FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended March 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ________ to ___________
Commission file number: 0-24484
Modis Professional Services, Inc.
(Exact name of Registrant as specified in its charter)
Florida 59-3116655
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Independent Drive
Jacksonville, Florida
32202
(Address of principal executive offices) (Zip code)
(904) 360-2000
(Registrant's telephone
number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. April 25, 2000.
Common Stock, $0.01 par value Outstanding: 96,439,686 (No. of shares)
FORWARD LOOKING STATEMENTS
This report on Form 10-Q 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 under
'Factors Which May Impact Future Results and Financial Condition'. In addition,
except for historical facts, all information provided in Part I, Item 3, 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.
Modis Professional Services, Inc. and Subsidiaries
Index
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999.............................................................................. 3
Unaudited Condensed Consolidated Statements of Income for the Three Months
ended March 31, 2000 and 1999...................................................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2000 and 1999...................................................................... 5
Notes to Condensed Consolidated Financial Statements................................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 10
Item 3 Quantitative and Qualitative Disclosures About Market Risks............................................ 16
Part II Other Information
Item 1 Legal Proceedings...................................................................................... 18
Item 2 Changes in Securities and Use of Proceeds.............................................................. 18
Item 3 Defaults Upon Senior Securities........................................................................ 18
Item 4 Submission of Matters to a Vote of Security Holders.................................................... 18
Item 5 Other Information...................................................................................... 18
Item 6 Exhibits and Reports on Form 8-K....................................................................... 18
Signatures............................................................................................. 19
Exhibits
2
Part I. Financial Information
Item 1. Financial Statements
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(dollar amounts in thousands except per share amounts)
March 31, 2000 December 31, 1999
------------------- -------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 6,728 $ 876
Accounts receivable, net 106,337 95,126
Prepaid expenses 2,214 2,381
Deferred income taxes 2,887 2,983
Note receivable 18,322 18,775
Income tax receivable 5,374 9,148
Other 3,064 2,856
------------------- -------------------
Total current assets 144,926 132,145
Furniture, equipment and leasehold improvements, net 14,937 14,895
Goodwill, net 315,570 317,939
Other assets, net 12,163 11,868
Net assets of discontinued operations 1,068,734 1,013,484
------------------- -------------------
Total assets $ 1,556,330 $ 1,490,331
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 1,863 $ 2,239
Accounts payable and accrued expenses 50,363 50,429
Accrued payroll and related taxes 19,762 16,648
------------------- -------------------
Total current liabilities 71,988 69,316
Notes payable, long-term portion 275,000 228,000
Deferred income taxes 11,481 10,500
------------------- -------------------
Total liabilities 358,469 307,816
------------------- -------------------
Commitments and contingencies
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;
96,406,527 and 96,043,270 shares issued and outstanding on
March 31, 2000 and December 31, 1999, respectively 964 960
Additional contributed capital 586,766 582,558
Retained earnings 615,007 601,989
Accumulated other comprehensive loss (4,876) (2,992)
------------------- -------------------
Total stockholders' equity 1,197,861 1,182,515
------------------- -------------------
Total liabilities and stockholders' equity $ 1,556,330 $ 1,490,331
=================== ===================
See accompanying notes to condensed consolidated financial statements.
3
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(unaudited)
(dollar amounts in thousands except per share amounts)
Three Months Ended
-------------------------------
(unaudited) (unaudited)
March 31, March 31,
2000 1999
------------- -------------
Revenue $ 160,963 $ 138,953
Cost of Revenue 108,303 93,612
------------- -------------
Gross Profit 52,660 45,341
------------- -------------
Operating expenses:
General and administrative 33,788 30,311
Depreciation and amortization 3,803 3,515
------------- -------------
Total operating expenses 37,591 33,826
------------- -------------
Income from operations 15,069 11,515
------------- -------------
Other (expense) income, net (1,598) 715
------------- -------------
Income from continuing operations before
provision for income taxes 13,471 12,230
Provision for income taxes 5,119 4,595
------------- -------------
Income from continuing operations 8,352 7,635
Income from discontinued operations, net of
income taxes 4,666 16,593
------------- -------------
Net income $ 13,018 $ 24,228
============= =============
Basic income per common share:
from continuing operations $ 0.09 $ 0.08
============= =============
from discontinued operations $ 0.05 $ 0.17
============= =============
Basic net income per common share $ 0.13 $ 0.25
============= =============
Diluted income per common share:
from continuing operations $ 0.08 $ 0.08
============= =============
from discontinued operations $ 0.05 $ 0.17
============= =============
Diluted net income per common share $ 0.13 $ 0.25
============= =============
Average common shares outstanding, basic 96,555 96,290
============= =============
Average common shares outstanding, diluted 99,082 96,924
============= =============
See accompanying notes to consolidated financial statements.
