MANAGEMENT'S DISCUSSION AND ANALYSIS
On June 8, 1998, Modis filed an initial public offering for the Company's
subsidiary Strategix Solutions, Inc. ('Strategix') for the proposed partial
initial public offering and subsequent spin off (subject to certain conditions)
of the Company's Commercial operations which included its Teleservices, and
Health Care divisions. On August 27, 1998, before the initial public offering
was consummated, the Company announced its intention to sell Strategix to
Randstad Holding nv for $850 million in cash. The effective date of the sale was
September 27, 1998. As a result of this transaction, the Company's Consolidated
Financial Statements and Management's Discussion and Analysis have been
reclassified to report Strategix as discontinued operations for all periods
presented.
The following detailed analysis of operations should be read in conjunction with
the 1997 Financial Statements included elsewhere in this Form 8-K.
FISCAL 1997 COMPARED TO FISCAL 1996
Results from continuing operations
Revenue. Revenue increased $584.1 million, or 100.7% to $1,164.1 million in
fiscal 1997 from $580.0 million in fiscal 1996. The increase was attributable by
division to: Information Technology, $380.2 million or an increase of 95.0% and
Professional Services, $203.9 million or an increase of 113.5%. The increases in
the Information Technology and Professional Services divisions were due to both
internal growth and, more significantly, to the revenues of acquired companies.
The revenue for the Company's Information Technology Division is obtained
through the modis solutions and modis consulting groups. modis solutions
provided approximately 17.6% and 18.4% of the divisions revenue for the years
ended 1997 and 1996 as compared to 82.4% and 81.6% which was provided by the
divisions modis consulting group during the same respective periods. The Company
plans to continue to expand the percentage of revenue contributed through its
modis solutions group as it expands that groups offerings thoughout the modis
consulting network. The Company's professional services division consists of the
accounting, legal, technical, outplacement and scientific groups which
contributed 24.3%, 20.3%, 39.1%, 9.6% and 6.7% of the professional services
divisions revenues by group during 1997 as compared to 8.8%, 15.1%, 74.0% 0.0%
and 2.1% during 1996.
Gross Profit. Gross profit increased $175.3 million or 114.4% to $328.5 million
in fiscal 1997 from $153.2 million in fiscal 1996. Gross margin increased to
28.2% in fiscal 1997 from 26.4% in fiscal 1996. The overall increase in the
Company's gross margin was due to the Company's continued migration into the
more specialized, higher margin disciplines within the Information Technology
and Professional Services divisions.
Operating Expenses. Operating expenses increased $89.8 million, or 73.6%, to
$211.7 million in fiscal 1997 from $122.0 million in fiscal 1996. Included in
operating expenses in fiscal 1996 is $14.4 million in merger related expenses
associated with the merger of the Company with Career Horizons, Inc. Operating
expenses before non-recurring merger related costs as a percentage of revenue
decreased to 18.2% in fiscal 1997, from 18.5% in fiscal 1996. The decrease was
due to the Company's ability to spread its expenses over a larger revenue base.
The Company's general and administrative ("G&A") expenses increased $92.1
million or 94.8% to $189.3 million in fiscal 1997 from $97.2 million in fiscal
1996. The increase in G&A expenses was primarily related to: the effects of
acquisitions made by the Company, internal growth of the operating companies
post-acquisition, investments made to improve infrastructure and to develop
technical practices and higher expenses at the corporate level to support the
growth of the Company. Included in general and administrative expenses during
1997 are the costs associated with projects underway to ensure accurate date
recognition and data processing with respect to the Year 2000 as it relates to
the Company's business, operations, customers and vendors. The Company expects
to substantially complete the Year 2000 conversion projects by the end of 1998.
These costs have been immaterial to date and are not expected to have a material
impact on the Company's results of operations, financial condition or liquidity
in the future.
Income from Operations. As a result of the foregoing, income from operations
increased $85.5 million or 273.8% to $116.8 million in fiscal 1997 from $31.2
million in fiscal 1996. Income from operations before non-recurring merger
related costs increased $71.1 million, or 155.6% to $116.8 million in fiscal
1997 from $45.7 million in fiscal 1996. Income from operations before
non-recurring merger related costs as a percentage of revenue increased to 10.0%
in fiscal 1997 from 7.9% in fiscal 1996.
Interest Expense. Interest expense increased $11.6 million , or 386.7%, to $14.6
million in fiscal 1997 from $3.0 million in fiscal 1996. The increase in
interest expense resulted from a combination of the utilization of the Company's
credit facility, and the timing of the common stock offering in April 1996. The
proceeds from the Company's offering in April 1996 and the borrowings from the
Company's credit facility were primarily used for the purchases of businesses.
