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, 1999
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, Florida
32202
(Address of principal executive offices) (Zip code)
(904) 360-2000
(Registrant's telephone
number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. October 29, 1999.
Common Stock, $0.01 par value Outstanding: 96,040,657 (No. of shares)
FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements, including but not
limited to all of the information under Part I, Item 3, under 'Quantitative and
Qualitative Disclosures About Market Risk' (except for historical data). These
forward-looking statements are subject to risks, uncertainties or assumptions
and may be affected by other factors, including but not limited to: the matters
discussed in Part I, Item 2, under 'Three months ended September 30, 1999
compared to three months ended September 30, 1998 - Revenue,' and under 'Nine
months ended September 30, 1999 compared to nine months ended September 30, 1998
- - Revenue,' under Part 1, Item 2 'Other Matters - Year 2000 Compliance,' under
Part 1, Item 2 'Factors Which May Impact Future Results and Financial
Information,' fluctuations in the economy and financial markets in general and
in the Company's industry in particular, industry trends towards consolidating
vendor lists, the demand for the Company's services, including the impact of
changes in utilization rates and effects of the Year 2000 on spending for
non-Year 2000 related items, consolidation of major customers, the effect of
competition, including the Company's ability to expand into new markets and to
maintain profit margins in the face of pricing pressures and wage inflation, the
Company's ability to retain significant existing customers or obtain new
customers, the Company's ability to recruit, place and retain consultants and
professional employees, the Company's ability to identify and complete
acquisition targets and to successfully integrate acquired operations into the
Company, possible changes in governmental regulations affecting the Company's
operations, including possible changes to regulations relating to benefits for
consultants and temporary personnel, unexpected fluctuations in interest rates
or foreign currency exchange rates, exposure to Year 2000 liability from the
Company's Year 2000 remediation and other IT services, loss of key employees,
the ability of the Company to successfully complete its previously announced
Integration and Strategic Repositioning Plan, and other factors discussed in the
Company's previous filings with the Securities and Exchange Commission under the
Securities Exchange Act of 1934. Should one or more of these risks,
uncertainties or other factors materialize, or should underlying assumptions
prove incorrect, actual results, performance or achievements of the Company may
vary materially from any future results, performance or achievements expressed
or implied by the forward-looking statements. Forward-looking statements are
based on beliefs and assumptions of the Company's management and on information
then currently available to management. Forward-looking statements speak only as
of the date they are made, and the Company undertakes no obligation to update
publicly any of them in light of new information or future events. Undue
reliance should not be placed on such forward-looking statements.
Forward-looking statements are not guarantees of performance.
Modis Professional Services, Inc. and Subsidiaries
Index
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998................... 3
Condensed Consolidated Statements of Income for the Three and Nine Months
ended September 30, 1999 and 1998.................................................................. 4
Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 1999 and 1998.. 5
Notes to Condensed Consolidated Financial Statements................................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 10
Item 3 Quantitative and Qualitive Disclosure About Market Risks............................................... 21
Part II Other Information
Item 1 Legal Proceedings...................................................................................... 24
Item 2 Changes in Securities and Use of Proceeds.............................................................. 24
Item 3 Defaults Upon Senior Securities........................................................................ 24
Item 4 Submission of Matters to a Vote of Security Holders.................................................... 24
Item 5 Other Information...................................................................................... 24
Item 6 Exhibits and Reports on Form 8-K....................................................................... 24
Signatures............................................................................................. 25
Exhibits
2
Part I. Financial Information
Item 1. Financial Statements
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(dollar amounts in thousands except per share amounts)
September 30, 1999 December 31, 1998
------------------- -------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 24,941 $ 105,816
Accounts receivable, net 383,379 327,185
Prepaid expenses 9,239 11,219
Deferred income taxes 13,393 16,858
Other 10,418 28,460
------------------- -------------------
Total current assets 441,370 489,538
Furniture, equipment and leasehold improvements, net 41,977 37,577
Goodwill, net 1,082,716 1,025,240
Other assets 18,467 19,526
------------------- -------------------
Total assets $ 1,584,530 $ 1,571,881
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 6,217 $ 15,988
Accounts payable and accrued expenses 69,152 396,568
Accrued payroll and related taxes 76,642 60,844
------------------- -------------------
Total current liabilities 152,011 473,400
Notes payable, long-term portion 244,819 15,525
Deferred income taxes 18,959 12,846
------------------- -------------------
Total liabilities 415,789 501,771
------------------- -------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.01 par value; 400,000,000 shares authorized
96,031,850 and 96,306,323 shares issued and outstanding on
September 30, 1999 and December 31, 1998, respectively 960 963
Additional contributed capital 582,270 563,728
Retained earnings 585,782 504,899
Accumulated other comprehensive income (271) 520
------------------- -------------------
Total stockholders' equity 1,168,741 1,070,110
------------------- -------------------
Total liabilities and stockholders' equity $ 1,584,530 $ 1,571,881
=================== ===================
See accompanying notes to condensed consolidated financial statements.
3
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(unaudited)
(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,
1999 1998 1999 1998
------------- ------------- -------------- -------------
Revenue $ 500,062 $ 441,580 $ 1,484,607 $ 1,241,455
Cost of Revenue 362,229 320,880 1,081,629 898,502
------------- ------------- -------------- -------------
Gross Profit 137,833 120,700 402,978 342,953
------------- ------------- -------------- -------------
Operating expenses:
General and administrative 79,034 69,464 238,232 189,862
Depreciation and amortization 11,403 10,053 33,293 26,925
Restructuring charge (3,250) - (3,250) -
Asset write-down related to sale of
discontinued operations 25,000 - 25,000 -
------------- ------------- -------------- -------------
Total operating expenses 112,187 79,517 293,275 216,787
------------- ------------- -------------- -------------
Income from operations 25,646 41,183 109,703 126,166
------------- ------------- -------------- -------------
Other income (expense):
Interest expense (3,800) (7,581) (7,860) (21,620)
Interest income and other, net 860 1,915 3,784 5,424
------------- ------------- -------------- -------------
Total other income (expense) (2,940) (5,666) (4,076) (16,196)
------------- ------------- -------------- -------------
Income from continuing operations before
provision for income taxes 22,706 35,517 105,627 109,970
Provision for income taxes 6,969 13,496 39,701 41,718
------------- ------------- -------------- -------------
Income from continuing operations 15,737 22,021 65,926 68,252
Income from discontinued operations, net of
income taxes - 6,907 - 30,020
Gain on sale of discontinued operations,
net of income taxes 14,955 216,365 14,955 216,365
------------- ------------- -------------- -------------
Net income $ 30,692 $ 245,293 $ 80,881 $ 314,637
============= ============= ============== =============
Basic income per common share:
from continuing operations $ 0.16 $ 0.20 $ 0.68 $ 0.63
============= ============= ============== =============
from discontinued operations $ - $ 0.06 $ - $ 0.28
============= ============= ============== =============
from gain on sale of discontinued operations $ 0.16 $ 1.94 $ 0.16 $ 1.98
============= ============= ============== =============
Basic net income per common share $ 0.32 $ 2.20 $ 0.84 $ 2.89
============= ============= ============== =============
Diluted income per common share:
from continuing operations $ 0.16 $ 0.19 $ 0.68 $ 0.59
============= ============= ============== =============
from discontinued operations $ - $ 0.06 $ - $ 0.25
============= ============= ============== =============
from gain on sale of discontinued operations $ 0.15 $ 1.79 $ 0.15 $ 1.80
============= ============= ============== =============
Diluted net income per common share $ 0.31 $ 2.04 $ 0.83 $ 2.64
============= ============= ============== =============
Average common shares outstanding, basic 96,313 111,412 96,252 109,085
============= ============= ============== =============
Average common shares outstanding, diluted 97,693 120,875 97,090 119,921
============= ============= ============== =============
See accompanying notes to consolidated financial statements.
