Report of Independent Accountants
To the Stockholders of Modis Professional Services Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Modis
Professional Services Inc. and Subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers, LLP
Jacksonville FL
March 20, 1998, except for notes 15, 16 and 17 as to which the
date is November 11, 1998.
Modis Professional Services Incorporated and Subsidiaries
Consolidated Balance Sheets.
DECEMBER 31, December 31,
(dollar amounts in thousands except per share amounts) 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 23,938 $ 96,416
Accounts receivable, net of allowance of $6,945 and $4,161 230,934 119,210
Prepaid expenses and other, net 9,352 3,305
Deferred income taxes 731 -
Net assets of discontinued operations 366,045 246,089
----------------------------------
Total current assets 631,000 465,020
Furniture, equipment and leasehold improvements, net 27,367 13,814
Goodwill, net 693,327 348,774
Other assets 17,328 12,861
----------------------------------
Total assets $ 1,369,022 $ 840,469
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable and convertible debt $ 16,366 $ 11,969
Accounts payable and accrued expenses 62,021 29,174
Accrued payroll and related taxes 37,647 23,702
Deferred income taxes - 2,476
----------------------------------
Total current liabilities 116,034 67,321
Convertible debt 86,250 86,250
Notes payable, long-term portion 347,785 17,119
Deferred income taxes 6,111 -
----------------------------------
Total liabilities 556,180 170,690
----------------------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.01 par value; 150,000,000 shares authorized
103,692,098 and 99,226,813 shares issued and outstanding on
December 31, 1997 and December 31, 1996, respectively 1,037 992
Additional contributed capital 634,194 594,186
Retained earnings 181,068 79,035
Deferred stock compensation (3,457) (4,434)
----------------------------------
Total shareholders' equity 812,842 669,779
----------------------------------
Total liabilities and shareholders' equity $ 1,369,022 $ 840,469
==================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Modis Professional Services Incorporated and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
------------------------------------------
(dollar amounts in thousands except per share amounts) 1997 1996 1995
- - - ----------------------------------------------------------------------------------------------------------------
Revenue $ 1,164,124 $ 580,016 $ 90,489
Cost of revenue 835,609 426,814 62,382
------------------------------------------
Gross Profit 328,515 153,202 28,107
------------------------------------------
Operating expenses:
General and administrative 189,271 97,209 14,253
Depreciation and amortization 22,456 10,303 868
Merger related costs - 14,446 -
------------------------------------------
Total operating expenses 211,727 121,958 15,121
------------------------------------------
Income from operations 116,788 31,244 12,986
------------------------------------------
Interest expense and other, net (14,615) (2,974) (1,465)
------------------------------------------
Income from continuing operations before provision for income taxes 102,173 28,270 11,521
Provision for income taxes 38,803 19,693 1,333
------------------------------------------
Income from continuing operations 63,370 8,577 10,188
Income from discontinued operations (net of income
taxes of $26,739, $19,079 and $11,655, respectively) 38,663 22,633 18,384
------------------------------------------
Net income $ 102,033 $ 31,210 $ 28,572
==========================================
Basic income per common share from continuing operations $ 0.62 $ 0.09 $ 0.16
==========================================
Basic income per common share from discontinued operations $ 0.38 $ 0.25 $ 0.30
==========================================
Basic net income per common share $ 1.00 $ 0.34 $ 0.46
==========================================
Average common shares outstanding, basic 101,914 90,582 62,415
==========================================
Diluted income per common share from continuing operations $ 0.59 $ 0.09 $ 0.16
==========================================
Diluted income per common share from discontinued operations $ 0.34 $ 0.24 $ 0.27
==========================================
Diluted net income per common share $ 0.93 $ 0.33 $ 0.43
==========================================
Average common shares outstanding, diluted 113,109 95,317 69,328
==========================================
Unaudited pro forma data (Note 2):
Net income before provision for pro forma income taxes $ 31,210 $ 28,572
Provision for pro forma income taxes (3,642) 3,144
-----------------------------
Pro forma net income $ 34,852 $ 25,428
=============================
Pro forma basic income per common share from continuing
operations $ 0.13 $ 0.11
=============================
Pro forma basic income per common share from discontinued
opertaions $ 0.25 $ 0.30
=============================
Pro forma basic net income $ 0.38 $ 0.41
=============================
Pro forma diluted income per common share from continuing
operations $ 0.13 $ 0.11
=============================
Pro forma diluted income per common share from discontinued
operations $ 0.24 $ 0.27
=============================
Pro forma diluted net income per common share $ 0.37 $ 0.38
=============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Modis Professional Services Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
------------------------------------------
(dollar amounts in thousands except for per share amounts) 1997 1996 1995
- - --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income from continuing operations $ 63,370 $ 8,577 $ 10,188
Adjustments to income from operations to net cash
provided by operating activities:
Depreciation and amortization 22,456 10,303 868
Deferred income taxes 3,800 1,221 (345)
Changes in assets and liabilities
Accounts receivable (45,188) (34,761) (5,451)
Prepaid expenses and other assets 1,592 9,335 (407)
Accounts payable and accrued expenses (8,151) 12,432 9,654
Accrued payroll and related taxes 3,701 (6,433) (1,549)
Other, net (2,623) 5,294 4,124
-----------------------------------------
Net cash provided by operating activities 38,957 5,968 17,082
-----------------------------------------
Cash flows from investing activities:
Purchase of investments - (10,438) (2,028)
Sales and maturities of investments - - 8,842
Investment in reverse repurchase agreements, net - 48,449 (48,449)
Purchase of furniture, equipment and leasehold
