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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998
COMMISSION FILE NUMBER: 0-24484
MODIS PROFESSIONAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3116655
- - -------------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Independent Drive, Jacksonville, FL 32202
- - ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number including area code): (904) 360-2000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.01 Per Share New York Stock Exchange
(Title of each class) (Name of each exchange on
which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant (assuming for these purposes, but not conceding, that all
executive officers and directors are "affiliates" of the Registrant), based upon
the closing sale price of common stock on March 19, 1999 as reported by the New
York Stock Exchange, was approximately $915,729,141.
As of March 19, 1999, the number of shares outstanding of the Registrant's
common stock was 95,787,567.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Registrant's Proxy
Statement for its 1999 Annual Meeting of shareholders are incorporated by
reference in Part III.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that are
subject to certain risks, uncertainties or assumptions and may be affected by
certain other factors, including but not limited to the specific factors
discussed in Part II, Item 5 under 'Market for Registrant's Common Equity and
Related Shareholder Matters' and in Part II, Item 7 under'Fiscal 1998 compared
to Fiscal 1997 - Results from continuing operations - revenue'; 'Factors Which
May Impact Future Results and Financial Condition' and under 'Other Matters -
Year 2000 Compliance.' In addition, except for historical facts, all information
provided in Part II item 7a. under 'Quantitative and qualitative disclosures
about market risk' should be considered forward looking statements. Should one
or more of these risks, uncertainties or other factors materialize, or should
underlying assumptions prove incorrect, actual results, performance or
achievements of the Company may vary materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
Forward-looking statements are based on beliefs and assumptions of the Company's
manangement and on information currently available to such management.
Forward-looking statements speak only as of the date they are made, and the
Company undertakes no obligation to update publically any of them in light of
new information or future events. Undue reliance should not be placed on such
forward-looking statements, which are based on current expectations.
Forward-looking statements are not guarantees of performance.
PART I
ITEM 1. BUSINESS
GENERAL
Modis Professional Services, Inc. ('Modis' or the 'Company') is a global
provider of professional business services, including consulting, outsourcing,
training and strategic human resource solutions, to Fortune 1000 and other
leading businesses. The Company's services are provided through its two business
divisions: (i) Information Technology, which provides technology consulting,
outsourcing and solutions services, and (ii) Professional Services, which
provides personnel who perform specialized services such as accounting, legal,
technical / engineering, scientific and career management and consulting.
Headquartered in Jacksonville, Florida, the Company has approximately 264
offices throughout the United States, Canada, United Kingdom, and certain parts
of continental Europe. Modis' objective is to concentrate its efforts and
resources on profitable, high-growth, high-end information technology ('IT') and
professional services that have the ability to consistently generate strong
earnings. The Company has experienced substantial growth in revenue and earnings
driven primarily by (i) acquisitions of other information technology and
professional services companies; (ii) increased business with the Company's
existing clients; (iii) increased penetration of existing and new markets; and
(iv) trends toward the increased outsourcing of non-core competency professional
business services.
The following table sets forth the respective business divisions' share of the
Company's consolidated revenue and gross profit for the fiscal years ending 1998
and 1997:
Division % of Consolidated Revenues % of Consolidated Gross Profit
- - --------------------------------------- --------------------------- -------------------------------
1998:
Information Technology 68.4% 64.5%
Professional Services 31.6% 35.5%
1997:
Information Technology 67.1% 63.7%
Professional Services 32.9% 36.3%
Business Strategy
Modis seeks to expand its revenues and profitability by expanding its
Information Technology and Professional Services divisions through offering an
extensive range of specialized human resource and consulting services through a
global network of branch offices. The Company markets and delivers its services
with an emphasis on local entrepreneurial spirit and decision-making at the
branch level combined with strong corporate, technological and managerial
support. The Company seeks to provide innovative and customized solutions to
human resource needs and to expand the Company's relationships with its Fortune
1000 clients. Modis' mission is to set the standard for the professional
business services industry by empowering its employees to provide quality
services.
Management believes the Company's concentration on the Information Technology
and Professional Services divisions allows faster growth and higher profit
margins versus the more traditional commercial staffing businesses due to the
specialized expertise of the professional personnel. Management's strategy is to
strengthen its position as one of the few companies offering information
technology and professional services on a global scale. Modis' principal
competitors in the information technology and professional services areas
generally consist of specialty firms in each of those fields, and to a lesser
extent, diversified business services firms. The Company's strategy is to
continue to increase the overall revenue and gross profits from the Information
Technology and Professional Services divisions by expanding current specialties
into new geographic markets, identifying and adding new practice areas, and
leveraging wherever possible on existing specialty strengths. The Company has
significantly expanded its information technology operations since 1997 by
acquiring approximately twenty firms with information technology operations.
These acquisitions allow the Information Technology division to provide clients
with services in the 48 contiguous states, Canada, the United Kingdom, the
Middle East and certain parts of continental Europe. See Note 14 to the
Company's audited consolidated financial statements for further discussion of
the Company's foreign operations.
GROWTH STRATEGY
The Company pursues a focused growth strategy designed to achieve both increased
revenues and earnings. The key elements of this growth strategy are as follows:
Internal Growth
The Company's internal growth strategy includes: (i) positioning in market
locations, customer segments and skill areas that value high levels of service;
(ii) increasing penetration of existing markets; (iii) expanding into new and
contiguous markets; and (iv) migrating to higher margin specialty practice
areas.
Acquisitions
The Company's growth strategy includes the acquisition of existing businesses
with complementary service offerings, strong management, profitable operating
results and recognized local and regional presence. The Company has acquired
approximately thirty information technology and professional services companies
since 1997. Acquisition criteria considered by management includes, among other
things, financial performance, a desirable market location, significant market
share, new or expanded specialties that can be added to the Company's existing
lines of business, efficient operating systems and existing management that will
operate effectively within the Company's existing managerial structure. The
Company believes that there is an opportunity, as a part of the consolidation in
the global business services industry, to focus on acquisitions of companies
that offer specialized information technology and other professional services.
The Company's management has had success in identifying acquisition candidates
that complement existing businesses, integrating them into existing operations
and utilizing them to enhance the Company's growth performance.
INFORMATION TECHNOLOGY DIVISION
Market Overview
The need for information technology services continues to expand as companies
and governmental agencies continue to require increased performance from their
information management systems. The reliance on information systems to provide
companies with a competitive advantage in the operation of their businesses has
prompted an exponential demand for information technology services. The demand
is driven by rapid technology shifts, a move to internet and web enabled
applications, increased cost pressures, skill shortages, and certain benefits
from outsourcing the information services which allows a company to focus on its
core competencies. These market influences are expected to remain long term in
nature and to increase the reliance upon information technology services
companies to recruit, train, and provide personnel and technology solutions and
outsourcing services as companies increase their demand for information
technology needs.
The supply of qualified information technology professionals continues to lag
behind the global demand for information technology services and it is
increasingly difficult for corporate MIS departments to keep internal staff
current with the latest technologies and skills. This results in an increased
dependence on outside consulting, outsourcing and contract technology services.
This shortfall of professionals has resulted in skill shortages and higher
costs, primarily in the newest technologies and high-end solutions sector of the
market. This has contributed to an increased trend by companies to obtain
outside consulting services, outsourcing and human resource solutions on a cost
efficient basis.
Division Operations
The Information Technology division, which operates primarily under the modis
brand name, accounted for 68.4% of the Company's fiscal 1998 revenues. Other
specialty brand names in this division include: IT Link, Hunterskil Howard,
Software Knowledge, Cope, Computer Action, Actium, Executive's Monitor, Inc. and
Berger & Co. A full range of information technology services are provided
through the Information Technology division's two business units, modis
Solutions and modis Consulting (collectively 'modis'), targeting a wide range of
industries, including banking and finance, manufacturing, public utilities,
retail, state and local government, technology, telecommunication and
transportation. As of December 31, 1998, the Information Technology division
operated 112 offices.
modis Solutions' wide range of services includes IT planning and strategies,
Enterprise Resource Planning ('ERP') software implementation, object oriented
methodology, web-enabled services, life cycle development, data warehousing,
process reengineering, mainframe to client-server transition, client-server
application development, custom software application development, Year 2000
remediation and consulting, management consulting, systems integration, and
other high-end IT practices.
modis Consulting provides staff augmentation for application development
services and brings in needed technical and project management processes to help
businesses achieve more predictable project execution and develop higher quality
systems more efficiently and effectively. Application development teams include
software application developers, system analysts, database analysts, software
specialists, documentation specialists, project managers, systems
administrators, and software engineers. Outsourcing of programming and
maintainence of software applications and certain MIS functions are provided
through both the Solutions and Consulting units.
Division Strategy
The Information Technology division pursues the following strategies in an
attempt to grow market share and further improve operating results:
Leverage Recruiting Power: With a base of over 100 offices worldwide, modis
employs over 1,000 professional technical recruiters. The resumes of nearly 1
million IT professionals are housed in the division's corporate databases. This
recruiting power gives modis the ability to compete effectively for relatively
scarce IT talent. To support the recruiting effort, modis offers benefit
programs which include medical, dental and 401(k) plans. The division also
recruits internationally and provides sponsorships for H-1B visas for qualified
candidates.
Emphasis on Specialty Solutions: The Information Technology division focuses on
specialized solutions such as ERP implementation, application development,
process reengineering and data warehousing which generally offer greater gross
margins than other IT services.
Cross-Selling Between Offices: The Information Technology division intends to
generate greater volumes of high-end specialty solution services by utilizing
its 100+ branches as a distribution channel for cross-selling. This positively
affects the revenue growth and operating margins of branches through the
marketing of high hourly bill rates, and high value services.
Upgrade Consultant Skills: The Information Technology division attempts to
continually upgrade the skills and market value of its consultants by providing
advanced specialty training through its IBT (internet based training) program in
such areas as ERP software implementation, object oriented technologies and
internet/intranet application development. This aids in consultant retention as
well as increasing hourly bill rates.
The Company completed the following acquisitions in the Information Technology
division for the year ended 1998:
(UNAUDITED)
FISCAL 1997
ACQUISITION REVENUES
DATE (IN MILLIONS)
----------------------------------
Technology Services Corporation 1/98 $ 9.2
Actium, Inc. and affiliates 3/98 $ 63.7
Avalon, Ltd. 5/98 $ 2.3
Consulting Partners, Inc. 8/98 $ 9.5
Cope Consulting, Ltd. and affiliates 9/98 $ 16.1
Software Knowledge, Ltd., and affiliates 11/98 $ 31.8
PROFESSIONAL SERVICES DIVISION
Market Overview
The need for professional services, specifically legal, accounting, career
management and consulting, scientific, and engineering / technical solutions,
has increased rapidly in response to the continuing shift in the respective
industries in which these professionals operate. The focus of large corporations
has migrated to a more flexible professional workforce which employs personnel
on a skill-specific or project-specific basis. This shift has increased the
reliance upon business service partners to be able to recruit and provide
solutions to these companies on a skill-specific or project-specific basis, or
an economic basis. The trend toward outsourcing these services is expected to be
long term in nature.
Division Operations
The Professional Services division, which accounted for 31.6% of the Company's
fiscal 1998 revenues, provides consulting, outsourcing and human resource
solutions for accounting, legal, engineering / technical, scientific and
career management and consulting functions.
Accounting Unit
The Accounting unit, which operates primarily under the Accounting Principals
brand name in the United States and under the Badenoch and Clark brand name
throughout the United Kingdom, provides professionals and project solutions and
support in finance/banking, data processing and accounting, including auditors,
controllers/CFOs, CPAs, financial analysts, mortgage processors, loan
processors, A/R and A/P clerks, and tax accountants. By providing these
accounting and financial services, the Company offers customers a reliable and
economic resource for financial professionals to address uncertain or uneven
work loads caused by special projects or unforeseen emergencies. The Company
entered the accounting services industry in 1995 through the acquisition of a
small, regional accounting firm and has since increased the division to
encompass 43 branches in the U.S. and the United Kingdom, as of December 31,
1998.
Legal Unit
The Legal unit, which operates primarily under the Special Counsel brand name,
provides litigation support and consulting as well as human resource services
and solutions to corporate legal departments and law firms. These services
include the provision of project teams/individuals consisting of: attorneys,
paralegals, legal secretaries, and law librarians to corporate legal departments
and private law firms for litigation support, as well as project and document
management, document imaging and coding, and trial presentation services. The
Company primarily competes with a few large companies and many local firms as
this market is highly fragmented. The Company entered the legal industry in 1995
through the acquisitions of Attorneys Per Diem, a Baltimore operation, (now
Special Counsel) in 1995, and Special Counsel, Inc., a New York City operation.
As of December 31, 1998, the legal unit has 30 branches operating primarily in
the United States, with capability in the United Kingdom through its Badenoch
and Clark brand.
Technical and Engineering Unit
The Technical and Engineering unit, collectively called ENTEGEE, provides
drafters, designers and engineers in the mechanical and electrical engineering
fields as well as personnel to the chemical, plastics and other industries.
ENTEGEE also provides high level engineering and drafting services, including
the outsourcing of specialized design services such as architectural design and
drafting, tool designs and computer-aided design ('CAD') services. ENTEGEE's
clients range from transportation, and aerospace to engineering firms, print
circuit board manufacturers, and other domestic and international businesses. As
of December 31, 1998, the technical and engineering unit operates 22 branches
throughout the United States.
Scientific Unit
The Scientific unit, Scientific Staffing, provides trained and advanced-degreed
scientists, laboratory technicians and support peronnel to companies in the
pharmaceutical, chemical, biotechnical, environmental, health care and consumer
products industries. As of December 31, 1998, the Scientific unit operates 24
branch offices throughout the United States.
Career Management and Consulting Unit
The Career Management and Consulting unit, Manchester, Inc. and Diversified
Search, Inc. offers corporate outplacement services, including career
counseling, resume development, skills assessment, interview and negotiating
techniques, and employee guidance counseling. It also provides leadership
development, career management consulting, retained executive search and other
human resource services to the banking, financial services, healthcare,
pharmaceutical, chemical and manufacturing industries. This unit started with
the acquisition of Manchester Partners International, Inc. ('Manchester') in
January 1997 and as of December 31, 1998 it operates through a network of 33
branch offices throughout the United States.
Division Strategy
The Professional Services Division pursues many strategies to grow market share
and further improve operating results. Several of the more distinguishing
strategies are as follows:
Staff Augmentation. The business units of the Professional Services Division
each provide variable workforce solutions by providing intellectual capital to
meet the changing needs of the clients. By establishing new relationships,
forming strategic alliances and continually improving current client and
consultant relationships management believes the traditional staff augmentation
will continually be an integral component to its service mix.
Specialized Staffing and Specialty Solution Opportunities. Many of the
Professional Service Divisions offices provide specialty solutions and staffing
to its corporate clients beyond the traditional professional staff augmentation.
Management believes it can leverage these practice specialties and client
relationships within each business unit by offering specialized services and
solutions to other existing and prospective clients. Examples include document
and trial management services, leadership development, executive coaching and
specialized computer aided design services.
Professional Development Opportunities. Enhancing the knowledge and skills of
the consultants and employees of the Professional Services Division based on the
needs of our clients will strengthen our overall relationship with clients,
consultants, and employees. Generally, these strategies are intended to better
serve our clients and strengthen our professionalism throughout each business
unit which management believes will improve overall relationships and
profitability by client and improve retention of consultants and employees.
