1
EXHIBIT 13.1
FINANCIAL DATA
2
FINANCIAL REVIEW
Selected Consolidated Financial Data
- --------------------------------------------------------------------------------
Norrell Corporation and Subsidiaries
The following Selected Consolidated Financial Data with respect to the Company's
consolidated statements of income for the years ended November 2, 1997, October
27, 1996, and October 29, 1995, and, with respect to the Company's consolidated
balance sheets as of November 2, 1997, and October 27, 1996, 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 30, 1994, and October 31, 1993,
and, with respect to the Company's consolidated balance sheets as of October 29,
1995, October 30, 1994, and October 31, 1993, 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 Ended Nov. 2, 1997(1) Oct. 27, 1996 Oct. 29, 1995 Oct. 30, 1994 Oct. 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Income Statement Data:
Revenues $ 1,300,039 $ 1,013,877 $ 842,360 $ 701,921 $ 576,748
Cost of services 1,014,048 795,013 656,517 543,330 436,287
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit 285,991 218,864 185,843 158,591 140,461
Operating expenses 209,499 169,206 149,745 128,919 117,196
Depreciation and amortization 10,365 5,904 4,261 4,677 3,596
Non-recurring charges 17,700 -- -- -- --
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 48,427 43,754 31,837 24,995 10,177
- ------------------------------------------------------------------------------------------------------------------------------
Other income (expense)
Recovery of preferred
stock investment -- -- -- 5,000 --
Interest expense (6,989) (1,200) (365) (1,956) (3,797)
Other (1,986) (1,485) (1,628) (408) (398)
- ------------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (8,975) (2,685) (1,993) 2,636 (4,195)
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 39,452 41,069 29,844 27,631 5,982
Income taxes 14,994 15,812 12,518 11,827 2,699
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 24,458 25,257 17,326 15,804 3,283
Discontinued operations:
Loss from operations, net -- -- -- -- (2,909)
(Loss) gain on disposal, net -- -- (348) -- 5,813
Extraordinary item -- -- -- -- (499)
Cumulative effect of change in
accounting principle -- -- -- 3,414 --
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 24,458 $ 25,257 $ 16,978 $ 19,218 $ 5,688
- ------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Continuing operations $ 0.91 $ 1.00 $ 0.71 $ 0.69 $ 0.13
Discontinued operations -- -- (0.01) -- 0.12
Extraordinary item -- -- -- -- (0.02)
Cumulative effect of change in
accounting principle -- -- -- 0.15 --
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.91 $ 1.00 $ 0.70 $ 0.84 $ 0.23
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares 26,747 25,344 24,357 22,782 24,872
Consolidated Balance Sheet Data:
Current assets $ 237,879 $ 167,388 $ 138,495 $ 111,735 $ 120,612
Working capital 113,314 64,590 55,492 46,952 30,556
Total assets 438,844 263,231 182,024 153,243 166,274
Long-term debt 60,129 23,316 2,057 386 19,180
Shareholders' equity 207,206 98,032 72,934 67,266 43,600
(1) Fiscal year included 53 weeks. All other fiscal years included 52 weeks.
3
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- --------------------------------------------------------------------------------
Norrell Corporation and Subsidiaries
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 Annual Report.
Recent Developments
Stock Offering
On July 28, 1997, the Company sold an additional 2,500,000 shares of its common
stock. The net proceeds of $76.1 million were used to reduce indebtedness under
the Company's $150.0 million revolving credit facility.
Acquisitions
On January 2, 1997, the Company acquired 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 stock options to acquire
approximately 141,000 shares of Norrell Corporation Common Stock at a weighted
average exercise price of $4.56 per share. Comtex is a New York City-based
provider of information technology services, including systems planning and
development, organizational consulting related to business transformation and
staff augmentation support. Comtex has locations in New York, New York; White
Plains, New York; and Miami, Florida. The acquisition, which was accounted for
under the purchase method, was financed with borrowings under the Company's
revolving credit facility. The results of operations of Comtex are included in
the statements of income beginning January 2, 1997.
On October 17, 1997, the Company acquired all of the assets of IMCOR,
Inc. ("IMCOR") in an all-cash-purchase transaction. IMCOR is based in
Connecticut and provides companies with experienced interim managers and project
leaders in the areas of general management, finance, operations, information
technology, manufacturing, marketing, human resources and strategic planning.
IMCOR has offices in Stamford, Connecticut; Chicago, Illinois; Dallas, Texas;
Los Angeles, California; and New York, New York.
On the last day of the 1997 fiscal year, the Company repurchased its
franchise in Orlando, Florida, consisting of six Staffing Services offices. The
purchase price was composed of cash and Norrell Corporation Common Stock.
Non-recurring Charges
During the fourth quarter of 1997, the Company recorded a charge of $17.7
million, before tax, of which $15.0 million was related to the impairment of
certain management information systems (MIS) development costs. The MIS
development cost write-down resulted from an examination of the Company's
payroll and billing systems. Based on a review made in conjunction with outside
consultants, the system architecture of the weekly payroll system lacked the
required capacity, flexibility and speed to support anticipated volumes.
Additionally, as a consequence of billing system customizations required to meet
the Company's customer and financial reporting requirements, and the resulting
difficulty and cost to upgrade the billing system, the system must be replaced
versus upgraded. A process, supported by outside consultants, is underway to
re-examine long-term business needs and to determine an appropriate technical
solution to the Company's systems requirements. The Company anticipates
completing the technical assessment by the end of the first quarter of fiscal
1998. In the interim, the Company expects no disruption in normal business. The
recognition of this impairment was in accordance with the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
The remaining $2.7 million charge resulted from the termination of two
businesses that did not meet the Company's expectations: a joint venture formed
in October 1994 of which the Company has a 50% interest and a Staffing Services
business acquired in April 1994 which provided executive training. This charge
was equal to the Company's investment in the joint venture, the acquired
goodwill in the Staffing Services business and estimated costs to terminate
operations of each business.