improvements, net of disposals (8,126) (7,345) (2,349)
Purchase of businesses, including additional earn-outs on
acquisitions, net of cash acquired (357,776) (305,963) (23,089)
-----------------------------------------
Net cash used in investing activities (365,902) (275,297) (67,073)
-----------------------------------------
Cash flows from financing activities:
Bank overdraft, net - - (39,063)
Proceeds from issuance of common stock, net of offering
expenses paid - 424,677 72,403
Proceeds from stock options exercised 23,130 6,977 2,017
Proceeds from issuance of convertible debentures - - 85,663
Borrowings on indebtedness 446,583 92,800 6,772
Repayments on indebtedness (133,853) (115,745) (18,058)
Other, net (100) (3,650) (3,350)
-----------------------------------------
Net cash provided by financing activities 335,760 405,059 106,384
Net increase in cash and cash equivalents -----------------------------------------
from continuing operations 8,815 135,730 56,393
Net cash used in discontinued operations (81,293) (77,038) (18,669)
Cash and cash equivalents, beginning of year 96,416 37,724 -
-----------------------------------------
Cash and cash equivalents, end of year $ 23,938 $ 96,416 $ 37,724
=========================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Years Ended December 31,
(dollar amounts in thousands except for per share amounts) 1997 1996 1995
- - - ----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 14,627 $ 8,049 $ 2,187
Income taxes paid 24,323 8,308 1,569
COMPONENTS OF CASH USED IN DISCONTINUED OPERATIONS
Cash (used in) provided by operating activities (2,413) 6,081 7,114
Cash used in financing activities (94,323) (54,509) (50,999)
Cash (used in) provided by investing activities 15,443 (28,610) 25,216
-----------------------------------------
Net cash used in discontinued operations (81,293) (77,038) (18,669)
=========================================
NON-CASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1995, the Company completed numerous acquisitions. In connection
with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired $ 46,978
Cash paid (28,285)
------------
Liabilities assumed $ 18,693
============
In fiscal 1995, convertible subordinated debentures of $1,500 were converted by
the Company into 1,127,262 shares of common stock.
During fiscal 1996, the Company completed numerous acquisitions. In connection
with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired $ 383,008
Cash paid (296,612)
------------
Liabilities assumed $ 86,396
============
In fiscal 1996, Convertible Subordinated Debentures of $1,300 were converted by
the Company into 1,040,000 shares of common stock. Also, 345,000 shares of stock
were issued to the President and Chief Executive Officer pursuant to the terms
of a restricted stock grant.
During fiscal 1997, the Company completed numerous acquisitions. In connection
with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired $ 393,474
Cash paid (308,067)
------------
Liabilities assumed $ 85,407
============
In fiscal 1997, Convertible Subordinated Debentures of $1,000 were converted by
the Company into 727,272 shares of common stock.
Modis Professioinal Services Incorporated and Subsidiaries
Consolidated Statements of Shareholders' Equity
Preferred Common Additional Deferred
(dollar amounts in thousands Stock Stock Contributed Retained Stock
except per share amounts) Shares Amount Shares Amount Capital Earnings Compensation Total
- - ----------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 - - 9,519,505 $ 95 $ 69,154 $ 23,068 $ (175) $ 92,142
Sale of common stock 2,500,000 25 72,378 - - 72,403
Conversion of subordinated debentures - - 187,877 2 1,498 - - 1,500
Exercise of stock options and related
tax benefit - - 143,169 2 2,018 - - 2,020
Amortization of unearned compensation - - - - - - 96 96
Net income - - - - - 28,572 - 28,572
McKinley income for the three months
ended December 31, 1994 - - - - - 702 - 702
Distribution to former shareholders of
acquired S-corporations - - - - - (2,350) - (2,350)
2 for 1 stock split - - 12,350,551 123 (123) - - -
---------------------------------------------------------------------------
Balance December 31, 1995 - - 24,701,102 247 144,925 49,992 (79) 195,085
3 for 1 stock split - - 49,402,203 494 (494) - - -
Sale of common stock - - 20,017,575 200 424,477 - - 424,677
Conversion of subordinated debentures - - 1,040,000 10 1,290 - - 1,300
Issuance of restricted stock - - 345,000 3 4,889 - (4,892) -
Exercise of stock options and related
tax benefit - - 2,726,412 27 17,013 - - 17,040
Vesting of restricted stock - - - - - - 537 537
Net income - - - - - 31,210 - 31,210
Issuance of stock related to business
combinations - - 994,521 11 2,086 1,214 - 3,311
Distribution to former shareholders of
acquired S-corporations - - - - - (3,381) - (3,381)
---------------------------------------------------------------------------
Balance, December 31, 1996 - - 99,226,813 992 594,186 79,035 (4,434) 669,779
Conversion of subordinated debentures 727,272 7 993 1,000
Exercise of stock options and related
tax benefit - - 3,069,143 31 30,169 - - 30,200
Vesting of restricted stock - - - - - - 977 977
Net income - - - - - 102,033 - 102,033
Issuance of stock related to business
combinations - - 668,870 7 8,846 - - 8,853
---------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 - - 103,692,098 $1,037 $634,194 $ 181,068 $(3,457) $812,842
===========================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Modis Professional Services Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS:
Modis Professional Services Incorporated (formerly known as AccuStaff
incorporated), including all subsidiaries unless the context requires otherwise,
(Modis, or the Company), is an international provider of business services,
including consulting, training and outsourcing services to businesses,
professional and service organizations and governmental agencies through a
branch office network of approximately 250 offices throughout the United States,
Canada, and Europe. The Company's revenues are primarily from the United States
since the Company's expansion outside the United States did not begin until
1997. The Company's ongoing business is organized into divisions: the
Information Technology division and the Professional Services division, which
generated 67.1% and 32.9% of the Company's fiscal 1997 revenue from continuing
operations, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany transactions have been
eliminated in the accompanying consolidated financial statements.
