<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 February 1, 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: 27,238,186 shares on March 1,
1998.
<PAGE> 2
Norrell Corporation and Subsidiaries
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets - 2
February 1, 1998 (Unaudited) and November 2, 1997
Consolidated Statements of Income 3
(Unaudited) - Three months ended February 1, 1998
and January 26, 1997
Consolidated Statements of Cash Flows 4
(Unaudited) - Three months ended February 1, 1998
and January 26, 1997
Notes to Consolidated Financial Statements 5
(Unaudited)
ITEM 2. Management's Discussion and Analysis of Financial 6
Condition and Results of Operations
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 9
(a) No Reports on Form 8-K were filed for the period
covered under this quarterly filing.
SIGNATURE 10
</TABLE>
<PAGE> 3
PART I
ITEM 1.
NORRELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS FEBRUARY 1, 1998 NOVEMBER 2, 1997
- ------ ---------------- ----------------
<S> <C> <C>
CURRENT ASSETS
CASH AND SHORT-TERM INVESTMENTS $ 8,274 $ 6,678
ACCOUNTS RECEIVABLE TRADE,
LESS ALLOWANCES OF $7,357 IN 1998 199,428 215,463
AND $6,497 IN 1997
PREPAID EXPENSES 3,280 2,915
OTHER 8,613 12,823
--------- ---------
TOTAL CURRENT ASSETS 219,595 237,879
--------- ---------
PROPERTY AND EQUIPMENT, LESS
ACCUMULATED DEPRECIATION 22,384 19,759
--------- ---------
NONCURRENT DEFERRED INCOME TAXES 12,335 12,690
--------- ---------
OTHER ASSETS
GOODWILL AND OTHER INTANGIBLES, NET OF AMORTIZATION 144,922 136,358
MIS DEVELOPMENT COSTS, NET OF AMORTIZATION 20,391 19,486
INVESTMENTS AND OTHER ASSETS 12,591 12,672
--------- ---------
TOTAL OTHER ASSETS 177,904 168,516
--------- ---------
TOTAL ASSETS $ 432,218 $ 438,844
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
CURRENT MATURITIES OF LONG-TERM DEBT $ 9,420 $ 12,881
ACCOUNTS PAYABLE 11,668 12,390
ACCRUED EXPENSES 77,866 90,515
DEFERRED REVENUE AND GAIN 7,375 8,779
--------- ---------
TOTAL CURRENT LIABILITIES 106,329 124,565
LONG-TERM DEBT, LESS CURRENT MATURITIES 60,111 60,129
LONG-TERM DEFERRED GAIN 9,611 9,983
LONG-TERM ACCRUED EXPENSES 38,868 36,961
--------- ---------
TOTAL LIABILITIES 214,919 231,638
--------- ---------
SHAREHOLDERS' EQUITY
COMMON STOCK, STATED VALUE $.01 PER SHARE;
50,000,000 SHARES AUTHORIZED, WITH SHARES
ISSUED AND OUTSTANDING OF 27,227,378 IN
1998 AND 26,903,738 IN 1997 273 269
TREASURY STOCK, AT COST; 26,534 SHARES IN 1998
AND 34,457 SHARES IN 1997 (768) (1,062)
ADDITIONAL PAID-IN CAPITAL 136,052 133,220
NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES (125) (125)
RETAINED EARNINGS 81,867 74,904
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 217,299 207,206
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 432,218 $ 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
-----------------------------------------
FEBRUARY 1, 1998 JANUARY 26, 1997
------------------ ------------------
<S> <C> <C>
REVENUES $ 334,276 $ 281,234
COST OF SERVICES 260,026 220,345
--------- ---------
GROSS PROFIT 74,250 60,889
OPERATING EXPENSES 56,942 45,956
DEPRECIATION AND AMORTIZATION 3,044 1,921
--------- ---------
INCOME FROM OPERATIONS 14,264 13,012
INTEREST EXPENSE (1,279) (938)
OTHER EXPENSES (107) (459)
--------- ---------
INCOME BEFORE INCOME TAXES 12,878 11,615
INCOME TAXES 4,829 4,414
--------- ---------
NET INCOME $ 8,049 $ 7,201
========= =========
PER COMMON SHARE (BASIC):
BASIC EARNINGS PER COMMON SHARE $ 0.30 $ 0.30
========= =========
SHARES USED IN COMPUTING BASIC
EARNINGS PER SHARE 27,044 23,720
========= =========
PER COMMON SHARE (DILUTED):
DILUTED EARNINGS PER COMMON SHARE $ 0.28 $ 0.28
========= =========
SHARES USED IN COMPUTING DILUTED
EARNINGS PER SHARE 28,553 25,732
========= =========
</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>
THREE MONTHS ENDED
--------------------------------------
FEBRUARY 1, 1998 JANUARY 26, 1997
--------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 8,049 $ 7,201
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
DEPRECIATION AND AMORTIZATION - OPERATING EXPENSE 3,044 1,921
DEPRECIATION AND AMORTIZATION - COST OF SERVICES/OTHER EXPENSES 252 131