Teamsters Strike at UPS
The Company's fourth quarter was adversely impacted by the Teamsters strike at
UPS, one of the Company's largest customers. The estimated fourth quarter impact
of the strike was reduced earnings per share of approximately $.04. Although the
strike lasted only two weeks, current revenue levels are at only 75% to 80% of
pre-strike levels. Several locations have not resumed service and bill rates
have been lowered in certain cases as UPS tries to reduce costs. The Company
maintains a strong relationship with UPS and anticipates this relationship to
continue. However, the Company expects the lower revenue level from UPS to
persist in the near future.
General
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, accounting
staffing and interim executive 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.
The fiscal year ended November 2, 1997, is referred to as "1997," the
fiscal year ended October 27, 1996, is referred to as "1996" and the fiscal year
ended October 29, 1995, is referred to as "1995."
4
Results of Operations
The following table sets forth certain statement of income items as a percentage
of revenues for 1997, 1996 and 1995:
1997(1) 1996 1995
Revenues 100.0% 100.0% 100.0%
Cost of services 78.0 78.4 77.9
- -------------------------------------------------------------------
Gross profit 22.0 21.6 22.1
Operating expenses 16.1 16.7 17.8
Depreciation and amortization 0.8 0.6 0.5
Non-recurring charges 1.4 -- --
- -------------------------------------------------------------------
Income from operations 3.7 4.3 3.8
- -------------------------------------------------------------------
Other expense
Interest expense (0.5) (0.1) (0.1)
Other (0.2) (0.1) (0.2)
- -------------------------------------------------------------------
Income from continuing operations
before income taxes 3.0 4.1 3.5
Income tax expense 1.1 1.6 1.4
- -------------------------------------------------------------------
Income from continuing operations 1.9 2.5 2.1
- -------------------------------------------------------------------
Net income 1.9 2.5 2.0
- -------------------------------------------------------------------
(1) Fiscal year included 53 weeks.
The Company operates on a 52-53-week fiscal calendar. A 53rd week occurs
in one of every five or six fiscal years depending on the timing of leap years.
The 1997 fiscal year included 53 weeks compared to 52 weeks for the 1996 and
1995 years. Therefore, 1997 revenues and associated costs and expenses were
impacted by this extra week of operations. If 1997 had been a 52-week year and
the previously discussed non-recurring charges were excluded, comparative
results of operations would have been reported as follows:
Adjusted 1997(1) 1996
Revenues $ 1,275,051 $ 1,013,877
Cost of services 994,279 795,013
- --------------------------------------------------------------------
Gross profit 280,772 218,864
Operating expenses 206,526 169,206
Depreciation and amortization 10,365 5,904
- --------------------------------------------------------------------
Income from operations 63,881 43,754
Other expense
Interest expense (6,960) (1,200)
Other (1,897) (1,485)
- --------------------------------------------------------------------
Income from operations
before income taxes 55,024 41,069
Income tax expense 20,911 15,812
- --------------------------------------------------------------------
Net income $ 34,113 $ 25,257
- --------------------------------------------------------------------
Earnings per common share $ 1.28 $ 1.00
- --------------------------------------------------------------------
Excludes the impact of the 53rd week and non-recurring charges.
Year Ended November 2, 1997, Compared to Year Ended October 27, 1996
Revenues increased 28.2%, or $286.2 million, to $1.3 billion in 1997. Staffing
Services revenues grew 19.2% to $882.9 million, and accounted for 67.9% and
73.1% of total 1997 and 1996 revenues, respectively. Staffing Services volume,
as measured by hours that staffing employees worked, increased 13.6% and prices
rose 3.0% compared to 12.4% and 3.9% for 1996. Outsourcing Services revenues
grew 21.4% to $252.6 million. Outsourcing Services revenues from customers other
than IBM increased $31.3 million from 1996 to $91.6 million. Included in
Outsourcing Services revenues was the recognition of $1.8 million and $2.2
million in 1997 and 1996, respectively, of deferred gain from the return in
January 1995 of Company stock held by IBM. Professional Services revenues were
$164.6 million in 1997 compared to $65.1 million in 1996, a 152.9% increase. The
Company added to its Professional Services Group through the acquisitions of
Analytical Technologies, Inc. and ANATEC Canada, Inc. (collectively "ANATEC") in
July, 1996, American Technical Resources, Inc. ("ATR") in August, 1996,
Accounting Resources, Inc. ("ARI") in November, 1996 and Comtex in January,
1997. The accompanying financial statements include the results of operations of
Comtex, ANATEC and ARI from the acquisition dates. ATR was accounted for as a
pooling of interests and, accordingly, the accompanying financial statements
include the results of ATR for all periods presented. If revenues for the 53rd
week were excluded, consolidated 1997 revenues would have increased $261.2
million or 25.8%. Staffing Services, Outsourcing Services and Professional
Services revenues would have grown $123.6 million, $39.5 million and $98.1
million and 16.7%, 19.0% and 150.6%, respectively.
