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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 25, 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 July 23, 1999 was 65,430,000.
TABLE OF CONTENTS
PART I Financial Information
Page
----
Item 1. Financial Statements
Consolidated Statements of Earnings
Three Months Ended June 25, 1999 and June 26, 1998;
Six Months Ended June 25, 1999 and June 26, 1998 ......... 1
Consolidated Balance Sheets
June 25, 1999 and December 25, 1998 ...................... 2
Consolidated Statements of Cash Flows
Six Months Ended June 25, 1999 and June 26, 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 .............................................. 13
PART II Other Information
Item 4. Matters Submitted to a Vote of Security Holders...... 14
Item 5. Unaudited Pro Forma Condensed Consolidated
Balance Sheet Unaudited Pro Forma Condensed
Consolidated Statement of Earnings and Notes Thereto. 15
Item 6. Exhibits and Reports on Form 8-K..................... 19
Signatures .................................................. 20
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 SIX MONTHS ENDED
------------------ ----------------
JUNE 25, 1999 JUNE 26, 1998 JUNE 25, 1999 JUNE 26, 1998
------------- ------------- ------------- -------------
Revenues.......................................... $ 607,075 $ 461,622 $ 1,173,106 $ 877,813
Cost of services.................................. 406,464 303,601 784,150 580,274
----------- ------------ ----------- -------------
Gross profit...................................... 200,611 158,021 388,956 297,539
----------- ------------ ----------- -------------
Selling, general and administrative expenses...... 140,297 108,515 275,874 204,492
Licensee commissions.............................. 13,515 12,745 25,229 24,352
Amortization of intangibles....................... 6,876 5,562 13,750 10,883
Interest expense.................................. 6,896 7,745 13,486 15,800
Interest income................................... (628) (893) (1,402) (1,248)
----------- ------------ ----------- -------------
166,956 133,674 326,937 254,279
----------- ------------ ----------- -------------
Earnings before income taxes and
extraordinary item............................ 33,655 24,347 62,019 43,260
Income taxes...................................... 14,816 10,761 27,296 19,121
----------- ------------ ----------- -------------
Earnings before extraordinary item.............. 18,839 13,586 34,723 24,139
Extraordinary item - early extinguishment of
debt, net of income taxes....................... -- 2,773 -- 2,773
----------- ------------ ----------- -------------
Net earnings.................................... $ 18,839 $ 10,813 $ 34,723 $ 21,366
----------- ------------ ----------- -------------
----------- ------------ ----------- -------------
Basic earnings per share:
Earnings before extraordinary item ............... $ 0.42 $ 0.32 $ 0.75 $ 0.59
Extraordinary item................................ -- (0.07) -- (0.07)
----------- ------------ ----------- -------------
Net earnings...................................... $ 0.42 $ 0.25 $ 0.75 $ 0.52
----------- ------------ ----------- -------------
----------- ------------ ----------- -------------
Diluted earnings per share:
Earnings before extraordinary item................ $ 0.40 $ 0.31 $ 0.73 $ 0.57
Extraordinary item................................ -- (0.06) -- (0.06)
----------- ------------ ----------- -------------
Net earnings...................................... $ 0.40 $ 0.25 $ 0.73 $ 0.51
----------- ------------ ----------- -------------
----------- ------------ ----------- -------------
Basic weighted average shares outstanding......... 44,831 42,488 46,108 41,187
----------- ------------ ----------- -------------
----------- ------------ ----------- -------------
Diluted weighted average shares outstanding 50,636 45,402 51,977 43,115
----------- ------------ ----------- -------------
----------- ------------ ----------- -------------
See notes to Consolidated Financial Statements.
1
INTERIM SERVICES INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
JUNE 25, 1999 DECEMBER 25, 1998
------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 32,600 $ 153,314
Receivables, less allowance for doubtful accounts of $9,381 and $8,937............ 380,063 327,296
Insurance deposits................................................................ 18,549 22,140
Other current assets.............................................................. 45,575 42,024
----------- -----------
Total current assets....................................................... 476,787 544,774
Goodwill, net..................................................................... 726,299 705,837
Tradenames and other intangibles, net............................................. 199,724 213,357
Property and equipment, net....................................................... 99,372 90,622
Other assets...................................................................... 59,309 58,854
----------- ----------
$ 1,561,491 $ 1,613,444
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt................................................. $ 25,580 $ 21,943
Due to Computer Power shareholders................................................ - 111,008
Accounts payable and other accrued expenses....................................... 111,768 101,469
Accrued salaries, wages and payroll taxes......................................... 131,649 125,890
Accrued self-insurance losses..................................................... 37,561 34,947
Accrued income taxes.............................................................. 27,767 23,232
----------- -----------
Total current liabilities................................................... 334,325 418,489
Long-term debt...................................................................... 485,956 426,856
Other long-term liabilities......................................................... 34,746 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 200,000,000 and
100,000,000 shares respectively; issued 47,532,501 and 47,335,654.............. 475 473
Treasury stock, at cost, 3,214,500 shares ........................................ (51,664) -
Additional paid-in capital........................................................ 473,374 468,032
Retained earnings................................................................. 296,988 262,265
Accumulated other comprehensive income/(loss)..................................... (12,709) 7,170
----------- -----------
Total stockholders' equity.................................................. 706,464 737,940
----------- -----------
$ 1,561,491 $ 1,613,444
----------- -----------
----------- -----------
See notes to Consolidated Financial Statements.
