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, 2001
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, 2001.
Common Stock, $0.01 par value Outstanding: 97,742,653 (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 in Part I,
Item 2 under 'Liquidity and Capital Resources', 'Seasonality', and 'Factors
Which May Impact Future Results and Financial Condition'. In some cases, you can
identify forward-looking statements by terminology such as 'will,' 'may,'
'should,' 'could,' 'expects,' 'plans,' 'indicates,' 'projects,' 'anticipates,'
'believes,' 'estimates,' 'appears,' 'predicts,' 'potential,' 'continues,'
'would,' or 'become' or the negative of these terms or other comparable
terminology. 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 management. 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, 2001 (unaudited)
and December 31, 2000.............................................................................. 3
Unaudited Condensed Consolidated Statements of Income for the Three and Six Months
ended June 30, 2001 and 2000....................................................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months
ended June 30, 2001 and 2000....................................................................... 5
Unaudited Notes to Condensed Consolidated Financial Statements......................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 11
Item 3 Quantitative and Qualitative Disclosures About Market Risks............................................ 18
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...................................................................................... 21
Item 6 Exhibits and Reports on Form 8-K....................................................................... 21
Signatures............................................................................................. 22
Exhibits
2
Part I. Financial Information
Item 1. Financial Statements
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, December 31,
(dollar amounts in thousands except per share amounts) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 16,907 $ 5,013
Accounts receivable, net 307,376 340,827
Prepaid expenses 11,686 9,404
Deferred income taxes 7,477 6,687
Other 10,906 10,376
----------------------------------
Total current assets 354,352 372,307
Furniture, equipment and leasehold improvements, net 55,863 55,711
Goodwill, net 1,183,256 1,199,849
Other assets, net 26,301 25,693
----------------------------------
Total assets $ 1,619,772 $ 1,653,560
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 6,836 $ 24,719
Accounts payable and accrued expenses 51,500 50,648
Accrued payroll and related taxes 40,134 41,540
Income taxes payable 871 7,012
----------------------------------
Total current liabilities 99,341 123,919
Notes payable, long-term portion 174,000 194,000
Deferred income taxes 37,726 28,584
Other 4,740 3,839
----------------------------------
Total liabilities 315,807 350,342
----------------------------------
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
97,742,511 and 96,522,867 shares issued and outstanding, respectively 977 965
Additional contributed capital 593,130 587,857
Retained earnings 731,741 721,742
Accumulated other comprehensive loss (16,687) (6,945)
Deferred stock compensation (5,196) (401)
----------------------------------
Total stockholders' equity 1,303,965 1,303,218
----------------------------------
Total liabilities and stockholders' equity $ 1,619,772 $ 1,653,560
==================================
See accompanying notes to condensed consolidated financial statements.
3
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
(dollar amounts in thousands except per share amounts) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue $ 409,639 $ 464,450 $ 854,049 $ 921,861
Cost of revenue 294,336 328,334 615,031 658,234
------------- ------------- -------------- -------------
Gross profit 115,303 136,116 239,018 263,627
------------- ------------- -------------- -------------
Operating expenses:
General and administrative 90,915 96,814 185,421 185,623
Depreciation 5,385 4,085 10,753 7,721
Amortization 9,702 8,942 19,301 17,842
------------- ------------- -------------- -------------
Total operating expenses 106,002 109,841 215,475 211,186
------------- ------------- -------------- -------------
Income from operations 9,301 26,275 23,543 52,441
Other expense, net 2,207 5,787 5,384 10,436
------------- ------------- -------------- -------------
Income before provision for income taxes 7,094 20,488 18,159 42,005
Provision for income taxes 3,513 8,093 8,160 16,592
------------- ------------- -------------- -------------
Net income $ 3,581 $ 12,395 $ 9,999 $ 25,413
============= ============= ============== =============
Basic net income per common share $ 0.04 $ 0.13 $ 0.10 $ 0.26
============= ============= ============== =============
Average common shares outstanding, basic 98,018 96,699 97,596 96,627
============= ============= ============== =============
Diluted net income per common share $ 0.04 $ 0.13 $ 0.10 $ 0.26
============= ============= ============== =============
Average common shares outstanding, diluted 98,193 97,207 97,776 98,145
============= ============= ============== =============
See accompanying notes to condensed consolidated financial statements.
4
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six months ended June 30,
------------------------------
(dollar amounts in thousands except per share amounts) 2001 2000
- ------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 9,999 $ 25,413
Adjustments to net income to net cash provided by
by operating activities:
Depreciation 10,753 7,721
Amortization 19,301 17,842
Deferred income taxes 8,882 6,648
Deferred compensation 462 -
Changes in certain assets and liabilities:
Accounts receivable 28,416 (35,806)
Prepaid expenses and other assets (2,282) (2,173)
Accounts payable and accrued expenses (2,770) 20,077
Accrued payroll and related taxes (1,136) 1,657
Other, net (1,728) 116
--------------- ---------------
Net cash provided by operating activities 69,897 41,495
--------------- ---------------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements, net of disposals (10,905) (13,784)
Purchase of businesses, including additional earn-outs on
acquisitions, net of cash acquired (3,807) (110,643)
--------------- ---------------
Net cash used in investing activities (14,712) (124,427)
--------------- ---------------
Cash flows from financing activities:
Proceeds from stock options exercised 28 4,840
(Repayments) borrowings on indebtedness, net (37,883) 84,171
--------------- ---------------
Net cash (used in) provided by financing activities (37,855) 89,011
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents (5,436) 1,782
Net increase in cash and cash equivalents 11,894 7,861
Cash and cash equivalents, beginning of period 5,013 8,526
--------------- ---------------
Cash and cash equivalents, end of period $ 16,907 $ 16,387
=============== ===============
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 April 2, 2001.
