<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[MARK ONE]
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE OF 1934
For the quarterly period ended August 2, 1998
--------------
Commission File No. 1-14018
NORRELL CORPORATION
-------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-0953079
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3535 Piedmont Road, NE, Atlanta, GA 30305
- ------------------------------------ -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404)240-3000
-------------
Not applicable
- -------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such (reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 27,499,508 shares on August 30,
1998.
<PAGE> 2
Norrell Corporation and Subsidiaries
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets - 2
August 2, 1998 (Unaudited) and November 2, 1997
Consolidated Statements of Income 3
(Unaudited) - Three and Nine months ended August 2, 1998
and July 27, 1997
Consolidated Statements of Cash Flows 4
(Unaudited) - Nine months ended August 2, 1998
and July 27, 1997
Notes to Consolidated Financial Statements 5
(Unaudited)
ITEM 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
</TABLE>
<PAGE> 3
PART I
ITEM 1.
NORRELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS August 2, 1998 November 2, 1997
- ------ -------------- ----------------
<S> <C> <C>
CURRENT ASSETS
Cash and short-term investments $ 6,378 $ 6,678
Accounts receivable trade,
less allowances of $7,388 in 1998
and $6,497 in 1997 201,764 215,463
Prepaid expenses 4,755 2,915
Other 7,536 12,823
--------- ---------
Total current assets 220,433 237,879
--------- ---------
PROPERTY AND EQUIPMENT, less
accumulated depreciation 23,014 19,759
NONCURRENT DEFERRED INCOME TAXES 14,102 12,690
OTHER ASSETS
Goodwill and other intangibles, net of amortization 163,438 136,358
MIS development costs, net of amortization 23,612 19,486
Investments and other assets 12,357 12,672
--------- ---------
Total other assets 199,407 168,516
--------- ---------
TOTAL ASSETS $ 456,956 $ 438,844
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 10,398 $ 12,881
Accounts payable 12,845 12,390
Accrued expenses 79,985 90,515
Deferred revenue and gain 5,330 8,779
--------- ---------
Total current liabilities 108,558 124,565
LONG-TERM DEBT, less current maturities 60,724 60,129
LONG-TERM DEFERRED GAIN 8,867 9,983
LONG-TERM ACCRUED EXPENSES 40,444 36,961
--------- ---------
Total liabilities 218,593 231,638
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, stated value $.01 per share; 50,000,000 shares authorized,
with shares issued and outstanding of 27,446,840 in
1998 and 26,903,738 in 1997 274 269
Treasury stock, at cost; 39,245 shares in 1998
and 34,457 shares in 1997 (825) (1,062)
Additional paid-in capital 138,956 133,220
Notes receivable from officers and employees (122) (125)
Retained earnings 100,080 74,904
--------- ---------
Total shareholders' equity 238,363 207,206
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 456,956 $ 438,844
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
NORRELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- -----------------------------------
August 2, 1998 July 27, 1997 August 2, 1998 July 27, 1997
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES $ 351,167 $ 332,691 $ 1,037,738 $ 931,868
COST OF SERVICES 272,761 258,374 806,497 726,751
--------- --------- ----------- ---------
Gross profit 78,406 74,317 231,241 205,117
OPERATING EXPENSES 56,120 53,810 171,159 150,452
YEAR 2000 REMEDIATION EXPENSES 1,007 - 1,412 -
DEPRECIATION AND AMORTIZATION 3,230 2,558 9,371 7,077
--------- --------- ----------- ---------
Income from operations 18,049 17,949 49,299 47,588
INTEREST EXPENSE (1,139) (2,281) (3,559) (5,767)
OTHER INCOME (EXPENSE) (173) (874) (224) (1,734)
--------- --------- ----------- ---------
INCOME BEFORE INCOME TAXES 16,737 14,794 45,516 40,087
INCOME TAXES 6,273 5,619 17,068 15,232
--------- --------- ----------- ---------
NET INCOME $ 10,464 $ 9,175 $ 28,448 $ 24,855
========= ========= =========== =========
PER COMMON SHARE (BASIC):
BASIC EARNINGS PER COMMON SHARE $ 0.38 $ 0.38 $ 1.04 $ 1.04
========= ========= =========== =========
SHARES USED IN COMPUTING BASIC
EARNINGS PER SHARE 27,400 24,079 27,243 23,919
========= ========= =========== =========
PER COMMON SHARE (DILUTED):
DILUTED EARNINGS PER COMMON SHARE $ 0.37 $ 0.35 $ 0.99 $ 0.96
========= ========= =========== =========
SHARES USED IN COMPUTING DILUTED
EARNINGS PER SHARE 28,628 26,308 28,630 25,999
========= ========= =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
NORRELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------
August 2, 1998 July 27, 1997
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 28,448 $ 24,855
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization - operating expenses 9,371 7,077
Depreciation and amortization - cost of services/other expenses 952 465
Gain on retirement of common stock (1,413) (1,413)
Provision for doubtful accounts 1,731 1,447
Deferred income taxes (1,467) (5,496)
Deferred gain on sale of building (1,116) (1,116)
