SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999
COMMISSION FILE NUMBER: 0-24484
MODIS PROFESSIONAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3116655
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Independent Drive, Jacksonville, FL 32202
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number including area code): (904) 360-2000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.01 Per Share New York Stock Exchange
(Title of each class) (Name of each exchange on
which registered)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant (assuming for these purposes, but not conceding, that all
executive officers and directors are "affiliates" of the Registrant), based upon
the closing sale price of common stock on March 15, 2000 as reported by the New
York Stock Exchange, was approximately $1,403,782,623.
As of March 15, 2000, the number of shares outstanding of the Registrant's
common stock was 96,397,090.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Registrant's Proxy
Statement for its 2000 Annual Meeting of shareholders are incorporated by
reference in Part III.
FORWARD LOOKING STATEMENTS
This Annual Report on From 10-K contains forward-looking statements that
are subject to certain risks, uncertainties or assumptions and may be affected
by certain other factors, including but not limited to the specific factors
discussed in Part I, Item 1 under "Business - Introdution and Recent Events',
Part II, Item 5 under 'Market for Registrant's Common Equity and Related
Shareholder Matters' and in Part II under 'Liquidity and Capital Resources',
'Other Matters - Year 2000 Compliance' and 'Factors Which May Impact Future
Results and Financial Condition'. In addition, except for historical facts, all
information provided in Part II under 'Quantitative and Qualitative Disclosures
About Market Risk' should be considered forward-looking statements. Should one
or more of these risks, uncertainties or other factors materialize, or should
underlying assumptions prove incorrect, actual results, performance or
achievements of the Company may vary materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
Forward-looking statements are based on beliefs and assumptions of the
Company's management and on information currently available to such manangement.
Forward looking statements speak only as of the date they are made, and the
Company undertakes no obligation to update publicly any of them in light of new
information or future events. Undue reliance should not be placed on such
forward-looking statements, which are based on current expectations.
Forward-looking statements are not guarantees of performance.
ITEM 1. BUSINESS GENERAL
Introduction and Recent Events
Modis Professional Services, Inc. ('MPS' or the 'Company') is an international
provider of professional business services, including consulting, outsourcing,
training and strategic human resource solutions, to Fortune 1000 and other
leading businesses. Historically, the Company's services have been provided
through its two business divisions: (i) Information Technology, which provides
technology consulting, outsourcing and solutions services, and (ii) Professional
Services, which provides personnel who perform specialized services such as
accounting, legal, technical / engineering, scientific, and career management
and consulting.
On December 15, 1999, the Company's Board of Directors approved a plan to split
the Company into two independent companies with the Company continuing to
operate the Professional Services business and to distribute to the stockholders
of the Company all of the outstanding stock of the Information Technology
division. The creation of two independent companies will enable management of
each company to devote the time and attention to the different needs of each
business and to sharpen its focus on the core strategies of each business. The
distribution is subject to market and other conditions, including regulatory
approvals and tax clearances. The Company has requested that the Internal
Revenue Service issue a ruling that the distribution will be tax free to the
Company and to its stockholders. This ruling, and the distribution, are expected
to occur during 2000.
Unless otherwise noted, the discussion of the Company's business set forth below
relates to the Professional Services business and does not include information
concerning the Information Technology business. Information concerning the
Information Technology division is included in Item 7, Management's Discussion
of Financial Condition and Results of Operations, 'Results of discontinued
operations'.
Discussion of the Business
Headquartered in Jacksonville, Florida, the Company has approximately 150
offices throughout the United States and the United Kingdom. MPS' objective is
to concentrate its efforts and resources on profitable, high-growth, high-end
professional services that have the ability to consistently generate strong
earnings. The Company has experienced substantial growth in revenue and earnings
driven primarily by (i) increased business with the Company's existing clients;
(ii) increased penetration of existing and new markets; (iii) trends toward the
increased outsourcing of non-core competency professional business services; and
(iv) acquisitions of other professional services companies.
Business Strategy
MPS seeks to expand its revenues and profitability by offering an extensive
range of specialized human resource and consulting services through a global
network of branch offices. The Company markets and delivers its services with an
emphasis on local entrepreneurial spirit and decision-making at the branch level
combined with strong corporate, technological and managerial support. The
Company seeks to provide innovative and customized solutions to human resource
needs and to expand the Company's relationships with its clients. MPS' mission
is to set the standard for the professional business services industry by
empowering its employees to provide quality services. Management believes the
Company's concentration on professional services allows faster growth and higher
profit margins versus the more traditional commercial staffing businesses due to
the specialized expertise of professional personnel. MPS' principal competitors
in the professional services areas generally consist of specialty firms in each
of those fields, and to a lesser extent, diversified business services firms.
The Company's strategy is to continue to increase the overall revenue and gross
profits by expanding current specialties into new geographic markets,
identifying and adding new practice areas, and leveraging wherever possible on
existing specialty strengths.
GROWTH STRATEGY
The Company pursues a focused growth strategy designed to achieve both increased
revenues and earnings. The key elements of this growth strategy are as follows:
Internal Growth
The Company's internal growth strategy includes: (i) positioning in market
locations, customer segments and skill areas that value high levels of service;
(ii) increasing penetration of existing markets; (iii) expanding into new and
contiguous markets; and (iv) migrating to higher margin specialty practice
areas. Several of the more distinguishing ways to facilitate the aforementioned
internal growth strategies are as follows:
Staff Augmentation
Each business unit provides variable workforce solutions by providing
intellectual capital to meet the changing needs of clients. By establishing
new relationships, forming strategic alliances and continually improving
current client and consultant relationships, management believes the
traditional staff augmentation will continually be an integral component to
its service mix.
Specialized Staffing and Specialty Solution Opportunities
Many of the Company's offices provide specialty solutions and staffing to
its corporate clients beyond the traditional professional staff
augmentation. Management believes it can leverage these practice
specialties and client relationships within each business unit by offering
specialized services and solutions to other existing and prospective
clients. Examples include document and trial management services,
leadership development, executive coaching and specialized computer-aided
design services.
Professional Development Opportunities
Enhancing the knowledge and skills of the consultants and employees of the
Company based on the needs of our clients will strengthen our overall
relationship with clients, consultants, and employees. Generally, these
strategies are intended to better serve our clients and strengthen our
professionalism throughout each business unit. Management believes this
will improve overall client relationships and profitability and improve
consultant and employee retention.
Acquisitions
The Company's growth strategy includes the acquisition of existing businesses
with complementary service offerings, strong management, profitable operating
results and recognized local and regional presence. The Company has acquired 13
professional services companies since 1996. Acquisition criteria considered by
management includes, among other things, financial performance, a desirable
market location, significant market share, new or expanded specialties that can
be added to the Company's existing lines of business, efficient operating
systems and existing management that will operate effectively within the
Company's existing managerial structure. The Company believes that there is an
opportunity, as a part of the consolidation in the global business services
industry, to focus on acquisitions of companies that offer specialized
professional services. The Company's management has had success in identifying
acquisition candidates that complement existing businesses, integrating them
into existing operations and utilizing them to enhance the Company's growth
performance.
MARKET OVERVIEW
The need for professional services, specifically legal, accounting, career
management and consulting, scientific, and engineering / technical solutions,
has increased rapidly in response to the continuing shift in the respective
industries in which these professionals operate. The focus of large corporations
has migrated to a more flexible professional workforce which employs personnel
on a skill-specific or project-specific basis. This shift has increased the
reliance upon business service partners to be able to recruit and provide
solutions to these companies on a skill-specific or project-specific basis, or
an economic basis. The trend toward outsourcing these services is expected to be
long term in nature.
Accounting Division
The Accounting division, which operates primarily under the Accounting
Principals brand name in the United States and under the Badenoch and Clark
brand name throughout the United Kingdom, provides professionals and project
solutions and support in finance/banking, data processing and accounting,
including auditors, controllers/CFOs, CPAs, financial analysts, mortgage
processors, loan processors, accounts receivable and accounts payable clerks,
and tax accountants. By providing these accounting and financial services, the
Company offers customers a reliable and economic resource for financial
professionals to address uncertain or uneven work loads caused by special
projects or unforeseen emergencies. The Company entered the accounting services
industry in 1995 through the acquisition of a small, regional accounting firm
and has since increased the division to encompass 45 branches in the U.S. and
the United Kingdom, as of December 31, 1999.
Included within the Accounting division's results is Management Principals, a
new brand that provides personnel with project management and implementation
experience to the banking and financial services industry to handle such matters
as change management, financial projects, marketing, mergers and acquisitions,
organizational development, and training. Management Principals also provides
direct placement solutions in banking and financial services. This unit started
with the acquisition of Keystone Consulting Group in May 1997 and as of December
31, 1999, it operates five branches across the United States.
Legal Division
The Legal division, which operates primarily under the Special Counsel brand
name, provides litigation support and consulting as well as human resource
services and solutions to corporate legal departments and law firms. These
services include the provision of project teams/individuals consisting of:
attorneys, paralegals, legal secretaries, and law librarians to corporate legal
departments and private law firms for litigation support, as well as project and
document management, document imaging and coding, and trial presentation
services. The Company primarily competes with a few large companies and many
local firms as this market is highly fragmented. The Company entered the legal
industry in 1995 through the acquisitions of Attorneys Per Diem, a Baltimore
operation, (now Special Counsel) in 1995, and Special Counsel, Inc., a New York
City operation. As of December 31, 1999, the legal unit had 33 branches
operating primarily in the United States, with capability in the United Kingdom
through its Badenoch and Clark brand.
Technical and Engineering Division
The Technical and Engineering division, collectively called ENTEGEE, provides
drafters, designers and engineers in the mechanical and electrical engineering
fields as well as personnel to the chemical, plastics and other industries.
ENTEGEE also provides high level engineering and drafting services, including
the outsourcing of specialized design services such as architectural design and
drafting, tool designs and computer-aided design ('CAD') services. ENTEGEE's
clients range from transportation and aerospace to engineering firms, print
circuit board manufacturers, and other domestic and international businesses. As
of December 31, 1999, the technical and engineering unit operates 29 branches
throughout the United States.
Scientific Division
The Scientific division, Scientific Staffing, provides trained and
advanced-degreed scientists, laboratory technicians and support personnel to
companies in the pharmaceutical, chemical, biotechnical, environmental, health
care and consumer products industries. As of December 31, 1999, the Scientific
unit operates 17 branch offices throughout the United States.
Career Management and Consulting Division
The Career Management and Consulting division, Manchester, Inc. and Diversified
Search, Inc. offers corporate outplacement services, including career
counseling, resume development, skills assessment, interview and negotiating
techniques, and employee guidance counseling. It also provides leadership
development, career management consulting, retained executive search and other
human resource services to the banking, financial services, healthcare,
pharmaceutical, chemical and manufacturing industries. This division started
with the acquisition of Manchester Partners International, Inc. ('Manchester')
in January 1997 and as of December 31, 1999 it operates through a network of 26
branch offices throughout the United States.
COMPETITION
The business services industry has grown steadily in recent years as companies
have utilized business service firms to provide value added solutions ranging
from the outsourcing of non-core competencies to the recruitment of a flexible
workforce able to provide a company with the unique skills it does not house
internally. MPS believes that the increasing pressure that companies are
experiencing to remain competitive and efficient will cause companies to focus
their permanent internal staff around their core competencies while expanding
their use of business service partners to provide strategic solutions to fulfill
their other business needs. MPS also believes that the business services
industry is highly fragmented, but is experiencing increasing consolidation
largely in response to increased demand for companies to provide a wide range of
comprehensive human resource solutions to regional and national accounts. A
large percentage of business services firms are local operations with fewer than
five offices. Within local markets, these firms actively compete with the
Company for business, and in most of these markets no single company has a
dominant share of the market. The Company also competes with larger full-service
and specialized competitors in national, regional and local markets.
The principal national competitors of the Company include On Assignment, Inc.,
the legal division of Kelly Services, Inc., Adecco SA, CDI Corporation,
Kforce.com, Inc., Acsys, Inc. and Robert Half International, Inc. The Company
believes that the primary competitive factors in obtaining and retaining clients
are an understanding of clients' specific job requirements, the ability to
provide professional personnel in a timely manner, the monitoring of quality of
job performance, and the price of services. The primary competitive factors in
obtaining qualified candidates for professional employment assignments are
wages, responsiveness to work schedules, continuing professional education
opportunities, and number of hours of work available. Management believes that
MPS is highly competitive in all of these areas.
FULL-TIME EMPLOYEES
At March 15, 2000, the Company employed approximately 9,400 professional
consultants and approximately 1,400 corporate employees on a full-time
equivalent basis. Approximately 60 of the employees work at corporate
headquarters. Full-time employees are covered by life and disability insurance
and receive health and other benefits.
GOVERNMENT REGULATIONS
Outside of the United States and Canada, the personnel outsourcing segment of
the Company's business is closely regulated. These regulations differ among
countries but generally may regulate: (i) the relationship between the Company
and its temporary employees; (ii) licensing and reporting requirements; and(iii)
types of operations permitted. Regulation within the United States does not
materially impact the Company's operations.
SERVICE MARKS
The Company or its subsidiaries maintain a number of service marks and other
intangible rights, including federally registered service marks for, ACCOUNTING
PRINCIPALS (and logo), MANCHESTER, SCIENTIFIC STAFFING, SPECIAL COUNSEL,
DIVERSIFIED SEARCH, CAREERSTAT, EXALT, MANCHESTER PARTNERS INTERNATIONAL, and
ENTEGEE for its services generally. The Company or its subsidiaries have
applications pending before the Patent and Trademark Office for federal
registration of the service marks for MODIS PROFESSIONAL SERVICES (and logo),
PROCOACHING, DIVERSIFIED TECHNOLOGY PARTNERS, and MANAGEMENT PRINCIPALS. The
Company plans to file affidavits of use and timely renewals, as appropriate, for
these and other intangible rights it maintains.
