1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[MARK ONE]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE OF 1934
For the quarterly period ended May 2, 1999
Commission File No. 1-14018
NORRELL CORPORATION
(Exact name of registrant as specified in its charter)
GEORGIA 58-0953079
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3535 Piedmont Road, NE, Atlanta, GA 30305
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404)240-3000
Not applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 26,765,531 shares on May 30,
1999.
2
Norrell Corporation and Subsidiaries
FORM 10-Q
INDEX
Page No.
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets - 2
May 2, 1999 (Unaudited) and November 1, 1998
Consolidated Statements of Income 3
(Unaudited) - Three and Six months ended May 2, 1999
and May 3, 1998
Consolidated Statements of Cash Flows 4
(Unaudited) - Six months ended May 2, 1999
and May 3, 1998
Notes to Consolidated Financial Statements 5
(Unaudited)
ITEM 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
3
PART I
ITEM 1.
NORRELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
ASSETS MAY 2, 1999 NOVEMBER 1, 1998
----------- ----------------
CURRENT ASSETS
Cash and short-term investments $ 6,647 $ 9,871
Accounts receivable trade,
less allowances of $6,658 IN 1999
and $7,351 IN 1998 204,532 220,573
Prepaid expenses 5,183 4,816
Other 9,037 6,500
--------- ---------
Total current assets 225,399 241,760
--------- ---------
PROPERTY AND EQUIPMENT, less
accumulated depreciation 30,794 27,923
NONCURRENT DEFERRED INCOME TAXES 14,333 14,657
OTHER ASSETS
Goodwill and other intangibles, net of amortization 184,831 188,265
MIS development costs, net of amortization 25,681 23,973
Investments and other assets 15,909 12,706
--------- ---------
Total other assets 226,421 224,944
--------- ---------
TOTAL ASSETS $ 496,947 $ 509,284
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 14,465 $ 32,690
Accounts payable 16,568 13,066
Accrued expenses 77,548 87,365
Deferred revenue and gain 4,372 4,505
--------- ---------
Total current liabilities 112,953 137,626
LONG-TERM DEBT, less current maturities 91,799 92,510
LONG-TERM DEFERRED GAIN 7,751 8,495
LONG-TERM ACCRUED EXPENSES 44,466 40,354
--------- ---------
Total liabilities 256,969 278,985
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, stated value $.01 per share;
50,000,000 shares authorized, with 28,163,095 shares issued
and 26,753,964 shares outstanding in 1999 and 27,550,286
shares issued and 26,252,554 shares outstanding in 1998 282 276
Treasury stock, at cost; 1,409,131 shares in 1999
and 1,297,732 shares in 1998 (18,890) (17,438)
Additional paid-in capital 146,919 139,772
Notes receivable from officers and employees (36) (80)
Accumulated other comprehensive (loss) income (570) 442
Unearned compensation (4,439) --
Retained earnings 116,712 107,327
--------- ---------
Total shareholders' equity 239,978 230,299
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 496,947 $ 509,284
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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4
NORRELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
MAY 2, 1999 MAY 3, 1998 MAY 2, 1999 MAY 3, 1998
----------- ----------- ----------- -----------
REVENUES $ 361,482 $ 352,295 $ 716,101 $ 686,571
COST OF SERVICES 279,100 273,710 553,581 533,736
--------- --------- --------- ---------
Gross profit 82,382 78,585 162,520 152,835
OPERATING EXPENSES 62,706 58,137 123,571 115,039
YEAR 2000 REMEDIATION EXPENSES 5,207 365 8,356 405
DEPRECIATION AND AMORTIZATION 4,462 3,097 8,658 6,141
--------- --------- --------- ---------
Income from operations 10,007 16,986 21,935 31,250
INTEREST EXPENSE (1,808) (1,141) (3,675) (2,420)
OTHER INCOME (EXPENSE) 55 56 135 (51)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 8,254 15,901 18,395 28,779
INCOME TAXES 3,095 5,966 6,898 10,795
--------- --------- --------- ---------
NET INCOME $ 5,159 $ 9,935 $ 11,497 $ 17,984
========= ========= ========= =========
PER COMMON SHARE (BASIC):
BASIC EARNINGS PER COMMON SHARE $ 0.20 $ 0.36 $ 0.44 $ 0.66
========= ========= ========= =========
SHARES USED IN COMPUTING BASIC
EARNINGS PER SHARE 26,353 27,287 26,314 27,165
