FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ________ to ___________
Commission file number: 0-24484
Modis Professional Services, Inc.
(Exact name of Registrant as specified in its charter)
Florida 59-3116655
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Independent Drive
Jacksonville, Florida
32202
(Address of principal executive offices) (Zip code)
(904) 360-2000
(Registrant's telephone
number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. July 31, 2000.
Common Stock, $0.01 par value Outstanding: 96,422,155 (No. of shares)
<PAGE>
FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements that are subject to
certain risks, uncertainties or assumptions and may be affected by certain other
factors, including but not limited to the specific factors discussed under
'Factors Which May Impact Future Results and Financial Condition'. In addition,
except for historical facts, all information provided in Part I, Item 3, under
'Quantitative and Qualitative Disclosures About Market Risk' should be
considered forward-looking statements. Should one or more of these risks,
uncertainties or other factors materialize, or should underlying assumptions
prove incorrect, actual results, performance or achievements of the Company may
vary materially from any future results, performance or achievements expressed
or implied by such forward-looking statements.
Forward-looking statements are based on beliefs and assumptions of the Company's
management and on information currently available to such manangement. Forward
looking statements speak only as of the date they are made, and the Company
undertakes no obligation to update publicly any of them in light of new
information or future events. Undue reliance should not be placed on such
forward-looking statements, which are based on current expectations.
Forward-looking statements are not guarantees of performance.
<PAGE>
<TABLE>
<CAPTION>
Modis Professional Services, Inc. and Subsidiaries
Index
<S> <C> <C>
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999.............................................................................. 3
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months
ended June 30, 2000 and 1999 ...................................................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months
ended June 30, 2000 and 1999 ...................................................................... 5
Notes to Condensed Consolidated Financial Statements................................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 10
Item 3 Quantitative and Qualitative Disclosures About Market Risks............................................ 18
Factors Which May Impact Future Results and Financial Condition........................................ 19
Part II Other Information
Item 1 Legal Proceedings...................................................................................... 20
Item 2 Changes in Securities and Use of Proceeds.............................................................. 20
Item 3 Defaults Upon Senior Securities........................................................................ 20
Item 4 Submission of Matters to a Vote of Security Holders.................................................... 20
Item 5 Other Information...................................................................................... 20
Item 6 Exhibits and Reports on Form 8-K....................................................................... 20
Signatures............................................................................................. 21
Exhibits
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(dollar amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------- -------------------
(unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,339 $ 876
Accounts receivable, net 100,369 95,126
Prepaid expenses 2,603 2,381
Deferred income taxes 2,790 2,983
Note receivable 16,182 18,775
Income tax receivable 1,925 9,148
Other 3,258 2,856
------------------- -------------------
Total current assets 138,466 132,145
Furniture, equipment and leasehold improvements, net 13,968 14,895
Goodwill, net 322,913 317,939
Other assets, net 11,277 11,868
Net assets of discontinued operations 1,093,811 1,013,484
------------------- -------------------
Total assets $ 1,580,435 $ 1,490,331
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 5,675 $ 2,239
Accounts payable and accrued expenses 12,695 50,429
Accrued payroll and related taxes 18,124 16,648
------------------- -------------------
Total current liabilities 36,494 69,316
Notes payable, long-term portion 320,154 228,000
Deferred income taxes 12,462 10,500
------------------- -------------------
Total liabilities 369,110 307,816
------------------- -------------------
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;
96,416,986 and 96,043,270 shares issued and outstanding on
June 30, 2000 and December 31, 1999, respectively 964 960
Additional contributed capital 587,395 582,558
Retained earnings 627,402 601,989
Accumulated other comprehensive loss (4,436) (2,992)
------------------- -------------------
Total stockholders' equity 1,211,325 1,182,515
------------------- -------------------
Total liabilities and stockholders' equity $ 1,580,435 $ 1,490,331
=================== ===================
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)
(dollar amounts in thousands except per share amounts)
Three Months Ended Six Months Ended
------------------------------- -------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C>
Revenue $ 162,732 $ 147,136 $ 323,695 $ 286,089
Cost of revenue 108,441 98,424 216,744 192,036
------------- ------------- ------------- -------------
Gross profit 54,291 48,712 106,951 94,053
------------- ------------- ------------- -------------
Operating expenses:
General and administrative 35,015 31,131 68,803 61,441
Depreciation and amortization 3,638 3,442 7,441 6,958
------------- ------------- ------------- -------------