2
INTERIM SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED
----------------
JUNE 25, 1999 JUNE 26, 1998
------------- -------------
Cash Flows from Operating Activities:
Net earnings before extraordinary item................... $ 34,723 $ 24,139
Adjustments to reconcile net earnings to net cash
from operating activities:
Depreciation and amortization.......................... 26,417 20,203
Deferred income tax (benefit) expense.................. 1,280 (1,611)
Changes in assets and liabilities, net of effects
of acquisitions:
Receivables........................................... (51,499) (28,942)
Other assets.......................................... 1,709 (7,766)
Accounts payable and accrued liabilities.............. 19,360 6,526
Other................................................. 407 64
----------- ----------
Net Cash Provided by Operating Activities........... 32,397 12,613
----------- ----------
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired....................... (150,723) (67,748)
Capital expenditures..................................... (21,884) (16,989)
----------- ----------
Net Cash Used in Investing Activities............... (172,607) (84,737)
----------- ----------
Cash Flows from Financing Activities:
Debt proceeds............................................ 71,344 219,845
Debt repayments.......................................... - (180,505)
Net proceeds from common stock offering.................. - 197,217
Purchase of treasury stock............................... (51,664) -
Other, net............................................... (184) 6,049
----------- ----------
Net Cash Provided by Financing Activities........... 19,496 242,606
----------- ----------
(Decrease)/increase in cash and cash equivalents......... (120,714) 170,482
Cash and cash equivalents, beginning of period........... 153,314 15,570
----------- ----------
Cash and cash equivalents, end of period................. $ 32,600 $ 186,052
----------- ----------
----------- ----------
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 and six months
ended June 25, 1999 and June 26, 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 and six months ended June 25, 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 $12.4 million and $6.1 million
for the three months ended June 25, 1999 and June 26, 1998,
respectively, is comprised of net earnings of $18.8 million and
$10.8 million, respectively, and foreign currency translation
adjustments of ($6.4 million) and ($4.7 million).
Comprehensive income, which totaled $14.8 million and $18.2 million
for the six months ended June 25, 1999 and June 26, 1998,
respectively, is comprised of net earnings of $34.7 million and
$21.4 million, respectively, and foreign currency translation
adjustments of ($19.9 million) and ($3.2 million).
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, convertible subordinated notes, restricted stock and
deferred stock units. 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)
-----------------------------------------------------------
JUNE 25, 1999 JUNE 26, 1998
----------------------------------------- ---------------------------------------------
EARNINGS
BEFORE
PER-SHARE EXTRAORDINARY PER-SHARE
NET EARNINGS SHARES AMOUNT ITEM SHARES AMOUNT
-------------- ---------- ------------ ----------------- ----------- -------------
Basic EPS........................... $ 18,839 44,831 $ 0.42 $ 13,586 42,488 $ 0.32
------- -------
------- -------
Effect of Dilutive Securities:
Stock options..................... - 257 - 1,096
Convertible subordinated notes....
1,517 5,548 456 1,818
---------- ------- ---------- -------
Diluted EPS......................... $ 20,356 50,636 $ 0.40 $ 14,042 45,402 $ 0.31
---------- ------- ------- ---------- ------- -------
---------- ------- ------- ---------- ------- -------
4
SIX MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------------------
JUNE 25, 1999 JUNE 26, 1998
---------------------------------------- ------------------------------------------
EARNINGS
BEFORE
NET PER-SHARE EXTRAORDINARY PER-SHARE
EARNINGS SHARES AMOUNT ITEM SHARES AMOUNT
------------- ----------- ------------- --------------- ----------- ------------
Basic EPS............................ $ 34,723 46,108 $ 0.75 $ 24,139 41,187 $ 0.59
--------- --------
Effect of Dilutive Securities:
Stock options...................... - 321 - 1,019
Convertible subordinated notes..... 3,037 5,548 456 909
----------- ---------- --------- ---------
Diluted EPS.......................... $ 37,760 51,977 $ 0.73 $ 24,595 43,115 $ 0.57
----------- ---------- --------- --------- --------- --------
----------- ---------- --------- --------- --------- --------
4. 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 and six months ended June 25, 1999
and June 26, 1998 are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- --------------------------------
JUNE 25, 1999 JUNE 26, 1998 JUNE 25, 1999 JUNE 26, 1998
------------- ------------- ------------- -------------
REVENUES:
North America...................... $ 395,352 $ 339,005 $ 761,882 $ 655,156
Europe............................. 148,077 110,315 289,433 199,427
Australia/Asia..................... 63,646 12,302 121,791 23,230
---------- ---------- ---------- ----------
$ 607,075 $ 461,622 $1,173,106 $ 877,813
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
GROSS PROFIT:
North America...................... $ 114,363 $ 100,476 $ 221,023 $ 192,660
Europe............................. 65,286 51,937 128,940 94,244
Australia/Asia..................... 20,962 5,608 38,993 10,635
---------- ---------- ---------- ----------
$ 200,611 $ 158,021 $ 388,956 $ 297,539
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SEGMENT CONTRIBUTION:
North America...................... $ 33,824 $ 26,601 $ 61,722 $ 52,570
Europe............................. 17,449 15,499 35,530 28,055
Australia/Asia..................... 4,877 1,256 7,798 2,051
---------- ---------- ---------- ----------
56,150 43,356 105,050 82,676
Central costs...................... 16,227 12,157 30,947 24,864
Interest, net...................... 6,268 6,852 12,084 14,552
---------- ---------- ---------- ----------
Earnings before income taxes....... $ 33,655 $ 24,347 $ 62,019 $ 43,260
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
5. Acquisitions
During the six months ended June 25, 1999, the Company completed
acquisitions for total cash consideration of approximately $40 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 July 2, 1999, the Company completed its previously announced merger
with Norrell Corporation ("Norrell"). Norrell shareholders received
either 0.9 shares of Interim common stock or a cash payment of $18.7622
per share. The holders of approximately 12% of Norrell's common stock
elected to receive cash in lieu of Interim stock and Interim issued
approximately 21 million shares to former Norrell shareholders and
converted existing Norrell stock options into options to purchase
approximately 1.6 million shares of Interim common stock. The value of
the transaction based upon the closing price of Interim stock on June
30, 1999, and debt assumed was approximately $650 million.