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.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ('SFAS') No. 141 'Business Combinations' and No.
142, 'Goodwill and Other Intangible Assets.' SFAS No. 141 and SFAS No. 142
establish accounting and reporting standards for business combinations and for
goodwill and intangible assets resulting from business combinations,
respectively. SFAS No. 141 prohibits the use of the pooling-of-interests method
of accounting for business combinations and applies to all business combinations
initiated after June 30, 2001. SFAS No. 142 discontinues the periodic
amortization of goodwill and requires impairment to be tested annually. Further,
SFAS No. 142 replaces the measurement guidelines for impairment, whereby
goodwill not considered impaired under previous accounting literature may be
considered impaired under SFAS No. 142. SFAS No. 142 is effective for all fiscal
years beginning after December 15, 2001, and cannot be applied retroactively.
SFAS No. 142 is to be applied to all recorded goodwill and intangible assets as
of the date of adoption. The Company has not yet quantified the impact of
adopting SFAS No. 142 in the first quarter of 2002.
2. Comprehensive Income
The Company discloses other comprehensive income in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 130, 'Reporting
Comprehensive Income'. Comprehensive income includes unrealized gains and losses
on foreign currency translation adjustments and changes in the fair value of
certain derivative financial instruments which qualify for hedge accounting. A
summary of comprehensive income for the three and six months ended June 30, 2001
and 2000 is as follows:
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Net income $ 3,581 $ 12,395 $ 9,999 $ 25,413
Unrealized (loss) gain on foreign currency
translation adjustments (a) (679) 440 (8,877) (1,444)
Unrealized loss on derivative
instruments, net of deferred taxes (245) - (865) -
------------- ------------- -------------- -------------
Total other comprehensive (loss) income (924) 440 (9,742) (1,444)
Comprehensive income $ 2,657 $ 12,835 $ 257 $ 23,969
============= ============= ============== =============
(a) The currency translation adjustments are not adjusted for income taxes as
they relate to indefinite investments in non-U.S. subsidiaries.
6
3. Derivative Instruments and Hedging Activities
In the first quarter of 2001, the Company adopted SFAS No. 133, 'Accounting
for Derivative Instruments and Hedging Activities'. The adoption of SFAS No. 133
did not have an initial impact on the Company as the Company did not hold any
derivatives prior to fiscal 2001. Pursuant to SFAS No. 133, on a date the
derivative contract is entered into, the Company designates the derivative as to
its type and recognizes the fair value of the derivative on the balance sheet.
In fiscal 2001, the Company has engaged in derivatives classified as cash flow
hedges, and changes in the fair value of highly effective derivatives are
recorded in 'Accumulated other comprehensive loss' on the balance sheet. The
Company formally documents all relations between hedging instruments and the
hedged items, as well as its risk-management objectives and strategy for
undertaking hedging transactions. The Company formally assesses whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in cash flows of the hedged items.
The Company has currently and in the future may enter into interest rate
swap agreements in the normal course of business to manage and reduce the risk
inherent in interest rate fluctuations. Interest rate swap agreements are
considered hedges of specific borrowings and differences received under the swap
agreements are recognized as adjustments to interest expense. On February 12,
2001, the Company entered into an interest rate swap agreement to convert
certain floating rate debt outstanding under the Company's credit facilities
into fixed rate debt by fixing the base rate, as defined by the applicable
credit facility. The actual interest rate on the credit facilities is equal to
this base rate plus an additional spread, determined by the Company's financial
performance. This agreement had an initial balance of $110.4 million as of
February 12, 2001, which amortizes to $55.7 million on January 2, 2003 in
correlation with the Company's estimate of cash flow needs. On March 2, 2001,
the Company entered into an additional interest rate swap agreement to convert
an additional $25.0 million into fixed rate debt. The agreements, which were
approved by the Board of Directors, had a total notional amount of $136.2
million at June 30, 2001, with underlying rates ranging from 4.85% to 5.185%.
Hedging interest rate exposure through the use of swaps are specifically
contemplated to manage risk in keeping with management policy. The Company does
not utilize derivatives for speculative purposes. These swaps are
transaction-specific so that a specific debt instrument determines the amount,
maturity and specifics of each swap.
4. Stockholders' Equity
In January 2001, the Company adopted the 2001 Voluntary Stock Option
Exchange Plan (the 'Option Exchange Plan') in an effort to improve the retention
and incentive aspects of the Company's 1995 Plan, and to provide a mechanism to
return shares to the 1995 Plan for future issuance. All current employees as of
February 12, 2001, who then held options under the Plan or who then held special
grants received outside the 1995 Plan since the 1995 Plan was adopted were
eligible to participate in the Option Exchange Plan. The Option Exchange Plan
allowed eligible option holders to voluntarily cancel existing options in
exchange for new options to be issued no earlier than six months and one day
following termination of existing options. The exercise price of the new options
will be the market price on the date of re-issue. Vested options that are
cancelled will be re-granted on a one-for-one basis and will be completely
vested upon re-grant. Unvested options that are cancelled will be re-granted on
a one-for-two basis and will vest in equal annual installments over a three year
period from the date of re-grant.