Total operating expenses 38,653 34,573 76,244 68,399
------------- ------------- ------------- -------------
Income from operations 15,638 14,139 30,707 25,654
------------- ------------- ------------- -------------
Other expense, net (2,740) (772) (4,338) (57)
------------- ------------- ------------- -------------
Income from continuing operations before
provision for income taxes 12,898 13,367 26,369 25,597
Provision for income taxes 4,901 5,022 10,020 9,617
------------- ------------- ------------- -------------
Income from continuing operations 7,997 8,345 16,349 15,980
Income from discontinued operations, net of
income taxes 4,398 17,616 9,064 34,209
------------- ------------- ------------- -------------
Net income $ 12,395 $ 25,961 $ 25,413 50,189
============= ============= ============= =============
Basic income per common share:
from continuing operations $ 0.08 $ 0.09 $ 0.17 $ 0.17
============= ============= ============= =============
from discontinued operations $ 0.05 $ 0.18 $ 0.09 $ 0.36
============= ============= ============= =============
Basic net income per common share $ 0.13 $ 0.27 $ 0.26 $ 0.52
============= ============= ============= =============
Diluted income per common share:
from continuing operations $ 0.08 $ 0.09 $ 0.17 $ 0.17
============= ============= ============= =============
from discontinued operations $ 0.05 $ 0.18 $ 0.09 $ 0.35
============= ============= ============= =============
Diluted net income per common share $ 0.13 $ 0.27 $ 0.26 $ 0.52
============= ============= ============= =============
Average common shares outstanding, basic 96,699 96,152 96,627 96,221
============= ============= ============= =============
Average common shares outstanding, diluted 97,207 96,653 98,145 96,788
============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(dollar amounts in thousands)
Six Months Ended
-------------------------------
June 30, June 30,
2000 1999
(unaudited) (unaudited)
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Income from continuing operations $ 16,349 $ 15,980
Adjustments to income from continuing operations to net
cash provided by operating activities:
Depreciation and amortization 7,441 6,958
Deferred income taxes 2,155 3,821
Changes in certain assets and liabilities:
Accounts receivable (7,287) (3,622)
Prepaid expenses and other assets 2,560 3,632
Accounts payable and accrued expenses 4,383 (13,232)
Accrued payroll and related taxes 1,597 11,194
Other, net 139 1,670
--------------- ---------------
Net cash provided by operating activities 27,337 26,401
--------------- ---------------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements, net of disposals (1,698) (528)
Purchase of businesses, including additional earn-outs on ,
acquisitions, net of cash acquired (38,101) (33,382)
Income taxes and other cash expenses related to sale of
net assets of discontinued commercial operations - (191,409)
Advances associated with sale of assets of discontinued
health care operations, net of repayments (10) (3,835)
--------------- ---------------
Net cash used in investing activities (39,809) (229,154)
--------------- ---------------
Cash flows from financing activities:
Repurchases of common stock, net of refunds - 11,871
Proceeds from stock options exercised 4,841 2,250
Borrowings on indebtedness, net 89,440 189,145
--------------- ---------------
Net cash provided by financing activities 94,281 203,266
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents 103 (1,762)
Net increase (decrease) in cash and cash equivalents 81,912 (1,249)
Net cash used in discontinued operations (71,449) (67,038)
Cash and cash equivalents, beginning of period 876 73,410
--------------- ---------------
Cash and cash equivalents, end of period $ 11,339 $ 5,123
=============== ===============
COMPONENTS OF CASH USED IN DISCONTINUED OPERATIONS
Cash provided by operating activities $ 14,156 $ 17,098
Cash used in investing activities (84,618) (77,814)
Cash used in financing activities (987) (6,322)
-------------------------------
Net cash used in discontinued operations $ (71,449) $ (67,038)
===============================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
Modis Professional Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(dollar amounts in thousands except for per share amounts)
1. Basis of Presentation.
The accompanying condensed consolidated financial statements are unaudited and
have been prepared by the Company in accordance with the rules and regulations
of the Securities and Exchange Commission ("SEC"). Accordingly, certain
information and footnote disclosures usually found in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The financial statements should be read in conjunction
with the consolidated financial statements and related notes included in the
Company's Form 10-K, as filed with the SEC on March 30, 2000.
The accompanying condensed consolidated financial statements reflect all
adjustments (including normal recurring adjustments) which, in the opinion of
management, are necessary to present fairly the financial position and results
of operations for the interim periods presented. The results of operations for
an interim period are not necessarily indicative of the results of operations
for a full fiscal year.
2. Restructuring of Operations
In December 1998, the Company's Board of Directors approved an Integration and
Strategic Repositioning Plan (the 'Plan') to strengthen the overall
profitability of the Company by implementing a back office integration program
and branch repositioning plan in an effort to consolidate or close branches
whose financial performance did not meet the Company's expectations. Pursuant to
the Plan, during the fourth quarter of 1998 the Company recorded a restructuring
and impairment charge of $18,683. The restructuring component of the Plan was
based, in part, on the evaluation of objective evidence of probable obligations
to be incurred by the Company or impairment of specifically identified assets.
