FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002
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
MPS Group, Inc.
(Exact name of Registrant as specified in its charter)
Florida 59-3116655
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Independent Drive
Jacksonville, Florida 32202
(Address of principal executive offices) (Zip code)
(904) 360-2000
(Registrant's telephone
number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. July 31, 2002.
Common Stock, $0.01 par value Outstanding: 102,603,340 (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 3 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.
MPS Group, Inc. and Subsidiaries
Index
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002 (unaudited)
and December 31, 2001.............................................................................. 3
Unaudited Condensed Consolidated Statements of Income for the Three and Six Months
ended June 30, 2002 and 2001....................................................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months
ended June 30, 2002 and 2001....................................................................... 5
Unaudited Notes to Condensed Consolidated Financial Statements......................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 12
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
MPS Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, December 31,
(dollar amounts in thousands except per share amounts) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 63,232 $ 49,208
Accounts receivable, net 199,408 227,069
Prepaid expenses 5,563 6,444
Deferred income taxes 5,786 5,873
Other 9,303 12,102
----------------------------------
Total current assets 283,292 300,696
Furniture, equipment, and leasehold improvements, net 42,716 48,742
Goodwill, net 499,296 1,165,961
Deferred income taxes, long-term 68,980 -
Other assets, net 42,878 28,223
----------------------------------
Total assets $ 937,162 $ 1,543,622
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 42,336 $ 49,207
Accrued payroll and related taxes 40,845 39,524
Income taxes payable - 7,243
----------------------------------
Total current liabilities 83,181 95,974
Credit facility 56,000 101,000
Deferred income taxes - 22,214
Other 10,665 13,623
----------------------------------
Total liabilities 149,846 232,811
----------------------------------
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;
101,448,773 and 98,306,783 shares issued and outstanding, respectively 1,014 983
Additional contributed capital 612,505 594,061
Retained earnings 182,495 730,085
Accumulated other comprehensive loss (4,672) (9,400)
Deferred stock compensation (4,026) (4,918)
----------------------------------
Total stockholders' equity 787,316 1,310,811
----------------------------------
Total liabilities and stockholders' equity $ 937,162 $ 1,543,622
==================================
See accompanying notes to condensed consolidated financial statements.
3
MPS Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
(dollar amounts in thousands except per share amounts) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue $ 288,653 $ 409,639 $ 585,106 $ 854,049
Cost of revenue 214,132 294,336 434,327 615,031
------------- ------------- -------------- -------------
Gross profit 74,521 115,303 150,779 239,018
------------- ------------- -------------- -------------
Operating expenses:
General and administrative 61,550 90,915 128,097 185,421
Depreciation 4,925 5,385 9,923 10,753
Amortization of goodwill - 9,702 - 19,301
------------- ------------- -------------- -------------
Total operating expenses 66,475 106,002 138,020 215,475
------------- ------------- -------------- -------------
Income from operations 8,046 9,301 12,759 23,543
Other expense, net 981 2,207 2,555 5,384
------------- ------------- -------------- -------------
Income before provision for income taxes and
cumulative effect of accounting change 7,065 7,094 10,204 18,159
Provision for income taxes 2,889 3,513 4,082 8,160
------------- ------------- -------------- -------------
Income before cumulative effect of accounting change 4,176 3,581 6,122 9,999
Cumulative effect of accounting change (net of
a $112,953 income tax benefit) - - (553,712) -
------------- ------------- -------------- -------------
Net income (loss) $ 4,176 $ 3,581 $ (547,590) $ 9,999
============= ============= ============== =============
Basic net income (loss) per common share:
Income before cumulative effect of accounting change $ 0.04 $ 0.04 $ 0.06 $ 0.10
Cumulative effect of accounting change, net of tax - - (5.57) -
------------- ------------- -------------- -------------
Basic net income (loss) per common share $ 0.04 $ 0.04 $ (5.51) $ 0.10
============= ============= ============== =============
Average common shares outstanding, basic 100,166 98,018 99,320 97,596
============= ============= ============== =============
Diluted net income (loss) per common share:
Income before cumulative effect of accounting change $ 0.04 $ 0.04 $ 0.06 $ 0.10
Cumulative effect of accounting change, net of tax - - (5.43) -
------------- ------------- -------------- -------------
Diluted net income (loss) per common share $ 0.04 $ 0.04 $ (5.37) $ 0.10
============= ============= ============== =============
Average common shares outstanding, diluted 102,996 98,193 101,897 97,776
============= ============= ============== =============
See accompanying notes to condensed consolidated financial statements.
