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 March 31, 2001
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ________ to ___________
Commission file number: 0-24484
Modis Professional Services, Inc.
(Exact name of Registrant as specified in its charter)
Florida 59-3116655
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Independent Drive
Jacksonville, Florida 32202
(Address of principal executive offices) (Zip code)
(904) 360-2000
(Registrant's telephone
number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. April 30, 2001.
Common Stock, $0.01 par value Outstanding: 97,742,511 (No. of shares)
FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements that are subject to
certain risks, uncertainties or assumptions and may be affected by certain other
factors, including but not limited to the specific factors discussed in Part I,
Item 2 under 'Liquidity and Capital Resources', 'Seasonality', and 'Factors
Which May Impact Future Results and Financial Condition'. In some cases, you can
identify forward-looking statements by terminology such as 'may,' 'should,'
'could,' 'expects,' 'plans,' 'projects,' 'anticipates,' 'believes,' 'estimates,'
'predicts,' 'potential,' or 'continues,' or the negative of these terms or other
comparable terminology. In addition, except for historical facts, all
information provided in Part I, Item 3, under 'Quantitative and Qualitative
Disclosures About Market Risk' should be considered forward-looking statements.
Should one or more of these risks, uncertainties or other factors materialize,
or should underlying assumptions prove incorrect, actual results, performance or
achievements of the Company may vary materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
Forward-looking statements are based on beliefs and assumptions of the Company's
management and on information currently available to such management. Forward
looking statements speak only as of the date they are made, and the Company
undertakes no obligation to update publicly any of them in light of new
information or future events. Undue reliance should not be placed on such
forward-looking statements, which are based on current expectations. Forward-
looking statements are not guarantees of performance.
Modis Professional Services, Inc. and Subsidiaries
Index
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001 (unaudited)
and December 31, 2000.............................................................................. 3
Unaudited Condensed Consolidated Statements of Income for the Three Months
ended March 31, 2001 and 2000...................................................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2001 and 2000...................................................................... 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 Qualitative Disclosures About Market Risks........................................ 15
Part II Other Information
Item 1 Legal Proceedings.................................................................................. 17
Item 2 Changes in Securities and Use of Proceeds.......................................................... 17
Item 3 Defaults Upon Senior Securities.................................................................... 17
Item 4 Submission of Matters to a Vote of Security Holders................................................ 17
Item 5 Other Information.................................................................................. 17
Item 6 Exhibits and Reports on Form 8-K................................................................... 17
Signatures......................................................................................... 18
Exhibits
2
Part I. Financial Information
Item 1. Financial Statements
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, December 31,
(dollar amounts in thousands except per share amounts) 2001 2000
- --------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,247 $ 5,013
Accounts receivable, net 335,302 343,314
Prepaid expenses 12,935 9,404
Deferred income taxes 6,739 6,687
Other 10,225 7,889
---------- ----------
Total current assets 366,448 372,307
Furniture, equipment and leasehold improvements, net 55,109 55,711
Goodwill, net 1,192,954 1,199,849
Other assets, net 23,667 25,693
---------- ----------
Total assets $1,638,178 $1,653,560
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 14,689 $ 24,719
Accounts payable and accrued expenses 52,531 50,648
Accrued payroll and related taxes 42,789 41,540
Income taxes payable 10,332 7,012
---------- ----------
Total current liabilities 120,341 123,919
Notes payable, long-term portion 181,000 194,000
Deferred income taxes 31,668 28,584
Other 4,210 3,839
---------- ----------
Total liabilities 337,219 350,342
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.01 par value; 400,000,000 shares authorized
97,741,561 and 96,522,867 shares issued and outstanding, respectively 977 965
Additional contributed capital 593,126 587,857
Retained earnings 728,160 721,742
Accumulated other comprehensive loss (15,763) (6,945)
Deferred stock compensation (5,541) (401)
---------- ----------
Total stockholders' equity 1,300,959 1,303,218
---------- ----------
Total liabilities and stockholders' equity $1,638,178 $1,653,560
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three months ended March 31,
--------------------------
(dollar amounts in thousands except per share amounts) 2001 2000
- -------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue $ 444,410 $ 457,411
Cost of revenue 320,695 329,900
---------- ----------
Gross profit 123,715 127,511
---------- ----------
Operating expenses:
General and administrative 94,506 88,809
Depreciation 5,368 3,636
Amortization 9,599 8,900
---------- ----------
Total operating expenses 109,473 101,345
---------- ----------
Income from operations 14,242 26,166
Other expense, net 3,177 4,649
---------- ----------
Income before provision for income taxes 11,065 21,517
Provision for income taxes 4,647 8,499
---------- ----------
Net income $ 6,418 $ 13,018
========== ==========
Basic net income per common share $ 0.07 $ 0.13
========== ==========
Average common shares outstanding, basic 97,173 96,555
========== ==========
Diluted net income per common share $ 0.07 $ 0.13
========== ==========
Average common shares outstanding, diluted 97,359 99,082
========== ==========
See accompanying notes to condensed consolidated financial statements.