The following table summarizes the restructuring activity from the origination
of the reserve through June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
Payments To Write-Down Of Payments On
Employees Certain Property, Cancelled Write-Down Of
Involuntarily Plant and Facility Certain
Terminated (a) Equipment (b) Leases (a) Receivables (b) Total
----------------- ------------------ ---------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Balances as of
December 31, 1998 $ 1,896 $ 803 $ 4,788 $ 1,260 $ 8,747
1999 charges and
write-downs (1,840) (803) (1,530) (1,260) (5,433)
Adjustment to estimated
payments on cancelled
facility leases - - (2,314)(b) - (2,314)
------- ------- ------- ------- -------
Balances as of
December 31, 1999 56 - 944 - 1,000
------- ------- ------- ------- -------
Charges and write-downs
during the three months
ended March 31, 2000 - - (186) - (186)
Charges and write-downs
during the three months
ended June 30, 2000 - - (52) - (52)
------- ------- ------- ------- -------
Balances as of
June 30, 2000 $ 56 $ - $ 706 $ - $ 762
======= ======= ======= ======= =======
(a): Cash; (b): Noncash
</TABLE>
As of June 30, 2000, the $762 balance in the restructuring accrual was
included in the balance sheet caption 'Accounts payable and accrued expenses'.
6
<PAGE>
3. Comprehensive Income
The Company discloses other comprehensive income in accordance with SFAS No.
130, 'Reporting Comprehensive Income'. A summary of comprehensive income for the
three and six months ended June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Foreign
Currency Total
Net Translation Comprehensive
Three Months Ended, Income Adjustments Income
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 30, 1999 $ 25,961 $ (2,068) $ 23,893
June 30, 2000 $ 12,395 $ 440 $ 12,835
</TABLE>
<TABLE>
<CAPTION>
Foreign
Currency Total
Net Translation Comprehensive
Six Months Ended, Income Adjustments Income
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 30, 1999 $ 50,189 $ (4,180) $ 46,009
June 30, 2000 $ 25,413 $ (1,444) $ 23,969
</TABLE>
The currency translation adjustments are not adjusted for income taxes as they
relate to indefinite investments in non-U.S. subsidiaries.
4. Geographic Financial Information
The following summarizes the Company's geographic financial information:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------------------------ ------------------------------
<S> <C> <C>
Revenues
United States $ 116,491 $ 106,498 $ 231,148 $ 210,299
U.K. 46,241 40,638 92,547 75,790
------------ ------------ ------------ ------------
Total $ 162,732 $ 147,136 $ 323,695 $ 286,089
============ ============ ============ ============
June 30, December 31,
2000 1999
------------------------------
Identifiable Assets
United States $ 1,432,711 $ 1,343,645
U.K. 147,724 146,686
------------ ------------
Total $ 1,580,435 $ 1,490,331
============ ============
</TABLE>
7
<PAGE>
5. Net Income per Common Share
The calculation of basic net income per common share and diluted net income
per common share from continuing and discontinued operations is presented below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------------------------------------------------------------------------------------- --------------------------------
<S> <C> <C>
Basic income per common share computation:
Income available to common shareholders
from continuing operations $ 7,997 $ 8,345 $ 16,349 $ 15,980
------------- ------------- ------------- -------------
Income available to common shareholders
from discontinued operations $ 4,398 $ 17,616 $ 9,064 $ 34,209
------------- ------------- ------------- -------------
Average common shares outstanding 96,699 96,152 96,627 96,221
============= ============= ============= =============
Basic income per common share from
continuing operations $ 0.08 $ 0.09 $ 0.17 $ 0.17
============= ============= ============= =============
Basic income per common share from
discontinued operations $ 0.05 $ 0.18 $ 0.09 $ 0.36
============= ============= ============= =============
Basic net income per common share $ 0.13 $ 0.27 $ 0.26 $ 0.52
============= ============= ============= =============
Diluted income per common share computation:
Income available to common shareholders
from continuing operations $ 7,997 $ 8,345 $ 16,349 $ 15,980
------------- ------------- ------------- -------------
Income available to common shareholders
from discontinued operations $ 4,398 $ 17,616 $ 9,064 $ 34,209
------------- ------------- ------------- -------------
Average common shares outstanding 96,699 96,152 96,627 96,221
Incremental shares from assumed conversions:
Stock options 508 501 1,518 567
------------- ------------- ------------- -------------
Diluted average common shares outstanding 97,207 96,653 98,145 96,788
============= ============= ============= =============
Diluted income per common share from
continuing operations $ 0.08 $ 0.09 $ 0.17 $ 0.17
============== ============= ============= =============
Diluted income per common share from
discontinued operations $ 0.05 $ 0.18 $ 0.09 $ 0.35
============== ============= ============= =============
Diluted net income per common share $ 0.13 $ 0.27 $ 0.26 $ 0.52
============== ============= ============= =============
</TABLE>
Options to purchase 14,121,366 and 10,804,819 shares of common stock that
were outstanding during the three and six months ended June 30, 2000,
respectively, 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.