4
MPS Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six months ended June 30,
------------------------------
(dollar amounts in thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net (loss) income $ (547,590) $ 9,999
Adjustments to net (loss) income to net cash provided
by operating activities:
Depreciation 9,923 10,753
Amortization of goodwill - 19,301
Cumulative effect of accounting change, net of tax 553,712 -
Deferred income taxes 9,003 8,882
Deferred compensation 864 462
Changes in assets and liabilities:
Accounts receivable 32,367 28,416
Prepaid expenses and other assets (128) (2,282)
Accounts payable and accrued expenses (11,395) (2,770)
Accrued payroll and related taxes 689 (1,136)
Other, net (2,220) (1,728)
--------------- ---------------
Net cash provided by operating activities 45,225 69,897
--------------- ---------------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements, net of disposals (2,645) (10,905)
Purchase of businesses, including additional earn-outs on
acquisitions, net of cash acquired - (3,807)
--------------- ---------------
Net cash used in investing activities (2,645) (14,712)
--------------- ---------------
Cash flows from financing activities:
Proceeds from stock options exercised 16,313 28
Repayments on indebtedness (45,382) (37,883)
--------------- ---------------
Net cash used in financing activities (29,069) (37,855)
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents 513 (5,436)
Net increase in cash and cash equivalents 14,024 11,894
Cash and cash equivalents, beginning of period 49,208 5,013
--------------- ---------------
Cash and cash equivalents, end of period $ 63,232 $ 16,907
=============== ===============
See accompanying notes to condensed consolidated financial statements.
5
MPS Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(dollar amounts in thousands except for per share amounts)
1. Basis of Presentation.
The accompanying condensed consolidated financial statements are unaudited
and have been prepared by the Company in accordance with the rules and
regulations of the Securities and Exchange Commission ('SEC'). Accordingly,
certain information and footnote disclosures usually found in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's Form 10-K, as filed with the SEC on March 26, 2002.
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.
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. 142, 'Goodwill and
Other Intangible Assets,' which is required to be adopted in fiscal 2002. SFAS
No. 142 establishes accounting and reporting standards for goodwill and
intangible assets resulting from business combinations. SFAS No. 142 includes
provisions discontinuing the periodic amortization of and assessing the
potential impairments of goodwill (and intangible assets deemed to have
indefinite lives). As SFAS No. 142 replaces the measurement guidelines for
goodwill impairment, goodwill not considered impaired under previous accounting
literature may be considered impaired under SFAS No. 142. SFAS 142 also requires
that the Company complete a two-step goodwill impairment test. The first step
compares the fair value of each reporting unit to its carrying amount, including
goodwill. If the fair value of a reporting unit exceeds its carrying amount,
goodwill is not considered to be impaired and the second step is not required.
SFAS 142 requires completion of this first step within the first six months of
initial adoption and annually thereafter. If the carrying amount of a reporting
unit exceeds its fair value, the second step is performed to measure the amount
of impairment loss. The second step compares the implied fair value of goodwill
to the carrying value of a reporting unit's goodwill. The implied fair value of
goodwill is determined in a manner similar to accounting for a business
combination with the allocation of the assessed fair value determined in the
first step to the assets and liabilities of the reporting unit. The excess of
the fair value of the reporting unit over the amounts assigned to the assets and
liabilities is the implied fair value of goodwill. This allocation process is
only performed for purposes of evaluating goodwill impairment and does not
result in an entry to adjust the value of any assets or liabilities. An
impairment loss is recognized for any excess in the carrying value of goodwill
over the implied fair value of goodwill. Upon the initial adoption, any
impairment loss identified is presented as a change in accounting principle, net
of applicable income tax benefit, and recorded as of the beginning of that year.
Subsequent to the initial adoption, any impairment loss recognized would be
recorded as a charge to income from operations.
The Company has adopted SFAS 142 as of January 1, 2002. During the first
quarter of 2002, the Company completed both steps of the transitional goodwill
impairment tests which resulted in an impairment charge of $553,712, net of an
income tax benefit of $112,953. Refer to Note 4, 'Goodwill' for further
discussion of the impact of SFAS 142 on the Company's financial position and
results of operations.
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. The Company
has adopted both SFAS No. 143 and No. 144 for 2002. The adoption of these
statements did not have a material effect on the Company's consolidated results
of operations and financial position.
Additionally, in July 2002, the FASB issued SFAS No. 146, 'Accounting for
Costs Associated with Exit or Disposal Activities.' SFAS No. 146 establishes
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred as opposed to recognition based on the
date of an entity's commitment to an exit plan. SFAS No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002, with
early application encouraged. Management does not anticipate the adoption of
this statement to have a material effect on the Company's consolidated results
of operations and financial position.
6
2. 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 six months ended June 30, 2002 and
2001 is as follows:
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,176 $ 3,581 $ (547,590) $ 9,999
Unrealized gain (loss) on foreign currency
translation adjustments (a) 5,208 (679) 3,801 (8,877)
Unrealized gain (loss) on derivative
instruments, net of deferred income taxes 97 (245) 927 (865)
------------- ------------- -------------- -------------
Total other comprehensive income (loss) 5,305 (924) 4,728 (9,742)
Comprehensive income (loss) $ 9,481 $ 2,657 $ (542,862) $ 257
============= ============= ============== =============
(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 2001, the Company 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 sheets. 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, amortizing to $55.7 million on January 2, 2003. In the
first quarter of 2002, the Company fixed the notional amount on this agreement
at $55.7 million through January 2, 2003. 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. This additional agreement was settled in the
fourth quarter of 2001. These agreements were approved by the Board of
Directors. As of June 30, 2002, the Company had an outstanding interest rate
swap agreement with a total notional amount of $55.7 million and an underlying
rate of 5.185%.