GAIN ON RETIREMENT OF COMMON STOCK (471) (471)
PROVISION FOR DOUBTFUL ACCOUNTS 503 479
DEFERRED INCOME TAXES (37) (4,304)
DEFERRED GAIN ON SALE OF BUILDING (372) (372)
LONG TERM ACCRUED EXPENSES 1,707 1,825
OTHER 733 2,331
CHANGE IN CURRENT ASSETS AND CURRENT LIABILITIES
ACCOUNTS RECEIVABLE, TRADE 18,235 (11,257)
ACCOUNTS PAYABLE (722) (6,242)
ACCRUED EXPENSES (11,962) (607)
OTHER 3,304 2,321
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACT 22,263 (7,044)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
COST OF ACQUISITIONS, NET OF CASH ACQUIRED (13,000) (67,082)
ADDITIONS TO PROPERTY AND EQUIPMENT, NET (3,095) (1,772)
INCREASE IN MIS DEVELOPMENT COSTS, NET (1,475) (4,896)
INCREASE IN INVESTMENTS AND OTHER NON-CURRENT ASSETS (665) (1,415)
INCREASE IN GOODWILL AND OTHER INTANGIBLES, NET (205) (78)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (18,440) (75,243)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
PROCEEDS FROM THE ISSUANCE OF LONG-TERM DEBT 14,844 159,352
REPAYMENTS OF LONG-TERM DEBT (18,323) (75,931)
STOCK OPTION EXERCISES, INCLUDING RELATED TAX BENEFITS 1,831 1,011
DIVIDENDS PAID ON COMMON STOCK (1,086) (951)
PROCEEDS FROM THE ISSUANCE OF COMMON STOCK 687 2,680
(ACQUISITION) ISSUANCE OF TREASURY STOCK (180) 11
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACT (2,227) 86,172
--------- ---------
NET INCREASE IN CASH AND SHORT-TERM
INVESTMENTS 1,596 3,885
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF PERIOD 6,678 8,876
--------- ---------
CASH AND SHORT-TERM INVESTMENTS AT END
OF PERIOD $ 8,274 $ 12,761
========= =========
SUPPLEMENTARY CASH FLOW DISCLOSURES
CASH PAYMENTS DURING THE PERIOD FOR
INTEREST 1,289 $ 451
INCOME TAXES, NET OF REFUNDS 202 5,205
NONCASH INVESTING AND FINANCING ACTIVITY
ISSUANCE OF OPTIONS TO BENEFIT PLAN 790 679
EXERCISE OF BENEFIT PLAN STOCK OPTIONS 459 157
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
</TABLE>
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 February 1, 1998, if the Company
had terminated each of the swap agreements, the estimated termination
payments by the Company would have totaled approximately $1,715,000.
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:
(In thousands)
1998 1997
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<S> <C> <C>
Weighted average shares 27,044 23,720
Dilutive stock options 1,509 2,012
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Adjusted weighted average shares 28,553 25,732
====== ======
Anti-dilutive options not included 914 81
====== ======
</TABLE>
5
<PAGE> 7
PART I
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OPERATING RESULTS FIRST QUARTER FEBRUARY 1, 1998 COMPARED TO FIRST QUARTER
JANUARY 26, 1997
Revenues increased 18.9%, or $53.0 million to $334.3 million in 1998.
Staffing Services revenues grew 14.1% to $222.2 million, and accounted for
66.5% and 69.2% of total 1998 and 1997 revenues, respectively. Staffing
Services volume, as measured by hours that staffing employees worked, increased
10.0% and prices rose 3.8% compared to 10.2% and 4.8% for 1997. Outsourcing
Services revenues grew 15.5% to $64.9 million. Outsourcing Services revenues
from customers other than IBM increased 32.5% or $6.0 million from 1997.
Professional Services revenues were $47.1 million in 1998 compared to $30.3
million in 1997, a 55.4% 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.
Gross profit increased 21.9%, or $13.4 million, to $74.3 million in
1998. Gross margin (gross profit as a percent of revenues) increased from
21.7% in 1997 to 22.2% in 1998. Staffing Services gross margin increased from
21.5% in 1997 to 21.7% in 1998. This increase is due to a favorable mix of
higher margin customers in the 1998 period. Outsourcing Services gross margin
decreased from 18.0% in 1997 to 17.2% in 1998 due primarily to recognizing
payroll expense without the related revenue for two paid holidays on the IBM
account in the 1998 period. Professional Services gross margin increased from
29.4% in 1997 to 31.8% in 1998 due principally to the acquisition of Comtex
Information Systems, Inc. ("Comtex") in January 1997 and IMCOR in October 1997.