4
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(dollar amounts in thousands except for per share amounts)
Nine Months Ended
-------------------------------
September 30, September 30,
1999 1998
(unaudited) (unaudited)
--------------- ---------------
Cash flows from operating activities:
Income from continuing operations $ 65,926 $ 68,252
Adjustments to income from continuing operations to net
cash provided by (used in) operating activities:
Restructuring and impairment charges (3,250) -
Depreciation and amortization 33,293 26,925
Asset write-down related to sale of
discontinued operations 25,000 -
Deferred income taxes 9,450 4,155
Changes in certain assets and liabilities:
Accounts receivable (42,224) (78,396)
Prepaid expenses and other assets 2,311 (11,876)
Accounts payable and accrued expenses (55,938) 3,018
Accrued payroll and related taxes 16,710 12,020
Other, net 1,964 157
--------------- ---------------
Net cash provided by operating activities 53,242 24,255
--------------- ---------------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements, net of disposals (13,230) (15,590)
Purchase of businesses, including additional earn-outs on
acquisitions, net of cash acquired (147,515) (135,111)
Income taxes and other cash expenses related to sale of
net assets of discontinued commercial operations (191,409) -
Advances associated with sale of assets of discontinued
health care operations, net of repayments (8,224) (12,382)
--------------- ---------------
Net cash used in investing activities (360,378) (163,083)
--------------- ---------------
Cash flows from financing activities:
Repurchases of common stock, net of refunds 11,871 -
Proceeds from stock options exercised 3,669 45,073
Borrowings on indebtedness 422,000 299,009
Repayments on indebtedness (209,196) (174,538)
Other - (357)
--------------- ---------------
Net cash provided by financing activities 228,344 169,187
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents (2,083) -
Net decrease in cash and cash equivalents (80,875) 30,359
Cash provided by discontinued operations - 26,475
Cash and cash equivalents, beginning of period 105,816 23,938
--------------- ---------------
Cash and cash equivalents, end of period $ 24,941 $ 80,772
=============== ===============
Supplemental noncash investing information:
During the first quarter of 1998, the Company issued 4,598,698 shares of its
common stock, with a fair value of $130,000 in exchange for all the outstanding
common stock of Actium, Incorporated.
See accompanying notes to condensed consolidated financial statements.
5
Modis Professional Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(dollar amounts in thousands except for per share amounts)
1. Basis of Presentation.
The accompanying condensed consolidated financial statements are unaudited and
have been prepared by the Company in accordance with the rules and regulations
of the Securities and Exchange Commission ("SEC"). Accordingly, certain
information and footnote disclosures usually found in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The financial statements should be read in conjunction
with the consolidated financial statements and related notes included in the
Company's Form 10-K, as filed with the SEC on March 31, 1999.
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.
2. Restructuring of Operations
In December 1998, the Company's Board of Directors approved an Integration and
Strategic Repositioning Plan (the "Plan") to strengthen the overall
profitability of the Company by implementing a back office integration program
and branch repositioning plan in an effort to consolidate or close branches
whose financial performance did not meet the Company's expectations. Pursuant to
the Plan, during the fourth quarter of 1998 the Company recorded a restructuring
and impairment charge of $34,759. The restructuring component of the Plan is
based, in part, on the evaluation of objective evidence of probable obligations
to be incurred by the Company or impairment of specifically identified assets.
The Plan calls for the consolidation or closing of 23 Professional Services
division branches, certain organizational improvements and the consolidation of
15 back office operations. This restructuring, which will result in the
elimination of approximately 290 positions, will be completed over a 12- to
18-month period, which began during the first quarter of 1999.
The major components of the restructuring and impairment charge include:(1)
costs of $7,494 to recognize severance and related benefits for the
approximately 290 employees to be terminated. The severance and related benefit
accruals are based on the Company's severance plan and other contractual
termination provisions. These accruals include amounts to be paid to employees
upon termination of employment. Prior to December 31, 1998, management had
approved and committed the Company to a plan that involved the involuntary
termination of certain employees. The benefit arrangements associated with this
plan were communicated to all employees in December 1998. The plan specifically
identified the number of employees to be terminated and their job
classifications; (2) costs of $2,476 to write down certain furniture, fixtures
and computer equipment to net realizable value at branches not performing up to
the Company's expectations; (3) costs of $9,936 to write down goodwill
associated with the acquisition of Legal Information Technology, Inc. which was
acquired in January 1997, calculated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121 in the fourth quarter of 1998; (4) costs of
$8,035 to terminate leases and other exit and shutdown costs associated with the
consolidated or closed branches, including closing the facilities; and (5) costs
of $6,818 to adjust accounts receivable due to the expected increase in bad
debts which results directly from the termination or change in client
relationships which results when branch and administrative employees, who have
the knowledge to effectively pursue collections, are terminated. These costs are
based upon management's best estimates. Based on efficiencies and lease
termination activities, the Company reduced the reserve for lease payments on
cancelled facility leases by $3,250 in the third quarter of 1999.
6
The following table summarizes the restructuring activity through September 30
1999 (in millions):
Payments To Write-Down Of Payments On
Employees Certain Property, Cancelled Write-Down Of
Involuntarily Plant and Facility Certain
Terminated (a) Equipment (b) Leases (a) Receivables (b) Total
----------------- ------------------ ---------------- ------------------ ---------------
Balances as of
December 31, 1998 $ 7,494 $ 2,476 $ 8,035 $ 6,818 $ 24,823
Charges during the
three months ended
March 31, 1999 (1,959) (125) (308) - (2,392)
Charges during the
three months ended
June 30, 1999 (2,439) (1,876) (573) (990) (5,878)
Charges and write-down
during the three
months ended
September 30, 1999 (2,485) (238) (1,140) (1,910) (5,773)
Adjustment to estimated
payments on cancelled
facility leases - - (3,250)(b) - (3,250)
------- ------- ------- ------- -------
Balances as of
September 30, 1999 $ 611 $ 237 $ 2,764 $ 3,918 $ 7,530
======= ======= ======= ======= =======
(a): Cash; (b): Noncash
As of September 30, 1999, the $7,530 balance in the restructuring accrual was
included in the balance sheet caption 'Accounts payable and accrued expenses'.
