FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ________ to ___________
Commission file number: 0-24484
Modis Professional Services, Inc.
(Exact name of Registrant as specified in its charter)
Florida 59-3116655
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Independent Drive
Jacksonville, Florida
32202
(Address of principal executive offices) (Zip code)
(904) 360-2000
(Registrant's telephone
number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. October 31, 2001.
Common Stock, $0.01 par value Outstanding: 98,179,705 (No. of shares)
FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements that are subject to
certain risks, uncertainties or assumptions and may be affected by certain other
factors, including but not limited to the specific factors discussed in Part I,
Item 2 under 'Liquidity and Capital Resources', 'Seasonality', 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 I, Item 3, under 'Quantitative and Qualitative Disclosures About Market
Risk' should be considered forward-looking statements. Should one or more of
these risks, uncertainties or other factors materialize, or should underlying
assumptions prove incorrect, actual results, performance or achievements of the
Company may vary materially from any future results, performance or achievements
expressed or implied by such forward-looking statements.
Forward-looking statements are based on beliefs and assumptions of the Company's
management and on information currently available to such 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.
Modis Professional Services, Inc. and Subsidiaries
Index
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2001 (unaudited)
and December 31, 2000.............................................................................. 3
Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months
ended September 30, 2001 and 2000.................................................................. 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 2001 and 2000.................................................................. 5
Unaudited Notes to Condensed Consolidated Financial Statements......................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 11
Item 3 Quantitative and Qualitative Disclosures About Market Risks............................................ 19
Part II Other Information
Item 1 Legal Proceedings...................................................................................... 21
Item 2 Changes in Securities and Use of Proceeds.............................................................. 21
Item 3 Defaults Upon Senior Securities........................................................................ 21
Item 4 Submission of Matters to a Vote of Security Holders.................................................... 21
Item 5 Other Information...................................................................................... 21
Item 6 Exhibits and Reports on Form 8-K....................................................................... 21
Signatures............................................................................................. 22
Exhibits
2
Part I. Financial Information
Item 1. Financial Statements
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, December 31,
(dollar amounts in thousands except per share amounts) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 17,951 $ 5,013
Accounts receivable, net 286,260 340,827
Prepaid expenses 11,264 9,404
Deferred income taxes 7,418 6,687
Other 11,275 10,376
----------------------------------
Total current assets 334,168 372,307
Furniture, equipment and leasehold improvements, net 53,239 55,711
Goodwill, net 1,173,562 1,199,849
Other assets, net 26,167 25,693
----------------------------------
Total assets $ 1,587,136 $ 1,653,560
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,399 $ 24,719
Accounts payable and accrued expenses 53,499 50,648
Accrued payroll and related taxes 43,936 41,540
Income taxes payable 433 7,012
----------------------------------
Total current liabilities 99,267 123,919
Notes payable, long-term portion 142,000 194,000
Deferred income taxes 34,243 28,584
Other 6,041 3,839
----------------------------------
Total liabilities 281,551 350,342
----------------------------------
Commitments and contingencies
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
98,129,705 and 96,522,867 shares issued and outstanding, respectively 981 965
Additional contributed capital 593,568 587,857
Retained earnings 732,819 721,742
Accumulated other comprehensive loss (16,628) (6,945)
Deferred stock compensation (5,155) (401)
----------------------------------
Total stockholders' equity 1,305,585 1,303,218
----------------------------------
Total liabilities and stockholders' equity $ 1,587,136 $ 1,653,560
==================================
See accompanying notes to condensed consolidated financial statements.
3
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
(dollar amounts in thousands except per share amounts) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue $ 368,853 $ 456,265 $ 1,222,902 $ 1,378,126
Cost of revenue 270,844 318,760 885,875 976,994
------------- ------------- -------------- -------------
Gross profit 98,009 137,505 337,027 401,132
------------- ------------- -------------- -------------
Operating expenses:
General and administrative 79,028 103,562 264,449 289,185
Depreciation 5,490 4,437 16,243 12,158
Amortization 9,635 9,454 28,936 27,296
Restructuring charge - (753) - (753)
Asset write-down related to sale of discontinued
operations - 13,122 - 13,122
------------- ------------- -------------- -------------
Total operating expenses 94,153 129,822 309,628 341,008
------------- ------------- -------------- -------------
Income from operations 3,856 7,683 27,399 60,124
Other expense, net 1,897 6,424 7,281 16,860
------------- ------------- -------------- -------------
Income before provision for income taxes 1,959 1,259 20,118 43,264
Provision (benefit) for income taxes 881 (85,635) 9,041 (69,043)
------------- ------------- -------------- -------------
Net income $ 1,078 $ 86,894 $ 11,077 $ 112,307
============= ============= ============== =============
Basic net income per common share $ 0.01 $ 0.90 $ 0.11 $ 1.16
============= ============= ============== =============
Average common shares outstanding, basic 98,071 96,698 97,754 96,650
============= ============= ============== =============
Diluted net income per common share $ 0.01 $ 0.90 $ 0.11 $ 1.15
============= ============= ============== =============
Average common shares outstanding, diluted 98,291 97,041 97,948 97,777
============= ============= ============== =============
See accompanying notes to condensed consolidated financial statements.