8
<PAGE>
6. Subsequent Events
On August 11, 2000, Idea Integration Corp. ("Idea"), a wholly-owned
subsidiary of the Company, filed a Registration Statement on Form S-1 in
connection with a proposed initial public offering of its common stock. Idea
anticipates that the offering will be completed during the fourth quarter of
2000, subject to SEC review and market conditions. Idea has stated that it
intends to use net proceeds from the offering for general corporate purposes and
to repay indebtedness of $30 million to the Company.
The Idea offering is subject to SEC review and certain other state and
local regulatory approvals and to the agreement of the several underwriters to
accept the securities. A registration statement relating to these securities has
been filed with the SEC but has not yet become effective. The Idea securities
may not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This Form 10-Q shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any sale
of these securities in any State in which such offer, solicitation or sale would
be unlawful prior to the registration or qualification under the securities laws
of any such State.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
During 1999, the Company's Board of Directors announced that the Company would
spin-off its Information Technology division ('modis') to its shareholders in
the form of a tax-free stock dividend. On August 14, 2000, the Company received
notice that the IRS ruled that the pending spinoff of the IT businesses would be
tax-free to the Company and its shareholders. The spinoff remains subject to
regulatory filings, approval of the SEC, favorable market conditions and a
favorable opinion from the Company's advisors regarding the advisability of the
spin-off.
As a result of the proposed spin-off, the Company's Condensed Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations have been presented to report the results of
operations of its Information Technology division as discontinued operations for
all periods presented.
The Company operates primarily through five operating divisions consisting of
the accounting, legal, engineering/technical, career management and consulting
and scientific divisions.
The following detailed analysis of operations should be read in conjunction with
the 1999 Consolidated Financial Statements and related notes included in the
Company's Form 10-K filed March 30, 2000.
THREE MONTHS ENDED June 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Results from Continuing Operations
Revenue. Revenue increased $15.6 million, or 10.6%, to $162.7 million in the
three months ended June 30, 2000 from $147.1 million in the year earlier period.
The majority of the growth in revenue was internal growth. Revenue growth was
led by the Technical and Engineering division at 17% and the Accounting division
at 14%. Additionally, growth in 2000 was affected by the Company's strategic
restructuring and repositioning plan (the 'restructuring plan') which resulted
in the closing of 23 offices over the past 18 months.
Gross Profit. Gross profit increased $5.6 million or 11.5% to $54.3 million in
the three months ended June 30, 2000 from $48.7 million in the year earlier
period. Gross margin increased slightly to 33.4% in the three months ended June
30, 2000 from 33.1% in the year earlier period. The increase in gross margin was
due to (1) the increase in revenue mix of the higher margin divisions and (2)
the Company's restructuring plan which closed certain less profitable offices.
Operating expenses. Operating expenses increased $4.1 million or 11.8% to $38.7
million in the three months ended June 30, 2000 from $34.6 million in the year
earlier period. Operating expenses before depreciation and amortization, as a
percentage of revenue, increased to 21.5% in the three months ended June 30,
2000 as compared to 21.2% in the year earlier period.
Income from operations. As a result of the foregoing, income from operations
increased $1.5 million or 10.6% to $15.6 million in the three months ended June
30, 2000 from $14.1 million in the year earlier period. Income from operations,
as a percentage of revenue remained constant at 9.6% in both the three months
ended June 30, 2000 and 1999.
Other expense, net. Other expense, net consists primarily of interest expense
related to borrowings on the Company's credit facility and notes issued in
connection with acquisitions net of interest income related to cash on hand. Net
interest expense increased to $2.7 million in the three months ended June 30,
2000 as compared to net interest expense of $0.8 million in the year earlier
period. Net interest expense in the three months ended June 30, 1999 was
significantly reduced as a result of the net cash on hand related to the sale of
the Company's discontinued Commercial operations and Teleservices division in
fiscal 1998. Net interest expense in the three months ended June 30, 2000
related to net borrowings on the Company's credit facility, which was used
primarily to pay earn-out obligations as a result of prior years' acquisition
agreements.
Income Taxes. The Company's effective tax rate increased slightly to 38.0% in
the three months ended June 30, 2000 compared to 37.6% in the year earlier
period, due to an increase in the Company's state tax rate.
Income from continuing operations. As a result of the foregoing, income from
continuing operations decreased $0.3 million or 3.6% to $8.0 million in the
three months ended June 30, 2000 from $8.3 million in the year earlier period.