In contemplation of the merger with Norrell and subsequent to June 25,
1999, the Company completed a plan of financing which included
increasing the size of the senior credit facility from $359.2 million
to $675.0 million, issuing $150.0 million in debt backed by the
Company's accounts receivable and issuing $53.0 million in Australian
dollar term financing. The existing senior credit facility's term was
extended five years to 2008. The outstanding balance under this
facility was $256.0 million at June 25, 1999. The debt backed by
accounts receivable and the Australian financing were used to repay
existing indebtedness of Norrell, fund the cash portion of the purchase
price and fund transaction costs associated with the merger.
The merger will be accounted for using the purchase method of
accounting, and Norrell's tangible and intangible assets and
liabilities will be adjusted to their fair market values at the date of
the completion of the merger. Any
6
excess consideration paid by Interim over the fair market value of
Norrell's net assets will be allocated to goodwill and other
intangibles. The final determination of the required purchase
accounting adjustments, including the amount recorded as goodwill
and other intangibles, has not been completed and the amounts
included in these pro forma financial statements are preliminary.
The combined company will operate through approximately 1,300 offices
throughout North America, Europe and Asia Pacific, with pro forma
revenues of approximately $4 billion in 1999. See Item 5 for pro forma
financial information for the combined company.
7. Extraordinary Item
In June 1998 the Company used a portion of net proceeds from the Common
Stock and Notes Offerings to repay its U.S. dollar denominated term
loan (the "term loan") and U.S. dollar denominated amounts outstanding
under its revolving credit facility. The prepayment of the term loan
and the termination of the related interest rate swap agreements
resulted in an extraordinary charge for early extinguishment of debt of
$2.8 million ($4.6 million before tax) or $0.06 per diluted share in
1998.
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 contingency recruiting and executive retained
search; and (4) flexible staffing-temporary personnel from administrative
personnel to executives.
RESULTS OF OPERATIONS
THREE MONTHS ENDED
-------------------------------------------------------------------------
JUNE 25, 1999 % OF TOTAL JUNE 26, 1998 % OF TOTAL
------------- ---------- ------------- ----------
REVENUES:
Consulting.................... $ 110,597 18.2% $ 67,439 14.6%
Managed Services.............. 94,462 15.6% 74,867 16.2%
Search/Recruitment............ 80,169 13.2% 68,146 14.8%
Flexible Staffing............. 321,847 53.0% 251,170 54.4%
----------- ------- --------- --------
$ 607,075 100.0% $ 461,622 100.0%
----------- ------- --------- --------
----------- ------- --------- --------
% OF REVENUES % OF REVENUES
------------- -------------
GROSS PROFIT:
Consulting.................... $ 46,311 41.9% $ 26,522 39.3%
Managed Services.............. 19,160 20.3% 15,909 21.2%
Search/Recruitment............ 63,135 78.8% 51,802 76.0%
Flexible Staffing............. 72,005 22.4% 63,788 25.4%
----------- ------- --------- --------
$ 200,611 33.0% $ 158,021 34.2%
----------- ------- --------- --------
----------- ------- --------- --------
7
THREE MONTHS ENDED JUNE 25, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 26,
1998
REVENUES. Revenues for the three months ended June 25, 1999 increased 31.5%
to $607.1 million from $461.6 million in the prior year. Consulting revenues
increased 64.0% 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. Managed
services revenues increased 26.2% reflecting the continued expansion in North
America of both the Interim On-Premise program and technology help-desk
services. Search/recruitment revenues increased 17.6% due to strong organic
growth primarily in European finance and accounting recruitment. Flexible
staffing revenues increased 28.1% reflecting the acquisitions of AGO
Uitzendbureau ("AGO") in The Netherlands in July 1998, Computer Power in
December 1998 and Tutor Recursos Humanos ("Tutor") in March 1999; 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 second quarter.
GROSS PROFIT. Gross profit for the three months ended June 25, 1999 increased
27.0% to $200.6 million from $158.0 million in the prior year. Gross profit
margin was 33.0% compared with 34.2% in the prior year. Margins were lower
principally due to the inclusion this year of Computer Power's flexible
staffing, lower pricing associated with business expansion at existing
On-Premise clients and higher self-insured workers' compensation costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 29.3% to $140.3 million from $108.5 million
in the prior year period. Selling, general and administrative expenses as a
percentage of revenues were 23.1% compared with 23.5% a year ago with higher
revenues allowing greater leveraging of expenses. The Company also continued
to deploy new technology including a new front-office system within its North
American flexible staffing offices and continued the consolidation of North
American back office operations.
LICENSEE COMMISSIONS. Licensee commissions increased 6.0% to $13.5 million
from $12.7 million in the prior year period and consistent with the growth of
license revenue.
AMORTIZATION OF INTANGIBLES. Amortization expense increased 23.6% to $6.9
million from $5.6 million in the prior year period reflecting the increase in
intangible assets arising from acquisitions.
INTEREST EXPENSE. Interest expense decreased 11.0% to $6.9 million from $7.7
million last year. This decrease primarily resulted from the refinancing 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
partially offset by higher average borrowings. The Company had average
borrowings outstanding during 1999 of $507.0 million at an average rate of
interest, including the effects of interest rate swaps, of 5.4 % compared
with $461.0 million outstanding during 1998 at an average rate of interest of
6.7%.
INTEREST INCOME. Interest income decreased to $0.6 million from $0.9
million in the prior year period.