========= ========= ========= =========
PER COMMON SHARE (DILUTED):
DILUTED EARNINGS PER COMMON SHARE $ 0.19 $ 0.35 $ 0.42 $ 0.63
========= ========= ========= =========
SHARES USED IN COMPUTING DILUTED
EARNINGS PER SHARE 27,058 28,674 27,112 28,617
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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5
NORRELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
SIX MONTHS ENDED
------------------------------
MAY 2, 1999 MAY 3, 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 11,497 $ 17,984
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization - operating expenses 8,658 6,141
Depreciation and amortization - cost of services/other expenses 1,385 561
Gain on retirement of common stock (353) (942)
Provision for doubtful accounts 1,283 1,110
Deferred income taxes (565) (287)
Deferred gain on sale of building (744) (744)
Long term accrued expenses 4,397 2,327
Other (1,017) 852
Change in current assets and current liabilities
Accounts receivable, trade 14,567 20,548
Deferred revenue 220 (706)
Accounts payable 3,566 3,047
Accrued expenses (9,618) (13,953)
Other (2,041) 4,095
-------- --------
Net cash provided by operating activities 31,235 40,033
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of acquisitions, net of cash acquired (8,397) (21,117)
Additions to property and equipment, net (7,845) (5,093)
Increase in MIS development costs, net (3,893) (3,863)
Increase in investments and other non-current assets (2,127) (586)
Increase in goodwill and other intangibles, net (182) (160)
-------- --------
Net cash used in investing activities (22,444) (30,819)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt 17,277 14,745
Repayments of long-term debt (27,791) (26,969)
Stock option exercises, including related tax benefits 1,287 2,761
Proceeds from the issuance of common stock 733 1,456
Dividends paid on common stock (2,112) (2,176)
Acquisition of treasury stock (1,520) (329)
Other stock activity 44 (49)
-------- --------
Net cash used in financing activities (12,082) (10,561)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 67 --
NET INCREASE IN CASH AND SHORT-TERM
INVESTMENTS (3,224) (1,347)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 9,871 6,678
-------- --------
CASH AND SHORT-TERM INVESTMENTS AT END
OF PERIOD $ 6,647 $ 5,331
======== ========
SUPPLEMENTARY CASH FLOW DISCLOSURES
Cash payments during the period for
Interest $ 3,625 $ 2,412
Income taxes, net of refunds 8,861 4,525
Noncash investing and financing activity
Issuance of options to benefit plan 262 993
Exercise of benefit plan stock options 301 882
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NORRELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission,
although the Company believes that the disclosures are adequate to make
the information presented not misleading. These consolidated financial
statements should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form
10-K. The information furnished reflects all adjustments which, in the
opinion of management, are necessary for a fair statement of the
results of operations for the periods presented. Such adjustments are
of a normal recurring nature.
2. Financial Instruments
The Company maintains 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 principal notional amounts is recognized as an adjustment
to interest expense over the life of the swap agreements. 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 terminate between November 2001
and January 2002. At May 2, 1999, if the Company had terminated each of
the swap agreements, the estimated termination payments by the Company
would have totaled approximately $1,517,000. In connection with the
Interim Services, Inc. merger (see Footnote 5), the Company is
evaluating its options relative to the contract period of the swap
agreements and early termination.
During the first fiscal quarter of 1999, the Company entered into a
three-month forward contract to manage exposure to fluctuations in
foreign currency exchange rates related to a $1,659,000 receivable from
one of its subsidiaries. This contract terminated at the end of the
Company's second fiscal quarter and a $38,000 gain was recognized in
other income.
