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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 26, 1999
Commission file number: 0-23198
INTERIM SERVICES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3536544
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2050 SPECTRUM BOULEVARD, FORT LAUDERDALE, FLORIDA 33309
(Address of principal executive offices) (Zip code)
(954) 938-7600
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK -- $.01 PAR VALUE New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(Title of class)
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
Number of shares of Registrant's Common Stock, par value $.01 per
share ("Common Stock"), outstanding on April 23, 1999 was 44,237,762.
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TABLE OF CONTENTS
PART I Financial Information
Item 1. Financial Statements PAGE
----
Consolidated Statements of Earnings
Three Months Ended March 26, 1999 and March 27, 1998...... 1
Consolidated Balance Sheets
March 26, 1999 and December 25, 1998...................... 2
Consolidated Statements of Cash Flows
Three Months Ended March 26, 1999 and March 27, 1998...... 3
Notes to Consolidated Financial Statements.................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 11
PART II Other Information
Item 4. Matters Submitted to a Vote of Security Holders ..... 12
Item 6. Exhibits and Reports on Form 8-K..................... 13
Signatures ................................................... 14
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERIM SERVICES INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
------------------
MARCH 26, 1999 MARCH 27, 1998
-------------- --------------
Revenues........................................... $566,031 $416,191
Cost of services................................... 377,686 276,673
-------- --------
Gross profit....................................... 188,345 139,518
-------- --------
Selling, general and administrative expenses....... 135,577 95,977
Licensee commissions............................... 11,714 11,607
Amortization of intangibles........................ 6,874 5,321
Interest expense................................... 6,590 8,055
Interest income.................................... (774) (355)
-------- --------
159,981 120,605
-------- --------
Earnings before income taxes..................... 28,364 18,913
Income taxes....................................... 12,480 8,360
-------- --------
Net earnings....................................... $ 15,884 $ 10,553
-------- --------
-------- --------
Basic earnings per share........................... $ 0.34 $ 0.26
-------- --------
-------- --------
Diluted earnings per share......................... $ 0.33 $ 0.26
-------- --------
-------- --------
Basic weighted average shares outstanding.......... 47,386 39,886
-------- --------
-------- --------
Diluted weighted average shares outstanding........ 53,318 40,828
-------- --------
-------- --------
See notes to Consolidated Financial Statements.
1
INTERIM SERVICES INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
MARCH 26, 1999 DECEMBER 25, 1998
-------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents.................................... $ 39,956 $ 153,314
Receivables, less allowance for doubtful accounts of
$8,991 and $8,937.......................................... 357,927 327,296
Insurance deposits........................................... 18,231 22,140
Other current assets......................................... 43,530 42,024
---------- ----------
Total current assets.................................. 459,644 544,774
Goodwill, net................................................ 719,979 705,837
Tradenames and other intangibles, net........................ 205,723 213,357
Property and equipment, net.................................. 94,050 90,622
Other assets................................................. 58,056 58,854
---------- ----------
$1,537,452 $1,613,444
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt............................ $ 24,882 $ 21,943
Due to Computer Power shareholders........................... - 111,008
Accounts payable and other accrued expenses.................. 110,683 101,469
Accrued salaries, wages and payroll taxes.................... 124,068 125,890
Accrued self-insurance losses................................ 33,592 34,947
Accrued income taxes......................................... 32,845 23,232
---------- ----------
Total current liabilities................................ 326,070 418,489
Long-term debt................................................. 441,455 426,856
Other long-term liabilities.................................... 31,090 30,159
Stockholders' Equity:
Preferred stock, par value $.01 per share; authorized
2,500,000 shares; none issued or outstanding............... - -
Common stock, par value $.01 per share; authorized
100,000,000 shares; issued 47,427,492 and 47,335,654....... 474 473
Treasury stock, at cost, 159,200 shares ..................... (2,916) -
Additional paid-in capital................................... 469,440 468,032
Retained earnings............................................ 278,149 262,265
Accumulated other comprehensive income....................... (6,310) 7,170
---------- ----------
Total stockholders' equity............................... 738,837 737,940
---------- ----------
$1,537,452 $1,613,444
---------- ----------
---------- ----------
See notes to Consolidated Financial Statements.