Fiscal Year
During 1996, the Company changed its fiscal year to a calendar year. In the
prior years, the fiscal year ended on the Sunday closest to December 31 of each
year. All fiscal years presented herein consist of 52 weeks.
Cash and Cash Equivalents
Cash and cash equivalents include deposits in banks, government money
market funds, and short-term investments with maturities, when acquired, of 90
days or less.
Furniture, Equipment, and Leasehold Improvements
Furniture, equipment, and leasehold improvements are recorded at cost less
accumulated depreciation and amortization. Depreciation of furniture and
equipment is computed using the straight-line method over the estimated useful
lives of the assets, ranging from 5 to 15 years. Amortization of leasehold
improvements is computed using the straight-line method over the useful life of
the asset or the term of the lease, whichever is shorter. Costs associated with
the development of the Company's proprietary software package have been deferred
and are being amortized over a five-year period. Total depreciation and
amortization expense was $4,871, $3,055 and $313 for 1997, 1996 and 1995
respectively. Accumulated depreciation and amortization of furniture, equipment
and leasehold improvements as of December 31, 1997 and 1996 was $29,459 and
$22,387, respectively.
Goodwill
Goodwill represents the excess of cost over fair value of net tangible assets
acquired through acquisitions. Such excess of cost over fair value of net
tangible assets acquired is being amortized on a straight-line basis over
periods ranging from 15 to 40 years. Management periodically reviews the
potential impairment of goodwill on a non-discounted cash flow basis to assess
recoverability. If the estimated future cash flows are projected to be less than
the carrying amount, an impairment write-down (representing the carrying amount
of the goodwill which exceeds the present value of estimated expected future
cash flows) would be recorded as a period expense. Accumulated amortization was
$25,714 and $8,397 as of December 31, 1997 and 1996, respectively.
Revenue Recognition
The Company recognizes as revenue, at the time the professional services
are provided, the amounts billed to clients. In all such cases, the temporary
worker is the Company's employee and all costs of employing the worker are the
responsibility of the Company and are included in cost of services.
Stock Based Compensation
The Company accounts for stock options as prescribed by APB Opinion No. 25
and includes pro forma information as prescribed by SFAS No. 123 in the
Stockholders' Equity footnote to the Consolidated Financial Statements.
Income Taxes
Deferred tax liabilities and assets are recognized for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax liabilities and assets are
determined based on the differences between the financial statement carrying
amounts and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Net Income Per Common Share
Basic and diluted net income per common share are presented in accordance
with SFAS No. 128. Basic net income per common share is computed by dividing net
income by the weighted average number of shares outstanding. Diluted net income
per common share includes the dilutive effect of convertible debentures and
stock options.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Although management believes these estimates and assumptions are adequate,
actual results may differ from the estimates and assumptions used.
Reclassifications
Certain amounts have been reclassified in 1995 and 1996 to conform to the
1997 presentation.
Recent Accounting Pronouncements
During 1997, the FASB issued 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, Disclosure About
Segments of an Enterprise and Related Information, which changes the way public
companies report information about segments. SFAS No. 131, which is based on the
management approach to segment reporting, includes requirements to report
selected segment information quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds assets and reports revenues.
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. Implementation is planned for fiscal 1999.
Unaudited Pro Forma Data
The McKinley Group, Inc. (McKinley) and HJM Consulting, Inc. (HJM), prior
to their acquisition by the Company, had elected to be treated as S Corporations
for federal and state income tax purposes. As such, the taxable income of each
company was reported to and subject to tax to its respective shareholders. The
unaudited pro forma data on the consolidated statements of income provides
approximate federal and state income taxes (by applying statutory income tax
rates) that would have been incurred if McKinley and HJM had been subject to tax
as a C Corporation.
3. ACQUISITIONS
For the years ended December 31, 1997, 1996 and 1995
The Company completed numerous acquisitions during 1997, 1996 and 1995
including McKinley, Career and HJM, for which the financial statements
have been restated.
In addition, the Company merged with Schwab Carrese and Associates, Inc. in
fiscal 1997, and with Legal Support Personnel, Inc. in fiscal 1996, both of
which were accounted for under the pooling-of-interests method of accounting.
The Company acquired all of the stock of these companies in exchange for 263,550
and 561,786 shares of the Company's common stock for the 1997 and 1996
acquisitions, respectively. Due to the immaterial effect on prior periods, the
Company's historical financial statements have not been restated.
Unaudited pro forma results of operations
During 1997, 1996 and 1995, the Company made certain other acquisitions which
were accounted for under the purchase method of accounting. Their operations are
included in the Consolidated Statements of Income from the date of acquisition.
The following unaudited pro forma consolidated results of operations give
effect to the acquisitions made during 1997, 1996 and 1995 assuming the
acquisitions had occurred at the beginning of the year in which each company was
acquired and also at the beginning of the preceding year. Pro forma adjustments
have been made to give effect to amortization of goodwill, interest expense on
additional borrowings used to fund the acquisitions, and other adjustments,
together with income tax effects.