Gross profit increased 30.7%, or $67.1 million, to $286.0 million in
1997. Gross margin (gross profit as a percent of revenues) increased from 21.6%
in 1996 to 22.0% in 1997. Staffing Services gross margin decreased from 22.0% in
1996 to 21.3% in 1997. The decline was due to volume increases in certain lower
margin accounts. Outsourcing Services gross margin increased from 18.2% in 1996
to 18.4% in 1997. Professional Services gross margin increased from 27.6% in
1996 to 31.2% in 1997 due principally to the acquisition of Comtex. If gross
profit for the 53rd week was excluded, consolidated gross profit would have
increased $61.9 million. Staffing Services, Outsourcing Services and
Professional Services gross profit would have increased $21.0 million, $7.8
million, and $33.1 million, respectively.
Operating expenses increased 23.8%, or $40.3 million. The operating
expense increase included $5.0 million of higher franchise commissions
associated with increased franchise revenues, $26.5 million of increased
personnel and personnel-related costs associated with internal growth, and $6.0
million of increased costs associated with the Comtex and ANATEC acquisitions.
If operating expenses associated with the 53rd week were excluded, operating
expenses would have increased $37.3 million or 22.1%. Depreciation and
amortization expense increased 75.6%, or $4.5 million due to increased
investment in management information systems and amortization of goodwill from
acquisitions.
Interest expense increased from $1.2 million in 1996 to $7.0 million in
1997 as a result of borrowings to fund the acquisitions discussed above;
spending on MIS development; additions to property and equipment; and the
increased cost associated with carrying a higher trade accounts receivable
balance (see Liquidity and Capital Resources), net of the proceeds from the
Company's July 28, 1997, stock offering.
Other expense increased from $1.5 million in 1996 to $2.0 million in
1997. Included in other expense is the Company's share of losses from its 50%
ownership in a joint venture formed in October 1995 to provide administrative
outsourcing for health care facilities. The losses totaled $2.0 million in 1997
and $830,000 in 1996. The termination of this business is discussed above.
5
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- --------------------------------------------------------------------------------
Norrell Corporation and Subsidiaries
The effective income tax rate declined from 38.5% in 1996 to 38.0% in
1997 primarily as a result of reduced state income taxes.
Earnings per share declined to $0.91 in 1997 from $1.00 in 1996.
Excluding the impact of the 53rd week and the 1997 non-recurring charges, 1997
earnings per share would have been $1.28, a 28.0% increase over 1996.
Year Ended October 27, 1996, Compared to Year Ended October 29, 1995
Revenues increased 20.4%, or $171.5 million, to $1.014 billion 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
increased 12.4% and prices rose 3.9% compared to 13.4% and 7.0% for 1995. During
1996, the Company acquired two information technology companies, ANATEC and 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, were
combined into the Professional Services group. The accompanying financial
statements include the results of operations of ANATEC from July 15, 1996, 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. 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.
Gross profit increased 17.8%, or $33.0 million, to $218.9 million in
1996. Gross margin 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 a 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 due to a
higher proportion of large accounts which typically have lower margins.
Outsourcing Services gross margin declined from 20.4% in 1995 to 18.2% in 1996
due primarily 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 as a result of higher information
technology services margins.
Operating expenses increased 13.0%, or $19.5 million. The increase also
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 office
additions. Depreciation and amortization expense increased 38.6%, or $1.6
million.
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 state 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.
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. The Company,
with the assistance of outside consultants, is currently assessing 1998 capital
and information systems development spending required to meet long term billing,
payroll and reporting needs. The Company anticipates completing the technical
assessment by the end of the first quarter and does expect that its operating
cash flows and credit facilities will be sufficient to fund such spending. See
Note 12 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 $150.0 million. See Note 7 of Notes to
Consolidated Financial Statements.
Cash used in operations in 1997 was $1.4 million compared to cash
provided of $38.0 million in 1996. The 1997 period included an increase of $60.7
million in trade accounts receivable compared to an increase of $20.2 million in
1996. The 1997 increase was due principally to the higher level of
6
revenues in 1997 and to continuing billing delays caused by the conversion in
December 1996 to a new billing and accounts receivable system. The Company does
not believe that system issues have materially impacted the collectibility of
its accounts receivable. The Company is currently assessing the billing system
technical design and expects to incur additional costs to replace the existing
system and to improve its operations. Higher revenues in 1997 were due, in part,
to the January acquisition of Comtex and a full year of operations for ANATEC.
During the 1997 period, cash used in operating activities was partially offset
by an increase in accrued expenses (an increase in cash) of $18.0 million
compared to an increase of $7.8 million in 1996. This increase was due to
internal growth in operations and payments that will be made in the future
related to the acquisitions of Comtex and the Orlando franchise. The 1996 cash
provided by operating activities included a $13.0 million gain from the sale of
the Company's interest in its Atlanta headquarters building which 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, the date on
which the landlord may terminate the lease, and is recorded as a reduction in
rent expense.
Investing activities used cash of $121.0 million in 1997 compared to cash
used of $56.9 million in 1996. The October 1997 purchases of IMCOR and the
Orlando franchise, the January 1997 purchase of Comtex, the November 1996
purchase of ARI and the final payment associated with the July 1996 acquisition
of ANATEC resulted in cash uses of $87.7 million in 1997. The purchase of Valley
Staffing Services, Inc. in January 1996 and ANATEC in July 1996 used cash of
$33.0 million in 1996. The investing activities for 1997 and 1996 included MIS
development costs of $17.7 million and $14.7 million, respectively.
Financing activities provided cash of $120.2 million in 1997 compared to
cash provided of $22.7 million in 1996. The 1997 period included the receipt of
proceeds from the July 28 stock offering of $76.1 million. Additionally, net
proceeds from the issuance of long-term debt provided cash in 1997 of $39.9
million compared to cash provided of $23.8 million in 1996. The increase in cash
was used to fund the acquisitions discussed above; spending on MIS development;
property and equipment; and the increased cost associated with carrying a higher
trade accounts receivable balance.
