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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998
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, FL 32202
- - ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number including area code): (904) 360-2000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.01 Per Share New York Stock Exchange
(Title of each class) (Name of each exchange on
which registered)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant (assuming for these purposes, but not conceding, that all
executive officers and directors are "affiliates" of the Registrant), based upon
the closing sale price of common stock on March 19, 1999 as reported by the New
York Stock Exchange, was approximately $915,729,141.
As of March 19, 1999, the number of shares outstanding of the Registrant's
common stock was 95,787,567.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Registrant's Proxy
Statement for its 1999 Annual Meeting of shareholders are incorporated by
reference in Part III.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K 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 II, Item 5 under 'Market for Registrant's Common Equity and
Related Shareholder Matters' and in Part II, Item 7 under'Fiscal 1998 compared
to Fiscal 1997 - Results from continuing operations - revenue'; 'Factors Which
May Impact Future Results and Financial Condition' and under 'Other Matters -
Year 2000 Compliance.' In addition, except for historical facts, all information
provided in Part II item 7a. 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
manangement 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 publically 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.
PART I
ITEM 1. BUSINESS
GENERAL
Modis Professional Services, Inc. ('Modis' or the 'Company') is a global
provider of professional business services, including consulting, outsourcing,
training and strategic human resource solutions, to Fortune 1000 and other
leading businesses. The Company's services are provided through its two business
divisions: (i) Information Technology, which provides technology consulting,
outsourcing and solutions services, and (ii) Professional Services, which
provides personnel who perform specialized services such as accounting, legal,
technical / engineering, scientific and career management and consulting.
Headquartered in Jacksonville, Florida, the Company has approximately 264
offices throughout the United States, Canada, United Kingdom, and certain parts
of continental Europe. Modis' objective is to concentrate its efforts and
resources on profitable, high-growth, high-end information technology ('IT') and
professional services that have the ability to consistently generate strong
earnings. The Company has experienced substantial growth in revenue and earnings
driven primarily by (i) acquisitions of other information technology and
professional services companies; (ii) increased business with the Company's
existing clients; (iii) increased penetration of existing and new markets; and
(iv) trends toward the increased outsourcing of non-core competency professional
business services.
The following table sets forth the respective business divisions' share of the
Company's consolidated revenue and gross profit for the fiscal years ending 1998
and 1997:
Division % of Consolidated Revenues % of Consolidated Gross Profit
- - --------------------------------------- --------------------------- -------------------------------
1998:
Information Technology 68.4% 64.5%
Professional Services 31.6% 35.5%
1997:
Information Technology 67.1% 63.7%
Professional Services 32.9% 36.3%
Business Strategy
Modis seeks to expand its revenues and profitability by expanding its
Information Technology and Professional Services divisions through offering an
extensive range of specialized human resource and consulting services through a
global network of branch offices. The Company markets and delivers its services
with an emphasis on local entrepreneurial spirit and decision-making at the
branch level combined with strong corporate, technological and managerial
support. The Company seeks to provide innovative and customized solutions to
human resource needs and to expand the Company's relationships with its Fortune
1000 clients. Modis' mission is to set the standard for the professional
business services industry by empowering its employees to provide quality
services.
Management believes the Company's concentration on the Information Technology
and Professional Services divisions allows faster growth and higher profit
margins versus the more traditional commercial staffing businesses due to the
specialized expertise of the professional personnel. Management's strategy is to
strengthen its position as one of the few companies offering information
technology and professional services on a global scale. Modis' principal
competitors in the information technology and professional services areas
generally consist of specialty firms in each of those fields, and to a lesser
extent, diversified business services firms. The Company's strategy is to
continue to increase the overall revenue and gross profits from the Information
Technology and Professional Services divisions by expanding current specialties
into new geographic markets, identifying and adding new practice areas, and
leveraging wherever possible on existing specialty strengths. The Company has
significantly expanded its information technology operations since 1997 by
acquiring approximately twenty firms with information technology operations.
These acquisitions allow the Information Technology division to provide clients
with services in the 48 contiguous states, Canada, the United Kingdom, the
Middle East and certain parts of continental Europe. See Note 14 to the
Company's audited consolidated financial statements for further discussion of
the Company's foreign operations.
GROWTH STRATEGY
The Company pursues a focused growth strategy designed to achieve both increased
revenues and earnings. The key elements of this growth strategy are as follows:
Internal Growth
The Company's internal growth strategy includes: (i) positioning in market
locations, customer segments and skill areas that value high levels of service;
(ii) increasing penetration of existing markets; (iii) expanding into new and
contiguous markets; and (iv) migrating to higher margin specialty practice
areas.
Acquisitions
The Company's growth strategy includes the acquisition of existing businesses
with complementary service offerings, strong management, profitable operating
results and recognized local and regional presence. The Company has acquired
approximately thirty information technology and professional services companies
since 1997. Acquisition criteria considered by management includes, among other
things, financial performance, a desirable market location, significant market
share, new or expanded specialties that can be added to the Company's existing
lines of business, efficient operating systems and existing management that will
operate effectively within the Company's existing managerial structure. The
Company believes that there is an opportunity, as a part of the consolidation in
the global business services industry, to focus on acquisitions of companies
that offer specialized information technology and other professional services.
The Company's management has had success in identifying acquisition candidates
that complement existing businesses, integrating them into existing operations
and utilizing them to enhance the Company's growth performance.
INFORMATION TECHNOLOGY DIVISION
Market Overview
The need for information technology services continues to expand as companies
and governmental agencies continue to require increased performance from their
information management systems. The reliance on information systems to provide
companies with a competitive advantage in the operation of their businesses has
prompted an exponential demand for information technology services. The demand
is driven by rapid technology shifts, a move to internet and web enabled
applications, increased cost pressures, skill shortages, and certain benefits
from outsourcing the information services which allows a company to focus on its
core competencies. These market influences are expected to remain long term in
nature and to increase the reliance upon information technology services
companies to recruit, train, and provide personnel and technology solutions and
outsourcing services as companies increase their demand for information
technology needs.
The supply of qualified information technology professionals continues to lag
behind the global demand for information technology services and it is
increasingly difficult for corporate MIS departments to keep internal staff
current with the latest technologies and skills. This results in an increased
dependence on outside consulting, outsourcing and contract technology services.
This shortfall of professionals has resulted in skill shortages and higher
costs, primarily in the newest technologies and high-end solutions sector of the
market. This has contributed to an increased trend by companies to obtain
outside consulting services, outsourcing and human resource solutions on a cost
efficient basis.
Division Operations
The Information Technology division, which operates primarily under the modis
brand name, accounted for 68.4% of the Company's fiscal 1998 revenues. Other
specialty brand names in this division include: IT Link, Hunterskil Howard,
Software Knowledge, Cope, Computer Action, Actium, Executive's Monitor, Inc. and
Berger & Co. A full range of information technology services are provided
through the Information Technology division's two business units, modis
Solutions and modis Consulting (collectively 'modis'), targeting a wide range of
industries, including banking and finance, manufacturing, public utilities,
retail, state and local government, technology, telecommunication and
transportation. As of December 31, 1998, the Information Technology division
operated 112 offices.
modis Solutions' wide range of services includes IT planning and strategies,
Enterprise Resource Planning ('ERP') software implementation, object oriented
methodology, web-enabled services, life cycle development, data warehousing,
process reengineering, mainframe to client-server transition, client-server
application development, custom software application development, Year 2000
remediation and consulting, management consulting, systems integration, and
other high-end IT practices.
modis Consulting provides staff augmentation for application development
services and brings in needed technical and project management processes to help
businesses achieve more predictable project execution and develop higher quality
systems more efficiently and effectively. Application development teams include
software application developers, system analysts, database analysts, software
specialists, documentation specialists, project managers, systems
administrators, and software engineers. Outsourcing of programming and
maintainence of software applications and certain MIS functions are provided
through both the Solutions and Consulting units.