Income from continuing operations as a percentage of revenue decreased to 4.9%
in the three months ended June 30, 2000 from 5.7% in the year earlier period,
primarily due to the increase in interest expense and the Company's effective
tax rate.
10
<PAGE>
Results of discontinued operations
The following discloses the results of the Company's Information Technology
('IT') businesses which are presented as discontinued operations for both the
three months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
June 30, June 30,
2000 1999
<CAPTION>
<S> <C> <C>
Discontinued IT businesses:
Revenue $ 301,718 $ 354,543
Cost of revenue 219,893 268,035
General and administrative expenses 61,799 48,715
Depreciation and amortization 9,389 7,565
Operating income 10,637 30,228
Interest, net 3,047 685
Provision for income taxes 3,192 11,927
Income from discontinued IT businesses 4,398 17,616
</TABLE>
Included in the operating expenses during both the three months ended June 30,
2000 and 1999 are allocations of certain net common expenses for corporate
support and back office functions totaling approximately $3.0 million and $3.6
million, respectively. Corporate support and back office allocations are based
primarily on the ratio of the Company's consolidated revenues to that of the
discontinued IT businesses. Additionally, results of discontinued operations
include allocations of consolidated interest expense totaling $3.0 million and
$0.7 million for the three months ended June 30, 2000 and 1999, respectively.
The allocations were based on the historic funding needs of the discontinued
operations, including: the purchases of furniture and equipment, acquisitions,
current income tax liabilities and fluctuating working capital needs. Management
believes that these allocations are reasonable.
SIX MONTHS ENDED June 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Results from Continuing Operations
Revenue. Revenue increased $37.6 million, or 13.1%, to $323.7 million for the
six months ended June 30, 2000 from $286.1 million in the year earlier period.
The majority of the growth in revenue was internal growth. Revenue growth was
led by the Accounting division at 20% and the Technical and Engineering division
at 19%. Additionally, growth in 2000 was affected by the Company's restructuring
plan which resulted in the closing of 23 offices over the past 18 months.
Gross Profit. Gross profit increased $12.9 million or 13.7% to $107.0 million in
the six months ended June 30, 2000 from $94.1 million in the year earlier
period. Gross margin increased slightly to 33.0% in the six months ended June
30, 2000 from 32.9% in the year earlier period. The increase in gross margin was
due to (1) the increase in revenue mix of the higher margin divisions and (2)
the Company's restructuring plan which closed certain less profitable offices.
Operating expenses. Operating expenses increased $7.8 million or 11.4% to $76.2
million in the six months ended June 30, 2000 from $68.4 million in the year
earlier period. Operating expenses before depreciation and amortization, as a
percentage of revenue, decreased to 21.3% in the six months ended June 30, 2000
as compared to 21.5% in the year earlier period. The decrease in operating
expenses before depreciation as a percentage of revenue is the result of the
Company's restructuring plan which closed certain less profitable offices.
Income from operations. As a result of the foregoing, income from operations
increased $5.0 million or 19.5% to $30.7 million in the six months ended June
30, 2000 from $25.7 million in the year earlier period. Income from operations,
as a percentage of revenue increased to 9.5% in the six months ended June 30,
2000 as compared to 9.0% in the year earlier period.
11
<PAGE>
Other expense, net. Other expense, net consists primarily of interest expense
related to borrowings on the Company's credit facility and notes issued in
connection with acquisitions net of interest income related to cash on hand. Net
interest expense increased to $4.3 million in the six months ended June 30, 2000
as compared to net interest expense of $0.1 million in the year earlier period.
Net interest expense in the six months ended June 30, 1999 was significantly
reduced as a result of the net cash on hand related to the sale of the Company's
discontinued Commercial operations and Teleservices division in fiscal 1998. Net
interest expense in the six months ended June 30, 2000 related to net borrowings
on the Company's credit facility, which was used primarily to pay earn-out
obligations as a result of prior years' acquisition agreements.
Income Taxes. The Company's effective tax rate increased slightly to 38.0% for
the six months ended June 30, 2000 compared to 37.6% in the year earlier period,
due to an increase in the Company's state tax rate.
Income from continuing operations. As a result of the foregoing, income from
continuing operations increased $0.3 million or 1.9% to $16.3 million in the six
months ended June 30, 2000 from $16.0 million in the year earlier period. Income
from continuing operations as a percentage of revenue decreased to 5.1% in the
six months ended June 30, 2000 from 5.6% in the year earlier period, primarily
due to the increase in interest expense.
