-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GZDLe1uF9YM/DkanW+mjF2+k40uveujncKyK9lFEfwmFygMSjzBeU6DAEANRUHuz UlxrKnIA6i6oqIa8BCR9Vw== 0000892569-98-003373.txt : 19981228 0000892569-98-003373.hdr.sgml : 19981228 ACCESSION NUMBER: 0000892569-98-003373 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19981223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REMEDYTEMP INC CENTRAL INDEX KEY: 0001013467 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 952890471 STATE OF INCORPORATION: CA FISCAL YEAR END: 0929 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20831 FILM NUMBER: 98774592 BUSINESS ADDRESS: STREET 1: 32122 CAMINO CAPISTRANO CITY: SAN JUAN CAPISTRANO STATE: CA ZIP: 92675 BUSINESS PHONE: 7146611211 MAIL ADDRESS: STREET 1: 32122 CAMINO CAPISTRANO STREET 2: 32122 CAMINO CAPISTRANO CITY: SAN JUAN CAPISTRANO STATE: CA ZIP: 92675 10-K 1 FORM 10-K FOR THE YEAR ENDED SEPTEMBER 27, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the fiscal year ended September 27, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------------- ------------------- Commission file number 0-5260 REMEDYTEMP, INC. (Exact Name of Registrant as Specified in Its Charter) California 95-2890471 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 101 Enterprise Aliso Viejo, California 92656 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (949) 425-7600 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Name of Each Exchange Title of Each Class on Which Registered - ----------------------------------- ---------------------- Class A Common Stock $.01 par value Nasdaq National Market Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or by amendment to this Form 10-K. [ ] The aggregate market value of the Class A Common Stock held by non-affiliates of the registrant based upon the closing sales price of its Class A Common Stock on December 15, 1998 on the Nasdaq National Market was $75,372,126. The aggregate market value of the Class B Common Stock (which converts to Class A upon sale) held by non-affiliates of the registrant based upon the closing sales price of its Class A Common Stock on December 15, 1998 on the Nasdaq National Market was $4,805,112. The number of shares of Class A Common Stock outstanding as of December 15, 1998 was 7,062,524 and the number of shares of Class B Common Stock outstanding as of December 15, 1998 was 1,805,539. DOCUMENTS INCORPORATED BY REFERENCE Part I and Part II of this report incorporate information by reference from the Company's Annual Report to Shareholders for the fiscal year ended September 27, 1998. The Company's Annual Report to Shareholders will be mailed to the Securities and Exchange Commission and the Company's shareholders in connection with the Company's Annual Meeting of Shareholders scheduled to be held on February 17, 1999 (the "Annual Meeting"). The registrant will file a definitive Proxy Statement pursuant to Regulation 14A within 120 days of the end of the fiscal year end September 27, 1998. Portions of the Company's Proxy Statement, to be mailed to the shareholders in connection with the Annual Meeting, are incorporated by reference in Part III of this report. Except for the portions expressly incorporated by reference, the Company's Proxy Statement and Annual Report shall not be deemed to be part of this report. 1 2 REMEDYTEMP, INC. 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PART I ------ PAGE NO. -------- Item 1 Business 3 Item 2 Properties 9 Item 3 Legal Proceedings 9 Item 4 Submission of Matters to a Vote of Security Holders 9 Executive Officers of the Registrant 10 PART II ------- Item 5 Market for Registrant's Common Equity and Related Shareholder Matters 11 Item 6 Selected Financial Data 11 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 7A Quantitative and Qualitative Disclosures About Market Risk * Item 8 Financial Statements and Supplementary Data 11 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 11 PART III -------- Item 10 Directors and Executive Officers of the Registrant 12 Item 11 Executive Compensation 12 Item 12 Security Ownership of Certain Beneficial Owners and Management 12 Item 13 Certain Relationships and Related Transactions 12 PART IV ------- Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 13 Signatures 15
* No information provided due to inapplicability of item. 2 3 PART I ITEM 1. BUSINESS In addition to historical information, the description of business below includes certain forward-looking statements, including, but not limited to, those related to the growth and strategies, future operating results and financial position as well as economic and market events and trends of RemedyTemp, Inc. (the "Company"), including its wholly-owned subsidiary, Remedy Insurance Group, LTD ("RIG"). All forward-looking statements made by the Company, including such statements herein, include material risks and uncertainties and are subject to change based on factors beyond the control of the Company. Accordingly, the Company's actual results and financial position could differ materially from those expressed or implied in any forward-looking statement as a result of various factors, including without limitation those factors described in the Company's filings with the Securities and Exchange Commission regarding risks affecting the Company's financial conditions and results of operations. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. The following should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto. GENERAL RemedyTemp, Inc., founded in 1965 and incorporated in California in 1974, is a rapidly growing national provider of clerical and light industrial temporary staffing services to industrial and service companies, professional organizations and governmental agencies. The Company provides its services in 37 states and Puerto Rico through a network of 234 offices, of which 98 are Company-owned and 136 are independently-managed. During the twelve months ended September 27, 1998, the Company placed approximately 136,000 temporary workers, known as "associates," and provided over 41.0 million hours of staffing services to approximately 17,000 clients. From the beginning of fiscal 1994 through the end of fiscal 1998, the Company added 140 offices and increased revenues and income before taxes at compound annual growth rates of 30.1% and 65.7% respectively, to $451.3 million and $23.2 million, respectively. The consolidated financial statements include the accounts of the Company, including its wholly-owned subsidiary, RIG. RIG is an offshore insurance captive domiciled in Bermuda, incorporated in September 1996 to provide the Company's direct and licensed offices with a self-insured workers' compensation program. The Company has positioned itself to take advantage of trends in the temporary staffing industry, such as increased integration of temporary workers as a significant, long-term workforce component in both manufacturing and service-oriented companies and increased outsourcing by clients or businesses of certain staffing functions. Historically, the Company focused on the clerical and light industrial sectors of the nation's temporary workforce. Beginning in November 1998, the Company began also to focus on the information technology sector. The clerical, light industrial and information technology sectors comprise approximately 80.5% of the nation's temporary staffing industry revenues, according to the Staffing Industry Analysts, Inc. ("SIA"), an independent staffing industry publication. Additionally, the Company intends to increase its efforts in the call center and logistics areas of its clerical and light industrial sectors, respectively. Through the use of innovative technologies and value-added services, the Company strives to partner with its clients to deliver total solutions to their temporary staffing needs. The Company's expertise in providing associates who possess the skills and attitudinal characteristics necessary to "fit" into clients' organizations and perform at a superior level distinguishes the Company as a premium provider of temporary staffing services and technologies. Over the past five years, the Company has invested significant human and financial resources in the development of proprietary technologies designed to enable the Company to provide its clients with premium temporary workers and unique value-added services. The Company's primary proprietary technologies are maintained and offered in the following three interactive systems: Human Performance Technology ("HPT(R)"), an innovative series of multimedia evaluations used to profile the attitudinal characteristics of the Company's associates; IntelliSearch(R), a computer database used to classify, search and match the Company's associates to job openings using parameters based upon client needs, and Employee Data Gathering and Evaluation ("EDGE(R)"), a proprietary computer system installed at client locations to coordinate scheduling and track job performance of the client's entire temporary workforce. EDGE(R) also has the capability to customize invoices and utilization reports. The Company is currently in the process of implementing its new information technology system, i/search 2000(TM), which is intended to replace Intellisearch(R). The Company believes that i/search 2000(TM) will enable its Company-owned and independently-managed offices to streamline operational efficiencies and enhance client service levels. Implementation of i/search 2000(TM) is scheduled to be completed by October 1999. Management believes that the Company's proprietary technologies give the Company advantages over competing temporary staffing companies that do not provide similar value-added services. 3 4 THE STAFFING INDUSTRY Revenues for the United States temporary staffing services industry were projected by SIA to have exceeded $54.5 billion in 1997. This represents an increase of approximately 15.7% over 1996 and, since 1993, industry revenues have increased at a compound annual rate of approximately 17.2%. Economic and social factors have increased the portion of the non-farm U.S. workforce working on a temporary basis from 1.4% in 1993 to 2.0% in 1997, according to the National Association of Temporary and Staffing Services ("NATSS"), an independent trade organization for the staffing industry. NATSS estimates that there are now approximately 2.7 million workers employed nationwide by temporary staffing service providers. The staffing services industry was once used predominately as a short-term solution for greater workforce needs during peak production periods and to replace workers who were abruptly terminated or who were absent due to illness or vacation. Since the late 1980s, the use of temporary services has evolved into a permanent and significant component of the staffing plans of many employers. Corporate restructuring, government regulations, advances in technology, and the desire by many companies to shift employee costs from a fixed to a variable expense have resulted in the use of a wide range of staffing alternatives by businesses. In addition, the high cost of recruitment and the risk of employment litigation have led to increasing use of temporary staffing as a means of evaluating the qualifications of personnel before hiring them on a full-time basis, as well as accomplishing reductions in workforce without the risk of wrongful termination liability. The clerical, light industrial and information technology sectors represent the largest three sectors of the temporary staffing industry. A staffing industry report by SIA, based on 1997 revenues, reported that the office and clerical sector accounted for $15.7 billion or approximately 28.8% of the temporary staffing industry revenues, while the light industrial sector accounted for $13.3 billion or approximately 24.4% of industry revenues, and the information technology sector accounted for $14.8 billion or approximately 27.2% of industry revenues. According to SIA, from 1993 through 1997, industry revenues for the office and clerical sector increased by approximately $6.1 billion, representing a compound annual growth rate of approximately 13.1%, and industry revenues for the light industrial sector increased by approximately $5.4 billion, representing a compound annual growth rate of approximately 13.9%. Industry revenues for the information technology sector increased by approximately $9.1 billion, representing a compound annual growth rate of approximately 26.9%. In the aggregate, these three sectors constituted approximately 80.5% of the $25.6 billion increase in industry revenues during the period. OPERATIONS The Company provides temporary personnel in the following three industry sectors: clerical, light industrial and information technology. Clerical Services. As use of temporary staffing has become more prevalent, the range of clerical positions provided by the Company has expanded beyond traditional secretarial staff to include a broad range of general business environment personnel. Clerical services include executive assistants, word processors, customer service representatives, data entry operators, accountants, bookkeepers, hosts, telemarketers, computer operators, and other general office staff. Within the clerical services sector, the Company's Caller Access division addresses the needs of clients for call center agents. Caller Access services include customer service, help desk/product support, customer service, order takers, market surveyors, collections agents and telesales. Light Industrial Services. Light industrial services personnel are furnished for a variety of assignments including assembly work (such as mechanical assemblers, general assemblers, solderers and electronic assemblers), factory work (including merchandise packagers, machine operators, and pricing and tagging personnel), warehouse work (such as general laborers, stock clerks, material handlers, order pullers, forklift operators, palletizers and shipping/receiving clerks), technical work (such as lab technicians, quality control technicians, bench technicians, test operators, electronic technicians, inspectors, drafters, checkers, designers, expediters and buyers) and general services (such as maintenance and repair personnel, janitors and food service workers). In August 1998, the Company created the Remedy Logistics Group to provide solutions for clients' logistics staffing needs. Logistics is the management of inventory, and includes warehousing, transportation, distribution and supply of goods. Remedy Logistics Group supplies temporary associates within the following categories: inventory takers, forklift operators, shipping clerks, material processors, warehouse workers, boxers, mail clerks, expeditors and inventory control clerks. 4 5 Information Technology Services. In November 1998, the Company's newest division, RemX Technology Group(SM), began providing information technology temporary staffing and consulting services. RemX Technology Group(SM) will supply contract staffing and consulting professionals in key technology categories including hardware and software engineering, database design development, Internet/Intranet site development, networking, software quality assurance, and technical support. Office Organization. The Company provides its services through a network of 234 office locations, 98 of which are owned and operated by the Company and 136 of which are operated as franchised or licensed offices. The table below sets forth the geographic distribution of the Company-owned and independently-managed offices.
COMPANY-OWNED LICENSED AND TOTAL OFFICES FRANCHISED OFFICES OFFICES ------------- ------------------ ------- California.............. 82 2 84 Western Region(1)....... 6 19 25 Midwestern Region(2).... 5 32 37 Southeastern Region(3).. 5 65 70 Northeastern Region(4).. 0 17 17 International(5)........ 0 1 1 -- --- --- Total................... 98 136 234 == === ===
- ------------------ (1) Includes Arizona, Colorado, Hawaii, Idaho, Nevada, New Mexico, Oregon, Utah and Washington. (2) Includes Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Ohio and Wisconsin. (3) Includes Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia. (4) Includes Connecticut, Maryland, Massachusetts, New Jersey, New York and Pennsylvania. (5) Includes Puerto Rico. Company-Owned Offices. The Company-owned offices are concentrated in California, with locations in 11 other states. These offices are organized into five regions, each managed by an Operational Vice President and other regional staff who provide operational support for the offices in their regions. Each Company-owned office has an on-site manager who is accountable for the day-to-day operations and profitability of that office. Managers report to their Operational Vice Presidents, and together they are responsible for sales, client development and retention, recruitment, placement and retention of associates, and general administration for their respective offices and regions. The Company believes that its decentralized structure contributes to the initiative and commitment of its management team and that its incentive compensation approach motivates managers to increase profits. Company-owned offices had average sales per office of approximately $2.8 million for fiscal 1998. The Company often pursues a "fill-in" strategy to expand its market penetration by transferring clients on the periphery of an existing office's territory to a newly-opened office, which can then use those established accounts as a base for further expansion. The density of Company-owned offices in certain areas also enables the Company to spread fixed costs such as advertising, recruiting and administration over a larger revenue base, and also to share associates and provide clients with superior coverage and service capabilities. In addition, the Company has divided highly successful Company-owned offices into separate clerical and light industrial offices, allowing each to specialize and further penetrate its market. Independently-Managed Offices. Independently-managed offices, structured in either franchise or license format, have been an important element of the Company's growth strategy over the last ten years. Such offices have enabled the Company to expand into new markets with highly qualified franchisees and licensees, without significant capital expenditures. Most of the Company's offices outside California are independently-managed. Independent office agreements have ten year terms and are renewable for successive five-year or ten-year terms depending upon when such agreements were originally entered into. Such agreements cover exclusive geographic territories and contain minimum revenue performance standards. 5 6 Franchises. The Company employed a traditional franchise model from 1987 until 1990. As of September 27, 1998, 19 of the Company's 136 independently-managed offices were franchises. Franchisees pay all lease and working capital costs, fund payroll and collect clients' accounts. Franchisees pay the Company an initial franchise fee and royalties equal to approximately 7% of gross billings. Royalty fees are reduced when the franchisee serves a national client, since they typically have lower margins. Franchisees employ all office management staff and all temporary personnel affiliated with their offices. The Company provides training, the right to use the Company's service marks, trademarks and business model, proprietary computer programs and operational support. Licenses. Since 1990, the Company has recruited new independent office managers as licensees. The Company switched from franchise to license format to exercise more control over the collection and tracking of the receivables of the independently-managed offices and to allow the Company to grow without being limited by the financial resources of franchisees. As of September 27, 1998, 117 of the Company's 136 independently-managed office locations were licensed offices. The license format differs from the franchise format in that the Company acts as the employer of all temporary personnel affiliated with the office. The Company funds payroll, collects clients' accounts, and remits to the licensee 60%-70% of the office's gross profit, based on the level of hours billed during the contract year. To reflect the increased value-added services and proprietary technologies provided by the Company, beginning in January 1999 and only for new licensees, the Company will remit to such licensees 60%-65% of the office's gross profit, based on the level of hours billed during the contract year. CLIENTS During the twelve months ended September 27, 1998, the Company served approximately 17,000 clients nationwide. The Company's ten highest volume clients in fiscal 1998 accounted for approximately 13.8% of the Company's system-wide gross billings. No single client accounted for more than 6% of the Company's system-wide gross billings for fiscal 1998. COMPETITION The temporary services industry is highly competitive with limited barriers to entry. The Company believes that its largest competitors in the clerical and light industrial sectors include Adecco Employment Services, Interim Services, Inc., Kelly Services, Inc., Manpower Inc., Norrell Corporation, Robert Half International, Inc. and The Olsten Corporation. These and other large competitors have nationwide operations with substantially greater resources than the Company, which among other things could enable them to attempt to maintain or increase their market share by reducing prices. In addition, there are a number of other medium-sized firms that are regional or emphasize specialized niches and compete with the Company in certain markets where they have a stronger presence. Finally, numerous small or single-office firms compete effectively with the Company's offices in their limited areas. In the information technology sector, the Company believes that its competitors include Alternative Resources, Data Processing Resources Corporation, Hall Kinion, Metamor Worldwide and Modis Professional Services. The Company's management believes that the most important competitive factors in obtaining and retaining its targeted clients are an understanding of a customer's specific job requirements, the ability to provide qualified temporary personnel in a timely manner and the quality and price of services. The primary competitive factors in obtaining qualified candidates for temporary employment assignments are wages, benefits and responsiveness to work schedules. The Company expects ongoing vigorous competition and pricing pressure from both national, regional and local providers, and there is no assurance that the Company will be able to maintain or increase its market share or gross margins. WORKERS' COMPENSATION As of July 22, 1997, the Company began a self-insured workers' compensation program for direct and licensed offices, administered through RIG. Management believes RIG enables the Company to control its claims administration, allocate safety resources where they are needed and develop efficient and cost effective methods of financing workers' compensation. The Company is responsible for individual claims up to $250,000 and has purchased excess liability coverage for individual claims greater than $250,000 and aggregate claims greater than $7.5 million. This aggregate stop-loss coverage is based on projected levels of workers' compensation wages and will vary to the extent that actual wage levels differ from the projection. 6 7 EMPLOYEES As of September 27, 1998, the Company employed a staff of approximately 500 individuals (excluding temporary associates). During fiscal 1998, approximately 136,000 temporary associates were placed by the Company through Company-owned and independently-managed offices. Approximately 61,000 of the temporary associates were employed by Company-owned offices and approximately 62,000 were employed through licensed offices. Approximately 13,000 of the temporary associates were placed by franchised offices, and are not employed by the Company but are legal employees of the franchised offices. At any given time during 1998, only a portion of these employees were assigned to temporary assignments. The Company has no collective bargaining agreements and believes its employee relations are good. GOVERNMENTAL REGULATION The Company's marketing and sale of franchises and licenses is regulated by the Federal Trade Commission and by authorities in 19 states. Additionally, 15 of the 37 states in which the Company provides its services require franchisers to file a registration application, provide notice or qualify for an exemption. The Company has filed the appropriate registration application or provided notice in seven of these states and has obtained an exemption from such registration requirements in the remaining eight states. The Company files and distributes to prospective franchisees and licensees Franchise Offering Circulars and other materials in order to comply with such registration and disclosure requirements. In addition, the Company's ongoing relationships with its franchisees and licensees are regulated by applicable federal and state franchise laws. PROPRIETARY RIGHTS AND SYSTEMS The Company has developed, either internally or through hired consultants, its HPT(R), EDGE(R), IntelliSearch(R), and i/search 2000(TM) computer systems. These proprietary systems are trade secrets of the Company and the Company has copyrights to certain software used in these systems. The Company has registered the service marks REMEDY(R), REMEDY TEMPORARY SERVICES(R), REMEDYTEMP(R), INTELLISEARCH(R), INTELLIGENT STAFFING(R), HIRE INTELLIGENCE(R), EDGE(R), VSM(R), HPT(R), and THE INTELLIGENT TEMPORARY(R) with the U.S. Patent & Trademark Office. In addition, the Company asserts ownership of, and has filed applications with the U.S. Patent & Trademark Office to register, the following trademarks and service marks: I/SEARCH 2000(TM), REMX TECHNOLOGY GROUP(SM), REMX(SM), STARS(SM), NON-STOP(SM), and WE WON'T SEND YOU A DUMMY(SM). These marks are used by the Company and its licensees and franchisees. SEASONALITY The Company's quarterly operating results are affected by the number of billing days in the quarter and the seasonality of its clients' businesses. The first fiscal quarter has been historically strong as a result of manufacturing and retail emphasis on holiday sales. The second fiscal quarter, from January through March, historically shows little to no growth in comparable revenues from the first fiscal quarter. Revenue growth has historically accelerated in each of the third and fourth fiscal quarters as manufacturers, retailers and service businesses increase their level of business activity. RISK FACTORS Among the risks affecting the Company are the following: Fluctuations in the General Economy. Demand for temporary services is significantly affected by the general level of economic activity. As economic activity slows, many companies reduce their use of temporary employees before undertaking layoffs of their full-time employees. Further, in an economic downturn, the Company may face pricing pressure from its customers and increased competition from other staffing companies, which could have a material adverse effect on the Company's business. Since the Company currently derives more than half of its system-wide billings from the California market (approximately 52.6% in fiscal 1998), an economic downturn in California would have a greater impact on the Company than if the Company had a more widely dispersed revenue base. Competitive Market. The temporary services industry is highly competitive with limited barriers to entry. The Company competes in national, regional and local markets with full service agencies and with specialized temporary services agencies. Many competitors are smaller than the Company but have an advantage over the Company in discrete geographic markets because of their stronger local presence. Other competitors are more well-known and have greater marketing and financial resources than the Company, which among other things could enable them to attempt to maintain 7 8 or increase their market share by reducing prices. The Company expects the level of competition to remain high, and competitive pricing pressures may have an adverse effect on the Company's operating margins. Ability to Continue Company Growth. The Company has grown rapidly in recent years by opening new offices and increasing the volume of services provided through existing offices. There can be no assurance that the Company will continue to be able to maintain or expand its market presence in its current locations or to successfully enter other markets. The ability of the Company to continue its growth will depend on a number of factors including existing and emerging competition, the availability of working capital to support such growth, and the Company's ability to maintain margins in the face of pricing pressures, find and retain new qualified licensees and office managers, recruit and train additional qualified temporary personnel, find and retain clients and manage costs. Franchising and Licensing Risks. The Company derives a substantial amount of its revenues (approximately 44.4% in fiscal 1998) from franchised and licensed operations. The ownership of the Company's franchised and licensed offices is concentrated, with the ten largest franchisees and licensees together accounting for approximately 19.6% of the Company's system-wide billings in fiscal 1998. The loss of one or more of these relationships, or other franchisees or licensees who may in the future account for a significant portion of the Company's revenues, could have a material adverse effect on the Company's results of operations. Year 2000 Compliance The Company's State of Readiness. Many computer systems and other equipment with embedded chips or processors use only two digits to represent the year and may be unable to process accurately certain data before, during or after the Year 2000. Consequently, business and governmental entities are at risk for possible miscalculations or systems failures causing disruptions in their business operation. Furthermore, the Year 2000 is a leap year, which may present additional issues for computer systems and other equipment with embedded chips or processors. Year 2000 issues may affect the Company's internal systems, including information technology ("IT") and non-IT systems. The Company is assessing the readiness of its systems for handling the Year 2000. Although the assessment is still underway, the Company currently believes that all material IT systems will be compliant by the Year 2000. The Company is in the final year of a three-year development and implementation process to replace all of its material IT systems with a new IT system. The Company believes that the new IT system and the computer hardware used to operate the system will be Year 2000 compliant. The Company anticipates that implementation of the new IT system will be completed for all "back office" systems (i.e. payroll, billing, general ledger, accounts payable, and accounts receivable) by June of 1999. The Company plans to implement the "front office" applications (i.e. administration, search and retrieval of data, and coordination or temporary employees) of the new IT system to all Company-owned offices by April of 1999 and to all independently-managed offices by October of 1999. There can be no guarantee that these estimated dates will be achieved, and actual results could differ materially from those anticipated. Based on information currently available, the Company believes that it does not have any material specific-dependencies on its non-IT systems (devices that have imbedded microprocessors). Accordingly the Company believes that the Year 2000 poses no material risk to the Company's non-IT systems. The Company intends to contact its material suppliers of products and services to determine that the suppliers' operations and the products and services they provide are Year 2000 compliant or to monitor their progress toward Year 2000 compliance. There can be no assurance that the Company's material suppliers, vendors or other third parties will not suffer a Year 2000 business disruption. Such failures could have a material adverse affect on the Company's financial condition and results of operations. The Costs to Address the Company's Year 2000 Issues. The Company's new IT system is being implemented for strategic business reasons unrelated to Year 2000 issues and the implementation schedule was not accelerated due to Year 2000 issues. Therefore, no specific costs were incurred to address Year 2000 issues. The Risks to the Company of Year 2000 Issues. Although unclear at this time, the Company believes that its exposure to Year 2000 risks are unlikely to have a material effect on the Company's results of operations, liquidity and financial condition. The Company anticipates that the new IT system will be implemented prior to Year 2000 and such system is believed to be Year 2000 compliant. Although the Company expects to implement its new IT system prior to the Year 2000, there is no guarantee that this result will be achieved. Consequently, the Company believes that its most reasonably likely worst case Year 2000 scenario is that the new IT system is not implemented on time. Such a scenario could disrupt the Company's business and therefore could have a material adverse effect on the financial condition and results of operations. Additionally, if any third parties that provide goods or services that are critical to the Company's business fail to appropriately address their Year 2000 issues, there could be a material adverse effect on the Company's financial condition and results of operations. 8 9 The Company's Contingency Plans. The Company has not completed the systems integration testing of the new IT system. Accordingly, the Company has not fully assessed its risks from potential Year 2000 failure of the new IT system and, therefore has not yet developed any Year 2000-specific contingency plans. The Company intends to develop such contingency plans if the results of systems integration testing identify a business function at risk. Additionally, should an unforeseen delay in the implementation of the Company's new IT system occur, failure to meet critical milestones in the Company's implementation plans would provide advance notice, and steps would be taken so that Year 2000 issues could be corrected in the Company's existing IT system to avoid a material impact on the Company's ability to conduct business. The likely impact on such existing IT systems would be in "from-to" reporting and date printing which the Company believes it can correct without material loss in business operation or function. Additionally, the Company is currently undertaking steps to identify its material vendors and to formulate a system to understand material third parties' ability to continue providing services and products after Year 2000. The Company intends to monitor its material suppliers, vendors, and distributors to avoid any business interruption in Year 2000, including formulating contingency plans. However, the Company can neither predict nor assure the successful outcome of such third parties' remediation efforts. ITEM 2. PROPERTIES The Company does not own any real property. The Company leases its corporate headquarters in Aliso Viejo, California, from Parker-Summit, LLC. The lease agreement provides for leased premises, totaling approximately 52,500 square feet in size, at a fixed rate of $1.93 per square foot per month, for a fixed term of five and one-half years from the date of occupancy. The base rent includes amounts for operating costs, which include, but are not limited to, property taxes, utilities, supplies, repairs and maintenance, janitorial staff, security staff and insurance premiums on the building. In addition to base rent, after the first year of occupancy the Company is obligated to pay a portion of the increase in operating costs and real property taxes for the leased premises. The Company has an option to renew the lease after the initial term for an additional term of five years. The Company moved into its current corporate headquarters in September 1998. From July 1997 to September 1998, the Company leased its 13,185 square foot national headquarters in San Juan Capistrano, California from Mitchell Land and Improvement Company at a cost of $14,583 per month ($1.11 per square foot per month.) The lease provided for the Company to pay property taxes, insurance and certain other operating expenses applicable to the leased property. Prior to July, 1997 the Company leased its national headquarters corporate facility from the principal shareholder and Chairman of the Company, Robert E. McDonough, Sr. The lease provided for the payment of property taxes, insurance and certain other operating expenses applicable to the leased property by the lessee. In September 1996, the lease expired and the lease term became month-to-month through July 1997. As of September 27, 1998, the Company leased the space occupied by the majority of its 98 Company-owned offices. The Company selects the sites for these offices by evaluating proximity to potential clients and available temporary personnel. The Company assists its franchisees and licensees in selecting sites for independently-managed offices, but presently does not own and is not obligated under any leases at these sites. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company becomes a party to litigation incidental to its business. The Company maintains insurance coverage that management believes is reasonable and prudent for the business risks that the Company faces. In management's opinion, no pending legal proceeding is likely to have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the Company's fourth quarter of the fiscal year ended September 27, 1998. 9 10 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officer employees of the Company and their respective ages as of September 27, 1998, are set forth below.
NAME AGE POSITION(S) HELD ---- --- ---------------- Robert E. McDonough, Sr. 76 Chairman of the Board of Directors Paul W. Mikos 53 Chief Executive Officer, President and Director Greg Palmer 42 Executive Vice President and Chief Operations Officer Alan M. Purdy 58 Senior Vice President and Chief Financial Officer Jeffrey A. Elias 41 Senior Vice President, Human Resources and Administration William M. Herbster 46 Vice President, Marketing Norman H. Leibson 53 Vice President, Information Technology
Robert E. McDonough, Sr. has served as Chairman of the Board of Directors of the Company (the "Board") since August 1978. Mr. McDonough founded the Company in 1965 and has been continuously involved in the management and long-term operation and strategic planning of the Company since that time. For 29 years, until May 1994, he served as the Company's Chief Executive Officer. Mr. McDonough is the father of Susan McDonough Mikos (a director of the Company) and the father-in-law of Paul W. Mikos. Paul W. Mikos has served in various positions in the Company since 1977, including as President since 1985. Mr. Mikos has served as Chief Executive Officer of the Company since January 1996 and as a Director of the Company since May 1993. From May 1994 until January 1996, he served as Co-Chief Executive Officer of the Company. Prior to joining the Company, Mr. Mikos worked for ARA as a Regional Sales Director from August 1976 until October 1977. From July 1968 until August 1976, Mr. Mikos worked for IBM in sales management. Mr. Mikos is the husband of Susan McDonough Mikos and the son-in-law of Robert E. McDonough, Sr. Greg Palmer has served as Executive Vice President and Chief Operations Officer of the Company since January 1998. From 1985 to December 1997, Mr. Palmer served in senior level management positions in the Southeast and Northeast divisions and previously as Senior Vice President in charge of managing operations in the Western United States for Olsen Corporation, a provider of staffing and health care services. Alan M. Purdy has served as Senior Vice President and Chief Financial Officer since November 1996 and prior to that as Vice President and Chief Financial Officer since February 1994. From January 1993 until December 1993, he was Senior Vice President and Chief Financial Officer of Builder's Emporium, a division of Collins and Aikman Group, Inc. From March 1988 until August 1992, he was Senior Vice President and Chief Financial Officer of HUB Distributing, Inc. (dba Millers Outpost), a subsidiary of American Retail Group. From January 1986 until October 1987, he was Senior Vice President and Chief Financial Officer of Robinson's of Florida, a subsidiary of The May Department Stores Company. From April 1983 until January 1986, he served as Senior Vice President and Chief Financial Officer of B. Dalton Booksellers, a subsidiary of the Dayton Hudson Corp. Jeffrey A. Elias has served as Senior Vice President, Human Resources and Administration since November 1996 and prior to that as Vice President, Human Resources and Risk Management since December 1992. From January 1991 to December 1992, he was Director, Human Resources and Risk Management for Adia Services, Inc. William M. Herbster has served as Vice President, Marketing since January 1994. From January 1985 until January 1994, he was with Manpower, Inc., a temporary staffing company, as Director of U.S. Marketing from April 1990 to January 1994, Manager of Office Automation Services from September 1987 to April 1990, and Marketing Manager, Great Lakes and Northeast Region from January 1985 to September 1987. Norman H. Leibson has served as Vice President, Information Technology Systems since November 1994. From March 1992 until November 1994, Mr. Leibson was a Vice President of HUB Distributing, Inc. (dba Millers Outpost), a subsidiary of American Retail Group, and from November 1983 until August 1992, he was a Vice President of Carter Hawley Hale. 10 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Since July 11, 1996, the Company's Class A Common Stock has been traded on the Nasdaq National Market under the symbol "REMX." Prior to July 11, 1996, the Company's stock was not publicly traded. The following table sets forth the high and low sales prices for the Class A Common Stock for fiscal 1998 and fiscal 1997:
FOR THE THREE MONTHS ENDED -------------------------------------------------- DECEMBER 28, MARCH 29, JUNE 28, SEPTEMBER 27, 1997 1998 1998 1998 ----------- --------- -------- ------------ High .................... $ 28.13 $ 32.63 $ 36.25 $ 29.25 Low...................... $ 20.00 $ 18.75 $ 23.69 $ 17.50
DECEMBER 29, MARCH 30, JUNE 29, SEPTEMBER 28, 1996 1997 1997 1997 ----------- --------- -------- ------------ High .................... $ 22.50 $ 20.00 $ 18.75 $ 22.75 Low...................... $ 14.25 $ 15.13 $ 14.88 $ 17.00
As of December 15, 1998, there were an estimated 1,750 shareholders of record and there were ten shareholders of record of the Company's Class B Common Stock. Except for the S corporation distributions prior to the Company's initial public offering (the "Offering") and the declared dividend to the Company's pre-Offering shareholders as discussed in Note 1 to the Consolidated Financial Statements, incorporated by reference from the Company's Annual Report to Shareholders (see Item 8 of this report), the Company has not paid cash dividends on its Class A or Class B Common Stock and does not anticipate that it will do so in the foreseeable future. The present policy of the Company is to retain earnings for use in its operations and the expansion of its business. ITEM 6. SELECTED FINANCIAL DATA Information as to Selected Financial Data required by this item is incorporated by reference from the Company's Annual Report to Shareholders for the fiscal year ended September 27, 1998, under the heading "Selected Financial Data," to be mailed to the Securities and Exchange Commission (the "Commission") and the Company's shareholders prior to the Company's Annual Meeting of Shareholders, which is scheduled to be held on February 17, 1999. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information as to Management's Discussion and Analysis of Financial Condition and Results of Operations required by this item is incorporated by reference from the Company's Annual Report to Shareholders for the fiscal year ended September 27, 1998 under the heading "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations," to be mailed to the Commission and the Company's shareholders prior to the Company's Annual Meeting of Shareholders, which is scheduled to be held on February 17, 1999. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information as to Financial Statements and Supplementary Data required by this item is incorporated by reference from the Company's Annual Report to Shareholders for the fiscal year ended September 27, 1998, under the section "Financial Statements and Notes thereto," to be mailed to the Commission and the Company's shareholders prior to the Company's Annual Meeting of Shareholders, which is scheduled to be held on February 17, 1999. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 11 12 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Information as to the officers of the Company required by this item is set forth at the end of Part I of this report under the caption "Executive Officers of the Registrant." Information as to the Company's reporting persons' compliance with Section 16(a) of the Exchange Act, required by this item, is incorporated by reference from the portion of the Company's definitive Proxy Statement under the caption "Section 16(A) Beneficial Ownership Reporting Compliance" to be filed with the Commission pursuant to Regulation 14A under the Exchange Act and mailed to the Company's shareholders prior to the Company's Annual Meeting of Shareholders, which is scheduled to be held on February 17, 1999. ITEM 11. EXECUTIVE COMPENSATION Information as to Executive Compensation required by this item is incorporated by reference from the Company's definitive Proxy Statement, under the caption "Executive Compensation and Other Information," to be filed with the Commission pursuant to Regulation 14A under the Exchange Act and mailed to the Company's shareholders prior to the Company's Annual Meeting of Shareholders, which is scheduled to be held on February 17, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information as to Security Ownership of Certain Beneficial Owners and Management required by this item is incorporated by reference from the Company's definitive Proxy Statement, under the caption "Security Ownership of Certain Beneficial Owners and Management," to be filed with the Commission pursuant to Regulation 14A under the Exchange Act and mailed to the Company's shareholders prior to the Company's Annual Meeting of Shareholders, which is scheduled to be held on February 17, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information as to Certain Relationships and Certain Transactions required by this item is incorporated by reference from the Company's definitive Proxy Statement, under the caption "Certain Transactions," to be filed with the Commission pursuant to Regulation 14A under the Exchange Act and mailed to the Company's shareholders prior to the Company's Annual Meeting of Shareholders, which is scheduled to be held on February 17, 1999. 12 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements.
PAGE NUMBER IN ANNUAL REPORT TO SHAREHOLDERS ------------ (1) Consolidated Financial Statements. (Data incorporated by reference from the attached Annual Report to Shareholders): Consolidated Balance Sheet as of September 27, 1998 and September 28, 1997 13 Consolidated Statement of Income for the three fiscal years ended September 27, 1998, September 28, 1997 and September 29, 1996 14 Consolidated Statement of Shareholders' Equity for the three fiscal years ended September 27, 1998, September 28, 1997 and September 29, 1996 15 Consolidated Statement of Cash Flows for three fiscal years ended September 27, 1998, September 28, 1997 and September 29, 1996 16 Notes to Consolidated Financial Statements 17-25 (2) Financial Statement Schedules. Report of Independent Accountants on Financial Statement Schedule SCHEDULE II - Valuation and Qualifying Accounts (3) The following Exhibits are filed as part of this Report.