4
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three months ended March 31,
----------------------------
(dollar amounts in thousands except per share amounts) 2001 2000
- ---------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 6,418 $ 13,018
Adjustments to net income to net cash provided by
operating activities:
Depreciation 5,368 3,636
Amortization 9,599 8,900
Deferred income taxes 3,412 3,325
Deferred compensation 117 -
Changes in certain assets and liabilities:
Accounts receivable 3,052 (26,494)
Prepaid expenses and other assets (3,745) (3,327)
Accounts payable and accrued expenses 5,522 19,281
Accrued payroll and related taxes 1,521 3,404
Other, net (925) (6)
-------- --------
Net cash provided by operating activities 30,339 21,737
-------- --------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements, net of disposals (4,766) (6,459)
Purchase of businesses, including additional earn-outs on
acquisitions, net of cash acquired (1,504) (61,134)
-------- --------
Net cash used in investing activities (6,270) (67,593)
-------- --------
Cash flows from financing activities:
Proceeds from stock options exercised 24 4,211
Repayments on indebtedness, net (23,030) 41,626
-------- --------
Net cash (used in) provided by financing activities (23,006) 45,837
-------- --------
Effect of exchange rate changes on cash and cash equivalents (4,829) (1,779)
Net decrease in cash and cash equivalents (3,766) (1,798)
Cash and cash equivalents, beginning of period 5,013 8,526
-------- --------
Cash and cash equivalents, end of period $ 1,247 $ 6,728
======== ========
See accompanying notes to condensed consolidated financial statements.
5
Modis Professional Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(dollar amounts in thousands except for per share amounts)
1. Basis of Presentation.
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by the Company in accordance with the rules and
regulations of the Securities and Exchange Commission ("SEC"). Accordingly,
certain information and footnote disclosures usually found in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's Form 10-K, as filed with the SEC on April 2, 2001.
The accompanying condensed consolidated financial statements reflect all
adjustments (including normal recurring adjustments) which, in the opinion of
management, are necessary to present fairly the financial position and results
of operations for the interim periods presented. The results of operations for
an interim period are not necessarily indicative of the results of operations
for a full fiscal year.
2. Comprehensive Income
The Company discloses other comprehensive income in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 130, 'Reporting
Comprehensive Income'. Comprehensive income includes unrealized gains and losses
on foreign currency translation adjustments and changes in the fair value of
certain derivative financial instruments which qualify for hedge accounting. A
summary of comprehensive income for the three months ended March 31, 2001 and
2000 is as follows:
Three months ended March 31,
-------------------------------
2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 6,418 $13,018
Unrealized loss on foreign currency
translation adjustments (a) (8,198) (1,884)
Unrealized loss on derivative
instruments, net of deferred taxes (620) -
------- -------
Total other comprehensive loss (8,818) (1,884)
Comprehensive (loss) income $(2,400) $11,134
======= =======
(a) The currency translation adjustments are not adjusted for income taxes as
they relate to indefinite investments in non-U.S. subsidiaries.
6
3. Derivative Instruments and Hedging Activities
In the first quarter of 2001, the Company adopted SFAS No. 133, 'Accounting
for Derivative Instruments and Hedging Activities'. The adoption of SFAS No. 133
did not have an initial impact on the Company as the Company did not hold any
derivatives prior to fiscal 2001. Pursuant to SFAS No. 133, on a date the
derivative contract is entered into, the Company designates the derivative as to
its type and recognizes the fair value of the derivative on the balance sheet.
In fiscal 2001, the Company has engaged in derivatives classified as cash flow
hedges, and changes in the fair value of highly effective derivatives are
recorded in 'Accumulated other comprehensive loss' on the balance sheet. The
Company formally documents all relations between hedging instruments and the
hedged items, as well as its risk-management objectives and strategy for
undertaking hedging transactions. The Company formally assesses whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in cash flows of the hedged items.