Hedging interest rate exposure through the use of swaps is specifically
intended 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. Goodwill
The Company adopted SFAS 142, 'Goodwill and Other Intangibles', effective
January 1, 2002. In connection with the adoption of SFAS 142, the Company
discontinued amortizing goodwill. The changes in the carrying amount of goodwill
for the six months ended June 30, 2002, are as follows:
7
Information
Professional e-Business Technology
Services Solutions Services Total
- -------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2001 $ 312,952 $ 260,972 $ 592,037 $1,165,961
Impairment losses (87,969) (240,247) (338,449) (666,665)
----------- ----------- ----------- -----------
Balance as of June 30, 2002 $ 224,983 $ 20,725 $ 253,588 $ 499,296
=========== =========== =========== ===========
In accordance with SFAS 142, the Company performed transitional goodwill
impairment tests at the reporting unit level as defined in SFAS 142. Reporting
units are equal to or one level below reportable segments. The Company engaged
an independent valuation consultant to assist with the transitional goodwill
impairment tests.
The fair value of each of the reporting units was calculated on an
enterprise value basis using the following approaches: (i) market multiple
approach and (ii) discounted cash flow approach. Under the market multiple
approach, market ratios and performance fundamentals relating to similar public
companies' stock prices or enterprise values were applied to the reporting units
to determine their enterprise value. Under the discounted cash flow ("DCF")
approach, the indicated enterprise value was determined using the present value
of the projected future cash flows to be generated considering appropriate
discount rates. The discount rates used in the calculation reflected all
associated risks of realizing the projected future cash flows.
The fair value conclusion of the reporting units reflects an equally
blended value of the market multiple approach and the DCF approach discussed
above. As a result of performing steps 1 and 2 of the goodwill impairment test,
a loss of $553,712, net of an income tax benefit of $112,953, was recognized and
recorded as a cumulative effect of accounting change in the accompanying
Condensed Consolidated Statements of Income.
The following table provides comparative disclosure of adjusted net income
excluding goodwill amortization expense, net of income taxes, for the periods
presented:
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change,
as reported $ 4,176 $ 3,581 $ 6,122 $ 9,999
Goodwill amortization, net of income taxes - 6,823 - 13,571
------------ ------------ ------------ ------------
Income before cumulative effect of accounting change,
as adjusted $ 4,176 $ 10,404 $ 6,122 $ 23,570
Cumulative effect of accounting change, net of income taxes - - (553,712) -
------------ ------------ ------------ ------------
Net income (loss), as adjusted $ 4,176 $ 10,404 $ (547,590) $ 23,570
============ ============ ============ ============
Basic income (loss) per common share:
Income before cumulative effect of accounting change,
as reported $ 0.04 $ 0.04 $ 0.06 $ 0.10
Goodwill amortization, net of income taxes - 0.07 - 0.14
------------ ------------ ------------ ------------
Income before cumulative effect of accounting change,
as adjusted $ 0.04 $ 0.11 $ 0.06 $ 0.24
Cumulative effect of accounting change, net of income taxes - - (5.57) -
------------ ------------ ------------ ------------
Basic net income (loss) per common share, as adjusted $ 0.04 $ 0.11 $ (5.51) $ 0.24
============ ============ ============ ============
Diluted income (loss) per common share:
Income before cumulative effect of accounting change,
as reported $ 0.04 $ 0.04 $ 0.06 $ 0.10
Goodwill amortization, net of income taxes - 0.07 - 0.14
------------ ------------ ------------ ------------
Income before cumulative effect of accounting change,
as adjusted $ 0.04 $ 0.11 $ 0.06 $ 0.24
Cumulative effect of accounting change, net of income taxes - - (5.43) -
------------ ------------ ------------ ------------
Diluted net income (loss) per common share, as adjusted $ 0.04 $ 0.11 $ (5.37) $ 0.24
============ ============ ============ ============
8
5. Net Income per Common Share
The calculation of basic net income (loss) per common share and diluted net
income (loss) per common share is presented below:
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Basic income (loss) per common share computation:
Income before cumulative effect of accounting change $ 4,176 $ 3,581 $ 6,122 $ 9,999
Cumulative effect of accounting change, net of
income taxes - - (553,712) -
------------ ------------ ------------ ------------
Net income (loss) $ 4,176 $ 3,581 $ (547,590) $ 9,999
============ ============ ============ ============
Basic average common shares outstanding 100,166 98,018 99,320 97,596
============ ============ ============ ============
Basic income (loss) per common share:
Income before cumulative effect of accounting change $ 0.04 $ 0.04 $ 0.06 $ 0.10
Cumulative effect of accounting change, net of
income taxes - - (5.57) -
------------ ------------ ------------ ------------
Basic net income (loss) per common share $ 0.04 $ 0.04 $ (5.51) $ 0.10
============ ============ ============ ============
Diluted income (loss) per common share computation:
Income before cumulative effect of accounting change $ 4,176 $ 3,581 $ 6,122 $ 9,999
Cumulative effect of accounting change, net of
income taxes - - (553,712) -
------------ ------------ ------------ ------------
Net income (loss) $ 4,176 $ 3,581 $ (547,590) $ 9,999
============ ============ ============ ============
Basic average common shares outstanding 100,166 98,018 99,320 97,596
Incremental shares from assumed exercise of stock options 2,830 175 2,577 180
------------ ------------ ------------ ------------
Diluted average common shares outstanding 102,996 98,193 101,897 97,776
============ ============ ============ ============
Diluted income (loss) per common share:
Income before cumulative effect of accounting change $ 0.04 $ 0.04 $ 0.06 $ 0.10
Cumulative effect of accounting change, net of
income taxes - - (5.43) -
------------ ------------ ------------ ------------
Diluted net income (loss) per common share $ 0.04 $ 0.04 $ (5.37) $ 0.10
============ ============ ============ ============
Options to purchase 1,472,864 and 1,957,507 shares of common stock that
were outstanding during the three and six months ended June 30, 2002,
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, 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.
