SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2001
COMMISSION FILE NUMBER: 0-24484
MPS GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3116655
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Independent Drive, Jacksonville, FL 32202
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number including area code): (904) 360-2000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.01 Per Share New York Stock Exchange
(Title of each class) (Name of each exchange on
which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant (assuming for these purposes, but not conceding, that all
executive officers and directors are 'affiliates' of the Registrant), based upon
the closing sale price of common stock on March 8, 2002 as reported by the New
York Stock Exchange, was approximately $763,284,961.
As of March 8, 2002 the number of shares outstanding of the Registrant's
common stock was 98,488,382.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Registrant's Proxy
Statement for its 2001 Annual Meeting of shareholders are incorporated by
reference in Part III.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that are
subject to certain risks, uncertainties or assumptions and may be affected by
certain other factors, including but not limited to the specific factors
discussed in Part II, Item 5 under 'Market for Registrant's Common Equity and
Related Stockholder Matters', 'Liquidity and Capital Resources,' and 'Factors
Which May Impact Future Results and Financial Condition.' In some cases, you can
identify forward-looking statements by terminology such as 'will,' 'may,'
'should,' 'could,' 'expects,' 'plans,' 'indicates,' 'projects,' 'anticipates,'
'believes,' 'estimates,' 'appears,' 'predicts,' 'potential,' 'continues,'
'would,' or 'become,' or the negative of these terms or other comparable
terminology. In addition, except for historical facts, all information provided
in Part II, Item 7A, under 'Quantitative and Qualitative Disclosures About
Market Risk' should be considered forward-looking statements. Should one or more
of these risks, uncertainties or other factors materialize, or should underlying
assumptions prove incorrect, actual results, performance or achievements of the
Company may vary materially from any future results, performance or achievements
expressed or implied by such forward-looking statements.
Forward-looking statements are based on beliefs and assumptions of the Company's
management and on information currently available to such management. Forward
looking statements speak only as of the date they are made, and the Company
undertakes no obligation to update publicly any of them in light of new
information or future events. Undue reliance should not be placed on such
forward-looking statements, which are based on current expectations.
Forward-looking statements are not guarantees of performance.
PART I
ITEM 1. BUSINESS
INTRODUCTION
MPS Group, Inc. ('MPS' or the 'Company') (NYSE:MPS) helps its client companies
thrive by delivering a unique mix of consulting, solutions, and staffing
services in the disciplines of information technology (IT), finance and
accounting, legal, e-Business, human capital automation, engineering, executive
search, and work force management.
Effective January 1, 2002, the Company completed its name change from Modis
Professional Services, Inc. to MPS Group, Inc. The name change was approved by
shareholders at a special meeting held in October 2001.
MPS is a leading global provider of human capital services. A Fortune 1000
company with headquarters in Jacksonville, Florida, MPS serves leading
businesses with over 200 offices throughout the United States, Canada, the
United Kingdom, and continental Europe. MPS generated revenue of $1,548 million
in 2001, of which $1,123 million, or 73%, was generated in the United States and
$425 million, or 27%, was generated abroad, primarily in the United Kingdom.
MPS consists of three divisions: the professional services division; the
e-Business solutions division, operating under the brand Idea Integration; and
the IT services division, operating under the brand Modis. See Note 16 to the
Company's Consolidated Financial Statements for segment and geographic
information for the three years ending December 31, 2001.
PROFESSIONAL SERVICES
The professional services division provides professional business and human
capital solutions to Fortune 1000 and middle market clients, with a network of
119 offices, throughout the United States and United Kingdom. The division
provides expertise in a wide variety of disciplines including accounting and
finance, legal, engineering and technical, career management, executive search,
and human resource consulting.
In December 2001, the Company sold the assets of its scientific operating unit,
which operated under the brand of Scientific Staffing, to Kforce, Inc. for
consideration including $3.5 million in cash and the assets of Kforce, Inc.'s
legal operating unit. Revenue generated from the scientific operating unit was
$21 million in 2001.
The professional services division generated $609 million of revenue and $198
million of gross profit during 2001, which represents 39.3% of total MPS revenue
and 47.0% of total MPS gross profit versus 35.7% and 40.9%, respectively, during
2000. The division has a variable cost business model whereby revenue and cost
of revenue are primarily generated on a time-and-materials basis. Less than 8%
of the division's revenue in 2001 is generated from permanent placement fees,
which are generated when a client hires a professional services-sourced
knowledge worker directly.
e-BUSINESS SOLUTIONS
The e-business solutions division, operating under the brand Idea Integration,
provides e-business strategy consulting, creative services, application
development, and integration to Fortune 1000 and middle market companies through
a combination of local, regional, and national practice groups located in twelve
markets in the United States and in the United Kingdom. The division integrates
the Internet into all aspects of its clients' businesses and is able to deliver
these solutions as a result of extensive expertise in key industries, propriety
software development and implementation methodologies known as Idea RoadMap
(TM), and a multi-level service delivery model that takes advantage of local,
national, and regional service delivery capabilities.
The e-business solutions division generated $169 million in revenue and $55
million in gross profit during 2001, which represents 10.9% of total MPS revenue
and 13.1% of total MPS gross profit versus 13.2% and 19.8%, respectively, during
2000. Idea Integration's business model utilizes salaried consultants and
delivers solutions primarily under time-and-materials contracts and to a lesser
extent under fixed-fee contracts.
IT Services
The IT services division, operating under the brand Modis, provides IT resource
management (ITRM) solutions to over 2,000 clients in a wide variety of
industries in more than 75 markets in the United States, United Kingdom, Canada
and certain parts of continental Europe. ITRM is the deployment of knowledge
capital to meet company-wide IT goals to obtain an optimal mix of internal
staff, outside consulting resources, and project outsourcing. The division
offers value-added solutions such as IT project support and staffing,
recruitment of full-time positions, project-based solutions, supplier management
solutions, and on-site recruiting support in the areas of application
development, systems integration, and EAI.
The IT services division generated $771 million in revenue and $168 million in
gross profit during 2001, which represents 49.8% of total MPS revenue and 39.9%
of total MPS gross profit versus 51.1% and 39.3%, respectively, during 2000. The
division has a variable cost business model whereby revenue and cost of revenue
are primarily generated on a time-and-materials basis. Less than 1% of the
division's revenue in 2001 was generated from permanent placement fees.
During 2000, MPS launched a service offering named Beeline. Through a Web-based
application, Beeline provides a Web-based supplier-neutral and on-site
vendor-neutral human capital management automation software solution. Beeline
streamlines the creation, distribution, and tracking of position requirements
for both full-time hiring and the contingent worker procurement process as well
as the interaction between clients and their suppliers. Beeline's corporate
customers include TransUnion, Digex, CSX Technology, Lutheran Brotherhood, DHL
Worldwide, and Neoforma. Under its business model, Beeline seeks to collect a
service charge which is based upon the usage of the service. During 2001,
minimal service charges were collected. During 2000 and most of 2001, Beeline
was focused on completing its releases and implementing its product at its
customers.
MARKET OVERVIEW AND COMPETITION
Businesses continue to migrate to a more flexible work force that employs
personnel on a skill-specific or project-specific basis. Key drivers include
technology shifts, a move to Internet and Web-enabled applications, increased
cost pressures, and skill shortages. This shift has increased the reliance on
business service partners to recruit for and provide solutions to these
companies on a skill-specific or project-specific basis, or an economic basis.
The Company faces competition in obtaining and retaining qualified consultants.
The primary competitive factors in obtaining qualified consultants for
professional assignments are wages, responsiveness to work schedules, continuing
professional education opportunities, and number of hours of work available.
Management believes that MPS' divisions are highly competitive in all of these
areas. Specifically, the broad geographic coverage, strong relationships with
customers, consultants, and employees, and market leadership positions give MPS'
divisions the ability to attract and retain consultants with the skill sets and
expertise necessary to meet clients' needs in various industries at competitive
prices.
Further, the Company faces competition in obtaining and retaining clients. MPS
believes that the primary competitive factors in obtaining and retaining clients
are an understanding of clients' specific job requirements, the ability to
provide professional personnel in a timely manner, the monitoring of the quality
of job performance, and the price of services. A large percentage of business
services firms that compete with MPS divisions' services are local companies
with fewer than five offices. Within local markets, these firms actively compete
with MPS' divisions for business, and in most of these markets no single company
has a dominant share of the market. MPS' divisions also compete to a lesser
extent with larger full-service competitors in national, regional and local
markets, which are listed below.
The principal national competitors of the professional services division include
Robert Half International, Inc., the legal division of Kelly Services, Inc.,
Adecco SA, CDI Corporation, and Kforce Inc.
The principal national competitors of the e-Business solutions division include
divisions of Data Dimension Corp. and CIBER, Inc., companies such as Sapient
Corporation and Cognizant Technology Solutions Corp., as well as Accenture, Cap
Gemini Ernst & Young, and to an extent, the consulting divisions of IBM and the
'Big Five' accounting firms. In addition, in seeking engagements the division
often competes against the internal management information services and IT
departments of clients and potential clients.
The principal national competitors of the IT services division include Keane,
Inc., Computer Horizons Corp., Comsys, CIBER, Inc., Hall, Kinion & Associates,
and iGATE Capital Corporation.