The Option Exchange Plan was approved by the Compensation Committee and the
non-employee members of the Board of Directors. The Company expects the Option
Exchange Plan to be completed in the third quarter. The Company does not expect
to incur any compensation charges in connection with the Option Exchange Plan.
For further discussion on the Option Exchange Plan see Form 8-K filed by the
Company on January 25, 2001.
In January 2001, the Company's Board of Directors issued restricted stock
grants of 200,000 shares and 50,000 shares to the Company's President and
current Chief Executive Officer and the Company's Chief Financial Officer,
respectively. In March 2001, the Company's Board of Directors issued a
restricted stock grant of 960,000 shares to the Company's Chairman of the Board,
which is scheduled to vest on the fifth anniversary of issuance. The Company
recorded $5.26 million in total deferred compensation expense which will be
amortized on a straight line basis over the vesting period of the grants.
7
5. Net Income per Common Share
The calculation of basic net income per common share and diluted net income
per common share is presented below:
Three Months Ended Six Months Ended
-------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Basic income per common share computation:
Net income $ 3,581 $ 12,395 $ 9,999 $ 25,413
============= ============= ============= =============
Average common shares outstanding 98,018 96,699 97,596 96,627
============= ============= ============= =============
Basic net income per common share $ 0.04 $ 0.13 $ 0.10 $ 0.26
============= ============= ============= =============
Diluted income per common share computation:
Net income $ 3,581 $ 12,395 $ 9,999 $ 25,413
============= ============= ============= =============
Basic average common shares outstanding 98,018 96,699 97,596 96,627
Incremental shares from assumed exercise of
stock options 175 508 180 1,518
------------- ------------- ------------- ------------
Diluted average common shares outstanding 98,193 97,207 97,776 98,145
============= ============= ============= ============
Diluted net income per common share $ 0.04 $ 0.13 $ 0.10 $ 0.26
============== ============= ============= ===========
Options to purchase 3,735,928 and 6,061,122 shares of common stock that
were outstanding during the three and six months ended June 30, 2001,
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.
6. Commitments and Contingencies
Litigation
The Company is a party to a number of lawsuits and claims arising out of
the ordinary conduct of its business. In the opinion of management, based on the
advice of in-house and external legal counsel, the lawsuits and claims pending
are not likely to have a material adverse effect on the Company, its financial
position, its results of operations, or its cash flows.
7. Segment Reporting
The Company discloses segment information in accordance with SFAS No. 131,
'Disclosure About Segments of an Enterprise and Related Information,' which
requires companies to report selected segment information on a quarterly basis
and to report certain entity-wide disclosures about products and services, major
customers, and the material countries in which the entity holds assets and
reports revenues.
The Company has three reportable segments: professional services,
e-Business solutions and information technology (IT) services. The Company's
reportable segments are strategic divisions that offer different services and
are managed separately as each division requires different resources and
marketing strategies. The professional services division provides experienced
expertise in a wide variety of disciplines including accounting and finance,
law, engineering and technical, science, career management, executive search,
and human resource consulting. The e-Business solutions division, operating
under the brand Idea Integration, provides e-Business strategy consulting,
design and branding, application development, and integration. The IT services
division, operating under the brand Modis, offers value-added solutions such as
IT project support and staffing, recruitment of full-time positions,
project-based solutions, supplier management solutions, and on-site recruiting
support.
8
The Company evaluates segment performance based on revenues, gross profit
and income before provision for income taxes. The Company does not allocate
income taxes or unusual items to the segments. The following table summarizes
segment and geographic information:
Three Months Ended Six Months Ended
------------------------------- --------------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Revenue
Professional services $ 158,315 $ 162,732 $ 328,499 $ 323,695
e-Business solutions 48,559 60,554 103,276 113,335
IT services 202,765 241,164 422,274 484,831
------------ ------------ ------------ ------------
Total revenue $ 409,639 $ 464,450 $ 854,049 $ 921,861
============ ============ ============ ============
Gross profit
Professional services $ 51,912 $ 54,291 $ 108,863 $ 106,951
e-Business solutions 18,735 27,916 36,838 50,720
IT services 44,656 53,909 93,317 105,956
------------ ------------ ------------ ------------
Total gross profit $ 115,303 $ 136,116 $ 239,018 $ 263,627
============ ============ ============ ============
Income before provision for income taxes
Professional services $ 11,098 $ 15,638 $ 26,176 $ 30,707
e-Business solutions (7,119) 3,312 (14,528) 5,611
IT services 5,322 7,325 11,895 16,123
------------ ------------ ------------ ------------
9,301 26,275 23,543 52,441
Corporate interest and other income (2,207) (5,787) (5,384) (10,436)
------------ ------------ ------------ ------------
Total income before provision for income taxes $ 7,094 $ 20,488 $ 18,159 $ 42,005
============ ============ ============ ============
Geographic Areas
Revenues
United States $ 303,162 $ 357,620 $ 634,786 $ 698,613
U.K. 103,336 104,003 213,106 217,578
Other 3,141 2,827 6,157 5,670
------------ ------------ ------------ ------------
Total $ 409,639 $ 464,450 $ 854,049 $ 921,861
============ ============ ============ ============
June 30, December 31,
2001 2000
- ----------------------------------------------------------------------------------------------
Assets
Professional services $ 464,157 $ 454,127
e-Business solutions 327,008 331,732
IT services 813,928 851,992
------------ ------------
1,605,093 1,637,851
Corporate 14,679 15,709
------------ ------------
Total assets $ 1,619,772 $ 1,653,560
============ ============
Geographic Areas
Identifiable Assets
United States $ 1,186,512 $ 1,223,932
U.K. 413,020 408,339
Other 20,240 21,289
------------ ------------
Total $ 1,619,772 $ 1,653,560
============ ============
9
8. Income Taxes
The Company is subject to periodic review by federal, state and local
taxing authorities in the ordinary course of business. During the three months
ended June 30, 2001, the Company was notified by the Internal Revenue Service
that certain prior year income tax returns will be examined. As part of this
examination, the tax benefit associated with an investment in a subsidiary that
the Company recognized in 2000 will also be reviewed. The impact or adjustment,
if any, as a result of this examination cannot be reasonably estimated at this
time.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Modis Professional Services, Inc. ('MPS' or the 'Company') is a global provider
of human capital solutions including professional staffing, e-Business and
systems integration, information technology (IT) resource management, career
management consulting, and knowledge worker e-procurement. MPS' solutions
enable customers and clients to effectively locate, retain, and deploy strategic
knowledge worker resources in the areas of information technology, accounting
and finance, law, engineering and technical, and science. MPS consists of three
divisions: the professional services division; the e-Business solutions
division, operating under the brand Idea Integration; and the information
technology services division, operating under the brand Modis.