The Company completed the following acquisitions in the Professional Services
division for the year ended 1998:
(UNAUDITED)
FISCAL 1997
ACQUISITION REVENUES
DATE (IN MILLIONS)
----------------------------------
Millard Consulting, Inc. 5/98 $ 4.2
Diversified Search, Inc. 6/98 $ 5.6
Colvin Resources Group - Fort Worth, Inc. 7/98 $ 1.9
Accountants Express of San Diego, Inc. 8/98 $ 1.5
BRANCH OFFICES
The Company delivers its services through a branch office network of 264 offices
primarily throughout the United States, and to a lesser extent, Canada, United
Kingdom, and certain parts of continental Europe. The following table shows the
Company's branch offices as of the dates indicated (including offices of an
acquired company only after such acquisition):
- - ------------------------ ------------- ------------- ------------- -------------
Branch Offices: 1995 1996 1997 1998
- - ------------------------ ------------- ------------- ------------- -------------
Information Technology 8 72 110 112
Professional Services 21 73 144 152
--- --- --- ---
Total 29 145 254 264
- - ------------------------ ------------- ------------- ------------- -------------
COMPETITION
The business services industry has grown rapidly in recent years as companies
have utilized business service firms to provide value added solutions ranging
from the outsourcing of non-core competencies to the recruitment of a flexible
workforce able to provide a company with the unique skills it does not house
internally. Modis believes that the increasing pressure that companies are
experiencing to remain competitive and efficient will cause companies to focus
their permanent internal staff around their core competencies while expanding
their use of business service partners to provide strategic solutions to fulfill
their other business needs. Modis also believes that the business services
industry is highly fragmented, but is experiencing increasing consolidation
largely in response to increased demand for companies to provide a wide range of
comprehensive human resource solutions to regional and national accounts. A
large percentage of business services firms are local operations with fewer than
five offices. Within local markets, these firms actively compete with the
Company for business, and in most of these markets no single company has a
dominant share of the market. The Company also competes with larger full-service
and specialized competitors in national, regional and local markets.
The principal national competitors of the Company's Information Technology
division include Keane Inc., Computer Horizons Corporation, Metamor Worldwide,
Inc., CIBER, Inc., Cambridge Technology Partners, Inc., Technology Services
Corporation, Whittman-Hart, Inc., CAP Gemini, Inc., Sapient Corporation, Data
Processing Resources Corporation and, to an extent, the consulting divisions of
IBM and the 'Big Five' accounting firms. The principal national competitors of
the Company's Professional Services division include Alternative Resources
Corporation, On Assignment, Inc., the legal division of Kelly Services, Inc.,
The Olsten Corporation, CDI Corporation, Romac International, Inc., Acsys, Inc.
and Robert Half International, Inc. The Company believes that the primary
competitive factors in obtaining and retaining clients are an understanding of
clients' specific job requirements, the ability to provide professional
personnel in a timely manner, the monitoring of quality of job performance, and
the price of services. The primary competitive factors in obtaining qualified
candidates for professional employment assignments are wages, responsiveness to
work schedules, continuing professional education opportunities, and number of
hours of work available. Management believes that Modis is highly competitive in
all of these areas.
FULL-TIME EMPLOYEES
At March 19, 1999, the Company employed approximately 16,500 professional and IT
consultants, and approximately 3,000 corporate employees on a full-time
equivalent basis. Approximately 200 of the employees work at corporate
headquarters. Full-time employees are covered by life and disability insurance
and receive health and other benefits.
GOVERNMENT REGULATIONS
Outside of the United States and Canada the personnel outsourcing segment of the
Company's business is closely regulated. These regulations differ among
countries but generally may regulate: (i) the relationship between the Company
and its temporary employees; (ii) licensing and reporting requirements; and
(iii) types of operations permitted. Regulation within the United States does
not materially impact the Company's operations.
SERVICE MARKS
The Company or its subsidiaries maintain a number of service marks and other
intangible rights, including federally registered service marks for MODIS (and
logo), ACCOUNTING PRINCIPALS (and logo), MANCHESTER, SCIENTIFIC STAFFING and
SPECIAL COUNSEL for its services generally. The Company or its subsidiaries have
applications pending before the Patent and Trademark Office for federal
registration of the service marks for MODIS PROFESSIONAL SERVICES (and logo),
MODIS SOLUTIONS (and logo), ENTEGEE, MANAGEMENT PRINCIPALS and THE EXPERTS (and
logo). The Company plans to file affidavits of use and timely renewals, as
appropriate, for these and other intangible rights it maintains. The Company
also has applications with the appropriate authorities for the MODIS service
mark in Canada, the United Kingdom and the European Union.
SALE OF COMMERCIAL AND HEALTH CARE DIVISIONS
On June 8, 1998, the Company's subsidiary, Strategix Solutions, Inc.
('Strategix') filed a registration statement with the Securities and Exchange
Commission for its initial public offering and subsequent spin off (subject to
certain conditions) of the Company's Commercial operations and its Teleservices
division. Before the initial public offering was consummated, the Company sold
its Commercial operations and its Teleservices division to Randstad U.S., L.P.,
a subsidiary of Randstad Holding nv, for approximately $850 million, prior to
any purchase price adjustment, in cash. The sale was completed on September 27,
1998.
Effective March 30, 1998, the Company sold the operations and certain assets of
its Health Care division for consideration of $8.0 million, consisting of $3.0
million in cash and $5.0 million in a note receivable due March 30, 2000 bearing
interest at 2% in excess of the prime rate. In addition, the Company retained
the accounts receivable of the Health Care division of approximately $28.2
million.
SEASONALITY
The Company's quarterly operating results are affected primarily by the number
of billing days in the quarter and the seasonality of its customers' businesses.
Demand for the Company's services has historically been lower during the
year-end holidays through February of the following year, showing gradual
improvement over the remainder of the year.
ITEM 2. PROPERTIES
The Company owns no material real property. It leases its corporate headquarters
as well as all but one of its branch offices. The branch office leases generally
run for three to five-year terms. The Company believes that its facilities are
generally adequate for its needs and does not anticipate difficulty replacing
such facilities or locating additional facilities, if needed.
ITEM 3. LEGAL PROCEEDINGS
The Company, in the ordinary course of its business, is from time to time
threatened with or named as a defendant in various lawsuits. The Company
maintains insurance in such amounts and with such coverage and deductables as
management believes are reasonable and prudent.
There is no pending litigation that the Company believes is likely to have a
material adverse effect on the Company, its financial position or results of its
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the twelve months ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The following table sets forth the reported high and low sales prices of the
Company's Common Stock for the quarters indicated as reported on the New York
Stock Exchange under the symbol "ASI" through September 30, 1998. Effective
October 1, 1998, subsequent to the Company's sale of its commercial division,
the Company changed its trading symbol and began trading on the New York Stock
Exchange under "MPS".
FISCAL YEAR 1997 High Low
First Quarter........................................................ $25.25 $16.13
Second Quarter....................................................... 26.63 15.75
Third Quarter........................................................ 31.50 23.31
Fourth Quarter....................................................... 31.88 21.75
FISCAL YEAR 1998
First Quarter........................................................ $35.00 $22.00
Second Quarter....................................................... 38.86 29.38
Third Quarter........................................................ 33.25 10.50
Fourth Quarter....................................................... 18.63 9.94
In addition to the factors set forth below in 'FACTORS WHICH MAY IMPACT FUTURE
RESULTS OF THE COMPANY' under 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS', the price of the Company's Common Stock is
affected by fluctuations and volatility in the financial and equity markets
generally and in the Company's industry sector in particular.
As of March 19, 1999, there were approximately 959 holders of record of the
Company's Common Stock.
No cash dividend or other cash distribution with respect to the Company's Common
Stock has ever been paid by the Company. The Company currently intends to retain
any earnings to provide for the operation and expansion of its business and does
not anticipate paying any cash dividends in the foreseeable future. The
Company's revolving credit facility prohibits the payment of cash dividends
without the lender's consent.
In March 1998, the Company issued 4,598,698 shares of Common Stock to the former
shareholders of Actium, Inc. in exchange for 100% of the outstanding shares of
Actium, Inc. In addition, in August 1998, the Company issued 874,815 shares of
Common Stock to the former shareholders of Consulting Partners, Inc. in exchange
for 100% of the outstanding shares of Consulting Partners, Inc. These issuances
of securities were made in reliance on the exemption from registration provided
under Section 4(2) of the Securities Act of 1933 as a transaction by an issuer
not involving a public offering. All of the securities were acquired by the
recipients for investment and with no view toward the public resale or
distribution of the securities without registration. There was not any public
solicitation and the issued stock certificates bore restrictive legends. All of
such shares were subsequently registered for sale by effective Registration
Statements on Form S-3 in accordance with the terms governing the acquisition of
Actium, Inc. and Consulting Partners, Inc.
On October 31, 1998, the Company's Board of Directors authorized the repurchase
of up to $200.0 million of the Company's Common Stock pursuant to a share
buyback program. On December 4, 1998, the Company's Board of Directors increased
the authorized share buyback program by an additional $110.0 million, bringing
the total authorized repurchase amount to $310.0 million. As of December 31,
1998, the Company had repurchased approximately 21,751,000 shares under the
share buyback program. Subsequent to December 31, 1998, the Company completed
the program during February 1999, with the repurchase of approximately 597,000
shares, bringing the total shares repurchased under the program to approximately
22,348,000 shares. All of these shares were retired upon purchase. See '
LIQUIDITY AND CAPITAL RESOURCES' for additional information.
SELECTED FINANCIAL DATA
Fiscal Years Ended
------------------------------------------------------------------------------------
DEC. 31, DEC. 31, Dec. 31, Dec. 31, Jan. 1,
(in thousands, except per share amounts) 1998 1997 (1) 1996 (1) 1995 (1) 1995 (1)
- - - -------------------------------------------------------------------------------------------------------------------------
Statement of Income Data:
Revenue $ 1,702,113 $ 1,164,124 $ 580,016 $ 90,489 $ 36,312
Cost of Revenue 1,234,537 835,609 426,814 62,382 25,448
------------------------------------------------------------------------------------
Gross Profit 467,576 328,515 153,202 28,107 10,864
Operating expenses 301,656 211,727 107,512 15,121 7,298
Restructuring and impairment charges 34,759 - - - -
Merger related costs - - 14,446 - -
------------------------------------------------------------------------------------
Operating income from continuing
operations 131,161 116,788 31,244 12,986 3,566
Other income, (expense), net (13,975) (14,615) (2,974) (1,465) (42)
------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 117,186 102,173 28,270 11,521 3,524
Provision for income taxes 48,326 38,803 19,693 1,333 874
------------------------------------------------------------------------------------
Income from continuing operations 68,860 63,370 8,577 10,188 2,650
Discontinued operations:
Income from discontinued operations,
net of income taxes 30,020 38,663 22,633 18,384 12,472
Gain on sale of discontinued operations,
net of income taxes 230,561 - - - -
------------------------------------------------------------------------------------
Income before extraordinary loss 329,441 102,033 31,210 28,572 15,122
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit (5,610) - - - (1,403)
------------------------------------------------------------------------------------
Net income $ 323,831 $ 102,033 $ 31,210 $ 28,572 $ 13,719
====================================================================================
Pro forma provision for income taxes - - (3,642) 3,144 1,592
------------------------------------------------------------------------------------
Pro forma net income (2) $ 323,831 $ 102,033 $ 34,852 $ 25,428 $ 12,127
====================================================================================
Basic income (loss) per common share:
From continuing operations $ 0.63 $ 0.62 $ 0.09 $ 0.16 $ 0.05
====================================================================================
From discontinued operations $ 0.28 $ 0.38 $ 0.25 $ 0.30 $ 0.26
====================================================================================
From gain on sale (4) $ 2.12 $ 0.00 $ 0.00 $ 0.00 $ 0.00
====================================================================================
From extraordinary item $ (0.05) $ 0.00 $ 0.00 $ 0.00 $ (0.03)
====================================================================================
Basic net income per common share $ 2.98 $ 1.00 $ 0.34 $ 0.46 $ 0.28
====================================================================================
Diluted income (loss) per common share:
From continuing operations $ 0.61 $ 0.59 $ 0.09 $ 0.16 $ 0.05
====================================================================================
From discontinued operations $ 0.26 $ 0.34 $ 0.24 $ 0.27 $ 0.24
====================================================================================
From gain on sale (4) $ 1.97 $ 0.00 $ 0.00 $ 0.00 $ 0.00
====================================================================================
From extraordinary item $ (0.05) $ 0.00 $ 0.00 $ 0.00 $ (0.03)
====================================================================================
Diluted net income per common share $ 2.79 $ 0.93 $ 0.33 $ 0.43 $ 0.26
====================================================================================
Pro forma basic income (loss) per
common share:
From continuing operations $ 0.63 $ 0.62 $ 0.13 $ 0.11 $ 0.02
====================================================================================
From discontinued operations $ 0.28 $ 0.38 $ 0.25 $ 0.30 $ 0.26
====================================================================================
From gain on sale (4) $ 2.12 $ 0.00 $ 0.00 $ 0.00 $ 0.00
====================================================================================
From extraordinary item $ (0.05) $ 0.00 $ 0.00 $ 0.00 $ (0.03)
====================================================================================
Pro forma basic net income per
common share $ 2.98 $ 1.00 $ 0.38 $ 0.41 $ 0.25
====================================================================================
Pro forma diluted income (loss) per
common share:
From continuing operations $ 0.61 $ 0.59 $ 0.13 $ 0.11 $ 0.02
====================================================================================
From discontinued operations $ 0.26 $ 0.34 $ 0.24 $ 0.27 $ 0.24
====================================================================================
From gain on sale (4) $ 1.97 $ 0.00 $ 0.00 $ 0.00 $ 0.00
====================================================================================
From extraordinary item $ (0.05) $ 0.00 $ 0.00 $ 0.00 $ (0.03)
====================================================================================
Pro forma diluted net income per
common share $ 2.79 $ 0.93 $ 0.37 $ 0.38 $ 0.23
====================================================================================
Fiscal Years Ended
------------------------------------------------------------------------------------
DEC. 31, DEC. 31, Dec. 31, Dec. 31, Jan. 1,
(in thousands, except per share amounts) 1998 1997 (1) 1996 (1) 1995 (1) 1995 (1)
- - - -------------------------------------------------------------------------------------------------------------------------
Basic average common shares
outstanding 108,518 101,914 90,582 62,415 48,132
Diluted average common ====================================================================================
shares outstanding (3) 116,882 113,109 95,317 69,328 51,919
====================================================================================
Division Revenue Data:
Information Technology $ 1,164,140 $ 780,634 $ 400,408 $ 61,424 $ 17,600
Professional Services 537,973 383,490 179,608 29,065 18,712
------------------------------------------------------------------------------------
Total revenue $ 1,702,113 $ 1,164,124 $ 580,016 $ 90,489 $ 36,312
====================================================================================
As of
------------------------------------------------------------------------------------
DEC. 31, DEC. 31, Dec. 31, Dec. 31, Jan. 1,
1998 1997 (1) 1996 (1) 1995 (1) 1995 (1)
====================================================================================
Balance Sheet data:
Working capital $ 16,138 $ 481,362 $ 397,699 $ 240,252 $ 110,204
Total assets 1,571,881 1,402,626 840,469 303,801 110,578
Long term debt 15,525 434,035 103,369 93,339 28,186
Stockholders' equity 1,070,110 812,842 669,779 195,085 92,142
(1) Includes the financial information of the Company for the respective years
noted above restated to account for any material business combinations
accounted for under the pooling-of-interests method of accounting.
(2) Pro forma net income is the Company's historical net income less the
approximate federal and state income taxes that would have been incurred,
if the companies with which the Company merged had been subject to tax as a
C Corporation.
(3) Diluted average common shares outstanding have been computed using the
treasury stock method and the as-if converted method for convertible
securities which includes dilutive common stock equivalents as if
outstanding during the respective periods.
(4) Gain on sale relates to the gain on the sale of the net assets of the
Company's discontinued operations. See Note 16 to the Consolidated
Financial Statements for a further discussion.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During 1998, the Company sold its assets that were unrelated to its Information
Technology and Professional Services divisions. Effective March 30, 1998, the
Company sold the Health Care division for consideration of $8.0 million,
consisting of $3.0 million in cash and $5.0 million in a note receivable due
March 30, 2000 bearing interest at 2% in excess of the prime rate. In addition,
the Company retained the accounts receivable of the Health Care division of
approximately $28.2 million. On September 27, 1998, the Company sold its
Commercial operations and its Teleservices division for $850 million, prior to
any purchase price adjustments, in cash.