2
INTERIM SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
------------------
MARCH 26, 1999 MARCH 27, 1998
-------------- --------------
Cash Flows from Operating Activities:
Net earnings................................................ $ 15,884 $ 10,553
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization........................... 13,104 9,818
Deferred income tax (benefit) expense................... (407) 290
Changes in assets and liabilities, net of effects
of acquisitions:
Receivables......................................... (28,471) (14,837)
Other assets........................................ 4,486 (586)
Accounts payable and accrued liabilities............ 12,825 (4,275)
Other............................................... 203 (175)
--------- ---------
Net Cash Provided by Operating Activities........ 17,624 788
--------- ---------
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired.......................... (139,409) (60,091)
Capital expenditures........................................ (9,780) (6,905)
--------- ---------
Net Cash Used in Investing Activities............. (149,189) (66,996)
--------- ---------
Cash Flows from Financing Activities:
Debt proceeds............................................... 24,546 73,199
Debt repayments............................................. (1,178) -
Purchase of treasury stock.................................. (2,916) -
Other, net.................................................. (2,245) 2,018
--------- ---------
Net Cash Provided by Financing Activities......... 18,207 75,217
--------- ---------
(Decrease)/increase in cash and cash equivalents............ (113,358) 9,009
Cash and cash equivalents, beginning of period.............. 153,314 15,570
--------- ---------
Cash and cash equivalents, end of period.................... $ 39,956 $ 24,579
--------- ---------
--------- ---------
See notes to Consolidated Financial Statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements of Interim Services Inc. and
subsidiaries (the "Company"), included herein, do not include all
footnote disclosures normally included in annual financial
statements and, therefore, should be read in conjunction with the
Company's financial statements and notes thereto for each of the
fiscal years in the three year period ended December 25, 1998
included in the Company's Annual Report on Form 10-K.
The consolidated financial statements for the three months ended
March 26, 1999 and March 27, 1998 are unaudited and, in the opinion
of management, reflect all adjustments (consisting only of normal
recurring adjustments) necessary for fair presentation of financial
position, results of operations and cash flows for such periods.
Results for the three months ended March 26, 1999 are not
necessarily indicative of results to be expected for the full fiscal
year ending December 31, 1999.
2. Comprehensive Income
Comprehensive income, which totaled $2.4 million and $12.0 million
for the three months ended March 26, 1999 and March 27, 1998,
respectively, is comprised of net earnings of $15.9 million and
$10.6 million, respectively, and foreign currency translation
adjustments of ($13.5 million) and $1.4 million, respectively.
3. Earnings Per Share
Basic earnings per share is computed by dividing the Company's
earnings by the weighted average number of shares outstanding during
the period.
Diluted earnings per share is computed by dividing the Company's
earnings by the weighted average number of shares outstanding and
the impact of all dilutive potential common shares, primarily stock
options and convertible subordinated notes. The dilutive impact of
stock options is determined by applying the treasury stock method
and the dilutive impact of the convertible subordinated notes is
determined by applying the "if converted" method.
The following table reconciles the numerator (earnings) and
denominator (shares) of the basic and diluted earnings per share
computations for net earnings.
THREE MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-------------------------------------------------------------
MARCH 26, 1999 MARCH 27, 1998
----------------------------- -----------------------------
NET PER-SHARE NET PER-SHARE
EARNINGS SHARES AMOUNT EARNINGS SHARES AMOUNT
-------- ------ --------- -------- ------ ---------
Basic EPS...................... $15,884 47,386 $0.34 $10,553 39,886 $0.26
----- -----
----- -----
Effect of Dilutive Securities:
Stock options................ - 384 - 942
Convertible subordinated
notes...................... 1,519 5,548 - -
------- ------ ------- ------
Diluted EPS.................... $17,403 53,318 $0.33 $10,553 40,828 $0.26
------- ------ ----- ------- ------ -----
------- ------ ----- ------- ------ -----
4
4. Segment Information
In 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 supersedes SFAS No.
14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE,
replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal
organization that is used by management for making operating
decisions and assessing performance as the source of the Company's
reportable operating segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major
customers. The adoption of SFAS No. 131 did not affect results of
operations or financial position but did affect the disclosure of
segment information.