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 74.2% to $18.8 million ($0.40 per
diluted share) from $10.8 million ($0.25 per diluted share) in the prior year
period. This represents a 60.0% increase in per share net earnings. Net
earnings for 1998 include an extraordinary loss on the early extinguishment
of debt in the after-tax amount of $2.8 million. Before this extraordinary
loss, net earnings and earnings per share increased 38.7% and 29.0%,
respectively. The weighted average number of shares (as adjusted for the
dilutive impact of potential common stock) increased to 50.6 million from
45.4 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, partially offset by the repurchase
8
of approximately 3 million shares by the Company of its common stock in April
1999 in contemplation of the Norrell merger.
SIX MONTHS ENDED JUNE 25, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 26, 1998
SIX MONTHS ENDED
-------------------------------------------------------------------
JUNE 25, 1999 % OF TOTAL JUNE 26, 1998 % OF TOTAL
------------- ---------- ------------- ----------
REVENUES:
Consulting.................... $ 217,245 18.5% $ 127,092 14.5%
Managed Services.............. 181,367 15.5% 146,501 16.7%
Search/Recruitment............ 154,275 13.2% 125,507 14.3%
Flexible Staffing....... 620,219 52.8% 478,713 54.5%
----------- ------ --------- ------
$ 1,173,106 100.0% $ 877,813 100.0%
----------- ------ --------- ------
----------- ------ --------- ------
% OF REVENUES % OF REVENUES
------------- -------------
GROSS PROFIT:
Consulting.................... $ 90,395 41.6% $ 48,403 38.1%
Managed Services.............. 36,377 20.1% 30,562 20.9%
Search/Recruitment............ 120,719 78.2% 94,505 75.3%
Flexible Staffing............. 141,465 22.8% 124,069 25.9%
----------- ----- --------- -----
$ 388,956 33.2% $ 297,539 33.9%
----------- ----- --------- -----
----------- ----- --------- -----
REVENUES. Revenues for the six months ended June 25, 1999 increased 33.6% to
$1,173.1 million from $877.8 million in the prior year. Consulting revenues
increased 70.9% reflecting the fourth quarter 1998 acquisitions of Computer
Power and Ouranos, as well as strong organic growth in North American IT
consulting. Managed services revenues increased 23.8% reflecting the
continued expansion in North America of both the Interim On-Premise program
and technology help-desk services. Search/recruitment revenues increased
22.9% due to strong organic growth primarily in European finance and
accounting recruitment. Flexible staffing revenues increased 29.6% reflecting
the acquisitions of Crone Corkill Group PLC ("Crone Corkill") in the United
Kingdom in March 1998, AGO in July 1998, Computer Power in December 1998 and
Tutor in March 1999. Continued strong organic growth in European and
Australian/Asian finance and accounting flexible staffing also contributed to
1999 revenue growth. North American administrative and light industrial
flexible staffing also contributed to flexible staffing growth in 1999.
GROSS PROFIT. Gross profit for the six months ended June 25, 1999 increased
30.7% to $389.0 million from $297.5 million in the prior year. Gross profit
margin was 33.2% compared with 33.9% in the prior year. Margins were lower
principally due to the inclusion this year of Computer Power's flexible
staffing pricing, lower pricing associated with business expansion at
existing On-Premise clients and higher self-insured workers' compensation
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 34.9% to $275.9 million from $204.5 million
in the prior year period. Selling, general and administrative expenses as a
percentage of revenues were 23.5% compared with 23.3% a year ago due to the
increase in consulting revenues as a percentage of total revenues in 1999 as
a result of acquisitions made in the latter half of 1998, deployment of
technology and consolidation of North American back office operations
partially offset by leveraging of other costs as revenues continued to grow.
LICENSEE COMMISSIONS. Licensee commissions increased 3.6% to $25.2 million
from $24.4 million in the prior year period and consistent with the growth of
license revenue.
AMORTIZATION OF INTANGIBLES. Amortization expense increased 26.3% to $13.8
million from $10.9 million in the prior year period reflecting the increase
in intangible assets arising from acquisitions.
9
INTEREST EXPENSE. Interest expense decreased 14.7% to $13.5 million from
$15.8 million last year. This decrease primarily resulted from the
refinancing 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 partially offset by higher average borrowings. The Company
had average borrowings outstanding during 1999 of $481.0 million at an
average rate of interest, including the effects of interest rate swaps, of
5.6% compared with $452.7 million outstanding during 1998 at an average rate
of interest of 6.9%.
INTEREST INCOME. Interest income increased to $1.4 million from $1.2 million
in the prior year period.
INCOME TAXES. The effective tax rate for the second half of 1999 was 44.0%
compared with 44.2% in 1998.
NET EARNINGS. Net earnings increased 62.5% to $34.7 million ($0.73 per
diluted share) from $21.4 million ($0.51 per diluted share) in the prior year
period. This represents a 43.1% increase in per share net earnings. Net
earnings for 1998 include an extraordinary loss on the early extinguishment
of debt in the after tax amount of $2.8 million. Before this extraordinary
loss, net earnings and earnings per share increased 43.9% and 28.1%,
respectively. The weighted average number of shares (as adjusted for the
dilutive impact of potential common stock) increased to 52.0 million from
43.1 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 notes
in the second quarter of 1998 offset by the repurchase of approximately 3
million shares by the Company of its common stock in April.