As a result of these transactions, the Company's Consolidated Financial
Statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations have been reclassified to report the results of operations
of its Commercial, Teleservices and Health Care divisions as discontinued
operations for all periods presented.
The following detailed analysis of operations should be read in conjunction with
the 1998 Financial Statements and related notes included elsewhere in this Form
10-K.
FISCAL 1998 COMPARED TO FISCAL 1997
Results from continuing operations
Revenue. Revenue increased $538.0 million, or 46.2%, to $1,702.1 million in
fiscal 1998 from $1,164.1 million in fiscal 1997. The increase was attributable
by division to: Information Technology, $383.5 million or an increase of 49.1%
and Professional Services, $154.5 million or an increase of 40.3%. The increases
in the Information Technology and Professional Services divisions were due to
both internal growth and, more significantly, to the revenues of acquired
companies. The revenue for the Company's Information Technology division is
obtained through the modis Solutions and modis Consulting business units. modis
Solutions provided approximately 30.3% and 17.6% of the division's revenue for
the years ended 1998 and 1997, as compared to 69.7% and 82.4% which was provided
by the division's modis Consulting unit during the same respective periods. The
Company plans to continue to expand the percentage of revenue contributed
through its modis Solutions unit as it expands that unit's offerings throughout
the offices of the modis Consulting unit through various cross-selling efforts.
During 1998, the Company solidified the information technology division's
management structure. The Company integrated substantially all of its acquired
companies from a managerial perspective, including 'next generation' leadership.
In conjunction with this integration, the Company has been able to consolidate
its marketing efforts and promote the modis brand name on a national level, as
the majority of its services are now offered under the modis brand name. For
example, a major advertising campaign was launched to increase brand awareness
to customers and recruits through print ads and airport billboards. The Company
believes the managerial integration and unified national marketing plan will
provide the Company with a platform to increase sales. The strong progress in
our integration efforts in 1998 were somewhat attributable to the Company
satisfying all of its domestic contingent earn-out obligations by the end of
1998. The Company will continue to integrate the back office operations of this
division in conjunction with the Company's Restructuring Plan.
In an effort to increase revenue and gross margin percentages, the Company has
rolled out a new incentive based compensation plan throughout the Modis
Consulting unit. The Company believes this plan will better motivate its
employees to stimulate revenue growth and provide an incentive to increase gross
margin percentages.
Management has observed a current trend in the industry which may possibly
enhance the effectiveness of its strategy. This trend involves the movement of
large users of IT services to larger, national and international providers of IT
services. The Company has seen a trend among large national and international
customers towards scaled back, preferred vendor lists for supplying IT services.
The Company believes it is well positioned as one of the companies which can
successfully offer services to these customers and achieve selection as a
preferred provider. Approximately 2.7% of the IT division's total revenue, are
derived from two United Kingdom customers. If these or other customers reduce
spending on IT services or exclude the Company from their vendor lists, then the
fiscal 1999 IT division revenues may experience a decrease if the revenue
associated with such customers cannot be replaced.
Another trend in the industry that may limit the Company's operating strategy
has been articulated by some industry analysts. These industry analysts have
speculated that non Year 2000 related IT spending may be negatively effected in
the third and fourth quarter of fiscal 1999. This theory speculates, among other
things, that customers will focus their efforts in the third and fourth quarters
of fiscal 1999 on testing and implementing legacy systems which have undergone
Year 2000 remediation. The theory further speculates that this focus will result
in a curtailment of spending on such IT services as ERP implementation and
custom software development during 1999. As the Company's modis Solutions unit
provides ERP implementation and custom software development services, if
spending is curtailed , the Company may possibly experience some weakness in its
ERP practice.
The Company's Professional Services division consists of the accounting, legal,
engineering / technical, career management and consulting and scientific units
which contributed 33.5%, 17.1%, 34.1%, 9.0% and 6.3%, respectively, of the
Professional Services division's revenues by group during 1998 as compared to
24.3%, 20.3%, 39.1% 9.6% and 6.7%, respectively, during 1997. The shift in the
Professional Services division's revenues towards the Accounting unit is
primarily the result of the acquisition of a large, international provider of
accounting services during June 1997. This resulted in approximately six months
of post acquisition revenue in fiscal 1997 results versus twelve months during
fiscal 1998. Included in the 1998 revenues of the Professional Services division
are revenues derived from a project in the Company's Legal unit and with a
certain customer. The revenues from this project amounted to approximately $16.1
million, or 3.0% of the division's total revenue. This project is scheduled to
curtail significantly or be completed during the early part of fiscal 1999, and
there is no guarantee that a replacement for that source of revenue will be
found. Projects of this nature occur from time to time within the Professional
Services division. However, management believes it is well positioned to
increase revenue through its existing sales force and makes a concerted effort
to redeploy consultants after such projects end if possible.
During 1999, the Company created and filled the position of President and COO of
the Professional Services division. This position will be responsible for the
operations of all business units of the Professional Services division. The
Company believes this position will create inertia to improve the platform for
better operational results throughout the entire professional services division.
Gross Profit. Gross profit increased $139.1 million, or 42.3%, to $467.6 million
in fiscal 1998 from $328.5 million in fiscal 1997. Gross margin decreased to
27.5% in fiscal 1998 from 28.2% in fiscal 1997. The gross margin in the IT
division decreased from 26.8% to 25.9%. The overall decrease in the IT
division's gross margin was due to a number of factors, including: (1) the
increased percentage of the Information Technology division's revenues generated
by the U.K. operations, which generally contribute a lower gross margin
percentage; (2) in certain cases, the inability of the Company to time increases
in bill rates with increases in pay rates (3) higher benefits costs including
mathcing 401(k) plan and holiday and vacation pay; (4) inability to use more
salaried versus hourly consultants; and (5) the overall decrease in gross margin
percentages in the information technology services industry as a whole. This
industry decrease may be attributed to the aforementioned trend by large users
of IT services toward scaled back preferred vendor lists. The aim of such vendor
list reductions is to push greater services revenue through fewer providers with
the tradeoff being lower gross margin percentages to the providers. If in the
future a greater portion of the Company's revenues are generated through
preferred vendor contracts, it is possible that this may result in a decrease in
gross margin percentages, although gross margin dollars may increase. The
decrease in gross margin percentages in the information technology services
industry may also be attributed to a continued shortage of skilled IT workers
worldwide. The current shortage of skilled IT workers creates an upward pressure
on pay rates for such workers. If the Company must continue to pay higher wages
to attract and retain skilled workers and is not able to completely pass this
increase through to its customers, this may result in somewhat depressed gross
margin percentages. The gross margin in the Professional Services division
decreased to 30.8% in fiscal 1998 from 31.1% in fiscal 1997. The overall
decrease in the Professional Services gross margin was due primarily to an
increased percentage of revenues from the United Kingdom, increased salary
pressures due to a continued shortage of skilled workers, higher benefits costs
including a matching 401(k) plan and holiday and vacation pay, and increased
competition within the segment including downward pricing pressure from
competitors.
Operating Expenses. Operating expenses increased $124.7 million, or 58.9%, to
$336.4 million in fiscal 1998 from $211.7 million in fiscal 1997. Included in
operating expenses in fiscal 1998 are $34.8 million in restructuring and
impairment charges associated with the Company's Integration and Strategic
Repositioning Plan (the 'Restructuring Plan'). Operating expenses before these
non-recurring costs as a percentage of revenue decreased to 17.7% in fiscal
1998, from 18.2% in fiscal 1997. The decrease was due to the Company's ability
to spread its expenses over a larger revenue base. The Company's general and
administrative ("G&A") expenses before the non-recurring charges increased $75.3
million or 39.8% to $264.6 million in fiscal 1998 from $189.3 million in fiscal
1997. The increase in G&A expenses was primarily related to: the effects of
acquisitions made by the Company, internal growth of the operating companies
post-acquisition, investments made to improve infrastructure and to develop
technical practices and increased expenses at the corporate level to support the
growth of the Company including sales, marketing and brand recognition. Included
in G&A expenses during both 1998 and 1997 are the costs associated with projects
underway to ensure accurate date recognition and data processing with respect to
the Year 2000 as it relates to the Company's business, operations, customers and
vendors. These costs have been immaterial to date and are not expected to have a
material impact on the Company's results of operations, financial condition or
liquidity in the future. See 'OTHER MATTERS - Year 2000 Compliance' below.
Restructuring and impairment charge. In December 1998, the Company's Board of
Directors approved a restructuring plan to strengthen overall profitability of
the Company by implementing a back office integration program and branch
repositioning plan in an effort to consolidate or close branches whose financial
performance does not meet the Company's expectations. The Company recorded a
restructuring and impairment charge of $34.8 million in relation to the
Restructuring Plan. The restructuring component of the $34.8 million charge is
based, in part, on the evaluation of objective evidence of probable obligations
to be incurred by the Company or of specifically identified assets.
The Company, formerly AccuStaff Incorporated, was formed in 1992 and grew over
the next 6 1/2 years through both acquisitions and internal growth. Prior to the
disposition of the Commercial operations and the Teleservices and Health Care
divisions in 1998, the Company was largely organized and structured from an
administrative, operations and systems capabilities standpoint as a commercial
staffing business. The Restructuring Plan focuses on meeting the needs of an
information technology and professional services company and is designed to
result in a back office environment tailored to serve these businesses. Upon
completion of the Restructuring Plan, certain back office operations will be
centralized at the Company's headquarters and possibly one additional location,
and certain positions which were necessary under the previous organizational and
operational structure will be eliminated.
The Restructuring Plan calls for the consolidation or closing of 23 Professional
Services division branches, certain organizational improvements and the
consolidation of 15 back office operations. This restructuring, which will
result in the elimination of approximately 290 positions, will be completed over
a 12- to 18-month period. The reduction in annualized revenue and operating
losses from the consolidation or closing of the 23 Professional Services
branches is estimated to be $12.0 million and $4.9 million, respectively. In
addition, the Company estimates an annual operating cost reduction of $10.1
million as a result of the consolidation of the back office operations. The
Company expects to begin to realize the benefits of the cost reductions in the
third quarter of 1999 and realize the majority of the annualized benefits in
fiscal 2000.
The major components of the restructuring and impairment plan include:(1) costs
to recognize severance and related benefits for the approximately 290 employees
to be terminated of $7.5 million. The severance and related benefit accruals are
based on the Company's severance plan and other contractual termination
provisions. These accruals include amounts to be paid to employees upon
termination of employment. Prior to December 31, 1998, management had approved
and committed the Company to a plan that involved the involuntary termination of
certain employees. The benefit arrangements associated with this plan were
communicated to all employees in December 1998. The plan specifically identified
the number of employees to be terminated and their job classifications, (2)
costs to write down certain furniture, fixtures and computer equipment to net
realizable value at branches not performing up to the Company's expectations of
$2.5 million,(3) costs to write down goodwill associated with the acquisition of
Legal Information Technology, Inc. which was acquired in January, 1996,
calculated in accordance with SFAS 121 as described in Note 2 to the
Consolidated Financial Statements, Summary of Significant Accounting Policies -
Goodwill of $9.9 million, (4) costs to terminate leases and other exit and
shutdown costs associated with the consolidated or closed branches and
back-office operations, including closing the facilities of $8.0 million, and
(5) costs to adjust accounts receivable due to the expected increase in bad
debts which results directly from the termination of employees which causes a
change in client relationships which results when severed branch and back-office
administrative employees, who have the knowledge to effectively pursue
collections are terminated of $6.8 million. These costs were based upon
management's best estimates based upon available information.
Since payments pursuant to the Restructuring Plan will not commence until fiscal
1999, there were no charges recognized by the Company against the restructuring
reserve as of December 31, 1998, at which time the total restructuring reserve
amount of $24.8 million (which does not include the $9.9 million goodwill
impairment charge which was recorded against goodwill in the fouth quarter of
fiscal 1999) was included in accounts payable and accrued liabilities Since
payments pursuant to the Restructuring Plan will not commence until fiscal 1999.
Income from Operations. Income from operations increased $14.4 million, or
12.3%, to $131.2 million in fiscal 1998 from $116.8 million in fiscal 1997.
Income from operations before non-recurring integration and impairment charges
increased $49.2 million, or 42.1%, to $166.0 million in fiscal 1998 from $116.8
million in fiscal 1997. Income from operations before non-recurring integration
and impairment costs as a percentage of revenue decreased to 9.7% in fiscal 1998
from 10.0% in fiscal 1997.
Other Income (Expense). Interest expense increased $9.1 million, or 56.9%, to
$25.1 million in fiscal 1998 from $16.0 million in fiscal 1997. The increase in
interest expense resulted from the utilization of the Company's credit facility.
The increase in interest expense was partially offset by interest and other
income of $11.1 from primarily four sources: (1) the sale of the Company's
Commercial and teleservices divisions and the resultant net cash proceeds of
approximately $373.0 million (net of $477.0 million used to pay off and
terminate the Company's then existing credit facility) which earned interest
income from October 1, 1998 through December 31, 1998; (2) the resulting
interest expense savings from October 1, 1998 through December 31, 1998 from
paying off the existing credit facility (the new facility did not have a balance
as of December 31, 1998); (3) investment income from certain investments owned
by the Company; and (4) interest income earned from cash on hand at certain
subsidiaries of the Company.
Income Taxes. The Company's effective tax rate was 41.2% in fiscal 1998 compared
to 38.0% in fiscal 1997. The increase in the effective tax rate was due to the
increase in taxable income which resulted from the recording of approximately
$9.9 million in non-deductible goodwill impairment charges (included in the
restructuring and impairment charge discussed above and in Note 12 to the
Consolidated Financial Statements included elsewhere herein) during fiscal 1998.
Absent these impairment charges, the Company's effective tax rate would have
remained constant at 38.0% for fiscal 1998 compared to fiscal 1997. Due to the
increase in certain non-deductible expense items, the majority of which is
non-deductible goodwill amortization resulting from tax-free mergers accounted
for under the purchase method of accounting, the Company's effective tax rate
will increase in fiscal 1999.
Income from continuing operations. As a result of the foregoing, income from
continuing operations increased $5.5 million, or 8.7%, to $68.9 million in 1998
from $63.4 million in fiscal 1997. Income from continuing operations as a
percentage of revenue decreased to 4.0% in fiscal 1998 from 5.4% in fiscal 1997,
due primarily to the decrease in income attributable to the recording of the
integration and impairment charge, and the increase in the effective income tax
rate due to the non-deductible goodwill impairment charge. Exclusive of these
non-recurring costs, income from continuing operations during 1998 would have
increased $30.7 million to $94.1 million, increasing income from continuing
operations as a percentage of revenue to 5.5%.
Results from discontinued operations
Income from discontinued operations, after income taxes, totaled $30.0 million
for fiscal 1998, a decrease of 22.5%, compared to $38.7 million for fiscal 1997.
Reported revenues from discontinued operations were $919.4 million for fiscal
1998 versus $1,260.7 million for fiscal 1997. Operating income for the
discontinued operations was $54.3 million for fiscal 1998 versus $69.8 million
during fiscal 1997. Results of discontinued operations include allocations of
consolidated interest expense totaling $4.2 million and $4.4 million for fiscal
1998 and 1997, respectively. The allocations were based on the historic funding
needs of the discontinued operations, including: the purchases of property,
plant and equipment, acquisitions, current income tax liabilities and
fluctuating working capital needs. Due to the sale of the Commercial operations
and Teleservices division on September 27, 1998, and the sale of the Health Care
division on March 30, 1998, fiscal 1998 operations include operations for only
nine months of the Commercial operations and Teleservices division and only
three months of the Health Care division, compared to twelve months in 1997.
Extraordinary item
During the fourth quarter of fiscal 1998, the Company recognized an
extraordinary after-tax charge of $5.6 million as a result of the Company's
early retirement of $16.5 million of 7% Convertible Senior Notes Due 2002, which
could have been converted into 1,449,780 shares of the Company's Common Stock,
and the termination of the Company's existing credit facility immediately
subsequent to the sale of the Company's Commercial operations and Teleservices
division. The Company paid a premium of $7.1 million on the early extinguishment
of the Senior Convertible Notes and wrote off $0.37 million of related
unamortized debt issuance costs. Additionally, the Company wrote off $1.6
million of unamortized debt financing costs related to the termination of the
credit facility. See Note 4 to the Consolidated Financial Statements for further
information on these transactions.