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: information technology (IT)
services, e-Business solutions, and professional services. The Company's
reportable segments are strategic divisions that offer different services and
9
are managed separately as each division requires different resources and
marketing strategies. 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 e-Business solutions division,
operating under the brand Idea Integration, provides e-Business strategy
consulting, design and branding, application development, and integration. The
professional services division provides expertise in a wide variety of
disciplines including accounting and finance, law, engineering and technical,
career management, executive search, and human resource consulting. For the
three and six months ended June 30, 2001, results from the scientific operating
unit of which the Company sold the assets of in December 2001 are included
therein. 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 Six Months Ended
------------------------------- --------------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Revenue
IT services $ 145,974 $ 202,765 $ 296,721 $ 422,274
e-Business solutions 21,049 48,559 43,847 103,276
Professional services 121,630 158,315 244,538 328,499
------------ ------------ ------------ ------------
Total revenue $ 288,653 $ 409,639 $ 585,106 $ 854,049
============ ============ ============ ============
Gross profit
IT services $ 31,231 $ 44,656 $ 62,166 $ 93,317
e-Business solutions 6,492 18,735 13,842 36,838
Professional services 36,798 51,912 74,771 108,863
------------ ------------ ------------ ------------
Total gross profit $ 74,521 $ 115,303 $ 150,779 $ 239,018
============ ============ ============ ============
Income before provision for income taxes and
cumulative effect of accounting change
IT services $ 4,256 $ 5,322 $ 4,947 $ 11,895
e-Business solutions (2,077) (7,119) (4,300) (14,528)
Professional services 5,867 11,098 12,112 26,176
------------ ------------ ------------ ------------
8,046 9,301 12,759 23,543
Corporate interest and other income (981) (2,207) (2,555) (5,384)
------------ ------------ ------------ ------------
Total income before provision for income taxes
and cumulative effect of accounting change $ 7,065 $ 7,094 $ 10,204 $ 18,159
============ ============ ============ ============
Geographic Areas
Revenue
United States $ 196,006 $ 303,162 $ 397,673 $ 634,786
United Kingdom 89,202 103,336 180,739 213,106
Other 3,445 3,141 6,694 6,157
------------ ------------ ------------ ------------
Total $ 288,653 $ 409,639 $ 585,106 $ 854,049
============ ============ ============ ============
June 30, December 31,
2002 2001
- ----------------------------------------------------------------------------------------------
Assets
IT services $ 464,450 $ 781,845
e-Business solutions 113,579 319,284
Professional services 342,860 426,547
------------ ------------
920,889 1,527,676
Corporate 16,273 15,946
------------ ------------
Total assets $ 937,162 $ 1,543,622
============ ============
Geographic Areas
Identifiable Assets
United States $ 678,359 $ 1,133,372
United Kingdom 250,924 399,259
Other 7,879 10,991
------------ ------------
Total $ 937,162 $ 1,543,622
============ ============
10
8. Income Taxes
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 of the Company's credit facility.
8. Subsequent Event
In July 2002, the Company acquired Elite Medical, Inc., a health care
staffing business. Purchase consideration totaled $7.0 million in cash at
closing, a $1.0 million deferred cash payment and 1,141,269 shares of stock
valued at $8.7 million.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MPS Group, Inc. ('MPS' or the 'Company') 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. MPS consists of three divisions: the IT services division,
operating under the brand Modis; the e-Business solutions division, operating
under the brand Idea Integration; and the professional services division.
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.
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ('SFAS') No. 142, 'Goodwill and Other Intangibles.' Comparability of
results prior to 2002 is affected by the Company's adoption of SFAS 142 as SFAS
142 requires the discontinuance of goodwill amortization. While the Company did
not recognize any goodwill amortization for 2002, the Company recorded $9.7
million and $19.3 million of goodwill amortization for the three and six months
ended June 30, 2001, respectively. See Note 4 to the Condensed Consolidated
Financial Statements for a discussion of SFAS 142.
The following detailed analysis of operations should be read in conjunction with
the 2001 Consolidated Financial Statements and related notes included in the
Company's Form 10-K filed March 26, 2002.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Revenue. Revenue decreased $120.9 million, or 29.5%, to $288.7 million in the
three months ended June 30, 2002, from $409.6 million in the year earlier
period. The decrease was attributable primarily to diminished demand for
services provided by the Company's divisions. This diminished demand has
primarily led to a reduction in billable headcount throughout the Company's
divisions and, to a lesser extent, a reduction in the Company's bill rates.
For the IT services division, which accounted for 50.6% and 49.6% of the
Company's total revenue for the three months ended June 30, 2002 and 2001,
respectively, the Company's customers continued to limit spending on IT
initiatives due to uncertainties relating to the economy. Revenue in the IT
services division decreased $56.8 million, or 28.0%, to $146.0 million in the
three months ended June 30, 2002, from $202.8 million in the year earlier
period.
