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 June 30, 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. July 31, 2000. Common Stock, $0.01 par value Outstanding: 96,422,155 (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 June 30, 2000 (unaudited) and December 31, 1999.............................................................................. 3 Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2000 and 1999 ...................................................................... 4 Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 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............................................ 18 Factors Which May Impact Future Results and Financial Condition........................................ 19 Part II Other Information Item 1 Legal Proceedings...................................................................................... 20 Item 2 Changes in Securities and Use of Proceeds.............................................................. 20 Item 3 Defaults Upon Senior Securities........................................................................ 20 Item 4 Submission of Matters to a Vote of Security Holders.................................................... 20 Item 5 Other Information...................................................................................... 20 Item 6 Exhibits and Reports on Form 8-K....................................................................... 20 Signatures............................................................................................. 21 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) June 30, 2000 December 31, 1999 ------------------- ------------------- (unaudited) Assets Current assets: Cash and cash equivalents $ 11,339 $ 876 Accounts receivable, net 100,369 95,126 Prepaid expenses 2,603 2,381 Deferred income taxes 2,790 2,983 Note receivable 16,182 18,775 Income tax receivable 1,925 9,148 Other 3,258 2,856 ------------------- ------------------- Total current assets 138,466 132,145 Furniture, equipment and leasehold improvements, net 13,968 14,895 Goodwill, net 322,913 317,939 Other assets, net 11,277 11,868 Net assets of discontinued operations 1,093,811 1,013,484 ------------------- ------------------- Total assets $ 1,580,435 $ 1,490,331 =================== =================== Liabilities and Stockholders' Equity Current liabilities: Notes payable $ 5,675 $ 2,239 Accounts payable and accrued expenses 12,695 50,429 Accrued payroll and related taxes 18,124 16,648 ------------------- ------------------- Total current liabilities 36,494 69,316 Notes payable, long-term portion 320,154 228,000 Deferred income taxes 12,462 10,500 ------------------- ------------------- Total liabilities 369,110 307,816 ------------------- ------------------- 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; 96,416,986 and 96,043,270 shares issued and outstanding on June 30, 2000 and December 31, 1999, respectively 964 960 Additional contributed capital 587,395 582,558 Retained earnings 627,402 601,989 Accumulated other comprehensive loss (4,436) (2,992) ------------------- ------------------- Total stockholders' equity 1,211,325 1,182,515 ------------------- ------------------- Total liabilities and stockholders' equity $ 1,580,435 $ 1,490,331 =================== =================== See accompanying notes to condensed consolidated financial statements. 3 Modis Professional Services, Inc. and Subsidiaries Condensed Consolidated Statements of Operations (unaudited) (dollar amounts in thousands except per share amounts) Three Months Ended Six Months Ended ------------------------------- ------------------------------- (unaudited) (unaudited) (unaudited) (unaudited) June 30, June 30, June 30, June 30, 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Revenue $ 162,732 $ 147,136 $ 323,695 $ 286,089 Cost of revenue 108,441 98,424 216,744 192,036 ------------- ------------- ------------- ------------- Gross profit 54,291 48,712 106,951 94,053 ------------- ------------- ------------- ------------- Operating expenses: General and administrative 35,015 31,131 68,803 61,441 Depreciation and amortization 3,638 3,442 7,441 6,958 ------------- ------------- ------------- ------------- Total operating expenses 38,653 34,573 76,244 68,399 ------------- ------------- ------------- ------------- Income from operations 15,638 14,139 30,707 25,654 ------------- ------------- ------------- ------------- Other expense, net (2,740) (772) (4,338) (57) ------------- ------------- ------------- ------------- Income from continuing operations before provision for income taxes 12,898 13,367 26,369 25,597 Provision for income taxes 4,901 5,022 10,020 9,617 ------------- ------------- ------------- ------------- Income from continuing operations 7,997 8,345 16,349 15,980 Income from discontinued operations, net of income taxes 4,398 17,616 9,064 34,209 ------------- ------------- ------------- ------------- Net income $ 12,395 $ 25,961 $ 25,413 50,189 ============= ============= ============= ============= Basic income per common share: from continuing operations $ 0.08 $ 0.09 $ 0.17 $ 0.17 ============= ============= ============= ============= from discontinued operations $ 0.05 $ 0.18 $ 0.09 $ 0.36 ============= ============= ============= ============= Basic net income per common share $ 0.13 $ 0.27 $ 0.26 $ 0.52 ============= ============= ============= ============= Diluted income per common share: from continuing operations $ 0.08 $ 0.09 $ 0.17 $ 0.17 ============= ============= ============= ============= from discontinued operations $ 0.05 $ 0.18 $ 0.09 $ 0.35 ============= ============= ============= ============= Diluted net income per common share $ 0.13 $ 0.27 $ 0.26 $ 0.52 ============= ============= ============= ============= Average common shares outstanding, basic 96,699 96,152 96,627 96,221 ============= ============= ============= ============= Average common shares outstanding, diluted 97,207 96,653 98,145 96,788 ============= ============= ============= ============= See accompanying notes to condensed consolidated financial statements. 4 Modis Professional Services, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (dollar amounts in thousands) Six Months Ended ------------------------------- June 30, June 30, 2000 1999 (unaudited) (unaudited) --------------- --------------- Cash flows from operating activities: Income from continuing operations $ 16,349 $ 15,980 Adjustments to income from continuing operations to net cash provided by operating activities: Depreciation and amortization 7,441 6,958 Deferred income taxes 2,155 3,821 Changes in certain assets and liabilities: Accounts receivable (7,287) (3,622) Prepaid expenses and other assets 2,560 3,632 Accounts payable and accrued expenses 4,383 (13,232) Accrued payroll and related taxes 1,597 11,194 Other, net 139 1,670 --------------- --------------- Net cash provided by operating activities 27,337 26,401 --------------- --------------- Cash flows from investing activities: Purchase of furniture, equipment and leasehold improvements, net of disposals (1,698) (528) Purchase of businesses, including additional earn-outs on , acquisitions, net of cash acquired (38,101) (33,382) Income taxes and other cash expenses related to sale of net assets of discontinued commercial operations - (191,409) Advances associated with sale of assets of discontinued health care operations, net of repayments (10) (3,835) --------------- --------------- Net cash used in investing activities (39,809) (229,154) --------------- --------------- Cash flows from financing activities: Repurchases of common stock, net of refunds - 11,871 Proceeds from stock options exercised 4,841 2,250 Borrowings on indebtedness, net 89,440 189,145 --------------- --------------- Net cash provided by financing activities 94,281 203,266 --------------- --------------- Effect of exchange rate changes on cash and cash equivalents 103 (1,762) Net increase (decrease) in cash and cash equivalents 81,912 (1,249) Net cash used in discontinued operations (71,449) (67,038) Cash and cash equivalents, beginning of period 876 73,410 --------------- --------------- Cash and cash equivalents, end of period $ 11,339 $ 5,123 =============== =============== COMPONENTS OF CASH USED IN DISCONTINUED OPERATIONS Cash provided by operating activities $ 14,156 $ 17,098 Cash used in investing activities (84,618) (77,814) Cash used in financing activities (987) (6,322) ------------------------------- Net cash used in discontinued operations $ (71,449) $ (67,038) =============================== 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 was 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 following table summarizes the restructuring activity from the origination of the reserve through June 30, 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) Charges and write-downs during the three months ended June 30, 2000 - - (52) - (52) ------- ------- ------- ------- ------- Balances as of June 30, 2000 $ 56 $ - $ 706 $ - $ 762 ======= ======= ======= ======= ======= (a): Cash; (b): Noncash As of June 30, 2000, the $762 balance in the restructuring accrual was included in the balance sheet caption 'Accounts payable and accrued expenses'. 6 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 and six months ended June 30, 2000 and 1999 is as follows: Foreign Currency Total Net Translation Comprehensive Three Months Ended, Income Adjustments Income - ---------------------------------------------------------------------------------------- June 30, 1999 $ 25,961 $ (2,068) $ 23,893 June 30, 2000 $ 12,395 $ 440 $ 12,835 Foreign Currency Total Net Translation Comprehensive Six Months Ended, Income Adjustments Income - ---------------------------------------------------------------------------------------- June 30, 1999 $ 50,189 $ (4,180) $ 46,009 June 30, 2000 $ 25,413 $ (1,444) $ 23,969 The currency translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. 