During the second fiscal quarter of 1999, the Company entered into a
second three-month forward contract to manage exposure to fluctuations
in foreign currency exchange rates related to a $1,371,000 receivable
from one of its subsidiaries. This contract terminates at the end of
the Company's third fiscal quarter. Changes in the exchange rate giving
rise to a gain or loss on the contract will be deferred and recorded in
income in the period that the contract is settled.
3. Earnings Per Share
In 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 128, "Earnings Per Share." In accordance with this
standard, basic earnings per share is computed on the basis of the
weighted average number of shares outstanding during the year. Diluted
earnings per share is computed giving effect to dilutive stock options.
The income amount used in the Company's earnings per share calculations
is the same for both basic and diluted earnings per share. A
reconciliation of the average outstanding shares used in the two
calculations is as follows:
5
7
Per Share Data: Three Months Ended Six Months Ended
---------------------- ----------------------
(In thousands) 5/2/99 5/3/98 5/2/99 5/3/98
------ ------ ------ ------
Weighted average shares outstanding (basic) 26,353 27,287 26,314 27,165
Potential dilutive common shares 705 1,387 798 1,452
------ ------ ------ ------
Weighted average shares outstanding (diluted)
27,058 28,674 27,112 28,617
====== ====== ====== ======
Anti-dilutive options not included 1,315 882 1,283 899
====== ====== ====== ======
4. New Accounting Standard
During the first fiscal quarter of 1999, the Company adopted SFAS No.
130, "Reporting Comprehensive Income." This statement establishes the
standards for the reporting and display of comprehensive income and its
components. Comprehensive income is the total of net income and all
other non-owner changes in shareholders' equity. Total comprehensive
income is as follows:
(In thousands) Three Months Ended Six Months Ended
------------------------ -----------------------
5/2/99 5/3/98 5/2/99 5/3/98
------ ------ ------ ------
Net income $ 5,159 $ 9,935 $11,497 $17,984
Other comprehensive income:
Change in cumulative foreign currency
translation adjustment, net of tax (313) -- (633) --
------- ------- ------- -------
Total comprehensive income $ 4,846 $ 9,935 $10,864 $17,984
======= ======= ======= =======
5. Interim Merger
On March 24, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Interim Services, Inc.
("Interim"). The Merger Agreement provides for the merger of the
Company with and into a wholly owned subsidiary of Interim. Pursuant to
the terms of the Merger Agreement, the shareholders of the Company will
receive 0.9 shares of Interim common stock for each Norrell common
share. Norrell shareholders may elect to receive cash in lieu of stock
subject to certain limitations. Interim stock will constitute a maximum
of 90 percent of the total consideration paid in the transaction with
cash paid for the remainder. The transaction is valued at approximately
$650,000,000 based on recent market values of Interim common stock and
including the assumption by the Company of Norrell's outstanding debt.
The transaction will be accounted for as a purchase, is expected to
conclude during the third quarter of 1999, and is subject to the
approval of the shareholders of both Interim and Norrell.
6
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OPERATING RESULTS FOR THE SECOND QUARTER MAY 2, 1999 COMPARED TO THE SECOND
QUARTER MAY 3, 1998
Revenues increased 2.6%, or $9.2 million, to $361.5 million in 1999.
Revenue mix in the second fiscal quarter of 1999 shows a shift in the mix of
revenues generated by each business group. Specifically, Professional Services
increased its proportionate contribution to consolidated revenue, while there
was a corresponding decline in relative Staffing Services revenue.