NUMBER EXHIBIT DESCRIPTION ------- ------------ 3.1 Amended and Restated Articles of Incorporation of the Company(a) 3.2 Amended and Restated Bylaws of the Company 4.1 Specimen Stock Certificate(a) 10.1 Robert E. McDonough, Sr. Amended and Restated Employment Agreement(a) 10.2 Paul W. Mikos Employment Agreement(a) 10.3 R. Emmett McDonough Employment Agreement(a) 10.4 Allocation Agreement with R. Emmett McDonough and Related Trusts(a) 10.5 Registration Rights Agreement with R. Emmett McDonough and Related Trusts(a) 10.6 Letter regarding terms of employment and potential severance of Alan M. Purdy(a) 10.7 Deferred Compensation Agreement for Alan M. Purdy(a) 10.8 Letter regarding potential severance of Jeffrey A. Elias(a) 10.9 Form of Indemnification Agreement(a) 10.11 Amended and restated RemedyTemp, Inc. 1996 Stock Incentive Plan 10.12 RemedyTemp, Inc. 1996 Employee Stock Purchase Plan(a) 10.13 Form of Franchising Agreement for Licensed Offices
13 14
NUMBER EXHIBIT DESCRIPTION ------- ------------ 10.14 Form of Franchising Agreement for Franchised Offices(a) 10.15 Form of Licensing Agreement for IntelliSearch(R)(a) 10.17 Paul W. Mikos Promissory Note(a) 10.18 Additional Deferred Compensation Agreement for Alan M. Purdy(c) 10.19 Lease Agreement between RemedyTemp, Inc. and Parker-Summit, LLC(d) 10.20 Lease Agreement between RemedyTemp, Inc. and Mitchell Land & Improvement Company(e) 10.21 Credit Agreement among Bank of America National Trust and Savings Association and RemedyTemp, Inc.(f) 10.22 RemedyTemp, Inc. Deferred Compensation Plan(f) 10.23 Greg Palmer Employment Agreement(g) 10.24 1998 RemedyTemp, Inc. Deferred Compensation and Stock Ownership Plan for Outside Directors(h) 10.25 Form of Licensing Agreement for i/search 2000(TM) 13.1 RemedyTemp, Inc. 1998 Annual Report to Shareholders 23.1 Consent of Independent Accountants 27.1 Financial Data Schedule
- ----------------- (a) Incorporated by reference to the exhibit of same number to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-4276), as amended. (b) Incorporated by reference to the exhibit of same number to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-4276), as amended. This agreement was terminated July 15, 1997. (c) Incorporated by reference to the exhibit of same number to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 29, 1996. (d) Incorporated by reference to the exhibit of same number to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1997. (e) Incorporated by reference to the exhibit of same number to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 29, 1997. (f) Incorporated by reference to the exhibit of same number to the Registrant's Annual Report on Form 10-K for the yearly period ended September 28, 1997. (g) Incorporated by reference to the exhibit of same number to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 28, 1997. (h) Incorporated by reference to the exhibit of same number to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 29, 1998. (b) Reports on Form 8-K. No reports on Form 8-K have been filed during the last quarter of the period covered by this Report. 14 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REMEDYTEMP, INC. /s/ PAUL W. MIKOS ------------------------------------- Paul W. Mikos President and Chief Executive Officer December 21, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT E. MCDONOUGH Chairman of the Board of December 21, 1998 - ------------------------------- Directors Robert E. McDonough, Sr. /s/ PAUL W. MIKOS President and Chief Executive December 21, 1998 - ------------------------------- Officer Paul W. Mikos /s/ ALAN M. PURDY Senior Vice President and Chief December 21, 1998 - ------------------------------- Financial Officer (Principal Alan M. Purdy Financial and Accounting Officer) /s/ SUSAN MCDONOUGH MIKOS Director, Corporate Secretary December 21, 1998 - ------------------------------- Susan McDonough Mikos /s/ WILLIAM D. CVENGROS Director December 21, 1998 - ------------------------------- William D. Cvengros /s/ JAMES L. DOTI Director December 21, 1998 - ------------------------------- James L. Doti, Ph.D. /s/ ROBERT A. ELLIOTT Director December 21, 1998 - ------------------------------ Robert A. Elliott /s/ J. MICHAEL HAGAN Director December 21, 1998 - ------------------------------ J. Michael Hagan /s/ JOHN B. ZAEPFEL Director December 21, 1998 - ------------------------------ John B. Zaepfel
15 16 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of RemedyTemp, Inc. Our audits of the consolidated financial statements referred to in our report dated November 13, 1998 appearing on page 25 of the 1998 Annual Report to Shareholders of RemedyTemp, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP ------------------------------- PricewaterhouseCoopers LLP Costa Mesa, California November 13, 1998 16 17 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BALANCE AT BEGINNING OF END OF DESCRIPTION PERIOD ADDITIONS DEDUCTIONS(1) PERIOD - ----------- ------------ --------- ------------- ---------- Allowance for Doubtful Accounts Receivable: Year ended September 27, 1998 $ 2,612 $ 1,519 $ 1,484 $ 2,647 Year ended September 28, 1997 2,111 1,276 775 2,612 Year ended September 29, 1996 1,950 1,621 1,460 2,111
- -------------- (1) Represents write-offs of bad debts 18 INDEX TO EXHIBITS
NUMBER EXHIBIT DESCRIPTION ------- ------------ 3.1 Amended and Restated Articles of Incorporation of the Company(a) 3.2 Amended and Restated Bylaws of the Company 4.1 Specimen Stock Certificate(a) 10.1 Robert E. McDonough, Sr. Amended and Restated Employment Agreement(a) 10.2 Paul W. Mikos Employment Agreement(a) 10.3 R. Emmett McDonough Employment Agreement(a) 10.4 Allocation Agreement with R. Emmett McDonough and Related Trusts(a) 10.5 Registration Rights Agreement with R. Emmett McDonough and Related Trusts(a) 10.6 Letter regarding terms of employment and potential severance of Alan M. Purdy(a) 10.7 Deferred Compensation Agreement for Alan M. Purdy(a) 10.8 Letter regarding potential severance of Jeffrey A. Elias(a) 10.9 Form of Indemnification Agreement(a) 10.11 Amended and restated RemedyTemp, Inc. 1996 Stock Incentive Plan 10.12 RemedyTemp, Inc. 1996 Employee Stock Purchase Plan(a) 10.13 Form of Franchising Agreement for Licensed Offices 10.14 Form of Franchising Agreement for Franchised Offices(a) 10.15 Form of Licensing Agreement for IntelliSearch(R)(a) 10.17 Paul W. Mikos Promissory Note(a) 10.18 Additional Deferred Compensation Agreement for Alan M. Purdy(c) 10.19 Lease Agreement between RemedyTemp, Inc. and Parker-Summit, LLC(d) 10.20 Lease Agreement between RemedyTemp, Inc. and Mitchell Land & Improvement Company(e) 10.21 Credit Agreement among Bank of America National Trust and Savings Association and RemedyTemp, Inc.(f) 10.22 RemedyTemp, Inc. Deferred Compensation Plan(f) 10.23 Greg Palmer Employment Agreement(g) 10.24 1998 RemedyTemp, Inc. Deferred Compensation and Stock Ownership Plan for Outside Directors(h) 10.25 Form of Licensing Agreement for i/search 2000(TM) 13.1 RemedyTemp, Inc. 1998 Annual Report to Shareholders 23.1 Consent of Independent Accountants 27.1 Financial Data Schedule
- ----------------- (a) Incorporated by reference to the exhibit of same number to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-4276), as amended. (b) Incorporated by reference to the exhibit of same number to the Registrant's Registration Statement on Form S-1 (Reg. No. 333-4276), as amended. This agreement was terminated July 15, 1997. (c) Incorporated by reference to the exhibit of same number to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 29, 1996. (d) Incorporated by reference to the exhibit of same number to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1997. (e) Incorporated by reference to the exhibit of same number to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 29, 1997. (f) Incorporated by reference to the exhibit of same number to the Registrant's Annual Report on Form 10-K for the yearly period ended September 28, 1997. (g) Incorporated by reference to the exhibit of same number to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 28, 1997. (h) Incorporated by reference to the exhibit of same number to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 29, 1998. EX-3.2 2 AMENDED AND RESTATED BYLAWS OF THE COMPANY 1 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF REMEDYTEMP, INC., A CALIFORNIA CORPORATION (EFFECTIVE FEBRUARY 18, 1998) 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I OFFICES.............................................................1 Section 1.01 Principal Executive Office....................................1 ARTICLE II SHAREHOLDERS.......................................................1 Section 2.01 Annual Meetings...............................................1 Section 2.02 Special Meetings..............................................3 Section 2.03 Conduct of Meetings...........................................4 Section 2.04 Elimination of Cumulative Voting..............................4 ARTICLE III DIRECTORS.........................................................4 Section 3.01 Number of Directors...........................................4 Section 3.02 Creation and Filling of Vacancies on the Board................4 Section 3.03 Fees and Compensation.........................................4 Section 3.04 Organization Meeting..........................................5 Section 3.05 Other Regular Meetings........................................5 Section 3.06 Special Meetings..............................................5 Section 3.07 Place of Meetings.............................................6 Section 3.08 Committees of the Board.......................................6 Section 3.09 Loans to Officers.............................................6 ARTICLE IV OFFICERS...........................................................6 Section 4.01 Officers......................................................6 Section 4.02 Election and Term of Office...................................6 Section 4.03 Removal and Resignation.......................................6 Section 4.04 Vacancies.....................................................7 Section 4.05 Duties and Compensation.......................................7 ARTICLE V INDEMNIFICATION OF AGENTS OF THE CORPORATION; PURCHASE OF LIABILITY INSURANCE........................................................7 Section 5.01 Indemnification of Agents.....................................7 CERTIFICATE OF SECRETARY.....................................................11
i 3 AMENDED AND RESTATED BYLAWS OF REMEDYTEMP, INC., A CALIFORNIA CORPORATION ARTICLE I OFFICES Section 1.01 Principal Executive Office. The principal executive office of the corporation is located at: 32122 Camino Capistrano, San Juan Capistrano, State of California. The board of directors shall have full power and authority to, and to authorize appropriate officers of the corporation to, change the location of said principal executive office and to establish other offices of the corporation. ARTICLE II SHAREHOLDERS Section 2.01 Annual Meetings. (a) The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. At each annual meeting, directors shall be elected and any other proper business may be transacted. The date so designated shall be within five (5) months after the end of the fiscal year of the corporation and within fifteen (15) months after the last annual meeting. (b) At an annual meeting of shareholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been brought before the annual meeting by or at the direction of a majority of the directors or by any shareholder of the corporation who complies with the notice procedures set forth in this Section 2.01(b). For a proposal to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a shareholder's notice must be delivered to, or mailed and received at, the principal executive offices of the corporation not less than sixty (60) days nor more than one hundred twenty (120) days prior to the scheduled annual meeting, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that if less than seventy (70) days notice or prior public disclosure of the date of the scheduled annual meeting is given or made, notice by the shareholder, to be timely, must be so delivered or received not later than the close of business on the tenth day following the earlier of the day on which such notice of the date of the scheduled annual meeting was mailed or the day on which such public disclosure was made. A shareholder's notice to the secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (i) a brief description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's 4 books, of the shareholder proposing such business and any other shareholders known by such shareholder to be supporting such proposal, (iii) the class and number of shares of the corporation's stock which are beneficially owned by the shareholder on the date of such shareholder notice and by any other shareholders known by such shareholder to be supporting such proposal on the date of such shareholder notice, and (iv) any financial interest of the shareholder in such proposal. The presiding officer of the annual meeting shall determine and declare at the annual meeting whether the shareholder proposal was made in accordance with the terms of this Section 2.01(b). If the presiding officer determines that a shareholder proposal was not made in accordance with the terms of this Section 2.01(b), he or she shall so declare at the annual meeting and any such proposal shall not be acted upon at the annual meeting. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees of the board of directors, but, in connection with such reports, no new business shall be acted upon at such annual meeting unless stated, filed and received as herein provided. (c) Subject to the rights, if any, of the holders of shares of Preferred Stock then outstanding, only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the board of directors of the corporation may be made at a meeting of shareholders by or at the direction of the board of directors, by any nominating committee or person appointed by the board of directors or by any shareholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.01(c). Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the secretary of the corporation. To be timely, a shareholder's notice must be delivered to, or mailed and received at, the principal executive offices of the corporation not less than sixty (60) days nor more than one hundred twenty (120) days prior to the scheduled annual meeting, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that if less than seventy (70) days notice or prior public disclosure of the date of the scheduled annual meeting is given or made, notice by the shareholder, to be timely, must be so delivered or received not later than the close of business on the tenth day following the earlier of the day on which such notice of the date of the scheduled annual meeting was mailed or the day on which such public disclosure was made. A shareholder's notice to the secretary shall set forth (i) as to each person whom the shareholder proposes to nominate for election or re-election as a director, (A) the name, age and business address of the person, (B) the principal occupation or employment of the person (C) the class and number of shares of capital stock of the corporation which are beneficially owned by the person and (D) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to applicable rules and regulations of the Securities and Exchange Commission (the "SEC") promulgated under the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act of 1934"); and (ii) as to the shareholder giving the notice (A) the name and address, as they appear on the corporation's books, of the shareholder and (B) the class and number of shares of the corporation's stock which are beneficially owned by the shareholder on the date of such shareholder notice. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine 2 5 the eligibility of such proposed nominee to serve as director of the corporation. The presiding officer of the annual meeting shall determine and declare at the annual meeting whether the nomination was made in accordance with the terms of this Section 2.01(c). If the presiding officer determines that a nomination was not made in accordance with the terms of this Section 2.01(c), he or she shall so declare at the annual meeting and any such defective nomination shall be disregarded. Section 2.02 Special Meetings. (a) A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than twenty percent (20%) of the votes at that meeting. (b) For a special meeting of shareholders to be properly called by any person or persons other than the board of directors, the request must be in writing, specifying the date and time of such meeting and the information set forth in Section 2.02(c) hereof, and must be delivered to, or mailed and received by, the chairman of the board, the president or the secretary of the corporation not less than forty (40) nor more than sixty (60) days prior to the date requested for such meeting. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote that a meeting will be held at the time requested by the person or persons calling the meeting. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this Section 2.02(b) shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. (c) Any request for a special meeting submitted pursuant to Section 2.02(b) hereof shall set forth as to each matter the shareholder proposes to bring before the special meeting (i) a brief description of the proposal desired to be brought before the special meeting and the reasons for conducting such business at the special meeting, (ii) the name and address, as they appear on the corporation's books, of the shareholder proposing such business and any other shareholders known by such shareholder to be supporting such proposal, (iii) the class and number of shares of the corporation's stock which are beneficially owned by the shareholder on the date of such shareholder request and by any other shareholders known by such shareholder to be supporting such proposal on the date of such shareholder request, and (iv) any financial interest of the shareholder in such proposal. In addition to whatever other limitations are imposed by applicable law, no person may be nominated for election to the board of directors of the corporation by any of the person or persons making a request for a special meeting pursuant to Section 2.02(b) hereof unless the request sets forth as to each person whom the requesting person or persons propose to nominate for election as a director, (A) the name, age and business address of the person, (B) the principal occupation or employment of the person (C) the class and number of shares of capital stock of the corporation which are beneficially owned by the person and (D) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors 3 6 pursuant to applicable rules and regulations of the SEC promulgated under the Securities Exchange Act of 1934. Section 2.03 Conduct of Meetings. Subject to the requirements of applicable law, and the express provisions of the Articles of Incorporation and these bylaws, all annual and special meetings of shareholders shall be conducted in accordance with such rules and procedures as the board of directors may determine and, as to matters not governed by such rules and procedures, as the chairman of such meeting shall determine. The chairman of any annual or special meeting of shareholders shall be designated by the board of directors and, in the absence of any such designation, shall be the president of the corporation. Section 2.04 Elimination of Cumulative Voting. The right of shareholders to cumulate votes shall be eliminated when the corporation becomes a listed corporation within the meaning of Section 301.5 of the California Corporations Code. ARTICLE III DIRECTORS Section 3.01 Number of Directors. The authorized number of directors of the corporation shall be not less than five (5) nor more than nine (9), until changed in accordance with applicable law. The exact number of directors shall be fixed from time to time, within the limits specified above by resolution of the board of directors or the shareholders of the corporation. Section 3.02 Creation and Filling of Vacancies on the Board. A vacancy or vacancies on the board of directors shall be deemed to exist in case of the death, removal or resignation of any director, if the authorized number of directors is increased, or if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are to be elected, to elect the full authorized number of directors to be elected at that meeting. Any director may resign effective upon giving written notice to the chairman of the board, the president, the secretary or the board of directors of the corporation, or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Unless otherwise provided in the Articles of Incorporation, vacancies in the board of directors, including without limitation vacancies created by the removal of a director, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until occurrence of an event specified above creating a vacancy in such director's office or until such director's successor is elected and qualified. Section 3.03 Fees and Compensation. By resolution of the board of directors, one or more of the directors may be paid a retainer for their services as directors, or a fixed fee (with or without expenses of attendance) for attendance at each meeting, or both. Payment 4 7 of such fees shall not preclude participation in stock option or incentive plans. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation therefor. Section 3.04 Organization Meeting. Immediately following each annual meeting of shareholders, the board of directors shall hold a regular meeting at the place of said annual meeting or at such other place as shall be fixed by the board of directors, for the purpose of organization, election of officers, and the transaction of other business. Call and notice of such meeting are hereby dispensed with. Section 3.05 Other Regular Meetings. Other regular meetings of the board of directors may be held at the time and place of regular meetings of the board fixed in advance by the board of directors. Call and notice of such regular meetings of the board of directors are hereby dispensed with. Section 3.06 Special Meetings. Special meetings of the board of directors, for the purpose of taking any action permitted by the directors under the General Corporation Law and the Articles of Incorporation, may be called at any time by the chairman of the board, the president, any vice president, the secretary or by any two directors. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to hold the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior to the meeting or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Subject to the preceding sentence, notice of the time and place of special meetings shall be given to each director (a) personally or by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, telegraph, facsimile, electronic mail, or other electronic means, in each case forty-eight (48) hours prior to the holding of the meeting, or (b) by mail, charges prepaid, addressed to him at his address as it is shown upon the records of the corporation or, if it is not so shown on such records and is not readily ascertainable, at the place at which the meetings of the directors are regularly held, at least four (4) days prior to the holding of the meeting. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mails, postage prepaid. Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient. Oral notice shall be deemed to have been given at the time it is communicated, in person or by telephone or wireless, to the recipient or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient. Any notice, waiver of notice or consent to holding a meeting shall state the time and place of the meeting but need not specify the purpose of the meeting. 5 8 Section 3.07 Place of Meetings. Regular and special meetings of the board of directors may be held at any place within or without the State which has been designated by resolution of the board. In the absence of such designation, meetings shall be held at the principal executive office of the corporation. Section 3.08 Committees of the Board. By resolution adopted by a majority of the authorized number of directors, the board of directors may designate such committees as it shall determine, each consisting of two or more directors, to serve at the pleasure of the board and having such authority as prescribed by the board, subject to applicable restrictions on committee authority imposed by the California Corporations Code. Unless, to the extent permitted by the General Corporation Law, the board of directors shall otherwise prescribe the manner of proceedings of any such committee, the provisions of these bylaws with respect to notice and conduct of meetings of the board shall govern committees of the board and action by such committees. Section 3.09 Loans to Officers. If the corporation has outstanding shares held of record by 100 or more persons (determined as provided by Section 605 of the California Corporations Code) on the date of board approval, the board may approve a loan of money or property to, or a guarantee of the obligation of, an officer, whether or not a director, or an employee benefit plan authorizing such a loan or guaranty to an officer, if the board determines that such loan, guaranty or plan may reasonably be expected to benefit the corporation in accordance with the provisions of Section 315 of the California Corporations Code. Board approval shall require a vote sufficient without counting the vote of any interested director or directors to approve such loan, guaranty or benefit plan. ARTICLE IV OFFICERS Section 4.01 Officers. The officers of the corporation shall be a chairman of the board, a chief executive officer, a president, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, such other officers, with such titles and duties as may be determined by the board of directors. One person may hold two or more offices, except that the offices of president and secretary shall not be held by the same person. Section 4.02 Election and Term of Office. The officers of the corporation shall be chosen by the board of directors, and each shall hold office at the pleasure of the board or until such officer shall resign, subject, in each case, to the rights, if any, of the corporation and any such officer under any contract of employment with the corporation. Section 4.03 Removal and Resignation. Any officer may be removed, either with or without cause, by a majority of the directors at the time in office, at any regular or special meeting of the board of directors, or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors, subject, in each case, to the rights, if any, of any such officer under any contract of employment with the corporation. 6 9 Any officer may resign at any time by giving written notice to the corporation, without prejudice, however, to the rights, if any, of the corporation under any contract to which such officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.04 Vacancies. A vacancy in any office shall be filled in the manner prescribed in these bylaws for regular appointments to such office. Section 4.05 Duties and Compensation. Officers of the corporation shall have such powers and duties, and shall receive such compensation therefor, as may be specified from time to time by the board of directors. ARTICLE V INDEMNIFICATION OF AGENTS OF THE CORPORATION; PURCHASE OF LIABILITY INSURANCE Section 5.01 Indemnification of Agents. (a) For the purposes of this Section, "Agent" means any person who is or was a director or officer of this corporation, or is or was serving at the request of the Board of Directors of this corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, including any such entity which was a predecessor of the corporation or of such other enterprise; "proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including without limitation an action by or in the right of this corporation); and "expenses" includes, without limitation, attorneys' fees and any expenses of establishing a right to indemnification under paragraph (d) or subparagraph (e) (3) of this Section. (b) This corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed proceeding (other than an action by or in the right of this corporation to procure a judgment in its favor) by reason of the fact that such person is or was an Agent of this corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of this corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of this corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. (c) This corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or in the right of this corporation to procure a judgment in its favor by reason of the fact that such 7 10 person is or was an Agent of this corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith, in a manner such person believed to be in the best interests of this corporation and its shareholders. No indemnification shall be made under this paragraph (c) for any of the following: (1) In respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to this corporation in the performance of such person's duty to this corporation and its shareholders, unless and only to the extent that the court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for expenses and then only to the extent that such court shall determine; (2) Of amounts paid in settling or otherwise disposing of a pending action without court approval; (3) Of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval; or (4) Of amounts or expenses the corporation is otherwise prohibited from paying under California Law. (d) To the extent that an Agent of this corporation has been successful on the merits in defense of any proceeding referred to in paragraph (b) or (c) or in defense of any claim, issue or matter therein, the Agent shall be indemnified against expenses actually and reasonably incurred by the Agent in connection therewith. (e) Except as provided in paragraph (d), any indemnification under this Section shall be made by this corporation only if authorized in the specific case, upon a determination that indemnification of the Agent is proper in the circumstances because the Agent has met the applicable standard of conduct set forth in paragraph (b) or (c), by any of the following: (1) A majority vote of a quorum consisting of directors who are not parties to such proceeding; (2) Approval or ratification by the affirmative vote of the holders of a majority of the shares of this corporation entitled to vote represented at a duly held meeting at which a quorum is present or by the written consent of holders of a majority of the outstanding shares entitled to vote, and by the affirmative vote or written consent of such greater proportion of the shares of any class or series as may be provided in the Articles of Incorporation for such action. For purposes of determining the required quorum of any meeting of shareholders called to approve or ratify indemnification of an 8 11 Agent and the vote or written consent required therefor, the shares owned by the person to be indemnified shall not be considered outstanding and shall not be entitled to vote thereon; or (3) The court in which such proceeding is or was pending, upon application made by this corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney or other person is opposed by this corporation. (f) Expenses incurred by or on behalf of an Agent in defending or investigating any proceeding shall be advanced by this corporation prior to the final disposition of such proceeding if such Agent undertakes in writing to repay any such advances if it is ultimately determined that such Agent is not entitled to be indemnified. Notwithstanding the foregoing, no advance shall be made by this corporation if a determination is reasonably and promptly made by the Board of Directors by a majority vote of a quorum of disinterested directors, or (if such a quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs) by independent legal counsel, that, based upon the facts known to the Board or counsel at the time such determination is made, (a) the Agent acted in bad faith or deliberately breached a duty to the corporation or its shareholders, and (b) as a result of such actions by the Agent, it is more likely than not that it will ultimately be determined that such Agent is not entitled to indemnification. (g) This Section shall create a right of indemnification for each person referred to in this Section, whether or not the proceeding to which the indemnification relates arose in whole or in part prior to adoption of this Section. The indemnification provided by this Section shall not be exclusive of any other rights to which those seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent such additional rights to indemnification are authorized in the Articles of Incorporation. The rights to indemnity under this Section shall continue as to a person who has ceased to be a director, officer, employee or Agent and shall inure to the benefit of the heirs, executors and administrators of such person. Nothing contained in this Section shall affect any right to indemnification to which persons other than such directors and officers may be entitled by contract, insurance policy or otherwise. (h) No indemnification or advance shall be made under this Section, except as provided in paragraph (d) or subparagraph (e)(3), in any circumstance where it appears: (1) That it would be inconsistent with a provision of the Articles of Incorporation, these bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. 9 12 (i) Upon determination by the board of directors, this corporation may purchase and maintain insurance on behalf of any Agent of this corporation against any liability asserted against or incurred by the Agent in such capacity or arising out of the Agent's status as such, whether or not this corporation would have the power to indemnify the Agent against such liability under the provisions of this Section. (j) This Section does not apply to any proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in such person's capacity as such, even though such person may also be an Agent of this corporation as defined in paragraph (a). This corporation shall have power to indemnify such a trustee, investment manager or other fiduciary to the extent permitted by Section 207(f) of the California Corporations Code. (k) As a condition precedent to the right to indemnification under this Section, notice shall be given to this corporation in writing as soon as practicable of any claim for which indemnity will or could be sought under this Section. In addition, no costs, charges or expenses for which indemnity shall be sought hereunder shall be incurred without this corporation's consent, which consent shall not be unreasonably withheld. (l) If a claim under this Section is not paid by this corporation, or on its behalf, within ninety (90) days after a written claim has been received by this corporation, the Agent may at any time thereafter bring suit against this corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the Agent shall be entitled to be paid also the expense of prosecuting such claim. 10 13 CERTIFICATE OF SECRETARY I, the undersigned, do hereby certify: 1. That I am the duly elected and acting assistant secretary of RemedyTemp, Inc., a California corporation; and 2. That the foregoing bylaws, consisting of ten (10) pages, including this page, constitute the amended and restated bylaws of said corporation as duly adopted by the shareholders of the corporation on February 18, 1998. IN WITNESS WHEREOF, I have executed this Certificate as secretary of the corporation effective as of the 19th day of February, 1998. ----------------------------------- Alan M. Purdy Assistant Secretary EX-10.11 3 AMENDED AND RESTATED REMEDYTEMP INC. STOCK PLAN 1 EXHIBIT 10.11 AMENDED AND RESTATED REMEDYTEMP, INC. 1996 STOCK INCENTIVE PLAN (EFFECTIVE AS OF FEBRUARY 18, 1998) ARTICLE I DEFINITIONS 1.01 DEFINITIONS. Capitalized terms used in the Plan and not otherwise defined shall have the meanings set forth below: (a) "AWARD" means an Incentive Award or a Non-employee Director's Option. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended from time to time. Where the context so requires, a reference to a particular Code section or regulation thereunder shall also be a reference to any successor provision of the Code to such section or regulation. (d) "COMMISSION" means the Securities and Exchange Commission. (e) "COMMITTEE" means the committee appointed by the Board to administer the Plan and, to the extent required to comply with Rule 16b-3 under the Exchange Act, consisting of two or more Board members, each of whom shall be a "Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange Act. In addition, if Incentive Awards are to be made to persons subject to Section 162(m) of the Code and such awards are intended to constitute Performance-Based Compensation, then each of the Committee's members shall also be an "outside director," as such term is defined in the regulations under Section 162(m) of the Code. (f) "COMMON STOCK" means the Class A Common Stock of the Company, $0.01 par value. (g) "DIVIDEND EQUIVALENT" means a right granted by the Company under Section 3.07 to a holder of a Stock Option, Stock Appreciation Right, or other Award denominated in shares of Common Stock to receive from the Company during the Applicable Dividend Period (as defined in Section 3.07) payments equivalent to the amount of dividends payable to holders of the number of shares of Common Stock underlying such Stock Option, Stock Appreciation Right, or other Award. (h) "ELIGIBLE PERSON" shall include officers or key employees, consultants, and advisors of the Company (as determined by the Committee) other than Non-employee Directors. (i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. Where the context so requires, a reference to a particular section of the Exchange Act or rule thereunder shall also refer to any successor provision to such section or rule. 2 (j) "FAIR MARKET VALUE" of a share of the Company's capital stock as of a particular date shall be: (i) if the stock is listed on an established stock exchange or exchanges (including, for this purpose, The Nasdaq National Market), the mean between the highest and lowest sale prices of the stock quoted for such date in the Transactions Index of each such exchange as averaged with such mean price as reported on any and all other exchanges, as published in The Wall Street Journal and determined by the Committee, or, if no sale price was quoted in any such Index for such date, then as of the next preceding date on which such a sale price was quoted; or (ii) if the stock is not then listed on an exchange, the average of the closing bid and asked prices per share for the stock in the over-the-counter market as quoted on the NASDAQ system on such date (in the case of (i) or (ii), subject to adjustment as and if necessary and appropriate to set an exercise price not less than 100% of the fair market value of the stock on the date an option is granted); or (iii) if the stock is not then listed on an exchange or quoted in the over-the-counter market, an amount determined in good faith by the Committee; provided, however, that when appropriate, the Committee in determining Fair Market Value of capital stock of the Company may take into account such other factors as it may deem appropriate under the circumstances. Notwithstanding the foregoing, the Fair Market Value of capital stock for purposes of grants of Incentive Stock Options shall be determined in compliance with applicable provisions of the Code. The Fair Market Value of rights or property other than capital stock of the Company means the fair market value thereof as determined by the Committee on the basis of such factors as it may deem appropriate. (k) "INCENTIVE AWARD" means any Stock Option, Restricted Stock, Stock Appreciation Right or Dividend Equivalent granted or sold to an Eligible Person under the Plan, but not a Non-employee Director's Option. (l) "INCENTIVE STOCK OPTION" means a Stock Option that qualifies as an incentive stock option under Section 422 of the Code and the regulations thereunder. (m) "JUST CAUSE DISMISSAL" means a termination of a Recipient's employment for any of the following reasons: (i) the Recipient violates any reasonable rule or regulation of the Board or the Recipient's superiors or the Chief Executive Officer or President of the Company that results in damage to the Company or which the Recipient fails to correct within a reasonable time after written notice; (ii) any willful misconduct or gross negligence by the Recipient in the discharge of the responsibilities assigned to him or her; (iii) any willful failure to perform his or her job as required to meet Company objectives; (iv) any wrongful conduct of a Recipient which has an adverse impact on the Company or which constitutes a misappropriation of Company assets; (v) the Recipient's performing services for any other person or entity which competes with the Company while he or she is employed by the Company, without the written approval of the Chief Executive Officer or President of the Company; or (vi) any other conduct that the Board or Committee determines constitutes Just Cause for Dismissal, provided, however, that if a Recipient is party to an employment agreement with the Company providing for just cause dismissal (or some comparable notion) of Recipient from his or her employment with the Company, "Just Cause Dismissal" purposes of the Plan shall have the same meaning as ascribed thereto or to such comparable notion in such employment agreement. (n) "NON-EMPLOYEE DIRECTOR" means a director of the Company who qualifies as a "Non-Employee Director" under Rule 16b-3 under the Exchange Act. (o) "NON-EMPLOYEE DIRECTOR'S OPTION" means a Stock Option granted to a Non-employee Director pursuant to Article IV of the Plan. 2 3 (p) "NON-QUALIFIED STOCK OPTION" means a Stock Option that is not an Incentive Stock Option. (q) "OPTION" or "STOCK OPTION" means a right to purchase Common Stock granted under the Plan, and can be an Incentive Stock Option or a Non-qualified Stock Option. (r) "PAYMENT EVENT" means the event or events giving rise to the right to payment of a Performance Award. (s) "PERFORMANCE AWARD" means an award granted under Section 3.03, payable in cash, Common Stock or a combination thereof, which vests and becomes payable over a period of time upon attainment of performance criteria established in connection with the grant of the award. (t) "PERFORMANCE-BASED COMPENSATION" means performance-based compensation as described in Section 162(m) of the Code and the regulations thereunder. If the amount of compensation a Recipient will receive under any Incentive Award is not based solely on an increase in the value of Common Stock after the date of grant or award, the Committee, in order to qualify an Incentive Award as performance-based compensation under Section 162(m) of the Code and the regulations thereunder, can condition the grant, award, vesting, or exercisability of such an award on the attainment of a preestablished, objective performance goal. For this purpose, a preestablished, objective performance goal may include one or more of the following performance criteria: (i) cash flow, (ii) earnings per share (including earnings before interest, taxes, and amortization), (iii) return on equity, (iv) total stockholder return, (v) return on capital, (vi) return on assets or net assets, (vii) income or net income, (viii) operating margin, (ix) return on operating revenue, and (x) any other similar performance criteria contemplated by the regulations under Section 162(m). (u) "PERMANENT DISABILITY" means that the Recipient becomes physically or mentally incapacitated or disabled so that he or she is unable to perform substantially the same services as he or she performed prior to incurring such incapacity or disability (the Company, at its option and expense, being entitled to retain a physician to confirm the existence of such incapacity or disability, and the determination of such physician to be binding upon the Company and the Recipient), and such incapacity or disability continues for a period of three consecutive months or six months in any 12-month period or such other period(s) as may be determined by the Committee with respect to any Option, provided that for purposes of determining the period during which an Incentive Stock Option may be exercised pursuant to Section 3.02(g)(ii) hereof, Permanent Disability shall mean "permanent and total disability" as defined in Section 22(e) of the Code. (v) "PURCHASE PRICE" means the purchase price (if any) to be paid by a Recipient for Restricted Stock as determined by the Committee (which price shall be at least equal to the minimum price required under applicable laws and regulations for the issuance of Common Stock which is nontransferable and subject to a substantial risk of forfeiture until specific conditions are met). (w) "RECIPIENT" means a recipient of an Award hereunder. (x) "RESTRICTED STOCK" means Common Stock that is the subject of an award made under Section 3.04 and which is nontransferable and subject to a substantial risk of forfeiture until specific conditions are met as set forth in this Plan and in any statement evidencing the grant of such Award. 3 4 (y) "SECURITIES ACT" means the Securities Act of 1933, as amended. (z) "STOCK APPRECIATION RIGHT" or "SAR" means a right granted under Section 3.05 to receive a payment that is measured with reference to the amount by which the Fair Market Value of a specified number of shares of Common Stock appreciates from a specified date, such as the date of grant of the SAR, to the date of exercise. (aa) "STOCK PAYMENT" means a payment in shares of the Company's Common Stock to replace all or any portion of the compensation (other than base salary) that would otherwise become payable to a Recipient. ARTICLE II GENERAL 2.01 ADOPTION. The Plan has been adopted by the Board and approved by the shareholders of the Company and is effective immediately prior to the closing of the initial public offering of the Company's securities. 