4
Modis Professional Services, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30,
------------------------------
(dollar amounts in thousands except per share amounts) 2001 2000
- ------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 11,077 $ 112,307
Adjustments to net income to net cash provided by
by operating activities:
Depreciation 16,243 12,158
Amortization 28,936 27,296
Restructuring and impairment charges - (753)
Asset write-down related to sale of discontinued operations - 13,122
Deferred income taxes 6,012 3,824
Deferred compensation 897 -
Changes in certain assets and liabilities:
Accounts receivable 53,331 (42,076)
Income tax receivable - (86,327)
Prepaid expenses and other assets (1,860) 311
Accounts payable and accrued expenses (2,441) 25,459
Accrued payroll and related taxes 2,513 3,809
Other, net (1,747) 146
--------------- ---------------
Net cash provided by operating activities 112,961 69,276
--------------- ---------------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements, net of disposals (13,771) (19,862)
Purchase of businesses, including additional earn-outs on
acquisitions, net of cash acquired (3,807) (123,445)
--------------- ---------------
Net cash used in investing activities (17,578) (143,307)
--------------- ---------------
Cash flows from financing activities:
Proceeds from stock options exercised 76 4,875
(Repayments) borrowings on indebtedness, net (75,320) 59,299
--------------- ---------------
Net cash (used in) provided by financing activities (75,244) 64,174
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents (7,201) 1,331
Net increase (decrease) in cash and cash equivalents 12,938 (8,526)
Cash and cash equivalents, beginning of period 5,013 8,526
--------------- ---------------
Cash and cash equivalents, end of period $ 17,951 $ -
=============== ===============
See accompanying notes to condensed consolidated financial statements.
5
Modis Professional Services, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(dollar amounts in thousands except for per share amounts)
1. Basis of Presentation.
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by the Company in accordance with the rules and
regulations of the Securities and Exchange Commission ("SEC"). Accordingly,
certain information and footnote disclosures usually found in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's Form 10-K, as filed with the SEC on April 2, 2001.
The accompanying condensed consolidated financial statements reflect all
adjustments (including normal recurring adjustments) which, in the opinion of
management, are necessary to present fairly the financial position and results
of operations for the interim periods presented. The results of operations for
an interim period are not necessarily indicative of the results of operations
for a full fiscal year.
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 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 plans to adopt
SFAS No. 142 in the first quarter of 2002. However, the Company has not yet
quantified the impact of adoption.
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 has not
yet quantified the impact from these statements' provisions on the Company's
consolidated results of operations and financial position.
2. Comprehensive Income
The Company discloses other comprehensive income in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 130, 'Reporting
Comprehensive Income'. Comprehensive income includes unrealized gains and losses
on foreign currency translation adjustments and changes in the fair value of
certain derivative financial instruments which qualify for hedge accounting. A
summary of comprehensive income for the three and nine months ended September
30, 2001 and 2000 is as follows:
6
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Net income $ 1,078 $ 86,894 $ 11,077 $ 112,307
Unrealized gain (loss) on foreign currency
translation adjustments (a) 963 (1,876) (7,914) (3,320)
Unrealized loss on derivative
instruments, net of deferred taxes (904) - (1,769) -
------------- ------------- -------------- -------------
Total other comprehensive income (loss) 59 (1,876) (9,683) (3,320)
Comprehensive income $ 1,137 $ 85,018 $ 1,394 $ 108,987
============= ============= ============== =============
(a) The currency translation adjustments are not adjusted for income taxes as
they relate to indefinite investments in non-U.S. subsidiaries.
3. Derivative Instruments and Hedging Activities
In the first quarter of 2001, the Company adopted 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 fiscal 2001. Pursuant to SFAS No. 133, on a date the
derivative contract is entered into, the Company designates the derivative as to
its type and recognizes the fair value of the derivative on the balance sheet.
In fiscal 2001, the Company has engaged in derivatives classified as cash flow
hedges, and changes in the fair value of highly effective derivatives 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 Company has currently 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 balance 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. The agreements, which were approved by the Board
of Directors, had a total notional amount of $130.8 million at September 30,
2001, with underlying rates ranging from 4.85% to 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.
