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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, 2000
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. [X]
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 15, 2001 as reported by the New
York Stock Exchange, was approximately $454,638,337.
As of March 15, 2001 the number of shares outstanding of the Registrant's
common stock was 96,731,561.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Registrant's Proxy
Statement for its 2001 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 Stockholder Matters', 'Liquidity and Capital Resources', and 'Factors
Which May Impact Future Results and Financial Condition'. In some cases, you can
identify forward-looking statements by terminology such as 'may,' 'should,'
'could,' 'expects,' 'plans,' 'projected,' 'anticipates,' 'believes,'
'estimates,' 'predicts,' 'potential,' or 'continues,' or the negative of these
terms or other comparable terminology. In addition, except for historical facts,
all information provided in Part 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
management and on information currently available to such management. Forward
looking statements speak only as of the date they are made, and the Company
undertakes no obligation to update publicly any of them in light of new
information or future events. Undue reliance should not be placed on such
forward-looking statements, which are based on current expectations.
Forward-looking statements are not guarantees of performance.
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Modis Professional Services, Inc. ('MPS' or the 'Company') is a global provider
of human capital solutions including professional staffing, e-business and
systems integration, information technology (IT) resource management, career
management consulting, and knowledge worker e-procurement. MPS' solutions enable
customers and clients to effectively locate, retain, and deploy strategic
knowledge worker resources in the areas of information technology, accounting
and finance, law, engineering, and science.
Headquartered in Jacksonville, Florida, MPS serves Fortune 1000 and middle
market clients with approximately 241 offices located throughout the United
States, Canada, the United Kingdom, and certain parts of continental Europe. MPS
is one of the largest global providers of human capital solutions with revenue
of $1,828 million in 2000, of which $1,399 million, or 77%, was generated in the
United States and $429 million, or 23%, was generated abroad, primarily in the
United Kingdom.
MPS consists of three divisions: Prolianz, the professional business solutions
division; Idea Integration, the e-business solutions division; and Modis, the
information technology resource management division. See Note 16 to the
Company's Consolidated Financial Statements for segment and geographic
information for the three years ending December 31, 2000.
PROLIANZ
Prolianz, the professional business solutions division, is a leading provider of
professional business and human capital solutions with a network of
approximately 149 offices throughout the United States and United Kingdom.
Prolianz combines the strengths and resources of all of its operating units to
offer human capital solutions to Fortune 1000 and middle market clients.
Prolianz provides expertise in a wide variety of disciplines including
accounting and finance, law, engineering and technical, science, career
management, executive search, and human resource consulting.
Prolianz generated $653 million of revenue and $217 million of gross profit
during fiscal 2000, which represents 35.7% of total MPS revenue and 40.9% of
total MPS gross profit versus 30.5% and 37.1%, respectively, during fiscal 1999.
Prolianz has a variable cost business model whereby revenue and cost of revenue
are primarily generated on a time-and-material basis. Less than 10% of Prolianz
revenue is generated from permanent placement fees, which are generated when a
client hires a Prolianz-sourced knowledge worker directly.
IDEA INTEGRATION
Idea Integration, the e-business solutions division, provides e-business
strategy consulting, design and branding, application development, and
integration to Fortune 1000 and middle market companies through a combination of
local, regional, and national practice groups located in nineteen (19) markets
in the United States and in the United Kingdom. Idea Integration specializes in
solutions in the areas of strategy and management consulting, creative design,
e-application development, business-to-business (B2B) solutions, enterprise
application integration, business intelligence, customer relationship management
(CRM), and enterprise solutions. Idea Integration is able to deliver these
solutions as a result of extensive expertise in key industries, propriety
software development and implementation methodologies known as Idea RoadMap, and
a multi-level service delivery model that takes advantage of local, national,
and regional service delivery capabilities.
Idea Integration generated $241 million in revenue and $105 million in gross
profit during fiscal 2000, which represents 13.2% of total MPS revenue and 19.8%
of total MPS gross profit versus 8.7% and 13.3%, respectively, during fiscal
1999. Idea Integration's business model utilizes salaried consultants and
delivers professional services primarily under time-and-materials contracts and
to a lesser extent under fixed-fee contracts. Less than 5% of Idea Integration's
revenue is generated from fixed-fee contracts.
In early 2000, Idea Integration acquired six e-business solution companies in
key markets, including Houston, Denver, San Francisco and Chicago.
MODIS
Modis, the information technology resource management ('ITRM') division, is one
of the world's largest providers of ITRM solutions with over 2,000 clients in a
wide variety of industries in more than 100 markets in the United States, United
Kingdom, Canada and certain parts of continental Europe. ITRM is the deployment
of knowledge capital to meet company-wide IT goals to obtain an optimal mix of
internal staff, third party consulting resources, and outsourcing. Modis offers
value-added solutions such as IT project support and staffing, recruitment of
full-time positions, project-based solutions, supplier management solutions, and
on-site recruiting support in the areas of application development, systems
integration, and ERP.
Modis generated $934 million in revenue and $208 million in gross profit during
fiscal 2000, which represents 51.1% of total MPS revenue and 39.3% of total MPS
gross profit versus 60.8% and 49.6%, respectively, during fiscal 1999. Modis has
a variable cost business model whereby revenue and cost of revenue are primarily
generated on a time-and-material basis. Less than 2% of Modis revenue is
generated from permanent placement fees.
During fiscal 2000, MPS launched a service offering named Beeline. Through a
web-based application, Beeline provides a common platform for clients and
suppliers to exchange and automate information regarding positions, candidates,
and their businesses. By unifying processes through automation, the relationship
between clients and suppliers is transformed into a collaborative commerce
environment and business is conducted more effectively and efficiently.
Beeline's corporate customers include Freddie Mac, Lutheran Brotherhood, Shaw
Industries, and Neoforma. Under its business model, Beeline seeks to collect a
service charge from suppliers, which will be based on a percentage of revenue
processed through the service. During fiscal 2000, no service charges were
collected. During the fourth quarter of 2000, Beeline focused on completing a
major new release and implementing its customers.
MARKET OVERVIEW AND COMPETITION
Businesses continue to migrate to a more flexible workforce which employs
personnel on a skill-specific or project-specific basis. Key drivers include
technology shifts, a move to Internet and web-enabled applications, increased
cost pressures, and skill shortages. This shift has increased the reliance upon
business service partners to recruit for and provide solutions to these
companies on a skill-specific or project-specific basis, or an economic basis.
The Company faces competition in obtaining and retaining qualified consultants.
The primary competitive factors in obtaining qualified consultants for
professional assignments are wages, responsiveness to work schedules, continuing
professional education opportunities, and number of hours of work available.
Management believes that MPS' divisions are highly competitive in all of these
areas. Specifically, the broad geographic coverage, strong relationships with
customers, consultants, and employees, and market leadership position gives MPS'
divisions the ability to attract and retain consultants with the skill sets and
expertise necessary to meet clients' needs in various industries at competitive
prices.
Further, the Company faces competition in obtaining and retaining clients. MPS
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 the quality
of job performance, and the price of services. A large percentage of business
services firms that compete with Prolianz, Idea Integration and Modis are local
companies with fewer than five offices. Within local markets, these firms
actively compete with MPS' divisions for business, and in most of these markets
no single company has a dominant share of the market. MPS' divisions also
compete to a lesser extent with larger full-services competitors in national,
regional and local markets, which are listed below.
The principal national competitors of Prolianz include Robert Half
International, Inc., On Assignment, Inc., the legal division of Kelly Services,
Inc., Adecco SA, CDI Corporation, Korn/Ferry International, Heidrick & Struggles
International, Inc., and kforce.com, Inc.
The principal national competitors of Idea Integration include Viant
Corporation, Scient Corp., Proxicom, Inc., Agency.com Ltd., Sapient Corporation,
Accenture, Cap Gemini Ernst & Young, MarchFirst, Inc., DiamondCluster
International, Inc, and to an extent, the consulting divisions of IBM and the
'Big Five' accounting firms. In addition, in seeking engagements Idea
Integration often competes against the internal management information services
and information technology departments of clients and potential clients.
The principal national competitors of Modis include Keane, Inc., Computer
Horizons Corp., Comsys, CIBER, Inc., Metro Information Service, Inc.,
Hall-Kinion, & Associates, Cambridge Technology Partners, Inc., and iGATE
Capital Corporation.
GROWTH STRATEGY
The Company's growth strategy is focused on increasing overall revenue and gross
profits primarily through internal growth, and to a lesser extent acquisitions.
The key elements of the Company's internal growth strategy include increasing
penetration of existing markets, expanding current specialties into new and
contiguous geographic markets, and identifying and adding new practice areas.
Further, the Company can strengthen its relationships with clients, consultants
and employees by enhancing the knowledge and skills of its consultants and
employees. Finally, by concentrating our efforts in market locations, customer
segments, and skill areas that value high levels of service, the Company seeks
to improve internal growth.
MATERIAL RECLASSIFICATION
On November 10, 2000, as a result of unfavorable market conditions, the Board of
Directors of the Company cancelled the proposed plan to spin-off Modis and its
subsidiary Idea Integration, (collectively the 'IT Businesses') which had been
approved December 15, 1999. The operations and assets of the IT Businesses were
previously reported in the 1999 annual report on Form 10-K as discontinued
operations under Accounting Principals Board Opinion No. 30. Due to the
cancellation of the plan to spin-off the IT Businesses, the operations and
assets of the IT Businesses have been included in continuing operations for all
periods presented.
FULL-TIME EMPLOYEES
At March 15, 2001, the Company employed approximately 16,500 professional
consultants and approximately 2,000 corporate employees on a full-time
equivalent basis. Approximately 300 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 and
Canada does not materially impact the Company's operations.
SERVICE MARKS
The Company and its subsidiaries maintain a number of service marks and other
intangible rights, including federally registered service marks for, MODIS
PROFESSIONAL SERVICES, MODIS (and logo), IDEA.COM, ACCOUNTING PRINCIPALS (and
logo), MANCHESTER, SCIENTIFIC STAFFING, SPECIAL COUNSEL, DIVERSIFIED SEARCH,
CAREERSTAT, EXALT, and ENTEGEE 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 IDEA INTEGRATION logo,
PROLIANZ, MANAGEMENT PRINCIPALS, BEELINE, PROCOACHING, and DIVERSIFIED
TECHNOLOGY PARTNERS. The Company plans to file affidavits of use and timely
renewals, as appropriate, for these and other intangible rights it maintains.
SALE OF COMMERCIAL AND HEALTH CARE DIVISIONS
Effective September 27, 1998, the Company sold its Commercial operations and
Teleservices division with a final adjusted purchase price of $826.2 million. On
March 30, 1998, the Company sold the operations and certain assets of its Health
Care division for $8.0 million. See Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations, and Note 17 to the Company's
Consolidated Financial Statements for a discussion of the sale of the Company's
Commercial operations and Teleservices division, and Health Care operations.
SEASONALITY
The Company's quarterly operating results are affected 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 calendar year-end
as a result of holidays, and through February of the following year, as the
Company's customers approve annual budgets.
ITEM 2. PROPERTIES
The Company owns no material real property. It leases its corporate
headquarters, as well as, almost all 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 deductibles 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, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 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 "MPS".
FISCAL YEAR 1999 High Low
First Quarter........................................................ $17.13 $ 7.00
Second Quarter....................................................... 15.63 8.00
Third Quarter........................................................ 17.50 11.88
Fourth Quarter....................................................... 14.81 9.50
FISCAL YEAR 2000
First Quarter........................................................ $18.69 $12.31
Second Quarter....................................................... 13.38 7.44
Third Quarter........................................................ 9.19 4.81
Fourth Quarter....................................................... 5.25 3.38
In addition to the factors set forth below in 'FACTORS WHICH MAY IMPACT FUTURE
RESULTS AND FINANCIAL CONDITION' 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 15, 2001, there were approximately 851 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.
During fiscal 1998, the Company's Board of Directors authorized the repurchase
of up to $310.0 million of the Company's Common Stock pursuant to a share
buyback program, under which the Company had repurchased approximately 21.8
million shares in fiscal 1998. The Company completed the program in the first
quarter of 1999, with the repurchase of approximately 0.6 million shares,
bringing the total shares repurchased under the program to approximately 22.4
million shares for approximately $297.9 million. All of these shares were
retired upon purchase. During fiscal 1999, the Company's Board of Directors
authorized the repurchase of up to $65.0 million of the Company's common stock.
As of December 31, 2000, no shares have been repurchased under this
authorization. See 'LIQUIDITY AND CAPITAL RESOURCES' under 'MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS' for
additional information.