4
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(dollar amounts in thousands except for per share amounts)
Three Months Ended
-------------------------------
March 31, March 31,
2000 1999
(unaudited) (unaudited)
--------------- ---------------
Cash flows from operating activities:
Income from continuing operations $ 8,352 $ 7,635
Adjustments to income from continuing operations to net
cash provided by operating activities:
Depreciation and amortization 3,803 3,515
Deferred income taxes 1,077 2,106
Changes in certain assets and liabilities:
Accounts receivable (11,246) (5,176)
Prepaid expenses and other assets (111) 3,440
Accounts payable and accrued expenses 4,336 (1,223)
Accrued payroll and related taxes 3,116 4,996
Other, net (3) 833
--------------- ---------------
Net cash provided by operating activities 9,324 16,126
--------------- ---------------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements, net of disposals (964) (319)
Purchase of businesses, including additional earn-outs on
acquisitions, net of cash acquired (700) (9,061)
Income taxes and other cash expenses related to sale of
net assets of discontinued commercial operations - (185,409)
Advances associated with sale of assets of discontinued
health care operations, net of repayments (10) (2,000)
--------------- ---------------
Net cash used in investing activities (1,674) (196,789)
--------------- ---------------
Cash flows from financing activities:
Repurchases of common stock, net of refunds - 11,876
Proceeds from stock options exercised 4,211 1,539
Borrowings on indebtedness, net 46,624 148,165
--------------- ---------------
Net cash provided by financing activities 50,835 161,580
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents (967) (145)
Net increase (decrease) in cash and cash equivalents 57,518 (19,228)
Net cash used in discontinued operations (51,666) (42,216)
Cash and cash equivalents, beginning of period 876 73,410
--------------- ---------------
Cash and cash equivalents, end of period $ 6,728 $ 11,966
=============== ===============
COMPONENTS OF CASH USED IN DISCONTINUED OPERATIONS
Cash provided by operating activities $ 12,413 $ 13,136
Cash used in investing activities (65,919) (42,124)
Cash provided by (used in) financing activities 1,840 (13,228)
-------------------------------
Net cash used in discontinued operations $ (51,666) $ (42,216)
===============================
See accompanying notes to condensed consolidated financial statements.
5
Modis Professional Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(dollar amounts in thousands except for per share amounts)
1. Basis of Presentation.
The accompanying condensed consolidated financial statements are unaudited and
have been prepared by the Company in accordance with the rules and regulations
of the Securities and Exchange Commission ("SEC"). Accordingly, certain
information and footnote disclosures usually found in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The financial statements should be read in conjunction
with the consolidated financial statements and related notes included in the
Company's Form 10-K, as filed with the SEC on March 30, 2000.
The accompanying condensed consolidated financial statements reflect all
adjustments (including normal recurring adjustments) which, in the opinion of
management, are necessary to present fairly the financial position and results
of operations for the interim periods presented. The results of operations for
an interim period are not necessarily indicative of the results of operations
for a full fiscal year.
2. Restructuring of Operations
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 Plan, which has resulted in the elimination of
approximately 100 positions and the consolidation or closing of certain less
profitable branches, is expected to be completed during fiscal 2000.
The major components of the restructuring and impairment charge included:(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.
6
The following table summarizes the restructuring activity through March 31, 2000
(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
------- ------- ------- ------- -------
Charges and write-downs
during the three months
ended March 31, 2000 - - (186) - (186)
------- ------- ------- ------- -------
Balances as of
March 31, 2000 $ 56 $ - $ 758 $ - $ 814
======= ======= ======= ======= =======
(a): Cash; (b): Noncash
As of March 31, 2000, the $814 balance in the restructuring accrual was
included in the balance sheet caption 'Accounts payable and accrued expenses'.