Division Strategy
The Information Technology division pursues the following strategies in an
attempt to grow market share and further improve operating results:
Leverage Recruiting Power: With a base of over 100 offices worldwide, modis
employs over 1,000 professional technical recruiters. The resumes of nearly 1
million IT professionals are housed in the division's corporate databases. This
recruiting power gives modis the ability to compete effectively for relatively
scarce IT talent. To support the recruiting effort, modis offers benefit
programs which include medical, dental and 401(k) plans. The division also
recruits internationally and provides sponsorships for H-1B visas for qualified
candidates.
Emphasis on Specialty Solutions: The Information Technology division focuses on
specialized solutions such as ERP implementation, application development,
process reengineering and data warehousing which generally offer greater gross
margins than other IT services.
Cross-Selling Between Offices: The Information Technology division intends to
generate greater volumes of high-end specialty solution services by utilizing
its 100+ branches as a distribution channel for cross-selling. This positively
affects the revenue growth and operating margins of branches through the
marketing of high hourly bill rates, and high value services.
Upgrade Consultant Skills: The Information Technology division attempts to
continually upgrade the skills and market value of its consultants by providing
advanced specialty training through its IBT (internet based training) program in
such areas as ERP software implementation, object oriented technologies and
internet/intranet application development. This aids in consultant retention as
well as increasing hourly bill rates.
The Company completed the following acquisitions in the Information Technology
division for the year ended 1998:
(UNAUDITED)
FISCAL 1997
ACQUISITION REVENUES
DATE (IN MILLIONS)
----------------------------------
Technology Services Corporation 1/98 $ 9.2
Actium, Inc. and affiliates 3/98 $ 63.7
Avalon, Ltd. 5/98 $ 2.3
Consulting Partners, Inc. 8/98 $ 9.5
Cope Consulting, Ltd. and affiliates 9/98 $ 16.1
Software Knowledge, Ltd., and affiliates 11/98 $ 31.8
PROFESSIONAL SERVICES DIVISION
Market Overview
The need for professional services, specifically legal, accounting, career
management and consulting, scientific, and engineering / technical solutions,
has increased rapidly in response to the continuing shift in the respective
industries in which these professionals operate. The focus of large corporations
has migrated to a more flexible professional workforce which employs personnel
on a skill-specific or project-specific basis. This shift has increased the
reliance upon business service partners to be able to recruit and provide
solutions to these companies on a skill-specific or project-specific basis, or
an economic basis. The trend toward outsourcing these services is expected to be
long term in nature.
Division Operations
The Professional Services division, which accounted for 31.6% of the Company's
fiscal 1998 revenues, provides consulting, outsourcing and human resource
solutions for accounting, legal, engineering / technical, scientific and
career management and consulting functions.
Accounting Unit
The Accounting unit, which operates primarily under the Accounting Principals
brand name in the United States and under the Badenoch and Clark brand name
throughout the United Kingdom, provides professionals and project solutions and
support in finance/banking, data processing and accounting, including auditors,
controllers/CFOs, CPAs, financial analysts, mortgage processors, loan
processors, A/R and A/P clerks, and tax accountants. By providing these
accounting and financial services, the Company offers customers a reliable and
economic resource for financial professionals to address uncertain or uneven
work loads caused by special projects or unforeseen emergencies. The Company
entered the accounting services industry in 1995 through the acquisition of a
small, regional accounting firm and has since increased the division to
encompass 43 branches in the U.S. and the United Kingdom, as of December 31,
1998.
Legal Unit
The Legal unit, which operates primarily under the Special Counsel brand name,
provides litigation support and consulting as well as human resource services
and solutions to corporate legal departments and law firms. These services
include the provision of project teams/individuals consisting of: attorneys,
paralegals, legal secretaries, and law librarians to corporate legal departments
and private law firms for litigation support, as well as project and document
management, document imaging and coding, and trial presentation services. The
Company primarily competes with a few large companies and many local firms as
this market is highly fragmented. The Company entered the legal industry in 1995
through the acquisitions of Attorneys Per Diem, a Baltimore operation, (now
Special Counsel) in 1995, and Special Counsel, Inc., a New York City operation.
As of December 31, 1998, the legal unit has 30 branches operating primarily in
the United States, with capability in the United Kingdom through its Badenoch
and Clark brand.
Technical and Engineering Unit
The Technical and Engineering unit, collectively called ENTEGEE, provides
drafters, designers and engineers in the mechanical and electrical engineering
fields as well as personnel to the chemical, plastics and other industries.
ENTEGEE also provides high level engineering and drafting services, including
the outsourcing of specialized design services such as architectural design and
drafting, tool designs and computer-aided design ('CAD') services. ENTEGEE's
clients range from transportation, and aerospace to engineering firms, print
circuit board manufacturers, and other domestic and international businesses. As
of December 31, 1998, the technical and engineering unit operates 22 branches
throughout the United States.
Scientific Unit
The Scientific unit, Scientific Staffing, provides trained and advanced-degreed
scientists, laboratory technicians and support peronnel to companies in the
pharmaceutical, chemical, biotechnical, environmental, health care and consumer
products industries. As of December 31, 1998, the Scientific unit operates 24
branch offices throughout the United States.
Career Management and Consulting Unit
The Career Management and Consulting unit, Manchester, Inc. and Diversified
Search, Inc. offers corporate outplacement services, including career
counseling, resume development, skills assessment, interview and negotiating
techniques, and employee guidance counseling. It also provides leadership
development, career management consulting, retained executive search and other
human resource services to the banking, financial services, healthcare,
pharmaceutical, chemical and manufacturing industries. This unit started with
the acquisition of Manchester Partners International, Inc. ('Manchester') in
January 1997 and as of December 31, 1998 it operates through a network of 33
branch offices throughout the United States.
Division Strategy
The Professional Services Division pursues many strategies to grow market share
and further improve operating results. Several of the more distinguishing
strategies are as follows:
Staff Augmentation. The business units of the Professional Services Division
each provide variable workforce solutions by providing intellectual capital to
meet the changing needs of the clients. By establishing new relationships,
forming strategic alliances and continually improving current client and
consultant relationships management believes the traditional staff augmentation
will continually be an integral component to its service mix.
Specialized Staffing and Specialty Solution Opportunities. Many of the
Professional Service Divisions offices provide specialty solutions and staffing
to its corporate clients beyond the traditional professional staff augmentation.
Management believes it can leverage these practice specialties and client
relationships within each business unit by offering specialized services and
solutions to other existing and prospective clients. Examples include document
and trial management services, leadership development, executive coaching and
specialized computer aided design services.
Professional Development Opportunities. Enhancing the knowledge and skills of
the consultants and employees of the Professional Services Division based on the
needs of our clients will strengthen our overall relationship with clients,
consultants, and employees. Generally, these strategies are intended to better
serve our clients and strengthen our professionalism throughout each business
unit which management believes will improve overall relationships and
profitability by client and improve retention of consultants and employees.
The Company completed the following acquisitions in the Professional Services
division for the year ended 1998:
(UNAUDITED)
FISCAL 1997
ACQUISITION REVENUES
DATE (IN MILLIONS)
----------------------------------
Millard Consulting, Inc. 5/98 $ 4.2
Diversified Search, Inc. 6/98 $ 5.6
Colvin Resources Group - Fort Worth, Inc. 7/98 $ 1.9
Accountants Express of San Diego, Inc. 8/98 $ 1.5
BRANCH OFFICES
The Company delivers its services through a branch office network of 264 offices
primarily throughout the United States, and to a lesser extent, Canada, United
Kingdom, and certain parts of continental Europe. The following table shows the
Company's branch offices as of the dates indicated (including offices of an
acquired company only after such acquisition):
- - ------------------------ ------------- ------------- ------------- -------------
Branch Offices: 1995 1996 1997 1998
- - ------------------------ ------------- ------------- ------------- -------------
Information Technology 8 72 110 112
Professional Services 21 73 144 152
--- --- --- ---
Total 29 145 254 264
- - ------------------------ ------------- ------------- ------------- -------------
COMPETITION
The business services industry has grown rapidly in recent years as companies
have utilized business service firms to provide value added solutions ranging
from the outsourcing of non-core competencies to the recruitment of a flexible
workforce able to provide a company with the unique skills it does not house
internally. Modis believes that the increasing pressure that companies are
experiencing to remain competitive and efficient will cause companies to focus
their permanent internal staff around their core competencies while expanding
their use of business service partners to provide strategic solutions to fulfill
their other business needs. Modis also believes that the business services
industry is highly fragmented, but is experiencing increasing consolidation
largely in response to increased demand for companies to provide a wide range of
comprehensive human resource solutions to regional and national accounts. A
large percentage of business services firms are local operations with fewer than
five offices. Within local markets, these firms actively compete with the
Company for business, and in most of these markets no single company has a
dominant share of the market. The Company also competes with larger full-service
and specialized competitors in national, regional and local markets.