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Years Ended
------------------------------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
(in thousands, except per share amounts) 2000 1999 1998 (4) 1997 (1,4) 1996 (1,4)
- - -------------------------------------------------------------------------------------------------------------------------
Statement of Income Data:
Revenue $ 1,827,686 $ 1,941,649 $1,702,113 $ 1,164,124 $ 580,016
Cost of Revenue 1,296,834 1,415,901 1,234,537 835,609 426,814
------------------------------------------------------------------------------------
Gross Profit 530,852 525,748 467,576 328,515 153,202
Operating expenses 440,208 363,786 301,656 211,727 107,512
Restructuring and impairment charges (753) (3,250) 34,759 - -
Asset write-down related to sale of
discontinued operations 13,122 25,000 - - -
Merger related costs - - - - 14,446
------------------------------------------------------------------------------------
Operating income from continuing
operations 78,275 140,212 131,161 116,788 31,244
Other expense, net 21,621 7,794 13,975 14,615 2,974
------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 56,654 132,418 117,186 102,173 28,270
(Benefit) provision for income taxes (63,099) 50,283 48,326 38,803 19,693
------------------------------------------------------------------------------------
Income from continuing operations 119,753 82,135 68,860 63,370 8,577
Discontinued operations:
Income from discontinued operations,
net of income taxes - - 30,020 38,663 22,633
Gain on sale of discontinued operations,
net of income taxes (2) - 14,955 230,561 - -
------------------------------------------------------------------------------------
Income before extraordinary loss 119,753 97,090 329,441 102,033 31,210
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit - - (5,610) - -
------------------------------------------------------------------------------------
Net income $ 119,753 $ 97,090 $ 323,831 $ 102,033 $ 31,210
====================================================================================
Proforma provision for income taxes - - - - (3,642)
------------------------------------------------------------------------------------
Pro forma net income (3) $ 119,753 $ 97,090 $ 323,831 $ 102,033 $ 34,852
====================================================================================
Basic income (loss) per common share:
From continuing operations $ 1.24 $ 0.85 $ 0.63 $ 0.62 $ 0.09
====================================================================================
From discontinued operations $ - $ - $ 0.28 $ 0.38 $ 0.25
====================================================================================
From gain on sale (2) $ - $ 0.16 $ 2.12 $ - $ -
====================================================================================
From extraordinary item $ - $ - $ (0.05) $ - $ -
====================================================================================
Basic net income per common share $ 1.24 $ 1.01 $ 2.98 $ 1.00 $ 0.34
====================================================================================
Diluted income (loss) per common share:
From continuing operations $ 1.23 $ 0.85 $ 0.61 $ 0.59 $ 0.09
====================================================================================
From discontinued operations $ - $ - $ 0.26 $ 0.34 $ 0.24
====================================================================================
From gain on sale (2) $ - $ 0.15 $ 1.97 $ - $ -
====================================================================================
From extraordinary item $ - $ - $ (0.05) $ - $ -
====================================================================================
Diluted net income per common share $ 1.23 $ 1.00 $ 2.79 $ 0.93 $ 0.33
====================================================================================
Fiscal Years Ended
------------------------------------------------------------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
(in thousands, except per share amounts) 2000 1999 1998 (4) 1997 (1,4) 1996 (1,4)
- ---------------------------------------------------------------------------------------------------------------------------
Pro forma basic income (loss)
per common share:
From continuing operations $ 1.24 $ 0.85 $ 0.63 $ 0.62 $ 0.13
====================================================================================
From discontinued operations $ - $ - $ 0.28 $ 0.38 $ 0.25
====================================================================================
From gain on sale (2) $ - $ 0.16 $ 2.12 $ - $ -
====================================================================================
From extraordinary item $ - $ - $ (0.05) $ - $ -
====================================================================================
Pro forma basic net income
per common share $ 1.24 $ 1.01 $ 2.98 $ 1.00 $ 0.38
====================================================================================
Pro forma diluted income (loss)
per common share:
From continuing operations $ 1.23 $ 0.85 $ 0.61 $ 0.59 $ 0.13
====================================================================================
From discontinued operations $ - $ - $ 0.26 $ 0.34 $ 0.24
====================================================================================
From gain on sale (2) $ - $ 0.15 $ 1.97 $ - $ -
====================================================================================
From extraordinary item $ - $ - $ (0.05) $ - $ -
====================================================================================
Pro forma diluted net income
per common share $ 1.23 $ 1.00 $ 2.79 $ 0.93 $ 0.37
====================================================================================
Basic average common shares
outstanding 96,675 96,268 108,518 101,914 90,582
Diluted average common ====================================================================================
shares outstanding 97,539 97,110 116,882 113,109 95,317
====================================================================================
Balance Sheet data:
Working capital $ 248,388 $ 247,111 $ 16,138 $ 481,362 $ 397,699
Total assets 1,653,560 1,596,395 1,571,881 1,402,626 840,469
Long term debt 194,000 238,615 15,525 434,035 103,369
Stockholders' equity 1,303,218 1,182,515 1,070,110 812,842 669,779
(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) Gain on sale relates to the gain on the sale of the net assets of the
Company's discontinued operations. See Note 17 to the Company's
Consolidated Financial Statements for a further discussion.
(3) 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.
(4) 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.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On November 10, 2000, as a result of unfavorable market conditions, the Board of
Directors of the Company cancelled the proposed plan to spin-off the IT
Businesses. The operations and assets of the IT Businesses were previously
reported in the 1999 annual report on Form 10-K as discontinued operations under
Accounting Principals Board Opinion No. 30. Due to the cancellation of the plan
to spin-off the IT Businesses, 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
Prolianz and the IT Businesses as continuing operations for all periods
presented.
Effective September 27, 1998 and March 30, 1998, the Company sold its Commercial
operations and Teleservices division, and the operations and certain assets of
its Health Care division, respectively, (jointly the "Commercial Businesses").
The Commercial operations and Teleservices division were sold with a final
adjusted purchase price of $826.2 million in cash. The after-tax gain on the
sale was $230.6 million. The operations and certain assets of the Health Care
division were sold for consideration of $8.0 million, consisting of $3.0 million
in cash and $5.0 million in a note receivable. The initial after-tax gain on the
sale was $0.1 million.
In connection with the Company's sale of its health care operations, the Company
entered into an agreement with the purchaser of the health care assets whereby
the Company agreed to make advances to the purchaser to fund its working capital
requirements. These advances were collateralized by the assets of the sold
operations, primarily the accounts receivable. In the third quarter of 1999, the
Company was informed by the purchaser that they would default on their
obligation to the Company. The Company evaluated the total amount owed to the
Company in both fiscal 1999 and fiscal 2000, ultimately believing it was
probable that the purchaser's debt would not be repaid. Accordingly, the Company
provided an allowance of $25.0 million and $13.1 million, respectively, for the
purchaser's debt. As of December 31, 2000, the Company had fully reserved all
amounts owed to the Company under this agreement.
As a result of the sale of the Company's Commercial Businesses, the Company's
Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations report the results of operations
of the Commercial Businesses as discontinued operations for all periods
presented.
The following detailed analysis of operations should be read in conjunction with
the 2000 Financial Statements and related notes included elsewhere in this Form
10-K.
FISCAL 2000 COMPARED TO FISCAL 1999
Revenue. Revenue decreased $113.9 million, or 5.9%, to $1,827.7 million in
fiscal 2000 from $1,941.6 million in fiscal 1999. The decrease was attributable
to a decrease in revenue for the Modis division which accounted for 51.1% and
60.8% of the Company's total revenue for fiscal 2000 and 1999, respectively.
Revenue in Modis decreased $247.0 million, or 20.9%, to $934.0 million in fiscal
2000, from $1,181.0 million in fiscal 1999. This decrease in revenue was
primarily attibutable to the continuing diminished demand for information
technology services as the Company's customers continue to re-evaluate their
information technology infrastructure needs after addressing their year 2000
issues.
Revenue in Prolianz increased $60.1 million, or 10.1%, to $652.6 million in
fiscal 2000 from $592.5 million in fiscal 1999. The increase in revenue is due
to internal growth. Prolianz operates primarily through five operating units
consisting of the accounting and finance, legal, engineering/technical, career
management and consulting and scientific units which contributed 39.4%, 13.2%,
34.7%, 8.5% and 4.2%, respectively, of Prolianz's revenue by group during fiscal
2000 as compared to 38.4%, 13.7%, 33.1%, 9.7% and 5.1%, respectively, during
fiscal 1999.
Revenue in Idea Integration increased $72.9 million, or 43.3%, to $241.1 million
in fiscal 2000, from $168.2 million in fiscal 1999. This increase in revenue is
due to a combination of internal growth and a contribution of revenue from
companies acquired in the first quarter of 2000.
Gross Profit. Gross profit increased $5.2 million or 1.0% to $530.9 million in
fiscal 2000 from $525.7 million in fiscal 1999. Gross margin increased to 29.0%
in fiscal 2000 from 27.1% in fiscal 1999. The overall increase in gross margin
was primarily due to the increased revenue contribution of the Company's Idea
Integration division, which generated a gross margin of 43.5% in fiscal 2000 as
compared to 41.8% in fiscal 1999. Revenue contributed from Idea Integration
increased to 13.2% in fiscal 2000 from 8.7% in fiscal 1999. The gross margin in
Prolianz increased to 33.3% in fiscal 2000 from 32.9% in fiscal 1999. The gross
margin in Modis increased to 22.3% in fiscal 2000 from 22.1% in fiscal 1999.
Operating expenses. Operating expenses increased $67.1 million or 17.4% to
$452.6 million in fiscal 2000 from $385.5 million in fiscal 1999. The Company's
general and administrative ("G&A") expenses increased $67.7 million or 21.2% to
$386.3 million in fiscal 2000, from $318.6 million in fiscal 1999. The overall
increase in G&A expenses is attributable primarily to Idea Integration and to a
lesser extent Prolianz. Idea Integration's G&A expenses increased $51.5 million,
or 137.0%, to $89.1 million in fiscal 2000 from $37.6 million in fiscal 1999. As
a percentage of revenue, Idea Integration's G&A expenses increased to 37.0% in
fiscal 2000 from 22.4% in fiscal 1999. The increase in Idea Integration's G&A
expenses was primarily related to increased expenses to support the growth of
the division, including sales, marketing and brand recognition. Prolianz's G&A
expenses increased $12.8 million, or 10.1%, to $139.7 million in fiscal 2000
from $126.9 million in fiscal 1999, even though G&A expenses as a percentage of
revenue remained constant at 21.4% for the respective years. The increase in
Prolianz's G&A expenses was primarily related to the internal growth of its
operating units and increased expenses to support the growth of the division.
G&A expenses for Modis decreased $3.9 million, or 2.5%, to $150.2 million in
fiscal 2000 from $154.1 million in fiscal 1999. The decrease in Modis' G&A
expenses is associated with the decrease in revenue for fiscal 2000. During the
fourth quarter of 2000, the Company implemented cost reduction initiatives
within the Modis division that resulted in a decrease in G&A expenses during the
quarter.
Further, the Company incurred charges of $13.1 million and $25.0 million during
fiscal 2000 and fiscal 1999, respectively, related to the impairment of the note
receivable due from the purchaser of the Company's discontinued health care
division. In fiscal 2000, the Company also incurred costs of $7.3 million
related to the planned separation and spin-off of the IT Businesses which was
cancelled.
Income from operations. Income from operations decreased $61.9 million, or
44.2%, to $78.3 million in fiscal 2000, from $140.2 million in fiscal 1999. The
decrease in operating income is due to the lower contribution of operating
income from the Company's Idea Integration and Modis divisions. The Company
elected to increase expenditures in Idea Integration to support sales, marketing
and brand recognition. Additionally, Modis' costs decreased slightly with a
reduction in revenue. Income from operations for Prolianz, however, increased
$7.3 million, or 13.4%, to $61.7 million in fiscal 2000, from $54.4 million in
fiscal 1999, mainly as a result of the increase in revenue in Prolianz. For the
Company as a whole, income from operations as a percentage of revenue decreased
to 4.3% in fiscal 2000, from 7.2% in fiscal 1999.
Other expense, net. Other expense, net consists primarily of interest expense
related to borrowings under the Company's credit facilities and notes issued in
connection with acquisitions, net of interest income related to investment
income from (1) certain investments owned by the Company and (2) cash on hand.
Interest expense increased $10.8 million, or 88.5%, to $23.0 million in fiscal
2000, from $12.2 million in fiscal 1999. Interest expense in fiscal 1999 was
significantly reduced as a result of the net cash on hand related to the sale of
the Company's discontinued Commercial operations and Teleservices division in
fiscal 1998 resulting in an overall lower level of borrowings under the
Company's credit facilities during fiscal 1999. Interest expense was offset by
$1.4 million of interest and other income in fiscal 2000 as compared to $4.4
million in fiscal 1999.
Income Taxes. The Company recognized a net income tax benefit for fiscal 2000 of
$63.1 million as compared to an income tax provision of $50.3 million in fiscal
1999. The income tax benefit related primarily to a tax benefit of $99.7 million
associated with an investment in a subsidiary. This tax benefit was partially
offset by a $13.4 million valuation allowance. Absent this net benefit, the
Company's effective tax rate increased to 41.0% in fiscal 2000 as compared to
38.0% in fiscal 1999, due to (1) the effect of foreign tax credits recognized in
fiscal 1999, and (2) the increased effect of non-deductible expense items on a
lower level of income in fiscal 2000.