Results of discontinued operations
The following discloses the results of the Company's Information Technology
('IT') businesses which are presented as discontinued operations for both the
six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
June 30, June 30,
2000 1999
<CAPTION>
<S> <C> <C>
Discontinued IT businesses:
Revenue $ 598,166 $ 698,456
Cost of revenue 441,490 527,364
General and administrative expenses 116,820 97,756
Depreciation and amortization 18,122 14,933
Operating income 21,734 58,403
Interest, net 6,098 1,079
Provision for income taxes 6,572 23,115
Income from discontinued IT businesses 9,064 34,209
</TABLE>
Included in the operating expenses during both the six months ended June 30,
2000 and 1999 are allocations of certain net common expenses for corporate
support and back office functions totaling approximately $6.1 million and $7.7
million, respectively. Corporate support and back office allocations are based
on the ratio of the Company's consolidated revenues to that of the discontinued
IT businesses. Additionally, results of discontinued operations include
allocations of consolidated interest expense totaling $6.1 million and $1.1
million for the six months ended June 30, 2000 and 1999, respectively. The
allocations were based on the historic funding needs of the discontinued
operations, including: the purchases of furniture and equipment, acquisitions,
current income tax liabilities and fluctuating working capital needs. Management
believes that these allocations are reasonable.
12
<PAGE>
The net assets of the Company's discontinued IT businesses are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
<S> <C> <C>
Receivables $ 268,719 $ 230,970
Other current assets 35,213 32,498
Total current assets 303,932 263,468
Furniture, equipment and leasehold improvements, net 39,507 31,065
Goodwill, net 882,497 814,647
Other assets 9,674 10,368
Total assets 1,235,610 1,119,548
Current liabilities 114,965 80,354
Non-current liabilities 26,834 25,710
Total liabilities 141,799 106,064
---------------- ----------------
Total net assets of discontinued operations $ 1,093,811 $ 1,013,484
================ ================
</TABLE>
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have principally been related to the
acquisition of businesses, working capital needs and capital expenditures. These
requirements have been met through a combination of bank debt, 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 consultants weekly or semi-monthly, and receives payments from
customers within 30 to 80 days from the date of invoice.
The Company had working capital of $102.0 million and $62.8 million as of June
30, 2000 and December 31, 1999, respectively. The principal reasons for the
increase in the Company's working capital is the decrease in accounts payable
and accrued liabilities and increases in accounts receivable and cash on hand at
June 30, 2000. Accounts payable and accrued liabilities decreased by $37.7
million primarily as a result of payments for earn-out obligations under prior
years' acquisition agreements. The Company had cash and cash equivalents of
$11.3 million and $0.9 million as of June 30, 2000 and December 31, 1999,
respectively. For the six months ended June 30, 2000 and 1999, the Company
generated $27.3 million and $26.4 million of cash flow from operations,
respectively. During the six months ended June 30, 1999, the Company made
certain severance and other exit and shutdown payments associated with the
Company's Integration and Strategic Repositioning Plan.
For the six months ended June 30, 2000, the Company used $39.8 million of cash
for investing activities. The Company used $1.7 million for the purchase of
fixed assets and $38.1 million for earn-out payments. For the six months ended
June 30, 1999, the Company used $229.2 million of cash for investing activities,
mainly as a result of the payment of the current tax liability, net worth
adjustment and certain transaction expenses of $191.4 million relating to the
sale of the Company's Commercial operations and Teleservices division.
Additionally, the Company used $33.4 million for acquisitions and earn-out
payments and $0.5 million for the purchase of fixed assets in the six months
ended June 30, 1999.
Effective March 30, 1998, the Company sold the operations and certain assets of
its Health Care division. In connection with the Company's sale of its health
care operations, the Company entered into an agreement with the purchaser of the
health care assets whereby the Company agreed to make advances to the purchaser
to fund its working capital requirements. These advances are collateralized by
the assets of the sold operations, primarily the accounts receivable. The
purchaser of the Company's health care operations has entered into agreements
with materially all of the franchisees and a potential acquirer of the
purchaser-owned locations, whereby net accounts receivable and any additional
amounts realized from the sale of purchaser-owned locations will, after
operating costs, be applied against the purchaser's debt to the Company.
Further, the purchaser has named an interim CEO to operate the business in an
effort to maximize debt reduction to the Company. However, in the third quarter
of 1999, the Company believed it was probable that a portion of the advances
would not be repaid and accordingly, provided an allowance for the advances
estimated to be uncollectible of $25.0 million. At June 30, 2000, the total
amount owed to the Company, including advances outstanding net of the $25
million reserve, was $16.2 million. During the six months ended June 30, 2000,
the Company has not made any material advances under this agreement.
For the six months ended June 30, 2000, the Company generated $94.3 million from
financing activities. This amount primarily represented net borrowings from the
Company's credit facility, which were used primarily to pay for acquisitions
related to the Company's eBusiness division, Idea Integration.
