SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2002
COMMISSION FILE NUMBER: 0-24484
MPS GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3116655
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Independent Drive, Jacksonville, FL 32202
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number including area code): (904) 360-2000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.01 Per Share New York Stock Exchange
(Title of each class) (Name of each exchange on
which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
--- ---
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of common stock on, June 28,
2002, the last business day of the registrant's most recently completed second
fiscal quarter, as reported by the New York Stock Exchange, was approximately
$861,464,571.
As of March 12, 2003 the number of shares outstanding of the Registrant's
common stock was 102,541,491.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Registrant's Proxy
Statement for its 2002 Annual Meeting of shareholders are incorporated by
reference in Part III.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that are
subject to certain risks, uncertainties or assumptions and may be affected by
certain other factors, including but not limited to the specific factors
discussed in Part II, Item 5 under 'Market for Registrant's Common Equity and
Related Stockholder Matters', 'Liquidity and Capital Resources,' and 'Factors
Which May Impact Future Results and Financial Condition.' In some cases, you can
identify forward-looking statements by terminology such as 'will,' 'may,'
'should,' 'could,' 'expects,' 'plans,' 'indicates,' 'projects,' 'anticipates,'
'believes,' 'estimates,' 'appears,' 'predicts,' 'potential,' 'continues,'
'would,' or 'become,' or the negative of these terms or other comparable
terminology. In addition, except for historical facts, all information provided
in Part II, Item 7A, under 'Quantitative and Qualitative Disclosures About
Market Risk' should be considered forward-looking statements. Should one or more
of these risks, uncertainties or other factors materialize, or should underlying
assumptions prove incorrect, actual results, performance or achievements of the
Company may vary materially from any future results, performance or achievements
expressed or implied by such forward-looking statements.
Forward-looking statements are based on beliefs and assumptions of the Company's
management and on information currently available to such management. Forward
looking statements speak only as of the date they are made, and the Company
undertakes no obligation to update publicly any of them in light of new
information or future events. Undue reliance should not be placed on such
forward-looking statements, which are based on current expectations.
Forward-looking statements are not guarantees of performance.
PART I
ITEM 1. BUSINESS
Introduction
MPS Group, Inc. ('MPS' or the 'Company') is a leading global provider of
business services with over 180 offices throughout the United States, Canada,
the United Kingdom, and continental Europe. MPS delivers a mix of consulting,
solutions, and staffing services in the following disciplines and through the
following brands:
Discipline Brand(s)
Information Technology (IT) Services Modis
Accounting and Finance Badenoch & Clark, Accounting Principals
Legal Special Counsel
Engineering Entegee
IT Solutions Idea Integration
Workforce Management Manchester
Executive Search Diversified Search
Human Capital Automation Beeline
Health Care Soliant Health
MPS operates these brands under three divisions: the IT services division; the
professional services division; and the IT solutions division. The Company
generated revenue of $1.15 billion in 2002, of which 67% was generated in the
United States. The remainder was generated internationally, primarily in the
United Kingdom. Note 16 to the Company's Consolidated Financial Statements
provides segment and geographic information for the three years ending December
31, 2002.
In the beginning of 2002, the Company completed its name change from Modis
Professional Services, Inc. to MPS Group, Inc., to further position MPS as a
specialist provider of business services.
MPS is a Fortune 1000 company listed on the New York Stock Exchange ('NYSE')
under the ticker symbol 'MPS'. The Company's Internet address is
www.mpsgroup.com and its principal executive offices are located at 1
Independent Drive, Jacksonville, Florida 32202 (telephone: 904-360-2000). The
Company makes available through its Internet website its annual reports on Form
10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as soon
as reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission. The information contained
on our website, or on other websites linked to our website, is not part of this
document.
Operations
IT Services division
The IT services division includes the Modis and Beeline units. The division
represented approximately 50% of MPS's revenue and 41% of its gross profit for
2002. Approximately 65% of the division's revenue was generated in the United
States, with the remainder generated internationally, primarily in the United
Kingdom.
Modis provides IT resource management (ITRM) solutions to over 2,000 clients in
a wide variety of industries through its network of more than 65 offices in the
United States, United Kingdom, Canada and continental Europe. ITRM is the
deployment of skilled consultants in IT specialties for clients who look to
obtain an optimal mix of internal staff, outside consulting resources, and
project outsourcing. The extent of the Company's deployment of skilled
consultants is driven by client companies' IT goals, budgets and project levels.
The value-added solutions falling under the umbrella of ITRM include IT project
support and staffing, recruitment of full-time positions, project-based
solutions, supplier management solutions, and on-site recruiting support in the
areas of application development, systems integration, and enterprise
application integration.
Modis has a variable cost business model whereby revenue and cost of revenue are
primarily generated on a time-and-materials basis. The majority of the billable
consultants are compensated on an hourly basis only for the hours which are
billed its client. Less than 1% of the Modis' revenue in 2002 was generated from
permanent placement fees. Permanent placement fees are generated when a client
directly hires a skilled consultant.
Beeline provides a Web-based and on-site human capital management automation
software solution. Beeline offers clients the ability to streamline the
creation, distribution, and tracking of position requirements for both full-time
hiring and the contingent worker procurement process, as well as, the
interaction between clients and their suppliers. Beeline has operations in both
the United States and the United Kingdom. Certain of Beeline's corporate
customers include Merrill Lynch, Pierce, Fenner & Smith, Mitchell International,
Trans Union, CSX Technology, JPMorgan Chase, BMW Manufacturing, and DHL
Worldwide Express.
Beeline maintains a full-time staff to support its operations and seeks to
collect a service charge that is based upon the usage of this service. During
2002, minimal service charges were collected as Beeline was focused on
completing its releases and implementing its service at its customers.
Additionally, uncertainties relating to the economy diminished the overall
spending levels for Beeline's customers. To implement its service, Beeline
incurs considerable start up costs and time. Subsequent to implementation,
minimal cost and resources are required for the usage of Beeline's services.
Professional Services division
The professional services division represented approximately 43% of MPS's
revenue and 50% of its gross profit for 2002. Approximately 64% of the
division's revenue was generated in the United States with the remainder
generated in the United Kingdom.
The professional services division provides professional business staffing and
solutions to a wide variety of clients, through its network of more than 100
offices in the United States and the United Kingdom. The division provides
expertise in a wide variety of disciplines operating through the Badenoch &
Clark, Accounting Principals, Special Counsel, Entegee, Manchester, Diversified
Search and Soliant Health brands.
Business staffing solutions are provided for varying periods of time to
companies or other organizations (including government agencies) that have a
need for such personnel, but are unable to, or choose not to, engage certain
personnel as their own employees. Examples of client needs for staffing
solutions include the need for specialized or highly-skilled personnel for the
completion of a specific project or subproject, substitution for regular
employees during vacation or sick leave, and staffing of high turnover positions
or seasonal peaks.
The division has a variable cost business model whereby revenue and cost of
revenue are primarily generated on a time-and-materials basis. The majority of
the billable consultants are compensated on an hourly basis only for the hours
which are billed its client. Approximately 5% of the division's revenue in 2002
was generated from permanent placement fees.
In July 2002, the Company acquired Elite Medical, Inc., a health care staffing
business. The Company entered the health care staffing space because it believes
there are favorable long-term market trends in healthcare - in particular with
respect to the imbalance in supply and demand for healthcare professionals. MPS
subsequently re-branded this business as Soliant Health. Consideration included
$7.0 million cash at closing, 1.1 million shares of MPS Common Stock valued at
$8.7 million, and the entitlement of additional consideration of up to $1.0
million worth of MPS Common Stock. Revenue generated from Soliant Health, since
acquisition, was $9.1 million in 2002.
In December 2001, the Company sold the assets of its scientific operating unit,
which operated under the brand of Scientific Staffing, to Kforce, Inc. for
consideration including $3.5 million in cash and the assets of Kforce, Inc.'s
legal operating unit. Revenue generated from the scientific operating unit was
$21 million in 2001.
IT Solutions division
The IT solutions division is comprised solely of Idea Integration ('Idea'). The
division represented approximately 7% of MPS's revenue and 9% of its gross
profit for 2002. All of the division's revenue was generated in the United
States.
Idea provides systems integration solutions to a wide variety of clients through
a combination of local, regional, and national practice groups located in nine
markets in the United States. Idea specializes in application development and
business information management, enterprise integration, business intelligence,
and Web-design and development. Idea integrates the Internet into all aspects of
its clients' businesses and is able to deliver these solutions as a result of
extensive expertise in key industries, propriety software development and
implementation methodologies known as Idea RoadMap (R), and a multi-level
service delivery model.
Idea has a fixed cost business model utilizing salaried consultants to deliver
solutions primarily under time-and-materials contracts and to a lesser extent
under fixed-fee contracts.
Competition
The ability of MPS to compete successfully for clients depends on its
reputation, pricing and quality of service provided, its understanding of
clients' specific job requirements, and the ability to provide qualified
personnel in a timely manner. Certain of the Company's contracts are awarded on
the basis of competitive proposals which can be periodically re-bid by the
client. While MPS's divisions have been successful in obtaining both short and
long-term contracts in the past, there can be no assurance that existing
contracts will be renewed on satisfactory terms or that additional or
replacement contracts will be awarded to the Company.
The principal competitors of the IT services division include Keane, Inc.,
Computer Horizons Corp., Comsys Information Technology Services, Inc., CIBER,
Inc., and the IT division of Adecco SA.
The principal competitors of the professional services division include Robert
Half International Inc., Resources Connection, Inc., Right Management
Consultants Inc., the legal division of Kelly Services, Inc., Adecco SA, and CDI
Corporation.