OPERATING SEGMENTS
Information on operating segments and a reconciliation to earnings before
income taxes for the three and six months ended June 25, 1999 and June 26,
1998 are as follows (in thousands):
THREE MONTHS ENDED
-----------------------------------------------------------------------
JUNE 25, 1999 JUNE 26, 1998
------------------------------------ ---------------------------------
% OF TOTAL % OF TOTAL
----------------- ----------------
REVENUES:
North America.......................... $ 395,352 65.1% $ 339,005 73.4%
Europe................................. 148,077 24.4% 110,315 23.9%
Australia/Asia......................... 63,646 10.5% 12,302 2.7%
----------------- ----------------- --------------- ----------------
$ 607,075 100.0% $ 461,622 100.0%
----------------- ----------------- --------------- ----------------
----------------- ----------------- --------------- ----------------
% OF REVENUES % OF REVENUES
----------------- ----------------
GROSS PROFIT:
North America.......................... $ 114,363 28.9% $ 100,476 29.6%
Europe................................. 65,286 44.1% 51,937 47.1%
Australia/Asia......................... 20,962 32.9% 5,608 45.6%
----------------- ----------------- --------------- ----------------
$ 200,611 33.0% $ 158,021 34.2%
----------------- ----------------- --------------- ----------------
----------------- ----------------- --------------- ----------------
% OF REVENUES % OF REVENUES
----------------- ----------------
SEGMENT CONTRIBUTION:
North America.......................... $ 33,785 8.5% $ 26,601 7.8%
Europe................................. 17,456 11.8% 15,499 14.0%
Australia/Asia......................... 4,870 7.7% 1,256 10.2%
----------------- ----------------- --------------- ----------------
56,111 9.2% 43,356 9.4%
----------------- ----------------
----------------- ----------------
Central costs.......................... 16,188 12,157
Interest, net.......................... 6,268 6,852
----------------- ---------------
Earnings before income taxes $ 33,655 $ 24,347
----------------- ---------------
----------------- ---------------
THREE MONTHS ENDED JUNE 25, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 26, 1998
NORTH AMERICA. North American revenues, which represented 65.1% of total
revenues for the three months ended June 25, 1999, increased 16.6% to $395.4
million from $339.0 million. Gross profit for the three months ended June 25,
1999 in North America increased 13.8% over the prior year period and the
gross profit margin was slightly lower than in the prior year period. Segment
contribution (income before central costs, interest and income taxes)
10
increased 27.0% over the prior year period. Higher revenues for the three
months ended June 25, 1999, compared with the prior year period resulted from
strong organic growth rates in most service offerings with particularly
strong growth in both IT related consulting and flexible staffing and the
expansion of Interim On-Premise. Segment contribution rates increased in 1999
compared with 1998 as the Company was able to leverage fixed costs more
efficiently. This improvement was partially offset by the deployment of new
technology including a new front-office system within its North American
flexible staffing offices and the consolidation of the North American back
office operations.
EUROPE. European revenues, which represented 24.4% of total revenues for the
three months ended June 25, 1999, increased 34.2% to $148.1 million from
$110.3 million in the prior year. Gross profit in Europe increased 25.7% over
the prior year and the gross profit margin decreased to 44.1% from 47.1% in
the prior year. Segment contribution increased 12.6% over the prior year
period. Factors contributing to the increase in revenues, gross profit and
segment contribution include the acquisitions of AGO in July 1998, Ouranos in
November 1998 and Tutor in March 1999 combined with continued organic growth
in both 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 consulting revenues. The decrease in segment
contribution as a percentage of revenues from 14.0% in 1998 to 11.8% in 1999
resulted primarily from the lower gross profit margin.
AUSTRALIA/ASIA. Australian/Asian revenue, which represented 10.5% of total
revenues for the three months ended June 25, 1999, increased significantly to
$63.6 million from $12.3 million due primarily to the acquisition of Computer
Power. Gross profit increased to $21.0 million from $5.6 million and segment
contribution increased to $4.9 million from $1.3 million in the prior year
for the same reason. The decrease in Australian/Asian gross profit margin
from 45.6% to 32.9% is due to the addition of a significant amount of
flexible staffing revenue with the acquisition of Computer Power.
SIX MONTHS ENDED JUNE 25, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 26, 1998
SIX MONTHS ENDED
-----------------------------------------------------------------------
JUNE 25, 1999 JUNE 26, 1998
------------------------------------ ---------------------------------
% OF TOTAL % OF TOTAL
----------------- ----------------
REVENUES:
North America.......................... $ 761,882 64.9% $ 655,156 74.6%
Europe................................. 289,433 24.7% 199,427 22.7%
Australia/Asia......................... 121,791 10.4% 23,230 2.7%
----------------- ----------------- --------------- ----------------
----------------- ----------------- --------------- ----------------
$ 1,173,106 100.0% $ 877,813 100.0%
----------------- ----------------- --------------- ----------------
----------------- ----------------- --------------- ----------------
% OF REVENUES % OF REVENUES
----------------- ----------------
GROSS PROFIT:
North America.......................... $ 221,023 29.0% $ 192,660 29.4%
Europe................................. 128,940 44.5% 94,244 47.3%
Australia/Asia......................... 38,993 32.0% 10,635 45.8%
----------------- ----------------- --------------- ----------------
----------------- ---------------
$ 388,956 33.2% $ 297,539 33.9%
----------------- ----------------- --------------- ----------------
----------------- ----------------- --------------- ----------------
% OF REVENUES % OF REVENUES
----------------- ----------------
SEGMENT CONTRIBUTION:
North America.......................... $ 61,722 8.1% $ 52,570 8.1%
Europe................................. 35,530 12.3% 28,055 14.1%
Australia/Asia......................... 7,798 6.4% 2,051 8.8%
----------------- ----------------- --------------- ----------------
105,050 9.0% 82,676 9.4%
----------------- ----------------
----------------- ----------------
Central costs.......................... 30,947 24,864
Interest, net.......................... 12,084 14,552
----------------- ---------------
Earnings before income taxes $ 62,019 $ 43,260
----------------- ---------------
----------------- ---------------
NORTH AMERICA. North American revenues, which represented 64.9% of total
revenues for the six months ended June 25,
11
1999, increased 16.3% to $761.9 million from $655.2 million. Gross profit for
the six months ended June 25, 1999 in North America increased 14.7% over the
prior year period and the gross profit margin was slightly lower than in the
prior year period. Segment contribution increased 17.4% over the prior year
period. Higher revenues for the six months ended June 25, 1999, compared with
the prior year period resulted from strong organic growth rates in most
service offerings with particularly strong growth in both IT related
consulting and flexible staffing and the expansion of Interim On-Premise.