4. Stockholders' Equity
In January 2001, the Company adopted the 2001 Voluntary Stock Option
Exchange Plan (the 'Option Exchange Plan') in an effort to improve the retention
and incentive aspects of the Company's 1995 Plan, and to provide a mechanism to
return shares to the 1995 Plan for future issuance. All current employees as of
February 12, 2001, who then held options under the Plan or who then held special
grants received outside the 1995 Plan since the 1995 Plan was adopted were
eligible to participate in the Option Exchange Plan. The Option Exchange Plan
allowed eligible option holders to voluntarily cancel existing options in
exchange for new options to be issued no earlier than six months and one day
following termination of existing options. The exercise price of the new options
was the market price on the date of re-issuance. Vested options that were
cancelled were re-granted on a one-for-one basis and were completely vested upon
7
re-grant. Unvested options that were cancelled were re-granted on a one-for-two
basis and will vest in equal annual installments over a three year period from
the date of re-grant.
The Option Exchange Plan was approved by the Compensation Committee and the
non-employee members of the Board of Directors. The Company completed the Option
Exchange Plan in the third quarter with the re-grant of 8.2 million options on
August 13, 2001. The Company did not incur any compensation charges in
connection with the Option Exchange Plan. For further discussion on the Option
Exchange Plan see Form 8-K filed by the Company on January 25, 2001.
In the nine months ended September 30, 2001, the Company's Board of
Directors issued restricted stock grants of 200,000 shares and 150,000 shares to
the Company's President and Chief Executive Officer and other members of senior
management, respectively. Additionally, the Company's Board of Directors issued
a restricted stock grant of 960,000 shares to the Company's Chairman of the
Board, which is scheduled to vest on the fifth anniversary of issuance. The
Company recorded $5.65 million in total deferred compensation expense which will
be amortized on a straight line basis over the vesting period of the grants.
5. Net Income per Common Share
The calculation of basic net income per common share and diluted net income
per common share is presented below:
Three Months Ended Nine Months Ended
-------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Basic income per common share computation:
Net income $ 1,078 $ 86,894 $ 11,077 $ 112,307
============= ============= ============= =============
Average common shares outstanding 98,071 96,698 97,754 96,650
============= ============= ============= =============
Basic net income per common share $ 0.01 $ 0.90 $ 0.11 $ 1.16
============= ============= ============= =============
Diluted income per common share computation:
Net income $ 1,078 $ 86,894 $ 11,077 $ 112,307
============= ============= ============= =============
Basic average common shares outstanding 98,071 96,698 97,754 96,650
Incremental shares from assumed exercise of
stock options 220 343 194 1,127
------------- ------------- ------------- ------------
Diluted average common shares outstanding 98,291 97,041 97,948 97,777
============= ============= ============= ============
Diluted net income per common share $ 0.01 $ 0.90 $ 0.11 $ 1.15
============== ============= ============= ===========
Options to purchase 7,653,411 and 6,407,322 shares of common stock that
were outstanding during the three and nine months ended September 30, 2001,
respectively, were not included in the computation of diluted earnings per share
as the exercise prices of these options were greater than the average market
price of the common shares.
6. Commitments and Contingencies
Litigation
The Company is a party to a number of lawsuits and claims arising out of
the ordinary conduct of its business. In the opinion of management, based on the
advice of in-house and external legal counsel, the lawsuits and claims pending
are not likely to have a material adverse effect on the Company, its financial
position, its results of operations, or its cash flows.
8
7. Segment Reporting
The Company discloses segment information in accordance with SFAS No. 131,
'Disclosure About Segments of an Enterprise and Related Information,' which
requires companies to report selected segment information on a quarterly basis
and to report certain entity-wide disclosures about products and services, major
customers, and the material countries in which the entity holds assets and
reports revenues.