2.02 PURPOSE. The purpose of the Plan is to promote the interests of the Company and its shareholders by using investment interests in the Company to attract and retain key personnel, to encourage and reward their contributions to the performance of the Company, and to align their interests with the interests of Company's shareholders. 2.03 ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee, which, subject to the express provisions of the Plan, shall have the power to construe the Plan and any agreements or memoranda defining the rights and obligations of the Company and Recipients thereunder, to determine all questions arising thereunder, to adopt and amend such rules and regulations for the administration thereof as it may deem desirable, and otherwise to carry out the terms of the Plan and such agreements and confirming memoranda. The interpretation and construction by the Committee of any provisions of the Plan or of any Award granted under the Plan shall be final. Any action taken by, or inaction of, the Committee relating to the Plan or Awards shall be within the absolute discretion of the Committee and shall be conclusive and binding upon all persons. No member of the Committee shall be liable for any such action or inaction except in circumstances involving bad faith of himself or herself. Subject only to compliance with the express provisions hereof, the Committee may act in its absolute discretion in matters related to the Plan or Awards, provided, however, that notwithstanding anything herein to the contrary, the Committee shall have no authority or discretion as to the selection of persons eligible to receive Non-employee Director's Options or the timing, exercise price, or number of shares covered by Non-employee Director's Options, which matters are specifically governed by the Plan. Any action of the Committee with respect to administration of the Plan shall be taken pursuant to a majority vote or unanimous written consent of its members. Subject to the requirements of Section 1.01(e), the Board may from time to time increase or decrease the number of members of the Committee, remove from membership on the Committee all or any portion of its members, and appoint such person or persons as it desires to fill any vacancy existing on the Committee, whether caused by removal, resignation or otherwise. 2.04 PARTICIPATION. A person shall be eligible to receive grants of Incentive Awards under the Plan if, at the time of the Award's grant, he or she is an Eligible Person. 4 5 2.05 SHARES OF COMMON STOCK SUBJECT TO PLAN. (a) Plan Limit and Counting. The shares that may be issued upon exercise of or in the form of Awards under the Plan shall be authorized and unissued shares of Common Stock, previously issued shares of Common Stock reacquired by the Company, and unused Award shares pursuant to the final sentence of this Section 2.05(a). The aggregate number of shares that may be issued pursuant to Awards under the Plan shall not exceed 1,225,000 shares of Common Stock, subject to adjustment in accordance with Article V. Shares of Common Stock subject to unexercised portions of any Award granted under the Plan that expire, terminate or are cancelled, and shares of Common Stock issued pursuant to an Award under the Plan that are reacquired by the Company pursuant to the terms of the Award under which such shares were issued, will again become available for the grant of further Awards under this Plan. (b) Annual Limit. Notwithstanding any other provision of this Plan, no Eligible Person shall be granted Incentive Awards with respect to more than 100,000 shares of Common Stock in any one calendar year; provided, however, that this limitation shall not apply if it is not required in order for the compensation attributable to Incentive Awards hereunder to qualify as Performance-Based Compensation. The limitation set forth in this Section 2.05(b) shall be subject to adjustment as provided in Article V, but only to the extent such adjustment would not affect the status of compensation attributable to Incentive Awards hereunder as Performance-Based Compensation. 2.06 AWARDS SUBJECT TO PLAN. (a) Terms. Each Award shall be subject to the terms and conditions of the Plan and such other terms and conditions (whether or not applicable to any other award) established by the Committee as are not inconsistent with the purpose and provisions of the Plan including, without limitation, provisions to assist the Recipient in financing the purchase of Common Stock through the exercise of Stock Options, provisions for the forfeiture of or restrictions on resale or other disposition of shares of Common Stock acquired under any Award, provisions giving the Company the right to repurchase shares of Common Stock acquired under any Award in the event the Recipient elects to dispose of such shares, and provisions to comply with federal and state securities laws and federal and state income tax withholding requirements. (b) Award Documents. Each Award granted under the Plan shall be evidenced by an award agreement duly executed on behalf of the Company and by the Recipient or, in the Committee's discretion, a confirming memorandum issued by the Company to the Recipient, setting forth such terms and conditions applicable to the Award as the Committee may in its discretion determine. Such option agreements or confirming memoranda may but need not be identical and shall comply with and be subject to the terms and conditions of the Plan, a copy of which shall be provided to each Recipient and incorporated by reference into each option agreement or confirming memorandum. Any award agreement or confirming memorandum may contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Committee. 2.07 AMENDMENTS. (a) Amendment and Suspension of the Plan. The Board or the Committee may, insofar as permitted by applicable laws and regulations, from time to time suspend or discontinue the Plan or revise or amend it in any respect whatsoever, and the Plan as so revised or amended will govern all options thereunder, including those granted before such revision or amendment, except that no such amendment shall impair or diminish in any material respect any 5 6 rights or impose additional material obligations under any Award theretofore granted under the Plan without the consent of the person to whom such Award was granted. Amendments shall be subject to approval by the Company's shareholders only to the extent required to comply with applicable laws or regulations. (b) Amendment of Incentive Awards. Subject to the requirements set forth in the Plan for amendment of particular Incentive Awards, the Committee may, with the consent of a Recipient, make such modifications in the terms and conditions of an Incentive Award as it deems advisable. Without limiting the generality of the foregoing, the Committee may, in its discretion with the consent of the Recipient, at any time and from time to time after the grant of any Incentive Award accelerate or extend the vesting or exercise period of the Incentive Award in whole or part, and adjust or reduce the purchase or exercise price of Incentive Awards held by such Recipient by cancellation of such Incentive Awards and granting of Incentive Awards at lower purchase or exercise prices or by modification, extension or renewal of such Incentive Awards. (c) Other Rights. Except as otherwise provided in this Plan or in the applicable award agreement or confirming memorandum, no amendment, suspension or termination of the Plan will, without the consent of the Recipient, alter, terminate, impair or adversely affect any right or obligation under any Award previously granted under the Plan. 2.08 TERM OF PLAN. Awards may be granted under the Plan until the tenth anniversary of the effective date of the Plan, whereupon the Plan shall terminate. No Awards may be granted during any suspension of the Plan or after its termination for any reason. Notwithstanding the foregoing, each Award properly granted under the Plan shall remain in effect until such Award has been exercised or terminated in accordance with its terms and the terms of the Plan. 2.09 RESTRICTIONS. All Awards granted under the Plan shall be subject to the requirement that, if at any time the Company shall determine, in its discretion, that the listing, registration or qualification of the shares subject to Awards granted under the Plan upon any securities exchange or under any state or federal law, or the consent or approval of any government or regulatory body or authority, is necessary or desirable as a condition of, or in connection with, the granting of such an Award or the issuance, if any, or purchase of shares in connection therewith, such Award may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. Unless the shares of stock covered by an Award granted under the Plan have been effectively registered under the Securities Act, the Company shall be under no obligation to issue such shares unless the Recipient shall give a written representation and undertaking to the Company satisfactory in form and scope to counsel to the Company and upon which, in the opinion of such counsel, the Company may reasonably rely, that he or she is acquiring such shares for his or her own account as an investment and not with a view to, or for sale in connection with, the distribution of any such shares of stock, and that he or she will make no transfer of the same except in compliance with any rules and regulations in force at the time of such transfer under the Securities Act, or any other applicable law or regulation, and that if shares of stock are issued without such registration, a legend to this effect may be endorsed upon the securities so issued, and the Company may order its transfer agent to stop transfers of such shares. 2.10 NONASSIGNABILITY. No Award granted under the Plan shall be assignable or transferable except (a) by will or by the laws of descent and distribution, or (b) subject to the final sentence of this Section 2.10, upon dissolution of marriage pursuant to a qualified domestic 6 7 relations order or, in the discretion of the Committee and under circumstances that would not adversely affect the interests of the Company, pursuant to a nominal transfer that does not result in a change in beneficial ownership. During the lifetime of a Recipient, an Award granted to him or her shall be exercisable only by the Recipient (or the Recipient's permitted transferee) or his or her guardian or legal representative. Notwithstanding the foregoing, (x) no Award owned by a Recipient subject to Section 16 of the Exchange Act may be assigned or transferred in any manner inconsistent with Rule 16b-3 as interpreted and administered by the Commission and its staff, and (y) Incentive Stock Options (or other Awards subject to transfer restrictions under the Code) may not be assigned or transferred in violation of Section 422(b)(5) of the Code or the Treasury Regulations thereunder, and nothing herein is intended to allow such assignment or transfer. 2.11 WITHHOLDING TAXES. Whenever shares of stock are to be issued upon exercise of or in connection with an Award granted under the Plan or subsequently transferred, the Committee shall have the right to require the Recipient to remit to the Company an amount sufficient to satisfy any federal, state and local withholding tax requirements prior to issuance of such shares. The Committee may, in the exercise of its discretion, allow satisfaction of tax withholding requirements by accepting delivery of stock of the Company or by withholding a portion of the stock otherwise issuable in connection with an Award. 2.12 RIGHTS OF ELIGIBLE PERSONS AND RECIPIENTS. Except as otherwise set forth herein, a Recipient or a permitted transferee of an Award shall have no rights as a shareholder with respect to any shares issuable or issued in connection with the Award until the date of the receipt by the Company of all amounts payable in connection with exercise of the Award and performance by the Recipient of all obligations thereunder. Status as an Eligible Person shall not be construed as a commitment that any Award will be granted under this Plan to an Eligible Person or to Eligible Persons generally. Nothing contained in this Plan (or in award agreements or confirming memoranda or in any other documents related to this Plan or to Awards granted hereunder) shall confer upon any Eligible Person or Recipient any right to continue in the employ of the Company or any of its subsidiaries or affiliates or constitute any contract or agreement of employment or engagement, or interfere in any way with the right of the Company or any of its subsidiaries or affiliates to reduce such person's compensation or other benefits or to terminate the employment of such Eligible Person or Recipient, with or without cause. No person shall have any right, title or interest in any fund or in any specific asset (including shares of capital stock) of the Company or any of its subsidiaries or affiliates by reason of any Award granted hereunder. Neither this Plan (or any documents related hereto) nor any action taken pursuant hereto shall be construed to create a trust of any kind or a fiduciary relationship between the Company or any of its subsidiaries or affiliates and any person. To the extent that any person acquires a right to receive an Award hereunder, such right shall be no greater than the right of any unsecured general creditor of the Company. 2.13 OTHER COMPENSATION PLANS. The adoption of the Plan shall not affect any other stock option, incentive or other compensation plans in effect for the Company, and the Plan shall not preclude the Company from establishing any other forms of incentive or other compensation for employees, directors, or advisors of the Company, whether or not approved by shareholders. 2.14 PLAN BINDING ON SUCCESSORS. The Plan shall be binding upon the successors and assigns of the Company. 2.15 PARTICIPATION BY FOREIGN EMPLOYEES. Notwithstanding anything to the contrary herein, the Committee may, consistent with the purposes of the Plan, modify grants of 7 8 Awards to confer the intended benefits of the Plan upon Recipients who are foreign nationals or employed outside of the United States to recognize differences in applicable law, tax policy or local custom. ARTICLE III AWARDS 3.01 GRANTS OF AWARDS. Subject to the express provisions of the Plan, the Committee may from time to time in its discretion select the Eligible Persons to whom, and the time or times at which, Incentive Awards shall be granted or sold, the nature of each Incentive Award, the number of shares of Common Stock or the number of rights that make up or underlie each Incentive Award, the period for the exercise of each Incentive Award, the performance criteria (which need not be identical) utilized to measure the value of Performance Awards, and such other terms and conditions applicable to each individual Incentive Award as the Committee shall determine. The Committee may grant at any time new Incentive Awards to an Eligible Person who has previously received Incentive Awards or other grants (including other stock options) whether such prior Incentive Awards or such other grants are still outstanding, have previously been exercised in whole or in part, or are cancelled in connection with the issuance of new Incentive Awards. The Committee may grant Incentive Awards singly or in combination or in tandem with other Incentive Awards as it determines in its discretion. The purchase price or initial value and any and all other terms and conditions of the Incentive Awards may be established by the Committee without regard to existing Incentive Awards or other grants. Further, the Committee may amend in a manner not inconsistent with the Plan the terms of any existing Incentive Award previously granted to such Eligible Person, provided that the consent of the Recipient shall be required for amendments that impair or diminish in any material respect any rights or impose additional material obligations under the Incentive Award to be amended. Notwithstanding the foregoing, however, members of the Committee shall not be eligible to receive Incentive Awards. 3.02 STOCK OPTIONS. (a) Nature of Stock Options. Stock Options may be Incentive Stock Options or Non-qualified Stock Options; Stock Options granted as Incentive Stock Options that fail or cease to qualify as such shall be treated as Non-qualified Stock Options hereunder. (b) Setting the Exercise Price. The exercise price for each Option shall be determined by the Committee at the date such Option is granted. The exercise price may be less than the Fair Market Value of the Common Stock subject to the Option, provided that in no event shall the exercise price be less than the par value of the shares of Common Stock subject to the Option, and provided further that the exercise price of an Incentive Stock Option shall be not less than such amount as is necessary to enable such Option to be treated as an "incentive stock option" within the meaning of Section 422 of the Code. The Committee, with the consent of the Recipient, and subject to compliance with statutory or administrative requirements applicable to Incentive Stock Options, may amend the terms of any Option (other than a Non-employee Director's Option) to provide that the exercise price of the shares remaining subject to the Option shall be reestablished at a price below the existing exercise price thereof or effect a reduction in exercise price by cancellation of an existing option and grant of a replacement option at an exercise price below the existing exercise price thereof. If the exercise price of an Option is reduced (or such Option is canceled for a new Option) and such Option is Performance-Based Compensation, the reduction of the Option's price (or the cancellation and grant of a new Option) shall be treated as the grant of a new Option and both the old and new Option shall be taken into account for purposes of applying the stock limit of Section 2.05(b). No modification of any 8 9 other term or provision of any Option which is amended in accordance with the foregoing shall be required, although the Committee may, in its discretion, make such further modifications of any such Option (other than Non-employee Director's Options) as are not inconsistent with the Plan. (c) Payment of the Exercise Price. The exercise price shall be payable upon the exercise of an Option in legal tender of the United States or capital stock of the Company delivered in transfer to the Company by or on behalf of the person exercising the Option and duly endorsed in blank or accompanied by stock powers duly endorsed in blank, with signatures guaranteed in accordance with the Exchange Act if required by the Committee, or retained by the Company from the Stock otherwise issuable upon exercise or surrender of vested and/or exercisable Awards or other equity incentive awards previously granted to the Recipient and being exercised (if applicable) (in either case valued at Fair Market Value as of the exercise date); or such other consideration as the Committee may from time to time in the exercise of its discretion deem acceptable in any particular instance, provided, however, that the Committee may, in the exercise of its discretion, (i) allow exercise of an Option in a broker-assisted or similar transaction in which the exercise price is not received by the Company until promptly after exercise, and/or (ii) allow the Company to loan the exercise price to the person entitled to exercise the Option, if the exercise will be followed by a prompt sale of some or all of the underlying shares and a portion of the sales proceeds is dedicated to full payment of the Exercise Price and amounts required pursuant to Section 2.11. (d) Option Period and Vesting. Options granted hereunder (other than Non-employee Director's Options) shall vest and may be exercised as determined by the Committee, except that exercise of such Options after termination of the Recipient's employment shall be subject to Section 3.02(g). Each Option granted hereunder (other than a Non-employee Director's Option) and all rights or obligations thereunder shall expire on such date as shall be determined by the Committee, but not later than ten years after the date the Option is granted, or five years after the date of grant in the case of a Recipient of an Incentive Stock Option who at the time of grant owns more than 10% of the combined voting power of the Company (after application of the constructive ownership rules of Section 424(d) of the Code), or any Parent or Subsidiary (as defined in Sections 424(e) and (f) of the Code, respectively), and shall be subject to earlier termination as herein provided. (e) Exercise of Options. Except as otherwise provided herein, an Option may become exercisable, in whole or in part, on the date or dates specified by the Committee (or, in the case of Non-employee Director's Options, the Plan) and thereafter shall remain exercisable until the expiration or earlier termination of the Option. No Option shall be exercisable except in respect of whole shares, and fractional share interests shall be disregarded. Not less than 100 shares of stock (or such other amount as is set forth in the applicable option agreement or confirming memorandum) may be purchased at one time and Options must be exercised in multiples of 100 unless the number purchased upon exercise is the total number at the time available for purchase under the terms of the Option. An Option shall be deemed to be exercised when the Secretary or other designated official of the Company receives written notice of such exercise from the Recipient, together with payment of the exercise price and any amounts required under Section 2.11. Notwithstanding any other provision of the Plan, the Committee may impose, by rule and in option agreements or confirming memoranda, such conditions upon the exercise of Options (including, without limitation, conditions limiting the time of exercise to specified periods) as may be required to satisfy applicable regulatory requirements, including without limitation Rule 10b-5 or Rule 16b-3 (or any successor rule) under the Exchange Act and any applicable section of or regulation under the Code. 9 10 (f) Limitation on Exercise of Incentive Stock Options. The aggregate Fair Market Value (determined as of the respective date or dates of grant) of the stock for which one or more Options granted to any Recipient under the Plan (or any other option plan of the Company or any of its subsidiaries or affiliates) may for the first time become exercisable as Incentive Stock Options under the federal tax laws during any one calendar year shall not exceed $100,000. Any Options granted as Incentive Stock Options pursuant to the Plan in excess of such limitation shall be treated as Non-qualified Stock Options. (g) Termination of Employment. (i) Termination for Cause. Except as otherwise provided in a written agreement between the Company and the Recipient, which may be entered into at any time before or after termination, in the event of a Just Cause Dismissal of a Recipient all of the Recipient's unexercised Options, whether or not vested, shall expire and become unexercisable as of the date of such Just Cause Dismissal. (ii) Termination other than Just Cause Dismissal. Subject to subsection (i) above and subsection (iii) below, and except as otherwise provided in a written agreement between the Company and the Recipient, or a confirming memorandum issued by the Company to the Recipient with the Recipient's consent, which may be entered into or delivered at any time before or after termination, in the event of a Recipient's termination of employment for: (A) any reason other than Just Cause Dismissal, death, or Permanent Disability, the Recipient's unexercised Options, whether or not vested, shall expire and become unexercisable as of the earlier of (1) the date such Options would expire in accordance with their terms if the Recipient remained employed or (2) three calendar months after the date of termination in the case of Incentive Stock Options, or six months after the date of termination in the case of Non-qualified Stock Options. (B) death or Permanent Disability, the Recipient's unexercised Options, whether or not vested, shall expire and become unexercisable as of the earlier of (1) the date such Options would expire in accordance with their terms if the Recipient remained employed or (2) 12 months after the date of termination. (iii) Alteration of Vesting and Exercise Periods. Notwithstanding anything to the contrary in subsections (i) or (ii) above, the Committee may in its discretion pursuant to Section 2.07(b) designate shorter or longer periods to exercise Options following a Recipient's termination of employment. Options shall be exercisable by a Recipient (or his successor in interest) following such Recipient's termination of employment only to the extent that installments thereof had become exercisable on or prior to the date of such termination unless the Company has a written agreement with the Recipient of the Option providing otherwise or the vesting period is extended pursuant to Section 2.07(b). 3.03 PERFORMANCE AWARDS. (a) Grant of Performance Award. The Committee shall determine the performance criteria (which need not be identical and may be established on an individual or group basis) governing Performance Awards, the terms thereof, and the form and time of payment of Performance Awards. 10 11 (b) Payment of Award; Limitation. Upon satisfaction of the conditions applicable to a Performance Award, payment will be made to the Recipient in cash or in shares of Common Stock valued at Fair Market Value or a combination of Common Stock and cash, as the Committee in its discretion may determine. (c) Annual Limit. Notwithstanding any other provision of this Plan, no Eligible Person shall be paid a Performance Award in excess of $250,000 in any one calendar year; provided, however, that this limitation shall not apply to the extent it is not required in order for the compensation attributable to the Performance Award hereunder to qualify as Performance-Based Compensation. (d) Expiration of Performance Award. If any Recipient's employment with the Company is terminated for any reason other than normal retirement, death, or Permanent Disability prior to the time a Performance Award or any portion thereof becomes payable, all of the Recipient's rights under the unpaid portion of the Performance Award shall expire and terminate unless otherwise determined by the Committee. In the event of termination of employment by reason of death, Permanent Disability or normal retirement, the Committee, in its discretion, may determine what portions, if any, of the Performance Award should be paid to the Recipient. 3.04 RESTRICTED STOCK. (a) Award of Restricted Stock. The Committee shall determine the Purchase Price (if any) applicable to Restricted Stock, the terms of payment of the Purchase Price, the restrictions upon the Restricted Stock, and when such restrictions shall lapse. (b) Requirements of Restricted Stock. All shares of Restricted Stock granted or sold pursuant to the Plan will be subject to the following conditions: (i) No Transfer. The shares may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, alienated or encumbered until the restrictions are removed or expire; (ii) Certificates. The Committee may require that the certificates representing Restricted Stock granted or sold to a Recipient pursuant to the Plan remain in the physical custody of an escrow holder or the Company until all restrictions are removed or expire; (iii) Restrictive Legends. Each certificate representing Restricted Stock granted or sold to a Recipient pursuant to the Plan will bear such legend or legends making reference to the restrictions imposed upon such Restricted Stock as the Committee in its discretion deems necessary or appropriate to enforce such restrictions; and (iv) Other Restrictions. The Committee may impose such other conditions on Restricted Stock as the Committee may deem advisable including, without limitation, restrictions under the Securities Act, under the Exchange Act, under the requirements of any stock exchange upon which such Restricted Stock or shares of the same class are then listed and under any blue sky or other securities laws applicable to such shares. (c) Lapse of Restrictions. The restrictions imposed upon Restricted Stock will lapse in accordance with such schedule or other conditions as are determined by the Committee. 11 12 (d) Rights of Recipient. Subject to the provisions of Section 3.04(b) and any restrictions imposed upon the Restricted Stock, the Recipient will have all rights of a shareholder with respect to the Restricted Stock granted or sold to such Recipient under the Plan, including the right to vote the shares and receive all dividends and other distributions paid or made with respect thereto. (e) Termination of Employment. Unless the Committee in its discretion determines otherwise, upon a Recipient's termination of employment for any reason, all of the Recipient's Restricted Stock remaining subject to restrictions imposed pursuant to the Plan on the date of such termination of employment shall be repurchased by the Company at the Purchase Price (if any) paid therefor by the Recipient. 3.05 STOCK APPRECIATION RIGHTS. (a) Granting of Stock Appreciation Rights. The Committee may approve the grant to Eligible Persons of Stock Appreciation Rights, related or unrelated to Options, at any time. (b) SARs Related to Options. (i) A Stock Appreciation Right granted in connection with an Option granted under this Plan will entitle the holder of the related Option, upon exercise of the Stock Appreciation Right, to surrender such Option, or any portion thereof to the extent unexercised, with respect to the number of shares as to which such Stock Appreciation Right is exercised, and to receive payment of an amount computed pursuant to Section 3.05(b)(iii). Such Option will, to the extent surrendered, then cease to be exercisable. (ii) A Stock Appreciation Right granted in connection with an Option hereunder will be exercisable at such time or times, and only to the extent that, the related Option is exercisable, and will not be transferable except to the extent that such related Option may be transferable. (iii) Upon the exercise of a Stock Appreciation Right related to an Option, the Holder will be entitled to receive payment of an amount determined by multiplying: (i) the difference obtained by subtracting the Exercise Price of a share of Common Stock specified in the related Option from the Fair Market Value of a share of Common Stock on the date of exercise of such Stock Appreciation Right (or as of such other date or as of the occurrence of such event as may have been specified in the instrument evidencing the grant of the Stock Appreciation Right), by (ii) the number of shares as to which such Stock Appreciation Right is exercised. (c) SARs Unrelated to Options. The Committee may grant Stock Appreciation Rights unrelated to Options to Eligible Persons. Section 3.05(b)(iii) shall be used to determine the amount payable at exercise under such Stock Appreciation Right, except that in lieu of the Option Exercise Price specified in the related Option the initial base amount specified in the Award shall be used. (d) Limits. Notwithstanding the foregoing, the Committee, in its discretion, may place a dollar limitation on the maximum amount that will be payable upon the exercise of a Stock Appreciation Right under the Plan. 12 13 (e) Payments. Payment of the amount determined under the foregoing provisions may be made solely in whole shares of Common Stock valued at their Fair Market Value on the date of exercise of the Stock Appreciation Right or, alternatively, at the sole discretion of the Committee, in cash or in a combination of cash and shares of Common Stock as the Committee deems advisable. The Committee has full discretion to determine the form in which payment of A Stock Appreciation Right will be made and to consent to or disapprove the election of a Recipient to receive cash in full or partial settlement of a Stock Appreciation Right. If the Committee decides to make full payment in shares of Common Stock, and the amount payable results in a fractional share, payment for the fractional share will be made in cash. (f) Rule 16b-3. The Committee may, at the time a Stock Appreciation Right is granted, impose such conditions on the exercise of the Stock Appreciation Right as may be required to satisfy the requirements of Rule 16b-3 under the Exchange Act (or any other comparable provisions in effect at the time or times in question). (g) Termination of Employment. Section 3.02(g) will govern the treatment of Stock Appreciation Rights upon the termination of a Recipient's employment with the Company. 3.06 STOCK PAYMENTS. The Committee may approve Stock Payments of the Company's Common Stock to any Eligible Person for all or any portion of the compensation (other than base salary) or other payment that would otherwise become payable by the Company to the Eligible Person in cash. 3.07 DIVIDEND EQUIVALENTS. The Committee may grant Dividend Equivalents to any Recipient who has received a Stock Option, SAR, or other Award denominated in shares of Common Stock. Such Dividend Equivalents shall be effective and shall entitle the recipients thereof to payments during the "APPLICABLE DIVIDEND PERIOD," which shall be (i) the period between the date the Dividend Equivalent is granted and the date the related Stock Option, SAR, or other Award is exercised, terminates, or is converted to Common Stock, or (ii) such other time as the Committee may specify in the written instrument evidencing the grant of the Dividend Equivalent. Dividend Equivalents may be paid in cash, Common Stock, or other Awards; the amount of Dividend Equivalents paid other than in cash shall be determined by the Committee by application of such formula as the Committee may deem appropriate to translate the cash value of dividends paid to the alternative form of payment of the Dividend Equivalent. Dividend Equivalents shall be computed as of each dividend record date and shall be payable to recipients thereof at such time as the Committee may determine. Notwithstanding the foregoing, if it is intended that an Incentive Award qualify as Performance-Based Compensation and the amount of the compensation the Eligible Person could receive under the award is based solely on an increase in value of the underlying stock after the date of grant or award (i.e., the grant, vesting, or exercisability of the award is not conditioned upon the attainment of a preestablished, objective performance goal described in Section 1.01(t)), then the payment of any Dividend Equivalents related to the award shall not be made contingent on the exercise of the award. ARTICLE IV NON-EMPLOYEE DIRECTOR'S OPTIONS 4.01 GRANTS OF ORIGINAL AND INITIAL OPTIONS. (a) Original Options. Persons serving as Non-employee Directors as of the closing of the initial public offering of the Company's securities shall, upon such closing, receive a one-time grant of an option to purchase up to 10,000 shares (or 15,000 shares if such person has served as a director of the Company for at least two years) of the Company's Common Stock 13 14 at an exercise price per share equal to the price to the public in such initial public offering, subject to adjustment as set forth in Article V. Options granted under this Section 4.01(a) are "ORIGINAL OPTIONS" for purposes hereof. (b) Initial Options. Each Non-employee Director who joins the Board after the consummation of the initial public offering of the Company's securities shall, upon first becoming a Non-employee Director ("Eligible Director"), receive a one-time grant of an option to purchase up to 10,000 shares of the Company's Common Stock at an exercise price per share equal to the Fair Market Value of the Company's Common Stock on the date of grant, subject to (a) vesting as set forth in Section 4.03, and (b) adjustment as set forth in Article V. Options granted under this Section 4.01(b) are "INITIAL OPTIONS" for purposes hereof. 4.02 GRANTS OF ADDITIONAL OPTIONS. Immediately following the annual meeting of shareholders of the Company next following an Eligible Director's becoming an Eligible Director, and immediately following each subsequent annual meeting of shareholders of the Company, in each case if the Eligible Director has served as a director since his or her election or appointment and has been re-elected as a director at such annual meeting or is continuing as a director without being re-elected due to the classification of the board, such Eligible Director shall automatically receive an option to purchase up to 5,000 shares of the Company's Common Stock (an "ADDITIONAL OPTION"). In addition to the Additional Options described above, an individual who was previously an Eligible Director and received an initial grant of stock options under the Plan or pursuant to a prior option plan for the Company's directors, who then ceased to be a director for any reason, and who then again becomes an Eligible Director, shall upon again becoming an Eligible Director automatically receive an Additional Option. The exercise price per share for all Additional Options shall be equal to the fair market value of the Company's Common Stock on the date of grant, subject to (a) vesting as set forth in Section 4.03, and (b) adjustment as set forth in Article V. No individual may receive Additional Options to purchase more than an aggregate of 20,000 shares of the Company's Common Stock, less the number of additional options received under any other option plan for the Company's directors. 4.03 VESTING. Original Options shall vest and become exercisable with respect to all underlying shares upon grant. Initial Options shall vest and become exercisable with respect to 50% of the underlying shares upon the date of grant and 50% of the underlying shares immediately prior to the next annual shareholders' meeting following the date of grant (or, if an annual meeting of shareholders occurs within six months after the grant date, then immediately prior to the second annual shareholders' meeting after the date of grant), if the Recipient has remained a director from the grant date to such vesting time. Additional Options shall vest and become exercisable with respect to all underlying shares upon the earlier of (y) the first anniversary the grant date or (z) immediately prior to the annual meeting of shareholders of the Company next following the grant date, if the optionee has served as a director from the grant date to such earlier date. Notwithstanding the foregoing, however, Initial Options and Additional Options that have not vested and become exercisable at the time the optionee ceases to be a director shall terminate. 4.04 EXERCISE. The exercise price for Non-employee Directors' Options shall be payable as set forth in Section 3.02(c). Non-employee Directors' Options shall be exercised in the manner provided in Section 3.02(e). 4.05 TERM OF OPTIONS AND EFFECT OF TERMINATION. Notwithstanding any other provision of the Plan, no Non-employee Director's Option granted under the Plan shall be exercisable after the expiration of ten years from the effective date of its grant. In the event that 14 15 the recipient of any Non-employee Directors' Options granted under the Plan shall cease to be a director of the Company, (a) all Original Options and Initial Options granted under this plan to such recipient shall be exercisable, to the extent already exercisable at the date such recipient ceases to be a director and regardless of the reason the recipient ceases to be a director, for a period of 365 days after that date (or, if sooner, until the expiration of the option according to its terms), and shall then terminate; and (b) all Additional Options granted under this Plan to such recipient shall be exercisable, to the extent already exercisable at the date such recipient ceases to be a director, for a period of 365 days after that date (or, if sooner, until the expiration of the option according to its terms) if he or she ceases to be a director because of death or permanent disability, or for a period of 90 days after that date (or, if sooner, until the expiration of the option according to its terms) if he or she ceases to be a director for any other reason, and shall then terminate. In the event of the death of an optionee while such optionee is a director of the Company or within the period after termination of such status during which he or she is permitted to exercise an option, such option may be exercised by any person or persons designated by the optionee on a beneficiary designation form adopted by the Plan administrator for such purpose or, if there is no effective beneficiary designation form on file with the Company, by the executors or administrators of the optionee's estate or by any person or persons who shall have acquired the option directly from the optionee by his or her will or the applicable laws of descent and distribution. ARTICLE V CORPORATE TRANSACTIONS 5.01 ANTI-DILUTION ADJUSTMENTS. The number of shares of Common Stock available for issuance upon exercise of Awards granted under the Plan, the number of shares for which each Award can be exercised, and the exercise price per share of Awards shall be appropriately and proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend or any other increase or decrease in the number of issued and outstanding shares of capital stock of the Company effected without receipt of consideration by the Company. No fractional interests will be issued under the Plan resulting from any such adjustments. The preceding sentence shall not result in an adjustment to the terms of an Incentive Stock Option unless such adjustment either (a) would not cause the Option to lose its status as an Incentive Stock Option or (b) is agreed to in writing by the Committee and the Recipient. 5.02 REORGANIZATIONS; MERGERS; CHANGES IN CONTROL. Subject to the other provisions of this Section 5.02, if the Company shall consummate any reorganization or merger or consolidation in which holders of shares of the Company's Common Stock are entitled to receive in respect of such shares any other consideration (including, without limitation, a different number of such shares), each Award outstanding under the Plan exercisable for Common Stock shall thereafter be exercisable, in accordance with the Plan, only for the kind and amount of securities, cash and/or other property receivable upon such reorganization or merger or consolidation by a holder of the same number of shares of Common Stock as are subject to that Award immediately prior to such reorganization or merger or consolidation, and any appropriate adjustments will be made to the exercise price thereof. In addition, if a Change in Control (as defined below) occurs and in connection with such Change in Control any Recipient's employment with the Company is terminated, then subject to the terms of any written employment agreement between the Company and the Recipient and the specific terms of any Award, such Recipient shall have the right to exercise or receive the full benefit of his or her Awards granted under the Plan in whole or in part during the applicable time period provided in Section 3.02(g) without regard to any vesting or performance requirements or other milestones. 15 16 For purposes hereof, but without limitation, a Recipient's employment with the Company will be deemed to have been terminated in connection with a Change of Control if (i) the Recipient is removed from his or her employment with the Company by or resigns his or her employment with the Company upon request of a Person (as defined in paragraph (a) below) exercising practical voting control over the Company following the Change in Control or a person acting upon authority or at the instruction of such Person, or (ii) the Recipient's position is eliminated as a result of a reduction in force within 150 days after the consummation of the Change in Control. In addition, if a Change in Control occurs and in connection with such Change in Control any recipient of a Non-employee Director's Option granted under the Plan ceases to be a director of the Company or its successor, then such recipient shall have the right to exercise his or her Non-Employee Director's Options granted under the Plan in whole or in part during the applicable time period provided in Section 4.05 without regard to any vesting requirements. For purposes hereof, but without limitation, a director will be deemed to have ceased to be a director of the Company or its successor in connection with a Change in Control if such director (i) is removed by or resigns upon request of a Person (as defined in paragraph (a) below) exercising practical voting control over the Company following the Change in Control or a person acting upon authority or at the instruction of such Person, or (ii) is willing and able to continue as a director of the Company or its successor but is not re-elected to or retained on the Company's board of directors by the Company's shareholders through the shareholder vote or consent action for election of directors that precedes and is taken in connection with, or next follows, the Change in Control, and is not elected or appointed to the board of directors of the successor. For purposes hereof, a "CHANGE IN CONTROL" means the following and shall be deemed to occur if any of the following events occur: (a) Any person, entity or group, within the meaning of Section 13(d) or 14(d) of the Exchange Act, but excluding the Company, its subsidiaries, any employee benefit or stock ownership plan of the Company or its subsidiaries, and any shareholder of the Company who, together with such shareholder's Affiliates, owned at least 25% of the Common Stock prior to the effective date of the Plan ("affiliate" being defined for such purpose as an entity controlled by or under common control with such shareholder), and also excluding an underwriter or underwriting syndicate that has acquired the Company's securities solely in connection with a public offering thereof (such person, entity or group being referred to herein as a "Person"), becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either the then outstanding shares of Common Stock or the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; or (b) Individuals who, as of the effective date hereof, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors of the Company, provided that any individual who becomes a director after the effective date hereof whose election, or nomination for election by the Company's shareholders, is approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered to be a member of the Incumbent Board; or (c) Consummation by the Company of the sale or other disposition by the Company of all or substantially all of the Company's assets or a reorganization or merger or consolidation of the Company with any other person, entity or corporation, other than (i) a reorganization or merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto (or, in the case of a reorganization or merger or consolidation that is preceded or accomplished by an acquisition or series of related acquisitions by any Person, by tender or exchange offer or otherwise, of voting 16 17 securities representing 5% or more of the combined voting power of all securities of the Company, immediately prior to such acquisition or the first acquisition in such series of acquisitions) continuing to represent, either by remaining outstanding or by being converted into voting securities of another entity, more than 50% of the combined voting power of the voting securities of the Company or such other entity outstanding immediately after such reorganization or merger or consolidation (or series of related transactions involving such a reorganization or merger or consolidation), or (ii) a reorganization or merger or consolidation effected to implement a recapitalization or reincorporation of the Company (or similar transaction) that does not result in a material change in beneficial ownership of the voting securities of the Company or its successor; or (d) Approval by the shareholders of the Company or an order by a court of competent jurisdiction of a plan of liquidation of the Company. 5.03 DETERMINATION BY THE COMMITTEE. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. The grant of an Award pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all of any part of its business or assets. 17 EX-10.13 4 FORM OF FRANCHISING AGREEMENT FOR LICENSED OFFICES 1 EXHIBIT 10.13 FRANCHISE AGREEMENT BY AND BETWEEN REMEDYTEMP, INC. AND _________________________ DATED __________ __, 199_ FTC 2 TABLE OF CONTENTS