The Company has currently and in the future may enter into interest rate swap
agreements in the normal course of business to manage and reduce the risk
inherent in interest rate fluctuations. Interest rate swap agreements are
considered hedges of specific borrowings and differences received under the swap
agreements are recognized as adjustments to interest expense. On February 12,
2001, the Company entered into an interest rate swap agreement to convert
certain floating rate debt outstanding under the Company's credit facilities
into fixed rate debt by fixing the base rate, as defined by the applicable
credit facility. The actual interest rate on the credit facilities is equal to
this base rate plus an additional spread, determined by the Company's financial
performance. This agreement had an initial balance of $110.4 million as of
February 12, 2001, which amortizes to $55.7 million on January 2, 2003 in
correlation with the Company's estimate of cash flow needs. On March 2, 2001,
the Company entered into an additional interest rate swap agreement to convert
an additional $25.0 million into fixed rate debt. The agreements, which were
approved by the Board of Directors, had a total notional amount of $135.4
million at March 31, 2001, with underlying rates ranging from 4.85% to 5.185%.
Hedging interest rate exposure through the use of swaps are specifically
contemplated to manage risk in keeping with management policy. The Company does
not utilize derivatives for speculative purposes. These swaps are transaction-
specific so that a specific debt instrument determines the amount, maturity and
specifics of each swap.
4. Stockholders' Equity
In January 2001, the Company adopted the 2001 Voluntary Stock Option Exchange
Plan (the 'Option Exchange Plan') in an effort to improve the retention and
incentive aspects of the Company's 1995 Plan, and to provide a mechanism to
return shares to the 1995 Plan for future issuance. All current employees as of
February 12, 2001, who then held options under the Plan or who then held special
grants received outside the 1995 Plan since the 1995 Plan was adopted were
eligible to participate in the Option Exchange Plan. The Option Exchange Plan
allowed eligible option holders to voluntarily cancel existing options in
exchange for new options to be issued no earlier than six months and one day
following termination of existing options. The exercise price of the new options
will be the market price on the date of re-issue. Vested options that are
cancelled will be re-granted on a one-for-one basis and will be completely
vested upon re-grant. Unvested options that are cancelled will be re-granted on
a one-for-two basis and will vest in equal annual installments over a three year
period from the date of re-grant.
The Option Exchange Plan was approved by the Compensation Committee and the
non-employee members of the Board of Directors. The Company expects the Option
Exchange Plan to be completed in the third quarter. The Company does not expect
to incur any compensation charges in connection with the Option Exchange Plan.
For further discussion on the Option Exchange Plan see Form 8-K filed by the
Company on January 25, 2001.
In January 2001, the Company's Board of Directors issued restricted stock
grants of 200,000 shares and 50,000 shares to the Company's President and
current Chief Executive Officer and the Company's Chief Financial Officer,
respectively. In March 2001, the Company's Board of Directors issued a
restricted stock grant of 960,000 shares to the Company's Chairman of the Board,
which is scheduled to vest over a five year period. This stock grant was in lieu
of a lump sum cash payment the Chairman and former Chief Executive Officer would
have received pursuant to his employment agreement. The Company recorded $5.26
million in total deferred compensation expense which will be amortized on a
straight line basis over the vesting period of the grants.
7
5. Net Income per Common Share
The calculation of basic net income per common share and diluted net income
per common share is presented below:
Three months ended March 31,
----------------------------
2001 2000
- --------------------------------------------------------------------------------------
Basic income per common share computation:
Net income $ 6,418 $13,018
======= =======
Basic average common shares outstanding 97,173 96,555
======= =======
Basic net income per common share $ 0.07 $ 0.13
======= =======
Diluted income per common share computation:
Net income $ 6,418 $13,018
======= =======
Basic average common shares outstanding 97,173 96,555
Incremental shares from assumed exercise of
stock options 186 2,527
------- -------
Diluted average common shares outstanding 97,359 99,082
======= =======
Diluted net income per common share $ 0.07 $ 0.13
======= =======
Options to purchase 8,809,725 shares of common stock that were outstanding
during the three months ended March 31, 2001 were not included in the
computation of diluted earnings per share as the exercise prices of these
options were greater than the average market price of the common shares.
6. Commitments and Contingencies
Litigation
The Company is a party to a number of lawsuits and claims arising out of the
ordinary conduct of its business. In the opinion of management, based on the
advice of in-house and external legal counsel, the lawsuits and claims pending
are not likely to have a material adverse effect on the Company, its financial
position, its results of operations, or its cash flows.