SALE OF COMMERCIAL AND HEALTH CARE DIVISIONS
The Company sold its Commercial operations and its Teleservices division to
Randstad U.S., L.P., a subsidiary of Randstad Holding nv, for a final adjusted
price of $826.2 million, in cash. The sale was completed on September 27, 1998.
Effective March 30, 1998, the Company sold the operations and certain assets of
its Health Care division for consideration of $8.0 million, consisting of $3.0
million in cash and $5.0 million in a note receivable due March 30, 2000 bearing
interest at 2% in excess of the prime rate. In addition, the Company retained
the accounts receivable of the Health Care division of approximately $28.2
million. See Item 7 and Note 3 to the Company's Consolidated Financial
Statements for discussion of the sale of the Company's Commercial operations,
Teleservices division, and Health Care operations.
SEASONALITY
The Company's quarterly operating results are affected primarily by the number
of billing days in the quarter and the seasonality of its customers' businesses.
Demand for the Company's services has historically been lower during the
year-end holidays through February of the following year, showing gradual
improvement over the remainder of the year.
ITEM 2. PROPERTIES
The Company owns no material real property. It leases its corporate headquarters
as well as all of its branch offices. The branch office leases generally run for
three to five-year terms. The Company believes that its facilities are generally
adequate for its needs and does not anticipate difficulty replacing such
facilities or locating additional facilities, if needed.
ITEM 3. LEGAL PROCEEDINGS
The Company, in the ordinary course of its business, is from time to time
threatened with or named as a defendant in various lawsuits. The Company
maintains insurance in such amounts and with such coverage and deductibles as
management believes are reasonable and prudent. There is no pending litigation
that the Company believes is likely to have a material adverse effect on the
Company, its financial position or results of its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the twelve months ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The following table sets forth the reported high and low sales prices of the
Company's Common Stock for the quarters indicated as reported on the New York
Stock Exchange under the symbol "ASI" through September 30, 1998. Effective
October 1, 1998, subsequent to the Company's sale of its Commercial opertions
and Teleservices division, the Company changed its trading symbol and began
trading on the New York Stock Exchange under "MPS".
FISCAL YEAR 1998 High Low
First Quarter........................................................ $35.00 $22.00
Second Quarter....................................................... 38.86 29.38
Third Quarter........................................................ 33.25 10.50
Fourth Quarter....................................................... 18.63 9.94
FISCAL YEAR 1999
First Quarter........................................................ $17.13 $ 7.00
Second Quarter....................................................... 15.63 8.00
Third Quarter........................................................ 17.50 11.88
Fourth Quarter....................................................... 14.81 9.50
In addition to the factors set forth below in 'FACTORS WHICH MAY IMPACT FUTURE
RESULTS AND FINANCIAL CONDITION' under 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS', the price of the Company's
Common Stock is affected by fluctuations and volatility in the financial and
equity markets generally and in the Company's industry sector in particular.
As of March 15, 2000, there were approximately 913 holders of record of the
Company's Common Stock.
No cash dividend or other cash distribution with respect to the Company's Common
Stock has ever been paid by the Company. The Company currently intends to retain
any earnings to provide for the operation and expansion of its business and does
not anticipate paying any cash dividends in the foreseeable future. The
Company's revolving credit facility prohibits the payment of cash dividends
without the lender's consent.
On October 31, 1998, the Company's Board of Directors authorized the repurchase
of up to $200.0 million of the Company's Common Stock pursuant to a share
buyback program. On December 4, 1998, the Company's Board of Directors increased
the authorized share buyback program by an additional $110.0 million, bringing
the total authorized repurchase amount to $310.0 million. As of December 31,
1998, the Company had repurchased approximately 21,751,000 shares under the
share buyback program. Subsequent to December 31, 1998, the Company completed
the program during February 1999, with the repurchase of approximately 616,000
shares, bringing the total shares repurchased under the program to approximately
22,367,000 shares for approximately $297.9 million. All of these shares were
retired upon purchase. On November 4, 1999, the Company's Board of Directors
authorized the repurchase of up to $65.0 million of the Company's common stock.
As of March 15, 2000, no shares have been repurchased under this authorization.
See 'LIQUIDITY AND CAPITAL RESOURCES' under 'MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS' for additional
information.
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Years Ended
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Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
(in thousands, except per share amounts) 1999 1998 (1) 1997 (1) 1996 (1) 1995 (1)
- - -------------------------------------------------------------------------------------------------------------------------
Statement of Income Data:
Revenue $ 592,455 $ 537,973 $ 383,489 $ 179,608 $ 21,179
Cost of Revenue 397,462 372,213 264,147 134,276 15,157
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Gross Profit 194,993 165,760 119,342 45,332 6,022
Operating expenses 140,603 115,426 80,656 34,798 3,792
Restructuring and impairment charges (2,314) 18,683 - - -
Asset write-down related to sale of
discontinued operations 25,000 - - - -
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Operating income from continuing
operations 31,704 31,651 38,686 10,534 2,230
Other income, (expense), net (1,916) 596 (8,008) (749) (484)
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Income from continuing operations
before income taxes 29,788 32,247 30,678 9,785 1,746
Provision for income taxes 11,191 14,556 11,186 3,676 952
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Income from continuing operations 18,597 17,691 19,492 6,109 794
Discontinued operations:
Income from discontinued operations,
net of income taxes 63,538 81,189 82,541 25,101 27,778
Gain on sale of discontinued operations,
net of income taxes 14,955 230,561 - - -
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Income before extraordinary loss 97,090 329,441 102,033 31,210 28,572
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit - (5,610) - - -
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Net income $ 97,090 $ 323,831 $ 102,033 $ 31,210 $ 28,572
====================================================================================
Basic income (loss) per common share:
From continuing operations $ 0.19 $ 0.16 $ 0.19 $ 0.07 $ 0.01
====================================================================================
From discontinued operations $ 0.66 $ 0.75 $ 0.81 $ 0.27 $ 0.45
====================================================================================
From gain on sale (2) $ 0.16 $ 2.12 $ - $ - $ -
====================================================================================
From extraordinary item $ - $ (0.05) $ - $ - $ -
====================================================================================
Basic net income per common share $ 1.01 $ 2.98 $ 1.00 $ 0.34 $ 0.46
====================================================================================
Diluted income (loss) per common share:
From continuing operations $ 0.19 $ 0.18 $ 0.21 $ 0.07 $ 0.01
====================================================================================
From discontinued operations $ 0.66 $ 0.69 $ 0.72 $ 0.26 $ 0.42
====================================================================================
From gain on sale (2) $ 0.15 $ 1.97 $ - $ - $ -
====================================================================================
From extraordinary item $ - $ (0.05) $ - $ - $ -
====================================================================================
Diluted net income per common share $ 1.00 $ 2.79 $ 0.93 $ 0.33 $ 0.43
====================================================================================
Fiscal Years Ended
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Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
(in thousands, except per share amounts) 1999 1998 (1) 1997 (1) 1996 (1) 1995 (1)
- - -------------------------------------------------------------------------------------------------------------------------
Basic average common shares
outstanding 96,268 108,518 101,914 90,582 62,415
Diluted average common ====================================================================================
shares outstanding 97,110 116,882 113,109 95,317 69,328
====================================================================================
As of
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Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1999 1998 (1) 1997 (1) 1996 (1) 1995 (1)
====================================================================================
Balance Sheet data:
Working capital $ 62,829 $ (76,370) $ 44,086 $ 93,769 $ 239,388
Total assets 1,490,331 1,359,166 1,275,012 776,451 298,008
Long term debt 228,000 1,988 425,143 89,733 91,461
Stockholders' equity 1,182,515 1,070,110 812,842 669,779 195,085
(1) Includes the financial information of the Company for the respective years
noted above restated to account for any material business combinations
accounted for under the pooling-of-interests method of accounting.
(2) Gain on sale relates to the gain on the sale of the net assets of the
Company's discontinued operations. See Note 3 to the Consolidated
Financial Statements for a further discussion.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
During 1999, the Company's Board of Directors announced that the Company would
spin-off its Information Technology division ('modis') to its shareholders in
the form of a tax-free stock dividend. The spin-off is subject to market and
other conditions, including regulatory and tax clearances. The distribution is
expected to be completed before December 31, 2000.
Effective September 27, 1998 and March 30, 1998, the Company sold its Commercial
operations and Teleservices division, and the operations and certain assets of
its Health Care division, respectively, (jointly the "Commercial Businesses").
The Commercial operations and Teleservices division were sold with a final
adjusted purchase price of $826.2 million in cash to Randstad U.S., LP
('Randstad'), the U.S. operating company of Ranstad Holding nv, an international
staffing company based in The Netherlands. The operations and certain assets of
the Health Care division were sold for consideration of $8.0 million, consisting
of $3.0 million in cash and $5.0 million in a note receivable due March 30, 2000
bearing interest at 2% in excess of the prime rate.
As a result of the proposed spin-off and the sale of the Company's Commercial
and Health Care operations, the Company's Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations have been reclassified to report the results of operations of its
Information Technology, Commercial, Teleservices and Health Care divisions as
discontinued operations for all periods presented.
In connection with the Company's sale of its health care operations, the Company
entered into an agreement with the purchaser of the health care assets whereby
the Company agreed to make advances to the purchaser to fund its working capital
requirements. These advances are collateralized by the assets of the sold
operations, primarily the accounts receivable. In the third quarter of 1999, the
Company was informed by the purchaser of its health care operations that the
purchaser was going to default on its obligation to the Company. The purchaser
of the Company's health care operations is attempting to enter into agreements
with its franchisees and potential acquirors of franchises and the
purchaser-owned locations, whereby net accounts receivable and any additional
amounts realized from the sale of purchaser-owned locations will, after
operating costs, be applied against the purchaser's debt to the Company.
Further, the purchaser has named an interim CEO to operate the business in an
effort to maximize debt reduction to the Company. However, in the third quarter
of 1999, the Company believed it was probable that a portion of the advances
would not be repaid and accordingly, provided an allowance for the advances
estimated to be uncollectible related to the sale of the Company's discontinued
health care operations of $25.0 million.
As a result of the proposed spin-off and the sale of the Company's Commercial
and Health Care operations, the Company's Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations have been reclassified to report the results of operations of its
Information Technology, Commercial, Teleservices and Health Care divisions as
discontinued operations for all periods presented.
The following detailed analysis of operations should be read in conjunction with
the 1999 Financial Statements and related notes included elsewhere in this Form
10-K.
FISCAL 1999 COMPARED TO FISCAL 1998
Results from continuing operations
Revenue. Revenue increased $54.5 million, or 10.1%, to $592.5 million in fiscal
1999 from $538.0 million in fiscal 1998. The majority of the growth in revenue
was internal, or organic, growth. Growth in 1999 was effected by the Company's
strategic restructuring and repositioning plan (the 'restructuring plan') which
resulted in the closing of approximately 23 offices. As a result, the 1998
revenue figures include an entire years' worth of revenue of the closed offices
whereas the 1999 results include only a partial years' worth of revenue. If the
results of these closed offices were removed in both fiscal 1999 and 1998,
revenue would have increased by 16.4%. The Company operates primarily through
five operating divisions consisting of the accounting, legal,
engineering/technical, career management and consulting and scientific
divisions.
Gross Profit. Gross profit increased $29.2 million or 17.6% to $195.0 million in
fiscal 1999 from $165.8 million in fiscal 1998. Gross margin increased to 32.9%
in fiscal 1999 from 30.8% in fiscal 1998. The increase in gross margin was
primarily a result of the Company's continued migration to higher margin
solutions-type engagements, as well as a result of the Company's restructuring
plan which closed certain less profitable offices.
Operating expenses. Operating expenses increased $29.2 million or 21.8% to
$163.3 million in fiscal 1999 from $134.1 million in fiscal 1998. Operating
expenses before one-time income items and depreciation and amortization, as a
percentage of revenue increased to 21.4% in fiscal 1999 as compared to 19.2% in
fiscal 1998. Included in 1999 operating costs is a one-time charge of $25.0
million relating to the impairment of the recoverability of advances made by the
Company to the purchaser of the Health Care operations. See 'LIQUIDITY AND
CAPITAL RESOURCES' below. Also included is a one-time credit of $2.3 million
adjusting the lease component of the restructuring and impairment charge of
$18.7 million taken in fiscal 1998 as a result of the Company not experiencing
the expected levels of payments on cancelled facility leases relating to the
closing of certain offices. Included in operating expenses during both fiscal
1999 and 1998 are the costs associated with projects to ensure accurate date
recognition and data processing with respect to Year 2000 as it relates to the
Company's business, operations, customers and vendors. These costs have been
immaterial to date and are not expected to have a material impact on the
Company's results of operations, financial condition or liquidity in the future.
See 'OTHER MATTERS - Year 2000 Compliance' below.
Income from operations. As a result of the foregoing, income from operations
remained constant at $31.7 million in fiscal 1999 and fiscal 1998. Income from
operations, before one-time income items, increased $4.1 million or 8.2% to
$54.4 million in fiscal 1999 from $50.3 million in fiscal 1998. Income from
operations, before one-time income items as a percentage of revenue remained
relatively constant at 9.2% in fiscal 1999 as compared to 9.4% in fiscal 1998.
Other income (expense). Other income (expense) consists primarily of interest
income related to cash on hand and interest expense related to borrowings on the
Company's credit facility and notes issued in connection with acquisitions.
Interest expense increased to $1.9 million in fiscal 1999 as compared to
interest income earned of $0.6 million in fiscal 1998. Interest income in fiscal
1998 was primarily a result of the cash on hand related to the sale of the
Company's discontinued commercial and health care operations. The Company
recorded net interest expense in 1999 related to net borrowings on the Company's
credit facility primarily for payment of taxes and other expenses on the sale of
the Company's commercial and health care operations and for the repurchase of
approximately $297.9 million of the Company's common stock, in late fiscal 1998
and early fiscal 1999.