Segment contribution rates increased in 1999 compared with 1998 as the
Company was able to leverage fixed costs more efficiently. This improvement
was partially offset by the deployment of new technology including a new
front-office system within its North American flexible staffing offices and
the consolidation of the North American back office operations.
EUROPE. European revenues, which represented 24.7% of total revenues for the
six months ended June 25, 1999, increased 45.1% to $289.4 million from $199.4
million in the prior year. Gross profit in Europe increased 36.8% over the
prior year and the gross profit margin decreased to 44.5% from 47.3% in the
prior year. Segment contribution increased 26.6% 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, Ouranos in November 1998 and Tutor in March 1999 combined with
continued organic growth in both 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. The decline in gross profit margin was
partially offset by an increase in IT related consulting revenues. The
decrease in segment contribution as a percentage of revenues from 14.1% in
1998 to 12.3% in 1999 resulted primarily from the lower gross profit margin.
AUSTRALIA/ASIA. Australian/Asian revenue, which represented 10.4% of total
revenues for the six months ended June 25, 1999, increased significantly to
$121.8 million from $23.2 million due primarily to the acquisition of
Computer Power. Gross profit increased to $39.0 million from $10.6 million
and segment contribution increased to $7.8 million from $2.1 million in the
prior year for the same reasons. The decrease in Australian/Asian gross
profit margin from 45.8% to 32.0% is due to the addition of a significant
amount of flexible staffing revenue.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Cash provided by operating activities for the six months ended June 25, 1999
was $32.4 million compared with $12.6 million in the prior year. Higher
operating cash flows resulted from increased earnings and higher amortization
and depreciation primarily as a result of acquisitions during the last half
of 1998. Cash used for working capital items was about the same in both
periods with an increase in accruals as a result of growth and acquisitions
largely offset by an increase in accounts receivable due primarily to higher
sales and days sales outstanding.
Investing activities used $172.6 million for the six months ended June 25,
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 $21.9 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 $19.5 million for the six months
ended June 25, 1999 and primarily reflects $56.6 million of net borrowings in
the United Kingdom under the senior credit facility, offset by $51.7 million
of purchases of the Company's common stock. The Company repurchased
approximately 3.2 million shares of common stock in contemplation of the
Norrell Merger.
In contemplation of the merger with Norrell and subsequent to June 25, 1999,
the Company completed a plan of financing which included increasing the size
of the senior credit facility from $359.2 million to $675.0 million, issuing
$150.0 million in debt backed by the Company's accounts receivable and
issuing $53.0 million in Australian dollar term financing. The existing
senior credit facility's term was extended five years to 2008. The
outstanding balance under this facility was $256.0 million at June 25, 1999.
The debt backed by accounts receivable and the Australian financing were used
to repay existing indebtedness of Norrell, fund the cash portion of the
purchase price and fund transaction costs associated with the merger.
After completion of these transactions, the Company's outstanding
indebtedness was approximately $736.0
12
million, an increase of $224 million from the balance outstanding at June 25,
1999. The Company has over $400 million of available capacity under its
current credit facilities to fund its operating requirements.
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").
Substantially all of the Company's applications are tested, implemented and
validated. The Company has contacted all material 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,
but is in the process of obtaining final certifications from vendors which
have only recently completed their efforts. 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 (excluding Norrell)
will be approximately $750,000, which includes both personnel costs related
to project management, programming and hardware and software upgrades. Of
this total, approximately $585,000 has been incurred as of June 25, 1999. 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 last half of 1999.
As discussed in Norrell's 1998 Annual Report on Form 10-K, Norrell has
developed a comprehensive Year 2000 project plan which addresses both
technological and non-IT systems, including embedded systems for all business
units. Norrell has designated a multi-phase approach consisting of both
internal and external resources to identify, correct and test systems to
achieve Year 2000 compliance. In addition, Norrell is also reviewing the Year
2000 readiness of third parties that provide goods or services essential to
its operations.
Norrell's key operational systems, which include, but are not limited to
payroll, billing, and accounts receivable, are also being remediated for year
2000 compliance. Norrell's primary payroll and billing system is Year 2000
ready. The general ledger and other major payroll systems are expected to be
Year 2000 ready during the third quarter. The Company expects that most of
Norrell's operational systems will be abandoned in early 2000 when they are
converted to Interim's operational systems.
Total estimated costs to remediate the Norrell systems continue to be $18.0
million to $22.0 million of which $16.5 million has been incurred and
expensed prior to the merger with Interim.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 25, 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 June 25, 1999
were $304.5 million. Interest rates on these borrowings are based on LIBOR
plus a variable margin. Based on the outstanding balance, a change of 1.0% in
the interest rate would cause a change in interest expense of approximately
$3.0 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
13
rates on its variable rate debt. The Company had a variable to variable
interest rate swap agreement outstanding as of June 25, 1999 with the
notional amount of $119.0 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 June 25, 1999 was $2.5 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 June 25, 1999 was $177.0 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 and firm committed transactions. 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 June 25, 1999 the Company had
outstanding foreign currency forward contracts which are designated as a
hedge of an intercompany loan to sell Australian dollars in the notional
amount of $118.0 million. The cost to terminate the foreign currency forward
contracts as of June 26, 1999 was not material.
PART II - OTHER INFORMATION
ITEM 4. MATTERS SUBMITTED TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on May 6, 1999.
(b) Not applicable.