The principal national competitors of the Company's Information Technology
division include Keane Inc., Computer Horizons Corporation, Metamor Worldwide,
Inc., CIBER, Inc., Cambridge Technology Partners, Inc., Technology Services
Corporation, Whittman-Hart, Inc., CAP Gemini, Inc., Sapient Corporation, Data
Processing Resources Corporation and, to an extent, the consulting divisions of
IBM and the 'Big Five' accounting firms. The principal national competitors of
the Company's Professional Services division include Alternative Resources
Corporation, On Assignment, Inc., the legal division of Kelly Services, Inc.,
The Olsten Corporation, CDI Corporation, Romac International, Inc., Acsys, Inc.
and Robert Half International, Inc. The Company believes that the primary
competitive factors in obtaining and retaining clients are an understanding of
clients' specific job requirements, the ability to provide professional
personnel in a timely manner, the monitoring of quality of job performance, and
the price of services. The primary competitive factors in obtaining qualified
candidates for professional employment assignments are wages, responsiveness to
work schedules, continuing professional education opportunities, and number of
hours of work available. Management believes that Modis is highly competitive in
all of these areas.
FULL-TIME EMPLOYEES
At March 19, 1999, the Company employed approximately 16,500 professional and IT
consultants, and approximately 3,000 corporate employees on a full-time
equivalent basis. Approximately 200 of the employees work at corporate
headquarters. Full-time employees are covered by life and disability insurance
and receive health and other benefits.
GOVERNMENT REGULATIONS
Outside of the United States and Canada the personnel outsourcing segment of the
Company's business is closely regulated. These regulations differ among
countries but generally may regulate: (i) the relationship between the Company
and its temporary employees; (ii) licensing and reporting requirements; and
(iii) types of operations permitted. Regulation within the United States does
not materially impact the Company's operations.
SERVICE MARKS
The Company or its subsidiaries maintain a number of service marks and other
intangible rights, including federally registered service marks for MODIS (and
logo), ACCOUNTING PRINCIPALS (and logo), MANCHESTER, SCIENTIFIC STAFFING and
SPECIAL COUNSEL for its services generally. The Company or its subsidiaries have
applications pending before the Patent and Trademark Office for federal
registration of the service marks for MODIS PROFESSIONAL SERVICES (and logo),
MODIS SOLUTIONS (and logo), ENTEGEE, MANAGEMENT PRINCIPALS and THE EXPERTS (and
logo). The Company plans to file affidavits of use and timely renewals, as
appropriate, for these and other intangible rights it maintains. The Company
also has applications with the appropriate authorities for the MODIS service
mark in Canada, the United Kingdom and the European Union.
SALE OF COMMERCIAL AND HEALTH CARE DIVISIONS
On June 8, 1998, the Company's subsidiary, Strategix Solutions, Inc.
('Strategix') filed a registration statement with the Securities and Exchange
Commission for its initial public offering and subsequent spin off (subject to
certain conditions) of the Company's Commercial operations and its Teleservices
division. Before the initial public offering was consummated, the Company sold
its Commercial operations and its Teleservices division to Randstad U.S., L.P.,
a subsidiary of Randstad Holding nv, for approximately $850 million, prior to
any purchase price adjustment, in cash. The sale was completed on September 27,
1998.
Effective March 30, 1998, the Company sold the operations and certain assets of
its 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.
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 the Company's services has historically been lower during the
year-end holidays through February of the following year, showing gradual
improvement over the remainder of the year.
ITEM 2. PROPERTIES
The Company owns no material real property. It leases its corporate headquarters
as well as all but one of its branch offices. The branch office leases generally
run for three to five-year terms. The Company believes that its facilities are
generally adequate for its needs and does not anticipate difficulty replacing
such facilities or locating additional facilities, if needed.
ITEM 3. LEGAL PROCEEDINGS
The Company, in the ordinary course of its business, is from time to time
threatened with or named as a defendant in various lawsuits. The Company
maintains insurance in such amounts and with such coverage and deductables as
management believes are reasonable and prudent.
There is no pending litigation that the Company believes is likely to have a
material adverse effect on the Company, its financial position or results of its
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the twelve months ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The following table sets forth the reported high and low sales prices of the
Company's Common Stock for the quarters indicated as reported on the New York
Stock Exchange under the symbol "ASI" through September 30, 1998. Effective
October 1, 1998, subsequent to the Company's sale of its commercial division,
the Company changed its trading symbol and began trading on the New York Stock
Exchange under "MPS".
FISCAL YEAR 1997 High Low
First Quarter........................................................ $25.25 $16.13
Second Quarter....................................................... 26.63 15.75
Third Quarter........................................................ 31.50 23.31
Fourth Quarter....................................................... 31.88 21.75
FISCAL YEAR 1998
First Quarter........................................................ $35.00 $22.00
Second Quarter....................................................... 38.86 29.38
Third Quarter........................................................ 33.25 10.50
Fourth Quarter....................................................... 18.63 9.94
In addition to the factors set forth below in 'FACTORS WHICH MAY IMPACT FUTURE
RESULTS OF THE COMPANY' under 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS', the price of the Company's Common Stock is
affected by fluctuations and volatility in the financial and equity markets
generally and in the Company's industry sector in particular.
As of March 19, 1999, there were approximately 959 holders of record of the
Company's Common Stock.
No cash dividend or other cash distribution with respect to the Company's Common
Stock has ever been paid by the Company. The Company currently intends to retain
any earnings to provide for the operation and expansion of its business and does
not anticipate paying any cash dividends in the foreseeable future. The
Company's revolving credit facility prohibits the payment of cash dividends
without the lender's consent.
In March 1998, the Company issued 4,598,698 shares of Common Stock to the former
shareholders of Actium, Inc. in exchange for 100% of the outstanding shares of
Actium, Inc. In addition, in August 1998, the Company issued 874,815 shares of
Common Stock to the former shareholders of Consulting Partners, Inc. in exchange
for 100% of the outstanding shares of Consulting Partners, Inc. These issuances
of securities were made in reliance on the exemption from registration provided
under Section 4(2) of the Securities Act of 1933 as a transaction by an issuer
not involving a public offering. All of the securities were acquired by the
recipients for investment and with no view toward the public resale or
distribution of the securities without registration. There was not any public
solicitation and the issued stock certificates bore restrictive legends. All of
such shares were subsequently registered for sale by effective Registration
Statements on Form S-3 in accordance with the terms governing the acquisition of
Actium, Inc. and Consulting Partners, Inc.
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. Subsequent to December 31, 1998, the Company completed
the program during 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. See '
LIQUIDITY AND CAPITAL RESOURCES' for additional information.