3. Comprehensive Income
The Company discloses other comprehensive income in accordance with SFAS No.
130, 'Reporting Comprehensive Income'. A summary of comprehensive income for the
three months ended March 31, 2000 and 1999 is as follows:
Foreign
Currency Total
Net Translation Comprehensive
Three Months Ended, Income Adjustments Income
- ----------------------------------------------------------------------------------------
March 31, 1999 $ 24,228 $ (2,112) $ 22,116
March 31, 2000 $ 13,018 $ (1,884) $ 11,134
The currency translation adjustments are not adjusted for income taxes as they
relate to indefinite investments in non-U.S. subsidiaries.
7
4. 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:
Three Months Ended
--------------------------------
March 31, March 31,
2000 1999
- -----------------------------------------------------------------------------------------
Basic income per common share computation:
Income available to common shareholders
from continuing operations $ 8,352 $ 7,635
------------- -------------
Income available to common shareholders
from discontinued operations $ 4,666 $ 16,593
------------- -------------
Average common shares outstanding 96,555 96,290
============= =============
Basic income per common share from
continuing operations $ 0.09 $ 0.08
============= =============
Basic income per common share from
discontinued operations $ 0.05 $ 0.17
============= =============
Basic net income per common share $ 0.13 $ 0.25
============= =============
Diluted income per common share computation:
Income available to common shareholders
from continuing operations $ 8,352 $ 7,635
------------- -------------
Income available to common shareholders
from discontinued operations $ 4,666 $ 16,593
------------- -------------
Average common shares outstanding 96,555 96,290
Incremental shares from assumed conversions:
Stock options 2,527 634
------------- -------------
Diluted average common shares outstanding 99,082 96,924
============= =============
Diluted income per common share from
continuing operations $ 0.08 $ 0.08
============== =============
Diluted income per common share from
discontinued operations $ 0.05 $ 0.17
============== =============
Diluted net income per common share $ 0.13 $ 0.25
============== =============
Options to purchase 2,636,125 shares of common stock that were outstanding
during the three months ended March 31, 2000 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.
8
5. Geographic Financial Information
The following summarizes the Company's geographic financial information:
Three Months Ended
------------------------------
March 31, March 31,
2000 1999
------------------------------
Revenues
United States $ 114,657 $ 103,801
U.K. 46,306 35,152
------------ ------------
Total $ 160,963 $ 138,953
============ ============
March 31, December 31,
2000 1999
------------------------------
Identifiable Assets
United States $ 1,401,184 $ 1,343,645
U.K. 155,146 146,686
------------ ------------
Total $ 1,556,330 $ 1,490,331
============ ============
9
Item 2. 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.
As a result of the proposed spin-off, the Company's Condensed 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 division as discontinued operations
for all periods presented.
The Company operates primarily through five operating divisions consisting of
the accounting, legal, engineering/technical, career management and consulting
and scientific divisions.
The following detailed analysis of operations should be read in conjunction with
the 1999 Consolidated Financial Statements and related notes included in the
Company's Form 10-K filed March 30, 2000.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Results from Continuing Operations
Revenue. Revenue increased $22.0 million, or 15.8%, to $161.0 million in the
three months ended March 31, 2000 from $139.0 million in the year earlier
period. The majority of the growth in revenue was internal growth. Revenue
growth was led by the Accounting division at 27% and the Technical and
Engineering division at 21%. Additionally, growth in 2000 was effected by the
Company's strategic restructuring and repositioning plan (the 'restructuring
plan') which resulted in the closing of 23 offices over the past 15 months.
Gross Profit. Gross profit increased $7.4 million or 16.3% to $52.7 million in
the three months ended March 31, 2000 from $45.3 million in the year earlier
period. Gross margin increased slightly to 32.7% in the three months ended March
31, 2000 from 32.6% in the year earlier period. The increase in gross margin was
due to (1) the increase in revenue mix of the higher margin divisions and (2)
the Company's restructuring plan which closed certain less profitable offices.