The results for fiscal 1996, include $14,446, $10,818 net of taxes, in
non-recurring acquisition costs related to the mergers with McKinley, Career,
and HJM. Exclusive of these non-recurring costs, income from continuing
operations and diluted income per common share from continuing operations would
have been $37,820 and $0.40, for the fiscal year ended 1996. These pro forma
amounts are not necessarily indicative of what actually would have occurred if
the acquisitions had been in effect for the entire periods presented. In
addition, they are not intended to be projections of future results and do not
reflect any synergies that might be achieved from combined operations.
Fiscal
-------------------------------------------
(unaudited) 1997 1996 1995
- - -----------------------------------------------------------------------------------------------------------------
Revenue from continuing operations $ 1,361,906 $ 1,127,786 $ 654,470
Income from continuing operations 68,084 27,002 14,926
Income from discontinued operations 39,050 23,312 20,222
Net income $ 107,134 $ 50,314 $ 35,148
Diluted income per common share from continuing
operations $ 0.63 $ 0.28 $ 0.23
Diluted income per common share from discontinued
operations $ 0.35 $ 0.24 $ 0.29
Diluted net income per common share $ 0.98 $ 0.52 $ 0.52
4. NOTES PAYABLE
Notes payable at December 31, 1997 and 1996 consisted of the following:
Fiscal
---------------------------
1997 1996
- - - ----------------------------------------------------------------------------------------------------------------
Credit facilities $ 337,000 $ -
Notes payable to former shareholder's of acquired companies, plus interest ranging
from 5.05% to 8.0% due through June 2000 27,151 28,088
---------------------------
364,151 28,088
Current portion of notes payable 16,366 10,969
---------------------------
Long-term portion of notes payable $ 347,785 $ 17,119
===========================
The Revolving Credit Facility contains certain covenants such as requiring
the Company to maintain certain minimum financial ratios and does not permit the
payment of dividends. The facility is unsecured, but is guaranteed by each of
the Company's subsidiaries. The Company was in compliance with all covenants as
of December 31, 1997 and 1996.
On May 23, 1997, the Facility was amended and restated, increasing the
available line from $150,000 to $500,000. The Facility has a term expiring May
23, 2002 and bears interest using an incentive pricing model based on the LIBOR,
federal funds, or the prime rate.
On February 6, 1998 the Company received a commitment from its primary lender
for $300 million of additional borrowings in the form of a revolving credit
facility. The commitment expires February 5, 2000 and contains substantially all
of the same terms as the Company's existing credit facility.
Maturities of loans and convertible debt (See Note 12), are as follows for
the fiscal years subsequent to December 31, 1997:
Fiscal year
- - - ------------------------------------
1998 $ 16,366
1999 9,650
2000 1,135
2001 -
2002 423,250
--------
$450,401
========
5. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office space under various noncancelable operating leases.
The following is a schedule of future minimum lease payments with terms in
excess of one year:
Fiscal Year
- - -------------------------------------------------------------------------------------------------------
1998 $ 9,153
1999 7,511
2000 5,468
2001 3,506
2002 2,056
Thereafter 3,538
-------
$31,232
=======
Total rent expense for fiscal 1997, 1996 and 1995 was $10,175, $4,303, and $365
respectively.
Litigation
The company is a party to a number of lawsuits and claims arising out of the
ordinary conduct of its business. In the opinion of management, based on the
advice of in-house and external legal counsel, the lawsuits and claims pending
will not have a material adverse effect on the Company's financial position.
6. INCOME TAXES:
A comparative analysis of the provision for income taxes from continuing
operations is as follows:
Fiscal
------------------------------------
1997 1996 1995
- - - --------------------------------------------------------------
Current:
Federal $ 30,210 $ 15,594 $ 1,362
State 3,347 2,878 316
Foreign 1,446 - -
------------------------------------
35,003 18,472 1,678
------------------------------------
Deferred:
Federal: 2,991 948 (226)
State: 361 273 (119)
Foreign: 448 - -
------------------------------------
3,800 1,221 (345)
------------------------------------
$ 38,803 $ 19,693 1,333
====================================
The difference between the actual income tax provision and the tax
provision computed by applying the statutory federal income tax rate to income
from continuing operations before provision for income taxes is attributable to
the following:
Fiscal
--------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- - - -----------------------------------------------------------------------------------------------------------------------
Tax computed using the federal statutory rate $ 35,761 35.0% $ 9,895 35.0% $ 4,032 35.0%
State income taxes, net of federal income tax effect 2,699 2.6 1,305 4.7 502 4.4
Pre-acquisition earnings of acquired S corporations - - (1,081) (3.8) (3,144) (27.3)
Acquired subsidiaries change from cash to accrual basis - - 4,723 16.7 - -
Non-deductible merger related costs - - 4,081 14.4 - -
Permanent differences and other 343 0.4 770 2.7 (57) (0.5)
--------------------------------------------------------------
$ 38,803 38.0% $ 19,693 69.7% $ 1,333 11.6%
==============================================================
The components of the deferred tax assets and liabilities recorded in the
accompanying consolidated balance sheets are as follows:
Fiscal
---------------------------
1997 1996
- - - ----------------------------------------------------------------------------------------------------------------
Gross deferred tax assets:
Self-insurance reserves $ 376 $ 628
Allowance for doubtful accounts receivable 897 601
Purchase accounting adjustments 2,910 1,561
Amortization of computer software costs 135 (87)
Depreciation and amortization of furniture, equipment and leasehold improvements 1,043 478
Other 1,872 187
---------------------------
Total gross deferred tax assets 7,233 3,368
---------------------------
Gross deferred tax liabilities:
Amortization of goodwill (10,202) (1,405)
Acquired subsidiaries change from cash to accrual basis (2,411) (3,746)
Other - (292)
---------------------------
Total gross deferred tax liabilities (12,613) (5,443)
---------------------------
Net deferred tax liability (1) $ (5,380) $ (2,075)
===========================
(1) Deferred tax assets of $401 have been included in the non-current balance
sheet captions "other" at December 31, 1996.