These higher end consulting businesses typically command relatively higher
margins.
Operating expenses increased 23.9%, or $ 11.0 million. Of the 23.9%
operating expense increase, over 8.0% resulted from increased operating costs
associated with the acquisitions of Comtex, IMCOR, and M. David Lowe, Inc., a
Houston based staffing services company acquired in December 1997. The 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 costs, as a percentage of
revenue increased from 16.3% in the 1997 period to 17.0% in the 1998 period.
Depreciation and amortization expense increased 58.5%, or $1.1 million due to
increased investment in desktop computers to support management information
systems and amortization of goodwill from acquisitions.
Interest expense increased from $938,000 in 1997, to $1.3 million in
1998 as a result of borrowings to fund the acquisitions discussed above, net of
the proceeds from the Company's July 28, 1997 stock offering.
Other expenses decreased from $459,000 in 1997 to $107,000 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 administrative
outsourcing for health care facilities. This joint venture was terminated in
the fiscal fourth quarter.
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.
Diluted earnings per share remained flat at $0.28 period over period.
During the 1998 period, the Financial Accounting Standards Board Emerging
Issues Task Force issued an accounting ruling requiring that companies expense
as incurred costs associated with business process reengineering. The Company
incurred a pretax charge of $1.2 million in the first quarter of 1998.
Excluding the $1.2 million pretax expense, 1998 earnings per share would have
been $0.31, a 10.7% increase over 1997.
6
<PAGE> 8
PART I
ITEM 2.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations in 1998 was $22.3 million compared to cash
used of $7.0 million in 1997. The 1998 period included a decrease of $18.2
million in trade accounts receivable compared to an increase of $11.3 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 $12.7 million compared to a decrease of $6.8 million in
1997. This increase was due to internal growth in operations and payments that
will be made in the future related to the acquisition of the Orlando franchise.
Investing activities used cash of $18.4 million in 1998 compared to
cash used of $75.2 million in 1997. The December 1997 purchase of M. David
Lowe resulted in cash uses of $13.0 million. The January 1997 purchase of
Comtex and the November 1997 purchase of ARI resulted in cash uses of $67.1
million in 1997. Investing activities for 1998 and 1997 included MIS
development costs of $1.5 million and $4.9 million, respectively.
Financing activities used cash of $2.2 million in 1998 compared to
cash provided of $86.2 million in 1997. Long-term debt used cash in 1998 of
$3.5 million compared to net cash provided from the issuance of long term debt
of $83.4 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 February 1, 1998, the Company had $69.5 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 $15 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.
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.
YEAR 2000 ISSUES
The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and is developing an implementation plan to resolve the issue. Estimates for
these one time costs are not available at this time. They are currently being
assessed as part of the implementation plan. The Year 2000 issue is the result
of computer programs being written using two digits rather than four to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations. The
planned modifications will not involve the Company's major systems, but will
probably include things such as PC's, phone systems and other field systems.
The Company presently believes that, with planned modifications to existing
software and conversions to new software, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems as so
modified and converted.
7
<PAGE> 9
PART I
ITEM 2.
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.
8
<PAGE> 10
PART II
ITEM 6
(a) No Reports on Form 8-K were filed for the period covered under this
quarterly filing.
(b) Exhibit 27 Financial Data Schedule (for SEC use only)
9
<PAGE> 11
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: March 13, 1998 By: S/C. Scott L. Colabuono
---------------------------------
Scott L. Colabuono
Vice President and Chief Financial
Officer (On behalf of the
Registrant and as Chief
Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-01-1998
<PERIOD-START> NOV-03-1997
<PERIOD-END> FEB-01-1998
<EXCHANGE-RATE> 1
<CASH> 8,274
<SECURITIES> 0
<RECEIVABLES> 206,785
<ALLOWANCES> 7,357
<INVENTORY> 0
<CURRENT-ASSETS> 219,595
<PP&E> 34,061
<DEPRECIATION> 11,677
<TOTAL-ASSETS> 432,218
<CURRENT-LIABILITIES> 106,329
<BONDS> 0
0
0
<COMMON> 273
<OTHER-SE> 217,026
<TOTAL-LIABILITY-AND-EQUITY> 432,218
<SALES> 0
<TOTAL-REVENUES> 334,276
<CGS> 0
<TOTAL-COSTS> 260,026
<OTHER-EXPENSES> 60,093
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,279
<INCOME-PRETAX> 12,878
<INCOME-TAX> 4,829
<INCOME-CONTINUING> 8,049
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,049
<EPS-PRIMARY> .30
<EPS-DILUTED> .28
</TABLE>
