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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 27, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-14018
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Norrell Corporation
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(Exact name of Registrant as specified in its charter)
Georgia 58-0953079
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(State or other jurisdiction of (I.R.S.
Employer incorporation or organization) Identification No.)
3535 Piedmont Road N.E., Atlanta, Georgia 30305
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (404) 240-3000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, as of December 31, 1996, was approximately $290,918,275. This
amount excludes a total of 10,545,377 shares of Common Stock owned either
directly or beneficially by officers, directors and principal stockholders of
the Registrant, who may be deemed to be affiliates under applicable rules of the
Securities and Exchange Commission. As of December 31, 1996, there were
23,885,662 shares of Registrant's Common Stock, no par value, outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement to be mailed to stockholders
in connection with the Company's annual meeting of stockholders, scheduled to be
held on March 4, 1997, are incorporated by reference in Part III of this report.
Except for the portions expressly incorporated by reference, the Company's Proxy
Statement shall not be deemed to be a part of this report.
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PART I
ITEM 1. BUSINESS
GENERAL
Norrell Corporation (the "Company" or "Norrell"), incorporated in 1965
as a Georgia corporation, is a leading national provider of staffing,
outsourcing and professional services to businesses, professional and service
organizations and government agencies. The Company provides a broad range of
services through its national network of 132 Company-owned locations, 115
outsourcing services locations, 133 franchised locations, and 32 professional
services offices as of December 22, 1996. More than 19,000 clients (including
subsidiaries and affiliated companies) in North America were served by the
Company during its latest fiscal year. The Company is benefiting from a
continuing trend toward staffing and outsourcing services and the Company's
implementation of its business strategy. Based upon revenues, the Company's
management believes that it is one of the largest companies in its industry in
North America.
As a national provider of temporary personnel and staffing services,
the Company supplies its clients with the services of individuals having a wide
variety of office, light industrial and other skills, including secretarial,
word processing, data entry, telemarketing, assembly, picking, packing and
sorting, and shipping and receiving. The Company also provides home health aides
and related services to government agencies or home health agencies in the
states of New York, New Jersey and Pennsylvania.
In addition to providing temporary personnel and staffing services,
the Company provides its clients with outsourcing solutions in a wide range of
office and business functions including administrative services, site services,
teleservices, accounting services, information systems, document processing,
data entry services and integrated service offerings. The Company also provides
hospitals with outsourcing solutions in certain office and business functions.
During fiscal 1996, the Company formalized its human resources services offering
and provides clients with recruitment, interviewing, assessment, and other
services associated with the workforce selection process. With its outsourcing
offering, the Company assumes responsibility for the function and its results,
including management of the people, service delivery process and technology
resources.
The Company also provides clients with a range of professional
services. During fiscal 1996, the Company acquired the capability to provide
services in the information technology field. The Company provides computer
professionals for both short-term and long-term assignments, including systems
analysts, computer programmers and computer technicians. The Company also
provides various computer consulting services such as system planning and
development, organizational consulting for business transformation, software
systems integration services and project management services. The Company also
offers professional services in the financial area, and provides clients with
temporary and permanent employees to perform accounting, bookkeeping and other
financial services.
The Company offers its staffing, outsourcing and professional services
through a number of affiliated companies and divisions, including Norrell
Services, Inc. ("Norrell Services"), and Tascor Incorporated ("Tascor"). Norrell
Health Care, Inc. provides home health aides, primarily in the states of New
York, New Jersey and Pennsylvania and Norrell Financial Staffing, a division of
Norrell Services, provides clients with temporary and permanent employees to
perform financial services. HealthTask Corporation, a joint venture between the
Company, Tascor and Ernst & Young U.S. LLP, provides hospitals with outsourcing
solutions in certain office and business functions. Two companies acquired
during fiscal year 1996 - Analytical Technologies, Inc. and ANATEC Canada, Inc.
(collectively referred to as "ANATEC") and American Technical Resources, Inc.,
("ATR") - and a third company acquired effective January 2, 1997 - Comtex
Information Systems, Inc., ("Comtex") - provide professional services in the
information technology field. Two joint venture companies - Norcross
Teleservices, Inc., and CallTask Incorporated - provide outsourcing solutions in
the teleservices arena.
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STRATEGY
The Company's overall business strategy is focused on: (i) providing a
seamless "spectrum of services" to its clients including traditional temporary
services, short-term and long-term staffing, value-added outsourcing solutions,
and professional services; (ii) establishing the Company as a recognized high
quality service provider; and (iii) continuing to grow the Company's existing
base of business by developing new product offerings from existing services,
expanding into additional skill classes, functional areas and technology, and
entering into selected new markets. In 1996, the Company: 1) expanded its
capabilities in higher-growth, higher-margin services, such as teleservices and
information technology services; 2) continued to re-engineer its service
delivery process to enhance customer satisfaction; and 3) continued to focus
upon operational factors that increase efficiency and profitability.
For clients committed to high-quality, value-added services, the
Company offers strategic workforce management, designed to strengthen a client's
organizational effectiveness and flexibility. The Company partners with these
clients to diagnose workforce problems and design an integrated service
solution, ranging from short-term staff augmentation to comprehensive workforce
structures that include dedicated management teams.
SPECTRUM OF SERVICES
The services provided by the Company can be viewed as a spectrum
ranging from traditional temporary services to value-added outsourcing
solutions.
NORRELL CORPORATION'S SPECTRUM OF SERVICES
[GRAPH]
Traditional Temporary Services. Traditional temporary personnel may be
assigned for either a specified or indefinite period of time as necessary to
meet the needs of clients. The expense and inconvenience to a client of
recruiting employees, including advertising, interviewing and testing,
conducting reference and background checks and drug testing are reduced when
temporary personnel are engaged. Use of these services also enables the client
to eliminate or reduce record keeping, expenses associated with fringe benefits,
turnover and related employee costs usually associated with its personnel. A
client pays only for actual hours worked by temporary personnel and may
terminate the use of temporary services without the adverse effects of layoffs.
Staffing Services. The Company offers both short-term and long-term
staffing options tailored to specific client needs. Through short-term staffing,
also known as project or peak period staffing, the Company can meet fluctuating
staffing requirements quickly and easily, helping clients maintain high levels
of productivity without the need to add permanent staff. Short-term staffing is
typically an assignment of less than six months and involves one-time, seasonal
or recurring use of at least five temporary employees. Through long-term
staffing, the Company provides and supervises temporary employees for functions
or departments on an extended basis. Long-term staffing typically involves
staffing specific positions for six months or more.
Managed Staffing. The Company also emphasizes managed staffing, which
is the staffing of positions with personnel on a planned and continuing basis,
in most cases with an on-site Norrell manager who is trained to
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manage the contingent workforce process. Managed staffing represents a
cost-effective solution for employers who spend a significant amount of
administrative and personnel department time managing employees whose jobs are
generally routine and are characterized by high turnover rates and also for
employers in industries with fluctuating personnel needs. Such employers use
staffing personnel as a valuable management tool to control overhead costs and
enhance profitability. Examples of managed staffing clients of the Company
include customer service centers, distribution centers, and various light
manufacturing and packaging businesses. The Company's managed staffing business
grew 26.9% during fiscal 1996 from $65.3 million in revenues in fiscal 1995 to
$82.9 million in revenues in fiscal 1996.
Master Vendor Partnering ("MVP"). The Company offers its MVP program
to its clients in conjunction with its other service offerings. Under the MVP
program the Company will, in addition to providing traditional temporary
services or managed staffing, assume responsibility for coordinating all of the
client's temporary help or staffing functions for one or more client locations.
This coordination includes taking and filling client orders for services,
employee scheduling, new employee orientation, personnel management, quality
reviews, and payroll and invoice processing. These functions are handled by a
Norrell on-site contract manager at the client location. As the Master Vendor,
the Company establishes relationships with other service providers which may be
used as specialty subcontractors to provide services in the event the Company
does not fill an order with its own personnel. These subcontractors receive
orders for services from the Company, usually sign a subcontract agreement with
Norrell, render their invoices directly to the Company, and are paid by the
Company. The Company provides the client with a single aggregated bill for all
of the services provided by Norrell and any subcontractors. The client also
looks to the Company as its single point of contact for placing orders for
temporary services, responding to quality issues and pricing matters as well as
preparing reports concerning usage of temporary services. During fiscal 1996,
revenues from the Company's MVP program increased 66.7% from $85.8 million in
fiscal 1995 to $143 million in fiscal 1996.
The Company's traditional temporary and staffing services can be
divided into four major categories:
Administrative Support Services. Office services are provided by
personnel possessing a wide variety of skills required in the workplace,
including secretarial, reception, desktop publishing, transcription, typing,
data entry, general clerical, switchboard and general office skills. Such
services are most often required by clients at times of peak work loads or
occasional absences or to fill ongoing staffing requirements. Through the
diversity of skills of its personnel, the Company is able to satisfy the needs
of its clients in virtually all areas of office services.
Office Automation Services. The Company provides personnel with word
processing and personal computer skills, including graphics specialists and
trainers, as well as specialists for spreadsheet and data base applications. The
Company not only seeks highly qualified and experienced operators to meet the
needs of its clients, but also trains its employees using an extensive office
automation cross-training curriculum. All Company-owned offices and franchised
locations are equipped with personal computers using several of the most widely
used word processing, data base and spreadsheet software applications. The
Company has developed its own office automation testing, training and support
programs, including course curricula designed for self-paced and instructional
training.
Technical and Light Industrial Services. Technical and light
industrial services personnel are furnished for a variety of assignments,
including general assemblers, machine attendants, shipping and receiving clerks,
inventory personnel, packers and ticketers. The Company also provides
semi-technical personnel, including printed circuit board assemblers, testers
and inspectors. Managed staffing has been an effective delivery channel for the
Company's technical and light industrial services.
Home Health Aide Services. Home health services are provided by
trained, certified home health aides and/or personal care aides in the patient's
home. These certified aides meet the requirements of state Medicaid programs and
generally provide personal care, cooking, cleaning, shopping and other essential
day-to-day services to patients. These services are performed under contracts
with the individual governmental entities administering the programs or with
certified home health agencies. Norrell's certified aides do not provide any
skilled nursing services.
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Outsourcing Services. The Company also provides outsourcing services.
Through this offering, clients can obtain a broad range of administrative and
business support services, with the Company assuming responsibility for managing
the productivity and work output of the functions that it performs. Employees
provide support tailored to the customer's needs on a long-term, contractual
basis. The Company assumes responsibility and accountability for results of the
function, including management of the people, the service delivery process and
the technology resources, enabling the customer to focus on its core business.
The Company's joint venture with Ernst & Young U.S. LLP - HealthTask Corporation
- - has targeted outsourcing solutions to hospitals for certain office and
administrative functions. In addition, during fiscal 1996, the Company entered
into two joint ventures to provide a wide range of teleservices. Norcross
Teleservices, Inc., a joint venture between the Company and the Cross Country
Group LLC, provides teleservices to organizations that outsource their customer
service functions. Norcross focuses on business-to-business and
customer-to-business support, including customer service call centers and help
desks. The Company owns a 51% interest in the Boston-based joint venture. The
Company also owns a 51% interest in CallTask Incorporated, a joint venture
between the Company and Harvard Teleservicing, Inc. CallTask primarily provides
teleservices to assist clients with customer reservations, product information
and order fulfillment.
In fiscal 1996, the Company's outsourcing revenues were $208.1
million, with over 6,000 employees working at client locations. New business
development continues to be a priority of the Company's management.
International Business Machines Corporation ("IBM"), the Company's largest
client, has engaged the Company to provide additional services during the
current year. In addition to IBM, the Company has outsourcing agreements with
other major clients, and outsourcing revenues from non-IBM customers increased
$15.3 million during 1996 to $60.3 million.
The Company's outsourcing services can be divided into several major
business categories:
Administrative Services. Administrative services include
secretarial and clerical support, text processing, desktop publishing, graphics
centers, management support teams and site management functions, such as mail
services and reprographic services.
Teleservices. Teleservices include managing information call
centers, service/dispatch centers, PC product information and warranty
maintenance centers as well as telephone service, network management and related
customized programs.
Accounting Services. Accounting services include performing
accounting functions such as processing accounts payable, accounts receivable,
employee travel reimbursement and asset tracking.
Document Processing and Data Entry Services. These services include
records management and a broad range of value-added services performed at
Company locations or at customer sites.
Human Resources Services. Human resources services include
recruitment, testing, interviewing and selection for a client's workforce.
Professional Services. During 1996, the Company expanded its
capabilities in the information technology field and offers a full spectrum of
services, from staff augmentation and recruiting to systems consulting. With the
acquisition of information technology companies, the Company offers clients a
variety of services, including systems planning and development, organizational
consulting related to business transformation, project management, software
systems integration, software development, and computer professionals for
short-term and long-term assignments, including systems analysts, computer
programmers and computer technicians. During fiscal 1996, revenues from the
Company's information technology services were $50.5 million.
The Company, through its Norrell Financial Staffing division, offers
its clients temporary and permanent employees to perform accounting, bookkeeping
and related financial services. During fiscal 1996, the Company experienced
significant growth in financial staffing due to growth of existing accounts and
an increase in office locations. In addition, subsequent to the fiscal year end,
the Company acquired Accounting Resources, Inc., a
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privately held financial placement firm in Providence, Rhode Island,
which provides staffing, permanent placement and executive search services to
clients in various industries. Revenues from financial staffing increased from
$2.9 million in fiscal 1995 to $14.6 million in fiscal 1996, an increase of
$11.7 million.
The Company offers its clients the option of combining any of the
above services into a single integrated offering, as well as tailoring services
specifically to customer requirements. By applying the principles of continuous
quality improvement and business process engineering to each of these areas, the
Company has been able to reduce costs and improve productivity for many of its
clients.
QUALITY INITIATIVES
The Company is dedicated to providing high quality services and
believes it is an industry leader in its quality focus and related measurement
systems. This quality focus helps attract and retain national accounts with
customers seeking consistent results and a nationwide approach to their needs.