4. Geographic Financial Information The following summarizes the Company's geographic financial information: Three Months Ended Six Months Ended ------------------------------ ------------------------------ June 30, June 30, June 30, June 30, 2000 1999 2000 1999 ------------------------------ ------------------------------ Revenues United States $ 116,491 $ 106,498 $ 231,148 $ 210,299 U.K. 46,241 40,638 92,547 75,790 ------------ ------------ ------------ ------------ Total $ 162,732 $ 147,136 $ 323,695 $ 286,089 ============ ============ ============ ============ June 30, December 31, 2000 1999 ------------------------------ Identifiable Assets United States $ 1,432,711 $ 1,343,645 U.K. 147,724 146,686 ------------ ------------ Total $ 1,580,435 $ 1,490,331 ============ ============ 7 5. 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 Six Months Ended -------------------------------- -------------------------------- June 30, June 30, June 30, June 30, 2000 1999 2000 1999 - ----------------------------------------------------------------------------------------- -------------------------------- Basic income per common share computation: Income available to common shareholders from continuing operations $ 7,997 $ 8,345 $ 16,349 $ 15,980 ------------- ------------- ------------- ------------- Income available to common shareholders from discontinued operations $ 4,398 $ 17,616 $ 9,064 $ 34,209 ------------- ------------- ------------- ------------- Average common shares outstanding 96,699 96,152 96,627 96,221 ============= ============= ============= ============= Basic income per common share from continuing operations $ 0.08 $ 0.09 $ 0.17 $ 0.17 ============= ============= ============= ============= Basic income per common share from discontinued operations $ 0.05 $ 0.18 $ 0.09 $ 0.36 ============= ============= ============= ============= Basic net income per common share $ 0.13 $ 0.27 $ 0.26 $ 0.52 ============= ============= ============= ============= Diluted income per common share computation: Income available to common shareholders from continuing operations $ 7,997 $ 8,345 $ 16,349 $ 15,980 ------------- ------------- ------------- ------------- Income available to common shareholders from discontinued operations $ 4,398 $ 17,616 $ 9,064 $ 34,209 ------------- ------------- ------------- ------------- Average common shares outstanding 96,699 96,152 96,627 96,221 Incremental shares from assumed conversions: Stock options 508 501 1,518 567 ------------- ------------- ------------- ------------- Diluted average common shares outstanding 97,207 96,653 98,145 96,788 ============= ============= ============= ============= Diluted income per common share from continuing operations $ 0.08 $ 0.09 $ 0.17 $ 0.17 ============== ============= ============= ============= Diluted income per common share from discontinued operations $ 0.05 $ 0.18 $ 0.09 $ 0.35 ============== ============= ============= ============= Diluted net income per common share $ 0.13 $ 0.27 $ 0.26 $ 0.52 ============== ============= ============= ============= Options to purchase 14,121,366 and 10,804,819 shares of common stock that were outstanding during the three and six months ended June 30, 2000, respectively, 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 6. Subsequent Events On August 11, 2000, Idea Integration Corp. ("Idea"), a wholly-owned subsidiary of the Company, filed a Registration Statement on Form S-1 in connection with a proposed initial public offering of its common stock. Idea anticipates that the offering will be completed during the fourth quarter of 2000, subject to SEC review and market conditions. Idea has stated that it intends to use net proceeds from the offering for general corporate purposes and to repay indebtedness of $30 million to the Company. The Idea offering is subject to SEC review and certain other state and local regulatory approvals and to the agreement of the several underwriters to accept the securities. A registration statement relating to these securities has been filed with the SEC but has not yet become effective. The Idea securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Form 10-Q shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such State. 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. On August 14, 2000, the Company received notice that the IRS ruled that the pending spinoff of the IT businesses would be tax-free to the Company and its shareholders. The spinoff remains subject to regulatory filings, approval of the SEC, favorable market conditions and a favorable opinion from the Company's advisors regarding the advisability of the spin-off. 