DALRADA FINANCIAL CORP (DFCO) - Description of business

Company Description
Dalrada Financial Corporation (OTCBB symbol: DFCO) ("DFCO" or the "Company") was incorporated in March 1982 under the laws of the State of California, and reincorporated in May 1983 under the laws of the State of Delaware. The Company's principal executive offices are located at 9949 Balboa Avenue, Suite 210, San Diego, CA 92123. The Company's main phone number is (858) 277-5300.We provide financial services to small and medium-size business. Our clients rely on us to provide services that relieve them from many of the day-to-day tasks that negatively impact their core business operations, such as payroll processing, human resources support, workers' compensation insurance, safety programs, employee benefits, and other administrative services.Our business is predominantly related to staffing - staff leasing, temporary staffing and co-employment. We provide core services as well as a wide selection of employee and employer benefits, which we present as the Benefits Bank(TM). These aftermarket products include health insurance, business insurance, 401k plans, 125 cafeteria plan, tool reimbursement, deferred compensation programs, voluntary benefits, debit cards, and discount programs for employees.FINANCIAL AND HUMAN RESOURCES SERVICESWe provide a variety of financial, staffing, professional employer organization outsourcing (PEO) and human resources services to small and medium-size businesses. These services allow our customers to outsource many human resources tasks, including payroll processing, workers' compensation insurance, employee benefits administration, risk management and human resource administration. These financial services relieve existing and potential customers of the burdens associated with personnel management and control.As a human resource department and strategic business partner for our clients, our service offerings allow our clients to: o comply with ever evolving complex employment related regulatory and tax issues; o increase productivity by improving employee satisfaction and retention; o reduce payroll expenses with lower workers' compensation costs; and o focus on core business activities instead of human resource matters.We also provide our products and services through our subsidiaries and divisions: SourceOne Group, Inc. ("SOG"), Heritage Staffing and The Solvis Group, Inc., ("Solvis"). Solvis operates several operating units, including CallCenterHR(TM), Solvis Financial Services, Solvis Medical Staffing and Solvis Home Health Care.Our temporary staffing services include on-demand or short-term staffing assignments, long-term or indefinite-term contract staffing and on-site management. This segment of our business is primarily devoted to medical, light industrial, and call center staffing.In a co-employment or PEO contract arrangement, we become a co-employer of the client's existing workforce and assume some or all of the client's human resource management responsibilities. Our product and services mix is similar, but the relationship with our PEO client is characterized by shared responsibility for employees.IMAGING PRODUCTSIn January 2003, we completed the acquisition of a controlling in the shares of Quik Pix, Inc. ("QPI"), located in Anaheim, California. At the time of acquisition, QPI's principal business was providing products and services associated with visual marketing support. QPI revenues consist primarily of developing and mounting photographic and digital images for use in display advertising for tradeshows and customer building interiors. QPI also has a proprietary product PhotoMotion Images(TM), ("PhotoMotion") which is a patented color medium of multi-image transparencies. DFCO moved its ColorBlind(TM) software business into QPI. The business is in the process of being sold to another company, which will be concluded by the end of October 2006.In July 2005, QPI acquired The Solvis Group, Inc. ("Solvis") from DFCO and changed its name to The Solvis Group and its trading symbol to SLVG. Solvis currently trades on the Pink Sheets(R).MARKET OVERVIEW - FINANCIAL AND HUMAN RESOURCES SERVICESThe burdens placed on small and medium-sized employers by the complex legal and regulatory issues related to human resources management caused our industry segment to grow beginning in the 1980's. While various service providers have been available to assist these businesses with specific tasks, companies like ours emerged as providers of a more comprehensive range of services relating to the employer/employee relationship. We assume broad aspects of the employer/employee relationship for our clients. Because we provide employee-related services to a large number of employees, we provide economies of scale that provide our clients employment-related functions more efficiently, provide a greater variety of employee benefits, and devote more attention to human resources management.We believe that the demand for our services is driven by (1) the trend by small and medium-sized businesses toward outsourcing management tasks outside of core competencies; (2) the difficulty of providing competitive health care and related benefits to attract and retain employees; (3) the increasing costs of health and workers' compensation insurance coverage and workplace safety programs; and (4) complex regulation of labor and employment issues and the related costs of compliance.MARKET OVERVIEW - IMAGING PRODUCTSDuring FY 2006 we continued to operate a business unit, Quik Pix (a division of The Solvis Group) to market our proprietary imaging products and to provide photographic