FISCAL 1997 COMPARED TO FISCAL 1996
Results from continuing operations
Revenue. Revenue increased $584.1 million, or 100.7%, to $1,164.1 million in
fiscal 1997 from $580.0 million in fiscal 1996. The increase was attributable by
division to: Information Technology, $380.2 million or an increase of 95.0% and
Professional Services, $203.9 million or an increase of 113.5%. The increases in
the Information Technology and Professional Services divisions were due to both
internal growth and, more significantly, to the revenues of acquired companies.
The revenue for the Company's Information Technology division is obtained
through the modis Solutions and modis Consulting business units. modis Solutions
provided approximately 17.6% and 18.4% of the division's revenue for the years
ended 1997 and 1996 as compared to 82.4% and 81.6% which was provided by the
division's modis Consulting unit during the same respective periods. The
Company's Professional Services division consists of the accounting, legal,
engineering/technical, career management and consulting and scientific groups
which contributed 24.3%, 20.3%, 39.1%, 9.6% and 6.7%, respectively, of the
Professional Services division's revenues by group during 1997 as compared to
8.8%, 15.1%, 74.0%, 0.0% and 2.1%, respectively, during 1996. The mix shift
among the units within the Professioanl Services division was primarily due to
the timing of acquisitions during fiscal 1996 and 1997.
Gross Profit. Gross profit increased $175.3 million, or 114.4%, to $328.5
million in fiscal 1997 from $153.2 million in fiscal 1996. Gross margin
increased to 28.2% in fiscal 1997 from 26.4% in fiscal 1996. The gross margin in
the IT division remained relatively constant in 1997 at 26.8% compared with
26.9% in fiscal 1996. The gross margin in the Professional division increased to
31.1% in fiscal 1997 compared to 25.2% in fiscal 1996. The increase in the
Professional Services division's gross margin was due primarily to the
substantial increase in revenue contribution by the divisions higher margin
accounting, legal and career management and consulting units.
Operating Expenses. Operating expenses increased $89.8 million, or 73.6%, to
$211.7 million in fiscal 1997 from $122.0 million in fiscal 1996. Included in
operating expenses in fiscal 1996 is $14.4 million in merger related expenses
associated with the merger of the Company with Career Horizons, Inc. Operating
expenses before merger related costs as a percentage of revenue decreased to
18.2% in fiscal 1997, from 18.5% in fiscal 1996. The decrease was due to the
Company's ability to spread its expenses over a larger revenue base. The
Company's G&A expenses increased $92.1 million or 94.8% to $189.3 million in
fiscal 1997 from $97.2 million in fiscal 1996. The increase in G&A expenses was
primarily related to: the effects of acquisitions made by the Company, internal
growth of the operating companies post-acquisition, investments made to improve
infrastructure and to develop technical practices and higher expenses at the
corporate level to support the growth of the Company. Included in G&A expenses
during 1997 are the costs associated with projects underway to ensure accurate
date recognition and data processing with respect to the Year 2000 as it relates
to the Company's business, operations, customers and vendors. These costs have
been immaterial to date and are not expected to have a material impact on the
Company's results of operations, financial condition or liquidity in the future.
See 'OTHER MATTERS - Year 2000 Compliance' below.
Income from Operations. As a result of the foregoing, income from operations
increased $85.5 million, or 273.8%, to $116.8 million in fiscal 1997 from $31.2
million in fiscal 1996. Income from operations before non-recurring merger
related costs increased $71.1 million, or 155.6%, to $116.8 million in fiscal
1997 from $45.7 million in fiscal 1996. Income from operations before
non-recurring merger related costs as a percentage of revenue increased to 10.0%
in fiscal 1997 from 7.9% in fiscal 1996.
Interest Expense. Interest expense increased $9.2 million, or 135.3%, to $16.0
million in fiscal 1997 from $6.8 million in fiscal 1996. The increase in
interest expense resulted from use of the Company's credit facility. The
borrowings from the Company's credit facility were primarily used for the
purchases of businesses.
Income Taxes. The Company's effective tax rate was 38.0% in fiscal 1997 compared
to 56.7%, including the effect of the pro forma tax provision, in fiscal 1996.
The decrease in the effective tax rate was due to the higher level of taxable
income in 1996 as a result of the non-deductible, non-recurring merger related
costs in connection with the acquisitions of The McKinley Group, Inc., HJM
Consulting, Inc. and Career Horizons, Inc. during 1996.
Income from continuing operations. As a result of the foregoing, income from
continuing operations increased $54.8 million, or 637.2%, to $63.4 million in
1997 from $8.6 million in fiscal 1996. Income from continuing operations as a
percentage of revenue increased to 5.4% in fiscal 1997 from 1.5% in fiscal 1996,
due primarily to the reduction of merger related costs during 1997 and the
acquisition of cash-basis S-corporations accounted for under the pooling of
interests method of accounting, which required a one-time increase to the
current period income tax provision during 1996. Exclusive of these costs,
income from continuing operations during 1996 would have increased $10.8 million
to $19.4 million, increasing pro forma net income as a percentage of revenue to
3.3%.
Results from discontinued operations
Income from discontinued operations, after income taxes, increased $16.1
million, or 71.2%, to $38.7 million for fiscal 1997 versus $22.6 million for
fiscal 1996. Reported revenues from discontinued operations were $1,260.7
million for fiscal 1997 versus $1,031.4 million for fiscal 1996. Operating
income for the discontinued operations was $69.8 million for fiscal 1997 versus
$42.1 million during fiscal 1996. Results of discontinued operations include
allocations of consolidated interest expense totaling $4.4 million and $0.4
million for fiscal 1997 and 1996, respectively. The allocations were based on
the historic funding needs of the discontinued operations, including: the
purchases of property, plant and equipment, acquisitions, current income tax
liabilities and fluctuating working capital needs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have principally related to the acquisition
of businesses, working capital needs and capital expenditures. These
requirements have been met through a combination of bank debt, issuances of
Common Stock and internally generated funds. The Company's operating cash flows
and working capital requirements are affected significantly by the timing of
payroll and by the receipt of payment from the customer. Generally, the Company
pays its Information Technology and Professional Services consultants
semi-monthly, and receives payments from customers within 30 to 80 days from the
date of invoice.
Exclusive of the net assets of discontinued operations, the Company had working
capital of $16.1 million and $115.3 million as of December 31, 1998 and 1997,
respectively. Included in current liabilities during fiscal 1998 and 1997 were
amounts related to earn-out payments due to the former owners of acquired
companies. These amounts were paid in the first quarter of fiscal 1999 and 1998,
respectively, and capitalized to the goodwill balances related to the respective
acquired companies. The Company had cash and cash equivalents of $105.8 million
and $23.9 million as of December 31, 1998 and 1997, respectively. The principal
reason for the decrease in the Company's working capital is that the Company has
recognized a $175.0 million current tax liability as of December 31, 1998
relating to the sale of its Commercial operations and Teleservices division. The
majority of the proceeds from the sale have been used to pay down long-term debt
under its credit facility (which did not have a balance as of December 31, 1998)
and to repurchase the Company's Common Stock. For the year ended December 31,
1998, the Company generated $88.9 million of cash flow from operations. For the
year ended December 31, 1997, the Company generated $39.0 million of cash flow
from operations. For the year ended December 31, 1996, the Company generated
$6.0 million of cash flow from operations. The large increase in cash flows from
operations during fiscal 1998 versus fiscal 1997 is mainly due to the cash flow
provided from acquired companies. The majority of the Company's acquisitions
occurred throughout the year ended December 31, 1997. Due to the timing of the
acquisitions, the cash flow from operations has increased substantially through
the year ended December 31, 1998.
For the year ended December 31, 1998, the Company generated $645.0 million of
cash flow from investing activities, as a result of net proceeds received in the
year ended December 31, 1998 from the Company's sale of its Commercial
operations and Teleservices division, of $840.9 million. The balance of $195.9
million relates to cash the Company used for acquisitions of $157.1 million, for
capital expenditures of $22.9 million, and advances related to the sale of its
Healthcare division of $15.9 million.
The Company will make payments of approximately $38.0 million in the first
quarter of 1999 related to the net worth adjustment and certain transaction
expenses associated with the sale of its Commercial operations and Teleservices
division. In addition, during the first quarter of fiscal 1999, the Company will
make tax payments of approximately $175.0 million related to the gain on the
sale of these businesses. In addition, the Company is subject to claims for
indemnification arising from the sales of its Commercial operations and
Teleservices division and its Health Care division in 1998. For the year ended
December 31, 1998, the Company did not pay any indemnification claims. Although
the Company has received certain claims for indemnification or notices of
possible claims pursuant to such obligations, the Company believes that it has
meritorious defenses against such claims and does not believe that such claims,
if successful, would have a material adverse effect on the Company's financial
condition or results of operations.
In connection with the Company's sale of its Health Care operations, the Company
entered into an agreement with the purchaser of the Health Care operations
whereby the Company agreed to make advances to the purchaser to fund its working
capital requirements. Any amounts extended are collateralized by the accounts
receivable and certain other assets of the related health care operations. Any
advances made under this agreement accrue interest at 10% per year. As of
December 31, 1998, the Company had advanced approximately $15.9 million under
this agreement.
For the years ended December 31, 1997 and 1996, the Company used $365.9 million
and $275.3 million, respectively, for investing activities, of which $357.8
million, and $306.0 million, respectively, were used for acquisitions and $8.1
million, and $7.3 million, respectively, were used for capital expenditures. The
Company made thirteen, twenty and thirty-one acquisitions in each of the years
ended December 31, 1998, 1997 and 1996, respectively.
For the year ended December 31, 1998, the Company used $658.6 million for
financing activities of which $309.7 million was used to repurchase the
Company's Common Stock, $349.5 million which represents net repayments on
borrowings from the Company's credit facility and notes issued in connection
with the acquisition of certain companies, $23.6 million related to the
repurchase of the Company's 7% Convertible Senior Notes Due 2002, and $24.2
million related to the proceeds from stock options exercised. The repayments
were mainly funded from the sale of the Company's Commercial operations and
Teleservices division.
On October 31, 1998, the Company's Board of Directors authorized the repurchase
of up to $200.0 million of the Company's Common Stock pursuant to a share
buyback program. On December 4, 1998, the Company's Board of Directors increased
the authorized share buyback program by an additional $110.0 million, bringing
the total authorized repurchase amount to $310.0 million. As of December 31,
1998, the Company had repurchased approximately 21,751,000 shares under the
share buyback program. Included in the shares repurchased as of December 31,
1998 were approximately 6,150,000 shares repurchased under an accelerated stock
acquisition plan ("ASAP"). The Company entered into the ASAP with a certain
brokerage firm which agreed to sell to the Company shares of its Common Stock at
a certain cost. The brokerage firm borrowed these shares from its customers and
was required to enter into market transactions, subject to Company approval, and
purchase shares of Company Common Stock to return to its customers. The Company,
pursuant to the ASAP, agreed to compensate the brokerage firm for any increases
in the Company's stock price that would cause the brokerage firm to pay an
amount to purchase the stock over the ASAP price. Conversely, the Company would
receive a refund in the purchase price if the Company's stock price fell below
the ASAP price. Subsequent to December 31, 1998, the Company used refunded
proceeds from the ASAP to complete the program during January and February 1999,
with the repurchase of approximately 597,000 shares, bringing the total shares
repurchased under the program to approximately 22,348,000 shares. All of these
shares were retired upon purchase.
For the years ended December 31, 1997 and 1996, the Company generated $335.8
million and $405.1 million, respectively, of cash flow from financing
activities. During fiscal 1997, this amount primarily represented net borrowings
from the Company's credit facility, which were used primarily to fund
acquisitions. During fiscal 1996, the Company generated the majority of its cash
flows from financing activities through the public sale of Company Common Stock.
The Company is also obligated under various acquisition agreements to make
earn-out payments to former stockholders of acquired companies over the next
four years. The Company estimates that the amount of these payments will total
$82.6 million, $26.2 million, $10.1 million and $2.9 million annually, for the
next four years. Included in the balance sheet in line item "Accounts payable
and accrued expenses" is $65.2 million related to estimated earnout payments
that were determinable at December 31, 1998. The Company anticipates that the
cash generated by the operations of the acquired companies will provide a
substantial part of the capital required to fund these payments.
The Company anticipates that capital expenditures for furniture and equipment,
including improvements to its management information and operating systems
during the next twelve months will be approximately $15.0 million. The Company
anticipates recurring expenditures in future years to be approximately $10.0
million per year.
The Company believes that funds provided by operations, available borrowings
under the credit facility, and current amounts of cash will be sufficient to
meet its presently anticipated needs for working capital, capital expenditures
and acquisitions for at least the next 12 months.
Indebtedness of the Company
Prior to the sale of the Company's Commercial operations and Teleservices
division, the Company had a $500 million credit facility which was syndicated to
a group of 20 banks, with NationsBank, N.A. as principal agent. Immediately
subsequent to the sale of the Company's Commercial operations and Teleservices
division, that facility was completely repaid and terminated. In connection with
this termination, the Company wrote off unamortized debt issuance costs of $1.63
million.
On October 30, 1998, the Company entered into a new $500 million revolving
credit facility which is syndicated to a group of 13 banks with NationsBank,
N.A. as the principal agent. The facility expires on October 21, 2003.
Outstanding amounts under the credit facility will bear interest at certain
floating rates as specified by the credit facility. The credit facility contains
certain financial and non-financial covenants relating to the Company's
operations, including maintaining certain financial ratios. Repayment of the
credit facility is guaranteed by the material subsidiaries of the Company. In
addition, approval is required by the majority of the lenders when the cash
consideration of an individual acquisition exceeds 10% of consolidated
stockholders' equity of the Company.
As of March 19, 1999, the Company had a balance of approximately $150.0 million
outstanding under the credit facility. The Company also had outstanding letters
of credit in the amount of $7.8 million, reducing the amount of funds available
under the credit facility to approximately $342.2 million as of March 19, 1999.
On October 16, 1995, Career Horizons, Inc., issued $86.25 million of 7%
Convertible Senior Notes Due 2002 which were assumed by the Company pursuant to
the merger with Career Horizons, Inc. Interest on the Notes were paid
semiannually on May 1 and November 1 of each year. The Notes were convertible at
the option of the holder thereof, unless previously redeemed, into shares of
Common Stock of the Company at a conversion price of $11.35 per share. The Notes
were redeemable, in whole or in part, at the option of the Company, at any time
on or after November 1, 1998, at stated redemption prices, together with accrued
interest. The Company called the Notes on October 1, 1998, to be either redeemed
or converted as of November 1, 1998. Prior to November 1, 1998, $16.45 million
of Notes were redeemed by the Company, at a premium of $7.13 million, and $69.80
million were converted into shares of Common Stock of the Company. Additionally,
the Company wrote off unamortized debt issuance costs of approximately $.37
million associated with the redemption and increased paid-in-capital by $1.5
million for unamortized debt issuance costs associated with the conversion.
The Company has certain notes payable to shareholders of acquired companies
which bear interest at rates ranging from 5.0% to 8.0% and have repayment terms
from January 1999 to November 2004. As of December 31, 1998, the Company owed
approximately $31.5 million in such acquisition indebtedness.
INFLATION
The effects of inflation on the Company's operations were not significant during
the periods presented in the financial statements. Generally, throughout the
periods discussed above, the increases in revenue have resulted primarily from
higher volumes, rather than price increases.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1998, the American Institute of Certified Public Accountants' Executive
Committee issued Statement of Position Number 98-1 (SOP 98-1), "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use". SOP 98-1
is effective for fiscal years beginning after December 15, 1998. Management
believes that the Company is substantially in compliance with this pronouncement
and that the implementation of this pronouncement will not have a material
effect on the Company's consolidated financial position, results of operations
or cash flows. Implementation is planned for fiscal 1999.