The following detailed analysis of operations should be read in conjunction with
the 2000 Consolidated Financial Statements and related notes included in the
Company's Form 10-K filed April 2, 2001.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Revenue. Revenue decreased $54.9 million, or 11.8%, to $409.6 million in the
three months ended June 30, 2001, from $464.5 million in the year earlier
period. The decrease was attributable primarily to a decrease in revenue for
Modis which accounted for 49.5% and 51.9% of the Company's total revenue for the
three months ended June 30, 2001 and 2000, respectively. Revenue in Modis
decreased $38.4 million, or 15.9%, to $202.8 million in the three months ended
June 30, 2001, from $241.2 million the year earlier period. This decrease in
Modis' revenue was primarily attributable to the diminished demand for
information technology services. The Company's customers continue to experience
a constrained ability to spend on information technology initiatives due to
uncertainties relating to the state of the economy. The Company has experienced
a decrease in billable headcount for Modis subsequent to the three months ended
June 30, 2001. This decrease will result in a lower level of revenue from Modis
if this trend continues.
Revenue in Idea Integration decreased $12.0 million, or 19.8%, to $48.6 million
in the three months ended June 30, 2001, from $60.6 million in the year earlier
period. This decrease in Idea Integration's revenue was primarily attributable
to weak demand for e-Business consulting services which is being intensified by
the uncertainties relating to the state of the economy. The Company has
experienced a decrease in billable headcount for Idea Integration subsequent to
the three months ended June 30, 2001. This decrease will result in a lower level
of revenue from Idea Integration if this trend continues.
Revenue in the professional services division decreased $4.4 million, or 2.7%,
to $158.3 million in the three months ended June 30, 2001, from $162.7 million
in the year earlier period. This decrease in the professional services
division's revenue was primarily attributable to the diminished demand for
knowledge worker resources in the services provided by the division. The
professional services division operates primarily through five operating units
consisting of the accounting and finance, legal, engineering/technical, career
management and consulting and scientific units which contributed 40.4%, 12.2%,
34.6%, 9.1% and 3.7%, respectively, of the division's revenue by group during
the three months ended June 30, 2001, as compared to 40.5%, 12.6%, 34.5%, 8.3%
and 4.1%, respectively, during the year earlier period. The Company has
experienced a decrease in billable headcount for the professional services
division subsequent to the three months ended June 30, 2001. This decrease will
result in a lower level of revenue from the division if this trend continues.
Gross Profit. Gross profit decreased $20.8 million or 15.3% to $115.3 million in
the three months ended June 30, 2001, from $136.1 million in the year earlier
period. Gross margin decreased to 28.1% in the three months ended June 30, 2001,
from 29.3% in the year earlier period.
The gross margin in Idea Integration decreased to 38.6% in the three months
ended June 30, 2001, from 46.1% in the year earlier period. Consultant
utilization within Idea Integration decreased as a result of (1) Idea
Integration's business model utilizing salaried consultants and (2) the weak
demand for e-Business consulting services. The Company addressed consultant
utilization within Idea Integration through the downsizing of its consultant
base. Additionally, the gross profit generated from Idea Integration, which
historically maintains the highest gross margin amongst the three divisions,
decreased to 16.2% of the Company's total gross profit for the three months
ended June 30, 2001, from 20.5% in the year earlier period.
11
The gross margin in Modis decreased slightly to 22.0% in the three months ended
June 30, 2001, from 22.4% in the year earlier period. The decrease in gross
margin in Modis is attributable to a lower level of direct hire and permanent
placement fees, which generate a higher margin, in the three months ended June
30, 2001 as compared to the year earlier period. As a percentage of revenue,
Modis' direct hire and permanent placement fees decreased to 0.5% of revenue in
the three months ended June 30, 2001 from 1.2% in the year earlier period.
The gross margin in the professional services division decreased to 32.8% in the
three months ended June 30, 2001, from 33.4% in the year earlier period. The
decrease in gross margin in the professional services division is attributable
to a lower level of direct hire and permanent placement fees in the three months
ended June 30, 2001 as compared to the year earlier period. As a percentage of
revenue, the division's direct hire and permanent placement fees decreased to
6.6% of revenue in the three months ended June 30, 2001 from 8.8% in the year
earlier period.