3. Segment Reporting
The Company discloses segment information in accordance with SFAS No. 131,
'Disclosure About Segments of an Enterprise and Related Information,' which
requires companies to report selected segment information on a quarterly basis
and to report certain entity-wide disclosures about products and services, major
customers, and the material countries in which the entity holds assets and
reports revenues.
The Company has two reportable segments: information technology and professional
services. The Company's reportable segments are strategic business units that
offer different services and are managed separately as each business unit
requires different resources and marketing strategies. The information
technology segment provides computer related consulting services. The
professional services segment provides personnel who perform specialized
services such as accounting, legal, technical, outplacement and scientific.
Discontinued operations of the Company are not contained within the scope of
this footnote.
The accounting policies of the segments are consistent with those described in
the summary of significant accounting policies in Note 2 to the Consolidated
Financial Statements on Form 10-K filed with the SEC on March 31, 1999 and all
intersegment sales and transfers are eliminated.
No one customer represents more than 5% of the Company's overall revenue.
Therefore, the Company does not believe it has a material reliance on any one
customer as the Company is able to provide services to numerous Fortune 1000 and
other leading businesses.
The Company evaluates segment performance based on revenues, gross margin and
pre-tax income from continuing operations. The Company does not allocate income
taxes or unusual items to the segments. The following table summarizes segment
and geographic information:
7
Three Months Ended Nine Months Ended
------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Revenue
IT $ 345,189 $ 300,994 $ 1,043,645 $ 846,707
Professional 154,873 140,586 440,962 394,748
------------ ------------ ------------ ------------
Total Revenue $ 500,062 $ 441,580 $ 1,484,607 $ 1,241,455
============ ============ ============ ============
Gross Profit
IT $ 86,218 $ 78,498 $ 257,310 $ 221,953
Professional 51,615 42,202 145,668 121,000
------------ ------------ ------------ ------------
Total Gross Profit $ 137,833 $ 120,700 $ 402,978 $ 342,953
============ ============ ============ ============
Pre-tax Income from Continuing Operations
IT $ 14,679 $ 25,300 $ 73,012 $ 78,682
Professional 8,027 10,217 32,615 31,288
------------ ------------ ------------ ------------
Total Pre-tax Income from
Continuing Operations $ 22,706 $ 35,517 $ 105,627 $ 109,970
============ ============ ============ ============
Geographic Areas
Revenues
United States $ 375,474 $ 381,242 $ 1,137,094 $ 1,078,223
U.K. 120,283 55,494 331,945 147,439
Other 4,305 4,844 15,568 15,793
------------ ------------ ------------ ------------
Total $ 500,062 $ 441,580 $ 1,484,607 $ 1,241,455
============ ============ ============ ============
September 30, December 31,
-------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------
Assets
IT $ 1,035,040 $ 1,043,722
Professional 411,530 394,563
------------ ------------
1,446,570 1,438,285
Corporate 137,960 133,596
------------ ------------
Total Assets $ 1,584,530 $ 1,571,881
============ ============
Geographic Areas
Identifiable Assets
United States $ 1,170,978 $ 1,222,821
U.K. 407,907 345,182
Other 5,645 3,878
------------ ------------
Total $ 1,584,530 $ 1,571,881
============ ============
8
4. Comprehensive Income
The Company discloses other comprehensive income in accordance with SFAS No.
130, 'Reporting Comprehensive Income'. A summary of comprehensive income for the
three and nine months ended September 30, 1999 and 1998 is as follows:
Foreign
Currency Total
Net Translation Comprehensive
Three Months Ended, Income Adjustments Income
- ----------------------------------------------------------------------------------------
September 30, 1998 $ 245,293 $ 1,335 $ 246,628
September 30, 1999 $ 30,692 $ 3,389 $ 34,081
Foreign
Currency Total
Net Translation Comprehensive
Nine Months Ended, Income Adjustments Income
- ----------------------------------------------------------------------------------------
September 30, 1998 $ 314,637 $ 2,041 $ 316,678
September 30, 1999 $ 80,881 $ (791) $ 80,090
The currency translation adjustments are not adjusted for income taxes as they
relate to indefinite investments in non-U.S. subsidiaries.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
During fiscal 1998, the Company sold its assets that were unrelated to its
Information Technology and Professional Services divisions. Effective March 30,
1998, the Company sold the Health Care division for consideration of $8.0
million, consisting of $3.0 million in cash and $5.0 million in a note
receivable due March 30, 2000 bearing interest at 2% in excess of the prime
rate. In addition, the Company retained the accounts receivable of the Health
Care division of approximately $28.2 million. On September 27, 1998, the Company
sold its Commercial operations and its Teleservices division for $850 million,
prior to any purchase price adjustments, for cash.
As a result of these transactions, the Company's Consolidated Financial
Statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations have been reclassified to report the results of operations
of its Commercial, Teleservices and Health Care divisions as discontinued
operations for all periods presented.
The following detailed analysis of operations should be read in conjunction with
the 1998 Financial Statements and related notes included in the Company's Form
10-K filed on March 31, 1999.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Results from Continuing Operations
Revenue. Revenue increased $58.5 million, or 13.2%, to $500.1 million in the
three months ended September 30, 1999, from $441.6 million in the year earlier
period. The increase was attributable by division to: Information Technology,
$44.2 million or an increase of 14.7%, and Professional Services, $14.3 million
or an increase of 10.2%. The increases in the Information Technology and
Professional Services divisions were due to both internal growth and to the
revenues of acquired companies. The revenue for the Company's Information
Technology division is obtained through the modis Solutions and modis Consulting
business units. modis Solutions provided approximately 32.8% and 29.2% of the
division's revenue for the three months ended September 30, 1999 and 1998, as
compared to 67.2% and 70.8% which was provided by the division's modis
Consulting unit during the same respective periods. The Company plans to
continue to expand the percentage of revenue contributed through its modis
Solutions unit as it expands that unit's offerings throughout the offices of the
modis Consulting unit through various cross-selling efforts.
Management has observed a current trend in the industry which may possibly
enhance the effectiveness of its strategy. This trend involves the movement of
large users of IT services to larger national and international providers of IT
services. The Company has seen a trend among large national and international
customers towards scaled-back, preferred vendor lists for supplying IT services.
The Company believes it is well positioned as one of the companies which can
successfully offer services to these customers and achieve selection as a
preferred provider. Approximately 3.2% of the Information Technology division's
total revenue is derived from two United Kingdom customers. If these or other
customers reduce spending on IT services or exclude the Company from their
vendor lists, then the fiscal 1999 IT division revenues may experience a
decrease if the revenue associated with such customers cannot be replaced.