The Company operates within the staffing industry in 12 countries
around the world: Australia, Canada, France, Germany, Hong Kong,
Italy, New Zealand, Singapore, Spain, The Netherlands, the United
Kingdom and the United States. The Company considers its operating
segments to be North America, Europe and Australia/Asia. These
operating segments generally follow the management organization
structure of the Company and also represent, in the opinion of
management, the most meaningful aggregation of the Company's
multiple operating units across the world. This aggregation is based
upon geographic similarities including market growth rates,
profitability, foreign currency exposure and local laws and
regulations. In each of these operating segments the Company's four
services, consulting, managed services, search/recruitment and
flexible staffing, are provided. The Company evaluates the
performance of its operating segments and allocates resources to
them based on revenues, gross profit and segment contribution.
Segment contribution is defined as income before central costs,
interest and income taxes. All intercompany revenues and expenses
are eliminated in computing segment revenues, gross profit and
segment contribution. Prior years' data has been restated to conform
to the current year reportable operating segments presentation.
5
Information on operating segments and a reconciliation to earnings
before income taxes for the three months ended March 26, 1999 and
March 27, 1998 are as follows (in thousands):
THREE MONTHS ENDED
------------------
MARCH 26, 1999 MARCH 27, 1998
-------------- --------------
REVENUES:
North America......................... $366,530 $316,151
Europe................................ 141,356 89,112
Australia/Asia........................ 58,145 10,928
-------- --------
$566,031 $416,191
-------- --------
-------- --------
GROSS PROFIT:
North America......................... $106,660 $ 92,184
Europe................................ 63,654 42,307
Australia/Asia........................ 18,031 5,027
-------- --------
$188,345 $139,518
-------- --------
-------- --------
SEGMENT CONTRIBUTION:
North America......................... $ 27,898 $ 25,970
Europe................................ 18,081 12,555
Australia/Asia........................ 2,921 794
-------- --------
48,900 39,319
Central costs......................... 14,720 12,706
Interest, net......................... 5,816 7,700
-------- --------
Earnings before income taxes.......... $ 28,364 $ 18,913
-------- --------
-------- --------
5. Acquisitions
During the quarter ended March 26, 1999, the Company completed
acquisitions for total cash consideration of approximately $28
million and made the final payment associated with the 1998
acquisition of Computer Power Group Limited ("Computer Power") in
the amount of approximately $111 million.
6. Norrell Merger
On March 24, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Norrell Corporation
("Norrell"). The Merger Agreement provides for the merger of Norrell
with and into a wholly-owned subsidiary of the Company. Pursuant to
the terms of the Merger Agreement, the shareholders of Norrell will
receive 0.9 share of Interim common stock for each Norrell 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 $575 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 and 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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Interim is a leader in identifying, assessing, deploying and
measuring talent for a wide variety of businesses. The Company is
organized into three operating segments, North America, Europe and
Australia/Asia. In each of its operating segments, Interim provides
four services. The Company's four services are: (1) consulting --
including outplacement, executive coaching and information
technology ("IT") consulting; (2) managed services -- such as
temporary and permanent workforce management, which includes Interim
On-Premise, functional outsourcing and vendor management; (3)
search/recruitment -- such as temporary to permanent assignments,
contingency recruiting and executive retained search; and (4)
flexible staffing -- temporary personnel from administrative
personnel to executives.