In order to maintain a consistent quality standard for all of its
temporary and staffing employees, the Company uses automated systems to screen
and evaluate potential personnel, to make appropriate assignments, and to
evaluate and review an employee's performance. The Company's quality system,
Qualisys, is comprised of three major components: (i) Exact Match(TM), a
screening and placement process which matches the employee to the client's
needs; (ii) B.O.S.S., its Branch Office Support System, an extensive database of
client and personnel information; and (iii) I.R.I.S.(TM), or Integrated Research
Information System, by which the Company obtains direct client feedback and
measures individual employee performance. These automated services enable the
Company to provide staffing services quickly and efficiently, monitor client
needs and utilization trends, measure the Company's quality and evaluate and
train its employees. This extensive, integrated and automated quality
measurement and control system distinguishes the Company from its competitors.
With its outsourcing clients, the Company also develops customized performance
measurement benchmarks and systems for each client contract as requested. These
standards and systems are designed with client input and take into account
clients' quality needs and standards.
As a result of such quality initiatives, the Company has received
recognition for the quality of its services by groups outside the temporary
services industry. The Company has received the national award for Best
Practices in Customer Satisfaction from Arthur Andersen's Enterprise Group. The
Company has also received the Sears Partners in Progress Award, the Tennessee
Quality Award and the Ford Q-1 Award. Ford gives its coveted Q-1 award only to
selected vendors in recognition of outstanding quality and service. This award
allows the Company to use the Ford Q-1 recognition in advertising and other
promotional material. Such recognition for its quality services enhances the
Company's ability to compete for larger and more complex contracts and business
opportunities.
GROWTH OPPORTUNITIES
The Company increased its revenues from $412.1 million in fiscal 1992
to $1,013.9 million in fiscal 1996. The Company continues to grow its business
and increase the volume of services provided by (i) enhancing new service
offerings; (ii) increasing the range of services provided to existing clients;
(iii) expanding into additional skill classes, functional areas and technology;
(iv) expanding its capabilities in higher-growth, higher-margin services; and
(v) entering into selected new geographic markets.
The Company has employed an effective geographical expansion
strategy with franchise locations providing penetration primarily in markets
with lower density populations and Company-owned offices servicing major
markets. This combination provides an increased local market presence and a
broad network of service locations for national accounts. The Company also
selectively considers the acquisition of local temporary service companies with
strong market presence in order to efficiently enter new markets. Pursuant to
this strategy, during fiscal 1996, the Company acquired Valley Temporary
Services, Inc., a staffing firm in Phoenix, Arizona.
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ORGANIZATIONAL STRUCTURE
The Company provides its services through a network of Company-owned
offices, franchised offices, outsourcing locations, and professional services
offices. The table below sets forth certain historical information concerning
the number of offices and outsourcing locations:
As of the End of Fiscal
Year
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1992 1993 1994 1995 1996
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Company-Owned Offices........................................... 115 115 115 121 133
Franchised Offices (1).......................................... 112 103 107 119 133
Outsourcing Locations (2)....................................... 43 59 75 91 105
Professional Services Offices................................... 1 2 2 21 30
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Total Company Offices and Locations...................... 271 279 299 352 401
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Company-Owned Operations. The Company owns and operates temporary
personnel services offices in major markets, each of which is managed by a
Norrell manager who is responsible for most aspects of the Company's business
within that market. These responsibilities include sales and client development,
recruitment and retention of temporary employees and the implementation of
Norrell's marketing strategies. The Company provides extensive training to field
managers, sales representatives and operations personnel in all of these areas.
A substantial portion of field employees' compensation is based on financial
performance, including the attainment of profit objectives. Company-owned
offices operating in "middle markets" (generally markets with populations
between 500,000 and 1.5 million people) are operated under special incentive
arrangements by managers who receive lower salaries and higher incentive
compensation relative to managers of other Company-owned offices.
Franchised Operations. The Company currently operates franchised
offices throughout the United States and in Canada and Puerto Rico. The Company
developed its initial franchise strategy in the mid-1960s as an important
element of its overall growth plans. Franchising provides the opportunity to
enter targeted markets with substantially less capital than would be required to
establish Company-owned offices. The Company's primary franchise target markets
are cities with populations between 50,000 and 500,000 people. The Company also
establishes franchised offices under its trade name Dynamic People to increase
market penetration in major markets in which the Company may also operate
Company-owned offices.
The preferred franchisee is a person who is familiar with a particular
local market and its business network, has a background in sales and exhibits
entrepreneurial qualities characteristic of a small business owner. The
franchised operation is designed to allow a franchisee to operate the business
autonomously within the framework of the Company's policies and standards. A
franchisee has the exclusive right to operate as a temporary personnel services
provider for specific services within a designated geographic area using the
Company's trade names, advertising materials, sales programs, operating
procedures and proprietary and licensed systems as described in the franchise
agreement.
Franchise agreements generally have 10 to 15 year terms and are subject
to earlier termination as provided in the franchise agreement. Under the
franchise agreements, all customers and temporary employees are the customers
and employees of the Company rather than of the franchisee. The Company is
responsible for all billing and collection procedures and pays the wages of all
temporary personnel. The current franchise agreement provides that the
franchisee receives between 40% and 60% of franchise gross profits depending
upon the volume of gross profits generated by the franchisee. The franchisee is
responsible for the overhead of its own operations, such as utilities, office
furniture and equipment, rent and staff personnel. The Company receives no
initial franchise fee upon the commencement of a franchise relationship. The
Company estimates that a franchisee will need working capital of $70,000 to
$140,000 to open and operate a franchised office.
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1/ Occasionally, the Company acquires a franchised office and operates it
as a Company-owned office until it is refranchised. Such offices are
included in franchised locations.
2/ Outsourcing services are generally performed at the clients' facilities.
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The franchise division assists and supports its franchisees through
regional managers and training development teams. The Company has entered into
agreements with the majority of the franchisees pursuant to which the franchisee
agrees to provide certain services for a fee in order to assist the Company in
certain outsourcing business which is performed in the franchisee's territory.
Those services could include recruiting, basic testing and training of
personnel, and interviewing persons seeking employment as outsourcing services
employees. In the event the Company needs to use temporary services in the
course of providing outsourcing services, the franchise owner may provide such
services. In addition, the Company selectively allows franchise owners to
perform financial staffing services depending upon market size, the amount of
financial staffing business involved, and the ability of the franchise owner to
meet the needs of the particular client. Franchise owners do not provide
outsourcing services in the teleservices area or services in the Company's
information technology business.
Outsourcing Locations
The Company currently has operations at sites throughout the United
States responsible for the delivery of outsourcing services. The majority of the
Company's outsourcing operations are located on site at its customers'
facilities, and the remaining outsourcing sites are located in leased offices.
Other than regional offices and its corporate offices in the Company's
headquarters building, the Company's outsourcing subsidiary does not maintain
sales or administrative offices separate from the locations at which client
services are performed, allowing the Company to control the growth of overhead
costs.
Outsourcing services are delivered by employees who are hired by the
Company to perform services during the term of an outsourcing contract. These
employees and related field operations are managed by the Company's site
managers and area managers who are responsible for service delivery, customer
satisfaction, and sales of additional services to current customers through both
expansion of existing contracts as well as the addition of new contracts.
Outsourcing field operations are supported by a centralized staff which
is responsible for pricing of new or additional business, payroll, performing
client process studies, management training and implementation services, which
includes the initial recruiting, screening, testing, hiring and training of
employees at the start of a new outsourcing services contract.
SALES AND MARKETING
The Company has developed a sales and marketing strategy which is
implemented through its Company-owned and franchised staffing services offices
and its on-site and off-site outsourcing services locations. The Company focuses
these efforts both on a national and local level. The national sales effort is
coordinated by a national account team located in the home office and in the
local division offices. The local branch offices provide the service and sales
efforts needed to support the large national customers. Pursuing national
account partnerships is important to the Company's growth due to the
consolidation of vendors by large national clients and due to the broad spectrum
of services these customers desire. Local accounts are developed by the
Company-owned and franchised offices primarily through client referrals,
community involvement and direct contacts with prospective clients. Contacts are
made through sales representatives, telephone marketing calls and direct mail
solicitation.
For all traditional temporary and staffing clients, national and local,
the Company has developed a system of formal consultation with its clients'
management to determine the clients' specific requirements and to evaluate their
potential use of staffing personnel. This approach involves: (i) an in-depth
study of the client's corporate attitudes and departmental organization to gain
insight into the client's operating philosophy; (ii) an analysis of the client's
performance expectations and work experience requirements for staffing
personnel; (iii) a job-by-job analysis of the cost effectiveness the client can
expect from the use of the Company's staffing employees; and (iv) on-going
management reports evaluating the actual results of utilizing the Company's
services. This process facilitates an effective match of a client's needs with
skills of the staffing employee and enables the client to analyze its use of
staffing services. The Company offers all clients the "Norrell Guarantee", under
which a client will not be billed if the client is not satisfied with a
temporary employee's performance.
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The Company's sales efforts for its outsourcing and professional
services offerings are accomplished by both the field sales organization and the
national accounts teams. Functional experts from Norrell's broad spectrum of
services, including ATR, ANATEC, Comtex, Norrell Financial Staffing, Tascor,
Norcross and CallTask, assist the sales team in their selling efforts. New sales
are generally made to companies at the senior executive level. Sales of
outsourcing and professional services to an existing client are made by both the
operations management team responsible for the client and the above-mentioned
personnel.
The development of awareness and preference for both the Norrell brand
and our service offerings is a primary initiative of the sales and corporate
marketing organizations. Through a variety of national and local marketing and
media vehicles, the Company communicates the attributes of a brand position and
service offerings to current customers, prospects and the business community.
For recruitment purposes, the Company and its franchisees utilize a multi-media
marketing strategy to attract and retain employees to fill the broad spectrum of
staffing and outsourcing services.
RECRUITING AND PLACEMENT
The Company's temporary and staffing personnel are primarily
individuals between jobs or careers, individuals re-entering the job market or
individuals who prefer the flexibility and variety of temporary or shorter-term
work assignments. A substantial proportion of new temporary personnel are
obtained through referrals by other Norrell personnel. Temporary and staffing
personnel are also recruited through local and national advertising media. Due
to shortages in the labor market, the Company focuses upon developing and
implementing recruiting techniques which will attract and retain qualified
personnel.
The Company conducts an interviewing and testing process to screen and
evaluate the skills of potential personnel. Company-developed or purchased
programs are used to determine skill levels and work attitudes in order to
assist in making proper assignments. The Company provides training programs to
increase and improve the skills of its personnel. To maintain the quality and
effectiveness of its temporary and staffing workforce employees, the Company
uses the I.R.I.S. system to review an employee's performance with the client.
To be able to meet demand for qualified home health personnel, who are
generally in short supply, the Company recruits employees and conducts a
two-week training program to qualify employees as certified home health aids or
a one-week training program to qualify them as personal care aides. These
training programs effectively increase the Company's supply of qualified aides.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems have been established to
allow the Company to maintain state-of-the-art capabilities while at the same
time reducing management's time and involvement in systems issues. In December
1992, the Company entered into an agreement with Integrated Systems Solutions
Corporation ("ISSC"), a subsidiary of IBM, for information systems operations,
development of new systems and maintenance of current software systems and
related services. In December 1995, the agreement was reduced in scope. The
Company assumed responsibility for development of new systems and maintenance of
current software systems. The services currently being provided by ISSC include
operating the Company's data center and data network, maintaining the hardware
in the data center and data network, generating printed reports previously
prepared by the Company and providing storage and disaster recovery for all data
media. The agreement with ISSC provides the Company with virtually unlimited
computer data storage and operating capacity to meet future information and
systems operations needs. This agreement expires on March 31, 2003 unless
extended by the Company and ISSC.
In 1995 the Company began replacing certain legacy systems. The primary
purpose of this initiative is to install state-of-the-art systems throughout the
Company and support the substantial growth of the Company, provide better
support for the Company's national account strategy, and to facilitate
integration of newly acquired companies. These systems will complete the
Company's transition to Client/Server Systems. In 1997 and beyond,
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the Company will leverage this new platform to introduce system extensions which
will enhance productivity and further our competitive edge.
The Company believes that its B.O.S.S., I.R.I.S.(TM), Exact Match(TM)
and proprietary payroll systems give the Company a competitive edge in service
delivery over its competitors, in that selected client and temporary employee
information, including client satisfaction survey results, are available
electronically in each office and at the corporate headquarters.
CLIENTS
During fiscal 1995 and 1996, revenues generated by the Company from
contracts with IBM equaled $136.2 million and $158.6 million, respectively,
representing 16.2% and 15.6% respectively, of the Company's consolidated
revenues for such periods. Approximately 31.0% and 21.4% of these revenues were
received during fiscal 1995 and fiscal 1996, respectively, for services
performed under a Management Services Agreement. The balance of the Company's
IBM-related revenues are consolidated under multiple contracts with different
purchasing units within IBM.
During fiscal 1996, revenues generated by the Company from contracts
with United Parcel Service, Inc. ("UPS") equaled $122.2 million representing
12.0% of the Company's consolidated revenues for fiscal 1996.
No other client accounted for more than 10% of the Company's
consolidated revenues for fiscal 1996 or 1995.
COMPETITION
The temporary services industry is highly competitive with more than
7,000 temporary services companies operating in the United States. The temporary
personnel services provided by the Company also are provided by several other
companies with nationwide operations that have substantially greater resources
than the Company. In addition, the Company competes with numerous local and
regional companies, which are frequently the strongest competitors in their
particular markets. Accordingly, the Company's competition varies from market to
market. Although the Company and other national firms benefit from having
nationally recognized names, the Company believes that its customers primarily
differentiate among firms by comparing the quality of personnel and services
provided by each local office. Companies typically use more than one temporary
services firm to satisfy their temporary personnel requirements.
The largest competitors of the Company's temporary and staffing
personnel offerings include Kelly Services, Inc., Manpower Inc., Adia Services,
Inc., AccuStaff, Inc., The Olsten Corporation, and Interim Services. In
addition, there are a number of other firms with annual sales in excess of $100
million, many of which are regional and/or emphasize specialized niches. There
are also numerous local and single office firms which are able to compete on
price because of their lower overhead structures. These firms are typically
located in one city and some are able to compete effectively on that limited
basis.