Income Taxes. The Company's effective tax rate decreased to 37.6% in fiscal 1999
compared to 45.1% in fiscal 1998. The decrease is due to a $9.9 million
non-deductible goodwill impairment charge included in taxable income during
fiscal 1998 (included in the restructuring and impairment charge discussed above
and in Note 13 to the Consolidated Financial Statements included elsewhere
herein). Absent these charges, the Company's effective tax rate increased to
37.6% in fiscal 1999 as compared to 34.5% in fiscal 1998, primarily as a result
of a one-time deduction in connection with the sale of the Company's
discontinued commercial operations.
Income from continuing operations. As a result of the foregoing, income from
continuing operations increased $0.9 million or 5.1% to $18.6 million in fiscal
1999 from $17.7 million in fiscal 1998. Income from continuing operations as a
percentage of revenue decreased to 3.1% in fiscal 1999 from 3.3% in fiscal 1998.
Income from continuing operations before one-time income items and the increase
in the effective tax rate as a result of the non-deductible goodwill impairment
charge as a percentage of revenue decreased to 5.5% in fiscal 1999 as compared
to 6.2% in fiscal 1998.
Results of discontinued operations
The reported results from discontinued operations include the results of the
Company's commercial operations and Teleservices division for the nine months
ended September 30, 1998, the results of the Company's health care operations
for the period January 1, 1998 through March 28, 1998. In addition, the
Company's Information Technology division, anticipated to be distributed to the
Company's shareholders in a tax-free spin-off prior to December 31, 2000, is
shown as discontinued operations for fiscal 1999 and fiscal 1998. The following
discloses the results of the discontinued Commercial businesses and the
Information Technology businesses for fiscal 1999 and fiscal 1998:
Years ended December 31,
1999 1998
Discontinued Commercial businesses:
Revenue $ - $ 919,400
Cost of revenue - 708,930
Operating expense - 156,180
Operating income - 54,290
Interest, net - 4,200
Provision for income taxes - 20,070
Income from discontinued commercial businesses - 30,020
Discontinued IT businesses:
Revenue $ 1,349,194 $ 1,164,140
Cost of Revenue 1,018,439 862,324
Operating Expense 222,247 202,305
Operating Income 108,508 99,511
Interest, net 5,878 14,572
Provision for income taxes 39,092 33,770
Income from discontinued IT businesses 63,538 51,169
Included in the operating expenses during both fiscal 1999 and 1998 are
allocations of certain net common expenses for corporate support and back office
functions totaling approximately $15.2 million and $8.0 million, respectively.
Corporate support and back office allocations are based on the ratio of the
Company's consolidated revenues to that of the discontinued Commercial and IT
Businesses. Additionally, results of discontinued operations include allocations
of consolidated interest expense totaling $5.9 million and $18.8 million for
fiscal 1999 and 1998, respectively. The allocations were based on the historic
funding needs of the discontinued operations, including: the purchases of
property, plant and equipment, acquisitions, current income tax liabilities and
fluctuating working capital needs.
FISCAL 1998 VERSUS FISCAL 1997
Results from continuing operations
Revenue. Revenue increased $154.5 million, or 40.3% to $538.0 million in fiscal
1998 from $383.5 million in fiscal 1997. A significant portion of the increase
was the result of the acquisition of a large, international provider of
accounting services during June 1997, which resulted in approximately six months
of post acquisition revenue in fiscal 1997 results versus twelve months during
fiscal 1998. Also included in the 1998 revenues are revenues derived from a
project in the Company's Legal division and with a certain customer. The
revenues from this project amounted to approximately $16.1 million, or 3.0% of
total revenue. This project was completed during the early part of fiscal 1999.
The Company operates primarily through five operating divisions consisting of
the accounting, legal, engineering / technical, career management and consulting
and scientific divisions.
Gross Profit. Gross profit increased $46.5 million, or 39.0%, to $165.8 million
in fiscal 1998 from $119.3 million in fiscal 1997. Gross margin decreased to
30.8% in fiscal 1998 from 31.1% in fiscal 1997. The overall decrease in the
gross margin was due primarily to an increased percentage of revenues from the
United Kingdom, increased salary pressures due to a continued shortage of
skilled workers, higher benefits costs including a matching 401(k) plan and
holiday and vacation pay, and increased competition within the segment including
downward pricing pressure from competitors.
Operating Expenses. Operating expenses increased $53.4 million, or 66.2%, to
$134.1 million in fiscal 1998 from $80.7 million in fiscal 1997. Included in
operating expenses in fiscal 1998 are $18.7 million in restructuring and
impairment charges associated with the Company's Integration and Strategic
Repositioning Plan (the 'Restructuring Plan'). Operating expenses before these
non-recurring items as a percentage of revenue increased to 21.5% in fiscal
1998, from 21.0% in fiscal 1997. The Company's general and administrative
("G&A") expenses before the non-recurring items increased $30.8 million or 42.5%
to $103.2 million in fiscal 1998 from $72.4 million in fiscal 1997. The increase
in G&A expenses was primarily related to: the effects of acquisitions made by
the Company; internal growth of the operating companies post-acquisition;
investments made to improve infrastructure and to develop technical practices;
and increased expenses at the corporate level to support the growth of the
Company including sales, marketing and brand recognition. Included in G&A
expenses during both 1998 and 1997 are the costs associated with projects to
ensure accurate date recognition and data processing with respect to the Year
2000 as it relates to the Company's business, operations, customers and vendors.
See 'OTHER MATTERS - Year 2000 Compliance' below.
Income from Operations. As a result of the foregoing, income from operations
decreased $7.0 million, or 18.1%, to $31.7 million in fiscal 1998 from $38.7
million in fiscal 1997. Income from operations before non-recurring items
increased $11.6 million, or 30.0%, to $50.3 million in fiscal 1998 from $38.7
million in fiscal 1997. Income from operations before non-recurring
restructuring and impairment costs as a percentage of revenue decreased to 9.4%
in fiscal 1998 from 10.1% in fiscal 1997.
Other Income (Expense). Interest expense decreased $8.6 million to $0.6 million
of interest income in fiscal 1998 from $8.0 million in interest expense in
fiscal 1997. The decrease in interest expense resulted primarily from four
sources: (1) the sale of the Company's Commercial and teleservices divisions and
the resultant net cash proceeds of approximately $373.0 million (net of $477.0
million used to pay off and terminate the Company's then existing credit
facility) which earned interest income from October 1, 1998 through December 31,
1998; (2) the resulting interest savings from October 1, 1998 through December
31, 1998 from paying off the existing credit facility (the new facility did not
have a balance as of December 31, 1998); (3) investment income from certain
investments owned by the Company; and (4) interest income earned from cash on
hand at certain subsidiaries of the Company.
Income Taxes. The Company's effective tax rate was 45.1% in fiscal 1998 compared
to 36.5% in fiscal 1997. The increase is due to a $9.9 million non-deductible
goodwill impairment charge included in taxable income during 1998 (included in
the restructuring and impairment charge discussed above and in Note 13 to the
Consolidated Financial Statements included elsewhere herein). Absent these
charges, the Company's effective tax rate would have decreased to 34.5% for
fiscal 1998 compared to 36.5% in fiscal 1997, primarily as a result of a
one-time deduction in connection with the sale of the Company's discontinued
commercial operations.
Income from continuing operations. As a result of the foregoing, income from
continuing operations decreased $1.8 million, or 9.2%, to $17.7 million in 1998
from $19.5 million in fiscal 1997. Income from continuing operations as a
percentage of revenue decreased to 3.3% in fiscal 1998 from 5.1% in fiscal 1997,
due primarily to the decrease in income attributable to the recording of the
restructuring and impairment charge, and the increase in the effective income
tax rate due to the non-deductible goodwill impairment charge. Exclusive of
these non-recurring costs, income from continuing operations during 1998 would
have increased $13.9 million to $33.4 million, increasing income from continuing
operations as a percentage of revenue to 6.2%.
Results of discontinued operations
The reported results from discontinued operations include the results of the
Company's commercial operations for the nine months ended September 30, 1998 and
the entirety of fiscal 1997, the results of the Company's health care operations
for the period January 1, 1998 through March 28, 1998 and the entirety of fiscal
1997. In addition, the Company's Information Technology division is shown as
discontinued operations for fiscal 1998 and fiscal 1997. The following discloses
the results of the discontinued Commercial businesses along with the Information
Technology businesses for fiscal 1998 and fiscal 1997:
Years ended December 31,
1998 1997
Discontinued Commercial businesses:
Revenue $ 919,400 $ 1,260,702
Cost of revenue 708,930 975,489
Operating expense 156,180 215,437
Operating income 54,290 69,776
Interest, net 4,200 4,374
Provision for income taxes 20,070 26,739
Income from discontinued commercial businesses 30,020 38,663
Discontinued IT businesses:
Revenue $ 1,164,140 $ 780,634
Cost of Revenue 862,324 571,464
Operating Expense 202,305 131,068
Operating Income 99,511 78,102
Interest, net 14,572 6,608
Provision for income taxes 33,770 27,617
Income from discontinued IT businesses 51,169 43,878
Included in the operating expenses during both fiscal 1998 and 1997 are
allocations of certain net common expenses for corporate support and back office
functions totaling approximately $8.0 million and $6.4 million, respectively.
Corporate support and back office allocations are based on the ratio of the
Company's consolidated revenues to that of the discontinued Commercial and IT
Businesses. Additionally, results of discontinued operations include allocations
of consolidated interest expense totaling $18.8 million and $11.0 million for
fiscal 1998 and 1997, respectively. The allocations were based on the historic
funding needs of the discontinued operations, including: the purchases of
property, plant and equipment, acquisitions, current income tax liabilities and
fluctuating working capital needs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have principally been related to the
acquisition of businesses, working capital needs and capital expenditures. These
requirements have been met through a combination of bank debt, issuances of
Common Stock and internally generated funds. The Company's operating cash flows
and working capital requirements are affected significantly by the timing of
payroll and by the receipt of payment from the customer. Generally, the Company
pays its consultants weekly or semi-monthly, and receives payments from
customers within 30 to 80 days from the date of invoice.
The Company had working capital of $62.8 million and $(76.4) million as of
December 31, 1999 and 1998, respectively. Included in current liabilities as of
December 31, 1999 and 1998 were amounts related to earn-out payments due to the
former owners of acquired companies. The earn-out amounts were scheduled to be
paid in the first and second quarters of fiscal 2000 and 1999, respectively, and
were capitalized to the goodwill balances related to the respective acquired
companies. See Note 13 to the Company's Consolidated Financial Statements for
further discussion of the Restructuring Plan. The principal reason for the
increase in the Company's working capital is the Company's recognition of a
$175.0 million current tax liability as of December 31, 1998 relating to the
sale of its Commercial operations and Teleservices division. The Company used
proceeds from borrowings under its credit facility to pay the tax liability. The
majority of the proceeds from the sale were used to pay down long-term debt
under its credit facility (which did not have a balance as of December 31, 1998)
and to repurchase the Company's Common Stock under an approved stock repurchase
plan. The Company had cash and cash equivalents of $0.9 million and $73.4
million as of December 31, 1999 and 1998, respectively. For the years ended
December 31, 1999 and 1998, the Company generated $45.7 million and $27.7
million of cash flow from operations, respectively. For the year ended December
31, 1997, the Company used $2.7 million of cash for operations. The large
increases in cash flows from operations year over year are due to the cash flow
provided from internal operations, as well as from acquired companies. The
majority of the Company's acquisitions occurred throughout the years ended
December 31, 1998 and 1997. Due to the timing of the acquisitions, the cash flow
from operations has increased during the years ended December 31, 1999 and 1998,
respectively.
For the year ended December 31, 1999, the Company used $252.0 million of cash
for investing activities, primarily as a result of taxes and other expenses
related to the Company's sale of the Commercial businesses, of $191.4 million.
The balance of $60.6 million relates to cash the Company used for acquisitions
of $39.7 million, for capital expenditures of $1.7 million, and advances related
to the sale of its discontinued Healthcare operations of $19.2 million.
For the year ended December 31, 1998, the Company generated $778.9 million of
cash flow from investing activities, primarily as a result of net proceeds of
$840.9 million received from the Company's sale of its Commercial operations and
Teleservices division. The Company also used $62.0 million for investing
activities, which was comprised of cash the Company used for acquisitions of
$38.4 million, for capital expenditures of $7.7 million, and advances related to
the sale of its discontinued Healthcare operations of $15.9 million.
In addition, the Company is subject to claims for indemnification arising from
the sales of its Commercial operations and Teleservices division and its Health
Care division in 1998. For the year ended December 31, 1999 and 1998, the
Company did not pay any indemnification claims. Although the Company has
received certain claims for indemnification or notices of possible claims
pursuant to such obligations, the Compnay believes that it has meritorious
defenses against such claims and does not believe that such claims, if
successful, would have a material adverse effect on the Company's cash flows,
financial condition or results of operations.
In connection with the Company's sale of its Health Care operations, the Company
entered into an agreement with the purchaser of the Health Care operations
whereby the Company agreed to make advances to the purchaser to fund its working
capital requirements. Any amounts extended are collateralized by the accounts
receivable and certain other assets of the related health care operations.
Advances made under this agreement accrue interest at 10% per year. During
fiscal 1999 and 1998, the Company had advanced approximately $19.2 and $15.9
million, respectively, under this agreement. See Note 12 to the Company's
Consolidated Financial Statements for further discussion of this agreement and
the Company's write-down of this asset in fiscal 1999.
For the year ended December 31, 1997, the Company used $138.6 million for
investing activities, of which $135.4 million was used for acquisitions and $3.2
million was used for capital expenditures. The Company made one, four and eight
acquisitions in each of the years ended December 31, 1999, 1998 and 1997,
respectively.
For the year ended December 31, 1999, the Company generated $241.8 million from
financing activities. During fiscal 1999, this amount primarily represented net
borrowings from the Company's credit facility, which was used primarily to pay
the tax liability and other payments related to the sale fo the Company'
Commercial operations and Teleservices division.