During 1998, the American Institute of Certified Public Accountants' Executive
Committee issued Statement of Position Number 98-5 (SOP 98-5), "Reporting on the
Costs of Start-Up Activities". SOP 98-5 is effective for fiscal years beginning
after December 15, 1998. Management does not believe that its adoption will have
a material effect on the Company's consolidated financial position or results of
operations. Implementation is planned for fiscal 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and for Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at fair value. SFAS
No. 133 requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999, and cannot be applied retroactively. We
have not yet quantified the impacts of adopting SFAS No. 133 on our financial
statements; however, SFAS No. 133 could increase the volatility of reported
earnings and other comprehensive income once adopted.
OTHER MATTERS
Year 2000 Compliance
The following disclosure is a Year 2000 Readiness disclosure statement pursuant
to the Year 2000 Readiness and Disclosure Act.
During 1997 the Company began projects to address potential problems within the
Company's operations which could result from the century change in the Year
2000. In 1998, the Company created a Year 2000 Project Office to oversee Year
2000 related projects and to address potential problems within the Company's
operations, which could result from the century change in the Year 2000. The
Project Office reports to the Company's Board of Directors and is staffed
primarily with representatives of the Company's Information Systems Department,
and has access to key associates in all areas of the Company's operations. The
Project Office also uses outside consultants on an as-needed basis.
A four-phase approach has been utilized to address the Year 2000 issues: (1) an
inventory phase to identify all computer-based systems and applications
(including embedded systems) which might not be Year 2000 compliant; (2) an
assessment phase to determine what revisions or replacements would be necessary
to achieve Year 2000 compliance and identification of remediation priorities
which would best serve the Company's business interests; (3) a conversion phase
to implement the actions necessary to achieve compliance and to conduct the
tests necessary to verify that the systems are operational; and (4) an
implementation phase to transition the compliant systems into the everyday
operations of the Company. Management believes that the four phases are
approximately 100%, 100%, 75%, and 65% complete, respectively.
The Company's corporate accounting, payroll and human resources systems are
recent implementations (installed since June 1997) of mainstream computer
products from vendors such as PeopleSoft, Informix, Microsoft, Digital Equipment
Corporation and Compaq. The Company is near completion of Year 2000 required
upgrades for corporate hardware systems, operating systems, network systems,
database systems and applications systems. This project is in process, and on
schedule with an anticipated completion date of May 1999.
The Company operates approximately 264 branches, primarily in the U.S., Canada
and the United Kingdom. The branch network relies on a variety of front office
automation systems to provide sales support for resume tracking and client
contact management. Because of the diverse architectural nature of these systems
together with the relative ease with which backup/contingency procedures can be
implemented in the event of an individual branch system outage, the Company does
not believe that these systems pose a material Year 2000 risk. Nevertheless, the
Company has completed Inventory and Assessment phases for all branch locations.
In conjunction with other business related integration projects, the Company is
actively replacing noncompliant Year 2000 branch hardware and software with Year
2000 compliant products. The Company expects that this replacement process will
be complete in July 1999. To date, the Company has found that less than 10% of
branch workstations require hardware or software upgrades for Year 2000
purposes.
Milestones and implementation dates and the cost of the Company's Year 2000
readiness program are subject to change based on new circumstances that may
arise or new information becoming available, that may change underlying
assumptions or requirements. Further, there are no assurances that the Company
will identify all data handling problems in its business systems or that the
Company will be able to successfully remedy Year 2000 items that are discovered.
Non-IT systems have also been assessed and inventoried. Potential Year 2000
risks in these systems includes landlord-controlled systems, such as heating and
cooling systems, automated security systems, elevators, and office equipment,
phone systems, facsimile machines and copiers. The Company has requested
assessments of non-IT systems for Year 2000 compliance from landlords and office
equipment vendors. Based on these responses that the Company has received, the
Company believes that the Year 2000 risk of non-IT systems failure is not
material.
The Company has budgeted approximately $2.0 million to address the Year 2000
issues, which includes the estimated cost of the salaries of associates and the
fees of consultants addressing the issue. This cost represents approximately 10%
of the Company's total MIS budget. Approximately $1.3 has been incurred to date
for outside consultants, software and hardware applications, and dedicated
personnel. The Company does not separately track the internal costs incurred for
portions of the Year 2000 compliance project that are completed as a part of
other business related projects. Such costs are principally the related payroll
costs for the Company's information systems group. The Company believes that
cash flows from operations and funds available under the Company's credit
facility as well as cash on hand are sufficient to fund these costs.
As a part of the Year 2000 review, the Company is examining its relationships
with certain key outside vendors and others with whom it has significant
business relationships to determine to the extent practical the degree of such
parties' Year 2000 compliance and to develop strategies and alternatives for
working with them through the century change. Other than its banking
relationships, which include only large, federally insured institutions, and
utilities (electrical power, telecommunications, water and related items), the
Company does not have a relationship with any third-party which is material to
the operations of the Company and, therefore, believes that the failure of any
such party to be Year 2000 compliant would not have a material adverse effect on
the Company. However, banking or utility failures at the Company's branches or
with its customers could have a material effect on the Company's revenue sources
and could disrupt the payment cycle of certain of the Company's customers.
Should the Company or a third party with whom the Company deals have a systems
failure due to the century change, the Company does not expect any such effect
to be material. The Company is developing contingency plans for alternative
methods of transaction processing and estimates that such plans will be
finalized by August 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following assessment of the Company's market risks does not include
uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax and other credit risks.
Interest Rates. The Company's exposure to market risk for changes in interest
rates relates primarily to the Company's short-term and long-term debt
obligations and to the Company's investments.
The Company's investment portfolio consists of cash and cash equivalents
including deposits in banks, government securities, money market funds, and
short-term investments with maturities, when acquired, of 90 days or less. The
Company is adverse to principal loss and ensures the safety and preservation of
its invested funds by placing these funds with high credit quality issuers. The
Company constantly evaluates its invested funds to respond appropriately to a
reduction in the credit rating of any investment issuer or guarantor.
The Company's short-term and long-term debt obligations totaled $31.5 million as
of December 31, 1998 and the Company had $477.1 million available under its
current credit facility. The debt obligations consist of notes payable to former
shareholders of acquired corporations, are at a fixed rate of interest, and
extend through 2004. The interest rate risk on these obligations is thus
immaterial due to the dollar amount and fixed nature of these obligations. The
interest rate on the credit facility is variable, but there were no amounts
outstanding on the facility as of December 31, 1998.
Foreign currency exchange rates. Foreign currency exchange rate changes impact
translations of foreign denominated assets and liabilities into U.S. dollars and
future earnings and cash flows from transactions denominated in different
currencies. The Company generated approximately 19% of fiscal 1998 consolidated
revenues from international operations, 93% of which were from the United
Kingdom and 7% of which were from other countries. Thus, 93% of international
revenues were derived from the United Kingdom, whose currency has not fluctuated
materially against the United States dollar in fiscal 1998. Foreign exchange
translation gains and losses have been and are as of December 31, 1998
immaterial. The Company did not hold or enter into any foreign currency
derivative instruments as of December 31, 1998.
FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION
Effect of Fluctuations in the General Economy
Demand for the Company's information technology and professional business
services is significantly affected by the general level of economic activity in
the markets served by the Company. During periods of slowing economic activity,
companies may reduce the use of outside consultants and staff augmentation
services prior to undertaking layoffs of full-time employees. Also during such
periods, companies may elect to defer installation of new information technology
systems and platforms (such as Enterprise Resource Planning systems) or upgrades
to existing systems and platforms. Year 2000 remediation and testing for
existing information technology systems may have a similiar effect. As a result,
any significant economic downturn or Year 2000 impact could have a material
adverse effect on the Company's results of operations or financial condition.
The Company may also be adversely effected by consolidations through mergers and
otherwise of main customers or between major customers with non-customers. These
consolidations as well as corporate downsizings may result in redundant
functions or services and a resulting reduction in demand by such customers for
the Company's services. Also, spending for outsourced business services may be
put on hold until the consolidations are completed.
Competition
The Company's industry segments are intensely competitive and highly fragmented,
with few barriers to entry by potential competitors. The Company faces
significant competition in the markets that it serves and will face significant
competition in any geographic market that it may enter. In each market and
industry segment in which the Company operates, it competes for both clients and
qualified professionals with other firms offering similar services. Competition
creates an aggressive pricing environment and higher wage costs, which puts
pressure on gross margins.
Ability to Recruit and Retain Professional Employees
The Company depends on its ability to recruit and retain employees who possess
the skills, experience and/or professional certifications necessary to meet the
requirements of the Company's clients. Competition for individuals possessing
the requisite criteria is intense, particularly in certain specialized IT and
professional skill areas. The Company often competes with its own clients in
attracting and retaining qualified personnel. There can be no assurance that
qualified personnel will be available and recruited in sufficient numbers on
economic terms acceptable to the Company.
The continuing shortage of qualified IT consultants may adversely affect the
Company's ability to increase revenue. This shortage may be exacerbated by the
difficulties of utilizing the services of qualified foreign nationals working in
the United States under H-1B visas. The use of these consultants requires both
the Company and these foreign nationals to comply with United States immigration
laws.
Ability to Continue Acquisition Strategy; Ability to Integrate Acquired
Operations
The Company has experienced significant growth in the past through acquisitions.
Although the Company continues to seek acquisition opportunities, there can be
no assurance that the Company will be able to negotiate acquisitions on economic
terms acceptable to the Company or that the Company will be able to successfully
identify acquisition candidates and integrate all acquired operations into the
Company.
Possible Changes in Governmental Regulations
From time to time, legislation is proposed in the United States Congress, state
legislative bodies and by foreign governments that would have the effect of
requiring employers to provide the same or similar employee benefits to
consultants and other temporary personnel as those provided to full-time
employees. The enactment of such legislation would eliminate one of the key
economic reasons for outsourcing certain human resources and could significantly
adversely impact the Company's staff augmentation business. In addition, the
Company's costs could increase as a result of future laws or regulations that
address insurance, benefits or other employment-related matters. There can be no
assurance that the Company could successfully pass any such increased costs to
its clients.
Possible Year 2000 Exposure
The IT division performs both Year 2000 remediation services as well as system
upgrades and enhancements for clients. There is some possibility that customers
who experience system failures related to Year 2000 may institute actions
against their IT vendors, including the Company. There is no ability to quantify
the likelihood or merit of any such claims; but if a significant number of such
claims are asserted against the Company or if one or more customers assert
meritorious claims, such claims may result in material adverse effects on the
Company's results of operations and financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Consolidated Financial Statements: The following consolidated financial
statements are included in this Annual Report on Form 10-K:
Report of Independent Public Accountants
Covered by the Report of Independent Public Accountants:
Consolidated Balance Sheet at December 31, 1998 and 1997
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Stockholders' Equity at
December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
Report of Independent Accountants
To the Board of Directors and Stockholders of
Modis Professional Services, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity, and of cash flows
present fairly, in all material respects, the financial position of Modis
Professional Services, Inc. (formerly AccuStaff Incorporated) and its
Subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
March 26, 1999
Modis Professional Services Inc. and Subsidiaries
Consolidated Balance Sheets.
DECEMBER 31, DECEMBER 31,
(dollar amounts in thousands except per share amounts) 1998 1997
- - -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 105,816 $ 23,938
Accounts receivable, net of allowance of $13,007 and $8,945 327,185 230,934
Prepaid expenses 11,219 9,352
Deferred income taxes 16,858 731
Net assets of discontinued operations - 366,045
Other 28,460 -
----------------------------------
Total current assets 489,538 631,000
Furniture, equipment and leasehold improvements, net 37,577 27,367
Goodwill, net 1,025,240 726,931
Other assets, net 19,526 17,328
----------------------------------
Total assets $ 1,571,881 $ 1,402,626
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 15,988 $ 16,366
Accounts payable and accrued expenses 206,681 92,433
Accrued payroll and related taxes 60,844 37,647
Income taxes payable 189,887 3,192
----------------------------------
Total current liabilities 473,400 149,638
Convertible debt - 86,250
Notes payable, long-term portion 15,525 347,785
Deferred income taxes 12,846 6,111
----------------------------------
Total liabilities 501,771 589,784
----------------------------------
Commitments and contingencies (Notes 3,4 and 6)
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.01 par value; 400,000,000 shares authorized
96,306,323 and 103,692,098 shares issued and outstanding on
December 31, 1998 and December 31, 1997, respectively 963 1,037
Additional contributed capital 564,248 634,194
Retained earnings 504,899 181,068
Deferred stock compensation - (3,457)
----------------------------------
Total stockholders' equity 1,070,110 812,842
----------------------------------
Total liabilities and stockholders' equity $ 1,571,881 $ 1,402,626
==================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Modis Professional Services Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
------------------------------------------
(dollar amounts in thousands except per share amounts) 1998 1997 1996
- - - ----------------------------------------------------------------------------------------------------------------
Revenue $ 1,702,113 $ 1,164,124 $ 580,016
Cost of revenue 1,234,537 835,609 426,814
------------------------------------------
Gross Profit 467,576 328,515 153,202
------------------------------------------
Operating expenses:
General and administrative 264,551 189,271 97,209
Depreciation and amortization 37,105 22,456 10,303
Restructuring and impairment charges 34,759 - -
Merger related costs - - 14,446
------------------------------------------
Total operating expenses 336,415 211,727 121,958
------------------------------------------
Income from operations 131,161 116,788 31,244
------------------------------------------
Other income (expense):
Interest expense (25,065) (15,979) (6,825)
Interest income and other, net 11,090 1,364 3,851
-------------------------------------------
Other income (expense) (13,975) (14,615) (2,974)
Income from continuing operations before provision for income taxes 117,186 102,173 28,270
Provision for income taxes 48,326 38,803 19,693
------------------------------------------
Income from continuing operations 68,860 63,370 8,577
Discontinued operations (Note 16):
Income from discontinued operations (net of income
taxes of $17,522, $26,739 and $19,079, respectively) 30,020 38,663 22,633
Gain on sale of discontinued operations (net of income
taxes of $175,000) 230,561 - -
------------------------------------------
Income before extraordinary loss 329,441 102,033 31,210
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $3,512) (5,610) - -
------------------------------------------
Net income $ 323,831 $ 102,033 $ 31,210
==========================================
Basic income per common share from continuing operations $ 0.63 $ 0.62 $ 0.09
==========================================
Basic income per common share from discontinued operations $ 0.28 $ 0.38 $ 0.25
==========================================
Basic income per common share from gain on sale of
discontinued operations $ 2.12 $ - $ -
==========================================
Basic income per common share from extraordinary item $ (0.05) $ - $ -
==========================================
Basic net income per common share $ 2.98 $ 1.00 $ 0.34
==========================================
Average common shares outstanding, basic 108,518 101,914 90,582
==========================================
Diluted income per common share from continuing operations $ 0.61 $ 0.59 $ 0.09
==========================================
Diluted income per common share from discontinued operations $ 0.26 $ 0.34 $ 0.24
==========================================
Diluted income per common share from gain on sale of
discontinued operations $ 1.97 $ - $ -
==========================================
Diluted income per common share from extraordinary item $ (0.05) $ - $ -
==========================================
Diluted net income per common share $ 2.79 $ 0.93 $ 0.33
==========================================
Average common shares outstanding, diluted 116,882 113,109 95,317
==========================================
Unaudited pro forma data (Note 3):
Net income before provision for pro forma income taxes $ 31,210