GROWTH STRATEGY
The Company's growth strategy is focused on increasing overall revenue and gross
profits primarily through our core services offerings relating to IT services,
professional services and e-Business solutions and, to a lesser extent,
expansion into new specialties. The Company looks to achieve this focus
primarily through internal growth and to a lesser extent acquisitions. The
decision of growing internally as opposed to an acquisition will be based on the
perceived length of time to penetrate a market compared to its cost.
Additionally, the Company is positioning itself for the turn in the economy
through the consolidation of back office activities and systems.
The key elements of the Company's internal growth strategy include increasing
penetration of existing markets and customer segments, expanding current
specialties into new and contiguous geographic markets, concentrating on skill
areas that value high levels of service, and identifying and adding new practice
areas. As one of the largest global providers of human services, the Company
looks to expand on this market footprint. Further, the Company can strengthen
its relationships with clients, consultants and employees by enhancing the
knowledge and skills of its consultants and employees.
FULL-TIME EMPLOYEES
At March 8, 2002, the Company employed approximately 12,000 consultants and
approximately 2,200 corporate employees on a full-time equivalent basis.
Approximately 300 of the employees work at corporate headquarters. Full-time
employees are covered by life and disability insurance and receive health and
other benefits.
GOVERNMENT REGULATIONS
Outside of the United States and Canada, the personnel outsourcing segment of
the Company's business is closely regulated. These regulations differ among
countries but generally may regulate: (i) the relationship between the Company
and its temporary employees; (ii) licensing and reporting requirements; and
(iii) types of operations permitted. Regulation within the United States and
Canada does not materially impact the Company's operations.
SERVICE MARKS
The Company and its subsidiaries maintain a number of service marks and other
intangible rights, including federally registered service marks for MODIS (and
logo), IDEA.COM, IDEA INTEGRATION, BEELINE, BEELINE.COM, ACCOUNTING PRINCIPALS
(and logo), MANCHESTER, SPECIAL COUNSEL, DIVERSIFIED SEARCH, PROCOACHING, EXALT,
ENTEGEE and THE EXPERTS for its services generally. The Company or its
subsidiaries have applications pending before the Patent and Trademark Office
for federal registration of the service marks for MPS GROUP, IDEA INTEGRATION
logo, and DIVERSIFIED TECHNOLOGY PARTNERS. The Company is also seeking
registration of several of its service marks in Canada, the United Kingdom, and
the European Community. The Company plans to file affidavits of use and timely
renewals, as appropriate, for these and other intangible rights it maintains.
SEASONALITY
The Company's quarterly operating results are affected by the number of billing
days in the quarter and the seasonality of its customers' businesses. Demand for
the Company's services has historically been lower during the calendar year-end
as a result of holidays, and through February of the following year, as the
Company's customers approve annual budgets.
ITEM 2. PROPERTIES
The Company owns no material real property. It leases its corporate
headquarters, as well as almost all of its branch offices. The branch office
leases generally run for three to five-year terms. The Company believes that its
facilities are generally adequate for its needs and does not anticipate
difficulty replacing such facilities or locating additional facilities, if
needed.
ITEM 3. LEGAL PROCEEDINGS
The Company, in the ordinary course of its business, is from time to time
threatened with or named as a defendant in various lawsuits. The Company
maintains insurance in such amounts and with such coverage and deductibles as
management believes are reasonable and prudent. There is no pending litigation
that the Company believes is likely to have a material adverse effect on the
Company, its financial position, or results of its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Except as related to a Special Meeting of the Company's shareholders held on
October 24, 2001 to vote on the changing of the Company's name to MPS Group,
Inc., hereby incorporated by reference, no matters were submitted to a vote of
security holders during the fourth quarter of the twelve months ended December
31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The following table sets forth the reported high and low sales prices of the
Company's Common Stock for the quarters indicated as reported on the New York
Stock Exchange under the symbol 'MPS'.
For 2000: High Low
First Quarter........................................................ $18.69 $12.31
Second Quarter....................................................... 13.38 7.44
Third Quarter........................................................ 9.19 4.81
Fourth Quarter....................................................... 5.25 3.38
For 2001:
First Quarter........................................................ $ 6.72 $ 3.88
Second Quarter....................................................... 6.97 3.70
Third Quarter........................................................ 7.00 3.70
Fourth Quarter....................................................... 8.20 3.80
In addition to the factors set forth below in 'FACTORS WHICH MAY IMPACT FUTURE
RESULTS AND FINANCIAL CONDITION' under 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS', the price of the Company's
Common Stock is affected by fluctuations and volatility in the financial and
equity markets generally and in the Company's industry sector in particular.
As of March 8, 2002, there were approximately 851 holders of record of the
Company's Common Stock.
No cash dividend or other cash distribution with respect to the Company's Common
Stock has ever been paid by the Company. The Company currently intends to retain
any earnings to provide for the operation and expansion of its business and does
not anticipate paying any cash dividends in the foreseeable future. The
Company's revolving credit facility prohibits the payment of cash dividends
without the lender's consent.
During 1999, the Company's Board of Directors authorized the repurchase of up to
$65.0 million of the Company's common stock. As of December 31, 2001, no shares
have been repurchased under this authorization. See 'LIQUIDITY AND CAPITAL
RESOURCES' under 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS' for additional information.
ITEM 6. SELECTED FINANCIAL DATA
Years Ended
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Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
(in thousands, except per share amounts) 2001 2000 1999 1998 (3) 1997 (1,3)
- - -------------------------------------------------------------------------------------------------------------------------
Statement of income data:
Revenue $ 1,548,489 $ 1,827,686 $1,941,649 $ 1,702,113 $ 1,164,124
Cost of revenue 1,127,444 1,296,834 1,415,901 1,234,537 835,609
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Gross profit 421,045 530,852 525,748 467,576 328,515
Operating expenses 396,699 440,208 363,786 301,656 211,727
Restructuring and impairment charges - (753) (3,250) 34,759 -
Asset write-down related to sale of
discontinued operations - 13,122 25,000 - -
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Operating income from continuing
operations 24,346 78,275 140,212 131,161 116,788
Other expense, net 9,199 21,621 7,794 13,975 14,615
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Income from continuing operations
before income taxes 15,147 56,654 132,418 117,186 102,173
Provision (benefit) for income taxes 6,804 (63,099) 50,283 48,326 38,803
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Income from continuing operations 8,343 119,753 82,135 68,860 63,370
Discontinued operations:
Income from discontinued operations,
net of income taxes - - - 30,020 38,663
Gain on sale of discontinued operations,
net of income taxes (2) - - 14,955 230,561 -
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Income before extraordinary loss 8,343 119,753 97,090 329,441 102,033
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit - - - (5,610) -
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Net income $ 8,343 $ 119,753 $ 97,090 $ 323,831 $ 102,033
====================================================================================
Basic income (loss) per common share:
From continuing operations $ 0.09 $ 1.24 $ 0.85 $ 0.63 $ 0.62
====================================================================================
From discontinued operations $ - $ - $ - $ 0.28 $ 0.38
====================================================================================
From gain on sale (2) $ - $ - $ 0.16 $ 2.12 $ -
====================================================================================
From extraordinary item $ - $ - $ - $ (0.05) $ -
====================================================================================
Basic net income per common share $ 0.09 $ 1.24 $ 1.01 $ 2.98 $ 1.00
====================================================================================
Diluted income (loss) per common share:
From continuing operations $ 0.08 $ 1.23 $ 0.85 $ 0.61 $ 0.59
====================================================================================
From discontinued operations $ - $ - $ - $ 0.26 $ 0.34
====================================================================================
From gain on sale (2) $ - $ - $ 0.15 $ 1.97 $ -
====================================================================================
From extraordinary item $ - $ - $ - $ (0.05) $ -
====================================================================================
Diluted net income per common share $ 0.08 $ 1.23 $ 1.00 $ 2.79 $ 0.93
====================================================================================
Basic average common shares
outstanding 97,868 96,675 96,268 108,518 101,914
Diluted average common ====================================================================================
shares outstanding 98,178 97,539 97,110 116,882 113,109
====================================================================================
Years Ended
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Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
(in thousands, except per share amounts) 2001 2000 1999 1998 1997 (1)
- ---------------------------------------------------------------------------------------------------------------------------
Balance Sheet data:
Working capital $ 204,722 $ 248,388 $ 247,111 $ 16,138 $ 481,362
Total assets 1,543,622 1,653,560 1,596,395 1,571,881 1,402,626
Long term debt 101,000 194,000 238,615 15,525 434,035
Stockholders' equity 1,310,811 1,303,218 1,182,515 1,070,110 812,842
(1) Includes the financial information of the Company for the respective years
noted above restated to account for any material business combinations
accounted for under the pooling-of-interests method of accounting.
(2) Gain on sale relates to the gain on the sale of the net assets of the
Company's discontinued operations.
(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.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following detailed analysis of operations should be read in conjunction with
the 2001 Financial Statements and related notes included elsewhere in this Form
10-K.
2001 COMPARED TO 2000
Revenue. Revenue decreased $279.2 million, or 15.3%, to $1,548.5 million in 2001
from $1,827.7 million in 2000. The decrease was attributable primarily to a
decrease in revenue for the IT services division which accounted for 49.8% and
51.1% of the Company's total revenue for 2001 and 2000, respectively. Revenue in
the IT services division decreased $163.2 million, or 25.7%, to $770.8 million
in 2001, from $934.0 million in 2000. This decrease in the division's revenue
was primarily attributable to the diminished demand for IT services. The
Company's customers continue to experience a constrained ability to spend on IT
initiatives due to uncertainties relating to the economy.
