-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PtuEyfqgWal384M3VKWC2lkdBNKG3hztTDH4WaZp5zOwHazg/OlpEmDCZ0cnA3zl QE1Gd9qJKr2uHeau2CPEqw== 0000924646-98-000019.txt : 20010416 0000924646-98-000019.hdr.sgml : 20010416 ACCESSION NUMBER: 0000924646-98-000019 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981112 ITEM INFORMATION: FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MODIS PROFESSIONAL SERVICES INC CENTRAL INDEX KEY: 0000924646 STANDARD INDUSTRIAL CLASSIFICATION: 7363 IRS NUMBER: 593116655 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-24484 FILM NUMBER: 98747118 BUSINESS ADDRESS: STREET 1: 1 INDEPENDENT DR CITY: JACKSONVILLE STATE: FL ZIP: 32202 BUSINESS PHONE: 9043602000 MAIL ADDRESS: STREET 1: 1 INDEPENDENT DR CITY: JACKSONVILLE STATE: FL ZIP: 32202 FORMER COMPANY: FORMER CONFORMED NAME: ACCUSTAFF INC DATE OF NAME CHANGE: 19940606 8-K 1 CURRENT REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 ---------------------- Date of Report (Date of Earliest Event Reported): November 12, 1998 Modis Professional Services, Inc. - - - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Florida 0-24484 59-3116655 - - - ------------------------ ------------------------ ----------------- (State of Incorporation) (Commission file number) (IRS Employer Identification No.) 1 Independent Drive, Jacksonville, FL 32202 ---------------------------------------------------------- (Address of principal executive office including zip code) (904) 360-2000 ------------------------------- (Registrant's telephone number) Item 5. Other Events Effective September 27, 1998, the Company sold the operations and certain assets of its Commercial Businesses to Randstad U.S., L.P ('Randstad') for $850 million in cash. The disposition of the Commercial Businesses represents the disposal of a segment of the Company's businesses. Accordingly, Managements Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements for the years ended December 31, 1997, 1996 and 1995 have been reclassified to exclude 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 Provided by (Used In) Discontinued Operations'. ITEM 7. Financial Statements and Exhibits (c) Exhibits (27) Financial Data Schedule (99.1) Selected Financial Highlights (99.2) Managements 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. (99.3) Audited Consolidated Financial Statements (23.1) Consent of PricewaterhouseCoopers LLP (99.4) Press Release Dated November 12, 1998 SIGNATURES Pursuant to the requirements 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. AccuStaff Incorporated November 12, 1998 Date By:/s/ Derek E. Dewan -------------------------------------------- Derek E. Dewan, Chairman, President and Chief Executive Officer November 12, 1998 By:/s/ Michael D. Abney Date -------------------------------------------- Michael D. Abney, Senior Vice President and Chief Financial Officer November 12, 1998 By:/s/ Robert P. Crouch Date -------------------------------------------- Robert P. Crouch, Vice President and Controller EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 Dec-31-1997 Jan-01-1997 Dec-31-1997 12-MOS 23,938 0 237,879 6,945 0 631,000 56,826 29,459 1,369,022 116,034 0 0 0 1,037 811,805 1,369,022 1,164,124 1,164,124 835,609 270,049 0 2,961 14,615 102,173 38,803 63,370 38,663 0 0 102,033 1.00 0.93
EX-99.1 3 SELECTED FINANCIAL DATA
SELECTED FINANCIAL HIGHLIGHTS Fiscal Years Ended ------------------------------------------------------------------------------------ DEC. 31, Dec. 31, Dec. 31, Jan. 1, Jan. 2, (in thousands, except per share amounts) 1997 (1) 1996 (1) 1995 (1) 1995 (1) 1994 (1) - - - ------------------------------------------------------------------------------------------------------------------------- Statement of Income Data: Revenue $ 1,164,124 $ 580,016 $ 90,489 $ 36,312 $ 11,258 Cost of Revenue 835,609 426,814 62,382 25,448 8,324 ------------------------------------------------------------------------------------ Gross Profit 328,515 153,202 28,107 10,864 2,934 Operating expenses 211,727 107,512 15,121 7,298 1,593 Merger related costs - 14,446 - - - ------------------------------------------------------------------------------------ Income from operations 116,788 31,244 12,986 3,566 1,341 Other income, (expense), net - - 146 - - Interest expense, net (14,615) (2,974) (1,611) (42) (141) ------------------------------------------------------------------------------------ Income from continuing operations before income taxes 102,173 28,270 11,521 3,524 1,200 Provision for income taxes 38,803 19,693 1,333 874 346 ------------------------------------------------------------------------------------ Income from continuing operations 63,370 8,577 10,188 2,650 854 Income from discontinued operations, net of income taxes 38,663 22,633 18,384 12,472 2,967 ------------------------------------------------------------------------------------ Net income before extraordinary items 102,033 31,210 28,572 15,122 3,821 Extraordinary item, net of income taxes - - - (1,403) - ------------------------------------------------------------------------------------ Net income 102,033 31,210 28,572 13,719 3,821 ==================================================================================== Pro forma provision for income taxes - (3,642) 3,144 1,592 - ------------------------------------------------------------------------------------ Pro forma Net income 102,033 34,852 25,428 12,127 3,821 ==================================================================================== Basic income per common share: From continuing operations $ 0.62 $ 0.09 $ 0.16 $ 0.02 $ 0.01 ==================================================================================== From discontinued operations $ 0.38 $ 0.25 $ 0.30 $ 0.26 $ 0.08 ==================================================================================== Basic net income per common share $ 1.00 $ 0.34 $ 0.46 $ 0.28 $ 0.09 ==================================================================================== Diluted income per common share: From continuing operations $ 0.59 $ 0.09 $ 0.16 $ 0.02 $ - ==================================================================================== From discontinued operations $ 0.34 $ 0.24 $ 0.27 $ 0.24 $ 0.08 ==================================================================================== Diluted net income per common share $ 0.93 $ 0.33 $ 0.43 $ 0.26 $ 0.08 ==================================================================================== Pro forma basic income per common share: From continuing operations $ 0.62 $ 0.13 $ 0.11 $ (0.01) $ 0.01 ==================================================================================== From discontinued operations $ 0.38 $ 0.25 $ 0.30 $ 0.26 $ 0.08 ==================================================================================== Pro forma basic net income per common share $ 1.00 $ 0.38 $ 0.41 $ 0.25 $ 0.09 ==================================================================================== Pro forma diluted income per common share: From continuing operations $ 0.59 $ 0.13 $ 0.11 $ (0.01) $ - ==================================================================================== From discontinued operations $ 0.34 $ 0.24 $ 0.27 $ 0.24 $ 0.08 ==================================================================================== Pro forma diluted net income per common share $ 0.93 $ 0.37 $ 0.38 $ 0.23 $ 0.08 ==================================================================================== Basic average common shares outstanding 101,914 90,582 62,415 48,132 36,549 Diluted average common ==================================================================================== shares outstanding (3) 113,109 95,317 69,328 51,919 38,669 ==================================================================================== Division Revenue Data: Information Technology 780,634 400,408 61,424 17,600 2,102 Professional Services 383,490 179,608 29,065 18,712 9,156 ------------------------------------------------------------------------------------ Total revenue $ 1,164,124 $ 580,016 $ 90,489 $ 36,312 $ 11,258 ====================================================================================
As of ------------------------------------------------------------------------------------ DEC. 31, Dec. 31, Dec. 31, Jan. 1, Jan. 2, 1997 (1) 1996 (1) 1995 (1) 1995 (1) 1994 (1) ==================================================================================== Balance Sheet data: Working capital $ 514,966 $ 397,699 $ 240,252 $ 110,204 $ 17,720 Total assets 1,369,022 840,469 303,801 110,578 17,934 Long term debt 434,035 103,369 93,339 28,186 66,842 Stockholders' equity 812,842 669,779 195,085 92,142 15,808