Business Group 1999 % of Consolidated Revenue 1998 % of Consolidated Revenue
- -------------- ------------------------------- ------------------------------
Staffing Services 59.0% 66.0%
Professional Services 22.0% 14.8%
Outsourcing Services 19.0% 19.2%
----- -----
Total 100.0% 100.0%
Staffing Services revenues declined 8.4% to $213.2 million. Staffing
Services volume, as measured by hours that staffing employees worked, decreased
10.1% and rates rose 2.5% compared to a volume increase of 4.3% and a rate
increase of 3.9% for 1998. The growth in Staffing Services was impacted by three
primary factors: difficulty in recruiting large volumes of employees due to
tight labor markets, a large customer realignment and the temporary loss of
focus due to the announcement of the merger between Norrell and Interim (see
Footnote 5). The Company has continued specific recruiting activities to
mitigate labor market challenges. The Company has also augmented its sales and
service delivery functions through a central management focus and target market
area coverage. The rate increases over prior year reflect changes in business
mix to higher priced services. Outsourcing Services revenues grew 2.0% to $68.8
million. Outsourcing Services revenues from customers other than IBM increased
1.9%, or $.5 million, over 1998, while revenues from IBM increased $.9 million,
or 2.1%. The increase in Outsourcing Services revenue included $980,000 of
revenue related to services rendered in the first fiscal quarter to a customer
in bankruptcy. The bankruptcy and subsequent collection was resolved in the
second quarter. Professional Services revenues were $79.5 million in 1999
compared to $52.2 million in 1998, a 52.3% increase. The Company's Professional
Services group includes Norrell Information Services, Norrell Financial
Staffing, IMCOR and FSS International Limited ("FSS"), a London based financial
and information technology ("IT") recruitment and international search and
selection business acquired in August 1998. Norrell Information Services was
augmented by the April 1998 acquisition of Trattner Network Ltd. ("Trattner"), a
California based information technology company and the July 1998 acquisition of
W.E. Carson Associates, Inc. ("Carson"), an information systems consulting firm
based in Atlanta, Georgia.
Gross profit increased 4.83%, or $3.8 million, to $82.4 million in
1999. Gross margin (gross profit as a percent of revenues) increased from 22.3%
in 1998 to 22.8% in the 1999 period. The Professional Services group, which
typically generates higher margins, accounts for a growing percentage of total
gross margin. Staffing Services gross margin decreased from 21.1% in 1998 to
20.2% in 1999 due to changes in business mix. Outsourcing Services gross margin
remained relatively flat at 18.6% in 1998 and 18.5% in 1999. The Outsourcing
Services margin was favorably impacted by .4% in 1999 due to the recognition of
$980,000 of revenue related to services rendered in the first fiscal quarter to
a customer in bankruptcy (see above explanation). Professional Services gross
margin increased from 32.5% in 1998 to 33.4% in 1999 as a result of adding
higher margin information technology consulting services and high end financial
staffing services.
Operating expenses increased 7.9%, or $4.6 million. The increase is
primarily due to incremental operating expenses resulting from the acquisitions
of Trattner, Carson and FSS. If incremental expenses related to these
acquisitions were excluded, operating expenses would have decreased $2.4 million
or 4.2%. The decrease is due in part to cost containment efforts in the field
and headquarters operations. Operating costs, as a percentage of revenue
increased
7
9
from 16.5% in the 1998 period to 17.3% in the 1999 period. Depreciation and
amortization expense increased 44.1%, or $1.4 million, due to increased
investment in desktop computers to support management information and field
operating systems and amortization of goodwill from acquisitions.
Interest expense increased from $1.1 million in 1998 to $1.8 million in
1999. This increase was due to carrying a higher debt balance as a result of
acquisitions completed during the latter part of fiscal year 1998.
See Liquidity and Capital Resources where discussed.
Other income (expense) remained relatively unchanged decreasing from
income of $56,000 in 1998 to income of $55,000 in 1999.
The effective income tax rate remained constant year over year at
37.5%.
Net income decreased from $9.9 million in 1998 to $5.2 million in 1999,
a 48.1% decrease. Diluted earnings per share decreased from $0.35 in the 1998
period to $0.19 in 1999.
Year 2000 remediation expense increased from $365,000 in 1998 to $5.2
million in the 1999 period. If these costs had been excluded, net income would
have been $8.4 million in 1999, a $1.8 million or 17.2% decrease over the prior
year quarter. Diluted earnings per share would have decreased to $0.31,
resulting in an 11.4% decrease over prior quarter diluted earnings per share.
OPERATING RESULTS FOR THE SIX MONTHS ENDED MAY 2, 1999 COMPARED TO THE SIX
MONTHS ENDED MAY 3, 1998
Revenues increased 4.3%, or $29.5 million, to $716.1 million in 1999.