PAGE ---- 1. DEFINITIONS....................................................................1 2. GRANT OF FRANCHISE.............................................................5 3. TERRITORIAL RIGHTS.............................................................5 3.1. LOCATION.................................................................5 3.2. TERRITORY................................................................5 3.3. RESTRICTIONS.............................................................5 3.3.1. Relinquishment Procedures........................................5 3.4. RESERVED RIGHTS..........................................................6 3.4.1. Franchisor's Reserved Rights.....................................6 3.4.2. Franchisee's Reserved Rights.....................................6 4. TERM AND RENEWAL...............................................................6 4.1. INITIAL TERM.............................................................6 4.2. SUCCESSIVE TERMS - FRANCHISEE'S OPTION...................................6 4.3. SUCCESSIVE TERMS - PROCEDURES............................................7 4.3.1. Franchisor's Responsibilities....................................7 4.3.2. Franchisee's Responsibilities....................................7 4.4. NO SUCCESSIVE TERMS .....................................................7 5. FEES. ....................................................................7 5.1. INITIAL FRANCHISE FEE....................................................7 5.2. CONTINUING FEES, UNCOLLECTIBLES, COLLECTION EXPENSES.....................7 5.3. PAYMENT OF FRANCHISEE'S SHARE............................................8 5.4. LATE PAYMENTS............................................................8
i 3 5.5. APPLICATION OF PAYMENTS..................................................8 5.6. CALCULATION OF FRANCHISOR'S SHARE........................................8 5.7. DETERMINATION OF GROSS MARGIN............................................9 5.8. AGGREGATION OF HOURS OF OTHER BUSINESSES.................................9 5.9. ALLOCATION OF TEMPORARY EMPLOYEE EXPENSES................................9 6. COMMENCEMENT AS A REMEDY FRANCHISEE...........................................10 6.1. TIME LIMITATIONS........................................................10 6.2. FRANCHISOR'S APPROVAL TO COMMENCE OPERATIONS............................10 7. TRAINING......................................................................10 7.1. INITIAL TRAINING........................................................10 7.1.1. Training.........................................................10 7.2. COMPLETION OF TRAINING; ADDITIONAL EVALUATION...........................10 7.3. FAILURE TO COMPLETE TRAINING/EVALUATION.................................10 7.4. NATIONAL BUSINESS CONFERENCE............................................11 8. EMPLOYMENT, BILLING, COLLECTION AND PAYMENT OF TEMPORARY EMPLOYEE EXPENSES....11 8.1. FRANCHISOR'S OBLIGATIONS................................................11 8.1.1. Employment of Temporary Employees...............................11 8.1.2. Billings and Collections........................................11 8.2. FRANCHISEE'S OBLIGATIONS................................................12 8.2.1. Temporary Employees..............................................12 8.2.2. Credit Policies.................................................12 8.2.3. Workers' Compensation Risk Policies.............................12
ii 4 8.2.4. Transmittal of Payments.........................................12 8.3. NATURE OF COLLECTIONS RELATIONSHIP......................................12 9. ADDITIONAL SERVICES TO BE PROVIDED BY FRANCHISOR..............................13 9.1. OPENING PUBLICITY.......................................................13 9.2. MANAGEMENT ASSISTANCE...................................................13 9.3. ADDITIONAL GUIDANCE.....................................................13 9.4. ACQUISITION OF GOODS AND SERVICES.......................................13 9.5. ON-LINE OPERATING MANUAL................................................13 9.5.1. Confidential Nature.............................................13 9.5.2. Contents........................................................13 9.5.3. Modification by Franchisor......................................14 9.5.4. Strict Compliance by Franchisee.................................14 10. MARKS. ...................................................................14 10.1. OWNERSHIP.............................................................14 10.2. USE...................................................................14 10.3. PROHIBITED USES.......................................................15 10.4. NOTICES...............................................................15 10.5. CONTROL OF PROCEEDINGS................................................15 10.6. DISCONTINUANCE OF USE.................................................15 10.7. INDEMNIFICATION.......................................................15 11. RELATIONS....................................................................16 11.1. NATURE OF RELATIONSHIP................................................16 11.2. IDENTIFICATION........................................................16 11.3. OBLIGATIONS...........................................................16 12. INDEMNIFICATION..............................................................16
iii 5 13. TRADE SECRETS................................................................17 13.1. LIMITS ON USE.........................................................17 13.2. NONCOMPETITION........................................................17 13.2.1. Franchisee's Covenant Not to Compete During Term of Agreement........................................17 13.2.2. Solicitation of Customers....................................18 13.2.3. Solicitation of Employees....................................18 13.2.4. Employees' Covenants Not To Compete..........................18 13.2.5. Franchisee's Covenant Not to Compete Following Termination...18 13.2.6. Exceptions...................................................19 14. MINIMUM PERFORMANCE STANDARDS AND OFFICE DEVELOPMENT REQUIREMENTS+...........19 14.1. MINIMUM GROSS BILLINGS................................................19 14.2. REMEDIES FOR FAILURE TO SATISFY MINIMUM PERFORMANCE STANDARDS.........19 14.3. OFFICE DEVELOPMENT REQUIREMNETS.......................................19 15. IMAGE AND OPERATING STANDARDS................................................20 15.1. SERVICES..............................................................20 15.2. SPECIFICATIONS, STANDARDS AND PROCEDURES..............................20 15.3. COMPLIANCE WITH LAWS..................................................20 15.4. REPORTS...............................................................21 15.5. ACTIONS...............................................................21 15.6. BUSINESS RELATIONS - PROFESSIONAL CONDUCT.............................21 15.7. HIRING, TRAINING AND CONDUCT OF EMPLOYEES.............................21
iv 6 16. INSURANCE....................................................................21 16.1. POLICIES..............................................................21 16.2. PROOF OF COVERAGE.....................................................21 16.3. ENDORSEMENTS..........................................................22 16.3.1. Additional Insured...........................................22 16.3.2. Cross-Liability..............................................22 16.3.3. Waiver of Subrogation........................................22 16.4. LOSS OF COVERAGE......................................................22 16.5. FAILURE TO MAINTAIN...................................................22 16.6. INSURANCE PROGRAMS....................................................22 16.7. OBLIGATION UNCONDITIONAL..............................................22 17. COOPERATIVE ADVERTISING......................................................23 18. LOCAL ADVERTISING BY FRANCHISEE..............................................23 18.1. REQUIRED ADVERTISING..................................................23 18.2. CONDUCT...............................................................23 18.3. APPROVALS.............................................................23 19. ACCOUNTING, REPORTS, FINANCIAL STATEMENTS....................................24 19.1. MAINTENANCE...........................................................24 19.2. REPORTS...............................................................24 20. PERIODIC REVIEWS, INSPECTIONS AND AUDITS.....................................24 20.1. PERIODIC REVIEWS......................................................24 20.2. INSPECTIONS...........................................................24 20.3. AUDITS................................................................25 21. COMPUTERIZED MANAGEMENT AND OPERATIONAL SYSTEM...............................25 21.1. SOFTWARE LICENSE......................................................25
v 7 21.2. SOFTWARE UPDATE AND SUPPORT. ........................................26 21.3. HARDWARE..............................................................26 21.4. HARDWARE MAINTENANCE..................................................26 21.5. INFORMATION RETRIEVAL.................................................26 22. TRANSFER.....................................................................26 22.1. BY FRANCHISOR.........................................................26 22.2. BY FRANCHISEE.........................................................26 22.3. CHANGE OF BUSINESS FORM...............................................26 22.4. DEEMED ASSIGNMENT.....................................................27 22.5. FRANCHISOR'S RIGHT OF FIRST REFUSAL...................................27 22.6. FURTHER CONDITIONS....................................................27 22.6.1. Transfer to Franchisee's Corporation.........................27 22.6.2. Other Transfers..............................................28 22.6.3. Covenants Not to Compete Unaffected..........................29 22.7. ASSIGNMENT IN CASE OF DEATH OR INCAPACITY.............................29 22.7.1. Assignment to Original Signatory.............................29 23. TERMINATION..................................................................30 23.1. TERMINATION WITH OPPORTUNITY TO CURE..................................30 23.2. TERMINATION WITH NO OPPORTUNITY TO CURE...............................30 23.3. OTHER TERMINATION RIGHTS..............................................31 23.4. LIQUIDATED DAMAGES....................................................31 24. RIGHTS AND OBLIGATIONS AFTER TERMINATION OR EXPIRATION.......................32 24.1. PAYMENT OF AMOUNTS OWED...............................................32
vi 8 24.2. MARKS.................................................................32 24.3. TRADE SECRETS.........................................................32 24.4. CLIENT LISTS..........................................................32 25. ENFORCEMENT..................................................................33 25.1. SEVERABILITY AND SUBSTITUTION.........................................33 25.2. WAIVER................................................................34 25.3. NONWAIVER.............................................................34 25.4. FORCE MAJEURE.........................................................34 25.5. SPECIFIC PERFORMANCE AND INJUNCTIVE RELIEF............................34 25.6. RIGHTS CUMULATIVE.....................................................35 25.7. GOVERNING LAW.........................................................35 25.8. ARBITRATION...........................................................35 25.9. BINDING EFFECT........................................................35 25.10. MODIFICATION..........................................................35 25.11. CONSTRUCTION..........................................................35 25.12. ATTORNEYS' FEES AND EXPENSES.........................................36 26. NOTICES AND PAYMENTS.........................................................36 27. MULTIPLE ORIGINALS...........................................................37
vii 9 EXHIBIT "A" FRANCHISE LOCATIONS EXHIBIT "B" TERRITORY EXHIBIT "C" MINIMUM PERFORMANCE STANDARDS EXHIBIT "D" OFFICE DEVELOPMENT REQUIREMENTS EXHIBIT "E" NONDISCLOSURE AND NONCOMPETITION AGREEMENT EXHIBIT "F" SOFTWARE LICENSE AGREEMENT viii 10 REMEDYTEMP, INC. FRANCHISE AGREEMENT This Franchise Agreement (this "AGREEMENT"), is made effective as of _____________, 199__, ("EFFECTIVE DATE") by and between RemedyTemp, Inc., a California corporation, having its principal place of business at 101 Enterprise, Aliso Viejo, California 92656 ("FRANCHISOR"), and __________________ ____________________________________________ _________________ _________________ _________________________, (residing at / having its principal place of business at) __________________________________ ("FRANCHISEE") with reference to the following facts: RECITALS WHEREAS, Franchisor owns Trade Secrets (hereinafter defined) relating to a unique system Franchisor has developed for providing temporary staffing and placement services (the "REMEDY SYSTEM"), and the Remedy System and the business of Franchisor, its licensees and its franchisees transacted in accordance with the Remedy System, have acquired a distinctive, high-quality reputation and public identity and have generated significant goodwill; WHEREAS, Franchisor has the exclusive right to use certain proprietary service marks and other trademarks, service marks and logos connected with the Remedy System as specified by Franchisor from time to time; WHEREAS, Franchisor, through its advertising and marketing programs, its high-quality service and the Remedy System, has established a national reputation and a demand for the qualified temporary personnel and the other services it makes available to business and industry under the Marks (hereinafter defined); and WHEREAS, Franchisee desires to obtain the benefits of the Remedy System and the right to operate a franchised RemedyTemp temporary employment service business using the Marks designated by Franchisor, upon the terms and conditions herein set out. NOW, THEREFORE, Franchisor and Franchisee agree as follows: 1. DEFINITIONS. Terms used in this Agreement and not otherwise defined herein shall have the meanings set forth below: "ACCOUNTING PERIOD" shall mean Franchisor's monthly accounting period, which currently varies from twenty-eight (28) to thirty-five (35) days, except that the first Accounting Period under this Agreement shall be the portion of Franchisor's monthly accounting period which commences on the Effective Date and the last Accounting Period 1 11 shall be the portion of Franchisor's monthly accounting period which ends with the term of this Agreement. "AFFILIATE" shall mean any company directly or indirectly owned or controlled by Franchisor that offers services or products, or transacts other business with Franchisee. "AGREEMENT" shall mean this Franchise Agreement dated _________________, 199__. "APPROPRIATE FRANCHISEE" shall mean, with respect to any client or customer, the Franchisee within whose protected territory that client's or customer's business is situated. "CONTINUING FEES" shall mean a monetary amount equal to the greater of (a) seven and one-half percent (7.5%) of Gross Billings (excluding all permanent employee placement amounts), or (b) Franchisor's Share (hereinafter defined). In no event shall the amount of the Continuing Fees be less than seven and one-half percent (7.5%) of Gross Billings. "CONTRACT YEAR" shall mean, for the first Contract Year, the period of twelve (12) consecutive Accounting Periods commencing from the Effective Date and for each subsequent Contract Year, the period of twelve (12) consecutive Accounting Periods commencing upon the anniversary of the Effective Date. "FRANCHISED BUSINESS" shall mean a license to use the Marks, the On-line Operating Manual, and the Remedy System only and exclusively for the operation of a RemedyTemp temporary employment service business as set forth in this Agreement. "FRANCHISEE'S SHARE" shall mean a monetary amount equal to the Gross Margin (hereinafter defined) after deducting therefrom the Continuing Fees payable to Franchisor, the adjustments described in Section 5.2. of this Agreement, and any other amounts due Franchisor under this Agreement or otherwise. The Franchisee's Share shall be calculated during each Accounting Period commencing on the date of the opening of the Franchised Business. "FRANCHISOR'S SHARE" for purposes of calculating the Continuing Fees for each Accounting Period, shall be a percentage of the Gross Margin (hereinafter defined) of the Franchised Business determined according to Sections 5.6. and 5.7., plus fifteen percent (15%) of Franchisee's billings for permanent employee placement services during the Accounting Period, including liquidation fees. "GROSS BILLABLE HOURS" shall mean the total number of hours for which temporary employees were placed with clients through the Franchised Business during a particular time period. "GROSS BILLINGS" shall mean gross amounts received or receivable, directly or indirectly, from or in connection with all services, consultation, assistance or sales provided from, or through or attributable to the Franchised Business regardless of where or to whom 2 12 provided, including, without limitation, services of temporary and permanent employees, excluding bona fide refunds and adjustments. "GROSS MARGIN" shall mean sums billed by Franchisor to customers of the Franchised Business on account of temporary employee placement services after deducting therefrom all Temporary Employee Expenses (hereinafter defined) attributable to temporary employees. "INITIAL FRANCHISE FEE" shall mean a franchise fee of Eighteen Thousand Dollars ($18,000.00), Eight Thousand Dollars ($8,000.00) of which shall be designated as a non-refundable training fee as set forth in Section 7.3. of this Agreement. If this Agreement is Franchisee's second or subsequent franchise agreement, the amount of the franchise fee shall be Ten Thousand Dollars ($10,000.00). "INITIAL TERM" unless terminated sooner pursuant to Sections 7.3., 14.2., or 23., the Initial Term shall expire ten (10) years from the Effective Date. "LOCATION" shall mean the office or offices within the Territory (hereinafter defined) from which the Franchised Business shall be conducted. The Location shall be either (i) at the address set forth in Exhibit A attached hereto and incorporated herein by this reference or (ii) at an address approved by Franchisor pursuant to Section 3.1. "MANAGER" shall mean the person primarily responsible to coordinate and manage the Franchised Business for Franchisee and who will devote full time to the coordination and management thereof. "MARKS" shall mean "RemedyTemp," "Remedy," "Remedy Temporary Services," "Hire Intelligence," "Intelligent Staffing," "EDGE," "VSM," "The Intelligent Temporary" and the related logotypes, and other service marks, trademarks, and logos developed or owned by Franchisor that are designated by Franchisor, in its sole discretion, for use in connection with the Franchised Business after the Effective Date. "MINIMUM PERFORMANCE STANDARDS" shall mean the amount of average Gross Billable Hours specified in Exhibit C attached hereto and incorporated herein by this reference. "NATIONAL ACCOUNT CUSTOMERS" shall mean any customer designated as such by Franchisor, based upon Franchisor's sole determination that, because such customer conducts its business at multiple locations situated in more than one licensed geographic territory of Franchisor, the account of such client or customer shall be negotiated and secured either (i) by Franchisor or (ii) with Franchisor's assistance and approval. "NATIONAL BUSINESS CONFERENCE" shall mean a meeting of Franchisor's franchisees to be held from time to time at Franchisor's discretion. 3 13 "NON-MARK BUSINESSES" shall mean temporary and regular employment service businesses operated under trademarks, service marks, or logotypes other than the Marks, offering services similar to those provided by the Franchised Business, including but not limited to information technology, accounting and legal temporary staffing businesses. "ON-LINE OPERATING MANUAL" shall mean the Franchisor's confidential on-line automated library and procedural help system as well as any hardcopy operating manuals provided by Franchisor to Franchisee, containing the Trade Secrets, including, without limitation, specifications, standards and procedures by which the Franchisee shall conduct the Franchised Business, as amended from time to time by Franchisor. "PROTECTED CUSTOMER" shall mean a customer situated within the protected territory of another franchisee of Franchisor. "REPURCHASE FORMULA" shall mean an amount equal to the average monthly Franchisee's Share remitted by Franchisor to Franchisee during the twelve-month period prior to Franchisor's election, multiplied by the number of months during which this Agreement has been in effect up to, but not more than, six (6). "SOFTWARE" shall mean computer software used in connection with the management and operation of the Franchised Business. "SUCCESSIVE AGREEMENT" shall mean a franchise agreement between Franchisor and Franchisee for the Franchised Business, commencing immediately following the expiration of the Initial Term of this Agreement subject to the terms of Section 4., the term of which shall be five (5) years. "TEMPORARY EMPLOYEE EXPENSES" shall mean wages, payroll taxes, workers' compensation insurance premiums, expenses and related charges, longevity pay, holiday pay as described in the On-line Operating Manual, state employment charges and taxes, any additional expenses pursuant to contractual agreements with clients and, to the extent maintained by Franchisor, all insurance charges, including, without limitation, liability insurance, policy premiums, policy deductibles for covered losses or claim costs and expenses for any losses not covered by an insurance policy attributable to temporary employees furnished by the Franchised Business during the term of this Agreement. "TERRITORY" shall mean the protected geographic area, described in or identified by the map attached as Exhibit "B" to this Agreement and incorporated herein by this reference, within which the license granted under this Agreement is exclusive to the Franchisee. "TRADE SECRETS" shall mean all customer lists, sales and promotional information, employee lists, financial information furnished or disclosed to Franchisee by Franchisor, the Software, the On-line Operating Manual, and other information with respect to Franchisor, the Remedy System, customers of Franchisor (i) of which Franchisee becomes aware as a result of its franchise relationship with Franchisor, (ii) which has actual or potential economic value to Franchisor from it not being generally known to other persons who could 4 14 obtain economic value from its disclosure or use, and (iii) which is the subject of reasonable efforts by Franchisor to maintain its secrecy or confidentiality, whether assembled and compiled by Franchisee or produced and provided by Franchisor, and the physical embodiments of such information, all of which are the confidential and trade secret property of Franchisor. 2. GRANT OF FRANCHISE. Franchisor hereby grants to Franchisee, and Franchisee accepts, subject to and in accordance with the terms and conditions of this Agreement, the Franchised Business. 3. TERRITORIAL RIGHTS. 3.1. LOCATION. Franchisee shall conduct the Franchised Business from the Location and such other address(es) as Franchisor shall approve in writing. If, as of the Effective Date, the Location has not yet been selected, Franchisee shall select the Location, subject to Franchisor's written approval. If any Location is leased to the Franchisee, all such leases must be fully assignable, and Franchisee shall provide copies of all such executed leases to Franchisor. Franchisee shall commence operations at the Location within ninety (90) days after the date of this Agreement. 3.2. TERRITORY. Except as provided in Sections 3.4.1. and 14.2., so long as Franchisee is in full compliance with the terms and conditions of this Agreement, Franchisor shall not itself conduct or grant to any other person the right to conduct a Remedy franchise or license from a location within the Territory. 3.3. RESTRICTIONS. Franchisee's license is limited to the Territory. Franchisee shall not sell the services provided by the Franchisee through the Franchised Business to customers situated in the protected territory of another franchisee of the Franchisor. Franchisee shall not provide the services provided by the Franchisee through the Franchised Business to customers situated in an unlicensed geographic area absent prior written authorization from Franchisor. If Franchisee provides its services to any customer situated in an unlicensed geographic area which subsequently becomes a Protected Customer of another franchisee of Franchisor or, if for any other reason, Franchisee shall sell the services provided through the Franchised Business to a Protected Customer of another franchisee of Franchisor, upon being notified thereof, Franchisee shall immediately relinquish all sales and service rights associated with such customer to the Appropriate Franchisee for such Protected Customer. 5 15 3.3.1. RELINQUISHMENT PROCEDURES. In the event of an encroachment on a protected territory as set forth in this Section 3.3., Franchisee shall: (i) Coordinate the substitution of temporary employees by the Appropriate Franchisee for those placed with the Protected Customer by Franchisee in such a manner as to minimize the impact of the substitution on the Protected Customer; and (ii) Within five (5) days of becoming aware of the encroachment, and prior to the substitution, (a) notify the Protected Customer that further requests for Remedy temporary staffing services should be directed to the Appropriate Franchisee and (b) provide the Protected Customer with a schedule for substitution of temporary employees. 3.4. RESERVED RIGHTS. 3.4.1. FRANCHISOR'S RESERVED RIGHTS. Franchisor reserves all rights not expressly granted to Franchisee hereunder. Without limiting the generality of the foregoing, Franchisor reserves the right, without geographic or other limitation, to: (i) Own and operate temporary and regular employment service businesses offering services similar to those provided by the Franchised Business, including Non-Mark Businesses situated within the Territory, and grant franchises to own and operate same; (ii) Acquire and operate pre-existing personnel companies as Non-Mark Businesses and grant franchises to own and operate same; (iii) Provide billing, collecting, payroll, accounting services and financing of receivables to other firms; and (iv) Negotiate and enter into contracts with National Account Customers to provide services offered by the Franchised Business and require Franchisee to service National Account Customer locations within the Territory on the terms negotiated. 3.4.2. FRANCHISEE'S RESERVED RIGHTS. Provided Franchisee is not in material default or breach of this Franchise Agreement, Franchisee reserves a 30-day right of first refusal with respect to any Non-Mark Business franchise offered by the Franchisor within the Territory, conditioned upon fulfillment, to Franchisor's satisfaction, of franchisee qualification criteria established by Franchisor, in its sole discretion, for such Non-Mark Business franchise. 4. TERM AND RENEWAL. 4.1. INITIAL TERM. The Initial Term shall commence on the Effective Date. 6 16 4.2. SUCCESSIVE TERMS - FRANCHISEE'S OPTION. Subject to the conditions of this Section 4., so long as the Franchisee has complied with this Agreement and is in full compliance with this Agreement to Franchisor's satisfaction when the Initial Term expires, and contingent upon the Franchisee's execution of general releases, in form satisfactory to Franchisor, of all claims against Franchisor and its officers, directors, employees and agents, Franchisee shall have the option to enter into a Successive Agreement. The terms of the Successive Agreement, including, without limitation, the levels of Continuing Fees and other fees, shall be the same as the terms set forth in Franchisor's then-standard form of franchise agreement for a new franchise of the type granted hereunder, except that, under the Successive Agreement, no initial or renewal franchise fee shall be charged the Franchisee. Franchisor shall have the right to charge Franchisee for services that Franchisor renders to Franchisee or expenses that Franchisor incurs in connection with such Successive Agreement. 4.3. SUCCESSIVE TERMS - PROCEDURES. Franchisee shall notify Franchisor in writing of its desire to enter into a Successive Agreement no earlier than three hundred sixty (360) days and no later than one hundred eighty (180) days prior to the expiration of the Initial Term. Time is of the essence. Franchisee's failure to provide such written notice within the specified time limitations shall constitute Franchisee's election not to enter into a Successive Agreement. In the event any law applicable to such Successive Agreement shall require additional notice, this Agreement shall be deemed amended to conform with the minimum requirement of such law and, until such additional notice has been given, this Agreement shall remain in effect on a month-to-month basis. 4.3.1. FRANCHISOR'S RESPONSIBILITIES. Upon receipt of Franchisee's notice, Franchisor shall determine whether Franchisee has complied and is in compliance with this Agreement to Franchisor's satisfaction. If so, Franchisor shall then deliver to Franchisee (i) a form Successive Agreement; (ii) general release forms; and (iii) any ancillary agreements and documents then customarily used by Franchisor in the grant of franchises of the type described in this Agreement. Each of these agreements shall be modified, as necessary, to conform to Section 4.2. hereof. 4.3.2. FRANCHISEE'S RESPONSIBILITIES. Franchisee shall execute the agreements and releases described in Section 4.3.1. and return the executed documents to the Franchisor within thirty (30) days of Franchisee's receipt thereof. Franchisee's failure to execute and return the agreements and releases shall constitute Franchisee's election not to enter into a Successive Agreement. 4.4. NO SUCCESSIVE AGREEMENT. In the event that a Successive Agreement is not entered into and the Franchised Business is not transferred to a third party pursuant to the terms of this Agreement, Franchisee shall, for a period of time beginning at least thirty (30) days prior to and ending thirty (30) days after the expiration of this Agreement, prepare, assist and cooperate with Franchisor (in such manner determined by Franchisor) in the: (i) collection of all accounts receivable due to Franchisor; (ii) transition of all temporary 7 17 employees; and (iii) the orderly transition of clients of the Franchised Business to Franchisor, a franchisee of Franchisor, or designee of Franchisor. 5. FEES. 5.1. INITIAL FRANCHISE FEE. Upon execution of this Agreement, Franchisee shall pay Franchisor an Initial Franchise Fee. 5.2. CONTINUING FEES, UNCOLLECTIBLES, COLLECTION EXPENSES. Following the end of each Accounting Period, Franchisee's Share shall be calculated by deducting from Gross Margin the following amounts: (i) the Continuing Fees; (ii) Franchisee's pro-rata share of all receivables declared uncollectible during the Accounting Period; (iii) Franchisee's pro-rata share of all legal and other out-of-pocket collection expenses incurred by Franchisor related to Franchised Business billings; (iv) to the extent that receivables remain uncollected beyond one hundred twenty (120) days after the invoice date, interest on Franchisee's pro-rata share of such receivables up until the time they are either collected or deemed uncollectible by Franchisor (at a monthly interest rate of the lesser of one and one-half percent (1.5%) or the maximum rate allowable by law); and (v) at Franchisor's discretion, any other amounts owed by Franchisee to Franchisor or any of its Affiliates. To the extent that any payments are received during the Accounting Period on account of receivables previously deemed uncollectible, Franchisee's Share shall be increased accordingly. 5.3. PAYMENT OF FRANCHISEE'S SHARE. As long as this Agreement remains in effect and Franchisee is not in default hereunder, Franchisor will pay to Franchisee Franchisee's Share within fifteen (15) days after the end of each Accounting Period. 5.4. LATE PAYMENTS. If any amount payable by Franchisee to Franchisor or any Affiliate of Franchisor under this Agreement or otherwise is not paid when due, Franchisor shall be entitled, in addition to the amount due, to payment, as liquidated damages, in an amount equal to the lesser of two percent (2%) per month of the late payment from the date due until paid or the maximum rate allowable under applicable law. This provision is neither an agreement by Franchisor to accept any late payment nor a commitment by Franchisor to extend credit or otherwise finance any aspect of the Franchised Business, and shall not be construed as such. 8 18 5.5. APPLICATION OF PAYMENTS. Franchisor shall have the right to apply any payment(s) received from Franchisee to any amount(s) owed Franchisor or Franchisor's Affiliates by Franchisee under this Agreement or otherwise regardless of Franchisee's designation as to application of such payment(s). 5.6. CALCULATION OF FRANCHISOR'S SHARE. Franchisor's Share shall be calculated in accordance with the following Schedule of Total Temporary Employee Hours Billed: 9 19 Schedule of Total Temporary Employee Hours Billed Per Contract Year -------------------------------------------------
Less Than Percentage Greater or of Than and Equal To Gross Margin ---------- ------- ------------------ --------------- 0 100,000 hours 40.0% 100,000 200,000 hours 39.0% 200,000 500,000 hours 37.0% 500,000 35.0%
5.7. DETERMINATION OF GROSS MARGIN. The percentage of Gross Margin to be used to calculate Franchisor's Share at the end of each Accounting Period shall be determined according to Section 5.6. by applying the sum of (1) the total number of temporary employee hours billed during that Accounting Period; plus (2) the total number of temporary employee hours billed during all previous Accounting Periods (if any) during the same Contract Year; plus (3) the total number of temporary employee hours billed during the immediately preceding Contract Year (if any). 5.8. AGGREGATION OF HOURS OF OTHER BUSINESSES. The cumulative number of temporary employee hours billed for purposes of this Section shall be the aggregate of such hours for the Franchised Business and other Remedy Temporary Services businesses owned by Franchisee, if any, for which one of the following conditions are satisfied: (1) the protected territory of each other Remedy Temporary Services businesses is contiguous with the Territory; or (2) if Franchisee is a partnership or a corporation, all of the shareholders or partners, as applicable, of such other franchises must constitute all of the shareholders or partners of Franchisee under this Agreement. 5.9. ALLOCATION OF TEMPORARY EMPLOYEE EXPENSES. Franchisee understands and agrees that Franchisor may (but shall not be obligated to) maintain a blanket policy of workers' compensation insurance covering temporary employees furnished by the Franchised Business and temporary employees furnished by other Remedy Temporary Services businesses. Franchisor shall have the right to allocate to Franchisee a portion of the premiums for such insurance in Franchisor's sole, good faith discretion based on the workers' compensation claims experience of temporary employees furnished by the Franchised Business during the term of this Agreement in relation to workers' compensation claims experience of temporary employees furnished by other Remedy Temporary Services businesses covered by such blanket policy of insurance. Franchisor may similarly allocate state unemployment insurance premiums in its sole, good faith discretion based on unemployment claim experience of temporary employees furnished by the Franchised 10 20 Business during the term of this Agreement in relation to such claims from other Remedy Temporary Services businesses in the state in which the Territory is situated. 6. COMMENCEMENT AS A REMEDY FRANCHISEE. 6.1. TIME LIMITATIONS. Within ninety (90) days after the Effective Date, Franchisee shall: (i) Furnish and equip office space and facilities for the Franchised Business which satisfy Franchisor's specifications; (ii) Cause staff who will perform tasks in connection with the Franchised Business to satisfactorily complete the initial training program described in Section 7. hereof; (iii) Obtain all required licenses, insurance policies; and (iv) Take all other actions necessary to commence operating the Franchised Business. 6.2. FRANCHISOR'S APPROVAL TO COMMENCE OPERATIONS. Franchisee shall not conduct the Franchised Business or otherwise operate as a Remedy franchise until Franchisee has complied with Sections 6. and 7. of this Agreement to Franchisor's satisfaction. 7. TRAINING. 7.1. INITIAL TRAINING. Franchisor shall furnish for the Franchisee and Manager, an initial ten (10) day training program covering topics in the management of the Franchised Business which may include, but are not limited to, the sales, service and operations of a franchised office. Additional employees of Franchisee may be provided training at no charge to Franchisee; however, such training shall be provided based upon space availability at regularly scheduled training programs. Franchisee shall be responsible for all personal and employee salaries, other compensation, expenses and other costs, including but not limited to, travel and living expenses associated with attendance or participation in the initial training program. 7.1.1. TRAINING. The training shall include extensive classes in all aspects of the Franchised Business at the Franchisor's corporate headquarters located in Aliso Viejo, California, or such other place or additional places as may be designated by the Franchisor. 7.2. COMPLETION OF TRAINING; ADDITIONAL EVALUATION. Franchisee and Manager shall, as a condition subsequent to this Agreement, complete Franchisor's training program to Franchisor's sole subjective satisfaction, exercised in good faith. During the initial training program, Franchisor shall have the right to evaluate Franchisee's and Manager's fitness to operate the Franchised 11 21 Business. The parties hereby expressly recognize and acknowledge that only the Franchisor is capable of making this judgment due to its unique experience and knowledge of the business methods involved in the operations of the Franchised Business. 7.3. FAILURE TO COMPLETE TRAINING/EVALUATION. Upon Franchisor's good faith determination that Franchisee lacks fitness to operate as a franchisee, or has failed to satisfactorily complete the training program, Franchisor shall provide written notice of such determination to Franchisee and Franchisor may, in its sole discretion elect to terminate this Agreement by repurchasing the Franchise from the Franchisee for the Initial Franchise Fee less the non-refundable training fee of Five Thousand Dollars ($5,000.00). 7.4. NATIONAL BUSINESS CONFERENCE. Franchisor, at its sole discretion, may sponsor a National Business Conference and may require the attendance of the Franchisee and/or the Manager. The National Business Conference will be designed to provide further training, provide information and facilitate discussions, on topics of interest to franchisees and will be of a one (1) to four (4) day duration. Franchisee shall be responsible for all personal and employee salaries and other compensation, and other costs and expenses, including, but not limited to, travel and living expenses, in connection with attendance at or participation in such National Business Conference. 8. EMPLOYMENT, BILLING, COLLECTION AND PAYMENT OF TEMPORARY EMPLOYEE EXPENSES. 8.1. FRANCHISOR'S OBLIGATIONS. 8.1.1. EMPLOYMENT OF TEMPORARY EMPLOYEES. Temporary employees provided by the Franchised Business shall be employees of the Franchisor and Franchisor shall pay all Temporary Employee Expenses. 8.1.2. BILLINGS AND COLLECTIONS. Franchisor shall bill customers for all regular and temporary placement services provided by the Franchised Business and shall collect all payments made by customers for all regular and temporary employee placement services provided by the Franchised Business (including liquidation fees paid for temporary employees hired on a regular basis by a customer). Franchisor shall endeavor in good faith to collect all billings made by Franchisor to customers of Franchisee and, in performing such work, shall apply substantially the same collection procedures and policies employed by Franchisor with its own customers. The payments and accounts receivable that arise from all regular and temporary employee placement services provided by the Franchised Business shall be property of Franchisor. 12 22 8.2. FRANCHISEE'S OBLIGATIONS. 8.2.1. TEMPORARY EMPLOYEES. Franchisee shall exercise its best efforts to recruit, screen, interview, test, hire, train, indoctrinate, assign, place and dispatch temporary employees on behalf of Franchisor in strict compliance with all applicable local, state, and federal law, including, without limitation, all laws related to employment discrimination. Prior to placement of any temporary employee through the Franchised Business, Franchisee shall obtain from such temporary employee a current application for employment in a form satisfactory to Franchisor. Franchisee shall maintain the original application in its files in accordance with retention policies as may be prescribed by Franchisor from time to time and shall promptly provide Franchisor with a copy of such application on request. 8.2.2. CREDIT POLICIES. Franchisee shall adhere to all credit policies and practices that may be recommended by Franchisor from time to time. Franchisor reserves the right to review the creditworthiness of any new client and to set credit limitations for clients. Franchisee shall not provide services to clients deemed uncreditworthy or clients whose accounts Franchisor has deemed delinquent and shall not extend credit to any client in any amount exceeding the credit limits set by Franchisor for such client. In the event that Franchisor incurs collection expenses or any other losses or deems any receivables uncollectible in connection with any client or account for which Franchisee has failed to adhere to Franchisor's credit policies and practices, Franchisor shall be entitled to deduct all such expenses, losses or uncollectibles in calculating Franchisee's Share pursuant to Section 5.2.1. 