Income Taxes. The Company's effective tax rate was 38.0% in fiscal 1997 compared
to 56.8 %, including the effect of the pro forma tax provision, in fiscal 1996.
The decrease in the effective tax rate was due to the higher level of taxable
income in 1996 as a result of the non-deductible, non-recurring merger related
costs in connection with the acquisitions of The McKinley Group, Inc., HJM
Consulting, Inc. and Career Horizons, Inc. during 1996.
Income from continuing operations. As a result of the foregoing, income from
continuing operations increased $54.8 million, or 637.2%, to $63.4 million in
1997 from $8.6 million in fiscal 1996. Income from continuing operations as a
percentage of revenue increased to 5.4% in fiscal 1997 from 1.5% in fiscal 1996,
due primarily to the reduction of non-recurring merger related costs during 1997
and the acquisition of cash-basis S-corporations accounted for under the pooling
of interests method of accounting, which required a one-time increase to the
current period income tax provision during 1996. Exclusive of these
non-recurring costs, income from continuing operations during 1996 would have
increased $10.8 million to $19.4 million, increasing pro forma net income as a
percentage of revenue to 3.3%.
Results from discontinued operations
Income from Discontinued Operations. Income from discontinued operations, after
tax, increased $16.1 million, or 71.2% to $38.7 million for fiscal 1997 versus
$22.6 million for fiscal 1996. Reported revenues from discontinued operations
were $1,260.7 million for fiscal 1997 versus $1,031.4 million for fiscal 1996.
Operating income for the discontinued operations was $69.8 million for fiscal
1997 versus $42.1 million during fiscal 1996. Results of discontinued operations
include allocations of consolidated interest expense totaling $4.4 million and
$0.4 million for fiscal 1997 and 1996, respectively. The allocations were based
on the historic funding needs of the discontinued opertaions, including: the
purchases of property, plant and equipment, acquisitions, current income tax
liabilities and fluctuating working capital needs.
FISCAL 1996 COMPARED TO FISCAL 1995
Results from continuing operations
Revenue. Revenue increased $489.5 million, or 541.0% to $580.0 million in fiscal
1996 from $90.5 million in fiscal 1995. The increase was attributable by
division to: Information Technology $339.0 million, or an increase of 551.9% and
Professional Services, $150.5 million or an increase of 518.0%. The increases in
the Information Technology and Professional Services Divisions was due to
internal growth, and more significantly, the revenue contribution of acquired
companies. The revenue for the Company's Information Technology Division is
obtained through the modis solutions and modis consulting groups. modis
solutions provided approximately 18.4% and 70.1% of the divisions revenue in the
years ended 1996 and 1995, respectively. The decrease in the percentage of modis
solutions revenue as a percentage of the divisions overall revenue is due to the
acquisition of two solutions companies in 1996 which were accounted for as
poolings of interests, which resulted in the restatement of the 1995 financial
statements to include their results. This restatement caused the 1995 results to
be predominantly that of solutions companies. When the restated results are
compared to 1996, when the Company completed numerous acquisitions of consulting
companies which were accounted for under the purchase method of accounting and
therefore do not require restatements, the revenue results of 1995 appear to be
scewed towards the solutions group. The Company plans to continue to expand the
percentage of revenue contributed through its modis solutions group as it
expands that groups offerings thoughout the modis consulting network. The
Company's professional division, which consists of the accounting, legal,
technical, outplacement and scientific groups contributed 8.8%, 15.1%, 74.0%,
0.0% & 2.1% of that division's revenues by group during 1996, respectively as
compared to 17.2%, 27.8%, 55.0% 0.0% and 0.0% during 1995.
Gross Profit. Gross profit increased $125.1 million, or 445.1%, to $153.2
million in fiscal 1996 from $28.1 million in fiscal 1995. Gross margin decreased
to 26.4% in fiscal 1996 from 31.1% in fiscal 1995.The overall in the Company's
gross margin was due to the effect of acquisitions, mostly of solutions
companies, whcih were accounted for under the pooling of interests method of
accounting. This method requires all prior periods presented to be restated as
if the acquisitions had occurred at the begining of respective period. As a
result, the majority of the gross margin in 1995 is that of the higher margin
solutions companies. In subsequent years, the gross margin becomes more
normalized as purchase transactions of consulting and professional services
companies become a larger percentage of the total Company's resutls.