During the three month period ended September 30, 1999, revenue was negatively
effected by reduced spending on non year 2000 items. During this period,
customers have begun to focus their IT efforts on testing and implementing
legacy systems which have undergone year 2000 remediation. Management expects
this year 2000 effect to extend into the fourth quarter of 1999 and, to some
extent, the first quarter of 2000.
The Company's Professional Services division consists of the accounting and
finance, legal, technical and engineering, career management and consulting and
scientific units which contributed 38.9%, 13.2%, 33.5%, 9.5% and 4.9%,
respectively, of the Professional Services division's revenues by group during
the three months ended September 30, 1999 as compared to 34.0%, 17.3%, 33.5%,
8.8% and 6.4%, respectively, during the year earlier period.
10
Gross Profit. Gross profit increased $17.1 million, or 14.2%, to $137.8 million
in the three months ended September 30, 1999, from $120.7 million in the year
earlier period. Gross margin increased to 27.6% from 27.3% for the same
respective periods. The gross margin in the IT division decreased from 26.1% to
25.0% for the three months ended September 30, 1998 and 1999, respectively. The
overall decrease in the IT division's gross margin was mainly due to the
increased percentage of the Information Technology division's revenues generated
by the U.K. operations, which generally contribute a lower gross margin
percentage. In addition, as the division's Consulting Unit increases the amount
of revenue generated as a result of Preferred Vendor relationships, certain
gross margin concessions may be made in exchange for an increase in overall
gross profit. The gross margin in the Professional Services division increased
to 33.3% in the three months ended September 30, 1999 from 30.0% in the year
earlier period.
Operating Expenses. Operating expenses increased $32.7 million, or 41.1%, to
$112.2 million in the three months ended September 30, 1999, from $79.5 million
in the year earlier period. Operating expenses, before one-time income items, as
a percentage of revenue remained relatively constant at 18.1% in the three
months ended September 30, 1999, as compared to 18.0% in the year earlier
period. In the third quarter of 1999, the Company was informed by the purchaser
of its health care operations that the purchaser was going to default on its
obligation to the Company. This default was due to the purchaser's decision to
discontinue its efforts to refinance their indebtedness to the Company and to
subsequently exit the business. As a result, the Company recorded a charge of
$25.0 million related to the impairment of an asset (notesrecievable) generated
from the sale of the Company's discontinued health care operations due to a
change in the estimate of the recoverability of the collateral securing the
asset. See 'LIQUIDITY AND CAPITAL RESOURCES' below. In addition, the Company
reduced the lease component of the restructuring and impairment charge $3.3
million as a result of the Company not experiencing the expected levels of
payments on cancelled facility leases relating to the closing of Professional
Services divison branches and the consolidation of back office operations.
Additionally, the Company's general and administrative ("G&A") expenses
increased $9.5 million or 13.7% to $79.0 million in the three months ended
September 30, 1999, from $69.5 million in the year earlier period. The increase
in G&A expenses was primarily related to the effects of acquisitions made by the
Company, internal growth of operating companies post-acquisition, investments
made to improve infrastructure and to develop technical practices and increased
expenses at the corporate level to support the growth of the Company, including
sales, marketing and brand recognition. Included in G&A expenses during both the
three months ended September 30, 1999 and 1998 are the costs associated with
projects underway to ensure accurate date recognition and data processing with
respect to Year 2000 as it relates to the Company's business, operations,
customers and vendors. 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. See 'OTHER MATTERS - Year 2000
Compliance' below.
Income from Operations. Income from operations decreased $15.6 million, or
37.9%, to $25.6 million in the three months ended September 30, 1999, from $41.2
million in the year earlier period. Income from operations before one-time
income items increased $6.2 million or 15.0% to $47.4 million in the three
months ended September 30, 1999 from $41.2 million in the year earlier period.
Income from operations as a percentage of revenue decreased to 5.1% in the three
months ended September 30, 1999, from 9.3% in the year earlier period. Income
from operations, before one-time income items, as a percentage of revenue
increased to 9.5% in the three months ended September 30, 1999, from 9.3% in the
year earlier period.
Other Income (Expense). Interest expense decreased $3.8 million, or 50.0%, to
$3.8 million in the three months ended September 30, 1999, from $7.6 million in
the year earlier period. Interest expense was offset in the three months ended
September 30, 1999 by interest and other income of $0.9 million from (1)
investment income from certain investments owned by the Company and (2) interest
income earned from cash on hand at certain subsidiaries of the Company.
Income Taxes. The Company's effective tax rate was 30.7% in the three months
ended September 30, 1999, compared to 38.0% in the year earlier period. The
decrease in the effective tax rate was primarily due to the effect of foreign
tax credits resulting from tax strategies relating to foreign subsidiaries.
Income from Continuing Operations. As a result of the foregoing, income from
continuing operations decreased $6.3 million, or 28.6%, to $15.7 million in the
three months ended September 30, 1999, from $22.0 million in the year earlier
period. Income from continuing operations before one-time income items increased
$6.9 million, or 31.4%, to $28.9 million in the three months ended September 30,
1999, from $22.0 million in the year earlier period. Income from continuing
operations as a percentage of revenue decreased to 3.1% in the three months
ended September 30, 1999, from 5.0% in the year earlier period. Income from
continuing operations, before one-time income items, as a percentage of revenue
increased to 5.8% in the three months ended September 30, 1999, from 5.0% in the
year earlier period.
11
Results from Discontinued Operations
Income from Discontinued Operations. Income from the discontinued commercial
operations, after tax, were $6.9 million for the three months ended September
30, 1998. Additionally, for the three months ended September 30, 1998, reported
revenues from discontinued operations were $287.8 million and operating income
for the discontinued operations were $ 13.0 million. Results of discontinued
operations include allocations of consolidated interest expense totaling $1.5
million for the three months ended September 30, 1998. 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. Due to the sale of the
Commercial operations and Teleservices division on September 27, 1998, and the
sale of the Health Care division on March 30, 1998, the three months ended
September 30, 1999 results did not include any operations of the Commercial,
Teleservices or Health Care divisions. In the third quarter of 1999, the
Company, in conjunction with the purchaser of Strategix, finalized the joint
section 338(h)(10) election as required by the sales agreement. This final
allocation of the sales price resulted in an adjustment to the tax liability
recorded in discontinued operations from the sale of Strategix. As a result, the
Company has reduced its tax liability by approximately $14.9 million. This
adjustment increases the gain related to the sale of the discontinued commercial
operations and is reflected in the income statement line item 'Gain on sale of
discontinued operations'.