Revenue mix in the first fiscal quarter of 1999 shows a shift in the mix of
revenues generated by each business group. Specifically, Professional Services
increased its proportionate contribution to consolidated revenue, while there
was a corresponding decline in relative Staffing Services revenue.
Business Group 1999 % of Consolidated Revenue 1998 % of Consolidated Revenue
- -------------- ------------------------------- ------------------------------
Staffing Services 59.5% 66.2%
Professional Services 21.0% 14.5%
Outsourcing Services 19.5% 19.3%
----- -----
Total 100.0% 100.0%
Staffing Services revenues declined 6.3% to $426.0 million. Staffing
Services volume, as measured by hours that staffing employees worked, decreased
8.2% and rates rose 2.6% compared to a volume increase of 7.1% and a rate
increase of 3.7% for 1998. The growth in Staffing Services was impacted by three
primary factors: difficulty in recruiting large volumes of employees due to
tight labor markets, a large customer realignment and the temporary loss of
focus due to the announcement of the merger between Norrell and Interim (see
Footnote 5). The Company has continued specific recruiting activities to
mitigate labor market challenges. The Company has also augmented its sales and
service delivery functions through a central management focus and target market
area coverage. The rate increases over prior year reflect changes in business
mix to higher priced services. Staffing Services includes the results of M.
David Lowe, Inc., ("MD Lowe") a Houston based company acquired in December 1997.
Outsourcing Services revenues grew 5.3% to $139.5 million. Outsourcing Services
revenues from customers other than IBM increased 7.9%, or $3.8 million, over
1998, while revenues from IBM increased $3.2 million or 3.9%. Professional
Services revenues were $150.7 million in 1999 compared to $99.4 million in 1998,
a 51.6% increase. The Company's Professional Services group includes Norrell
Information Services, Norrell Financial Staffing, IMCOR and FSS (acquired August
1998). Norrell Information Services was augmented by the April 1998 acquisition
of Trattner and the July 1998 acquisition of Carson.
8
10
Gross profit increased 6.3%, or $9.7 million, to $162.5 million in
1999. Gross margin (gross profit as a percent of revenues) increased from 22.3%
in 1998 to 22.7% in the 1999 period. The Professional Services group, which
typically generates higher margins, accounts for a growing percentage of total
gross margin. Staffing Services gross margin decreased from 21.4% in 1998 to
20.3% in 1999 primarily due to changes in business mix. Outsourcing Services
gross margin increased from 17.9% in 1998 to 18.5% in 1999 due to the ramp up of
several new call center projects. Professional Services gross margin increased
from 32.2% in 1998 to 33.5% in 1999 as a result of adding higher margin
information technology consulting services and high end financial staffing
services.
Operating expenses increased 7.4%, or $8.5 million. The increase is
primarily due to incremental operating expenses resulting from the acquisitions
of MD Lowe, Trattner, Carson and FSS. If incremental expenses related to these
acquisitions were excluded, operating expenses would have decreased $5.3 million
or 4.8%. The decrease is due in part to cost containment efforts in the field
and headquarters operations. Also, during the 1998 period, the Financial
Accounting Standards Board Emerging Issues Task Force issued an accounting
ruling requiring companies to expense as incurred costs associated with business
process reengineering. The Company incurred $1.2 million of incremental costs
for business process reengineering work in 1998. Operating costs, as a
percentage of revenue increased from 16.8% in the 1998 period to 17.3% in the
1999 period. Depreciation and amortization expense increased 41.0%, or $2.5
million, due to increased investment in desktop computers to support management
information and field operating systems and amortization of goodwill from
acquisitions.
Interest expense increased from $2.4 million in 1998 to $3.7 million in
1999. This increase was due to carrying a higher debt balance as a result of
acquisitions completed during the latter part of fiscal year 1998.
See Liquidity and Capital Resources where discussed.
Other income (expense) changed from an expense of $51,000 in 1998 to
income of $135,000 in 1999.
The effective income tax rate remained constant year over year at
37.5%.