For the year ended December 31, 1998, the Company used $648.8 million for
financing activities of which $309.7 million were used to repurchase the
Company's Common Stock, $339.7 million which represents net repayments on
borrowings from the Company's credit facility and notes issued in connection
with the acquisition of certain companies, $23.6 million related to the
repurchase of the Company's 7% Convertible Senior Notes Due 2002, and $24.2
million related to the proceeds from stock options exercised. The repayments on
the Company's credit facility were mainly funded from the sale of the Company's
Commercial operations and Teleservices division.
On October 31, 1998, the Company's Board of Directors authorized the repurchase
of up to $200.0 million of the Company's Common Stock pursuant to a share
buyback program. On December 4, 1998, the Company's Board of Directors increased
the authorized share buyback program by an additional $110.0 million, bringing
the total authorized repurchase amount to $310.0 million. As of December 31,
1998, the Company had repurchased approximately 21,751,000 shares under the
share buyback program. Included in the shares repurchased as of December 31,
1998 were approximately 6,150,000 shares repurchased under an accelerated stock
acquisition plan ("ASAP"). The Company entered into the ASAP with a certain
brokerage firm which agreed to sell to the Company shares of its Common Stock at
a certain cost. The brokerage firm borrowed these shares from its customers and
was required to enter into market transactions, subject to Company approval, and
purchase shares of Company Common Stock to return to its customers. The Company,
pursuant to the ASAP, agreed to compensate the brokerage firm for any increases
in the Company's stock price that would cause the brokerage firm to pay an
amount to purchase the stock over the ASAP price. Conversely, the Company would
receive a refund in the purchase price if the Company's stock price fell below
the ASAP price. Subsequent to December 31, 1998, the Company used refunded
proceeds from the ASAP to complete the program during January and February 1999,
with the repurchase of approximately 616,000 shares, bringing the total shares
repurchased under the program to approximately 22,348,000 shares for
approximately $297.9 million. All of these shares were retired upon purchase. On
November 4, 1999, the Company's Board of Directors authorized the repurchase of
up to $65.0 million of the Company's common stock. As of March 15, 2000, no
shares have been repurchased under this authorization.
For the years ended December 31, 1997, the Company generated $352.5 million of
cash flow from financing activities. During fiscal 1997, this amount primarily
represented net borrowings from the Company's credit facility, which was used
primarily to fund acquisitions.
The Company is also obligated under various acquisition agreements to make
earn-out payments to former stockholders of acquired companies over the next two
years. The Company estimates that the amount of these payments will total $34.6
and $3.9 million annually, for the next two years. The $34.6 million estimate is
included in the balance sheet in line item "Accounts payable and accrued
expenses" at December 31, 1999. The Company anticipates that the cash generated
by the operations of the acquired companies will provide a substantial portion
of the capital required to fund these payments.
The Company anticipates that capital expenditures for furniture and equipment,
including improvements to its management information and operating systems
during the next twelve months will be approximately $5.0 million.
The Company believes that funds provided by operations, available borrowings
under the credit facility, and current amounts of cash will be sufficient to
meet its presently anticipated needs for working capital, capital expenditures
and acquisitions for at least the next 12 months.
Indebtedness of the Company
On October 30, 1998, the Company entered into a new $500 million revolving
credit facility which is syndicated to a group of 13 banks with NationsBank
(Bank of America), as the principal agent. This facility is comprised of a
$350.0 million facility which expires on October 21, 2003 and a $150.0 million,
364 day facility. On October 27, 1999, the 364 day, $150.0 million portion of
the original credit facility was replaced by a new $150.0 million 364 day credit
facility. Pursuant to the 364 day credit facility, the Company has the option to
term out the 364 day component of the credit facility for up to one year.
Outstanding amounts under the credit facilities bear interest at certain
floating rates as specified by the applicable credit facility. The credit
facilities contain certain financial and non-financial covenants relating to the
Company's operations, including maintaining certain financial ratios. Repayment
of the credit facilities are guaranteed by the material subsidiaries of the
Company. In addition, approval is required by the majority of the lenders when
the cash consideration of an individual acquisition exceeds 10% of consolidated
stockholders' equity of the Company.
As of March 15, 2000, the Company had a balance of approximately $279.0 million
outstanding under the credit facility. The Company also had outstanding letters
of credit in the amount of $1.8 million, reducing the amount of funds available
under the credit facility to approximately $219.2 million as of March 15, 2000.
A portion of the outstanding balance under the Company's credit facility
resulted from the Company's funding of modis. The Company funds modis based on
various needs including: purchases of furniture, equipment and leasehold
improvements, acquisitions, current income tax liabilities and fluctuating
working capital needs. Upon completion of the spin-off, modis will repay to MPS
an amount that represents the historical funding needs which resulted from those
items described above. As of December 31, 1999, approximately $105.9 million of
funding was provided to modis from MPS.
The Company has certain notes payable to shareholders of acquired companies
which bear interest at rates ranging from 4.3% to 5.5% and have repayment terms
from January 2000 to August 2000. As of December 31, 1999, the Company owed
approximately $2.2 million in such acquisition indebtedness.
INFLATION
The effects of inflation on the Company's operations were not significant during
the periods presented in the financial statements. Generally, throughout the
periods discussed above, the increases in revenue have resulted primarily from
higher volumes, rather than price increases.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and for Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at fair value. SFAS
No. 133 requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. In June, 1999 the Financial
Accounting Standards Board issued SFAS No. 137, an amendment to SFAS No. 133,
deferring the effective date of SFAS No. 133. SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000, and cannot be
applied retroactively. We have not yet quantified the impacts of adopting SFAS
No. 133 on our financial statements; however, SFAS No. 133 could increase the
volatility of reported earnings and other comprehensive income once adopted.
OTHER MATTERS
Year 2000 Compliance. The Year 2000 issue was the result of computer programs
(whether related to IT systems or non-IT systems) being written using two digits
rather than four digits to define the applicable year. There were concerns that
computer programs with time sensitive software might recognize a date using "00"
as the Year 1900 rather than the Year 2000. In preparation for such
possibilities, the Company assembled a Year 2000 compliance team to address such
matters company-wide. The Company, to date, has not observed any instances that
would indicate that the Company's efforts in addressing the Year 2000 issue were
not successful. The financial impact of addressing the Year 2000 issue had no
material impact on the Company's financial condition, results of operations or
cash flows.
As to non-IT systems and vendor services, other than banking relationships and
utilities (which includes electrical power, water and related items), there is
no single system or vendor service that is material to the Company's operations.
As to banking needs, our banking relationships are primarily with large national
and international financial institutions that addressed their own Year 2000
compliance procedures and certified their compliance to the Company. Certain of
our utility vendors certified their Year 2000 compliance to the Company. The
Company established a contingency plan, which ensured the needed back-up utility
sources necessary to maintain the critical information systems at the corporate
headquarters. Utility failures at the Company's branch offices or the inability
of the Company's customers to operate, which did not occur, could have had a
material adverse effect on revenue sources and could have disrupted customers'
payment cycle. The costs of Year 2000 compliance project for each matter
individually and all matters in the aggregate were not material to our financial
condition, results of operations, or cash flows.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following assessment of the Company's market risks does not include
uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax and other credit risks.
Interest Rates. The Company's exposure to market risk for changes in interest
rates relates primarily to the Company's short-term and long-term debt
obligations and to the Company's investments.
The Company's investment portfolio consists of cash and cash equivalents
including deposits in banks, government securities, money market funds, and
short-term investments with maturities, when acquired, of 90 days or less. The
Company is adverse to principal loss and ensures the safety and preservation of
its invested funds by placing these funds with high credit quality issuers. The
Company constantly evaluates its invested funds to respond appropriately to a
reduction in the credit rating of any investment issuer or guarantor.
The Company's short-term and long-term debt obligations totaled $230.2 million
as of December 31, 1999 and the Company had $270.2 million available under its
current credit facility. The debt obligations consist of notes payable to former
shareholders of acquired corporations, are at a fixed rate of interest, and
extend through August 2000. The interest rate risk on these obligations is thus
immaterial due to the dollar amount and fixed nature of these obligations. The
interest rate on the credit facility is variable.
Foreign currency exchange rates. Foreign currency exchange rate changes impact
translations of foreign denominated assets and liabilities into U.S. dollars and
future earnings and cash flows from transactions denominated in different
currencies. The Company generated approximately 27% of fiscal 1999 consolidated
revenues from international operations, approximately 100% of which were from
the United Kingdom. The United Kingdom's currency has not fluctuated materially
against the United States dollar in fiscal 1999. See Note 15 to the Company's
Consolidated Financial Statements for effect of foreign currency translation
adjustments on net income. The Company did not hold or enter into any foreign
currency derivative instruments as of December 31, 1999.
The Proposed Distribution of the Information Technology
Business
The distribution of the Information Technology business is subject to market and
other conditions, including a determination that the distribution is tax free to
the Company and its shareholders. Accordingly, there is some risk that the
distribution will not take place. In such event, the price of the Company's
common stock may decline if not distributing the Information Technology business
is perceived as adversely impacting the Company's focus and market position.
Conversley, there can be no assurance that if the proposed distribution does
occur that the price of the Company's common stock will not decline (after
taking into account the value of any securities received in the distribution).
Effect of Fluctuations in the General Economy
Demand for the Company's professional business services is significantly
affected by the general level of economic activity in the markets served by the
Company. During periods of slowing economic activity, companies may reduce the
use of outside consultants and staff augmentation services prior to undertaking
layoffs of full-time employees. As a result, any significant economic downturn
could have a material adverse effect on the Company's results of operations or
financial condition.
The Company may also be adversely effected by consolidations through mergers and
otherwise of main customers or between major customers with non-customers. These
consolidations as well as corporate downsizings may result in redundant
functions or services and a resulting reduction in demand by such customers for
the Company's services. Also, spending for outsourced business services may be
put on hold until the consolidations are completed.
Competition
The Company's industry is intensely competitive and highly fragmented, with few
barriers to entry by potential competitors. The Company faces significant
competition in the markets that it serves and will face significant competition
in any geographic market that it may enter. In each market in which the Company
operates, it competes for both clients and qualified professionals with other
firms offering similar services. Competition creates an aggressive pricing
environment and higher wage costs, which puts pressure on gross margins.
Ability to Recruit and Retain Professional Employees
The Company depends on its ability to recruit and retain employees who possess
the skills, experience and/or professional certifications necessary to meet the
requirements of the Company's clients. Competition for individuals possessing
the requisite criteria is intense, particularly in certain specialized
professional skill areas. The Company often competes with its own clients in
attracting and retaining qualified personnel. There can be no assurance that
qualified personnel will be available and recruited in sufficient numbers on
economic terms acceptable to the Company.
Ability to Continue Acquisition Strategy; Ability to Integrate Acquired
Operations
The Company has experienced significant growth in the past through acquisitions.
Although the Company continues to seek acquisition opportunities, there can be
no assurance that the Company will be able to negotiate acquisitions on economic
terms acceptable to the Company or that the Company will be able to successfully
identify acquisition candidates and integrate all acquired operations into the
Company.
Possible Changes in Governmental Regulations
From time to time, legislation is proposed in the United States Congress, state
legislative bodies and by foreign governments that would have the effect of
requiring employers to provide the same or similar employee benefits to
consultants and other temporary personnel as those provided to full-time
employees. The enactment of such legislation would eliminate one of the key
economic reasons for outsourcing certain human resources and could significantly
adversely impact the Company's staff augmentation business. In addition, the
Company's costs could increase as a result of future laws or regulations that
address insurance, benefits or other employment-related matters. There can be no
assurance that the Company could successfully pass any such increased costs to
its clients.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Consolidated Financial Statements: The following consolidated financial
statements are included in this Annual Report on Form 10-K:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Income for the years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
Modis Professional Services, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity, and of cash flows
present fairly, in all material respects, the financial position of Modis
Professional Services, Inc. and its Subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers, LLP
Jacksonville, Florida
March 30, 2000
Modis Professional Services Inc. and Subsidiaries
Consolidated Balance Sheets.