Income from continuing operations. As a result of the foregoing, income from
continuing operations increased $37.7 million, or 45.9%, to $119.8 million in
the fiscal 2000, from $82.1 million in fiscal 1999. Income from continuing
operations as a percentage of revenue increased to 6.6% in fiscal 2000, from
4.2% in fiscal 1999.
FISCAL 1999 COMPARED TO FISCAL 1998
Results from continuing operations
Revenue. Revenue increased $239.5 million, or 14.1%, to $1,941.6 million in
fiscal 1999 from $1,702.1 million in fiscal 1998. The increase in revenue was
primarily due to internal growth and, to a lesser extent, growth through
acquisition of businesses.
Revenue in Prolianz increased $54.5 million, or 10.1%, to $592.5 million in
fiscal 1999 from $538.0 million in fiscal 1998. Prolianz operates primarily
through five operating units consisting of the accounting and finance, legal,
engineering/technical, career management and consulting and scientific units
which contributed 38.4%, 13.7%, 33.1%, 9.7% and 5.1%, respectively, of
Prolianz's revenue by group during fiscal 1999 as compared to 33.5%, 17.1%,
34.1%, 9.0% and 6.3%, respectively, during fiscal 1998.
Revenue in Modis increased $131.3 million, or 12.5%, to $1,181.0 million in
fiscal 1999, from $1,049.7 million in fiscal 1998. Revenue in Idea Integration
increased $53.8 million, or 47.0%, to $168.2 million in fiscal 1999, from $114.4
million in fiscal 1998.
Gross Profit. Gross profit increased $58.1 million or 12.4% to $525.7 million in
fiscal 1999 from $467.6 million in fiscal 1998. The increase in gross profit was
due to a combination of internal growth and growth through acquisition of
businesses. Gross margin decreased slightly to 27.1% in fiscal 1999 from 27.5%
in fiscal 1998 as a result of the decrease in gross margins in both Idea
Integration and Modis. The gross margin in Idea Integration decreased to 41.8%
in fiscal 1999 from 43.3% in fiscal 1998 due to an increase in compensation
costs due to competitive recruiting and retention environment during fiscal
1999. The gross margin in Modis decreased to 22.1% in fiscal 1999 from 24.0% in
fiscal 1998 due to the increased percentage of Modis' revenues generated by U.K.
operations, which generally contribute a lower gross margin percentage.
The gross margin in Prolianz increased to 32.9% in fiscal 1999 from 30.8% in
fiscal 1998. The increase in gross margin was primarily a result of the
continued migration to higher margin solutions-type engagements.
Operating Expenses. Operating expenses increased $49.1 million or 14.6% to
$385.5 million in fiscal 1999 from $336.4 million in fiscal 1998. The Company's
G&A expenses increased $54.0 million or 20.4% to $318.6 million in fiscal 1999,
from $264.6 million in fiscal 1998. The increase in G&A expenses was primarily
related to the internal growth of operating companies, 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. G&A expenses in Prolianz increased $23.7
million, or 23.0%, to $126.9 million in fiscal 1999 from $103.2 million in
fiscal 1998. As a percentage of revenue, Prolianz's G&A expenses increased to
21.4% in fiscal 1999 from 19.8% in fiscal 1998. G&A expenses in Idea Integration
increased $10.5 million, or 38.7%, to $37.6 million in fiscal 1999 from $27.1
million in fiscal 1998. As a percentage of revenue, Idea Integration's G&A
expenses decreased to 22.4% in fiscal 1999 from 23.7% in fiscal 1998. G&A
expenses in Modis increased $19.8 million, or 14.7%, to $154.1 million in fiscal
1999 from $134.3 million in fiscal 1998. As a percentage of revenue, Modis' G&A
expenses increased to 13.0% in fiscal 1999 from 12.8% in fiscal 1998.
Additionally, the Company incurred charges of $25.0 million in fiscal 1999
related to the impairment of the note receivable due from the purchaser of the
Company's discontinued Health Care division. These increases in operating
expenses relating to both the increase in G&A expenses and the charges related
to the Company's discontinued Health Care division were somewhat offset by
restructuring and impairment charges of $34.8 million in fiscal 1998 associated
with the Company's restructuring plan. See Note 12 to the Company's Consolidated
Financial Statements for a discussion on the Company's restructuring plan.
Income from Operations. As a result of the foregoing, income from operations
increased $9.0 million, or 6.9%, to $140.2 million in fiscal 1999 from $131.2
million in fiscal 1998.
Other expense, net. Interest expense decreased $11.5 million, or 48.5%, to $12.2
million in fiscal 1999, from $23.7 million in fiscal 1998. Interest expense in
fiscal 1999 was significantly reduced as a result of the net cash on hand
related to the sale of the Company's discontinued Commercial operations and
Teleservices division in fiscal 1998 resulting in less borrowings under the
Company's credit facilities. Interest expense was offset by $4.4 million of
interest and other income in fiscal 1999 as compared to $9.7 million in fiscal
1998.
Income Taxes. The Company's effective tax rate decreased to 38.0% in fiscal 1999
compared to 41.2% in fiscal 1998. The decrease was due to (1) a $9.9 million
non-deductible goodwill impairment charge included in taxable income during
fiscal 1998 (included in the restructuring and impairment charge of the
Company's restructuring plan) and (2) foreign tax credits recognized in fiscal
1999. Absent the 1998 charge and the 1999 credits, the Company's effective tax
rate would have increased to 39.5% for fiscal 1999 compared to 38.0% for fiscal
1998 as a result of 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 during 1998.
Income from continuing operations. As a result of the foregoing, income from
continuing operations increased $13.2 million, or 19.2%, to $82.1 million in the
fiscal 1999, from $68.9 million in fiscal 1998. Income from continuing
operations as a percentage of revenue increased to 4.2% in fiscal 1999, from
4.0% in fiscal 1998.
Results of discontinued operations
The reported results from discontinued operations include the results of the
Company's Commercial operations and Teleservices division for the nine months
ended September 30, 1998 and the results of the Company's health care operations
for the period January 1, 1998 through March 28, 1998. The following discloses
the results of the discontinued Commercial businesses for fiscal 1998:
Discontinued Commercial businesses:
Revenue $ 919,400
Cost of revenue 708,930
Operating expense 156,180
Operating income 54,290
Interest, net 4,200
Provision for income taxes 20,070
Income from discontinued commercial businesses 30,020
Results of the discontinued Commercial Business include the allocation of
certain net common expenses for corporate support and back office functions
totaling approximately $0.9 million for the year ended December 31, 1998.
Corporate support and back office allocations are based on the ratio of the
Company's consolidated revenues, operating income and assets to that of the
discontinued Commercial Business. Additionally, the results of discontinued
operations include allocations of consolidated interest expense totaling $4.2
million for fiscal 1998. Interest expense is allocated based on the historic
funding needs of the discontinued operations, using a rate that approximates the
weighted average interest rate outstanding for the Company for each fiscal year
presented. Historic funding needs include: the purchases of property, plant and
equipment, acquisitions, current income tax liabilities and fluctuating working
capital needs.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have principally been related to the
acquisition of businesses, working capital needs and capital expenditures. These
requirements have been met through a combination of bank debt and internally
generated funds. The Company's operating cash flows and working capital
requirements are affected significantly by the timing of payroll and by the
receipt of payment from the customer. Generally, the Company pays its
consultants weekly or semi-monthly, and receives payments from customers within
30 to 90 days from the date of invoice.
The Company had working capital of $248.4 million and $247.1 million as of
December 31, 2000 and 1999, respectively. Included in current liabilities as of
December 31, 2000 and 1999 were amounts related to earn-out payments due to the
former owners of acquired companies. The earn-out amounts were scheduled to be
paid in the first and second quarters of fiscal 2001 and 2000, respectively, and
were capitalized to the goodwill balances related to the respective acquired
companies. The Company had cash and cash equivalents of $5.0 million and $8.5
million as of December 31, 2000 and 1999, respectively.
For the years ended December 31, 2000, 1999 and 1998, the Company generated
$192.7 million, $75.7 million, and $88.9 million of cash flow from operations,
respectively. The increase in cash flow from operations in fiscal 2000 from
fiscal 1999 primarily related to a net tax benefit of $86.3 million associated
with an investment in a subsidiary and to a lesser extent improved receivables
collection, decreasing the cash needed to fund accounts receivable. The decrease
in cash flow from operations in fiscal 1999 from fiscal 1998 was due to payments
associated with the Company's restructuring plan along with an increase in cash
needed to fund accounts receivable and Company infrastructure.
For the year ended December 31, 2000, the Company used $148.8 million of cash
for investing activities, primarily as a result of acquisitions in Idea
Integration and to a lesser extent earn-out payments. The Company also used
$25.2 million for capital expenditures. For the year ended December 31, 1999,
the Company used $392.5 million of cash flow for investing activities, mainly as
a result of the payment of a tax liability, net worth adjustment and certain
transaction expenses of $191.4 million relating to the sale of the Company's
Commercial operations and Teleservices division. Additionally, the Company used
$160.7 million for acquisitions and earn-out payments, $21.2 million for capital
expenditures, and $19.2 million for advances associated with the sale of the
Company's Health Care division in fiscal 1998.
For the year ended December 31, 1998, the Company generated $645.0 million of
cash flow from investing activities, primarily as a result of net proceeds of
$840.9 million received from the Company's sale of its Commercial operations and
Teleservices division. The Company also used $195.9 million for investing
activities, which was comprised of cash the Company used for acquisitions and
earn-out payments of $157.1 million, for capital expenditures of $22.9 million,
and advances related to the sale of its discontinued Healthcare operations of
$15.9 million.
In connection with the Company's sale of its health care operations, the Company
entered into an agreement with the purchaser of the health care assets whereby
the Company agreed to make advances to the purchaser to fund its working capital
requirements. These advances were collateralized by the assets of the sold
operations, primarily the accounts receivable. In the third quarter of 1999, the
Company was informed by the purchaser that they would default on their
obligation to the Company. The Company believed it was probable that a portion
of the advances would not be repaid and accordingly, provided an allowance for
the advances estimated to be uncollectible of $25.0 million. At September 30,
2000, the total amount owed to the Company, net of the $25.0 million reserve,
was $13.1 million. The Company reevaluated the total amount owed to the Company
and believed it was probable that the balance of the purchaser's debt to the
Company of $13.1 million would not be repaid and accordingly, provided an
additional allowance for the debt estimated to be uncollectible. As of December
31, 2000, the Company had fully reserved all amounts owed to the Company under
this agreement.
For the year ended December 31, 2000, the Company used $47.4 million of cash for
financing activities. This amount primarily represented net repayments on the
Company's credit facility and on notes issued in connection with the acquisition
of certain companies. These repayments were mainly funded from a net tax benefit
associated with an investment in a subsidiary.
For the year ended December 31, 1999, the Company generated $223.0 million from
financing activities. During fiscal 1999, this amount primarily represented net
borrowings from the Company's credit facility, which was used primarily to pay
the tax liability and other payments related to the sale of the Company's
Commercial operations and Teleservices division. Additionally, in connection
with the Company's 1998 share buyback program, the Company was refunded a
portion of the purchase price in the first quarter of 1999.
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 for net repayments on the Company's
credit facility and on 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 the receipt of $24.2 million related to
the proceeds from stock options exercised. The repayments on the Company's
credit facility 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 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 for
approximately $297.9 million. All of these shares were retired upon purchase. On
November 4, 1999, the Company's Board of Directors authorized the repurchase of
up to $65.0 million of the Company's common stock. As of December 31, 2000, no
shares have been repurchased under this authorization.
The Company is also obligated under various acquisition agreements to make
earn-out payments to former stockholders of acquired companies in fiscal 2001.
The Company estimates that the amount of these payments will total $5.0 million
for fiscal 2001.
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 $28.0 million.
The Company believes that funds provided by operations, available borrowings
under the credit facility, and current amounts of cash will be sufficient to
meet its presently anticipated needs for working capital, capital expenditures
and acquisitions for at least the next 12 months.
Indebtedness of the Company
The Company has a $350 million revolving credit facility which is syndicated to
a group of 13 banks with Bank of America, as the principal agent. This facility
expires on October 27, 2003. In addition, the Company also has a $50 million 364
day credit facility that expires on October 24, 2001. The 364 day credit
facility, which has historically never been drawn upon, was reduced in fiscal
2000 from $150 million to $50 million to more closely align the Company's
borrowing capacity to its anticipated funding needs. The credit facilities
contain certain financial and non-financial covenants relating to the Company's
operations, including maintaining certain financial ratios. Repayment of the
credit facilities are guaranteed by the material subsidiaries of the Company. In
addition, approval is required by the majority of the lenders when the cash
consideration of an individual acquisition exceeds 10% of consolidated
stockholders' equity of the Company.