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 7 to the Notes to Consolidated Financial Statements, the
Company has an unsecured revolving credit facility of $150.0 million which
extends until September 30, 2000, and $50.0 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 12 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.
New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings Per Share," which
is effective for fiscal years ending after December 15, 1997. Early adoption is
not permitted. SFAS 128 may significantly change reported earnings per share
("EPS") for companies, such as Norrell Corporation, with complex capital
structures as compared to EPS calculated using the modified treasury stock
method. See Note 1 of Notes to Consolidated Financial Statements where
discussed.
In June 1997, the FASB issued Financial Accounting Standard No. 130,
"Reporting Comprehensive Income," and Financial Accounting Standard No. 131,
"Disclosure about Segments of an Enterprise and Related Information." These
standards are effective for fiscal years beginning after December 15, 1997. See
Note 1 of Notes to Consolidated Financial Statements where discussed.
Inflation
The effects of inflation were not significant to the Company's operations during
1997, 1996 or 1995.
Year 2000 Issues
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Year 2000 issue is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with planned modifications
to existing software and conversions to new software, the Year 2000 problem will
not pose significant operational problems for the Company's computer systems as
so modified and converted. However, if such modifications and conversions are
not completed in a timely fashion, the Year 2000 problem may have a material
impact on the operations of the Company.
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 the
sufficiency of funds from operations and available borrowings to meet the
Company's working capital and capital expenditure needs for 1998. 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, professional services and outsourcing
industry.
7
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
Norrell Corporation and Subsidiaries
Nov. 2, 1997 Oct. 27, 1996
(in thousands, except share amounts)
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 6,678 $ 8,876
Accounts receivable trade, less
allowances of $6,497 in 1997 and
$7,411 in 1996 215,463 145,843
Prepaid expenses 2,915 2,674
Other 12,823 9,995
- ----------------------------------------------------------------------------------------
Total current assets 237,879 167,388
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION 19,759 13,513
- ----------------------------------------------------------------------------------------
NONCURRENT DEFERRED INCOME TAXES 12,690 6,034
- ----------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill and other intangibles, net of amortization 136,358 45,069
MIS development costs, net of amortization 19,486 18,634
Investments and other assets 12,672 12,593
- ----------------------------------------------------------------------------------------
Total other assets 168,516 76,296
- ----------------------------------------------------------------------------------------
Total Assets $ 438,844 $ 263,231
- ----------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 12,881 $ 9,789
Accounts payable 12,390 14,651
Accrued expenses 90,515 67,536
Deferred revenue and gain 8,779 10,822
- ----------------------------------------------------------------------------------------
Total current liabilities 124,565 102,798
Long-Term Debt, less current maturities 60,129 23,316
Long-Term Deferred Gain 9,983 11,471
Long-Term Accrued Expenses 36,961 27,614
- ----------------------------------------------------------------------------------------
Total liabilities 231,638 165,199
- ----------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock, stated value $.01 per share;
50,000,000 shares authorized,
with shares issued and outstanding
of 26,903,738 in 1997 and 23,566,204 in 1996 270 236
Treasury stock, at cost; 34,457 shares in
1997 and 29,091 shares in 1996 (1,062) (575)
Additional paid-in capital 133,219 44,096
Notes receivable from officers and employees (125) (111)
Retained earnings 74,904 54,386
- ----------------------------------------------------------------------------------------
Total shareholders' equity 207,206 98,032
- ----------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 438,844 $263,231
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
8
Consolidated Statements of Income
- --------------------------------------------------------------------------------
Norrell Corporation and Subsidiaries
Years Ended Nov. 2, 1997(1) Oct. 27, 1996 Oct. 29, 1995
- -----------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
REVENUES $ 1,300,039 $ 1,013,877 $ 842,360
COST OF SERVICES 1,014,048 795,013 656,517
- ----------------------------------------------------------------------------------------------------
Gross profit 285,991 218,864 185,843
OPERATING EXPENSES 209,499 169,206 149,745
DEPRECIATION AND AMORTIZATION 10,365 5,904 4,261
NON-RECURRING CHARGES 17,700 -- --
- ----------------------------------------------------------------------------------------------------
Income from operations 48,427 43,754 31,837
- ----------------------------------------------------------------------------------------------------
OTHER EXPENSE
Interest (6,989) (1,200) (365)
Other (1,986) (1,485) (1,628)
- ----------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 39,452 41,069 29,844
INCOME TAXES 14,994 15,812 12,518
- ----------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 24,458 25,257 17,326
DISCONTINUED OPERATIONS
Loss on disposal, net -- -- (348)
- ----------------------------------------------------------------------------------------------------
NET INCOME $ 24,458 $ 25,257 $ 16,978
- ----------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER COMMON SHARE
Continuing operations $ 0.91 $ 1.00 $ 0.71
Discontinued operations -- -- (0.01)
- ----------------------------------------------------------------------------------------------------
$ 0.91 $ 1.00 $ 0.70
- ----------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 26,747 25,344 24,357
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
(1) Fiscal year included 53 weeks.
9
Consolidated Statements of Shareholders' Equity
- --------------------------------------------------------------------------------
Norrell Corporation and Subsidiaries
Additional Notes Receivable
Common Stock Treasury Paid-ln From Officers Retained
(in thousands, except share and per share amounts) Shares Amount Stock Capital and Employees Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
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
Stock options exercised, including related tax benefits 614 6 1,159 4,773 -- --
Stock offering proceeds 2,500 25 -- 76,091 -- --
Other common stock issued 284 3 19 7,191 (40) --
Dividends on common stock ($0.16 per share) -- -- -- -- -- (3,940)
Issuance of options for discounted stock option plan -- -- -- 1,068 -- --
Purchase of treasury stock (60) -- (1,665) -- -- --
Decrease in receivable from employees -- -- -- -- 26 --
Net income -- -- -- -- -- 24,458
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at November 2, 1997 (1) 26,904 $ 270 $(1,062) $ 133,219 $ (125) $ 74,904
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
(1) Fiscal year included 53 weeks.