Operating expenses. Operating expenses increased $3.8 million or 11.2% to $37.6
million in the three months ended March 31, 2000 from $33.8 million in the year
earlier period. Operating expenses before depreciation and amortization, as a
percentage of revenue, decreased to 21.0% in the three months ended March 31,
2000 as compared to 21.8% in the year earlier period. The decrease in operating
expenses before depreciation and amortization as a percentage of revenue is the
result of (1) the Company's restructuring plan which closed certain less
profitable offices, and (2) the improved operating leverage in the overall
business.
Income from operations. As a result of the foregoing, income from operations
increased $3.6 million or 31.3% to $15.1 million in the three months ended March
31, 2000 from $11.5 million in the year earlier period. Income from operations,
as a percentage of revenue increased to 9.4% in the three months ended March 31,
2000 as compared to 8.3% in the year earlier period.
10
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. Net
interest expense increased to $1.6 million in the three months ended March 31,
2000 as compared to net interest income earned of $0.7 million in the year
earlier period. Net interest income in the three months ended March 31, 1999 was
primarily a result of the net cash on hand related to the sale of the Company's
discontinued Commercial operations and Teleservices division in fiscal 1998. The
Company recorded net interest expense in the three months ended March 31, 2000
related to net borrowings on the Company's credit facility, which was used
primarily to pay the tax liability and other payments related to the sale of the
Company's Commercial operations and Teleservices division.
Income Taxes. The Company's effective tax rate increased slightly to 38.0% in
the three months ended March 31, 2000 compared to 37.6% in the year earlier
period, due to an increase in the Company's state tax rate.
Income from continuing operations. As a result of the foregoing, income from
continuing operations increased $0.8 million or 10.5% to $8.4 million in the
three months ended March 31, 2000 from $7.6 million in the year earlier period.
Income from continuing operations as a percentage of revenue decreased to 5.2%
in the three months ended March 31, 2000 from 5.5% in the year earlier period,
primarily due to the increase in interest expense and the Company's effective
tax rate.
Results of discontinued operations
The following discloses the results of the Company's Information Technology
('IT') businesses, anticipated to be distributed to the Company's shareholders
in a tax-free spin-off prior to December 31, 2000. The Company's IT businesses
are being shown as discontinued operations for both the three months ended March
31, 2000 and 1999.
Three Months Ended
---------------------------
March 31, March 31,
2000 1999
Discontinued IT businesses:
Revenue $ 296,448 $ 343,913
Cost of Revenue 221,597 259,329
General and Administrative expenses 55,021 49,041
Depreciation and Amortization 8,733 7,368
Operating Income 11,097 28,175
Interest, net 3,051 394
Provision for income taxes 3,380 11,188
Income from discontinued IT businesses 4,666 16,593
Included in the operating expenses during both the three months ended March 31,
2000 and 1999 are allocations of certain net common expenses for corporate
support and back office functions totaling approximately $3.6 million and $4.1
million, respectively. Corporate support and back office allocations are based
on the ratio of the Company's consolidated revenues to that of the discontinued
IT Businesses. Additionally, results of discontinued operations include
allocations of consolidated interest expense totaling $3.1 million and $0.4
million for the three months ended March 31, 2000 and 1999, respectively. The
allocations were based on the historic funding needs of the discontinued
operations, including: the purchases of furniture and equipment, acquisitions,
current income tax liabilities and fluctuating working capital needs.
11
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 $72.9 million and $62.8 million as of March
31, 2000 and December 31, 1999, respectively. The principal reasons for the
increase in the Company's working capital is the increase in accounts receivable
and cash on hand at March 31, 2000. The Company had cash and cash equivalents of
$6.7 million and $0.9 million as of March 31, 2000 and December 31, 1999,
respectively. For the three months ended March 31, 2000 and 1999, the Company
generated $9.3 million and $16.1 million of cash flow from operations,
respectively. The decrease in cash flow from operations during the three months
ended March 31, 2000 is due to an increase in cash needed to fund accounts
receivable.