As of March 15, 2001, the Company had a balance of approximately $184.0 million
outstanding under the $350 million credit facility. The Company also had
outstanding letters of credit in the amount of $2.0 million, reducing the amount
of funds available under the credit facilities to approximately $214.0 million
as of March 15, 2001.
The Company has certain notes payable to shareholders of acquired companies
which bear interest at rates ranging from 4.7% to 6.5%, all maturing by November
2001. As of December 31, 2000, the Company owed approximately $24.7 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
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. In June 1999, the Financial
Accounting Standards Board issued SFAS No. 137, an amendment to SFAS No. 133,
deferring the effective date of SFAS No. 133. SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000, and cannot be
applied retroactively. Management has determined that there will be no impact
upon the adoption of SFAS No. 133; however, SFAS No. 133 could increase the
volatility of reported earnings and other comprehensive income depending on
future derivative instruments which may be obtained by the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following assessment of the Company's market risks does not include
uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax and credit risks.
Interest Rates. The Company's exposure to market risk for changes in interest
rates relates primarily to the Company's short-term and long-term debt
obligations and to the Company's investments.
The Company's investment portfolio consists of cash and cash equivalents
including deposits in banks, government securities, money market funds, and
short-term investments with maturities, when acquired, of 90 days or less. The
Company is 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 $218.7 million
as of December 31, 2000 and the Company had $204.0 million available under its
credit facilities. The debt obligations consist of notes payable to former
shareholders of acquired corporations, which are at a fixed rate of interest,
and extend through November 2001. The interest rate risk on these obligations is
thus immaterial due to the dollar amount of these obligations. The interest rate
on the credit facilities is variable and at a margin of 50 to 75 basis points
above a base rate as defined by the applicable credit facility.
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 23% of its fiscal 2000
consolidated revenues from international operations, approximately 97% of which
were from the United Kingdom. The exchange rate has decreased approximately 7%
in fiscal 2000, from 1.61 at December 31, 1999 to 1.49 at December 31, 2000. The
exchange rate fluctuation has not historically had a material impact on the
Company's results of operations; however, if the British pound sterling
continues to weaken, exchange rates could have a material adverse effect on
future results of operations. The Company did not hold or enter into any foreign
currency derivative instruments as of December 31, 2000.
FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION
Effect of Fluctuations in the General Economy
Demand for the Company's 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 IT systems and platforms (such as Enterprise Resource
Planning systems) or upgrades to existing systems and platforms. As a result,
any significant economic downturn could have a material adverse effect on the
Company's results of operations or financial condition.
The Company may also be adversely effected by consolidations through mergers and
otherwise of 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 is intensely competitive and highly fragmented, with few
barriers to entry by potential competitors. The Company faces significant
competition in the markets that it serves and will face significant competition
in any geographic market that it may enter. In each market in which the Company
operates, it competes for both clients and qualified professionals with other
firms offering similar services. Competition creates an aggressive pricing
environment and higher wage costs, which puts pressure on gross margins.
Ability to Recruit and Retain Professional Employees
The Company depends on its ability to recruit and retain employees who possess
the skills, experience and/or professional certifications necessary to meet the
requirements of the Company's clients. Competition for individuals possessing
the requisite criteria is intense, particularly in certain specialized IT and
professional skill areas. The Company often competes with its own clients in
attracting and retaining qualified personnel. There can be no assurance that
qualified personnel will be available and recruited in sufficient numbers on
economic terms acceptable to the Company.
Ability to Continue Acquisition Strategy; Ability to Integrate Acquired
Operations
The Company has experienced significant growth in the past through acquisitions.
Although the Company continues to seek acquisition opportunities, there can be
no assurance that the Company will be able to negotiate acquisitions on economic
terms acceptable to the Company or that the Company will be able to successfully
identify acquisition candidates and integrate all acquired operations into the
Company.
Possible Changes in Governmental Regulations
From time to time, legislation is proposed in the United States Congress, state
legislative bodies and by foreign governments that would have the effect of
requiring employers to provide the same or similar employee benefits to
consultants and other temporary personnel as those provided to full-time
employees. The enactment of such legislation would eliminate one of the key
economic reasons for outsourcing certain human resources and could significantly
adversely impact the Company's staff augmentation business. In addition, the
Company's costs could increase as a result of future laws or regulations that
address insurance, benefits or other employment-related matters. There can be no
assurance that the Company could successfully pass any such increased costs to
its clients.
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 Certified Public Accountants
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Income for the years ended
December 31, 2000, 1999, and 1998
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999, and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999, and 1998
Notes to Consolidated Financial Statements
Report of Independent Certified Public 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 cash flows present
fairly, in all material respects, the financial position of Modis Professional
Services, Inc. and its Subsidiaries at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
Jacksonville, Florida
March 23, 2001
Modis Professional Services Inc. and Subsidiaries
Consolidated Balance Sheets.
DECEMBER 31, DECEMBER 31,
(dollar amounts in thousands except per share amounts) 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,013 $ 8,526
Accounts receivable, net of allowance of $19,433 and $16,510 343,314 330,036
Prepaid expenses 9,404 11,199
Deferred income taxes 6,687 8,120
Note receivable - 18,775
Other 7,889 16,113
----------------------------------
Total current assets 372,307 392,769
Furniture, equipment and leasehold improvements, net 55,711 45,960
Goodwill, net 1,199,849 1,132,586
Other assets, net 25,693 25,080
----------------------------------
Total assets $ 1,653,560 $ 1,596,395
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 24,719 $ 8,662
Accounts payable and accrued expenses 50,648 90,431
Accrued payroll and related taxes 41,540 46,565
Income taxes payable 7,012 -
----------------------------------
Total current liabilities 123,919 145,658
Notes payable, long-term portion 194,000 238,615
Deferred income taxes 28,584 25,595
Other 3,839 4,012
----------------------------------
Total liabilities 350,342 413,880
----------------------------------
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
96,522,867 and 96,043,270 shares issued and outstanding, respectively 965 960
Additional contributed capital 587,857 582,558
Retained earnings 721,742 601,989
Accumulated other comprehensive loss (6,945) (2,992)
Deferred stock compensation (401) -
----------------------------------
Total stockholders' equity 1,303,218 1,182,515
----------------------------------
Total liabilities and stockholders' equity $ 1,653,560 $ 1,596,395
==================================
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) 2000 1999 1998
- - ----------------------------------------------------------------------------------------------------------------
Revenue $ 1,827,686 $ 1,941,649 $ 1,702,113
Cost of revenue 1,296,834 1,415,901 1,234,537
------------------------------------------
Gross Profit 530,852 525,748 467,576
------------------------------------------
Operating expenses:
General and administrative 386,327 318,593 264,551
Depreciation and amortization 53,881 45,193 37,105
Restructuring and impairment (recapture) charges (753) (3,250) 34,759
Asset write-down related to sale of discontinued operations 13,122 25,000 -
------------------------------------------
Total operating expenses 452,577 385,536 336,415
------------------------------------------
Income from operations 78,275 140,212 131,161
Other expense, net 21,621 7,794 13,975
------------------------------------------
Income from continuing operations before provision for income taxes 56,654 132,418 117,186
(Benefit) provision for income taxes (63,099) 50,283 48,326
------------------------------------------
Income from continuing operations 119,753 82,135 68,860
Discontinued operations (Note 17):
Income from discontinued operations (net of income
taxes of $20,070) - - 30,020
Gain on sale of discontinued operations (net of income taxes of
$0 and $175,000 in 1999 and 1998, respectively) - 14,955 230,561
------------------------------------------
Income before extraordinary loss 119,753 97,090 329,441
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $3,512) - - (5,610)
------------------------------------------
Net income $ 119,753 $ 97,090 $ 323,831
==========================================
Basic income per common share from continuing operations $ 1.24 $ 0.85 $ 0.63
==========================================
Basic income per common share from discontinued operations - - 0.28
==========================================
Basic income per common share from gain on sale of
discontinued operations - 0.16 2.12
==========================================
Basic income per common share from extraordinary item - - (0.05)
==========================================
Basic net income per common share $ 1.24 $ 1.01 $ 2.98
==========================================
Average common shares outstanding, basic 96,675 96,268 108,518
==========================================
Diluted income per common share from continuing operations $ 1.23 $ 0.85 $ 0.61
==========================================
Diluted income per common share from discontinued operations - - 0.26
==========================================
Diluted income per common share from gain on sale of
discontinued operations - 0.15 1.97
==========================================
Diluted income per common share from extraordinary item - - (0.05)
==========================================
Diluted net income per common share $ 1.23 $ 1.00 $ 2.79
==========================================
Average common shares outstanding, diluted 97,539 97,110 116,882
==========================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Modis Professional Services Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Accumulated
Other
Preferred Common Additional Comprehensive Deferred
(dollar amounts in thousands Stock Stock Contributed Retained Income Stock
except per share amounts) Shares Amount Shares Amount Capital Earnings (loss) Compensation Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 - - 103,692,098 $1,037 $ 634,289 $181,068 $ (95) $(3,457) $ 812,842
Repurchase of Common Stock, net - - (21,750,522) (218) (309,517) - - - (309,735)
Conversion of Convertible debt - - 6,149,339 61 71,238 - - - 71,299
Exercise of stock options and related
tax benefit - - 2,741,895 28 26,838 - - - 26,866
Vesting of restricted stock - - - - - - - 3,457 3,457
Issuance of common stock related to
business combinations - - 5,473,513 55 140,880 - - - 140,935
Net income - - - - - 323,831 - - 323,831
Foreign currency translation - - - - - - 615 - 615
----------------------------------------------------------------------------------------
Balance, December 31, 1998 - - 96,306,323 963 563,728 504,899 520 - 1,070,110
Repurchase of Common Stock, net - - (615,687) (6) 11,877 - - - 11,871
Exercise of stock options and related
tax benefit - - 352,634 3 6,953 - - - 6,956
Net income - - - - - 97,090 - - 97,090
Foreign currency translation - - - - - - (3,512) - (3,512)
----------------------------------------------------------------------------------------
Balance, December 31, 1999 - - 96,043,270 960 582,558 601,989 (2,992) - 1,182,515
Exercise of stock options and related
tax benefit - - 379,597 4 4,875 - - - 4,879
Net income - - - - - 119,753 - - 119,753
Issuance of restricted stock - - 100,000 1 424 - - (425) -
Vesting of restricted stock - - - - - - - 24 24
Foreign currency translation - - - - - - (3,953) - (3,953)
----------------------------------------------------------------------------------------
Balance, December 31, 2000 - - 96,522,867 $ 965 $ 587,857 $721,742 $(6,945) $ (401) $1,303,218
========================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Modis Professional Services Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
------------------------------------------
(dollar amounts in thousands except for per share amounts) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income from continuing operations $ 119,753 $ 82,135 $ 68,860
Adjustments to income from continuing operations to net
cash provided by operating activities:
Restructuring and impairment (recapture)charges (753) (3,250) 34,759
Asset write-down related to sale of discontinued operations 13,122 25,000 -
Depreciation and amortization 53,881 45,193 37,105
Deferred income taxes 4,422 21,487 (5,750)
Changes in assets and liabilities
Accounts receivable (13,994) 1,316 (55,712)
Prepaid expenses and other assets 6,805 (5,806) (9,072)
Accounts payable and accrued expenses 12,802 (82,811) 14,161
Accrued payroll and related taxes (3,401) (9,523) 10,007
Other, net 78 1,918 (5,417)
-----------------------------------------
Net cash provided by operating activities 192,715 75,659 88,941
-----------------------------------------
Cash flows from investing activities:
Proceeds from sale of net assets of discontinued
operations, net of costs - - 840,937
Advances associated with sale of discontinued operations,
net of repayments (10) (19,205) (15,866)
Income taxes and other cash expenses related to sale of net
assets of discontinued Commercial operations
and Teleservices division - (191,409) -
Purchase of furniture, equipment and leasehold
improvements, net of disposals (25,150) (21,234) (22,873)
Purchase of businesses, including additional earn-outs on
acquisitions, net of cash acquired (123,623) (160,663) (157,162)
-----------------------------------------
Net cash (used in) provided by investing activities (148,783) (392,511) 645,036
-----------------------------------------
Cash flows from financing activities:
Refunds (repurchases) of common stock - 11,871 (309,735)
Repurchase of convertible debentures - - (23,581)
Proceeds from stock options exercised 4,880 3,952 24,235
Repayments on indebtedness, net (52,284) 207,211 (349,500)
-----------------------------------------
Net cash (used in) provided by financing activities (47,404) 223,034 (658,581)
-----------------------------------------
Effect of exchange rate changes on cash and cash equivalents (41) (3,472) -
-----------------------------------------
Net (decrease) increase in cash and cash equivalents
from continuing operations (3,513) (97,290) 75,396
Net cash provided by discontinued operations - - 6,482
Cash and cash equivalents, beginning of year 8,526 105,816 23,938
-----------------------------------------
Cash and cash equivalents, end of year $ 5,013 $ 8,526 $ 105,816
=========================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Years Ended December 31,
(dollar amounts in thousands except for per share amounts) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 22,112 $ 12,631 $ 26,528
Income taxes paid 11,586 179,624 40,440
COMPONENTS OF CASH USED IN DISCONTINUED OPERATIONS
Cash provided by operating activities 81,559
Cash used in investing activities (39,448)
Cash used in financing activities (35,629)
-----------
Net cash used in discontinued operations 6,482
===========
NON-CASH INVESTING AND FINANCING ACTIVITIES
During fiscal 2000, 1999 and 1998, the Company completed numerous acquisitions. In connection
with the acquisitions, liabilities were assumed as follows:
Years Ended December 31,
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
Fair value of assets acquired $ 73,344 $ 89,217 $ 104,943
Cash paid (63,550) (72,223) (81,784)
---------- ----------- -----------
Liabilities assumed $ 9,794 $ 16,994 $ 23,159
========== =========== ===========
In fiscal 1998, Convertible Subordinated Debentures of $69,800 were converted by
the Company into 6,149,339 shares of common stock. Also, additional contributed
capital was increased by $1,499 relating to unamortized debt issuance costs
associated with the conversion.