Revenue in the e-Business solutions division decreased $72.3 million, or 30.0%,
to $168.8 million in 2001, from $241.1 million in 2000. This decrease in the
division's revenue was primarily attributable to weak demand for e-Business
consulting services which is being intensified by the uncertainties relating to
the economy.
Revenue in the professional services division decreased $43.7 million, or 6.7%,
to $608.9 million 2001, from $652.6 million in 2000. This decrease in the
division's revenue was primarily attributable to the diminished demand for
knowledge worker resources in the services provided by the division, primarily
in the United States. Revenue generated in the United Kingdom increased 5.3% in
2001 from 2000, while revenue generated in the United States decreased 11.4%.
The professional services division operates primarily through five operating
units consisting of the accounting and finance, legal, engineering/technical,
career management and consulting, and scientific, which contributed 40.6%,
12.2%, 34.3%, 9.5% and 3.4%, respectively, of the division's revenue by group
during 2001, as compared to 39.4%, 13.2%, 34.7%, 8.5% and 4.2%, respectively,
during 2000. In December 2001, the Company sold the assets of its scientific
operating unit, which operated under the brand of Scientific Staffing.
Gross Profit. Gross profit decreased $109.9 million, or 20.7%, to $421.0 million
in 2001 from $530.9 million in 2000. Gross margin decreased to 27.2% in 2001,
from 29.0% in 2000.
The gross margin in the e-Business solutions division decreased to 32.4% in the
2001, from 43.5% in 2000. Consultant utilization within the e-Business solutions
division decreased as a result of (1) the division's business model utilizing
salaried consultants and (2) the weak demand for e-Business consulting services.
The Company continued to address consultant utilization within the division
through the downsizing of its consultant base. Additionally, the gross profit
generated from the e-Business solutions division, which historically maintained
the highest gross margin among the three divisions, decreased to 13.0% of the
Company's total gross profit for 2001, from 19.8% 2000.
The gross margin in the IT services division decreased to 21.8% in 2001, from
22.3% 2000. The decrease in gross margin in the IT services division is
primarily attributable to a decrease in bill rates and, to a lesser extent, the
lower level of direct hire and permanent placement fees, which generate a higher
margin, in 2001 as compared to 2000. As a percentage of revenue, the division's
direct hire and permanent placement fees decreased to 0.6% of revenue in 2001,
from 1.1% in 2000.
The gross margin in the professional services division decreased to 32.5% in
2001, from 33.3% in 2000. The decrease in gross margin in the professional
services division is attributable to a lower level of direct hire and permanent
placement fees in the 2001 as compared to 2000. As a percentage of revenue, the
division's direct hire and permanent placement fees decreased to 6.3% of revenue
in 2001, from 8.0% in 2000.
Operating expenses. Total operating expenses decreased $55.9 million, or 12.4%,
to $396.7 million in 2001, from $452.6 million in 2000. The Company's general
and administrative ('G&A') expenses decreased $49.7 million, or 12.9%, to $336.6
million in 2001, from $386.3 million in 2000. Included in total operating
expenses in 2000 is a $13.1 million charge for an asset write-down related to
the sale of discontinued operations, $7.3 million of costs related to the
cancelled separation and spin-off of the IT services division and the cancelled
initial public offering of the e-Business solutions division, and a $0.8 million
restructuring charge recapture.
Excluding these aforementioned costs, operating expenses decreased $36.3
million, or 8.4%, to $396.7 million in 2001, from $433.0 million in 2000, and
G&A expenses decreased $42.4 million, or 11.2%, to $336.6 million in 2001, from
$379.0 million in 2000. Excluding these aforementioned costs, the decrease in
G&A expenses is attributable to both the IT services and the e-Business
solutions divisions.
The IT services division's G&A expenses decreased $25.6 million, or 17.0%, to
$124.6 million in 2001, from $150.2 million in 2000. As a percentage of revenue,
the division's G&A expenses increased slightly to 16.2% in 2001, from 16.1% in
2000. The decrease in the IT services division's G&A expenses is associated with
the decrease in revenue for 2001, and cost reduction initiatives implemented
within the division in both late 2000 and throughout 2001.
The e-Business solutions division's G&A expenses decreased $17.5 million, or
19.6%, to $71.6 million in 2001, from $89.1 million in 2000. As a percentage of
revenue, the division's G&A expenses increased to 42.4% in 2001, from 37.0% in
2000. The decrease in the e-Business solutions division's G&A expenses was
related to reductions in its work force that started in early 2001.
The professional services division's G&A expenses increased $0.7 million, or
0.5%, to $140.4 million in 2001, from $139.7 million in 2000. As a percentage of
revenue, the division's G&A expenses increased to 23.1% in 2001, from 21.4% in
2000. The increase in the professional services division's G&A expenses was
related to an increase in the level of spending to establish the corporate
infrastructure in the division. During the spring of 2001, the Company began to
eliminate many of these duplicative corporate infrastructure responsibilities in
the division, integrating these efforts into the MPS corporate structure.
Income from operations. Income from operations decreased $54.0 million, or
69.0%, to $24.3 million in 2001, from $78.3 million in 2000. Income from
operations for the e-Business solutions division decreased $34.7 million, to a
$28.9 million loss in 2001, from income of $5.8 million in 2000. Income from
operations for the professional services division decreased $21.9 million, or
35.5%, to $39.8 million in 2001, from $61.7 million in 2000. Income from
operations for the IT services division decreased $17.0 million, or 55.9 %, to
$13.4 million in the 2001, from $30.4 million in 2000. For the Company as a
whole, income from operations as a percentage of revenue decreased to 1.6% in
2001, from 4.3% in 2000.
Other expense, net. Other expense, net consists primarily of interest expense
related to borrowings under the Company's credit facilities and notes issued in
connection with acquisitions, net of interest income related to investment
income from (1) certain investments owned by the Company and (2) cash on hand.
Interest expense decreased $12.4 million, or 53.9%, to $10.6 million in 2001,
from $23.0 million in 2000. The decrease in interest expense is related to the
lower level of borrowings under the Company's credit facilities during 2001.
Interest expense was offset by $1.4 million of interest and other income in both
2001 and 2000.
Income Taxes. The Company recognized an income tax provision of $6.8 million in
2001, compared to a net income tax benefit of $63.1 million in 2000. The income
tax benefit in the prior year related primarily to a tax benefit associated with
an investment in a subsidiary. Absent this net benefit in 2000, the Company's
effective tax rate increased to 44.9% in 2001 as compared to 41.0% in 2000. This
increase is attributable to state tax expense, a higher level of non-deductible
expenses, and a lower level of income which is partially offset by a tax benefit
associated with a reorganization of a subsidiary.
Net Income. As a result of the foregoing, net income decreased $111.5 million,
or 93.1%, to $8.3 million in 2001, from $119.8 million in 2000. Net income as a
percentage of revenue decreased to 0.5% in 2001, from 6.6% in 2000.
2000 COMPARED TO 1999
Revenue. Revenue decreased $113.9 million, or 5.9%, to $1,827.7 million in 2000
from $1,941.6 million in 1999. The decrease was attributable to a decrease in
revenue for the IT services division which accounted for 51.1% and 60.8% of the
Company's total revenue for 2000 and 1999, respectively. Revenue in the IT
services division decreased $247.0 million, or 20.9%, to $934.0 million in 2000,
from $1,181.0 million in 1999. This decrease in revenue was primarily
attibutable to the diminished demand for information technology services as the
Company's customers re-evaluated their information technology infrastructure
needs after addressing their year 2000 issues.
Revenue in the professional services division increased $60.1 million, or 10.1%,
to $652.6 million in 2000 from $592.5 million in 1999. The increase in revenue
was due to internal growth. The professional services division operated
primarily through five operating units consisting of the accounting and finance,
legal, engineering/technical, career management and consulting and scientific
units which contributed 39.4%, 13.2%, 34.7%, 8.5% and 4.2%, respectively, of the
division's revenue by group during 2000 as compared to 38.4%, 13.7%, 33.1%, 9.7%
and 5.1%, respectively, during 1999.
Revenue in the e-Business solutions division increased $72.9 million, or 43.3%,
to $241.1 million in 2000, from $168.2 million in 1999. This increase in revenue
was due to a combination of internal growth and a contribution of revenue from
companies acquired in the first quarter of 2000.
Gross Profit. Gross profit increased $5.2 million or 1.0% to $530.9 million in
2000 from $525.7 million in 1999. Gross margin increased to 29.0% in 2000 from
27.1% in 1999. The overall increase in gross margin was primarily due to the
increased revenue contribution of the Company's e-Business solutions division,
which generated a gross margin of 43.5% in 2000 as compared to 41.8% in 1999.
Revenue contributed from the e-Business solutions division increased to 13.2% in
2000 from 8.7% in 1999. The gross margin in the professional services division
increased to 33.3% in 2000 from 32.9% in 1999. The gross margin in the IT
services division increased to 22.3% in 2000 from 22.1% in 1999.