The principal competitors of the IT solutions division include Sapient
Corporation, Cognizant Technology Solutions Corporation, Answerthink, Inc.,
Accenture Ltd., Cap Gemini Ernst & Young, and to an extent, the consulting
division of IBM. In addition, in seeking engagements the division often competes
against the internal management information services and IT departments of
clients and potential clients.
Growth Strategy
The Company's growth strategy is focused on increasing overall revenue and gross
profits primarily through our core services offerings relating to IT services,
professional services and IT solutions and, to a lesser extent, expansion into
new specialties. The Company looks to achieve this focus primarily through
internal growth and to a lesser extent acquisitions. The decision of growing
internally as opposed to an acquisition will be based on the perceived length of
time to penetrate a market compared to its cost, as well as analyzing the
potential return on invested capital for a potential acquisition. Additionally,
the Company is positioning itself for the turn in the economy through the
consolidation of back office activities and the continued development of its
strategic management systems.
The key elements of the Company's internal growth strategy include increasing
penetration of existing markets and customer segments, expanding current
specialties into new and contiguous geographic markets, concentrating on skill
areas that value high levels of service, and identifying and adding new practice
areas. As one of the largest global providers of business services, the Company
looks to expand on this market footprint. Further, the Company can strengthen
its relationships with clients, consultants and employees by enhancing the
knowledge and skills of its consultants and employees. While the Company looks
to strengthen its relationships with clients, it does not look to concentrate on
any one specific client. For example, there were no customers to which sales
represented over 5% of the Company's consolidated revenue for 2002.
Employees
On March 12, 2003, the Company employed approximately 11,000 consultants and
approximately 2,000 corporate employees on a full-time equivalent basis.
Approximately 300 of the employees work at corporate headquarters.
As described below, in most jurisdictions, the Company, as the employer of the
consultants or as otherwise required by applicable law, is responsible for
employment administration. This administration includes collection of
withholding taxes, employer contributions for social security or its equivalent
outside the United States, unemployment tax, workers' compensation and fidelity
and liability insurance, and other governmental requirements imposed on
employers. Full-time employees are covered by life and disability insurance and
receive health insurance and other benefits.
Government Regulations
Outside of the United States and Canada, the staffing services industry is
closely regulated. These regulations differ among countries but generally may
regulate: (i) the relationship between the Company and its temporary employees;
(ii) registration, licensing, record keeping, and reporting requirements; and
(iii) types of operations permitted. Regulation within the United States and
Canada does not materially impact the Company's operations.
In many countries, including the United States and the United Kingdom, staffing
services firms are considered the legal employers of these consultants.
Therefore, laws regulating the employer/employee relationship, such as tax
withholding or reporting, social security or retirement, anti-discrimination,
and workers' compensation, govern the Company. In other countries, staffing
services firms, while not the direct legal employer of the consultant, are still
responsible for collecting taxes and social security deductions and transmitting
such amounts to the taxing authorities.
Intellectual Property
The Company seeks to protect its intellectual property through copyright, trade
secret and trademark law and through contractual non-disclosure restrictions.
The Company's services often involve the development of work and materials for
specific client engagements, the ownership of which is frequently assigned to
the client. The Company does at times, and when appropriate, negotiate to retain
the ownership or continued use of development tools or know how created or
generated by the Company in the delivery of its services, which the Company may
license to clients for certain purposes.
Seasonality
The Company's quarterly operating results are affected by the number of billing
days in the quarter and the seasonality of its customers' businesses. Demand for
the Company's services has historically been lower during the calendar year-end,
as a result of holidays, through February of the following year, as the
Company's customers approve annual budgets. Extreme weather conditions may also
affect demand in the early part of the year as certain of the Company's client
bases are located in geographic areas subject to extreme weather.
ITEM 2. PROPERTIES
The Company owns no material real property. It leases its corporate
headquarters, as well as almost all of its branch offices. The branch office
leases generally run for three to five-year terms. The Company believes that its
facilities are generally adequate for its needs and does not anticipate
difficulty replacing such facilities or locating additional facilities, if
needed. For additional information on lease commitments, see Note 6 to the
Company's Consolidated Financial Statements. In the fourth quarter of 2002, the
Company recorded a $9.7 million charge for exit costs associated with the
abandonment of excess real estate obligations for certain vacant office space.
See Note 17 of the Company's Consolidated Financial Statements for further
information on this charge.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the New York Stock Exchange (NYSE symbol
- - MPS). The following table sets forth the high and low prices of MPS's Common
Stock, as reported by the NYSE, during the two years ended December 31, 2002:
2002 2001
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High Low High Low
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Period:
First Quarter..................... $ 8.94 $ 6.45 $ 6.72 $ 3.88
Second Quarter.................... 9.80 7.00 6.97 3.70
Third Quarter..................... 8.25 4.35 7.00 3.70
Fourth Quarter.................... 6.65 4.35 8.20 3.80
See the factors set forth below in 'FACTORS WHICH MAY IMPACT FUTURE RESULTS AND
FINANCIAL CONDITION' under 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS,' for factors that may impact the price of
the Company's Common Stock. Fluctuations and volatility in the financial and
equity markets, in general, and in the Company's industry sector, in particular,
affect the price of the Company's Common Stock.
As of March 12, 2003, there were approximately 902 holders of record of the
Company's Common Stock.
No cash dividend or other cash distribution with respect to the Company's Common
Stock has ever been paid by the Company. The Company currently intends to retain
any earnings to provide for the operation and expansion of its business and does
not anticipate paying any cash dividends in the foreseeable future. The
Company's revolving credit facility prohibits the payment of cash dividends
without the lender's consent.
The Company's Board of Directors has authorized the repurchase of up to $65.0
million of the Company's Common Stock. The Company began to utilize this
authorization in the third quarter of 2002. As of March 12, 2003, 997,400 shares
at a cost of $5.0 million have been repurchased under this authorization.
In July 2002, the Company acquired Elite Medical, Inc., a health care staffing
business. Consideration included an initial cash payment of $7.0 million, 1.1
million shares of MPS Common Stock valued at $8.7 million, and the entitlement
of additional consideration of up to $1.0 million worth of MPS Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
Years Ended
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Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
(in thousands, except per share amounts) 2002 2001 2000 1999 1998 (2)
- - -------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Operations data:
Revenue $ 1,154,970 $ 1,548,489 $1,827,686 $ 1,941,649 $ 1,702,113
Cost of revenue 853,184 1,127,444 1,296,834 1,415,901 1,234,537
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Gross profit 301,786 421,045 530,852 525,748 467,576
Operating expenses 269,976 358,301 403,179 332,320 275,524
Amortization of goodwill (1) - 38,398 37,029 31,466 26,132
Impairment of investment 16,165 - - - -
Exit costs (recapture) 9,699 - (753) (3,250) 24,823
SFAS No. 121 goodwill impairment charge - - - - 9,936
Asset write-down related to sale of
discontinued operations - - 13,122 25,000 -
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Operating income from continuing
operations 5,946 24,346 78,275 140,212 131,161
Other expense, net 3,947 9,199 21,621 7,794 13,975
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Income from continuing operations
before income taxes 1,999 15,147 56,654 132,418 117,186
Provision (benefit) for income taxes 14,591 6,804 (63,099) 50,283 48,326
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Income (loss) from continuing
operations (12,592) 8,343 119,753 82,135 68,860
Discontinued operations:
Income from discontinued operations,
net of income taxes - - - - 30,020
Gain on sale of discontinued operations,
net of income taxes - - - 14,955 230,561
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Income (loss) before extraordinary loss
and cumulative effect of accounting
change (12,592) 8,343 119,753 97,090 329,441
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit - - - - (5,610)
Cumulative effect of accounting change,
net of income tax benefit (1) (553,712) - - - -
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Net income (loss) $ (566,304) $ 8,343 $ 119,753 $ 97,090 $ 323,831
====================================================================================
Basic income (loss) per common share:
From continuing operations $ (0.12) $ 0.09 $ 1.24 $ 0.85 $ 0.63
====================================================================================
From discontinued operations $ - $ - $ - $ - $ 0.28
====================================================================================
From gain on sale $ - $ - $ - $ 0.16 $ 2.12
====================================================================================
From extraordinary item $ - $ - $ - $ - $ (0.05)
====================================================================================
From accounting change $ (5.49) $ - $ - $ - $ -
====================================================================================
Basic income (loss) per common share $ (5.62) $ 0.09 $ 1.24 $ 1.01 $ 2.98
====================================================================================
Diluted income (loss) per common share:
From continuing operations $ (0.12) $ 0.08 $ 1.23 $ 0.85 $ 0.61
====================================================================================
From discontinued operations $ - $ - $ - $ - $ 0.26
====================================================================================
From gain on sale $ - $ - $ - $ 0.15 $ 1.97
====================================================================================
From extraordinary item $ - $ - $ - $ - $ (0.05)
====================================================================================
From accounting change $ (5.49) $ - $ - $ - $ -
====================================================================================
Diluted income (loss) per common share $ (5.62) $ 0.08 $ 1.23 $ 1.00 $ 2.79
====================================================================================
Basic average common shares
outstanding 100,833 97,868 96,675 96,268 108,518
====================================================================================
Diluted average common shares
outstanding 100,833 98,178 97,539 97,110 116,882
====================================================================================
December 31,
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(in thousands) 2002 2001 2000 1999 1998
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Consolidated Balance Sheet data:
Working capital $ 171,931 $ 204,722 $ 248,388 $ 247,111 $ 16,138
Total assets 897,983 1,543,622 1,653,560 1,596,395 1,571,881
Long term debt - 101,000 194,000 238,615 15,525
Stockholders' equity 781,559 1,310,811 1,303,218 1,182,515 1,070,110
(1) Cumulative effect of accounting change relates to the Company's adoption of
Statement of Financial Accounting Standards ('SFAS') No. 142 'Goodwill and
Other Intangible Assets,' effective January 1, 2002. SFAS No. 142
discontinued the periodic amortization of goodwill.