For the e-Business solutions division, weak demand for e-Business consulting
services was intensified by the uncertainties relating to the economy. Revenue
in the division decreased $27.6 million, or 56.8%, to $21.0 million in the three
months ended June 30, 2002, from $48.6 million in the year earlier period.
Revenue in the professional services division decreased $36.7 million, or 23.2%,
to $121.6 million in the three months ended June 30, 2002, from $158.3 million
in the year earlier period. Included in revenue in the year earlier period is
$5.9 million of revenue from the division's scientific operating unit, which was
sold in December 2001. Excluding the results of the scientific unit in the year
earlier period, revenue in the professional services division decreased 20.2% in
the three months ended June 30, 2002, from 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,
primarily in the United States. Excluding the results of the scientific unit in
the year earlier period, revenue generated in the United Kingdom decreased 8.9%
year over year, while revenue generated in the United States decreased 25.5%.
Excluding the results of the scientific unit, the professional services division
operates primarily through four operating units consisting of accounting and
finance, legal, engineering/technical, and career management and consulting,
which contributed 43.4%, 11.6%, 36.2%, and 8.8%, respectively, of the division's
revenue by group during the three months ended June 30, 2002, as compared to
41.9%, 12.7%, 35.9%, and 9.5%, respectively, during the year earlier period.
Gross Profit. Gross profit decreased $40.8 million or 35.4% to $74.5 million in
the three months ended June 30, 2002, from $115.3 million in the year earlier
period. Gross margin decreased to 25.8% in the three months ended June 30, 2002,
from 28.1% in the year earlier period.
The gross margin in the IT services division decreased to 21.4% in the three
months ended June 30, 2002, from 22.0% in the year earlier period. The decrease
in gross margin in the IT services division is mainly attributable to a decrease
in bill rates, which could not be passed onto pay rates, in the existing
services provided by the division, along with a shift in the mix of services
provided by the division.
The gross margin in the e-Business solutions division decreased to 30.8% in the
three months ended June 30, 2002, from 38.6% 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.
12
The gross margin in the professional services division decreased to 30.3% in the
three months ended June 30, 2002, from 32.8% in the year earlier period. The
decrease in gross margin in the professional services division is primarily
attributable to a decrease in bill rates in the services provided by the
division and, to a lesser extent, the lower level of direct hire and permanent
placement fees, which generate a higher margin. Excluding the results of the
scientific unit, as a percentage of revenue, the division's direct hire and
permanent placement fees decreased to 5.9% of revenue in the three months ended
June 30, 2002, from 6.6% in the year earlier period.
Operating expenses. Operating expenses decreased $39.5 million or 37.3% to $66.5
million in the three months ended June 30, 2002, from $106.0 million in the year
earlier period. During the year earlier period, operating expenses included $9.7
million of goodwill amortization, while the Company did not recognize any
goodwill amortization during the current year period as a result of the adoption
of SFAS 142 in 2002. The Company's general and administrative ('G&A') expenses
decreased $29.3 million or 32.2% to $61.6 million in the three months ended June
30, 2002, from $90.9 million in the year earlier period.
The IT services division's G&A expenses decreased $7.0 million, or 22.2%, to
$24.6 million in the three months ended June 30, 2002, from $31.6 million in the
year earlier period. As a percentage of revenue, the division's G&A expenses
increased to 16.9% in the three months ended June 30, 2002, from 15.6% 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 June 30,
2002, and cost reduction initiatives implemented within the division throughout
2001 and continuing into the first half of 2002.
The e-Business solutions division's G&A expenses decreased $15.3 million, or
67.1%, to $7.5 million in the three months ended June 30, 2002, from $22.8
million in the year earlier period. As a percentage of revenue, the division's
G&A expenses decreased to 35.9% in the three months ended June 30, 2002, from
47.0% in the year earlier period. 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 and has continued through the first half of 2002.
The professional services division's G&A expenses decreased $7.0 million, or
19.2%, to $29.4 million in the three months ended June 30, 2002, from $36.4
million in the year earlier period. Excluding the results of the scientific unit
in the year earlier period, the professional services G&A expenses decreased
16.6% in the three months ended June 30, 2002, from the year earlier period. As
a percentage of revenue, the division's G&A expenses increased to 24.1% in the
three months ended June 30, 2002, from 23.0% in the year earlier period. The
decrease in the professional services division's G&A expenses is associated with
the decrease in revenue for the three months ended June 30, 2002, and cost
reduction initiatives implemented within the division beginning in 2001 and
continuing into the first half of 2002.
Income from operations. Income from operations decreased $1.3 million, or 14.0%,
to $8.0 million in the three months ended June 30, 2002, from $9.3 million in
the year earlier period. Excluding goodwill amortization in the year earlier
period, income from operations decreased 57.9% in the three months ended June
30, 2002, from the year earlier period. Income from operations for the IT
services division decreased $1.0 million, or 18.9 %, to $4.3 million in the
three months ended June 30, 2002, from $5.3 million in the year earlier period.
