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 September 30, 1998
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.)
One Independent Drive, Jacksonville, FL 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. October 30, 1998.
Title Outstanding
Common Stock, Par Value $0.01 Per Share 111,813,236 (No. of shares)
Modis Professional Services, Inc. and Subsidiaries
Index
Part I Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997
Consolidated Statements of Income for the Three and Nine Months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows for the Nine Months ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations
Part II Other Information
Item 2 Changes in Securities and Use of Proceeds
Item 6 Exhibits
Signatures
Part I. Financial Information
Item 1. Financial Statements
Modis Professional Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollar amounts in thousands except per share amounts)
September 30, 1998 December 31, 1997
------------------- -------------------
(unaudited) (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 80,772 $ 23,938
Accounts receivable, net 322,291 230,934
Prepaid expenses 15,547 9,352
Deferred income taxes 1,376 731
Other 849,356 -
Net assets of discontinued operations - 366,045
------------------- -------------------
Total current assets 1,269,342 631,000
Furniture, equipment and leasehold improvements, net 35,297 27,367
Goodwill, net 951,126 693,327
Other assets 21,981 17,328
------------------- -------------------
Total assets $ 2,277,746 $ 1,369,022
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities
Notes payable $ 15,998 $ 16,366
Accounts payable and accrued expenses 292,906 62,021
Accrued payroll and related taxes 79,345 37,647
Credit facility 477,000 -
------------------- -------------------
Total current liabilities 865,249 116,034
Convertible debt 86,250 86,250
Notes payable, long-term portion 2,596 347,785
Other 9,767 6,111
------------------- -------------------
Total liabilities 963,862 556,180
------------------- -------------------
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; 150,000,000 shares authorized
111,967,334 and 103,692,098 shares issued and outstanding on
June 30, 1998 and December 31, 1997, respectively 1,120 1,037
Additional contributed capital 819,745 634,194
Retained earnings 495,705 181,068
------------------- -------------------
1,316,570 816,299
Less: deferred stock compensation (2,686) (3,457)
------------------- -------------------
Total stockholders' equity 1,313,884 812,842
------------------- -------------------
Total liabilities and stockholders' equity $ 2,277,746 $ 1,369,022
=================== ===================
See accompanying notes to consolidated financial statements.
Modis Professional Services, Inc. and Subsidiaries
Consolidated Statements of Income
(dollar amounts in thousands except per share amounts)
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- -------------- -------------
Revenue $ 441,580 $ 302,270 $ 1,241,455 $ 818,179
Cost of Revenue 320,880 214,280 898,502 588,887
------------- ------------- -------------- -------------
Gross Profit 120,700 87,990 342,953 229,292
------------- ------------- -------------- -------------
Operating expenses:
General and administrative 69,464 50,149 189,862 130,449
Depreciation and amortization 10,053 6,764 26,925 15,726
------------- ------------- -------------- -------------
Total operating expenses 79,517 56,913 216,787 146,175
------------- ------------- -------------- -------------
Income from operations 41,183 31,077 126,166 83,117
------------- ------------- -------------- -------------
Other income (expense):
Interest expense (7,581) (5,017) (21,620) (10,631)
Interest income and other 1,915 355 5,424 1,161
------------- ------------- -------------- -------------
Total other expense, net (5,666) (4,662) (16,196) (9,470)
------------- ------------- -------------- -------------
Income from continuing operations before
provision for income taxes 35,517 26,415 109,970 73,647
Provision for income taxes 13,496 9,867 41,718 28,223
------------- ------------- -------------- -------------
Income from continuing operations 22,021 16,548 68,252 45,424
Income from discontinued operations, net of
income taxes of $4,141, $7,435, $17,522 and
$21,304, respectively 6,907 12,141 30,020 28,614
Gain on sale of discontinued operations,
net of income taxes of $190,000 216,365 - 216,365 -