During fiscal 1998, in connection with the acquisition of certain companies, the
Company issued 5,473,513 shares of common stock with a fair value of $140,935.
1. DESCRIPTION OF BUSINESS
Modis Professional Services, Inc. ('MPS' or the 'Company') is a global
provider of human capital solutions including professional staffing, e-business
and systems integration, information technology (IT) resource management, career
management consulting, and knowledge worker e-procurement. MPS solutions enable
customers and clients to effectively locate, retain, and deploy strategic
knowledge worker resources in the areas of information technology, accounting
and finance, law, engineering, and science.
Headquartered in Jacksonville, Florida, MPS serves Fortune 1000 and middle
market clients with approximately 241 offices located throughout the United
States, Canada, the United Kingdom, and certain parts of continental Europe. MPS
is one of the largest global providers of human capital solutions with revenue
of $1,828 million in 2000, of which $1,399 million, or 77%, was generated in the
United States and $429 million, or 23%, was generated abroad, primarily in the
United Kingdom.
MPS consists of three divisions: Prolianz, the professional business
solutions division; Idea Integration, the e-business solutions division; and
Modis, the information technology resource management division.
On November 10, 2000, as a result of unfavorable market conditions, the
Board of Directors of the Company cancelled the proposed plan to spin-off Modis
and its subsidiary Idea Integration, (collectively the 'IT Businesses') which
had been approved December 15, 1999. The operations and assets of the IT
Businesses were previously reported on the 1999 annual report on Form 10-K as
discontinued operations under Accounting Principals Board Opinion No. 30. Due to
the cancellation of the plan to spin-off the IT Businesses, the accompanying
consolidated financial statements and notes to the consolidated financial
statements reflect both the results of Prolianz and the IT Businesses as
continuing operations. The consolidated balance sheet as of December 31, 1999
and 1998, the consolidated statements of income and cash flows for the years
ended December 31, 1999 and 1998, and the related notes to these consolidated
financial statements have been reclassified from the amounts presented in the
1999 annual report on Form 10-K to include the assets, liabilities, results of
operations and cash flows of the IT Businesses as part of continuing operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany transactions have
been eliminated in the accompanying consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include deposits in banks, government securities,
money market funds, and short-term investments with maturities, when acquired,
of 90 days or less.
Furniture, Equipment, and Leasehold Improvements
Furniture, equipment, and leasehold improvements are recorded at cost less
accumulated depreciation and amortization. Depreciation of furniture and
equipment is computed using the straight-line method over the estimated useful
lives of the assets, ranging from 3 to 15 years. Amortization of leasehold
improvements is computed using the straight-line method over the useful life of
the asset or the term of the lease, whichever is shorter. The Company has
developed a proprietary software package which allows the Company to implement
imaging, time capture, and data-warehouse reporting. The costs associated with
the development of this proprietary software package have been capitalized
according to Statement of Position 98-1, 'Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use,' and are being amortized over a
five-year period. Unamortized computer software costs of $13,647 and $9,309,
have been included in 'Furniture, equipment and leasehold improvements, net' as
of December 31, 2000 and 1999, respectively. Total depreciation and amortization
expense was $16,852, $13,727 and $10,973 for 2000, 1999 and 1998, respectively.
Accumulated depreciation and amortization of furniture, equipment and leasehold
improvements as of December 31, 2000 and 1999 was $57,811 and $46,336,
respectively.
Goodwill
The Company has allocated the purchase price of acquired companies
according to the fair market value of the assets acquired. Goodwill represents
the excess of the cost over the fair value of the net tangible assets acquired
through these acquisitions, including any contingent consideration paid (as
discussed in Note 3 to the Consolidated Financial Statements), and is being
amortized on a straight-line basis over periods ranging from 15 to 40 years,
with an average amortization period of 35 years. Management periodically reviews
the potential impairment of goodwill on a undiscounted cash flow basis to assess
recoverability. If the estimated future cash flows are projected to be less than
the carrying amount, an impairment write-down to fair value (representing the
carrying amount of the goodwill that exceeds the discounted expected future cash
flows) would be recorded as a period expense. Accumulated amortization was
$121,639 and $84,610 as of December 31, 2000 and 1999, respectively.
Revenue Recognition
The Company recognizes revenue at the time services are provided. In most
cases, the consultant is the Company's employee and all costs of employing the
worker are the responsibility of the Company and are included in cost of
revenue. Management believes that the Company's revenue recognition policy is in
compliance with Staff Accounting Bulletin No. 101, 'Revenue Recognition in
Financial Statements', issued by the Securities and Exchange Commission on
December 3, 1999, and has not incurred any material costs for this compliance.
Foreign Operations
The financial position and operating results of foreign operations are
consolidated using the local currency as the functional currency. Local currency
assets and liabilities are translated at the rate of exchange to the U.S. dollar
on the balance sheet date, and the local currency revenues and expenses are
translated at average rates of exchange to the U.S. dollar during the period.
See Note 14 for a discussion of foreign currency translation adjustments in
total comprehensive income.
Stock Based Compensation
The Company measures compensation expense for instruments issued pursuant
to stock-based compensation plans in accordance with Accounting Principles Board
Opinion No. 25 ('APB No. 25'), 'Accounting for Stock Issued to Employees.'
Compensation expense for employee and director stock options is equal to the
aggregate difference between the market and exercise prices of the options on
the date that both the number of shares the grantee is entitled to receive and
the purchase price are known. Compensation expense associated with restricted
stock grants is equal to the market value of the shares on the date of grant and
is recorded pro rata over the required holding period. Pro forma information
relating to the fair value of stock-based compensation, as required by Statement
of Financial Accounting Standards ('SFAS') No. 123 'Accounting for Stock-Based
Compensation,' for companies who elect to measure compensation expense in
accordance with APB No. 25, is presented in Note 9 to the consolidated financial
statements.
Advertising Costs
The Company participates in various advertising and marketing programs.
Costs associated with these advertising and marketing programs are expensed as
incurred.
Income Taxes
The provision for income taxes is based on income before taxes as reported
in the accompanying Consolidated Statements of Income. Deferred tax assets and
liabilities are recognized for the expected future tax consequences of events
that have been included in the financial statements or tax returns, in
accordance with SFAS No. 109. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
statement carrying amounts and the tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. An assessment is made as to whether or not a valuation allowance is
required to offset deferred tax assets. This assessment includes anticipating
future income.
During fiscal 2000, the Company recognized a tax benefit of $99,705
associated with an investment in a subsidiary. This tax benefit was partially
offset by a $13.4 million valuation allowance. See Note 7 to the consolidated
financial statements for presentation.
Net Income Per Common Share
The consolidated financial statements include 'basic' and 'diluted' per
share information, presented in accordance with SFAS No. 128, 'Earnings per
Share.' Basic per share information is calculated by dividing net income by the
weighted average number of shares outstanding. Diluted per share information is
calculated by also considering the impact of potential common stock on both net
income and the weighted average number of shares outstanding. The weighted
average number of shares used in the basic earnings per share computations were
96.7 million, 96.3 million, and 108.5 million in fiscal 2000, 1999 and 1998,
respectively. The only difference in the computation of basic and diluted
earnings per share is the inclusion of 0.9 million, 0.8 million, and 8.4 million
potential common shares in fiscal 2000, 1999 and 1998, respectively. The
Company's potential common stock consists of employee and director stock
options, and the as-if converted effect of convertible debentures. See Note 10
to the consolidated financial statements.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Although management believes these estimates and assumptions are adequate,
actual results may differ from the estimates and assumptions used.
Reclassifications
Certain amounts have been reclassified in 1998 and 1999 to conform to the
2000 presentation.
Recent Accounting Pronouncements
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. In June 1999, the Financial
Accounting Standards Board issued SFAS No. 137, an amendment to SFAS No. 133,
deferring the effective date of SFAS No. 133. SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000, and cannot be
applied retroactively. Management has determined that there will be no impact
upon the adoption of SFAS No. 133; however, SFAS No. 133 could increase the
volatility of reported earnings and other comprehensive income depending on
future derivative instruments which may be obtained by the Company.
3. ACQUISITIONS
During fiscal 2000, 1999 and 1998, all acquisitions made by the Company
were accounted for under the purchase method of accounting. The Company has
allocated the purchase price according to the fair value of the assets acquired
in the acquisitions. The excess of the purchase price, including any contingent
consideration paid, over the fair value of the tangible assets (goodwill) is
being amortized on a straight line basis over a period of 40 years for all
acquisitions in fiscal 2000, 1999 and 1998.
For the year ended December 31, 2000
The Company acquired the following companies in fiscal 2000: Catapult
Technology, Inc., Brahma Software Solutions, Inc., Brahma Technolutions, Inc.,
T1 Design, Inc., Red Eye Digital Media, LLC, ITIC, Inc., Integral Results, Inc.,
G.B. Roberts & Associates, Inc. d/b/a Ramworks, and Corporate Consulting
Services, Inc. Purchase consideration for these 2000 acquisitions totaled
$70,940, comprised of $63,550 in cash and $7,390 in notes payable to former
stockholders.
For the year ended December 31, 1999
The Company acquired the following companies during fiscal 1999: Consulting
Solutions, Inc., Brenda Pejovich & Associates, Inc., Intelligent Solutions,
Ltd., Zeal, Inc., UTEK, Inc., Data Management Consultants, Inc., Open Management
Systems, Inc., and Forsythe, Inc. Purchase consideration for these 1999
acquisitions totaled $91,993, comprised of $81,366 in cash and $10,627 in notes
payable to former stockholders. Purchase consideration includes consideration
paid after closing based on the increase in earnings before interest and taxes
('EBIT'), as defined (earn-outs). Except for the sellers of Brenda Pejovich &
Associates, Inc., who are entitled to additional earn-outs of up to
approximately $4,550 through fiscal 2001, the sellers for the other
aforementioned 1999 acquisitions are not entitled to any additional purchase
consideration.
For the year ended December 31, 1998
The Company acquired the following companies during fiscal 1998: Technology
Services Corporation, Avalon Systems Development Limited, Millard Consulting
Services, Inc., Diversified Search, Inc., Diversified Health Services, Inc.
f/k/a DH Services, Inc., Colvin Resources Group - Ft. Worth, Inc., Accountants
Express of San Diego, Inc., Cope Management Limited, Lion Recruitment Limited,
Software Knowledge Limited, Resource Control and Management Limited, and
Software Knowledge Systems Limited. Purchase consideration for these 1998
acquisitions totaled $107,866, comprised of $96,008 in cash and $11,858 in notes
payable to former stockholders. Purchase consideration includes earn-outs for
1998 and 1999. The sellers for the aforementioned 1998 acquisitions are not
entitled to any additional purchase consideration. Additionally, in March 1998,
the Company issued 4,598,698 shares of common stock to the former shareholders
of Actium, Inc. in exchange for all of their shares of Actium, Inc., and in
August 1998, the Company issued 874,815 shares of Common Stock to the former
shareholders of Consulting Partners, Inc. in exchange for all of their shares of
Consulting Partners, Inc.
Earn-out payments
The Company is obligated under certain acquisition agreements to make
earn-out payments to former stockholders of some of the aforementioned acquired
companies accounted for under the purchase method of accounting upon attainment
of certain earnings targets of the acquired companies. The agreements do not
specify a fixed payment of contingent consideration to be issued; however, the
Company has limited its maximum exposure under some earn-out agreements to a cap
which is negotiated at the time of acquisition.
The Company records these payments as goodwill in accordance with EITF
95-8, 'Accounting for Contingent Consideration Paid to the Shareholders of an
Acquired Enterprise in a Purchase Business Combination', rather than
compensation expense. Earn-outs are utilized by the Company to supplement the
partial consideration initially paid to the stockholders of the acquired
companies, if certain earnings targets are achieved. All earn-out payments are
tied to the ownership interests of the selling stockholders of the acquired
companies rather than being contingent upon any further employment with the
Company. Any former owners who remain as employees of the Company receive a
compensation package which is comparable to other employees of the Company at
the same level of responsibility.