10
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Norrell Corporation and Subsidiaries
Years Ended Nov. 2, 1997(1) Oct. 27, 1996 Oct. 29, 1995
- --------------------------------------------------------------------------------------------------------------
(in thousands)
Cash Flows from Operating Activities
Net income $ 24,458 $ 25,257 $ 16,978
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization - operating expenses 10,365 5,904 4,261
Depreciation and amortization - cost of
services/other expenses 667 409 235
Gain on retirement of common stock (1,884) (2,177) (4,499)
Non-recurring charge 17,700 -- --
Provision for doubtful accounts 1,095 2,315 1,699
Deferred income taxes (8,114) 173 963
Deferred gain on sale of building (1,488) 12,967 --
Long-term accrued expenses 3,989 2,304 3,222
Other 4,071 106 270
Change in current assets and current liabilities
Accounts receivable, trade (60,748) (20,235) (28,899)
Accounts payable (7,434) 3,025 6,180
Accrued expenses 17,983 7,759 8,320
Other (2,059) 174 (1,383)
- --------------------------------------------------------------------------------------------------------------
Net cash (used in) provided
by operating activities (1,399) 37,981 7,347
- --------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Cost of acquisitions, net of cash acquired (87,662) (32,963) (2,861)
Increase in MIS development costs, net (17,695) (14,741) (4,687)
Additions to property and equipment, net (10,902) (6,880) (5,336)
(Increase) decrease in goodwill and other intangibles, net (1,344) (270) 1,599
Increase in investments and other non-current assets (3,361) (2,046) (50)
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (120,964) (56,900) (11,335)
- --------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from the issuance of long-term debt 272,827 87,886 6,398
Repayments of long-term debt (232,924) (64,102) (4,181)
Stock option exercises, including related tax benefits 5,913 1,646 2,186
Dividends paid on common stock (3,940) (3,065) (2,639)
Acquisition of treasury stock (520) (536) (552)
Proceeds from the issuance of common stock 78,809 851 315
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 120,165 22,680 1,527
- --------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Short-Term Investments (2,198) 3,761 (2,461)
Cash and Short-Term Investments at Beginning of Period 8,876 5,115 7,576
- --------------------------------------------------------------------------------------------------------------
Cash and Short-Term Investments at End of Period $ 6,678 $ 8,876 $ 5,115
- --------------------------------------------------------------------------------------------------------------
Supplementary Cash Flow Disclosures
Cash payments during the period for
Interest $ 6,340 $ 1,183 $ 364
Income taxes, net of refunds 20,828 17,303 12,907
Noncash investing and financing activity
Issuance of options to benefit plan 1,083 938 703
Exercise of benefit plan stock options (1,488) (630) (385)
The accompanying notes are an integral part of these consolidated financial
statements.
(1) Fiscal year included 53 weeks.
11
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Norrell Corporation and Subsidiaries
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
revenues 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 years 1997 and 1995, one customer accounted for 13.2% and 16.2% of
revenues, respectively. For fiscal year 1996, two customers accounted for
revenues of 27.6%.
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 and short-term investments.
Financial Instruments
Based on pertinent information available to the Company at November 2, 1997, the
Company estimates that the carrying value of cash and short-term investments,
investments, current maturities of long-term debt and long-term debt approximate
their fair values when compared to instruments of similar type, terms and
maturity.
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 1997, 1996 and 1995 was
$3,617,000, $1,015,000 and $641,000, respectively. Accumulated amortization of
intangibles was $11,470,000 and $7,853,000 at November 2, 1997, and October 27,
1996, respectively.
Management Information Systems ("MIS") Development
During fiscal 1997 and 1996, the Company incurred costs associated with the
purchase and development of management information systems unrelated to the
impact of year 2000 processing issues. These costs are capitalized and amortized
on a straight-line basis over five years. MIS development cost amortization for
1997 and 1996 was $2,464,000 and $719,000, 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 November 2, 1997, or October 27, 1996.
Other Income (Expense)
Other income (expense) consists of the following:
1997 1996 1995
- --------------------------------------------------------------------
(in thousands)
Interest income $ 346 $ 481 $ 428
Equity in loss of joint ventures (2,026) (803) (656)
Amortization of deferred
loan costs and bank fees (907) (885) (762)
Loss on disposal of fixed assets (16) (218) (335)
Minority interest 193 (10) --
Other, net 424 (50) (303)
- --------------------------------------------------------------------
Total $(1,986) $(1,485) $(1,628)
- --------------------------------------------------------------------
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.
12
Stock Offering
On July 28, 1997, the Company completed the sale of 2,500,000 shares of its
common stock at a public offering price of $32.25 per share. The net proceeds of
$76,116,000 were used to reduce amounts outstanding under the $150,000,000
revolving credit facility.
New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings Per
Share," which is effective for fiscal years ending after December 15, 1997.