7. Segment Reporting
The Company discloses segment information in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
requires companies to report selected segment information on a quarterly basis
and to report certain entity-wide disclosures about products and services, major
customers, and the material countries in which the entity holds assets and
reports revenues.
The Company has three reportable segments: Prolianz, Idea Integration and
Modis. The Company's reportable segments are strategic divisions that offer
different services and are managed separately as each division requires
different resources and marketing strategies. Prolianz, the professional
business solutions division, provides experienced expertise in a wide variety of
disciplines including accounting and finance, law, engineering and technical,
science, career management, executive search, and human resource consulting.
Idea Integration, the e-business solutions division, provides e-business
strategy consulting, design and branding, application development, and
integration. Modis, the information technology resource management division,
offers value-added solutions such as IT project support and staffing,
recruitment of full-time positions, project-based solutions, supplier management
solutions, and on-site recruiting support.
8
The Company evaluates segment performance based on revenues, gross margin
and income before provision for income taxes. The Company does not allocate
income taxes or unusual items to the segments. The following table summarizes
segment and geographic information:
Three months ended March 31,
----------------------------
2001 2000
- ----------------------------------------------------------------------------------------------
Revenue
Prolianz $ 170,184 $ 160,963
Idea Integration 54,717 52,781
Modis 219,509 243,667
---------- ----------
Total Revenue $ 444,410 $ 457,411
========== ==========
Gross Profit
Prolianz $ 56,951 $ 52,660
Idea Integration 18,103 22,804
Modis 48,661 52,047
---------- ----------
Total Gross Profit $ 123,715 $ 127,511
========== ==========
Income before Provision for Income Taxes
Prolianz $ 15,078 $ 15,069
Idea Integration (7,409) 2,299
Modis 6,573 8,798
---------- ----------
14,242 26,166
Corporate interest and other income (3,177) (4,649)
---------- ----------
Total Income before Provision for Income
Taxes $ 11,065 $ 21,517
========== ==========
Geographic Areas
Revenues
United States $ 331,625 $ 340,993
U.K. 109,769 113,575
Other 3,016 2,843
---------- ----------
Total $ 444,410 $ 457,411
========== ==========
March 31, December 31,
2001 2000
- ------------------------------------------------------------------------------------
Assets
Prolianz $ 455,407 $ 454,127
Idea Integration 330,432 331,732
Modis 837,874 851,992
---------- ----------
1,623,713 1,637,851
Corporate 14,465 15,709
---------- ----------
Total Assets $1,638,178 $1,653,560
========== ==========
Geographic Areas
Identifiable Assets
United States $1,208,510 $1,223,932
U.K. 409,187 408,339
Other 20,481 21,289
---------- ----------
Total $1,638,178 $1,653,560
========== ==========
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Modis Professional Services, Inc. ('MPS' or the 'Company') is a global provider
of human capital solutions including professional staffing, e-business and
systems integration, information technology (IT) resource management, career
management consulting, and knowledge worker e-procurement. MPS's solutions
enable customers and clients to effectively locate, retain, and deploy strategic
knowledge worker resources in the areas of information technology, accounting
and finance, law, engineering, and science. MPS consists of three divisions:
Prolianz, the professional business solutions division; Idea Integration, the
e-business solutions division; and Modis, the information technology resource
management division.
The following detailed analysis of operations should be read in conjunction with
the 2000 Consolidated Financial Statements and related notes included in the
Company's Form 10-K filed April 2, 2001.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Revenue. Revenue decreased $13.0 million, or 2.8%, to $444.4 million in the
three months ended March 31, 2001, from $457.4 million in the year earlier
period. The decrease was attributable to a decrease in revenue for the Modis
division which accounted for 49.4% and 53.3% of the Company's total revenue for
the three months ended March 31, 2001 and 2000, respectively. Revenue in Modis
decreased $24.2 million, or 9.9%, to $219.5 million in the three months ended
March 31, 2001, from $243.7 million the year earlier period. This decrease in
Modis" revenue was primarily attributable to the diminished demand for
information technology services. The Company's customers continue to experience
a constrained ability to spend on information technology initiatives due to
uncertainties relating to the state of the economy. The Company has experienced
a decrease in billable headcount subsequent to the three months ended March 31,
2001. This decrease will result in a lower level of revenue from Modis if this
trend continues.
Revenue in Idea Integration increased $1.9 million, or 3.6%, to $54.7 million in
the three months ended March 31, 2001, from $52.8 million in the year earlier
period. Contrary to the year-over-year results, Idea Integration is experiencing
a weak demand for e-business consulting services which is being intensified by
the uncertainties relating to the state of the economy. The Company believes
that there will be a continued decrease in demand for the services provided by
Idea Integration in the three month period ended June 30, 2001.