Operating expenses. Operating expenses increased $67.1 million or 17.4% to
$452.6 million in 2000 from $385.5 million in 1999. The Company's G&A expenses
increased $67.7 million or 21.2% to $386.3 million in 2000, from $318.6 million
in 1999. Included in operating expenses in 1999 is a $25.0 million charge for an
asset write-down related to the sale of discontinued operations and a $0.8
million restructuring charge recapture. Included in operating expenses in 2000
is an additional $13.1 million charge for an asset write-down related to the
sale of discontinued operations, $7.3 million of costs related to the cancelled
separation and spin-off of the IT services division and the cancelled initial
public offering of the e-Business solutions division, and an additional $0.8
million restructuring charge recapture.
Excluding these aforementioned costs, operating expenses increased $69.2
million, or 19.0%, to $433.0 million in 2000, from $363.8 million in 1999, and
G&A expenses increased $60.4 million, or 19.0%, to $379.0 million in 2000, from
$318.6 million in 1999. Excluding these costs, the overall increase in G&A
expenses was attributable primarily to the e-Business solutions division and to
a lesser extent the professional services division.
The e-Business solution division's G&A expenses increased $51.5 million, or
137.0%, to $89.1 million in 2000 from $37.6 million in 1999. As a percentage of
revenue, the e-Business solution division's G&A expenses increased to 37.0% in
2000 from 22.4% in 1999. The increase in the division's G&A expenses was
primarily related to increased expenses to support the growth of the division,
including sales, marketing and brand recognition.
The professional services division's G&A expenses increased $12.8 million, or
10.1%, to $139.7 million in 2000 from $126.9 million in 1999, even though G&A
expenses as a percentage of revenue remained constant at 21.4% for the
respective years. The increase in the professional services division's G&A
expenses was primarily related to the internal growth of its operating units and
increased expenses to support the growth of the division.
G&A expenses for the IT services division decreased $3.9 million, or 2.5%, to
$150.2 million in 2000 from $154.1 million in 1999. The decrease in the
division's G&A expenses was associated with the decrease in revenue for 2000.
During the fourth quarter of 2000, the Company implemented cost reduction
initiatives within the Modis division that resulted in a decrease in G&A
expenses during the quarter.
Income from operations. Income from operations decreased $61.9 million, or
44.2%, to $78.3 million in 2000, from $140.2 million in 1999. The decrease in
operating income is due to the lower contribution of operating income from the
Company's e-Business solutions and IT services divisions. The Company elected to
increase expenditures in the e-Business solutions division to support sales,
marketing and brand recognition. Additionally, the IT services division's costs
decreased slightly with a reduction in revenue. Income from operations for the
professional services division, however, increased $7.3 million, or 13.4%, to
$61.7 million in 2000, from $54.4 million in 1999, mainly as a result of the
increase in revenue in the division. For the Company as a whole, income from
operations as a percentage of revenue decreased to 4.3% in 2000, from 7.2% in
1999.
Other expense, net. Other expense, net consists primarily of interest expense
related to borrowings under the Company's credit facilities and notes issued in
connection with acquisitions, net of interest income related to investment
income from (1) certain investments owned by the Company and (2) cash on hand.
Interest expense increased $10.8 million, or 88.5%, to $23.0 million in 2000,
from $12.2 million in 1999. Interest expense in 1999 was significantly reduced
as a result of the net cash on hand related to the sale of the Company's
discontinued Commercial operations and Teleservices division in 1998 resulting
in an overall lower level of borrowings under the Company's credit facilities
during 1999. Interest expense was offset by $1.4 million of interest and other
income in 2000 as compared to $4.4 million in 1999.
Income Taxes. The Company recognized a net income tax benefit for 2000 of $63.1
million as compared to an income tax provision of $50.3 million in 1999. The
income tax benefit related primarily to a tax benefit of $99.7 million
associated with an investment in a subsidiary. This tax benefit was partially
offset by a $13.4 million valuation allowance. Absent this net benefit, the
Company's effective tax rate increased to 41.0% in 2000 as compared to 38.0% in
1999, due to (1) the effect of foreign tax credits recognized in 1999, and (2)
the increased effect of non-deductible expense items on a lower level of income
in 2000.
Income from continuing operations. As a result of the foregoing, income from
continuing operations increased $37.7 million, or 45.9%, to $119.8 million in
2000, from $82.1 million in 1999. Income from continuing operations as a
percentage of revenue increased to 6.6% in 2000, from 4.2% in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have principally been related to the
acquisition of businesses, working capital needs and capital expenditures. These
requirements have been met through a combination of bank debt and internally
generated funds. The Company's operating cash flows and working capital
requirements are affected significantly by the timing of payroll and by the
receipt of payment from the customer. Generally, the Company pays its
consultants weekly or semi-monthly, and receives payments from customers within
30 to 90 days from the date of invoice.
The Company had working capital of $204.7 million and $248.4 million as of
December 31, 2001 and 2000, respectively. The Company had cash and cash
equivalents of $49.2 million and $5.0 million as of December 31, 2001 and 2000,
respectively.
For the years ended December 31, 2001 and 2000, the Company generated $183.6
million and $192.7 million of cash flow from operations, respectively. Excluding
the effect of a net tax benefit of $86.3 million associated with an investment
in a subsidiary in 2000, the increase in cash flows from operations in 2001 from
2000 primarily related to improved receivables collection, decreasing the cash
needed to fund accounts receivable. The Company's continued consolidation of
back office activities and systems and increased collection efforts led to
improved collections in 2001. For the year ended December 31, 1999, the Company
generated $75.7 million of cash flow from operations. The increase in cash flow
from operations in 2000 from 1999 primarily related to the net tax benefit.
For the year ended December 31, 2001, the Company used $15.3 million of cash for
investing activities, primarily for capital expenditures. For the year ended
December 31, 2000, the Company used $148.8 million of cash for investing
activities, primarily as a result of acquisitions in the e-Business solutions
division and to a lesser extent earn-out payments. The Company also used $25.2
million for capital expenditures. For the year ended December 31, 1999, the
Company used $392.5 million of cash flow for investing activities, mainly as a
result of the payment of a tax liability, net worth adjustment and certain
transaction expenses of $191.4 million relating to the sale of the Company's
Commercial operations and Teleservices division. Additionally, the Company used
$160.7 million for acquisitions and earn-out payments, $21.2 million for capital
expenditures, and $19.2 million for advances associated with the sale of the
Company's Health Care division in 1998.
For the year ended December 31, 2001, the Company used $116.6 million of cash
for financing activities. This amount primarily represented net repayments on
the Company's credit facility and on notes issued in connection with the
acquisition of certain companies. These repayments were mainly funded from cash
flows from operations.
For the year ended December 31, 2000, the Company used $47.4 million of cash for
financing activities. This amount primarily represented net repayments on the
Company's credit facility and on notes issued in connection with the acquisition
of certain companies. These repayments were mainly funded from a net tax benefit
associated with an investment in a subsidiary.
For the year ended December 31, 1999, the Company generated $223.0 million from
financing activities. During 1999, this amount primarily represented net
borrowings from the Company's credit facility, which was used primarily to pay
the tax liability and other payments related to the sale of the Company's
Commercial operations and Teleservices division. Additionally, in connection
with the Company's 1998 share buyback program, the Company was refunded a
portion of the purchase price in 1999.
On November 4, 1999, the Company's Board of Directors authorized the repurchase
of up to $65.0 million of the Company's common stock. As of December 31, 2001,
no shares have been repurchased under this authorization.
The Company anticipates that capital expenditures for furniture and equipment,
including improvements to its management information and operating systems
during the next twelve months will be approximately $15.0 million.
The Company believes that funds provided by operations, available borrowings
under the credit facility, and current amounts of cash will be sufficient to
meet its presently anticipated needs for working capital, capital expenditures
and acquisitions for at least the next 12 months.
Indebtedness, Contractual Obligations, and Commercial Commitments of the Company
The following are contractual cash obligations and other commercial commitments
of the Company at December 31, 2001:
Payments Due by Period
------------------------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Total 1 Year Years Years Years
Contractual Cash Obligations
(in thousands)
Long term debt $ 101,000 $ - $ 101,000 $ - $ -
Operating leases 65,664 18,387 38,084 5,614 3,579
------------------------------------------------------------------------------
Total Contractual Cash Obligations $ 166,664 $ 18,387 $ 139,084 $ 5,614 $ 3,579
==============================================================================
Amount of Commitment Expiration per Period
------------------------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Total 1 Year Years Years Years
Commercial Commitments
(in thousands)
Lines of credit $ 350,000 $ - $ 350,000 $ - $ -
Standby letters of credit 2,309 - 2,309 - -
------------------------------------------------------------------------------
Total Commercial Commitments $ 352,309 $ - $ 352,309 $ - $ -
==============================================================================
The Company has a $350 million revolving credit facility which is syndicated to
a group of 13 banks with Bank of America as the principal agent. This facility
expires on October 27, 2003. The credit facility contains certain financial and
non-financial covenants relating to the Company's operations, including
maintaining certain financial ratios. Repayment of the credit facility is
guaranteed by the material subsidiaries of the Company. In addition, approval is
required by the majority of the lenders when the cash consideration of an
individual acquisition exceeds 10% of consolidated stockholders' equity of the
Company. On October 24, 2001, the Company elected not to renew an additional $50
million 364 day credit facility so as to more closely align its borrowing
capacity to its anticipated funding needs. The election not to renew reduced the
overall credit commitment to the Company to $350 million at December 31, 2001
from $400 million at December 31, 2000.