Provision for pro forma income taxes (3,642)
--------------
Pro forma net income $ 34,852
==============
Pro forma basic income per common share from continuing
operations $ 0.13
==============
Pro forma basic income per common share from discontinued
operations $ 0.25
==============
Pro forma basic net income per common share from continuing operations $ 0.38
==============
Pro forma diluted income per common share from continuing
operations $ 0.13
==============
Pro forma diluted income per common share from discontinued
operations $ 0.24
==============
Pro forma diluted net income per common share $ 0.37
==============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Modis Professional Services Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Preferred Common Additional Deferred
(dollar amounts in thousands Stock Stock Contributed Retained Stock
except per share amounts) Shares Amount Shares Amount Capital Earnings Compensation Total
- - ----------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 - - 24,701,102 $ 247 $144,925 $ 49,992 $ (79) $ 195,085
3 for 1 stock split - - 49,402,203 494 (494) - - -
Sale of common stock - - 20,017,575 200 424,477 - - 424,677
Conversion of subordinated debentures - - 1,040,000 10 1,290 - - 1,300
Issuance of restricted stock - - 345,000 3 4,889 - (4,892) -
Exercise of stock options and related
tax benefit - - 2,726,412 27 17,013 - - 17,040
Vesting of restricted stock - - - - - - 537 537
Net income - - - - - 31,210 - 31,210
Issuance of stock related to business
combinations - - 994,521 11 2,086 1,214 - 3,311
Distribution to former shareholders of
acquired S-corporations - - - - - (3,381) - (3,381)
-----------------------------------------------------------------------------
Balance, December 31, 1996 - - 99,226,813 992 594,186 79,035 (4,434) 669,779
Conversion of subordinated debentures 727,272 7 993 1,000
Exercise of stock options and related
tax benefit - - 3,069,143 31 30,169 - - 30,200
Vesting of restricted stock - - - - - - 977 977
Net income - - - - - 102,033 - 102,033
Issuance of stock related to business
combinations - - 668,870 7 8,846 - - 8,853
-----------------------------------------------------------------------------
Balance, December 31, 1997 - - 103,692,098 1,037 634,194 181,068 (3,457) 812,842
Repurchase of Common Stock - - (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 27,453 - - 27,481
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
-----------------------------------------------------------------------------
Balance, December 31, 1998 - - 96,306,323 $ 963 $564,248 $504,899 $ - $1,070,110
===========================================================================
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) 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income from continuing operations $ 68,860 $ 63,370 $ 8,577
Adjustments to income from operations to net cash
provided by operating activities:
Restructuring and impairment charges 34,759 - -
Depreciation and amortization 37,105 22,456 10,303
Deferred income taxes (9,392) 3,800 1,221
Changes in assets and liabilities
Accounts receivable (55,712) (45,188) (34,761)
Prepaid expenses and other assets (9,072) 1,592 9,335
Accounts payable and accrued expenses 14,161 (8,151) 12,432
Accrued payroll and related taxes 10,007 3,701 (6,433)
Other, net (1,775) (2,623) 5,294
-----------------------------------------
Net cash provided by operating activities 88,941 38,957 5,968
-----------------------------------------
Cash flows from investing activities:
Proceeds from sale of net assets of discontinued
operations, net of costs 840,937 - -
Advances associated with sale of assets, net of
repayments (15,866) - -
Purchase of investments - - (10,438)
Investment in reverse repurchase agreements, net - - 48,449
Purchase of furniture, equipment and leasehold
improvements, net of disposals (22,873) (8,126) (7,345)
Purchase of businesses, including additional earnouts on
acquisitions, net of cash acquired (157,162) (357,776) (305,963)
-----------------------------------------
Net cash provided by (used in) investing activities 645,036 (365,902) (275,297)
-----------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering
expenses paid - - 424,677
Repurchases of common stock (309,735) - -
Repurchase of convertible debentures (23,581) - -
Proceeds from stock options exercised 24,235 23,130 6,977
Borrowings on indebtedness 302,500 446,583 92,800
Repayments on indebtedness (652,000) (133,853) (115,745)
Other, net - (100) (3,650)
-----------------------------------------
Net cash provided by (used in) provided by
financing activities (658,581) 335,760 405,059
Net increase in cash and cash equivalents -----------------------------------------
from continuing operations 75,396 8,815 135,730
Net cash provided by (used in) discontinued operations 6,482 (81,293) (77,038)
Cash and cash equivalents, beginning of year 23,938 96,416 37,724
-----------------------------------------
Cash and cash equivalents, end of year $ 105,816 $ 23,938 $ 96,416
=========================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Years Ended December 31,
(dollar amounts in thousands except for per share amounts) 1998 1997 1996
- - - ----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 26,528 $ 14,627 $ 8,049
Income taxes paid 40,440 24,323 8,308
COMPONENTS OF CASH USED IN DISCONTINUED OPERATIONS
Cash provided by (used in) operating activities 81,559 (2,413) 6,081
Cash used in investing activities (39,448) (94,323) (54,509)
Cash (used in) provided by financing activities (35,629) 15,443 (28,610)
-----------------------------------------
Net cash provided by (used in) discontinued operations 6,482 (81,293) (77,038)
=========================================
NON-CASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1996, the Company completed numerous acquisitions. In connection
with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired $ 383,008
Cash paid (306,958)
------------
Liabilities assumed $ 76,050
============
In fiscal 1996, Convertible Subordinated Debentures of $1,300 were converted by
the Company into 1,040,000 shares of common stock. Also, 345,000 shares of stock
were issued to the President and Chief Executive Officer pursuant to the terms
of a restricted stock grant.
During fiscal 1996, in connection with the acquisition of certain companies, the
Company issued 994,521 shares of common stock with a fair value of $3,311.
During fiscal 1997, the Company completed numerous acquisitions. In connection
with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired $ 393,474
Cash paid (280,148)
------------
Liabilities assumed $ 113,326
============
In fiscal 1997, Covertible Subordinated Debentures of $1,000 were converted by
the Company into 727,272 shares of common stock.
During fiscal 1997, in connection with the acquisition of certain companies, the
Company issued 668,870 shares of common stock with a fair value of $8,853.
During fiscal 1998, the Company completed numerous acquisitions. In connection
with the acquisitions, liabilities were assumed as follows:
Fair value of assets acquired $ 104,943
Cash paid (81,784)
------------
Liabilities assumed $ 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,
paid-in-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.
Modis Professional Services Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS:
Modis Professional Services, Inc. (formerly known as AccuStaff
Incorporated), including all subsidiaries unless the context requires otherwise,
(Modis, or the Company), is an international provider of business services,
including consulting, training and outsourcing services to businesses,
professional and service organizations and governmental agencies through a
branch office network of approximately 264 offices throughout the United States,
Canada, United Kingdom and continental Europe. The Company's ongoing business is
organized into two divisions: the Information Technology division and the
Professional Services division, which generated 68.4% and 31.6% of the Company's
fiscal 1998 revenue from continuing operations, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of 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 5 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. Costs associated with
the development of the Company's proprietary software package have been deferred
and are being amortized over a five-year period. Total depreciation and
amortization expense was $10,973, $4,871 and $3,055 for 1998, 1997 and 1996,
respectively. Accumulated depreciation and amortization of furniture, equipment
and leasehold improvements as of December 31, 1998 and 1997 was $40,432 and
$29,459, 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.
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 (representing the carrying amount of the goodwill that exceeds the
undiscounted expected future cash flows) would be recorded as a period expense.
Accumulated amortization was $51,846 and $25,714 as of December 31, 1998 and
1997, respectively. See Note 12 to the Consolidated Financial Statements for
discussion of goodwill impairment charge.
Revenue Recognition
The Company recognizes as revenue, at the time the professional services
are provided, the amounts billed to clients. In all such 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 the cost of services.
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.
Foreign currency translation gains and losses during fiscal 1998 and 1997 were
not material and have not been segregated in the Company's Statement of
Stockholders' Equity.
Stock Based Compensation
During 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which encourages all
companies to recognize compensation expense based on the fair value, at grant
date, of instruments issued pursuant to stock-based compensation plans. SFAS No.
123 requires the fair value of the instruments granted, which is measured
pursuant to the provisions of the statement, to be recognized as compensation
expense over the vesting period of the instrument. However, the statement also
allows companies to continue to measure compensation costs for these instruments
using the method of accounting prescribed by Accounting Principles Board Opinion
No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees." Companies
electing to account for stock-based compensation plans pursuant to the
provisions of APB No. 25 must make pro forma disclosures of net income as if the
fair value method defined in SFAS No. 123 had been applied. The Company has
elected to account for stock options under the provisions of APB No. 25 and has
included the disclosures required by SFAS No. 123 in Note 9 to the Consolidated
Financial Statements.
Income Taxes
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, Accounting for Income Taxes.
Under this method, deferred tax liabilities and assets 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.
Net Income Per Common Share
Basic and diluted net income per common share are presented in accordance
with SFAS No. 128, Earnings per Share. Basic net income per common share is
computed by dividing net income by the weighted average number of shares
outstanding. Diluted net income per common share includes the dilutive effect of
convertible debentures and stock options.
Comprehensive Income
During 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which requires that changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. This statement is effective for the Company's 1998 fiscal year.
Management does not believe that the Company has material other comprehensive
income that would require separate disclosure.
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 1996 and 1997 to conform to the
1998 presentation.
Recent Accounting Pronouncements
During 1998, the American Institute of Certified Public Accountants'
Executive Committee issued Statement of Position Number 98-1 (SOP 98-1),
"Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use". SOP 98-1 is effective for fiscal years beginning after December 15, 1998.
Management believes that the Company is substantially in compliance with this
pronouncement and that the implementation of this pronouncement will not have a
material effect on the Company's consolidated financial position, results of
operations or cash flows. Implementation is planned for fiscal 1999.
During 1998, the American Institute of Certified Public Accountants'
Executive Committee issued Statement of Position Number 98-5 (SOP 98-5),
"Reporting on the Costs of Start-Up Activities". SOP 98-5 is effective for
fiscal years beginning after December 15, 1998. Management does not believe that
its adoption will have a material effect on the Company's consolidated financial
position or results of operations. Implementation is planned for fiscal 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and for Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at fair value. SFAS
No. 133 requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999, and cannot be applied retroactively. We
have not yet quantified the impacts of adopting SFAS No. 133 on our financial
statements; however, SFAS No. 133 could increase the volatility of reported
earnings and other comprehensive income once adopted.
Unaudited Pro Forma Data
The McKinley Group, Inc. (McKinley) and HJM Consulting, Inc. (HJM), prior
to their acquisition by the Company, had elected to be treated as S Corporations
for federal and state income tax purposes. As such, the taxable income of each
company was reported to and subject to tax to its respective shareholders. The
unaudited pro forma data on the 1996 consolidated statement of income provides
approximate federal and state income taxes (by applying statutory income tax
rates) that would have been incurred if McKinley and HJM had been subject to tax
as a C Corporation.
3. ACQUISITIONS
For the year ended December 31, 1998
The Company acquired the following companies which have been accounted for
under the purchase method of accounting: Technology Services Corporation,
Millard Consulting Services, Inc., Diversified Consulting, Inc., Avalon, Ltd.,
Cope Management, Ltd. and Lion Recruitment, Ltd., Accountants Express of San
Diego, Inc., Software Knowledge, Ltd., Resource Control and Management, Ltd. and
Software Knowledge Systems, Ltd. and Colvin Resources, Inc. The aggregate
purchase price of these acquisitions during 1998, was $93,642, comprised of
$81,784 in cash and $11,858 in notes payable to former shareholders.
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. These two acquisitions were
also accounted for under the purchase method of accounting. The Company has
allocated the purchase price according to the fair market value of the assets
acquired in the aforementioned acquisitions accounted for under the purchase
method of accounting. The excess of the purchase price over the fair value of
the tangible assets (goodwill) is being amortized on a straight line basis over
a period of 40 years, including any contingent consideration paid.
For the year ended December 31, 1997
The Company acquired the following companies which have been accounted for
under the purchase method of accounting: Executives Monitor, Inc., Manchester,
Inc., Consultants in Computer Software, Inc., Preferred Consulting, Inc., Legal
Information Technology, Inc., Lenco Computer Consulting, Inc., Computer Action,
Inc., AMPL Inc. d/b/a Parker & Lynch, Wasser, Inc., AMICUS Staffing, Inc.,
Custom Software Services, Inc., Accounting Principals, Inc., Keystone Consulting
Group, Inc., Badenoch & Clark Ltd., Computer Systems Development Co. of America,
Inc., Technical Software Solutions, Inc., Real-Time Consulting, Inc., IT Link,
Inc., and Hunterskil Howard, plc. The aggregate purchase price of these
acquisitions during 1997, was $307,971, comprised of $280,148 in cash, $19,413
in notes payable to former shareholders and $8,410 in the Company's common
stock. The Company has allocated the purchase price according to the fair market
value of the assets acquired in the aforementioned acquisitions accounted for
under the purchase method of accounting. The excess of the purchase price over
the fair value of the tangible assets (goodwill) is being amortized on a
straight line basis over period of 40 years, including any contingent
consideration paid.
In addition, the Company merged with Schwab Carrese and Associates, Inc.
which was accounted for under the pooling-of-interests method of accounting. The
Company acquired all of the stock of Schwab Carrese and Associates, Inc. in
exchange for 263,550 shares of the Company's common stock. Due to the immaterial
affect on prior periods, the Company's historical financial statements have not
been restated for this merger.
For the year ended December 31, 1996
The Company acquired the following companies which have been accounted for
under the purchase method of accounting: Tekna, Inc., Goldfarb-Wasson
Associates, Inc. d/b/a/ GW Consulting, and an affiliated company, Programming
Enterprises, Inc. d/b/a Mini-Systems Associates, Zeitech, Inc., Career
Enhancement International, Inc., Additional Technical Support, Inc. and
affiliated companies, HNS Software, Inc., American Computer Professionals, Inc.,
Project Professionals, Inc., Logue & Rice, Inc. and affiliated companies,
Contact Recruiters, Inc. and an affiliated company, Openware Technologies, Inc.,
CAD Design, Inc., Alta Technical Services, Inc., In-House Counsel, Inc., TRAK
Services, Inc., Perspective Technology, Inc., Datacorp Business Systems, Inc.,
The Daedalian Group, Inc. d/b/a Berger & Co., North American Consulting
Services, Inc., TSG Professional Services, Inc., Contracted Services Group, Inc.
d/b/a The Blackstone Group, Scientific Staffing, Inc. and affiliated companies,
and Resource Solutions Group, Inc. The aggregate purchase price of these
acquisitions during 1996, was $336,958, comprised of $306,958 in cash, $28,000
in notes payable to former shareholders and $2,000 in the Company's common
stock. The Company has allocated the purchase price according to the fair market
value of the assets acquired in the aforementioned acquisitions accounted for
under the purchase method of accounting. The excess of the purchase price over
the fair value of the tangible assets (goodwill) is being amortized on a
straight line basis over periods ranging from 30 to 40 years, including any
contingent consideration paid for the purchase method acquisitions.
The Company completed three mergers during 1996, McKinley, Career and HJM,
which were accounted for under the pooling-of-interests method of accounting and
for which the 1996 financial statements have been restated. Additionally, the
Company merged with Staffware, Inc. and Legal Support Personnel, Inc. which were
accounted for under the pooling-of-interests method of accounting. The Company
acquired all of the stock of the these two companies in exchange for 926,486
shares of the Company's common stock. Due to the immaterial effect on prior
periods, the Company's historical financial statements have not been restated
for these two acquisitions.
Earn-out payments
In addition, the Company is obligated under various acquisition agreements
to make earn-out payments to former stockholders of aforementioned acquired
companies accounted for under the purchase method of accounting, over periods up
to four years upon attainment of certain earnings targets of the acquired
companies. The Company anticipates that the cash generated by the operations of
the acquired companies will provide a substantial part of the capital required
to fund these payments.
Unaudited pro forma results of operations
The unaudited pro forma consolidated results of operations listed below
include the effects of the purchases discussed above assuming the acquisitions
had occurred at the beginning of the year in which each company was acquired and
also at the beginning of the preceding year. Pro forma adjustments have been
made to give effect to amortization of goodwill, interest expense on additional
borrowings used to fund the acquisitions, and other adjustments, together with
income tax effects.
The results for fiscal 1996, include $14,446, $10,818 net of taxes, in
acquisition costs related to the mergers with McKinley, Career, and HJM. The
results for fiscal 1998 include $25,202, net of taxes, in restructuring and
impairment charges. These pro forma amounts are not necessarily indicative of
what actually would have occurred if the acquisitions had been in effect for the
entire periods presented. In addition, they are not intended to be projections
of future results and do not reflect any synergies that might be achieved from
combined operations.