(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. EX-99.2 4 MANAGEMENTS DISCUSSION AND ANALYSIS MANAGEMENT'S DISCUSSION AND ANALYSIS On June 8, 1998, Modis filed an initial public offering for the Company's subsidiary Strategix Solutions, Inc. ('Strategix') for the proposed partial initial public offering and subsequent spin off (subject to certain conditions) of the Company's Commercial operations which included its Teleservices, and Health Care divisions. On August 27, 1998, before the initial public offering was consummated, the Company announced its intention to sell Strategix to Randstad Holding nv for $850 million in cash. The effective date of the sale was September 27, 1998. As a result of this transaction, the Company's Consolidated Financial Statements and Management's Discussion and Analysis have been reclassified to report Strategix as discontinued operations for all periods presented. The following detailed analysis of operations should be read in conjunction with the 1997 Financial Statements included elsewhere in this Form 8-K. 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 groups. modis solutions provided approximately 17.6% and 18.4% of the divisions revenue for the years ended 1997 and 1996 as compared to 82.4% and 81.6% which was provided by the divisions modis consulting group during the same respective periods. The Company plans to continue to expand the percentage of revenue contributed through its modis solutions group as it expands that groups offerings thoughout the modis consulting network. The Company's professional services division consists of the accounting, legal, technical, outplacement and scientific groups which contributed 24.3%, 20.3%, 39.1%, 9.6% and 6.7% of the professional services divisions revenues by group during 1997 as compared to 8.8%, 15.1%, 74.0% 0.0% and 2.1% during 1996. 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 overall increase in the Company's gross margin was due to the Company's continued migration into the more specialized, higher margin disciplines within the Information Technology and Professional Services divisions. 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 non-recurring 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 general and administrative ("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 general and administrative 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. The Company expects to substantially complete the Year 2000 conversion projects by the end of 1998. 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. 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 $11.6 million , or 386.7%, to $14.6 million in fiscal 1997 from $3.0 million in fiscal 1996. The increase in interest expense resulted from a combination of the utilization of the Company's credit facility, and the timing of the common stock offering in April 1996. The proceeds from the Company's offering in April 1996 and 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 56.8 %, 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 non-recurring 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 non-recurring 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. Income from discontinued operations, after tax, 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 opertaions, including: the purchases of property, plant and equipment, acquisitions, current income tax liabilities and fluctuating working capital needs. FISCAL 1996 COMPARED TO FISCAL 1995 Results from continuing operations Revenue. Revenue increased $489.5 million, or 541.0% to $580.0 million in fiscal 1996 from $90.5 million in fiscal 1995. The increase was attributable by division to: Information Technology $339.0 million, or an increase of 551.9% and Professional Services, $150.5 million or an increase of 518.0%. The increases in the Information Technology and Professional Services Divisions was due to internal growth, and more significantly, the revenue contribution of acquired companies. The revenue for the Company's Information Technology Division is obtained through the modis solutions and modis consulting groups. modis solutions provided approximately 18.4% and 70.1% of the divisions revenue in the years ended 1996 and 1995, respectively. The decrease in the percentage of modis solutions revenue as a percentage of the divisions overall revenue is due to the acquisition of two solutions companies in 1996 which were accounted for as poolings of interests, which resulted in the restatement of the 1995 financial statements to include their results. This restatement caused the 1995 results to be predominantly that of solutions companies. When the restated results are compared to 1996, when the Company completed numerous acquisitions of consulting companies which were accounted for under the purchase method of accounting and therefore do not require restatements, the revenue results of 1995 appear to be scewed towards the solutions group. The Company plans to continue to expand the percentage of revenue contributed through its modis solutions group as it expands that groups offerings thoughout the modis consulting network. The Company's professional division, which consists of the accounting, legal, technical, outplacement and scientific groups contributed 8.8%, 15.1%, 74.0%, 0.0% & 2.1% of that division's revenues by group during 1996, respectively as compared to 17.2%, 27.8%, 55.0% 0.0% and 0.0% during 1995. Gross Profit. Gross profit increased $125.1 million, or 445.1%, to $153.2 million in fiscal 1996 from $28.1 million in fiscal 1995. Gross margin decreased to 26.4% in fiscal 1996 from 31.1% in fiscal 1995.The overall in the Company's gross margin was due to the effect of acquisitions, mostly of solutions companies, whcih were accounted for under the pooling of interests method of accounting. This method requires all prior periods presented to be restated as if the acquisitions had occurred at the begining of respective period. As a result, the majority of the gross margin in 1995 is that of the higher margin solutions companies. In subsequent years, the gross margin becomes more normalized as purchase transactions of consulting and professional services companies become a larger percentage of the total Company's resutls. Operating Expenses. Operating expenses increased $106.8 million, or 706.5%, to $122.0 million in fiscal 1996 from $15.1 million in fiscal 1995. 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 expense before non-recurring merger related costs as a percentage of revenue increased significantly to 18.5% for fiscal 1996 as compared to 16.7% for fiscal 1995. The majority of the increase was due to non-cash amortization charges associated with the acquisition of several companies. Operating expenses before depreciation, amortization and non-recurring merger related costs as a percentage of revenue was 16.8% in 1996 as compared to 15.8% in 1995. Income from Operations. As a result of the foregoing, income from operations increased $18.2 million or 140.4% to $31.2 million in fiscal 1996 from $13.0 million in fiscal 1995. Income from operations before non-recurring merger related costs increased $32.7 million, or 251.8%, to $45.7 million in fiscal 1996 from $13.0 million in fiscal 1995. Income from operations before non-recurring merger related costs as a percentage of revenue increased to 7.9% in fiscal 1996 from 14.4% in fiscal 1995. The overall decrease in operating margin is due to the effect of acquisitions, mostly Information Technology solutions companies, which were accounted for under the pooling of interests method of accounting. This method requires all prior periods presented to be restated as if the acquisition had occured at the beginning of each respective period. As a result, the majority of the operating margins in 1995 is that of the higher margin information technology solutions companies. In subsequent years, the operating margin becomes more normalized as purchase transactions of information technology consulting and professional services companies become a larger percentage of the total Company's results. Interest Expense. Interest expense increased $1.5 million, or 103.0%, to $3.0 million in fiscal 1996 from $1.5 million in fiscal 1995. The interest expense resulted from the combination of the utilization of the Company's credit facility, the timing of the Company's common stock offerings and the notes payable to shareholders of acquired companies. Income Taxes. The Company's effective income tax rate, including the effect of the pro forma tax provision, was 56.8%in fiscal 1996 compared to 38.9% in fiscal 1995. The increase in the effective tax rate was due to the increase in taxable income as a result of the non-deductible, non-recurring merger related costs with The McKinley Group, Inc., HJM Consulting, Inc., and Career Horizons, Inc. Income from continuing operations. As a result of the foregoing, income from continuing operations decreased $ 1.6 million, or 15.7%, to $8.6 million in fiscal 1996 from $10.2 million in fiscal 1995. Income from continuing operations as a percentage of revenue decreased to 1.5% in fiscal 1996 from 11.3% in fiscal 1995, due to a combination of the the non-deductible, non-recurring merger related costs in 1996, and acquisitions of cash basis S-corporations accounted for under the pooling of interests method of accounting in 1996, which resulted in untaxed income being included in 1995. After giving effect to both the merger costs and the pro forma tax provisions to account for the S-corporations as C-corporations, income from continuing operations as a percentage of revenue would have been 4.3% in fiscal 1996 versus 7.8% in 1995, a result of the Information Technology Solutions companies acquired and discussed in Income from Operations, above. Results from discontinued operations Income from Discontinued Operations. Income from discontinued operations, after tax, increased $4.2 million, or 22.8% to $22.6 million for fiscal 1996 versus $18.4 million for fiscal 1995. Reported revenues from discontinued operations were $1,031.4 million for fiscal 1996 versus $772.5 million for fiscal 1995. Operating income for the discontinued operations were $42.1 million for fiscal 1996 versus $31.2 million during fiscal 1995. Results of discontinued operations include allocations of consolidated interest expense totaling $0.4 million and $1.2 million for fiscal 1996 and 1995, respectively. The allocations were based on the historic funding needs of the discontinued opertaions, 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 securities and internally generated funds. Exclusive of the net assets of discontinued operations, the Company had working capital of $148.9 million and $151.6 million as of December 31, 1997 and 1996, respectively. The Company had cash and cash equivalents of $23.9 million and $96.4 million as of December 31, 1997 and 1996, respectively. The Company's operating cash flows and working capital requirements are significantly affected by the timing of payroll and 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. 