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 presented 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 June 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 Results from Continuing Operations Revenue. Revenue increased $15.6 million, or 10.6%, to $162.7 million in the three months ended June 30, 2000 from $147.1 million in the year earlier period. The majority of the growth in revenue was internal growth. Revenue growth was led by the Technical and Engineering division at 17% and the Accounting division at 14%. Additionally, growth in 2000 was affected by the Company's strategic restructuring and repositioning plan (the 'restructuring plan') which resulted in the closing of 23 offices over the past 18 months. Gross Profit. Gross profit increased $5.6 million or 11.5% to $54.3 million in the three months ended June 30, 2000 from $48.7 million in the year earlier period. Gross margin increased slightly to 33.4% in the three months ended June 30, 2000 from 33.1% 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 $4.1 million or 11.8% to $38.7 million in the three months ended June 30, 2000 from $34.6 million in the year earlier period. Operating expenses before depreciation and amortization, as a percentage of revenue, increased to 21.5% in the three months ended June 30, 2000 as compared to 21.2% in the year earlier period. Income from operations. As a result of the foregoing, income from operations increased $1.5 million or 10.6% to $15.6 million in the three months ended June 30, 2000 from $14.1 million in the year earlier period. Income from operations, as a percentage of revenue remained constant at 9.6% in both the three months ended June 30, 2000 and 1999. Other expense, net. Other expense, net consists primarily of interest expense related to borrowings on the Company's credit facility and notes issued in connection with acquisitions net of interest income related to cash on hand. Net interest expense increased to $2.7 million in the three months ended June 30, 2000 as compared to net interest expense of $0.8 million in the year earlier period. Net interest expense in the three months ended June 30, 1999 was significantly reduced as 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. Net interest expense in the three months ended June 30, 2000 related to net borrowings on the Company's credit facility, which was used primarily to pay earn-out obligations as a result of prior years' acquisition agreements. Income Taxes. The Company's effective tax rate increased slightly to 38.0% in the three months ended June 30, 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 decreased $0.3 million or 3.6% to $8.0 million in the three months ended June 30, 2000 from $8.3 million in the year earlier period. Income from continuing operations as a percentage of revenue decreased to 4.9% in the three months ended June 30, 2000 from 5.7% in the year earlier period, primarily due to the increase in interest expense and the Company's effective tax rate. 10 Results of discontinued operations The following discloses the results of the Company's Information Technology ('IT') businesses which are presented as discontinued operations for both the three months ended June 30, 2000 and 1999. Three Months Ended --------------------------- June 30, June 30, 2000 1999 Discontinued IT businesses: Revenue $ 301,718 $ 354,543 Cost of revenue 219,893 268,035 General and administrative expenses 61,799 48,715 Depreciation and amortization 9,389 7,565 Operating income 10,637 30,228 Interest, net 3,047 685 Provision for income taxes 3,192 11,927 Income from discontinued IT businesses 4,398 17,616 Included in the operating expenses during both the three months ended June 30, 2000 and 1999 are allocations of certain net common expenses for corporate support and back office functions totaling approximately $3.0 million and $3.6 million, respectively. Corporate support and back office allocations are based primarily 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 $3.0 million and $0.7 million for the three months ended June 30, 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. Management believes that these allocations are reasonable. SIX MONTHS ENDED June 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 Results from Continuing Operations Revenue. Revenue increased $37.6 million, or 13.1%, to $323.7 million for the six months ended June 30, 2000 from $286.1 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 20% and the Technical and Engineering division at 19%. Additionally, growth in 2000 was affected by the Company's restructuring plan which resulted in the closing of 23 offices over the past 18 months. Gross Profit. Gross profit increased $12.9 million or 13.7% to $107.0 million in the six months ended June 30, 2000 from $94.1 million in the year earlier period. Gross margin increased slightly to 33.0% in the six months ended June 30, 2000 from 32.9% 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 $7.8 million or 11.4% to $76.2 million in the six months ended June 30, 2000 from $68.4 million in the year earlier period. Operating expenses before depreciation and amortization, as a percentage of revenue, decreased to 21.3% in the six months ended June 30, 2000 as compared to 21.5% in the year earlier period. The decrease in operating expenses before depreciation as a percentage of revenue is the result of the Company's restructuring plan which closed certain less profitable offices. Income from operations. As a result of the foregoing, income from operations increased $5.0 million or 19.5% to $30.7 million in the six months ended June 30, 2000 from $25.7 million in the year earlier period. Income from operations, as a percentage of revenue increased to 9.5% in the six months ended June 30, 2000 as compared to 9.0% in the year earlier period. 