(2) Diluted average common shares outstanding have been computed using the
treasury stock method and the as-if converted method for convertible
securities which includes dilutive common stock equivalents as if
outstanding during the respective periods.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following detailed analysis of operations should be read in conjunction with
the 2002 Financial Statements and related notes included elsewhere in this Form
10-K.
MPS is a leading global provider of business services with over 180 offices
throughout the United States, Canada, the United Kingdom, and continental
Europe. MPS delivers a mix of consulting, solutions, and staffing services in
the disciplines such as IT services, finance and accounting, legal, engineering,
IT solutions, workforce management, executive search, human capital automation,
and health care.
Demand for the Company's services along with the overall markets in which it
operates has declined significantly since the second half of 2000. As a result
of this diminished demand, revenue generated in 2002 decreased 25% from 2001 and
37% from 2000. Excluding charges of $25.9 million in 2002 and goodwill
amortization of $38.4 million in 2001, operating income decreased to $31.8
million in 2002 from $62.7 million in 2001. As a result of the diminished
demand, the Company implemented cost reduction initiatives in 2001 and 2002 to
lessen the effect of the reduced revenues on its level of income. These
initiatives included: significantly reducing the Company's salaried workforce;
realigning compensation levels for the Company's employees; closing certain
unprofitable offices; consolidating or abandoning certain excess office space;
and exiting certain non-strategic markets.
Also during 2001 and 2002, management focused its attention on the Company's
financial position. The Company instituted measures to improve its financial
position by paying down debt and improving cash flow. Borrowings outstanding
under the Company's credit facility decreased to zero at December 31, 2002 from
$101 million at December 31, 2001 while cash and cash equivalents increased to
$66.9 million from $49.2 million during this same period.
However, the economic outlook remains uncertain, and as long as this uncertainty
remains, management believes that the demand for the Company's services will
remain sluggish. Therefore, management cannot predict when the demand for the
Company's services will significantly improve. When the market does improve,
management cannot predict, whether and to what extent, the demand for the
Company's services will improve. While the Company has taken actions to reduce
costs and to convert its cost base to a more variable structure, any further
declines in revenue will result in diminished profitability.
2002 COMPARED TO 2001
Consolidated Results
Revenue. Revenue decreased $393.5 million, or 25.4%, to $1,155.0 million in 2002
from $1,548.5 million in 2001. The decrease was attributable to diminished
demand for the Company's services. For example, the Company's customers
continued to experience a constrained ability to spend on IT initiatives due to
uncertainties relating to the economy.
Approximately 33% of the Company's 2002 revenue was generated internationally,
primarily in the United Kingdom. The Company's revenue is therefore subject to
changes in foreign currency exchange rates. The weakening of the U.S. dollar in
2002 had a slight impact on revenue, as revenue, on a constant currency basis
decreased 26.4%, as compared to the decrease of 25.4% above. Constant currency
removes the impact on revenue from changes in exchange rates between the U.S.
dollar and the functional currencies of its foreign subsidiaries.
Included in the results for 2001 was $20.7 million in revenue from the Company's
scientific operating unit which was sold in December 2001. Additionally, the
Company acquired a health care staffing business in July 2002 which contributed
$9.1 million in revenue for 2002. See Note 3 to the Company's Consolidated
Financial Statements for a discussion of the acquisition.
Gross profit. Gross profit decreased $119.2 million, or 28.3%, to $301.8 million
in 2002 from $421.0 million in 2001. Gross margin decreased to 26.1% in 2002,
from 27.2% in 2001. The lower margin is due primarily to changes in business
mix, pricing pressures, and a decrease in direct hire and permanent placement
fees, which generate a higher margin.
Operating expenses. Total operating expenses decreased $100.9 million, or 25.4%,
to $295.8 million in 2002, from $396.7 million in 2001. There are two items
which should be separately identified to provide a more meaningful analysis of
the change in operating expenses. Included in total operating expenses for 2002
was a $25.9 million charge for an investment impairment and exit costs. Included
in total operating expenses for 2001 was $38.4 million of goodwill amortization.
Excluding these aforementioned costs, total operating expenses decreased $88.4
million, or 24.7%, to $269.9 million in 2002, from $358.3 million in 2001. The
Company's general and administrative ('G&A') expenses, which are included in
operating expenses, decreased $87.6 million, or 26.0%, to $249.0 million in
2002, from $336.6 million in 2001. The decrease in G&A expenses was attributable
to (i) a decrease in revenue for 2002, (ii) cost reduction initiatives that were
implemented in 2001 and throughout 2002 across MPS's divisions in response to
the lower revenue levels and (iii) the elimination of duplicative corporate
infrastructure responsibilities. The decrease in revenue primarily reduces the
variable component of compensation for the Company's employees. Certain of the
cost reduction initiatives include the reduction of the Company's salaried
workforce, and the realignment of compensation levels for the Company's
employees.
The aforementioned charge of $25.9 million, which was incurred in the fourth
quarter of 2002, was comprised of the following: (1) The Company elected not to
participate in a recapitalization of a minority investment originally made in
1996. This election resulted in the investment being impaired. As a result, the
Company wrote off the investment in its entirety resulting in a $16.2 million
charge. See Note 18 to the Company's Consolidated Financial Statements for
further discussion; (2) The Company recorded a $9.7 million charge for exit
costs associated with the abandonment of excess real estate obligations for
certain vacant office space. This charge was recorded in accordance with SFAS
No. 146, 'Accounting for Costs Associated with Exit or Disposal.' See Note 17 to
the Company's Consolidated Financial Statements for further discussion.
In accordance with SFAS No. 142, the Company did not record any goodwill
amortization in 2002. See Note 5 to the Company's Consolidated Financial
Statements for further discussion.
Income from operations. Income from operations decreased $18.4 million, or
75.7%, to $5.9 million in 2002, from $24.3 million in 2001. Income from
operations as a percentage of revenue decreased to 0.5% in 2002, from 1.6% in
2001.
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 $5.0 million, or 47.2%, to $5.6 million in 2002, from
$10.6 million in 2001. The decrease in interest expense is related to the lower
level of borrowings under the Company's credit facility during 2002. As of March
12, 2003, there are no borrowings outstanding under the Company's credit
facility. Interest expense was offset by $1.7 million and $1.4 million of
interest and other income in 2002 and 2001, respectively.
Income taxes. The Company recognized an income tax provision of $14.6 million in
2002, compared to a provision of $6.8 million in 2001. Included in the provision
for 2002 is an $8.7 million charge recognized in the fourth quarter for a
proposed adjustment related to an ongoing audit by the Internal Revenue Service
of prior years' tax returns. See Note 7 to the Company's Consolidated Financial
Statements for further discussion. Absent this charge and the tax benefit on the
previously mentioned investment impairment and exit costs in 2002, the Company's
effective tax rate decreased to 40.6% in 2002 as compared to 44.9% in 2001. This
decrease is primarily due to the discontinuance of goodwill amortization
required by SFAS No. 142. In 2001, 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 decreased $20.9
million, to a $12.6 million loss in 2002, from $8.3 million of income in 2001.
Excluding goodwill amortization in the year earlier period, income before
cumulative effect of accounting change decreased $47.9 million, to a $12.6
million loss in 2002, from $35.3 million of income in 2001.
Segment Results
IT Services division
Revenue in the IT services division decreased $195.5 million, or 25.4%, to
$575.3 million in 2002, from $770.8 million in 2001. On a constant currency
basis, excluding the effects of exchange rates, revenue decreased 26.4%. The
decrease was attributable to the diminished demand for IT services. The
division's customers continued to experience a constrained ability to spend on
IT initiatives due to uncertainties relating to the economy.
Of the division's revenue, approximately 65% and 71% was generated in the United
States in 2002 and 2001, respectively. The remainder was generated
internationally, primarily in the United Kingdom. Revenue generated in the
United States decreased 30.8% in 2002. On a local currency basis, revenue
decreased 15.7% for revenue generated internationally.
Gross profit for the IT services division decreased $46.0 million, or 27.3%, to
$122.3 million in 2002 from $168.3 million in 2001. The gross margin decreased
to 21.3% in 2002, from 21.8% 2001. The decrease in gross margin is attributable
to the division's international operations, where it experienced a decrease in
bill rates, which exceeded the related decrease in pay rates of the division's
primarily hourly employees, along with a shift in the mix of its services. For
revenue generated internationally, the gross margin decreased to 15.4% in 2002,
from 16.6 % in 2001. For revenue generated in the United States, the gross
margin increased to 24.4% in 2002, from 24.0% in 2001.
The IT services division's G&A expenses decreased $22.6 million, or 18.1%, to
$102.0 million in 2002, from $124.6 million in 2001. As a percentage of revenue,
the division's G&A expenses increased to 17.7% in 2002, from 16.2% in 2001. The
decrease in the division's G&A expenses is associated with the decrease in
revenue for 2002, and cost reduction initiatives implemented within the division
in 2001 and throughout 2002.
Income from operations for the IT services division decreased $2.8 million, or
20.9%, to $10.6 million in 2002, from $13.4 million in 2001. Excluding goodwill
amortization in 2001, income from operations decreased $22.2 million, or 67.7%,
to $10.6 million in the 2002, from $32.8 million in 2001.
Professional Services division
Revenue in the professional services division decreased $113.7 million, or
18.7%, to $495.2 million in 2002, from $608.9 million in 2001. The decrease was
attributable to the diminished demand for staffing services and workforce
solutions provided by the division.