(c) At the Annual Meeting, stockholders voted on the following matters:
(1) The election of directors Raymond Marcy, J. Ian Morrison and
A. Michael Victory to continue in office as Class III
directors for a three-year term expiring on the date of the
Annual Meeting in the year 2002.
Votes For: Votes Withheld:
---------- ---------------
Raymond Marcy 40,895,674 347,361
J. Ian Morrison 40,873,301 369,734
A. Michael Victory 40,887,181 355,854
(2) A proposal to ratify the appointment of Deloitte & Touche LLP
as the Company's independent auditors for the fiscal year
ending December 31, 1999.
Votes For: Votes Against: Abstentions:
---------- -------------- ------------
41,168,916 61,314 12,806
(3) A proposal to approve an amendment to the Company's 1998
Stock Incentive Plan increasing the number of shares issuable
under this Plan by an aggregate of 2,200,000 shares.
Votes For: Votes Against: Abstentions:
---------- -------------- ------------
34,012,288 7,201,790 28,958
(4) A proposal of a stockholder of the Company to establish a
position on the Company's Board of Directors that is reserved
for a "non-corporate, non-branch management employee" of the
Company.
Votes For: Votes Against: Abstentions:
---------- -------------- ------------
1,169,164 35,916,483 573,945
(d) Not applicable.
14
ITEM 5. -- OTHER INFORMATION
Unaudited pro forma financial information for Interim and Norrell
Attached are the unaudited pro forma financial statements of Interim and
Norrell for their latest reported quarterly reporting periods. The merger
closed on July 2, 1999 and the attached pro forma financial statements
present the latest pro forma information available. Interim's quarter ended
on June 25, 1999 and Norrell's quarter ended on May 2, 1999. In preparing
this data, Interim's June 25, 1999 balance sheet was combined with Norrell's
balance sheet as of May 2, 1999. The unaudited statements of earnings were
combined for Interim's six months ended June 25, 1999 and Norrell's six
months ended May 2, 1999. After the merger, Norrell will change its fiscal
reporting periods to conform to Interim's reporting periods.
The merger will be accounted for using the purchase method of accounting, and
Norrell's tangible and intangible assets and its liabilities will be adjusted
to their fair market values at the date of the completion of the merger. Any
excess consideration paid by Interim over the fair market value of Norrell's
net assets will be allocated to goodwill and other intangibles. The final
determination of the required purchase accounting adjustments, including the
amount recorded as goodwill and other intangibles, has not been completed and
the amounts included in these pro forma financial statements are preliminary.
The attached pro forma financial statements include only those pro forma
adjustments based on known information currently available and these
assumptions do not include potential cost savings that may result from the
merger. Therefore, it is likely that the combined company would have
performed differently from the attached pro forma financial statements
indicate.
15
INTERIM UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS)
AS OF JUNE 25, 1999 (INTERIM) AND MAY 2, 1999 (NORRELL)
--------------------------------------------------------------------------------
NORRELL
HISTORICAL HISTORICAL PRO FORMA COMBINED
INTERIM NORRELL ADJUSTMENTS PRO FORMA
----------------- ------------------ ----------------- -------------------
Current Assets:
Cash and cash equivalents................. $ 32,600 $ 6,647 $ 39,247
Receivables, net.......................... 380,063 204,532 584,595
Insurance deposits........................ 18,549 - 18,549
Other current assets...................... 45,575 14,220 59,795
----------------- ------------------ ----------------- -------------------
Total current assets............... 476,787 225,399 702,186
Goodwill, net............................. 726,299 184,049 $ 327,366 (a) 1,237,714
Tradenames and other intangibles, net..... 199,724 782 200,506
Property and equipment, net............... 99,372 56,475 (25,535) (a) 130,312
Other assets.............................. 59,309 30,242 5,616 (b) 95,167
----------------- ------------------ ----------------- -------------------
$ 1,561,491 $ 496,947 $ 307,447 $ 2,365,885
----------------- ------------------ ----------------- -------------------
----------------- ------------------ ----------------- -------------------
Current Liabilities:
Current portion of long-term debt......... $ 25,580 $ 14,465 $ 40,045
Accounts payable and other accrued
expenses.................................. 111,768 41,552 $ 23,068 (a) 176,388
Accrued salaries, wages and payroll taxes.
131,649 48,087 179,736
Accrued self-insurance losses............. 37,561 8,849 46,410
Accrued income taxes...................... 27,767 - 27,767
----------------- ------------------ ----------------- -------------------
Total current liabilities........... 334,325 112,953 23,068 470,346
Long-term debt.............................. 485,956 91,799 6,456 (b) 664,581
80,370 (b)
Other long-term liabilities................. 34,746 52,217 86,963
(239,978) (c)
Stockholders' equity........................ 706,464 239,978 437,531 (c) 1,143,995
----------------- ------------------ ----------------- -------------------
$ 1,561,491 $ 496,947 $ 307,447 $2,365,885
----------------- ------------------ ----------------- -------------------
----------------- ------------------ ----------------- -------------------
See notes to Unaudited Pro Forma Financial Information.