DECEMBER 31, DECEMBER 31,
(dollar amounts in thousands except per share amounts) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 876 $ 73,410
Accounts receivable, net of allowance of $4,251 and $4,114 95,126 95,595
Prepaid expenses 2,381 5,353
Deferred income taxes 2,983 6,159
Note receivable 18,775 24,411
Income tax receivable 9,148 -
Other 2,856 2,056
----------------------------------
Total current assets 132,145 206,984
Furniture, equipment and leasehold improvements, net 14,895 16,492
Goodwill, net 317,939 279,103
Other assets, net 11,868 12,030
Net assets of discontinued operations 1,013,484 844,557
----------------------------------
Total assets $ 1,490,331 $ 1,359,166
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,239 $ 1,884
Accounts payable and accrued expenses 50,429 89,962
Accrued payroll and related taxes 16,648 18,101
Income taxes payable - 173,407
----------------------------------
Total current liabilities 69,316 283,354
Notes payable, long-term portion 228,000 1,988
Deferred income taxes 10,500 3,714
----------------------------------
Total liabilities 307,816 289,056
----------------------------------
Commitments and contingencies (Notes 4,5 and 7)
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.01 par value; 400,000,000 shares authorized
96,043,270 and 96,306,323 shares issued and outstanding, respectively 960 963
Additional contributed capital 582,558 563,728
Retained earnings 601,989 504,899
Accumulated other comprehensive (loss) income (2,992) 520
----------------------------------
Total stockholders' equity 1,182,515 1,070,110
----------------------------------
Total liabilities and stockholders' equity $ 1,490,331 $ 1,359,166
==================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Modis Professional Services Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
------------------------------------------
(dollar amounts in thousands except per share amounts) 1999 1998 1997
- - ----------------------------------------------------------------------------------------------------------------
Revenue $ 592,455 $ 537,973 $ 383,489
Cost of revenue 397,462 372,213 264,147
------------------------------------------
Gross Profit 194,993 165,760 119,342
------------------------------------------
Operating expenses:
General and administrative 126,910 103,217 72,443
Depreciation and amortization 13,693 12,209 8,213
Restructuring and impairment charges (recapture) (2,314) 18,683 -
Asset write-down related to sale of discontinued operations 25,000 - -
------------------------------------------
Total operating expenses 163,289 134,109 80,656
------------------------------------------
Income from operations 31,704 31,651 38,686
Other income (expense), net (1,916) 596 (8,008)
------------------------------------------
Income from continuing operations before provision for income taxes 29,788 32,247 30,678
Provision for income taxes 11,191 14,556 11,186
------------------------------------------
Income from continuing operations 18,597 17,691 19,492
Discontinued operations (Note 3):
Income from discontinued operations (net of income
taxes of $39,092, $53,840 and $54,355, respectively) 63,538 81,189 82,541
Gain on sale of discontinued operations (net of income
taxes of $0, $175,000 and $0, respectively) 14,955 230,561 -
------------------------------------------
Income before extraordinary loss 97,090 329,441 102,033
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $3,512) - (5,610) -
------------------------------------------
Net income $ 97,090 $ 323,831 $ 102,033
==========================================
Basic income per common share from continuing operations $ 0.19 $ 0.16 $ 0.19
==========================================
Basic income per common share from discontinued operations $ 0.66 $ 0.75 $ 0.81
==========================================
Basic income per common share from gain on sale of
discontinued operations $ 0.16 $ 2.12 $ -
==========================================
Basic income per common share from extraordinary item $ - $ (0.05) $ -
==========================================
Basic net income per common share $ 1.01 $ 2.98 $ 1.00
==========================================
Average common shares outstanding, basic 96,268 108,518 101,914
==========================================
Diluted income per common share from continuing operations $ 0.19 $ 0.18 $ 0.21
==========================================
Diluted income per common share from discontinued operations $ 0.66 $ 0.69 $ 0.72
==========================================
Diluted income per common share from gain on sale of
discontinued operations $ 0.15 $ 1.97 $ -
==========================================
Diluted income per common share from extraordinary item $ - $ (0.05) $ -
==========================================
Diluted net income per common share $ 1.00 $ 2.79 $ 0.93
==========================================
Average common shares outstanding, diluted 97,110 116,882 113,109
==========================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Modis Professional Services Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Accumulated
Other
Preferred Common Additional Comprehensive Deferred
(dollar amounts in thousands Stock Stock Contributed Retained Income Stock
except per share amounts) Shares Amount Shares Amount Capital Earnings (loss) Compensation Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 - - 99,226,813 $ 992 $594,186 $ 79,035 $ - $(4,434) $ 669,779
Conversion of subordinated debentures 727,272 7 993 - - - 1,000
Exercise of stock options and related
tax benefit - - 3,069,143 31 30,264 - - - 30,295
Vesting of restricted stock - - - - - - - 977 977
Net income - - - - - 102,033 - - 102,033
Issuance of stock related to business
combinations - - 668,870 7 8,846 - - - 8,853
Foreign currency translation - - - - - - (95) - (95)
----------------------------------------------------------------------------------------
Balance, December 31, 1997 - - 103,692,098 1,037 634,289 181,068 (95) (3,457) 812,842
Repurchase of Common Stock, net - - (21,750,522) (218) (309,517) - - - (309,735)
Conversion of Convertible debt - - 6,149,339 61 71,238 - - - 71,299
Exercise of stock options and related
tax benefit - - 2,741,895 28 26,838 - - - 26,866
Vesting of restricted stock - - - - - - - 3,457 3,457
Issuance of common stock related to
business combinations - - 5,473,513 55 140,880 - - - 140,935
Net income - - - - - 323,831 - - 323,831
Foreign currency translation - - - - - - 615 - 615
----------------------------------------------------------------------------------------
Balance, December 31, 1998 - - 96,306,323 963 563,728 504,899 520 - 1,070,110
Repurchase of Common Stock, net - - (615,687) (6) 11,877 - - - 11,871
Exercise of stock options and related
tax benefit - - 352,634 3 6,953 - - - 6,956
Net income - - - - - 97,090 - - 97,090
Foreign currency translation - - - - - - (3,512) - (3,512)
----------------------------------------------------------------------------------------
Balance, December 31, 1999 - - 96,043,270 $ 960 $582,558 $601,989 $(2,992) $ - $1,182,515
========================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Modis Professional Services Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
------------------------------------------
(dollar amounts in thousands except for per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income from continuing operations $ 18,597 $ 17,691 $ 19,492
Adjustments to income from operations to net cash
provided by operating activities:
Restructuring and impairment (recapture)charges (2,314) 18,683 -
Asset write-down related to sale of discontinued operations 25,000 - -
Depreciation and amortization 13,693 12,209 8,213
Deferred income taxes 9,962 (2,815) 319
Changes in assets and liabilities
Accounts receivable 1,962 (19,924) (40,075)
Prepaid expenses and other assets 741 (5,792) 3,712
Accounts payable and accrued expenses (26,880) 14,909 3,515
Accrued payroll and related taxes 4,156 (5,451) 4,742
Other, net 749 (1,775) (2,623)
-----------------------------------------
Net cash provided by (used in) operating activities 45,666 27,735 (2,705)
-----------------------------------------
Cash flows from investing activities:
Proceeds from sale of net assets of discontinued
operations, net of costs - 840,937 -
Advances associated with sale of discontinued operations,
net of repayments (19,205) (15,866) -
Income taxes and other cash expenses related to sale of net
assets of discontinued commercial operations (191,409) - -
Purchase of furniture, equipment and leasehold
improvements, net of disposals (1,709) (7,674) (3,188)
Purchase of businesses, including additional earnouts on
acquisitions, net of cash acquired (39,720) (38,458) (135,380)
-----------------------------------------
Net cash (used in) provided by investing activities (252,043) 778,939 (138,568)
-----------------------------------------
Cash flows from financing activities:
Repurchases of common stock, net of refunds 11,871 (309,735) -
Repurchase of convertible debentures - (23,581) -
Proceeds from stock options exercised 3,952 24,235 23,130
Borrowings on indebtedness, net 225,992 (339,628) 329,495
Other, net - - (100)
-----------------------------------------
Net cash provided by (used in) financing activities 241,815 (648,709) 352,525
-----------------------------------------
Effect of exchange rate changes on cash and cash equivalents (2,057) - -
Net increase in cash and cash equivalents
from continuing operations 33,381 157,965 211,252
Net cash used in discontinued operations (105,915) (87,641) (290,393)
Cash and cash equivalents, beginning of year 73,410 3,086 82,227
-----------------------------------------
Cash and cash equivalents, end of year $ 876 $ 73,410 $ 3,086
=========================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Years Ended December 31,
(dollar amounts in thousands except for per share amounts) 1999 1998 1997
- - ----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 5,047 $ 1,667 $ 8,869
Income taxes paid 158,857 11,775 7,551
COMPONENTS OF CASH USED IN DISCONTINUED OPERATIONS
Cash provided by operating activities 29,993 142,765 39,249
Cash used in investing activities (140,468) (173,351) (321,657)
Cash (used in) provided by financing activities 4,560 (57,055) (7,985)
-----------------------------------------
Net cash used in discontinued operations (105,915) (87,641) (290,393)
=========================================
NON-CASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1997, the Company completed numerous acquisitions. In connection
with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired $ 116,522
Cash paid (101,162)
------------
Liabilities assumed $ 15,360
============
In fiscal 1997, Covertible Subordinated Debentures of $1,000 were converted by
the Company into 727,272 shares of common stock.
During fiscal 1997, in connection with the acquisition of certain companies, the
Company issued 668,870 shares of common stock with a fair value of $8,853.
During fiscal 1998, the Company completed numerous acquisitions. In connection
with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired $ 22,529
Cash paid (17,777)
------------
Liabilities assumed $ 4,752
============
In fiscal 1998, Convertible Subordinated Debentures of $69,800 were
converted by the Company into 6,149,339 shares of common stock. Also,
paid-in-capital was increased by $1,499 relating to unamortized debt issuance
costs associated with the conversion.
During fiscal 1999, the Company completed numerous acquisitions. In connection
with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired $ 3,872
Cash paid (3,375)
------------
Liabilities assumed $ 497
============
1. DESCRIPTION OF BUSINESS
Modis Professional Services, Inc. ('MPS' or the 'Company') is an
international provider of professional business services, including consulting,
outsourcing, training and strategic human resource solutions, to Fortune 1000
and other leading businesses. The Company provides professional personnel who
perform specialized services such as accounting, legal, technical / engineering,
scientific, Project Consulting and career management and consulting.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany transactions have
been eliminated in the accompanying consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include deposits in banks, government securities,
money market funds, and short-term investments with maturities, when acquired,
of 90 days or less.
Furniture, Equipment, and Leasehold Improvements
Furniture, equipment, and leasehold improvements are recorded at cost less
accumulated depreciation. Depreciation of furniture and equipment is computed
using the straight-line method over the estimated useful lives of the assets,
ranging from 5 to 15 years. Amortization of leasehold improvements is computed
using the straight-line method over the useful life of the asset or the term of
the lease, whichever is shorter. Total depreciation and amortization expense was
$4.6, $4.1 and $2.3 for 1999, 1998 and 1997, respectively. Accumulated
depreciation of furniture, equipment and leasehold improvements as of December
31, 1999 and 1998 was $18,312 and $18,258, respectively.
Goodwill
The Company has allocated the purchase price of acquired companies
according to the fair market value of the assets acquired. Goodwill represents
the excess of the cost over the fair value of the net tangible assets acquired
through these acquisitions, including any contingent consideration paid (as
discussed in Note 4 to the Consolidated Financial Statements), and is being
amortized on a straight-line basis over periods ranging from 15 to 40 years,
with an average amortization period of 32.3 years. Management periodically
reviews the potential impairment of goodwill on an undiscounted cash flow basis
to assess recoverability. If the estimated future cash flows are projected to be
less than the carrying amount, an impairment write-down (representing the
carrying amount of the goodwill that exceeds the undiscounted expected future
cash flows) would be recorded as a period expense. Accumulated amortization was
$26,200 and $17,063 as of December 31, 1999 and 1998, respectively. See Note 13
for a discussion of goodwill impairment charge.
December 31,
-------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Beginning Balance of Goodwill, net $ 279,103 $ 235,560
--------- ---------
Goodwill recorded for companies purchased in current year 3,275 18,125
Goodwill recorded for earn-out payments made, but not accrued at prior
year-end 10,098 16,363
Goodwill accrued, but not paid, for determinable earn-outs 34,600 27,111
Amortization (9,137) (8,120)
Impairment charge - (9,936)
--------- ---------
Net Increase in Balance of Goodwill 38,836 43,543
--------- ---------
Ending Balance of Goodwill, net $ 317,939 $ 279,103
========= =========
Revenue Recognition
The Company recognizes as revenue, at the time the professional services
are provided, the amounts billed to clients. In all such cases, the consultant
is the Company's employee and all costs of employing the worker are the
responsibility of the Company and are included in the cost of services.
Foreign Operations
The financial position and operating results of foreign operations are
consolidated using the local currency as the functional currency. Local currency
assets and liabilities are translated at the rate of exchange to the U.S. dollar
on the balance sheet date, and the local currency revenues and expenses are
translated at average rates of exchange to the U.S. dollar during the period.
See Note 15 for a discussion of foreign currency translation adjustments in
total comprehensive income.
Stock Based Compensation
The Company measures compensation expense for employee and director stock
options as the aggregate difference between the market and exercise prices of
the options on the date that both the number of shares the grantee is entitled
to receive and the purchase price are known. Compensation expense associated
with restricted stock grants is equal to the market value of the shares on the
date of grant and is recorded pro rata over the required holding period. Pro
forma information relating to the fair value of stock-based compensation is
presented in Note 10 to the consolidated financial statements.
Income Taxes
The provision for income taxes is based on income before taxes as reported
in the accompanying Consolidated Statements of Income. Deferred tax assets and
liabilities are recognized for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. An assessment is made as to
whether or not a valuation allowance is required to offset deferred tax assets.
This assessment includes anticipating future income.
Net Income Per Common Share
The financial statements include 'basic' and 'diluted' per share
information. Basic per share information is calculated by dividing net income by
the weighted average number of shares outstanding. Diluted per share information
is calculated by also considering the impact of potential common stock on both
net income and the weighted average number of shares outstanding. The weighted
average number of shares used in the basic earnings per share computations were
96.3 million, 108.5 million, and 101.9 million in fiscal 1999, 1998 and 1997,
respectively. The only difference in the computation of basic and diluted
earnings per share is the inclusion of 0.8 million, 8.4 million, and 11.2
million potential common shares in fiscal 1999, 1998 and 1997, respectively. The
Company's potential common stock consists of employee and director stock
options, and the as-if converted effect of convertible debentures.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Although management believes these estimates and assumptions are adequate,
actual results may differ from the estimates and assumptions used.
Reclassifications
Certain amounts have been reclassified in 1997 and 1998 to conform to the
1999 presentation.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and for Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at fair value. SFAS
No. 133 requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. In June 1999, the Financial
Accounting Standards Board issued SFAS No. 137, an amendment to SFAS No. 133,
deferring the effective date of SFAS No. 133. SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000, and cannot be
applied retroactively. The Company has not yet quantified the impacts of
adopting SFAS No. 133; however, SFAS No. 133 could increase the volatility of
reported earnings and other comprehensive income once adopted.