12
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
From continuing operations
Revenue. Revenue increased $243.1 million, or 19.6%, to $1,484.6 million in the
nine months ended September 30, 1999 from $1,241.5 million in the year earlier
period. The increase was attributable by division to: Information Technology,
$196.9 million or an increase of 23.3%; and Professional Services, $46.2
million, or an increase of 11.7%. The increases in the Information Technology
and Professional Services divisions were due to both internal growth and to the
revenues of acquired companies. The revenue for the Company's Information
Technology division is obtained through the modis Solutions and modis Consulting
business units. modis Solutions provided approximately 32.2% and 26.5% of the
division's revenue for the nine months ended September 30, 1999 and 1998, as
compared to 67.8% and 73.5% which was provided by the division's modis
Consulting unit during the same respective periods. The Company plans to
continue to expand the percentage of revenue contributed through its modis
Solutions unit as it expands that unit's offerings throughout the offices of the
modis Consulting unit through various cross-selling efforts.
Management has observed a current trend in the industry which may possibly
enhance the effectiveness of its strategy. This trend involves the movement of
large users of IT services to larger national and international providers of IT
services. The Company has seen a trend among large national and international
customers towards scaled-back, preferred vendor lists for supplying IT services.
The Company believes it is well positioned as one of the companies which can
successfully offer services to these customers and achieve selection as a
preferred provider. Approximately 3.4% of the Information Technology division's
total revenue is derived from two United Kingdom customers. If these or other
customers reduce spending on IT services or exclude the Company from their
vendor lists, then the fiscal 1999 IT division revenues may experience a
decrease if the revenue associated with such customers cannot be replaced.
During the three month period ended September 30, 1999, revenue was negatively
effected by reduced spending on non year 2000 items. During this period,
customers have begun to focus their IT efforts on testing and implementing
legacy systems which have undergone year 2000 remediation. Management expects
this year 2000 effect to extend into the fourth quarter of 1999 and, to some
extent, the first quarter of 2000.
The Company's Professional Services division consists of the accounting and
finance, legal, technical and engineering, career management and consulting and
scientific units which contributed 38.4%, 13.6%, 32.7%, 10.1% and 5.2%,
respectively, of the Professional Services division's revenues by group during
the nine months ended September 30, 1999 as compared to 32.9%, 16.6%, 35.0%,
9.0% and 6.5%, respectively, during the year earlier period.
During the first quarter of 1999, the Company created and filled the position of
President and COO of the Professional Services division. This officer is
responsible for the operations of all business units of the Professional
Services division. The Company believes this position will create inertia to
improve the platform for better operational results throughout the entire
Professional Services division. Additionally, the Special Counsel unit of the
Professional Services division formed strategic alliance with International
Paper in the nine months ended September 30, 1999.
Gross Profit. Gross profit increased $60.0 million or 17.5% to $403.0 million in
the nine months ended September 30, 1999 from $343.0 million in the year earlier
period. Gross margin decreased to 27.1% in the nine months ended September 30,
1999 from 27.6% in the year earlier period. The gross margin in the IT division
decreased from 26.2% to 24.7% for the nine months ended September 30, 1998 and
1999, respectively. The overall decrease in the IT division's gross margin was
mainly due to the increased percentage of the Information Technology division's
revenues generated by the U.K. operations, which generally contribute a lower
gross margin percentage. In addition, as modis Consulting increases the amount
of revenue generated as a result of preferred vendor relationships, certain
gross margin concessions may be made in exchange for an increase in overall
gross profit. The gross margin in the Professional division increased to 33.0%
in the nine months ended September 30, 1999 from 30.7% in the year earlier
period.
13
Operating Expenses. Operating expenses increased $76.5 million, or 35.3%, to
$293.3 million in the nine months ended September 30, 1999 from $216.8 million
in the year earlier period. Operating expenses, before one-time income items, as
a percentage of revenue increased to 18.3% in the nine months ended September
30, 1999 as compared to 17.5% in the year earlier period. In the third quarter
of 1999, the Company was informed by the purchaser of its health care operations
that the purchaser was going to default on its obligation to the Company. This
default was due to the purchaser's decision to discontinue its efforts to
refinance their indebtedness to the Company and to subsequently exit the
business. As a result, the Company recorded a charge of $25.0 million related to
the impairment of an asset (notes receivable)generated from the sale of the
Company's discontinued health care operations due to a change in the estimate of
the recoverability of the collateral securing the asset. See 'LIQUIDITY AND
CAPITAL RESOURCES' below. In addition, the Company adjusted the lease component
of the restructuring and impairment charge $3.3 million as a result of the
Company not experiencing the expected levels of payments on cancelled facility
leases relating to the closing of Professional Services divison branches and the
consolidation of back office operations. Additionally, the Company's general and
administrative ("G&A") expenses increased $48.3 million or 25.4% to $238.2
million in the nine months ended September 30, 1999, from $189.9 million in the
year earlier period. The increase in G&A expenses was primarily related to the
effects of acquisitions made by the Company, internal growth of operating
companies post-acquisition, investments made to improve infrastructure and to
develop technical practices and increased expenses at the corporate level to
support the growth of the Company, including sales, marketing and brand
recognition. Included in G&A expenses during both the nine months ended
September 30, 1999 and 1998 are the costs associated with projects underway to
ensure accurate date recognition and data processing with respect to Year 2000
as it relates to the Company's business, operations, customers and vendors.
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. See 'OTHER MATTERS - Year 2000 Compliance' below.
Income from Operations. Income from operations decreased $16.5 million, or 13.1%
to $109.7 million in the nine months ended September 30, 1999 from $126.2
million in the year earlier period. Income from operations before one-time
income items increased $5.3 million, or 4.2% to $131.5 million in the nine
months ended September 30, 1999 from $126.2 million in the year earlier period.
Income from operations as a percentage of revenue decreased to 7.4% in the nine
months ended September 30, 1999 from 10.2% in the year earlier period. Income
from operations, before one-time income items, as a percentage of revenue
decreased to 8.9% in the nine months ended September 30, 1999 from 10.2% in the
year earlier period.
Other Income (Expense). Interest expense decreased $13.7 million, or 63.4%, to
$7.9 million in the nine months ended September 30, 1999, from $21.6 million in
the year earlier period. Interest expense was offset in the nine months ended
September 30, 1999 by interest and other income of $3.8 million from (1)
investment income from certain investments owned by the Company and (2) interest
income earned from cash on hand at certain subsidiaries of the Company. In
addition, immediately subsequent to the sale of the Company's Commercial
operations and Teleservices divisions in September 1998, the Company paid off
and terminated the Company's then existing credit facility. The new and
currently existing facility did not have a balance at December 31, 1998 and the
Company did not begin borrowing on the facility until late in the first quarter
of 1999.
Income Taxes. The Company's effective tax rate was 37.6% in the nine months
ended September 30, 1999, compared to 37.9% in the year earlier period. The
decrease in the effective tax rate was primarily due to the effect of foreign
tax credits recognized in the third quarter of 1999, resulting from tax
strategies relating to foreign subsidiaries.