Of the division's revenue, approximately 64% and 68% was generated in the United
States in 2002 and 2001, respectively. The remainder was generated in the United
Kingdom. Included in revenue for 2001 was $20.7 million of revenue from the
Company's scientific operating unit which was sold in 2001. Included in revenue
for 2002 was $9.1 million of revenue from the Company's mid-year acquisition of
a health care staffing business. On an organic basis, excluding both the
divestiture and the acquisition, revenue generated in the United States
decreased 21.9% for 2002. On a local currency basis, revenue decreased 11.8% for
revenue in the United Kingdom.
Excluding the divested scientific unit, the professional services division
operates primarily through five operating units consisting of accounting and
finance, legal, engineering, workforce management and executive search, and
health care, which contributed 42.6%, 11.9%, 34.7%, 9.0%, and 1.8%,
respectively, of the division's revenue by group during 2002, as compared to
42.1%, 12.6%, 35.5%, 9.8%, and 0%, respectively, during 2001.
Gross profit for the professional services division decreased $46.9 million, or
23.7%, to $151.1 million in 2002 from $198.0 million in 2001. The gross margin
decreased to 30.5% in 2002, from 32.5% in 2001. The decrease in gross margin is
primarily attributable to a decrease in bill rates for 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. As a percentage of
revenue, the division's direct hire and permanent placement fees decreased to
5.0% of revenue in 2002, from 6.3% in 2001.
The professional services division's G&A expenses decreased $21.2 million, or
15.1%, to $119.2 million in 2002, from $140.4 million in 2001. As a percentage
of revenue, the division's G&A expenses increased to 24.1% in 2002, from 23.1%
in 2001. The decrease in the division's G&A expenses is associated with the
decrease in revenue for 2002, and cost reduction initiatives implemented within
the division in 2001 and throughout 2002.
Income from operations for the professional services division decreased $15.0
million, or 37.7%, to $24.8 million in 2002, from $39.8 million in 2001.
Excluding goodwill amortization in 2001, income from operations decreased $26.6
million, or 51.8%, to $24.8 million in the 2002, from $51.4 million in 2001.
IT Solutions division
Revenue in the IT solutions division decreased $84.3 million, or 49.9%, to $84.5
million in 2002, from $168.8 million in 2001. Weak demand for IT consulting
solutions was intensified by the uncertainties relating to the economy. As a
result, management refined its focus by deciding to exit certain non-strategic
markets. These markets, while generating revenue, were not producing positive
income or cash flow from operations.
Gross profit for the IT solutions division decreased $26.3 million, or 48.1%, to
$28.4 million in 2002 from $54.7 million in 2001. However, the gross margin
increased to 33.6% in 2002, from 32.4% in 2001. This increase was driven by
higher utilization of the Company's salaried consultants. This division's
business model, unlike the Company's other divisions, uses primarily salaried
consultants to meet customer demand. To reflect lower customer demand, the
division significantly reduced billable headcount from 2001 to 2002.
The IT solutions division's G&A expenses decreased $43.9 million, or 61.3%, to
$27.7 million in 2002, from $71.6 million in 2001. As a percentage of revenue,
the division's G&A expenses decreased to 32.8% in 2002, from 42.4% in 2001. The
decrease in the division's G&A expenses was primarily related to reductions in
its work force that started in 2001 and continued through 2002.
Loss from operations for the IT solutions division decreased $25.3 million, to a
$3.6 million loss in 2002, from a $28.9 million loss in 2001. Excluding goodwill
amortization in 2001, loss from operations decreased $17.9 million, to a $3.6
million loss in 2002, from a $21.5 million loss in 2001.
2001 COMPARED TO 2000
Consolidated Results
Revenue. Revenue decreased $279.2 million, or 15.3%, to $1,548.5 million in 2001
from $1,827.7 million in 2000. The decrease was attributable to diminished
demand for the Company's services. For example, the Company's customers
experienced a constrained ability to spend on IT initiatives due to
uncertainties relating to the economy.
Approximately 27% of the Company's 2001 revenue was generated internationally,
primarily in the United Kingdom. The Company's revenue was therefore subject to
changes in foreign currency exchange rates. The strengthening of the dollar in
2001 had a slight impact on revenue, as revenue, on a constant currency basis
decreased 14.1%, as compared to the decrease of 15.3% above. Constant currency
removes the impact on revenue from changes in exchange rates between the U.S.
dollar and the functional currencies of its foreign subsidiaries.
Gross profit. Gross profit decreased $109.9 million, or 20.7%, to $421.0 million
in 2001 from $530.9 million in 2000. Gross margin decreased to 27.2% in 2001,
from 29.0% in 2000. The lower margin is due primarily to the lower utilization
of the IT solutions division's salaried consultants, and to a lesser extent,
pricing pressures, and a decrease in direct hire and permanent placement fees.
Operating expenses. Total operating expenses decreased $55.9 million, or 12.4%,
to $396.7 million in 2001, from $452.6 million in 2000. The Company's G&A
expenses decreased $49.7 million, or 12.9%, to $336.6 million in 2001, from
$386.3 million in 2000. Included in total operating expenses in 2000 is a $13.1
million charge for an asset write-down related to the sale of discontinued
operations, $7.3 million of costs related to the cancelled separation and
spin-off of the IT services division and the cancelled initial public offering
of the IT solutions division, and a $0.8 million exit recapture. Excluding these
aforementioned costs, operating expenses decreased $36.3 million, or 8.4%, to
$396.7 million in 2001, from $433.0 million in 2000, and G&A expenses decreased
$42.4 million, or 11.2%, to $336.6 million in 2001, from $379.0 million in 2000.
Excluding these aforementioned costs, the decrease in G&A expenses was
attributable to (i) a decrease in revenue for 2001, (ii) cost reduction
initiatives that were implemented in 2001 across MPS's divisions in response to
the lower revenue levels and (iii) the elimination of duplicative corporate
infrastructure responsibilities.
Income from operations. Income from operations decreased $54.0 million, or
69.0%, to $24.3 million in 2001, from $78.3 million in 2000. Income from
operations as a percentage of revenue decreased to 1.6% in 2001, from 4.3% in
2000.
Other expense, net. Other expense, net consists primarily of interest expense
related to borrowings under the Company's credit facilities and notes issued in
connection with acquisitions, net of interest income related to investment
income from (1) certain investments owned by the Company and (2) cash on hand.
Interest expense decreased $12.4 million, or 53.9%, to $10.6 million in 2001,
from $23.0 million in 2000. The decrease in interest expense is related to the
lower level of borrowings under the Company's credit facilities during 2001.
Interest expense was offset by $1.4 million of interest and other income in both
2001 and 2000.
Income taxes. The Company recognized an income tax provision of $6.8 million in
2001, compared to a net income tax benefit of $63.1 million in 2000. The income
tax benefit in the prior year related primarily to a tax benefit associated with
an investment in a subsidiary. Absent this net benefit in 2000, the Company's
effective tax rate increased to 44.9% in 2001 as compared to 41.0% in 2000. This
increase is attributable to state tax expense, a higher level of non-deductible
expenses, and a lower level of income which is partially offset by a tax benefit
associated with a reorganization of a subsidiary.
Net income. As a result of the foregoing, net income decreased $111.5 million,
or 93.1%, to $8.3 million in 2001, from $119.8 million in 2000. Net income as a
percentage of revenue decreased to 0.5% in 2001, from 6.6% in 2000.
Segment Results
IT Services division
Revenue in the IT services division decreased $163.2 million, or 17.5%, to
$770.8 million in 2001, from $934.0 million in 2000. On a constant currency
basis, excluding the effects of exchange rates, revenue decreased 16.3%. The
decrease was attributable to the diminished demand for IT services. The
division's customers experienced a constrained ability to spend on IT
initiatives due to uncertainties relating to the economy.
Of the division's revenue, approximately 71% and 74% was generated in the United
States in 2001 and 2000, respectively. The remainder was generated
internationally, primarily in the United Kingdom. Revenue generated in the
United States decreased 21.8% in 2001. On a local currency basis, revenue
remained flat for 2001 for revenue generated internationally.
Gross profit for the IT services division decreased $40.2 million, or 19.3%, to
$168.3 million in 2001 from $208.5 million in 2000. The gross margin decreased
to 21.8% in 2001, from 22.3% 2000. The decrease in gross margin was primarily
attributable to a decrease in domestic bill rates and, to a lesser extent, the
lower level of direct hire and permanent placement fees, in 2001 as compared to
2000. Bill rates for the division's domestic operations decreased 7% during
2001, while bill rates for the division's international operations remained flat
during the year. As a percentage of revenue, the division's direct hire and
permanent placement fees decreased to 0.6% of revenue in 2001, from 1.1% in
2000.
The IT services division's G&A expenses decreased $25.6 million, or 17.0%, to
$124.6 million in 2001, from $150.2 million in 2000. As a percentage of revenue,
the division's G&A expenses increased slightly to 16.2% in 2001, from 16.1% in
2000. The decrease in the division's G&A expenses is associated with the
decrease in revenue for 2001, and cost reduction initiatives implemented within
the division in 2001.
Income from operations for the IT services division decreased $17.0 million, or
55.9 %, to $13.4 million in the 2001, from $30.4 million in 2000.
Professional Services division
Revenue in the professional services division decreased $43.7 million, or 6.7%,
to $608.9 million in 2001, from $652.6 million in 2000. The decrease was
attributable to the diminished demand for staffing services and workforce
solutions provided by the division.
Of the division's revenue, approximately 68% and 72% was generated in the United
States in 2001 and 2000, respectively. The remainder was generated in the United
Kingdom. Revenue generated in the United States decreased 11.4% for 2001. On a
local currency basis, revenue increased 10.9% for revenue generated in the
United Kingdom.