11 Other expense, net. Other expense, net consists primarily of interest expense related to borrowings on the Company's credit facility and notes issued in connection with acquisitions net of interest income related to cash on hand. Net interest expense increased to $4.3 million in the six months ended June 30, 2000 as compared to net interest expense of $0.1 million in the year earlier period. Net interest expense in the six months ended June 30, 1999 was significantly reduced as 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. Net interest expense in the six months ended June 30, 2000 related to net borrowings on the Company's credit facility, which was used primarily to pay earn-out obligations as a result of prior years' acquisition agreements. Income Taxes. The Company's effective tax rate increased slightly to 38.0% for the six months ended June 30, 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 $0.3 million or 1.9% to $16.3 million in the six months ended June 30, 2000 from $16.0 million in the year earlier period. Income from continuing operations as a percentage of revenue decreased to 5.1% in the six months ended June 30, 2000 from 5.6% in the year earlier period, primarily due to the increase in interest expense. Results of discontinued operations The following discloses the results of the Company's Information Technology ('IT') businesses which are presented as discontinued operations for both the six months ended June 30, 2000 and 1999. Six Months Ended --------------------------- June 30, June 30, 2000 1999 Discontinued IT businesses: Revenue $ 598,166 $ 698,456 Cost of revenue 441,490 527,364 General and administrative expenses 116,820 97,756 Depreciation and amortization 18,122 14,933 Operating income 21,734 58,403 Interest, net 6,098 1,079 Provision for income taxes 6,572 23,115 Income from discontinued IT businesses 9,064 34,209 Included in the operating expenses during both the six months ended June 30, 2000 and 1999 are allocations of certain net common expenses for corporate support and back office functions totaling approximately $6.1 million and $7.7 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 $6.1 million and $1.1 million for the six months ended June 30, 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. Management believes that these allocations are reasonable. 12 The net assets of the Company's discontinued IT businesses are as follows: June 30, December 31, 2000 1999 Receivables $ 268,719 $ 230,970 Other current assets 35,213 32,498 Total current assets 303,932 263,468 Furniture, equipment and leasehold improvements, net 39,507 31,065 Goodwill, net 882,497 814,647 Other assets 9,674 10,368 Total assets 1,235,610 1,119,548 Current liabilities 114,965 80,354 Non-current liabilities 26,834 25,710 Total liabilities 141,799 106,064 ---------------- ---------------- Total net assets of discontinued operations $ 1,093,811 $ 1,013,484 ================ ================ 13 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 $102.0 million and $62.8 million as of June 30, 2000 and December 31, 1999, respectively. The principal reasons for the increase in the Company's working capital is the decrease in accounts payable and accrued liabilities and increases in accounts receivable and cash on hand at June 30, 2000. Accounts payable and accrued liabilities decreased by $37.7 million primarily as a result of payments for earn-out obligations under prior years' acquisition agreements. The Company had cash and cash equivalents of $11.3 million and $0.9 million as of June 30, 2000 and December 31, 1999, respectively. For the six months ended June 30, 2000 and 1999, the Company generated $27.3 million and $26.4 million of cash flow from operations, respectively. During the six months ended June 30, 1999, the Company made certain severance and other exit and shutdown payments associated with the Company's Integration and Strategic Repositioning Plan. For the six months ended June 30, 2000, the Company used $39.8 million of cash for investing activities. The Company used $1.7 million for the purchase of fixed assets and $38.1 million for earn-out payments. For the six months ended June 30, 1999, the Company used $229.2 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 $191.4 million relating to the sale of the Company's Commercial operations and Teleservices division. Additionally, the Company used $33.4 million for acquisitions and earn-out payments and $0.5 million for the purchase of fixed assets in the six months ended June 30, 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. The purchaser of the Company's health care operations has entered into agreements with materially all of the franchisees and a potential acquirer of 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 of $25.0 million. At June 30, 2000, the total amount owed to the Company, including advances outstanding net of the $25 million reserve, was $16.2 million. During the six months ended June 30, 2000, the Company has not made any material advances under this agreement. For the six months ended June 30, 2000, the Company generated $94.3 million from financing activities. This amount primarily represented net borrowings from the Company's credit facility, which were used primarily to pay for acquisitions related to the Company's eBusiness division, Idea Integration. For the six months ended June 30, 1999, the Company generated $203.3 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 first quarter of 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. 14 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 July 31, 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 $4.7 million for the remainder of 2000, the majority of which was paid as of July 31, 2000. The Company is also obligated to make earn-out payments from discontinued operations and the amount of these payments will total approximately $7.0 million for the remainder of 2000 which has been paid as of July 31, 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 $10.4 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 $3.0 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. 15 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 July 31, 2000, the Company had a balance of approximately $329.0 million outstanding under the credit facility. The Company also had outstanding letters of credit in the amount of $1.9 million, reducing the amount of funds available under the credit facilities to approximately $169.1 million as of July 31, 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 June 30, 2000, approximately $177.3 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 6.5%, all maturing by the end of July 2001. As of June 30, 2000, the Company owed approximately $8.0 million in such acquisition indebtedness. 16 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. 17 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 $325.8 million as of June 30, 2000 and the Company had $180.1 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 July 2001. 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 its six months ended June 30, 2000 consolidated revenues from international operations, approximately 100% of which were from the United Kingdom. The exchange rate has decreased approximately 7% in the six months ended June 30, 2000, from 1.6 at December 31, 1999 to 1.5 at June 30, 2000. The exchange rate fluctuation has not historically had a material impact on the Company's results of operations; however, if the British pound sterling continues to weaken, exchange rates could have a material adverse effect on future results of operations. The Company did not hold or enter into any foreign currency derivative instruments as of June 30, 2000. 18 FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION The Proposed Distribution of the Information Technology Business The distribution of the IT businesses 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 IT businesses 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. 19 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 The Annual Meeting of the Company's shareholders was held on May 24, 2000. Proxies were solicited from shareholders of record on the close of business on April 3, 2000. On April 3, 2000, there were 96,406,636 shares outstanding and entitled to vote at the Annual Meeting. The shareholder vote on the issues presented at the Annual Meeting was as follows: ELECTION OF DIRECTORS All of the following persons nominated were elected to serve as directors and received the number of votes set opposite their names: Name For Withhold Authority - ---------------------------------------------------------------------------------------- Derek E. Dewan 70,513,444 13,243,925 Peter J. Tanous 81,073,429 2,683,940 T. Wayne Davis 81,071,517 2,685,852 John R. Kennedy 81,059,779 2,697,590 Michael D. Abney 71,004,168 12,753,201 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. 20 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 August 14, 2000 - ---------------------- of the Board and Chief Derek E. Dewan Executive Officer /s/ MICHAEL D. ABNEY Senior Vice President, August 14, 2000 - ---------------------- Chief Financial Officer, Michael D. Abney Treasurer, and Director /s/ ROBERT P. CROUCH Vice President and August 14, 2000 - ---------------------- Chief Accounting Officer Robert P. Crouch 21