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; and for the year ended December 31, 1995, the Company generated $17.1 million of cash flow from operations. The Company's positive cash flow from operations for the year ended December 31, 1997 reflects the increased profitability of its operations and the increased collections in accounts receivable. The Company used $365.9 million, $275.3 million and $67.1 million for investing activities in the years ended December 31, 1997, December 31, 1996 and December 31, 1995, respectively, of which $357.8 million, $306.0 million, and $23.1 million, respectively, was used for acquisitions and $8.1 million, $7.3 million, and $2.3 million, respectively, was used for capital expenditures. The Company made 20, 31 and 5 acquisitions in each of the years ended December 31, 1997, 1996 and 1995, respectively. For the year ended December 31, 1997, the Company was provided $335.8 million of cash flows by financing activities; for the year ended December 31, 1996, the Company was provided $405.1 million of cash flow from financing activities; and for the year ended December 31, 1995, the Company was provided $106.4 million of cash flow by financing activities. During fiscal 1997, these amounts primarily represent net borrowings from the Company's credit facility, which were used primarily to fund acquisitions. During fiscal 1996 and 1995, the Company generated the majority of its cash flows from financing activities through Common Stock Offerings and Convertible Debenture Offerings. Indebtedness of the Company Prior to the sale of Strategix, the Company had a $500 million line of credit which was syndicated to a group of 20 banks, with NationsBank, N.A. as principal agent. Subsequent to the sale of Strategix, the existing facility was paid-off, and terminated. As of October 25, 1998, the Company's indebtedness consisted solely of the acquisition notes and convertible senior debentures noted below. On October 22, 1998, the Company closed on its new $500 million revolving credit facility with NationsBank, N.A. as 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 affirmative and negative covenants relating to the Company's operations, including a prohibition on making any business acquisitions which would result in pro forma noncompliance with the related covenants if the acquired company would meet or exceed 10% of total assets or income on a consolidated basis. In addition, approval is required by the majority lenders at such time that the cash consideration of an individual acquisition exceeds 20% of consolidated shareholder's equity. On October 16, 1995, the Company's subsidiary, Career Horizons, Inc., issued $86.25 million of 7% Convertible Senior Notes Due 2002 which were assumed by the Company pursuant to a merger. Interest on the notes is paid semiannually on May 1 and November 1 of each year. The notes were convertible at the option of the holder thereof, at any time after 90 days following the date of original issuance thereof and prior to maturity, unless previously redeemed, into shares of common stock of the Company at a conversion price of $11.35 per share, subject to adjustment in certain events. 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. On October 1, the Company called the notes to be converted as of November 1, 1998. As of November 1, 1998, the notes were either purchased by the Company or converted into shares of the Company's common stock and are no longer outstanding. The Company has certain notes payable to shareholders of acquired companies. The notes payable bear interest at rates ranging from 5.0% to 8.0% and have repayment terms from January 1998 to June 2000. As of November 1, 1998 the Company owed approximately $15.1 million in such acquisition indebtedness. The Company is also obligated under various acquisition agreements to make earn-out payments to former stockholders of acquired companies over the next five years. The Company estimates the amount of these payments will total $5.6 million for the remainder of 1998, and $38.9 million, $26.2 million, $10.1 million and $3.0 million annually for the next four years. 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 million. The Company anticipates recurring expenditures in future years to be approximately $10 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. 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. The Company plans on funding any such repurchase through the use of either cash on hand or its credit facility. 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 services in the information technology and professional services businesses is typically lower during the first quarter until customers' operating budgets are finalized and the profitability of the Company's consultants is lower in the fourth quarter due to fewer billing days because of the higher number of holidays and vacation days. 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 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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. The Company is in the process of determining its preferred disclosure format. Additionally, during 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 131 requires, among other things, that certain general and financial information be disclosed for reportable operating segments of a company. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997, with interim application not required in the initial year of adoption. 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. The Company plans to adopt SOP 98-1 during fiscal 1999. OTHER MATTERS Foreign Acquisitions. During 1997, the Company, through a series of acquisitions, expanded its operations into Canada and Europe (primarily the United Kingdom). The results of operations of these acquired companies are included with those of the Company from date of acquisition and are immaterial to the Company's results of operations for fiscal 1997, and financial position as of December 31, 1997. Year 2000 Compliance 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 Program Office to oversee year 2000 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 Corporate 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: an inventory phase to identify all computer-based systems and applications (including embedded systems) which might not be Year 2000 compliant; an assessment phase to determine what revisions or replacements would be necessary to achieve compliance and what priorities would best serve the Company; 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 an implementation phase to transition the compliant systems into the everyday operations of the Company. Management believes that the four phases are approximately 100%, 95%, 70% and 55% complete, respectively and estimates that all critical systems will be compliant with the century change by March 1999. The Company has budgeted approximately $2.0 million to address the Year 2000 issue, which includes the estimated cost of all modifications and the salaries of associates and the fees of consultants addressing the issues. Approximately $1.1 million of this amount has been expended through November 1, 1998. 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 for working with them through the century change. Other than its banking relationships, which include only large, federally insured institutions, the Company does not have a relationship with any third-party vendor 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. 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 and it is developing contingency plans for alternative methods of transaction processing and estimates that such plans will be finalized by March of 1999. FORWARD LOOKING STATEMENTS Statements made in this Report regarding the Company's expectation or beliefs concerning future events, including capital spending, expected results and the Company's liquidity situation during 1998, should be considered forward-looking and subject to various risks and uncertainties. The Company's actual results may differ materially from the results anticipated in these forward-looking statements as a result of certain factors set forth under Risk Factors and elsewhere in the Company's prospectus dated January 15, 1997, and as discussed in the Company's reports on Forms 10-Q and 8-K made under the Securities Exchange Act of 1934. For instance, the Company's results of operations may differ materially from those anticipated in the forward-looking statements due to, among other things: the Company's ability to successfully identify suitable acquisition candidates, complete acquisitions or integrate the acquired business into its operations; the general level of economic activity in the Company's markets; increased price competition; changes in government regulations or interpretations thereof; and the continued availability of qualified temporary personnel, particularly in the information technology and other professional segments of the Company's businesses. In addition, the market price of the Company's stock may, from time to time, be significantly volatile as a result of, among other things: the Company's operating results; the operating results of other temporary staffing companies; and changes in the performance of the stock market in general. EX-99.3 5 AUDITED CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants To the Stockholders of Modis Professional Services Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Modis Professional Services Inc. and Subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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 Jacksonville FL March 20, 1998, except for notes 15, 16 and 17 as to which the date is November 11, 1998. Modis Professional Services Incorporated and Subsidiaries Consolidated Balance Sheets.