Long term accrued expenses 2,754 1,037
Other 979 4,219
Change in current assets and current liabilities
Accounts receivable, trade 20,218 (58,686)
Deferred revenue (2,036) (569)
Accounts payable (509) (7,420)
Accrued expenses (4,112) 12,546
Other 3,572 (2,648)
-------- ---------
Net cash provided by (used in) operating activities 57,372 (25,702)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cost of acquisitions, net of cash acquired (42,766) (76,971)
Additions to property and equipment, net (6,930) (6,379)
Increase in MIS development costs, net (5,799) (13,318)
Increase in investments and other non-current assets (710) (2,709)
Increase in goodwill and other intangibles, net (142) (650)
-------- ---------
Net cash used in investing activities (56,347) (100,027)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt 24,370 276,489
Repayments of long-term debt (27,008) (158,750)
Stock option exercises, including related tax benefits 3,700 4,238
Dividends paid on common stock (3,272) (2,871)
Proceeds from the issuance of common stock 1,383 2,594
Other stock activity (498) (401)
-------- ---------
Net cash (used in) provided by financing activities (1,325) 121,299
-------- ---------
NET DECREASE IN CASH AND SHORT-TERM
INVESTMENTS (300) (4,430)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 6,678 8,876
-------- ---------
CASH AND SHORT-TERM INVESTMENTS AT END
OF PERIOD $ 6,378 $ 4,446
======== =========
SUPPLEMENTARY CASH FLOW DISCLOSURES
Cash payments during the period for
Interest $ 3,524 $ 4,760
Income taxes, net of refunds 5,862 15,108
Noncash investing and financing activity
Issuance of options to benefit plan 1,108 953
Exercise of benefit plan stock options 1,347 1,227
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
NORRELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission,
although the Company believes that the disclosures are adequate to make
the information presented not misleading. These consolidated financial
statements should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form
10-K. The information furnished reflects all adjustments which, in the
opinion of management, are necessary for a fair statement of the
results of operations for the periods presented. Such adjustments are
of a normal recurring nature.
2. Financial Instruments
The Company maintains four interest rate swap agreements in order to
manage exposure to fluctuations in interest rates. The difference
between fixed and variable interest amounts calculated by reference to
agreed-upon principal notional amounts is recognized as an adjustment
to interest expense over the life of the swap agreements. Two of the
swap agreements are each for notional principal amounts of $20,000,000,
the remaining two agreements are for notional principal amounts of
$12,000,000 and $8,000,000. The Company exchanges floating interest
rates based on LIBOR for an average fixed rate of 6.43% at quarterly
settlement dates. The swap agreements terminate between November 2001
and January 2002. At August 2, 1998, if the Company had terminated each
of the swap agreements, the estimated termination payments by the
Company would have totaled approximately $1,253,445. The Company does
not expect to terminate these agreements and expects them to expire as
originally contracted.
3. Earnings Per Share
In 1998, the Company adopted SFAS 128, "Earnings Per Share." In
accordance with this standard, basic earnings per share is computed on
the basis of the weighted average number of shares outstanding during
the year. Diluted earnings per share is computed giving effect to
dilutive stock options. The income amount used in the Company's
earnings per share calculations is the same for both basic and diluted
earnings per share. A reconciliation of the average outstanding shares
used in the two calculations is as follows:
<TABLE>
<CAPTION>
Per Share Data: Three Months Ended Nine Months Ended
(In thousands) ------------------ ------------------
8/2/98 7/27/97 8/2/98 7/27/97
------------------ ------------------
<S> <C> <C>
Weighted Average Shares 27,400 24,079 27,243 23,919
Dilutive stock Options 1,228 2,229 1,387 2,080
================== ==================
Weighted average shares 28,628 26,308 28,630 25,999
================== ==================
Anti-dilutive options not included 859 10 850 55
================== ==================
</TABLE>
5
<PAGE> 7
4. New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS 130"). This Statement is
effective for fiscal years beginning after December 15, 1997. SFAS 130
establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of the statement will
have no material impact on the Company's net income or shareholders'
equity when adopted in fiscal year 1999.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information " ("SFAS 131"). This Statement is effective for fiscal
years beginning after December 15, 1997. SFAS 131 establishes standards
for reporting information about operating segments in annual financial
statements and requires reporting of selected information about
operating segments in interim financial reports issued to stockholders.