The Company has accrued contingent payments related to earn-out obligations
in Accounts payable and accrued expenses of $1.1 million and $41.0 million as of
December 31, 2000 and 1999, respectively. These accrued contingent payments
represent the liabilities related to earn-out payments that are readily
determinable, as a result of resolved and issuable earn-outs, as of the
respective fiscal year ends. The Company applies the relevant profits related to
the earn-out period to the earn-out formula, and determines the appropriate
amount to accrue. Currently, there are no earn-out agreements that extend beyond
fiscal 2001 for any of the acquired companies.
The following table summarizes goodwill:
December 31,
-------------------------------------
2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Beginning Balance of Goodwill, net $ 1,132,586 $ 1,025,240
Goodwill recorded for companies purchased in current year 64,989 72,860
Goodwill recorded for earn-out payments made, but not accrued at prior
year-end, and other capitalizable acquisition costs 38,203 24,952
Goodwill accrued, but not paid, for determinable earn-outs 1,100 41,000
Amortization (37,029) (31,466)
--------- ---------
Net Increase in Balance of Goodwill 67,263 107,346
Ending Balance of Goodwill, net $ 1,199,849 $ 1,132,586
========= =========
4. NOTES PAYABLE
Notes payable at December 31, 2000 and 1999 consisted of the following:
Fiscal
---------------------------
2000 1999
- - --------------------------------------------------------------------------------------------------------------
Credit facilities (weighted average interest rate of 7.34%) $ 194,000 $ 228,000
Notes payable to former shareholders of acquired companies (interest
ranging from 4.67% to 6.45% due through November 2001) 24,719 19,277
---------------------------
218,719 247,277
Current portion of notes payable 24,719 8,662
---------------------------
Long-term portion of notes payable $ 194,000 $ 238,615
===========================
The Company has a $350 million revolving credit facility which is
syndicated to a group of 13 banks with Bank of America, as the principal agent.
This facility expires on October 27, 2003. In addition, the Company also has a
$50 million 364 day credit facility that expires on October 24, 2001. The 364
day credit facility, which has historically never been drawn upon, was reduced
in fiscal 2000 from $150 million to $50 million to more closely align the
Company's borrowing capacity to its anticipated funding needs. Outstanding
amounts under the credit facilities bear interest at a margin of 50 to 75 basis
points above a base rate as defined by the applicable credit facility. The
credit facilities contain certain financial and non-financial covenants relating
to the Company's operations, including maintaining certain financial ratios.
Repayment of the credit facilities are guaranteed by the material subsidiaries
of the Company. In addition, approval is required by the majority of the lenders
when the cash consideration of an individual acquisition exceeds 10% of
consolidated stockholders' equity of the Company. The Company incurred certain
costs directly related to obtaining the credit facilities in the amount of
approximately $2.4 million. These costs have been capitalized and are being
amortized over the life of the credit facilities.
Maturities of notes payable are as follows for the fiscal years subsequent
to December 31, 2000:
Fiscal year
- - ------------------------------------
2001 $ 24,719
2003 194,000
--------
$218,719
========
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Components of accounts payable and accrued expenses as of December 31, 2000 and
1999 are as follows:
Fiscal
----------------------------
2000 1999
-------- ---------
Trade accounts payable $ 49,548 $ 45,308
Accrued earn-out payments 1,100 41,000
Restructuring charge - 4,123
-------- --------
Total $ 50,648 $ 90,431
======== ========
6. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases office space under various noncancelable operating leases.
The following is a schedule of future minimum lease payments with terms in
excess of one year:
Fiscal Year
- -------------------------------------------------------------------------------------------------------
2001 $ 20,688
2002 18,251
2003 15,725
2004 12,064
2005 8,090
Thereafter 14,102
--------
$ 88,920
========
Total rent expense for fiscal 2000, 1999 and 1998 was $25,823, $21,727, and
$13,834, respectively.
Litigation
The Company is a party to a number of lawsuits and claims arising out of
the ordinary conduct of its business. In the opinion of management, based on the
advice of in-house and external legal counsel, the lawsuits and claims pending
are not likely to have a material adverse effect on the Company, its financial
position, its results of operations, or its cash flows.
7. INCOME TAXES
A comparative analysis of the (benefit) provision for income taxes from
continuing operations is as follows:
Fiscal
------------------------------------
2000 1999 1998
- --------------------------------------------------------------
Current:
Federal $ (76,659) $ 17,210 $ 42,030
State 2,945 903 5,789
Foreign 6,193 10,683 6,257
------------------------------------
(67,521) 28,796 54,076
------------------------------------
Deferred:
Federal: 3,220 15,981 (8,256)
State: (3,032) 1,696 (1,136)
Foreign: 4,234 3,810 3,642
------------------------------------
4,422 21,487 (5,750)
------------------------------------
$ (63,099) $ 50,283 $ 48,326
====================================
The difference between the actual income tax provision and the tax
provision computed by applying the statutory federal income tax rate to income
from continuing operations before provision for income taxes is attributable to
the following:
Fiscal
-------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- ----------------------------------------------------------------------------------------------------------------------------
Tax computed using the federal statutory rate $ 19,829 35.0% $ 46,346 35.0% $ 41,015 35.0%
State income taxes, net of federal income tax effect (87) (0.1) 2,599 2.0 3,024 2.6
Non-deductible goodwill 2,957 5.2 2,628 2.0 - -
Non-deductible goodwill impairment charge - - - - 3,825 3.2
Foreign tax credit carryforward 13,378 23.6 - - - -
Investment in subsidiary (99,705) (176.0) - - - -
Other permanent differences 529 0.9 (1,290) (1.0) 462 0.4
-------------------------------------------------------------------
$ (63,099) (111.4)% $ 50,283 38.0% $ 48,326 41.2%
===================================================================
The components of the deferred tax assets and liabilities recorded in the
accompanying consolidated balance sheets are as follows:
Fiscal
---------------------------
2000 1999
- - ----------------------------------------------------------------------------------------------------------------
Gross deferred tax assets:
Self-insurance reserves $ 2,185 $ 2,609
Allowance for doubtful accounts receivable 4,904 4,570
Purchase accounting adjustments 1,480 1,596
Restructuring and impairment charge - 1,567
Foreign tax credit carryforward 22,356 -
Net operating loss carryforward 4,440 -
Other 3,323 4,113
---------------------------
Total gross deferred tax assets 38,688 14,455
---------------------------
Valuation allowance (13,378) -
---------------------------
Total gross deferred tax assets, net of valuation allowance 25,310 14,455
---------------------------
Gross deferred tax liabilities:
Amortization of goodwill (44,643) (30,023)
Other (2,564) (1,907)
---------------------------
Total gross deferred tax liabilities (47,207) (31,930)
---------------------------
Net deferred tax liability $ (21,897) $ (17,475)
===========================
The realization of deferred tax assets may be based on the utilization of
carrybacks to prior taxable periods, the anticipation of future taxable income
and the utilization of tax planning strategies. Management has determined that
it is more likely than not that the deferred tax assets can be supported by
carrybacks to federal taxable income in the federal carryback period and by
expected future taxable income. The valuation allowance represents $13,378 in
foreign tax credit carryforwards for which it is more likely than not that
realization will not occur.
8. EMPLOYEE BENEFIT PLANS:
Profit Sharing Plans
The Company has a qualified contributory profit sharing plan (a 401(k)
plan) which covers all full-time employees over age twenty-one with over 90 days
of employment and 375 hours of service. The Company made matching contributions
of approximately $7,037, $6,883, and $6,060, net of forfeitures, to the profit
sharing plan for fiscal 2000, 1999 and 1998, respectively. The Company also has
a non-qualified deferred compensation plan for its highly compensated employees.
The non-qualified deferred compensation plan does not provide for any matching,
either discretionary or formula-based, by the Company.
The Company has assumed many 401(k) plans of acquired subsidiaries. From
time to time, the Company merges these plans into the Company's plan. Pursuant
to the terms of the various profit sharing plans, the Company will match 50% of
employee contributions up to the first 5% of total eligible compensation, as
defined. Company contributions relating to these merged plans are included in
the aforementioned total.
9. STOCKHOLDERS' EQUITY
Stock Repurchase Plan
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 repurchase by an additional $110.0 million, bringing
the total authorized share buyback program 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 investment bank who agreed to sell the Company shares at a
certain cost. The investment bank borrowed these shares from its customers and
was required to enter into market transactions, subject to Company approval, and
purchase shares to return to its customers. The Company, pursuant to the
agreement, agreed to compensate the investment bank for any increases in the
Company's stock price that would cause the investment bank to pay an amount to
purchase the stock over the ASAP price. Conversely, the Company received 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.
On November 4, 1999, the Company's Board of Directors authorized the
repurchase of up to $65.0 million of the Company's common stock. As of December
31, 2000, no shares have been repurchased under this authorization.
Incentive Employee Stock Plans
Effective December 19, 1993, the Board of Directors approved the 1993 Stock
Option Plan (the 1993 Plan) which provides for the granting of options for the
purchase of up to an aggregate of 2,400,000 shares of common stock to key
employees.
Under the 1993 Plan, the Stock Option Committee (the Committee) of the
Board of Directors has the discretion to award stock options, stock appreciation
rights (SARS) or restricted stock options or non-qualified options and the
option price shall be established by the Committee. Incentive stock options may
be granted at an exercise price not less than 100% of the fair value of a share
on the effective date of the grant and non-qualified options may be granted at
an exercise price not less than 50% of the fair market value of a share on the
effective date of the grant. The Committee has not issued non-qualified options
at an exercise price less than 100% of the fair market value and, therefore, the
Company has not been required to recognize compensation expense for its stock
option plans.
On August 24, 1995, the Board of Directors approved the 1995 Stock Option
Plan (the 1995 Plan) which provided for the granting of options up to an
aggregate of 3,000,000 shares of common stock to key employees under terms and
provisions similar to the 1993 Plan. During fiscal 1998 and 1997, the 1995 Plan
was amended to provide for the granting of an additional 8,000,000 and 3,000,000
shares, respectively. During fiscal 1998, the 1995 Plan was also amended to,
among other things, require the exercise price of non-qualified stock options to
not be less than 100% of the fair value of the stock on the date the option is
granted, to limit the persons eligible to participate in the plan to employees,
to eliminate the Company's ability to issue SARS and to amend the definition of
a director to comply with Rule 16b-3 of the Securities Exchange Act of 1934, as
amended and with Section 162(m) of the Internal Revenue Code of 1986, as
amended. There were no amendments to the 1995 Plan in fiscal 2000 or 1999.
The Company assumed the stock option plans of its subsidiaries, Career
Horizons, Inc., Actium, Inc. and Consulting Partners, Inc., upon acquisition in
accordance with terms of the respective merger agreements. At the date of the
respective acquisitions, the assumed plans had 2,566,252 options outstanding. As
of December 31, 2000 and 1999, the assumed plans had 28,841 and 198,263 options
outstanding, respectively.
Non-Employee Director Stock Plan
Effective December 29, 1993, the Board of Directors of the Company approved
a stock option plan (Director Plan) for non-employee directors, whereby 600,000
shares of common stock, subsequently amended in 1997 to 1.6 million shares, have
been reserved for issuance to non-employee directors. The Director Plan allows
each non-employee director to purchase 60,000 shares at an exercise price equal
to the fair value at the date of the grant upon election to the Board. In
addition, each non-employee director is granted 20,000 options upon the
anniversary date of the director's initial election date. The options become
exercisable ratably over a five-year period and expire ten years from the date
of the grant. However, the options are exercisable for a maximum of three years
after the individual ceases to be a director and, if the director ceases to be a
director within one year of appointment, the options are cancelled. In fiscal
2000, 1999 and 1998, the Company granted 500,000, 60,000 and 240,000 options,
respectively, at an average exercise price of $5.13, $13.63 and $21.56,
respectively.
The following table summarizes the Company's Stock Option Plans:
Weighted
Range of Average
Shares Exercise Prices Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 9,908,121 $ 0.83 - $33.75 $ 16.76
Granted 8,560,721 $ 4.80 - $35.13 $ 16.00
Exercised (2,741,895) $ 0.83 - $28.50 $ 13.57
Canceled (4,522,954) $ 1.25 - $35.13 $ 20.22
----------------------------------------------
Balance, December 31, 1998 11,203,993 $ 0.83 - $33.38 $ 15.38
Granted 6,317,285 $ 8.13 - $16.69 $ 12.92
Exercised (352,634) $ 0.83 - $14.44 $ 7.11
Canceled (2,115,956) $ 4.24 - $26.13 $ 16.63
----------------------------------------------
BALANCE, DECEMBER 31, 1999 15,052,688 $ 1.25 - $33.38 $ 14.32
Granted 3,365,768 $ 3.56 - $18.00 $ 9.70
Exercised (379,597) $ 1.25 - $14.70 $ 12.22
Canceled (3,421,498) $ 2.54 - $33.38 $ 12.00
----------------------------------------------
BALANCE, DECEMBER 31, 2000 14,617,361 $ 1.25 - $33.38 $ 13.83
==============================================
Effective December 15, 1998, the Company's Board of Directors approved a
stock option repricing program whereby substantially all holders of outstanding
options who were active employees (except certain officers and directors) with
exercise prices above $14.44 per share were amended so as to change the exercise
price to $14.44 per share, the fair value on the effective date. A total of
3,165,133 shares, with exercise prices ranging from $16.13 to $35.13, were
amended under this program, all in fiscal 1998. All other terms of such options
remained unchanged. See Note 19 to the consolidated financial statements on
subsequent events whereby the Company in 2001 has adopted a voluntary stock
option exchange plan.