For the six months ended June 30, 1999, the Company generated $203.3 million
from financing activities. This amount primarily represented net borrowings from
the Company's credit facility, which was used primarily to pay the tax liability
and other payments related to the sale of the Company's Commercial operations
and Teleservices division. Additionally, in connection with the Company's 1998
share buyback program, the Company was refunded a portion of the purchase price
in the first quarter of 1999. Included in the 1999 Consolidated Financial
Statements and related notes included in the Company's Form 10-K filed March 30,
2000, is a complete description of the share buyback program.
14
<PAGE>
On November 4, 1999, the Company's Board of Directors authorized the repurchase
of up to $65.0 million of the Company's common stock. As of July 31, 2000, no
shares have been repurchased under this authorization.
The Company is also obligated under various acquisition agreements to make
earn-out payments to former stockholders of acquired companies over the next two
years. The Company estimates that the amount of these payments from continuing
operations will total $4.7 million for the remainder of 2000, the majority of
which was paid as of July 31, 2000. The Company is also obligated to make
earn-out payments from discontinued operations and the amount of these payments
will total approximately $7.0 million for the remainder of 2000 which has been
paid as of July 31, 2000. The Company estimates that the amount of earn out
payments for fiscal 2001 for continuing and discontinued operations will total
$5.9 million and $10.4 million, respectively. The Company anticipates that the
cash generated by the operations of the acquired companies will provide a
substantial portion of the capital required to fund these payments.
The Company anticipates that capital expenditures for furniture and equipment,
including improvements to its management information and operating systems
during the remainder of 2000 will be approximately $3.0 million.
The Company believes that funds provided by operations, available borrowings
under the credit facility, and current amounts of cash will be sufficient to
meet its presently anticipated needs for working capital, capital expenditures
and acquisitions for at least the next 12 months.
15
<PAGE>
Indebtedness of the Company
The Company has a $350 million revolving credit facility which is syndicated to
a group of 13 banks with NationsBank (Bank of America), as the principal agent.
This facility expires on October 21, 2003. The Company also has a $150.0 million
364 day credit facility that expires October 26, 2000. Pursuant to the 364 day
credit facility, the Company has the option to term out the 364 day component of
the credit facility for up to one year. Outstanding amounts under the credit
facilities bear interest at certain floating rates as specified by the
applicable credit facility. The credit facilities contain certain financial and
non-financial covenants relating to the Company's operations, including
maintaining certain financial ratios. Repayment of the credit facilities are
guaranteed by the material subsidiaries of the Company. In addition, approval is
required by the majority of the lenders when the cash consideration of an
individual acquisition exceeds 10% of consolidated stockholders' equity of the
Company.
As of July 31, 2000, the Company had a balance of approximately $329.0 million
outstanding under the credit facility. The Company also had outstanding letters
of credit in the amount of $1.9 million, reducing the amount of funds available
under the credit facilities to approximately $169.1 million as of July 31, 2000.
A portion of the outstanding balance under the Company's credit facility
resulted from the Company's funding of modis. The Company funds modis based on
various needs including: purchases of furniture, equipment and leasehold
improvements, acquisitions, current income tax liabilities and fluctuating
working capital needs. Upon completion of the planned spin-off, modis will repay
the Company an amount that represents the historical funding needs which
resulted from those items described above. As of June 30, 2000, approximately
$177.3 million of funding was provided to modis from the Company.
The Company has certain notes payable to shareholders of acquired companies
which bear interest at rates ranging from 5.4% to 6.5%, all maturing by the end
of July 2001. As of June 30, 2000, the Company owed approximately $8.0 million
in such acquisition indebtedness.
16
<PAGE>
SEASONALITY
The Company's quarterly operating results are affected primarily by the number
of billing days in the quarter and the seasonality of its customers' businesses.
Demand for professional services is typically lower during the first quarter
until customers' operating budgets are finalized and the profitability of the
Company's consultants is generally lower in the fourth quarter due to fewer
billing days because of the higher number of holidays and vacation days.
17
<PAGE>
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The following assessment of the Company's market risks does not include
uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax and credit risks.
Interest Rates. The Company's exposure to market risk for changes in interest
rates relates primarily to the Company's short-term and long-term debt
obligations and to the Company's investments.
The Company's investment portfolio consists of cash and cash equivalents
including deposits in banks, government securities, money market funds, and
short-term investments with maturities, when acquired, of 90 days or less. The
Company is 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 $325.8 million
as of June 30, 2000 and the Company had $180.1 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 July 2001. 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.
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 29% of its six months ended June
30, 2000 consolidated revenues from international operations, approximately 100%
of which were from the United Kingdom. The exchange rate has decreased
approximately 7% in the six months ended June 30, 2000, from 1.6 at December 31,
1999 to 1.5 at June 30, 2000. The exchange rate fluctuation has not historically
had a material impact on the Company's results of operations; however, if the
British pound sterling continues to weaken, exchange rates could have a material
adverse effect on future results of operations. The Company did not hold or
enter into any foreign currency derivative instruments as of June 30, 2000.