It also establishes standards for related disclosures about products
and services, geographical areas and major customers. The Company will
be required to present the segment disclosures in its financial
statements for the year ending October 31, 1999. Disclosure of interim
information to shareholders is not required during the year of
adoption.
In February 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This Statement is effective for fiscal years
beginning after December 15, 1997. As a result of this new
pronouncement, the Company will include an additional footnote
disclosure for its non-qualified salary continuation plan in the
financial statements beginning in fiscal year 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
This Statement requires companies to record derivatives on the balance
sheet as assets and liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would
be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This Statement is effective for fiscal
years beginning after June 15, 1999. The Company plans to adopt this
Statement beginning in fiscal year 2000 and does not expect it to have
a material impact on the consolidated financial statements.
Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," was issued
by the American Institute of Certified Public Accountants in March
1998. This SOP provides guidance on accounting for the costs of
computer software developed or obtained for internal use. The Company
plans to adopt this Statement beginning in the fiscal year 2000 and
does not expect it to have a material impact on the consolidated
financial statements.
6
<PAGE> 8
PART I
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OPERATING RESULTS THIRD QUARTER AUGUST 2, 1998 COMPARED TO THIRD QUARTER JULY
27, 1997
Revenues increased 5.6% or $18.5 million to $351.2 million in 1998.
Revenue by business group is as follows:
<TABLE>
<CAPTION>
Business Group 1998 % of Consolidated Revenue 1997 % of Consolidated Revenue
- -------------- ------------------------------- ------------------------------
<S> <C> <C>
Staffing Services 64.4% 67.8%
Outsourcing Services 19.2% 19.5%
Professional Services 16.4% 12.7%
----- -----
Total 100.0% 100.0%
</TABLE>
Staffing Services revenues grew 0.3% to $226.3 million. Staffing
Services volume, as measured by hours that staffing employees worked, decreased
3.8% and rates rose 4.1% compared to a volume increase of 17.0% and a rate
increase of 3.4% for 1997. The growth in Staffing Services was impacted by
slower-than-expected ramp up of new business and difficulty in recruiting large
volumes of employees in tight labor markets. Rate increases over prior year
reflect changes in business mix to higher priced services. Staffing Services
includes the results of M. David Lowe, Inc., ("M. David Lowe") a Houston based
company acquired in December 1997. Outsourcing Services revenues grew 4.1% to
$67.4 million. Outsourcing Services revenues from customers other than IBM
decreased 2.0% or $518,000 from 1997, while revenues from IBM increased $3.2
million or 8.1%. Professional Services revenues were $57.6 million in 1998
compared to $42.4 million in 1997, a 35.8% increase. The Company's Professional
Services group includes Norrell Information Services, Norrell Financial Staffing
and IMCOR, Inc. ("IMCOR"), an interim executive staffing company acquired in
October 1997. Norrell Information Services was augmented by the April 1998
acquisition of Trattner Network Ltd., ("Trattner") a California based
information technology company and the July 1998 acquisition of W.E. Carson
Associates, Inc., ("Carson") an information systems consulting firm based in
Atlanta, Georgia.
Gross profit increased 5.5%, or $4.1 million, to $78.4 million in 1998.
Gross margin (gross profit as a percent of revenues) remained constant year over
year at 22.3%. Staffing Services gross margin decreased from 21.7% in 1997 to
21.1% in 1998 mainly due to a change in the business mix. Outsourcing Services
gross margin decreased from 18.1% in 1997 to 17.7% in 1998. Professional
Services gross margin remained constant year over year at 32.4%.
Operating expenses increased 4.3%, or $2.3 million. The increase is
primarily due to incremental operating expenses resulting from the acquisitions
of IMCOR, M. David Lowe, Inc., Trattner and Carson. Operating costs, as a
percentage of revenue decreased from 16.2% in the 1997 period to 16.0% in the
1998 period. The Company incurred costs of $1.0 million in the 1998 period
related to the Year 2000 assessment project (see Year 2000 Issues). Depreciation
and amortization expense increased 26.3%, or $672,000 due to increased
investment in desktop computers to support management information systems and
amortization of goodwill from acquisitions.