The Company has three reportable segments: professional services,
e-Business solutions, and information technology (IT) services. The Company's
reportable segments are strategic divisions that offer different services and
are managed separately as each division requires different resources and
marketing strategies. The professional services division provides experienced
expertise in a wide variety of disciplines including accounting and finance,
law, engineering and technical, science, career management, executive search,
and human resource consulting. The e-Business solutions division, operating
under the brand Idea Integration, provides e-Business strategy consulting,
design and branding, application development, and integration. The IT services
division, operating under the brand Modis, offers value-added solutions such as
IT project support and staffing, recruitment of full-time positions,
project-based solutions, supplier management solutions, and on-site recruiting
support. The Company evaluates segment performance based on revenues, gross
profit and income before provision for income taxes. The Company does not
allocate income taxes or unusual items to the segments. The following table
summarizes segment and geographic information:
Three Months Ended Nine Months Ended
------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Revenue
Professional services $ 150,501 $ 163,220 $ 479,000 $ 486,915
e-Business solutions 34,736 66,651 138,012 179,986
IT services 183,616 226,394 605,890 711,225
------------ ------------ ------------ ------------
Total revenue $ 368,853 $ 456,265 $ 1,222,902 $ 1,378,126
============ ============ ============ ============
Gross profit
Professional services $ 48,011 $ 54,025 $ 156,874 $ 160,976
e-Business solutions 9,670 30,619 46,508 81,339
IT services 40,328 52,861 133,645 158,817
------------ ------------ ------------ ------------
Total gross profit $ 98,009 $ 137,505 $ 337,027 $ 401,132
============ ============ ============ ============
Income before provision for income taxes
Professional services $ 7,628 $ 16,157 $ 33,804 $ 46,864
e-Business solutions (7,481) 4,926 (22,009) 10,537
IT services 3,709 6,265 15,604 22,388
------------ ------------ ------------ ------------
3,856 27,348 27,399 79,789
Charges (a) - (19,665) - (19,665)
Corporate interest and other income (1,897) (6,424) (7,281) (16,860)
------------ ------------ ------------ ------------
Total income before provision for income taxes $ 1,959 $ 1,259 $ 20,118 $ 43,264
============ ============ ============ ============
Geographic Areas
Revenues
United States $ 260,813 $ 352,474 $ 895,599 $ 1,051,087
U.K. 104,822 100,813 317,928 318,391
Other 3,218 2,978 9,375 8,648
------------ ------------ ------------ ------------
Total $ 368,853 $ 456,265 $ 1,222,902 $ 1,378,126
============ ============ ============ ============
9
September 30, December 31,
2001 2000
- ----------------------------------------------------------------------------------------------
Assets
Professional services $ 452,176 $ 454,127
e-Business solutions 332,261 331,732
IT services 786,913 851,992
------------ ------------
1,571,350 1,637,851
Corporate 15,786 15,709
------------ ------------
Total assets $ 1,587,136 $ 1,653,560
============ ============
Geographic Areas
Identifiable Assets
United States $ 1,152,680 $ 1,223,932
U.K. 415,907 408,339
Other 18,549 21,289
------------ ------------
Total $ 1,587,136 $ 1,653,560
============ ============
(a) Charges for the three and nine months ended September 30, 2000 include (1)
$13,122 asset write-down related to the sale of discontinued operations,
(2) $7,296 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 (3) $753 restructuring charge recapture.
These charges were recognized in third quarter 2000.
8. Income Taxes
The Company is subject to periodic review by federal, state and local
taxing authorities in the ordinary course of business. During the second quarter
of 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
tax benefit associated with an investment in a subsidiary that the Company
recognized in 2000 will also be reviewed. The impact or adjustment, if any, as a
result of this examination cannot be reasonably estimated at this time.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Modis Professional Services, Inc. ('MPS' or the 'Company') is a global provider
of human capital solutions including professional staffing, e-Business and
systems integration, information technology (IT) resource management, career
management consulting, and human capital management automation. MPS' solutions
enable customers and clients to effectively locate, retain, and deploy strategic
knowledge worker resources in the areas of information technology, accounting
and finance, law, engineering and technical, and science. 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.
The following detailed analysis of operations should be read in conjunction with
the 2000 Consolidated Financial Statements and related notes included in the
Company's Form 10-K filed April 2, 2001.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Revenue. Revenue decreased $87.4 million, or 19.2%, to $368.9 million in the
three months ended September 30, 2001, from $456.3 million in the year earlier
period. The decrease was attributable primarily to a decrease in revenue for the
IT services division which accounted for 49.8% and 49.6% of the Company's total
revenue for the three months ended September 30, 2001 and 2000, respectively.
Revenue in the IT services division decreased $42.8 million, or 18.9%, to $183.6
million in the three months ended September 30, 2001, from $226.4 million in the
year earlier period. 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 state of the economy. The Company has experienced
a decrease in billable headcount for the IT services division subsequent to the
three months ended September 30, 2001. This decrease will result in a lower
level of revenue from the division if this trend continues.
Revenue in the e-Business solutions division decreased $32.0 million, or 48.0%,
to $34.7 million in the three months ended September 30, 2001, from $66.7
million in the year earlier period. 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 state of the economy.
The Company has experienced a decrease in billable headcount for the e-Business
solutions division subsequent to the three months ended September 30, 2001. This
decrease will result in a lower level of revenue from the division if this trend
continues.