------------- ------------- -------------- -------------
Net income $ 245,293 $ 28,689 $ 314,637 $ 74,038
============= ============= ============== =============
Basic income per common share:
From continuing operations $ 0.20 $ 0.16 $ 0.63 $ 0.45
============= ============= ============== =============
From discontinued operations $ 0.06 $ 0.12 $ 0.28 $ 0.28
============= ============= ============== =============
From gain on sale of discontinued
operations $ 1.94 $ - $ 1.98 $ -
============= ============= ============== =============
Basic net income per common share $ 2.20 $ 0.28 $ 2.89 $ 0.73
============= ============= ============== =============
Diluted income per common share:
From continuing operations $ 0.19 $ 0.15 $ 0.59 $ 0.43
============= ============= ============== =============
From discontinued operations $ 0.06 $ 0.11 $ 0.25 $ 0.25
============= ============= ============== =============
From gain on sale of discontinued
operations $ 1.79 $ - $ 1.80 $ -
============= ============= ============== =============
Diluted net income per common share $ 2.04 $ 0.26 $ 2.64 $ 0.68
============= ============= ============== =============
Average common shares outstanding, basic 111,412 102,577 109,085 101,549
============= ============= ============== =============
Average common shares outstanding, diluted 120,875 113,966 119,921 112,567
============= ============= ============== =============
See accompanying notes to consolidated financial statements.
Modis Professional Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollar amounts in thousands except for per share amounts)
Nine months ended
-------------------------------
(unaudited) (unaudited)
September 30, September 30,
1998 1997
--------------- ---------------
Cash flows from operating activities:
Income from continuing operations $ 68,252 $ 45,424
Adjustments to net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 26,925 15,726
Deferred income taxes 4,155 (1,612)
Changes in certain assets and liabilities
Accounts receivable (78,396) (12,405)
Prepaid expenses and other assets (11,876) 3,181
Accounts payable and accrued expenses 3,018 (12,531)
Accrued payroll and related taxes 12,020 2,940
Other, net 157 6,000
Net cash provided by (used in) operating --------------- ---------------
activities 24,255 46,723
--------------- ---------------
Cash flows from investing activities:
Advances associated with sale of assets, net of repayments (12,382) -
Purchase of furniture, equipment and leasehold
improvements, net of disposals (15,590) (6,462)
Purchase of businesses, including additional earn-outs on
acquisitions, net of cash acquired (135,111) (236,618)
--------------- ---------------
Net cash used in investing activities (163,083) (243,080)
--------------- ---------------
Cash flows from financing activities:
Proceeds from stock options exercised 45,073 15,920
Borrowings on indebtedness 299,009 301,606
Repayments on indebtedness (174,538) (72,501)
Other (357) (19)
--------------- ---------------
Net cash provided by financing activities 169,187 245,006
--------------- ---------------
Net increase (decrease) in cash and cash equivalents
from continuing operations 30,359 48,649
Cash provided by (used in) discontinued operations 26,475 (116,599)
Cash and cash equivalents, beginning of period 23,938 96,416
--------------- ---------------
Cash and cash equivalents, end of period $ 80,772 $ 28,466
=============== ===============
See accompanying notes to consolidated financial statements.
Modis Professional Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
(dollar amounts in thousands except for per share amounts)
1. Basis of Presentation:
The accompanying 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. 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 and related notes included in the Company's Form 8-K, as
filed with the Securities and Exchange Commission on November 12, 1998.
The accompanying 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.
The Company completed the acquisition of Office Specialists, Inc. ("OSI") on
December 1, 1997 which was accounted for as a pooling of interests and
accordingly all periods presented have been restated as if the acquisition had
taken place at the beginning of each such period. The results of OSI are
included in the accompanying Balance Sheets and Income Statements as 'Net assets
of discontinued operations' and 'Income from discontinued operations',
respectively.