Operating expenses. Operating expenses decreased $3.8 million or 3.5% to $106.0
million in the three months ended June 30, 2001, from $109.8 million in the year
earlier period. The Company's general and administrative ("G&A") expenses
decreased $5.9 million or 6.1% to $90.9 million in the three months ended June
30, 2001, from $96.8 million in the year earlier period. The overall decrease in
G&A expenses is attributable to Modis. Modis' G&A expenses decreased $7.9
million, or 20.0%, to $31.6 million in the three months ended June 30, 2001,
from $39.5 million in the year earlier period. As a percentage of revenue,
Modis' G&A expenses decreased to 15.6% in the three months ended June 30, 2001,
from 16.4% in the year earlier period. The decrease in Modis' G&A expenses is
associated with the decrease in revenue for the three months ended June 30,
2001, and cost reduction initiatives implemented within Modis in both the first
quarter of 2001 and the fourth quarter of 2000.
Idea Integration's G&A expenses increased $0.5 million, or 2.2%, to $22.8
million in the three months ended June 30, 2001, from $22.3 million in the year
earlier period. As a percentage of revenue, Idea Integration's G&A expenses
increased to 47.0% in the three months ended June 30, 2001, from 36.8% in the
year earlier period. The increase in Idea Integration's G&A expenses was related
primarily to an incremental $7.1 million provision for uncollectible accounts
and to a lesser extent severance costs associated with reductions in its
workforce in the second quarter of 2001.
The professional services division's G&A expenses increased $1.4 million, or
4.0%, to $36.4 million in the three months ended June 30, 2001, from $35.0
million in the year earlier period. As a percentage of revenue, the division's
G&A expenses increased to 23.0% in the three months ended June 30, 2001, from
21.5% in the year earlier period. The increase in the professional services
division's G&A expenses was related to an increase in the level of spending to
establish the corporate infrastructure in the division. During the second
quarter of 2001, the Company eliminated many of these duplicative corporate
infrastructure responsibilities in the division, integrating these efforts into
the MPS corporate structure. Integrating these efforts are expected to lower the
level of spending in the professional services division for the remainder of
fiscal 2001.
Income from operations. Income from operations decreased $17.0 million, or
64.6%, to $9.3 million in the three months ended June 30, 2001, from $26.3
million in the year earlier period. The decrease in operating income is due to
the lower contribution of operating income primarily from Idea Integration and
to a lesser extent the professional services division and Modis. Income from
operations for Idea Integration decreased $10.4 million, to a $7.1 million loss
in the three months ended June 30, 2001, from income of $3.3 million in the year
earlier period. Income from operations for the professional services division
decreased $4.5 million, or 28.8%, to $11.1 million in the three months ended
June 30, 2001, from $15.6 million in the year earlier period. Income from
operations for Modis decreased $2.0 million, or 27.4 %, to $5.3 million in the
three months ended June 30, 2001, from $7.3 million in the year earlier period.
For the Company as a whole, income from operations as a percentage of revenue
decreased to 2.3% in the three months ended June 30, 2001, from 5.7% in the year
earlier period.
Other expense, net. Other expense, net consists primarily of interest expense
related to borrowings under the Company's credit facilities and notes issued in
connection with acquisitions, net of interest income related to investment
income from (1) certain investments owned by the Company and (2) cash on hand.
Interest expense decreased $3.7 million, or 58.7%, to $2.6 million in the three
months ended June 30, 2001, from $6.3 million in the year earlier period. The
decrease in interest expense is related to the lower level of borrowings under
the Company's credit facilities during the second quarter of 2001. Interest
expense was offset by $0.4 million of interest and other income in the three
12
months ended June 30, 2001, as compared to $0.5 million in the year earlier
period.
Income Taxes. The Company's effective tax rate increased to 49.5% in the three
months ended June 30, 2001, as compared to 39.5% in the year earlier period, due
to the increased effect of non-deductible expense items on a lower level of
income in the three months ended June 30, 2001.
Net Income. As a result of the foregoing, net income decreased $8.8 million, or
71.0%, to $3.6 million in the three months ended June 30, 2001, from $12.4
million in the year earlier period. Net income as a percentage of revenue
decreased to 0.9% in the three months ended June 30, 2001, from 2.7% in the year
earlier period. As a result of the aforementioned revenue trends in each of the
Company's divisions, the Company anticipates its net income will be negatively
impacted during the remainder of fiscal 2001 as compared to the level of net
income produced during the three months ended June 30, 2001.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Revenue. Revenue decreased $67.9 million, or 7.4%, to $854.0 million in the six
months ended June 30, 2001, from $921.9 million in the year earlier period. The
decrease was attributable primarily to a decrease in revenue for Modis which
accounted for 49.4% and 52.6% of the Company's total revenue for the six months
ended June 30, 2001 and 2000, respectively. Revenue in Modis decreased $62.5
million, or 12.9%, to $422.3 million in the six months ended June 30, 2001, from
$484.8 million the year earlier period. This decrease in Modis' revenue was
primarily attributable to the diminished demand for information technology
services. The Company's customers continue to experience a constrained ability
to spend on information technology initiatives due to uncertainties relating to
the state of the economy. The Company has experienced a decrease in billable
headcount for Modis subsequent to the six months ended June 30, 2001. This
decrease will result in a lower level of revenue from Modis if this trend
continues.
Revenue in Idea Integration decreased $10.0 million, or 8.8%, to $103.3 million
in the six months ended June 30, 2001, from $113.3 million in the year earlier
period. This decrease in Idea Integration's revenue was primarily attributable
to weak demand for e-Business consulting services which is being intensified by
the uncertainties relating to the state of the economy. The Company has
experienced a decrease in billable headcount for Idea Integration subsequent to
the six months ended June 30, 2001. This decrease will result in a lower level
of revenue from Idea Integration if this trend continues.