Management has determined, based on the history of prior taxable earnings and
its expectations for the future, taxable income will more likely than not be
sufficient to fully realize deferred tax assets and, accordingly, has not
reduced deferred tax assets by a valuation allowance.
7. EMPLOYEE BENEFIT PLANS:
Profit Sharing Plan
The Company has a discretionary contribution profit sharing plan that
includes a 401(k) plan, which covers all non-highly compensated (as defined by
IRS regulations) full time employees over age twenty-one with at least one year
of employment and 1,000 hours of service. The Company also has a non-qualified
deferred compensation plan for its highly compensated employees. The Company may
make annual contributions at the discretion of the Board of Directors, but
contributions are limited to the maximum amount allowed under the provisions of
the Internal Revenue Code. The Company did not contribute to the profit sharing
plan during fiscal 1997, 1996, or 1995. Effective July 1, 1997, the Company
established a separate plan for employees of the professional divisions so as to
make employees of those divisions eligible to participate in that plan after 90
days or 375 hours of service. The amended plan is retroactive, giving effect to
service performed prior to July 1, 1997.
The Company has assumed many 401(k) plans of acquired subsidiaries and
intends to merge these plans into the Company's plan in the future. Effective
January 1, 1998, a significant number of the profit sharing plans were merged
and amended to become contributory plans. Pursuant to the terms of the various
profit sharing plans, the Company will match 50% of employee contributions up to
the first 5% of total eligible compensation, as defined.
8. STOCKHOLDERS' EQUITY
Public Offerings of Common Stock
On October 3, 1995, the Company completed an offering for the sale of
15,000,000 shares of common stock. The Company received $72,403 from the sale of
the shares, net of underwriting discount and expenses associated with the
offering. A portion of the net proceeds were used to repay all outstanding
indebtedness under the Company's credit facility, which was approximately
$8,500. The remaining proceeds, expended through December 31, 1995, were used
primarily to fund additional acquisitions.
In April 1996, the Company completed an offering for the sale of 11,790,000
shares of common stock. The Company received $304,900 from the sale of the
shares, net of underwriting discount and expenses associated with the offering.
The net proceeds were used to repay all outstanding indebtedness under the
Company's credit facility, which was approximately $92,800. The remaining
proceeds have been used primarily to fund acquisitions.
The Company's subsidiary, Career, prior to the date of the merger with the
Company, completed offerings in which Career issued 8,227,575 shares of common
stock, adjusted for the conversion to the Company's shares of common stock, in
which Career received $119,777, net of underwriting discounts and expenses
associated with the offerings. Career used a portion of the proceeds from its
initial offering to repay subordinated notes.
Incentive Employee Stock Plans
Effective December 19, 1993, the Board of Directors approved the 1993 Stock
Option Plan (the 1993 Plan) which provides for the granting of options for the
purchase of up to an aggregate of 2,400,000 shares of common stock to key
employees.
Under the 1993 Plan, the Stock Option Committee (the Committee) of the Board
of Directors has the discretion to award stock options, stock appreciation
rights (SARS) or restricted stock options or non-qualified options and the
option price shall be established by the Committee. Incentive stock options may
be granted at an exercise price not less than 100% of the fair market value of a
share on the effective date of the grant and non-qualified options may be
granted at an exercise price not less than 50% of the fair market value of a
share on the effective date of the grant.
On August 24, 1995, the Board of Directors approved the 1995 Stock Option
Plan (the 1995 Plan) which provided for the granting of options up to an
aggregate of 3,000,000 shares of common stock to key employees under terms and
provisions similar to the 1993 Plan. During fiscal 1996 and 1997, the 1995 Plan
was amended to provide for the granting of an additional 6,000,000 and 3,000,000
shares, respectively.
The Company has assumed the stock option plans of its acquired subsidiary,
Career, in accordance with terms of the merger agreement dated November 14,
1996. At the date of acquisition Career had 2,254,831 options outstanding under
the plans which were assumed. As of December 31, 1997 the plan had 372,445
options outstanding.
Non-Employee Director Stock Plan
Effective December 29, 1993, the Board of Directors of the Company approved
a stock option plan (Director Plan) for non-employee directors, whereby 600,000
shares of common stock have been reserved for issuance to non-employee
directors. The Director Plan allows each non-employee director to purchase
60,000 shares at an exercise price equal to the fair market value at the date of
the grant upon election to the Board. In addition, each non-employee director is
granted 20,000 options upon the anniversary date of the director's initial
election date. The options become exercisable ratably over a five-year period
and expire ten years from the date of the grant. However, the options are
exercisable for a maximum of three years after the individual ceases to be a
director and if the director ceases to be a director within one year of
appointment the options are canceled. In fiscal 1996, the Company granted 80,000
options under the Director's Plan at an average exercise price of $25.31. In
fiscal 1997 the Company granted 120,000 options at an average exercise price of
$28.35. During 1997, the Board of Directors amended the non-employee director
stock plan, increasing the number of shares available under the plan to 1.6
million shares.