Interest expense decreased from $2.3 million in 1997, to $1.1 million
in 1998. This decrease resulted from the net effect of the proceeds from the
Company's July 28, 1997 stock offering and positive operating cash flow in the
1998 period reduced by borrowings to fund the acquisitions discussed above. See
liquidity and capital resources.
Other expense decreased from $874,000 in 1997 to $173,000 in 1998. The
1997 period expense included the Company's share of losses from its 50%
ownership in a joint venture formed in October 1995 to provide
7
<PAGE> 9
PART I
ITEM 2.
administrative outsourcing for health care facilities. This joint venture was
terminated in the fiscal fourth quarter of 1997.
The effective income tax rate declined from 38.0% in 1997 to 37.5% in
1998 primarily as a result of reduced state income taxes.
Net income rose from $9.2 million in 1997 to $10.5 million in 1998, a
14.0% increase. Diluted earnings per share increased from $0.35 in 1997 to $0.37
in 1998.
Year 2000 remediation expense totaled $1.0 million in the 1998 period.
If these costs had been excluded from the 1998 period, net income would have
been $11.1 million, a $1.9 million or 20.9% increase over the prior year
quarter. Diluted earnings per share would have increased by $0.04 to $0.39,
resulting in an 11.4% increase over prior year diluted earnings per share.
OPERATING RESULTS NINE MONTHS ENDED AUGUST 2, 1998 COMPARED TO NINE MONTHS ENDED
JULY 27, 1997
Revenues increased 11.4%, or $105.9 million, to $1,037.7 million in
1998. Revenue by business group is as follows:
<TABLE>
<CAPTION>
Business Group 1998 % of Consolidated Revenue 1997 % of Consolidated Revenue
- -------------- ------------------------------- ------------------------------
<S> <C> <C>
Staffing Services 65.7% 68.1%
Outsourcing Services 19.2% 19.5%
Professional Services 15.1% 12.4%
----- -----
Total 100.0% 100.0%
</TABLE>
Staffing Services revenues grew 7.4% to $681.4 million. Staffing
Services volume, as measured by hours that staffing employees worked, increased
3.2% and rates rose 3.9% compared to 13.8% and 3.9%, respectively, for the 1997
period. The growth in Staffing Services was impacted by slower-than-expected
ramp up of new business and difficulty in recruiting large volumes of employees
in tight labor markets. Rate increases over prior year reflect changes in
business mix to higher priced services. Outsourcing Services revenues grew 9.7%
to $199.8 million. Outsourcing Services revenues from customers other than IBM
increased $7.9 million or 12.1% from 1997 to $73.5 million while IBM revenue
increased $9.7 million or 8.4%. Professional Services revenues were $156.6
million in the 1998 period compared to $115.1 million in the 1997 period, a
36.1% increase.
Gross profit increased 12.7%, or $26.1 million, to $231.2 million in
1998. Gross margin increased from 22.0% in the 1997 period to 22.3% in the 1998
period. Staffing Services gross margin decreased from 21.4% in 1997 to 21.3% in
1998 mainly due to a change in the business mix. Outsourcing Services gross
margin declined from 18.2% in 1997 to 17.8% in the 1998 period due primarily to
an increased number of variable versus fixed priced IBM contracts. Professional
Services gross margin increased from 31.3% in the 1997 period to 32.2% in the
1998 period. Margins increased as a result of adding higher margin information
technology consulting services in the 1998 period through the acquisitions of
Comtex Information Systems, Inc. ("Comtex") in January 1997, Trattner, Carson,
and IMCOR. The 1997 period includes the results of Norrell Information Systems
and Financial Staffing.
Operating expenses increased 13.8%, or $20.7 million, primarily as a
result of the incremental operating costs associated with the acquisitions of
Comtex, IMCOR, M. David Lowe, Inc., Trattner, and Carson. The
8
<PAGE> 10
PART I
ITEM 2.