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 Components of the Net assets of Discontinued operations were as follows as
of September 31, 1998 and December 31, 1997:
September 30, December 31,
(dollars in thousands) 1998 1997
Receivables $ 158,521 $ 195,415
Other current assets 65,961 60,674
Total current assets 224,482 256,089
Furniture, Equipment and Leasehold Improvements 18,082 21,210
Goodwill 215,595 189,659
Other Assets 5,855 9,581
Total Assets 464,014 476,539
Current Liabilities 93,493 79,623
Non-current liabilities 6,912 30,871
Total liabilities 100,405 110,494
-------------------------------
Total Net assets of discontinued operations $ 363,609 $ 366,045
===============================
2. Contingencies:
The Company is, from time to time, subject to routine lawsuits and claims
incidental to the business. The Company believes that, based on the advice of
in-house and external legal counsel, the results of any lawsuits, claims and
other proceedings will not have a materially adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
3. Newly Issued Accounting Standards:
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.
Management does not believe that the Company has material other comprehensive
income which would require separate disclosure.
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 the
Company's 1998 fiscal year. The Company is currently evaluating the effects of
SFAS No. 131 on its disclosure format.
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.
4. 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.
5. 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 in the Company's Form 8-K filed on
November 12, 1998.
Three Months ended September 30, 1998 Compared to Three Months ended September
30, 1997.
From continuing operations
Revenue. Revenue increased $139.3 million, or 46.1%, to $441.6 million in the
three months ended September 30, 1998 from $302.3 million in the year earlier
period. The increase was attributable by division to: Information Technology,
$102.9 million or an increase of 52.0%; and Professional Services, $36.4
million, or an increase of 34.9%. The increases in the Information Technology
and Professional Services divisions were due to both internal growth and the
revenue contribution of acquired companies.
Gross Profit. Gross profit increased $32.7 million or 37.2% to $120.7 million in
the three months ended September 30, 1998 from $88.0 million in the year earlier
period. Gross margin decreased to 27.3% in the three months ended September 30,
1998 as compared to 29.1% in the year earlier period. The incrase in gross
profit was attributable by division to: Information Technology $24.5 million, or
45.3% and Professional Services $8.2 million, or 24.3%. The Information
Technology division realized an overall decrease in gross margin to 26.1% in the
three months ended September 30, 1998 from 27.3% in the year earlier period. The
decrease was primarily attributable to the higher volume of contribution to
gross profit from the division's international operations, which produces lower
gross margins than the division's domestic operations, the majority of which
were acquired in November 1997 and are therefore not included in the September
30, 1997 results. The remainder of the division's decrease is attributable to
the Company's continuing effort to recruit and retain intellectual capital which
requires, in some instances, higher pay rates for consultants which cannot
necessarily be passed through to the customers. Additionally, the Company is
employing more salaried consultants, who receive increased benefits which in
certain instances may not be passed through to the customer. The gross margin in
the Professional Services division decreased to 30.0% in the three months ended
September 30, 1998 from 32.6% in the year earlier period. The decrease was due
to the fact that the international portion of professional services (which
historically has lower gross margins) was a much smaller part of the total
revenue mix in the prior period.
Operating Expenses. Operating expenses increased $22.6 million, or 39.7%, to
$79.5 million in the three months ended September 30, 1998 from $56.9 million in
the year earlier period. Operating expenses as a percentage of revenue decreased
to 18.0% in the three months ended September 30, 1998 from 18.8% in the year
earlier period due to the Company's ability to spread its expenses over a larger
revenue base. Included in operating expenses during the three months ended
September 30, 1998 and 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 related costs, which are expensed as incurred, are included in general and
administrative expense. The Company expects to substantially complete the Year
2000 conversion projects by the end of 1999. 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 $10.1 million, or 32.5% to $41.2 million in the three months ended
September 30, 1998 from $31.1 million in the year earlier period. Income from
operations as a percentage of revenue decreased to 9.3% in the three months
ended September 30, 1998 from 10.3% in the year earlier period.
Interest Expense. Interest expense increased $2.6 million, or 52.0%, to $7.6
million in the three months ended September 30, 1998 from $5.0 million in the
year earlier period. The increase in interest expense resulted from a
combination of the utilization of the Company's credit facility, and the amount
of cash on hand at December 31, 1996.