Revenue in the professional services division decreased $12.7 million, or 7.8%,
to $150.5 million in the three months ended September 30, 2001, from $163.2
million in the year earlier period. 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. 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 40.9%, 12.7%, 33.4%, 9.7% and 3.3%, respectively,
of the division's revenue by group during the three months ended September 30,
2001, as compared to 39.4%, 13.0%, 36.0%, 7.4% and 4.2%, respectively, during
the year earlier period. The Company has experienced a decrease in billable
headcount for the professional services division subsequent to the three months
ended September 30, 2001. This decrease will result in a lower level of revenue
from the division if this trend continues.
Gross Profit. Gross profit decreased $39.5 million, or 28.7%, to $98.0 million
in the three months ended September 30, 2001, from $137.5 million in the year
earlier period. Gross margin decreased to 26.6% in the three months ended
September 30, 2001, from 30.1% in the year earlier period.
The gross margin in the e-Business solutions division decreased to 27.8% in the
three months ended September 30, 2001, from 45.9% in the year earlier period.
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
11
amongst the three divisions, decreased to 9.9% of the Company's total gross
profit for the three months ended September 30, 2001, from 22.3% in the year
earlier period.
The gross margin in the IT services division decreased to 22.0% in the three
months ended September 30, 2001, from 23.3% in the year earlier period. 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 the three
months ended September 30, 2001 as compared to the year earlier period. As a
percentage of revenue, the division's direct hire and permanent placement fees
decreased to 0.6% of revenue in the three months ended September 30, 2001, from
1.0% in the year earlier period.
The gross margin in the professional services division decreased to 31.9% in the
three months ended September 30, 2001, from 33.1% in the year earlier period.
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
three months ended September 30, 2001 as compared to the year earlier period. As
a percentage of revenue, the division's direct hire and permanent placement fees
decreased to 6.3% of revenue in the three months ended September 30, 2001, from
8.3% in the year earlier period.
Operating expenses. Operating expenses decreased $35.6 million, or 27.4%, to
$94.2 million in the three months ended September 30, 2001, from $129.8 million
in the year earlier period. Included in operating expenses in the year earlier
period is a $13.1 million charge for an asset write-down related to the sale of
discontinued operations and a $0.8 million restructuring charge recapture. The
Company's general and administrative ("G&A") expenses decreased $24.6 million,
or 23.7%, to $79.0 million in the three months ended September 30, 2001, from
$103.6 million in the year earlier period. Included in G&A expenses in the year
earlier period is $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 e-Business solutions division. 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 $10.4 million, or 26.3%, to $29.1 million in the three months ended
September 30, 2001, from $39.5 million in the year earlier period. As a
percentage of revenue, the division's G&A expenses decreased to 15.9% in the
three months ended September 30, 2001, from 17.5% in the year earlier period.
The decrease in the IT services division's G&A expenses is associated with the
decrease in revenue for the three months ended September 30, 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 $9.0 million, or
39.0%, to $14.1 million in the three months ended September 30, 2001, from $23.1
million in the year earlier period. As a percentage of revenue, the division's
G&A expenses increased to 40.5% in the three months ended September 30, 2001,
from 34.6% in the year earlier period. The decrease in the e-Business solutions
division's G&A expenses was related to reductions in its workforce that started
in early 2001.
The professional services division's G&A expenses increased $2.2 million, or
6.5%, to $35.9 million in the three months ended September 30, 2001, from $33.7
million in the year earlier period. As a percentage of revenue, the division's
G&A expenses increased to 23.8% in the three months ended September 30, 2001,
from 20.6% in the year earlier period. 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 third quarter
of 2001, the Company continued to eliminate many of these duplicative corporate
infrastructure responsibilities in the division, integrating these efforts into
the MPS corporate structure. Integrating these efforts are expected to lower the
level of spending in the professional services division for the remainder of
fiscal 2001.
Income from operations. Income from operations decreased $3.8 million, or 49.4%,
to $3.9 million in the three months ended September 30, 2001, from $7.7 million
in the year earlier period. The decrease in operating income is due to the lower
contribution of operating income primarily from the e-Business solutions
division and the professional services division and to a lesser extent the IT
services division. Income from operations for the e-Business solutions division
decreased $12.4 million, to a $7.5 million loss in the three months ended
September 30, 2001, from income of $4.9 million in the year earlier period.