Company also added costs in the 1998 period to support organic growth and to
provide increased client support. The Company incurred $1.2 million of
incremental costs for business process reengineering work. During the 1998
period, the Financial Accounting Standards Board Emerging Issues Task Force
issued an accounting ruling requiring companies to expense as incurred costs
associated with business process reengineering. Operating expenses, as a
percentage of revenues, increased from 16.1% in the 1997 period to 16.5% in the
1998 period. The Company incurred costs of $1.4 million in the 1998 period
related to the Year 2000 assessment project (see Year 2000 Issues). Depreciation
and amortization expense increased $2.3 million, or 32.4%, from the 1997 period
due to increased investment in desktop computers to support management
information systems, MIS development and goodwill from acquisitions.
Interest expense decreased from $5.8 million in the 1997 period to $3.6
million in the 1998 period. This decrease resulted from the net effect of the
proceeds from the Company's July 28, 1997 stock offering and positive operating
cash flow in the 1998 period reduced by borrowings to fund the acquisitions
discussed above. See liquidity and capital resources.
Other expense decreased from $1.7 million in the 1997 period to
$224,000 in the 1998 period. The 1997 period expense included the Company's
share of losses from its 50% ownership in a joint venture formed in October 1995
to provide administrative outsourcing for health care facilities. This joint
venture was terminated in the fiscal fourth quarter of 1997.
Net income rose from $24.9 million in 1997 to $28.4 million in 1998, a 14.5%
increase. Diluted earnings per share increased from $0.96 in 1997 to $0.99 in
1998.
Year 2000 remediation expense totaled $1.4 million in the 1998 period.
If these costs had been excluded from the 1998 period, net income would have
been $29.3 million, a $4.5 million or 18.0% increase over the prior year
quarter. Diluted earnings per share would have increased by $0.06 versus the
$0.03 reported diluted earnings per share increase which included Year 2000
remediation expenses. The diluted earnings per share would have been $1.02,
resulting in a 6.3% increase over prior year diluted earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations in 1998 was $57.4 million compared to cash
used of $25.7 million in 1997. The 1998 period included a decrease of $20.2
million in trade accounts receivable compared to an increase of $58.7 million in
1997. The 1998 decrease was due principally to a decline in days sales
outstanding. During the 1998 period, cash provided by operating activities was
partially offset by a decrease in accounts payable and accrued expenses (a
decrease in cash) of $4.6 million compared to an increase of $5.1 million in
1997. The 1997 amount included an accrual of $9.2 million for the contingent
payment associated with the acquisition of Anatec.
Investing activities used cash of $56.3 million in 1998 compared to
cash used of $100.0 million in 1997. The purchases of Carson in July 1998,
Trattner in April 1998 and M. David Lowe in December 1997 and the contractual
payments related to the Comtex and Orlando acquisitions resulted in cash uses of
$42.8 million. The fiscal year 1997 purchases of Comtex Information Systems,
Inc., Accounting Resources Inc., and IMCOR, resulted in cash uses of $77.0
million. In addition to the initial cash purchase price paid at closing for
Imcor and Trattner, the sellers have the right to receive contingent payments
based on its achieving a specified level of operating profit, with final payment
9
<PAGE> 11
PART I
ITEM 2.
dates between 2000 and 2001. The Company does not expect these contingent
payments to have a material impact on its operations. Investing activities for
1998 and 1997 included MIS development costs of $5.8 million and $13.3 million,
respectively.
Financing activities used cash of $1.3 million in 1998 compared to cash
provided of $121.3 million in 1997. Long-term debt used cash in 1998 of $2.6
million compared to net cash provided from the issuance of long-term debt of
$117.7 million in 1997. The 1997 issuance of long-term debt was used to fund the
acquisitions discussed above, spending on MIS development, property and
equipment, and the cost associated with carrying a higher 1997 trade accounts
receivable balance. In July 1997 the Company reduced its outstanding long-term
debt by its secondary stock offering.
At August 2, 1998, the Company had $71.1 million of total debt
outstanding.
With the assistance of outside consultants, the Company has completed
an information systems plan to address the Company's long-term business needs.
The plan includes three major initiatives: 1) Development of a new weekly
payroll system which will enhance capacity, flexibility and speed to support
anticipated volumes, 2) Replacement of the highly customized billing system with
a version more closely resembling the vendor delivered software in order to
reduce cost and improve efficiency of applying vendor upgrades through business
process improvements, and 3) Continue the roll out of the revised branch office
order entry system. Anticipated capital spending for the payroll and branch
office systems projects during fiscal 1998 and 1999 is in the range of $18
million to $23 million. The new weekly payroll system is expected to be complete
in the first fiscal quarter of 1999. The branch office order entry system will
be implemented in a phased roll out approach and is expected to be complete in
the third fiscal quarter of 1999. The remaining costs related to the billing
system replacement will be absorbed in operating expenses and are not expected
to significantly impact the Company's normal operating costs as a percentage of
revenue.