Excluding goodwill amortization in the year earlier period, income from
operations for the IT services division decreased 57.8% in the three months
ended June 30, 2002, from the year earlier period. Loss from operations for the
e-Business solutions division decreased $5.0 million, to a $2.1 million loss in
the three months ended June 30, 2002, from a $7.1 million loss in the year
earlier period. Excluding goodwill amortization in the year earlier period, loss
from operations for the e-Business solutions division decreased to a $2.1
million loss in the three months ended June 30, 2002, from a $5.3 million loss
in the year earlier period. Income from operations for the professional services
division decreased $5.2 million, or 46.8%, to $5.9 million in the three months
ended June 30, 2002, from $11.1 million in the year earlier period. Excluding
goodwill amortization in the year earlier period, income from operations for the
professional services division decreased 57.9% in the three months ended June
30, 2002, from the year earlier period. For the Company as a whole, income from
operations as a percentage of revenue increased to 2.8% in the three months
ended June 30, 2002, from 2.3% in the year earlier period. Excluding goodwill
amortization in the year earlier period, for the Company as a whole, income from
operations as a percentage of revenue decreased to 2.8% in the three months
ended June 30, 2002, from 4.6% in the year earlier period.
Other expense, net. Other expense, net consists primarily of interest expense
related to borrowings under the Company's credit facility and notes issued in
connection with acquisitions, net of interest income related to investment
income from certain investments owned by the Company and cash and cash
equivalents on hand. Interest expense decreased $1.4 million, or 53.8%, to $1.2
million in the three months ended June 30, 2002, from $2.6 million in the year
earlier period. The decrease in interest expense is related to the lower level
of borrowings under the Company's credit facility during the second quarter of
2002. Interest expense was offset by $0.2 million of interest and other income
in the three months ended June 30, 2002, as compared to $0.4 million in the year
earlier period.
13
Income taxes. The Company's effective tax rate decreased to 40.9% in the three
months ended June 30, 2002, as compared to 49.5% in the year earlier period, due
to the discontinuance of goodwill amortization required by SFAS 142. In the year
earlier period, non-deductible goodwill amortization on certain acquisitions had
an increased effect on the Company's effective tax rate.
Income before cumulative effect of accounting change. As a result of the
foregoing, income before cumulative effect of accounting change increased $0.6
million, or 16.7%, to $4.2 million in the three months ended June 30, 2002, from
$3.6 million in the year earlier period. Excluding goodwill amortization in the
year earlier period, income before cumulative effect of accounting change
decreased 59.6% in the three months ended June 30, 2002, from the year earlier
period. Income before cumulative effect of accounting change as a percentage of
revenue increased to 1.4% in the three months ended June 30, 2002, from 0.9% in
the year earlier period. Excluding goodwill amortization in the year earlier
period, income before cumulative effect of accounting change as a percentage of
revenue decreased to 1.4% in the three months ended June 30, 2002, from 2.5% in
the year earlier period.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Revenue. Revenue decreased $268.9 million, or 31.5%, to $585.1 million in the
six months ended June 30, 2002, from $854.0 million in the year earlier period.
The decrease was attributable primarily to diminished demand for services
provided by the Company's divisions. This diminished demand has primarily led to
a reduction in billable headcount throughout the Company's divisions and, to a
lesser extent, a reduction in the Company's bill rates.
For the IT services division, which accounted for 50.7% and 49.4% of the
Company's total revenue for the six months ended June 30, 2002 and 2001,
respectively, the Company's customers continued to limit spending on IT
initiatives due to uncertainties relating to the economy. Revenue in the IT
services division decreased $125.6 million, or 29.7%, to $296.7 million in the
six months ended June 30, 2002, from $422.3 million in the year earlier period.
For the e-Business solutions division, weak demand for e-Business consulting
services was intensified by the uncertainties relating to the economy. Revenue
in the division decreased $59.5 million, or 57.6%, to $43.8 million in the six
months ended June 30, 2002, from $103.3 million in the year earlier period.
Revenue in the professional services division decreased $84.0 million, or 25.6%,
to $244.5 million in the six months ended June 30, 2002, from $328.5 million in
the year earlier period. Included in revenue in the year earlier period is $12.2
million of revenue from the division's scientific operating unit, which was sold
in December 2001. Excluding the results of the scientific unit in the year
earlier period, revenue in the professional services division decreased 22.7% in
the six months ended June 30, 2002, from 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,
primarily in the United States. Excluding the results of the scientific unit in
the year earlier period, revenue generated in the United Kingdom decreased 12.3%
year over year, while revenue generated in the United States decreased 27.5%.
Excluding the results of the scientific unit, the professional services division
operates primarily through four operating units consisting of accounting and
finance, legal, engineering/technical, and career management and consulting,
which contributed 43.4%, 11.3%, 35.4%, and 9.9%, respectively, of the division's
revenue by group during the six months ended June 30, 2002, as compared to
42.1%, 12.7%, 36.1%, and 9.1%, respectively, during the year earlier period.
Gross Profit. Gross profit decreased $88.2 million or 36.9% to $150.8 million in
the six months ended June 30, 2002, from $239.0 million in the year earlier
period. Gross margin decreased to 25.8% in the six months ended June 30, 2002,
from 28.0% in the year earlier period.