services to selected clientele.ColorBlind software is a suite of software applications, which allow users to build color profiles of images in order to insure accurate output on digital devices such as printers, plotters, scanners, monitors, and cameras.Photomotion is a patented process for adding multiple images to backlit static displays that appear to change as the viewer passes by the image. The PhotoMotion process uses existing original art to create an illusion of movement; and allows for separate and distinct image displays. It allows for three to five distinct images to be displayed within an existing light box. Images appear to change or "morph" as the viewer passes the display.We offer a spectrum of services allowing a client to produce color visuals (digital and photographic). We also offer a full range of color laboratory reproduction services.The Company is in the process of selling this business unit to another company, with a planned closing of the transaction in October 2006.FINANCIAL AND HUMAN RESOURCE SERVICESSTRATEGIC OBJECTIVEOur long-term strategic objective is to becoming a leading provider of human resource outsourcing services for small and medium-sized businesses. We differentiate our strategic position by offering a full spectrum of staffing services. The integrated nature of our platform assists our clients and customers in strengthening their organizational structure to meet their business objectives. Our operating and growth strategies are described below.OPERATING STRATEGYSALES: Our selling premise is that the aggregate cost providing human resources support in-house or purchasing separate services from multiple vendors is greater than the cost of purchasing from one independent source. We believe that we offer cost savings and managerial efficiencies to clients. Companies with multiple vendors often fail to realize the benefits and economies of scale of having a single, integrated source of human resource services.We provide a broad range of human resource management tools and related financial services that meet critical personnel needs. Our solutions allow clients to maximize the value realized from integrating human resource needs by establishing a partnership with a single vendor.OPERATIONAL EFFICIENCIES: We recently reorganized our senior management into four regions in order to decentralize our management philosophy and structure to enhance our client contact and response. Our experienced senior managers possess the technical and management skills to be proactive in addressing the marketplace as well as being responsive to client needs. We believe that this investment in the re-organized structure and in the hiring of industry experienced senior managers will provide us with a platform to grow our business.WORKERS COMPENSATION AND RISK MANAGEMENT: We have committed to minimize workers' compensation risk through disciplined underwriting processes. Our risk managers corroborate the underwriting data by assessing the candidate's operating culture, workplace safety standards and human resource administration philosophies, including compensation rates and benefit levels. If the client's safe-work culture or adherence to workplace safety procedures declines to unsatisfactory levels, we reserve the right to terminate the relationship under the terms of our contract.We provide workers' compensation insurance through an independent carrier and coordinate rates, compliance, claims, safety programs, and medical review. We provide coverage through an A-rated national carrier and take responsibility for payment of premiums and the deposit of adequate reserves against claims.GROWTH STRATEGYEXPAND REGION AND BRANCH OFFICE OPERATIONS. Our strategy is to increase penetration of our existing markets by enhancing our reputation and increasing brand awareness in the regions and cities in which we operate. We believe that there is substantial opportunity to further penetrate these territories by the effective use of insurance broker networks, referrals, and marketing efforts within the local business community.INCREASE VALUE-ADDED PRODUCTS AND SERVICES. We believe that our partnership philosophy provides us with the opportunity to expand our staffing services and add on services. We will be able to continue our base level of service fees per client employee and to increase our business through products and programs such as employee benefits, which are expected to provide incremental profits and to improve client retention.INFORMATION SYSTEMS. We have invested in new payroll processing systems, financial information systems and related process management systems during this past year. We intend to add a comprehensive human resource management system during the next year. The combination of these efforts are expected to provided us with a scalable platform to enable efficient growth. The systems will allow our customer service and human resource personnel to increase productivity while maintaining high levels of quality service.STRATEGIC ACQUISITION. In May 2006 we acquired Strategic Staff Leasing, Inc.,a Dallas, Texas-based provider of benefits and PEO services. In September 2006 we acquired All Staffing, Inc.