OTHER EVENTS
On August 12, 1998, the Company acquired FSS International Limited, a
United Kingdom financial and information technology ("IT") recruitment and
international search and selection business. This acquisition represents a
milestone in the Company's growth as it represents the first step in our global
expansion efforts.
During September 1998, the Board of Directors authorized the Company
to purchase up to 3,750,000 shares of the Company's common stock or
approximately 15% of its shares outstanding. The periodic purchase will take
place on the open market or in privately negotiated transactions.
NEW ACCOUNTING PRONOUNCEMENT
In 1998, The Company adopted SFAS 128, "Earnings Per Share." In
accordance with this standard, basic earnings per share is computed on the basis
of the weighted average number of shares outstanding during the year. Diluted
earnings per share is computed giving effect to dilutive stock options. See Note
3 of Notes to Consolidated Financial Statements where discussed.
10
<PAGE> 12
PART I
ITEM 2.
YEAR 2000 ISSUES
The Company is currently in the process of addressing a problem that is
facing all users of automated information systems. The Year 2000 Issue is the
result of computer programs being written using two digits rather than four to
define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations.
Based on a recent assessment, the Company determined that it will be
required to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. This modification and replacement process will be implemented by the
Company's Information Systems team with assistance from outside consultants. The
Company presently believes that, with planned modifications to existing software
and conversions to new software, the Year 2000 Issue will not pose significant
operational problems for its computer systems.
The Company is developing an implementation plan to resolve the Year
2000 Issue. This plan includes assessment, modification and testing of
identified core and other systems. Preliminary estimates for these one time Year
2000 project costs are in the range of $12 million to $18 million. This estimate
excludes Year 2000 system modification which may be required for the Company's
subsidiaries not using the Company's core systems and the replacement of
embedded systems found to be non-compliant. The Company expects the majority of
these costs to be incurred in 1999. The Company's Year 2000 project costs are
not expected to have a material impact on its liquidity or capital resources.
SPECIAL NOTE REGARDING "FORWARD-LOOKING" INFORMATION
The foregoing section contains "forward-looking" statements which
represent the Company's expectations or beliefs concerning future events,
including the sufficiency of funds from operations and available borrowings to
meet the Company's working capital and capital expenditure needs for 1998. A
number of important factors could, individually or in the aggregate, cause
actual results to differ materially from those forming the basis of the
forward-looking statements, including changes in the Company's relationship with
its largest customers and increased competition in, and changes in laws and
regulations relating to, the temporary services, professional services and
outsourcing industry.
11
<PAGE> 13
PART II
ITEM 6
Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule (for SEC use only)
(b) No Reports on Form 8-K were filed for the period covered under this
quarterly filing.
12
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORRELL CORPORATION
(REGISTRANT)
Date: September 15, 1998 By: S/C. Scott L. Colabuono
-----------------------------------
Scott L. Colabuono
Senior Vice President and Chief
Financial Officer
(On behalf of the Registrant and as
Chief Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-01-1998
<PERIOD-START> NOV-03-1997
<PERIOD-END> AUG-02-1998
<EXCHANGE-RATE> 1
<CASH> 6,378
<SECURITIES> 0
<RECEIVABLES> 209,152
<ALLOWANCES> 7,388
<INVENTORY> 0
<CURRENT-ASSETS> 220,433
<PP&E> 37,819
<DEPRECIATION> 14,805
<TOTAL-ASSETS> 456,956
<CURRENT-LIABILITIES> 108,558
<BONDS> 0
0
0
<COMMON> 274
<OTHER-SE> 238,089
<TOTAL-LIABILITY-AND-EQUITY> 456,956
<SALES> 0
<TOTAL-REVENUES> 1,037,738
<CGS> 0
<TOTAL-COSTS> 806,497
<OTHER-EXPENSES> 1,412<F1>
<LOSS-PROVISION> 1,739
<INTEREST-EXPENSE> 3,559
<INCOME-PRETAX> 45,516
<INCOME-TAX> 17,068
<INCOME-CONTINUING> 28,448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,448
<EPS-PRIMARY> 1.04
<EPS-DILUTED> .99
<FN>
AMOUNT INCLUDED IN OTHER EXPENSES REPRESENTS Y2K EXPENDITURES.
</FN>
</TABLE>