DECEMBER 31, December 31, (dollar amounts in thousands except per share amounts) 1997 1996 - - ----------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 23,938 $ 96,416 Accounts receivable, net of allowance of $6,945 and $4,161 230,934 119,210 Prepaid expenses and other, net 9,352 3,305 Deferred income taxes 731 - Net assets of discontinued operations 366,045 246,089 ---------------------------------- Total current assets 631,000 465,020 Furniture, equipment and leasehold improvements, net 27,367 13,814 Goodwill, net 693,327 348,774 Other assets 17,328 12,861 ---------------------------------- Total assets $ 1,369,022 $ 840,469 ================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable and convertible debt $ 16,366 $ 11,969 Accounts payable and accrued expenses 62,021 29,174 Accrued payroll and related taxes 37,647 23,702 Deferred income taxes - 2,476 ---------------------------------- Total current liabilities 116,034 67,321 Convertible debt 86,250 86,250 Notes payable, long-term portion 347,785 17,119 Deferred income taxes 6,111 - ---------------------------------- Total liabilities 556,180 170,690 ---------------------------------- Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued and outstanding - - Common stock, $.01 par value; 150,000,000 shares authorized 103,692,098 and 99,226,813 shares issued and outstanding on December 31, 1997 and December 31, 1996, respectively 1,037 992 Additional contributed capital 634,194 594,186 Retained earnings 181,068 79,035 Deferred stock compensation (3,457) (4,434) ---------------------------------- Total shareholders' equity 812,842 669,779 ---------------------------------- Total liabilities and shareholders' equity $ 1,369,022 $ 840,469 ==================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Modis Professional Services Incorporated and Subsidiaries Consolidated Statements of Income
Years Ended December 31, ------------------------------------------ (dollar amounts in thousands except per share amounts) 1997 1996 1995 - - - ---------------------------------------------------------------------------------------------------------------- Revenue $ 1,164,124 $ 580,016 $ 90,489 Cost of revenue 835,609 426,814 62,382 ------------------------------------------ Gross Profit 328,515 153,202 28,107 ------------------------------------------ Operating expenses: General and administrative 189,271 97,209 14,253 Depreciation and amortization 22,456 10,303 868 Merger related costs - 14,446 - ------------------------------------------ Total operating expenses 211,727 121,958 15,121 ------------------------------------------ Income from operations 116,788 31,244 12,986 ------------------------------------------ Interest expense and other, net (14,615) (2,974) (1,465) ------------------------------------------ Income from continuing operations before provision for income taxes 102,173 28,270 11,521 Provision for income taxes 38,803 19,693 1,333 ------------------------------------------ Income from continuing operations 63,370 8,577 10,188 Income from discontinued operations (net of income taxes of $26,739, $19,079 and $11,655, respectively) 38,663 22,633 18,384 ------------------------------------------ Net income $ 102,033 $ 31,210 $ 28,572 ========================================== Basic income per common share from continuing operations $ 0.62 $ 0.09 $ 0.16 ========================================== Basic income per common share from discontinued operations $ 0.38 $ 0.25 $ 0.30 ========================================== Basic net income per common share $ 1.00 $ 0.34 $ 0.46 ========================================== Average common shares outstanding, basic 101,914 90,582 62,415 ========================================== Diluted income per common share from continuing operations $ 0.59 $ 0.09 $ 0.16 ========================================== Diluted income per common share from discontinued operations $ 0.34 $ 0.24 $ 0.27 ========================================== Diluted net income per common share $ 0.93 $ 0.33 $ 0.43 ========================================== Average common shares outstanding, diluted 113,109 95,317 69,328 ========================================== Unaudited pro forma data (Note 2): Net income before provision for pro forma income taxes $ 31,210 $ 28,572 Provision for pro forma income taxes (3,642) 3,144 ----------------------------- Pro forma net income $ 34,852 $ 25,428 ============================= Pro forma basic income per common share from continuing operations $ 0.13 $ 0.11 ============================= Pro forma basic income per common share from discontinued opertaions $ 0.25 $ 0.30 ============================= Pro forma basic net income $ 0.38 $ 0.41 ============================= Pro forma diluted income per common share from continuing operations $ 0.13 $ 0.11 ============================= Pro forma diluted income per common share from discontinued operations $ 0.24 $ 0.27 ============================= Pro forma diluted net income per common share $ 0.37 $ 0.38 =============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Modis Professional Services Incorporated and Subsidiaries Consolidated Statements of Cash Flows
Years Ended December 31, ------------------------------------------ (dollar amounts in thousands except for per share amounts) 1997 1996 1995 - - -------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Income from continuing operations $ 63,370 $ 8,577 $ 10,188 Adjustments to income from operations to net cash provided by operating activities: Depreciation and amortization 22,456 10,303 868 Deferred income taxes 3,800 1,221 (345) Changes in assets and liabilities Accounts receivable (45,188) (34,761) (5,451) Prepaid expenses and other assets 1,592 9,335 (407) Accounts payable and accrued expenses (8,151) 12,432 9,654 Accrued payroll and related taxes 3,701 (6,433) (1,549) Other, net (2,623) 5,294 4,124 ----------------------------------------- Net cash provided by operating activities 38,957 5,968 17,082 ----------------------------------------- Cash flows from investing activities: Purchase of investments - (10,438) (2,028) Sales and maturities of investments - - 8,842 Investment in reverse repurchase agreements, net - 48,449 (48,449) Purchase of furniture, equipment and leasehold improvements, net of disposals (8,126) (7,345) (2,349) Purchase of businesses, including additional earn-outs on acquisitions, net of cash acquired (357,776) (305,963) (23,089) ----------------------------------------- Net cash used in investing activities (365,902) (275,297) (67,073) ----------------------------------------- Cash flows from financing activities: Bank overdraft, net - - (39,063) Proceeds from issuance of common stock, net of offering expenses paid - 424,677 72,403 Proceeds from stock options exercised 23,130 6,977 2,017 Proceeds from issuance of convertible debentures - - 85,663 Borrowings on indebtedness 446,583 92,800 6,772 Repayments on indebtedness (133,853) (115,745) (18,058) Other, net (100) (3,650) (3,350) ----------------------------------------- Net cash provided by financing activities 335,760 405,059 106,384 Net increase in cash and cash equivalents ----------------------------------------- from continuing operations 8,815 135,730 56,393 Net cash used in discontinued operations (81,293) (77,038) (18,669) Cash and cash equivalents, beginning of year 96,416 37,724 - ----------------------------------------- Cash and cash equivalents, end of year $ 23,938 $ 96,416 $ 37,724 =========================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Years Ended December 31, (dollar amounts in thousands except for per share amounts) 1997 1996 1995 - - - ---------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 14,627 $ 8,049 $ 2,187 Income taxes paid 24,323 8,308 1,569 COMPONENTS OF CASH USED IN DISCONTINUED OPERATIONS Cash (used in) provided by operating activities (2,413) 6,081 7,114 Cash used in financing activities (94,323) (54,509) (50,999) Cash (used in) provided by investing activities 15,443 (28,610) 25,216 ----------------------------------------- Net cash used in discontinued operations (81,293) (77,038) (18,669) ========================================= NON-CASH INVESTING AND FINANCING ACTIVITIES During fiscal 1995, the Company completed numerous acquisitions. In connection with the acquisitions, liabilities were assumed as follows: Fair value of assets acquired $ 46,978 Cash paid (28,285) ------------ Liabilities assumed $ 18,693 ============ In fiscal 1995, convertible subordinated debentures of $1,500 were converted by the Company into 1,127,262 shares of common stock. 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 (296,612) ------------ Liabilities assumed $ 86,396 ============ 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 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 (308,067) ------------ Liabilities assumed $ 85,407 ============