Revenue in the professional services division increased $4.8 million, or 1.5%,
to $328.5 million in the six months ended June 30, 2001, from $323.7 million in
the year earlier period. The increase in revenue is due to internal growth. The
professional services division operates primarily through five operating units
consisting of the accounting and finance, legal, engineering/technical, career
management and consulting and scientific units which contributed 40.5%, 12.3%,
34.7%, 8.8% and 3.7%, respectively, of the division's revenue by group during
the six months ended June 30, 2001, as compared to 40.4%, 12.9%, 33.9%, 8.6% and
4.2%, respectively, during the year earlier period. Contrary to the
year-over-year results, the professional services division is experiencing a
diminished demand for knowledge worker resources in the services provided by its
operating units. Further, the Company has experienced a decrease in billable
headcount for the professional services division subsequent to the six months
ended June 30, 2001. This decrease will result in a lower level of revenue from
the division if this trend continues.
Gross Profit. Gross profit decreased $24.6 million or 9.3% to $239.0 million in
the six months ended June 30, 2001, from $263.6 million in the year earlier
period. Gross margin decreased to 28.0% in the six months ended June 30, 2001,
from 28.6% in the year earlier period. This decrease in gross margin was
attributable to Idea Integration. The gross margin in Idea Integration decreased
to 35.7% in the six months ended June 30, 2001, from 44.8% in the year earlier
period. Consultant utilization within Idea Integration decreased as a result of
(1) Idea Integration's business model utilizing salaried consultants and (2) the
weak demand for e-Business consulting services. The Company addressed consultant
utilization within Idea Integration through the downsizing of its consultant
base. Additionally, the gross profit generated from Idea Integration, which
historically maintains the highest gross margin amongst the three divisions,
decreased to 15.4% of the Company's total gross profit for the six months ended
June 30, 2001, from 19.2% in the year earlier period.
The gross margin in Modis increased to 22.1% in the six months ended June 30,
2001, from 21.9% in the year earlier period. The gross margin in the
professional services division increased slightly to 33.1% in the six months
ended June 30, 2001, from 33.0% in the year earlier period.
13
Operating expenses. Operating expenses increased $4.3 million or 2.0% to $215.5
million in the six months ended June 30, 2001, from $211.2 million in the year
earlier period. The Company's G&A expenses decreased $0.2 million or 0.1% to
$185.4 million in the six months ended June 30, 2001, from $185.6 million in the
year earlier period. The overall decrease in G&A expenses is attributable to
Modis. Modis' G&A expenses decreased $10.1 million, or 13.3%, to $66.0 million
in the six months ended June 30, 2001, from $76.1 million in the year earlier
period. As a percentage of revenue, Modis' G&A expenses decreased slightly to
15.6% in the six months ended June 30, 2001, from 15.7% in the year earlier
period. The decrease in Modis' G&A expenses is associated with the decrease in
revenue for the six months ended June 30, 2001, and cost reduction initiatives
implemented within Modis in both the first quarter of 2001 and the fourth
quarter of 2000.
Idea Integration's G&A expenses increased $4.7 million, or 11.5%, to $45.4
million in the six months ended June 30, 2001, from $40.7 million in the year
earlier period. As a percentage of revenue, Idea Integration's G&A expenses
increased to 44.0% in the six months ended June 30, 2001, from 35.9% in the year
earlier period. The increase in Idea Integration's G&A expenses was related
primarily to an incremental $9.9 million provision for uncollectible accounts
and to a lesser extent severance costs associated with reductions in its
workforce in the first six months of 2001.
The professional services division's G&A expenses increased $5.1 million, or
7.4%, to $73.9 million in the six months ended June 30, 2001, from $68.8 million
in the year earlier period. As a percentage of revenue, the division's G&A
expenses increased to 22.5% in the six months ended June 30, 2001, from 21.3% in
the year earlier period. The increase in the professional services division's
G&A expenses was related to an increase in the level of spending to establish
the corporate infrastructure in the division. During the second quarter of 2001,
the Company eliminated many of these duplicative corporate infrastructure
responsibilities in the division, integrating these efforts into the MPS
corporate structure. Integrating these efforts are expected to lower the level
of spending in the professional services division for the remainder of fiscal
2001.
Income from operations. Income from operations decreased $28.9 million, or
55.2%, to $23.5 million in the six months ended June 30, 2001, from $52.4
million in the year earlier period. The decrease in operating income is due to
the lower contribution of operating income primarily from Idea Integration and
to a lesser extent the professional services division and Modis. Income from
operations for Idea Integration decreased $20.1 million, to a $14.5 million loss
in the six months ended June 30, 2001, from income of $5.6 million in the year
earlier period. Income from operations for the professional services division
decreased $4.5 million, or 14.7%, to $26.2 million in the six months ended June
30, 2001, from $30.7 million in the year earlier period. Income from operations
for Modis decreased $4.2 million, or 26.1%, to $11.9 million in the six months
ended June 30, 2001, from $16.1 million in the year earlier period. For the
Company as a whole, income from operations as a percentage of revenue decreased
to 2.8% in the six months ended June 30, 2001, from 5.7% in the year earlier
period.
Other expense, net. Other expense, net consists primarily of interest expense
related to borrowings under the Company's credit facilities and notes issued in
connection with acquisitions, net of interest income related to investment
income from (1) certain investments owned by the Company and (2) cash on hand.