Income from continuing operations. As a result of the foregoing, income from
continuing operations decreased $2.4 million, or 3.5%, to $65.9 million in the
nine months ended September 30, 1999 from $68.3 million in the year earlier
period. Income from continuing operations before one-time income items increased
$10.8 million, or 15.8%, to $79.1 million in the nine months ended September 30,
1999 from $68.3 million in the year earlier period. Income from continuing
operations as a percentage of revenue decreased to 4.4% in the nine months ended
September 30, 1999 from 5.5% in the year earlier period. Income from continuing
operations, before one-time income items, as a percentage of revenue decreased
to 5.3% in the nine months ended September 30, 1999 from 5.5% in the year
earlier period.
14
From discontinued operations
Income from Discontinued Operations. Income from the discontinued commercial
operations, after tax, were $30.0 million for the nine months ended September
30, 1998. Additionally, for the nine months ended September 30, 1998, reported
revenues from discontinued operations were $919.4 million and operating income
for the discontinued operations were $ 54.2 million. Results of discontinued
operations include allocations of consolidated interest expense totaling $4.2
million for the nine months ended September 30, 1998. 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. Due to the sale of the
Commercial operations and Teleservices division on September 27, 1998, and the
sale of the Health Care division on March 30, 1998, the six months ended
September 30, 1999 results did not include any operations of the Commercial,
Teleservices or Health Care divisions. In the third quarter of 1999, the
Company, in conjunction with the purchaser of Strategix, finalized the joint
section 338(h)(10) election as required by the sales agreement. This final
allocation of the sales price resulted in an adjustment to the tax liability
recorded in discontinued operations from the sale of Strategix. As a result, the
Company has reduced its tax liability by approximately $14.9 million. This
adjustment increases the gain related to the sale of the discontinued commercial
operations and is reflected in the income statement line item 'Gain on sale of
discontinued operations'.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have principally related to the acquisition
of businesses, working capital needs and capital expenditures. These
requirements have been met through a combination of bank debt, issuances of
Common Stock and internally generated funds. The Company's operating cash flows
and working capital requirements are affected significantly by the timing of
payroll and by the receipt of payment from the customer. Generally, the Company
pays its Information Technology and Professional Services consultants
semi-monthly, and receives payments from customers within 30 to 80 days from the
date of invoice.
The Company had working capital of $289.4 million and $16.1 million as of
September 30, 1999 and December 31, 1998, respectively. The Company had cash and
cash equivalents of $24.9 million and $105.8 million as of September 30, 1999
and December 31, 1998, respectively. The principal reasons for the increase in
the Company's working capital is that included in current liabilities at
December 31, 1998 were (1) amounts related to determinable earn-out payments due
to the former owners of acquired companies and (2) a $175 million current tax
liability relating to the sale of its Commercial operations and Teleservices
division. The majority of these amounts were paid in the first quarter of fiscal
1999. The Company generated $53.2 million of cash flows from operations during
the nine months ended September 30, 1999 versus generating $24.3 million during
the same period in fiscal 1998. The cash flows from operations during the nine
months ended September 30, 1999 were off-set by cash expenditures related to the
Company's restructuring and repositioning plan $8.9 million. The increase in
cash flow from operations in the nine months ended September 30, 1999 is due to
the reduction in cash needed to fund accounts receivable and cash flows provided
from acquired companies.
The Company used $360.4 million for investing activities in the nine months
ended September 30, 1999 mainly as a result of the payment of the current tax
liability, net worth adjustment and certain transaction expenses relating to the
sale of the Company's Commercial operations and Teleservices division.
Additionally, the Company used $147.5 million for acquisitions and earn-out
payments and $8.2 million for capital expenditures. In the nine months ended
September 30, 1998, the Company used $163.1 million for investing activities, of
which $135.1 million was used for acquisitions and earn-out payments and $15.6
million was used for capital expenditures. For the nine months ended September
30, 1999, the Company did not pay any indemnification claims resulting from the
sale of the Company's Commercial, Teleservices and Health Care divisions in
1998. Although the Company has received certain claims for indemnification or
notices of possible claims pursuant to such obligations, the Company believes
that it has meritorious defenses against such claims and does not believe that
such claims, if successful, would have a material adverse effect on the
Company's financial condition or results of operations.
For the nine months ended September 30, 1999 and 1998, the Company generated
$228.3 million and $169.2 million of cash flows from financing activities,
respectively. For both the nine months ended September 30, 1999 and 1998, these
amounts primarily represent net borrowings from the Company's credit facility.
For the nine months ended September 30, 1999, these net borrowings were used
primarily to satisfy the current tax liability, net worth adjustment, business
acquisitions and related earn-outs, and certain transaction expenses relating to
the sale of the Company's Commercial operations and Teleservices division while
for the nine months ended September 30, 1998 these net borrowings were used
primarily to fund acquisitions and earn-out payments.
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 pursuant to a share
buyback program. On December 4, 1998, the Company's Board of Directors increased
the authorized share buyback program by an additional $110.0 million, bringing
the total authorized repurchase amount to $310.0 million. As of December 31,
1998, the Company had repurchased approximately 21,751,000 shares under the
share buyback program. Included in the shares repurchased as of December 31,
1998 were approximately 6,150,000 shares repurchased under an accelerated stock
acquisition plan ("ASAP"). The Company entered into the ASAP with a certain
brokerage firm which agreed to sell to the Company shares of its Common Stock at
a certain cost. The brokerage firm borrowed these shares from its customers and
was required to enter into market transactions, subject to Company approval, and
purchase shares of Company Common Stock to return to its customers. The Company,
pursuant to the ASAP, agreed to compensate the brokerage firm for any increases
in the Company's stock price that would cause the brokerage firm to pay an
amount to purchase the stock over the ASAP price. Conversely, the Company would
receive a refund in the purchase price if the Company's stock price fell below
the ASAP price. Subsequent to December 31, 1998, the Company used refunded
16
proceeds from the ASAP to complete the program during January and February 1999,
with the repurchase of approximately 597,000 shares, bringing the total shares
repurchased under the program to approximately 22,348,000 shares. All of these
shares were retired upon purchase. On November 5, 1999, the Company's Board of
Directors authorized the repurchase of up to $65.0 million of the Company's
Common Stock pursuant to a new share buyback program.
The Company is also obligated under various acquisition agreements to make
earn-out payments to former stockholders of acquired companies over the next
three years. The Company estimates that the amount of these payments will total
$54.6 million, $11.3 million and $1.3 million annually, for the next three
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 remainder of 1999 will be approximately $5.0 million. The Company
anticipates recurring expenditures in future years to be approximately $15.0 to
$20.0 million per year.