In fiscal 1997, Convertible Subordinated Debentures of $1,000 were converted by the Company into 727,272 shares of common stock. Modis Professioinal Services Incorporated and Subsidiaries Consolidated Statements of Shareholders' 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, January 1, 1995 - - 9,519,505 $ 95 $ 69,154 $ 23,068 $ (175) $ 92,142 Sale of common stock 2,500,000 25 72,378 - - 72,403 Conversion of subordinated debentures - - 187,877 2 1,498 - - 1,500 Exercise of stock options and related tax benefit - - 143,169 2 2,018 - - 2,020 Amortization of unearned compensation - - - - - - 96 96 Net income - - - - - 28,572 - 28,572 McKinley income for the three months ended December 31, 1994 - - - - - 702 - 702 Distribution to former shareholders of acquired S-corporations - - - - - (2,350) - (2,350) 2 for 1 stock split - - 12,350,551 123 (123) - - - --------------------------------------------------------------------------- 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 ===========================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Modis Professional Services Incorporated and Subsidiaries Notes to Consolidated Financial Statements 1. DESCRIPTION OF BUSINESS: Modis Professional Services Incorporated (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 250 offices throughout the United States, Canada, and Europe. The Company's revenues are primarily from the United States since the Company's expansion outside the United States did not begin until 1997. The Company's ongoing business is organized into divisions: the Information Technology division and the Professional Services division, which generated 67.1% and 32.9% of the Company's fiscal 1997 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 intercompany transactions have been eliminated in the accompanying consolidated financial statements. Fiscal Year During 1996, the Company changed its fiscal year to a calendar year. In the prior years, the fiscal year ended on the Sunday closest to December 31 of each year. All fiscal years presented herein consist of 52 weeks. Cash and Cash Equivalents Cash and cash equivalents include deposits in banks, government 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 $4,871, $3,055 and $313 for 1997, 1996 and 1995 respectively. Accumulated depreciation and amortization of furniture, equipment and leasehold improvements as of December 31, 1997 and 1996 was $29,459 and $22,387, respectively. Goodwill Goodwill represents the excess of cost over fair value of net tangible assets acquired through acquisitions. Such excess of cost over fair value of net tangible assets acquired 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 non-discounted 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 which exceeds the present value of estimated expected future cash flows) would be recorded as a period expense. Accumulated amortization was $25,714 and $8,397 as of December 31, 1997 and 1996, respectively. 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 temporary worker is the Company's employee and all costs of employing the worker are the responsibility of the Company and are included in cost of services. Stock Based Compensation The Company accounts for stock options as prescribed by APB Opinion No. 25 and includes pro forma information as prescribed by SFAS No. 123 in the Stockholders' Equity footnote to the Consolidated Financial Statements. Income Taxes Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement carrying amounts and 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. 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. 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 1995 and 1996 to conform to the 1997 presentation. Recent Accounting Pronouncements 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. The Company is in the process of determining its preferred disclosure format. Additionally, during 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information, 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 quarterly and entity-wide disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports revenues. 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. 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 consolidated statements 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 years ended December 31, 1997, 1996 and 1995 The Company completed numerous acquisitions during 1997, 1996 and 1995 including McKinley, Career and HJM, for which the financial statements have been restated. In addition, the Company merged with Schwab Carrese and Associates, Inc. in fiscal 1997, and with Legal Support Personnel, Inc. in fiscal 1996, both of which were accounted for under the pooling-of-interests method of accounting. The Company acquired all of the stock of these companies in exchange for 263,550 and 561,786 shares of the Company's common stock for the 1997 and 1996 acquisitions, respectively. Due to the immaterial effect on prior periods, the Company's historical financial statements have not been restated. Unaudited pro forma results of operations During 1997, 1996 and 1995, the Company made certain other acquisitions which were accounted for under the purchase method of accounting. Their operations are included in the Consolidated Statements of Income from the date of acquisition. The following unaudited pro forma consolidated results of operations give effect to the acquisitions made during 1997, 1996 and 1995 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 non-recurring acquisition costs related to the mergers with McKinley, Career, and HJM. Exclusive of these non-recurring costs, income from continuing operations and diluted income per common share from continuing operations would have been $37,820 and $0.40, for the fiscal year ended 1996. 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) 1997 1996 1995 - - ----------------------------------------------------------------------------------------------------------------- Revenue from continuing operations $ 1,361,906 $ 1,127,786 $ 654,470 Income from continuing operations 68,084 27,002 14,926 Income from discontinued operations 39,050 23,312 20,222 Net income $ 107,134 $ 50,314 $ 35,148 Diluted income per common share from continuing operations $ 0.63 $ 0.28 $ 0.23 Diluted income per common share from discontinued operations $ 0.35 $ 0.24 $ 0.29 Diluted net income per common share $ 0.98 $ 0.52 $ 0.52
4. NOTES PAYABLE Notes payable at December 31, 1997 and 1996 consisted of the following:
Fiscal --------------------------- 1997 1996 - - - ---------------------------------------------------------------------------------------------------------------- Credit facilities $ 337,000 $ - Notes payable to former shareholder's of acquired companies, plus interest ranging from 5.05% to 8.0% due through June 2000 27,151 28,088 --------------------------- 364,151 28,088 Current portion of notes payable 16,366 10,969 --------------------------- Long-term portion of notes payable $ 347,785 $ 17,119 ===========================
The Revolving Credit Facility contains certain covenants such as requiring the Company to maintain certain minimum financial ratios and does not permit the payment of dividends. The facility is unsecured, but is guaranteed by each of the Company's subsidiaries. The Company was in compliance with all covenants as of December 31, 1997 and 1996. On May 23, 1997, the Facility was amended and restated, increasing the available line from $150,000 to $500,000. The Facility has a term expiring May 23, 2002 and bears interest using an incentive pricing model based on the LIBOR, federal funds, or the prime rate. On February 6, 1998 the Company received a commitment from its primary lender for $300 million of additional borrowings in the form of a revolving credit facility. The commitment expires February 5, 2000 and contains substantially all of the same terms as the Company's existing credit facility. Maturities of loans and convertible debt (See Note 12), are as follows for the fiscal years subsequent to December 31, 1997: Fiscal year - - - ------------------------------------ 1998 $ 16,366 1999 9,650 2000 1,135 2001 - 2002 423,250 -------- $450,401 ======== 5. 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 - - ------------------------------------------------------------------------------------------------------- 1998 $ 9,153 1999 7,511 2000 5,468 2001 3,506 2002 2,056 Thereafter 3,538 ------- $31,232 =======
Total rent expense for fiscal 1997, 1996 and 1995 was $10,175, $4,303, and $365 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 will not have a material adverse effect on the Company's financial position. 6. INCOME TAXES: A comparative analysis of the provision for income taxes from continuing operations is as follows:
Fiscal ------------------------------------ 1997 1996 1995 - - - -------------------------------------------------------------- Current: Federal $ 30,210 $ 15,594 $ 1,362 State 3,347 2,878 316 Foreign 1,446 - - ------------------------------------ 35,003 18,472 1,678 ------------------------------------ Deferred: Federal: 2,991 948 (226) State: 361 273 (119) Foreign: 448 - - ------------------------------------ 3,800 1,221 (345) ------------------------------------ $ 38,803 $ 19,693 1,333 ====================================
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 -------------------------------------------------------------- 1997 1996 1995 -------------------------------------------------------------- AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE - - - ----------------------------------------------------------------------------------------------------------------------- Tax computed using the federal statutory rate $ 35,761 35.0% $ 9,895 35.0% $ 4,032 35.0% State income taxes, net of federal income tax effect 2,699 2.6 1,305 4.7 502 4.4 Pre-acquisition earnings of acquired S corporations - - (1,081) (3.8) (3,144) (27.3) Acquired subsidiaries change from cash to accrual basis - - 4,723 16.7 - - Non-deductible merger related costs - - 4,081 14.4 - - Permanent differences and other 343 0.4 770 2.7 (57) (0.5) -------------------------------------------------------------- $ 38,803 38.0% $ 19,693 69.7% $ 1,333 11.6% ==============================================================
The components of the deferred tax assets and liabilities recorded in the accompanying consolidated balance sheets are as follows:
Fiscal --------------------------- 1997 1996 - - - ---------------------------------------------------------------------------------------------------------------- Gross deferred tax assets: Self-insurance reserves $ 376 $ 628 Allowance for doubtful accounts receivable 897 601 Purchase accounting adjustments 2,910 1,561 Amortization of computer software costs 135 (87) Depreciation and amortization of furniture, equipment and leasehold improvements 1,043 478 Other 1,872 187 --------------------------- Total gross deferred tax assets 7,233 3,368 --------------------------- Gross deferred tax liabilities: Amortization of goodwill (10,202) (1,405) Acquired subsidiaries change from cash to accrual basis (2,411) (3,746) Other - (292) --------------------------- Total gross deferred tax liabilities (12,613) (5,443) --------------------------- Net deferred tax liability (1) $ (5,380) $ (2,075) ===========================
(1) Deferred tax assets of $401 have been included in the non-current balance sheet captions "other" at December 31, 1996. 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. 7. EMPLOYEE BENEFIT PLANS: Profit Sharing Plan The Company has a discretionary contribution profit sharing plan that includes a 401(k) plan, which covers all non-highly compensated (as defined by IRS regulations) full time employees over age twenty-one with at least one year of employment and 1,000 hours of service. The Company also has a non-qualified deferred compensation plan for its highly compensated employees. The Company may make annual contributions at the discretion of the Board of Directors, but contributions are limited to the maximum amount allowed under the provisions of the Internal Revenue Code. The Company did not contribute to the profit sharing plan during fiscal 1997, 1996, or 1995. Effective July 1, 1997, the Company established a separate plan for employees of the professional divisions so as to make employees of those divisions eligible to participate in that plan after 90 days or 375 hours of service. The amended plan is retroactive, giving effect to service performed prior to July 1, 1997. The Company has assumed many 401(k) plans of acquired subsidiaries and intends to merge these plans into the Company's plan in the future. 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. 8. STOCKHOLDERS' EQUITY Public Offerings of Common Stock On October 3, 1995, the Company completed an offering for the sale of 15,000,000 shares of common stock. The Company received $72,403 from the sale of the shares, net of underwriting discount and expenses associated with the offering. A portion of the net proceeds were used to repay all outstanding indebtedness under the Company's credit facility, which was approximately $8,500. The remaining proceeds, expended through December 31, 1995, were used primarily to fund additional acquisitions. 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, 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. 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 1996 and 1997, the 1995 Plan was amended to provide for the granting of an additional 6,000,000 and 3,000,000 shares, respectively. The Company has assumed the stock option plans of its acquired subsidiary, Career, in accordance with terms of the merger agreement dated November 14, 1996. At the date of acquisition Career had 2,254,831 options outstanding under the plans which were assumed. As of December 31, 1997 the plan had 372,445 options outstanding. 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 1996, the Company granted 80,000 options under the Director's Plan at an average exercise price of $25.31. In fiscal 1997 the Company granted 120,000 options at an average exercise price of $28.35. During 1997, the Board of Directors amended the non-employee director stock plan, increasing the number of shares available under the plan to 1.6 million shares. The following table summarizes the Company's Stock Option Plans:
Weighted Range of Average Shares Exercise Prices Exercise Price - - --------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1995 2,935,716 $ 0.18 - $ 5.81 $ 1.08 Granted 4,002,493 $ 2.31 - $11.00 $ 4.74 Exercised (867,113) $ 0.18 - $ 5.80 $ 0.37 Canceled (6,640) $ 1.39 - $ 5.81 $ 1.25 ---------------------------------------------- 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) $ 1.25 - $32.00 $ 7.02 Canceled (43,273) $11.80 - $24.92 $ 23.18 ---------------------------------------------- BALANCE, DECEMBER 31, 1997 9,908,121 $ 0.69 - $33.75 $ 16.76 ==============================================
The following table summarizes information about stock options outstanding at December 31, 1997:
Outstanding Exercisable ------------------------------------------- ----------------------------- Average Average Average Exercise Exercise Shares life (a) Price Shares Price - - -------------------------------------------------------------------------------------------------------------------- $ 0.83 - $ 13.67 2,299,699 7.20 5.66 1,656,405 4.95 $ 13.83 - $ 13.83 344,200 8.03 13.83 34,200 13.83 $ 14.50 - $ 14.50 1,920,000 8.07 14.50 1,632,000 14.50 $ 16.00 - $ 19.75 2,056,722 9.02 17.44 151,738 17.18 $ 20.00 - $ 33.75 3,287,500 8.41 25.67 1,646,717 25.95 ------------------------------------------------------------------------- Total 9,908,121 8.18 $ 16.76 5,121,060 $ 15.16 =========================================================================
(a) Average contractual life remaining in years. At year-end 1996, options with an average exercise price of $8.07 were exercisable on 5.0 million shares; at year-end 1995, options with an average exercise price of $3.28 were exercisable on 3.5 million shares. The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation," issued in October 1995. As permitted by the provisions of SFAS No. 123, the Company applied 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 1996 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.
1997 1996 - - -------------------------------------------------------------------------------------------------------------------- Net Income As reported $ 102,033 $ 31,210 Pro forma $ 92,353 $ 21,717 Basic net income per common share As reported $ 1.00 $ 0.34 Pro forma $ 0.91 $ 0.24 Diluted net income per common share As reported $ 0.93 $ 0.33 Pro forma $ 0.85 $ 0.24
The weighted average fair values of options granted during 1997 and 1996 were $6.16 and $4.57 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 1997 1996 - - ------------------------------------------------------------------------------------------------------------- Expected dividend yield - - Expected stock price volatility .30 .30 Risk-free interest rate 6.12 5.90 Expected life of options (years) 3.40 3.50
During Fiscal 1996, the Company's Board of Directors issued a restricted stock grant of 345,000 shares, under the 1995 Plan, to the Company's President and Chief Executive Officer, which vests over five years. The Company recorded $4,892 in deferred compensation expense which is being amortized on a straight line basis over the vesting period of the grant. Stock Splits Effective November 27, 1995, the Company's Board of Directors approved a two-for-one stock split of common stock for stockholders of record as of November 9, 1995. A total of $123 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. 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. 9. 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:
1997 1996 1995 - - - ---------------------------------------------------------------------------------------------------------------- Basic net income per common share computation: Income available to common shareholders from continuing operations $ 63,370 $ 8,577 $ 10,188 ------------------------------------------ Income available to common shareholders from discontinued opertations $ 38,663 $ 22,633 $ 18,384 ------------------------------------------ Basic average common shares outstanding 101,914 90,582 62,415 ------------------------------------------ Basic income per common share from continuing operations $ 0.62 $ 0.09 $ 0.16 ========================================== Basic income per common share from discontinued operations $ 0.38 $ 0.25 $ 0.30 ========================================== Basic net income per common share $ 1.00 $ 0.34 $ 0.46 ========================================== Diluted net income per common share computation: Income available to common shareholders from continuing operations $ 63,370 $ 8,577 $ 10,188 Interest paid on convertible debt, net of tax benefit (1) 3,712 - 840 Income available to common shareholders and assumed ------------------------------------------ conversions from continuing operations $ 67,082 $ 8,577 $ 11,028 Income available to common shareholders from ------------------------------------------ discontinued opertations $ 38,663 $ 22,633 $ 18,384 ------------------------------------------ Average common shares outstanding 101,914 90,582 62,415 Incremental shares from assumed conversions: Convertible debt (1) 7,599 - 4,286 Stock options 3,596 4,735 2,627 ------------------------------------------ Diluted average common shares outstanding 113,109 95,317 69,328 ------------------------------------------ Diluted income per common share from continuing operations $ 0.59 $ 0.09 $ 0.16 ========================================== Diluted income per common share from discontinued operations $ 0.34 $ 0.24 $ 0.27 ========================================== Diluted net income per common share $ 0.93 $ 0.33 $ 0.43 ========================================== (1) The Company's convertible debt did not have a dilutive effect on earings per share from continuing operations during fiscal 1996.