Fiscal
-------------------------------------------
(unaudited) 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------
Revenue from continuing operations $ 1,829,318 $ 1,543,006 $ 1,127,786
Income from continuing operations 71,934 70,747 27,002
Income and gain on sale from discontinued operations 260,581 39,050 23,312
Net income $ 332,515 $ 109,797 $ 50,314
Diluted income per common share from continuing
operations $ 0.64 $ 0.66 $ 0.28
Diluted income per common share and gain on sale from
discontinued operations $ 2.23 $ 0.35 $ 0.24
Diluted net income per common share $ 2.87 $ 1.01 $ 0.52
4. NOTES PAYABLE
Notes payable at December 31, 1998 and 1997 consisted of the following:
Fiscal
---------------------------
1998 1997
- - - --------------------------------------------------------------------------------------------------------------
Credit facilities $ - $ 337,000
Notes payable to former shareholders of acquired companies (interest
ranging from 4.99% to 8.00% due through November 2004) 31,513 27,151
---------------------------
31,513 364,151
Current portion of notes payable 15,988 16,366
---------------------------
Long-term portion of notes payable $ 15,525 $ 347,785
===========================
Prior to the sale of the Company's Commercial operations and Teleservices
division, the Company had a $500 million credit facility which was syndicated to
a group of 20 banks with NationsBank, N.A. as the principal agent. This facility
was unsecured, but guaranteed by each of the Company's subsidiaries. Immediately
subsequent to the sale of the Company's Commercial and Teleservices divisions,
the existing facility was paid-off, and terminated. Repayment of the existing
facility totaled $477,000.
On October 30, 1998, the Company entered into a new $500 million revolving
credit facility which is syndicated to a group of 13 banks with NationsBank,
N.A. as the principal agent. The facility expires on October 21, 2003.
Outstanding amounts under the credit facility will bear interest at certain
floating rates as specified by the credit facility. The credit facility contains
certain financial and non-financial covenants relating to the Company's
operations, including maintaining certain financial ratios. Repayments of the
credit facility is guaranteed by the material subsidiaries of the Company. In
addition, approval is required by the majority of the lenders at such time that
the cash consideration of an individual acquisition exceeds 10% of consolidated
stockholders' equity of the Company. The Company incurred certain costs directly
related to securing the credit facility in the amount of approximately $788 .
These costs have been capitalized and are being amortized over the life of the
credit facility.
On October 16, 1995, Career Horizons, Inc., issued $86.25 million of 7%
Convertible Senior Notes Due 2002 which were assumed by the Company pursuant to
the merger with Career Horizons, Inc. Interest on the notes were paid
semiannually on May 1 and November 1 of each year. The Notes were convertible at
the option of the holder thereof, unless previously redeemed, into shares of
common stock of the Company at a conversion price of $11.35 per share. The Notes
were redeemable, in whole or in part, at the option of the Company, at any time
on or after November 1, 1998, at stated redemption prices, together with accrued
interest. The Company called the Notes on October 1, 1998, to be either redeemed
or converted as of November 1, 1998. Prior to November 1, 1998, $16.45 million
of Notes were redeemed by the Company at a premium of $7.13 million, and $69.8
million were converted into shares of common stock of the Company.
During the fourth quarter of 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.
Maturities of notes payable are as follows for the fiscal years subsequent
to December 31, 1998:
Fiscal year
- - - ------------------------------------
1999 $ 15,988
2000 7,546
2001 -
2002 -
2003 2,475
Thereafter 5,504
--------
$ 31,513
========
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Components of accounts payable and accrued expenses as of December 31, 1998 and
1997 are as follows:
December 31, December 31,
1998 1997
-------- ---------
Trade accounts payable 96,447 58,829
Accrued earn-out payments 65,161 33,604
Restructuring charge 24,823 -
Due to Randstad (1) 20,250 -
-------- --------
Total 206,681 92,433
======== ========
(1) The Due to Randstad represents the purchase price true-up adjustment
pursuant to the sale agreement which was paid in the first quarter of fiscal
1999.
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
- - -------------------------------------------------------------------------------------------------------
1999 $ 13,410
2000 11,828
2001 8,432
2002 6,083
2003 3,830
Thereafter 6,195
--------
$ 49,778
========
Total rent expense for fiscal 1998, 1997 and 1996 was $13,834, $10,175, and
$4,303 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, or results of its operations.
7. INCOME TAXES:
A comparative analysis of the provision for income taxes from continuing
operations is as follows:
Fiscal
------------------------------------
1998 1997 1996
- - - --------------------------------------------------------------
Current:
Federal $ 42,030 $ 30,210 $ 15,594
State 5,789 3,347 2,878
Foreign 6,257 1,446 -
------------------------------------
54,076 35,003 18,472
------------------------------------
Deferred:
Federal: (8,256) 2,991 948
State: (1,136) 361 273
Foreign: 3,642 448 -
------------------------------------
(5,750) 3,800 1,221
------------------------------------
$ 48,326 $ 38,803 $ 19,693
====================================
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
--------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- - - -----------------------------------------------------------------------------------------------------------------------
Tax computed using the federal statutory rate $ 41,015 35.0% $ 35,761 35.0% $ 9,895 35.0%
State income taxes, net of federal income tax effect 3,024 2.6 2,699 2.6 1,305 4.6
Pre-acquisition earnings of acquired S corporations - - - - (1,081) (3.8)
Acquired subsidiaries change from cash to accrual basis - - - - 4,723 16.7
Non-deductible merger related costs - - - - 4,081 14.4
Non-deductible goodwill impairment charge 3,825 3.2 - - - -
Permanent differences and other 462 0.4 343 0.4 770 2.8
--------------------------------------------------------------
$ 48,326 41.2% $ 38,803 38.0% $ 19,693 69.7%
==============================================================
The components of the deferred tax assets and liabilities recorded in the
accompanying consolidated balance sheets are as follows:
Fiscal
---------------------------
1998 1997
- - - ----------------------------------------------------------------------------------------------------------------
Gross deferred tax assets:
Self-insurance reserves $ 2,954 $ 376
Allowance for doubtful accounts receivable 4,097 897
Purchase accounting adjustments 2,887 2,910
Amortization of computer software costs - 135
Depreciation and amortization of furniture, equipment and leasehold improvements - 1,043
Restructuring and impairment charge 10,243 -
Other 2,207 1,872
---------------------------
Total gross deferred tax assets 22,388 7,233
---------------------------
Gross deferred tax liabilities:
Amortization of goodwill (15,399) (10,202)
Acquired subsidiaries change from cash to accrual basis (2,423) (2,411)
Depreciation and amortization of furniture, equipment and leasehold improvements (237) -
Other (317) -
---------------------------
Total gross deferred tax liabilities (18,376) (12,613)
---------------------------
Net deferred tax asset (liability) $ 4,012 $ (5,380)
===========================
Management has determined, based on the history of prior taxable earnings and
its expectations for the future, taxable income will more likely than not be
sufficient to fully realize deferred tax assets and, accordingly, has not
reduced deferred tax assets by a valuation allowance.
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 contributions of
approximately $6,060, net of forfeitures, to the profit sharing plan for fiscal
1998. No matching contributions were made by the Company to the profit sharing
plan in fiscal 1997 or 1996. 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
discretionay 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. Effective
January 1, 1998, a significant number of the profit sharing plans were merged
and amended to become contributory plans. 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.
Prior to the Company's sale of its Commercial operations and Teleservices
division, as discussed in Note 16 to the Consolidated Financial Statements, the
Company had two 401(k) plans: the aforementioned plan covering professional and
IT employees, and one covering non-highly compensated (as defined by IRS
regulations) full time commercial employees over age twenty-one with at least
one year of employment and 1,000 hours of service (the 'commercial plan'). In
connection with the sale, the Company transferred sponsorship of the commercial
plan to Randstad U.S., L.P. The effective date of the transfer was September 27,
1998. Company contributions relating to the commercial plan prior to the
Company's sale of its commercial businesses are included in Income from
Discontinued Operations, as disclosed in Note 16 to the Consolidated Financial
Statements.
9. STOCKHOLDERS' EQUITY
Public Offerings of Common Stock
In April 1996, the Company completed an offering for the sale of 11,790,000
shares of common stock. The Company received $304,900 from the sale of the
shares, net of underwriting discount and expenses associated with the offering.
The net proceeds were used to repay all outstanding indebtedness under the
Company's credit facility, which was approximately $92,800. The remaining
proceeds have been used primarily to fund acquisitions.
The Company's subsidiary, Career Horizons, Inc., prior to the date of the
merger with the Company, completed offerings in which Career issued 8,227,575
shares of common stock, adjusted for the conversion to the Company's shares of
common stock, in which Career received $119,777, net of underwriting discounts
and expenses associated with the offerings. Career used a portion of the
proceeds from its initial offering to repay subordinated notes.
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.
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 market 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.
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, 1997 and 1996, the 1995
Plan was amended to provide for the granting of an additional 8,000,000,
3,000,000 and 6,000,000 shares, respectively. During fiscal 1998, the 1995 Plan
was amended to, among other things, 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.
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
respective acquisitions, the assumed plans had 2,566,252 options outstanding. As
of December 31, 1998 and 1997 the assumed plans had 340,719 and 372,445 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 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 market 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 canceled. In fiscal 1997 and 1996, the Company
granted 120,000 and 80,000 options, respectively, at an average exercise price
of $28.35 and $25.31, respectively. During 1997, the Director plan was amended
to increase the number of shares available under the plan to 1.6 million shares.
In fiscal 1998, the Company granted 240,000 options at an average exercise price
of $21.56.
The following table summarizes the Company's Stock Option Plans:
Weighted
Range of Average
Shares Exercise Prices Exercise Price
- - ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 6,064,456 $ 0.18 - $11.00 $ 3.88
Granted 6,594,535 $11.27 - $33.75 $ 19.50
Exercised (2,029,163) $ 0.18 - $12.09 $ 2.76
Canceled (61,467) $ 5.81 - $22.22 $ 11.69
----------------------------------------------
Balance, December 31, 1996 10,568,361 $ 0.69 - $33.75 $ 13.67
Granted 2,452,176 $16.13 - $31.38 $ 18.92
Exercised (3,069,143) $ 0.69 - $32.00 $ 7.02
Canceled (43,273) $11.80 - $24.92 $ 23.18
----------------------------------------------
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
==============================================
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 those 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 market 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 other terms of such options remained unchanged.
The following table summarizes information about stock options outstanding at
December 31, 1998:
Outstanding Exercisable
------------------------------------------- -----------------------------
Average Average
Average Exercise Exercise
Shares life (a) Price Shares Price
- - --------------------------------------------------------------------------------------------------------------------
$ 0.83 - $ 1.25 180,600 5.03 $ 1.22 168,600 $ 1.22
$ 2.54 - $ 2.54 84,078 8.50 2.54 84,078 2.54
$ 2.85 - $ 5.17 595,492 6.85 4.84 487,234 4.98
$ 6.63 - $ 9.00 36,633 8.85 7.85 32,433 7.76
$ 10.20 - $ 14.50 7,513,857 8.49 13.52 2,351,947 14.37
$ 16.38 - $ 24.00 1,328,333 8.80 21.16 55,336 19.62
$ 24.50 - $ 33.38 1,465,000 7.97 26.46 1,044,668 26.16
-------------------------------------------------------------------------
Total 11,203,993 8.31 $ 15.39 4,224,296 $ 15.49
=========================================================================
(a) Average contractual life remaining in years.
At year-end 1997, options with an average exercise price of $15.16 were
exercisable on 5.1 million shares; at year-end 1996, options with an average
exercise price of $8.07 were exercisable on 5.0 million shares.
The Company adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, issued in October 1995. As permitted
by the provisions of SFAS No. 123, the Company applies APB Opinion 25 and
related interpretations in accounting for its employee stock option plans and,
accordingly, does not recognize compensation cost. If the Company had elected to
recognize compensation cost for options granted in 1998 and 1997, based on the
fair value of the options granted at the grant date as prescribed by SFAS No.
123, net income and earnings per share would have been reduced to the pro forma
amounts indicated below.
1998 1997
- - --------------------------------------------------------------------------------------------------------------------
Net Income
As reported $ 323,831 $ 102,033
Pro forma $ 312,029 $ 92,353
Basic net income per common share
As reported $ 2.98 $ 1.00
Pro forma $ 2.88 $ 0.91
Diluted net income per common share
As reported $ 2.79 $ 0.93
Pro forma $ 2.69 $ 0.85
The weighted average fair values of options granted during 1998 and 1997 were
$5.20 and $6.16 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
1998 1997
- - -------------------------------------------------------------------------------------------------------------
Expected dividend yield - -
Expected stock price volatility .35 .30
Risk-free interest rate 5.57 6.12
Expected life of options (years) 3.50 3.40
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.
Stock Splits
Effective March 6, 1996, the Company's Board of Directors approved a three-
for-one stock split of common stock for stockholders of record as of March 20,
1996. A total of $494 was transferred from additional contributed capital to the
stated value of common stock in connection with the stock split. The par value
of the common stock remains unchanged. All share and per share amounts have been
restated to retroactively reflect the stock split.
10. NET INCOME PER COMMON SHARE
In accordance with SFAS No. 128, Earnings per 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:
1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------
Basic net income per common share computation:
Net Income available to common shareholders from
continuing operations $ 68,860 $ 63,370 $ 8,577
------------------------------------------
Net Income available to common shareholders from
discontinued operations $ 30,020 $ 38,663 $ 22,633
------------------------------------------
Gain on sale of discontinued operations, net of income
taxes $ 230,561 $ - $ -
------------------------------------------
Extraordinary item of loss on early extinguishment of
debt, net of income benefit $ (5,610) $ - $ -
------------------------------------------
Basic average common shares outstanding 108,518 101,914 90,582
------------------------------------------
Basic income per common share from continuing
operations $ 0.63 $ 0.62 $ 0.09
==========================================
Basic income per common share from discontinued
operations $ 0.28 $ 0.38 $ 0.25
==========================================
Basic income per common share from gain on sale of
discontinued operations $ 2.12 $ - $ -
==========================================
Basic income per common share from extraordinary item $ (0.05) $ - $ -
==========================================
Basic net income per common share $ 2.98 $ 1.00 $ 0.34
==========================================
Diluted net income per common share computation:
Income available to common shareholders from continuing
operations $ 68,860 $ 63,370 $ 8,577
Interest paid on convertible debt, net of tax benefit (1) 2,784 3,712 -
Income available to common shareholders and assumed ------------------------------------------
conversions from continuing operations $ 71,644 $ 67,082 $ 8,577
Income available to common shareholders from ------------------------------------------
discontinued operations $ 30,020 $ 38,663 $ 22,633
------------------------------------------
Average common shares outstanding 108,518 101,914 90,582
Incremental shares from assumed conversions:
Convertible debt (1) 5,699 7,599 -
Stock options 2,665 3,596 4,735
------------------------------------------
Diluted average common shares outstanding 116,882 113,109 95,317
------------------------------------------
Diluted income per common share from continuing
operations $ 0.61 $ 0.59 $ 0.09
==========================================
Diluted income per common share from discontinued
operations $ 0.26 $ 0.34 $ 0.24
==========================================
Diluted income per common share from gain on sale of
discontinued operations $ 1.97 $ - $ -
==========================================
Diluted income per common share from extraordinary item $ (0.05) $ - $ -
==========================================
Diluted net income per common share $ 2.79 $ 0.93 $ 0.33
==========================================
(1) The Company's convertible debt did not have a dilutive effect on earnings per
share from continuing operations during fiscal 1996 and the Fourth quarter of
fiscal 1998.
Options to purchase 2,201,757 shares of common stock that were outstanding
during 1998 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 trade accounts receivable. The Company
places its cash with what it 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 trade accounts receivable credit risk exposure is
limited.