The Company believes that no single competitor has more than a 10%
share of the national temporary services market. Nevertheless, it is expected
that the industry will continue to consolidate with the large national firms
increasing their market share at the expense of firms which are large enough to
require sophisticated information-based systems for the placement of temporary
personnel and payroll functions for their offices but may lack the capital to
compete operationally with larger industry competitors.
The temporary health care market also is highly fragmented and
competitive at the local level. While several national health care companies
compete with the Company in its markets, many local health care staffing
services and home health agencies also compete with the Company. Selections of
home health aide services are made primarily on a local basis by agencies and
health care administrative personnel.
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The principal competitive factors in the temporary services industry
are the availability and quality of personnel, the level of service, the
effective monitoring of job performance and the price of service. The Company
believes that it competes favorably in these areas.
The Company believes that the largest companies that compete with its
outsourcing offering are "niche" players which do not compete with the Company's
full range of outsourcing services. These outsourcing services providers offer a
more limited range of services, assuming responsibility for functions such as
food services, facilities maintenance, mailrooms or reprographics.
The Company considers its principal competitors for its outsourcing
services to be companies such as Pitney-Bowes, Inc., an equipment manufacturer
which provides mailroom services; Manpower; Xerox, an equipment manufacturer
that provides reprographics services; Kelly Services, and other large temporary
services firms which are attempting to expand their services offerings; and Host
Marriott Corporation, which is expanding beyond its traditional hospitality and
food services operations in the area of facilities staffing.
In the professional services industry, a large number of national
companies provides information technology consulting services related to systems
planning and development and business processes and transformation, including
Andersen Consulting & Co., IBM Global Services, and Electronic Data Systems.
Staff augmentation services in the information technology field are provided
primarily by regional and local firms as well as some national firms.
Competitive factors in the information technology industry are a proven track
record in the marketplace, recruitment and retention of employees with the
appropriate skills, development and implementation of effective methodologies,
and process and business expertise.
PERSONNEL
As of January 8, 1997, the Company had a staff of approximately 1,300
(excluding temporary employees and employees who perform services on outsourcing
contracts). The Company maintains employment contracts with all executive and
most field personnel which, among other things, provide agreements not to
compete with or solicit customers of the Company after termination of employment
for varying periods of time. As of January 8, 1997, the Company employed
approximately 6,600 outsourcing services personnel, and approximately 220,000
temporary personnel were employed by the Company during calendar year 1996,
including those operating out of franchised offices. As of January 8, 1997, the
Company's information technology companies employed 194 individuals (excluding
employees who perform services at client locations) and an additional 1,078
employees were assigned to clients to perform systems-related services. This
includes employees of Comtex, acquired by the Company on January 2, 1997. As of
January 8, 1997, Comtex had a staff of 55 internal employees and employed an
additional 222 individuals to perform services at client locations. The Company
has no collective bargaining agreements with its employees. The Company believes
that it has good relations with its employees.
SERVICE MARKS
The Company is the owner of various service marks, including Norrell,
The Norrell Advantage, Dynamic, Dynamic People, Smarter Ways to Get Things Done,
Tascor and ANATEC. The Company protects its service marks and believes that the
"Norrell" service mark is an important asset to the Company's operations.
GOVERNMENTAL REGULATION
The marketing of the Company's franchises is subject to the disclosure
requirements of the Federal Trade Commission and the registration and/or
disclosure requirements of certain states. In certain states, the Company's
relationship with its franchisees also are governed by the franchise laws of
such states.
The Company's home health aide business operates in New York, New
Jersey, and Pennsylvania which require licensing of home care providers. In
those states, the Company is subject to periodic licensure surveys to ensure
continued compliance with licensing requirements. A change in control or the
sale of the Company's home health aide business must be approved by the Public
Health Council of the New York State Department of Public Health.
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In certain states, companies which engage in permanent placement are
subject to regulations. The Company analyzes the applicability of these state
regulations to the permanent placement activities of Norrell Financial Staffing
and complies with these requirements, if applicable. In addition, certain states
require licensure and otherwise regulate companies which provide employee
leasing services. The Company analyzes these state laws in light of its service
offerings and complies when the state law is applicable.
SEASONALITY
Revenues and profits generated in the Company's fourth fiscal quarter
(August through October) are typically the highest of its four fiscal quarters.
Management believes that this results from a heavier demand during this period
and because the fourth quarter includes only one nationally observed holiday.
Conversely, revenues for the first fiscal quarter (November through January) are
typically the lowest of its four fiscal quarters due to the reduced number of
business days for many of the Company's clients because of the number of
observed holidays and inclement weather. Revenues and operating profits for the
Company's first quarter are typically less than the fourth quarter of the
previous year.
ITEM 2. PROPERTIES
The Company leases approximately 150,000 square feet of the building which
houses its office headquarters pursuant to a lease agreement which will expire
June 30, 2007.
On October 27, 1996, the Company was committed under operating leases for
office facilities and certain equipment. Aggregate minimum rental requirements
under these leases are as follows:
-----------------------------------------
YEAR AMOUNT
(IN THOUSANDS)
-----------------------------------------
1997 $ 9,858
-----------------------------------------
1998 8,511
-----------------------------------------
1999 6,881
-----------------------------------------
2000 5,796
-----------------------------------------
2001 4,790
-----------------------------------------
Thereafter 20,115
-----------------------------------------
TOTAL $55,951
-----------------------------------------
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to ordinary, routine
litigation incidental to the Company's business. In the opinion of management,
the ultimate resolution of all pending litigation will not have an adverse
effect on the Company's business or financial condition.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of fiscal 1996 to a
vote of security holders.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers are elected annually and serve at the
discretion of the Board of Directors. Information concerning the executive
officers, as of January 1, 1997, is provided below.
Name Age Position
---- --- --------
Guy W. Millner...................... 60 Chairman of the Board
C. Douglas Miller................... 55 Director, Chief Executive Officer, President
Larry J. Bryan...................... 53 Director, Executive Vice President
Thomas A. Vadnais .................. 49 Director, President and Chief Operating Officer, Tascor
and Vice President, National Service Management
Stanley E. Anderson................. 43 Senior Vice President of Business Development
James L. Donahue.................... 52 Vice President and General Manager, West Division,
Norrell Services
Caress C. Kennedy................... 46 Vice President and General Manager, Northeast Division,
Norrell Services
Ronald T. Self...................... 40 Senior Vice President and General Manager, Metro
Markets Division, Norrell Services
Eugene F. Obermeyer................. 53 President and Chief Operating Officer, Franchise Division,
Norrell Services, Vice President of the Company
Mark H. Hain........................ 47 Vice President, Secretary and General Counsel
Peter F. Rosen...................... 49 Vice President, Human Resources
C. Kent Garner...................... 50 Vice President and Chief Financial Officer
Thomas E. Fricks.................... 48 Vice President and Chief Information Officer
Stanley Smith....................... 47 Vice President and General Manager, North Central
Division, Norrell Services
Theresa G. Williams................. 37 Vice President and General Manager, Mid Atlantic
Division, Norrell Services
Robert W. Grissom, Jr............... 39 Vice President, Marketing
Timothy E. Tindle.................. 41 President and Chief Executive Officer, ANATEC
Charles F. Phillips................. 40 President, ATR
Michael C. Mullins.................. 48 Chairman and Chief Executive Officer, Comtex
Guy W. Millner founded the predecessor of the Company in 1961 and has
served as Chairman of the Board since that time. He served as President and
Chief Executive Officer of the Company from November 1983 until October 15,
1993. Mr. Millner is on an unpaid leave of absence effective November 15, 1995.
C. Douglas Miller was elected Chief Executive Officer and President of
the Company effective October 15, 1993. He joined Norrell Services in 1979 and
has served since that time as an Area Manager, Regional Manager, Vice President
and General Manager of the Franchise Division, and President and General Manager
of the Franchise Division for Norrell Services; and as Vice President, President
and Chief Operating Officer of the Company. Before joining Norrell Services, Mr.
Miller spent 11 years with IBM, most recently serving as Marketing Manager for
Major Accounts in the Atlanta Office.
Larry J. Bryan joined the Company in October 1985 and is an Executive
Vice President of the Company. Prior to his current position, Mr. Bryan was
Chief Financial Officer of the Company. From 1984 until he joined the Company,
Mr. Bryan served as Senior Vice President and Chief Financial Officer of
American First Corporation. From 1975 to 1984, Mr. Bryan served as Chief
Financial Officer and in other capacities of divisions or subsidiaries of
Pepsico, Inc., including Pepsico Bottling Group, Taco Bell, Inc., and Leeway
Motor Freight, Inc.
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Thomas A. Vadnais joined Tascor on September 1, 1992 and served as Vice
President -- General Manager until October 31, 1993 when he was elected
President and Chief Operating Officer of Tascor. Mr. Vadnais is also Vice
President, National Service Management and has served in that capacity since
October, 1995. Prior to joining Tascor, Mr. Vadnais was a Vice President of
Operations for the national distribution division of IBM where he was employed
for 24 years.
Stanley E. Anderson has been employed by Norrell Services since 1981.
He is currently Senior Vice President of Business Development, a position he
assumed in February, 1996. Prior to that time, he held the positions of Vice
President and General Manager, Southeast Division, Vice President and General
Manager, East Division, Vice President of Franchise Development, Regional
Manager, Branch Manager, and Sales Training Manager.
James L. Donahue is presently Vice President and General Manager for
the West Division of Norrell Services. He has been employed by Norrell Services
since August, 1994. Prior to that time, he was Vice President of a temporary
services firm in San Juan Capistrano, California from April 1991 until August,
1994.
Caress C. Kennedy has been employed by Norrell Services since 1992. She
is presently Vice President and General Manager, Northeast Division. She
previously held the position of Market Vice President in New York and New
Jersey. Prior to joining Norrell Services, Ms. Kennedy was employed by Thompson
Financial Services as Senior Vice President of Sales and Marketing and by Xerox
as Vice President of Marketing, and Vice President of Strategic Planning and New
Business Development.
Ronald T. Self joined Norrell Services on August 31, 1990. He is Senior
Vice President and General Manager, Metro Markets Division, Norrell Services. He
has held the position of Vice President and General Manager, Central Division,
Vice President - Major Accounts and Market Vice-President. From 1986 to 1990,
Mr. Self was employed by Coca-Cola U.S.A., Atlanta, Georgia, most recently as
Southeast Area Manager.
Eugene F. Obermeyer has been employed by Norrell Services since July 1,
1979. He has been the President and Chief Operating Officer of the Franchise
Division of Norrell Services since 1991. He previously held the positions of
President and Chief Operating Officer, Southeast Division, Regional Vice
President and Regional Manager, District Manager and Branch Manager.
Mark H. Hain has been Vice President, Secretary and General Counsel to
the Company since March 1, 1988, when he joined the Company.
Peter F. Rosen is presently Vice President, Human Resources for Norrell
Corporation and has served in that capacity since September, 1995. Prior to that
time, he was Senior Vice President of Human Resources for GAB Robbins, and
Director of Human Resources for SmithKline Beecham.
Thomas E. Fricks serves as Vice President and Chief Information Officer
of the Company and has served in that capacity since he joined the Company in
August, 1994. From 1983 until 1992, Mr. Fricks was employed by Contel Corp. as
Vice President of Information Services. From 1992 until 1994, Mr. Fricks was
Vice President of the Telecommunications Group for American Management Systems,
Inc.
C. Kent Garner is a Vice President and the Chief Financial Officer of
the Company, and has served in that capacity since joining the company in
October, 1995. Prior to joining the Company, Mr. Garner was Chief Financial
Officer of Dollar General Corporation and Treasurer of Vulcan Materials Company.
Stanley Smith is Vice President and General Manager of the North
Central Division of Norrell Services and has held that position since February,
1996. Prior to February, 1996, Mr. Smith held the position of Regional Vice
President, North Central Region, Norrell Services from March, 1989 until
February, 1996.
Theresa G. Williams has been the Division Vice President, and, General
Manager of the Mid Atlantic Division for Norrell Services since February, 1996.
Ms. Williams has been employed with the Company since
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March, 1984 and has previously held the positions of Region Vice-President,
Region Manager and Branch Manager.
Robert W. Grissom, Jr. has served as Vice President, Marketing since
February, 1996. Mr. Grissom has also held the positions of Vice President, New
Market Development, Region Vice President, Franchise Division and Region
Manager, Franchise Division.
Timothy E. Tindle is President and Chief Executive Officer of
Analytical Technologies, Inc. ("ANATEC") and has held that position since 1994.
Prior to his association with ANATEC, Mr. Tindle was employed with Compaq
Computer Corporation for approximately 11 years where he served as Director,
National Support Center, Director, Systems Support and National Service Manager.
Charles F. Phillips is President of American Technical Resources, Inc.
and has served in that capacity since February, 1986.
Michael C. Mullins is President and Chief Executive Officer of Comtex
Information Systems, Inc., a company he founded in 1976.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the New York Stock Exchange
on October 30, 1995 under the symbol NRL. Prior to this date, the Company's
Common Stock traded in the over-the-counter market on the National Association
of Securities Dealers, Inc.'s Nasdaq National Market. Prior to July 26, 1994,
there was no established public trading market for the Common Stock of the
Company. The following table sets forth the quarterly closing price ranges for
the Company's last two fiscal years.
HIGH/LOW STOCK PRICE
HIGH LOW
------------------------
First Quarter, 1995 $ 9 7/8 $ 7 3/4
Second Quarter, 1995 $ 12 1/8 $ 9 1/2
Third Quarter, 1995 $ 12 1/8 $ 9 1/2
Fourth Quarter, 1995 $ 17 $ 11 3/4
First Quarter, 1996 $ 16 5/8 $ 13 1/4
Second Quarter, 1996 $ 19 1/8 $ 12 3/4
Third Quarter, 1996 $ 28 3/4 $ 18 3/8
Fourth Quarter, 1996 $ 33 $ 26 5/8
At January 8, 1997, there were 211 registered record holders of the
Company's Common Stock.