10. 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. 11. CONVERTIBLE DEBT: At January 1, 1995, the Company had outstanding $1,800 of 6% Convertible Subordinated Debentures due January 31, 1997. The debentures were convertible at the option of the debenture holders into shares of the Company's common stock at a price of $1.25 per share. In addition, certain debenture holders were issued options to purchase an additional $2,000 of 6% convertible subordinated debentures, due January 31, 1997, which were convertible into shares of the Company's common stock at $1.38 per share. During fiscal 1995 the debenture holders converted their options. Debentures in the amount of $1,000, $1,300 and $1,500 in principal amount of the Company's 6% debentures were converted into 727,272, 1,040,000 and 1,127,262 shares of the Company's common stock during 1997, 1996 and 1995, respectively. The Company's subsidiary, Career, has $86,250 of 7% Convertible Senior Notes due 2002 which have been assumed by the Company pursuant to their November 1996 merger. Interest on the notes is paid semiannually on May 1 and November 1 of each year. The notes are convertible at the option of the holder thereof, at any time after 90 days following the date of original issuance thereof and prior to maturity, unless previously redeemed, into shares of common stock of the Company at a conversion price of $11.35 per share, subject to adjustment in certain events. See note 16. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and the relevant market information. Where available, quoted market prices are used. In other cases, fair values are based on estimates using other valuation techniques, such as discounting estimated future cash flows using a rate commensurate with the risks involved or other acceptable methods. These techniques involve uncertainties and are significantly affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, prepayments, discount rates, estimates of future cash flows, future suspected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in an immediate sale of the instrument. Also, because of differences in methodologies and assumptions used to estimate fair value, the Company's fair values should not be compared to those of other companies. Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. For certain assets and liabilities, the information required is supplemented with additional information relevant to an understanding of the fair value. The method and assumption used to estimate the fair value of debt instruments is based on rates available to the Company for debt with similar terms and maturities and approximates its carrying amount. 13. SUMMARY DATA OF SUBSIDIARY: The following table details the summarized financial information of the Company's wholly owned subsidiary, Career Horizons, Inc., and Career Horizons' subsidiaries as of and for the fiscal year ended December 31, 1997 and have been included in the accompanying Consolidated Balance Sheet and Consolidated Statement of Income as 'Net assets of discontinued operations' and 'Income from discontinued operations', respectively:
Dec. 31, 1997 - - --------------------------------------------------------------------------------------------- Current assets $ 186,674 Non-current assets 251,261 Current liabilities 67,459 Non-current liabilities 114,520 Revenue 901,465 Gross profit 232,520 Income from operations 59,883
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
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 Pro forma 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 Pro forma 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 Pro forma basic income from continuing operations 0.14 0.13 0.16 0.19 0.62 Pro forma basic income from discontinued operations 0.07 0.11 0.12 0.08 0.38 Pro forma basic net income 0.21 0.24 0.28 0.27 1.00 Pro forma dilutive income from continuing operations 0.14 0.12 0.15 0.18 0.59 Pro forma dilutive income from discontinued operations 0.06 0.10 0.11 0.07 0.34 Pro forma dilutive net income $ 0.20 $ 0.22 $ 0.26 $ 0.25 $ 0.93
For the Three Months Period Ended For the ---------------------------------------------------------- Year Ended Mar. 31, June 30, Sept. 30, Dec. 31, Dec. 31, 1996 1996 1996 1996 1996 - - ------------------------------------------------------------------------------------------------- --------------- Revenue $ 99,903 $ 130,961 $ 155,344 $ 193,808 $ 580,016 Gross profit 25,131 33,070 41,669 53,332 153,202 Income from continuing operations 2,237 2,152 9,207 (5,019) 8,577 Pro forma income from continuing operations 1,782 3,169 9,207 (1,939) 12,219 Income from discontinued operations, net of taxes 6,163 8,251 8,719 (500) 22,633 Pro forma net income 7,945 11,420 17,926 (2,439) 34,852 Basic income per common share from continuing operations 0.03 0.02 0.10 (0.06) 0.09 Basic income per common share from discontinued operations 0.08 0.09 0.09 (0.01) 0.25 Basic net income per common share 0.11 0.11 0.19 (0.07) 0.34 Diluted income per common share from continuing operations 0.03 0.02 0.09 (0.05) 0.09 Diluted income per common share from discontinued operations 0.08 0.08 0.09 (0.01) 0.24 Diluted net income per common share 0.11 0.10 0.18 (0.06) 0.33 Pro forma basic income from continuing operations 0.02 0.03 0.10 (0.02) 0.13 Pro forma basic income from discontinued operations 0.08 0.09 0.09 (0.01) 0.25 Pro forma basic net income 0.10 0.12 0.19 (0.03) 0.38 Pro forma dilutive income from continuing operations 0.02 0.03 0.09 (0.01) 0.13 Pro forma dilutive income from discontinued operations 0.08 0.08 0.09 (0.01) 0.24 Pro forma dilutive net income $ 0.10 $ 0.11 $ 0.18 $ (0.02) $ 0.37
15. DISCONTINUED OPERATIONS Effective September 27,1998, the Company sold its commercial staffing businesses (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 Businesses were sold for $850 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 purchase price is subject to adjustment based on final tangible net worth, as defined in the purchase agreement. The after-tax gain on the sale (unaudited) prior to any purchase price adjustment is approximately $240 million which is net of related taxes of approximately $210 million. 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, 1997, 1996 and 1995 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 1997 1996 1995 (dollars in thousands) Revenues $ 1,260,702 $ 1,031,431 $ 772,479 Cost of Revenues 975,489 807,940 608,207 Operating Expenses 215,437 181,350 133,080 Operating Income 69,776 42,141 31,192 Interest, net 4,374 429 1,153 Provision for income taxes 26,739 19,079 11,655 Income from discontinued operations 38,663 22,633 18,384
Results of the discontinued Commercial Business include the allocation of certain net common expenses for corporate support and back office functions totaling approximately $1.2 million, $ 1.5 million, and $4.6 million for the years ended December 31, 1997, 1996 and 1995, respectively. Additionally, the results of discontinued operations include allocations of consolidated interest expense totaling $4.4 million, $0.4 million and $1.2 million for fiscal 1997 1996 and 1995, respectively. The allocations were based on the historic funding needs of the discontinued opertaions, including: 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, December 31, (dollars in thousands) 1997 1996 Receivables $ 195,415 $ 147,643 Other current assets 60,674 63,261 Total current assets 256,089 210,904 Furniture, Equipment and Leasehold Improvements 21,210 16,316 Goodwill 189,659 102,745 Other Assets 9,581 7,743 Total Assets 476,539 337,708 Current Liabilities 79,623 82,268 Non-current liabilities 30,871 9,351 Total liabilities 110,494 91,619 ------------------------------- Total Net assets of discontinued operations $ 366,045 $ 246,089 ===============================
16. REDEMPTION OF CONVERTIBLE DEBENTURES AND NEW CREDIT FACILITY On October 1, 1998 the Company called the 7% Convertible Senior Notes described in note 11 to be converted as of November 1, 1998. As of November 1, 1998, the notes were either purchased by the Company or converted into shares of the Company's common stock and are no longer outstanding. On October 22, 1998, the Company closed on its new $500 million revolving credit facility with NationsBank, N.A. as 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 affirmative and negative covenants relating to the Company's operations, including a prohibition on making any business acquisitions which would result in pro forma noncompliance with the related covenants if the acquired company would meet or exceed 10% of total assets or income on a consolidated basis. In addition, approval is required by the majority lenders at such time that the cash consideration of an individual acquisition exceeds 20% of consolidated shareholder's equity. 17. AUTHORIZATION FOR REPURCHASE OF TREASURY SHARES 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. EX-23 6 CONSENT OF INDEPENDENT ACCOUNTANTS Consent of PricewaterhouseCoopers LLP November 12, 1998 Consent of Independent Accountants We consent to the incorporation by reference in the registration statements of Modis Professional Services, Inc. on Form S-3 (Reg. Nos. 333-17715, 333-18695, and 333-49505) of our report dated March 20, 1998, except for notes 15, 16 and 17, as to which the date is November 11, 1998, on our audits of the consolidated financial statements of Modis Professional Services, Inc. as of December 31, 1997 and 1996, and for each ofthe three years in the period ended December 31, 1997, which report is included in the Company's filing on From 8-K, dated November 12, 1998. PricewaterhouseCoopers LLP Consent of PricewaterhouseCoopers LLP November 12, 1998 Consent of Independent Accountants We consent to the incorporation by reference in the registration statements of Modis Professional Services, Inc. on Form S-8 (Reg. Nos. 33-99262, 333-06899, 333-15701, 333-16043, 333-30455, 333-41305, 333-49495, 333-49493, and 333-58261) of our report dated March 20, 1998, except for notes 15, 16 and 17, as to which the date is November 11, 1998, on our audits of the consolidated financial statements of Modis Professional Services, Inc. as of December 31, 1997 and 1996, and for each ofthe three years in the period ended December 31, 1997, which report is included in the Company's filing on From 8-K, dated November 12, 1998. PricewaterhouseCoopers LLP EX-99.4 7 PRESS RELEASE DATED NOVEMBER 12, 1998 Modis Professional Services Announces Third Quarter Results EPS from Continuing Operations (Before Restatement) Up 33% to $.20 vs. $.15 JACKSONVILLE, Fla.