RESULTS OF OPERATIONS
The following table sets forth revenues and gross profit by service
for the periods indicated (in thousands):
THREE MONTHS ENDED
----------------------------------------------------
% OF % OF
MARCH 26, 1999 TOTAL MARCH 27, 1998 TOTAL
-------------- ------ -------------- ------
REVENUES:
Consulting........... $106,645 18.8% $ 59,653 14.3%
Managed Services..... 86,906 15.4% 71,635 17.2%
Search/Recruitment... 74,106 13.1% 57,359 13.8%
Flexible Staffing.... 298,374 52.7% 227,544 54.7%
-------- ------ -------- ------
$566,031 100.0% $416,191 100.0%
-------- ------ -------- ------
-------- ------ -------- ------
% OF % OF
REVENUES REVENUES
-------- --------
GROSS PROFIT:
Consulting........... $ 44,085 41.3% $ 21,881 36.7%
Managed Services..... 17,221 19.8% 14,653 20.5%
Search/Recruitment... 57,581 77.7% 43,808 76.4%
Flexible Staffing.... 69,458 23.3% 59,176 26.0%
-------- ------ -------- ------
$188,345 33.3% $139,518 33.5%
-------- ------ -------- ------
-------- ------ -------- ------
THREE MONTHS ENDED MARCH 26, 1999 COMPARED WITH THREE MONTHS ENDED
MARCH 27, 1998
REVENUES. Revenues for the three months ended March 26, 1999
increased 36.0% to $566.0 million from $416.2 million in the prior
year. Consulting revenues increased 78.8% reflecting the fourth
quarter 1998 acquisitions of Computer Power Group Limited ("Computer
Power") in Australia and Ouranos Informatica Groep B.V. ("Ouranos")
in The Netherlands, both of which provide IT consulting, as well as
strong organic growth in IT consulting, outplacement and executive
coaching. Managed services revenues increased 21.3% reflecting the
continued expansion of the Interim On-Premise program and an
increase in technology help-desk services. Search/recruitment
revenues increased 29.2% due to strong organic growth primarily in
European finance and accounting recruitment. Flexible staffing
revenues increased 31.1% reflecting the acquisitions of Crone
Corkill Group PLC ("Crone Corkill") in the United Kingdom in March
1998, AGO Uitzendbureau ("AGO") in The Netherlands in July 1998 and
Computer Power in December 1998; and continued strong organic growth
in European and Australian/Asian finance and accounting flexible
staffing. North American administrative and light industrial
flexible staffing also contributed to flexible staffing growth in
the first quarter.
7
GROSS PROFIT. Gross profit for the three months ended March 26,
1999 increased 35.0% to $188.3 million from $139.5 million in the
prior year. Gross profit margin was 33.3% compared with 33.5% in the
prior year. Margins were lower principally due to the inclusion in
the first quarter of 1999 of Computer Power's flexible staffing and
pricing pressures associated with business expansion at existing
On-Premise clients.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 41.3% to $135.6 million from $96.0
million in the prior year period. Selling, general and
administrative expenses as a percentage of revenues were 24.0%
compared with 23.1% a year ago due partially to the increase in
consulting as a percentage of total revenues in 1999 as a result of
acquisitions made subsequent to the first quarter of 1998. These
higher gross margin businesses have higher operating expenses than
flexible staffing and managed services. Higher selling, general and
administrative expenses as a percentage of revenues are also due to
the deployment of new technology including a new front-office system
within North American flexible staffing offices and the
consolidation of North American back office operations.
LICENSEE COMMISSIONS. Licensee commissions increased slightly to
$11.7 million from $11.6 million in the prior year period.
AMORTIZATION OF INTANGIBLES. Amortization expense increased 29.2%
to $6.9 million from $5.3 million in the prior year period
reflecting the increase in intangible assets arising from
acquisitions.
INTEREST EXPENSE. Interest expense decreased 18.2% to $6.6 million
from $8.1 million last year. This decrease primarily resulted from
the repayment of a portion of the Company's existing credit
facilities at lower rates in May 1998 from the issuance of $207
million, 4 1/2% convertible subordinated notes. The Company had
average borrowings outstanding during 1999 of $454.6 million at an
average rate of interest, including the effects of interest rate
swaps, of 5.7% compared with $444.4 million outstanding during 1998
at an average rate of interest of 7.2%.
INTEREST INCOME. Interest income increased to $0.8 million from
$0.4 million last year, primarily due to the investment of proceeds
from the Company's common stock and notes offerings in May 1998
prior to the payments for the acquisition of Computer Power and
other acquisitions during the first quarter of 1999.
INCOME TAXES. The effective tax rate for the first quarter of 1999
was 44.0% compared with 44.2% in 1998.
NET EARNINGS. Net earnings increased 50.5% to $15.9 million ($0.33
per diluted share) from $10.6 million ($0.26 per diluted share) in
the prior year period. This represents a 26.9% increase in per share
net earnings. The weighted average number of shares (as adjusted for
the dilutive impact of common stock equivalents) increased to 53.3
million from 40.8 million in the prior year, primarily due to the
issuance of 7.0 million shares of common stock and $207.0 million of
convertible subordinated debt in the second quarter of 1998.