8.2.3. WORKERS' COMPENSATION RISK POLICIES. Franchisee shall adhere to all workers' compensation risk minimization policies that may be recommended by Franchisor from time to time. Franchisee shall investigate the nature of work for which temporary employees are provided and shall refrain from providing temporary employees to any client which, in Franchisor's opinion, involves an excessive risk of workers' compensation claims. 8.2.4. TRANSMITTAL OF PAYMENTS. Franchisee shall immediately forward to Franchisor, without any deduction of any kind, any payment received by Franchisee from customers on account of billings made by Franchisor. 8.3. NATURE OF COLLECTIONS RELATIONSHIP. Franchisor shall endeavor in good faith to collect all billings made by Franchisor for accounts of Franchisee, but Franchisor is not an agent, legal representative, joint venturer, partner, employee or servant of Franchisee and shall not be a fiduciary of Franchisee by reason of the billing and collection arrangements described in this Agreement. Franchisor shall not be obligated to commence any legal proceeding against any customer, and shall not be responsible to Franchisee for any uncollected receivables unless due to its gross negligence or willful malfeasance. 13 23 9. ADDITIONAL SERVICES TO BE PROVIDED BY FRANCHISOR. 9.1. OPENING PUBLICITY. Franchisor shall provide Franchisee with information and materials with which Franchisee shall conduct a direct mail advertising campaign prior to and upon commencement of the Franchised Business. 9.2. MANAGEMENT ASSISTANCE. Franchisor shall provide the services of a Franchisor representative to assist Franchisee in managing the Franchised Business for a period of approximately five (5) days within the sixty (60) days following commencement of operations of the Franchised Business. In order to prevent dissemination of the Trade Secrets, absent written approval, Franchisee is prohibited from retaining outside operations and marketing consultants, other than legal and accounting counsel. 9.3. ADDITIONAL GUIDANCE. Franchisor, at its sole discretion, may require Franchisee to provide operating, accounting, and other reports and may conduct inspections or authorize its representatives to conduct inspections of the Franchised Business operations and records. Franchisor shall review such reports and/or inspections and, on the basis thereof, may provide guidance with respect to (a) management and operation of the Franchised Business; (b) advertising standards and operating procedures used by Remedy franchisees; (c) acquisition of supplies, insurance and other products and services; (d) administrative, bookkeeping, accounting and general operating and management procedures; (e) employee training; (f) use of the Software; and (g) such other matters as Franchisor deems necessary, appropriate or advisable. Franchisor may furnish guidance through Franchisor's confidential On-line Operating Manual, bulletins, written correspondence, meetings, or personal consultations with Franchisee. Upon Franchisee's reasonable request, Franchisor may furnish additional guidance with respect to the operation of the Franchised Business. 9.4. ACQUISITION OF GOODS AND SERVICES. Franchisor shall assist Franchisee in identifying sources of certain goods and/or services that Franchisee may use in connection with the operation of the Franchised Business. 9.5. ON-LINE OPERATING MANUAL. 9.5.1. CONFIDENTIAL NATURE. Whereas, Franchisor's confidential On-line Operating Manual contains Trade Secrets related to the operation of Franchisor's business, the Franchised Business, and other Remedy franchisees, Franchisee is strictly prohibited from disclosing the On-line Operating Manual or any part thereof to any person or entity other than Franchisee's employees without Franchisor's prior express written consent. Any such disclosure shall be deemed to constitute a material breach of this Agreement and shall constitute just cause for termination of this Agreement by the Franchisor pursuant to Section 23.2. of this Agreement. 9.5.2. CONTENTS. The On-line Operating Manual contains mandatory specifications, standards and operating procedures prescribed from time to time by Franchisor for Remedy franchisees and information concerning other obligations of 14 24 Franchisee and the operation of the Franchised Business. The On-line Operating Manual may also contain recommended specifications, standards and procedures. 9.5.3. MODIFICATION BY FRANCHISOR. Franchisor shall have the right, in its sole discretion, to modify the On-line Operating Manual from time to time to reflect changes in the various attributes associated with or constituting part of the Remedy System including, without limitation, image, methods, standards, specifications and procedures. 9.5.4. STRICT COMPLIANCE BY FRANCHISEE. Franchisee expressly agrees to conduct the Franchised Business in strict compliance with the specifications, standards and operating procedures established by Franchisor and incorporated in the On-line Operating Manual, as modified by Franchisor from time to time. 10. MARKS. 10.1. OWNERSHIP. Franchisee's license to use the Marks derives only from this Agreement. This Agreement confers no goodwill or other interest in the Marks other than the non-exclusive right to use them in connection with the Franchised Business for the duration of this Agreement. Franchisee acknowledges and agrees that all goodwill resulting from Franchisee's use of the Marks shall inure exclusively to Franchisor's benefit. Franchisee shall not sub-franchise, sub-license or otherwise authorize any other person to use the Marks, except in connection with the use of training materials by clients of the Franchised Business as expressly permitted in the Operating Manual. In the event that Franchisor authorizes and licenses Franchisee to use additional proprietary trade and service marks or commercial symbols from time to time during the duration of this Agreement, all provisions of this Agreement which apply to the Marks shall apply equally to all such additional marks and symbols. 10.2. USE. Franchisee shall only use the Marks to identify the Franchised Business. Franchisee shall prominently display the Marks on stationery, invoices, packaging and supply materials and in connection with advertising and marketing of the Franchised Business pursuant to the specifications, standards and operating procedures set forth in the On-line Operating Manual. In order to protect the goodwill and reputation associated with the Marks, Franchisee further covenants and agrees as follows: (a) A reasonable number of samples of all uses of the Marks shall be submitted to Franchisor for its review at any time upon Franchisor's reasonable request therefor. (b) Franchisee's use of the Marks shall not reflect adversely upon the good name of Franchisor or upon the goodwill and reputation associated with the Marks. 15 25 (c) Franchisee acknowledges that the goodwill of the Marks is dependent on satisfactory customer service. Therefore, Franchisee agrees to use all commercially reasonable efforts to provide customer service at all locations of the Franchised Business at a level of quality commensurate with that presently provided at other Franchisor locations. 10.3. PROHIBITED USES. Franchisee shall not use the Marks as part of any corporate or trade name or with any prefix, suffix, or modifying words, terms, designs, or symbols other than logos authorized for use by Franchisee under this Agreement. Franchisee shall not use the Marks in any modified form, in connection with performance of any unauthorized services, or in any other manner, unless expressly authorized in writing by Franchisor. Franchisee shall not use any of the Marks in signing any contract, check, purchase agreement, negotiable instrument or other legal obligation, application for any license or permit, or in any manner that may result in liability of Franchisor for any debt or obligation of Franchisee whatsoever. 10.4. NOTICES. Franchisee shall give such notices of trade and service mark registrations as Franchisor specifies. Franchisee shall obtain such fictitious or assumed name registrations as applicable law requires and shall file statements of abandonment of use of such fictitious or assumed names as applicable law requires or when it becomes appropriate to do so. Franchisee shall immediately notify Franchisor of any apparent infringement of or challenge to Franchisee's use of the Marks, or claim by any person of any rights in the Marks, and Franchisee shall not communicate with any person other than Franchisor and Franchisor's counsel in connection with any such infringement, challenge, or claim. 10.5. CONTROL OF PROCEEDINGS. Whereas the license to the Marks granted under this Agreement is non-exclusive, Franchisor retains sole discretion to take or refrain from taking any action in connection with any possible or actual infringement, challenge or claim described in this Section 10. Franchisor retains the exclusive right to control any litigation, Patent and Trademark Office or other proceeding that in any way relates to any of the Marks. 10.6. DISCONTINUANCE OF USE. In the event that Franchisor determines that Franchisor and/or Franchisee should modify or discontinue use of any or all of the Marks, and/or use one or more additional or substitute trade or service marks, Franchisee shall comply with Franchisor's directions to modify or otherwise discontinue use of such Marks within such reasonable time and pursuant to such directions that Franchisor specifies to Franchisee in writing. Franchisor shall have no obligation to compensate Franchisee for any costs that Franchisee incurs in connection with any such modification or discontinuance. 10.7. INDEMNIFICATION. So long as Franchisee's use of the Marks complies with the terms of this Agreement, including, without limitation, this Section 10. and the On-line Operating Manual, Franchisor shall indemnify Franchisee against and reimburse Franchisee for all damages for which Franchisee is held liable in any proceeding arising from Franchisee's use of the Marks and for all costs that Franchisee reasonably incurs in defense of any such claim against Franchisee or in any such proceeding in which Franchisee is named as 16 26 a party, provided Franchisor receives timely written notice of any such claim from Franchisee, has the right to fully control the defense of any such claim and receives Franchisee's full cooperation in such defense. 11. RELATIONS. 11.1. NATURE OF RELATIONSHIP. Franchisor and Franchisee are independent businesses and/or businesspersons, have dealt at arm's length in entering into this Agreement, and will continue to deal at arms length as independent contractors for the duration of this Agreement. Franchisor and Franchisee shall have no agency, joint venture, employer-employee, partnership, fiduciary, or other special relationship. 11.2. IDENTIFICATION. In all transactions with clients, patrons, suppliers, public officials and Franchisee's employees and colleagues, Franchisee shall conspicuously identify itself as the operator of the Franchised Business under a franchise from Franchisor. Franchisee shall place such other notices of independent ownership on forms, business cards, stationery, advertising and other materials as Franchisor may from time to time require. 11.3. OBLIGATIONS. Except as this Agreement expressly authorizes, neither Franchisee nor Franchisor shall make any express or implied agreement, warranty, guaranty or representation or incur any debt, in the name of or on behalf of the other. Neither Franchisee nor Franchisor shall represent that their relationship is other than that of independent contractors or Franchisor and Franchisee. Neither Franchisee nor Franchisor shall have any obligation or liability under any agreement, representation, or warranty made by the other that is not expressly authorized by this Agreement. Franchisor shall have no obligation for any damages to any person or party that arises directly or indirectly from the Franchised Business whether caused by Franchisee's negligent or willful action or failure to act. Franchisor shall have no liability for any sales, use, occupation, excise, gross receipts, income, property, license, or other fees or taxes, whether levied upon Franchisee, the Franchised Business, or Franchisee's property, or upon Franchisor, in connection with services rendered or activities or business conducted by Franchisee or payments to Franchisor pursuant to this Agreement. 12. INDEMNIFICATION. Franchisee shall indemnify and hold Franchisor, and Franchisor's shareholders, directors, officers, employees, agents, attorneys, successors in interest and assignees harmless against and promptly reimburse them for, any and all loss, damages, liability and attorneys' fees and other costs and expenses incurred by any of them as a result of any violation of this Agreement by, or any act of omission or commission on the part of Franchisee, or any of its agents, servants or employees, and from all claims demands losses, costs, damages (including consequential and punitive damages), suits, judgments, penalties, expenses and liabilities of any kind or nature whatsoever arising directly or indirectly out of or in connection with the Franchised Business as a result of any such violation or act of 17 27 omission or commission by franchisee, or any of its agents, servants, or employees. Franchisor shall have the right to defend any such claim against Franchisor at Franchisee's expense. This indemnity shall continue in full force and effect after and regardless of this Agreement's expiration or termination. 13. TRADE SECRETS. Franchisee agrees that all Trade Secrets are and will remain the confidential and trade secret property of Franchisor. Upon expiration or termination of this Agreement for any reason, and as a condition precedent to receiving payment of any sums due from Franchisor upon such expiration or termination, Franchisee shall immediately return to Franchisor all material containing Trade Secrets. 13.1. LIMITS ON USE. Franchisee acknowledges and agrees that ownership of all right, title and interest in the Trade Secrets are and shall remain vested solely in Franchisor and Franchisee disclaims any right or interest therein or the goodwill derived therefrom. Franchisee shall acquire no interest in the Trade Secrets other than the right to use them in developing and conducting the Franchised Business during this Agreement's term. Franchisee shall not challenge or contest the right, title or interest of Franchisor in and to the Trade Secrets. Franchisee's duplication or use of the Trade Secrets in any other endeavor or business shall constitute an unfair method of competition. Franchisee shall: (i) not use the Trade Secrets in any business or other endeavor other than in connection with the Franchised Business; (ii) maintain absolute confidentiality of the Trade Secrets during and after this Agreement's term; (iii) make no unauthorized copy of any portion of the Trade Secrets, including, without limitation, the On-line Operating Manual, bulletins, supplements, confidential correspondence, or other confidential communications, whether written or oral; and (iv) implement, maintain, and diligently utilize all reasonable procedures prescribed from time to time by Franchisor to prevent unauthorized use and disclosure of the Trade Secrets, including, without limitation, restrictions on disclosure to employees and use of non-disclosure and non-competition provisions as Franchisor prescribes in employment agreements with employees who may have access to the Trade Secrets. Promptly upon Franchisor's request, Franchisee shall deliver executed copies of such agreements to Franchisor. 13.2. NONCOMPETITION. 13.2.1. FRANCHISEE'S COVENANT NOT TO COMPETE DURING TERM OF AGREEMENT. Franchisee recognizes that Franchisor's Trade Secrets are the underpinning of Franchisor's business, and protection of the Trade Secrets is a matter of critical importance to Franchisor, and Franchisee acknowledges Franchisor's need to protect the Trade Secrets against unauthorized use or disclosure as well as 18 28 Franchisor's simultaneous need to encourage free exchange of ideas and information among Remedy franchisees. Franchisee agrees that neither Franchisee, nor, as applicable, any shareholder who owns more than three percent (3%) of the outstanding capital stock of Franchisee, nor any general partner, director, officer, manager nor other key employee of Franchisee, nor the spouse or immediate family member of any such person shall directly or indirectly conduct or hold an ownership interest, directly or indirectly, in any temporary employment service, regular employment service, or other similar competing business or program, or any entity that grants franchises or licenses to others to conduct or operate similar or competing systems or businesses during the term of this Agreement. Accordingly, Franchisee shall have all applicable persons execute the Nondisclosure and Non-Competition Agreement attached hereto as Exhibit E. Franchisee's promise to deal exclusively with Franchisor is a significant element of the consideration for which Franchisor grants the rights in this Agreement and Franchisor has entered into this Agreement in reliance upon such promise. 13.2.2. SOLICITATION OF CUSTOMERS. Franchisee shall not, without the prior written consent of Franchisor, within the Territory, either directly or indirectly, on its own behalf or in the service or on behalf of others, solicit, divert or appropriate to any competing business, any person or entity which is, or was at any time during the preceding two (2) year period, a customer of the Franchised Business. 13.2.3. SOLICITATION OF EMPLOYEES. Franchisee shall not, either directly or indirectly, on its own behalf or on the behalf of others, solicit, divert or hire away, or attempt to solicit, divert or hire away, to any competing business, any person employed by Franchisor, whether or not such employee is a full-time or temporary employee of Franchisor, whether or not such employment was pursuant to a written agreement and whether or not such employment was for a determined period or was at will; nor will Franchisee solicit, divert or hire away or attempt to solicit, divert or hire away to the Franchised Business or any competing business any such employee of any licensee or franchisee of Franchisor, without the prior written consent of such licensee or franchisee of Franchisor. 13.2.4. EMPLOYEES' COVENANTS NOT TO COMPETE. Franchisee shall obtain from each of its employees within five (5) days after the date of this Agreement, or the date of employment of each employee, whichever is later, covenants and agreements not to compete, in form and substance satisfactory to Franchisor. Such covenants and agreements shall be for the benefit of and enforceable by Franchisor against the employee. In the event that Franchisee becomes aware of any actual or threatened violation of any such covenants and agreements by any of its employees, Franchisee shall promptly and fully advise Franchisor in writing of all related facts known to Franchisee. Franchisee may take action to prevent or stop any such violation as it deems appropriate, at its own expense, except that, it may not waive its rights or give any release without the express written consent of Franchisor. Franchisor may request that Franchisee take action or may take action itself to 19 29 prevent or stop any such violation. Franchisee will cooperate with Franchisor in all ways reasonably requested by Franchisor to prevent or stop any such violation, including, without limitation, instituting or permitting to be instituted in the name of Franchisee any demand, suit or action which Franchisor determines to be necessary or appropriate. If Franchisor makes any such demand, the suit or action will be maintained and prosecuted at the expense of Franchisor unless otherwise agreed. 13.2.5. FRANCHISEE'S COVENANT NOT TO COMPETE FOLLOWING TERMINATION. Upon expiration or termination of this Agreement for any reason, Franchisee and, as applicable, its partners and its shareholders shall not, for a period of two (2) years thereafter, have any interest as an owner, manager, employee, operator or consultant or in any other capacity in any business, venture, program or enterprise the primary function of which is to provide temporary or permanent employee placement within the Territory or within fifty (50) miles of the Territory. 13.2.6. EXCEPTIONS. 13.2.6.1. PRIOR AUTHORIZATION UNDER SEPARATE AGREEMENT. The foregoing restrictions shall not prohibit Franchisor from entering into a separate written agreement prior to entering into this Agreement whereby Franchisee may be permitted to continue to own and operate such business during the term of this Agreement or following the expiration or termination of this Agreement; provided, however, that Franchisee shall in no event provide permanent placement services for any temporary services employee of the Franchisor through any permanent employment placement service so authorized. 13.2.6.2. PUBLICLY-TRADED STOCK. The restrictions in this Section 13.2. shall not apply to ownership of securities traded on a nationally recognized stock exchange that constitute less than three percent (3%) of the shares of the class of securities issued and outstanding, or to the conduct of other franchised businesses pursuant to franchise agreements with Franchisor. 14. MINIMUM PERFORMANCE STANDARDS AND OFFICE DEVELOPMENT REQUIREMENTS+. 14.1. MINIMUM GROSS BILLINGS. During each year during the term of this Agreement, Franchisee's average Gross Billable Hours shall be not less than the Minimum Performance Standards. 14.2. REMEDIES FOR FAILURE TO SATISFY MINIMUM PERFORMANCE STANDARDS. Franchisor shall determine Franchisee's compliance with the Minimum Performance Standards within sixty (60) days after each anniversary date of this Agreement. If Franchisee at any time fails to satisfy the Minimum Performance Standards, Franchisor shall have the option, exercisable at any time within ten (10) months 20 30 after the end of any year in which the Minimum Performance Standards are not satisfied, to either (a) purchase the Franchised Business by paying to Franchisee an amount calculated in accordance with the Repurchase Formula; or (b) itself operate a Remedy Temporary Services business within the Territory; or (c) grant a franchise to others to do so (in which event Franchisee shall have no right of first refusal with respect thereto). Franchisor shall exercise its option by providing written notice to Franchisee of its election to do so. If Franchisor elects to purchase the Franchised Business, upon such purchase, this Agreement shall be terminated as if terminated by Franchisor pursuant to the provisions of Section 23. hereof. Franchisor's payment of the Repurchase Formula amount shall be made in two (2) equal monthly installments of principal, without interest, beginning ninety (90) days following the effective date of such termination. 14.3 OFFICE DEVELOPMENT REQUIREMENTS. Franchisee shall open the number of office Locations within the geographical areas specified and by the designated time as set forth on the office development requirements attached hereto as Exhibit D. In the event that Franchisee fails to open an office within the geographical territory by the designated time pursuant to Exhibit D, Franchisor shall have the right to unilaterally modify the Franchise Agreement to eliminate such geographical area from the Territory and shall be free to operate or license/franchise to a third party the right to operate a Remedy franchised business within such area. 15. IMAGE AND OPERATING STANDARDS. 15.1. SERVICES. Franchisee shall offer all services designated by Franchisor. Franchisee shall not, without Franchisor's written approval, offer any services or products in connection with the Franchised Business that are not authorized by Franchisor. 15.2. SPECIFICATIONS, STANDARDS AND PROCEDURES. Franchisee acknowledges that every detail of the Franchised Business's operation, appearance, supplies used, and services offered is critically important to Franchisor, other Remedy franchisees, and to Franchisee's clients and customers. Absent written consent, Franchisee shall devote full time to development of the Franchised Business in accordance with Franchisor's standards. Franchisee shall comply with all mandatory specifications, standards and operating procedures, regardless of whether these appear in the On-line Operating Manual, or are communicated to Franchisee in writing or by other means, relating, without limitation, to: (i) conduct of Franchisee's employees; (ii) appearance and decor and standards of services and conduct of the Franchised Business; (iii) signage and advertising; (iv) equipment; (v) supplies and suppliers; (vi) computer hardware and software systems; and (vii) days and hours during which the Franchised Business will operate, receive personnel and telephone calls, and be open to provide service to clients. 21 31 15.3. COMPLIANCE WITH LAWS. Franchisee shall conduct the Franchised Business in compliance with all applicable laws, ordinances and regulations, including, without limitation, all laws and regulations relating to insurance, unemployment insurance and withholding and payment of federal, state and local income taxes. Franchisee shall obtain and maintain in Franchisee's name all required licenses, permits and certificates relating to the conduct of the Franchised Business. Upon Franchisor's request, Franchisee shall immediately transmit copies of each such license, permit and certificate to Franchisor. 15.4. REPORTS. Within five (5) days after receiving any report or notice from any government agency or department, or from any licensing organization, Franchisee shall deliver to Franchisor a complete copy of such report or notice. 15.5. ACTIONS. Franchisee shall notify Franchisor in writing, as soon as possible, but not later than five (5) days after commencement of any action, suit or proceeding against the Franchisee or the Franchised Business, or after issuance of any order, writ, injunction, award or decree of any court or government agency concerning the Franchisee or the Franchised Business. 15.6. BUSINESS RELATIONS - PROFESSIONAL CONDUCT. In all dealings with clients and customers, suppliers, Franchisor, Franchisee's own employees and all others, Franchisee shall adhere to the highest standards of ethical and professional conduct, honesty, integrity, good faith and fair dealing. Franchisee shall use its best efforts to develop, maintain and promote the Franchised Business and its public image. Franchisee shall refrain from any business practice that Franchisor determines may injure Franchisor's business, other franchisees of Franchisor or the goodwill associated with the Marks. 15.7. HIRING, TRAINING AND CONDUCT OF EMPLOYEES. Franchisee shall have exclusive responsibility for all obligations that arise from employment and compensation of Franchisee's employees and, except as set forth in Section 7., for the proper training of employees in the operation of the Franchised Business. Franchisee shall require all employees to conduct themselves at all times in a professional and courteous manner. 16. INSURANCE. 16.1. POLICIES. During this Agreement's term, Franchisee shall, at its sole cost and expense, maintain insurance policies issued by carriers with an A.M. Best rating of "A: Class X," or better, and in forms satisfactory to Franchisor, covering the risks enumerated and in at least the amounts of coverage specified in the On-line Operating Manual. Franchisor, in its sole discretion, may from time to time increase or decrease the amounts of coverage required under such insurance policies. Franchisor may from time to time require different or additional kinds of insurance, such as excess liability insurance, to reflect 22 32 inflation, identification of new risks, changes in law or standards of liability, higher damage awards or other changes in relevant circumstances. 16.2. PROOF OF COVERAGE. Franchisee shall provide evidence satisfactory to Franchisor that such insurance policies are in force at least ten (10) days before commencing the Franchised Business. Furthermore, Franchisee shall provide Franchisor with copies of all required insurance policies and related documents within ten (10) days following any request by Franchisor for such disclosure. Franchisee shall provide Franchisor with satisfactory evidence of renewal of required insurance policies fifteen (15) days prior to the expiration of any such policies. Satisfactory evidence shall consist, at a minimum, of binders of coverage or certificates of insurance including copies of required endorsements issued by the insurance carrier or an authorized representative thereof. 23 33 16.3. ENDORSEMENTS. 16.3.1. ADDITIONAL INSURED. The Comprehensive General Liability, Automobile Liability and Errors and Omissions (Professional Liability) Insurance policies required under this Agreement shall be endorsed to show Franchisor, its officers, directors, agents and employees, as additional insureds thereunder with respect to Franchise operations performed by or on behalf of the named insured. These endorsements shall provide that insurance for the additional insureds shall be primary and not contributing with any other insurance maintained by the additional insureds. 16.3.2. CROSS-LIABILITY. The Comprehensive General Liability, Comprehensive Automobile Liability and Errors and Omissions (Professional Liability) policies required under this Agreement shall be endorsed to show that each such policy applies separately to each insured against which claim is made or suit is brought, except with respect to the limits of the insurance company's liability. 16.3.3. WAIVER OF SUBROGATION. Franchisee's Workers' Compensation and Errors and Omissions (Professional Liability) policies shall be endorsed to show that the respective insurers agree to waive all rights of subrogation against the Franchisor, its officers, directors, agents and employees. 16.4. LOSS OF COVERAGE. The required insurance policies shall include a provision requiring insuring companies to provide not less than thirty (30) days written notice to Franchisor of any intent to cancel, not to renew, or to materially alter or reduce the required insurance. Franchisee shall not alter, reduce, cancel, or fail to renew or replace the required insurance without prior written consent of Franchisor, which shall be at Franchisor's sole discretion but not unreasonably withheld and which, if given, shall not waive any other rights of Franchisor. 16.5. FAILURE TO MAINTAIN. If Franchisee fails for any reason to maintain all required insurance policies, or to furnish evidence satisfactory to Franchisor that such insurance policies are in force, Franchisor shall have the option, but not the obligation, in addition to Franchisor's other rights and remedies, to obtain insurance on Franchisee's behalf. In such circumstances Franchisee shall cooperate with Franchisor in Franchisor's efforts to obtain and maintain such insurance; promptly execute all forms or instruments; allow any inspections of the Franchised Business appropriate or necessary to obtain such insurance; and pay Franchisor on demand all costs and premiums incurred by Franchisor. 16.6. INSURANCE PROGRAMS. Franchisor may, but is not required to, establish programs for its franchisees, including Franchisee, for any of the required insurance coverage. Franchisee shall enroll and maintain its participation in any such programs, if requested to do so by Franchisor. 16.7. OBLIGATION UNCONDITIONAL. Separate insurance that Franchisor from time to time maintains shall not effect Franchisee's obligation to maintain insurance as 24 34 described in this Section 16. Franchisor shall have no liability for the sufficiency of insurance that Franchisor requires Franchisee to maintain, that Franchisor maintains on Franchisor's behalf, or that Franchisor obtains for Franchisee pursuant to this Section 16. 17. COOPERATIVE ADVERTISING. At such times as Franchisor deems appropriate, Franchisor may, but shall not be obligated to, delineate or modify the boundaries of a marketing region that encompasses the Territory for purposes of administering a cooperative advertising program among Remedy franchisees in that region. If Franchisor establishes any such region, Franchisee shall participate in cooperative advertising in the same manner and to the same extent as a majority of Remedy offices in the region elect. The size and composition of such region and any other marketing regions delineated by Franchisor shall be binding upon Franchisee. Each Remedy franchisee in such region shall have the right to cast one vote for each Franchised Business operated by such franchisee in such region and the Franchisor shall, similarly, have the right to cast one vote for each Remedy office operated by Franchisor in such region, in all questions considered by the members of such region. 18. LOCAL ADVERTISING BY FRANCHISEE. 18.1. REQUIRED ADVERTISING. Franchisee shall provide and maintain suitable signs approved by Franchisor identifying the Franchised Business as a Remedy franchise, and advertise Franchisee's offices and services in conformity with the On-line Operating Manual. Franchisee shall secure at least one "Yellow Page" advertisement in the primary telephone directory for the Territory, using ad copy approved by Franchisor. Franchisee shall maintain a computerized mailing list of the Franchised Business' clients for direct mailing purposes and shall promptly provide a copy of such list to Franchisor upon request. 18.2. CONDUCT. Franchisee shall advertise the services offered by the Franchised Business factually, ethically and in good taste in Franchisor's judgment. Advertising by Franchisee shall be subject to Franchisor's approval as provided in Section 18.3. Franchisee shall refrain from any advertising technique or program that Franchisor determines may injure Franchisor's business, other franchisees of Franchisor or the goodwill associated with the Marks. 18.3. APPROVALS. Franchisee shall submit to Franchisor, before use, samples of all local advertising materials, and descriptions of all local advertising programs, not prepared or previously approved by Franchisor, for Franchisor's approval. Franchisee shall not use any advertising material or program that Franchisor disapproves. Franchisor's failure to provide Franchisee written notice of Franchisor's decision concerning any such submission within ten working (10) days after Franchisor receives the submission shall constitute Franchisor's approval. 25 35 19. ACCOUNTING, REPORTS, FINANCIAL STATEMENTS. 19.1. MAINTENANCE. Franchisee shall, at Franchisee's expense, maintain true business records and books of account at the Location according to generally accepted accounting principles and other methods and procedures prescribed by Franchisor. All such records shall be open to inspection and copying by Franchisor and/or Franchisor's authorized representatives at the Location during regular business hours or at other reasonable times requested by Franchisor. Franchisee shall cooperate in Franchisor's inspection and copying. Franchisee shall keep and preserve, for at least six (6) years from the dates of their preparation, business tax returns, reports, and complete and accurate financial records for the Franchisee's Franchised Business. 19.2. REPORTS. Franchisee shall furnish Franchisor the following items, signed and verified by Franchisee, in the form and manner that Franchisor prescribes from time to time: (i) within thirty (30) days after the end of each calendar quarter, a profit and loss statement for the preceding calendar quarter and a year-to-date profit and loss statement for the Franchised Business; (ii) within ninety (90) days after the end of Franchisee's fiscal year, a balance sheet and an annual profit and loss statement reflecting all year-end adjustments for the Franchised Business prepared and certified by an independent certified public accountant; (iii) upon request, any requested Social Security reports, Immigration and Naturalization Service reports or forms, state and federal unemployment reports, federal income tax returns, state, county or city income, franchise, or other tax returns, and other federal, state or other governmentally mandated reports; and (iv) such other reports as required under the On-Line Operating Manual from time-to-time. 20. PERIODIC REVIEWS, INSPECTIONS AND AUDITS. 20.1. PERIODIC REVIEWS. From time to time, at times that Franchisor designates, Franchisee and Manager shall meet with Franchisor's representatives to discuss and review the Franchised Business' operations, status and financial performance. 20.2. INSPECTIONS. To determine whether Franchisee and the Franchised Business are complying with this Agreement and with specifications, standards and operating procedures prescribed by Franchisor for operation of the Franchised Business, Franchisor or Franchisor's designated agents shall have the right at any reasonable time and without prior notice to Franchisee to: (i) interview Franchisee and employees of the Franchised Business; 26 36 (ii) interview the Franchised Business' clients and customers, Franchisee's suppliers and any other person with whom Franchisee does business; (iii) confer with members and staff of government agencies with authority over Franchisee about matters relevant to the Franchised Business; and (iv) require Franchisee to participate and/or request Franchisee's clients and customers, Franchisee's suppliers and any others to participate in any marketing surveys performed by or on behalf of Franchisor. 20.3. AUDITS. (i) Franchisor shall have the right, during regular business hours of Franchisee and without prior notice to Franchisee, to inspect, copy and/or audit or cause to be inspected, copied and/or audited the business, bookkeeping, accounting, sales tax, income tax, files, and other records of the Franchised Business, and the books and records of any individual, partnership or corporation that owns the Franchised Business. Franchisee shall fully cooperate with Franchisor's representatives or independent certified public accountants in any such inspection or audit. (ii) If Franchisee's failure to maintain or furnish reports, supporting records or other information required by this Agreement or the On-line Operating Manual makes necessary any such inspection or audit, Franchisee shall reimburse Franchisor for the costs of such audit or inspection. Such reimbursement shall include, without limitation, charges of any independent accountants and travel expenses, room and board and compensation of Franchisor's employees and other agents or representatives who participate in such inspection or audit. (iii) The remedies in this Section 20. shall be additional to and not in lieu of Franchisor's other remedies and rights under this Agreement or applicable law. 21. COMPUTERIZED MANAGEMENT AND OPERATIONAL SYSTEM. 21.1. SOFTWARE LICENSE. Franchisee shall license from Franchisor the right to use certain computer software designated by Franchisor (the "Software") to be used in connection with the administration, management and operation of the Franchised Business. Franchisor shall license the Software to Franchisee on the terms and conditions pursuant to the Software License Agreement, attached hereto as Exhibit F (the "Software License Agreement"). Franchisee shall utilize the Software in the operation of the Franchised Business as set forth in the On-Line Operating Manual, which may be updated by Franchisor, at its sole discretion. Franchisee and Franchisor shall duly perform all of their respective obligations under the Software License Agreement and a default thereunder shall constitute a default under this Agreement. The term of the Software License Agreement shall be the 27 37 same as the term of this Agreement. In the event of an assignment of this Agreement pursuant to Section 22. below, the Software License Agreement shall be assigned to the assignee of this Agreement. 21.2. SOFTWARE UPDATE AND SUPPORT. Franchisee shall pay Franchisor an annual software fee, as set forth in the Software License Agreement attached hereto as Exhibit F and incorporated herein by reference, for published updates of the Software and for technical assistance, support for installation and program support of the Software as updated from time to time. 21.3. HARDWARE. At Franchisee's expense, prior to commencement of operations of the Franchised Business, Franchisee shall purchase through Franchisor the computer hardware and related equipment required for the operation and use of the Software and install such hardware and equipment at the premises of the Franchised Business. Any and all such hardware and related equipment must fully comply with Franchisor's specifications as set forth in the On-Line Operating Manual. 21.4. HARDWARE MAINTENANCE. At Franchisee's expense, Franchisee shall procure and maintain in force during the entire term of this Agreement a maintenance agreement with a vendor designated by Franchisor to maintain the computer hardware described in this Section 21., the On-Line Operating Manual and the Software License Agreement. 21.5. INFORMATION RETRIEVAL. During the term of this Agreement, Franchisee shall afford Franchisor access via telephone modem to Franchisee's computer system to enable Franchisor to periodically upload and download data to facilitate Franchisor's performance of automated payroll and related services hereunder. 22. TRANSFER. 22.1. BY FRANCHISOR. This Agreement shall be fully transferable by Franchisor. 22.2. BY FRANCHISEE. Franchisee understands and acknowledges that the rights and duties created by this Agreement are personal to Franchisee or its owners and that Franchisor has entered into this Agreement in reliance upon the individual or collective character, skill, aptitude, attitude, business ability and financial capacity of Franchisee or its owners. Therefore, except as hereinafter provided, neither Franchisee's interest in this Agreement nor any of its rights or privileges herein or obligations hereunder shall be sold, assigned, transferred, sublicensed, shared or divided or otherwise transferred by Franchisee, in whole or in part, voluntarily or involuntarily, by operation of law or otherwise in any manner, except upon prior written approval of Franchisor, and in accordance with the 28 38 provisions of this Section 22. Any assignment or transfer without such approval shall constitute a breach of this Agreement and shall convey no rights or interest in the Franchised Business to such purported assignees or transferees. The only permissible methods of sale, transfer or assignment of the Franchised Business are those set forth in this Section 22. 22.3. CHANGE OF BUSINESS FORM. Whether or not an assignment or transfer of the Franchised Business is involved, Franchisee, whether an individual or otherwise, shall not change its business form, whether to obtain the services of a partner, to merge, consolidate, reorganize, or to accomplish any other change, without the prior written approval of Franchisor. 22.4. DEEMED ASSIGNMENT. If Franchisee is at any time a corporation, then one or more transactions involving (i) issuance of any securities by Franchisee, or (ii) the transfer of stock or voting power of Franchisee, or (iii) any merger or consolidation involving Franchisee, the effect of which shall result in Franchisee's shareholders owning or controlling less than fifty-one percent (51%) of the aggregate voting securities of Franchisee or otherwise losing the right to control the affairs of Franchisee, shall be deemed to be an assignment of this Agreement within the meaning of this Section 22. If Franchisee is at any time a partnership, then the death, voluntary or involuntary or other withdrawal of any general partner, admission of any additional general partner, or transfer of any general partner's interest in the property, management or profits and/or losses of the partnership shall be deemed to be an assignment within the meaning of this Section 22. 22.5. FRANCHISOR'S RIGHT OF FIRST REFUSAL. If Franchisee desires to sell or otherwise transfer the Franchised Business and assign this Agreement, Franchisee shall deliver to Franchisor written notice setting forth all the terms of the proposed transfer and assignment and all information that Franchisor requests concerning the proposed assignee. Franchisor shall have the option, during the fifteen (15) days after receipt of the notice, to purchase the Franchised Business and accept assignment of this Agreement on the terms contained in the notice, provided that Franchisor shall have the right to substitute the cash equivalent of any noncash consideration described in such notice. If Franchisor exercises this option, the purchase of the Franchised Business by Franchisor must be completed no later than thirty (30) days after Franchisor's notice to Franchisee of its purchase election. If Franchisor does not exercise this option during such fifteen (15) day period then Franchisee may, during the following one hundred twenty (120) days, transfer the Franchised Business and assign this Agreement to the proposed assignee on the terms in the notice, provided that the assignment shall be made, without limitation, in compliance with this Section 22. Any proposed transfer not completed within such one hundred twenty (120) day period or any material change in the terms of the proposed transaction prior to closing shall constitute a new offer to which Franchisor shall have the right of first refusal and shall require compliance with this Section 22.5. 