The Company declared a dividend on its Common Stock of $.03 per share in
December, 1994, March, 1995, April, 1995 and September, 1995. The Company
declared a dividend on its Common Stock of $.035 per share in December, 1995,
March, 1996, June, 1996 and September, 1996. The Company declared a dividend of
$.04 per share on its Common Stock in December, 1996. The Company's loan
agreement restricts the amount available
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for the payment of dividends to not more than 40% of the Company's cumulative
net income since November 1, 1993.
On August 5, 1996, the Company issued an aggregate of 1.0 million shares of
its Common Stock, no par value, to five shareholders of ATR in exchange for all
of the issued and outstanding stock of ATR, pursuant to a merger and
reorganization transaction treated as a pooling of interests. Exemption from
registration is claimed pursuant to Section 4(2) of the Securities Act of 1933
due to the limited number of purchasers and isolated nature of this transaction.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data with respect to the
Company's consolidated statements of income for the years ended October 27,
1996, October 29, 1995 and October 30, 1994 and, with respect to the Company's
consolidated balance sheets as of October 27, 1996 and October 29, 1995, have
been derived from the Company's Consolidated Financial Statements for such years
which have been audited by Arthur Andersen LLP, and are included elsewhere
herein. The Selected Consolidated Financial Data with respect to the Company's
consolidated statements of income for the years ended October 31, 1993 and
November 1, 1992, and, with respect to the Company's consolidated balance sheets
as of October 30, 1994, October 31, 1993 and November 1, 1992, have been derived
from the Company's Consolidated Financial Statements for such years which have
been audited by Arthur Andersen LLP. The following data should be read in
conjunction with the Company's Financial Statements and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Fiscal Years
(In thousands, except per share amounts)
October 27, October 29, October 30, October 31, November 1,
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Revenues $1,013,877 $ 842,360 $ 701,921 $ 576,748 $ 412,071
Cost of services 795,013 656,517 543,330 436,287 304,427
---------- ---------- ---------- ---------- ----------
Gross profit 218,864 185,843 158,591 140,461 107,644
Operating expenses 169,206 149,745 128,919 117,196 87,843
Depreciation and amortization 5,904 4,261 4,677 3,596 7,586
Write-off of goodwill -- -- -- 6,584 --
Write-off of software development costs -- -- -- 1,527 --
Provision for lease, legal and other charges -- -- -- 1,381 --
---------- ---------- ---------- ---------- ----------
Income from operations 43,754 31,837 24,995 10,177 12,215
---------- ---------- ---------- ---------- ----------
Other income (expense)
Recovery of preferred
stock investment -- -- 5,000 -- --
Interest expense (1,200) (365) (1,956) (3,797) (4,618)
Other (1,485) (1,628) (408) (398) (838)
---------- ---------- ---------- ---------- ----------
(2,685) (1,993) 2,636 (4,195) (5,456)
---------- ---------- ---------- ---------- ----------
Income from continuing
operations before income taxes 41,069 29,844 27,631 5,982 6,759
Income taxes 15,812 12,518 11,827 2,699 3,652
---------- ---------- ---------- ---------- ----------
Income from continuing operations 25,257 17,326 15,804 3,283 3,107
Discontinued operations:
Loss from operations, net -- -- -- (2,909) (843)
Gain (loss) on disposal, net -- (348) -- 5,813 --
Extraordinary item -- -- -- (499) --
Cumulative effect of change in
accounting principle -- -- 3,414 -- --
---------- ---------- ---------- ---------- ----------
Net income $ 25,257 $ 16,978 $ 19,218 $ 5,688 $ 2,264
========== ========== ========== ========== ==========
Earnings (loss) per common share:
Continuing operations $ 1.00 $ 0.71 $ 0.69 $ 0.13 $ 0.13
Discontinued operations -- (0.01) -- 0.12 (0.04)
Extraordinary item -- -- -- (0.02) --
Cumulative effect of change in
accounting principle -- -- 0.15 -- --
---------- ---------- ---------- ---------- ----------
Net income $ 1.00 $ 0.70 $ 0.84 $ 0.23 $ 0.09
========== ========== ========== ========== ==========
Weighted average number of shares 25,344 24,357 22,782 24,872 23,895
CONSOLIDATED BALANCE SHEET DATA:
Current assets $ 167,388 $ 138,495 $ 111,735 $ 120,612 $ 83,438
Working capital 64,590 55,492 46,952 30,556 27,662
Total assets 263,231 182,024 153,243 166,274 138,308
Long-term debt 23,316 2,057 386 19,180 27,763
Shareholders' equity 98,032 72,934 67,266 43,600 44,515
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Consolidated Financial Data and the Consolidated Financial Statements of the
Company and related notes thereto appearing elsewhere in this Form 10-K.
INTRODUCTION
The Company is organized into three service groups: Staffing Services,
which provides temporary administrative, teleservices and light industrial
staffing; Professional Services, which provides information technology and
accounting staffing; and Outsourcing Services, which provides administrative
services and teleservices through contracts in which the Company assumes
responsibility for the results of a client process. The Company's customers are
businesses, professional and service organizations, and government agencies in
the United States and Canada.
Revenue is generally recognized upon the performance of services.
Certain services are performed under long-term contracts and revenue from these
contracts is recognized by the percentage-of-completion method.
A portion of the Company's revenues is attributable to franchised
operations. Employees and customers of the franchised operations are employees
and customers of the Company. The Company includes such revenues and related
direct costs in its revenues and cost of services, respectively. The net
distribution paid to franchisees is based upon a percentage of the gross profit
generated and is included in the Company's selling, general and administrative
expenses.
In years prior to fiscal 1996, the Company's fiscal year ended on the
Sunday closest to October 31. In 1996, the fiscal year end was changed to the
last Sunday in October. The fiscal year ended October 27, 1996 is referred to as
"1996", the fiscal year ended October 29, 1995 is referred to as "1995" and the
fiscal year ended October 30, 1994 is referred to as "1994".
RESULTS OF OPERATIONS
The following table sets forth certain statement of income items as a
percentage of revenues for 1996, 1995 and 1994:
1996 1995 1994
------ ------ ------
Revenues 100.0% 100.0% 100.0%
Cost of services 78.4 77.9 77.4
------ ------ ------
Gross profit 21.6 22.1 22.6
Operating expenses 16.7 17.8 18.4
Depreciation and amortization 0.6 0.5 0.6
------ ------ ------
Income from operations 4.3 3.8 3.6
Other income (expense)
Recovery of preferred stock investment -- -- 0.7
Interest expense (0.1) (0.1) (0.3)
Other (0.1) (0.2)
------ ------ ------
Income from continuing operations before income
taxes 4.1 3.5 3.9
Income tax expense 1.6 1.4 1.6
------ ------ ------
Income from continuing operations 2.5 2.1 2.3
------ ------ ------
Net income 2.5 2.0 2.7
====== ====== ======
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YEAR ENDED OCTOBER 27, 1996 COMPARED TO YEAR ENDED OCTOBER 29, 1995
Revenues increased 20.4%, or $171.5 million to $1,013.9 million in
1996. Staffing Services revenues grew 16.7% to $740.7 million, and accounted for
73.1% and 75.3% of total 1996 and 1995 revenues, respectively. Staffing Services
volume, as measured by hours that staffing employees worked, increased 12.4% and
prices rose 3.9% compared to 13.4 % and 7.0% for 1995. Staffing Services office
openings, net of closings, for 1996 included 12 company-owned and 14 franchise
offices. During 1996, the Company acquired two information technology companies:
Analytical Technologies, Inc., and ANATEC Canada, Inc. (collectively "ANATEC")
and American Technical Resources, Inc. ("ATR"). ANATEC, which specializes in
information technology consulting, project management, training, and software
systems integration, was purchased for cash on July 15, 1996. ATR, which
provides short and long-term contract programmers, was acquired in a transaction
accounted for as a pooling of interests on August 5, 1996. These two
acquisitions plus the Company's existing Financial Staffing division, which
provides temporary accounting and financial staffing, have been combined into
the Professional Services group. The accompanying financial statements include
the results of operations of ANATEC from July 15, the acquisition date. ATR was
accounted for as a pooling and, accordingly, the accompanying financial
statements include the results of ATR for all periods presented. Professional
Services revenues were $65.1 million in 1996 compared to $34.0 million in 1995,
a 91.5% increase. Professional Services offices increased by 9 to a total of 30
offices. Outsourcing Services revenues grew 19.7% to $208.1 million. Outsourcing
Services revenues from customers other than IBM increased $15.3 million from
1995 to $60.3 million. Included in Outsourcing Services revenues was the
recognition of $2.2 million and $4.5 million in 1996 and 1995, respectively, of
deferred gain from the return in January 1995 of Company stock held by IBM.
Outsourcing Services sites increased by 14 to a total of 105 sites.
Gross profit increased 17.8%, or $33.0 million, to $218.9 million in
1996. Gross margin (gross profit as a percent of revenues) decreased from 22.1%
in 1995 to 21.6 % in 1996. Staffing Services gross margin decreased slightly
from 22.4% in 1995 to 22.0% in 1996. During the first quarter of 1996, workers'
compensation liability for the franchise division of Norrell Services was
adjusted to give effect to much better than expected loss experience. The
adjustment resulted in a reduction of $800,000 in cost of services which added
0.1% to the Staffing Services gross margin. Without this adjustment, gross
margin declined to 21.9% in 1996. Outsourcing Services gross margin declined
from 20.4% in 1995 to 18.2% in 1996 due to the renegotiation of a large contract
with IBM. The renegotiation extended the contract term through December 1998. Of
the 2.2 percentage point decline in Outsourcing Services gross margin, 1.8
percentage points were the result of the renegotiation. Professional Services
gross margin increased from 24.6% in 1995 to 27.6% in 1996.
Operating expenses increased 13.0%, or $19.5 million. Depreciation and
amortization expense increased 38.6%, or $1.6 million. The increase included
$2.6 million of higher franchise commissions associated with increased franchise
revenues, $15.7 million of increased personnel and personnel related costs, and
$2.1 million of increased costs associated with 1996 additions to offices and
sites.
Interest expense increased from $365,000 in 1995, to $1.2 million in
1996 as a result of borrowings to fund the purchase of ANATEC.
Other expense decreased from $1.6 million in 1995 to $1.5 million in
1996. Included in other expense is the Company's share of losses from its 50%
ownership in a joint venture formed in October 1994 to provide administrative
outsourcing for health care facilities. The losses totaled $830,000 in 1996 and
$875,000 in 1995. Other expenses for 1995 also included a loss of $307,000 from
the sale in October 1995 of rental real estate. The property had a net book
value of $4.3 million and the Company received cash and a $3.4 million
three-year, 7% note.
The effective income tax rate declined from 41.9% in 1995 to 38.5% in
1996 primarily as a result of reduced stated income taxes.
Earnings per share from continuing operations rose to $1.00 in 1996
from $.71 in 1995. The 1995 period included a discontinued loss of $.01 per
share.
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YEAR ENDED OCTOBER 29, 1995 COMPARED TO YEAR ENDED OCTOBER 30, 1994
Revenues increased 20.0%, or $140.4 million, to $842.4 million in 1995.
Staffing Services revenues grew 21.3%, or $111.4 million, and accounted for
75.3% and 74.5% of total 1995 and 1994 revenues, respectively. Staffing Services
volume increased 13.4% and prices rose 7.0% compared to 21.1% and 1.7%,
respectively, for 1994. Office openings, net of closings, for 1995 included 6
company-owned offices and 12 franchise offices. In addition, 16 Outsourcing
Services sites were opened, net of closings. Outsourcing Services revenues grew
10.2%, or $16.2 million, to $173.9 million. Outsourcing Services revenues from
customers other than IBM increased $22.5 million from 1994 to $45.0 million.
Included in 1995 Outsourcing Services was the recognition of $4.5 million of
deferred gain from the return in January 1995 of Company stock held by IBM.
Professional Services revenues grew 61.0% to $34.0 million. Professional
Services offices increased by 19 to a total of 21 offices.
Gross profit increased 17.2%, or $27.3 million, to $185.8 million in
1995. Gross margin declined from 22.6% in 1994 to 22.1% in 1995. Staffing
Services gross margin remained constant year-over-year at 22.4%. Outsourcing
Services gross margin declined from 22.9% in 1994 to 20.4% in 1995. The decline
resulted from the renegotiation of a contract with IBM. Professional Services
gross margin increased from 23.9% in 1994 to 24.6% in 1995.
Operating expenses increased 16.2%, or $20.8 million. The increase
included $5.6 million of higher franchise commissions associated with increased
franchise revenues and $10.7 million of personnel and personnel related costs.
Operating expenses, as a percentage of revenues declined from 18.4% in 1994 to
17.8% in 1995 as the Company experienced favorable operating leverage.
Interest expense declined from $2.0 million in 1994 to $365,000 in 1995
as a result of the repayment of debt with the proceeds from the Company's August
1994 initial public offering and the collection of sale proceeds and accounts
receivable from the disposition in October 1993 of the Company's home health
care operations.
Other expense increased from $408,000 in 1994 to $1.6 million in 1995.
Included in the 1995 amount is a loss of $875,000 representing the Company's
share of losses from its 50% ownership in a joint venture which provides
administrative outsourcing for health care facilities. The joint venture was
formed in October 1994 and incurred a loss of $197,000 that year. The increased
loss in 1995 was due to a full year of start-up operation. Other expense for
1995 also included a loss of $307,000 from the sale in October 1995 of rental
real estate. The 1994 amount included a gain of $760,000 from termination of two
interest rate swaps and a loss of $288,000 from the write-off of deferred loan
costs upon renegotiation of the Company's credit agreement.
The effective income tax rate declined from 42.8% in 1994 to 41.9% in
1995. As pretax income increases, the impact of nondeductible goodwill expense
declines thereby reducing the effective rate. In addition, state income tax
expense declined as a percentage of pretax income.
Discontinued operations resulted in a loss of $348,000, net of tax, in
1995. The Company provided for additional legal costs related to the October
1993 sale of its home health care operations.