The gross margin in the IT services division decreased to 21.0% in the six
months ended June 30, 2002, from 22.1% in the year earlier period. The decrease
in gross margin in the IT services division is mainly attributable to a decrease
in bill rates, which could not be passed onto pay rates, in the existing
services provided by the division, along with a shift in the mix of services
provided by the division.
The gross margin in the e-Business solutions division decreased to 31.6% in the
six months ended June 30, 2002, from 35.7% 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.
The gross margin in the professional services division decreased to 30.6% in the
six months ended June 30, 2002, from 33.1% in the year earlier period. The
decrease in gross margin in the professional services division is primarily
attributable to a decrease in bill rates in the services provided by the
division and, to a lesser extent, the lower level of direct hire and permanent
placement fees, which generate a higher margin. Excluding the results of the
scientific unit, as a percentage of revenue, the division's direct hire and
permanent placement fees decreased to 5.6% of revenue in the six months ended
June 30, 2002, from 7.0% in the year earlier period.
14
Operating expenses. Operating expenses decreased $77.5 million or 36.0% to
$138.0 million in the six months ended June 30, 2002, from $215.5 million in the
year earlier period. During the year earlier period, operating expenses included
$19.3 million of goodwill amortization, while the Company did not recognize any
goodwill amortization during the current year period as a result of the adoption
of SFAS 142 in 2002. The Company's general and administrative ('G&A') expenses
decreased $57.3 million or 30.9% to $128.1 million in the six months ended June
30, 2002, from $185.4 million in the year earlier period.
The IT services division's G&A expenses decreased $13.4 million, or 20.3%, to
$52.6 million in the six months ended June 30, 2002, from $66.0 million in the
year earlier period. As a percentage of revenue, the division's G&A expenses
increased to 17.7% in the six months ended June 30, 2002, from 15.6% 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 six months ended June 30, 2002,
and cost reduction initiatives implemented within the division throughout 2001
and continuing into the first half of 2002.
The e-Business solutions division's G&A expenses decreased $29.5 million, or
65.0%, to $15.9 million in the six months ended June 30, 2002, from $45.4
million in the year earlier period. As a percentage of revenue, the division's
G&A expenses decreased to 36.3% in the six months ended June 30, 2002, from
44.0% in the year earlier period. 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 and has continued through the first half of 2002.
The professional services division's G&A expenses decreased $14.3 million, or
19.4%, to $59.6 million in the six months ended June 30, 2002, from $73.9
million in the year earlier period. Excluding the results of the scientific unit
in the year earlier period, the professional services G&A expenses decreased
16.5% in the six months ended June 30, 2002, from the year earlier period. As a
percentage of revenue, the division's G&A expenses increased to 24.4% in the six
months ended June 30, 2002, from 22.5% in the year earlier period. The decrease
in the professional services division's G&A expenses is associated with the
decrease in revenue for the six months ended June 30, 2002, and cost reduction
initiatives implemented within the division beginning in 2001 and continuing
into the first half of 2002.
Income from operations. Income from operations decreased $10.7 million, or
45.5%, to $12.8 million in the six months ended June 30, 2002, from $23.5
million in the year earlier period. Excluding goodwill amortization in the year
earlier period, income from operations decreased 70.1% in the six months ended
June 30, 2002, from the year earlier period. Income from operations for the IT
services division decreased $7.0 million, or 58.8%, to $4.9 million in the six
months ended June 30, 2002, from $11.9 million in the year earlier period.
Excluding goodwill amortization in the year earlier period, income from
operations for the IT services division decreased 77.4% in the six months ended
June 30, 2002, from the year earlier period. Loss from operations for the
e-Business solutions division decreased $10.2 million, to a $4.3 million loss in
the six months ended June 30, 2002, from a $14.5 million loss in the year
earlier period. Excluding goodwill amortization in the year earlier period, loss
from operations for the e-Business solutions division decreased to a $4.3
million loss in the six months ended June 30, 2002, from a $10.8 million loss in
the year earlier period. Income from operations for the professional services
division decreased $14.1 million, or 53.8%, to $12.1 million in the six months
ended June 30, 2002, from $26.2 million in the year earlier period. Excluding
goodwill amortization in the year earlier period, income from operations for the
professional services division decreased 62.2% in the six months ended June 30,
2002, from the year earlier period. For the Company as a whole, income from
operations as a percentage of revenue decreased to 2.2% in the six months ended
June 30, 2002, from 2.8% in the year earlier period. Excluding goodwill
amortization 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 six months ended
June 30, 2002, from 5.0% in the year earlier period.
Other expense, net. Other expense, net consists primarily of interest expense
related to borrowings under the Company's credit facility and notes issued in
connection with acquisitions, net of interest income related to investment
income from certain investments owned by the Company and cash and cash
equivalents on hand. Interest expense decreased $3.2 million, or 50.8%, to $3.1
million in the six months ended June 30, 2002, from $6.3 million in the year
earlier period. The decrease in interest expense is related to the lower level
of borrowings under the Company's credit facility during 2002. Interest expense
was offset by $0.6 million of interest and other income in the six months ended
June 30, 2002, as compared to $0.9 million in the year earlier period.
Income taxes. The Company's effective tax rate decreased to 40.0% in the six
months ended June 30, 2002, as compared to 44.9% in the year earlier period, due
to the discontinuance of goodwill amortization required by SFAS 142. In the year
earlier period, non-deductible goodwill amortization on certain acquisitions had
an increased effect on the Company's effective tax rate.