3. DISCONTINUED OPERATIONS
Effective September 27, 1998 and March 30, 1998, the Company sold its
Commercial operations and Teleservices division and the operations and certain
assets of its Health Care division, respectively, (jointly the "Commercial
Businesses"). During 1999, the Company's Board of Directors approved a plan in
which the Company would spin-off its Information Technology operations ("IT
Business") to its shareholders in the form of a stock dividend during 2000. This
distribution is subject to a favorable private letter ruling from the Internal
Revenue Service. As a result, the Commercial and IT Businesses have been
reported as a discontinued operation and the consolidated financial statements
have been reclassified to segregate the net assets and operating results of the
Commercial and IT Businesses. The Commercial operations and Teleservices
division were sold with a final adjusted purchase price of $826.2 million in
cash to Randstad U.S., L.P. ('Randstad'), the U.S. operating company of Ranstad
Holding nv, an international staffing company based in the Netherlands. The
after-tax gain on the sale was $230.6 million. The operations and certain assets
of the Health Care division were sold for consideration of $8.0 million,
consisting of $3.0 million in cash and $5.0 million in a note receivable due
March 30, 2000 bearing interest at 2% in excess of the prime rate. The after-tax
gain on the sale was $0.1 million.
The sale of the Commercial Businesses and the announced spin-off of the
Company's IT Businesses, represents the disposal and planned disposal of a
segment of the Company's business. Accordingly, the financial statements for the
years ended December 31, 1999, 1998 and 1997 have been reclassified to separate
the revenues, costs and expenses, assets and liabilities, and cash flows of the
Commercial and IT Businesses. The net operating results of the Commercial and IT
Businesses have been reported, net of applicable income taxes, as 'Income from
Discontinued Operations'. The net assets of the Commercial and IT Businesses
have been reported as 'Net Assets of Discontinued Operations'; and the net cash
flows of the Commercial and IT Businesses have been reported as 'Net Cash Used
In Discontinued Operations'.
Summarized financial information for the discontinued Commercial and IT
operations follows (in thousands):
Years ended December 31,
1999 1998 1997
Discontinued Commercial businesses:
Revenue $ - $ 919,400 $ 1,260,702
Cost of revenue - 708,930 975,489
Operating expense - 156,180 215,437
Operating income - 54,290 69,776
Interest, net - 4,200 4,374
Provision for income taxes - 20,070 26,739
Income from discontinued commercial businesses - 30,020 38,663
Discontinued IT businesses:
Revenue $ 1,349,194 $ 1,164,140 $ 780,634
Cost of Revenue 1,018,439 862,324 571,464
Operating Expense 222,247 202,305 131,068
Operating Income 108,508 99,511 78,102
Interest, net 5,878 14,572 6,608
Provision for income taxes 39,092 33,770 27,616
Income from discontinued IT businesses 63,538 51,169 43,878
Results of the discontinued Commercial Business include the allocation of
certain net common expenses for corporate support and back office functions
totaling approximately $15.2 million, $8.0 million, and $6.4 million for the
years ended December 31, 1999, 1998 and 1997, respectively. Corporate support
and back office allocations are based on the ratio of the Company's consolidated
revenues to that of the discontinued Commercial and IT Businesses. Additionally,
the results of discontinued operations include allocations of consolidated
interest expense totaling $5.9 million, $18.8 million and $11.0 million for
fiscal 1999,1998 and 1997, respectively. Interest expense is allocated based on
the historic funding needs of the discontinued operations, using a rate that
approximates the weighted average interest rate outstanding for the Company for
each fiscal year presented. Historic funding needs include: the purchases of
property, plant and equipment, acquisitions, current income tax liabilities and
fluctuating working capital needs. The net assets of the Company's discontinued
operations are as follows (in thousands):
December 31, December 31,
1999 1998
Receivables $ 241,864 $ 231,591
Other current assets 21,604 50,962
Total current assets 263,468 282,553
Furniture, equipment and leasehold improvements, net 31,065 21,085
Goodwill, net 814,647 746,137
Other assets 10,368 7,495
Total assets 1,119,548 1,057,270
Current liabilities 80,354 190,044
Non-current liabilities 25,710 22,669
Total liabilities 106,064 212,713
---------------- ----------------
Total net assets of discontinued operations $1,013,484 $ 844,557
================ ================
4. ACQUISITIONS
For the year ended December 31, 1999
During fiscal 1999, the Company acquired Brenda Pejovich and Associates,
Inc., which was accounted for under the purchase method of accounting. The
aggregate purchase price totalled $3.8 million which consisted of $3.4 million
in cash and $0.4 million in a note payable to the former shareholder. The
Company has allocated the purchase price according to the market value of the
assets acquired. The excess of the purchase price over the fair value of the
tangible assets (goodwill) is being amortized on a straight line basis over a
period of 40 years, including any contingent consideration paid.
For the year ended December 31, 1998
The Company acquired the following companies which have been accounted for
under the purchase method of accounting: Millard Consulting Services, Inc.,
Diversified Consulting, Inc., Colvin Resources, Inc., and Accountants Express of
San Diego, Inc. The aggregate purchase price of these acquisitions during 1998
was $19.7 million, comprised of $17.8 million in cash and $1.9 million in notes
payable to the former shareholders. The Company has allocated the purchase price
according to the market value of the assets acquired. The excess of the purchase
price over the fair value of the tangible assets (goodwill) is being amortized
on a straight line basis over a period of 40 years, including any contingent
consideration paid.
For the year ended December December 31, 1997
The Company acquired the following companies which have been accounted for
under the purchase method of accounting: Manchester, Inc., Legal Information
Technology, Inc., AMPL d/b/a Parker & Lynch, Accounting Principals, Inc., AMICUS
staffing, Inc., Keystone Consulting Group, Inc., and Badenoch and Clark Ltd. The
aggregate purchase price of these acquisitions during 1998 was $112.3 million,
comprised of $101.2 million in cash, $7.9 million in notes payable and $8.4
million in the Company's common stock. shareholders The Company has allocated
the purchase price according to the market value of the assets acquired. The
excess of the purchase price over the fair value of the tangible assets
(goodwill) is being amortized on a straight line basis over a period of 40
years, including any contingent consideration paid.
Earn-out payments
The Company is obligated under various acquisition agreements to make
earn-out payments to former stockholders of some the aforementioned acquired
companies accounted for under the purchase method of accounting, over periods up
to two years, upon attainment of certain earnings targets of the acquired
companies. The agreements do not specify a fixed payment of contingent
consideration to be issued; however, the Company has limited its maximum
exposure under some earn-out agreements to a cap which is negotiated at the time
of acquisition.
The Company records these payments as goodwill in accordance with EITF
95-8, 'Accounting for Contingent Consideration Paid to the Shareholders of an
Acquired Enterprise in a Purchase Business Combination', rather than
compensation expense. Earn-outs are utilized by the Company to supplement the
partial consideration initially paid to the stockholders of the acquired
companies, if certain earnings targets are achieved. All earnout payments are
tied to the ownership interests of the selling stockholders of the acquired
companies rather than being contingent upon any further employment with the
Company. Any former owners who remain as employees of the Company receive a
compensation package which is comparable to other employees of the Company at
the same level of responsibility.
The Company has accrued contingent payments related to earn-out obligations
in Accounts payable and Accrued expenses of $34.6 million and $27.1 million as
of December 31, 1999 and 1998, respectively. These accrued contingent payments
represent the liabilities related to earn-out payments that are readily
determinable, as a result of resolved and issuable earn-outs, as of the
respective fiscal year ends. The Company applies the relevant profits related to
the earn-out period to the earn-out formula, and determines the appropriate
amount to accrue. The Company anticipates that the cash generated by the
operations of the acquired companies will provide a substantial part of the
capital required to fund these payments.
5. NOTES PAYABLE
Notes payable at December 31, 1999 and 1998 consisted of the following:
Fiscal
---------------------------
1999 1998
- - --------------------------------------------------------------------------------------------------------------
Credit facilities $ 228,000 $ -
Notes payable to former shareholders of acquired companies (interest
ranging from 4.33% to 5.50% due through August 2000) 2,239 3,872
---------------------------
230,239 3,872
Current portion of notes payable 2,239 1,884
---------------------------
Long-term portion of notes payable $ 228,000 $ 1,988
===========================
On October 30, 1998, the Company entered into a new $500 million revolving
credit facility which is syndicated to a group of 13 banks with NationsBank
(Bank of America), as the principal agent. This facility is comprised of a
$350.0 million facility which expires on October 21, 2003 and a $150.0 million,
364 day facility. On October 27, 1999, the 364 day, $150.0 million portion of
the original credit facility was replaced by a new $150.0 million 364 day credit
facility. Pursuant to the 364 day credit facility, the Company has the option to
term out the 364 day component of the credit facility for up to one year.
Outstanding amounts under the credit facilities bear interest at certain
floating rates as specified by the applicable credit facility. The credit
facilities contain certain financial and non-financial covenants relating to the
Company's operations, including maintaining certain financial ratios. Repayment
of the credit facilities are guaranteed by the material subsidiaries of the
Company. In addition, approval is required by the majority of the lenders when
the cash consideration of an individual acquisition exceeds 10% of consolidated
stockholders' equity of the Company. The Company incurred certain costs directly
related to securing the credit facilities in the amount of approximately $1,245
These costs have been capitalized and are being amortized over the life of the
credit facilities.
During the fourth quarter of fiscal 1998, the Company recognized an
extraordinary after-tax charge of $5.61 million as a result of the Company's
early retirement of $16.45 million of 7% Convertible Senior Notes Due 2002 and
the termination of the Company's existing credit facility immediately subsequent
to the sale of the Company's Commercial operations and Teleservices division.
The Company paid a premium of $7.13 million on the early extinguishment of
the 7% Senior Convertible Senior Notes and wrote off $0.37 million of related
unamortized debt issuance costs. Additionally, the Company wrote off $1.63
million of unamortized debt financing costs related to the termination of the
credit facility.
Maturities of notes payable are as follows for the fiscal years subsequent
to December 31, 1999:
Fiscal year
- - ------------------------------------
2000 $ 2,239
2003 228,000
--------
$230,239
========
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Components of accounts payable and accrued expenses as of December 31, 1999 and
1998 are as follows:
Fiscal
----------------------------
1999 1998
-------- ---------
Trade accounts payable $ 14,829 $ 33,854
Accrued earn-out payments 34,600 27,111
Restructuring charge 1,000 8,747
Due to to purchaser of
discontinued commercial operations (1) - 20,250
-------- --------
Total 50,429 89,962
======== ========
<FN>
(1) The amount due to purchaser of discontinued commercial operations represents
a true up of the purchase price pursuant to the sales agreement and was paid in
the first quarter of fiscal 1999.
</FN>
7. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office space under various noncancelable operating leases.
The following is a schedule of future minimum lease payments with terms in
excess of one year:
Fiscal Year
- -------------------------------------------------------------------------------------------------------
2000 $ 8,501
2001 7,296
2002 6,241
2003 4,752
2004 2,801
Thereafter 4,942
--------
$ 34,533
========
Total rent expense for fiscal 1999, 1998 and 1997 was $11,241, $5,165, and
$3,552, respectively.
Litigation
The Company is a party to a number of lawsuits and claims arising out of
the ordinary conduct of its business. In the opinion of management, based on the
advice of in-house and external legal counsel, the lawsuits and claims pending
are not likely to have a material adverse effect on the Company, its financial
position, its results of operations, or its cash flows.
In addition, the Company is subject to claims for indemnification arising
from the sales of its Commercial operations and Teleservices division and its
Health Care division in fiscal 1998. For the years ended December 31, 1999 and
1998, the Company did not pay any indemnification claims. Although the Company
has received certain claims for indemnification or notices of possible claims
pursuant to such obligations, the Compnay believes that it has meritorious
defenses against such claims and does not believe that such claims, if
successful, would have a material adverse effect on the Company's cash flows,
financial condition or results of operations.
8. INCOME TAXES:
A comparative analysis of the provision for income taxes from continuing
operations is as follows:
Fiscal
------------------------------------
1999 1998 1997
- - ------------------------------------------------------------
Current:
Federal $ (3,636) $ 14,318 $ 9,054
State (381) 1,850 1,097
Foreign 5,246 1,203 716
------------------------------------
1,229 17,371 10,867
------------------------------------
Deferred:
Federal: 8,208 (3,318) (32)
State: 786 (321) (4)
Foreign: 968 824 355
------------------------------------
9,962 (2,815) 319
------------------------------------
$ 11,191 $ 14,556 $ 11,186
====================================
The difference between the actual income tax provision and the tax
provision computed by applying the statutory federal income tax rate to income
from continuing operations before provision for income taxes is attributable to
the following:
Fiscal
--------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- - -----------------------------------------------------------------------------------------------------------------------
Tax computed using the federal statutory rate $ 10,426 35.0% $ 11,286 35.0% $ 10,737 35.0%
State income taxes, net of federal income tax effect 405 1.4 994 3.1 710 2.3
Non-deductible goodwill 179 0.6 228 0.7 169 0.6
Non-deductible goodwill impairment charge - - 3,825 11.8 - -
Other permanent differences 181 0.6 (1,777) (5.5) (430) (1.4)
--------------------------------------------------------------
$ 11,191 37.6% $ 14,556 45.1% $ 11,186 36.5%
==============================================================
The components of the deferred tax assets and liabilities recorded in the
accompanying consolidated balance sheets are as follows:
Fiscal
---------------------------
1999 1998
- - ----------------------------------------------------------------------------------------------------------------
Gross deferred tax assets:
Self-insurance reserves $ 1,120 $ 1,260
Restructuring and impairment charge 380 3,324
Allowance for doubtful accounts receivable 1,616 1,560
Other 308 1,037
---------------------------
Total gross deferred tax assets 3,424 7,181
---------------------------
Gross deferred tax liabilities:
Amortization of goodwill (10,733) (4,631)
Other (208) (105)
---------------------------
Total gross deferred tax liabilities (10,941) (4,736)
---------------------------
Net deferred tax (liability) asset $ (7,517) $ 2,445
===========================
Management has determined, based on the history of prior taxable earnings and
its expectations for the future, taxable income will more likely than not be
sufficient to fully realize deferred tax assets and, accordingly, has not
reduced deferred tax assets by a valuation allowance.