SELECTED FINANCIAL DATA
Fiscal Years Ended
------------------------------------------------------------------------------------
DEC. 31, DEC. 31, Dec. 31, Dec. 31, Jan. 1,
(in thousands, except per share amounts) 1998 1997 (1) 1996 (1) 1995 (1) 1995 (1)
- - - -------------------------------------------------------------------------------------------------------------------------
Statement of Income Data:
Revenue $ 1,702,113 $ 1,164,124 $ 580,016 $ 90,489 $ 36,312
Cost of Revenue 1,234,537 835,609 426,814 62,382 25,448
------------------------------------------------------------------------------------
Gross Profit 467,576 328,515 153,202 28,107 10,864
Operating expenses 301,656 211,727 107,512 15,121 7,298
Restructuring and impairment charges 34,759 - - - -
Merger related costs - - 14,446 - -
------------------------------------------------------------------------------------
Operating income from continuing
operations 131,161 116,788 31,244 12,986 3,566
Other income, (expense), net (13,975) (14,615) (2,974) (1,465) (42)
------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 117,186 102,173 28,270 11,521 3,524
Provision for income taxes 48,326 38,803 19,693 1,333 874
------------------------------------------------------------------------------------
Income from continuing operations 68,860 63,370 8,577 10,188 2,650
Discontinued operations:
Income from discontinued operations,
net of income taxes 30,020 38,663 22,633 18,384 12,472
Gain on sale of discontinued operations,
net of income taxes 230,561 - - - -
------------------------------------------------------------------------------------
Income before extraordinary loss 329,441 102,033 31,210 28,572 15,122
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit (5,610) - - - (1,403)
------------------------------------------------------------------------------------
Net income $ 323,831 $ 102,033 $ 31,210 $ 28,572 $ 13,719
====================================================================================
Pro forma provision for income taxes - - (3,642) 3,144 1,592
------------------------------------------------------------------------------------
Pro forma net income (2) $ 323,831 $ 102,033 $ 34,852 $ 25,428 $ 12,127
====================================================================================
Basic income (loss) per common share:
From continuing operations $ 0.63 $ 0.62 $ 0.09 $ 0.16 $ 0.05
====================================================================================
From discontinued operations $ 0.28 $ 0.38 $ 0.25 $ 0.30 $ 0.26
====================================================================================
From gain on sale (4) $ 2.12 $ 0.00 $ 0.00 $ 0.00 $ 0.00
====================================================================================
From extraordinary item $ (0.05) $ 0.00 $ 0.00 $ 0.00 $ (0.03)
====================================================================================
Basic net income per common share $ 2.98 $ 1.00 $ 0.34 $ 0.46 $ 0.28
====================================================================================
Diluted income (loss) per common share:
From continuing operations $ 0.61 $ 0.59 $ 0.09 $ 0.16 $ 0.05
====================================================================================
From discontinued operations $ 0.26 $ 0.34 $ 0.24 $ 0.27 $ 0.24
====================================================================================
From gain on sale (4) $ 1.97 $ 0.00 $ 0.00 $ 0.00 $ 0.00
====================================================================================
From extraordinary item $ (0.05) $ 0.00 $ 0.00 $ 0.00 $ (0.03)
====================================================================================
Diluted net income per common share $ 2.79 $ 0.93 $ 0.33 $ 0.43 $ 0.26
====================================================================================
Pro forma basic income (loss) per
common share:
From continuing operations $ 0.63 $ 0.62 $ 0.13 $ 0.11 $ 0.02
====================================================================================
From discontinued operations $ 0.28 $ 0.38 $ 0.25 $ 0.30 $ 0.26
====================================================================================
From gain on sale (4) $ 2.12 $ 0.00 $ 0.00 $ 0.00 $ 0.00
====================================================================================
From extraordinary item $ (0.05) $ 0.00 $ 0.00 $ 0.00 $ (0.03)
====================================================================================
Pro forma basic net income per
common share $ 2.98 $ 1.00 $ 0.38 $ 0.41 $ 0.25
====================================================================================
Pro forma diluted income (loss) per
common share:
From continuing operations $ 0.61 $ 0.59 $ 0.13 $ 0.11 $ 0.02
====================================================================================
From discontinued operations $ 0.26 $ 0.34 $ 0.24 $ 0.27 $ 0.24
====================================================================================
From gain on sale (4) $ 1.97 $ 0.00 $ 0.00 $ 0.00 $ 0.00
====================================================================================
From extraordinary item $ (0.05) $ 0.00 $ 0.00 $ 0.00 $ (0.03)
====================================================================================
Pro forma diluted net income per
common share $ 2.79 $ 0.93 $ 0.37 $ 0.38 $ 0.23
====================================================================================
Fiscal Years Ended
------------------------------------------------------------------------------------
DEC. 31, DEC. 31, Dec. 31, Dec. 31, Jan. 1,
(in thousands, except per share amounts) 1998 1997 (1) 1996 (1) 1995 (1) 1995 (1)
- - - -------------------------------------------------------------------------------------------------------------------------
Basic average common shares
outstanding 108,518 101,914 90,582 62,415 48,132
Diluted average common ====================================================================================
shares outstanding (3) 116,882 113,109 95,317 69,328 51,919
====================================================================================
Division Revenue Data:
Information Technology $ 1,164,140 $ 780,634 $ 400,408 $ 61,424 $ 17,600
Professional Services 537,973 383,490 179,608 29,065 18,712
------------------------------------------------------------------------------------
Total revenue $ 1,702,113 $ 1,164,124 $ 580,016 $ 90,489 $ 36,312
====================================================================================
As of
------------------------------------------------------------------------------------
DEC. 31, DEC. 31, Dec. 31, Dec. 31, Jan. 1,
1998 1997 (1) 1996 (1) 1995 (1) 1995 (1)
====================================================================================
Balance Sheet data:
Working capital $ 16,138 $ 481,362 $ 397,699 $ 240,252 $ 110,204
Total assets 1,571,881 1,402,626 840,469 303,801 110,578
Long term debt 15,525 434,035 103,369 93,339 28,186
Stockholders' equity 1,070,110 812,842 669,779 195,085 92,142
(1) Includes the financial information of the Company for the respective years
noted above restated to account for any material business combinations
accounted for under the pooling-of-interests method of accounting.
(2) Pro forma net income is the Company's historical net income less the
approximate federal and state income taxes that would have been incurred,
if the companies with which the Company merged had been subject to tax as a
C Corporation.
(3) Diluted average common shares outstanding have been computed using the
treasury stock method and the as-if converted method for convertible
securities which includes dilutive common stock equivalents as if
outstanding during the respective periods.
(4) Gain on sale relates to the gain on the sale of the net assets of the
Company's discontinued operations. See Note 16 to the Consolidated
Financial Statements for a further discussion.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During 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, in 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 elsewhere in this Form
10-K.
FISCAL 1998 COMPARED TO FISCAL 1997
Results from continuing operations
Revenue. Revenue increased $538.0 million, or 46.2%, to $1,702.1 million in
fiscal 1998 from $1,164.1 million in fiscal 1997. The increase was attributable
by division to: Information Technology, $383.5 million or an increase of 49.1%
and Professional Services, $154.5 million or an increase of 40.3%. The increases
in the Information Technology and Professional Services divisions were due to
both internal growth and, more significantly, to the revenues of acquired
companies. The revenue for the Company's Information Technology division is
obtained through the modis Solutions and modis Consulting business units. modis
Solutions provided approximately 30.3% and 17.6% of the division's revenue for
the years ended 1998 and 1997, as compared to 69.7% and 82.4% 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.
During 1998, the Company solidified the information technology division's
management structure. The Company integrated substantially all of its acquired
companies from a managerial perspective, including 'next generation' leadership.
In conjunction with this integration, the Company has been able to consolidate
its marketing efforts and promote the modis brand name on a national level, as
the majority of its services are now offered under the modis brand name. For
example, a major advertising campaign was launched to increase brand awareness
to customers and recruits through print ads and airport billboards. The Company
believes the managerial integration and unified national marketing plan will
provide the Company with a platform to increase sales. The strong progress in
our integration efforts in 1998 were somewhat attributable to the Company
satisfying all of its domestic contingent earn-out obligations by the end of
1998. The Company will continue to integrate the back office operations of this
division in conjunction with the Company's Restructuring Plan.