Net income decreased from $18.0 million in 1998 to $11.5 million in
1999, a 36.1% decrease. Diluted earnings per share decreased from $0.63 in the
1998 period to $0.42 in 1999.
Year 2000 remediation expense increased from $405,000 in 1998 to $8.4
million in the 1999 period. If these costs had been excluded, net income would
have been $16.7 million in 1999, a $1.5 million or 8.3% decrease over the prior
year. Diluted earnings per share would have decreased to $0.62, resulting in a
3.1% decrease over prior year diluted earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations in 1999 was $31.2 million compared to cash
provided of $40.0 million in 1998. The 1999 period included a decrease of $14.6
million in trade accounts receivable (an increase in cash) compared to a
decrease of $20.5 million in 1998. The 1998 collections of accounts receivable
were higher due to the completion of a large call center staffing project during
the first quarter of 1998. During the 1999 and 1998 periods, cash provided by
operating activities was partially offset by a decrease in accounts payable and
accrued expenses (a decrease in cash) of $6.1 million and $10.9 million,
respectively. The decrease was primarily due to the timing of payroll related
payments.
Investing activities used cash of $22.4 million in 1999 compared to
cash used of $30.8 million in 1998. The 1999 period included the repayment of
notes payable for two prior acquisitions, the NorCross Teleservices, Inc.
minority interest in fiscal 1998 and MD Lowe in fiscal 1997. The notes payable
repayments resulted in cash uses of $8.4 million. The 1998 period included
payments related to the acquisitions of MD Lowe in December 1997 and Trattner in
April 1998 which used cash of $13.0 million and $8.1 million, respectively.
Investing activities for 1999 and 1998 included MIS
9
11
development costs of $3.9 million in each year. The 1999 period also included
$2.9 million for capital costs incurred for two new call centers in Tucson,
Arizona and Victoria, Texas.
Financing activities used cash of $12.1 million in 1999 compared to
cash used of $10.6 million in 1998. Long-term debt used cash of $10.5 million in
1999 compared to net cash used of $12.2 million in 1998. The 1999 and 1998
long-term debt issuance was for the acquisitions discussed above, spending on
MIS development and property and equipment.
The Company expects to make an additional acquisition payment to the
previous shareholders of Trattner, Inc. on June 14, 1999. This payment, which
will be calculated based on Trattner's earning during the twelve month period
following its acquisition by Norrell, is anticipated to be in the range of $20
million to $25 million. The payment will be accounted for as an additional cost
of the acquired assets and amortized over the remaining life of the assets.
At May 2, 1999, the Company had $106.3 million of total debt
outstanding.
Consistent with the Company's information systems plan to address
long-term business needs, the Company completed required work on its new weekly
payroll system in its first fiscal quarter. Pending the outcome of the merger
with Interim, the Company is reassessing its branch order entry system
requirements.
OTHER EVENTS
On March 24, 1999, the Company entered into an Agreement and Plan of
Merger with Interim Services, Inc. The Merger Agreement provides for the merger
of the Company with and into a wholly owned subsidiary of Interim. Pursuant to
the terms of the Merger Agreement, the shareholders of the Company will receive
0.9 shares of Interim common stock for each Norrell common share. Norrell
shareholders may elect to receive cash in lieu of stock subject to certain
limitations. Interim stock will constitute a maximum of 90 percent of the total
consideration paid in the transaction with cash paid for the remainder. The
transaction is valued at approximately $650 million based on recent market
values of Interim common stock and including the assumption by the Company of
Norrell's outstanding debt. The transaction will be accounted for as a purchase,
is expected to conclude during the third quarter of 1999, and is subject to the
approval of the shareholders of both Interim and Norrell.
During the first quarter of 1999, the Company purchased 93,000 shares
of its common stock for an aggregate price of $1.4 million. The periodic
purchases were made in the open market and were financed through the Company's
normal operating cash flows.