OPERATING SEGMENTS
Interim currently operates in three operating segments: North
America, Europe and Australia/Asia.
8
Information on operating segments and a reconciliation to earnings
before income taxes for the three months ended March 26, 1999 and
March 27, 1998 are as follows (in thousands):
THREE MONTHS ENDED
----------------------------------------------------
MARCH 26, 1999 MARCH 27, 1998
------------------------- ------------------------
% OF % OF
TOTAL TOTAL
------ ------
REVENUES:
North America........ $366,530 64.8% $316,151 76.0%
Europe............... 141,356 25.0% 89,112 21.4%
Australia/Asia....... 58,145 10.2% 10,928 2.6%
-------- ------ -------- ------
$566,031 100.0% $416,191 100.0%
-------- ------ -------- ------
-------- ------ -------- ------
% OF % OF
REVENUES REVENUES
-------- --------
GROSS PROFIT:
North America........ $106,660 29.1% $ 92,184 29.2%
Europe............... 63,654 45.0% 42,307 47.5%
Australia/Asia....... 18,031 31.0% 5,027 46.0%
-------- ------ -------- ------
$188,345 33.3% $139,518 33.5%
-------- ------ -------- ------
-------- ------ -------- ------
% OF % OF
REVENUES REVENUES
-------- --------
SEGMENT CONTRIBUTION:
North America........ $ 27,898 7.6% $ 25,970 8.2%
Europe............... 18,081 12.8% 12,555 14.1%
Australia/Asia....... 2,921 5.0% 794 7.3%
-------- ------ -------- ------
48,900 8.6% 39,319 9.5%
------ ------
------ ------
Central costs........ 14,720 12,706
Interest, net........ 5,816 7,700
-------- --------
Earnings before
income taxes....... $ 28,364 $ 18,913
-------- --------
-------- --------
NORTH AMERICA. North American revenues, which represented 64.8% of
total revenues for the three months ended March 26, 1999, increased
15.9% to $366.5 million from $316.2 million. Gross profit for the
three months ended March 26, 1999 in North America increased 15.7%
over the prior year period and the gross profit margin was about the
same as in the prior year period. Segment contribution (income
before central costs, interest and income taxes) increased 7.4% over
the prior year period. Higher revenues for the three months ended
March 26, 1999, compared with the prior year period resulted from
strong organic growth rates in most service offerings with
particularly strong growth in IT related consulting and flexible
staffing, outplacement and executive coaching and the expansion of
Interim On-Premise. Segment contribution rates decreased in 1999
compared with 1998 due to the deployment of new technology including
a new front-office system within North American flexible staffing
offices and the consolidation of the North American back office
operations.
EUROPE. European revenues, which represented 25.0% of total
revenues for the three months ended March 26, 1999, increased 58.6%
to $141.4 million from $89.1 million in the prior year. Gross profit
in Europe increased 50.5% over the prior year and the gross profit
margin decreased to 45.0% from 47.5% in the prior year. Segment
contribution increased 44.0% over the prior year period. Factors
contributing to the increase in revenues, gross profit and segment
contribution include the acquisitions of Crone Corkill in March
1998, AGO in July 1998 and Ouranos in November 1998 combined with
continued organic growth in finance and accounting flexible staffing
and search/recruitment and IT consulting. The decrease in European
gross profit margin is primarily due to increased flexible staffing
revenues as a percentage of total revenues. Flexible staffing gross
profit margins are lower than search/recruitment margins. The
decline in gross profit margin was partially offset by an increase
in IT related
9
consulting revenues. The decrease in segment contribution as a
percentage of revenues from 14.1% in 1998 to 12.8% in 1999 resulted
primarily from the lower gross profit margin and higher selling,
general and administrative expenses as a percentage of revenues due
to IT consulting acquisitions made subsequent to the first quarter
of 1998.