The following table summarizes the Company's Stock Option Plans:
Weighted
Range of Average
Shares Exercise Prices Exercise Price
- - ---------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 2,935,716 $ 0.18 - $ 5.81 $ 1.08
Granted 4,002,493 $ 2.31 - $11.00 $ 4.74
Exercised (867,113) $ 0.18 - $ 5.80 $ 0.37
Canceled (6,640) $ 1.39 - $ 5.81 $ 1.25
----------------------------------------------
Balance, December 31, 1995 6,064,456 $ 0.18 - $11.00 $ 3.88
Granted 6,594,535 $11.27 - $33.75 $ 19.50
Exercised (2,029,163) $ 0.18 - $12.09 $ 2.76
Canceled (61,467) $ 5.81 - $22.22 $ 11.69
----------------------------------------------
Balance, December 31, 1996 10,568,361 $ 0.69 - $33.75 $ 13.67
Granted 2,452,176 $16.13 - $31.38 $ 18.92
Exercised (3,069,143) $ 1.25 - $32.00 $ 7.02
Canceled (43,273) $11.80 - $24.92 $ 23.18
----------------------------------------------
BALANCE, DECEMBER 31, 1997 9,908,121 $ 0.69 - $33.75 $ 16.76
==============================================
The following table summarizes information about stock options outstanding at
December 31, 1997:
Outstanding Exercisable
------------------------------------------- -----------------------------
Average Average
Average Exercise Exercise
Shares life (a) Price Shares Price
- - --------------------------------------------------------------------------------------------------------------------
$ 0.83 - $ 13.67 2,299,699 7.20 5.66 1,656,405 4.95
$ 13.83 - $ 13.83 344,200 8.03 13.83 34,200 13.83
$ 14.50 - $ 14.50 1,920,000 8.07 14.50 1,632,000 14.50
$ 16.00 - $ 19.75 2,056,722 9.02 17.44 151,738 17.18
$ 20.00 - $ 33.75 3,287,500 8.41 25.67 1,646,717 25.95
-------------------------------------------------------------------------
Total 9,908,121 8.18 $ 16.76 5,121,060 $ 15.16
=========================================================================
(a) Average contractual life remaining in years.
At year-end 1996, options with an average exercise price of $8.07 were
exercisable on 5.0 million shares; at year-end 1995, options with an average
exercise price of $3.28 were exercisable on 3.5 million shares.
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," issued in October 1995. As permitted by the provisions of SFAS
No. 123, the Company applied APB Opinion 25 and related interpretations in
accounting for its employee stock option plans and, accordingly, does not
recognize compensation cost. If the Company had elected to recognize
compensation cost for options granted in 1996 and 1997, based on the fair value
of the options granted at the grant date as prescribed by SFAS No. 123, net
income and earnings per share would have been reduced to the pro forma amounts
indicated below.
1997 1996
- - --------------------------------------------------------------------------------------------------------------------
Net Income
As reported $ 102,033 $ 31,210
Pro forma $ 92,353 $ 21,717
Basic net income per common share
As reported $ 1.00 $ 0.34
Pro forma $ 0.91 $ 0.24
Diluted net income per common share
As reported $ 0.93 $ 0.33
Pro forma $ 0.85 $ 0.24
The weighted average fair values of options granted during 1997 and 1996 were
$6.16 and $4.57 per share, respectively. The fair value of each option grant is
estimated on the date of grant using the Black Scholes option-pricing model with
the following assumptions:
Fiscal
1997 1996
- - -------------------------------------------------------------------------------------------------------------
Expected dividend yield - -
Expected stock price volatility .30 .30
Risk-free interest rate 6.12 5.90
Expected life of options (years) 3.40 3.50
During Fiscal 1996, the Company's Board of Directors issued a restricted
stock grant of 345,000 shares, under the 1995 Plan, to the Company's President
and Chief Executive Officer, which vests over five years. The Company recorded
$4,892 in deferred compensation expense which is being amortized on a straight
line basis over the vesting period of the grant.
Stock Splits
Effective November 27, 1995, the Company's Board of Directors approved a
two-for-one stock split of common stock for stockholders of record as of
November 9, 1995. A total of $123 was transferred from additional contributed
capital to the stated value of common stock in connection with the stock split.
The par value of the common stock remains unchanged. All share and per share
amounts have been restated to retroactively reflect the stock split.
Effective March 6, 1996, the Company's Board of Directors approved a three-
for-one stock split of common stock for stockholders of record as of March 20,
1996. A total of $494 was transferred from additional contributed capital to the
stated value of common stock in connection with the stock split. The par value
of the common stock remains unchanged. All share and per share amounts have been
restated to retroactively reflect the stock split.