9. EMPLOYEE BENEFIT PLANS:
Profit Sharing Plans
The Company has a qualified contributory profit sharing plan (a 401(k)
plan) which covers all full-time employees over age twenty-one with over 90 days
of employment and 375 hours of service. The Company made contributions of
approximately $1,625 and $1,818, net of forfeitures, to the profit sharing plan
for fiscal 1999 and 1998, respectively. No matching contributions were made by
the Company to the profit sharing plan in fiscal 1997. The Company also has a
non-qualified deferred compensation plan for its highly compensated employees.
The non-qualified deferred compensation plan does not provide for any matching,
either discretionary or formula-based, by the Company.
The Company has assumed many 401(k) plans of acquired subsidiaries. From
time to time, the Company merges these plans into the Company's plan. Effective
January 1, 1998, a significant number of the profit sharing plans were merged
and amended to become contributory plans. Pursuant to the terms of the various
profit sharing plans, the Company will match 50% of employee contributions up to
the first 5% of total eligible compensation, as defined. Company contributions
relating to these merged plans are included in the aforementioned total.
Prior to the Company's sale of its Commercial operations and Teleservices
division in fiscal 1998 (see Note 3), the Company had two 401(k) plans: the
aforementioned plan covering employees of the Professional Services division and
employees of the discontinued Information Technology division, and the other
covering non-highly compensated (as defined by IRS regulations) full time
commercial employees over age twenty-one with at least one year of employment
and 1,000 hours of service (the 'commercial plan'). In connection with the sale
of the Commercial operations and Teleservices division in fiscal 1998, the
Company transferred sponsorship of the commercial plan to Randstad U.S., L.P.
The effective date of the transfer was September 27, 1998. Company contributions
relating to the commercial plan prior to the Company's sale of its commercial
businesses are included in Income from Discontinued Operations, as disclosed in
Note 3 to the Consolidated Financial Statements.
10. STOCKHOLDERS' EQUITY
Stock Repurchase Plan
On October 31, 1998, the Company's Board of Directors authorized the
repurchase of up to $200.0 million of the Company's common stock pursuant to a
share buyback program. On December 4, 1998, the Company's Board of Directors
increased the authorized repurchase by an additional $110.0 million, bringing
the total authorized share buyback program amount to $310.0 million. As of
December 31, 1998, the Company had repurchased approximately 21,751,000 shares
under the share buyback program. Included in the shares repurchased as of
December 31, 1998 were approximately 6,150,000 shares repurchased under an
accelerated stock acquisition plan ("ASAP"). The Company entered into the ASAP
with a certain investment bank who agreed to sell the Company shares at a
certain cost. The investment bank borrowed these shares from its customers and
was required to enter into market transactions, subject to Company approval, and
purchase shares to return to its customers. The Company, pursuant to the
agreement, agreed to compensate the investment bank for any increases in the
Company's stock price that would cause the investment bank to pay an amount to
purchase the stock over the ASAP price. Conversely, the Company received a
refund in the purchase price if the Company's stock price fell below the ASAP
price. Subsequent to December 31, 1998, the Company used refunded proceeds from
the ASAP to complete the program during January and February 1999, with the
repurchase of approximately 616,000 shares, bringing the total shares
repurchased under the program to approximately 22,367,000 shares. All of these
shares were retired upon purchase.
On November 4, 1999, the Company's Board of Directors authorized the
repurchase of up to $65.0 million of the Company's common stock. As of December
31, 1999, no shares have been repurchased under this authorization.
Incentive Employee Stock Plans
Effective December 19, 1993, the Board of Directors approved the 1993 Stock
Option Plan (the 1993 Plan) which provides for the granting of options for the
purchase of up to an aggregate of 2,400,000 shares of common stock to key
employees.
Under the 1993 Plan, the Stock Option Committee (the Committee) of the
Board of Directors has the discretion to award stock options, stock appreciation
rights (SARS) or restricted stock options or non-qualified options and the
option price shall be established by the Committee. Incentive stock options may
be granted at an exercise price not less than 100% of the fair market value of a
share on the effective date of the grant and non-qualified options may be
granted at an exercise price not less than 50% of the fair market value of a
share on the effective date of the grant. The Committee has not issued
non-qualified options at an exercise price less than 100% of the fair market
value and, therefore, the Company has not been required to recognize
compensation expense for its stock option plans.
On August 24, 1995, the Board of Directors approved the 1995 Stock Option
Plan (the 1995 Plan) which provided for the granting of options up to an
aggregate of 3,000,000 shares of common stock to key employees under terms and
provisions similar to the 1993 Plan. During fiscal 1998 and 1997, the 1995 Plan
was amended to provide for the granting of an additional 8,000,000 and 3,000,000
shares, respectively. During fiscal 1998, the 1995 Plan was also amended to,
among other things, require the exercise price of non-qualified stock options to
not be less than 100% of the fair market value of the stock on the date the
option is granted, to limit the persons eligible to participate in the plan to
employees, to eliminate the Company's ability to issue SARS and to amend the
definition of a director to comply with Rule 16b-3 of the Securities Exchange
Act of 1934, as amended and with Section 162(m) of the Internal Revenue Code of
1986, as amended. There were no amendments to the 1995 Plan in fiscal 1999.
The Company assumed the stock option plans of its subsidiaries, Career
Horizons, Inc., Actium, Inc. and Consulting Partners, Inc., upon acquisition in
accordance with terms of the respective merger agreements. At the date of the
respective acquisitions, the assumed plans had 2,566,252 options outstanding. As
of December 31, 1999 and 1998, the assumed plans had 198,263 and 340,719 options
outstanding, respectively.
Non-Employee Director Stock Plan
Effective December 29, 1993, the Board of Directors of the Company approved
a stock option plan (Director Plan) for non-employee directors, whereby 600,000
shares of common stock have been reserved for issuance to non-employee
directors. The Director Plan allows each non-employee director to purchase
60,000 shares at an exercise price equal to the fair market value at the date of
the grant upon election to the Board. In addition, each non-employee director is
granted 20,000 options upon the anniversary date of the director's initial
election date. The options become exercisable ratably over a five-year period
and expire ten years from the date of the grant. However, the options are
exercisable for a maximum of three years after the individual ceases to be a
director and if the director ceases to be a director within one year of
appointment the options are canceled. During 1997, the Director plan was amended
to increase the number of shares available under the plan to 1.6 million shares.
In fiscal 1999, 1998 and 1997 , the Company granted 60,000, 240,000 and 120,000
options, respectively, at an average exercise price of $13.63, $21.56 and
$28.35, respectively.
The following table summarizes the Company's Stock Option Plans (which
includes options held by Information Technology employees):
Weighted
Range of Average
Shares Exercise Prices Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 10,568,361 $ 0.69 - $33.75 $ 13.67
Granted 2,452,176 $16.13 - $31.38 $ 18.92
Exercised (3,069,143) $ 0.69 - $32.00 $ 7.02
Canceled (43,273) $11.80 - $24.92 $ 23.18
----------------------------------------------
Balance, December 31, 1997 9,908,121 $ 0.83 - $33.75 $ 16.76
Granted 8,560,721 $ 4.80 - $35.13 $ 16.00
Exercised (2,741,895) $ 0.83 - $28.50 $ 13.57
Canceled (4,522,954) $ 1.25 - $35.13 $ 20.22
----------------------------------------------
Balance, December 31, 1998 11,203,993 $ 0.83 - $33.38 $ 15.38
Granted 6,317,285 $ 8.13 - $16.69 $ 12.92
Exercised (352,634) $ 0.83 - $14.44 $ 7.11
Canceled (2,115,956) $ 4.24 - $26.13 $ 16.63
----------------------------------------------
BALANCE, DECEMBER 31, 1999 15,052,688 $ 1.25 - $33.38 $ 14.32
==============================================
Effective December 15, 1998, the Company's Board of Directors approved a
stock option repricing program whereby substantially all holders of outstanding
options who were active employees (except certain officers and directors) with
exercise prices above $14.44 per share were amended so as to change the exercise
price to $14.44 per share, the fair market value on the effective date. A total
of 3,165,133 shares, with exercise prices ranging from $16.13 to $35.13, were
amended under this program, all in fiscal 1998. All other terms of such options
remained unchanged.
The following table summarizes information about stock options outstanding
at December 31, 1999(which includes options held by Information Technology
employees):
Outstanding Exercisable
------------------------------------------- -----------------------------
Average Average
Average Exercise Exercise
Shares life (a) Price Shares Price
- --------------------------------------------------------------------------------------------------------------------
$ 1.25 - $ 11.13 3,410,755 8.36 $ 9.39 1,124,148 $ 7.25
$ 11.25 - $ 13.67 3,018,536 9.13 12.82 284,107 12.94
$ 13.81 - $ 14.50 4,342,064 6.88 14.41 2,815,584 14.45
$ 14.56 - $ 22.38 3,345,333 8.45 17.13 1,816,669 16.12
$ 22.88 - $ 33.38 936,000 6.06 26.50 798,001 26.71
-------------------------------------------------------------------------
Total 15,052,688 7.97 $ 14.32 6,838,509 $ 15.10
=========================================================================
(a) Average contractual life remaining in years.
At year-end 1998, options with an average exercise price of $15.49 were
exercisable on 4.2 million shares; at year-end 1997, options with an average
exercise price of $15.16 were exercisable on 5.1 million shares.
If the Company had elected to recognize compensation cost for options
granted in 1999 and 1998, based on the fair value of the options granted at the
grant date, net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
1999 1998
- --------------------------------------------------------------------------------------------------------------------
Net Income
As reported $ 97,090 $ 323,831
Pro forma $ 80,937 $ 312,029
Basic net income per common share
As reported $ 1.01 $ 2.98
Pro forma $ 0.84 $ 2.88
Diluted net income per common share
As reported $ 1.00 $ 2.79
Pro forma $ 0.83 $ 2.69
The weighted average fair values of options granted during 1999 and 1998
were $5.29 and $5.20 per share, respectively. The fair value of each option
grant is estimated on the date of grant using the Black Scholes option-pricing
model with the following assumptions:
Fiscal
1999 1998
- -------------------------------------------------------------------------------------------------------------
Expected dividend yield - -
Expected stock price volatility .34 .35
Risk-free interest rate 6.14 5.57
Expected life of options (years) 5.64 3.50
During Fiscal 1996, under the 1995 Plan, the Company's Board of Directors
issued a restricted stock grant of 345,000 shares to the Company's President and
Chief Executive Officer, which was scheduled to vest over a five year period.
The Company recorded $4,892 in deferred compensation expense which was amortized
on a straight line basis over the vesting period of the grant. In December 1998,
the Company's Board of Directors removed the vesting restrictions, thus vesting
the unamortized portion of the grant in the amount of $2,686.
11. NET INCOME PER COMMON SHARE
The calculation of basic net income per common share and diluted net income
per common share from continuing and discontinued operations is presented below:
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Basic net income per common share computation:
Net Income available to common shareholders from
continuing operations $ 18,597 $ 17,691 $ 19,492
------------------------------------------
Net Income available to common shareholders from
discontinued operations $ 63,538 $ 81,189 $ 82,541
------------------------------------------
Gain on sale of discontinued operations, net of income
taxes $ 14,955 $ 230,561 $ -
------------------------------------------
Extraordinary item of loss on early extinguishment of
debt, net of income benefit $ - $ (5,610) $ -
------------------------------------------
Basic average common shares outstanding 96,268 108,518 101,914
------------------------------------------
Basic income per common share from continuing
operations $ 0.19 $ 0.16 $ 0.19
==========================================
Basic income per common share from discontinued
operations $ 0.66 $ 0.75 $ 0.81
==========================================
Basic income per common share from gain on sale of
discontinued operations $ 0.16 $ 2.12 $ -
==========================================
Basic income per common share from extraordinary item $ - $ (0.05) $ -
==========================================
Basic net income per common share $ 1.01 $ 2.98 $ 1.00
==========================================
Diluted net income per common share computation:
Income available to common shareholders from continuing
operations $ 18,597 $ 17,691 $ 19,492
Interest paid on convertible debt, net of tax benefit (1) - 2,784 3,712
Income available to common shareholders and assumed ------------------------------------------
conversions from continuing operations $ 18,597 $ 20,475 $ 23,204
Income available to common shareholders from ------------------------------------------
discontinued operations $ 63,538 $ 81,189 $ 82,541
------------------------------------------
Average common shares outstanding 96,268 108,518 101,914
Incremental shares from assumed conversions:
Convertible debt (1) - 5,699 7,599
Stock options 842 2,665 3,596
------------------------------------------
Diluted average common shares outstanding 97,110 116,882 113,109
------------------------------------------
Diluted income per common share from continuing
operations $ 0.19 $ 0.18 $ 0.21
==========================================
Diluted income per common share from discontinued
operations $ 0.66 $ 0.69 $ 0.72
==========================================
Diluted income per common share from gain on sale of
discontinued operations $ 0.15 $ 1.97 $ -
==========================================
Diluted income per common share from extraordinary item $ - $ (0.05) $ -
==========================================
Diluted net income per common share $ 1.00 $ 2.79 $ 0.93
==========================================
(1) The Company's convertible debt did not have a dilutive effect on earnings
per share from continuing operations during the fourth quarter of fiscal 1998.
Options to purchase 9,231,486 shares of common stock that were outstanding
during 1999 were not included in the computation of diluted earnings per share
as the exercise prices of these options were greater than the average market
price of the common shares.
12. CONCENTRATION OF CREDIT RISK:
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and trade accounts receivable. The Company
places its cash with what it believes to be high credit quality institutions. At
times such investments may be in excess of the FDIC insurance limit. The Company
routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk exposure is
limited.