16
INTERIM UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(AMOUNTS IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 25, 1999 (INTERIM) AND MAY 2, 1999 (NORRELL)
---------------------------------------------------------------------------------
NORRELL
HISTORICAL HISTORICAL PRO FORMA COMBINED
INTERIM NORRELL ADJUSTMENTS PRO FORMA
------------------ ------------------ ------------------- ------------------
Revenues.................................... $ 1,173,106 $ 716,101 $ 1,889,207
Cost of Services............................ 784,150 553,581 1,337,731
------------------ ------------------ ------------------
Gross Profit......................... 388,956 162,520 551,476
Selling, general............................
and administrative expenses.............. 275,874 118,725 $ (1,800) (d) 392,799
Licensee commissions........................ 25,229 17,972 43,201
Amortization of intangibles................. 13,750 3,753 4,100 (e) 21,603
Interest expense, net....................... 12,084 3,675 3,000 (f) 18,759
------------------ ------------------ ------------------- ------------------
326,937 144,125 5,300 476,362
Earnings before income taxes 62,019 18,395 (5,300) 75,114
Income taxes................................ 27,296 6,898 (468) (g) 33,726
------------------ ------------------ ------------------- ------------------
Net Earnings.......................... $ 34,723 $ 11,497 $ (4,832) $ 41,388
------------------ ------------------ ------------------- ------------------
------------------ ------------------ ------------------- ------------------
Earnings Per Share:
Basic................................. $ 0.75 $ 0.44 $ 0.62
Diluted............................... 0.73 0.42 0.61
Weighted Average Shares Outstanding:
Basic................................. 46,108 26,314 67,137(h)
Diluted............................... 51,977 27,112 73,256(h)
See notes to Unaudited Pro Forma Financial Information.
17
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
a) The merger consideration and the associated calculation of the
preliminary intangible asset as of June 25, 1999 are as follows
(amounts in thousands):
Total consideration (27,648,202 shares x $20.8469 per share x 0.9 )......................... $ 518,741
Norrell debt assumed........................................................................ 106,264
Transaction costs included in accrued liabilities........................................... 5,709
--------------
Total....................................................................................... 630,714
Less net assets purchased, including debt assumed........................................... 346,242
--------------
Subtotal.................................................................................... 284,472
Plus preliminary purchase accounting adjustments:
Write down because of abandonment of capitalized software
Costs to estimated fair market value..................................................... 25,535
Accrued liabilities:
Severance and other personnel related costs........................................... 16,679
Termination of interest rate swaps.................................................... 680
--------------
Total of items in accrued liabilities.............................................. 17,359
--------------
Total preliminary goodwill.................................................................. $ 327,366
--------------
--------------
Goodwill represents the excess of cost over book value of the net assets
acquired. The accrued liabilities above include severance for certain
executives, field employees and administrative personnel at Norrell. No
estimate has been made in our pro forma financial information for
certain costs such as office closures, employee relocation and other
items that will be incurred in the combination of the businesses once
Interim completes its final allocation of the merger consideration.
b) Represents additional borrowings of long-term debt to fund the cash
portion of the consideration to be paid by Interim in the merger and to
fund approximately $6.456 million in transaction costs to issue debt and
additional shares of Interim stock, including $5.616 million in costs
capitalized as other assets related to the issuance of new debt. This
debt will be funded by additional borrowings under Interim's amended and
restated credit facility at an assumed interest rate of 5.6% for the
first half of 1999.
c) Represents the elimination of the existing Norrell equity balance and
the issuance of shares to complete the merger. This equity value was
derived by using the price of Interim common shares for the twenty
business days ending June 30, 1999, which is the price paid to Norrell
shareholders of $20.8469 per share.
d) Represents the reduction of amortization expense associated with the
abandonment of Norrell management information system software which was
written down to its estimated fair value.
e) Represents amortization of the goodwill acquired in the merger over a
period of 40 years.
f) Represents interest expense on approximately $86.8 million estimated
borrowing under Interim's credit facility at the assumed rate of 5.6%
for the first half of 1999. This amount also includes estimated debt
issuance costs associated with an amendment to increase the availability
under the credit facility and an extension of the term. The debt
issuance costs are amortized on a straight-line basis over a period of
five years. The interest rate on borrowing under the credit facility may
differ from the assumption set forth in Note b above.
g) Represents the tax impact of the pro forma adjustments using Interim's
statutory tax rate of 39%.
h) Represents basic and diluted weighted average outstanding Interim common
shares as of June 25, 1999 plus additional Interim common shares issued
in the merger as discussed in Note c above. Total dilutive securities
are comprised of Interim weighted average dilutive shares of 51,977,000
plus Norrell's dilutive shares of 21,029,000
18
and the dilutive impact of Norrell stock options (26,815,765 total Norrell
common shares exchanged at 0.9 Norrell common shares for each Interim
common share and with 12.87% of the shares exchanged for cash).
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.
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, as amended by First Amendment to Agreement and Plan of
Merger dated April 27, 1999 and as further amended by Second Amendment
to Agreement and Plan of Merger dated May 24, 1999, each filed
as composite Exhibit 2.1 to the registrant's Form S-4 as filed
with the Securities and Exchange Commission on May 24, 1999 and
included as Appendix A to the registrant's and Norrell Corporation's
Joint Proxy Statement/Prospectus dated May 26, 1999, are incorporated
herein by reference.
10.13 Interim Services Inc. Amended and Restated 1998 Stock Incentive
Plan, filed as Exhibit A to the registrant's Proxy Statement dated
April 5, 1999, is incorporated herein by reference.
27 Financial Data Schedule is filed herewith.
(b) On March 30, 1999, the Company filed a Report on Form 8-K dated March
24, 1999 pertaining to the merger with Norrell Corporation, which merger
was consummated on July 2, 1999. The required financial statements and
pro forma financial information were filed as part of the registrant's
Form S-4 as filed with Securities and Exchange Commission on May 24,
1999.
On July 1, 1999, the Company filed a report on Form 8-K announcing the
completion of the merger with Norrell Corporation.
(c) Exhibits filed with this form:
Exhibit
Number Exhibit Name
- ------ ------------
27 Financial Data Schedule.
19
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-- BY /s/ Roy G. Krause
------------------ --------------------------
Roy G. Krause
Executive Vice President
and Chief Financial Officer
(principal financial officer)
DATE-- BY /s/ Mark W. Smith
------------------ ---------------------------
Mark W. Smith
Vice President, Finance
(principal accounting officer)
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