In connection with the Company's sale of its health care operations, the Company
entered into an agreement with the purchaser of the health care assets whereby
the Company agreed to make advances to the purchaser to fund its working capital
requirements in an amount not to exceed the lesser of $30.0 million or 85% of
accounts receivable through March 31, 1999, which was later extended until
September 30, 1999. These advances are collateralized by the assets of the sold
operations, primarily the accounts receivable. As of September 30, 1999, the
Company had advanced approximately $24.1 million under this agreement.
Additionally, the Company has $5.0 million in notes receivable from the sale of
the health care operations, which are offset by a reserve of $1.5 million,
resulting in a total unreserved asset balance related to the sale of the
Company's discontinued health care operations of $27.6 million. In the third
quarter of 1999, the Company was informed by the purchaser of its health care
operations that the purchaser was going to default on its obligation to the
Company. This default was due to the purchaser's decision to discontinue its
efforts to refinance purchaser's indebtedness to the Company. Accordingly, the
purchaser of the Company's health care operations is attempting to enter into
agreements with its franchisees and potential acquirors of franchises and the
purchaser-owned locations, whereby net accounts receivable and any additional
amounts realized from the sale of purchaser-owned locations will, after
operating costs, be applied against the purchaser's debt to the Company.
Further, the purchaser, with the approval of the Company, has named an interim
CEO to operate the business in an effort to maximize debt reduction to the
Company. However, the Company believes that the collectibility of these assets
is uncertain enough that it is appropriate, in the third quarter of 1999, to
write-down the assets related to the sale of the Company's discontinued health
care operations by $25.0 million.
The Company believes that funds provided by operations, available borrowings
under its credit facilities, 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.
Indebtedness of the Company
On October 30, 1998, the Company entered into a $500 million revolving credit
facility which is syndicated to a group of 13 banks with NationsBank, N.A., as
principal agent. On October 27, 1999 the 364 day facility portion of the
original credit facility was replaced by a new $150.0 million 364 day credit
facility. The new facility expires in 364 days and the remaining $350.0 million
under the old credit facility expires on October 21, 2003. Pursuant to the 364
day credit facility, the Company has the option to term out the 364 day
component of the credit facility for up to one year. Outstanding amounts under
the credit facilities bear interest at certain floating rates as specified by
the applicable credit facility. The credit facilities contain certain financial
and non-financial covenants relating to the Company's operations, including
maintaining certain financial ratios. Repayment of the credit facilities are
guaranteed by the material subsidiaries of the Company. In addition, approval is
required by the majority of the lenders when the cash consideration of an
individual acquisition exceeds 10% of consolidated stockholders' equity of the
Company.
As of October 29, 1999, the Company had a balance of $243.0 million outstanding
under the old credit facility. The Company also had outstanding letters of
credit in the amount of $1.5 million, reducing the amount of funds available
under the credit facility to $255.5 million, as of October 29, 1999. There were
no amounts outstanding under the new credit facility as of October 29, 1999.
The Company also has certain notes payable to shareholders of acquired
companies. The notes payable bear interest at rates ranging from 4.3% to 8.0%
and have repayment terms from January 1999 to November 2004. As of October 29,
the Company owed approximately $19.0 million in such acquisition indebtedness.
17
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 generally lower in the fourth quarter due to fewer billing days
because of the higher number of holidays and vacation days.
18
OTHER MATTERS
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 Project Office to oversee Year
2000 related 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, is staffed primarily
with representatives of the Company's 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: (1) an
inventory phase to identify all computer-based systems and applications
(including embedded systems) which might not be Year 2000 compliant; (2) an
assessment phase to determine what revisions or replacements would be necessary
to achieve Year 2000 compliance and identification of remediation priorities
which would best serve the Company's business interests; (3) 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 (4) an
implementation phase to transition the compliant systems into the everyday
operations of the Company. Management believes that the four phases are
approximately 100%, 100%, 100%, and 98% complete, respectively.
The Company's corporate accounting, payroll and human resources systems are
recent implementations (installed since June 1997) of mainstream computer
products from vendors such as PeopleSoft, Informix, Microsoft, Digital Equipment
Corporation and Compaq. The Company has completed Year 2000 required upgrades
for corporate hardware systems, operating systems, network systems, database
systems and applications systems. The project to upgrade the Company's
PeopleSoft financial applications from version 6.1 to Year 2000 compliant
version 7.5 is complete.
The Company operates approximately 263 branches, primarily in the U.S., Canada
and the United Kingdom. The branch network relies on a variety of front office
automation systems to provide sales support for resume tracking and client
contact management. Because of the diverse architectural nature of these systems
together with the relative ease with which backup/contingency procedures can be
implemented in the event of an individual branch system outage, the Company does
not believe that these systems pose a material Year 2000 risk. Nevertheless, the
Company has completed inventory, assessment, and conversion phases for all
branch locations. In conjunction with other business related integration
projects, the Company has replaced noncompliant Year 2000 branch hardware and
software with Year 2000 compliant products.
Non-IT systems have also been assessed and inventoried. Potential Year 2000
risks in these systems include landlord-controlled systems, such as heating and
cooling systems, automated security systems, elevators, and office equipment,
phone systems, facsimile machines and copiers. The Company has requested
assessments of non-IT systems for Year 2000 compliance from landlords and office
equipment vendors. Based on these responses that the Company has received, the
Company believes that the Year 2000 risk of non-IT systems failure is not
material.
The Company budgeted $2.5 million to address the Year 2000 issues, which
includes the estimated cost of the salaries of associates and the fees of
consultants addressing the issue. This cost represents approximately 12% of the
Company's total MIS budget. Approximately $2.3 million has been incurred to date
for outside consultants, software and hardware applications, and dedicated
personnel. The Company does not separately track the internal costs incurred for
portions of the Year 2000 compliance project that are completed as a part of
other business related projects. Such costs are principally the related payroll
costs for the Company's information systems group. The Company believes that
cash flows from operations and funds available under the Company's credit
facility as well as cash on hand are sufficient to fund these costs.
19
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 and alternatives for
working with them through the century change. Other than its banking
relationships, which include only large, federally insured institutions, and
utilities (electrical power, telecommunications, water and related items), the
Company does not have a relationship with any third-party 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. However, banking or utility failures at the Company's branches or
with its customers could have a material effect on the Company's revenue sources
and could disrupt the payment cycle of certain of the Company's customers.
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. The Company has developed contingency plans for addressing
issues, which may arise as a result of the century change in the year 2000.
20
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The following assessment of the Company's market risks does not include
uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax and other credit risks.
Interest Rates. The Company's exposure to market risk for changes in interest
rates relates primarily to the Company's short-term and long-term debt
obligations and to the Company's investments.
The Company's investment portfolio consists of cash and cash equivalents
including deposits in banks, government securities, money market funds, and
short-term investments with maturities, when acquired, of 90 days or less. The
Company is adverse to principal loss and ensures the safety and preservation of
its invested funds by placing these funds with high credit quality issuers. The
Company constantly evaluates its invested funds to respond appropriately to a
reduction in the credit rating of any investment issuer or guarantor.