15
Income before cumulative effect of accounting change. As a result of the
foregoing, income before cumulative effect of accounting change decreased $3.9
million, or 39.0%, to $6.1 million in the six months ended June 30, 2002, from
$10.0 million in the year earlier period. Excluding goodwill amortization in the
year earlier period, income before cumulative effect of accounting change
decreased 74.0% in the six months ended June 30, 2002, from the year earlier
period. Income before cumulative effect of accounting change as a percentage of
revenue decreased to 1.0% in the six months ended June 30, 2002, from 1.2% in
the year earlier period. Excluding goodwill amortization in the year earlier
period, income before cumulative effect of accounting change as a percentage of
revenue decreased to 1.0% in the six months ended June 30, 2002, from 2.8% in
the year earlier period.
16
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 $200.1 million and $204.7 million as of June
30, 2002 and December 31, 2001, respectively. The Company had cash and cash
equivalents of $63.2 million and $49.2 million as of June 30, 2002 and December
31, 2001, respectively.
For the six months ended June 30, 2002 and 2001, the Company generated $45.2
million and $69.9 million of cash flow from operations, respectively.
For the six months ended June 30, 2002, the Company used $2.6 million of cash
for investing activities, all of which was used for capital expenditures. For
the six months ended June 30, 2001, the Company used $14.7 million of cash for
investing activities, of which $10.9 million were used for capital expenditures
and $3.8 million for earn-out payments.
For the six months ended June 30, 2002, the Company used $29.1 million of cash
for financing activities, of which $45.4 million was used for repayments on the
Company's credit facility and $16.3 million was generated from stock option
exercises. For the six months ended June 30, 2001, the Company used $37.9
million of cash for financing activities. This amount primarily represented
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.
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 June 30, 2002, 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 2002, will be approximately $5.0 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 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 of
an individual acquisition is required by the majority of the lenders if cash
consideration for the acquisition would exceed 10% of consolidated stockholders'
equity of the Company.
As of July 31, 2002, the Company had a balance of $56.0 million outstanding
under the credit facility. The Company also had outstanding letters of credit in
the amount of $2.4 million. The Company is considering a reduction of up to $150
million in the notional amount of the facility to more closely align the
Company's facility with its anticipated capital needs.
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, amortizing to $55.7 million on January 2, 2003. In the
first quarter of 2002, the Company fixed the notional amount on this agreement
at $55.7 million through January 2, 2003. 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. This additional agreement was settled in the
fourth quarter of 2001. These agreements were approved by the Board of
Directors. As of June 30, 2002, the Company had an outstanding interest rate
swap agreement with a total notional amount of $55.7 million and an underlying
rate of 5.185%.
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 business 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.
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 debt obligations under its credit
facility 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 debt obligations totaled $56.4 million as of June 30, 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, amortizing to $55.7 million on January 2, 2003. In the
first quarter of 2002, the Company fixed the notional amount on this agreement
at $55.7 million through January 2, 2003. 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. This additional agreement was settled in the
fourth quarter of 2001. These agreements were approved by the Board of
Directors. As of June 30, 2002, the Company had an outstanding interest rate
swap agreement with a total notional amount of $55.7 million and 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
$0.2 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 32% of its consolidated revenues
for the six months ended June 30, 2002 from international operations,
approximately 96% of which were from the United Kingdom. The exchange rate has
increased approximately 5% in the six months ended June 30, 2002, from 1.45 at
December 31, 2001 to 1.53 at June 30, 2002. 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 2002.
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. As of June 30, 2002, the Company did not hold or has not
previously entered into any foreign currency derivative instruments.
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 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 as 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 of the Company's credit facility.
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
The Annual Meeting of the Company's shareholders was held on May 20, 2002.
Proxies were solicited from shareholders of record on the close of business on
April 5, 2002. On April 5, 2002, there were 98,728,605 shares outstanding and
entitled to vote at the Annual Meeting. The shareholder vote on the issues
presented at the Annual Meeting was as follows:
ELECTION OF DIRECTORS
All of the following persons nominated were elected to serve as directors and
received the number of votes set opposite their names:
Name For Withhold Authority
- -------------------------------------------------------------------------------
Derek E. Dewan 66,884,737 18,431,350
Timothy D. Payne 84,126,287 1,189,800
Peter J. Tanous 81,443,287 3,872,800
T. Wayne Davis 81,442,552 3,873,535
John R. Kennedy 84,013,158 1,302,929
Michael D. Abney 81,443,422 3,872,665
William M. Isaac 84,016,051 1,300,036
George J. Mitchell 81,833,830 3,482,257
Michael L. Huyghue 84,131,181 1,184,906
Darla D. Moore 84,163,170 1,152,917
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
B. Reports on Form 8-K
A report on Form 8-K dated August 14, 2002 was filed by the
Company in August 2002. The report was filed under Item 9,
Regulation FD Disclosure.
21
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 August 14, 2002
Timothy D. Payne Executive Officer and
Director
/s/ Robert P. Crouch Senior Vice President, August 14, 2002
Robert P. Crouch Treasurer, and Chief
Financial Officer
22