For the three months ended March 31, 2000, the Company used $1.7 million of cash
for investing activities. The Company used $1.0 million for the purchase of
fixed assets and $0.7 million for earn-out payments. For the three months ended
March 31, 1999, the Company used $196.8 million of cash for investing
activities, mainly as a result of the payment of the current tax liability, net
worth adjustment and certain transaction expenses of $185.4 million relating to
the sale of the Company's Commercial operations and Teleservices division.
Additionally, the Company used $9.1 million for acquisitions and earn-out
payments in the three months ended March 31, 1999.
Effective March 30, 1998, the Company sold the operations and certain assets of
its Health Care division. 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 has entered into
agreements with a number of franchisees and is attempting to enter into
agreements with the remaining 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. At March 31, 2000, advances
outstanding, net of the $25.0 million reserve, totaled $18.3 million. During the
three months ended March 31, 2000, the Company has not made any material
advances under this agreement.
For the three months ended March 31, 2000, the Company generated $50.8 million
from financing activities. This amount primarily represented net borrowings from
the Company's credit facility, which was used primarily to pay for acquisitions
of modis.
For the three months ended March 31, 1999, the Company generated $161.6 million
from financing activities. 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 of the Company's Commercial operations
and Teleservices division. Additionally, in connection with the Company's 1998
share buyback program, the Company was refunded a portion of the purchase price
in the three months ended March 31, 1999. Included in the 1999 Consolidated
Financial Statements and related notes included in the Company's Form 10-K filed
March 30, 2000 is a complete description of the share buyback program.
12
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 April 25, 2000, no
shares have been repurchased under this authorization.
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 from continuing
operations will total $45.0 million for the remainder of 2000, of which $25.0
million has been paid as of April 25, 2000. The Company is also obligated to
make earn-out payments from discontinued operations and estimates that the
amount of these payments will total $10.0 million for the remainder of 2000, of
which $6.0 million has been paid as of April 25, 2000. The Company estimates
that the amount of earn out payments for fiscal 2001 for continuing and
discontinued operations will total $5.9 million and $7.0 million, respectively.
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 remainder of 2000 will be approximately $4.0 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.
13
Indebtedness of the Company
The Company has a $350 million revolving credit facility which is syndicated to
a group of 13 banks with NationsBank (Bank of America), as the principal agent.
This facility expires on October 21, 2003. The Company also has a $150.0 million
364 day credit facility that expires October 26, 2000. 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 April 25, 2000, the Company had a balance of approximately $321.0 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 $177.2 million as of April 25, 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 planned spin-off, modis will repay
the Company an amount that represents the historical funding needs which
resulted from those items described above. As of March 31, 2000, approximately
$157.6 million of funding was provided to modis from the Company.
The Company has certain notes payable to shareholders of acquired companies
which bear interest at rates ranging from 5.4% to 5.5%. These notes are
classified as short-term on the Company's Balance Sheet as they are due in the
third quarter of 2000. As of March 31, 2000, the Company owed approximately $1.9
million in such acquisition indebtedness.
14
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 professional services is typically lower during the first quarter
until customers' operating budgets are finalized and the profitability of the
Company's consultants is generally lower in the fourth quarter due to fewer
billing days because of the higher number of holidays and vacation days.
15
Item 3. 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 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 $276.9 million
as of March 31, 2000 and the Company had $223.2 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 29% of first quarter 2000
consolidated revenues from international operations, approximately 100% of which
were from the United Kingdom. The exchange rate fluctuation has not historically
had a material impact on the Company's results of operations and is not
currently expected to have a material adverse effect in the future. The Company
did not hold or enter into any foreign currency derivative instruments as of
March 31, 2000.
16
FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION
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 by the Internal Revenue Service 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. Conversely, 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.
17
Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
Item 2. Changes in Securities and Use of Proceeds
No disclosure required.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
No disclosure required.
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
27 Financial Data Schedule.
B. Reports on Form 8-K
No disclosure required.
18
SIGNATURES
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 May 15, 2000
- ---------------------- of the Board and Chief
Derek E. Dewan Executive Officer
/s/ MICHAEL D. ABNEY Senior Vice President, May 15, 2000
- ---------------------- Chief Financial Officer,
Michael D. Abney Treasurer, and Director
/s/ ROBERT P. CROUCH Vice President and May 15, 2000
- ---------------------- Chief Accounting Officer
Robert P. Crouch
19