In an effort to increase revenue and gross margin percentages, the Company has
rolled out a new incentive based compensation plan throughout the Modis
Consulting unit. The Company believes this plan will better motivate its
employees to stimulate revenue growth and provide an incentive to increase gross
margin percentages.
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 2.7% of the IT division's total revenue, are
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.
Another trend in the industry that may limit the Company's operating strategy
has been articulated by some industry analysts. These industry analysts have
speculated that non Year 2000 related IT spending may be negatively effected in
the third and fourth quarter of fiscal 1999. This theory speculates, among other
things, that customers will focus their efforts in the third and fourth quarters
of fiscal 1999 on testing and implementing legacy systems which have undergone
Year 2000 remediation. The theory further speculates that this focus will result
in a curtailment of spending on such IT services as ERP implementation and
custom software development during 1999. As the Company's modis Solutions unit
provides ERP implementation and custom software development services, if
spending is curtailed , the Company may possibly experience some weakness in its
ERP practice.
The Company's Professional Services division consists of the accounting, legal,
engineering / technical, career management and consulting and scientific units
which contributed 33.5%, 17.1%, 34.1%, 9.0% and 6.3%, respectively, of the
Professional Services division's revenues by group during 1998 as compared to
24.3%, 20.3%, 39.1% 9.6% and 6.7%, respectively, during 1997. The shift in the
Professional Services division's revenues towards the Accounting unit is
primarily the result of the acquisition of a large, international provider of
accounting services during June 1997. This resulted in approximately six months
of post acquisition revenue in fiscal 1997 results versus twelve months during
fiscal 1998. Included in the 1998 revenues of the Professional Services division
are revenues derived from a project in the Company's Legal unit and with a
certain customer. The revenues from this project amounted to approximately $16.1
million, or 3.0% of the division's total revenue. This project is scheduled to
curtail significantly or be completed during the early part of fiscal 1999, and
there is no guarantee that a replacement for that source of revenue will be
found. Projects of this nature occur from time to time within the Professional
Services division. However, management believes it is well positioned to
increase revenue through its existing sales force and makes a concerted effort
to redeploy consultants after such projects end if possible.
During 1999, the Company created and filled the position of President and COO of
the Professional Services division. This position will be 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.
Gross Profit. Gross profit increased $139.1 million, or 42.3%, to $467.6 million
in fiscal 1998 from $328.5 million in fiscal 1997. Gross margin decreased to
27.5% in fiscal 1998 from 28.2% in fiscal 1997. The gross margin in the IT
division decreased from 26.8% to 25.9%. The overall decrease in the IT
division's gross margin was due to a number of factors, including: (1) the
increased percentage of the Information Technology division's revenues generated
by the U.K. operations, which generally contribute a lower gross margin
percentage; (2) in certain cases, the inability of the Company to time increases
in bill rates with increases in pay rates (3) higher benefits costs including
mathcing 401(k) plan and holiday and vacation pay; (4) inability to use more
salaried versus hourly consultants; and (5) the overall decrease in gross margin
percentages in the information technology services industry as a whole. This
industry decrease may be attributed to the aforementioned trend by large users
of IT services toward scaled back preferred vendor lists. The aim of such vendor
list reductions is to push greater services revenue through fewer providers with
the tradeoff being lower gross margin percentages to the providers. If in the
future a greater portion of the Company's revenues are generated through
preferred vendor contracts, it is possible that this may result in a decrease in
gross margin percentages, although gross margin dollars may increase. The
decrease in gross margin percentages in the information technology services
industry may also be attributed to a continued shortage of skilled IT workers
worldwide. The current shortage of skilled IT workers creates an upward pressure
on pay rates for such workers. If the Company must continue to pay higher wages
to attract and retain skilled workers and is not able to completely pass this
increase through to its customers, this may result in somewhat depressed gross
margin percentages. The gross margin in the Professional Services division
decreased to 30.8% in fiscal 1998 from 31.1% in fiscal 1997. The overall
decrease in the Professional Services gross margin was due primarily to an
increased percentage of revenues from the United Kingdom, increased salary
pressures due to a continued shortage of skilled workers, higher benefits costs
including a matching 401(k) plan and holiday and vacation pay, and increased
competition within the segment including downward pricing pressure from
competitors.
Operating Expenses. Operating expenses increased $124.7 million, or 58.9%, to
$336.4 million in fiscal 1998 from $211.7 million in fiscal 1997. Included in
operating expenses in fiscal 1998 are $34.8 million in restructuring and
impairment charges associated with the Company's Integration and Strategic
Repositioning Plan (the 'Restructuring Plan'). Operating expenses before these
non-recurring costs as a percentage of revenue decreased to 17.7% in fiscal
1998, from 18.2% in fiscal 1997. The decrease was due to the Company's ability
to spread its expenses over a larger revenue base. The Company's general and
administrative ("G&A") expenses before the non-recurring charges increased $75.3
million or 39.8% to $264.6 million in fiscal 1998 from $189.3 million in fiscal
1997. The increase in G&A expenses was primarily related to: the effects of
acquisitions made by the Company, internal growth of the operating companies
post-acquisition, investments made to improve infrastructure and to develop
technical practices and 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 1998 and 1997 are the costs associated with projects
underway to ensure accurate date recognition and data processing with respect to
the Year 2000 as it relates to the Company's business, operations, customers and
vendors. 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.
Restructuring and impairment charge. In December 1998, the Company's Board of
Directors approved a restructuring plan to strengthen 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 does not meet the Company's expectations. The Company recorded a
restructuring and impairment charge of $34.8 million in relation to the
Restructuring Plan. The restructuring component of the $34.8 million charge is
based, in part, on the evaluation of objective evidence of probable obligations
to be incurred by the Company or of specifically identified assets.
The Company, formerly AccuStaff Incorporated, was formed in 1992 and grew over
the next 6 1/2 years through both acquisitions and internal growth. Prior to the
disposition of the Commercial operations and the Teleservices and Health Care
divisions in 1998, the Company was largely organized and structured from an
administrative, operations and systems capabilities standpoint as a commercial
staffing business. The Restructuring Plan focuses on meeting the needs of an
information technology and professional services company and is designed to
result in a back office environment tailored to serve these businesses. Upon
completion of the Restructuring Plan, certain back office operations will be
centralized at the Company's headquarters and possibly one additional location,
and certain positions which were necessary under the previous organizational and
operational structure will be eliminated.
The Restructuring 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. The reduction in annualized revenue and operating
losses from the consolidation or closing of the 23 Professional Services
branches is estimated to be $12.0 million and $4.9 million, respectively. In
addition, the Company estimates an annual operating cost reduction of $10.1
million as a result of the consolidation of the back office operations. The
Company expects to begin to realize the benefits of the cost reductions in the
third quarter of 1999 and realize the majority of the annualized benefits in
fiscal 2000.
The major components of the restructuring and impairment plan include:(1) costs
to recognize severance and related benefits for the approximately 290 employees
to be terminated of $7.5 million. 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 to write down certain furniture, fixtures and computer equipment to net
realizable value at branches not performing up to the Company's expectations of
$2.5 million,(3) costs to write down goodwill associated with the acquisition of
Legal Information Technology, Inc. which was acquired in January, 1996,
calculated in accordance with SFAS 121 as described in Note 2 to the
Consolidated Financial Statements, Summary of Significant Accounting Policies -
Goodwill of $9.9 million, (4) costs to terminate leases and other exit and
shutdown costs associated with the consolidated or closed branches and
back-office operations, including closing the facilities of $8.0 million, and
(5) costs to adjust accounts receivable due to the expected increase in bad
debts which results directly from the termination of employees which causes a
change in client relationships which results when severed branch and back-office
administrative employees, who have the knowledge to effectively pursue
collections are terminated of $6.8 million. These costs were based upon
management's best estimates based upon available information.