Income from operations for the professional services division decreased $8.5
million, or 52.5%, to $7.7 million in the three months ended September 30, 2001,
from $16.2 million in the year earlier period. Income from operations for the IT
12
services division decreased $2.6 million, or 41.3 %, to $3.7 million in the
three months ended September 30, 2001, from $6.3 million in the year earlier
period. For the Company as a whole, income from operations as a percentage of
revenue decreased to 1.0% in the three months ended September 30, 2001, from
1.7% in the year earlier period.
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 $4.6 million, or 67.6%, to $2.2 million in the three
months ended September 30, 2001, from $6.8 million in the year earlier period.
The decrease in interest expense is related to the lower level of borrowings
under the Company's credit facilities during the third quarter of 2001. Interest
expense was offset by $0.3 million of interest and other income in both the
three months ended September 30, 2001 and 2000.
Income Taxes. The Company recognized an income tax provision of $0.9 million in
the three months ended September 30, 2001, compared to a net income tax benefit
of $85.6 million for the year earlier period. The income tax benefit in the
prior year related primarily to a tax benefit associated with an investment in a
subsidiary.
Net Income. As a result of the foregoing, net income decreased $85.8 million, or
98.7%, to $1.1 million in the three months ended September 30, 2001, from $86.9
million in the year earlier period. Net income as a percentage of revenue
decreased to 0.3% in the three months ended September 30, 2001, from 19.0% in
the year earlier period. As a result of the aforementioned revenue trends in
each of the Company's divisions, the Company anticipates its net income will be
negatively impacted during the remainder of fiscal 2001 as compared to the level
of net income produced during the three months ended September 30, 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Revenue. Revenue decreased $155.2 million, or 11.3%, to $1,222.9 million in the
nine months ended September 30, 2001, from $1,378.1 million in the year earlier
period. The decrease was attributable primarily to a decrease in revenue for the
IT services division which accounted for 49.5% and 51.6% of the Company's total
revenue for the nine months ended September 30, 2001 and 2000, respectively.
Revenue in the IT services division decreased $105.3 million, or 14.8%, to
$605.9 million in the nine months ended September 30, 2001, from $711.2 million
the year earlier period. 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 state of the economy. The Company has experienced
a decrease in billable headcount for the IT services division subsequent to the
nine months ended September 30, 2001. This decrease will result in a lower level
of revenue from Modis if this trend continues.
Revenue in the e-Business solutions division decreased $42.0 million, or 23.3%,
to $138.0 million in the nine months ended September 30, 2001, from $180.0
million in the year earlier period. 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 state of the economy.
The Company has experienced a decrease in billable headcount for the e-Business
solutions division subsequent to the nine months ended September 30, 2001. This
decrease will result in a lower level of revenue from the division if this trend
continues.
Revenue in the professional services division decreased $7.9 million, or 1.6%,
to $479.0 million in the nine months ended September 30, 2001, from $486.9
million in the year earlier period. 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. 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%, 12.4%, 34.3%, 9.1% and 3.6%, respectively,
of the division's revenue by group during the nine months ended September 30,
2001, as compared to 40.1%, 12.9%, 34.6%, 8.2% and 4.2%, respectively, during
the year earlier period. The Company has experienced a decrease in billable
headcount for the professional services division subsequent to the nine months
ended September 30, 2001. This decrease will result in a lower level of revenue
from the division if this trend continues.
13
Gross Profit. Gross profit decreased $64.1 million, or 16.0%, to $337.0 million
in the nine months ended September 30, 2001, from $401.1 million in the year
earlier period. Gross margin decreased to 27.6% in the nine months ended
September 30, 2001, from 29.1% in the year earlier period. This decrease in
gross margin was primarily attributable to the e-Business solutions division.
The gross margin in the e-Business solutions division decreased to 33.7% in the
nine months ended September 30, 2001, from 45.2% in the year earlier period.
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 addressed
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 maintains the highest gross margin
amongst the three divisions, decreased to 13.8% of the Company's total gross
profit for the nine months ended September 30, 2001, from 20.3% in the year
earlier period.
The gross margin in the IT services division decreased slightly to 22.1% in the
nine months ended September 30, 2001, from 22.3% in the year earlier period. The
gross margin in the professional services division decreased to 32.8% in the
nine months ended September 30, 2001, from 33.1% in the year earlier period.