The following table summarizes information about stock options outstanding
at December 31, 2000:
Outstanding Exercisable
------------------------------------------- -----------------------------
Average Average
Average Exercise Exercise
Shares life (a) Price Shares Price
- --------------------------------------------------------------------------------------------------------------------
$ 1.25 - $ 7.56 1,521,517 7.69 $ 5.27 825,702 $ 4.72
$ 7.63 - $ 10.69 1,731,073 8.86 9.31 586,507 9.45
$ 10.75 - $ 12.50 1,617,330 7.85 11.50 777,915 11.44
$ 12.56 - $ 13.63 1,765,250 8.56 12.99 357,598 12.92
$ 13.67 - $ 14.44 1,674,374 6.45 14.34 966,340 14.34
$ 14.50 - $ 14.56 1,460,000 5.12 14.50 1,441,000 14.50
$ 14.63 - $ 14.63 1,875,000 8.00 14.63 1,855,000 14.63
$ 14.69 - $ 22.38 2,068,483 7.45 19.29 1,216,150 20.53
$ 22.88 - $ 31.38 871,000 5.06 26.22 870,000 26.22
$ 33.38 - $ 33.38 33,334 3.39 33.38 33,334 33.38
-------------------------------------------------------------------------
Total 14,617,361 7.39 $ 13.83 8,929,546 $ 14.98
=========================================================================
(a) Average contractual life remaining in years.
At year-end 1999, options with an average exercise price of $15.10 were
exercisable on 6.8 million shares; at year-end 1998, options with an average
exercise price of $15.49 were exercisable on 4.2 million shares.
If the Company had elected to recognize compensation cost for options
granted in 2000, 1999 and 1998, based on the fair value of the options granted
at the grant date, net income and earnings per share would have been reduced to
the pro forma amounts indicated below.
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Net Income
As reported $ 119,753 $ 97,090 $ 323,831
Pro forma $ 111,984 $ 80,937 $ 312,029
Basic net income per common share
As reported $ 1.24 $ 1.01 $ 2.98
Pro forma $ 1.16 $ 0.84 $ 2.88
Diluted net income per common share
As reported $ 1.23 $ 1.00 $ 2.79
Pro forma $ 1.15 $ 0.83 $ 2.69
The weighted average fair values of options granted during 2000, 1999 and
1998 were $4.57, $5.29, and $5.20 per share, respectively. The fair value of
each option grant is estimated on the date of grant using the Black Scholes
option-pricing model with the following assumptions:
Fiscal
------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Expected dividend yield - - -
Expected stock price volatility .35 .34 .35
Risk-free interest rate 4.99 6.14 5.57
Expected life of options (years) 7.15 5.64 3.50
During fiscal 1996, under the 1995 Plan, the Company's Board of Directors
issued a restricted stock grant of 345,000 shares to the Company's President and
Chief Executive Officer, which was scheduled to vest over a five year period.
The Company recorded $4,892 in deferred compensation expense which was amortized
on a straight line basis over the vesting period of the grant. In December 1998,
the Company's Board of Directors removed the vesting restrictions, thus vesting
the unamortized portion of the grant in the amount of $2,686. During fiscal
2000, the Company's Board of Directors issued a restricted stock grant of
100,000 shares to the Company's Chief Operating Officer - elect, which is
scheduled to vest over a three year period. The Company recorded $425 in
deferred compensation expense which will be amortized on a straight line basis
over the vesting period of the grant.
10. NET INCOME PER COMMON SHARE
The calculation of basic net income per common share and diluted net income
per common share from continuing and discontinued operations is presented below:
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Basic net income per common share computation:
Income from continuing operations $ 119,753 $ 82,135 $ 68,860
------------------------------------------
Income from discontinued operations $ - $ - $ 30,020
------------------------------------------
Gain on sale of discontinued operations, net of income
taxes $ - $ 14,955 $ 230,561
------------------------------------------
Extraordinary loss on early extinguishment of debt,
net of income tax benefit $ - $ - $ (5,610)
------------------------------------------
Basic average common shares outstanding 96,675 96,268 108,518
------------------------------------------
Basic income per common share from continuing
operations $ 1.24 $ 0.85 $ 0.63
==========================================
Basic income per common share from discontinued
operations - - 0.28
==========================================
Basic income per common share from gain on sale of
discontinued operations - 0.16 2.12
==========================================
Basic income per common share from extraordinary loss - - (0.05)
==========================================
Basic net income per common share $ 1.24 $ 1.01 $ 2.98
==========================================
Diluted net income per common share computation:
Income from continuing operations $ 119,753 $ 82,135 $ 68,860
Interest paid on convertible debt, net of tax benefit - - 2,784
------------------------------------------
Income and assumed conversions from continuing operations $ 119,753 $ 82,135 $ 71,644
------------------------------------------
Average common shares outstanding 96,675 96,268 108,518
Incremental shares from assumed conversions:
Convertible debt - - 5,699
Stock options 864 842 2,665
------------------------------------------
Diluted average common shares outstanding 97,539 97,110 116,882
------------------------------------------
Diluted income per common share from continuing
operations $ 1.23 $ 0.85 $ 0.61
==========================================
Diluted income per common share from discontinued
operations - - 0.26
==========================================
Diluted income per common share from gain on sale of
discontinued operations - 0.15 1.97
==========================================
Diluted income per common share from extraordinary loss - - (0.05)
==========================================
Diluted net income per common share $ 1.23 $ 1.00 $ 2.79
==========================================
Options to purchase 12,783,433 shares of common stock that were outstanding
during 2000 were not included in the computation of diluted earnings per share
as the exercise prices of these options were greater than the average market
price of the common shares.
11. CONCENTRATION OF CREDIT RISK:
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company
places its cash and cash equivalents with what management believes to be high
credit quality institutions. At times such investments may be in excess of the
FDIC insurance limit. The Company routinely assesses the financial strength of
its customers and, as a consequence, believes that its accounts receivable
credit risk exposure is limited.
12. RESTRUCTURING OF OPERATIONS AND IMPAIRMENT CHARGE
In December 1998, the Company's Board of Directors approved an Integration
and Strategic Repositioning Plan (the 'Plan') to strengthen the overall
profitability of the Company by implementing a back office integration program
and branch repositioning plan in an effort to consolidate or close branches
whose financial performance did not meet the Company's expectations. Pursuant to
the Plan, during the fourth quarter of 1998 the Company recorded a restructuring
and impairment charge of $34,759. The $24,823 restructuring component of the
Plan was based, in part, on the evaluation of objective evidence of probable
obligations to be incurred by the Company or impairment of specifically
identified assets. The $9,936 impairment component of the Plan was based on
costs to write down goodwill associated with the acquisition of a subsidiary in
accordance with SFAS No. 121.
The Plan called for the consolidation or closing of 23 Prolianz branches,
certain organizational improvements and the consolidation of 15 Modis back
office operations. The Plan was completed in the third quarter of 2000, and
based on this completion, management recaptured any balances remaining relating
to the components of the Plan.
The following table summarizes the restructuring activity from the
origination of the reserve through December 31, 2000 (in thousands):
Payments To Write-Down Of Payments On
Employees Certain Property, Cancelled Write-Down Of
Involuntarily Plant and Facility Certain
Terminated (a) Equipment (b) Leases (a) Receivables (b) Total
----------------- ------------------ ---------------- ------------------ ---------------
Balances as of
December 31, 1998 $ 7,494 $ 2,476 $ 8,035 $ 6,818 $ 24,823
1999 charges and
write-downs (7,438) (2,453) (3,028) (4,531) (17,450)
Adjustment to estimated
payments on cancelled
facility leases - - (3,250)(b) - (3,250)
------- ------- ------- ------- -------
Balances as of
December 31, 1999 56 23 1,757 2,287 4,123
------- ------- ------- ------- -------
2000 charges and
write-downs (35) (23) (1,091) (2,221) (3,370)
Recapture of outstanding
balances (b) (21) - (666) (66) (753)
------- ------- ------- ------- -------
Balances as of
December, 31, 2000 $ - $ - $ - $ - $ -
======= ======= ======= ======= =======
(a): Cash; (b): Noncash
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, and notes payable to former shareholders
approximate fair value due to the short-term maturities of these assets and
liabilities. Borrowings under the revolving credit facility have variable rates
that reflect currently available terms and conditions for similar debt. The
carrying amount of this debt is considered by management to be a reasonable
estimate of its fair value. Management believes that these financial instruments
bear interest at rates which approximate prevailing market rates for instruments
with similar characteristics and, accordingly, that the carrying values for
these instruments are reasonable estimates of fair value.
14. COMPREHENSIVE INCOME
A summary of comprehensive income for the year ended December 31, 2000,
1999 and 1998 is as follows:
Foreign
Currency Total
Net Translation Comprehensive
For the Year Ended, Income Adjustments Income
- ----------------------------------------------------------------------------------------
December 31, 2000 $ 119,753 $ (3,953) $ 115,800
December 31, 1999 $ 97,090 $ (3,512) $ 93,578
December 31, 1998 $ 323,831 $ 615 $ 324,446
The foreign currency translation adjustments are not adjusted for income
taxes as they relate to indefinite investments in non-U.S. subsidiaries.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
For the Three Months Period Ended For the
---------------------------------------------------------- Year Ended
Mar. 31, June 30, Sept. 30, Dec. 31, Dec. 31,
2000 2000 2000 2000 2000
- ------------------------------------------------------------------------------------------------- ---------------
Revenue $ 457,411 $ 464,450 $ 456,265 $ 449,560 $ 1,827,686
Gross profit 127,511 136,116 137,505 129,720 530,852
Net income 13,018 12,395 86,894 7,446 119,753
Basic net income per common share 0.13 0.13 0.90 0.08 1.24
Diluted net income per common share 0.13 0.13 0.90 0.08 1.23
For the Three Months Period Ended For the
---------------------------------------------------------- Year Ended
Mar. 31, June 30, Sept. 30, Dec. 31, Dec. 31,
1999 1999 1999 1999 1999
- ------------------------------------------------------------------------------------------------- ---------------
Revenue $ 482,866 $ 501,679 $ 500,062 $ 457,042 $ 1,941,649
Gross profit 129,925 135,220 137,833 122,770 525,748
Income from continuing operations 24,228 25,961 15,737 16,209 82,135
Gain on sale of discontinued
operations, net of taxes - - 14,955 - 14,955
Net income 24,228 25,961 30,692 16,209 97,090
Basic income per common share from
continuing operations 0.25 0.27 0.16 0.17 0.85
Basic income per common share from
gain on sale of discontinued
operations - - 0.16 - 0.16
Basic net income per common share 0.25 0.27 0.32 0.17 1.01
Diluted income per common share from
continuing operations 0.25 0.27 0.16 0.17 0.85
Diluted income per common share from
gain on sale of discontinued
operations - - 0.15 - 0.15
Diluted net income per common share $ 0.25 $ 0.27 $ 0.31 $ 0.17 $ 1.00
16. SEGMENT REPORTING
The Company discloses segment information in accordance with SFAS No. 131,
'Disclosure About Segments of an Enterprise and Related Information,' which
requires companies to report selected segment information on a quarterly basis
and to report certain entity-wide disclosures about products and services, major
customers, and the material countries in which the entity holds assets and
reports revenues.
The Company has three reportable segments: Prolianz, Idea Integration and
Modis. The Company's reportable segments are strategic divisions that offer
different services and are managed separately as each division requires
different resources and marketing strategies. Prolianz, the professional
business solutions division, provides experienced expertise in a wide variety of
disciplines including accounting and finance, law, engineering and technical,
science, career management, executive search, and human resource consulting.
Idea Integration, the e-business solutions division, provides e-business
strategy consulting, design and branding, application development, and
integration. Modis, the information technology resource management division,
offers value-added solutions such as IT project support and staffing,
recruitment of full-time positions, project-based solutions, supplier management
solutions, and on-site recruiting support.
The accounting policies of the segments are consistent with those described
in the summary of significant accounting policies in Note 2 and all intersegment
sales and transfers are eliminated.
No one customer represents more than 5% of the Company's overall revenue.
Therefore, the Company does not believe it has a material reliance on any one
customer as the Company is able to provide services to numerous Fortune 1000 and
other leading businesses.