Since payments pursuant to the Restructuring Plan will not commence until fiscal
1999, there were no charges recognized by the Company against the restructuring
reserve as of December 31, 1998, at which time the total restructuring reserve
amount of $24.8 million (which does not include the $9.9 million goodwill
impairment charge which was recorded against goodwill in the fouth quarter of
fiscal 1999) was included in accounts payable and accrued liabilities Since
payments pursuant to the Restructuring Plan will not commence until fiscal 1999.
Income from Operations. Income from operations increased $14.4 million, or
12.3%, to $131.2 million in fiscal 1998 from $116.8 million in fiscal 1997.
Income from operations before non-recurring integration and impairment charges
increased $49.2 million, or 42.1%, to $166.0 million in fiscal 1998 from $116.8
million in fiscal 1997. Income from operations before non-recurring integration
and impairment costs as a percentage of revenue decreased to 9.7% in fiscal 1998
from 10.0% in fiscal 1997.
Other Income (Expense). Interest expense increased $9.1 million, or 56.9%, to
$25.1 million in fiscal 1998 from $16.0 million in fiscal 1997. The increase in
interest expense resulted from the utilization of the Company's credit facility.
The increase in interest expense was partially offset by interest and other
income of $11.1 from primarily four sources: (1) the sale of the Company's
Commercial and teleservices divisions and the resultant net cash proceeds of
approximately $373.0 million (net of $477.0 million used to pay off and
terminate the Company's then existing credit facility) which earned interest
income from October 1, 1998 through December 31, 1998; (2) the resulting
interest expense savings from October 1, 1998 through December 31, 1998 from
paying off the existing credit facility (the new facility did not have a balance
as of December 31, 1998); (3) investment income from certain investments owned
by the Company; and (4) interest income earned from cash on hand at certain
subsidiaries of the Company.
Income Taxes. The Company's effective tax rate was 41.2% in fiscal 1998 compared
to 38.0% in fiscal 1997. The increase in the effective tax rate was due to the
increase in taxable income which resulted from the recording of approximately
$9.9 million in non-deductible goodwill impairment charges (included in the
restructuring and impairment charge discussed above and in Note 12 to the
Consolidated Financial Statements included elsewhere herein) during fiscal 1998.
Absent these impairment charges, the Company's effective tax rate would have
remained constant at 38.0% for fiscal 1998 compared to fiscal 1997. Due to the
increase in certain non-deductible expense items, the majority of which is
non-deductible goodwill amortization resulting from tax-free mergers accounted
for under the purchase method of accounting, the Company's effective tax rate
will increase in fiscal 1999.
Income from continuing operations. As a result of the foregoing, income from
continuing operations increased $5.5 million, or 8.7%, to $68.9 million in 1998
from $63.4 million in fiscal 1997. Income from continuing operations as a
percentage of revenue decreased to 4.0% in fiscal 1998 from 5.4% in fiscal 1997,
due primarily to the decrease in income attributable to the recording of the
integration and impairment charge, and the increase in the effective income tax
rate due to the non-deductible goodwill impairment charge. Exclusive of these
non-recurring costs, income from continuing operations during 1998 would have
increased $30.7 million to $94.1 million, increasing income from continuing
operations as a percentage of revenue to 5.5%.
Results from discontinued operations
Income from discontinued operations, after income taxes, totaled $30.0 million
for fiscal 1998, a decrease of 22.5%, compared to $38.7 million for fiscal 1997.
Reported revenues from discontinued operations were $919.4 million for fiscal
1998 versus $1,260.7 million for fiscal 1997. Operating income for the
discontinued operations was $54.3 million for fiscal 1998 versus $69.8 million
during fiscal 1997. Results of discontinued operations include allocations of
consolidated interest expense totaling $4.2 million and $4.4 million for fiscal
1998 and 1997, respectively. The allocations were based on the historic funding
needs of the discontinued operations, including: the purchases of property,
plant and equipment, acquisitions, current income tax liabilities and
fluctuating working capital needs. 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, fiscal 1998 operations include operations for only
nine months of the Commercial operations and Teleservices division and only
three months of the Health Care division, compared to twelve months in 1997.
Extraordinary item
During the fourth quarter of fiscal 1998, the Company recognized an
extraordinary after-tax charge of $5.6 million as a result of the Company's
early retirement of $16.5 million of 7% Convertible Senior Notes Due 2002, which
could have been converted into 1,449,780 shares of the Company's Common Stock,
and the termination of the Company's existing credit facility immediately
subsequent to the sale of the Company's Commercial operations and Teleservices
division. The Company paid a premium of $7.1 million on the early extinguishment
of the Senior Convertible Notes and wrote off $0.37 million of related
unamortized debt issuance costs. Additionally, the Company wrote off $1.6
million of unamortized debt financing costs related to the termination of the
credit facility. See Note 4 to the Consolidated Financial Statements for further
information on these transactions.
FISCAL 1997 COMPARED TO FISCAL 1996
Results from continuing operations
Revenue. Revenue increased $584.1 million, or 100.7%, to $1,164.1 million in
fiscal 1997 from $580.0 million in fiscal 1996. The increase was attributable by
division to: Information Technology, $380.2 million or an increase of 95.0% and
Professional Services, $203.9 million or an increase of 113.5%. The increases in
the Information Technology and Professional Services divisions were due to both
internal growth and, more significantly, to the revenues of acquired companies.
The revenue for the Company's Information Technology division is obtained
through the modis Solutions and modis Consulting business units. modis Solutions
provided approximately 17.6% and 18.4% of the division's revenue for the years
ended 1997 and 1996 as compared to 82.4% and 81.6% which was provided by the
division's modis Consulting unit during the same respective periods. The
Company's Professional Services division consists of the accounting, legal,
engineering/technical, career management and consulting and scientific groups
which contributed 24.3%, 20.3%, 39.1%, 9.6% and 6.7%, respectively, of the
Professional Services division's revenues by group during 1997 as compared to
8.8%, 15.1%, 74.0%, 0.0% and 2.1%, respectively, during 1996. The mix shift
among the units within the Professioanl Services division was primarily due to
the timing of acquisitions during fiscal 1996 and 1997.
Gross Profit. Gross profit increased $175.3 million, or 114.4%, to $328.5
million in fiscal 1997 from $153.2 million in fiscal 1996. Gross margin
increased to 28.2% in fiscal 1997 from 26.4% in fiscal 1996. The gross margin in
the IT division remained relatively constant in 1997 at 26.8% compared with
26.9% in fiscal 1996. The gross margin in the Professional division increased to
31.1% in fiscal 1997 compared to 25.2% in fiscal 1996. The increase in the
Professional Services division's gross margin was due primarily to the
substantial increase in revenue contribution by the divisions higher margin
accounting, legal and career management and consulting units.
Operating Expenses. Operating expenses increased $89.8 million, or 73.6%, to
$211.7 million in fiscal 1997 from $122.0 million in fiscal 1996. Included in
operating expenses in fiscal 1996 is $14.4 million in merger related expenses
associated with the merger of the Company with Career Horizons, Inc. Operating
expenses before merger related costs as a percentage of revenue decreased to
18.2% in fiscal 1997, from 18.5% in fiscal 1996. The decrease was due to the
Company's ability to spread its expenses over a larger revenue base. The
Company's G&A expenses increased $92.1 million or 94.8% to $189.3 million in
fiscal 1997 from $97.2 million in fiscal 1996. The increase in G&A expenses was
primarily related to: the effects of acquisitions made by the Company, internal
growth of the operating companies post-acquisition, investments made to improve
infrastructure and to develop technical practices and higher expenses at the
corporate level to support the growth of the Company. Included in G&A expenses
during 1997 are the costs associated with projects underway to ensure accurate
date recognition and data processing with respect to the Year 2000 as it relates
to the Company's business, operations, customers and vendors. 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. As a result of the foregoing, income from operations
increased $85.5 million, or 273.8%, to $116.8 million in fiscal 1997 from $31.2
million in fiscal 1996. Income from operations before non-recurring merger
related costs increased $71.1 million, or 155.6%, to $116.8 million in fiscal
1997 from $45.7 million in fiscal 1996. Income from operations before
non-recurring merger related costs as a percentage of revenue increased to 10.0%
in fiscal 1997 from 7.9% in fiscal 1996.