Revenue in Prolianz increased $9.2 million, or 5.7%, to $170.2 million in the
three months ended March 31, 2001, from $161.0 million in the year earlier
period. The increase in revenue is due to internal growth. Prolianz operates
primarily through five operating units consisting of the accounting and finance,
legal, engineering/technical, career management and consulting and scientific
units which contributed 40.4%, 13.1%, 33.3%, 8.8% and 4.4%, respectively, of
Prolianz's revenue by group during the three months ended March 31, 2001, as
compared to 40.7%, 12.3%, 34.8%, 8.5% and 3.7%, respectively, during the year
earlier period. Contrary to the year-over-year results, trends subsequent to the
three months ended March 31, 2001, indicate a slowdown in demand for knowledge
worker resources in some of the services provided by Prolianz.
Gross Profit. Gross profit decreased $3.8 million or 3.0% to $123.7 million in
the three months ended March 31, 2001, from $127.5 million in the year earlier
period. Gross margin decreased slightly to 27.8% in the three months ended March
31, 2001, from 27.9% in the year earlier period.
The gross margin in Idea Integration decreased to 33.1% in the three months
ended March 31, 2001, from 43.2% in the year earlier period. Consultant
utilization within Idea Integration decreased as a result of (1) Idea
Integration's business model utilizing salaried consultants and (2) the weak
demand for e-business consulting services. The Company addressed consultant
utilization within Idea Integration through the downsizing of its consultant
base.
The decrease in Idea Integration's gross margin was mostly offset by gross
margin increases in both Modis and Prolianz. The gross margin in Modis increased
to 22.2% in the three months ended March 31, 2001, from 21.4% in the year
earlier period. The gross margin in Prolianz increased to 33.5% in the three
months ended March 31, 2001, from 32.7% in the year earlier period.
10
Operating expenses. Operating expenses increased $8.2 million or 8.1% to $109.5
million in the three months ended March 31, 2001, from $101.3 million in the
year earlier period. The Company's general and administrative ('G&A') expenses
increased $5.7 million or 6.4% to $94.5 million in the three months ended March
31, 2001, from $88.8 million in the year earlier period. The overall increase in
G&A expenses is attributable primarily to Idea Integration and to a lesser
extent Prolianz. Idea Integration's G&A expenses increased $4.1 million, or
22.2%, to $22.6 million in the three months ended March 31, 2001, from $18.5
million in the year earlier period. As a percentage of revenue, Idea
Integration's G&A expenses increased to 41.3% in the three months ended March
31, 2001, from 35.0% in the year earlier period. The increase in Idea
Integration's G&A expenses was primarily related to an incremental $2.8 million
provision for uncollectible accounts and to a lesser extent severance costs
associated with reductions in its workforce in the first quarter of 2001.
Prolianz's G&A expenses increased $3.7 million, or 10.9%, to $37.5 million in
the three months ended March 31, 2001, from $33.8 million in the year earlier
period. As a percentage of revenue, Prolianz's G&A expenses increased to 22.0%
in the three months ended March 31, 2001, from 21.0% in the year earlier period.
The increase in Prolianz's G&A expenses was primarily related to the internal
growth of its operating units and increased expenses to support the growth of
the division.
G&A expenses for Modis decreased $2.2 million, or 6.0%, to $34.4 million in the
three months ended March 31, 2001, from $36.6 million in the year earlier
period. The decrease in Modis' G&A expenses is associated with the decrease in
revenue for the three months ended March 31, 2001, and cost reduction
initiatives implemented within Modis in the fourth quarter of 2000.
Income from operations. Income from operations decreased $12.0 million, or
45.8%, to $14.2 million in the three months ended March 31, 2001, from $26.2
million in the year earlier period. The decrease in operating income is due to
the lower contribution of operating income primarily from Idea Integration and
to a lesser extent Modis. Income from operations for Idea Integration decreased
$9.7 million, to a $7.4 million loss in the three months ended March 31, 2001,
from income of $2.3 million in the year earlier period. Income from operations
for Modis decreased $2.2 million, or 25.0%, to $6.6 million in the three months
ended March 31, 2001, from $8.8 million in the year earlier period. Income from
operations for Prolianz, however, remained constant at $15.1 million in both the
three months ended March 31, 2001 and 2000. For the Company as a whole, income
from operations as a percentage of revenue decreased to 3.2% in the three months
ended March 31, 2001, from 5.7% in the year earlier period.