9. NET INCOME PER COMMON SHARE
In accordance with SFAS No. 128, "Earnings per Share", the calculation of
basic net income per common share and diluted net income per common share from
continuing and discontinued operations is presented below:
1997 1996 1995
- - - ----------------------------------------------------------------------------------------------------------------
Basic net income per common share computation:
Income available to common shareholders from
continuing operations $ 63,370 $ 8,577 $ 10,188
------------------------------------------
Income available to common shareholders from
discontinued opertations $ 38,663 $ 22,633 $ 18,384
------------------------------------------
Basic average common shares outstanding 101,914 90,582 62,415
------------------------------------------
Basic income per common share from continuing
operations $ 0.62 $ 0.09 $ 0.16
==========================================
Basic income per common share from discontinued
operations $ 0.38 $ 0.25 $ 0.30
==========================================
Basic net income per common share $ 1.00 $ 0.34 $ 0.46
==========================================
Diluted net income per common share computation:
Income available to common shareholders from continuing
operations $ 63,370 $ 8,577 $ 10,188
Interest paid on convertible debt, net of tax benefit (1) 3,712 - 840
Income available to common shareholders and assumed ------------------------------------------
conversions from continuing operations $ 67,082 $ 8,577 $ 11,028
Income available to common shareholders from ------------------------------------------
discontinued opertations $ 38,663 $ 22,633 $ 18,384
------------------------------------------
Average common shares outstanding 101,914 90,582 62,415
Incremental shares from assumed conversions:
Convertible debt (1) 7,599 - 4,286
Stock options 3,596 4,735 2,627
------------------------------------------
Diluted average common shares outstanding 113,109 95,317 69,328
------------------------------------------
Diluted income per common share from continuing
operations $ 0.59 $ 0.09 $ 0.16
==========================================
Diluted income per common share from discontinued
operations $ 0.34 $ 0.24 $ 0.27
==========================================
Diluted net income per common share $ 0.93 $ 0.33 $ 0.43
==========================================
(1) The Company's convertible debt did not have a dilutive effect on earings per share from continuing operations
during fiscal 1996.
10. CONCENTRATION OF CREDIT RISK:
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and trade accounts receivable. The Company
places its cash with what it believes to be high credit quality institutions. At
times such investments may be in excess of the FDIC insurance limit. The Company
routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk exposure is
limited.
11. CONVERTIBLE DEBT:
At January 1, 1995, the Company had outstanding $1,800 of 6% Convertible
Subordinated Debentures due January 31, 1997. The debentures were convertible at
the option of the debenture holders into shares of the Company's common stock at
a price of $1.25 per share. In addition, certain debenture holders were issued
options to purchase an additional $2,000 of 6% convertible subordinated
debentures, due January 31, 1997, which were convertible into shares of the
Company's common stock at $1.38 per share. During fiscal 1995 the debenture
holders converted their options. Debentures in the amount of $1,000, $1,300 and
$1,500 in principal amount of the Company's 6% debentures were converted into
727,272, 1,040,000 and 1,127,262 shares of the Company's common stock during
1997, 1996 and 1995, respectively.
The Company's subsidiary, Career, has $86,250 of 7% Convertible Senior Notes
due 2002 which have been assumed by the Company pursuant to their November 1996
merger. Interest on the notes is paid semiannually on May 1 and November 1 of
each year. The notes are 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. See note 16.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and the relevant market
information. Where available, quoted market prices are used. In other cases,
fair values are based on estimates using other valuation techniques, such as
discounting estimated future cash flows using a rate commensurate with the risks
involved or other acceptable methods. These techniques involve uncertainties and
are significantly affected by the assumptions used and the judgments made
regarding risk characteristics of various financial instruments, prepayments,
discount rates, estimates of future cash flows, future suspected loss experience
and other factors. Changes in assumptions could significantly affect these
estimates. Derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in an immediate
sale of the instrument. Also, because of differences in methodologies and
assumptions used to estimate fair value, the Company's fair values should not be
compared to those of other companies. Fair value estimates are based on existing
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company. For certain assets and
liabilities, the information required is supplemented with additional
information relevant to an understanding of the fair value.
The method and assumption used to estimate the fair value of debt instruments is
based on rates available to the Company for debt with similar terms and
maturities and approximates its carrying amount.
13. SUMMARY DATA OF SUBSIDIARY:
The following table details the summarized financial information of the
Company's wholly owned subsidiary, Career Horizons, Inc., and Career Horizons'
subsidiaries as of and for the fiscal year ended December 31, 1997 and have been
included in the accompanying Consolidated Balance Sheet and Consolidated
Statement of Income as 'Net assets of discontinued operations' and 'Income from
discontinued operations', respectively:
Dec. 31, 1997
- - ---------------------------------------------------------------------------------------------
Current assets $ 186,674
Non-current assets 251,261
Current liabilities 67,459
Non-current liabilities 114,520
Revenue 901,465
Gross profit 232,520
Income from operations 59,883
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
For the Three Months Period Ended For the
---------------------------------------------------------- Year Ended
Mar. 31, June 30, Sept. 30, Dec. 31, Dec. 31,
1997 1997 1997 1997 1997