Interest Expense. Interest expense increased $9.2 million, or 135.3%, to $16.0
million in fiscal 1997 from $6.8 million in fiscal 1996. The increase in
interest expense resulted from use of the Company's credit facility. The
borrowings from the Company's credit facility were primarily used for the
purchases of businesses.
Income Taxes. The Company's effective tax rate was 38.0% in fiscal 1997 compared
to 56.7%, including the effect of the pro forma tax provision, in fiscal 1996.
The decrease in the effective tax rate was due to the higher level of taxable
income in 1996 as a result of the non-deductible, non-recurring merger related
costs in connection with the acquisitions of The McKinley Group, Inc., HJM
Consulting, Inc. and Career Horizons, Inc. during 1996.
Income from continuing operations. As a result of the foregoing, income from
continuing operations increased $54.8 million, or 637.2%, to $63.4 million in
1997 from $8.6 million in fiscal 1996. Income from continuing operations as a
percentage of revenue increased to 5.4% in fiscal 1997 from 1.5% in fiscal 1996,
due primarily to the reduction of merger related costs during 1997 and the
acquisition of cash-basis S-corporations accounted for under the pooling of
interests method of accounting, which required a one-time increase to the
current period income tax provision during 1996. Exclusive of these costs,
income from continuing operations during 1996 would have increased $10.8 million
to $19.4 million, increasing pro forma net income as a percentage of revenue to
3.3%.
Results from discontinued operations
Income from discontinued operations, after income taxes, increased $16.1
million, or 71.2%, to $38.7 million for fiscal 1997 versus $22.6 million for
fiscal 1996. Reported revenues from discontinued operations were $1,260.7
million for fiscal 1997 versus $1,031.4 million for fiscal 1996. Operating
income for the discontinued operations was $69.8 million for fiscal 1997 versus
$42.1 million during fiscal 1996. Results of discontinued operations include
allocations of consolidated interest expense totaling $4.4 million and $0.4
million for fiscal 1997 and 1996, respectively. The allocations were based on
the historic funding needs of the discontinued operations, including: the
purchases of property, plant and equipment, acquisitions, current income tax
liabilities and fluctuating working capital needs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have principally related to the acquisition
of businesses, working capital needs and capital expenditures. These
requirements have been met through a combination of bank debt, issuances of
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.
Exclusive of the net assets of discontinued operations, the Company had working
capital of $16.1 million and $115.3 million as of December 31, 1998 and 1997,
respectively. Included in current liabilities during fiscal 1998 and 1997 were
amounts related to earn-out payments due to the former owners of acquired
companies. These amounts were paid in the first quarter of fiscal 1999 and 1998,
respectively, and capitalized to the goodwill balances related to the respective
acquired companies. The Company had cash and cash equivalents of $105.8 million
and $23.9 million as of December 31, 1998 and 1997, respectively. The principal
reason for the decrease in the Company's working capital is that the Company has
recognized a $175.0 million current tax liability as of December 31, 1998
relating to the sale of its Commercial operations and Teleservices division. The
majority of the proceeds from the sale have been used to pay down long-term debt
under its credit facility (which did not have a balance as of December 31, 1998)
and to repurchase the Company's Common Stock. For the year ended December 31,
1998, the Company generated $88.9 million of cash flow from operations. For the
year ended December 31, 1997, the Company generated $39.0 million of cash flow
from operations. For the year ended December 31, 1996, the Company generated
$6.0 million of cash flow from operations. The large increase in cash flows from
operations during fiscal 1998 versus fiscal 1997 is mainly due to the cash flow
provided from acquired companies. The majority of the Company's acquisitions
occurred throughout the year ended December 31, 1997. Due to the timing of the
acquisitions, the cash flow from operations has increased substantially through
the year ended December 31, 1998.
For the year ended December 31, 1998, the Company generated $645.0 million of
cash flow from investing activities, as a result of net proceeds received in the
year ended December 31, 1998 from the Company's sale of its Commercial
operations and Teleservices division, of $840.9 million. The balance of $195.9
million relates to cash the Company used for acquisitions of $157.1 million, for
capital expenditures of $22.9 million, and advances related to the sale of its
Healthcare division of $15.9 million.
The Company will make payments of approximately $38.0 million in the first
quarter of 1999 related to the net worth adjustment and certain transaction
expenses associated with the sale of its Commercial operations and Teleservices
division. In addition, during the first quarter of fiscal 1999, the Company will
make tax payments of approximately $175.0 million related to the gain on the
sale of these businesses. In addition, the Company is subject to claims for
indemnification arising from the sales of its Commercial operations and
Teleservices division and its Health Care division in 1998. For the year ended
December 31, 1998, the Company did not pay any indemnification claims. 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.
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 operations
whereby the Company agreed to make advances to the purchaser to fund its working
capital requirements. Any amounts extended are collateralized by the accounts
receivable and certain other assets of the related health care operations. Any
advances made under this agreement accrue interest at 10% per year. As of
December 31, 1998, the Company had advanced approximately $15.9 million under
this agreement.
For the years ended December 31, 1997 and 1996, the Company used $365.9 million
and $275.3 million, respectively, for investing activities, of which $357.8
million, and $306.0 million, respectively, were used for acquisitions and $8.1
million, and $7.3 million, respectively, were used for capital expenditures. The
Company made thirteen, twenty and thirty-one acquisitions in each of the years
ended December 31, 1998, 1997 and 1996, respectively.
For the year ended December 31, 1998, the Company used $658.6 million for
financing activities of which $309.7 million was used to repurchase the
Company's Common Stock, $349.5 million which represents net repayments on
borrowings from the Company's credit facility and notes issued in connection
with the acquisition of certain companies, $23.6 million related to the
repurchase of the Company's 7% Convertible Senior Notes Due 2002, and $24.2
million related to the proceeds from stock options exercised. The repayments
were mainly funded from the sale of the Company's Commercial operations and
Teleservices division.
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
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.
For the years ended December 31, 1997 and 1996, the Company generated $335.8
million and $405.1 million, respectively, of cash flow from financing
activities. During fiscal 1997, this amount primarily represented net borrowings
from the Company's credit facility, which were used primarily to fund
acquisitions. During fiscal 1996, the Company generated the majority of its cash
flows from financing activities through the public sale of Company Common Stock.
The Company is also obligated under various acquisition agreements to make
earn-out payments to former stockholders of acquired companies over the next
four years. The Company estimates that the amount of these payments will total
$82.6 million, $26.2 million, $10.1 million and $2.9 million annually, for the
next four years. Included in the balance sheet in line item "Accounts payable
and accrued expenses" is $65.2 million related to estimated earnout payments
that were determinable at December 31, 1998. The Company anticipates that the
cash generated by the operations of the acquired companies will provide a
substantial part of the capital required to fund these payments.
The Company anticipates that capital expenditures for furniture and equipment,
including improvements to its management information and operating systems
during the next twelve months will be approximately $15.0 million. The Company
anticipates recurring expenditures in future years to be approximately $10.0
million per year.
The Company believes that funds provided by operations, available borrowings
under the credit facility, and current amounts of cash will be sufficient to
meet its presently anticipated needs for working capital, capital expenditures
and acquisitions for at least the next 12 months.
Indebtedness of the Company
Prior to the sale of the Company's Commercial operations and Teleservices
division, the Company had a $500 million credit facility which was syndicated to
a group of 20 banks, with NationsBank, N.A. as principal agent. Immediately
subsequent to the sale of the Company's Commercial operations and Teleservices
division, that facility was completely repaid and terminated. In connection with
this termination, the Company wrote off unamortized debt issuance costs of $1.63
million.