The Company evaluates segment performance based on revenues, gross margin
and pre-tax income from continuing operations. The Company does not allocate
income taxes or unusual items to the segments. The following table summarizes
segment and geographic information:
Fiscal
-------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------------------------------
Revenue
Prolianz $ 652,626 $ 592,455 $ 537,973
Idea Integration 241,092 168,158 114,411
Modis 933,968 1,181,036 1,049,729
------------ ------------ ------------
Total Revenue $ 1,827,686 $ 1,941,649 $ 1,702,113
============ ============ ============
Gross Profit
Prolianz $ 217,464 $ 194,993 $ 165,760
Idea Integration 104,925 70,209 49,531
Modis 208,463 260,546 252,285
------------ ------------ ------------
Total Gross Profit $ 530,852 $ 525,748 $ 467,576
============ ============ ============
Pre-tax Income from Continuing Operations
Prolianz $ 61,699 $ 54,390 $ 50,334
Idea Integration 5,842 26,540 17,775
Modis 30,399 81,032 97,811
------------ ------------ ------------
97,940 161,962 165,920
Charges (a) (19,665) (21,750) (34,759)
Corporate interest and other income (21,621) (7,794) (13,975)
------------ ------------ ------------
Total Pre-tax Income from Continuing Operations $ 56,654 $ 132,418 $ 117,186
============ ============ ============
Geographic Areas
Revenues
United States $ 1,398,876 $ 1,440,071 $ 1,348,120
U.K. 417,414 485,302 329,746
Other 11,396 16,276 24,247
------------ ------------ ------------
Total $ 1,827,686 $ 1,941,649 $ 1,702,113
============ ============ ============
December 31,
-------------------------------
2000 1999
- ----------------------------------------------------------------------------------------------
Assets
Prolianz $ 454,127 $ 443,862
Idea Integration 431,293 241,873
Modis 752,431 877,675
------------ ------------
1,637,851 1,563,410
Corporate 15,709 32,985
------------ ------------
Total Assets $ 1,653,560 $ 1,596,395
============ ============
Geographic Areas
Identifiable Assets
United States $ 1,223,932 $ 1,193,021
U.K. 408,339 380,869
Other 21,289 22,505
------------ ------------
Total $ 1,653,560 $ 1,596,395
============ ============
(a) Charges for the year ended December 31, 2000 include (1) $13,122 asset
write down related to the sale of discontinued Health Care operations, (2)
$7,296 of costs related to the planned separation and spin-off of the IT
Businesses which was cancelled and (3) $753 restructuring charge recapture.
These charges were recognized in third quarter 2000. Charges for the year
ended December 31, 1999 include $25,000 asset write down related to the
sale of discontinued Health Care operations and $3,250 recapture of
restructuring charges. Charges for the year ended December 31, 1998 relate
to restructuring and impairment charges of $34,759.
17. DISCONTINUED OPERATIONS
Effective September 27, 1998 and March 30, 1998, the Company sold its
Commercial operations and Teleservices division, and the operations and certain
assets of its Health Care division, respectively, (jointly the "Commercial
Businesses"). As a result, the Commercial Businesses have been reported as a
discontinued operation. The Commercial operations and Teleservices division were
sold with a final adjusted purchase price of $826.2 million in cash to Randstad
U.S., L.P. ('Randstad'), the U.S. operating company of Ranstad Holding nv, an
international staffing company based in The Netherlands. The after-tax gain on
the sale was $230.6 million. The operations and certain assets of the Health
Care division were sold for consideration of $8.0 million, consisting of $3.0
million in cash and $5.0 million in a note receivable. The after-tax gain on the
sale was $0.1 million.
In connection with the Company's sale of its health care operations, the
Company entered into an agreement with the purchaser of the health care assets
whereby the Company agreed to make advances to the purchaser to fund its working
capital requirements. These advances were collateralized by the assets of the
sold operations, primarily the accounts receivable. In the third quarter of
1999, the Company was informed by the purchaser that they would default on their
obligation to the Company. The Company believed it was probable that a portion
of the advances would not be repaid and accordingly, provided an allowance for
the advances estimated to be uncollectible of $25.0 million. At September 30,
2000, the total amount owed to the Company, net of the $25.0 million reserve,
was $13.1 million. The Company reevaluated the total amount owed to the Company
and believed it was probable that the balance of the purchaser's debt to the
Company of $13.1 million would not be repaid and accordingly, provided an
additional allowance for the debt estimated to be uncollectible. As of December
31, 2000, the Company had fully reserved all amounts owed to the Company under
this agreement.
The sale of the Commercial Businesses represents the disposal of a segment
of the Company's business. The net operating results of the Commercial
Businesses have been reported, net of applicable income taxes, as 'Income from
Discontinued Operations'. The net cash flows of the Commercial Businesses have
been reported as 'Net Cash Used In Discontinued Operations'.
Summarized financial information for the discontinued operations for the
year ended December 31, 1998 follows (in thousands):
Revenue $ 919,400
Cost of Revenue 708,930
Operating Expense 156,180
Operating Income 54,290
Interest, net 4,200
Provision for income taxes 20,070
Income from discontinued operations 30,020
Results of the discontinued Commercial Business include the allocation of
certain net common expenses for corporate support and back office functions
totaling approximately $0.9 million for the year ended December 31, 1998.
Corporate support and back office allocations are based on the ratio of the
Company's consolidated revenues, operating income and assets to that of the
discontinued Commercial Business. Additionally, the results of discontinued
operations include allocations of consolidated interest expense totaling $4.2
million for fiscal 1998. Interest expense is allocated based on the historic
funding needs of the discontinued operations, using a rate that approximates the
weighted average interest rate outstanding for the Company for each fiscal year
presented. Historic funding needs include: the purchases of property, plant and
equipment, acquisitions, current income tax liabilities and fluctuating working
capital needs.
18. EXTRAORDINARY ITEM
During fiscal 1998, the Company recognized an extraordinary after-tax
charge of $5.61 million as a result of the Company's early retirement of $16.45
million of 7% Convertible Senior Notes Due 2002 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 $7.13 million on the early extinguishment of
the 7% Senior Convertible Senior Notes and wrote off $0.37 million of related
unamortized debt issuance costs. Additionally, the Company wrote off $1.63
million of unamortized debt financing costs related to the termination of the
credit facility.
19. SUBSEQUENT EVENT
In January 2001, the Company adopted the 2001 Voluntary Stock Option
Exchange Plan (the 'Option Exchange Plan') in an effort to improve the retention
and incentive aspects of the Company's 1995 Plan, and to provide a mechanism to
return shares to the 1995 Plan for future issuance. All current employees who
have received options under the Plan or who received special grants outside the
1995 Plan since the 1995 Plan was adopted are eligible to participate in the
Option Exchange Plan. The Option Exchange Plan will allow eligible option
holders to voluntarily cancel existing options in exchange for new options to be
issued no earlier than six months and one day following termination of existing
options. The exercise price of the new options will be the market price on the
date of re-issue. Vested options that are cancelled will be re-granted on a
one-for-one basis and will be completely vested upon re-grant. Unvested options
that are cancelled will be re-granted on a one-for-two basis and will vest in
equal annual installments over a three year period from the date of re-grant.
The Option Exchange Plan was approved by the Compensation Committee and the
non-employee members of the Board of Directors. The Company expects the Option
Exchange Plan to be completed by mid-August. The Company does not expect to
incur any compensation charges in connection with the Option Exchange Plan. For
further discussion on the Option Exchange Plan see Form 8-K filed by the Company
on January 25, 2001.
PART III
Information required by Part III is incorporated by reference to the
Registrant's Definitive Proxy Statement to be filed pursuant to Regulation 14A
("the Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
section entitled "Election of Directors," "Executive Compensation" and "Section
16(a) Beneficial Ownership Reporting Compliance" contained in the proxy
statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section entitled "Executive Compensation" contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section entitled "Principal Shareholders and Securities Ownership of Management"
contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
sections entitled 'Certain Relationships and Related Transactions'; and
'Compensation Committee Interlocks and Insider Participation' contained in the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
1. Financial Statements
The following consolidated financial statements of the Company and its
subsidiaries are included in Item 8 of this report:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Income for each of the three years in the period
ended December 31, 2000
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 2000
Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended December 31, 2000
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Financial statement schedules required to be included in this
report are either shown in the financial statements and notes thereto
included in Item 8 of this report or have been omitted because they
are not applicable.
3. Exhibits
3.1 Amended and restated Articles of Incorporation.(1)
3.2 Amended and Restated Bylaws.(2)
10.1 AccuStaff Incorporated Employee Stock Plan. (3)
10.2 AccuStaff Incorporated (now Modis Professional Services, Inc. amended
and restated Non-Employee Director Stock Plan. (4)
10.3 Form of Employee Stock Option Award Agreement. (3)
10.4 Form of Non-Employee Director Stock Option Award Agreement,
as amended.
10.5 Profit Sharing Plan. (3)
10.6 Revolving Credit and Reimbursement Agreement by and between
the Company and NationsBank National Association as
Administration Agent and certain lenders named therein,
dated October 30, 1998. (2)
10.6(a) Amendment agreement No. 1 to revolving credit and reimbursement
agreement, dated October 27, 1999. (1)
10.6(b) 364 day credit agreement by and between the Company and Bank of
America. N.A. as administration agent and certain lenders named
therein dated October 27, 1999. (1)
10.6(c) Amendment agreement No. 2 to 364 day credit agreement, dated October
25, 2000.
10.6(d) Amendment agreement No. 3 to revolving credit and reimbursement
agreement, dated October 25, 2000.
10.7 Modis Professional Services, Inc., 1995 Stock Option Plan, as
Amended and Restated. (2)
10.8 Form of Stock Option Agreement under Modis Professional
Services, Inc. amended and restated 1995 Stock Option Plan. (2)
10.9 Executive Employment Agreement with Derek E. Dewan. (4)
10.9(a) Award notification to Derek E. Dewan under the Senior Executive
Annual Incentive Plan (1)
10.10 Executive Employment Agreement with Michael D. Abney. (4)
10.10(a)Award notification to Michael D. Abney under Senior Executive
Annual Incentive Plan. (1)
10.11 Executive Employment Agreement with Marc M. Mayo. (4)
10.11(a)Award notification to Marc M. Mayo under the Senior Executive
Annual Incentive Plan. (1)
10.12 Executive Employment Agreement with Timothy D. Payne. (4)
10.12(a)Award notification to Timothy D. Payne under the Senior Executive
Annual Incentive Plan. (1)
10.13 Executive Employment Agreement with George A. Bajalia. (4)
10.13(a)Amended and Restated Executive Employment Agreement with George A.
Bajalia, effective November 1, 2000.
10.14 Executive Employment Agreement with Robert P. Crouch. (4)
10.14(a)Award notification to Robert P. Crouch under the Senior
Executive Annual Incentive Plan. (1)
10.15 Senior Executive Annual Incentive Plan. (1)
10.16 Form of Director's Indemnification Agreement.
10.17 Form of Officer's Indemnification Agreement.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
(1) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed November 15, 1999.
(2) Incorporated by reference to the Company's Annual Report on Form
10-K filed March 31, 1999.
(3) Incorporated by reference to the Company's Registration on Form S-1
(No. 33-78906).
(4) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed August 16, 1999.
(b) reports on Form 8-K. No reports on form 8-K were filed during the final
quarter of fiscal 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MODIS PROFESSIONAL SERVICES, INC.
By: /s/ Timothy D. Payne
Timothy D. Payne
President and Chief Executive Officer
Date: March 29, 2001
Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signatures Title Date
/s/ Timothy D. Payne President, Chief March 29, 2001
Timothy D. Payne Executive Officer and
Director
/s/ Robert P. Crouch Senior Vice President, Chief March 29, 2001
Robert P. Crouch Financial Officer, Treasurer,
and Chief Accounting Officer
/s/ George A. Bajalia Senior Vice President, March 29, 2001
George A. Bajalia Chief Operating Officer
and Director
/s/ Derek E. Dewan Chairman of the Board March 29, 2001
Derek E. Dewan
/s/ Michael D. Abney Director March 29, 2001
Michael D. Abney
/s/ T. Wayne Davis Director March 29, 2001
T. Wayne Davis
/s/ Michael L. Huyghue Director March 29, 2001
Michael L. Huyghue
/s/ William M. Isaac Director March 29, 2001
William M. Isaac
/s/ John R. Kennedy Director March 29, 2001
John R. Kennedy
/s/ George J. Mitchell Director March 29, 2001
George J. Mitchell
/s/ Peter J. Tanous Director March 29, 2001
Peter J. Tanous
EXHIBIT INDEX
10.6(c) Amendment agreement No. 2 to 364 day credit agreement,
dated October 25, 2000.
10.6(d) Amendment agreement No. 3 to revolving credit and reimbursement
agreement, dated October 25, 2000.
10.13(a) Amended and Restated Executive Employment Agreement with George
A. Bajalia, effective November 1, 2000.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.