Operating expenses. Operating expenses decreased $31.4 million, or 9.2%, to
$309.6 million in the nine months ended September 30, 2001, from $341.0 million
in the year earlier period. Included in operating expenses in the year earlier
period is a $13.1 million charge for an asset write-down related to the sale of
discontinued operations and a $0.8 million restructuring charge recapture. The
Company's G&A expenses decreased $24.8 million, or 8.6%, to $264.4 million in
the nine months ended September 30, 2001, from $289.2 million in the year
earlier period. Included in G&A expenses in the year earlier period is $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. 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 $20.4 million, or
17.6%, to $95.2 million in the nine months ended September 30, 2001, from $115.6
million in the year earlier period. As a percentage of revenue, the division's
G&A expenses decreased to 15.7% in the nine months ended September 30, 2001,
from 16.3% in the year earlier period. The decrease in the IT services
division's G&A expenses is associated with the decrease in revenue for the nine
months ended September 30, 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 $4.3 million, or
6.7%, to $59.5 million in the nine months ended September 30, 2001, from $63.8
million in the year earlier period. As a percentage of revenue, the division's
G&A expenses increased to 43.1% in the nine months ended September 30, 2001,
from 35.4% in the year earlier period. The decrease in e-Business solutions
division's G&A expenses was related to reductions in its workforce that started
in early 2001.
The professional services division's G&A expenses increased $7.3 million, or
7.1%, to $109.8 million in the nine months ended September 30, 2001, from $102.5
million in the year earlier period. As a percentage of revenue, the division's
G&A expenses increased to 22.9% in the nine months ended September 30, 2001,
from 21.0% in the year earlier period. 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. Integrating these efforts are expected to lower the
level of spending in the professional services division for the remainder of
fiscal 2001.
Income from operations. Income from operations decreased $32.7 million, or
54.4%, to $27.4 million in the nine months ended September 30, 2001, from $60.1
million in the year earlier period. Income from operations for the e-Business
solutions division decreased $32.5 million, to a $22.0 million loss in the nine
months ended September 30, 2001, from income of $10.5 million in the year
earlier period. Income from operations for the professional services division
decreased $13.1 million, or 27.9%, to $33.8 million in the nine months ended
September 30, 2001, from $46.9 million in the year earlier period. Income from
operations for the IT services division decreased $6.8 million, or 30.4%, to
$15.6 million in the nine months ended September 30, 2001, from $22.4 million in
the year earlier period. For the Company as a whole, income from operations as a
percentage of revenue decreased to 2.2% in the nine months ended September 30,
2001, from 4.4% in the year earlier period.
14
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 $9.6 million, or 53.3%, to $8.4 million in the nine
months ended September 30, 2001, from $18.0 million in the year earlier period.
The decrease in interest expense is related to the lower level of borrowings
under the Company's credit facilities during the first nine months of 2001.
Interest expense was offset by $1.2 million of interest and other income in the
nine months ended September 30, 2001, as compared to $1.1 million in the year
earlier period.
Income Taxes. The Company recognized an income tax provision of $9.0 million in
the nine months ended September 30, 2001, compared to a net income tax benefit
of $69.0 million for the year earlier period. The income tax benefit in the
prior year related primarily to a tax benefit associated with an investment in a
subsidiary.
Net Income. As a result of the foregoing, net income decreased $101.2 million,
or 90.1%, to $11.1 million in the nine months ended September 30, 2001, from
$112.3 million in the year earlier period. Net income as a percentage of revenue
decreased to 0.9% in the nine months ended September 30, 2001, from 8.1% in the
year earlier period. As a result of the aforementioned revenue trends in each of
the Company's divisions, the Company anticipates its net income will be
negatively impacted during the remainder of fiscal 2001 as compared to the level
of net income produced during the nine months ended September 30, 2001.
15
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 $234.9 million and $248.4 million as of
September 30, 2001 and December 31, 2000, respectively. The Company had cash and
cash equivalents of $18.0 million and $5.0 million as of September 30, 2001 and
December 31, 2000, respectively.
For the nine months ended September 30, 2001 and 2000, the Company generated
$113.0 million and $69.3 million of cash flow from operations, respectively. The
increase in cash flow from operations in the nine months ended September 30,
2001 primarily related to improved receivables collection, decreasing the cash
needed to fund accounts receivable.
For the nine months ended September 30, 2001, the Company used $17.6 million of
cash for investing activities, of which $13.8 million were used for capital
expenditures and $3.8 million for earn-out payments. For the nine months ended
September 30, 2000, the Company used $143.3 million of cash for investing
activities, of which $123.4 million were used primarily for acquisitions in Idea
Integration and to a lesser extent earn-out payments. The Company also used
$19.9 million for capital expenditures.
For the nine months ended September 30, 2001, the Company used $75.2 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
flow from operations.
For the nine months ended September 30, 2000, the Company generated $64.2
million from financing activities. This amount primarily represented net
borrowings from the Company's credit facility, which was used primarily to pay
for acquisitions in Idea Integration and to a lesser extent earn-out payments.
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 September 30, 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 remainder of fiscal 2001 will be approximately $4.0 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.