On October 30, 1998, the Company entered into a new $500 million revolving
credit facility which is syndicated to a group of 13 banks with NationsBank,
N.A. as the principal agent. The facility expires on October 21, 2003.
Outstanding amounts under the credit facility will bear interest at certain
floating rates as specified by the credit facility. The credit facility contains
certain financial and non-financial covenants relating to the Company's
operations, including maintaining certain financial ratios. Repayment of the
credit facility is 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 March 19, 1999, the Company had a balance of approximately $150.0 million
outstanding under the credit facility. The Company also had outstanding letters
of credit in the amount of $7.8 million, reducing the amount of funds available
under the credit facility to approximately $342.2 million as of March 19, 1999.
On October 16, 1995, Career Horizons, Inc., issued $86.25 million of 7%
Convertible Senior Notes Due 2002 which were assumed by the Company pursuant to
the merger with Career Horizons, Inc. Interest on the Notes were paid
semiannually on May 1 and November 1 of each year. The Notes were convertible at
the option of the holder thereof, unless previously redeemed, into shares of
Common Stock of the Company at a conversion price of $11.35 per share. The Notes
were redeemable, in whole or in part, at the option of the Company, at any time
on or after November 1, 1998, at stated redemption prices, together with accrued
interest. The Company called the Notes on October 1, 1998, to be either redeemed
or converted as of November 1, 1998. Prior to November 1, 1998, $16.45 million
of Notes were redeemed by the Company, at a premium of $7.13 million, and $69.80
million were converted into shares of Common Stock of the Company. Additionally,
the Company wrote off unamortized debt issuance costs of approximately $.37
million associated with the redemption and increased paid-in-capital by $1.5
million for unamortized debt issuance costs associated with the conversion.
The Company has certain notes payable to shareholders of acquired companies
which bear interest at rates ranging from 5.0% to 8.0% and have repayment terms
from January 1999 to November 2004. As of December 31, 1998, the Company owed
approximately $31.5 million in such acquisition indebtedness.
INFLATION
The effects of inflation on the Company's operations were not significant during
the periods presented in the financial statements. Generally, throughout the
periods discussed above, the increases in revenue have resulted primarily from
higher volumes, rather than price increases.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1998, the American Institute of Certified Public Accountants' Executive
Committee issued Statement of Position Number 98-1 (SOP 98-1), "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use". SOP 98-1
is effective for fiscal years beginning after December 15, 1998. Management
believes that the Company is substantially in compliance with this pronouncement
and that the implementation of this pronouncement will not have a material
effect on the Company's consolidated financial position, results of operations
or cash flows. Implementation is planned for fiscal 1999.
During 1998, the American Institute of Certified Public Accountants' Executive
Committee issued Statement of Position Number 98-5 (SOP 98-5), "Reporting on the
Costs of Start-Up Activities". SOP 98-5 is effective for fiscal years beginning
after December 15, 1998. Management does not believe that its adoption will have
a material effect on the Company's consolidated financial position or results of
operations. Implementation is planned for fiscal 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and for Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at fair value. SFAS
No. 133 requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999, and cannot be applied retroactively. We
have not yet quantified the impacts of adopting SFAS No. 133 on our financial
statements; however, SFAS No. 133 could increase the volatility of reported
earnings and other comprehensive income once adopted.
OTHER MATTERS
Year 2000 Compliance
The following disclosure is a Year 2000 Readiness disclosure statement pursuant
to the Year 2000 Readiness and Disclosure Act.
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 and 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%, 75%, and 65% 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 is near completion of Year 2000 required
upgrades for corporate hardware systems, operating systems, network systems,
database systems and applications systems. This project is in process, and on
schedule with an anticipated completion date of May 1999.
The Company operates approximately 264 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 and Assessment phases for all branch locations.
In conjunction with other business related integration projects, the Company is
actively replacing noncompliant Year 2000 branch hardware and software with Year
2000 compliant products. The Company expects that this replacement process will
be complete in July 1999. To date, the Company has found that less than 10% of
branch workstations require hardware or software upgrades for Year 2000
purposes.
Milestones and implementation dates and the cost of the Company's Year 2000
readiness program are subject to change based on new circumstances that may
arise or new information becoming available, that may change underlying
assumptions or requirements. Further, there are no assurances that the Company
will identify all data handling problems in its business systems or that the
Company will be able to successfully remedy Year 2000 items that are discovered.
Non-IT systems have also been assessed and inventoried. Potential Year 2000
risks in these systems includes 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 has budgeted approximately $2.0 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 10%
of the Company's total MIS budget. Approximately $1.3 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.
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 is developing contingency plans for alternative
methods of transaction processing and estimates that such plans will be
finalized by August 1999.
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 $31.5 million as
of December 31, 1998 and the Company had $477.1 million available under its
current credit facility. The debt obligations consist of notes payable to former
shareholders of acquired corporations, are at a fixed rate of interest, and
extend through 2004. The interest rate risk on these obligations is thus
immaterial due to the dollar amount and fixed nature of these obligations. The
interest rate on the credit facility is variable, but there were no amounts
outstanding on the facility as of December 31, 1998.
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 19% of fiscal 1998 consolidated
revenues from international operations, 93% of which were from the United
Kingdom and 7% of which were from other countries. Thus, 93% of international
revenues were derived from the United Kingdom, whose currency has not fluctuated
materially against the United States dollar in fiscal 1998. Foreign exchange
translation gains and losses have been and are as of December 31, 1998
immaterial. The Company did not hold or enter into any foreign currency
derivative instruments as of December 31, 1998.
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 may have a similiar effect. As a result,
any significant economic downturn or 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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Consolidated Financial Statements: The following consolidated financial
statements are included in this Annual Report on Form 10-K:
Report of Independent Public Accountants
Covered by the Report of Independent Public Accountants:
Consolidated Balance Sheet at December 31, 1998 and 1997
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Stockholders' Equity at
December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
Report of Independent Accountants
To the Board of Directors and Stockholders of
Modis Professional Services, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity, and of cash flows
present fairly, in all material respects, the financial position of Modis
Professional Services, Inc. (formerly AccuStaff Incorporated) and its
Subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
March 26, 1999
Modis Professional Services Inc. and Subsidiaries
Consolidated Balance Sheets.
DECEMBER 31, DECEMBER 31,
(dollar amounts in thousands except per share amounts) 1998 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 105,816 $ 23,938
Accounts receivable, net of allowance of $13,007 and $8,945 327,185 230,934
Prepaid expenses 11,219 9,352
Deferred income taxes 16,858 731
Net assets of discontinued operations - 366,045
Other 28,460 -
----------------------------------
Total current assets 489,538 631,000
Furniture, equipment and leasehold improvements, net 37,577 27,367
Goodwill, net 1,025,240 726,931
Other assets, net 19,526 17,328
----------------------------------
Total assets $ 1,571,881 $ 1,402,626
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 15,988 $ 16,366
Accounts payable and accrued expenses 206,681 92,433
Accrued payroll and related taxes 60,844 37,647
Income taxes payable 189,887 3,192
----------------------------------
Total current liabilities 473,400 149,638
Convertible debt - 86,250
Notes payable, long-term portion 15,525 347,785
Deferred income taxes 12,846 6,111
----------------------------------
Total liabilities 501,771 589,784
----------------------------------
Commitments and contingencies (Notes 3,4 and 6)
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
96,306,323 and 103,692,098 shares issued and outstanding on
December 31, 1998 and December 31, 1997, respectively 963 1,037
Additional contributed capital 564,248 634,194
Retained earnings 504,899 181,068
Deferred stock compensation - (3,457)
----------------------------------
Total stockholders' equity 1,070,110 812,842
----------------------------------
Total liabilities and stockholders' equity $ 1,571,881 $ 1,402,626
==================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Modis Professional Services Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
------------------------------------------
(dollar amounts in thousands except per share amounts) 1998 1997 1996
- - - ----------------------------------------------------------------------------------------------------------------