AUSTRALIA/ASIA. Australian/Asian revenue, which represented 10.2%
of total revenues for the three months ended March 26, 1999,
increased significantly to $58.1 million from $10.9 million due
primarily to the acquisition of Computer Power. Gross profit
increased to $18.0 million from $5.0 million and segment
contribution increased to $2.9 million from $0.8 million in the
prior year for the same reasons. The decrease in Australian/Asian
gross profit margin from 46.0% to 31.0% is due to the addition of a
significant amount of flexible staffing revenue with the acquisition
of Computer Power at the end of 1998.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Cash provided by operating activities for the three months ended
March 26, 1999 was $17.6 million compared with $0.8 million in the
prior year. Higher operating cash flows resulted from increased
earnings, higher amortization and depreciation; combined with less
cash used by changes in working capital items. Changes in working
capital items used cash of $11.0 million this year compared with
cash used of $19.9 million last year. Less cash used for working
capital items in 1999 resulted from an increase in accruals for
foreign taxes, higher interest accruals due to timing of interest
payments, a reduction in insurance deposits due to claims payments
partially offset by an increase in accounts receivable due primarily
to higher sales and days sales outstanding.
Investing activities used $149.2 million for the three months ended
March 26, 1999 primarily due to the remaining payments on the
December 1998 acquisition of Computer Power as well as first quarter
1999 acquisitions in the areas of European and North American
flexible staffing. Investing activities also included $9.8 million
of capital expenditures primarily for new computer hardware and
software to continue to upgrade and expand the Company's information
technology capabilities and new office related expenditures.
Cash provided by financing activities was $18.2 million for the
three months ended March 26, 1999 and primarily reflects $23.0
million of U.S. borrowings under the Company's primary revolving
credit facility.
During the second quarter of 1999, the Company repurchased
approximately 3 million shares of common stock under a previously
announced program to repurchase up to 3.3 million shares of its
stock.
YEAR 2000 COMPLIANCE
As discussed in the Company's 1998 Annual Report on Form 10-K, the
Company determined it will be required to upgrade certain
application systems to ensure operability after the year 1999. To
ensure that the Company's computer systems are Year 2000 compliant,
the Company continues to utilize internal and external resources for
testing and project management of the Year 2000 modifications ("Year
2000 project" or "project"). The Company anticipates completion of
the Year 2000 project in mid 1999, which is based upon expected
vendor upgrades to compliant versions of software.
The Company has implemented a five-step process to address Year 2000
issues, consisting of awareness, assessment, renovation, validation
and implementation. This uniform process is being used across the
entire Company, including new acquisitions, to ensure consistent
results throughout the project. A majority of the Company's
applications are either implemented or in the late phases of
implementation, although some of the Company's applications are
still in the validation stage. The most critical business system,
the Company's largest payroll and billing system, has been validated
and implemented and greater than 95% of all critical systems in the
U.S. are year 2000 ready.
10
The Company is in the process of contacting vendors and others on
whom it relies to assure that their systems will be converted in a
timely fashion. Based on current information received, the Company
does not foresee any material potential risk with its significant
vendors and business partners. However, there can be no assurance
that the systems of other companies on which the Company's systems
rely will be converted timely, or that a failure to convert by
another company would not have a material adverse effect on the
Company.
The Company estimates that the total cost of the project will be
approximately $750,000, which includes both personnel costs related
to project management, programming and hardware and software
upgrades. Of this total, approximately $535,000 has been incurred as
of March 26, 1999. The cost of the project and the estimated
completion dates are based on management's best estimates, which
were derived utilizing assumptions of future events, including the
continued availability of certain resources, third-party
modification plans and other factors. There can be no assurance that
these estimates will prove accurate, and actual results could differ
from those estimated if these assumptions prove inaccurate. Based
upon progress to date, the Company believes that it is unlikely that
the foregoing factors will cause actual results to differ
significantly from those estimated. However, for those systems in
the pre-implementation phases, no assurance can be given that those
systems will be Year 2000 compliant, or that the ultimate costs
required to address the Year 2000 issue or the impact of any failure
to achieve substantial Year 2000 compliance will not have a material
adverse effect on the Company's financial condition. If certain
systems or systems of other companies on which the Company relies
fail to be converted timely, the Company will develop a contingency
plan in the third quarter of 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 26, 1999, the Company maintains a portion of its cash
and cash equivalents in financial instruments with original
maturities of three months or less. These financial instruments are
subject to interest rate risk and will decline in value if interest
rates increase. Due to the short duration of these financial
instruments, an immediate increase of 1% in interest rates would not
have a material effect on the Company's financial condition.