Earnings per share from continuing operations rose to $0.71 in 1995
from $0.69 in 1994. The loss per share from discontinued operations in 1995 was
$0.01 and in 1994 the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109) increasing 1994
earnings per share by $0.15.
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22
LIQUIDITY AND CAPITAL RESOURCES
The Company's short-term liquidity depends primarily upon its level of
net income, accounts receivable, accounts payable and accrued expenses. The
nature of the Company's business requires payment of wages to its temporary
personnel on a weekly basis and to its other employees on a bi-weekly basis
while payments from its clients are received on average 30 to 60 days after
billing. As a result of this timing difference, the Company's working capital
requirements increase proportionately with its revenue increases. The Company
has no binding commitments for capital expenditures during the next fiscal year
but does expect 1997 capital and information systems development spending ,
excluding acquisitions, to range from $17 to $21 million as the Company
completes the conversion of its headquarters and field information systems. See
Note 11 of Notes to Consolidated Financial Statements regarding commitments
under the Company's headquarters office building lease and information systems
contract. The Company's primary sources of liquidity are operating cash flows
and credit facilities totaling $135.0 million. See Note 6 of Notes to
Consolidated Financial Statements.
Cash provided from operations in 1996 was $38.0 million compared to
$7.3 million in 1995, an increase of $30.7 million. Included in the 1996 amount
was $13.0 million provided by the gain from the December 1995 sale of the
Company's interest in its Atlanta headquarters building that was sold by its
joint venture owner. The Company had a 50% interest in the joint venture.
Concurrent with the sale, the Company extended its lease for office space in the
building for an additional seven years to now expire in 2007. The gain is being
deferred and amortized on a straight-line basis through July 2005 since the
landlord may terminate the lease as of this date, and is recorded as a
reduction in rent expense. The 1995 amount included an increase of $28.9
million in trade accounts and notes receivable, compared to an increase of
$20.2 million in 1996. The larger 1995 increase resulted from higher revenues
and a change in payment terms of a large contract.
Investing activities used cash of $56.9 million in 1996 compared to
cash used of $11.3 million in 1995. The purchase of ANATEC in July 1996 and
Valley Staffing Services, Inc. in January 1996, resulted in uses of cash of
$26.2 million and $6.8 million, respectively. The 1996 and 1995 amounts included
additions to property and equipment of $7.4 million and $6.0 million in 1996 and
1995, respectively, and MIS development costs of $14.7 million and $4.7 million
in 1996 and 1995, respectively. Increased additions to property and equipment
were primarily for desk top computers required by new operations and support
software. In connection with its acquisition of ANATEC, the Company is obligated
to make an additional payment of approximately $10.0 million in February 1997 if
ANATEC'S gross profit for the twelve month period ending December 31, 1996
exceeds a specified level. See Note 2 of Notes to Consolidated Financial
Statements.
The Company's long-term liquidity is also dependent upon cash flows
from operations and borrowing under its credit facilities. The Company has
historically been able to obtain debt financing adequate to fund its operations.
As described in Note 6 to the Notes to Consolidated Financial Statements, the
Company has an unsecured revolving credit facility of $95.0 million which
extends until September 30, 1999, and $40.0 million of unsecured bank lines of
credit. Management believes the Company's relationships with its lenders are
good and that it will be able to obtain any required financing upon maturity of
its existing credit facilities. The Company has no long-term commitments other
than those described in Note 11 to the Notes to Consolidated Financial
Statements.
The Company believes that funds provided from operations and available
borrowings under its credit facilities will be sufficient to meet its needs for
working capital and capital expenditures at least through the end of the coming
fiscal year.
INFLATION
The effects of inflation were not significant to the Company's
operations during 1996, 1995, or 1994.
-22-
23
SUBSEQUENT EVENT
On December 8, 1996, the Company executed an agreement to purchase all
of the outstanding common and preferred stock and all vested and unvested stock
rights of Comtex Information Systems, Inc. ("Comtex") for $67.0 million of cash
plus options to acquire approximately 141,000 shares of Norrell Corporation
common stock at an average exercise price of $4.43 per share. The transaction,
which will be accounted for under the purchase method of accounting, is
scheduled to close on or about January 2, 1997. Comtex is a New York City-based
provider of information systems services, including systems planning and
development, organizational consulting related to business transformation and
staff augmentation support. Comtex has locations in New York City, White Plains,
New York, and Miami, Florida. At October 31, 1996, Comtex had net assets of
$10.9 million.
SPECIAL NOTE REGARDING "FORWARD-LOOKING" INFORMATION
The foregoing section contains "forward-looking" statements which
represent the Company's expectations or beliefs concerning future events,
including capital spending for 1997 and the sufficiency of funds from operations
and available borrowings to meet the Company's working capital and capital
expenditure needs for 1997. A number of important factors could, individually or
in the aggregate, cause actual results to differ materially from those forming
the basis of the forward-looking statements, including changes in the Company's
relationship with its largest customers and increased competition in, and
changes in laws and regulations relating to, the temporary services and
outsourcing industry.
-23-
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NORRELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 27, 1996 and October 29, 1995
(In thousands, except share amounts)
ASSETS 1996 1995
- ------ --------- ---------
CURRENT ASSETS
Cash and short-term investments $ 8,876 $ 5,115
Accounts receivable trade,
less allowances of $7,411 in 1996 145,843 122,206
and $4,869 in 1995
Prepaid expenses 2,674 2,456
Other 9,995 8,718
--------- ---------
Total current assets 167,388 138,495
--------- ---------
PROPERTY AND EQUIPMENT, less
accumulated depreciation 13,513 9,513
--------- ---------
NONCURRENT DEFERRED INCOME TAXES 6,034 6,059
--------- ---------
OTHER ASSETS
Goodwill and other intangibles, net of amortization 45,069 13,617
MIS development costs, net of amortization 18,634 4,612
Investments and other assets 12,593 9,728
--------- ---------
Total other assets 76,296 27,957
--------- ---------
TOTAL ASSETS $ 263,231 $ 182,024
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 9,789 $ 2,571
Accounts payable 14,651 10,590
Accrued expenses 67,536 59,663
Deferred revenue and gain 10,822 10,179
--------- ---------
Total current liabilities 102,798 83,003
LONG-TERM DEBT, less current maturities 23,316 2,057
LONG-TERM DEFERRED GAIN 11,471 --
LONG-TERM ACCRUED EXPENSES 27,614 24,030
--------- ---------
Total liabilities 165,199 109,090
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, stated value $.01 per share;
50,000,000 shares authorized, with shares
issued of 23,566,204 in 1996 and 23,213,808
in 1995 236 232
Treasury stock, at cost; 29,091 shares in 1996
and 41,290 shares in 1995 (575) (476)
Additional paid-in capital 44,096 41,382
Notes receivable from officers and employees (111) (398)
Retained earnings 54,386 32,194
--------- ---------
Total shareholders' equity 98,032 72,934
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 263,231 $ 182,024
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
-24-
25
NORRELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED OCTOBER 27, 1996, OCTOBER 29, 1995 AND OCTOBER 30, 1994
(In thousands, except per share amounts)
1996 1995 1994
------------- ------------- -------------
REVENUES $ 1,013,877 $ 842,360 $ 701,921
COST OF SERVICES 795,013 656,517 543,330
------------- ------------- -------------
Gross profit 218,864 185,843 158,591
OPERATING EXPENSES 169,206 149,745 128,919
DEPRECIATION AND AMORTIZATION 5,904 4,261 4,677
------------- ------------- -------------
Income from operations 43,754 31,837 24,995
OTHER INCOME (EXPENSE)
Recovery of preferred stock investment -- -- 5,000
Interest (1,200) (365) (1,956)
Other (1,485) (1,628) (408)
------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 41,069 29,844 27,631
INCOME TAXES 15,812 12,518 11,827
------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS 25,257 17,326 15,804
DISCONTINUED OPERATIONS
Loss on disposal, net -- (348) --
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- -- 3,414
------------- ------------- -------------
NET INCOME $ 25,257 $ 16,978 $ 19,218
============= ============= =============
EARNINGS (LOSS) PER COMMON SHARE
Continuing operations $ 1.00 $ 0.71 $ 0.69
Discontinued operations -- (0.01) --
Cumulative effect of change in
accounting for income taxes -- -- 0.15
------------- ------------- -------------
$ 1.00 $ 0.70 $ 0.84
============= ============= =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 25,344 24,357 22,782
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
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26
NORRELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended October 27, 1996, October 29, 1995 and October 30, 1994
(In thousands, except share and per share amounts)
Additional Receivable
Common Stock Treasury Paid-In From Officers Retained
Shares Amount Stock Capital and Employees Earnings
---------- ---------- ---------- ---------- ------------- ----------
BALANCE at October 31, 1993 11,584 $ 115 $ -- $ 19,360 $ (4,163) $ 26,814
Adjustment to reflect two-for-one
stock split in 1996 11,584 115 -- -- -- (115)
Adjustment to reflect pooling of
interests in 1996 1,000 10 -- (6) -- 1,470
---------- ---------- ---------- ---------- ---------- ----------
BALANCE at October 31, 1993, restated 24,168 240 -- 19,354 (4,163) 28,169
Stock options exercised 446 5 128 1,422 -- --
Common stock issued 4,850 49 33 30,913 -- --
Dividends on common stock
($0.03 per share) -- -- -- -- -- (685)
Issuance of options for discounted
stock option plan -- -- -- 586 -- --
Purchase and retirement of common
stock (5,608) (55) -- (9,240) (21,948)
Purchase of treasury stock -- -- (378) -- -- --
Decrease in receivable from major
shareholder -- -- -- -- 4,163 --
Increase in receivable from employees -- -- -- -- (545) --
Net income -- -- -- -- -- 19,218
---------- ---------- ---------- ---------- ---------- ----------
BALANCE at October 30, 1994 23,856 239 (217) 43,035 (545) 24,754
Stock options exercised 560 5 299 1,987 (96) --
Common stock issued 12 -- 28 78 (14) --
Dividends on common stock
($0.12 per share) -- -- -- -- -- (2,639)
Issuance of options for discounted
stock option plan -- -- -- 703 -- --
Purchase and retirement of common
stock (1,162) (12) -- (4,421) -- (6,899)
Purchase of treasury stock (52) -- (586) -- -- --
Decrease in receivable from employees -- -- -- -- 257 --
Net income -- -- -- -- -- 16,978
---------- ---------- ---------- ---------- ---------- ----------
BALANCE at October 29, 1995 23,214 232 (476) 41,382 (398) 32,194
Stock options exercised 337 4 436 1,213 -- --
Common stock issued 41 -- -- 563 (40) --
Dividends on common stock
($0.14 per share) -- -- -- -- -- (3,065)
Issuance of options for discounted
stock option plan -- -- -- 938 -- --
Purchase of treasury stock (26) -- (535) -- -- --
Decrease in receivable from employees -- -- -- -- 327 --
Net income -- -- -- -- -- 25,257
---------- ---------- ---------- ---------- ---------- ----------
BALANCE at October 27, 1996 23,566 $ 236 $ (575) $ 44,096 $ (111) $ 54,386
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
-26-
27
NORRELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended October 27, 1996, October 29, 1995 and October 30, 1994
(In thousands)
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 25,257 $ 16,978 $ 19,218
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization - operating expenses 5,904 4,261 4,677
Depreciation and amortization - cost of services/other expenses 409 235 661
Cumulative effect of change in accounting principle -- -- (3,414)
Recovery of investment -- -- (5,000)
Loss on disposal of discontinued operations -- 348 --
Gain on retirement of common stock (2,177) (4,499) --
Loss on disposal of property and equipment 218 326 242
Provision for doubtful accounts 2,315 1,699 2,509
Deferred income taxes 173 963 783
Deferred gain on sale of building 12,967 -- --
Long-term accrued expenses 2,304 3,222 7,370
Other 106 270 (358)
Change in current assets and current liabilities
Accounts receivable, trade (20,235) (28,899) (6,258)
Prepaid expenses 245 181 (846)
Deferred revenue 1,202 (251) 1,680
Accounts payable 3,025 6,180 (926)
Accrued expenses 7,759 8,320 (1,706)
Other (1,491) (1,987) (331)
----------- ----------- -----------
Net cash provided by operating activities 37,981 7,347 18,301
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of acquisitions, net of cash acquired (32,963) (2,861) --
Proceeds from sale of discontinued operations -- -- 16,500
Increase in MIS development costs, net (14,741) (4,687) --
Additions to property and equipment (7,439) (5,999) (2,132)
Disposal of property and equipment 559 663 --
(Increase) decrease in goodwill and other intangibles, net (270) 1,599 5,596
Recovery of preferred stock investment -- -- 5,000
Reduction in receivable from major shareholder -- -- 4,163
Cash investments in and advances to joint ventures (1,849) (908) (332)
Cash distributions from joint venture 325 780 850
Increase in other investments (522) (155) (1,128)
Decrease (increase) in other noncurrent assets -- 233 (413)
----------- ----------- -----------
Net cash (used in) provided by investing activities (56,900) (11,335) 28,104
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt 27,893 2,598 629
Repayments of long-term debt (4,109) (381) (42,879)
Purchase of common stock -- -- (30,966)
Proceeds from the issuance of common stock 564 58 30,394
Dividends paid on common stock (3,065) (2,639) (685)
Stock options exercised 1,646 2,186 1,175
Acquisition of treasury stock (536) (552) (217)
Reduction in receivables from officers and employees 287 257 --
----------- ----------- -----------
Net cash provided by (used in) financing activities 22,680 1,527 (42,549)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS 3,761 (2,461) 3,856
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 5,115 7,576 3,720
----------- ----------- -----------
CASH AND SHORT-TERM INVESTMENTS AT END
OF PERIOD $ 8,876 $ 5,115 $ 7,576
=========== =========== ===========
SUPPLEMENTARY CASH FLOW DISCLOSURES
Cash payments during the period for
Interest $ 1,183 $ 364 $ 2,811
Income taxes, net of refunds 17,303 12,907 4,212
Noncash investing and financing activity
Issuance of options to benefit plan 98 703 586
Exercise of benefit plan stock options (630) (385) (323)
The accompanying notes are an integral part of these consolidated financial
statements.