- a PEO serving Pennsylvania, New Jersey and New York. All Staffing billed approximately $100 million in non-GAAP gross revenues for 2005. We expect to continue to seek acquisitions that will effectively support our growth strategy.PRODUCTS AND SERVICES.Our business provides a broad range of services associated with human resources management. These include benefits and payroll administration, health and workers' compensation insurance programs, voluntary benefits programs, personnel records management, employer liability management, employee recruiting and selection, performance management, and training and development services.We perform a wide variety of processing and record keeping tasks, mostly related to payroll administration and government compliance. Specific examples include payroll processing, payroll tax deposits, quarterly payroll tax reporting, employee file maintenance, unemployment claims processing, workers' compensation claims management and reporting and safety programs.We provide workers' compensation insurance through independent carriers and coordinate rates, compliance, claims, safety programs, and medical review. We provide coverage through an A-rated national carrier and take responsibility for payment of premiums and the deposit of adequate reserves against claims.We sponsor benefit plans including individual and group health coverage, 401(k) and 125-Flex plans, and others. We are responsible for the costs and premiums associated with these plans, act as plan sponsor and administrator of the plans, negotiate the terms and costs of the plans, maintain the plans in accordance with applicable federal and state regulations, and serve as liaison for the delivery of such benefits to worksite employees.We provide a variety of personnel management services, which provide our client companies access to resources normally found in the human resources departments of larger companies. Our client companies have access to a personnel guide, which sets forth a systematic approach to administering personnel policies and practices and is often customized to fit a client company's particular work culture/environment. We assume many employment-related responsibilities associated with administrative functions and benefit plans administration. Upon request, we can also provide our clients guidance on avoiding liability for discrimination, sexual harassment, and civil rights violations. We employ counsel specializing in employment law.Our business represents a distribution channel for a wide variety of employer and employee benefit programs such as 401(k) plans, 125-Flex plans, legal services, tax consulting, payroll advances, and insurance programs. Our intention is to expand our business through offering a variety of financial services.Our Company is growing rapidly, but profit margins are small. Consequently, profitability depends on (1) economies of scale leading to greater operating efficiencies; and (2) value-added services such as training, education, Internet support, and other services that may be used by employers and employees.The income model for the service segment of our business generally revolves around fees charged for our services. While gross profit is low, gross revenues are generally substantial. To this end, the Company intends to pursue acquisitions of small firms and strategic alliances with similar companies as ours.STAFFING SERVICESStaffing services include on-demand or short-term staffing assignments, contract staffing, long-term or indefinite-term on-site management, and human resource administration:Short-term staffing involves demands for employees caused by such factors as seasonality, fluctuations in customer demand, vacations, illnesses, parental leave and special projects.Contract staffing refers to providing employees for our clients for a period of more than three months or an indefinite period.We employ an experienced on site manager at a client's place of business under certain contractual arrangements. The manager is responsible for conducting all recruiting, screening, interviewing, testing, hiring and employee placement functions at the client's facility for a long-term or indefinite period.We use a variety of methods to recruit our work force for staffing services. The employee application process may include an interview, skills assessment test, reference verification, and background checks. We use a pre-employment screening process to find and select applicants who are appropriately qualified for employment.We have not experienced any material liability due to claims arising out of negligent acts or misconduct by our staffing services employees by staffing employees that are not under our direct control while working at a customer's business.PEO SERVICESIn certain circumstances, we become a co-employer of the client's existing workforce in a PEO contract and assume responsibility for some or all of the human resource management responsibilities, including payroll and payroll taxes, employee benefits, health insurance, workers' compensation coverage, workplace safety programs, compliance with federal and state employment laws, labor and workplace regulatory requirements, and related administrative responsibilities. We have the right to hire and fire our worksite employees, while the client's management remains responsible for recruiting, work assignments, supervision and training.Prior to entering into a co-employer arrangement, we perform an analysis of the potential client's actual personnel and workers' compensation costs based on information provided. We recommend safety improvement procedures and equipment following a risk assessment. The potential client must agree to implement recommended changes as part of the co-employer arrangement.Most service agreements provide for an initial term of one year with renewal provisions. Our agreements generally permit cancellation by either party upon 30 days' written notice. In addition, we may terminate the agreement at any time for specified reasons, including nonpayment or failure to comply with