In connection with the Company's sale of its health care operations, the
Company entered into an agreement with the purchaser of the health care assets
whereby the Company agreed to make advances to the purchaser to fund its working
capital requirements. These advances are collateralized by the assets of the
sold operations, primarily the accounts receivable. In the third quarter of
1999, the Company was informed by the purchaser that they would default on their
obligation to the Company. The purchaser is attempting to sell the
purchaser-owned locations and enter into agreements with its franchisees,
whereby net accounts receivable and any amounts realized from the sale of
purchaser-owned locations will, after operating costs, be applied against the
purchaser's debt to the Company. Further, the purchaser has named an interim
executive to operate the business in an effort to maximize debt reduction to the
Company. However, in the third quarter of 1999, the Company believed that, based
upon an analysis of the assets and liabilities of the purchaser, it was probable
that a portion of the advances would not be repaid. Accordingly, the Company
recorded a $25.0 million reserve. At December 31, 1999, advances outstanding,
net of the $25.0 million reserve, totaled $18.8 million. See Note 3.
13. RESTRUCTURING OF OPERATIONS AND IMPAIRMENT CHARGE
In December 1998, the Company's Board of Directors approved an Integration and
Strategic Repositioning Plan (the "Plan") to strengthen the overall
profitability of the Company by implementing a back office integration program
and branch repositioning plan in an effort to consolidate or close branches
whose financial performance did not meet the Company's expectations. Pursuant to
the Plan, during the fourth quarter of 1998 the Company recorded a restructuring
and impairment charge of $18,683. The restructuring component of the Plan is
based, in part, on the evaluation of objective evidence of probable obligations
to be incurred by the Company or impairment of specifically identified assets.
The Plan provided for the consolidation or closing of 23 branches and
certain organizational improvements. This restructuring, which will result in
the elimination of approximately 100 positions, will be completed over a 12- to
18-month period, which began during the first quarter of 1999. As of December
31, 1999, the Company has consolidated the majority of the branches contemplated
and expects to complete the Plan by mid-2000.
The major components of the restructuring and impairment charge include:(1)
costs of $1,896 to recognize severance and related benefits for the
approximately 100 employees to be terminated. The severance and related benefit
accruals are based on the Company's severance plan and other contractual
termination provisions. These accruals include amounts to be paid to employees
upon termination of employment. Prior to December 31, 1998, management had
approved and committed the Company to a plan that involved the involuntary
termination of certain employees. The benefit arrangements associated with this
plan were communicated to all employees in December 1998. The plan specifically
identified the number of employees to be terminated and their job
classifications; (2) costs of $803 to write down certain furniture, fixtures and
computer equipment to net realizable value at branches not performing up to the
Company's expectations; (3) costs of $9,936 to write down goodwill associated
with the acquisition of Legal Information Technology, Inc. which was acquired in
January 1997, calculated in accordance with Statement of Financial Accounting
Standards (SFAS) No. 121 in the fourth quarter of 1998; (4) costs of $4,788 to
terminate leases and other exit and shutdown costs associated with the
consolidated or closed branches, including closing the facilities; and (5) costs
of $1,260 to adjust accounts receivable due to the expected increase in bad
debts which results directly from the termination or change in client
relationships which results when branch and administrative employees, who have
the knowledge to effectively pursue collections, are terminated. These costs are
based upon management's best estimates. Based on efficiencies and lease
termination activities, the Company reduced the reserve for lease payments on
cancelled facility leases by $2,314 in the third quarter of 1999.
The following table summarizes the restructuring activity through December 31
1999 (in thousands):
Payments To Write-Down Of Payments On
Employees Certain Property, Cancelled Write-Down Of
Involuntarily Plant and Facility Certain
Terminated (a) Equipment (b) Leases (a) Receivables (b) Total
----------------- ------------------ ---------------- ------------------ ---------------
Balances as of
December 31, 1998 $ 1,896 $ 803 $ 4,788 $ 1,260 $ 8,747
1999 charges and
write-downs (1,840) (803) (1,530) (1,260) (5,433)
Adjustment to estimated
payments on cancelled
facility leases - - (2,314)(b) - (2,314)
------- ------- ------- ------- -------
Balances as of
December 31, 1999 $ 56 $ - $ 944 $ - $ 1,000
======= ======= ======= ======= =======
(a): Cash; (b): Noncash
The balance in the restructuring accrual is included in Accounts payable
and accrued expenses. See Note 6.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents and
its debt obligations. Management believes that these financial instruments bear
interest at rates which approximate prevailing market rates for instruments with
similar characteristics and, accordingly, that the carrying values for these
instruments are reasonable estimates of fair value.
15. COMPREHENSIVE INCOME
A summary of comprehensive income for the year ended December 31, 1999,
1998 and 1997 is as follows:
Foreign
Currency Total
Net Translation Comprehensive
For the Year Ended, Income Adjustments Income
- ----------------------------------------------------------------------------------------
December 31, 1999 $ 97,090 $ (3,512) $ 93,578
December 31, 1998 $ 323,831 $ 615 $ 324,446
December 31, 1997 $ 102,033 $ (95) $ 101,938
The foreign currency translation adjustments are not adjusted for income
taxes as they relate to indefinite investments in non-U.S. subsidiaries.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
For the Three Months Period Ended For the
---------------------------------------------------------- Year Ended
Mar. 31, June 30, Sept. 30, Dec. 31, Dec. 31,
1999 1999 1999(3) 1999 1999
- ------------------------------------------------------------------------------------------------- ---------------
Revenue $ 138,953 $ 147,136 $ 154,873 $ 151,493 $ 592,455
Gross profit 45,341 48,712 51,615 49,325 194,993
Income from continuing operations 7,635 8,345 (5,051) 7,668 18,597
Income from discontinued operations,
net of taxes 16,593 17,616 20,788 8,541 63,538
Gain on sale of discontinued
operations, net of taxes (2) - - 14,955 - 14,955
Net income 24,228 25,961 30,692 16,209 97,090
Basic income per common share from
continuing operations 0.08 0.09 (0.06) 0.08 0.19
Basic income per common share from
discontinued operations 0.17 0.18 0.22 0.09 0.66
Basic income per common share from
gain on sale of discontinued
operations - - 0.16 - 0.16
Basic net income per common share 0.25 0.27 0.32 0.17 1.01
Diluted income per common share from
continuing operations 0.08 0.09 (0.06) 0.08 0.19
Diluted income per common share from
discontinued operations 0.17 0.18 0.22 0.09 0.66
Diluted income per common share from
gain on sale of discontinued
operations - - 0.15 - 0.15
Diluted net income per common share 0.25 0.27 0.31 0.17 1.00
For the Three Months Period Ended For the
---------------------------------------------------------- Year Ended
Mar. 31, June 30, Sept. 30, Dec. 31, Dec. 31,
1998 1998 1998 1998(1) 1998
- ------------------------------------------------------------------------------------------------- ---------------
Revenue $ 121,479 $ 132,683 $ 140,586 $ 143,225 $ 537,973
Gross profit 38,318 40,480 42,202 44,760 165,760
Income from continuing operations 6,824 7,741 8,038 (4,912) 17,691
Income from discontinued operations,
net of taxes 25,752 29,017 20,890 5,530 81,189
Gain on sale of discontinued
operations, net of taxes (2) - - 216,365 14,196 230,561
Extraordinary item of loss on early
extinguishment of debt, net of
benefit - - - (5,610) (5,610)
Net income 32,576 36,758 245,293 9,204 323,831
Basic income per common share from
continuing operations 0.06 0.07 0.08 (0.05) 0.16
Basic income per common share from
discontinued operations 0.25 0.26 0.18 0.06 0.75
Basic income per common share from
gain on sale of discontinued
operations - - 1.99 0.13 2.12
Basic income per common share from
extraordinary item - - - (0.05) (0.05)
Basic net income per common share 0.31 0.33 2.25 0.09 2.98
Diluted income per common share from
continuing operations 0.07 0.07 0.09 (0.05) 0.18
Diluted income per common share from
discontinued operations 0.22 0.24 0.17 0.06 0.69
Diluted income per common share from
gain on sale of discontinued
operations - - 1.84 0.13 1.97
Diluted income per common share from
extraordinary item - - - (0.05) (0.05)
Diluted net income per common share $ 0.29 $ 0.31 $ 2.10 $ 0.09 $ 2.79
(1) In the fourth quarter of 1998, the Company recorded a restructuring and
impairment charge of $20,437. See Note 13.
(2) During the fourth quarter of 1998, the Company recorded adjustments to
estimated costs relating to the third quarter gain on sale of net assets of
discontinued operations to reflect the determination of transaction related
costs and income taxes. During the third quarter of 1999, the Company recorded
adjustments to the tax liability relating to the third quarter 1998 gain on sale
of net assets of discontinued operations to reflect the final allocation of
sales price resulting from the finalization of certain deliverables of the sales
agreement.
(3) In the third quarter of 1999, the Company recorded a charge of $25,000
million related to the estimated uncollectibility of notes recievable generated
from the sale of the Company's discontinued health care operations. See note 11.
The Company, also in the third quarter of 1999, reduced the reserve for lease
payments on cancelled facility leases by $2,314. See Note 13.
17. GEOGRAPHIC FINANCIAL INFORMATION
The following summarizes the Company's geographic financial information:
Fiscal
------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Revenues
United States $ 432,567 $ 417,917 $ 333,023
U.K. 159,888 120,056 50,466
------------ ------------ ------------
Total $ 592,455 $ 537,973 $ 383,489
============ ============ ============
Identifiable Assets
United States $ 1,343,645 $ 1,251,007
U.K. 146,686 108,159
------------ ------------
Total $ 1,490,331 $ 1,359,166
============ ============
PART III
Information required by Part III is incorporated by reference to the
Registrant's Definitive Proxy Statement to be filed pursuant to Regulation 14A
("the Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
section entitled "Election of Directors" and "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" contained in the proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section entitled "Executive Compensation" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section entitled "Voting Securities" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
sections entitled 'Certain Relationships and Related Transactions'; and
'Compensation Committee Interlocks and Insider Participation' contained in the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
1. Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries are included in Item 8 of this report:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for each of the three years in the period
ended December 31, 1999
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1999
Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended December 31, 1999
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Financial statement schedules required to be included in this
report are either shown in the financial statements and notes thereto
included in Item 8 of this report or have been omitted because they
are not applicable.
3. Exhibits
3.1 Amended and restated Articles of Incorporation.(1)
3.2 Amended and Restated Bylaws.(2)
10.1 AccuStaff Incorporated Employee Stock Plan. (3)
10.2 AccuStaff Incorporated (now Modis Professional Services, Inc. amended
and restated Non-Employee Director Stock Plan. (4)
10.3 Form of Employee Stock Option Award Agreement. (3)
10.4 Form of Non-Employee Director Stock Option Award Agreement,
as amended.
10.5 Profit Sharing Plan. (3)
10.6 Revolving Credit and Reimbursement Agreement by and between
the Company and NationsBank National Association as
Administration Agent and certain lenders named therein,
dated October 30, 1998. (2)
10.6(a) Amendment agreement No. 1 to revolving credit and reimbursement
agreement, Dated October 27, 1999. (1)
10.6(b) 364 day credit agreement by and between the Company and Bank of
America. N.A. as administration agent and certain lenders named
therein dated October 27, 1999. (1)
10.7 Modis Professional Services, Inc., 1995 Stock Option Plan, as
Amended and Restated. (2)
10.8 Form of Stock Option Agreement under Modis Professional
Services, Inc. amended and restated 1995 Stock Option Plan. (2)
10.9 Executive Employment Agreement with Derek E. Dewan. (4)
10.9(a) Award notification to Derek E. Dewan under the Senior Executive
Annual Incentive Plan (1)
10.10 Executive Employment Agreement with Michael D. Abney. (4)
10.10(a)Award notification to Michael D. Abney under Senior Executive
Annual Incentive Plan. (1)
10.11 Executive Employment Agreement with Marc M. Mayo. (4)
10.11(a)Award notification to Marc M. Mayo under the Senior Executive
Annual Incentive Plan. (1)
10.12 Executive Employment Agreement with Timothy D. Payne. (4)
10.12(a)Award notification to Timothy D. Payne under the Senior Executive
Annual Incentive Plan. (1)
10.13 Executive Employment Agreement with George A. Bajalia. (4)
10.13(a)Award notification to George A. Bajalia under the Senior
Executive Annual Incentive Plan. (1)
10.14 Executive Employment Agreement with Robert P. Crouch. (4)
10.14(a)Award notification to Robert P. Crouch under the Senior
Executive Annual Incentive Plan. (1)
10.15 Senior Executive Annual Incentive Plan. (1)
10.16 Form of Director's Indemnification Agreement.
10.17 Form of Officer's Indemnification Agreement.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
(1) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed November 15, 1999.
(2) Incorporated by reference to the Company's Annual Report on Form
10-K filed March 31, 1999.
(3) Incorporated by reference to the Company's Registration on Form S-1
(No. 33-78906).
(4) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed August 16, 1999.
(b) reports on Form 8-K. No reports on form 8-K were filed during the final
quarter of fiscal 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MODIS PROFESSIONAL SERVICES, INC.
By: /s/ Derek E. Dewan
Derek E. Dewan
President, Chairman of the Board
and Chief Executive Officer
Date: March 30, 1999
Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signatures Title Date
/s/ Derek E. Dewan President, Chairman of the Board March 30, 2000
Derek E. Dewan and Chief Executive Officer
/s/ Michael D. Abney Senior Vice President, Chief March 30, 2000
Michael D. Abney Financial Officer, Treasurer
And Director
/s/ Robert P. Crouch Vice President and Chief March 30, 2000
Robert P. Crouch Accounting Officer
/s/ T. Wayne Davis Director March 30, 2000
T. Wayne Davis
/s/ Peter J. Tanous Director March 30, 2000
Peter J. Tanous
/s/ John R. Kennedy Director March 30, 2000
John R. Kennedy
EXHIBIT INDEX
10.4 Form of Non-Employee Director Stock Option Award Agreement,
as amended.
10.16 Form of Director's Indemnification Agreement.
10.17 Form of Officer's Indemnification Agreement.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.