Operating Expenses. Operating expenses increased $106.8 million, or 706.5%, to
$122.0 million in fiscal 1996 from $15.1 million in fiscal 1995. Included in
operating expenses in fiscal 1996 is $14.4 million in merger related expenses
associated with the merger of the Company with Career Horizons, Inc. Operating
expense before non-recurring merger related costs as a percentage of revenue
increased significantly to 18.5% for fiscal 1996 as compared to 16.7% for fiscal
1995. The majority of the increase was due to non-cash amortization charges
associated with the acquisition of several companies. Operating expenses before
depreciation, amortization and non-recurring merger related costs as a
percentage of revenue was 16.8% in 1996 as compared to 15.8% in 1995.
Income from Operations. As a result of the foregoing, income from operations
increased $18.2 million or 140.4% to $31.2 million in fiscal 1996 from $13.0
million in fiscal 1995. Income from operations before non-recurring merger
related costs increased $32.7 million, or 251.8%, to $45.7 million in fiscal
1996 from $13.0 million in fiscal 1995. Income from operations before
non-recurring merger related costs as a percentage of revenue increased to 7.9%
in fiscal 1996 from 14.4% in fiscal 1995. The overall decrease in operating
margin is due to the effect of acquisitions, mostly Information Technology
solutions companies, which were accounted for under the pooling of interests
method of accounting. This method requires all prior periods presented to be
restated as if the acquisition had occured at the beginning of each respective
period. As a result, the majority of the operating margins in 1995 is that of
the higher margin information technology solutions companies. In subsequent
years, the operating margin becomes more normalized as purchase transactions of
information technology consulting and professional services companies become a
larger percentage of the total Company's results.
Interest Expense. Interest expense increased $1.5 million, or 103.0%, to $3.0
million in fiscal 1996 from $1.5 million in fiscal 1995. The interest expense
resulted from the combination of the utilization of the Company's credit
facility, the timing of the Company's common stock offerings and the notes
payable to shareholders of acquired companies.
Income Taxes. The Company's effective income tax rate, including the effect of
the pro forma tax provision, was 56.8%in fiscal 1996 compared to 38.9% in fiscal
1995. The increase in the effective tax rate was due to the increase in taxable
income as a result of the non-deductible, non-recurring merger related costs
with The McKinley Group, Inc., HJM Consulting, Inc., and Career Horizons, Inc.
Income from continuing operations. As a result of the foregoing, income from
continuing operations decreased $ 1.6 million, or 15.7%, to $8.6 million in
fiscal 1996 from $10.2 million in fiscal 1995. Income from continuing operations
as a percentage of revenue decreased to 1.5% in fiscal 1996 from 11.3% in fiscal
1995, due to a combination of the the non-deductible, non-recurring merger
related costs in 1996, and acquisitions of cash basis S-corporations accounted
for under the pooling of interests method of accounting in 1996, which resulted
in untaxed income being included in 1995. After giving effect to both the merger
costs and the pro forma tax provisions to account for the S-corporations as
C-corporations, income from continuing operations as a percentage of revenue
would have been 4.3% in fiscal 1996 versus 7.8% in 1995, a result of the
Information Technology Solutions companies acquired and discussed in Income from
Operations, above.
Results from discontinued operations
Income from Discontinued Operations. Income from discontinued operations, after
tax, increased $4.2 million, or 22.8% to $22.6 million for fiscal 1996 versus
$18.4 million for fiscal 1995. Reported revenues from discontinued operations
were $1,031.4 million for fiscal 1996 versus $772.5 million for fiscal 1995.
Operating income for the discontinued operations were $42.1 million for fiscal
1996 versus $31.2 million during fiscal 1995. Results of discontinued operations
include allocations of consolidated interest expense totaling $0.4 million and
$1.2 million for fiscal 1996 and 1995, respectively. The allocations were based
on the historic funding needs of the discontinued opertaions, including: the
purchases of property, plant and equipment, acquisitions, current income tax
liabilities and fluctuating working capital needs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have principally 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
securities and internally generated funds.
Exclusive of the net assets of discontinued operations, the Company had working
capital of $148.9 million and $151.6 million as of December 31, 1997 and 1996,
respectively. The Company had cash and cash equivalents of $23.9 million and
$96.4 million as of December 31, 1997 and 1996, respectively. The Company's
operating cash flows and working capital requirements are significantly affected
by the timing of payroll and the receipt of payment from the customer.