29 39 22.6. FURTHER CONDITIONS. If Franchisor elects not to exercise its right of first refusal, Franchisor's approval of a proposed transfer shall not be unreasonably withheld. However, without limitation of the foregoing, imposition of any or all of the following conditions precedent to Franchisor's approval shall be deemed to be reasonable: 22.6.1. TRANSFER TO FRANCHISEE'S CORPORATION. If Franchisee is an individual or partnership and desires to assign and transfer his rights to a newly organized corporation solely for the convenience of ownership: (i) Such corporation's charter shall provide that its activities are confined exclusively to operating the Franchised Business as set forth in this Agreement; (ii) Franchisee shall be, and shall remain, the owner of the majority stock interest in the transferee corporation; (iii) The individual Franchisee (or if the Franchisee is a partnership, one of the general partners) shall be, and shall remain, the principal executive officer of the corporation; (iv) The transferee corporation shall enter into a written assignment with Franchisee and Franchisor, in form satisfactory to Franchisor, assuming all of the Franchisee's obligations under this Agreement; (v) Each stock certificate of the transferee corporation shall have conspicuously endorsed upon it a statement that it is held subject to, and that further assignment or transfer thereof is subject to, all restrictions imposed upon assignments and transfers by this Agreement; (vi) No new shares of common or preferred voting stock in the transferee corporation shall be issued to any person, partnership, trust, foundation, or corporation without obtaining Franchisor's prior written consent; and (vii) All accrued money obligations of Franchisee to Franchisor, its Affiliates or assignees, shall be satisfied prior to assignment or transfer. 22.6.2. OTHER TRANSFERS. If the transfer, other than such transfer authorized under Section 22.6.1. of this Agreement, as consummated alone or together with other related previous, simultaneous, or proposed transfers, would have the effect of transferring control of the Franchised Business to someone other than an original signatory of this Agreement: (i) The proposed assignee(s) or, if the proposed assignee is a corporation, its principal officers, shareholders, or directors, shall be of good moral character and demonstrate skills, qualifications and economic resources necessary in Franchisor's reasonable judgment, to operate the franchise that this Agreement contemplates and, in any event, at least 30 40 equal to the Franchisee's skills, qualifications and economic resources; (ii) The proposed assignee(s) shall expressly assume in writing, for Franchisor's benefit, all Franchisee's obligations under this Agreement; (iii) The proposed assignee(s) shall have completed the training program and additional evaluation to Franchisor's sole subjective satisfaction, as described in Section 7.; (iv) As of the date of any such transfer, Franchisee shall have fully satisfied all Franchisee's obligations, including accrued money obligations, to Franchisor and Franchisor's Affiliates and assignees under this Agreement and any other agreement, arrangement or understanding; (v) Franchisor shall require the proposed assignee(s), including all shareholders and partners of the proposed assignees(s), to jointly and severally execute Franchisor's standard form Franchise Agreement then being offered to prospective franchisees of Franchisor, except that, other than any fees designated in such Franchise Agreement as non-refundable training fees, no initial franchisee fee shall be required from the proposed assignee and the term of the Agreement shall be modified to equal the remaining term under this Agreement; (vi) Franchisee shall pay Franchisor a transfer fee of Five Thousand Dollars ($5,000.00), which is deemed to be reasonably required to cover Franchisor's expenses (other than training expenses) relating to such transfer; and (vii) Franchisee shall have executed a written release in a form approved by Franchisor, releasing Franchisor from all liabilities. 22.6.3. COVENANTS NOT TO COMPETE UNAFFECTED. No sale, assignment, transfer, conveyance, encumbrance or gift of any interest in this Agreement, or in the Franchised Business, shall relieve Franchisee, and as applicable, its shareholders or partners participating in any transfer, of the obligations of the covenants not to compete contained in Section 13.2. of this Agreement. 22.7. ASSIGNMENT IN CASE OF DEATH OR INCAPACITY. If, as applicable, Franchisee, or Franchisee's majority stockholder, or general partner dies or becomes permanently disabled for any mental or physical condition (as evidenced by an inability to perform usual duties for a period of four (4) consecutive months), the surviving spouse, heirs, beneficiaries, devisees, or legal representative of said individual, partner or shareholder shall have the opportunity to participate in partnership of the Franchised Business during the one hundred eighty (180) days following such death or incapacity, provided that during that time such participant shall maintain all standards and obligations required under this Agreement. During such one hundred eighty (180) day period, such 31 41 participant shall either satisfy all the then-current qualifications for a purchaser of a Remedy franchise in accordance with the requirements of this Section 22. or sell, transfer, or assign such participant's ownership interest in Franchisee, or, if applicable, this Agreement and the Franchised Business to a person who satisfies the Franchisor's then-current standards for new Remedy franchisees. 22.7.1. ASSIGNMENT TO ORIGINAL SIGNATORY. If, as a result of the death or incapacity of a shareholder or partner of the Franchisee, all of the deceased or disabled party's interest in this Agreement or the Franchised Business is transferred to an original signatory to this Agreement, then, upon written notice to Franchisor, Franchisor shall consent to the continued operation of the Franchised Business pursuant to the terms of this Agreement. 23. TERMINATION. 23.1. TERMINATION WITH OPPORTUNITY TO CURE. Except as provided in Section 23.2., when Franchisee receives written notice from Franchisor that Franchisee has failed to comply with the terms of this Agreement, Franchisee shall have thirty (30) days to cure the breach(es) and to prove such cure to Franchisor. If any breach of this Agreement is not cured within thirty (30) days of Franchisee's receipt of notice of such breach, Franchisor may terminate this Agreement upon written notice to Franchisee of such termination, effective on the expiration of the cure period. 23.2. TERMINATION WITH NO OPPORTUNITY TO CURE. If any of the following events of default occur, Franchisor may terminate this Agreement immediately upon delivery to Franchisee of notice of termination. Franchisor shall have no obligation to allow Franchisee any opportunity to cure any such event of default. (i) Franchisee is declared bankrupt or judicially determined to be insolvent, or all or a substantial part of the assets of Franchisee or the Franchised Business are assigned to or for the benefit of any creditor, or Franchisee admits his inability to pay Franchisee's debts as they come due; (ii) Franchisee abandons the Franchised Business by failing to operate for five (5) consecutive days during which Franchisee is required to operate the Franchised Business under this Agreement's terms, or any shorter period after which it is not unreasonable under the facts and circumstances for Franchisor to conclude that Franchisee does not intend to continue to operate the Franchised Business; (iii) Franchisee has made any material misrepresentation relating to acquisition of the Franchised Business; (iv) Franchisee engages in conduct that, in Franchisor's sole discretion, materially and unfavorably reflects upon the operation and reputation of the Franchised Business or the Remedy System; 32 42 (v) Franchisee fails for a period of ten (10) days or such longer period as applicable laws may require, after notification of noncompliance, to comply with any federal, state or local law or regulation applicable to operation of the Franchised Business; (vi) After curing any failure described in Section 23.1. Franchisee engages in the same noncompliance, regardless of whether such noncompliance is corrected after notice; (vii) Franchisee repeatedly fails to comply with one (1) or more requirements of this Agreement regardless of whether corrected after notice; (viii) The Franchised Business is seized, taken over or foreclosed by a government official in the exercise of such official's duties, or seized, taken over, or foreclosed by a creditor, lienholder or lessor, provided that a final judgment against Franchisee remains unsatisfied for thirty (30) days, unless a supersedeas or other appeal bond has been filed; (ix) A levy of execution is made upon the Franchised Business or upon any property used in the Franchised Business and is not discharged within five (5) days after such levy; (x) Franchisee is convicted of a felony or other criminal misconduct relevant to operation of the Franchised Business; (xi) Franchisee attempts to transfer the Franchised Business or make an assignment of this Agreement in violation of Section 22. of this Agreement; (xii) In the event of death or incapacity, the surviving spouse, heirs, beneficiaries, devisees, or legal representatives fail to comply with the provisions of Section 22.7.; or (xiii) Franchisee discloses, attempts or threatens to disclose any of the Trade Secrets in violation of this Agreement. 23.3. OTHER TERMINATION RIGHTS. Franchisor's right to terminate this Agreement is in addition to all other rights and remedies, whether at law or in equity, that Franchisor might have against Franchisee as a result of any breach or default by Franchisee of any provision of this Agreement. 23.4. LIQUIDATED DAMAGES. Franchisee understands and acknowledges that Franchisee is obligated by this Agreement to operate the Franchised Business as set forth herein for a term of ten (10) years, and any attempt by Franchisee to terminate this Agreement prior to the expiration date shall be deemed to be a material breach of this Agreement and shall be grounds, at Franchisor's sole discretion, for termination by Franchisor pursuant to Section 23.2. The parties hereto agree that it would be impracticable and extremely difficult to determine the actual damages to Franchisor arising from any such termination of this Agreement. Therefore, the parties agree that in the event of any such termination, Franchisee shall pay to Franchisor as liquidated damages in an amount equal to twelve (12) times the average monthly Franchisor's Share for the six (6) month period prior to any such termination, such amount being a reasonable estimate, as of the date of this 33 43 Agreement, of Franchisor's actual damages resulting from such termination. If such liquidated damages are not paid in full by Franchisee within 14 days of the date of termination, interest shall accrue on any unpaid balance at a rate equal to the lesser of (a) eighteen percent (18%) per annum or (b) the maximum rate allowed by law until such balance is paid in full. Nothing contained in this Section 23.4. shall be construed as a limitation on (i) the rights or remedies of Franchisor to recover for any indebtedness owed Franchisor by Franchisee at the time of such termination, (ii) Franchisor's right to seek specific performance or other equitable relief with respect to this Agreement, or (iii) Franchisor's right to recover its reasonable attorneys' fees, court costs and expenses incurred in enforcing its rights under this Agreement. This Section 23.4. shall survive termination of this Agreement. 24. RIGHTS AND OBLIGATIONS AFTER TERMINATION OR EXPIRATION. 24.1. PAYMENT OF AMOUNTS OWED. Upon expiration of this Agreement or termination for any reason, and regardless of any other provision of this Agreement, all amounts owed to Franchisor or Franchisor's Affiliates, including but not limited to amounts pursuant to this Agreement, and interest due on any of these amounts shall be immediately due and payable. 24.2. MARKS. After termination or expiration of this Agreement, Franchisee shall: (i) refrain from directly or indirectly, at any time or in any manner, identifying Franchisee or any business as a current or former Remedy franchisee or business; (ii) refrain from using any Marks or any colorable imitation of any Marks or other indicia of a Franchised Business in any manner or for any purpose or use for any purpose any trade name, trade or service mark or other commercial symbol that suggests or indicates a connection or association with Franchisor; (iii) remove and discontinue use of all signs, sign faces, stationery, advertising materials, informational or other brochures, and other materials containing any of the Marks or otherwise identifying or relating to the Franchised Business; (iv) take all action necessary or appropriate to cancel all fictitious or assumed name or equivalent registrations relating to Franchisee's use of any of the Marks; and (v) furnish to Franchisor within thirty (30) days after the effective date of termination or expiration, evidence satisfactory to Franchisor of Franchisee's compliance with all obligations under this Section 24. 24.3. TRADE SECRETS. Upon termination or expiration of this Agreement, Franchisee shall immediately cease to use any of the Trade Secrets disclosed to Franchisee pursuant to this Agreement. Upon such termination or expiration, Franchisee shall 34 44 immediately return to Franchisor all confidential or proprietary materials that Franchisor has loaned to Franchisee. Franchisee's continued use of any of the Trade Secrets or any other confidential or proprietary materials or information following the expiration of this Agreement or termination of this Agreement for any reason shall constitute an unfair method of competition. 24.4. CLIENT LISTS. It being recognized and acknowledged that Franchisee's client base is derived, in large part, from its affiliation with Franchisor and from the goodwill associated with the Marks, it is the intent of the parties to this Agreement that the client base of the Franchised Business shall inure to the benefit of the Franchisor and, upon expiration of this Agreement or termination of this Agreement for any reason, Franchisee shall deliver to Franchisor all copies of all materials in Franchisee's possession which in any way identify the clients of the Franchised Business. Franchisee further agrees not to contact clients of the Franchised Business for the purpose of offering services of the type provided by the Franchised Business for a period of two (2) years following the expiration or termination of this Agreement. Franchisee agrees that any failure by Franchisee to fully comply with this Section 24.4. shall constitute an unfair method of competition. 25. ENFORCEMENT. 25.1. SEVERABILITY AND SUBSTITUTION. (i) Except as expressly provided to the contrary herein, each part of this Agreement shall be severable. If any provision is held invalid, or in conflict with any applicable law or regulation in a final unappealable ruling by a competent court, agency or other tribunal in a proceeding to which Franchisor is a party, the ruling shall not impair or otherwise effect remaining parts of this Agreement that remain intelligible. Any portion held invalid shall be deemed not to be part of this Agreement when the time for appeal expires if Franchisee is a party to such proceeding, otherwise when Franchisee receives notice of non-enforcement of such provision from Franchisor. (ii) To the extent that Sections 13. or 24.2., relating to trademarks, Trade Secrets and non-competition, or any part of such sections is unenforceable because of geographical, temporal or subject-matter scope, but could be enforceable by reducing any or all of such scope, such provisions shall be enforced to the fullest extent permissible under applicable laws and public policies. (iii) If any applicable law or rule requires greater prior notice of termination or refusal to enter into a Subsequent Agreement, or action different than this Agreement requires, or if under any applicable law or rule any provision of this Agreement or specification, standard or operating procedure prescribed by Franchisor is invalid or unenforceable, the prior notice and/or action required by such law or 35 45 rule shall replace this Agreement's comparable provisions. In such circumstances, Franchisor shall have the right, in Franchisor's sole discretion, to modify the invalid or unenforceable provision, specification, standard or operating procedure to the extent required to be valid and enforceable. (iv) Franchisee shall satisfy the maximum duty permitted by law under any promise or covenant subsumed within any of this Agreement, that results from reducing any provision, or specification, standard or operating procedure prescribed by Franchisor, or striking from any such provision, specification, standard or operating procedure, any portion(s) that a court holds unenforceable, or orders to be unenforced, in a final decision to which Franchisor is a party, as if the remaining promise or covenant were a separately articulated part of this Agreement. Such modifications to this Agreement shall be effective only in such jurisdiction, unless Franchisor elects to make them applicable in other jurisdictions. 25.2. WAIVER. Franchisor or Franchisee may unilaterally waive or reduce any obligation of or restriction upon the other only by a signed written instrument. Such waiver shall take effect upon delivery of the instrument to the other or such other date stated in the instrument. Any waiver shall be without prejudice to the waiving party's other rights and shall be subject to continuing review. 25.3. NONWAIVER. Franchisor and Franchisee shall not be deemed to waive or impair the right to demand strict compliance with every term, condition and covenant in this Agreement, or to declare any breach to be a default and to terminate this Agreement prior to its expiration, or any other right, power or option reserved in this Agreement, by virtue of: (i) any custom or practice of the parties that varies from this Agreement's terms; (ii) any failure, refusal or neglect to exercise any right under this Agreement or to insist upon strict compliance with mandatory specifications, standards, operating procedures or other obligations; (iii) any waiver, forbearance, delay, failure or omission to exercise any right, power or option, of the same, similar or different nature, with respect to other franchisees; or (iv) acceptance of payments after any breach of this Agreement. 25.4. FORCE MAJEURE. Neither Franchisor nor Franchisee shall be liable or deemed to be in breach for loss, damage or failure to perform that results from any of the following causes. Any delay that results from the following causes shall extend performance accordingly or excuse performance in whole or in part as is reasonable. However, such causes shall not excuse payment of amounts due or owed at the time of such occurrence or payment of royalties due from subsequent Gross Billings. 36 46 (i) strikes, inadequate supply of equipment, merchandise, supplies, material or energy, or the voluntary foregoing of the right to acquire or use any of these in order to accommodate or comply with orders, requests, regulations, recommendations or instructions of any government, government department or government agency; (ii) compliance with any law, rule, order, regulation, requirement or instruction of a government agency other than an order, requirement or instruction that arises from a violation of law or this Agreement; (iii) acts of God or the public enemy; or (iv) acts or omissions of the other party. 25.5. SPECIFIC PERFORMANCE AND INJUNCTIVE RELIEF. Nothing in this Agreement shall prevent Franchisor or Franchisee from obtaining specific performance of this Agreement and injunctive relief against threatened conduct that will cause loss or damages, under equity rules, including applicable rules for obtaining restraining orders and preliminary injunctions. Franchisor shall be entitled to injunctive relief without bond but upon due notice, in addition to all further and other relief available at law or equity. Franchisee's sole remedy upon entry of any injunction shall be dissolution of the injunction, if warranted, upon hearing. 25.6. RIGHTS CUMULATIVE. Franchisor and Franchisee's rights under this Agreement are cumulative. No exercise or enforcement of any right or remedy shall preclude exercise or enforcement of any other right or remedy that the law entitles Franchisor or Franchisee to enforce. Franchisee acknowledges that execution of this Agreement does not entitle Franchisee the right to participate in Franchisor's Franchisee Investment and Growth Program. 25.7. GOVERNING LAW. This Agreement shall be interpreted and construed under California law except to the extent California law is preempted by federal law including, without limitation, federal copyright, patent or trademark law. However if any applicable state franchise investment or similar law or regulation prohibits the parties from agreeing to be governed by California law then this Agreement shall be governed by the law of the state that prohibits application of California law. 25.8. ARBITRATION. Except as precluded by applicable law, any controversy or claim that arises out of or relates to this Agreement, or any breach of this Agreement, including, without limitation, any claim that any of this Agreement is invalid, illegal, voidable or void, shall be submitted to arbitration in accordance with the rules of the American Arbitration Association or any similar successor body and judgment upon the award may be entered in any court with jurisdiction thereof. The preceding sentence shall not limit Franchisor's rights or remedies in connection with any action in any court of competent jurisdiction for injunctive or other provisional relief that Franchisor deems necessary or appropriate to compel Franchisee to comply with Franchisee's obligations under this Agreement or to protect the Marks. Each party shall appoint one arbitrator, and the two arbitrators so appointed shall agree upon a third arbitrator to act as chairman. If a party fails 37 47 to appoint an arbitrator within thirty (30) days from the date upon which the claimant's request for arbitration is communicated to the other party or, if the two appointed arbitrators fail to nominate the chairman within thirty (30) days from the date of appointment of the later appointed arbitrator, such arbitrator shall be selected by the American Arbitration Association or successor body. The award of the arbitrators shall include an award of reasonable attorneys' fees and costs to the prevailing party, and shall be final. The parties agree to waive their right to any form of appeal, to the greatest extent allowed by law, and to share equally the fees and expenses of the arbitrators. Unless applicable law requires otherwise, arbitration shall occur in Los Angeles, California. This arbitration provision shall be self executing. If a party fails to appear at any properly noticed arbitration proceeding, an award may be entered against such party regardless of such failure to appear. 25.9. BINDING EFFECT. This Agreement shall inure to the benefit of and shall bind the parties and their executors, administrators, heirs, assigns, and successors in interest. 25.10. MODIFICATION. Except as expressly provided in Section 25.1., the parties may modify this Agreement only by written instrument signed by the parties. 25.11. CONSTRUCTION. (i) The preambles and exhibit(s) are part of this Agreement. This Agreement is the parties' entire agreement with respect to its subject matter. There are no other prior or contemporaneous oral or written understandings or agreements between the parties relating to the subject matter of this Agreement, and Franchisee expressly acknowledges that it is not relying on any oral or written representations of Franchisor, except as expressly set forth herein. (ii) Nothing in this Agreement shall confer any right or remedy upon any third person or legal entity not a party to this Agreement. (iii) Except when this Agreement expressly requires Franchisor to reasonably approve or not unreasonably withhold approval of any action or request by Franchisee, Franchisor shall have the right to refuse any request by Franchisee or to withhold approval of any action by Franchisee. (iv) Headings in this Agreement are for convenience only. Headings do not define, limit or construe the contents of sections. (v) "AFFILIATE" means any company directly or indirectly owned or controlled by Franchisor that offers services or products, or transacts other business with Franchisee. (vi) If two or more persons are Franchisee under this Agreement regardless of whether they are partners or joint venturers or in another capacity or relation, their obligations shall be joint and several. (vii) If Franchisee or a transferee is a corporation or partnership, then the terms "FRANCHISEE," "OWNER," and "TRANSFEREE" mean, unless expressly made applicable to all shareholders and partners, any person 38 48 who owns of record or beneficially ten percent (10%) or more of the equity or control of Franchisee. (viii) Franchisor and Franchisee are sophisticated parties acting on the advice of competent legal counsel in entering into this Agreement. Thus, Franchisee agrees that any common law or statutory provision providing that an ambiguous or uncertain term will be construed against the drafting party is waived and shall not apply to the construction of this Agreement. 25.12. ATTORNEYS' FEES AND EXPENSES. Should any party hereto commence any action or proceeding for the purpose of enforcing or preventing the breach of any provision hereof, whether by arbitration, judicial or quasi-judicial action or otherwise or any appeal therefrom or for damages for any alleged breach of any provision hereof or for a declaration of such party's rights or obligations hereunder, then the prevailing party shall be reimbursed by the losing party for all costs and expenses incurred in connection therewith, including, but not limited to, reasonable attorney's fees for the services (including all appeals) rendered to such prevailing party. 26. NOTICES AND PAYMENTS. Written notices and reports that this Agreement or the On-Line Operating Manual permit or require to be delivered shall be deemed so delivered when delivered by hand, or one (1) business day after transmission by telegraph or other electronic system, or three (3) business days after placement in the United States Mail by registered or certified mail, return receipt requested, postage prepaid and addressed to the party to be notified at the address first written above or its most current principal business address of which the notifying party has been notified. Payments and reports required by this Agreement shall be directed to Franchisor at the address first written above or at the address of which Franchisor from time to time notifies Franchisee, or to such other persons and places as Franchisor may from time to time direct. Any required payment or report not actually received by Franchisor during regular business hours on the date due or postmarked by postal authorities at least two (2) days prior to the date due shall be deemed delinquent. 39 49 27. MULTIPLE ORIGINALS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall become effective and binding immediately upon its execution by all signatories. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day and year first written above. "FRANCHISOR" "FRANCHISEE" REMEDYTEMP, INC. _______________________________ By:______________________________ By:____________________________ Name:____________________________ Name:__________________________ Title:___________________________ Title:_________________________ 40 50 EXHIBIT "A" TO FRANCHISE AGREEMENT FRANCHISE LOCATIONS 51 EXHIBIT "B" TO FRANCHISE AGREEMENT TERRITORY 52 EXHIBIT "C" TO FRANCHISE AGREEMENT MINIMUM PERFORMANCE STANDARDS 53 EXHIBIT "D" TO FRANCHISE AGREEMENT OFFICE DEVELOPMENT REQUIREMENTS 54 EXHIBIT "E" TO FRANCHISE AGREEMENT NONDISCLOSURE AND NONCOMPETITION AGREEMENT 55 NONDISCLOSURE AND NONCOMPETITION AGREEMENT (FRANCHISEE) In consideration of the execution by RemedyTemp, Inc. of a Franchise Agreement with ______________________ relating to a Remedy franchise, the undersigned, who are the Owners and/or Principal Officers of __________________ ________________________________________________________________________________ __________________________________________________________________________ the "FRANCHISEE" thereunder agree individual and jointly to comply with and be bound by all provisions of the Franchise Agreement in any way related to nondisclosure and noncompetition, including, but not limited to, Sections 9., 13. and 24. of the Franchise Agreement. This Nondisclosure and Noncompetition Agreement shall be executed by all persons and other legal entities who are now and who shall from time to time be such Beneficial Owners and/or Principal Officers, and the execution hereof by all such persons and legal entities shall be the responsibility of the undersigned. SIGNATURE OF SIGNATURES OF BENEFICIAL OWNERS PRINCIPAL OFFICERS _____________________________________ ____________________________________ ___% OF OWNERSHIP _____________________________________ ____________________________________ ___% OF OWNERSHIP _____________________________________ ____________________________________ ___% OF OWNERSHIP _____________________________________ ____________________________________ ___% OF OWNERSHIP 56 EXHIBIT "F" TO FRANCHISE AGREEMENT SOFTWARE LICENSE AGREEMENT 57 REMEDYTEMP, INC. SOFTWARE LICENSE AGREEMENT This License Agreement (hereinafter "Agreement") is entered into as of the _____ day of __________________, 199 _____ (the "Effective Date") by and between RemedyTemp, Inc., (hereinafter "Remedy") and __________________________ ____________________________________ (hereinafter "Franchisee"). For good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties hereto agree to the following terms and conditions: 1. License of Software. Subject to the terms and conditions of this Agreement, Remedy will license to Franchisee one (1) or more I/SEARCH 2000 computer software program(s) and all related materials and documentation (collectively, the "I/SEARCH 2000 Software") for an annual license fee (which shall include all application updates and related support services), installation costs plus shipping and handling costs, and all applicable state/local/federal taxes, as further set forth in this Agreement. Subject to the terms and conditions of this Agreement, Remedy hereby grants to Franchisee a non-transferable non-exclusive right to use the I/SEARCH 2000 Software, ordered and accepted as set forth above, for the term of this Agreement, as set forth in Section 5 herein. 2. System Hardware. Franchisee shall maintain, at its sole cost and expense, computer hardware and related equipment designated by Remedy, in its sole discretion, as required for the use of the I/SEARCH 2000 Software. Franchisee shall purchase such required computer hardware and related equipment through Remedy. Remedy may, from time-to-time, modify, change, add or delete specifications required for computer hardware and related equipment. Any change in specifications provided by Remedy shall, which may require the purchase of additional equipment or the upgrade of existing equipment, be implemented within a reasonable time after notice of such change by Remedy and at the sole cost and expense of Franchisee. 3. Technical Support. 3.1. Remedy agrees to provide reasonable technical assistance to Franchisee for installation and program support of the I/SEARCH 2000 Software as may be required from time-to-time by Franchisee, the cost of which shall be included in the Annual Fee set forth under Section 6.3. In the event ------------ Remedy personnel are required to travel to Franchisee location(s), Franchisee agrees that Franchisee shall pay Remedy all costs incurred as a result of such on-location service. Payment of all such costs incurred shall be due and payable net thirty (30) days upon receipt of invoice. 3.2 Remedy assumes that Franchisee and its employees shall have the requisite skills to access and use the I/SEARCH 2000 Software. If either Franchisee or 1 58 its employees do not have such requisite skill, Franchisee or its employees shall obtain the skills needed, either through Remedy training or elsewhere, at additional cost to Franchisee. 4. Hardware and Equipment Service. Franchisee shall purchase a hardware maintenance contract with Remedy's designated vendor (the "Maintenance Vendor") for hardware and equipment service during the term of this Agreement. The cost of such maintenance contract shall be set by the Maintenance Vendor. Franchisee shall look to the Maintenance Vendor or the applicable manufacturer of any hardware and other equipment purchased from Remedy or otherwise used with the I/SEARCH 2000 Software for any and all warranties and service of such items. Remedy shall not be responsible for any warranties, service or support of such items. 5. Term of Agreement. The term of this Agreement shall be for the term or duration of the original Franchise Agreement, or any renewal thereof, entered into and executed by and between Franchisee and RemedyTemp, Inc. (the "Franchise Agreement"), subject to the provisions of Section 12 of this Agreement. 6. Payment Terms. 6.1 The fees for any item or service provided by Remedy to Franchisee under this Agreement shall be as set forth below. Such fees may be changed from time-to-time in Remedy's sole discretion, unless otherwise provided herein. Accordingly, the prices for any items ordered by Franchisee under this Agreement after the Effective Date are subject to change; provided that all fees shall be charged at Remedy's published rates for such items in effect at the time charged. 6.2 Late Payments. If any amount payable to Remedy under this Agreement or otherwise is not paid when due, Remedy shall be entitled to payment as specified under the Franchise Agreement. 6.3 Annual Fee. Franchisee shall pay to Remedy an annual fee of Two Thousand Eight Hundred and Thirty-Two Dollars ($2,832) upon execution of this Agreement (the "Annual Fee"). The Annual Fee shall cover all of Franchisee's costs relating to: (1) the licensing the I/SEARCH 2000 Software; (2) Remedy's service of the of I/SEARCH 2000 Software; (3) all Remedy's published updates of the I/SEARCH 2000 Software; and (4) Remedy's technical support of the I/SEARCH 2000 Software. Upon the first year anniversary of the Effective Date, and each subsequent annual anniversary date thereafter, Franchisee shall pay to Remedy an Annual Fee of Two Thousand Eight Hundred and Thirty-Two Dollars ($2,832), for as long as this Agreement remains in effect. The Annual Fees, and any other fees owed to Remedy by Franchisee shall be due and payable as provided under Paragraph 6.5(a) hereof. 6.4 Hardware Costs. Franchisee shall pay Remedy for any and all hardware and equipment purchased from Remedy upon installation within thirty (30) days upon receipt of invoice, as provided under Paragraph 6.5(b) hereof. 2 59 6.5 Payments. (a) Remedy shall invoice Franchisee for all costs of annual license fees, annual update fees, annual support fees, and all costs for shipping, handling and applicable state/local/federal taxes. All amounts invoiced to Franchisee, pursuant to this paragraph, shall be deducted by Remedy from the Franchisee's Share pursuant to the Franchise Agreement. (b) Remedy shall invoice Franchisee all costs for hardware and equipment purchased by Franchisee from Remedy. Payment shall be due and payable to Remedy within thirty (30) days of receipt of invoice. 6.6 Security Interest. Remedy reserves a security interest in all hardware and equipment purchased hereunder and invoiced to Franchisee and in any proceeds thereof to secure Franchisee's payment obligations to Remedy. Upon Remedy's request, Franchisee agrees to promptly take such actions necessary, and execute any documents required, to perfect and maintain such security interest. 7. Ownership. 7.1 Ownership and Use of Software. The I/SEARCH 2000 Software licensed hereunder is solely for Franchisee's use in connection with the Franchised Business (as defined in the Franchise Agreement) at Franchisee's franchise premises. Franchisee understands and agrees that the I/SEARCH 2000 Software shall at all times remain the sole and exclusive property of Remedy. Franchisee shall at no time possess or have any right of ownership or proprietary interest in or to the I/SEARCH 2000 Software, including any modifications thereto. Accordingly, no title to or ownership interest in any part of the I/SEARCH 2000 Software is transferred to Franchisee. Title to all applicable rights in patents, patent rights, copyrights, trademarks, service marks, trade names, trade secrets and proprietary rights in the I/SEARCH 2000 Software are and shall remain in Remedy. Franchisee agrees to be bound by and observe the proprietary nature of I/SEARCH 2000 Software program and further, shall not take any action to jeopardize, limit, or interfere with such proprietary information concerning the I/SEARCH 2000 Software to any third party. Franchisee agrees to take appropriate action by instruction or agreement with its employees who are permitted access to the I/SEARCH 2000 Software to fulfill its obligations hereunder. 7.2 Title to Hardware. Title to hardware and equipment purchased hereunder shall transfer to Franchisee after all applicable payments therefor have been made. Risk of loss and damage for, hardware and equipment, if any, purchased hereunder shall pass to Franchisee upon shipment to Franchisee, F.O.B. manufacturer's or Remedy's facilities, whichever location such items are shipped from. 7.3 Rights of Third Parties. Franchisee acknowledges and agrees that its acquisition and use of the hardware, the I/SEARCH 2000 Software and other any other items pursuant to this Agreement may be subject to the rights of Remedy's vendors thereof in such items and to Remedy's obligations to such persons in connection with Remedy's acquisition 3 60 of such items. Accordingly, Franchisee agrees to execute such further instruments and documents required by such persons to evidence or secure such persons' rights in the items acquired by Franchisee under this Agreement. 8. No Warranty. REMEDY MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND, WHETHER EXPRESS OR IMPLIED (EITHER IN FACT OR BY OPERATION OF LAW), WITH RESPECT TO THE I/SEARCH 2000 SOFTWARE LICENSED HEREUNDER OR ANY HARDWARE OR OTHER EQUIPMENT PURCHASED HEREUNDER, AND ALL SUCH WARRANTIES ARE HEREBY DISCLAIMED. REMEDY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. ANY OTHER REPRESENTATIONS OR WARRANTIES MADE BY ANY PERSON, INCLUDING EMPLOYEES OR REPRESENTATIVES OF REMEDY, WHICH ARE INCONSISTENT HEREWITH SHALL BE DISREGARDED BY FRANCHISEE AND SHALL NOT BE BINDING UPON REMEDY. 9. Liability Limitations. REMEDY SHALL NOT BE LIABLE FOR ANY LIABILITIES, LOSSES, OR DAMAGES, INCLUDING, WITHOUT LIMITATION, SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES OR LOSS OF USE, REVENUE, OR PROFITS, IN CONNECTION WITH OR ARISING OUT OF ANY FAILURE OR DEFECT IN OR UNAVAILABILITY OR USE OF THE I/SEARCH 2000 SOFTWARE OR THE HARDWARE AND EQUIPMENT, IF ANY, PURCHASED HEREUNDER. REMEDY SHALL NOT HAVE ANY LIABILITY WITH RESPECT TO ANY LOSS OR DAMAGE RELATED TO ANY (i) FAILURE OF THE I/SEARCH 2000 SOFTWARE; OR (ii) ANY USE OF THE I/SEARCH 2000 SOFTWARE OR THE RESULTS OR DECISIONS MADE OR OBTAINED BY USERS OF THE I/SEARCH 2000 SOFTWARE. THE LIMITATIONS CONTAINED IN THIS SECTION SHALL APPLY EVEN IF ANY LIMITED REMEDY FAILS IN ITS ESSENTIAL PURPOSE. 10. Nondisclosure. Franchisee shall keep confidential and shall require its officers, directors and employees to keep the I/SEARCH 2000 Software confidential. Franchisee shall not disclose the I/SEARCH 2000 Software to any person or entity other than those employees of Franchisee who are authorized to use the I/SEARCH 2000 Software. Franchisee shall use the same degree of diligence and effort to protect the I/SEARCH 2000 Software from disclosure to third parties as Franchisee uses to protect its own confidential information, but in no event shall franchisee use less than reasonable diligence and effort in protecting the I/SEARCH 2000 Software from disclosure. Franchisee shall notify each employee having access to the I/SEARCH 2000 Software of the nondisclosure obligations under this Agreement. 11. Notice of Inoperability. In the event the I/SEARCH 2000 Software system is not operable for any reason, Franchisee shall notify the designated representative of Remedy within twenty-four (24) hours of such inoperability, or within one (l) business work day, whichever shall first occur. 4 61 12. License and Agreement Termination. In addition, Remedy shall have the right to terminate Franchisee's license hereunder and this Agreement if Franchisee fails to comply with the terms and conditions of this Agreement or any Franchise Agreement. To exercise such termination rights, Remedy shall give written notice to Franchisee of such failure and if such failure has not been remedied within three (3) days after such notice, the Franchisee's license and this Agreement shall terminate upon written notice from Remedy. Remedy shall also have the right to immediately terminate Franchisee's license and this Agreement upon written notice to Franchisee, if Franchisee breaches any of the provisions of Section7 or 10 hereof. In the event the Franchise Agreement by and between Remedy and Franchisee is terminated, or the Franchise is closed or sold by Franchisee, unless Franchisee's rights and obligations hereunder are assigned pursuant to the provisions of Section 19 hereof, this Agreement shall automatically terminate. 13. Consequences of Termination. Upon termination, Franchisee shall return all copies of the I/SEARCH 2000 Software along with all related reference and other descriptive documentation related thereto to Remedy. Upon Remedy's request, Franchisee shall be solely responsible for the return of any and all hardware and related equipment which contains the I/SEARCH 2000 Software to Remedy in order to allow Remedy to remove the I/SEARCH 2000 Software on such hardware and equipment and then return such hardware and equipment to Franchisee. All shipping costs for the above shall be paid by Franchisee. In the event Franchisee ceases to do business, Remedy, in its sole discretion reserves the right to take possession of the hardware and related equipment in order to remove all I/SEARCH 2000 Software and any then existing data contained in the I/SEARCH 2000 Software. If termination occurs prior to the end of a license term for the I/SEARCH 2000 Software and Franchisee has paid in advance for the license hereunder, Remedy shall refund to Franchisee a pro rata amount of the license fee with respect to the remaining license term. In the event of termination, all provisions of Section 7, 8, 9, and 10 shall survive termination of this Agreement. 14. Insurance. Franchisee shall, during the term of this Agreement, be responsible for maintaining all-risk insurance, including replacement cost in any insurable amount as determined by Franchisee for any loss or damage to system hardware using the I/SEARCH 2000 Software or destruction or loss of data for use with the I/SEARCH 2000 Software maintained on the system. It shall be in the sole discretion of Franchisee to maintain business interruption insurance insuring against interruption of business as a result of any system failure, damage or destruction. Remedy shall not have any responsibility for maintaining any insurance to protect Franchisee against any and all loss or damage to system hardware, software or data contained in the system using the I/SEARCH 2000 Software. 15. Modification and Discontinuance. All updates to I/SEARCH 2000 Software and all modules or options of I/SEARCH 2000 Software are subject to change, revision, modification or discontinuance with thirty (30) days' advance notice of Franchisees. 16. Waivers. The waiver or failure of either party to exercise in any respect any right provided for herein shall not be deemed a waiver of any further right thereunder. Termination of a license granted herein or of this Agreement by either party shall not act as a 5 62 waiver of any breaches of the terms and conditions of this Agreement and shall not act as a release of either party from any liability for breach of such party's obligations hereunder. 17. Equitable Remedies. The obligation of Franchisee under Sections 7, 10, l2, and 13 hereof are of a special and unique character which gives them a peculiar value to Remedy for which Remedy cannot be reasonably or adequately compensated in damages in the event Franchisee breaches such obligations. Therefore Remedy shall, in addition to other remedies which may be available, be entitled to injunctive or other equitable relief in the event of the breach or threatened breach of such obligation. 18. Representatives and Notices. All notices required to be given hereunder shall be in writing to the parties' representatives at the addresses set forth below. Notice shall be considered delivered and effective three (3) working days after mailing when sent by registered or certified mail, return receipt requested. Notice shall be deemed given on the date of service if personally served or sent by a reputable overnight messenger service or on the date of telecopying, if telecopied, provided that a copy of the telecopy is also sent by United States mail. Either party, upon written notice to the other, may change any name or address to which future notices shall be sent. Any notices under this Agreement shall be sent to the following representatives: If to Remedy: Attention: Vice President, Information Technology RemedyTemp, Inc. 101 Enterprise Aliso Viejo, CA 92656 If to Franchisee: Attention: __________________________________ __________________________________ __________________________________ Telephone: __________________________________ Fax: __________________________________ 19. Assignment. Upon the assignment by Franchisee to any person or entity (the "Assignee") of Franchisee's rights and obligations under the Franchise Agreement in accordance with the provisions thereof, Franchisee shall concurrently therewith assign all of its rights and obligations under this Agreement to the Assignee, who shall, from and after such assignment of this Agreement, assume and perform for the express benefit of Remedy the obligations and liabilities of Franchisee hereunder. Except as set forth in the preceding sentence, any assignment or transfer by Franchisee of this Agreement or of Franchisee's rights or obligations hereunder without the prior written consent of Remedy shall be void and shall constitute an event of default hereunder. 