As of March 8, 2002, the Company had a balance of approximately $91.7 million
outstanding under the credit facility. The Company also had outstanding letters
of credit in the amount of $2.3 million, reducing the amount of funds available
under the credit facility to approximately $256.0 million as of March 8, 2002.
On February 12, 2001, the Company entered into an interest rate swap agreement
to convert certain floating rate debt outstanding under the Company's credit
facility into fixed rate debt by fixing the base rate, as defined by the credit
facility. The actual interest rate on the credit facility is equal to this base
rate plus an additional spread, determined by the Company's financial
performance. This agreement had an initial notional amount of $110.4 million as
of February 12, 2001, which amortizes to $55.7 million on January 2, 2003 in
correlation with the Company's estimate of cash flow needs. On March 2, 2001,
the Company entered into an additional interest rate swap agreement to convert
an additional $25.0 million into fixed rate debt. These agreements were approved
by the Board of Directors. In the fourth quarter of 2001, the Company settled
the interest rate swap agreement entered into on March 2, 2001 for a $0.2
million loss. As of December 31, 2001, the outstanding agreement had a total
notional amount of $100.7 million, with an underlying rate of 5.185%.
The Company has certain notes payable to shareholders of acquired companies
which bear interest at rates ranging from 5.0% to 7.0%. As of March 8, 2002, the
Company owed approximately $0.8 million in such acquisition indebtedness.
CRITICAL ACCOUNTING POLICIES
The Company believes the following are its most critical accounting policies in
that they are the most important to the portrayal of the Company's financial
condition and results and require management's most difficult, subjective or
complex judgements
Revenue Recognition
The Company recognizes revenue at the time services are provided. In most cases,
the consultant is the Company's employee and all costs of employing the worker
are the responsibility of the Company and are included in cost of revenue.
Revenues generated when the Company permanently places an individual with a
client are recorded at the time of placement less a reserve for employees not
expected to meet the probationary period. The Company, to a lesser extent, is
also involved in fixed price engagements whereby revenues are recognized under
the percentage-of-completion method of accounting.
Allowance for Doubtful Accounts
The Company regularly monitors and assesses its risk of not collecting amounts
owed to it by its customers. This evaluation is based upon an analysis of
amounts currently and past due along with relevant history and facts particular
to the customer. Based upon the results of this analysis, the Company records an
allowance for uncollectible accounts for this risk. This analysis requires the
Company to make significant estimates, and changes in facts and circumstances
could result in material changes in the allowance for doubtful accounts.
Asset Impairment
The Company reviews its long-lived assets and identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. In performing the review
for recoverability, the Company estimates the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized.
Otherwise, an impairment loss is not recognized. Measurement of an impairment
loss for long-lived assets and identifiable intangibles would be based on the
fair value of the asset.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ('FASB') issued
Statements of Financial Accounting Standards ('SFAS') No. 141, 'Business
Combinations' and No. 142, 'Goodwill and Other Intangible Assets.' SFAS No. 141
and SFAS No. 142 establish accounting and reporting standards for business
combinations and for goodwill and intangible assets resulting from business
combinations, respectively. SFAS No. 141 prohibits the use of the
pooling-of-interests method of accounting for business combinations and applies
to all business combinations initiated after June 30, 2001. SFAS No. 142
discontinues the periodic amortization of goodwill (and intangible assets deemed
to have indefinite lives) and requires impairment to be tested annually.
Further, SFAS No. 142 replaces the measurement guidelines for impairment,
whereby goodwill not considered impaired under previous accounting literature
may be considered impaired under SFAS No. 142. SFAS No. 142 is effective for all
fiscal years beginning after December 15, 2001, and cannot be applied
retroactively. SFAS No. 142 is to be applied to all recorded goodwill and
intangible assets as of the date of adoption.
The Company has applied SFAS No. 142 for the accounting of goodwill and other
intangible assets beginning January 1, 2002. Application of the non-amortization
provisions of SFAS No. 142 is expected to increase income from operations by
approximately $40 million per year. Additionally, the Company is currently in
the process of performing the required transitionary impairment test of goodwill
under SFAS No. 142. As a result of this transitionary impairment test, the
Company expects to incur a non-cash charge of between $550 million and $700
million ($450 - $600 million, net of tax) in the first quarter of 2002. This
charge will be accounted for as a change in accounting principle.
Additionally, in August and October 2001, the FASB issued SFAS No. 143,
'Accounting for Asset Retirement Obligations' and SFAS No. 144, 'Accounting for
the Impairment or Disposal of Long-Lived Assets,' respectively. SFAS No. 143
requires the fair value of a liability be recorded for an asset retirement
obligation in the period in which it is incurred. SFAS No. 144 addresses the
accounting and reporting for the impairment of long-lived assets, other than
goodwill, and for long-lived assets to be disposed of. Further, SFAS No. 144
establishes a single accounting model for long-lived assets to be disposed of by
sale. Both SFAS No. 143 and No. 144 are effective for all fiscal years beginning
after December 15, 2001. For both SFAS No. 143 and No. 144, management does not
expect the impact from these statements' provisions to have a material effect on
the Company's consolidated results of operations and financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following assessment of the Company's market risks does not include
uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax and credit risks.
Interest Rates. The Company's exposure to market risk for changes in interest
rates relates primarily to the Company's short-term and long-term debt
obligations and to the Company's investments.
The Company's investment portfolio consists of cash and cash equivalents
including deposits in banks, government securities, money market funds, and
short-term investments with maturities, when acquired, of 90 days or less. The
Company is adverse to principal loss and seeks to preserve its invested funds by
placing these funds with high credit quality issuers. The Company constantly
evaluates its invested funds to respond appropriately to a reduction in the
credit rating of any investment issuer or guarantor.
The Company's short-term and long-term debt obligations totaled $101.8 million
as of December 31, 2001, and the Company had $246.7 million available under its
credit facilities. The short-term debt obligations include $0.8 million of notes
payable to former shareholders of acquired corporations, which are at a fixed
rate of interest. The interest rate risk on these notes payable to former
shareholders is immaterial due to the dollar amount of these obligations.
On February 12, 2001, the Company entered into an interest rate swap agreement
to convert certain floating rate debt outstanding under the Company's credit
facility into fixed rate debt by fixing the base rate, as defined by the credit
facility. The actual interest rate on the credit facility is equal to this base
rate plus an additional spread, determined by the Company's financial
performance. This swap agreement had an initial notional amount of $110.4
million as of February 12, 2001, which amortizes to $55.7 million on January 2,
2003 in correlation with the Company's estimate of cash flow needs. On March 2,
2001, the Company entered into an additional interest rate swap agreement to
convert an additional $25.0 million into fixed rate debt. These agreements were
approved by the Board of Directors. In the fourth quarter of 2001, the Company
settled the interest rate swap agreement entered into on March 2, 2001 for a
$0.2 million loss. As of December 31, 2001, the outstanding agreement had a
total notional amount of $101.0 million, with an underlying rate of 5.185%.
Hedging interest rate exposure through the use of swaps are specifically
contemplated to manage risk in keeping with management policy. The Company does
not utilize derivatives for speculative purposes. These swaps are
transaction-specific so that a specific debt instrument determines the amount,
maturity and specifics of each swap.
The Company prepared sensitivity analyses of its borrowings under the credit
facility and its financial instruments to determine the impact of hypothetical
changes in interest rates on the Company's results of operations and cash flows,
and the fair value of its financial instruments. The interest-rate analysis
assumed a 50 basis point adverse change in interest rates on all borrowings
under the credit facility and financial instruments, representing approximately
10% of the Company's weighted average borrowing rate. However, the interest-rate
analysis did not consider the effects of the reduced level of economic activity
that could exist in such an environment. A 50 basis point adverse move in
interest rates on the Company's outstanding borrowings under the credit facility
would have an immaterial impact on the Company's results of operations and cash
flows. However, a 50 basis point adverse move in interest rates would decrease
the fair value of the Company's interest rate swap agreement by approximately
$0.3 million.
Foreign currency exchange rates. Foreign currency exchange rate changes impact
translations of foreign denominated assets and liabilities into U.S. dollars and
future earnings and cash flows from transactions denominated in different
currencies. The Company generated approximately 27% of its 2001 consolidated
revenues from international operations, approximately 97% of which were from the
United Kingdom. The exchange rate has decreased approximately 3% in 2001, from
1.49 at December 31, 2000 to 1.45 at December 31, 2001. The Company prepared
sensitivity analyses to determine the adverse impact of hypothetical changes in
the British pound sterling, relative to the U.S. Dollar, on the Company's
results of operations and cash flows. However, the analysis did not include the
potential impact on sales levels resulting from a change in the British pound
sterling. An additional 10% adverse movement in the exchange rate would have had
an immaterial impact on the Company's cash flows and financial position for
2001. While fluctuations in the British pound sterling have not historically had
a material impact on the Company's results of operations, the lower level of
earnings resulting from a decrease in demand for the services provided by the
Company's domestic operations have increased the impact of exchange rate
fluctuations. However, the Company did not hold or enter into any foreign
currency derivative instruments as of December 31, 2001.
FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION
Effect of Fluctuations in the General Economy
Demand for the Company's business services is significantly affected by the
general level of economic activity in the markets served by the Company. During
periods of slowing economic activity, companies may reduce the use of outside
consultants and staff augmentation services prior to undertaking layoffs of
full-time employees. Also during such periods, companies may elect to defer
installation of new IT systems and platforms (such as Enterprise Resource
Planning systems) or upgrades to existing systems and platforms. As a result,
any significant or continued economic downturn could have a material adverse
effect on the Company's results of operations or financial condition.
The Company may also be adversely affected by consolidations through mergers and
otherwise of major customers or between major customers with non-customers.
These consolidations as well as corporate downsizings may result in redundant
functions or services and a resulting reduction in demand by such customers for
the Company's services. Also, spending for outsourced business services may be
put on hold until the consolidations are completed.
Competition
The Company's industry is intensely competitive and highly fragmented, with few
barriers to entry by potential competitors. The Company faces significant
competition in the markets that it serves and will face significant competition
in any geographic market that it may enter. In each market in which the Company
operates, it competes for both clients and qualified professionals with other
firms offering similar services. Competition creates an aggressive pricing
environment and higher wage costs, which puts pressure on gross margins.
Ability to Recruit and Retain Professional Employees
The Company depends on its ability to recruit and retain employees who possess
the skills, experience and/or professional certifications necessary to meet the
requirements of the Company's clients. Competition for individuals possessing
the requisite criteria is intense, particularly in certain specialized IT and
professional skill areas. The Company often competes with its own clients in
attracting and retaining qualified personnel. There can be no assurance that
qualified personnel will be available and recruited in sufficient numbers on
economic terms acceptable to the Company.
Ability to Continue Acquisition Strategy; Ability to Integrate Acquired
Operations
Historically, the Company has included acquisitions are a part of the Company's
overall growth strategy. Although the Company continues to seek acquisition
opportunities, there can be no assurance that the Company will be able to
negotiate acquisitions on economic terms acceptable to the Company or that the
Company will be able to successfully identify acquisition candidates and
integrate all acquired operations into the Company.
Possible Changes in Governmental Regulations
From time to time, legislation is proposed in the United States Congress, state
legislative bodies and by foreign governments that would have the effect of
requiring employers to provide the same or similar employee benefits to
consultants and other temporary personnel as those provided to full-time
employees. The enactment of such legislation would eliminate one of the key
economic reasons for outsourcing certain human resources and could significantly
adversely impact the Company's staff augmentation business. In addition, the
Company's costs could increase as a result of future laws or regulations that
address insurance, benefits or other employment-related matters. There can be no
assurance that the Company could successfully pass any such increased costs to
its clients.
Financial Covenants
The Company's credit facility requires that specified financial ratios be
maintained. The Company's ability to meet these financial ratios can be affected
by events beyond its control. Failure to meet those financial ratios could allow
its lenders to terminate the credit facility and to declare all amounts
outstanding under those facilities to be immediately due and payable. Further,
the Company may not be able to obtain a replacement credit facility on terms and
conditions or at interest rates as favorable as those in current agreements.
Income Tax Audits
The Company is subject to periodic review by federal, state, and local taxing
authorities in the ordinary course of business. During 2001, the Company was
notified by the Internal Revenue Service that certain prior year income tax
returns will be examined. As part of this examination, the net tax benefit
associated with an investment in a subsidiary that the Company recognized in
2000 of $86.3 million is also being reviewed. There can be no assurance that the
Internal Revenue Service will not disallow any or all of the tax benefit. A
disallowance would result in the Company having to repay any or all of the tax
benefit to the Internal Revenue Service which may affect the Company's financial
condition and financial covenants.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Consolidated Financial Statements: The following consolidated financial
statements are included in this Annual Report on Form 10-K:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets at December 31, 2001 and 2000
Consolidated Statements of Income for the years ended
December 31, 2001, 2000, and 1999
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the years ended December 31, 2001, 2000, and 1999
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000, and 1999
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
MPS Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and comprehensive
income, and of cash flows present fairly, in all material respects, the
financial position of MPS Group, Inc. (formerly, Modis Professional Services,
Inc.) and its Subsidiaries at December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Jacksonville, Florida
March 20, 2002
MPS Group, Inc. and Subsidiaries
Consolidated Balance Sheets
DECEMBER 31, DECEMBER 31,
(dollar amounts in thousands except per share amounts) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 49,208 $ 5,013
Accounts receivable, net of allowance of $19,533 and $19,433 227,069 340,827
Prepaid expenses 6,444 9,404
Deferred income taxes 5,873 6,687
Other 12,102 10,376
----------------------------------
Total current assets 300,696 372,307
Furniture, equipment, and leasehold improvements, net 48,742 55,711
Goodwill, net 1,165,961 1,199,849
Other assets, net 28,223 25,693
----------------------------------
Total assets $ 1,543,622 $ 1,653,560
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 757 $ 24,719
Accounts payable and accrued expenses 48,450 50,648
Accrued payroll and related taxes 39,524 41,540
Income taxes payable 7,243 7,012
----------------------------------
Total current liabilities 95,974 123,919
Notes payable, long-term portion 101,000 194,000
Deferred income taxes 22,214 28,584
Other 13,623 3,839
----------------------------------
Total liabilities 232,811 350,342
----------------------------------
Commitments and contingencies (Notes 3, 4, 6, and 7) Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.01 par value; 400,000,000 shares authorized;
98,306,783 and 96,796,217 shares issued and outstanding, respectively 983 968
Additional contributed capital 594,061 587,854
Retained earnings 730,085 721,742
Accumulated other comprehensive loss (9,400) (6,945)
Deferred stock compensation (4,918) (401)
----------------------------------
Total stockholders' equity 1,310,811 1,303,218
----------------------------------
Total liabilities and stockholders' equity $ 1,543,622 $ 1,653,560
==================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
MPS Group, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
------------------------------------------
(dollar amounts in thousands except per share amounts) 2001 2000 1999
- - ----------------------------------------------------------------------------------------------------------------
Revenue $ 1,548,489 $ 1,827,686 $ 1,941,649
Cost of revenue 1,127,444 1,296,834 1,415,901
------------------------------------------
Gross profit 421,045 530,852 525,748
------------------------------------------
Operating expenses:
General and administrative 336,577 386,327 318,593
Depreciation 21,724 16,852 13,727
Amortization of goodwill 38,398 37,029 31,466
Restructuring recapture - (753) (3,250)
Asset impairment related to sale of discontinued operations - 13,122 25,000
------------------------------------------
Total operating expenses 396,699 452,577 385,536
------------------------------------------
Income from operations 24,346 78,275 140,212
Other expense, net 9,199 21,621 7,794
------------------------------------------
Income from continuing operations before income taxes 15,147 56,654 132,418
Provision (benefit) for income taxes 6,804 (63,099) 50,283
------------------------------------------
Income from continuing operations 8,343 119,753 82,135
Gain on sale of discontinued operations - - 14,955
------------------------------------------
Net income $ 8,343 $ 119,753 $ 97,090
==========================================
Basic income per common share from continuing operations $ 0.09 $ 1.24 $ 0.85
==========================================
Basic income per common share from gain on sale of
discontinued operations $ - $ - $ 0.16
==========================================
Basic net income per common share $ 0.09 $ 1.24 $ 1.01
==========================================
Average common shares outstanding, basic 97,868 96,675 96,268
==========================================
Diluted income per common share from continuing operations $ 0.08 $ 1.23 $ 0.85
==========================================
Diluted income per common share from gain on sale of
discontinued operations $ - $ - $ 0.15
==========================================
Diluted net income per common share $ 0.08 $ 1.23 $ 1.00
==========================================
Average common shares outstanding, diluted 98,178 97,539 97,110
==========================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
MPS Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Accumulated
Other
Common Additional Comprehensive Deferred
(dollar amounts in thousands Stock Contributed Retained Income Stock
except per share amounts) Shares Amount Capital Earnings (Loss) Compensation Total
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 96,579,673 $ 966 $ 563,725 $504,899 $ 520 $ - $1,070,110
Comprehensive income:
Net income - - - 97,090 - -
Foreign currency translation - - - - (3,512) -
Total comprehensive income - - - - - - 93,578
Repurchase of common stock, net (615,687) (6) 11,877 - - - 11,871
Exercise of stock options and related
tax benefit 352,634 3 6,953 - - - 6,956
------------------------------------------------------------------------------
Balance, December 31, 1999 96,316,620 963 582,555 601,989 (2,992) - 1,182,515
Comprehensive income:
Net income - - - 119,753 - -
Foreign currency translation - - - - (3,953) -
Total comprehensive income - - - - - - 115,800
Exercise of stock options and related
tax benefit 379,597 4 4,875 - - - 4,879
Issuance of restricted stock 100,000 1 424 - - (425) -
Vesting of restricted stock - - - - - 24 24
------------------------------------------------------------------------------
Balance, December 31, 2000 96,716,217 968 587,854 721,742 (6,945) (401) 1,303,218
Comprehensive income:
Net income - - - 8,343 - -
Foreign currency translation - - - - (9,132) -
Foreign currency translation, tax benefit - - - - 8,185 -
Derivative instruments, net of
related tax benefit - - - - (1,508) -
Total comprehensive income - - - - - - 5,888
Exercise of stock options and related
tax benefit 150,566 1 373 - - - 374
Issuance of restricted stock 1,360,000 14 5,834 - - (5,848) -
Vesting of restricted stock - - - - - 1,331 1,331
------------------------------------------------------------------------------