Income Taxes. The Company's effective tax rate was 38.0% in the three months
ended September 30, 1998 compared to 37.4% in the year earlier period. The
increase in the effective tax rate was due in large part to nondeductible
goodwill amortization related to the Company's acquisition of Actium, Inc.
Income from continuing operations. As a result of the foregoing,income from
continuing operations increased $5.5 million, or 33.3%, to $22.0 million in the
three months ended September 30, 1998 from $16.5 million in the year earlier
period. Income from continuing operations as a percentage of revenue decreased
to 5.0% in the three months ended September 30, 1998 from 5.5% in the year
earlier period.
From discontinued operations
Income from Discontinued Operations. Income from the discontinued commercial
operations, after tax, decreased $5.2 million, or 43.0% to $6.9 million for the
three months ended September 30, 1998 versus $12.1 million for the year earler
period. Reported revenues from discontinued operations were $287.8 million for
the three months ended September 30, 1998 versus $338.6 million for the year
earlier period. Operating income for the discontinued operations were $ 13.0
million for the three months ended September 30, 1998 versus $21.0 million
during the year earler period. Results of discontinued operations include
allocations of consolidated interest expense totaling $1.5 million and $1.4
million for the three months ended September 30, 1998 and 1997, respectively.
The allocations were based on the historic funding needs of the discontinued
operations, including: the purchases of property, plant and equipment,
acquisitions, current income tax liabilities and fluctuating working capital
needs.
Nine Months ended September 30, 1998 Compared to Nine Months ended September 30,
1997.
From continuing operations
Revenue. Revenue increased $423.3 million, or 51.7%, to $1,241.5 million in the
nine months ended September 30, 1998 from $818.2 million in the year earlier
period. The increase was attributable by division to: Information Technology,
$291.5 million or an increase of 52.5%; and Professional Services, $131.8
million, or an increase of 50.1%. The increase in the Information Technology
division was due to growth through acquisition, and more significantly, internal
growth. The growth in the Professional Services division was due to both
internal growth and the revenue contribution of acquired companies.
Gross Profit. Gross profit increased $113.7 million or 49.6% to $343.0 million
in the nine months ended September 30, 1998 from $229.3 million in the year
earlier period. Gross margin decreased to %27.6 in the nine months ended
September 30, 1998 from 28.0% in the year earlier period. The increase in gross
profit was attributable by division to: Information Technology $72.7 million, or
48.7% and Professional Services $41.0 million, or 51.2%. The Information
Technology division realized an overall decrease in gross margin to 26.2% in the
nine months ended September 30, 1998 from 26.9% in the year earlier period. The
decrease was partially attributable to the higher volume of contribution to
gross profit from the division's international operations, which produces lower
gross margins than the division's domestic operations, the majority of which
were acquired in November of 1997 and are therefore not included in the
September 30, 1997 results. The remainder of the divisions decrease is
attributable to the Company's continuing effort to recruit and retain
intellectual capital which requires, in some instances, higher pay rates for
consultants which cannot necessarily be passed through to the customer.
Additionally, the Company is employing more salaried consultants, who receive
increased benefits which in certain instances may not be passed through to the
customer. The gross margin in the Professional division increased to 30.7% in
the nine months ended September 30, 1998 from 30.4% in the year earlier period.
Operating Expenses. Operating expenses increased $70.6 million, or 48.3%, to
$216.8 million in the nine months ended September 30, 1998 from $146.2 million
in the year earlier period. Operating expenses as a percentage of revenue
decreased to 17.5% in the nine months ended September 30, 1998 from 17.9% in the
year earlier period due to the Company's ability to spread its expenses over a
larger revenue base. Included in Operating expenses during the nine months ended
September 30, 1998 and 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 related costs, which are expensed as incurred, are included in general and
administrative expense. The Company expects to substantially complete the Year
2000 conversion projects by the end of 1999. 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 $43.1 million, or 51.9% to $126.2 million in the nine months ended
September 30, 1998 from $83.1 million in the year earlier period. Income from
operations as a percentage of revenue remained relatively constant at 10.2% in
the nine months ended September 30, 1998 and 1997, respectively.