6 63 20. Further Assurances. Franchisee agrees to take such further actions and to execute and deliver such further documents as may be required to evidence, confirm or consummate the agreements set forth in this Agreement. 21. Authority. The parties by their respective signatures below acknowledge and affirm that each is an authorized and designated representative to execute this Agreement on behalf of their respective company. This Agreement is executed as of the ________ day of _____________, 199__. RemedyTemp, Inc. Remedy Franchisee By: __________________________________ By: _______________________________ Title:__________________________________ Title:______________________________ 101 Enterprise Aliso Viejo, CA 92656 Address:____________________________ 7 EX-10.25 5 FORM OF LICENSING AGREEMENT FOR I/SEARCH 2000(TM) 1 EXHIBIT 10.25 REMEDYTEMP, INC. SOFTWARE LICENSE AGREEMENT This License Agreement (hereinafter "Agreement") is entered into as of the _____ day of __________________, 199 _____ (the "Effective Date") by and between RemedyTemp, Inc., (hereinafter "Remedy") and ___________________________ (hereinafter "Franchisee"). For good and valuable consideration, the receipt and sufficiency of which is acknowledged, the parties hereto agree to the following terms and conditions: 1. License of Software. Subject to the terms and conditions of this Agreement, Remedy will license to Franchisee one (1) or more I/SEARCH 2000 computer software program(s) and all related materials and documentation (collectively, the "I/SEARCH 2000 Software") for an annual license fee (which shall include all application updates and related support services), installation costs plus shipping and handling costs, and all applicable state/local/federal taxes, as further set forth in this Agreement. Subject to the terms and conditions of this Agreement, Remedy hereby grants to Franchisee a non-transferable non-exclusive right to use the I/SEARCH 2000 Software, ordered and accepted as set forth above, for the term of this Agreement, as set forth in Section 5 herein. 2. System Hardware. Franchisee shall maintain, at its sole cost and expense, computer hardware and related equipment designated by Remedy, in its sole discretion, as required for the use of the I/SEARCH 2000 Software. Franchisee shall purchase such required computer hardware and related equipment through Remedy. Remedy may, from time-to-time, modify, change, add or delete specifications required for computer hardware and related equipment. Any change in specifications provided by Remedy shall, which may require the purchase of additional equipment or the upgrade of existing equipment, be implemented within a reasonable time after notice of such change by Remedy and at the sole cost and expense of Franchisee. 3. Technical Support. 3.1. Remedy agrees to provide reasonable technical assistance to Franchisee for installation and program support of the I/SEARCH 2000 Software as may be required from time-to-time by Franchisee, the cost of which shall be included in the Annual Fee set forth under Section 6.3. In the event Remedy personnel are required to travel to Franchisee location(s), Franchisee agrees that Franchisee shall pay Remedy all costs incurred as a result of such on-location service. Payment of all such costs incurred shall be due and payable net thirty (30) days upon receipt of invoice. 3.2 Remedy assumes that Franchisee and its employees shall have the requisite skills to access and use the I/SEARCH 2000 Software. If either Franchisee or 1 2 its employees do not have such requisite skill, Franchisee or its employees shall obtain the skills needed, either through Remedy training or elsewhere, at additional cost to Franchisee. 4. Hardware and Equipment Service. Franchisee shall purchase a hardware maintenance contract with Remedy's designated vendor (the "Maintenance Vendor") for hardware and equipment service during the term of this Agreement. The cost of such maintenance contract shall be set by the Maintenance Vendor. Franchisee shall look to the Maintenance Vendor or the applicable manufacturer of any hardware and other equipment purchased from Remedy or otherwise used with the I/SEARCH 2000 Software for any and all warranties and service of such items. Remedy shall not be responsible for any warranties, service or support of such items. 5. Term of Agreement. The term of this Agreement shall be for the term or duration of the original Franchise Agreement, or any renewal thereof, entered into and executed by and between Franchisee and RemedyTemp, Inc. (the "Franchise Agreement"), subject to the provisions of Section 12 of this Agreement. 6. Payment Terms. 6.1 The fees for any item or service provided by Remedy to Franchisee under this Agreement shall be as set forth below. Such fees may be changed from time-to-time in Remedy's sole discretion, unless otherwise provided herein. Accordingly, the prices for any items ordered by Franchisee under this Agreement after the Effective Date are subject to change; provided that all fees shall be charged at Remedy's published rates for such items in effect at the time charged. 6.2 Late Payments. If any amount payable to Remedy under this Agreement or otherwise is not paid when due, Remedy shall be entitled to payment as specified under the Franchise Agreement. 6.3 Annual Fee. Franchisee shall pay to Remedy an annual fee of Two Thousand Eight Hundred and Thirty-Two Dollars ($2,832) upon execution of this Agreement (the "Annual Fee"). The Annual Fee shall cover all of Franchisee's costs relating to: (1) the licensing the I/SEARCH 2000 Software; (2) Remedy's service of the of I/SEARCH 2000 Software; (3) all Remedy's published updates of the I/SEARCH 2000 Software; and (4) Remedy's technical support of the I/SEARCH 2000 Software. Upon the first year anniversary of the Effective Date, and each subsequent annual anniversary date thereafter, Franchisee shall pay to Remedy an Annual Fee of Two Thousand Eight Hundred and Thirty-Two Dollars ($2,832), for as long as this Agreement remains in effect. The Annual Fees, and any other fees owed to Remedy by Franchisee shall be due and payable as provided under Paragraph 6.5(a) hereof. 6.4 Hardware Costs. Franchisee shall pay Remedy for any and all hardware and equipment purchased from Remedy upon installation within thirty (30) days upon receipt of invoice, as provided under Paragraph 6.5(b) hereof. 2 3 6.5 Payments. (a) Remedy shall invoice Franchisee for all costs of annual license fees, annual update fees, annual support fees, and all costs for shipping, handling and applicable state/local/federal taxes. All amounts invoiced to Franchisee, pursuant to this paragraph, shall be deducted by Remedy from the Franchisee's Share pursuant to the Franchise Agreement. (b) Remedy shall invoice Franchisee all costs for hardware and equipment purchased by Franchisee from Remedy. Payment shall be due and payable to Remedy within thirty (30) days of receipt of invoice. 6.6 Security Interest. Remedy reserves a security interest in all hardware and equipment purchased hereunder and invoiced to Franchisee and in any proceeds thereof to secure Franchisee's payment obligations to Remedy. Upon Remedy's request, Franchisee agrees to promptly take such actions necessary, and execute any documents required, to perfect and maintain such security interest. 7. Ownership. 7.1 Ownership and Use of Software. The I/SEARCH 2000 Software licensed hereunder is solely for Franchisee's use in connection with the Franchised Business (as defined in the Franchise Agreement) at Franchisee's franchise premises. Franchisee understands and agrees that the I/SEARCH 2000 Software shall at all times remain the sole and exclusive property of Remedy. Franchisee shall at no time possess or have any right of ownership or proprietary interest in or to the I/SEARCH 2000 Software, including any modifications thereto. Accordingly, no title to or ownership interest in any part of the I/SEARCH 2000 Software is transferred to Franchisee. Title to all applicable rights in patents, patent rights, copyrights, trademarks, service marks, trade names, trade secrets and proprietary rights in the I/SEARCH 2000 Software are and shall remain in Remedy. Franchisee agrees to be bound by and observe the proprietary nature of I/SEARCH 2000 Software program and further, shall not take any action to jeopardize, limit, or interfere with such proprietary information concerning the I/SEARCH 2000 Software to any third party. Franchisee agrees to take appropriate action by instruction or agreement with its employees who are permitted access to the I/SEARCH 2000 Software to fulfill its obligations hereunder. 7.2 Title to Hardware. Title to hardware and equipment purchased hereunder shall transfer to Franchisee after all applicable payments therefor have been made. Risk of loss and damage for, hardware and equipment, if any, purchased hereunder shall pass to Franchisee upon shipment to Franchisee, F.O.B. manufacturer's or Remedy's facilities, whichever location such items are shipped from. 7.3 Rights of Third Parties. Franchisee acknowledges and agrees that its acquisition and use of the hardware, the I/SEARCH 2000 Software and other any other items pursuant to this Agreement may be subject to the rights of Remedy's vendors thereof in such items and to Remedy's obligations to such persons in connection with Remedy's acquisition 3 4 of such items. Accordingly, Franchisee agrees to execute such further instruments and documents required by such persons to evidence or secure such persons' rights in the items acquired by Franchisee under this Agreement. 8. No Warranty. REMEDY MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND, WHETHER EXPRESS OR IMPLIED (EITHER IN FACT OR BY OPERATION OF LAW), WITH RESPECT TO THE I/SEARCH 2000 SOFTWARE LICENSED HEREUNDER OR ANY HARDWARE OR OTHER EQUIPMENT PURCHASED HEREUNDER, AND ALL SUCH WARRANTIES ARE HEREBY DISCLAIMED. REMEDY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. ANY OTHER REPRESENTATIONS OR WARRANTIES MADE BY ANY PERSON, INCLUDING EMPLOYEES OR REPRESENTATIVES OF REMEDY, WHICH ARE INCONSISTENT HEREWITH SHALL BE DISREGARDED BY FRANCHISEE AND SHALL NOT BE BINDING UPON REMEDY. 9. Liability Limitations. REMEDY SHALL NOT BE LIABLE FOR ANY LIABILITIES, LOSSES, OR DAMAGES, INCLUDING, WITHOUT LIMITATION, SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES OR LOSS OF USE, REVENUE, OR PROFITS, IN CONNECTION WITH OR ARISING OUT OF ANY FAILURE OR DEFECT IN OR UNAVAILABILITY OR USE OF THE I/SEARCH 2000 SOFTWARE OR THE HARDWARE AND EQUIPMENT, IF ANY, PURCHASED HEREUNDER. REMEDY SHALL NOT HAVE ANY LIABILITY WITH RESPECT TO ANY LOSS OR DAMAGE RELATED TO ANY (i) FAILURE OF THE I/SEARCH 2000 SOFTWARE; OR (ii) ANY USE OF THE I/SEARCH 2000 SOFTWARE OR THE RESULTS OR DECISIONS MADE OR OBTAINED BY USERS OF THE I/SEARCH 2000 SOFTWARE. THE LIMITATIONS CONTAINED IN THIS SECTION SHALL APPLY EVEN IF ANY LIMITED REMEDY FAILS IN ITS ESSENTIAL PURPOSE. 10. Nondisclosure. Franchisee shall keep confidential and shall require its officers, directors and employees to keep the I/SEARCH 2000 Software confidential. Franchisee shall not disclose the I/SEARCH 2000 Software to any person or entity other than those employees of Franchisee who are authorized to use the I/SEARCH 2000 Software. Franchisee shall use the same degree of diligence and effort to protect the I/SEARCH 2000 Software from disclosure to third parties as Franchisee uses to protect its own confidential information, but in no event shall franchisee use less than reasonable diligence and effort in protecting the I/SEARCH 2000 Software from disclosure. Franchisee shall notify each employee having access to the I/SEARCH 2000 Software of the nondisclosure obligations under this Agreement. 11. Notice of Inoperability. In the event the I/SEARCH 2000 Software system is not operable for any reason, Franchisee shall notify the designated representative of Remedy within twenty-four (24) hours of such inoperability, or within one (l) business work day, whichever shall first occur. 4 5 12. License and Agreement Termination. In addition, Remedy shall have the right to terminate Franchisee's license hereunder and this Agreement if Franchisee fails to comply with the terms and conditions of this Agreement or any Franchise Agreement. To exercise such termination rights, Remedy shall give written notice to Franchisee of such failure and if such failure has not been remedied within three (3) days after such notice, the Franchisee's license and this Agreement shall terminate upon written notice from Remedy. Remedy shall also have the right to immediately terminate Franchisee's license and this Agreement upon written notice to Franchisee, if Franchisee breaches any of the provisions of Section 7 or 10 hereof. In the event the Franchise Agreement by and between Remedy and Franchisee is terminated, or the Franchise is closed or sold by Franchisee, unless Franchisee's rights and obligations hereunder are assigned pursuant to the provisions of Section 19 hereof, this Agreement shall automatically terminate. 13. Consequences of Termination. Upon termination, Franchisee shall return all copies of the I/SEARCH 2000 Software along with all related reference and other descriptive documentation related thereto to Remedy. Upon Remedy's request, Franchisee shall be solely responsible for the return of any and all hardware and related equipment which contains the I/SEARCH 2000 Software to Remedy in order to allow Remedy to remove the I/SEARCH 2000 Software on such hardware and equipment and then return such hardware and equipment to Franchisee. All shipping costs for the above shall be paid by Franchisee. In the event Franchisee ceases to do business, Remedy, in its sole discretion reserves the right to take possession of the hardware and related equipment in order to remove all I/SEARCH 2000 Software and any then existing data contained in the I/SEARCH 2000 Software. If termination occurs prior to the end of a license term for the I/SEARCH 2000 Software and Franchisee has paid in advance for the license hereunder, Remedy shall refund to Franchisee a pro rata amount of the license fee with respect to the remaining license term. In the event of termination, all provisions of Section 7, 8, 9, and 10 shall survive termination of this Agreement. 14. Insurance. Franchisee shall, during the term of this Agreement, be responsible for maintaining all-risk insurance, including replacement cost in any insurable amount as determined by Franchisee for any loss or damage to system hardware using the I/SEARCH 2000 Software or destruction or loss of data for use with the I/SEARCH 2000 Software maintained on the system. It shall be in the sole discretion of Franchisee to maintain business interruption insurance insuring against interruption of business as a result of any system failure, damage or destruction. Remedy shall not have any responsibility for maintaining any insurance to protect Franchisee against any and all loss or damage to system hardware, software or data contained in the system using the I/SEARCH 2000 Software. 15. Modification and Discontinuance. All updates to I/SEARCH 2000 Software and all modules or options of I/SEARCH 2000 Software are subject to change, revision, modification or discontinuance with thirty (30) days' advance notice of Franchisees. 16. Waivers. The waiver or failure of either party to exercise in any respect any right provided for herein shall not be deemed a waiver of any further right thereunder. Termination of a license granted herein or of this Agreement by either party shall not act 5 6 as a waiver of any breaches of the terms and conditions of this Agreement and shall not act as a release of either party from any liability for breach of such party's obligations hereunder. 17. Equitable Remedies. The obligation of Franchisee under Sections 7, 10, l2, and 13 hereof are of a special and unique character which gives them a peculiar value to Remedy for which Remedy cannot be reasonably or adequately compensated in damages in the event Franchisee breaches such obligations. Therefore Remedy shall, in addition to other remedies which may be available, be entitled to injunctive or other equitable relief in the event of the breach or threatened breach of such obligation. 18. Representatives and Notices. All notices required to be given hereunder shall be in writing to the parties' representatives at the addresses set forth below. Notice shall be considered delivered and effective three (3) working days after mailing when sent by registered or certified mail, return receipt requested. Notice shall be deemed given on the date of service if personally served or sent by a reputable overnight messenger service or on the date of telecopying, if telecopied, provided that a copy of the telecopy is also sent by United States mail. Either party, upon written notice to the other, may change any name or address to which future notices shall be sent. Any notices under this Agreement shall be sent to the following representatives: If to Remedy: Attention: Vice President, Information Technology RemedyTemp, Inc. 101 Enterprise Aliso Viejo, CA 92656 If to Franchisee: Attention: __________________________________ __________________________________ __________________________________ Telephone: __________________________________ Fax: __________________________________ 19. Assignment. Upon the assignment by Franchisee to any person or entity (the "Assignee") of Franchisee's rights and obligations under the Franchise Agreement in accordance with the provisions thereof, Franchisee shall concurrently therewith assign all of its rights and obligations under this Agreement to the Assignee, who shall, from and after such assignment of this Agreement, assume and perform for the express benefit of Remedy the obligations and liabilities of Franchisee hereunder. Except as set forth in the preceding sentence, any assignment or transfer by Franchisee of this Agreement or of Franchisee's rights or obligations hereunder without the prior written consent of Remedy shall be void and shall constitute an event of default hereunder. 6 7 20. Further Assurances. Franchisee agrees to take such further actions and to execute and deliver such further documents as may be required to evidence, confirm or consummate the agreements set forth in this Agreement. 21. Authority. The parties by their respective signatures below acknowledge and affirm that each is an authorized and designated representative to execute this Agreement on behalf of their respective company. This Agreement is executed as of the ________ day of _____________, 199__. RemedyTemp, Inc. Remedy Franchisee By: __________________________________ By: __________________________________ Title:________________________________ Title:________________________________ 101 Enterprise Aliso Viejo, CA 92656 Address:______________________________ 7 EX-13.1 6 REMEDYTEMP, INC. 1998 ANNUAL REPORT TO SHAREHOLDER 1 EXHIBIT 13.1 SELECTED FINANCIAL DATA
FISCAL YEAR ENDED(1) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Total revenues .................... $451,344 $360,346 $285,519 $209,003 $153,005 Income before income taxes ........ 23,177 17,424 12,007 6,497 3,802 Provision for income taxes (2) .... 9,271 7,231 7,794 97 57 -------- -------- -------- -------- -------- Net income ........................ $ 13,906 $ 10,193 $ 4,213 $ 6,400 $ 3,745 ======== ======== ======== ======== ======== Net income per share, basic ....... $ 1.55 $ 1.15 $ 0.58 $ 0.94 $ 0.55 ======== ======== ======== ======== ======== Weighted-average number of shares, basic ............................. 8,966 8,896 7,225 6,795 6,795 Net income per share, diluted ..... $ 1.50 $ 1.13 $ 0.58 $ 0.94 $ 0.55 ======== ======== ======== ======== ======== Weighted-average number of shares, diluted ........................... 9,297 9,042 7,250 6,795 6,795 PRO FORMA DATA(2): Income before income taxes ........ 12,007 6,497 3,802 Provision for income taxes ........ 4,923 2,599 1,521 -------- -------- -------- Net income ........................ $ 7,084 $ 3,898 $ 2,281 ======== ======== ======== BALANCE SHEET DATA: Cash and cash equivalents ......... $ 450 $ 5,128 $ 10,959 $ 2,204 $ 1,330 Working capital ................... $ 42,461 $ 39,130 $ 35,341 $ 14,649 $ 10,610 Total assets ...................... $ 89,785 $ 73,806 $ 63,906 $ 43,496 $ 30,490 Long-term debt .................... $ 63 $ 281 $ 734 $ 1,142 $ 851 Shareholders' equity .............. $ 62,437 $ 47,061 $ 36,276 $ 19,308 $ 13,829
(1) The fiscal year end of RemedyTemp, Inc., (the "Company"), including its wholly-owned subsidiary, Remedy Insurance Group, LTD ("RIG"), is a 52 or 53 week period ending the Sunday closest to September 30. Thus, "fiscal 1998," "fiscal 1997," "fiscal 1996," "fiscal 1995," and "fiscal 1994" refer to the Company's fiscal years ending September 27, 1998, September 28, 1997, September 29, 1996, October 1, 1995 and October 2, 1994, respectively. All these fiscal years consisted of 52 weeks. (2) Prior to the Company's initial public offering (the "Offering") in July 1996, the Company operated as an S corporation under Subchapter S of the Internal Revenue Code and comparable provisions of certain state income tax laws. The pro forma income statement data reflects provisions for federal and state income taxes as if the Company had been subject to federal and state income taxation as a C corporation during each of the periods presented. The termination of the Company's S corporation status in connection with the Offering resulted in a non-recurring net charge to actual earnings of $7.8 million in the fourth quarter of fiscal 1996. See "Notes to Consolidated Financial Statements- Note 4." 6 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS In addition to historical information, management's discussion and analysis includes certain forward-looking statements, including, but not limited to, those related to the Company's growth and strategies, future operating results and financial position as well as economic and market events and trends. All forward-looking statements made by the Company, including such statements herein, include material risks and uncertainties and are subject to change based on factors beyond the control of the Company. Accordingly, the Company's actual results and financial position could differ materially from those expressed or implied in any forward-looking statement as a result of various factors, including without limitation those factors described in the Company's filings with the Securities and Exchange Commission regarding risks affecting the Company's financial conditions and results of operations. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. The following should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto. GENERAL The Company provides temporary staffing services to industrial and service companies, professional organizations and governmental agencies. During the twelve fiscal months ended September 27, 1998, the Company placed approximately 136,000 temporary workers and provided over 41.0 million hours of staffing services to approximately 17,000 clients. From the beginning of fiscal 1994 through the end of fiscal 1998, the Company added 140 offices, for a total of 234 offices and increased revenues and income before taxes at compound annual growth rates of approximately 30.1% and 65.7%, respectively, to $451.3 million and $23.2 million, respectively. OPERATIONS The Company's revenues are derived from Company-owned offices (direct sales) and independently-managed offices (licensed sales and franchise royalties). Under the Company's franchise arrangements, the franchisee pays all lease and working capital costs relating to its office, including funding payroll and collecting clients' accounts. The franchisee pays the Company an initial franchise fee and royalties equal to 7% of its gross billings (except for national accounts on which royalties are paid at a reduced rate). The Company processes payroll and invoices clients, and the franchisee employs all management staff and temporary personnel affiliated with its office. Under the Company's license arrangements, the licensee pays the Company an initial license fee and pays all lease and operating costs relating to its office. The licensee employs all management staff affiliated with its office, but the Company employs all temporary personnel affiliated with the licensed office, handles invoicing and collecting clients' accounts, and remits to the licensee 60%-70% of the office's gross profit. However, the Company's share of the licensed gross profit is never less than 7.5% of licensee's gross billings, with the exception of national accounts on which the Company's fee is reduced to compensate for lower gross margins. The amount of gross profit paid to the licensee is based on the level of hours billed during the contract year. As of September 27, 1998, there were 19 independently-managed offices operating as franchises and 117 operating as licensed offices. In general, independently-managed offices opened from 1987 to 1990 are operated as franchises, and independently-managed offices opened since 1990 are operated as licensed offices. The Company switched from franchise to license format to exercise more control over the collection and tracking of the receivables of the independently-managed offices and to allow the Company to grow without being limited by the financial resources of franchisees. The number of licensed offices is expected to increase because new independently-managed offices will be opened in license format and offices currently operated as franchises may, depending upon various factors, be converted to license format upon renewal of their franchise agreements. As the number of franchise offices is reduced, royalty income will decrease. The table on the following page sets forth for the last five fiscal years, the number of Company-owned, franchised and licensed offices and customer billings associated with each. Total system-wide billings consists of all services billed to clients by all Company-owned and independently-managed offices. For the Company-owned offices and licensed offices, all billings are Company revenues; for franchised offices, Company revenues are royalties. Average billings per office is computed by dividing the relevant billings by the number of related offices. The Company's long-term revenue growth depends in part upon its ability to continue to attract new clients, retain existing clients and open new offices, as well as its ability to enhance the sales of existing offices beyond historical levels. 7 3
FISCAL YEAR ENDED ----------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) COMPANY-OWNED OFFICES Number of offices ............. 98 86 68 63 59 Average hours billed per office 241,216 233,233 248,062 217,907 192,857 Total billings ................ $274,577 $221,679 $184,564 $144,646 $119,042 Average billings per office ... $ 2,802 $ 2,578 $ 2,714 $ 2,296 $ 2,018 LICENSED OFFICES Number of offices ............. 117 93 73 58 39 Average hours billed per office 118,494 123,813 117,373 96,545 80,801 Total billings ................ $173,764 $135,532 $ 98,003 $ 61,377 $ 31,201 Average billings per office ... $ 1,485 $ 1,457 $ 1,343 $ 1,058 $ 800 FRANCHISED OFFICES Number of offices ............. 19 20 20 21 21 Average hours billed per office 184,679 190,345 190,674 175,699 163,402 Total billings ................ $ 45,371 $ 46,526 $ 44,304 $ 41,095 $ 36,027 Average billings per office ... $ 2,388 $ 2,326 $ 2,215 $ 1,957 $ 1,716 Royalties ..................... $ 2,812 $ 2,948 $ 2,811 $ 2,751 $ 2,462 TOTAL OFFICES ................. 234 199 161 142 119 TOTAL SYSTEM-WIDE BILLINGS .... $493,712 $403,737 $326,871 $247,118 $186,270 AVERAGE HOURS BILLED PER OFFICE 175,265 177,786 181,677 162,096 150,936 TOTAL COMPANY REVENUES ........ $451,344 $360,346 $285,519 $209,003 $153,005
WORKERS' COMPENSATION As of July 22, 1997, the Company began a self-insured workers' compensation program for direct and licensed offices, administered through RIG. Management believes RIG enables the Company to control its claims administration, allocate safety resources where they are needed and develop efficient and cost effective methods of financing workers' compensation. The Company is responsible for individual claims up to $250,000 and has purchased excess liability coverage for individual claims greater than $250,000 and aggregate claims greater than $7.5 million. This aggregate stop-loss coverage is based on projected levels of workers' compensation wages and will vary to the extent that actual wage levels differ from the projection. See "Notes to Consolidated Financial Statements- Note 1." RESULTS OF OPERATIONS Fiscal 1998 Compared to Fiscal 1997 Total revenues increased 25.3% or $91.0 million to $451.3 million for fiscal 1998 from $360.3 million for fiscal 1997. This increase was primarily attributable to volume increases that resulted from increased billings at existing offices and expansion of services, including EDGE(R) and call center activity, and from 35 new offices opened during fiscal 1998. Although the annual increase in total revenues generally is consistent with the Company's historical performance as a public company, the Company recently experienced extraordinary price competition from a national staffing provider on one of the Company's existing high volume, low gross margin clients. As of December 1998, the Company discontinued providing service to this client for various reasons, including the Company's strategic emphasis on maintaining acceptable gross margin levels on all client accounts. In light of the significant market demand for the Company's staffing services from clients and potential clients who accept the Company's customary gross margin requirements, the Company believes that it should be able to continue to maintain its gross margin requirements and to expand its business on that basis, however, no assurance in this regard can be given. Future revenue increases depend significantly on the Company's ability to continue to attract new clients, retain existing clients, open new offices and manage newly opened offices to maturity. Total cost of direct and licensed sales, which consists of wages and other expenses related to the temporary associates, increased 25.4% or $69.6 million to $344.1 million for fiscal 1998 from $274.5 million for fiscal 1997. Total cost of direct and licensed sales as a percentage of revenues remained constant. 8 4 Licensees' share of gross profit represents the net payments to licensees based upon a percentage of gross profit generated by the licensed operation. The percentage of gross profit earned by the licensee is based on the number of hours billed. Under the Company's license arrangements, the Company's share of gross profit cannot be less than 7.5% of the licensed operation sales, with the exception of national accounts on which the Company's fee is reduced to compensate for lower gross margins. Licensees' share of gross profit increased 31.2% or $7.2 million to $30.1 million for 1998 from $23.0 million for fiscal 1998. Licensees' share of gross profit as a percentage of total revenues increased to 6.7% for fiscal 1998 from 6.4% for fiscal 1997. This change resulted from an increase to 38.5% from 37.6% in the amount of licensed revenues as a percentage of total revenue. Licensees' share of gross profit as a percentage of licensees' total gross profit increased by 0.5% during fiscal 1998 due to an increase in hours billed at existing licensed offices. Selling, general and administrative expenses, which include depreciation and amortization, increased 17.3% or $8.2 million to $55.3 million for fiscal 1998 from $47.1 million for fiscal 1997. Selling, general and administrative expenses as a percentage of total revenues decreased to 12.3% for fiscal 1998 from 13.1% for fiscal 1997, due to the Company's total revenues expanding more rapidly than selling, general and administrative expenses. The Company has controlled growth in selling, general and administrative expenses by tightening cost controls through budgetary analysis and implementation of more stringent hiring and compensation guidelines. The Company expects selling, general and administrative expenses to increase as the Company continues to pursue its growth objectives and there can be no assurance that these expenses will not increase at greater rates in the future, or constitute a greater percentage of total revenues. Operating income increased 38.5% or $6.1 million to $21.8 million for fiscal 1998 from $15.8 million for fiscal 1997 due to the factors described above. Operating income as a percentage of revenues increased to 4.8% for fiscal 1998 from 4.4% for fiscal 1997. Income before income taxes increased 33.0% or $5.8 million to $23.2 million for fiscal 1998 from $17.4 million for fiscal 1997 due to the factors described above. As a percentage of total revenues, income before income taxes increased to 5.1% in 1998 from 4.8% in fiscal 1997. Fiscal 1997 Compared to Fiscal 1996 Total revenues increased 26.2% or $74.8 million to $360.3 million for fiscal 1997 from $285.5 million for fiscal 1996. This increase was primarily attributable to volume increases that resulted from increased billings at existing offices and expansion of services, including EDGE(R) and call center activity, and from 38 new offices opened during fiscal 1997. Total cost of direct and licensed sales, which consists of wages and other expenses related to the temporary associates, increased 27.1% or $58.5 million to $274.5 million for fiscal 1997 from $216.0 million for fiscal 1996. Total cost of direct and licensed sales as a percentage of revenues increased to 76.2% for fiscal 1997 from 75.7% for fiscal 1996. This increase was due to the expansion of revenue growth in the light industrial business, which generally has lower gross margin rates than the clerical and office automation business. The Company's cost of licensed sales as a percentage of licensed sales remained relatively stable. Licensees' share of gross profit represents the net payments to licensees based upon a percentage of gross profit generated by the licensed operation. Licensees' share of gross profit increased 41.0% or $6.7 million to $23.0 million for 1997 from $16.3 million for fiscal 1996. Licensees' share of gross profit as a percentage of total revenues increased to 6.4% for fiscal 1997 from 5.7% for fiscal 1996. This change resulted from an increase to 37.6% from 34.3% in the amount of total licensed revenues as a percentage of total revenue. Licensees' share of gross profit as a percentage of licensed offices total gross profit increased by 1.2% during fiscal 1997 due to an increase in hours billed at existing licensed offices. Selling, general and administrative expenses, which include depreciation and amortization, increased 12.2% or $5.1 million to $47.1 million for fiscal 1997 from $42.0 million for fiscal 1996. Selling, general and administrative expenses as a percentage of total revenues decreased to 13.1% for fiscal 1997 from 14.7% for fiscal 1996, due to the Company's total revenues expanding more rapidly than selling, general and administrative expenses. The Company has controlled growth in selling, general and administrative expenses by tightening cost controls through budgetary analysis and implementation of more stringent hiring and compensation guidelines. Operating income increased 40.3% or $4.5 million to $15.8 million for fiscal 1997 from $11.2 million for fiscal 1996 due to the factors described above. Operating income as a percentage of revenues increased to 4.4% for fiscal 1997 from 3.9% for fiscal 1996. 9 5 Income before income taxes increased 45.1% or $5.4 million to $17.4 million for fiscal 1997 from $12.0 million for fiscal 1996 due to the factors described above. As a percentage of total revenues, income before income taxes increased to 4.8% in 1997 from 4.2% in fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $6.2 million and $1.7 million in fiscal 1998 and fiscal 1997, respectively. Cash provided by operating activities was significantly impacted by increases in working capital primarily resulting from a substantial increase in business volumes. Additionally, and as discussed below, the Company was required to pay $3.0 million in additional tax installments during both fiscal years 1998 and 1997 resulting from the termination of its S corporation status in fiscal year 1996. Cash used for purchases of fixed assets was $10.6 million and $4.1 million in fiscal 1998 and fiscal 1997, respectively. The increase in fiscal 1998 primarily resulted from expenditures associated with the Company's new management information system and the new corporate headquarters. Implementation of the new management information system is expected to begin and be completed in fiscal 1999. During fiscal 1999, the Company anticipates capital expenditures associated with direct office openings and further investments in the Company's computer-based technologies to approximate $5.0 million. Prior to the Offering on July 11, 1996, the Company declared distributions to its pre-Offering shareholders. In accordance with the declaration, distributions of $3.7 million and $6.6 million were paid to the pre-Offering shareholders during fiscal 1997 and fiscal 1996, respectively. The final distribution was completed during fiscal year 1997. In connection with the Offering, the Company terminated its S corporation status and, as a result, was required to change its overall method of accounting for tax reporting purposes from the cash method to the accrual method, resulting in a one-time net charge to earnings in the fourth quarter of fiscal 1996 of approximately $7.8 million. See "Notes to Consolidated Financial Statements- Note 4." The Internal Revenue Code allows the Company to recognize the effects of this termination in its tax returns over a four-year period. This resulted in additional quarterly installments totaling $3.0 million in both fiscal 1998 and 1997 and may have the same impact in fiscal 1999. The Company has a revolving line of credit agreement with Bank of America providing for aggregate borrowings and letters of credit of $30.0 million. Interest on outstanding borrowings is payable monthly at the bank's reference rate or, at the Company's discretion, LIBOR plus 1.5%. The line of credit is unsecured and expires on February 28, 1999. Management intends to renew the line of credit upon its expiration. The principal use of the line of credit has been to finance receivables and to provide a letter of credit required in connection with the Company's workers' compensation self-insurance program. The Company had no balance outstanding under its line of credit and $6.7 million in undrawn letters of credit as of September 27, 1998. The bank agreement governing the line of credit requires the Company to maintain certain financial ratios and comply with certain restrictive covenants. The Company is in compliance with these covenants. See "Notes to Consolidated Financial Statements- Note 3." During fiscal 1998, the Company acquired two franchised offices in Orlando, Florida. During fiscal 1997, the Company acquired three licensed offices at the following locations: (i) Grand Rapids, Michigan, (ii) Worthington, Ohio, and (iii) Atlanta, Georgia, and one franchised office located in Indianapolis, Indiana. The Company is contemplating the continued selective repurchase of licensed and franchised offices in certain territories with the intent of expanding the Company's market presence in such regions. The Company is contemplating certain strategic acquisitions. Such acquisitions may have an impact on liquidity depending on the size of the acquisition. On October 2, 1998, the Board of Directors authorized the Company to repurchase its outstanding Class A and/or Class B Common Stock in the open market or in privately negotiated transactions at the prevailing market prices not to exceed $5.0 million in aggregate. Through December 14, 1998, the Company has repurchased 151,900 Class A Common Stock shares at prices ranging from $12.56 to $15.13. The Company believes that its levels of working capital and line of credit are adequate to support present operations and to fund future growth and business opportunities. 10 6 YEAR 2000 COMPLIANCE The Company's State of Readiness Many computer systems and other equipment with embedded chips or processors use only two digits to represent the year and may be unable to process accurately certain data before, during or after the Year 2000. Consequently, business and governmental entities are at risk for possible miscalculations or systems failures causing disruptions in their business operation. Furthermore, the Year 2000 is a leap year, which may present additional issues for computer systems and other equipment with embedded chips or processors. Year 2000 issues may affect the Company's internal systems, including information technology ("IT") and non-IT systems. The Company is assessing the readiness of its systems for handling the Year 2000. Although the assessment is still underway, the Company currently believes that all material IT systems will be compliant by the Year 2000. The Company is in the final year of a three-year development and implementation process to replace all of its material IT systems with a new IT system. The Company believes that the new IT system and the computer hardware used to operate the system will be Year 2000 compliant. The Company anticipates that implementation of the new IT system will be completed for all "back office" systems (i.e. payroll, billing, general ledger, accounts payable, and accounts receivable) by June of 1999. The Company plans to implement the "front office" applications (i.e. administration, search and retrieval of data, and coordination or temporary employees) of the new IT system to all Company-owned offices by April of 1999 and to all independently-managed offices by October of 1999. There can be no guarantee that these estimated dates will be achieved and actual results could differ materially from those anticipated. Based on information currently available, the Company believes that it does not have any material-specific dependencies on its non-IT systems (devices that have imbedded microprocessors). Accordingly, the Company believes that the Year 2000 poses no material risk to the Company's non-IT systems. The Company intends to contact its material suppliers of products and services to determine that the suppliers' operations and the products and services they provide are Year 2000 compliant or to monitor their progress toward Year 2000 compliance. There can be no assurance that the Company's material suppliers, vendors or other third parties will not suffer a Year 2000 business disruption. Such failures could have a material adverse affect on the Company's financial condition and results of operations. The Costs to Address the Company's Year 2000 Issues The Company's new IT system is being implemented for strategic business reasons unrelated to Year 2000 issues and the implementation schedule was not accelerated due to Year 2000 issues. Therefore, no specific costs were incurred to address Year 2000 issues. The Risks to the Company of Year 2000 Issues Although unclear at this time, the Company believes that its exposure to Year 2000 risks are unlikely to have a material effect on the Company's results of operations, liquidity and financial condition. The Company anticipates that the new IT system will be implemented prior to the Year 2000 and such system is believed to be Year 2000 compliant. Although the Company expects to implement its new IT system prior to the Year 2000, there is no guarantee that this result will be achieved. Consequently, the Company believes that its most reasonably likely worst case Year 2000 scenario is that the new IT system is not implemented on time. Such a scenario could disrupt the Company's business and therefore could have a material adverse effect on the financial condition and results of operations. Additionally, if any third parties that provide goods or services that are critical to the Company's business fail to appropriately address their Year 2000 issues, there could be a material adverse effect on the Company's financial condition and results of operations. The Company's Contingency Plans The Company has not completed the systems integration testing of the new IT system. Accordingly, the Company has not fully assessed its risks from potential Year 2000 failure of the new IT system and, therefore has not yet developed any Year 2000-specific contingency plans. The Company intends to develop such contingency plans if the results of systems integration testing identify a business function at risk. Additionally, should an unforeseen delay in the implementation of the Company's new IT system occur, failure to meet critical milestones in the Company's implementation plans would provide advance notice, and steps would be taken so that Year 2000 issues could be corrected in the Company's existing IT system to avoid a material impact on the Company's ability to conduct business. The likely impact on such existing IT systems would be in "from-to" reporting and date printing which the Company believes it can correct without material loss in business operation or function. Additionally, the Company is currently undertaking steps to identify its material vendors and to formulate a system to understand material third parties' ability to continue providing services and products after the Year 2000. The Company intends to monitor its material suppliers, vendors, and distributors to avoid any business interruption in the Year 2000, including formulating contingency plans. However, the Company can neither predict nor assure the successful outcome of such third parties' remediation efforts. 11 7 SEASONALITY The Company's quarterly operating results are affected by the number of billing days in the quarter and the seasonality of its clients' businesses. The first fiscal quarter has been historically strong as a result of manufacturing and retail emphasis on holiday sales. The second fiscal quarter, from January through March, historically shows little to no growth in comparable revenues from the first fiscal quarter. Revenue growth has historically accelerated in each of the third and fourth fiscal quarters as manufacturers, retailers and service businesses increase their level of business activity. INFLATION The effects of inflation on the Company's operations were not significant during the periods presented in the consolidated financial statements. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Since July 11, 1996, the Company's Class A Common Stock has been traded on the Nasdaq National Market under the symbol "REMX." Prior to July 11, 1996, the Company's stock was not publicly traded. The following table sets forth the high and low sales prices for the Class A common Stock for fiscal 1998 and fiscal 1997:
FOR THE THREE MONTHS ENDED ----------------------------------------------------------- DECEMBER 28, MARCH 29, JUNE 28, SEPTEMBER 27, 1997 1998 1998 1998 ---- ---- ---- ---- High .......................... $ 28.13 $ 32.63 $ 36.25 $ 29.25 Low............................ $ 20.00 $ 18.75 $ 23.69 $ 17.50 DECEMBER 29, MARCH 30, JUNE 29, SEPTEMBER 28, 1996 1997 1997 1997 ---- ---- ---- ---- High .......................... $ 22.50 $ 20.00 $ 18.75 $ 22.75 Low............................ $ 14.25 $ 15.13 $ 14.88 $ 17.00
As of December 15, 1998, there were an estimated 1,750 shareholders of record of the Company's Class A Common Stock and ten shareholders of record of the Company's Class B Common Stock. Except for the S corporation distributions prior to the Offering and the declared dividend to the Company's pre-Offering shareholders as discussed in Note 1 to the Consolidated Financial Statements, the Company has not paid cash dividends on its Class A or Class B Common Stock and does not anticipate that it will do so in the foreseeable future. The present policy of the Company is to retain earnings for use in its operations and the expansion of its business. 12 8 REMEDYTEMP, INC. CONSOLIDATED BALANCE SHEET (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS
SEPTEMBER 27, SEPTEMBER 28, 1998 1997 --------- ------- Current assets: Cash and cash equivalents ............................................................... $ 450 $ 5,128 Accounts receivable, net of allowance for doubtful accounts of $2,647 and $2,612, respectively .............................................................. 63,660 55,751 Prepaid expenses and other current assets ............................................... 3,401 1,987 Deferred income taxes (Note 4) .......................................................... 2,235 349 ------- ------- Total current assets ............................................................. 69,746 63,215 Fixed assets, net (Note 2) ................................................................. 15,184 7,184 Other assets, net (Note 5) ................................................................. 2,567 2,502 Deferred income taxes (Note 4) ............................................................. 501 -- Goodwill, net of accumulated amortization of $152 and $20 (Note 6), respectively ........... 1,787 905 ------- ------- $89,785 $73,806 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ........................................................................ $ 3,033 $ 4,082 Accrued workers' compensation ........................................................... 5,535 2,905 Accrued payroll, benefits and related costs ............................................. 13,604 11,489 Accrued licensees' share of gross profit ................................................ 3,194 2,225 Other accrued expenses .................................................................. 865 1,148 Income taxes payable (Note 4) ........................................................... 809 1,783 Current portion of capitalized lease obligation (Note 7) ................................ 245 453 ------- ------- Total current liabilities ........................................................ 27,285 24,085 Deferred income taxes (Note 4) ............................................................. -- 2,379 Capitalized lease obligation (Note 7) ...................................................... 63 281 ------- ------- 27,348 26,745 ------- ------- Commitments and contingent liabilities (Note 7) Shareholders' equity: Preferred Stock, $.01 par value; authorized 5,000 shares; none outstanding Class A Common Stock, $.01 par value; authorized 50,000 shares; 7,206 and 5,930 issued and outstanding at September 27, 1998 and September 28, 1997, respectively ................................................................ 72 60 Class B Non-Voting Common Stock, $.01 par value; authorized 4,530 shares; 1,806 and 2,997 issued and outstanding at September 27, 1998 and September 28, 1997, respectively .................................................. 18 30 Additional paid-in capital ................................................................. 34,732 33,262 Retained earnings .......................................................................... 27,615 13,709 ------- ------- Total shareholders' equity ................................................................. 62,437 47,061 ------- ------- $89,785 $73,806 ======= =======
See accompanying notes to consolidated financial statements. 13 9 REMEDYTEMP, INC. CONSOLIDATED STATEMENT OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 29, 1998 1997 1996 ----------- ----------- ------- Direct sales ............................. $ 274,577 $ 221,679 $ 184,564 Licensed sales ........................... 173,764 135,532 98,003 Franchise royalties ...................... 2,812 2,948 2,811 Initial license and franchise fees ....... 191 187 141 --------- --------- --------- Total revenues .................... 451,344 360,346 285,519 Cost of direct sales ..................... 214,870 173,148 142,643 Cost of licensed sales ................... 129,219 101,327 73,347 Licensees' share of gross profit ......... 30,138 22,970 16,287 Selling and administrative expenses ...... 52,577 44,647 39,974 Depreciation and amortization ............ 2,723 2,501 2,043 --------- --------- --------- Income from operations ............ 21,817 15,753 11,225 Other income: Interest income (expense), net ......... 263 480 (64) Other, net ............................. 1,097 1,191 846 --------- --------- --------- Income before provision for income taxes . 23,177 17,424 12,007 Provision for income taxes (Note 4) ...... 9,271 7,231 7,794 --------- --------- --------- Net income ............................... $ 13,906 $ 10,193 $ 4,213 ========= ========= ========= Net income per share, basic (Note 9) ..... $ 1.55 $ 1.15 $ 0.58 ========= ========= ========= Weighted-average number of shares, basic . 8,966 8,896 7,225 ========= ========= ========= Net income per share, diluted (Note 9) ... $ 1.50 $ 1.13 $ 0.58 ========= ========= ========= Weighted-average number of shares, diluted ................................ 9,297 9,042 7,250 ========= ========= =========
See accompanying notes to consolidated financial statements. 14 10 REMEDYTEMP, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
CLASS A CLASS B COMMON STOCK COMMON STOCK ADDITIONAL ----------------- ----------------- PAID-IN RETAINED SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL ------ ------ ------ ------ ------- -------- ----- Balance at October 1, 1995............. 2,265 $ 23 4,530 $ 45 $ 84 $19,156 $19,308 Conversion of Common Stock (Note 1)......................... 1,472 14 (1,472) (14) Net proceeds from the Offering of Common Stock (Note 1)............ 2,093 21 23,387 23,408 Reclassification of S corporation retained earnings................ 9,200 (9,200) Net income.......................... 4,213 4,213 Distributions to pre-Offering shareholders..................... (701) (701) Special distributions to pre-Offering shareholders in connection with the Offering (Note 1)......................... (9,952) (9,952) ----- ------ ------ ------ --------- ------- ------- Balance at September 29, 1996.......... 5,830 58 3,058 31 32,671 3,516 36,276 Activity of Employee Stock Purchase Plan............................. 12 163 163 Stock option activity............... 27 1 428 429 Conversion upon transfer to non-affiliates................... 61 1 (61) (1) Net income........................... 10,193 10,193 ----- ------ ------ ------ --------- ------- ------- Balance at September 28, 1997.......... 5,930 60 2,997 30 33,262 13,709 47,061 Activity of Employee Stock Purchase Plan............................. 19 313 313 Stock option activity............... 66 857 857 Tax benefits from option activity... 300 300 Conversion upon transfer to non-affiliates................... 1,191 12 (1,191) (12) Net income........................... 13,906 13,906 ----- ------ ------ ------ --------- ------- ------- Balance at September 27, 1998.......... 7,206 $ 72 1,806 $ 18 $ 34,732 $27,615 $62,437 ===== ====== ====== ====== ========= ======= =======
See accompanying notes to consolidated financial statements. 15 11 REMEDYTEMP, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (AMOUNTS IN THOUSANDS)
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 29, Cash flows (used in) provided by operating activities: 1998 1997 1996 ----------- ---------- ------- Net income .................................................. $ 13,906 $ 10,193 $ 4,213 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................... 2,723 2,501 2,043 Provision for losses on accounts receivable ............. 1,519 1,276 1,621 Gain on sale of workers' compensation liability ......... (1,438) Deferred taxes .......................................... (4,546) (4,938) 6,501 Changes in assets and liabilities: Accounts receivable ................................... (9,428) (14,690) (10,890) Prepaid expenses and other current assets ............. (1,414) 354 82 Other assets .......................................... (65) (776) (265) Accounts payable ...................................... (1,049) 3,149 414 Accrued workers' compensation ......................... 2,630 2,355 (4,745) Accrued payroll, benefits and related costs ........... 2,115 1,433 2,991 Accrued licensees' share of gross profit .............. 969 837 184 Other accrued expenses ................................ (283) (563) 1,520 Income taxes payable .................................. (894) 616 1,083 -------- -------- -------- Net cash provided by operating activities ................... 6,183 1,747 3,314 -------- -------- -------- Cash flows (used in) provided by investing activities: Purchase of fixed assets .................................... (10,591) (4,138) (3,230) Purchase of franchises, net of assets acquired .............. (1,014) (925) -- Sale (purchase) of investments .............................. -- 1,016 (1,016) -------- -------- -------- Net cash used in investing activities ....................... (11,605) (4,047) (4,246) -------- -------- -------- Cash flows (used in) provided by financing activities: Borrowings under line of credit agreement ................... 1,000 100 16,098 Repayments under line of credit agreement ................... (1,000) (100) (22,798) Repayments under capital lease obligation ................... (426) (416) (375) Proceeds from stock option activity ......................... 857 429 -- Proceeds from Employee Stock Purchase Plan activity ......... 313 163 -- Net proceeds from the Offering .............................. 23,408 Distributions to pre-Offering shareholders .................. -- (3,707) (6,646) -------- -------- -------- Net cash provided by (used in) financing activities ......... 744 (3,531) 9,687 -------- -------- -------- Net (decrease) increase in cash and cash equivalents .......... (4,678) (5,831) 8,755 Cash and cash equivalents at beginning of period .............. 5,128 10,959 2,204 -------- -------- -------- Cash and cash equivalents at end of period .................... $ 450 $ 5,128 $ 10,959 ======== ======== ======== Other cash flow information: Cash paid during the period for interest .................... $ 98 $ 110 $ 327 Cash paid during the period for income taxes ................ $ 15,011 $ 9,981 $ 97 Non-cash financing activities: Utilization of tax benefit from disqualifying dispositions .. $ (80) $ -- $ -- Tax benefit from disqualifying dispositions recorded into additional paid-in capital ................................. $ 300 $ -- $ --
See accompanying notes to consolidated financial statements. 16 12 REMEDYTEMP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The consolidated financial statements include the accounts of RemedyTemp, Inc. (the "Company") including its wholly-owned subsidiary, Remedy Insurance Group, LTD ("RIG"). See workers' compensation below. All significant intercompany transactions and balances have been eliminated. Description of business The Company's principal business is providing temporary personnel to businesses and industry nationwide. The Company has two classes of Common Stock outstanding: Class A Common Stock, which has all voting and other rights normally associated with Common Stock; and Class B Common Stock, which is identical to the Class A Common Stock in all respects except that the Class B Common Stock has no voting rights except with respect to certain amendments of the Company's Amended and Restated Articles of Incorporation, certain mergers and as otherwise required by law. The Class B Common Stock automatically converts into Class A Common Stock on a share-for-share basis upon the earlier of (i) certain transfers to non-affiliates, (ii) the death or legal incapacity of Robert E. McDonough, Sr. or (iii) the tenth anniversary of the completion of the Company's initial public offering (the "Offering") described below. Initial Public Offering On July 16, 1996, the Company completed the "Offering" of 3,565 shares of its Class A Common Stock at $13.00 per share, of which 2,093 were sold by the Company and 1,472 were sold by certain pre-Offering shareholders. The shares sold by the pre-Offering shareholders were originally Class B Common Stock that automatically converted to Class A Common Stock in connection with the Offering. The net proceeds to the Company from the sale of 2,093 shares of Class A Common Stock were $23,408, after deduction of the underwriting discount of $1,905 and expenses related to the Offering of $1,900. A portion of the net proceeds was used to finance distributions to the Company's pre-Offering shareholders, with the remaining balance reserved for working capital and other general corporate use. The Company did not receive any of the proceeds from the sale of the shares of Common Stock offered by pre-Offering shareholders. Recapitalization Concurrent with the Offering, the Company effected (i) a 1.812-for-1 stock split of its outstanding voting and non-voting Common Stock, and (ii) an amendment to the Company's Articles of Incorporation to authorize 5,000 shares of Preferred Stock, par value $.01, an increase in the number of voting common shares authorized from 10,000 to 50,000, a reclassification of the voting and non-voting Common Stock, and a decrease in the number of authorized non-voting common shares from 7,500 to 4,530. Share and per share amounts for all periods presented have been adjusted to give retroactive effect to the above. Summary of significant accounting policies Fiscal year The Company's fiscal year includes 52 or 53 weeks, ending on the Sunday closest to September 30. Fiscal years 1998, 1997 and 1996 consisted of 52 weeks. Revenue recognition Revenue from the sale of services is recognized at the time the service is performed. A portion of the Company's revenue is derived from affiliate operations which consist of franchised and licensed operations. Under the Company's franchised operations, the franchisee has the direct contractual relationship with the customers, holds title to the related customer receivables and is the legal employer of the temporary employees. Accordingly, sales and cost of sales generated by the franchised operations are not included in the Company's consolidated financial statements. Fees are paid to the Company based upon a percentage of the gross sales generated by the franchised operation and such fees are recorded by the Company as "Franchise royalties." Revenues generated by licensed operations and the related costs of services are included in the Company's consolidated financial statements and are reported as "Licensed sales" and "Cost of licensed sales," respectively. The Company has the direct contractual relationship with the customer, holds title to the related customer receivables and is the legal employer of the temporary employees. The risks associated with the licensed operations remain with the Company. "Licensee" refers to the Company's affiliates in their role as independent contractors and limited agents of the Company in recruiting job applicants, soliciting job orders, filling those orders and handling collection matters upon request. The licensee acts as a limited agent for the Company to market the Company's services within the licensee's territory. The net distribution paid to the licensee for the services rendered is based on a percentage of the gross profit generated by the Licensee's operation and is reflected as "Licensees' share of gross profit" in the consolidated statement of income. 17 13 REMEDYTEMP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Both franchisees and licensees pay an initial fee for their affiliation with the Company. This fee is recognized as revenue when substantially all of the initial services required of the Company have been performed, and is reported by the Company as "Initial license and franchise fees." Concentrations of credit risk The Company's financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. However, concentrations of credit risk are limited due to the large number of customers comprising the Company's customer base and their dispersion across different business and geographic areas. Furthermore, the Company routinely assesses the financial strength of its customers. Use of estimates in the preparation of consolidated financial statements The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash and cash equivalents For purposes of financial reporting, cash equivalents represent highly liquid short-term investments with original maturities of less than 90 days. Fixed assets Fixed assets are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which are three to five years for furniture and fixtures and computer equipment. Major improvements to leased office space are capitalized and amortized over the shorter of their useful lives or the term of the lease. The Company currently capitalizes the costs of purchased internal-use software as well as internal and external software development costs related to its new management information system. These capitalized costs are included in property, plant and equipment and are amortized over their estimated useful life, not to exceed five years. In March of 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 (SOP 98-1), "Accounting for the costs of computer software developed or obtained for internal use" which the Company will be required to adopt beginning in fiscal 2000. Management is currently assessing the impact of SOP 98-1 but does not anticipate the adoption will have a significant impact on the Company's current capitalization practices. Goodwill Goodwill consists of the excess of purchase price over the fair value of net assets of businesses acquired and is amortized on a straight line basis over 20 years. The Company regularly reviews the individual components of the balance and recognizes any decline in value on a current basis. Workers' compensation As of July 22, 1997, RIG began providing direct and licensed offices with a self-insured workers' compensation program. Management believes that RIG enables the Company to control its claims administration, allocate safety resources where they are needed and develop efficient methods of financing workers' compensation. RIG, an offshore insurance captive domiciled in Bermuda, was incorporated and funded with an amount of $600 of restricted cash which is classified on the consolidated balance sheet as other assets. RIG is a component of the Company's strategic plan to renew the workers' compensation self-insured program for its operations nationwide. The Company utilizes Lindsey Morden, a national Third Party Administrator to administer claims nationally, and Reliance National Indemnity Company to provide stop-loss insurance coverage. This stop-loss coverage will pay individual claims greater than $250 and aggregate claims greater than $7,500, based on projected levels of workers' compensation wages. This aggregate stop loss will vary to the extent that actual wage levels differ from the projection. Prior to July 22, 1996, the Company's workers' compensation risk was self-insured in California. On July 22, 1996, the Company entered into a contract with an insurance company whereby the insurance company assumed the Company's existing self-insured workers' compensation liability for claims incurred during the period May 1, 1986 through July 22, 1996. As a result of the contract, the Company reduced its estimated workers' compensation exposure by $1,438 (reflected as a reduction in selling and administrative expenses for the fiscal year ended September 29, 1996). Additionally, the Company purchased a guaranteed cost insurance policy to cover workers' compensation claims, in California, for the period July 22, 1996 to July 22, 1997. For workers' compensation coverage in states other than California, the Company had similar guaranteed cost policies. 18 14 REMEDYTEMP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Other income Other income consists primarily of fees collected from customers on past due accounts receivable balances in the amounts of $1,091, $1,411 and $1,064, for the years ended September 27, 1998, September 28, 1997 and September 29, 1996, respectively. Income taxes The Company records income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." SFAS No. 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. In estimating future tax consequences, SFAS No. 109 generally considers all expected future events including enactments of changes in the tax law or rates. Accounting for stock-based compensation The Company accounts for its stock compensation plans under Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations. The disclosures required under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No.123) have been included in Note 9. 2. FIXED ASSETS
SEPTEMBER 27, SEPTEMBER 28, 1998 1997 ----------- ----------- Computer equipment and software..... $ 10,502 $ 8,516 Furniture and fixtures.............. 6,429 4,352 Leasehold improvements.............. 3,638 2,302 Construction in progress............ 7,175 2,597 ----------- ----------- 27,744 17,767 Less accumulated depreciation....... (12,560) (10,583) ----------- ----------- $ 15,184 $ 7,184 =========== ===========
Included in the above computer equipment are capitalized leases and related accumulated depreciation of $2,050 and $1,818 at September 27, 1998, respectively and $2,050 and $1,408 at September 28, 1997, respectively. Construction in progress primarily relates to expenditures for the Company's development and implementation of a new Company-wide management information system. 3. LINE OF CREDIT The Company has a revolving line of credit agreement with Bank of America, dated August 25, 1997, which provides for aggregate borrowings and letters of credit of $30,000. Interest on outstanding borrowings is payable monthly at the bank's reference rate (8.5% at September 27, 1998) or, at the Company's election, LIBOR plus 1.5 %. The line of credit is unsecured and expires on February 28, 1999. Management intends to renew the line of credit upon its expiration. The principal uses of the line of credit have been to finance receivables and to provide a letter of credit required in connection with the Company's workers' compensation self-insurance program. At September 27, 1998 and September 28, 1997 the Company had no balances outstanding under its line of credit agreement. The Company had outstanding undrawn letters of credit of $6,700 and $150 at September 27, 1998 and September 28, 1997, respectively. Under the provisions of the line of credit agreement, the Company must maintain certain financial ratios and comply with certain restrictive covenants. The Company was in compliance with these requirements for the fiscal years ended September 27, 1998 and September 28, 1997, respectively. 19 15 REMEDYTEMP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4. INCOME TAXES Prior to the Offering, the Company elected to be taxed as an S corporation for federal and state income tax purposes. Pursuant to this election, earnings or losses were subject to tax at the shareholder level rather than the corporate level. Therefore, no provision was made for federal income tax on earnings or losses of the Company in the historical consolidated financial statements. In conjunction with the Offering, the S corporation status was terminated after July 9, 1996. As a result, the Company was required by the Internal Revenue Code to change its overall method of accounting for income tax reporting purposes from the cash basis to the accrual basis. The termination also resulted in a non-recurring net charge to earnings of $7,793 in the fourth quarter of fiscal 1996 for additional federal and state income tax liability related to the net change required to adjust the deferred tax assets and liabilities to their appropriate values utilizing C corporation rates. The Company's provision for income taxes for the three fiscal years ended September 27, 1998 consists of the following:
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 29, 1998 1997 1996 ------------- ------------- ------------- Current tax expense: Federal............................................ $ 11,042 $ 9,983 $ 1,123 State.............................................. 2,775 2,186 170 ------------- ------------- ------------- Total current......................... 13,817 12,169 1,293 ------------- ------------- ------------- Deferred tax expense: Federal............................................ (3,960) (4,375) (1,122) State.............................................. (586) (563) (170) Deferred tax provision resulting from termination of S corporation status...................... - - 7,793 ------------- ------------- ------------- Total deferred........................ (4,546) (4,938) 6,501 ------------- ------------- ------------- Total provision for income taxes...... $ 9,271 $ 7,231 $ 7,794 ============= ============= =============
The composition of the deferred tax assets (liabilities) at September 27, 1998 and September 28, 1997 is listed below.
SEPTEMBER 27, SEPTEMBER 28, 1998 1997 ------------ ------------ Reserves and accrued liabilities.......................... $ 5,219 $ 3,333 Depreciation ............................................. 501 606 ------------ ------------ Gross deferred tax assets.................... 5,720 3,939 ------------ ------------ S corporation cash basis accounting adjustment............ (2,984) (5,969) ------------ ------------ Gross deferred tax liabilities............... (2,984) (5,969) ------------ ------------ Net deferred tax assets (liabilities)..................... $ 2,736 $ (2,030) ============ ============
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory income tax rates to income before taxes as a result of the following differences:
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 29, 1998 1997 1996* ---- ---- ----- Federal tax computed at statutory rate........ 35.0% 35.0% 35.0% State taxes, net of federal benefit........... 5.3% 5.5% 5.0% Other......................................... (0.3)% 1.0% 1.0% -------------- ------------- ----------- Total provision for income taxes.............. 40.0% 41.5% 41.0% ============= ============= =========== * - pro forma due to prior S Corporation status
20 16 REMEDYTEMP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 5. RELATED PARTY TRANSACTIONS Prior to the completion of the Offering, the Company's Board of Directors declared a distribution of $4,952 to be paid to the Company's pre-Offering shareholders representing the estimated income tax obligations of the pre-Offering shareholders on undistributed S corporation earnings from October 2, 1995 through July 9, 1996, the date immediately preceding the termination of the S corporation status. The distribution, net of advances for the quarterly estimated tax payments of the pre-Offering shareholders, was paid in fiscal 1997. Prior to July, 1997, the Company leased its corporate facility from the largest shareholder and Chairman of the Company, Robert E. McDonough, Sr. The lease provided for the payment of property taxes, insurance and certain other operating expenses applicable to the leased property by the lessee. In September 1996, the lease expired and the lease term became month-to-month through July 1997. Rent expense paid to the largest shareholder totaled $0, $238, and $301 for the years ended September 27, 1998, September 28, 1997, and September 29, 1996, respectively. Included in other assets at September 27, 1998 and September 28, 1997 are advances and notes receivable due from employees and officers of the Company in the amount of $62 and $310, respectively. 6. REPURCHASE OF FRANCHISED AND LICENSED OFFICES During fiscal 1998, the Company acquired two franchised offices in Orlando, Florida. During fiscal 1997, the Company acquired three licensed offices at the following locations: (i) Grand Rapids, Michigan, (ii) Worthington, Ohio, and (iii) Atlanta, Georgia, and one franchised office located in Indianapolis, Indiana. Results of operations for the acquired licensed and franchised offices are recorded in accordance with the Company's related revenue recognition policy (Note 1) until the acquisition date. Subsequent to the acquisition date, the direct office revenue recognition policy is utilized. Had the results of operations for the franchised offices been shown as of the beginning of the current and preceding fiscal years, the consolidated financial information would not be significantly different. These acquisitions were accounted for under the purchase method of accounting. The combined purchase prices were allocated primarily to goodwill and are being amortized over a twenty-year life. The Company is contemplating the continued selective repurchase of licensed and franchised offices in certain territories with the intent of expanding the Company's market presence in such regions. 7. COMMITMENTS AND CONTINGENT LIABILITIES The Company leases its corporate facility, Company-owned offices and certain equipment under operating leases. The leases typically require the Company to pay taxes, insurance and certain other operating expenses applicable to the leased property. Total rent expense was approximately $2,867, $2,298 and $2,220 for the years ended September 27, 1998, September 28, 1997 and September 29, 1996, respectively. On April 17, 1997, the Company executed a lease for new corporate headquarters. The lease agreement provides for leased premises approximating 52,500 square feet in size, at a fixed rate of $1.93 per square foot per month, for a fixed term of five and one-half years from the date of occupancy. The base rent includes amounts for operating costs, which include, but are not limited to, property taxes, utilities, supplies, repairs and maintenance, janitorial staff, security staff and insurance premiums on the building. In addition to base rent, after the first year of occupancy the Company is obligated to pay a portion of the increase in operating costs and real property taxes for the leased premises. The Company has an option to renew the lease after the initial term for an additional term of five years. The Company moved into its new corporate headquarters in September 1998. 21 17 REMEDYTEMP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Future minimum lease commitments under all noncancellable capital and operating leases as of September 27, 1998 are as follows:
CAPITAL OPERATING FISCAL YEAR LEASES LEASES ------- ------- 1999 ....... $ 245 $ 3,592 2000 ....... 62 2,879 2001 ....... 1 2,484 2002 ....... -- 2,142 2003 ....... -- 1,668 ------- ------- Total $ 308 $12,765 ======= =======
The Company is involved in various claims and legal actions arising in the ordinary course of business. It is the opinion of management, upon the advice of legal counsel, that the ultimate disposition of these matters will not materially affect the Company's consolidated financial position, results of operations or cash flows. 8. EMPLOYEE BENEFIT PLAN 401(k) plan The Company has an employee savings plan which permits participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code. The plan is open to qualified full-time and temporary employees who earn less than $80 per year. The annual amount of employer contributions to the plan is determined at the discretion of the Board of Directors, subject to certain limitations. Eligible participants may make voluntary contributions to the plan and become fully vested in the Company's contributions over a five-year period. The Company has made no contributions during the three fiscal years ended September 27, 1998. 9. SHAREHOLDERS' EQUITY Employee Stock Purchase Plan In connection with the Offering, the Company implemented its 1996 Employee Stock Purchase Plan (the "Purchase Plan"). A total of 250 shares were reserved for issuance under the Purchase Plan. Under the terms of the Purchase Plan, eligible employees may purchase shares of the Company's Common Stock based on payroll deductions. The purchase price for shares granted is the lower of 85% of the market price of the stock on the first or last day of each six month purchase period. The Purchase Plan commenced on October 1, 1996. During fiscal 1998, 19 shares were purchased at prices between $13.18 and $20.82. During fiscal 1997, a total of 12 shares were purchased at a price of $13.18 per share. Stock Incentive Plan In connection with the Offering, the Company implemented its 1996 Stock Incentive Plan (the "Incentive Plan") for officers, directors and key employees of the Company. A total of 900 shares were reserved for issuance under the Incentive Plan. In February, 1998, an amendment to the Incentive Plan was approved by a vote of the Company's shareholders to reserve an additional 325 shares for issuance under the Incentive Plan. Options granted to employees of the Company typically may be exercised within ten years from the grant date and are exercisable in installments determined by the Leadership, Development and Compensation Committee of the Board of Directors. Options granted to non-employee, non-officer directors prior to the Offering were immediately exercisable. Options granted to non-employee, non-officer directors subsequent to the Offering are typically 50% exercisable immediately and 50% exercisable upon the date of the next annual shareholders meeting. Grants for 263 shares at prices between $17.93 and $29.00 per share were made during fiscal year 1998. Stock Ownership Plan for Outside Directors Prior to March 16, 1998, non-employee directors received an annual cash retainer of $18. Effective March 16, 1998, the Company implemented its Non-Employee Director Compensation and Deferral Plan (the "Director Plan"). Under the Director Plan, non-employee, non-officer directors receive an annual retainer in the form of shares of Common Stock with a total value of $18 on the date of the director's election and/or subsequent reelection to the Board (the "Director Shares"). When issued, the Director Shares are held in trust, on a deferred basis until a director is no longer a director of the Company. Participation in the Director Plan is mandatory. During the seven fiscal months ended September 27, 1998, the Company reserved a total of 2 shares to be issued no later than ten business days after the next annual shareholders meeting, to be held February 17, 1999. 22 18 REMEDYTEMP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) COO Option Grant In January 1998, the Company hired a Chief Operations Officer for the first time. Greg Palmer has assumed this responsibility and comes to the Company with over 13 years of successful operational experience in the staffing industry. Under the employment agreement between the Company and Greg Palmer, 125 options were granted on December 16, 1997 at a price of $20.72, the fair market value of Class A Common Stock on that date. This grant was approved by a vote of the Company's shareholders at the Company's Annual Meeting of Shareholders on February 18, 1998. The shares are exercisable over a five year period, were granted outside the Incentive Plan and will expire ten years from the grant date. Earnings per share calculation During the first fiscal quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") which became effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 replaces the previous presentation of earnings per share on the Statement of Income with a dual presentation of Basic Earnings Per Share ("Basic EPS") and Diluted Earnings Per Share ("Diluted EPS"). Basic EPS excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if stock options and other commitments to issue Common Stock were exercised, resulting in the issuance of Common Stock that then shared in the earnings of the Company. As required by SFAS 128, all prior period EPS data has been restated to conform with the provisions of this statement. Basic and Diluted EPS under SFAS No. 128 do not differ materially from Primary Earnings Per Share as previously presented. The table below sets forth the computation of Basic and Diluted EPS under SFAS 128:
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 29, 1998 1997 1996 -------- -------- -------- BASIC EPS Income available to common shareholders.............. $ 13,906 $ 10,193 $ 4,213 Weighted-average number of shares, basic............. 8,966 8,896 7,225 BASIC EPS......................................... $ 1.55 $ 1.15 $ 0.58 ======== ======== ======== DILUTED EPS Income available to common shareholders.............. $ 13,906 $ 10,193 $ 4,213 Weighted-average number of shares, basic............. 8,966 8,896 7,225 Effect of dilutive securities: Stock options..................................... 331 146 25 -------- -------- -------- Weighted-average number of shares - assuming dilution.......................................... 9,297 9,042 7,250 DILUTED EPS....................................... $ 1.50 $ 1.13 $ 0.58 ======== ======== ========
The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock and option plans. Had compensation cost for all stock and option plans been determined based on the fair value at the grant date of awards in fiscal 1998, 1997, and 1996 consistent with the provisions of SFAS No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below:
September 27, 1998 September 28, 1997 September 29, 1996 ------------------ ------------------ ------------------ Net income - as reported $ 13,906 $ 10,193 $ 4,213 Net income - pro forma $ 12,355 $ 9,514 $ 3,942 Basic earnings per share - as reported $ 1.55 $ 1.15 $ 0.58 Basic earnings per share - pro forma $ 1.38 $ 1.07 $ 0.55 Diluted earnings per share - as reported $ 1.50 $ 1.13 $ 0.58 Diluted earnings per share - pro forma $ 1.34 $ 1.05 $ 0.54
23 19 REMEDYTEMP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The fair value of each option grant has been estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the grants in fiscal 1998, 1997 and 1996, respectively: dividend yield of 0.0%, 0.0% and 0.0%; risk free interest rate of 5.81%, 6.48% and 6.61%; expected volatility of 31.0%, 30.0% and 30.0% and expected lives of 2.9, 2.8 and 4.7 years. The weighted-average per share estimated fair value at the date of grant for options granted during fiscal 1998, 1997 and 1996 was $6.24, $4.26 and $4.88, respectively. The following table summarizes the activity relating to all stock and option plans:
Incentive Plan Purchase Options Outside Options Plan Stock Incentive Plan ---------------------- -------------------- -------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Option outstanding October 1, 1995 ... -- -- -- -- -- -- Options granted ...................... 443.0 $ 13.00 -- -- -- -- Options canceled ..................... (3.6) $ 13.00 -- -- -- ------- --------- ----- --------- ----- ------ Option outstanding September 29, 1996 439.4 $ 13.00 -- -- -- -- Options granted ...................... 280.0 $ 15.55 23.6 $ 13.18 -- -- Options canceled ..................... (21.4) $ 14.46 -- -- -- -- Options exercised .................... (26.4) $ 13.00 (12.3) $ 13.18 -- ------- --------- ------- --------- ------- ------ Options outstanding September 28, 1997 671.6 11.3 -- Options granted ...................... 262.8 $ 21.63 15.5 $ 19.49 125.0 $20.72 Options canceled ..................... (55.4) $ 14.95 -- -- -- -- Options exercised .................... (65.6) $ 13.98 (18.8) $ 16.46 -- -- ------- --------- ------- --------- ------- ------ Options outstanding September 27, 1998 813.4 8.0 125.0 ======= ======= ======
The number of exercisable options outstanding for the fiscal years ended 1998, 1997 and 1996 under the plans were 241.6, 114.5 and 61.0 shares, respectively, at weighted-average prices of $15.14, $13.00 and $13.00 per share, respectively. The following table summarizes information about stock options outstanding at September 27, 1998:
Options Outstanding Options exercisable --------------------------------------------------------------------- -------------------------------- Weighted- Average Shares Remaining Weighted-Average Shares Weighted-Average Exercise Price Outstanding Life Price Exercisable Price -------------- ----------- --------- ---------------- ----------- ---------------- $10.00 - $13.00 327.1 7.8 years $ 13.00 137.2 $ 13.00 $13.01 - $16.00 218.1 8.6 years $ 15.31 61.4 $ 15.31 $16.01 - $20.00 59.5 8.2 years $ 18.57 23.0 $ 18.84 $20.01 - $25.00 306.7 9.2 years $ 21.12 15.0 $ 24.69 $25.01 - $30.00 35.0 9.5 years $ 26.59 5.0 $ 26.19
24 20 REMEDYTEMP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 10. SUBSEQUENT EVENT (UNAUDITED) On October 2, 1998, the Board of Directors authorized the Company to repurchase its outstanding Class A and/or Class B Common Stock in the open market or in privately negotiated transactions at the prevailing market prices not to exceed $5,000 in aggregate. Subsequent to year end, through December 14, 1998, the Company has repurchased 151.9 Class A Common Stock shares at prices ranging from $12.56 to $15.13. 11. UNAUDITED CONSOLIDATED QUARTERLY INFORMATION
FOR THE THREE MONTHS ENDED --------------------------------------------------------- DECEMBER 28, MARCH 29, JUNE 28, SEPTEMBER 27, 1997 1998 1998 1998 ---- ---- ---- ---- Total revenues ............................. $111,145 $109,607 $113,388 $117,204 Total cost of direct and licensed sales .... $ 85,300 $ 84,041 $ 85,946 $ 88,802 Licensees' share of gross profit ........... $ 6,936 $ 6,937 $ 7,771 $ 8,494 Selling, general and administrative expenses $ 13,294 $ 13,906 $ 13,934 $ 14,166 Net income ................................. $ 3,515 $ 2,986 $ 3,540 $ 3,865 Net income per share, basic ................ $ 0.39 $ 0.33 $ 0.39 $ 0.43 Net income per share, diluted .............. $ 0.38 $ 0.32 $ 0.38 $ 0.42 FOR THE THREE MONTHS ENDED --------------------------------------------------------- DECEMBER 29, MARCH 30, JUNE 29, SEPTEMBER 28, 1996 1997 1997 1997 ---- ---- ---- ---- Total revenues ............................. $ 84,563 $ 83,587 $ 92,287 $ 99,909 Total cost of direct and licensed sales .... $ 64,313 $ 63,702 $ 70,058 $ 76,402 Licensees' share of gross profit ........... $ 5,015 $ 5,289 $ 6,153 $ 6,513 Selling, general and administrative expenses $ 11,280 $ 11,519 $ 12,087 $ 12,262 Net income ................................. $ 2,557 $ 2,040 $ 2,571 $ 3,025 Net income per share, basic ................ $ 0.29 $ 0.23 $ 0.29 $ 0.34 Net income per share, diluted .............. $ 0.28 $ 0.23 $ 0.29 $ 0.33
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of RemedyTemp, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of RemedyTemp, Inc. and its subsidiary (the "Company") at September 27, 1998, and September 28, 1997, and the results of their operations and their cash flows for each of the three fiscal years in the period ended September 27, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICE WATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Costa Mesa, California November 13, 1998 25 EX-23.1 7 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-11307, 333-11277, 333-47581 and 333-55823) of RemedyTemp, Inc. of our report dated November 13, 1998, appearing on page 25 of the Annual Report to Shareholders which is incorporated by reference in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 16 of this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP --------------------------------- PricewaterhouseCoopers LLP Costa Mesa, California December 21, 1998 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 YEAR SEP-27-1998 SEP-29-1997 SEP-27-1998 450 0 63,660 0 0 69,746 15,184 0 89,785 27,285 0 0 0 90 62,347 89,785 0 451,344 0 344,089 85,438 0 0 23,177 9,271 13,906 0 0 0 13,906 1.55 1.50
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