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28
NORRELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 27, 1996, OCTOBER 29, 1995 AND OCTOBER 30, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Basis of Presentation
The consolidated financial statements include the accounts of Norrell
Corporation and its subsidiaries (the "Company"). All material intercompany
accounts and transactions have been eliminated.
Business and Revenue Recognition
The Company operates in one industry segment, providing staffing and
outsourcing services in the United States and parts of Canada.
Revenue is generally recognized upon the performance of services. Certain
services are performed under long-term contracts. Revenue from these contracts
is recognized using the percentage-of-completion method based on the percentage
that incurred costs to date bear to total estimated costs after giving effect to
the most recent estimates of total cost. Losses expected to be incurred on jobs
in process would be charged to income as soon as such losses are known. Amounts
received from customers in excess of revenues recognized to date are classified
as deferred revenues and are included in current liabilities.
A portion of the Company's revenue is attributable to franchise
operations. Employees and customers of franchise operations are employees and
customers of the Company. The Company includes such revenues and related direct
costs in its revenue and cost of services, respectively. The net distribution
paid to the franchisee is based on a percentage of the gross profit generated
and is included in operating expenses.
Significant Customer Information
For fiscal year 1996, two customers accounted for 27.6% of revenues.
For fiscal years 1995 and 1994, one customer accounted for revenues of 16.2% and
20.0%, respectively.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all
liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents.
Intangible Assets
Intangible assets consist primarily of goodwill associated with acquired
businesses, which is amortized on a straight-line basis over 40 years.
Subsequent to an acquisition, the Company regularly evaluates whether events and
circumstances have occurred that indicate the carrying amount of goodwill may
warrant revision or may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Company uses an estimate of the
future undiscounted net cash flows of the related business over the remaining
life of the goodwill in measuring whether the goodwill is recoverable. Other
intangible assets are amortized over two to seven years. Amortization expense
for fiscal years 1996, 1995 and 1994 was $1,015,000, $641,000, and $1,486,000,
respectively. Accumulated amortization of intangibles was $7,853,000 and $
6,944,000 at October 27, 1996 and October 29, 1995, respectively.
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29
NORRELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Management Information Systems ("MIS") Development Costs
During fiscal 1996 and 1995, the Company incurred costs associated with
the purchase and development of management information systems. These costs are
capitalized and amortized on a straight-line basis over five years. MIS
development cost amortization for 1996 and 1995 was $719,000 and $70,000,
respectively.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of no par preferred
stock. The Board of Directors is authorized to fix relative rights, preferences,
and limitations of any unissued series of preferred stock. No preferred stock
was issued or outstanding at October 27, 1996 or October 29, 1995.
Other Income (Expense)
Other income (expense) consists of the following:
1996 1995 1994
------- ------- -------
(In thousands)
Interest income $ 481 $ 428 $ 497
Gain on settlement of interest
rate swap agreements -- -- 760
Dividend income -- -- 444
Equity in loss of joint ventures (803) (656) (201)
Amortization of deferred loan costs and
bank fees (885) (762) (1,142)
Loss on disposal of fixed assets (218) (335) (266)
Other, net (60) (303) (500)
------- ------- -------
Total $(1,485) $(1,628) $ (408)
------- ------- -------
Earnings (Loss) Per Share
Earnings (loss) per share is computed by dividing income (loss)
attributable to common shareholders by the weighted average number of shares of
common stock outstanding during each period adjusted to reflect the assumed
exercise of dilutive stock options under the treasury stock method.
Stock Split
On June 4, 1996, the Board of Directors authorized a two-for-one split of
common stock for shareholders of record on June 24, 1996. The stated value
remained at $.01 per share. All references in the accompanying financial
statements to the number of common shares, except shares authorized, and to
per-share amounts have been restated to reflect the stock split. The stated
value of the additional shares of common stock issued in connection with the
stock split has been credited to common stock with the like amount charged to
retained earnings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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30
NORRELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Reclassifications
Certain amounts have been reclassified in the 1995 and 1994 financial
statements to conform to the 1996 presentation.
Fiscal Year
Prior to 1996, the Company's fiscal year was a 52 or 53 week period which
ended on the Sunday closest to October 31. In 1996, the fiscal year end was
changed to the last Sunday in October. Each of the fiscal years ended October
27, 1996, October 29, 1995 and October 30, 1994 included 52 weeks.
2. ACQUISITIONS
Effective July 15, 1996, the Company acquired all of the assets and
certain of the liabilities of Analytical Technologies, Inc. and ANATEC Canada,
Inc. (collectively, "ANATEC"). ANATEC is a software services and technology
organization serving primarily Fortune 500 companies in the Midwestern United
States. Services include consulting, project management, software development,
training and software systems integration services. The $25,905,000 excess of
the acquisition cost over the fair value of ANATEC's tangible assets has been
allocated to goodwill and is being amortized over 40 years. In addition to the
$27,100,000 paid at closing, ANATEC has the right to receive a contingent
payment based on its achieving a specified level of gross profit for the
12-month period ending December 31, 1996. At June 30, 1996, ANATEC had net
assets of $1,469,000.
On August 5, 1996, the Company acquired all of the issued and outstanding
stock of American Technical Resources Inc. ("ATR") in exchange for 1,000,000
shares of company common stock in a transaction accounted for as a pooling of
interests. ATR is an information technology staffing company that specializes in
providing computer professionals for short and long term assignments including
contract programming, contract recruiting and payrolling services. At July 31,
1996, ATR had net assets of $3,224,000. The Company's financial statements have
been restated to include the results of ATR for all periods presented.
3. DISCONTINUED OPERATIONS
On October 29, 1993, the Company sold substantially all assets of its
comprehensive home care and nursing resource management operations to Hooper
Holmes, Inc., a New York corporation. In the third quarter of 1995, a loss on
disposal of $348,000, net of tax, was provided for legal expenses and expenses
associated with the wind down of these operations.
4. PROPERTY AND EQUIPMENT, INVESTMENTS AND NON-OPERATING ASSETS
Property and Equipment
The major classes of property and equipment are as follows:
October 27, October 29,
1996 1995
---- ----
(In thousands)
Leasehold improvements $ 5,542 $ 4,823
Furniture, fixtures and equipment 31,508 24,141
------- -------
37,050 28,964
Less accumulated depreciation 23,537 19,451
------- -------
Net property and equipment $13,513 $ 9,513
======= =======
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated asset lives of three to twelve years for
leasehold improvements and three to ten years for furniture, fixtures and
equipment.
Depreciation expense for fiscal years 1996, 1995 and 1994 was $4,273,000,
$3,413,000 and $2,893,000, respectively.
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31
NORRELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Investments and Other Assets
Investments consist principally of securities held for employee benefit
plans and are carried at market.
On October 29, 1995, the Company sold for $4,250,000 all land and
buildings which had been held as rental property. Proceeds from the sale
included a $3,425,000 note receivable. The note bears interest at 7% and is due
in October 1998. The sale resulted in a pretax loss of $307,000.
In October 1994, the Company acquired a 50% equity interest in a joint
venture formed for the purpose of providing administrative outsourcing services
for health care facilities. During fiscal years 1996, 1995 and 1994, the Company
contributed $1,059,000, $908,000 and $167,000, respectively, for general
operating purposes in accordance with the joint venture agreement.
In 1994, the Company recovered $5,000,000 of principal and $444,000 of
dividends from an investment in preferred stock which had been written off in
1991.
5. ACCRUED EXPENSES
Current and long-term accrued expenses are summarized as follows:
October 27, October 29,
1996 1995
---- ----
(In thousands)
Current:
Accrued wages, salaries and related taxes $48,905 $41,522
Workers' compensation reserve, current portion 6,737 7,008
Other 11,894 11,133
------- -------
Total $67,536 $59,663
======= =======
Long-term:
Workers' compensation reserve, less current portion $16,146 $16,796
Other 11,468 7,234
------- -------
Total $27,614 $24,030
======= =======
The Company self-insures up to specified limits for certain risks related
to workers' compensation liability. The estimated costs of existing and future
claims under the insurance program are accrued as incidents occur based on
historical loss development trends which may be subsequently revised based on
developments relating to such claims.
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32
NORRELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. NOTES PAYABLE AND LONG-TERM DEBT
The Company's debt is summarized as follows:
October 27, October 29,
1996 1995
---- ----
(In Thousands)
Revolving credit facility, due September 30, 1999,
with varying interest rates, interest payable monthly $23,000 $ 2,194
Bank lines of credit due in varying installments before
October 26, 1997, with varying interest rates,
interest payable monthly 9,555 1,775
Other notes payable in various
installments through 2000 550 659
------- -------
Total 33,105 4,628
Less current maturities 9,789 2,571
------- -------
Total long-term debt $23,316 $ 2,057
======= =======
At October 27, 1996, the Company had a $95,000,000 revolving credit
facility expiring September 30, 1999 with a group of commercial banks.
Borrowings are unsecured and bear interest at LIBOR, plus an applicable margin.
The revolving credit facility contains negative and affirmative covenants
which (a) limit additional indebtedness, liens, investments, payment of
dividends and disposition of assets and (b) require maintenance of certain
financial ratios. In addition, four commercial banks make available unsecured
lines of credit that total $40,000,000. Maturities and interest rates on
borrowings under these lines are negotiated at the time such borrowings occur.
The Company's policy is to classify borrowings under the revolving credit
facility as long-term debt since the Company has the ability under the credit
agreement, and the intent, to maintain the obligation for longer than one year.
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33
NORRELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following is a summary of data concerning total debt (Dollars in thousands):
Revolving Credit Facility Lines of Credit
------------------------------------ ---------------------------------
1996 1995 1996 1995
---- ---- ---- ----
Outstanding borrowings at end of period $23,000 $2,194 $9,555 $1,775
Outstanding month-end balances:
Maximum 33,448 3,073 11,470 4,450
Average 30,835 2,020 5,274 670
Weighted average interest rate:
At end of period 5.63 % 8.75 % 5.57 % 6.22 %
For the period 5.95 % 9.41 % 5.65 % 6.15 %
Future maturities of long-term debt as of October 27, 1996 are as follows:
Year Amount
---- ------
(In thousands)
Fiscal 1998 $ 182
Fiscal 1999 23,134
-------
Total $23,316
=======
7. DEFERRED REVENUE AND GAIN
On December 11, 1995, the Company's headquarters building was sold by the
joint venture which owned it. The Company had a 50% interest in this joint
venture which was formed in 1986 to construct, finance, own and operate a
300,000-square-foot office building in Atlanta, Georgia. The cost of the
building was approximately $26,000,000. Each partner contributed $3,000,000 (the
other partner also contributed the land for the project), and the balance was
financed with a 9.75% nonrecourse 20-year mortgage loan. The investment was
accounted for by the equity method. Because of cash distributions, the Company
had a negative investment balance of $1,584,000 at October 29, 1995. The
Company's share of the pretax gain from the sale was $14,251,000. Concurrent
with the sale, the Company extended its lease for office space in the building
for an additional seven years. The gain has been deferred and is being amortized
on a straight-line basis through July 2005 since the landlord may terminate the
lease as of this date, and is recorded as a reduction in rent expense. At
October 27, 1996, the deferred gain was $12,967,000 of which $11,471,000 was
classified as long-term and $1,496,000 was classified as a current liability in
the accompanying balance sheets.
Included in deferred revenue in the accompanying balance sheets was
$4,121,000 and $6,298,000 at October 27, 1996 and October 29, 1995,
respectively, resulting from redemption of 580,947 shares of the Company's
common stock. On December 1, 1994, the stock was returned by a major customer as
partial consideration for the Company agreeing to renegotiate that customer's
contract for services. The difference between the fair market value of the stock
at the redemption date and the unamortized cost of the prior service contract
(approximately $11,000,000) was deferred and is being amortized into income
through December 1998, the term of the new service contract.
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NORRELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. STOCK OPTION AND PURCHASE PLANS
The Company has a stock incentive plan for the grant of equity-based
incentives in the form of nonqualified stock options, incentive stock options,
shares of restricted stock, unrestricted bonus stock, performance units, phantom
stock, stock appreciation rights and dividend equivalent rights. There are
3,111,113 shares of common stock reserved for issuance under the plan. Incentive
stock options are granted at not less than fair value and expire five to ten
years after the date of grant. Nonqualified options are granted at prices
determined by the Board of Directors and expire five to ten years after the date
of grant. The exercise period for all options is fixed by the Board. No shares
of restricted stock, unrestricted bonus stock, performance units, phantom stock,
stock appreciation rights or dividend equivalent rights have been issued.
Nonqualified stock options to purchase common stock have been granted to certain
directors.
A summary of stock option activity follows:
Shares
Under Price Range
Options Per Share
------- -----------
Outstanding, at October 31, 1993 2,133,690 $ 3.05 - $ 5.25
Granted 779,362 7.00 - 8.25
Exercised (490,716) 3.05 - 5.25
Cancelled/Expired (171,426) 3.05 - 5.25
---------
Outstanding, at October 30, 1994 2,250,910 3.05 - 8.25
Granted 1,379,598 9.25 - 16.32
Exercised (525,586) 3.05 - 9.25
Cancelled/Expired (107,172) 3.05 - 11.25
---------
Outstanding, at October 29, 1995 2,997,750 3.05 - 16.32
Granted 469,674 14.56 - 32.00
Exercised (298,733) 3.05 - 12.75
Cancelled/Expired (151,331) 3.05 - 14.94
---------
Outstanding, at October 27, 1996 3,017,360 $ 3.05 - $32.00
=========
At October 27, 1996, options to purchase 1,517,514 shares were exercisable and
93,753 shares were reserved and available for future options.
On January 1, 1996, the Company instituted an employee stock purchase plan for
all employees. Employees may contribute up to 15% of their compensation to
purchase the Company's common stock at 85% of the lower of the fair market value
on the first or last business day of quarterly purchase periods. The Company has
reserved 600,000 shares of common stock for the plan. At October 27, 1996,
570,366 shares were available for future issuance.