Early adoption is not permitted. SFAS 128 may significantly change reported
earnings per share ("EPS") for companies, such as Norrell Corporation, with
complex capital structures, as compared to EPS calculated using the modified
treasury stock method. The pro forma effect of applying the provisions of SFAS
128 is as follows:
1997 1996
Historical Pro Forma Historical Pro Forma
- --------------------------------------------------------------------------
Primary/Basic EPS $0.91 $0.99 $1.00 $1.08
Fully Diluted/Diluted EPS $0.91 $0.91 $0.98 $1.00
In June 1997, the FASB issued Financial Accounting Standard No. 130,
"Reporting Comprehensive Income," effective for fiscal years beginning after
December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Based on current accounting standards, this new
accounting statement is not expected to have a material impact on the Company's
consolidated financial statements. The Company will adopt this accounting
standard in fiscal 1999.
Also in June 1997, the FASB issued Financial Accounting Standard No. 131,
"Disclosure about Segments of an Enterprise and Related Information," effective
for fiscal years beginning after December 15, 1997. This statement requires
companies to identify segments consistent with the manner in which management
makes decisions about allocating resources to segments and measuring their
performance. Disclosures for the newly identified segments are similar to those
required under current standards, with the addition of certain quarterly
disclosure requirements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
will adopt this accounting standard in fiscal 1999.
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.
Reclassifications
Certain amounts have been reclassified in the 1996 and 1995 financial statements
to conform to the 1997 presentation.
Fiscal Year
The Company operates on a 52- or 53-week fiscal year which resulted in fiscal
year ends of November 2, 1997, October 27, 1996, and October 29, 1995. The
fiscal year ended November 2, 1997, included 53 weeks. Fiscal years ended
October 27, 1996, and October 29, 1995, 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 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 was paid a contingent payment of $9,200,000
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.
Effective January 2, 1997, the Company acquired all of the outstanding
common and preferred stock and all vested and unvested stock rights of Comtex
Information Systems, Inc. ("Comtex") for $67,000,000 of cash plus stock options
to acquire approximately 141,000 shares of Norrell Corporation Common Stock at a
weighted average exercise price of $4.56 per share. Comtex is a New York
City-based provider of information technology services, including systems
planning and development, organizational consulting related to business
transformation and staff augmentation support. Comtex has locations in New York,
New York; White Plains, New York; and Miami, Florida. The $62,231,000 excess of
the acquisition cost over the fair value of Comtex's tangible assets has been
allocated to goodwill and is being amortized over 40 years. At December 31,
1996, Comtex had net assets of $10,066,000.
13
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Norrell Corporation and Subsidiaries
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 Other Assets
Property and Equipment
The major classes of property and equipment are as follows:
1997 1996
- -------------------------------------------------------
(in thousands)
Leasehold improvements $ 5,964 $ 5,542
Furniture, fixtures and equipment 26,815 31,508
- -------------------------------------------------------
32,779 37,050
Less accumulated depreciation 13,020 23,537
- -------------------------------------------------------
Net property and equipment $19,759 $13,513
- -------------------------------------------------------
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 1997, 1996 and 1995 was $4,892,000,
$4,273,000 and $3,413,000, respectively.
Investments and Other Assets
Investments consist principally of securities held for employee benefit
plans and are carried at market.
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 1997, 1996 and 1995, the Company
contributed $2,092,000, $1,059,000 and $908,000, respectively, for general
operating purposes in accordance with the joint venture agreement. Refer to Note
6, where the termination of this investment is discussed.
5. Accrued Expenses
Current and long-term accrued expenses are summarized as follows:
1997 1996
- -------------------------------------------------------
(in thousands)
Current:
Accrued wages, salaries
and related taxes $58,505 $48,905
Workers' compensation
reserve, current portion 7,292 6,737
Other 24,718 11,894
- -------------------------------------------------------
Total $90,515 $67,536
- -------------------------------------------------------
Long-term:
Workers' compensation
reserve, less current portion $17,477 $16,146
Other 19,484 11,468
Total $36,961 $27,614
- -------------------------------------------------------
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.
6. Non-recurring Charges
During the fourth quarter of 1997, the Company recorded a charge of $17,700,000,
before tax, of which $14,980,000 was related to the impairment of certain MIS
development costs. The MIS development cost write-down resulted from an
examination of the Company's payroll and billing systems. Based on a review made
in conjunction with outside consultants, the system architecture of the weekly
payroll system lacked the required capacity, flexibility and speed to support
anticipated volumes. Additionally, as a consequence of billing system
customizations required to meet the Company's customer and financial reporting
requirements, and the resulting difficulty and cost to upgrade the billing
system, the system must be replaced versus upgraded. A process, supported by
outside consultants, is underway to re-examine long-term business needs and to
determine an appropriate technical solution to the Company's systems
requirements. The Company anticipates completing the technical assessment by the
end of the first quarter of fiscal 1998. In the interim, the Company expects no
disruption in normal business. The recognition of this impairment was in
accordance with the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the
14
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of." The remaining $2,720,000 charge resulted from the termination of two
businesses that did not meet the Company's expectations: a joint venture formed
in October 1994 of which the Company has a 50% interest and a Staffing Services
business acquired in April 1994 which provided executive training. This charge
was equal to the Company's investment in the joint venture, the acquired
goodwill in the Staffing Services business, and estimated costs to terminate
operations of each business.
7. Notes Payable and Long-Term Debt
The Company's debt is summarized as follows:
1997 1996
- ----------------------------------------------------------
(in thousands)
Revolving credit facility, due
September 30, 2000, with
varying interest rates,
interest payable monthly $60,000 $23,000
Bank lines of credit due in
varying installments before
October 30, 1998, with
varying interest rates, interest
payable monthly 12,540 9,555
Other notes payable in various
installments through 2000 470 550
- ----------------------------------------------------------
Total 73,010 33,105
Less current maturities 12,881 9,789
- ----------------------------------------------------------
Total long-term debt $60,129 $23,316
- ----------------------------------------------------------
At November 2, 1997, the Company had a $150,000,000 revolving credit
facility expiring September 30, 2000 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, five commercial banks make available unsecured lines of credit that
total $50,000,000. 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.