The professional services division operated primarily through five operating
units consisting of the accounting and finance, legal, engineering, workforce
management and executive search, and scientific, which contributed 40.6%, 12.2%,
34.3%, 9.5% and 3.4%, respectively, of the division's revenue by group during
2001, as compared to 39.4%, 13.2%, 34.7%, 8.5% and 4.2%, respectively, during
2000. In December 2001, the Company sold the assets of its scientific operating
unit, which operated under the brand of Scientific Staffing.
Gross profit for the professional services division decreased $19.5 million, or
9.0%, to $198.0 million in 2001 from $217.5 million in 2000. The gross margin
decreased to 32.5% in 2001, from 33.3% in 2000. The decrease in gross margin was
attributable to a lower level of direct hire and permanent placement fees in the
2001 as compared to 2000. As a percentage of revenue, the division's direct hire
and permanent placement fees decreased to 6.3% of revenue in 2001, from 8.0% in
2000.
The professional services division's G&A expenses increased $0.7 million, or
0.5%, to $140.4 million in 2001, from $139.7 million in 2000. As a percentage of
revenue, the division's G&A expenses increased to 23.1% in 2001, from 21.4% in
2000. The increase in the professional services division's G&A expenses was
related to an increase in the level of spending to establish the corporate
infrastructure in the division. During the spring of 2001, the Company began to
eliminate many of these duplicative corporate infrastructure responsibilities in
the division, integrating these efforts into the MPS corporate structure. Both
the ramp up and subsequent elimination of a separate corporate infrastructure
revolved around the proposed, and subsequent cancellation of the, spinoff of the
of the Company's other two divisions.
Income from operations for the professional services division decreased $21.9
million, or 35.5%, to $39.8 million in 2001, from $61.7 million in 2000.
IT Solutions division
Revenue in the IT solutions division decreased $72.3 million, or 30.0%, to
$168.8 million in 2001, from $241.1 million in 2000. Weak demand for IT
consulting solutions was intensified by the uncertainties relating to the
economy.
Gross profit for the IT solutions division decreased $50.2 million, or 47.8%, to
$54.7 million in 2001 from $104.9 million in 2000. The gross margin decreased to
32.4% in the 2001, from 43.5% in 2000. This decrease was driven by lower
utilization of the Company's salaried consultants. This division's business
model, unlike the Company's other divisions, uses primarily salaried consultants
to meet customer demand. To reflect lower demand, the division addressed
consultant utilization through the downsizing of its consultant base from 2000
to 2001, However, the decreased use of the remaining billable consultants
decreased the division's gross margin.
The IT solutions division's G&A expenses decreased $17.5 million, or 19.6%, to
$71.6 million in 2001, from $89.1 million in 2000. As a percentage of revenue,
the division's G&A expenses increased to 42.4% in 2001, from 37.0% in 2000. The
decrease in the G&A expenses was related to reductions in its work force that
started in 2001.
Income from operations for the IT solutions division decreased $34.7 million, to
a $28.9 million loss in 2001, from income of $5.8 million in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's historical 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 $171.9 million and $204.7 million as of
December 31, 2002 and 2001, respectively. The Company had cash and cash
equivalents of $66.9 million and $49.2 million as of December 31, 2002 and 2001,
respectively.
For the years ended December 31, 2002 and 2001, the Company generated $115.9
million and $183.6 million of cash flow from operations, respectively. The
reduction in cash flow from operations, from 2001 to 2002, is primarily due to a
reduced level of earnings in the current year, which was somewhat offset by an
improvement in receivables collection. The Company experienced an increase in
receivables collection as the main elements of the Company's back office
integration and consolidation efforts were being completed in 2001 and 2002.
For the year ended December 31, 2000, the Company generated $192.7 million of
cash flow from operations. Included in 2000's cash flow is an $86.3 million net
tax refund. Excluding the effect of this tax refund, cash flow from operations
increased from 2000 to 2001. This increase again primarily related to improved
receivables collection mentioned above, decreasing the cash needed to fund
accounts receivable.
For the year ended December 31, 2002, the Company used $13.2 million of cash for
investing activities, of which $6.7 million, net of cash acquired, was used for
the purchase of Elite Medical, Inc., and $6.5 million was used for capital
expenditures. For the year ended December 31, 2001, the Company used $15.3
million of cash for investing activities, primarily for capital expenditures.
For the year ended December 31, 2000, the Company used $148.8 million of cash
for investing activities, primarily for acquisitions in the IT solutions
division and to a lesser extent earn-out payments. The Company also used $25.2
million for capital expenditures in 2000.
For the year ended December 31, 2002, the Company used $86.5 million of cash for
financing activities, of which $101.4 was used for repayments on the Company's
credit facility and $16.4 million was generated from stock option exercises. The
Company also used $1.4 million for the purchase of treasury stock. For the year
ended December 31, 2001, the Company used $116.6 million of cash for financing
activities. This amount primarily represented net repayments on the Company's
credit facility and on notes issued in connection with the acquisition of
certain companies. These repayments were mainly funded from cash flows from
operations.
For the year ended December 31, 2000, the Company used $47.4 million of cash for
financing activities. This amount primarily represented net repayments on the
Company's credit facility and on notes issued in connection with the acquisition
of certain companies. These repayments were mainly funded from a net tax refund
mentioned above.
The Company's Board of Directors has authorized the repurchase of up to $65.0
million of the Company's common stock. The Company began to utilize this
authorization in the third quarter of 2002. As of March 12, 2003, 997,400 shares
at a cost of $5.0 million have been repurchased under this authorization.
The Company anticipates that capital expenditures for furniture and equipment,
including improvements to its management information and operating systems
during the next twelve months will be approximately $10 million.
While there can be no assurance in this regard, the Company believes that funds
provided by operations, available borrowings under the credit facility, and
current amounts of cash will be sufficient to meet its presently anticipated
needs for working capital, capital expenditures and acquisitions for at least
the next 12 months.
Indebtedness, Contractual Obligations, and Commercial Commitments of the Company
The following are contractual cash obligations and other commercial commitments
of the Company at December 31, 2002:
Payments Due by Period
------------------------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Total 1 Year Years Years Years
Contractual Cash Obligations
(in thousands)
<c> <c> <c> <c> <c>
Operating leases $ 77,020 $ 19,739 $ 36,068 $ 10,905 $ 10,308
Other 334 334 - - -
------------------------------------------------------------------------------
Total Contractual Cash Obligations $ 77,354 $ 20,073 $ 36,068 $ 10,905 $ 10,308
==============================================================================
Amount of Commitment Expiration per Period
------------------------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Total 1 Year Years Years Years
Commercial Commitments
(in thousands)
Standby letters of credit $ 2,401 $ 2,401 $ - $ - $ -
------------------------------------------------------------------------------
Total Commercial Commitments $ 2,401 $ 2,401 $ - $ - $ -
==============================================================================
The Company has a $200 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. In 2002, the Company reduced the notional amount of the
facility from $350 million to $200 million to more closely align the Company's
facility with its anticipated capital needs.
At both December 31, 2002, and March 12, 2003, there were no borrowings
outstanding under the credit facility. The Company had outstanding letters of
credit in the amount of $2.4 million, reducing the amount of funds available
under the credit facility to approximately $197.6 million at both December 31,
2002, and March 12, 2003. While there can be no assurance that a new credit
facility can be obtained on terms acceptable to management, management expects
to enter into a new revolving credit facility during 2003. The size and timing
will depend upon the capital needs of the Company and the condition of the
lending environment.
CRITICAL ACCOUNTING POLICIES
The Company believes the following are its most critical accounting policies in
that they are the most important to the portrayal of the Company's financial
condition and results and require management's most difficult, subjective or
complex judgments.
Revenue Recognition
The Company recognizes revenue at the time services are provided and is recorded
on a time and materials basis. In most cases, the consultant is the Company's
employee and all costs of employing the worker are the responsibility of the
Company and are included in cost of revenue. Revenues generated when the Company
permanently places an individual with a client are recorded at the time of
placement less a reserve for employees not expected to meet the probationary
period. The Company, to a lesser extent, is also involved in fixed price
engagements whereby revenues are recognized under the percentage-of-completion
method of accounting.
Allowance for Doubtful Accounts
The Company regularly monitors and assesses its risk of not collecting amounts
owed to it by its customers. This evaluation is based upon a variety of factors
including: an analysis of amounts currently and past due along with relevant
history and facts particular to the customer. Based upon the results of this
analysis, the Company records an allowance for uncollectible accounts for this
risk. This analysis requires the Company to make significant estimates, and
changes in facts and circumstances could result in material changes in the
allowance for doubtful accounts.
Income Taxes
The provision for income taxes is based on income before taxes as reported in
the Company's Consolidated Statements of Income. Deferred tax assets and
liabilities are recognized for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. An assessment is made as to
whether or not a valuation allowance is required to offset deferred tax assets.
This assessment includes anticipating future income.
Significant management judgment is required in determining the Company's
provision for income taxes, deferred tax assets and liabilities and any
valuation allowance recorded against the Company's net deferred tax assets.
Management evaluates all available evidence to determine whether it is more
likely than not that some portion or all of the deferred income tax assets will
not be realized. The establishment and amount of a valuation allowance requires
significant estimates and judgment and can materially affect the Company's
results of operations. The company's effective tax rate may vary from period to
period based, for example, on changes in estimated taxable income or loss,
changes to the valuation allowance, changes to federal, state or foreign tax
laws, deductibility of certain costs and expenses by jurisdiction and as a
result of acquisitions.
The Company has a net deferred tax asset of $67.5 million as of December 31,
2002, which was created primarily by the impairment loss recorded as a change in
accounting principle, associated with the Company's adoption of SFAS No. 142.
This impairment reduced the financial statement carrying amount of goodwill,
which resulted in the tax basis of tax deductible goodwill being greater than
the financial statement carrying amount. The Company's tax basis in its tax
deductible goodwill will be deducted in the Company's income tax returns,
generating $441.2 million of future tax deductions over the next 15 years, of
which $47.0 million will be deducted in 2003.