In December 1998, the Company issued 333,500 shares of restricted stock
to certain employees. These shares will vest to the employees upon the
completion of a 9 year service requirement, as soon as the year 2001 if certain
performance criteria are met or upon change in control of the Company. The
transaction resulted in $4.6 million of compensation expense, which has been
deferred and will be recognized on a straight-line basis over 9 years. The
balance of deferred compensation expense is shown in the equity section of the
Consolidated Balance Sheets as Unearned Compensation. During the six months
ended May 2, 1999, $189,000 of compensation expense was recognized.
In April 1999, the Company issued 7,000 shares of restricted stock to
outside Board members. These shares will vest on March 2, 2000 or when the
individual ceases being a director of the Company. This transaction resulted in
$90,000 of compensation expense, which has been deferred and will be recognized
on a straight-line basis over 11 months. The balance of deferred compensation
expense is shown in the equity section of the Consolidated Balance Sheets as
Unearned Compensation. During the six months ended May 2, 1999, $7,000 of
compensation expense was recognized.
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NEW ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income." This standard is effective for fiscal
years beginning after December 15, 1997 and was adopted by the Company in the
first fiscal quarter of 1999. See Note 4 to Consolidated Financial Statements
where discussed.
YEAR 2000 ISSUES
The following represents an update to the Company's Year 2000 plan
detailed in the 1998 form 10-K filing:
STATE OF READINESS
The Company met its anticipated Strategy phase deadline during the
first fiscal quarter of 1999, but expects to complete mission critical systems
testing by mid August rather than late June.
ESTIMATED COSTS
Total estimates for Year 2000 costs continue to be $18 million to $25
million. Of the total estimated costs, $7.0 million has been incurred and
expensed since the inception of the Year 2000 project. During fiscal 1999, $3.1
million has been incurred and expensed.
YEAR 2000 CONTINGENCY PLANS
The Company has secured the services of a consultant who has been
working on Year 2000 projects for the last four years specializing in business
continuity planning. This consultant will assist the Company with contingency
planning and business continuity planning for Year 2000 for all of the Company's
business units.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the Company's market risk
exposure as detailed in the 1998 form 10-K filing.
SPECIAL NOTE REGARDING "FORWARD-LOOKING" INFORMATION
The foregoing section contains forward-looking statements, including
statements regarding, among other matters: (i) the Company's plans, intentions
and expectations with respect to its future prospects, including its business
and growth strategies and its relationships with its major clients; (ii)
industry trends, competitive conditions and client preferences; (iii) expected
capital expenditures to be made in the future, including investments in its
computerized management information systems; (iv) the sufficiency of funds from
operations and available borrowings to meet the Company's working capital and
capital expenditure needs for fiscal 1999; (v) the Company's plans, beliefs and
expectations with respect to changes which have been or will be made to its
computerized management information systems, including modifications to its
payroll and billing systems and other modifications to address Year 2000 issues;
and (vi) resolution of pending litigation without material adverse effect on the
Company. This notice is intended to take advantage of the " safe harbor"
provided by the Private Securities Litigation Reform Act of 1995 with respect to
such forward-looking statements. These forward-looking statements involve a
number of risks and uncertainties. Among others, factors that could cause actual
results to differ materially from the Company's beliefs or expectations are the
following: industry trends and trends in the general economy or in industries in
which the Company's major clients operate; competitive factors in the markets in
which the Company or its major clients operate; the loss or reduction of
revenues generated by the Company's major clients; the variability of quarterly
results and seasonality of the Company's business; the dependence on key
personnel who have been hired or retained by the Company; changes in regulatory
requirements which are applicable to the Company's business; the availability of
strategic acquisitions or joint venture partners; and other factors referenced
herein or from time to time in this document.
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PART II
ITEM 6
(a) Exhibit 27 Financial Data Schedule (for SEC use only)
(b) The following report on Form 8-K filed for the period covered under
this quarterly filing is incorporated by reference.
Form 8-K report dated March 24, 1999, filed on March 30, 1999
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORRELL CORPORATION
(REGISTRANT)
Date: June 14, 1999 By: /s/ Scott L. Colabuono
------------------------------------------
Scott L. Colabuono
Vice President and Chief Financial Officer
(On behalf of the Registrant and as
Chief Accounting Officer)
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