Generally, the Company pays its Information Technology and Professional Services
consultants semi-monthly, and receives payments from customers within 30 to 80
days from the date of invoice. For the year ended December 31, 1997, the Company
generated $39.0 million of cash flow from operations; for the year ended
December 31, 1996, the Company generated $6.0 million of cash flow from
operations; and for the year ended December 31, 1995, the Company generated
$17.1 million of cash flow from operations. The Company's positive cash flow
from operations for the year ended December 31, 1997 reflects the increased
profitability of its operations and the increased collections in accounts
receivable.
The Company used $365.9 million, $275.3 million and $67.1 million for investing
activities in the years ended December 31, 1997, December 31, 1996 and December
31, 1995, respectively, of which $357.8 million, $306.0 million, and $23.1
million, respectively, was used for acquisitions and $8.1 million, $7.3 million,
and $2.3 million, respectively, was used for capital expenditures. The Company
made 20, 31 and 5 acquisitions in each of the years ended December 31, 1997,
1996 and 1995, respectively.
For the year ended December 31, 1997, the Company was provided $335.8 million of
cash flows by financing activities; for the year ended December 31, 1996, the
Company was provided $405.1 million of cash flow from financing activities; and
for the year ended December 31, 1995, the Company was provided $106.4 million of
cash flow by financing activities. During fiscal 1997, these amounts primarily
represent net borrowings from the Company's credit facility, which were used
primarily to fund acquisitions. During fiscal 1996 and 1995, the Company
generated the majority of its cash flows from financing activities through
Common Stock Offerings and Convertible Debenture Offerings.
Indebtedness of the Company
Prior to the sale of Strategix, the Company had a $500 million line of credit
which was syndicated to a group of 20 banks, with NationsBank, N.A. as principal
agent. Subsequent to the sale of Strategix, the existing facility was paid-off,
and terminated. As of October 25, 1998, the Company's indebtedness consisted
solely of the acquisition notes and convertible senior debentures noted below.
On October 22, 1998, the Company closed on its new $500 million revolving credit
facility with NationsBank, N.A. as principal agent. The facility expires on
October 21, 2003. Outstanding amounts under the credit facility will bear
interest at certain floating rates as specified by the credit facility. The
credit facility contains certain affirmative and negative covenants relating to
the Company's operations, including a prohibition on making any business
acquisitions which would result in pro forma noncompliance with the related
covenants if the acquired company would meet or exceed 10% of total assets or
income on a consolidated basis. In addition, approval is required by the
majority lenders at such time that the cash consideration of an individual
acquisition exceeds 20% of consolidated shareholder's equity.
On October 16, 1995, the Company's subsidiary, Career Horizons, Inc., issued
$86.25 million of 7% Convertible Senior Notes Due 2002 which were assumed by the
Company pursuant to a merger. Interest on the notes is paid semiannually on May
1 and November 1 of each year. The notes were convertible at the option of the
holder thereof, at any time after 90 days following the date of original
issuance thereof and prior to maturity, unless previously redeemed, into shares
of common stock of the Company at a conversion price of $11.35 per share,
subject to adjustment in certain events. The notes were redeemable, in whole or
in part, at the option of the Company, at any time on or after November 1, 1998,
at stated redemption prices, together with accrued interest. On October 1, the
Company called the notes to be converted as of November 1, 1998. As of November
1, 1998, the notes were either purchased by the Company or converted into shares
of the Company's common stock and are no longer outstanding.
The Company has certain notes payable to shareholders of acquired companies. The
notes payable bear interest at rates ranging from 5.0% to 8.0% and have
repayment terms from January 1998 to June 2000. As of November 1, 1998 the
Company owed approximately $15.1 million in such acquisition indebtedness.
The Company is also obligated under various acquisition agreements to make
earn-out payments to former stockholders of acquired companies over the next
five years. The Company estimates the amount of these payments will total $5.6
million for the remainder of 1998, and $38.9 million, $26.2 million, $10.1
million and $3.0 million annually for the next four years. The Company
anticipates that the cash generated by the operations of the acquired companies
will provide a substantial part of the capital required to fund these payments.
The Company anticipates that capital expenditures for furniture and equipment,
including improvements to its management information and operating systems
during the next twelve months will be approximately $15 million. The Company
anticipates recurring expenditures in future years to be approximately $10
million per year.
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.
On October 31, 1998, the Company's Board of Directors authorized the repurchase
of up to $200.0 million of the Company's common stock. The Company plans on
funding any such repurchase through the use of either cash on hand or its credit
facility.
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 services in the information technology and professional services
businesses is typically lower during the first quarter until customers'
operating budgets are finalized and the profitability of the Company's
consultants is lower in the fourth quarter due to fewer billing days because of
the higher number of holidays and vacation days.