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 would be examined. As part of this examination, the Company recorded a
tax provision of $8.7 million in 2002 for a proposed adjustment with the
Internal Revenue Service. For a further discussion, see Note 7 to the
Consolidated Financial Statements.
Goodwill
In July 2001, the FASB issued SFAS No. 142, 'Goodwill and Other Intangible
Assets,' which was required to be adopted for fiscal 2002. SFAS No. 142
established accounting and reporting standards for goodwill and intangible
assets resulting from business combinations. SFAS No. 142 included provisions
discontinuing the periodic amortization of, and requiring the assessment of the
potential impairments of, goodwill (and intangible assets deemed to have
indefinite lives). As SFAS No. 142 replaced the measurement guidelines for
goodwill impairment, goodwill not considered impaired under previous accounting
literature may be considered impaired under SFAS No. 142. SFAS No. 142 also
required that the Company complete a two-step goodwill impairment test. The
first step compared the fair value of each reporting unit to its carrying
amount, including goodwill. If the fair value of a reporting unit exceeded its
carrying amount, goodwill is not considered to be impaired and the second step
was not required. SFAS 142 required completion of this first step within the
first six months of initial adoption and annually thereafter. If the carrying
amount of a reporting unit exceeded its fair value, the second step is performed
to measure the amount of impairment loss. The second step compared 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 was only performed for purposes of evaluating goodwill
impairment and did 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 was 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 adopted SFAS No. 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 $553.7 million, net
of an income tax benefit of $113.0 million. During the fourth quarter of 2002,
the Company completed the annual goodwill impairment tests, in which no
additional impairment was recorded. However, the Company will perform goodwill
impairment tests on at least an annual basis going forward. If the fair value of
the reporting units decrease below their respective carrying values, the Company
may be subject to a material charge to earnings as a result of the impairment
loss that will need to be recognized. Refer to Note 5 to the Company's
Consolidated Financial Statements for further discussion.
Exit Costs
During June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for a cost
associated with an exit or disposal activity be recognized, at fair value, when
the liability is incurred rather than at the time an entity commits to a plan.
The provisions of SFAS No. 146 are effective for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. The Company
adopted the provisions of SFAS No. 146 in 2002.
In 2001 and 2002, the Company experienced a material decrease in demand for its
domestic operations. To reflect this decreased demand, the Company made attempts
to realign its real estate capacity needs and thus vacate and reorganize certain
office space.
In the fourth quarter of 2002, management determined that the Company would not
be able to utilize this vacated office space. This determination eliminated the
economic benefit associated with the vacated office space. As a result, the
Company recorded $9.7 million of contract termination costs, mainly due to,
costs that will continue to be incurred under the lease contract for its
remaining term without economic benefit to the Company. While the Company looks
to settle excess lease obligations, the current economic environment has made it
difficult for the Company to either settle or find acceptable subleasing
opportunities. The average remaining lease term for the lease obligations
included herein is approximately 2.5 years. The Company expects to realize $3.3
million in lease savings during 2003 as a result of the charge. See Note 17 to
the Company's Consolidated Financial Statements.
Investment Impairment
The process of assessing whether a particular equity investment's net realizable
value is less than its carrying cost requires a significant amount of judgment.
The Company periodically monitors an investment for impairment by considering,
among other things, the investee's cash position, projected cash flows,
financing needs, liquidation preference, most recent valuation data (including
the duration and extent to which the fair value is less than cost), the current
investing environment, competition and the Company's intent and ability to hold
the investment.
The Company had a minority investment in a privately held company that was
recorded as a non-current asset, and was included in 'Other Assets, net' on the
Consolidated Balance Sheets. The asset was carried at its original cost plus
accrued interest. The investment was originally made in 1996 and was set to
mature in 2004. The Company was notified during the third quarter of 2002, that
this privately held company was trying to raise additional capital through a
recapitalization, at terms which would dilute the value of the Company's
investment, should (a) the Company elect not to participate in the
recapitalization and (b) the recapitalization be completed. In the fourth
quarter, this privately held company completed the recapitalization. The Company
elected not to participate in the recapitalization, which resulted in the
investment being impaired. As a result, the Company wrote off the investment in
its entirety recognizing a $16.2 million charge in the fourth quarter of 2002.
Asset Impairment
The Company reviews its long-lived assets and identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. In performing the review
for recoverability, the Company estimates the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized.
Otherwise, an impairment loss is not recognized. Measurement of an impairment
loss for long-lived assets and identifiable intangibles would be based on the
fair value of the asset.
RECENT ACCOUNTING PRONOUNCEMENTS
During December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which provides for alternative
methods of transition for a voluntary change to the fair-value-based method of
accounting for stock-based compensation. In addition, SFAS No. 148 amends the
disclosure requirements for both annual and interim financial statements. The
Company adopted the disclosure provisions of SFAS No. 148 on December 31, 2002
but continue to account for our stock-based compensation under APB Opinion No.
25. See Note 2 to the Company's Consolidated Financial Statements for further
discussion.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk
The following assessment of the Company's market risks does not include
uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax and credit risks.
Interest rates. The Company's exposure to market risk for changes in interest
rates relates primarily to the Company's 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.
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 33% of its consolidated revenues
for 2002 from international operations, approximately 97% of which were from the
United Kingdom. The British pound sterling to U.S. dollar exchange rate has
increased approximately 11% in 2002, from 1.45 at December 31, 2001 to 1.61 at
December 31, 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 consolidated 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 December 31, 2002, the Company did not hold and has not previously entered
into any foreign currency derivative instruments.
FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION
Demand For The Company's Services has Weakened Significantly And Demand Will
Likely Remain Weak For Some Time Because Of The Current Economic Climate.
The Company's results are affected by the level of business activity of its
customers, which is driven by the level of economic activity in the industries
and markets they serve. The current economic downturn and uncertainty has
significantly hurt its results of operations. Further deterioration in global
economic or political conditions could increase these effects. As long as this
uncertainty remains, management believes that the demand for the Company's
services will remained diminished. Therefore, management cannot predict when the
demand for the Company's services will significantly improve. When the market
does improve, management cannot predict, whether and to what extent, the demand
for the Company's services will improve. Although the Company has implemented a
largely variable cost model, as it relates to compensation for a substantial
part of its business, further declines in revenue will have a material adverse
impact on its results.
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.
Our Market Is Highly Competitive And The Company May Not Be Able To Continue To
Compete Efficiently.
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. The Company has increasingly competed against
services providers offering their services from remote locations, particularly
from offshore locations such as India. The substantially lower cost of the labor
pool in these remote locations puts significant pricing pressure on the
Company's service offerings when it competes with these service providers. While
the Company believes that its service delivery model provides a superior level
of service than many of these offshore based competitors, the increased pricing
pressure from these providers may have a material adverse impact on the
Company's business. Competition creates an aggressive pricing environment and
higher wage costs, which puts pressure on gross margins.
The Company may also be adversely effected by the consolidation of vendor
lists. As customers have consolidated their number of vendors, the Company
historically has a high percentage of wins in that it has remained on these
shortened lists of approved vendors. Competition to be an approved vendor has
only intensified and if the Company fails to maintain its percentage of wins for
these consolidated vendor lists, its failure will have a material impact on the
Company's results.
The Company's Business May Suffer From The Loss of Key Personnel
The Company's operations are dependent on the continued efforts of its
officers and executive management. In addition, it is dependent on the
performance and productivity of its local managers and field personnel. The
Company's ability to attract and retain business is significantly affected by
local relationships and the quality of service rendered. The loss of those key
officers and members of executive management may cause a significant disruption
to our business. Moreover, the loss of its key managers and field personnel may
jeopardize existing client relationships with businesses that continue to use
the Company's services based upon past relationships with these local managers
and field personnel. The loss of such key personnel could materially adversely
affect the Company's operations, including its ability to establish and maintain
client relationships.
Possible Changes In Governmental Regulations Could Have A Material Impact On The
Company's Business
From time to time, legislation is proposed in the United States Congress,
state legislative bodies, and the foreign governments of the United Kingdom and
continental Europe, 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 business 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.
IRS Adjustments During Periodic Income Tax Audits May Have A Material Impact On
The Company's Results
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. In the fourth quarter of 2002, the
Company recorded an $8.7 million charge for a proposed adjustment related to its
ongoing audit of prior years' tax returns. While management has not received
notice of any additional proposed adjustments relating to its ongoing audit of
prior years' tax returns, there can be no assurance that the Internal Revenue
Service will not propose additional adjustments. Additional adjustments may
affect the Company's financial condition and financial covenants of the
Company's credit facility.
The Price Of The Company's Common Stock May Fluctuate Significantly, Which May
Result In Losses For Investors
The market price for MPS's Common Stock has been and may continue to be
volatile. For example, during the year ended December 31, 2002, the prices of
its Common Stock as reported on the New York Stock Exchange ranged from a high
of $9.80 to a low of $4.35. Its stock price can fluctuate as a result of a
variety of factors, including factors listed in the above Risk Factors and
others, many of which are beyond the Company's control. These factors include:
- - actual or anticipated variations in the Company's quarterly operating
results;
- - announcement of new services by the Company or its competitors;
- - announcements relating to strategic relationships or acquisitions;
- - changes in financial estimates or other statements by securities analysts;
and
- - changes in general economic conditions.