Interest expense decreased $4.9 million, or 43.8%, to $6.3 million in the six
months ended June 30, 2001, from $11.2 million in the year earlier period. The
decrease in interest expense is related to the lower level of borrowings under
the Company's credit facilities during the first six months of 2001. Interest
expense was offset by $0.9 million of interest and other income in the six
months ended June 30, 2001, as compared to $0.8 million in the year earlier
period.
Income Taxes. The Company's effective tax rate increased to 44.9% in the six
months ended June 30, 2001, as compared to 39.5% in the year earlier period, due
to the increased effect of non-deductible expense items on a lower level of
income in the six months ended June 30, 2001.
Net Income. As a result of the foregoing, net income decreased $15.4 million, or
60.6%, to $10.0 million in the six months ended June 30, 2001, from $25.4
million in the year earlier period. Net income as a percentage of revenue
decreased to 1.2% in the six months ended June 30, 2001, from 2.8% in the year
earlier period. As a result of the aforementioned revenue trends in each of the
Company's divisions, the Company anticipates its net income will be negatively
impacted during the remainder of fiscal 2001 as compared to the level of net
income produced during the six months ended June 30, 2001.
14
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 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 90 days from the date of invoice.
The Company had working capital of $255.0 million and $248.4 million as of June
30, 2001 and December 31, 2000, respectively. The Company had cash and cash
equivalents of $16.9 million and $5.0 million as of June 30, 2001 and December
31, 2000, respectively.
For the six months ended June 30, 2001 and 2000, the Company generated $69.9
million and $41.5 million of cash flow from operations, respectively. The
increase in cash flow from operations in the six months ended June 30, 2001
related to improved receivables collection, decreasing the cash needed to fund
accounts receivable.
For the six months ended June 30, 2001, the Company used $14.7 million of cash
for investing activities, of which $10.9 million were used for capital
expenditures and $3.8 million for earn-out payments. For the six months ended
June 30, 2000, the Company used $124.4 million of cash for investing activities,
of which $110.6 million were used primarily for acquisitions in Idea Integration
and to a lesser extent earn-out payments. The Company also used $13.8 million
for capital expenditures.
For the six months ended June 30, 2001, the Company used $37.9 million of cash
for financing activities. This amount primarily represented net repayments on
the Company's credit facility and on notes issued in connection with the
acquisition of certain companies. These repayments were mainly funded from cash
flow from operations.
For the six months ended June 30, 2000, the Company generated $89.0 million from
financing activities. This amount primarily represented net borrowings from the
Company's credit facility, which was used primarily to pay for acquisitions in
Idea Integration and to a lesser extent earn-out payments.
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 June 30, 2001, no
shares have been repurchased under this authorization.
The Company anticipates that capital expenditures for furniture and equipment,
including improvements to its management information and operating systems
during the remainder of fiscal 2001 will be approximately $10.0 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 Bank of America, as the principal agent. This facility
expires on October 27, 2003. In addition, the Company also has a $50 million 364
day credit facility that expires on October 24, 2001. 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, 2001, the Company had a balance of approximately $156.0 million
outstanding under the $350 million credit facility. The Company also had
outstanding letters of credit in the amount of $2.0 million, reducing the amount
of funds available under the credit facilities to approximately $242.0 million
as of July 31, 2001.
On February 12, 2001, the Company entered into an interest rate swap agreement
to convert certain floating rate debt outstanding under the Company's credit
facilities into fixed rate debt by fixing the base rate, as defined by the
applicable credit facility. The actual interest rate on the credit facilities is
equal to this base rate plus an additional spread, determined by the Company's
financial performance. This agreement had an initial balance of $110.4 million
as of February 12, 2001, which amortizes to $55.7 million on January 2, 2003 in
correlation with the Company's estimate of cash flow needs. On March 2, 2001,
the Company entered into an additional interest rate swap agreement to convert
an additional $25.0 million into fixed rate debt. The agreements, which were
approved by the Board of Directors, had a total notional amount of $136.2
million at June 30, 2001, with underlying rates ranging from 4.85% to 5.185%.
The Company has certain notes payable to shareholders of acquired companies
which bear interest at rates ranging from 5.0% to 7.0%, the majority of which
mature by November 2001. As of July 31, 2001, the Company owed approximately
$6.8 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ('SFAS') No. 141 'Business Combinations' and No.
142, 'Goodwill and Other Intangible Assets.' SFAS No. 141 and SFAS No. 142
establish accounting and reporting standards for business combinations and for
goodwill and intangible assets resulting from business combinations,
respectively. SFAS No. 141 prohibits the use of the pooling-of-interests method
of accounting for business combinations and applies to all business combinations
initiated after June 30, 2001. SFAS No. 142 discontinues the periodic
amortization of goodwill and requires impairment to be tested annually. Further,
SFAS No. 142 replaces the measurement guidelines for impairment, whereby
goodwill not considered impaired under previous accounting literature may be
considered impaired under SFAS No. 142. SFAS No. 142 is effective for all fiscal
years beginning after December 15, 2001, and cannot be applied retroactively.
SFAS No. 142 is to be applied to all recorded goodwill and intangible assets as
of the date of adoption. The Company has not yet quantified the impact of
adopting SFAS No. 142 in the first quarter of 2002.
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 seeks to preserve 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 $180.8 million
as of June 30, 2001 and the Company had $224.0 million available under its
credit facilities. The short-term debt obligations include notes payable to
former shareholders of acquired corporations, which are at a fixed rate of
interest, the majority of which mature by November 2001. The interest rate risk
on these notes is immaterial due to the dollar amount of these obligations.