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 company to fund its working
capital requirements. Any amounts extended are collateralized by the assets of
the related health care operations. As of December 31, 1998, the company had
advanced approximately $15.9 million under this agreement. Additionally, the
Company has $5.0 million in notes receivable from the purchasers of the health
care opertaions related to the initial sale.
12. RESTRUCTURING OF OPERATIONS AND IMPAIRMENT CHARGE
Restructuring and impairment charge. In December 1998, the Company's Board
of Directors approved the Restructuring Plan to strengthen overall profitability
of the Company by implementing a back office integration program and branch
repositioning plan in an effort to consolidate or close branches whose financial
performance does not meet the Company's expectations. Pursuant to the plan, the
Company recorded a restructuring and impairment charge of $34,759. The
restructuring component of the plan is based, in part, on the evaluation of
objective evidence of probable obligations to be incurred by the Company or of
specifically identified assets.
The Company, formerly AccuStaff Incorporated, was formed in 1992 and grew
over the next 6 1/2 years through both acquisitions and internal growth. Prior
to the disposition of the Commercial operations and the Teleservices and Health
Care divisions in 1998, the Company was largely organized and structured from an
administrative, operations and systems capabilities standpoint as a commercial
staffing business. The Restructuring Plan focuses on meeting the needs of an
information technology and professional services company and is designed to
result in a back office environment tailored to serve these businesses. Upon
completion of the Restructuring Plan, certain back office operations will be
centralized at the Company's headquarters and possibly one additional location,
and certain positions which were necessary under the previous organizational and
operational structure will be eliminated.
The Restructuring Plan calls for the consolidation or closing of 23
Professional Services division branches, certain organizational improvements and
the consolidation of 15 back office operations. This restructuring, which will
result in the elimination of approximately 290 positions, will be completed over
a 12- to 18-month period.
The major components of the restructuring and impairment charge include:(1)
costs to recognize severance and related benefits for the approximately 290
employees to be terminated of $7,494. The severance and related benefit accruals
are based on the Company's severance plan and other contractual termination
provisions. These accruals include amounts to be paid to employees upon
termination of employment. Prior to December 31, 1998, management had approved
and committed the Company to a plan that involved the involuntary termination of
certain employees. The benefit arrangements associated with this plan were
communicated to all employees in December 1998. The plan specifically identified
the number of employees to be terminated and their job classifications. (2)
costs to write down certain furniture, fixtures and computer equipment to net
realizable value at branches not performing up to the Company's expectations of
$2,476,(3) costs to write down goodwill associated with the acquisition of Legal
Information Technology, Inc. which was acquired in January, 1996, calculated in
accordance with SFAS 121 as described in Note 2 to the Consolidated Financial
Statements, Summary of Significant Accounting Policies - Goodwill of $9,936 (4)
costs to terminate leases and other exit and shutdown costs associated with the
consolidated or closed branches including closing the facilities of $8,035
million, and (5) costs to adjust accounts receivable due to the expected
increase in bad debts which results directly from the termination or change in
client relationships which results when branch and administrative employees, who
have the knowledge to effectively pursue collections are terminated of $6,818.
These costs were based upon management's best estimates based upon available
information.
Since payments pursuant to the Restructuring Plan will not commence until
fiscal 1999, there were no charges recognized by the Company against the
restructuring reserve as of December 31, 1998, at which time the total
restructuring reserve amount of $24,823 (which does not include the $9,936
goodwill impairment charge which was recorded against goodwill in the fouth
quarter of fiscal 1999) was included in accounts payable and accrued liabilities
Since payments pursuant to the Restructuring Plan will not commence until fiscal
1999.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents and
its debt obligations. 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. SEGMENT REPORTING
The Company has adopted SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information, issued during 1997, which changes the way
public companies report information about segments. SFAS No. 131, which is based
on the management approach to segment reporting, includes requirements to report
selected segment information on a quarterly basis and to report certain
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues.
The Company has two reportable segments: information technology (IT) and
professional services. The Company's reportable segments are strategic business
units that offer different services and are managed separately as each business
unit requires different resources and marketing strategies. The IT segment
provides computer related consulting services. The professional segment provides
personnel who perform specialized services such as accounting, legal, technical,
outplacement and scientific. See Note 16 to the Consolidated Financial
Statements for information on the discontinued operations of the Company as
these operations are not contained within the scope of this footnote.
Discontinued operations included the Company's former Commercial, Teleservices
and Health Care divisions.
The accounting policies of the segments are consistent with those described
in the summary of significant accounting policies in Note 2 to the Consolidated
Financial Statements, and all intersegment sales and transfers are eliminated.
The Company does not have a material reliance on any one customer
relationship as the Company is able to provide a breadth of 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
------------------------------------------------
1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------
Revenues
IT $ 1,164,140 $ 780,634 $ 400,408
Professional 537,973 383,490 179,608
------------ ------------ ------------
Total Revenues $ 1,702,113 $ 1,164,124 $ 580,016
============ ============ ============
Gross Profit
IT $ 301,816 $ 209,170 $ 107,869
Professional 165,760 119,345 45,333
------------ ------------ ------------
Total Gross Profit $ 467,576 $ 328,515 $ 153,202
============ ============ ============
Income from Operations
IT $ 114,332 $ 79,339 $ 20,673
Professional 51,588 37,449 10,571
------------ ------------ ------------
165,920 116,788 31,244
Restucturing and impairment charges and
Other expenses 48,734 14,615 2,974
------------ ------------ ------------
Total pre-tax income from Continuing Operations $ 117,186 $ 102,173 $ 28,270
============ ============ ============
Assets
IT $ 1,037,722 $ 687,283
Professional 400,563 330,553
------------ ------------
1,438,285 1,017,836
Corporate 133,596 384,790
------------ ------------
Total Assets $ 1,571,881 $ 1,402,626
============ ============
Geographic Areas
Revenues
United States $ 1,348,120 $ 1,074,183 $ 580,016
U.K. 329,746 73,679 -
Other 24,247 16,262 -
------------ ------------ ------------
Total $ 1,702,113 $ 1,164,124 $ 580,016
============ ============ ============
Identifiable Assets
United States $ 1,222,821 $ 1,175,056
U.K. 345,182 222,095
Other 3,878 5,475
------------ ------------
Total $ 1,571,881 $ 1,402,626
============ ============
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,
1998 1998 1998 1998(1) 1998
- - ------------------------------------------------------------------------------------------------- ---------------
Revenue $ 374,492 $ 425,383 $ 441,580 $ 460,658 $ 1,702,113
Gross profit 104,443 117,810 120,700 124,623 467,576
Income from continuing operations 22,097 24,124 22,021 618 68,860
Income from discontinued operations,
net of taxes 10,479 12,634 6,907 - 30,020
Gain on sale of discontinued
operations, net of taxes (1) - - 216,365 14,196 230,561
Extraordinary item of loss on early
extinguishment of debt, net of
benefit - - - (5,610) (5,610)
Net income 32,576 36,758 245,293 9,204 323,831
Basic income per common share from
continuing operations 0.21 0.22 0.20 0.01 0.63
Basic income per common share from
discontinued operations 0.10 0.11 0.06 - 0.28
Basic income per common share from
gain on sale of discontinued
operations - - 1.94 0.13 2.12
Basic income per common share from
extraordinary item - - - (0.05) (0.05)
Basic net income per common share 0.31 0.33 2.20 0.09 2.98
Diluted income per common share from
continuing operations 0.20 0.21 0.19 0.01 0.61
Diluted income per common share from
discontinued operations 0.09 0.10 0.06 - 0.26
Diluted income per common share from
gain on sale of discontinued
operations - - 1.79 0.13 1.97
Diluted income per common share from
extraordinary item - - - (0.05) (0.05)
Diluted net income per common share $ 0.29 $ 0.31 $ 2.04 $ 0.09 $ 2.79
For the Three Months Period Ended For the
---------------------------------------------------------- Year Ended
Mar. 31, June 30, Sept. 30, Dec. 31, Dec. 31,
1997 1997 1997 1997 1997
- - ------------------------------------------------------------------------------------------------- ---------------
Revenue $ 242,234 $ 273,675 $ 302,271 $ 345,944 $ 1,164,124
Gross profit 65,413 75,888 87,991 99,223 328,515
Income from continuing operations 14,750 12,886 16,549 19,185 63,370
Income from discontinued operations,
net of taxes 6,711 11,001 12,142 8,809 38,663
Net income 21,461 23,887 28,691 27,994 102,033
Basic income per common share from
continuing operations 0.14 0.13 0.16 0.19 0.62
Basic income per common share from
discontinued operations 0.07 0.11 0.12 0.08 0.38
Basic net income per common share 0.21 0.24 0.28 0.27 1.00
Diluted income per common share from
continuing operations 0.14 0.12 0.15 0.18 0.59
Diluted income per common share from
discontinued operations 0.06 0.10 0.11 0.07 0.34
Diluted net income per common share $ 0.20 $ 0.22 $ 0.26 $ 0.25 $ 0.93
(1) In the fourth quarter of 1998, the Company recorded a restructuring and
impairment charge of $34,759. See Note 12 to the Consolidated Financial
Statements for further discussion on the restructuring and impairment charge.
(2) During the fourth quarter of 1998, the Company recorded adjustments to
estimated costs relating to the third quarter gain on sale of net assets of
discontinued operations to reflect the final determination of transaction
related costs and income taxes.
16. 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, and the consolidated financial statements have been
reclassified to segregate the net assets and operating results of the Commercial
Businesses. 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 due March 30, 2000 bearing
interest at 2% in excess of the prime rate. 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 extend capital to the purchaser to fund its
working capital requirements. Any amounts extended are collateralized by the
accounts receivable and certain other assets of the related health care
operations. Any advances made under this agreement accrue interest at 10% per
year. As of December 31, 1998, the Company had extended approximately $15.9
million under this agreement.
The sale of the Commercial Businesses represents the disposal of a segment
of the Company's business. Accordingly, the financial statements for the years
ended December 31, 1998, 1997 and 1996 have been reclassified to separate the
revenues, costs and expenses, assets and liabilities, and cash flows of the
Commercial Businesses sold. The net operating results of the Commercial
Businesses have been reported, net of applicable income taxes, as 'Income from
Discontinued Operations'. The net assets of the Commercial Businesses have been
reported as 'Net Assets of Discontinued Operations'; and 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 follows:
For the years ended
December 31 1998 1997 1996
(dollars in thousands)
Revenue $ 919,400 $ 1,260,702 $ 1,031,431
Cost of Revenue 708,930 975,489 807,940
Operating Expense 156,180 215,437 181,350
Operating Income 54,290 69,776 42,141
Interest, net 4,200 4,374 429
Provision for income taxes 20,070 26,739 19,079
Income from discontinued operations 30,020 38,663 22,633
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, $1.2 million, and $1.5 million for the
years ended December 31, 1998, 1997 and 1996, respectively. 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, $4.4 million
and $0.4 million for fiscal 1998,1997 and 1996, respectively. 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. The net assets of the
Company's discontinued operations are as follows:
December 31,
(dollars in thousands) 1997
Receivables $ 195,415
Other current assets 60,674
Total current assets 256,089
Furniture, Equipment and Leasehold Improvements, net 21,210
Goodwill, net 189,659
Other Assets 9,581
Total Assets 476,539
Current Liabilities 79,623
Non-current liabilities 30,871
Total liabilities 110,494
----------------
Total Net assets of discontinued operations $ 366,045
================
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" and "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" 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 "Voting Securities" 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 Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for each of the three years in the period
ended December 31, 1998
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1998
Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended December 31, 1998
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.
10.1 AccuStaff Incorporated Employee Stock Plan. (2)
10.2 AccuStaff Incorporated amended and restated Non-Employee
Director Stock Plan.
10.3 Form of Employee Stock Option Award Agreement. (2)
10.4 Form of Non-Employee Director Stock Option Award Agreement,
as amended.
10.5 Profit Sharing Plan. (2)
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.
10.7 Employment Agreement with Derek E. Dewan, as amended. (3)
10.8 Modis Professional Services, Inc., 1995 Stock Option Plan, as
amended.
10.9 Form of Stock Option Agreement under Modis Professional
Services, Inc.amended and restated 1995 Stock Option Plan. (5)
10.10 Executive Employment Agreement with Michael D. Abney. (1)
10.11 Executive Employment Agreement with Marc M. Mayo.
10.12 Form of Director's and Officer's Indemnification Agreement.(2)
10.13 Executive Employment Agreement with Timothy D. Payne
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Definitive Proxy Statement
on Schedule 14A filed July 14, 1998.
(2) Incorporated by reference to the Company's Registration Statement on
Form S-1 (No. 33-79806).
(3) Employment Agreement, First, Second and Third Amendments incorporated
by reference to the Company's Registration Statement on Form S-1, filed
August 29, 1996(Reg. No. 33-96372). Fourth Amendment incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1996.
(4) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1996.
(5) Incorporated by reference to the Company's Registration on Form S-8
(No. 333-49495).
(b) Reports on Form 8-K. The Registrant filed the following reports on Form
8-K during the fourth quarter of 1998:
(i) Form 8-K dated October 1, 1998 as amended by Forms 8-K/A dated
October 16, 1998, and November 13, 1998, reporting the following:
1. The completion of the sale of its commercial staffing
business to Randstad U.S., L.P. filed pursuant to Item 2.
2. The change of the Company's name from AccuStaff Incorporated
to Modis Professional Services, Inc., and the change of the
Company's trading symbol on the New York Stock Exchange from
'ASI' to 'MPS' filed pursuant to Item 5.
3. The Company's Notice of Redemption to the holders of the
Company's 7% Convertible Senior Notes due 2002 filed pursuant
to Item 5. Included in such Form 8-K, as amended, were: (a)
unaudited pro forma condensed consolidated balance sheet as
of June 30, 1998; (b) unaudited pro forma condensed
consolidated statement of income for the year ended December
31, 1997; (c) unaudited pro forma condensed consolidated
statement of income for the six months ended June 30, 1998;
and (d) notes to unaudited pro forma condensed consolidated
financial statements.
(ii) Form 8-K dated November 13, 1998, reporting the closing of the
sale of the operations and certain assets of its Commercial
Businesses to Randstad U.S., L.P. filed pursuant to Item 5 of Form
8-K. Included in such Form 8-K were: (a) audited consolidated
financial statements; (b) management's discussion and analysis of
results of operations for the three years in the period ended
December 31, 1997 and as of December 31, 1997 and 1996; and (c)
selected financial highlights.
(c) The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedule - not applicable.
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/ Derek E. Dewan
--------------------------
Derek E. Dewan
President, Chairman of
the Board and Chief Executive
Officer
Date: March 30, 1999
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ DEREK E. DEWAN President, Chairman March 30, 1999
- - ---------------------- of the Board and Chief
Derek E. Dewan Executive Officer
/s/ MICHAEL D. ABNEY Senior Vice President, March 30, 1999
- - ---------------------- Chief Financial Officer,
Michael D. Abney Treasurer, and Director
/s/ ROBERT P. CROUCH Vice President and March 30, 1999
- - ---------------------- Chief Accounting Officer
Robert P. Crouch
/s/ JOHN K. ANDERSON, JR. Director March 30, 1999
- - ----------------------
John K. Anderson
/s/ T. WAYNE DAVIS Director March 30, 1999
- - ----------------------
T. Wayne Davis
/s/ DANIEL M. DOYLE Director March 30, 1999
- - ----------------------
Daniel M. Doyle
/s/ PETER J. TANOUS Director March 30, 1999
- - ----------------------
Peter J. Tanous
EXHIBIT INDEX
3.2 Amended and restated bylaws
10.2 AccuStaff Incorporated amended and restated non-employee director stock
option plan
10.6 Revolving Credit and Reimbursement Agreement
10.7 Fifth amendment to employment agreement of Derek E. Dewan
10.8 Modis Professional Services, Inc., 1995 Stock Option Plan, as
amended.
10.11 Executive employment agreement of Marc M. Mayo
10.13 Executive employment agreement of Timothy D. Payne
23 Consents of Experts and Counsel
27 Financial Data Schedule