our workplace safety requests or as the result of worsening safety record or OSHA violations. The form of PEO services agreement also provides for indemnification of us by the client against losses arising out of any default by the client under the agreement, including failure to comply with any employment-related, health and safety, or immigration laws or regulations.IMAGING PRODUCTS AND SERVICESDuring FY2006 we continued to provide imaging products and services through Quik Pix, a division of The Solvis Group. This business segment includes our proprietary ColorBlind color management software, our patented PhotoMotion Visual Images, and photographic services.We are in the process of selling this business unit to another company with a planned closing of the transaction in October 2006.SALES AND MARKETINGSales efforts are conducted by our regional and branch managers and by local sales representatives, often coupled with ties with insurance brokers. Our corporate office is responsible for product development, product management and the development of sales materials. Our sales activities are primarily focused on branch-level business relationships. Referrals by insurance brokers have been an important contributor in building our sales.COMPETITIONThe financial and human resources services business is highly competitive, with over 800 firms operating in the U.S. There are several staffing services firms that operate on a nationwide basis with revenues and resources far greater than ours, such as Manpower, Inc and Kelly Services, Inc; in addition, we compete with local and regional staffing firms for customers and employees. The competitive factors that dominate the industry include price and quality placements of employees in a timely manner. We price our services competitively, provide premier customer service and manage the placement process.Some large PEO companies are owned by insurance carriers and some are public companies whose shares trade on Nasdaq, including Administaff, Inc., Team Staff, Inc., Barrett Business Services, Gevity HR, Inc. and Staff Leasing, Inc. Competition includes staffing firms, payroll processors and financial services firms. As workers compensation insurance is often the key element in a client's decision to engage a PEO, competition among PEOs is often on the availability of cost competitive insurance. Our competitive position is enhanced by having a high deductible workers compensation plan with an A rated carrier. Our procedures to manage claims had resulted in a low claims loss experience in the last fiscal year.The markets for our imaging products and services are also highly competitive and rapidly changing. Our ability to compete in our markets depends on a number of factors, including the success and timing of product and services introductions by us and our competitors, selling prices, performance, distribution, marketing ability, and customer support.WORKERS' COMPENSATION PROGRAMWorkers' compensation is a principal service we provide. We, as employer of record, are responsible for applicable statutory compliance for workers' compensation coverage. Our risk management activities are closely related to our underwriting approach.INSURANCE FOR WORKERS' COMPENSATION. In April 2005, we obtained a high deductible policy with an A rated national carrier in order to manage our financial exposure from catastrophic injuries and fatalities. Regulations governing self-insured employers often require the employer to maintain surety deposits of government securities, letters of credit or other financial instruments to cover workers' claims in the event the employer is unable to pay for such claims.Our excess workers' compensation insurance annual policy provided coverage for single occurrences exceeding $250,000 with an aggregate stop loss provision of $4,000,000. We were required to post a $2.625 million reserve with the carrier from which claims would be paid until all claims are settled. As of the end of the policy year, ending April 30, 2006, based upon an independent actuary report, we reserved $615,000 in pending claims against the remaining collateral fund; producing an approximate $1.8 million in excess reserves.For the next policy year beginning May 2006, the carrier slightly raised our stop loss rates, but required us to deposit only $1.6 million in the claims collateral fund as the result of our low claims experience in the prior year. However we are anticipating that, despite our risk management program and claims management program, we may not be able to duplicate the low claims experience of 2006 and may trend closer to traditional loss experiences of the general population.CLAIMS MANAGEMENT . Our workers' compensation expense is tied directly to the incidence and severity of workplace injuries. We attempt to contain workers' compensation costs through an aggressive claims management process. We employ a managed-care system to minimize medical costs and income loss costs by assigning injured workers, as provided for in certain service agreements with our clients, to short-term assignments which are safe for the injured worker. We utilize TPAs for principal claims management expertise. Typical management procedures include performing thorough and prompt on-site investigations of claims filed by employees, working with physicians to encourage efficient medical management of cases, denying questionable claims and attempting to negotiate early settlements to eliminate future case development and costs.WORKERS' COMPENSATION INSURANCE COSTS . The costs associated with our high deductible workers' compensation program include case