Because of this volatility, the Company may fail to meet the expectations
of its shareholders or of securities analysts, and its stock price could decline
as a result.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Consolidated Financial Statements: The following consolidated financial
statements are included in this Annual Report on Form 10-K:
<c>
Report of Independent Certified Public Accountants
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001, and 2000
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
MPS Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity, and of cash
flows present fairly, in all material respects, the financial position of MPS
Group, Inc. (formerly, Modis Professional Services, Inc.) and its subsidiaries
at December 31, 2002 and 2001, and the results of their operations and their
cash flows for the three years then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 5 to the Consolidated Financial Statements, the Company
changed its method of accounting for goodwill upon the adoption of the
accounting guidance of Statement of Financial Accounting Standards No. 142,
'Goodwill and Other Intangible Assets', effective January 1, 2002.
PricewaterhouseCoopers LLP
Jacksonville, Florida
March 26, 2003
MPS Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, December 31,
(dollar amounts in thousands except share amounts) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 66,934 $ 49,208
Accounts receivable, net of allowance of $17,506 and $19,533 185,510 227,069
Prepaid expenses 5,099 6,444
Deferred income taxes 3,386 5,873
Other 11,632 12,102
----------------------------------
Total current assets 272,561 300,696
Furniture, equipment, and leasehold improvements, net 38,792 48,742
Goodwill, net 511,796 1,165,961
Deferred income taxes 64,085 -
Other assets, net 10,749 28,223
----------------------------------
Total assets $ 897,983 $ 1,543,622
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 49,834 49,207
Accrued payroll and related taxes 35,885 39,524
Income taxes payable 14,911 7,243
----------------------------------
Total current liabilities 100,630 95,974
Credit facility - 101,000
Deferred income taxes - 22,214
Other 15,794 13,623
----------------------------------
Total liabilities 116,424 232,811
----------------------------------
Commitments and contingencies (Notes 3, 4, 6, and 7)
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
no shares issued - -
Common stock, $.01 par value; 400,000,000 shares authorized;
102,531,491 and 98,306,783 shares issued, respectively 1,025 983
Additional contributed capital 622,079 594,061
Retained earnings 163,781 730,085
Accumulated other comprehensive income (loss) 66 (9,400)
Deferred stock compensation (3,958) (4,918)
Treasury stock, at cost (290,400 shares in 2002) (1,434) -
----------------------------------
Total stockholders' equity 781,559 1,310,811
----------------------------------
Total liabilities and stockholders' equity $ 897,983 $ 1,543,622
==================================
See accompanying notes to consolidated financial statements.
MPS Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31,
------------------------------------------
(dollar amounts in thousands except per share amounts) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Revenue $ 1,154,970 $ 1,548,489 $ 1,827,686
Cost of revenue 853,184 1,127,444 1,296,834
------------------------------------------
Gross profit 301,786 421,045 530,852
------------------------------------------
Operating expenses:
General and administrative 248,959 336,577 386,327
Depreciation and intangibles amortization 21,017 21,724 16,852
Amortization of goodwill - 38,398 37,029
Exit costs (recapture) 9,699 - (753)
Impairment of investment 16,165 - -
Asset impairment related to sale of discontinued operations - - 13,122
------------------------------------------
Total operating expenses 295,840 396,699 452,577
------------------------------------------
Income from operations 5,946 24,346 78,275
Other expense, net 3,947 9,199 21,621
------------------------------------------
Income before provision for income taxes and cumulative effect
of accounting change 1,999 15,147 56,654
Provision (benefit) for income taxes 14,591 6,804 (63,099)
------------------------------------------
Income (loss) before cumulative effect of accounting change (12,592) 8,343 119,753
Cumulative effect of accounting change (net of a $112,953
income tax benefit) (553,712) - -
------------------------------------------
Net income (loss) $ (566,304) $ 8,343 $ 119,753
==========================================
Basic net income (loss) per common share:
Income (loss) before cumulative effect of accounting change $ (0.12) $ 0.09 $ 1.24
Cumulative effect of accounting change, net of tax (5.49) - -
------------------------------------------
Basic net income (loss) per common share $ (5.62) $ 0.09 $ 1.24
==========================================
Average common shares outstanding, basic 100,833 97,868 96,675
==========================================
Diluted net income (loss) per common share:
Income (loss) before cumulative effect of accounting change $ (0.12) $ 0.08 $ 1.23
Cumulative effect of accounting change, net of tax (5.49) - -
------------------------------------------
Diluted net income (loss) per common share $ (5.62) $ 0.08 $ 1.23
==========================================
Average common shares outstanding, diluted 100,833 98,178 97,539
==========================================
See accompanying notes to consolidated financial statements.
MPS Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Accumulated
Other
Common Additional Comprehensive Deferred
(dollar amounts in thousands Stock Treasury Contributed Retained Income Stock
except share amounts) Shares Amount Stock Capital Earnings (Loss) Compensation Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 96,316,620 $ 963 $ - $ 582,555 $601,989 $(2,992) $ - $1,182,515
Comprehensive income:
Net income - - - - 119,753 - -
Foreign currency translation - - - - - (3,953) -
Total comprehensive income - - - - - - - 115,800
Exercise of stock options and related
tax benefit 379,597 4 - 4,875 - - - 4,879
Issuance of restricted stock 100,000 1 - 424 - - (425) -
Vesting of restricted stock - - - - - - 24 24
-----------------------------------------------------------------------------------------
Balance, December 31, 2000 96,796,217 968 - 587,854 721,742 (6,945) (401) 1,303,218
Comprehensive income:
Net income - - - - 8,343 - -
Foreign currency translation - - - - - (9,132) -
Foreign currency translation, tax benefit - - - - - 8,185 -
Derivative instruments, net of
related tax benefit - - - - - (1,508) -
Total comprehensive income - - - - - - - 5,888
Exercise of stock options and related
tax benefit 150,566 1 - 373 - - - 374
Issuance of restricted stock 1,360,000 14 - 5,834 - - (5,848) -
Vesting of restricted stock - - - - - - 1,331 1,331
-----------------------------------------------------------------------------------------
Balance, December 31, 2001 98,306,783 983 - 594,061 730,085 (9,400) (4,918) 1,310,811
Comprehensive loss:
Net loss - - - - (566,304) - -
Foreign currency translation - - - - - 7,958 -
Derivative instruments, net of
related tax benefit - - - - - 1,508 -
Total comprehensive loss - - - - - - - (556,838)
Issuance of common stock related to
business combinations 1,149,679 11 - 8,714 - - - 8,725
Exercise of stock options and related
tax benefit 2,871,696 29 - 18,023 - - - 18,052
Purchase of treasury stock - - (1,434) - - - - (1,434)
Issuance of restricted stock 203,333 2 - 1,281 - - (1,283) -
Vesting of restricted stock - - - - - - 2,243 2,243
-----------------------------------------------------------------------------------------
Balance, December 31, 2002 102,531,491 $1,025 $(1,434) $ 622,079 $163,781 $ 66 $(3,958) $ 781,559
=========================================================================================
See accompanying notes to consolidated financial statements.
MPS Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
------------------------------------------
(dollar amounts in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (566,304) $ 8,343 $ 119,753
Adjustments to net income (loss) to net cash provided
by operating activities:
Exit costs (recapture) 9,699 - (753)
Impairment of investment 16,165 - -
Cumulative effect of accounting change, net of tax 553,712 - -
Impairment of asset related to sale of discontinued operations - - 13,122
Depreciation and identified intangibles amortization 21,017 21,724 16,852
Amortization of goodwill - 38,398 37,029
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 53,082 111,238 (13,994)
Prepaid expenses and other assets (1,807) 3,073 6,805
Deferred income taxes 28,217 3,553 4,422
Deferred compensation 2,243 1,331 24
Accounts payable and accrued expenses 5,182 (2) 12,802
Accrued payroll and related taxes (5,046) (1,851) (3,401)
Other, net (279) (2,216) 54
-----------------------------------------
Net cash provided by operating activities 115,881 183,591 192,715
-----------------------------------------
Cash flows from investing activities:
Purchase of furniture, equipment, and leasehold
improvements, net of disposals (6,487) (14,814) (25,150)
Purchase of businesses, including additional earn-outs on
acquisitions, net of cash acquired and businesses sold (6,739) (509) (123,633)
-----------------------------------------
Net cash used in investing activities (13,226) (15,323) (148,783)
-----------------------------------------
Cash flows from financing activities:
Repurchases of common stock (1,434) - -
Proceeds from stock options exercised 16,387 373 4,880
Borrowings on indebtedness - 2,000 543,000
Repayments on indebtedness (101,423) (118,962) (595,284)
-----------------------------------------
Net cash used in financing activities (86,470) (116,589) (47,404)
-----------------------------------------
Effect of exchange rate changes on cash and cash equivalents 1,541 (7,484) (41)
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 17,726 44,195 (3,513)
Cash and cash equivalents, beginning of year 49,208 5,013 8,526
-----------------------------------------
Cash and cash equivalents, end of year $ 66,934 $ 49,208 $ 5,013
=========================================
See accompanying notes to consolidated financial statements.
Years Ended December 31,
(dollar amounts in thousands except for per share amounts) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 4,534 $ 12,711 $ 22,112
Income taxes paid 6,214 13,873 11,586
NON-CASH INVESTING AND FINANCING ACTIVITIES
During 2002 and 2000, the Company completed one and several acquisitions,
respectively. There were no acquisitions in 2001. In connection with the
acquisitions, liabilities were assumed as follows:
Years Ended December 31,
2002 2000
- ------------------------------------------------------------------------------------------------------------------
Fair value of assets acquired $ 7,367 $ 73,344
Cash paid (7,000) (63,550)
---------- -----------
Liabilities assumed $ 367 $ 9,794
========== ===========
1. DESCRIPTION OF BUSINESS
MPS Group, Inc. ('MPS' or the 'Company') (New York Stock Exchange
symbol:MPS) delivers a mix of consulting, solutions, and staffing services in
the disciplines of information technology (IT) services, finance and accounting,
legal, engineering, IT solutions, work force management, executive search, human
capital automation, and health care.