- - ------------------------------------------------------------------------------------------------- ---------------
Revenue $ 242,234 $ 273,675 $ 302,271 $ 345,944 $ 1,164,124
Gross profit 65,413 75,888 87,991 99,223 328,515
Income from continuing operations 14,750 12,886 16,549 19,185 63,370
Pro forma income from continuing
operations 14,750 12,886 16,549 19,185 63,370
Income from discontinued operations,
net of taxes 6,711 11,001 12,142 8,809 38,663
Pro forma net income 21,461 23,887 28,691 27,994 102,033
Basic income per common share from
continuing operations 0.14 0.13 0.16 0.19 0.62
Basic income per common share from
discontinued operations 0.07 0.11 0.12 0.08 0.38
Basic net income per common share 0.21 0.24 0.28 0.27 1.00
Diluted income per common share from
continuing operations 0.14 0.12 0.15 0.18 0.59
Diluted income per common share from
discontinued operations 0.06 0.10 0.11 0.07 0.34
Diluted net income per common share 0.20 0.22 0.26 0.25 0.93
Pro forma basic income from
continuing operations 0.14 0.13 0.16 0.19 0.62
Pro forma basic income from
discontinued operations 0.07 0.11 0.12 0.08 0.38
Pro forma basic net income 0.21 0.24 0.28 0.27 1.00
Pro forma dilutive income from
continuing operations 0.14 0.12 0.15 0.18 0.59
Pro forma dilutive income from
discontinued operations 0.06 0.10 0.11 0.07 0.34
Pro forma dilutive net income $ 0.20 $ 0.22 $ 0.26 $ 0.25 $ 0.93
For the Three Months Period Ended For the
---------------------------------------------------------- Year Ended
Mar. 31, June 30, Sept. 30, Dec. 31, Dec. 31,
1996 1996 1996 1996 1996
- - ------------------------------------------------------------------------------------------------- ---------------
Revenue $ 99,903 $ 130,961 $ 155,344 $ 193,808 $ 580,016
Gross profit 25,131 33,070 41,669 53,332 153,202
Income from continuing operations 2,237 2,152 9,207 (5,019) 8,577
Pro forma income from continuing
operations 1,782 3,169 9,207 (1,939) 12,219
Income from discontinued operations,
net of taxes 6,163 8,251 8,719 (500) 22,633
Pro forma net income 7,945 11,420 17,926 (2,439) 34,852
Basic income per common share from
continuing operations 0.03 0.02 0.10 (0.06) 0.09
Basic income per common share from
discontinued operations 0.08 0.09 0.09 (0.01) 0.25
Basic net income per common share 0.11 0.11 0.19 (0.07) 0.34
Diluted income per common share from
continuing operations 0.03 0.02 0.09 (0.05) 0.09
Diluted income per common share from
discontinued operations 0.08 0.08 0.09 (0.01) 0.24
Diluted net income per common share 0.11 0.10 0.18 (0.06) 0.33
Pro forma basic income from
continuing operations 0.02 0.03 0.10 (0.02) 0.13
Pro forma basic income from
discontinued operations 0.08 0.09 0.09 (0.01) 0.25
Pro forma basic net income 0.10 0.12 0.19 (0.03) 0.38
Pro forma dilutive income from
continuing operations 0.02 0.03 0.09 (0.01) 0.13
Pro forma dilutive income from
discontinued operations 0.08 0.08 0.09 (0.01) 0.24
Pro forma dilutive net income $ 0.10 $ 0.11 $ 0.18 $ (0.02) $ 0.37
15. DISCONTINUED OPERATIONS
Effective September 27,1998, the Company sold its commercial staffing businesses
(the "Commercial Businesses"). As a result, the Commercial Businesses have been
reported as a discontinued operation, and the consolidated financial statements
have been reclassified to segregate the net assets and operating results of the
Commercial Businesses. The Commercial Businesses were sold for $850 million in
cash to Randstad U.S., L.P. ('Randstad') , the U.S. operating company of Ranstad
Holding nv, an international staffing company based in The Netherlands. The
purchase price is subject to adjustment based on final tangible net worth, as
defined in the purchase agreement. The after-tax gain on the sale (unaudited)
prior to any purchase price adjustment is approximately $240 million which is
net of related taxes of approximately $210 million.
The sale of the Commercial Businesses represents the disposal of a segment of
the Company's business. Accordingly, the financial statements for the years
ended December 31, 1997, 1996 and 1995 have been reclassified to separate the
revenues, costs and expenses, assets and liabilities, and cash flows of the
Commercial Businesses sold. The net operating results of the Commercial
Businesses have been reported, net of applicable income taxes, as 'Income from
Discontinued Operations'. The net assets of the Commercial Businesses have been
reported as 'Net Assets of Discontinued Operations'; and the net cash flows of
the Commercial Businesses have been reported as 'Net Cash Used In Discontinued
Operations'.
Summarized financial information for the discontinued operations follows:
For the years ended
December 31 1997 1996 1995
(dollars in thousands)
Revenues $ 1,260,702 $ 1,031,431 $ 772,479
Cost of Revenues 975,489 807,940 608,207
Operating Expenses 215,437 181,350 133,080
Operating Income 69,776 42,141 31,192
Interest, net 4,374 429 1,153
Provision for income taxes 26,739 19,079 11,655
Income from discontinued operations 38,663 22,633 18,384
Results of the discontinued Commercial Business include the allocation of
certain net common expenses for corporate support and back office functions
totaling approximately $1.2 million, $ 1.5 million, and $4.6 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Additionally, the
results of discontinued operations include allocations of consolidated interest
expense totaling $4.4 million, $0.4 million and $1.2 million for fiscal 1997
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. The net assets of the Company's discontinued
operations are as follows:
December 31, December 31,
(dollars in thousands) 1997 1996
Receivables $ 195,415 $ 147,643
Other current assets 60,674 63,261
Total current assets 256,089 210,904
Furniture, Equipment and Leasehold Improvements 21,210 16,316
Goodwill 189,659 102,745
Other Assets 9,581 7,743
Total Assets 476,539 337,708
Current Liabilities 79,623 82,268
Non-current liabilities 30,871 9,351
Total liabilities 110,494 91,619
-------------------------------
Total Net assets of discontinued operations $ 366,045 $ 246,089
===============================
16. REDEMPTION OF CONVERTIBLE DEBENTURES AND NEW CREDIT FACILITY
On October 1, 1998 the Company called the 7% Convertible Senior Notes described
in note 11 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.
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.
17. AUTHORIZATION FOR REPURCHASE OF TREASURY SHARES
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.