reserves for reported claims, an additional expense provision for potential future increases in the cost of open injury claims, fees payable to our TPAs, administrative fees payable to state and federal workers' compensation regulatory agencies, premiums for excess workers' compensation insurance, and legal fees.WORKERS' COMPENSATION CLAIMS EXPERIENCE AND RESERVES: We recognize our liability for the ultimate payment of incurred claims and claims adjustment expenses by accruing liabilities which represent estimates of future amounts necessary to pay claims and related expenses with respect to covered events that have occurred. When a claim involving a probable loss is reported, our TPA establishes a case reserve for the estimated amount of ultimate loss. The estimate reflects an informed judgment based on established case reserving practices and the experience and knowledge of the TPA regarding the nature and expected value of the claim, as well as the estimated expense of settling the claim, including legal and other fees and expenses of administering claims. The adequacy of such case reserves depends on the professional judgment of each TPA to properly and comprehensively evaluate the economic consequences of each claim. On an aggregate basis, we have established an additional reserve for both future adverse loss development in excess of initial case reserves on open claims.As part of the case reserving process, historical data is reviewed and consideration is given to the anticipated effect of various factors, including known and anticipated legal developments, inflation and economic conditions. We have engaged an independent actuary to assist management in estimating the total future costs of claims, including potential future adverse loss development. We believe our total accrued workers' compensation claims liabilities at June 30, 2006, are adequate. It is possible, however, that our actual future workers' compensation obligations may exceed the amount of our accrued liabilities, with a corresponding negative effect on future earnings, due to such factors such as unanticipated adverse loss development of known claims, and to a much lesser extent, if any, of claims incurred but not reported.OPERATIONSOur corporate headquarters facility in San Diego, California houses most of our administrative operations. Human resource services operations are conducted from the Company's headquarters offices and branch offices in Michigan (3), California (4), Colorado, Texas, and Pennsylvania (2). All of our offices are leased.INTELLECTUAL PROPERTYWe have obtained U.S. registration for several of our trade names or trademarks, including ColorBlind, Photomotion Images, MedicalHR, CallCenterHR, SourceOne Group, and The Benefits Bank. These trade names are used to distinguish our products and services in the markets we serve.If we fail to establish that we have not violated any asserted rights of others, we could be prohibited from marketing the associated product and/or services, and we could be liable for damages. We rely on a combination of trade secret, copyright and trademark protection, and non-disclosure agreements to protect our proprietary rights.Software products related to our imaging operations are copyrighted. However, copyright protection does not prevent other companies from emulating the features and benefits provided by our software. We protect our software source code as trade secrets and make our proprietary source code available to OEM customers only under limited circumstances and specific security and confidentiality constraints. We hold the patent for Photomotion. These products exist in a rapidly changing business environment. Consequently, we believe the effectiveness of patents, trade secrets, and copyright protection is less important in influencing long term success than the experience of our employees and our contractual relationships. Due to lack of sales of the Photomotion, we have fully written-off the value of the related patent as of June 2005 year end.MANUFACTURING, PRODUCTION, AND SOURCES OF SUPPLY: - IMAGING PRODUCTSWe manufacture our software products and imaging products in-house and through selected outside vendors.RESEARCH AND DEVELOPMENT - IMAGING PRODUCTSSome of our imaging products are characterized by rapidly evolving technology, frequent new product introductions, and significant price competition. We have entered into no formal projects in research and development for several years; however, we do make modifications to existing products on an as-needed basis to maintain their currency.GOVERNMENT REGULATIONWhile many states do not explicitly regulate companies like ours, over 20 states have passed laws that have licensing or registration requirements for professional employer organizations ("PEO"), which is a component of our business. Such laws vary from state to state, but generally provide for monitoring the fiscal responsibility of PEOs and, in some cases, codify and clarify the co-employment relationship for unemployment, workers' compensation, and other purposes under state law. We estimate that the annual cost of compliance with these regulations is approximately $250,000.EMPLOYEESOur Company (including subsidiaries, but not including employees pursuant to staffing and/or co-employer client contracts) employed a total of 75 individuals worldwide as of September 30, 2006. Of this number, 30 were involved in sales and marketing, 13 in corporate administration and finance, 40 were in human resources, payroll, and benefits administration, and 2 in technical support. There is no union representation for any of our employees.