The Company's outstanding debt under the revolving Credit Facility
and other borrowings, excluding the convertible subordinated notes,
at March 26, 1999 were $259.3 million. Interest rates on these
borrowings are based on LIBOR plus a variable margin. Based on the
outstanding balance, a change of 1% in the interest rate would cause
a change in interest expense of approximately $2.6 million on an
annual basis not considering the offset of the interest rate swap
discussed below.
The Company utilizes interest rate swap agreements to reduce the
impact on interest expense of fluctuating interest rates on its
variable rate debt. The Company had a variable to variable interest
rate swap agreement outstanding as of March 26, 1999 with the
notional amount of $121.8 million which effectively converts
interest from a British Pound LIBOR basis to a broader index and
caps the Company's exposure to upward movement in rates at 8.5%.
This agreement expires in 2002. The cost to terminate this interest
rate swap as of March 26, 1999 was $3.6 million.
In May 1998, the Company issued $207.0 million of 4 1/2% Convertible
Subordinated Notes due June 2005. The fair value of the Company's
fixed rate convertible subordinated debt as of March 26, 1999 was
$158.7 million compared with the related carrying value of $207.0
million.
The purpose of the Company's foreign exchange hedging activities is
to mitigate the impact of changes in foreign currency exchange
rates. The Company attempts to hedge transaction exposures through
natural offsets. To the extent this is not practicable, exposure
areas which are considered for hedging include foreign currency
denominated receivables and payables, intercompany loans, firm
committed transactions and dividends related to foreign
subsidiaries. The Company uses financial instruments, principally
forward exchange contracts, in its management of foreign currency
exposures. The Company does not enter into forward contracts for
trading purposes. At March 26, 1999 the Company had outstanding
foreign currency forward contracts to sell Australian dollars in the
notional amount of $59.6 million. The cost to terminate foreign
currency forward contracts as of December 25, 1998 was $0.7 million.
11
FORWARD-LOOKING STATEMENTS
Part I, Items 2 (Management's Discussion and Analysis of Financial
Condition and Results of Operations) and 3 (Quantitative and
Qualitative Disclosures about Market Risk) of this Quarterly Report
on Form 10-Q may contain forward-looking statements, including
statements regarding future prospects, industry trends, competitive
conditions, litigation, Year 2000 systems issues and quantitative
and qualitative estimates as to market risk. 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; competitive factors in the markets in
which the Company operates; changes in regulatory requirements which
are applicable to the Company's business; and other factors
referenced herein or from time to time in the Company's Securities
and Exchange Commission reports.
PART II - OTHER INFORMATION
ITEM 4. MATTERS SUBMITTED TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the security holders for a vote
during the period covered by this report.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Required by Item 601 of Regulation S-K
Exhibit
Number Exhibit Name
------- ------------
2.1 Agreement and Plan of Merger dated as of March 24, 1999,
by and among Interim Services Inc., Interim Merger
Corporation and Norrell Corporation filed as Exhibit 2.1
to the registrant's Form 8-K, dated March 24, 1999, is
incorporated herein by reference.
27. Financial Data Schedule is filed herewith.
99.1 Irrevocable Proxy and Merger Consideration Election
Agreement dated March 24, 1999, filed as Exhibit 99.2 to
the registrant's Form 8-K, dated March 24, 1999, is
incorporated herein by reference.
(b) On March 30, 1999, the Company filed a Report on Form 8-K dated
March 24, 1999 pertaining to the proposed merger with Norrell
Corporation.
(c) Exhibits Filed With This Form
Exhibit
Number Exhibit Name
------- ------------
27. Financial Data Schedule.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERIM SERVICES INC.
(Registrant)
DATE - May 10, 1999 BY /s/ Roy G. Krause
----------------------------------
Roy G. Krause
Executive Vice President
and Chief Financial Officer
(principal financial officer)
DATE - May 10, 1999 BY /s/ Mark W. Smith
----------------------------------
Mark W. Smith
Vice President, Finance
(principal accounting officer)
13