The Company has also entered into four interest rate swap agreements in
order to manage exposure to fluctuations in interest rates. The difference
between fixed and variable interest amounts calculated by reference to
agreed-upon notional principal amounts is recognized as an adjustment to
interest expense over the life of the swaps. Two of the swap agreements are each
for notional principal amounts of $20,000,000. The remaining two agreements are
for notional principal amounts of $12,000,000 and $8,000,000. The Company
exchanges floating interest rates based on LIBOR for an average fixed rate of
6.43% at quarterly settlement dates. The swap agreements expire between November
2001 and January 2002. At November 2, 1997, if the Company had terminated each
of the swap agreements, the Company's cost of termination would have totaled
approximately $997,000.
The following is a summary of data concerning total debt:
Revolving Credit Facility Lines of Credit
1997 1996 1997 1996
- ------------------------------------------------------------------------------
(in thousands of dollars)
Outstanding borrowings
at end of period $ 60,000 $ 23,000 $ 12,540 $ 9,555
Outstanding
month-end balances:
Maximum 120,000 33,448 40,225 11,470
Average 85,417 30,835 22,116 5,274
Weighted average
interest rate (including
the effect of the
aforementioned
interest rate swap
agreements):
At end of period 6.74% 5.63% 6.04% 5.57%
For the period 6.26% 5.95% 5.75% 5.65%
Future maturities of long-term debt at November 2, 1997 are as follows:
Year Amount
- ------------------------------------
(in thousands)
Fiscal 1999 $ 72
Fiscal 2000 60,057
- ------------------------------------
Total $60,129
- ------------------------------------
8. Deferred Revenue and Gain
On December 11, 1995, the Company's headquarters building was sold by its joint
venture owner. 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 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 November 2, 1997, and October 27, 1996, the
deferred gain was $11,479,000 and $12,967,000, of which $9,983,000 and
$11,471,000, respectively, was classified as long term.
Included in deferred revenue in the accompanying balance sheets was
$2,237,000 and $4,121,000 at November 2, 1997, and October 27, 1996,
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
was deferred and is being amortized into income through December 1998, the term
of the new service contract.
15
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Norrell Corporation and Subsidiaries
9. Stock Option and Purchase Plans
The Company has a stock incentive plan and an employee stock purchase plan.
These plans are described in detail below.
The stock incentive plan provides for the grant of incentive stock
options, nonqualified stock options and other equity-based incentives. At
November 2, 1997, there were 3,293,334 shares of common stock reserved for this
plan, of which 153,063 shares were available for future option grants. 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.
Nonqualified stock options to purchase common stock have been granted to certain
directors.
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. Under the
plan, the Company sold 50,903 and 59,332 shares in 1997 and 1996 at average
exercise prices of $22.77 and $13.26, respectively. The Company has reserved
600,000 shares of common stock for the plan. At November 2, 1997, 489,766 shares
were available for future issuance.
No compensation expense related to these plans has been recognized
consistent with the provisions of Accounting Principles Board Opinion No. 24,
"Accounting for Stock Issued to Employees." Had compensation expense for the
plans been recorded based on the fair value of the options at the grant date as
prescribed by Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
Fiscal years 1997 1996
- ---------------------------------------------------------------------
(in thousands, except per share amounts)
Net income:
As reported $ 24,458 $ 25,257
Pro forma $ 22,549 $ 24,775
Primary earnings per share:
As reported $ 0.91 $ 1.00
Pro forma $ 0.84 $ 0.98
Pro forma amounts were computed using the Black-Scholes option pricing model
with the following assumptions used for grants in 1997 and 1996: dividend yield
of 0.60%; expected volatility of 32%; risk-free interest rates of 4.91% to 6.91%
and expected lives of 3 months to 7.7 years. Since the SFAS 123 method of
accounting has not been applied to options granted prior to October 30, 1995,
the resulting pro forma compensation cost may not be representative of that to
be expected in future years.
A summary of stock option activity follows:
Weighted
Average
Options Exercise Price
- ----------------------------------------------------------------
Outstanding, at October 30, 1994 2,250,910 $ 6.30
Granted 1,379,598 12.50
Exercised (525,586) 4.34
Canceled/Expired (107,172) 4.71
- ----------------------------------------------------------------
Outstanding, at October 29, 1995 2,997,750 8.28
Options exercisable, end of year 630,910 3.05
Granted 469,674 21.13
Exercised (298,733) 5.51
Canceled/Expired (151,331) 11.94
- ----------------------------------------------------------------
Outstanding, at October 27, 1996 3,017,360 10.37
Options exercisable, end of year 1,517,514 7.22
Granted 753,393 21.64
Exercised (560,345) 6.16
Canceled/Expired (70,151) 15.18
- ----------------------------------------------------------------
Outstanding, at November 2, 1997 3,140,257 13.72
- ----------------------------------------------------------------
Options exercisable, end of year 1,511,456 $ 9.12
- ----------------------------------------------------------------
A summary of options outstanding at November 2, 1997, follows:
Weighted Average
Range Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Prices Exercisable Exercise Prices
- -------------------------------------------------------------------------------------------------------------------
$ 3.05 - $ 9.25 1,139,621 5.1 $ 5.38 920,058 $ 5.65
11.38 - 19.00 1,114,826 7.9 13.10 527,633 13.39
24.00 - 29.50 872,578 8.2 25.14 61,709 24.35
31.13 - 32.00 13,232 9.2 31.67 2,056 32.00
- -------------------------------------------------------------------------------------------------------------------
$ 3.05 - $32.00 3,140,257 6.9 $13.72 1,511,456 $ 9.12
- -------------------------------------------------------------------------------------------------------------------
16
10. 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 2% of employee compensation. In
addition, the Company may make discretionary contributions to the plan. Company
contributions are 100% vested after three years of service (two years in the
case of employees hired on or after January 1, 1998).