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NORRELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. BENEFIT PLANS
The Company has a tax qualified 401(k) profit sharing plan which covers
substantially all nonhighly compensated employees, as defined under the Internal
Revenue Code, other than temporary employees. The plan provides for a matching
company contribution of an amount up to 1% of employee compensation. In
addition, the Company may make discretionary contributions to the plan. Company
contributions are 100% vested after two years of service (three years in the
case of employees hired on or after January 1, 1994).
The Company has an unfunded, nonqualified plan for those highly
compensated employees not covered by the qualified plan. Under this plan, the
Company may match participant contributions up to a percentage of participant
compensation determined by the Company. In addition, the Company may make
discretionary contributions to the plan. Participants are immediately 100%
vested in their contributions and are 100% vested in the Company's contribution
after three years of service. Participant contributions may be used to purchase
rights to buy company stock or may be invested in funds established by the plan
administrator. Company contributions are used to purchase rights to buy company
stock. Rights are purchased for the fair value of the underlying stock at the
time of grant, less the exercise price of $0.15 per share. Rights may not be
exercised until the date the participant terminates employment. At October 27,
1996, 383,529 rights ranging in price from $3.05 to $31.25 per share were
outstanding and 91,056 were available for grant.
Effective in June 1994, the Company instituted a management equity
program under which members of senior management who are designated as
participants in the plan may purchase, at fair market value, shares of common
stock, and for those participants who meet certain minimum stock ownership
thresholds, stock options will be granted as set forth in the plan. There are
400,000 shares of common stock reserved for issuance under this plan. At October
27, 1996, 106,932 shares had been issued. The remaining reserve totaled 293,068
shares. Any stock options granted under this plan will be issued under the
Company's stock incentive plan. At October 27, 1996, the balance of notes
receivable from plan participants for stock purchases was $111,000.
Certain highly compensated employees may also qualify for an unfunded,
nonqualified salary continuation plan. The plan provides for a benefit upon
reaching age 62 and ending at age 76 equal to 20% of average annual compensation
as defined in the plan. Vesting occurs over ten years (starts in year six at 20%
and reaches 100% in year ten).
Total expense related to the above described benefit plans for the years
ended 1996, 1995 and 1994 was $3,164,000, $2,408,000 and $1,646,000,
respectively.
10. INCOME TAXES
Effective November 1, 1993, the Company changed its method of accounting
for income taxes from the deferred method to the liability method as required by
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes". As permitted under the new rules, prior years' financial
statements have not been restated. The cumulative effect of adopting SFAS 109 as
of November 1, 1993 was to increase net income by $3,414,000.
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NORRELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The provision (benefit) for federal, foreign and state income taxes
consists of the following:
1996 1995 1994
-------- -------- --------
(In thousands)
Current:
Federal $ 14,197 $ 9,749 $ 7,509
State 1,576 1,758 2,595
Foreign (83) 68 (73)
-------- -------- --------
15,690 11,575 10,031
-------- -------- --------
Deferred:
Federal (1,415) 1,009 (1,317)
State 1,537 (318) (301)
-------- -------- --------
122 691 (1,618)
-------- -------- --------
Total $ 15,812 $ 12,266 $ 8,413
======== ======== ========
Income tax provision
(benefit)
Continuing operations $ 15,812 $ 12,518 $ 11,827
Discontinued operations -- (252) --
Cumulative effect of
change in accounting
principle -- -- (3,414)
-------- -------- --------
Total $ 15,812 $ 12,266 $ 8,413
======== ======== ========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets are as follows:
October 27, October 29,
1996 1995
-------- --------
(In thousands)
Deferred tax liabilities:
MIS development costs $ (4,099) $ (1,794)
Other (4,680) (2,159)
-------- --------
(8,779) (3,953)
-------- --------
Deferred tax assets:
Workers' compensation 8,000 10,716
Profit sharing 4,767 3,898
Bad debts 2,510 1,467
Gains on sale of interest in headquarters building 5,094 --
Other 398 91
-------- --------
20,769 16,172
-------- --------
Net deferred tax assets $ 11,990 $ 12,219
======== ========
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NORRELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Subsequent to the preparation of the financial statements as of October
31, 1993, the Company, based on the advice of tax counsel, determined that the
1993 tax loss on disposal of a subsidiary should be reported as an ordinary loss
in the 1993 tax return which was filed in July 1994. This resulted in claims for
federal and state refunds of approximately $6,900,000, all of which had been
collected and credited to goodwill as of October 29, 1995.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. statutory tax rate to income tax expense is:
Fiscal Years
------------------------------------
1996 1995 1994
------ ------ ------
Income taxes at statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 2.4 6.0 6.4
Amortization of goodwill 0.4 0.4 1.0
Other, net 0.7 0.5 0.4
------ ------ ------
38.5% 41.9% 42.8%
====== ====== ======
11. COMMITMENTS AND CONTINGENCIES
At October 27, 1996, the Company was committed under operating leases for
office facilities and certain equipment. Aggregate minimum rental requirements
under these leases are as follows:
Year Amount
---- ------
(In thousands)
1997 $ 9,858
1998 8,511
1999 6,881
2000 5,796
2001 4,790
Thereafter 20,115
-------
Total $55,951
=======
Rent expense was $8,409,000, $8,441,000 and $7,863,000 for fiscal years
1996, 1995 and 1994, respectively.
Effective April 1, 1993, the Company entered into a ten year contract for
the purchase of information systems operations services at an annual base cost
ranging from $3,000,000 to $5,000,000.
The Company is, from time to time, a party to ordinary, routine
litigation incidental to the Company's business. In the opinion of management,
the ultimate resolution of all pending legal proceedings will not have an
adverse effect on the Company's business or financial condition.
-37-
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NORRELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. SELECTED QUARTERLY INFORMATION (UNAUDITED)
Fiscal 1996 Quarter Ended
-------------------------
(In thousands, except per share amounts)
January 28 April 28 July 28 October 27
----------- ----------- ----------- -----------
Revenues $ 229,251 $ 250,334 $ 255,275 $ 279,017
Gross profit 49,434 53,323 53,977 62,130
Net income $ 5,114 $ 6,249 $ 6,619 $ 7,275
=========== =========== =========== ===========
Earnings per common share $ 0.21 $ 0.25 $ 0.26 $ 0.28
=========== =========== =========== ===========
Weighted average number of shares outstanding 24,774 24,929 25,485 25,820
=========== =========== =========== ===========
Fiscal 1995 Quarter Ended
-------------------------
(In thousands, except per share amounts)
January 29 April 30 July 30 October 29
----------- ----------- ----------- -----------
Revenues $ 192,650 $ 203,987 $ 209,785 $ 235,938
Gross profit 42,660 44,167 46,380 52,636
Income from continuing operations before 3,989 4,034 4,464 4,839
discontinued operations
Discontinued operations -- (348) -- --
----------- ----------- ----------- -----------
Net income $ 3,989 $ 4,034 $ 4,116 $ 4,839
=========== =========== =========== ===========
Earnings per common share:
Continuing operations $ 0.16 $ 0.17 $ 0.18 $ 0.20
Discontinued operations -- -- (0.01) --
----------- ----------- ----------- -----------
Net income $ 0.16 $ 0.17 $ 0.17 $ 0.20
=========== =========== =========== ===========
Weighted average number of shares outstanding 24,400 24,236 24,288 24,564
=========== =========== =========== ===========
-38-
39
NORRELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. SUBSEQUENT EVENT
On December 8, 1996, the Company executed an agreement to purchase all of the
outstanding common and preferred stock and all vested and unvested stock rights
of Comtex Information Systems, Inc. ("Comtex") for $67 million of cash plus
options to acquire approximately 141,000 shares of Norrell Corporation common
stock at an average exercise price of $4.43 per share. The transaction, which
will be accounted for under the purchase method of accounting, is scheduled to
close on or about January 2, 1997. Comtex is a New York City-based provider of
information systems services, including systems planning and development,
organizational consulting related to business transformation and staff
augmentation support. Comtex has locations in New York City, White Plains, New
York, and Miami, Florida. At October 31, 1996, Comtex had net assets of
$10,921,000.
-39-
40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Shareholders of Norrell Corporation:
We have audited the accompanying consolidated balance sheets of Norrell
Corporation (a Georgia corporation) and subsidiaries as of October 27, 1996 and
October 29, 1995 and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended October 27, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Norrell Corporation and
subsidiaries as of October 27, 1996 and October 29, 1995 and the results of
their operations and their cash flows for each three years in the period ended
October 27, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
December 10, 1996
-40-
41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
We have audited in accordance with generally accepted auditing
standards, the financial statements of Norrell Corporation included in the Form
10-K and have been issued our report thereon dated December 10, 1996. Our audit
was made for the purpose of forming an opinion on the financial statements taken
as a whole. The schedule listed in the preceding index is presented for the
purpose of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
December 10, 1996
-41-
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Information regarding Executive Officers of the Company is contained in
Item 4A of Part I. Information as to Directors required by this item is
incorporated by reference from the Company's definitive Proxy Statement, under
the caption "Proposal 1. Election of Directors", which Proxy Statement will be
mailed to stockholders in connection with the Company's annual meeting of
stockholders, which is scheduled to be held March 4, 1997 and will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A.
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" which Proxy Statement will be mailed to
stockholders in connection with the Company's annual meeting of stockholders,
which is scheduled to be held March 4, 1997 and will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A.
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 "Voting Rights and Principal
Shareholders", which Proxy Statement will be mailed to stockholders in
connection with the Company's annual meeting of stockholders, which is scheduled
to be held March 4, 1997 and will be filed with the Securities and Exchange
Commission pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information as to Certain Relationships and Related Transactions
required by this item is incorporated by reference from the Company's definitive
Proxy Statement, under the caption "Certain Transactions and Relationships",
which Proxy Statement will be mailed to stockholders in connection with the
Company's annual meeting of stockholders, which is scheduled to be held March 4,
1997 and will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
1. FINANCIAL STATEMENTS.
The following consolidated financial statements of the Company and
it subsidiaries are included in Item 8 of this report:
Consolidated Balance Sheets as of October 27, 1996 and October 29, 1995. p. 24
Consolidated Statements of Income for fiscal years 1996, 1995, and 1994. p. 25
Consolidated Statements of Shareholders' Equity for fiscal years 1996, 1995, and 1994. p. 26
Consolidated Statements of Cash Flows for fiscal years 1996, 1995, and 1994. p. 27
Notes to Consolidated Financial Statements. p. 28
Reports of Independent Public Accountants. p. 40, 41
Selected quarterly financial data for the fiscal years ended October 27, 1996 and
October 29, 1995 is set forth in Note 12 - Selected Quarterly Information (Unaudited)
included in Item 8 of this report. p. 38
2. FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule of the Company is
included herein:
II. Valuation and Qualifying Accounts p. 53
Schedules not listed above have been omitted because they are not
applicable, or the required information is included in the
financial statements or notes thereto.
3. EXHIBITS.
The Exhibits filed as a part of this Form 10-K are listed in Item
14(c) of this report, which listing is incorporated herein by
reference.
(B) REPORTS ON FORM 8-K.
During the last quarter of the period covered by this report on Form
10-K, the Company filed the following Current Reports on Form 8-K:
(1) Current Report on Form 8-K filed August 6, 1996 providing
information under Items 2 and 7 relating to the acquisition of
Analytical Technologies, Inc. and ANATEC Canada, Inc.
(2) Amendment Number One on Form 8-K/A filed October 2, 1996 to
Current Report on Form 8-K providing information under Items 2 and
7 relating to the acquisition of Analytical Technologies, Inc. and
ANATEC Canada, Inc., and including the following financial
statements:
(a) Financial statements of Analytical Technologies, Inc. as of
December 31, 1995 and 1994, (audited).
(b) Financial statements of ANATEC CANADA, Inc. as of December
31, 1995, (audited).
(c) Balance sheet of Analytical Technologies, Inc. as of June,
30, 1996, (unaudited).
-43-
44
(d) Statements of operations and statements of cash flows of
Analytical Technologies, Inc. as of June 30, 1996 and June 30,
1995, (unaudited).
(e) Balance sheet of ANATEC CANADA, Inc. as of June 30, 1996,
(unaudited).
(f) Statements of operations and statements of cash flows of ANATEC
CANADA, Inc. as of June 30, 1996 and June 30, 1995, (unaudited).
(g) Norrell Corporation pro forma condensed consolidated statement of
income for the year ended October 29, 1995, (unaudited).
(h) Norrell Corporation pro forma condensed consolidated statement of
income for the nine month period ended July 28, 1996, (unaudited).
(3) Current Report on Form 8-K filed August 20, 1996 providing information
under Items 2 and 7 relating to the acquisition of American Technical
Resources, Inc.
(4) Amendment Number One on Form 8-K/A filed October 15, 1996 to Current
Report on Form 8-K, providing information under Items 2 and 7 relating to
the acquisition of American Technical Resources, Inc. and including the
following financial statements:
(a) Financial statements of American Technical Resources, Inc. as of
July 30, 1996, (unaudited) and October 31, 1995, (audited).
(b) Norrell Corporation pro forma combined balance sheet as of July
28, 1996, (unaudited).
(c) Norrell Corporation pro forma combined statement of income for the
nine month period ended July 28, 1996, (unaudited).
(d) Norrell Corporation pro forma combined statements of income for
the years ended October 29, 1995, October 30, 1994 and October 31,
1993, (unaudited).
-44-
45
3. EXHIBITS.
EXHIBIT NO. DESCRIPTION
--------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation of the
Company, incorporated by reference to Exhibit 3.1 of the
Company's Amendment No. 1 to Registration Statement on Form
S-1, as filed with the Securities and Exchange Commission
on June 22, 1994.
3.2 Amended and Restated Bylaws of the Company, incorporated by
reference to Exhibit 3.2 of the Company's Registration
Statement on Form S-1, as filed with the Securities and
Exchange Commission on June 10, 1994.
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and the Amended and
Restated Bylaws of the Company defining the rights of the
holders of securities of the Company.
4.2 Form of Specimen Stock Certificate, incorporated by
reference to Exhibit 4.2 to Amendment No. 3 to the
Company's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on July 21, 1994.