Other expense, net. Other expense, net consists primarily of interest expense
related to borrowings under the Company's credit facilities and notes issued in
connection with acquisitions, net of interest income related to investment
income from (1) certain investments owned by the Company and (2) cash on hand.
Interest expense decreased $1.2 million, or 24.5%, to $3.7 million in the three
months ended March 31, 2001, from $4.9 million in the year earlier period. The
decrease in interest expense is related to the lower level of borrowings under
the Company's credit facilities during the first quarter of 2001. Interest
expense was offset by $0.5 million of interest and other income in the three
months ended March 31, 2001, as compared to $0.3 million in the year earlier
period.
Income Taxes. The Company's effective tax rate increased to 42.0% in the three
months ended March 31, 2001, as compared to 39.5% in the year earlier period,
due to the increased effect of non-deductible expense items on a lower level of
income in the three months ended March 31, 2001.
Net Income. As a result of the foregoing, net income decreased $6.6 million, or
50.8%, to $6.4 million in the three months ended March 31, 2001, from $13.0
million in the year earlier period. Net income as a percentage of revenue
decreased to 1.4% in the three months ended March 31, 2001, from 2.8% in the
year earlier period. As a result of the aforementioned revenue trends in each of
the Company's divisions, the Company anticipates its net income will be
negatively impacted during the remainder of fiscal 2001 as compared to the level
of net income produced during the three months ended March 31, 2001.
11
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have principally been related to the
acquisition of businesses, working capital needs and capital expenditures. These
requirements have been met through a combination of bank debt and internally
generated funds. The Company's operating cash flows and working capital
requirements are affected significantly by the timing of payroll and by the
receipt of payment from the customer. Generally, the Company pays its
consultants weekly or semi-monthly, and receives payments from customers within
30 to 90 days from the date of invoice.
The Company had working capital of $246.1 million and $248.4 million as of March
31, 2001 and December 31, 2000, respectively. Included in current liabilities as
of both March 31, 2001 and December 31, 2000 were amounts related to earn-out
payments due to the former owners of acquired companies. The earn-out amounts
were scheduled to be paid in the first and second quarters of fiscal 2001, and
were capitalized to the goodwill balances related to the respective acquired
companies. The Company had cash and cash equivalents of $1.2 million and $5.0
million as of March 31, 2001 and December 31, 2000, respectively.
For the three months ended March 31, 2001 and 2000, the Company generated $30.3
million and $21.7 million of cash flow from operations, respectively. The
increase in cash flow from operations in the three months ended March 31, 2001
related to improved receivables collection, decreasing the cash needed to fund
accounts receivable.
For the three months ended March 31, 2001, the Company used $6.3 million of cash
for investing activities, of which $4.8 million were used for capital
expenditures and $1.5 million for earn-out payments. For the three months ended
March 31, 2000, the Company used $67.6 million of cash for investing activities,
of which $61.1 million were used primarily for acquisitions in Idea Integration
and to a lesser extent earn-out payments. The Company also used $6.5 million for
capital expenditures.
For the three months ended March 31, 2001, the Company used $23.0 million of
cash for financing activities. This amount primarily represented net repayments
on the Company's credit facility and on notes issued in connection with the
acquisition of certain companies. These repayments were mainly funded from cash
flow from operations.
For the three months ended March 31, 2000, the Company generated $45.8 million
from financing activities. This amount primarily represented net borrowings from
the Company's credit facility, which was used primarily to pay for acquisitions
in Idea Integration.
On November 4, 1999, the Company's Board of Directors authorized the repurchase
of up to $65.0 million of the Company's common stock. As of March 31, 2001, no
shares have been repurchased under this authorization.
The Company is also obligated under various acquisition agreements to make earn-
out payments in fiscal 2001 to former stockholders of acquired companies. The
Company estimates that the amount of these payments will total $2.3 million for
the remainder of fiscal 2001, all of which were paid by April 30, 2001.
The Company anticipates that capital expenditures for furniture and equipment,
including improvements to its management information and operating systems
during the remainder of fiscal 2001 will be approximately $15.0 million.
The Company believes that funds provided by operations, available borrowings
under the credit facility, and current amounts of cash will be sufficient to
meet its presently anticipated needs for working capital, capital expenditures
and acquisitions for at least the next 12 months.