18
<PAGE>
FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION
The Proposed Distribution of the Information Technology
Business
The distribution of the IT businesses is subject to market and other conditions,
including a determination by the Internal Revenue Service that the distribution
is tax free to the Company and its shareholders. Accordingly, there is some risk
that the distribution will not take place. In such event, the price of the
Company's common stock may decline if not distributing the IT businesses is
perceived as adversely impacting the Company's focus and market position.
Conversely, there can be no assurance that if the proposed distribution does
occur that the price of the Company's common stock will not decline (after
taking into account the value of any securities received in the distribution).
Effect of Fluctuations in the General Economy
Demand for the Company's professional business services is significantly
affected by the general level of economic activity in the markets served by the
Company. During periods of slowing economic activity, companies may reduce the
use of outside consultants and staff augmentation services prior to undertaking
layoffs of full-time employees. As a result, any significant economic downturn
could have a material adverse effect on the Company's results of operations or
financial condition.
The Company may also be adversely effected by consolidations through mergers and
otherwise of main customers or between major customers with non-customers. These
consolidations as well as corporate downsizings may result in redundant
functions or services and a resulting reduction in demand by such customers for
the Company's services. Also, spending for outsourced business services may be
put on hold until the consolidations are completed.
Competition
The Company's industry is intensely competitive and highly fragmented, with few
barriers to entry by potential competitors. The Company faces significant
competition in the markets that it serves and will face significant competition
in any geographic market that it may enter. In each market in which the Company
operates, it competes for both clients and qualified professionals with other
firms offering similar services. Competition creates an aggressive pricing
environment and higher wage costs, which puts pressure on gross margins.
Ability to Recruit and Retain Professional Employees
The Company depends on its ability to recruit and retain employees who possess
the skills, experience and/or professional certifications necessary to meet the
requirements of the Company's clients. Competition for individuals possessing
the requisite criteria is intense, particularly in certain specialized
professional skill areas. The Company often competes with its own clients in
attracting and retaining qualified personnel. There can be no assurance that
qualified personnel will be available and recruited in sufficient numbers on
economic terms acceptable to the Company.
Ability to Continue Acquisition Strategy; Ability to Integrate Acquired
Operations
The Company has experienced significant growth in the past through acquisitions.
Although the Company continues to seek acquisition opportunities, there can be
no assurance that the Company will be able to negotiate acquisitions on economic
terms acceptable to the Company or that the Company will be able to successfully
identify acquisition candidates and integrate all acquired operations into the
Company.
Possible Changes in Governmental Regulations
From time to time, legislation is proposed in the United States Congress, state
legislative bodies and by foreign governments that would have the effect of
requiring employers to provide the same or similar employee benefits to
consultants and other temporary personnel as those provided to full-time
employees. The enactment of such legislation would eliminate one of the key
economic reasons for outsourcing certain human resources and could significantly
adversely impact the Company's staff augmentation business. In addition, the
Company's costs could increase as a result of future laws or regulations that
address insurance, benefits or other employment-related matters. There can be no
assurance that the Company could successfully pass any such increased costs to
its clients.
19
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
Item 2. Changes in Securities and Use of Proceeds
No disclosure required.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Company's shareholders was held on May 24, 2000.
Proxies were solicited from shareholders of record on the close of business on
April 3, 2000. On April 3, 2000, there were 96,406,636 shares outstanding and
entitled to vote at the Annual Meeting. The shareholder vote on the issues
presented at the Annual Meeting was as follows:
ELECTION OF DIRECTORS
All of the following persons nominated were elected to serve as directors and
received the number of votes set opposite their names:
<TABLE>
<CAPTION>
Name For Withhold Authority
----------------------------------------------------------------------------------------
<S> <C> <C>
Derek E. Dewan 70,513,444 13,243,925
Peter J. Tanous 81,073,429 2,683,940
T. Wayne Davis 81,071,517 2,685,852
John R. Kennedy 81,059,779 2,697,590
Michael D. Abney 71,004,168 12,753,201
</TABLE>
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
27 Financial Data Schedule.
B. Reports on Form 8-K
No disclosure required.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ DEREK E. DEWAN President, Chairman August 14, 2000
---------------------- of the Board and Chief
Derek E. Dewan Executive Officer
/s/ MICHAEL D. ABNEY Senior Vice President, August 14, 2000
---------------------- Chief Financial Officer,
Michael D. Abney Treasurer, and Director
/s/ ROBERT P. CROUCH Vice President and August 14, 2000
---------------------- Chief Accounting Officer
Robert P. Crouch
21