Interest Expense. Interest expense increased $11.0 million, or 103.8%, to $21.6
million in the nine months ended September 30, 1998 from $10.6 million in the
year earlier period. The increase in interest expense resulted from a
combination of the utilization of the Company's credit facility, and the amount
of cash on hand at December 31, 1996.
Income taxes. The Company's effective tax rate was 37.9% in the nine months
ended September 30, 1998 compared to 38.3% in the year earlier period. The
decrease in the effective tax rate was due to tax savings realized from
corporate restructurings.
Income from continuing operations. As a result of the foregoing, income from
continuing operations increased $22.9 million, or 50.4%, to $68.3 million in the
nine months ended September 30, 1998 from $45.4 million in the year earlier
period. Income from continuing operations as a percentage of revenue remained
relatively constant at 5.5% in the nine months ended September 30, 1998 and
1997, respectively.
From discontinued operations
Income from Discontinued Operations. Income from the discontinued commercial
operations, after tax, increased $1.4 million, or 4.9% to $30.0 million for the
nine months ended September 30, 1998 versus $28.6 million for the year earler
period. Reported revenues from discontinued operations were $919.4 million for
the nine months ended September 30, 1998 versus $931.5 million for the year
earlier period. Operating income for the discontinued operations were $ 54.2
million for the nine months ended September 30, 1998 versus $49.0 million during
the year earler period. Results of discontinued operations include allocations
of consolidated interest expense totaling $4.2 million and $2.8 million for the
nine months ended September 30, 1998 and 1997, 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 been 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.
The Company had working capital of $404.1 million and $515.0 million as of
September 30, 1998 and December 31, 1997, respectively. The Company had cash and
cash equivalents of $80.8 million and $23.9 million as of September 30, 1998 and
December 31, 1997, respectively. Included in the Company's current assets as of
September 30, 1998 is a note receivable of $829.9 million from Randstad
resulting from the acquisition of Strategix. This receivable was converted into
cash on October 1, 1998 and, after the Company paid off its credit facility of
approximately $477.0 million, the Company had approximately $433.7 million of
cash on its balance sheet. 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.
As a result of the foregoing the Company generated $24.3 million and $46.7
million of cash flow from operations for the nine months ended September 30,
1998 and 1997, respectively.
The Company used $163.1 million and $243.1 million for investing activities in
the nine months ended September 30, 1998 and 1997, respectively, of which $135.1
million and $236.6 million, respectively, was used for acquisitions and $15.6
million and $6.5 million, respectively, was used for capital expenditures.
For the nine months ended September 30, 1998 and 1997, the Company was provided
$169.2 million and $245.0 million of cash flows from financing activities. These
amounts primarily represent net borrowings from the Company's credit facility,
which were used primarily to fund acquisitions.
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 purchases from cash on hand, cash flows from operations, or
borrowings on its credit facility.
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 30, 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 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. The notes are 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 Companies 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 October 30, 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.
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%, 90%, 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.
Item 3. Changes in Information About Market Risk
None
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
No disclosure required.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
No disclosure required
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
3 Amended and Restated Bylaws
11 Calculation of Per Share Earnings
27 Financial Data Schedule
(B) Reports on Form 8-K
No disclosure required
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AccuStaff Incorporated
August 14, 1998 By:/S/ DEREK E. DEWAN
___________________________________________
Derek E. Dewan, President, Chairman of the
Board and Chief Executive Officer
August 14, 1998 By:/S/ MICHAEL D. ABNEY
___________________________________________
Michael D. Abney, Senior Vice President, Chief
Financial Officer,Treasurer, Secretary and Director
August 14, 1998 By:/S/ ROBERT P. CROUCH
___________________________________________
Robert P. Crouch, Vice President and Chief
Accounting Officer