The Company has an unfunded, nonqualified plan for those highly
compensated employees not covered by the 401(k) plan. Under this plan, the
Company may match participant contributions up to 2% 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 (two years for employees hired on or after January 1, 1998).
Participant contributions may be used to purchase rights to buy company stock or
may be invested in funds established by the plan administrator. All company
contributions are used to purchase rights to buy company stock. Rights are
purchased at 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 November 2, 1997, 370,154 rights
ranging in price from $3.05 to $34.69 per share were outstanding and 487,877
were available for grant.
Effective in June 1994, the Company instituted a management equity
program whereby members of senior management who were designated as participants
could purchase, at fair market value, shares of company common stock, and for
those participants who met certain minimum stock ownership thresholds, stock
options were granted as set forth in the plan. This plan was terminated on
December 31, 1996. At November 2, 1997, 106,932 shares had been issued under the
plan. Any stock options granted under this plan were issued under the Company's
stock incentive plan. At November 2, 1997, the balance of notes receivable from
plan participants for stock purchases was $125,000.
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. For participants who become eligible after January 1,
1997, the plan provides for a benefit equal to 1% of average annual
compensation, as defined in the plan, multiplied by the lesser of 20 years or
the years from eligibility until attainment of age 62. Vesting occurs over ten
years (starts in year six at 20% and reaches 100% after year ten).
Total expense related to the above described benefit plans for the years
ended 1997, 1996 and 1995 was $3,371,000, $3,164,000 and $2,408,000,
respectively.
11. Income Taxes
The provision (benefit) for federal, foreign and state income taxes consists of
the following:
1997 1996 1995
- ---------------------------------------------------------------
(in thousands)
Current:
Federal $ 10,021 $ 14,197 $ 9,749
State 2,080 1,576 1,758
Foreign 427 (83) 68
- ---------------------------------------------------------------
12,528 15,690 11,575
- ---------------------------------------------------------------
Deferred:
Federal 3,764 (1,415) 1,009
State (1,298) 1,537 (318)
- ---------------------------------------------------------------
2,466 122 691
- ---------------------------------------------------------------
Total $ 14,994 $ 15,812 $ 12,266
- ---------------------------------------------------------------
Continuing operations $ 14,994 $ 15,812 $ 12,518
Discontinued operations -- -- (252)
- ---------------------------------------------------------------
Total $ 14,994 $ 15,812 $ 12,266
- ---------------------------------------------------------------
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:
Nov. 2, Oct. 27,
1997 1996
- --------------------------------------------------------
(in thousands)
Deferred tax liabilities:
MIS development costs $ (4,074) $ (4,099)
Other (3,820) (4,680)
- --------------------------------------------------------
(7,894) (8,779)
- --------------------------------------------------------
Deferred tax assets:
Workers' compensation 10,527 8,000
Profit sharing 6,017 4,767
Bad debts 2,845 2,510
Gains on sale of interest in
headquarters building 4,436 5,094
Other 3,731 398
- --------------------------------------------------------
27,556 20,769
- --------------------------------------------------------
Net deferred tax assets $ 19,662 $ 11,990
- --------------------------------------------------------
The reconciliation of income tax attributable to continuing operations
computed at the U.S. statutory tax rate to income tax expense is:
1997 1996 1995
- -----------------------------------------------------------------
Income taxes at statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 1.7 2.4 6.0
Amortization of goodwill 2.0 0.4 0.4
Other, net (0.7) 0.7 0.5
- -----------------------------------------------------------------
Total 38.0% 38.5% 41.9%
- -----------------------------------------------------------------
17
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Norrell Corporation and Subisidiaries
12. Commitments and Contingencies
At November 2, 1997, 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)
1998 $11,838
1999 13,178
2000 11,908
2001 10,491
2002 9,218
Thereafter 10,870
- -------------------------------
Total $67,503
- -------------------------------
Rent expense was $10,241,000, $8,409,000 and $8,441,000 for fiscal years
1997, 1996 and 1995, 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.
13. Selected Quarterly Information (Unaudited)
Fiscal 1997 Quarter Ended
(in thousands, except per share amounts) Jan. 26 April 27 July 27 Nov. 2 (2)
- -----------------------------------------------------------------------------------------------------------
Revenues $ 281,234 $ 317,943 $ 332,691 $ 368,171
Gross profit $ 60,889 $ 69,911 $ 74,317 $ 80,874
Net income $ 7,201 $ 8,479 $ 9,175 $ (397)
- -----------------------------------------------------------------------------------------------------------
Earnings per common share (1) $ 0.28 $ 0.33 $ 0.35 $ (0.01)
- -----------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 25,732 25,944 26,308 28,828
- -----------------------------------------------------------------------------------------------------------
Fiscal 1996 Quarter Ended
(in thousands, except per share amounts) Jan. 28 April 28 July 28 Oct. 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
- -----------------------------------------------------------------------------------------------------------
(1) Due to changes in the weighted average number of shares outstanding each
quarter, the sum of earnings per share per quarter does not equal the
earnings per share for the applicable year.
(2) Refer to Note 6, where non-recurring charges are discussed.
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 November 2, 1997 and
October 27, 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended November 2, 1997. 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 November 2, 1997 and October 27, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended November 2, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
December 10, 1997