10.1 Stock Purchase Agreement executed in 1981 by and among Guy
W. Millner, Robert J. Gibson, Norrell Corporation and the
several purchasers named therein and related stock purchase
option agreement, incorporated by reference to Exhibit 10.1
of the Company's Registration Statement on Form S-1, as
filed with the Securities and Exchange Commission on June
10, 1994.
10.2 Norrell Corporation Employee Stock Purchase Plan,
incorporated by reference to Exhibit 10.2 to the Company
Form 10-K for the year ended October 29, 1995.*
10.3 Agreement and Plan of Reorganization among American
Technical Resources, Inc., Charles F. Phillips, Ralph L.
Lary, III, Gary L. Kilgore, William C. Holman, George G.
Lytle, Norrell Corporation and N. Acquisition Corp., dated
August 5, 1996, incorporated by reference to Exhibit 1 of
the Company's Current Report on Form 8-K filed on August
20, 1996.
10.4 Asset Purchase Agreement among Analytical Technologies,
Inc., Anatec Canada, Inc., Albert G. Schornberg, James A.
Barbour, Timothy E. Tindle, David H. Cleland and Norrell
Corporation, Norrell Technical Services, Inc., and Norrell
Services, Ltd., dated July 22, 1996, incorporated by
reference to Exhibit 1 of the Company's Current Report on
Form 8-K filed on August 6, 1996.
10.5 Agreement of Acquisition dated October 29, 1993 by and
among Hooper Holmes, Inc., Norrell Health Care, Inc. and
Norrell Corporation, incorporated by reference to Exhibit
10.5 of the Company's Registration Statement on Form S-1,
as filed with the Securities and Exchange Commission on
June 10, 1994.
10.6 Shareholders Agreement among Norrell Corporation, Harvard
Teleservicing, LLC and CallTask Incorporated, dated March
22, 1996.
* A management contract or compensatory plan, contract or
arrangement
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46
EXHIBIT NO. DESCRIPTION
--------------------------------------------------------------------
10.7 Agreement for Systems Operations Services dated December
17, 1992 by and between Norrell Corporation and Integrated
Systems Solutions Corporation, incorporated by reference to
Exhibit 10.7 of the Company's Registration Statement on
Form S-1, as filed with the Securities and Exchange
Commission on June 10, 1994.
10.8 Form of Franchise Agreement used by Dynamic Temporary
Services, Inc. The schedules used in the table of contents
have been omitted. The Company agrees to furnish
supplementally to the Commission upon its request a copy of
any such schedule.
10.9 Form of Franchise Agreement used by Norrell Services, Inc.,
incorporated by reference to Exhibit 10.9 of the Company's
Registration Statement on Form S-1, as filed with the
Securities and Exchange Commission on June 10, 1994.
10.10 Form of Master Vendor Agreement used by Norrell Services,
Inc.
10.11 Form of Agreement between Tascor Incorporated and
franchisees of Norrell Services, Inc., incorporated by
reference to Exhibit 10.11 of the Company's Registration
Statement on Form S-1, as filed with the Securities and
Exchange Commission on June 10, 1994.
10.12 Form of Management Services Agreement used by Tascor
Incorporated.
10.13 Joint Venture Agreement dated as of October 15, 1986
between Habersham Venture, Ltd. and Norrell Corporation,
incorporated by reference to Exhibit 10.13 of the Company's
Registration Statement on Form S-1, as filed with the
Securities and Exchange Commission on June 10, 1994.
10.14 Lease dated October 15, 1986 between Norhab Associates and
Norrell Corporation, as amended by that certain amendment
dated May 3, 1988, that certain amendment No. 2 dated
September 13, 1988, and that certain amendment No. 3 dated
May 1, 1989, incorporated by reference to Exhibit 10.14 of
the Company's Registration Statement on Form S-1, as filed
with the Securities and Exchange Commission on June 10,
1994.
10.15 Amendment to Lease, dated December 11, 1995, amending Lease
Agreement dated October 15, 1986 between Norhab Associates
and Norrell Corporation, incorporated by reference to
Exhibit 10.15 to the Company Form 10-K for the year ended
October 29, 1995.
10.16 First Amendment to Lease, (two), dated December 11, 1995
between Norhab Associates and Norrell Corporation, amending
Lease Agreement dated May 3, 1988, incorporated by
reference to Exhibit 10.16 to the Company Form 10-K for the
year ended October 29, 1995.
10.17 Form of Indemnification Agreement, incorporated by
reference to Exhibit 10.17 of the Company's Registration
Statement on Form S-1, as filed with the Securities and
Exchange Commission on June 10, 1994.
-46-
47
EXHIBIT NO. DESCRIPTION
--------------------------------------------------------------------
10.18 Employment Agreement dated May 24, 1993 between Norrell
Corporation and Larry J. Bryan, incorporated by reference
to Exhibit 10.18 of the Company's Registration Statement on
Form S-1, as filed with the Securities and Exchange
Commission on June 10, 1994.*
10.19 Employment Agreement dated October 15, 1993 between Norrell
Corporation and C. Douglas Miller, incorporated by
reference to Exhibit 10.19 of the Company's Registration
Statement on Form S-1, as filed with the Securities and
Exchange Commission on June 10, 1994.*
10.20 Form of agreement for executive officers relating to
confidentiality and non-competition.*
10.21 Omitted.
10.22 Omitted.
10.23 Omitted.
10.24 Omitted.
10.25 Norrell Corporation Horizon - Vision Supplemental Plan, as
amended and restated on June 8, 1994, incorporated by
reference to Exhibit 10.25 of the Company's Registration
Statement on Form S-1, as filed with the Securities and
Exchange Commission on June 10, 1994.*
10.26 Form of Norrell Corporation Non-Management Director
Restricted Stock Grant Agreement, incorporated by reference
to Exhibit 10.26 of the Company's Registration Statement on
Form S-1, as filed with the Securities and Exchange
Commission on June 10, 1994.*
10.27 Norrell Corporation 1994 Stock Incentive Plan, incorporated
by reference to Exhibit 10.27 of the Company's Registration
Statement on Form S-1, as filed with the Securities and
Exchange Commission on June 10, 1994.*
10.28 Norrell Corporation Management Equity Plan, incorporated by
reference to Exhibit 10.28 of the Company's Amendment No. 1
to Registration Statement on Form S-1, as filed with the
Securities and Exchange Commission on June 22, 1994.*
10.29 The Norrell Corporation 1991 Stock Option Plan,
incorporated by reference to Exhibit 10.29 of the Company's
Registration Statement on Form S-1, as filed with the
Securities and Exchange Commission on June 10, 1994.*
10.30 Preferred Vendor Agreement, executed May 14, 1993 between
Norrell Services, Inc. and United Parcel Service General
Services Company. The Exhibit A of the Agreement has been
omitted. The Company agrees to furnish supplementally to
the Commission upon its request a copy of such Exhibit.
* A management contract or compensatory plan, contract or
arrangement
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48
EXHIBIT NO. DESCRIPTION
--------------------------------------------------------------------
10.31 Management Services Agreement between International
Business Machines and Tascor Incorporated, executed on
December 1, 1994 ("MSA"), incorporated by reference to
Exhibit 10.31 to the Company Form 10-K for the year ended
October 30, 1994. The attachments to the MSA listed on page
11 of the Agreement have been omitted. The Company agrees
to furnish supplementally to the Commission upon its
request a copy of any such attachment.
10.32 Amended and Restated Credit Agreement, dated October 21,
1996, by and among Norrell Corporation as the Company,
certain Commercial Lending Institutions as the Lenders,
Bank of America National Trust and Savings Association, as
the Agent for the Lenders, and SunTrust Bank, Atlanta, as
the co-Agent for the Lenders. The Credit Agreement contains
a list of schedules and exhibits on page (v) of the table
of contents. These schedules and exhibits have been
omitted. The Company agrees to furnish supplementally to
the Commission upon its request a copy of any such
schedules and exhibits.
10.33 First Amendment to Credit Agreement, dated December 26,
1996, amending the Amended and Restated Credit Agreement
dated October 21, 1996 among Norrell Corporation as the
Company, certain Commercial Lending Institutions as the
Lenders, Bank of America National Trust and Savings
Association, as the Agent for the Lenders and SunTrust
Bank, Atlanta, as co-agent for the Lenders. Schedules and
exhibits referenced in the Agreement have been omitted. The
Company agrees to furnish supplementally to the Commission
upon its request a copy of any such schedules and exhibits.
10.34 Agreement of Limited Partnership executed October 6, 1994
by and between HealthTask Corporation, Tascor Incorporated
and Ernst & Young U.S. LLP, incorporated by reference to
Exhibit 10.34 to the Company Form 10-K for the year ended
October 30, 1994.
10.35 Letter agreement between Norrell Corporation and Integrated
Systems Solutions Corporation, executed between the parties
on August 23, 1995 amending the Agreement for Systems
Operation Services dated December 17, 1992 by and between
Norrell Corporation and Integrated Systems Solutions
Corporation, incorporated by reference to Exhibit 10.35 to
the Company Form 10-K for the year ended October 29, 1995.
10.36 Non-Technical Services Agreement between International
Business Machines Corporation and Tascor Incorporated,
entered into between the parties on April 4, 1995 and April
11, 1995, incorporated by reference to Exhibit 10.36 to the
Company Form 10-K for the year ended October 29, 1995. The
attachments and appendices listed on page iii of the
Agreement have been omitted. The Company agrees to furnish
supplementally to the Commission upon its request a copy of
any such attachment or appendix.
10.37 Purchase and Sale Agreement between Norhab Associates, a
joint venture comprised of Norrell Corporation and
Habersham Venture, Ltd. as Seller and Oregon Public
Employees' Retirement Fund, or its nominee, as Buyer, dated
October 25, 1995, incorporated by reference to Exhibit
10.37 to the Company Form 10-K for the year ended October
29, 1995. The exhibits listed on page iii of the Agreement
have been omitted. The Company agrees to furnish
supplementally to the Commission upon its request a copy of
any such exhibit.
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49
EXHIBIT NO. DESCRIPTION
--------------------------------------------------------------------
10.38 First Amendment to Purchase and Sale Agreement between
Norhab Associates, a joint venture comprised of Norrell
Corporation and Habersham Venture, Ltd. as Seller and
Oregon Public Employees' Retirement Fund, or its nominee,
Property Georgia OBJLW One Corporation, an Oregon
Corporation, as Buyers, dated December 4, 1995,
incorporated by reference to Exhibit 10.38 to the Company
Form 10-K for the year ended October 29, 1995.
10.39 Closing Document # 3 Assignment and Assumption of Leases
dated October 25, 1995 between Norhab Associates, a joint
venture, comprised of Norrell Corporation and Habersham
Venture, Ltd. ("Assignor") and Property Georgia OBJLW One
Corporation, an Oregon Corporation ("Assignee"),
incorporated by reference to Exhibit 10.39 to the Company
Form 10-K for the year ended October 29, 1995.
10.40 Stockholders Agreement among Norrell Corporation, The Cross
Country Group, LLC and Norcross, Inc. dated August 15,
1996.
10.41 Norrell Corporation 401(k) Retirement Savings Plan.
10.42 Norrell Corporation Non-Qualified Deferred Compensation
Plan, effective January 1, 1995, incorporated by reference
to Exhibit 10.42 to the Company Form 10-K for the year
ended October 29, 1995. *
11.1 Computation of Primary Earnings Per Share.
11.2 Computation of Fully Diluted Earnings Per Share.
21 Subsidiaries of the Company.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule (for SEC use only).
* A management contract or compensatory plan, contract or
arrangement
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50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORRELL CORPORATION
The Company
By /s/ C. DOUGLAS MILLER
-----------------------------------------------
C. Douglas Miller
Chief Executive Officer and President
Date: January 16, 1997
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 Company
and in the capacities and on the dates indicated.
By: /s/ C. DOUGLAS MILLER
-----------------------------------------------
C. Douglas Miller
Director, Chief Executive Officer and President
(Principal Executive Officer)
Date: January 16, 1997
-----------------------------------------------
By: /s/ C. KENT GARNER
-----------------------------------------------
C. Kent Garner
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: January 16, 1997
-----------------------------------------------
By:
-----------------------------------------------
Guy W. Millner
Chairman of the Board
Date:
-----------------------------------------------
By: /s/ THOMAS A. VADNAIS
-----------------------------------------------
Thomas A. Vadnais
Director, President and Chief
Operating Officer, Tascor
Date: January 16, 1997
-----------------------------------------------
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51
By: /s/ LARRY J. BRYAN
-------------------------------------
Larry J. Bryan
Director and Executive Vice President
Date: January 16, 1997
-------------------------------------
By: /s/ CARL E. SANDERS
-------------------------------------
Carl E. Sanders
Director
Date: January 16, 1997
-------------------------------------
By: /s/ LUCIUS E. BURCH, III
-------------------------------------
Lucius E. Burch, III
Director
Date: January 16, 1997
-------------------------------------
By: /s/ DONALD A. MC MAHON
-------------------------------------
Donald A. McMahon
Director
Date: January 16, 1997
-------------------------------------
By: /s/ NANCY CLARK REYNOLDS
-------------------------------------
Nancy Clark Reynolds
Director
Date: January 16, 1997
-------------------------------------
By: /s/ FRANK A. METZ, JR.
-------------------------------------
Frank A. Metz, Jr.
Director
Date: January 16, 1997
-------------------------------------
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52
By: /s/ KAAREN JOHNSON-STREET
-------------------------------------
Kaaren Johnson-Street
Director
Date: January 16, 1997
-------------------------------------
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53
SCHEDULE II
NORRELL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 30, 1994, OCTOBER 29, 1995 AND OCTOBER 27, 1996
(In thousands) 1994 1995 1996
------- ------- ------
Allowance for doubtful accounts,
balance at beginning of year $ 2,909 $ 4,835 $4,869
Addition charged to cost and expense 2,509 1,699 2,315
Charged to other accounts -- -- 227
Deductions (583) (1,665) --
------- ------- ------
Allowance for doubtful accounts,
balance at end of year $ 4,835 $ 4,869 $7,411
======= ======= ======
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