12
Indebtedness of the Company
The Company has a $350 million revolving credit facility which is syndicated to
a group of 13 banks with Bank of America, as the principal agent. This facility
expires on October 27, 2003. In addition, the Company also has a $50 million 364
day credit facility that expires on October 24, 2001. The 364 day credit
facility, which has historically never been drawn upon, was reduced in fiscal
2000 from $350 million to $50 million to more closely align the Company's
borrowing capacity to its anticipated funding needs. 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 April 30, 2001, the Company had a balance of approximately $181.0 million
outstanding under the $350 million credit facility. The Company also had
outstanding letters of credit in the amount of $2.0 million, reducing the amount
of funds available under the credit facilities to approximately $217.0 million
as of April 30, 2001.
On February 12, 2001, the Company entered into an interest rate swap agreement
to convert certain floating rate debt outstanding under the Company's credit
facilities into fixed rate debt by fixing the base rate, as defined by the
applicable credit facility. The actual interest rate on the credit facilities is
equal to this base rate plus an additional spread, determined by the Company's
financial performance. This agreement had an initial balance of $110.4 million
as of February 12, 2001, which amortizes to $55.7 million on January 2, 2003 in
correlation with the Company's estimate of cash flow needs. On March 2, 2001,
the Company entered into an additional interest rate swap agreement to convert
an additional $25.0 million into fixed rate debt. The agreements, which were
approved by the Board of Directors, had a total notional amount of $135.4
million at March 31, 2001, with underlying rates ranging from 4.85% to 5.185%.
The Company has certain notes payable to shareholders of acquired companies
which bear interest at rates ranging from 5.0% to 7.0%, all maturing by November
2001. As of April 30, 2001, the Company owed approximately $10.1 million in such
acquisition indebtedness.
13
SEASONALITY
The Company's quarterly operating results are affected primarily by the number
of billing days in the quarter and the seasonality of its customers' businesses.
Demand for professional services is typically lower during the first quarter
until customers' operating budgets are finalized and the profitability of the
Company's consultants is generally lower in the fourth quarter due to fewer
billing days because of the higher number of holidays and vacation days.
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Item 3. Quantitative And Qualitative Disclosures About Market Risk
The following assessment of the Company's market risks does not include
uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax and credit risks.
Interest Rates. The Company's exposure to market risk for changes in interest
rates relates primarily to the Company's short-term and long-term debt
obligations and to the Company's investments.
The Company's investment portfolio consists of cash and cash equivalents
including deposits in banks, government securities, money market funds, and
short-term investments with maturities, when acquired, of 90 days or less. The
Company is averse to principal loss and seeks to preserve its invested funds by
placing these funds with high credit quality issuers. The Company constantly
evaluates its invested funds to respond appropriately to a reduction in the
credit rating of any investment issuer or guarantor.
The Company's short-term and long-term debt obligations totaled $195.7 million
as of March 31, 2001 and the Company had $217.0 million available under its
credit facilities. The short-term debt obligations include notes payable to
former shareholders of acquired corporations, which are at a fixed rate of
interest, and extend through November 2001. The interest rate risk on these
notes is immaterial due to the dollar amount of these obligations.
On February 12, 2001, the Company entered into an interest rate swap agreement
to convert certain floating rate debt outstanding under the Company's credit
facilities into fixed rate debt by fixing the base rate, as defined by the
applicable credit facility. The actual interest rate on the credit facilities is
equal to this base rate plus an additional spread, determined by the Company's
financial performance. This agreement had an initial balance of $110.4 million
as of February 12, 2001, which amortizes to $55.7 million on January 2, 2003 in
correlation with the Company's estimate of cash flow needs. On March 2, 2001,
the Company entered into an additional interest rate swap agreement to convert
an additional $25.0 million into fixed rate debt. The agreements, which were
approved by the Board of Directors, had a total notional amount of $135.4
million at March 31, 2001, with underlying rates ranging from 4.85% to 5.185%.
Hedging interest rate exposure through the use of swaps are specifically
contemplated to manage risk in keeping with management policy. The Company does
not utilize derivatives for speculative purposes. These swaps are transaction-
specific so that a specific debt instrument determines the amount, maturity and
specifics of each swap.
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 25% of its consolidated revenues
for the three months ended March 31, 2001 from international operations,
approximately 97% of which were from the United Kingdom. The exchange rate has
decreased approximately 5% in the three months ended March 31, 2001, from 1.49
at December 31, 2000 to 1.42 at March 31, 2001. The exchange rate fluctuation
has not historically had a material impact on the Company's results of
operations; however, if the British pound sterling continues to weaken, exchange
rates could have a material adverse effect on future results of operations. The
Company did not hold or enter into any foreign currency derivative instruments
as of March 31, 2001.