Balance, December 31, 2001 98,306,783 $ 983 $ 594,061 $730,085 $(9,400) $(4,918) $1,310,811
==============================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
MPS Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
------------------------------------------
(dollar amounts in thousands except for per share amounts) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income from continuing operations $ 8,343 $ 119,753 $ 82,135
Adjustments to income from continuing operations to net
cash provided by operating activities:
Restructuring recapture - (753) (3,250)
Asset write-down related to sale of discontinued operations - 13,122 25,000
Depreciation 21,724 16,852 13,727
Amortization of goodwill 38,398 37,029 31,466
Deferred income taxes 3,553 4,422 21,487
Deferred compensation 1,331 24 -
Changes in assets and liabilities:
Accounts receivable 111,238 (13,994) 1,316
Prepaid expenses and other assets 3,073 6,805 (5,806)
Accounts payable and accrued expenses (2) 12,802 (82,811)
Accrued payroll and related taxes (1,851) (3,401) (9,523)
Other, net (2,216) 54 1,918
-----------------------------------------
Net cash provided by operating activities 183,591 192,715 75,659
-----------------------------------------
Cash flows from investing activities:
Advances associated with sale of discontinued operations,
net of repayments - (10) (19,205)
Income taxes and other cash expenses related to sale of net
assets of discontinued Commercial operations
and Teleservices division - - (191,409)
Purchase of furniture, equipment, and leasehold
improvements, net of disposals (14,814) (25,150) (21,234)
Purchase of businesses, including additional earn-outs on
acquisitions, net of cash acquired and businesses sold (509) (123,623) (160,663)
-----------------------------------------
Net cash used in investing activities (15,323) (148,783) (392,511)
-----------------------------------------
Cash flows from financing activities:
Refunds of common stock - - 11,871
Proceeds from stock options exercised 373 4,880 3,952
Borrowings on indebtedness 2,000 543,000 602,000
Repayments on indebtedness (118,962) (595,284) (394,789)
-----------------------------------------
Net cash (used in) provided by financing activities (116,589) (47,404) 223,034
-----------------------------------------
Effect of exchange rate changes on cash and cash equivalents (7,484) (41) (3,472)
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 44,195 (3,513) (97,290)
Cash and cash equivalents, beginning of year 5,013 8,526 105,816
-----------------------------------------
Cash and cash equivalents, end of year $ 49,208 $ 5,013 $ 8,526
=========================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Years Ended December 31,
(dollar amounts in thousands except for per share amounts) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 12,711 $ 22,112 $ 12,631
Income taxes paid 13,873 11,586 179,624
NON-CASH INVESTING AND FINANCING ACTIVITIES
During 2000 and 1999, the Company completed numerous acquisitions. In connection
with the acquisitions, liabilities were assumed as follows:
Years Ended December 31,
2000 1999
- ------------------------------------------------------------------------------------------------------------------
Fair value of assets acquired $ 73,344 $ 89,217
Cash paid (63,550) (72,223)
---------- -----------
Liabilities assumed $ 9,794 $ 16,994
========== ===========
1. DESCRIPTION OF BUSINESS
MPS Group, Inc. ('MPS' or the 'Company') (NYSE:MPS) helps its client
companies thrive by delivering a unique mix of consulting, solutions, and
staffing services in the disciplines of information technology (IT), finance and
accounting, legal, e-Business, human capital automation, engineering, executive
search, and work force management.
Effective January 1, 2002, the Company completed its name change from Modis
Professional Services, Inc. to MPS Group, Inc. The name change was approved by
shareholders at a special meeting held in October 2001.
MPS consists of three divisions: the professional services division; the
e-Business solutions division, operating under the brand Idea Integration; and
the IT services division, operating under the brand Modis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany transactions have
been eliminated in the accompanying consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include deposits in banks, government securities,
money market funds, and short-term investments with maturities, when acquired,
of 90 days or less.
Furniture, Equipment, and Leasehold Improvements
Furniture, equipment, and leasehold improvements are recorded at cost less
accumulated depreciation and amortization. Depreciation of furniture and
equipment is computed using the straight-line method over the estimated useful
lives of the assets. The Company has developed a proprietary software package
which allows the Company to implement imaging, time capture, and data-warehouse
reporting. The costs associated with the development of this proprietary
software package have been capitalized, and are being amortized over a five-year
period. For a further discussion, see Note 14 to the Consolidated Financial
Statements.
The Company evaluates the recoverability of its carrying value of property
and equipment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Carrying value write-downs and gains and
losses on disposition of property and equipment are reflected in 'Income from
operations.'
Goodwill
The Company has allocated the purchase price of acquired companies
according to the fair market value of the assets acquired. Goodwill represents
the excess of the cost over the fair value of the net tangible and identifiable
intangible assets acquired through these acquisitions, including any contingent
consideration paid (as discussed in Note 3 to the Consolidated Financial
Statements), and is being amortized on a straight-line basis over periods
ranging from 15 to 40 years, with an average amortization period of 35 years.
Management periodically reviews the potential impairment of goodwill on an
undiscounted cash flow basis to assess recoverability. If the estimated future
cash flows are projected to be less than the carrying amount, an impairment
write-down to fair value (representing the carrying amount of the goodwill that
exceeds the discounted expected future cash flows) would be recorded as a period
expense. Accumulated amortization was $160,037 and $121,639 as of December 31,
2001 and 2000, respectively.
In December 2001, the Company sold the assets of its scientific operating
unit, which operated under the brand of Scientific Staffing, to Kforce, Inc. for
consideration including $3.5 million in cash and the assets of Kforce, Inc.'s
legal operating unit. There was no gain or loss on the transaction.
Revenue Recognition
The Company recognizes revenue at the time services are provided. In most
cases, the consultant is the Company's employee and all costs of employing the
worker are the responsibility of the Company and are included in cost of
revenue. Revenues generated when the Company permanently places an individual
with a client are recorded at the time of placement less a reserve for employees
not expected to meet the probationary period. The Company, to a lesser extent,
is also involved in fixed price engagements whereby revenues are recognized
under the percentage-of-completion method of accounting.
Foreign Operations
The financial position and operating results of foreign operations are
consolidated using the local currency as the functional currency. These
operating results are considered to be permanently invested in foreign
operations. Local currency assets and liabilities are translated at the rate of
exchange to the U.S. dollar on the balance sheet date, and the local currency
revenues and expenses are translated at average rates of exchange to the U.S.
dollar during the period.
Stock-Based Compensation
The Company measures compensation expense for employee and director stock
options as the aggregate difference between the market value of its common stock
and exercise prices of the options on the date that both the number of shares
the grantee is entitled to receive and the exercise prices are known.
Compensation expense associated with restricted stock grants is equal to the
market value of the shares on the date of grant and is recorded pro rata over
the required holding period. Pro forma information relating to the fair value of
stock-based compensation is presented in Note 9 to the Consolidated Financial
Statements.
Derivative Instruments and Hedging Activities
In the first quarter of 2001, the Company adopted Statement of Financial
Accounting Standards ('SFAS') No. 133, 'Accounting for Derivative Instruments
and Hedging Activities'. The adoption of SFAS No. 133 did not have an initial
impact on the Company as the Company did not hold any derivatives prior to 2001.
SFAS No. 133 requires that an entity recognize all derivative instruments as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge. The accounting for changes in fair value
of a derivative accounted for as a hedge depends on the intended use of the
derivative and the resulting designation of the hedged exposure. Depending on
how the hedge is used and the designation, the gain or loss due to changes in
fair value is reported either in earnings or in other comprehensive income.
Income Taxes
The provision for income taxes is based on income before taxes as reported
in the accompanying Consolidated Statements of Income. Deferred tax assets and
liabilities are recognized for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. An assessment is made as to
whether or not a valuation allowance is required to offset deferred tax assets.
This assessment includes anticipating future income.
During 2000, the Company recognized a tax benefit of $99.7 million
associated with an investment in a subsidiary. This tax benefit was partially
offset by a $13.4 million valuation allowance. For a further discussion, see
Note 7 to the Consolidated Financial Statements.
Net Income per Common Share
The consolidated financial statements include 'basic' and 'diluted' per
share information. Basic per share information is calculated by dividing net
income by the weighted average number of shares outstanding. Diluted per share
information is calculated by also considering the impact of potential common
stock on both net income and the weighted average number of shares outstanding.
The weighted average number of shares used in the basic earnings per share
computations were 97.9 million, 96.7 million, and 96.3 million in 2001, 2000 and
1999, respectively. The only difference in the computation of basic and diluted
earnings per share is the inclusion of 0.3 million, 0.9 million, and 0.8 million
potential common shares in 2001, 2000 and 1999, respectively. See Note 10 to the
Consolidated Financial Statements.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Although management believes these estimates and assumptions are
adequate, actual results may differ from the estimates and assumptions used.
Reclassifications
Certain amounts have been reclassified in 1999 and 2000 to conform to the
2001 presentation.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ('FASB') issued
Statements of Financial Accounting Standards ('SFAS') No. 141, 'Business
Combinations' and No. 142, 'Goodwill and Other Intangible Assets.' SFAS No. 141
and SFAS No. 142 establish accounting and reporting standards for business
combinations and for goodwill and intangible assets resulting from business
combinations, respectively. SFAS No. 141 prohibits the use of the
pooling-of-interests method of accounting for business combinations and applies
to all business combinations initiated after June 30, 2001. SFAS No. 142
discontinues the periodic amortization of goodwill (and intangible assets deemed
to have indefinite lives) and requires impairment to be tested annually.