INFLATION
The effects of inflation on the Company's operations were not significant during
the periods presented in the financial statements. Generally, throughout the
periods discussed above, the increases in revenue have resulted primarily from
higher volumes, rather than price increases.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income,
which requires that changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. This statement is effective for the Company's 1998 fiscal year. The
Company is in the process of determining its preferred disclosure format.
Additionally, during 1997, the FASB issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 131 requires, among
other things, that certain general and financial information be disclosed for
reportable operating segments of a company. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997, with interim application not required
in the initial year of adoption.
During 1998, the American Institute of Certified Public Accountants' Executive
Committee issued Statement of Position Number 98-1 (SOP 98-1), "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use". SOP 98-1
is effective for fiscal years beginning after December 15, 1998. Management
believes that the Company is substantially in compliance with this pronouncement
and that the implementation of this pronouncement will not have a material
effect on the Company's consolidated financial position, results of operations
or cash flows. The Company plans to adopt SOP 98-1 during fiscal 1999.
OTHER MATTERS
Foreign Acquisitions. During 1997, the Company, through a series of
acquisitions, expanded its operations into Canada and Europe (primarily the
United Kingdom). The results of operations of these acquired companies are
included with those of the Company from date of acquisition and are immaterial
to the Company's results of operations for fiscal 1997, and financial position
as of December 31, 1997.
Year 2000 Compliance
During 1997, the Company began projects to address potential problems within the
Company's operations which could result from the century change in the Year
2000. In 1998, the Company created a Year 2000 Program Office to oversee year
2000 projects and to address potential problems within the Company's operations
which could result from the century change in the year 2000. The Project Office
reports to the Company's Board of Directors and is staffed primarily with
representatives of the Company's Corporate Information Systems Department, and
has access to key associates in all areas of the Company's operations. The
Project Office also uses outside consultants on an as-needed basis.
A four-phase approach has been utilized to address the Year 2000 issues: an
inventory phase to identify all computer-based systems and applications
(including embedded systems) which might not be Year 2000 compliant; an
assessment phase to determine what revisions or replacements would be necessary
to achieve compliance and what priorities would best serve the Company; a
conversion phase to implement the actions necessary to achieve compliance and to
conduct the tests necessary to verify that the systems are operational; and an
implementation phase to transition the compliant systems into the everyday
operations of the Company. Management believes that the four phases are
approximately 100%, 95%, 70% and 55% complete, respectively and estimates that
all critical systems will be compliant with the century change by March 1999.
The Company has budgeted approximately $2.0 million to address the Year 2000
issue, which includes the estimated cost of all modifications and the salaries
of associates and the fees of consultants addressing the issues. Approximately
$1.1 million of this amount has been expended through November 1, 1998.
As a part of the Year 2000 review, the Company is examining its relationships
with certain key outside vendors and others with whom it has significant
business relationships to determine to the extent practical the degree of such
parties' Year 2000 compliance and to develop strategies for working with them
through the century change. Other than its banking relationships, which include
only large, federally insured institutions, the Company does not have a
relationship with any third-party vendor which is material to the operations of
the Company and, therefore, believes that the failure of any such party to be
Year 2000 compliant would not have a material adverse effect on the Company.
Should the Company or a third party with whom the Company deals have a systems
failure due to the century change, the Company does not expect any such effect
to be material and it is developing contingency plans for alternative methods of
transaction processing and estimates that such plans will be finalized by March
of 1999.
FORWARD LOOKING STATEMENTS
Statements made in this Report regarding the Company's expectation or beliefs
concerning future events, including capital spending, expected results and the
Company's liquidity situation during 1998, should be considered forward-looking
and subject to various risks and uncertainties. The Company's actual results may
differ materially from the results anticipated in these forward-looking
statements as a result of certain factors set forth under Risk Factors and
elsewhere in the Company's prospectus dated January 15, 1997, and as discussed
in the Company's reports on Forms 10-Q and 8-K made under the Securities
Exchange Act of 1934. For instance, the Company's results of operations may
differ materially from those anticipated in the forward-looking statements due
to, among other things: the Company's ability to successfully identify suitable
acquisition candidates, complete acquisitions or integrate the acquired business
into its operations; the general level of economic activity in the Company's
markets; increased price competition; changes in government regulations or
interpretations thereof; and the continued availability of qualified temporary
personnel, particularly in the information technology and other professional
segments of the Company's businesses. In addition, the market price of the
Company's stock may, from time to time, be significantly volatile as a result
of, among other things: the Company's operating results; the operating results
of other temporary staffing companies; and changes in the performance of the
stock market in general.