--(BUSINESS WIRE)--Nov. 12, 1998-- Revenues from Continuing Operations up 46% to $441.6 Million vs. $302.3 Million Modis Professional Services, Inc. (NYSE:MPS - news), a global provider of information technology and professional services, including consulting, outsourcing, outplacement, training, and professional staffing services, today announced results for the third quarter and nine months ended September 30, 1998. Financial Results The discussion below includes results of continuing and discontinued operations and the change in accounting treatment (restatement) of the Actium acquisition from a pooling of interests to a purchase. On October 31, 1998, the Company's Board of Directors authorized the repurchase of up to $200 million of the Company's common stock. The Company first considered the repurchase on August 31, 1998, shortly after it announced the sale of its commercial businesses (``Strategix'') to Randstad for $850 million as a result of an unsolicited offer. Prior to the Randstad offer, the Company had announced plans to sell 20% of Strategix in an initial public offering with a subsequent spin-off of the Company's interest to its shareholders, subject to certain market conditions. As a result of the aforementioned events, the Company believes it is now appropriate to change the accounting treatment for its acquisition of Actium, Inc. on March 27, 1998, from a pooling of interests to a purchase. As a result, the Company has recorded goodwill of approximately $130.0 million, based on the preliminary allocation of purchase price. Prior periods have been restated to eliminate the Actium results and, starting in the second quarter of 1998, included amortization of goodwill from the purchase. In addition, as a result of the sale of Strategix, the Company will present those financial results as discontinued operations for all periods presented and discussed. Continuing Operations Revenues for the third quarter of 1998 totaled $441.6 million, an increase of 46% over revenues of $302.3 million in the year-earlier period. Net income for the quarter, before the pooling restatement, totaled $22.8 million, an increase of 38% over third quarter 1997 net income of $16.5 million. After giving effect to the pooling restatement, net income for the 1998 third quarter totaled $22.0 million, an increase of 33% over third quarter 1997 net income of $16.5 million. Net income per diluted common share, before the pooling restatement, rose 33% to $0.20 per share, compared with net income of $0.15 per diluted common share for the third quarter of 1997. After giving effect to the pooling restatement, net income per diluted common share for the third quarter of 1998 rose 27% to $0.19 per share compared with net income of $0.15 per diluted common share for the third quarter of 1997. For the nine months ended September 30, 1998, revenues totaled $1.24 billion, an increase of 52% over revenues of $818.0 million in the prior-year period. Net income year to date, before the pooling restatement, totaled $69.9 million before non-recurring merger costs, an increase of 54% over net income for the first nine months of 1997 of $45.4 million. Diluted net income per common share, before the pooling restatement, rose 40% to $0.60 per share, compared with $0.43 per diluted common share for the year-earlier period. After giving effect to the pooling restatement, net income for the nine months ended September 30, 1998, totaled $68.3 million, up 50% over net income for the prior-year period of $45.4 million, and net income per diluted common share rose 37% to $0.59 per share for the nine months ended September 30, 1998, compared with net income per diluted common share of $0.43 for the year-earlier period. Revenues for the third quarter of 1998, broken down by division, are as follows: Information Technology $301 million and Professional $141 million. This compares with third quarter 1997 revenue of $198 million for Information Technology and $104 million for Professional. Professional revenue was affected by the disposition of an unprofitable foreign technical/engineering unit that would have contributed approximately $3 million in revenue this quarter. In addition, the impact on revenue from holidays (July 4th and Labor Day) was greater than expected in the two divisions, which contributed to fewer billable hours. Gross margin percentages for the third quarter of 1998, broken down into the two aforementioned divisions, are: Information Technology -- U.S. 27.7% and International 18.8%; Professional Services 30%. This compares with third quarter 1997 gross margins of 27.4% for Information Technology -- U.S. and 17% for Information Technology -- International on a pro forma basis; 32.6% for Professional Services. The comparative gross margin in the professional division is affected by the relative revenue contribution each quarter of each separate line of business -- accounting, legal, engineering/technical, scientific, outplacement/workforce, and consulting -- and the fact that in the 1997 quarter, the international portion of professional services (which historically has lower gross margins) was a much smaller part of the total revenue mix. Sale of Discontinued Operations As previously announced, the Company sold Strategix, its commercial staffing services business, effective September 27, 1998. The results of this business prior to the sale have been reported as discontinued operations. The after-tax proceeds from the sale totaled approximately $600 million and were used to retire all borrowings under the Company's credit facility with the remaining proceeds available for other corporate purposes. The after-tax gain on the sale of $216 million, or $1.79 per share, was recognized in the current quarter. Management Comments Commenting on the results, Modis Professional Services Chairman, President and Chief Executive Officer Derek E. Dewan said, ``We are pleased with our third quarter results and have made significant progress. Highlights during the third quarter include: o Sale of our commercial businesses -- Strategix -- for $850 million and use of a portion of the proceeds to pay off our credit facility; o Announcement of a share repurchase program of up to $200 million of common stock, which may be additive to earnings per share; o Secured a new $500 million revolving credit facility; o Transformed our company into a world class information technology and professional services firm. ``We have made several investments in infrastructure -- systems, sales and marketing -- and added strong operational leadership in each division,'' Dewan continued. ``Our goal is to continue to generate strong internal growth and capture greater market share in each service line. ``The acquisition pipeline is full and purchase multiples have adjusted downward. We plan to accelerate our activity in making strategic cash acquisitions that are accretive to earnings per share and that fill in a specialty area or a geographic need in both divisions. We are well positioned to do so with our strong cash position and new credit facility.'' Timothy D. Payne, President and Chief Operating Officer of modis, the Company's billion-dollar information technology services division, added, ``The information technology sector is strong and vibrant. Our size, geographic diversity, and breadth of I.T. services -- enterprise resource planning implementation, data warehousing, software application development, systems integration, electronic commerce, Internet and Web enablement services -- allow us to compete very effectively for new clients and expand services to existing customers. Additionally, we have designed our organizational structure along practice specialties for modis Solutions to help facilitate and accelerate cross-selling with the modis Consulting branch network.'' About Modis Professional Services, Inc. Modis Professional Services, Inc. is a global provider of business services, including consulting, outsourcing, outplacement, training, and professional staffing services. The Company provides strategic solutions in the information technology, accounting, legal, engineering/technical, and scientific areas. Headquartered in Jacksonville, Florida, the Company serves the Fortune 1000 and other leading businesses through its offices located in the United States, Canada, the United Kingdom, Continental Europe, and Latin America. For more information about Modis Professional Services, please visit the following web site: www.modispro.com. Statements made in this press release, other than those concerning historical information, should be considered forward-looking and subject to various risks and uncertainties. The Company's actual results may differ materially from the results anticipated in these forward-looking statements as a result of certain factors set forth under Risk Factors and elsewhere in the Company's reports on Forms 10-K, 10-Q and 8-K made under the Securities Exchange Act of 1934. For instance, the Company's results of operations may differ materially from those anticipated in the forward-looking statements due to, among other things: the Company's ability to successfully identify suitable acquisition candidates, complete acquisitions or integrate the acquired business into its operations; the general level of economic activity in the Company's markets; increased price competition; and the continued availability of qualified temporary personnel -- particularly in the information technology and other professional segments of the Company's businesses. In addition, the market price of the company's stock may from time to time be significantly volatile as a result of, among other things: the Company's operating results; the operating results of other temporary staffing companies; and changes in the performance of the stock market in general. MODIS PROFESSIONAL SERVICES, INC. Unaudited Financial Highlights (in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, Operating Highlights: 1998 1997 1998 1997 Revenue $441,580 $302,300 $1,241,456 $818,179 Gross profit 120,700 87,990 342,953 229,292 Net income from continuing operations 22,021 16,548 68,252 45,424 Net income from discontinued operations 6,907 12,141 30,020 28,614 Gain on sale of discontinued operations, net 216,365 -- 216,365 -- Net income $245,293 $28,689 $314,637 $74,038 Diluted net income per common share: From continuing operations (before restatement) $ 0.20 $ 0.15 $ 0.60 $ 0.43 From continuing operations (restated) 0.19 0.15 0.59 0.43 From discontinued operations 0.06 0.11 0.25 0.25 Gain on sale of discontinued operations 1.79 -- 1.80 -- Net income per common share $ 2.04 $ 0.26 $ 2.64 $ 0.68 Weighted average shares outstanding 120,875 113,966 119,921 112,567 As of Sept. 30, Dec. 31, Balance Sheet Highlights: 1998 1997 Working capital $ 404,109 $514,966 Total assets 2,038,650 1,369,022 Long-term debt 2,596 347,785 Convertible debentures 86,250 86,250 Stockholders' equity 1,313,900 812,842 - - --------------- Contact: Modis Professional Services Inc., Jacksonville Michael D. Abney, 904/360-2550 or Derek E. Dewan, 904/360-2525 - - ------------------------- More Quotes and News: Modis Professional Services, Inc (NYSE:MPS - news) Related News Categories: earnings - - ------------------------- -----END PRIVACY-ENHANCED MESSAGE-----