Further, SFAS No. 142 replaces the measurement guidelines for impairment,
whereby goodwill not considered impaired under previous accounting literature
may be considered impaired under SFAS No. 142. SFAS No. 142 is effective for all
fiscal years beginning after December 15, 2001, and cannot be applied
retroactively. SFAS No. 142 is to be applied to all recorded goodwill and
intangible assets as of the date of adoption.
The Company has applied SFAS No. 142 for the accounting of goodwill and other
intangible assets beginning January 1, 2002. Application of the non-amortization
provisions of SFAS No. 142 is expected to increase income from operations by
approximately $40 million per year. Additionally, the Company is currently in
the process of performing the required transitionary impairment test of goodwill
under SFAS No. 142. As a result of this transitionary impairment test, the
Company expects to incur a non-cash charge of between $550 million and $700
million ($450 - $600 million, net of tax) in the first quarter of 2002. This
charge will be accounted for as a change in accounting principle.
Additionally, in August and October 2001, the FASB issued SFAS No. 143,
'Accounting for Asset Retirement Obligations' and SFAS No. 144, 'Accounting for
the Impairment or Disposal of Long-Lived Assets,' respectively. SFAS No. 143
requires the fair value of a liability be recorded for an asset retirement
obligation in the period in which it is incurred. SFAS No. 144 addresses the
accounting and reporting for the impairment of long-lived assets, other than
goodwill, and for long-lived assets to be disposed of. Further, SFAS No. 144
establishes a single accounting model for long-lived assets to be disposed of by
sale. Both SFAS No. 143 and No. 144 are effective for all fiscal years beginning
after December 15, 2001. For both SFAS No. 143 and No. 144, management does not
expect the impact from these statements' provisions to have a material effect on
the Company's consolidated results of operations and financial position.
3. ACQUISITIONS
During 2000 and 1999, all acquisitions made by the Company were accounted
for under the purchase method of accounting. The Company has allocated the
purchase price according to the fair value of the assets acquired in the
acquisitions. The excess of the purchase price, including any contingent
consideration paid, over the fair value of the tangible and identifiable
intangible assets (goodwill) is being amortized on a straight line basis over a
period of 40 years for all acquisitions in 2000 and 1999. Because these
acquisitions did not have a material effect on results of operations, pro forma
information has not been shown.
For the Year Ended December 31, 2000
The Company acquired the following companies during the year ended December
31, 2000: Catapult Technology, Inc.; Brahma Software Solutions, Inc.; Brahma
Technolutions, Inc.; T1 Design, Inc.; Red Eye Digital Media, LLC; ITIC, Inc.;
Integral Results, Inc.; G.B. Roberts & Associates, Inc. d/b/a Ramworks; and
Corporate Consulting Services, Inc. Purchase consideration for these 2000
acquisitions totaled $70,940, comprised of $63,550 in cash and $7,390 in notes
payable to former stockholders.
For the Year Ended December 31, 1999
The Company acquired the following companies during the year ended December
31, 1999: Consulting Solutions, Inc.; Brenda Pejovich & Associates, Inc.;
Intelligent Solutions, Ltd.; Zeal, Inc.; UTEK, Inc.; Data Management
Consultants, Inc.; Open Management Systems, Inc.; and Forsythe, Inc. Purchase
consideration for these 1999 acquisitions totaled $94,293, comprised of $83,666
in cash and $10,627 in notes payable to former stockholders. Purchase
consideration includes consideration paid after closing based on the increase in
earnings before interest and taxes ('EBIT'), as defined (earn-outs). The sellers
for the aforementioned 1999 acquisitions are not entitled to any additional
purchase consideration.
Earn-Out Payments
Prior to January 1, 2002, the Company was obligated under certain
acquisition agreements to make earn-out payments to former stockholders of some
of the aforementioned acquired companies accounted for under the purchase method
of accounting upon attainment of certain earnings targets of the acquired
companies. The agreements do not specify a fixed payment of contingent
consideration to be issued; however, the Company has limited its maximum
exposure under some earn-out agreements to a cap which is negotiated at the time
of acquisition.
The Company recorded these payments as goodwill in accordance with EITF
95-8, 'Accounting for Contingent Consideration Paid to the Shareholders of an
Acquired Enterprise in a Purchase Business Combination', rather than
compensation expense. Earn-outs are utilized by the Company to supplement the
partial consideration initially paid to the stockholders of the acquired
companies, if certain earnings targets are achieved. All earn-out payments are
tied to the ownership interests of the selling stockholders of the acquired
companies rather than being contingent upon any further employment with the
Company. Any former owners who remain as employees of the Company receive a
compensation package which is comparable to other employees of the Company at
the same level of responsibility.
The Company has accrued contingent payments related to earn-out obligations
in Accounts payable and accrued expenses of $1.1 million and $41.0 million as of
December 31, 2000 and 1999, respectively. These accrued contingent payments
represent the liabilities related to earn-out payments that are readily
determinable, as a result of resolved and issuable earn-outs, as of the
respective fiscal year ends. The Company applies the relevant profits related to
the earn-out period to the earn-out formula, and determines the appropriate
amount to accrue. There is no accrued contingent payments related to earn-out
obligations as of December 31, 2001 as currently, there are no earn-out
agreements that extend beyond 2001 for any of the acquired companies.
4. NOTES PAYABLE
Notes payable at December 31, 2001 and 2000 consisted of the following:
2001 2000
- ----------------------------------------------------------------------------------------------------------------
Credit facilities (weighted average interest rate of 5.8% - See Note 5
to the Consolidated Financial Statements for a discussion of the
interest rate) $ 101,000 $ 194,000
Notes payable to former shareholders of acquired companies (interest
ranging from 5.0% to 7.0%) 757 24,719
---------------------------
101,757 218,719
Current portion of notes payable 757 24,719
---------------------------
Long-term portion of notes payable $ 101,000 $ 194,000
===========================
The Company has a $350 million revolving credit facility which is
syndicated to a group of 13 banks with Bank of America, as the principal agent.
This facility expires on October 27, 2003. The credit facility contains certain
financial and non-financial covenants relating to the Company's operations,
including maintaining certain financial ratios. Repayment of the credit facility
is guaranteed by the material subsidiaries of the Company. In addition, approval
is required by the majority of the lenders when the cash consideration of an
individual acquisition exceeds 10% of consolidated stockholders' equity of the
Company. On October 24, 2001, the Company elected not to renew the additional
$50 million 364 day credit facility so as to more closely align its borrowing
capacity to its anticipated funding needs. The election not to renew reduced the
overall credit commitment to the Company to $350 million at December 31, 2001
from $400 million at December 31, 2000. The Company incurred certain costs
directly related to obtaining the credit facility in the amount of approximately
$2.4 million. These costs have been capitalized and are being amortized over the
life of the credit facility.
Maturities of notes payable are as follows for the fiscal years subsequent
to December 31, 2001:
Fiscal year
- - ------------------------------------
2002 $ 757
2003 101,000
--------
$101,757
========
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In 2001, the Company has engaged in derivatives classified as cash flow
hedges. Accordingly, changes in the fair value of these hedges are recorded in
'Accumulated other comprehensive loss' on the balance sheet. The Company
formally documents all relations between hedging instruments and the hedged
items, as well as its risk-management objectives and strategy for undertaking
hedging transactions. The Company formally assesses whether the derivatives that
are used in hedging transactions are highly effective in offsetting changes in
cash flows of the hedged items. The non-effective portions of these hedges are
recorded as a component of current earnings.
The Company is currently a party to and in the future may enter into
interest rate swap agreements in the normal course of business to manage and
reduce the risk inherent in interest rate fluctuations. Interest rate swap
agreements are considered hedges of specific borrowings, and differences
received under the swap agreements are recognized as adjustments to interest
expense. On February 12, 2001, the Company entered into an interest rate swap
agreement to convert certain floating rate debt outstanding under the Company's
credit facility into fixed rate debt by fixing the base rate, as defined by the
credit facility. The actual interest rate on the credit facility is equal to
this base rate plus an additional spread, determined by the Company's financial
performance. This agreement had an initial notional amount of $110.4 million as
of February 12, 2001, which amortizes to $55.7 million on January 2, 2003 in
correlation with the Company's estimate of cash flow needs. On March 2, 2001,
the Company entered into an additional interest rate swap agreement to convert
an additional $25.0 million into fixed rate debt. These agreements were approved
by the Board of Directors. In the fourth quarter of 2001, the Company settled
the interest rate swap agreement entered into on March 2, 2001 for a $0.2
million loss. As of December 31, 2001, the outstanding agreement had a total
notional amount of $100.7 million, with an underlying rate of 5.185%.
Hedging interest rate exposure through the use of swaps are specifically
contemplated to manage risk in keeping with management policy. The Company does
not utilize derivatives for speculative purposes. These swaps are
transaction-specific so that a specific debt instrument determines the amount,
maturity and specifics of each swap.
6. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under various noncancelable operating
leases. The following is a schedule of future minimum lease payments with terms
in excess of one year:
Year
- -------------------------------------------------------------------------------------------------------
2002 $ 18,387
2003 16,125
2004 12,923
2005 9,036
2006 3,195
Ther