15
FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION
Effect of Fluctuations in the General Economy
Demand for the Company's business services is significantly affected by the
general level of economic activity in the markets served by the Company. During
periods of slowing economic activity, companies may reduce the use of outside
consultants and staff augmentation services prior to undertaking layoffs of
full-time employees. Also during such periods, companies may elect to defer
installation of new IT systems and platforms (such as Enterprise Resource
Planning systems) or upgrades to existing systems and platforms. As a result,
any significant economic downturn could have a material adverse effect on the
Company's results of operations or financial condition.
The Company may also be adversely effected by consolidations through mergers and
otherwise of major customers or between major customers with non-customers.
These consolidations as well as corporate downsizings may result in redundant
functions or services and a resulting reduction in demand by such customers for
the Company's services. Also, spending for outsourced business services may be
put on hold until the consolidations are completed.
Competition
The Company's industry is intensely competitive and highly fragmented, with few
barriers to entry by potential competitors. The Company faces significant
competition in the markets that it serves and will face significant competition
in any geographic market that it may enter. In each market in which the Company
operates, it competes for both clients and qualified professionals with other
firms offering similar services. Competition creates an aggressive pricing
environment and higher wage costs, which puts pressure on gross margins.
Ability to Recruit and Retain Professional Employees
The Company depends on its ability to recruit and retain employees who possess
the skills, experience and/or professional certifications necessary to meet the
requirements of the Company's clients. Competition for individuals possessing
the requisite criteria is intense, particularly in certain specialized IT and
professional skill areas. The Company often competes with its own clients in
attracting and retaining qualified personnel. There can be no assurance that
qualified personnel will be available and recruited in sufficient numbers on
economic terms acceptable to the Company.
Ability to Continue Acquisition Strategy; Ability to Integrate Acquired
Operations
The Company has experienced significant growth in the past through acquisitions.
Although the Company continues to seek acquisition opportunities, there can be
no assurance that the Company will be able to negotiate acquisitions on economic
terms acceptable to the Company or that the Company will be able to successfully
identify acquisition candidates and integrate all acquired operations into the
Company.
Possible Changes in Governmental Regulations
From time to time, legislation is proposed in the United States Congress, state
legislative bodies and by foreign governments that would have the effect of
requiring employers to provide the same or similar employee benefits to
consultants and other temporary personnel as those provided to full-time
employees. The enactment of such legislation would eliminate one of the key
economic reasons for outsourcing certain human resources and could significantly
adversely impact the Company's staff augmentation business. In addition, the
Company's costs could increase as a result of future laws or regulations that
address insurance, benefits or other employment-related matters. There can be no
assurance that the Company could successfully pass any such increased costs to
its clients.
Financial Covenants
Our credit facilities require us to maintain specified financial ratios. Our
ability to meet these financial ratios can be affected by events beyond our
control. Failure to meet those financial ratios could allow our lenders to
terminate our credit facilities and to declare all amounts outstanding under
those facilities to be immediately due and payable. Further, the Company may not
be able to obtain replacement credit facilities on terms and conditions or at
interest rates as favorable as those in current agreements.
16
Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
Item 2. Changes in Securities and Use of Proceeds
No disclosure required.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
No disclosure required.
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.12(c) Amended and Restated Executive Employment Agreement with
Timothy D. Payne, effective November 1, 2000.
10.14(a) Amended and Restated Executive Employment Agreement with
Robert P. Crouch, effective January 1, 2001.
10.18 Restricted Stock Agreement with George A. Bajalia.
10.19 Restricted Stock Agreement with Timothy D. Payne.
10.20 Restricted Stock Agreement with Derek E. Dewan.
10.21 Restricted Stock Agreement with Robert P. Crouch.
10.22 Promissory Note from Timothy D. Payne.
10.23 Consulting Agreement with Senator George J. Mitchell,
effective March 31, 2001.
10.24 Chairman Employment Agreement with Derek E. Dewan,
effective March 1, 2001.
B. Reports on Form 8-K
The Company filed Form 8-K, dated January 25, 2001, relating to
the Company's adoption of the 2001 Voluntary Stock Option
Exchange Plan.
17
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signatures Title Date
/s/ Timothy D. Payne President, Chief May 15, 2001
Timothy D. Payne Executive Officer and
Director
/s/ Robert P. Crouch Senior Vice President, Chief May 15, 2001
Robert P. Crouch Financial Officer, Treasurer,
and Chief Accounting Officer
18