The Company's short-term and long-term debt obligations totaled approximately
$251.0 million as of September 30, 1999 and the Company had $266.5 million
available under its current credit facility. The debt obligations consist of (1)
notes payable to former shareholders of acquired corporations, are at a fixed
rate of interest, and extend through 2004 and (2) amounts outstanding under the
credit facility which expires in 2003. The interest rate risk on the note
obligations is immaterial due to the dollar amount and fixed nature of these
obligations. The interest rate on the credit facility is variable, with the rate
on borrowings outstanding at September 30, 1999 being approximately 5.9%. As of
September 30, 1999, the Company has not entered into any interest rate
instruments to reduce its exposure to interest rate risk.
Foreign Currency Exchange Rates. Foreign currency exchange rate changes impact
translations of foreign denominated assets and liabilities into U.S. dollars and
future earnings and cash flows from transactions denominated in different
currencies. The Company generated approximately 24.9% and 23.4% of its
consolidated revenues for the three and nine months ended September 30, 1999
consolidated revenues from international operations, respectively, 96.5% and
95.5% of which were from the United Kingdom and 3.5% and 4.5% of which were from
other countries, respectively. Thus, 96.5% and 95.5%of international revenues
for the three and nine months ended September 30, 1999 were derived from the
United Kingdom, whose currency, has not fluctuated materially against the United
States dollar since the Company began operating in the United Kingdom. The
Company recorded unrealized cumulative foreign exchange translation losses of
$271 as of September 30, 1999, and unrealized cumulative foreign exchange
translation gains of $520 as of December 31, 1998. The cumulative amounts are
recorded as a separate component of stockholders' equity under the caption
'Accumulated other comprehensive income'. The Company did not hold and has not
entered into any foreign currency derivative instruments as of September 30,
1999.
21
FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION
Effect of Fluctuations in the General Economy
Demand for the Company's information technology and professional business
services is significantly affected by the general level of economic activity in
the markets served by the Company. During periods of slowing economic activity,
companies may reduce the use of outside consultants and staff augmentation
services prior to undertaking layoffs of full-time employees. Also during such
periods, companies may elect to defer installation of new information technology
systems and platforms (such as Enterprise Resource Planning systems) or upgrades
to existing systems and platforms. Year 2000 remediation and testing for
existing information technology systems is having a similar effect. As a result,
any significant economic downturn or more pronounced Year 2000 impact could have
a material adverse effect on the Company's results of operations or financial
condition.
The Company may also be adversely effected by consolidations through mergers and
otherwise of main customers or between major customers with non-customers. These
consolidations as well as corporate downsizings may result in redundant
functions or services and a resulting reduction in demand by such customers for
the Company's services. Also, spending for outsourced business services may be
put on hold until the consolidations are completed.
Competition
The Company's industry segments are intensely competitive and highly fragmented,
with few barriers to entry by potential competitors. The Company faces
significant competition in the markets that it serves and will face significant
competition in any geographic market that it may enter. In each market and
industry segment in which the Company operates, it competes for both clients and
qualified professionals with other firms offering similar services. Competition
creates an aggressive pricing environment and higher wage costs, which puts
pressure on gross margins.
Ability to Recruit and Retain Professional Employees
The Company depends on its ability to recruit and retain employees who possess
the skills, experience and/or professional certifications necessary to meet the
requirements of the Company's clients. Competition for individuals possessing
the requisite criteria is intense, particularly in certain specialized IT and
professional skill areas. The Company often competes with its own clients in
attracting and retaining qualified personnel. There can be no assurance that
qualified personnel will be available and recruited in sufficient numbers on
economic terms acceptable to the Company.
The continuing shortage of qualified IT consultants may adversely affect the
Company's ability to increase revenue. This shortage may be exacerbated by the
difficulties of utilizing the services of qualified foreign nationals working in
the United States under H-1B visas. The use of these consultants requires both
the Company and these foreign nationals to comply with United States immigration
laws.
Ability to Continue Acquisition Strategy; Ability to Integrate Acquired
Operations
The Company has experienced significant growth in the past through acquisitions.
Although the Company continues to seek acquisition opportunities, there can be
no assurance that the Company will be able to negotiate acquisitions on economic
terms acceptable to the Company or that the Company will be able to successfully
identify acquisition candidates and integrate all acquired operations into the
Company.
Possible Changes in Governmental Regulations
From time to time, legislation is proposed in the United States Congress, state
legislative bodies and by foreign governments that would have the effect of
requiring employers to provide the same or similar employee benefits to
consultants and other temporary personnel as those provided to full-time
employees. The enactment of such legislation would eliminate one of the key
economic reasons for outsourcing certain human resources and could significantly
adversely impact the Company's staff augmentation business. In addition, the
Company's costs could increase as a result of future laws or regulations that
address insurance, benefits or other employment-related matters. There can be no
assurance that the Company could successfully pass any such increased costs to
its clients.
22
Possible Year 2000 Exposure
The IT division performs both Year 2000 remediation services as well as system
upgrades and enhancements for clients. There is some possibility that customers
who experience system failures related to Year 2000 may institute actions
against their IT vendors, including the Company. There is no ability to quantify
the likelihood or merit of any such claims; but if a significant number of such
claims are asserted against the Company or if one or more customers assert
meritorious claims, such claims may result in material adverse effects on the
Company's results of operations and financial condition.
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Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
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
10.6(a) Amendment agreement No. 1 to revolving credit and
reimbursement agreement, Dated October 27, 1999.
10.6(b) 364 day credit agreement by and between the Company
and Bank of America. N.A. as administration agent and
certain lenders named therein dated October 27, 1999.
10.10(a) Award notification to Derek E. Dewan under Senior
executive annual incentive program.
10.11(a) Award notification to Michael D. Abney under Senior
executive annual incentive program.
10.12(a) Award notification to Marc M. Mayo under Senior
executive annual incentive program.
10.13(a) Award notification to Timothy D. Payne under Senior
executive annual incentive program.
10.14(a) Award notification to George A. Bajalia under Senior
executive annual incentive program.
10.15(a) Award notification to Robert P. Crouch under Senior
executive annual incentive program.
10.16 Modis Professional Services, Inc. Senior Executive
Annual Incentive Program
11 Calculation of Per Share Earnings.
27 Financial Data Schedule.
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ DEREK E. DEWAN President, Chairman November 15, 1999
- ---------------------- of the Board and Chief
Derek E. Dewan Executive Officer
/s/ MICHAEL D. ABNEY Senior Vice President, November 15, 1999
- ---------------------- Chief Financial Officer,
Michael D. Abney Treasurer, and Director
/s/ ROBERT P. CROUCH Vice President and November 15, 1999
- ---------------------- Chief Accounting Officer
Robert P. Crouch
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