On February 12, 2001, the Company entered into an interest rate swap agreement
to convert certain floating rate debt outstanding under the Company's credit
facilities into fixed rate debt by fixing the base rate, as defined by the
applicable credit facility. The actual interest rate on the credit facilities is
equal to this base rate plus an additional spread, determined by the Company's
financial performance. This agreement had an initial balance of $110.4 million
as of February 12, 2001, which amortizes to $55.7 million on January 2, 2003 in
correlation with the Company's estimate of cash flow needs. On March 2, 2001,
the Company entered into an additional interest rate swap agreement to convert
an additional $25.0 million into fixed rate debt. The agreements, which were
approved by the Board of Directors, had a total notional amount of $136.2
million at June 30, 2001, with underlying rates ranging from 4.85% to 5.185%.
Hedging interest rate exposure through the use of swaps are specifically
contemplated to manage risk in keeping with management policy. The Company does
not utilize derivatives for speculative purposes. These swaps are
transaction-specific so that a specific debt instrument determines the amount,
maturity and specifics of each swap.
The Company prepared sensitivity analyses of its borrowings under the credit
facilities and its financial instruments to determine the impact of hypothetical
changes in interest rates on the Company's results of operations, cash flows and
the fair value of its financial instruments. The interest-rate analysis assumed
a 50 basis point adverse change in interest rates on all borrowings under the
credit facilities and financial instruments, representing approximately 10% of
the Company's weighted average borrowing rate. However, the interest-rate
analysis did not consider the effects of the reduced level of economic activity
that could exist in such an environment. A 50 basis point adverse move in
interest rates on the Company's outstanding borrowings under the credit
facilities would have an immaterial impact on the Company's results of
operations and cash flows. However, a 50 basis point adverse move in interest
rates would decrease the fair value of the Company's interest rate swap
agreements by $0.6 million.
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 26% of its consolidated revenues
for the six months ended June 30, 2001 from international operations,
approximately 97% of which were from the United Kingdom. The exchange rate has
decreased approximately 5% in the six months ended June 30, 2001, from 1.49 at
December 31, 2000 to 1.42 at June 30, 2001. The Company prepared sensitivity
analyses to determine the adverse impact of hypothetical changes in the British
pound sterling, relative to the U.S. Dollar, on the Company's results of
operations and cash flows. However, the analysis did not include the potential
impact on sales levels resulting from a change in the British pound sterling. An
additional 10% adverse movement in the exchange rate would have had an
immaterial impact on the Company's cash flows and financial position for the six
months ended June 30, 2001. While fluctuations in the British pound sterling did
not historically have a material impact on the Company's results of operations,
the lower level of earnings resulting from a decrease in demand for the services
provided by the Company's domestic operations have increased the impact of
exchange rate fluctuations. However, the Company did not hold or enter into any
foreign currency derivative instruments as of June 30, 2001.
18
FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION
Effect of Fluctuations in the General Economy
Demand for the Company's 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. Also during such periods, companies may elect to defer
installation of new IT systems and platforms (such as Enterprise Resource
Planning systems) or upgrades to existing systems and platforms. 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 affected by consolidations through mergers and
otherwise of major 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 IT and
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.
Financial Covenants
The Company's credit facilities require that specified financial ratios be
maintained. The Company's ability to meet these financial ratios can be affected
by events beyond its control. Failure to meet those financial ratios could allow
its lenders to terminate the credit facilities and to declare all amounts
outstanding under those facilities to be immediately due and payable. Further,
the Company may not be able to obtain replacement credit facilities on terms and
conditions or at interest rates as favorable as those in current agreements.
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 30, 2001.
Proxies were solicited from shareholders of record on the close of business on
April 4, 2001. On April 4, 2001, there were 96,731,561 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 81,908,579 6,735,561
Timothy D. Payne 82,398,134 6,246,006
George A. Bajalia 83,073,891 5,570,249
Peter J. Tanous 82,637,997 6,006,143
T. Wayne Davis 82,615,039 6,029,101
John R. Kennedy 83,126,240 5,517,900
Michael D. Abney 82,093,410 6,550,730
William M. Isaac 83,119,297 5,524,843
George J. Mitchell 80,839,612 7,804,528
Michael L. Huyghue 83,067,847 5,576,293
Effective June 15, 2001, Mr. George A. Bajalia resigned from both his role as an
officer of the Company and as a director of the Company.
APPROVAL OF 2001 EMPLOYEE STOCK PURCHASE PLAN
The 2001 Employee Stock Purchase Plan was approved with the following mix of
votes:
Name
- --------------------------------------------------------
Voting for 87,826,062
Voting against 764,425
Withhold authority 53,653
20
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.1 Modis Professional Services, Inc. 2001 Employee Stock
Purchase Plan.
10.2 Modis Professional Services, Inc. Amended and Restated
Stock Option Plan.
10.3 Form of Award Notification under the Modis Professional
Professional Services, Inc. Senior Executive Annual
Incentive Plan.
10.4 Executive Employment Agreement with John L.
Marshall III.
B. Reports on Form 8-K
No disclosure required.
21
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/ Timothy D. Payne President, Chief August 8, 2001
Timothy D. Payne Executive Officer and
Director
/s/ Robert P. Crouch Senior Vice President, Chief August 8, 2001
Robert P. Crouch Financial Officer, Treasurer,
and Chief Accounting Officer
22