16
Indebtedness of the Company
The Company has a $350 million revolving credit facility which is syndicated to
a group of 13 banks, with Bank of America, as the principal agent. This facility
expires on October 27, 2003. 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.
As of October 31, 2001, the Company had a balance of approximately $136.0
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 $211.7 million as of
October 31, 2001.
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 balance 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. The agreements, which were
approved by the Board of Directors, had a total notional amount of $130.8
million at September 30, 2001, with underlying rates ranging from 4.85% to
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 October 31, 2001,
the Company owed approximately $1.4 million in such acquisition indebtedness.
17
SEASONALITY
The Company's quarterly operating results are affected primarily by the number
of billing days in the quarter and the seasonality of its customers' businesses.
Demand for professional services is typically lower during the first quarter
until customers' operating budgets are finalized, and the profitability of the
Company's consultants is generally lower in the fourth quarter due to fewer
billing days because of the higher number of holidays and vacation days.
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 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 plans to adopt
SFAS No. 142 in the first quarter of 2002. However, the Company has not yet
quantified the impact of adoption.
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 has not
yet quantified the impact from these statements' provisions on the Company's
consolidated results of operations and financial position.
18
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The following assessment of the Company's market risks does not include
uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax and credit risks.
Interest Rates. The Company's exposure to market risk for changes in interest
rates relates primarily to the Company's short-term and long-term debt
obligations and to the Company's investments.
The Company's investment portfolio consists of cash and cash equivalents
including deposits in banks, government securities, money market funds, and
short-term investments with maturities, when acquired, of 90 days or less. The
Company is adverse to principal loss and 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 $143.4 million
as of September 30, 2001, and the Company had $205.7 million available under its
credit facilities. The short-term debt obligations include $1.4 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 agreement had an initial balance 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. The agreements, which were
approved by the Board of Directors, had a total notional amount of $130.8
million at September 30, 2001, with underlying rates ranging from 4.85% to
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
facilities 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
agreements by $0.5 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 consolidated revenues
for the nine months ended September 30, 2001 from international operations,
approximately 97% of which were from the United Kingdom. The exchange rate has
decreased approximately 1% in the nine months ended September 30, 2001, from
1.49 at December 31, 2000 to 1.47 at September 30, 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 the
nine months ended September 30, 2001. While fluctuations in the British pound
sterling did not historically have 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 September 30, 2001.
19
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 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
The Company has experienced significant growth in the past through acquisitions.
Although the Company continues to seek acquisition opportunities, there can be
no assurance that the Company will be able to negotiate acquisitions on economic
terms acceptable to the Company or that the Company will be able to successfully
identify acquisition candidates and integrate all acquired operations into the
Company.
Possible Changes in Governmental Regulations
From time to time, legislation is proposed in the United States Congress, state
legislative bodies and by foreign governments that would have the effect of
requiring employers to provide the same or similar employee benefits to
consultants and other temporary personnel as those provided to full-time
employees. The enactment of such legislation would eliminate one of the key
economic reasons for outsourcing certain human resources and could significantly
adversely impact the Company's staff augmentation business. In addition, the
Company's costs could increase as a result of future laws or regulations that
address insurance, benefits or other employment-related matters. There can be no
assurance that the Company could successfully pass any such increased costs to
its clients.
Financial Covenants
The Company's credit facilities require 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 facilities and to declare all amounts
outstanding under those facilities to be immediately due and payable. Further,
the Company may not be able to obtain replacement credit facilities on terms and
conditions or at interest rates as favorable as those in current agreements.
20
Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
Item 2. Changes in Securities and Use of Proceeds
No disclosure required.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
APPROVAL OF COMPANY'S NAME CHANGE TO MPS GROUP, INC.
A Special Meeting of the Company's shareholders was held on October 24, 2001 to
vote on the proposal of changing the Company's name to MPS Group, Inc. Proxies
were solicited from shareholders of record on the close of business on September
13, 2001. On September 13, 2001, there were 98,129,705 shares outstanding and
entitled to vote at the Special Meeting. The name change to MPS Group, Inc. was
approved with the following mix of votes:
Name
- --------------------------------------------------------
<s> <c>
Voting for 90,724,630
Voting against 83,899
Withhold authority 40,294
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
No disclosure required.
B. Reports on Form 8-K
No disclosure required.
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ Timothy D. Payne President, Chief November 13, 2001
Timothy D. Payne Executive Officer and
Director
/s/ Robert P. Crouch Senior Vice President, Chief November 13, 2001
Robert P. Crouch Financial Officer, Treasurer,
and Chief Accounting Officer
22