In the beginning of 2002, the Company completed its name change from Modis
Professional Services, Inc. to MPS Group, Inc., to further position MPS as a
specialist provider of business services.
MPS consists of three divisions: the IT services division; the professional
services division; and the IT solutions division.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany transactions have
been eliminated in the accompanying consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include deposits in banks, government securities,
money market funds, and short-term investments with maturities, when acquired,
of 90 days or less.
Furniture, Equipment, and Leasehold Improvements
Furniture, equipment, and leasehold improvements are recorded at cost less
accumulated depreciation and amortization. Depreciation of furniture and
equipment is computed using the straight-line method over the estimated useful
lives of the assets. The Company has developed a proprietary software package
which allows the Company to implement imaging, time capture, and data-warehouse
reporting. The costs associated with the development of this proprietary
software package have been capitalized, and are being amortized over a five-year
period. See Note 14 to the Consolidated Financial Statements.
The Company adopted Statements of Financial Accounting Standards ('SFAS')
No. 144, 'Accounting for the Impairment or Disposal of Long-Lived Assets,' as of
January 1, 2002. The Company evaluates the recoverability of its carrying value
of property and equipment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Carrying value write-downs and
gains and losses on disposition of property and equipment are reflected in
'Income from operations.'
Goodwill and Other Identifiable Intangible Assets
In July 2001, the Financial Accounting Standards Board ('FASB') issued SFAS
No. 142, 'Goodwill and Other Intangible Assets,' which was required to be
adopted for fiscal 2002. SFAS No. 142 established accounting and reporting
standards for goodwill and intangible assets resulting from business
combinations. SFAS No. 142 included provisions discontinuing the periodic
amortization of, and requiring the assessment of the potential impairments of,
goodwill (and intangible assets deemed to have indefinite lives). As SFAS No.
142 replaced the measurement guidelines for goodwill impairment, goodwill not
considered impaired under previous accounting literature may be considered
impaired under SFAS No. 142. SFAS No. 142 also required that the Company
complete a two-step goodwill impairment test. The first step compared the fair
value of each reporting unit to its carrying amount, including goodwill. If the
fair value of a reporting unit exceeded its carrying amount, goodwill is not
considered to be impaired and the second step was not required. SFAS 142
required completion of this first step within the first six months of initial
adoption and annually thereafter. If the carrying amount of a reporting unit
exceeded its fair value, the second step is performed to measure the amount of
impairment loss. The second step compared 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 was
only performed for purposes of evaluating goodwill impairment and did 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 was 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 adopted SFAS No. 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 $553.7 million, net
of an income tax benefit of $113.0 million. During the fourth quarter of 2002,
the Company completed the annual goodwill impairment tests, in which no
additional impairment was recorded. For further discussion, see Note 5 to the
Consolidated Financial Statements.
In July 2002, the Company acquired Elite Medical, Inc., a health care
staffing business. The acquisition was recorded in accordance with the
provisions of SFAS No. 141 'Business Combinations'. For further discussion, see
Note 3 'Business Combinations' and Note 5, 'Goodwill and Other Identifiable
Intangible Assets' to the Consolidated Financial Statements.
Revenue Recognition
The Company recognizes revenue at the time services are provided and is
recorded on a time and materials basis. In most cases, the consultant is the
Company's employee and all costs of employing the worker are the responsibility
of the Company and are included in cost of revenue. Revenues generated when the
Company permanently places an individual with a client are recorded at the time
of placement less a reserve for employees not expected to meet the probationary
period. The Company, to a lesser extent, is also involved in fixed price
engagements whereby revenues are recognized under the percentage-of-completion
method of accounting.
Foreign Operations
The financial position and operating results of foreign operations are
consolidated using the local currency as the functional currency. These
operating results are considered to be permanently invested in foreign
operations. Local currency assets and liabilities are translated at the rate of
exchange to the U.S. dollar on the balance sheet date, and the local currency
revenues and expenses are translated at average rates of exchange to the U.S.
dollar during the period.
Stock-Based Compensation
During December 2002, the Financial Accounting Standards Board (FASB),
issued SFAS No. 148, 'Accounting for Stock-Based Compensation - Transition and
Disclosure,' which provides for alternative methods of transition for a
voluntary change to the fair-value-based method of accounting for stock-based
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123, 'Accounting for Stock-Based Compensation,' to require more
prominent disclosure in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results.
The Company accounts for its employee and director stock option plans in
accordance with APB Opinion No. 25, 'Accounting for Stock Issued to Employees,'
and related Interpretations. The Company measures compensation expense for
employee and director stock options as the aggregate difference between the
market value of its common stock and exercise prices of the options on the date
that both the number of shares the grantee is entitled to receive and the
exercise prices are known. Compensation expense associated with restricted stock
grants is equal to the market value of the shares on the date of grant and is
recorded pro rata over the required holding period. If the Company had elected
to recognize compensation cost for all outstanding options granted by the
Company, by applying the fair value recognition provisions of SFAS No. 148 to
stock-based employee compensation, net (loss) income and (loss) earnings per
share would have been reduced to the pro forma amounts indicated below.
(dollar amounts in thousands except per share amounts) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss)
As reported $ (566,304) $ 8,343 $ 119,753
Total stock-based employee compensation expense determined
under fair value based method for all awards, net of
related tax effects (4,451) (11,037) (7,769)
-----------------------------------------
Pro forma $ (570,755) $ (2,694) $ 111,984
=========================================
Basic net income (loss) per common share
As reported $ (5.62) $ 0.09 $ 1.24
Pro forma $ (5.66) $ (0.03) $ 1.16
Diluted net income (loss) per common share
As reported $ (5.62) $ 0.08 $ 1.23
Pro forma $ (5.66) $ (0.03) $ 1.15
The weighted average fair values of options granted during 2002, 2001, and
2000 were $3.99, $2.68, and $4.57 per share, respectively. The fair value of
each option grant is estimated on the date of grant using the Black Scholes
option-pricing model with the following assumptions:
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Expected dividend yield - - -
Expected stock price volatility .77 .42 .35
Risk-free interest rate 3.78 4.88 4.99
Expected life of options (years) 5.00 7.87 7.87
Derivative Instruments and Hedging Activities
The Company accounts for derivative instruments in accordance with SFAS
Nos. 133, 137, and 138 related to "Accounting for Derivative Instruments and
Hedging Activities" ('SFAS No. 133, as amended'). Derivative instruments are
recorded on the balance sheet as either an asset or liability measured at their
fair value. If the derivative is designated as a fair value hedge, the changes
in the fair value of the derivative and of the hedged item attributable to the
hedged risk are recognized in earnings. If the derivative is designated as a
cash flow hedge, the effective portions of the changes in the fair value of the
derivative are recorded as a component of 'Accumulated other comprehensive
income (loss)' and recognized in the 'Consolidated statements of operations'
when the hedged item affects earnings. Ineffective portions of changes in the
fair value of hedges are recognized in earnings. The Company adopted SFAS No.
133, as amended, in the first quarter of 2001. The adoption of SFAS No. 133 did
not have an initial impact on the Company as the Company did not hold any
derivatives prior to 2001.
In 2001, the Company entered into interest rate swap agreements to manage
and reduce the risk inherent in interest rate fluctuations. The Company entered
into these agreements 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. These derivatives were classified as cash flow
hedges as interest rate swap agreements are considered hedges of specific
borrowings. Differences received under the swap agreements were recognized as
adjustments to interest expense. Accordingly, changes in the fair value of these
hedges were recorded in 'Accumulated other comprehensive loss' on the balance
sheet. As of December 31, 2002, there were no interest rate swap agreements
outstanding.
Hedging interest rate exposure through the use of swaps were specifically
contemplated to manage risk in keeping with management policy. The Company does
not utilize derivatives for speculative purposes. These swaps were
transaction-specific so that a specific debt instrument determined the amount,
maturity and specifics of each swap.
Income Taxes
The provision for income taxes is based on income before taxes as reported
in the accompanying Consolidated Statements of Operations. Deferred tax assets
and liabilities are recognized for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based on the
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. An assessment is made as to
whether or not a valuation allowance is required to offset deferred tax assets.
This assessment includes anticipating future taxable income.
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 would be examined. As part of this examination, the Company recorded a
tax provision of $8.7 million in 2002 for a proposed adjustment with the
Internal Revenue Service. For a further discussion, see Note 7 to the
Consolidated Financial Statements.
Net Income (Loss) per Common Share
The consolidated financial statements include 'basic' and 'diluted' per
share information. Basic per share information is calculated by dividing net
income by the weighted average number of shares outstanding. Diluted per share
information is calculated by also considering the impact of potential common
stock on both net income and the weighted average number of shares outstanding.
The weighted average number of shares used in the basic earnings per share
computations were 100.8 million, 97.9 million, and 96.7 million in 2002, 2001
and 2000, respectively. The only difference in the computation of basic and
diluted earnings per share is the inclusion of 310,000 and 864,000 potential
common shares in 2001 and 2000, respectively. As the Company was in loss
position for 2002, before the cumulative effect of an accounting change, the
potential common shares for 2002 were excluded from the calculation of diluted
earnings per share as the shares would have had an anti-dilutive effect. See
Note 10 to the Consolidated Financial Statements.
Excess Real Estate Obligations
During June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires that a liability
for a cost associated with an exit or disposal activity be recognized, at fair
value, when the liability is incurred rather than at the time an entity commits
to a plan. The provisions of SFAS No. 146 are effective for exit or disposal
activities initiated after December 31, 2002, with earlier adoption encouraged.
The Company adopted the provisions of SFAS No. 146 in 2002. In the fourth
quarter of 2002, the Company recorded a $9.7 million charge relating to its
abandonment of excess real estate obligations for certain vacant office space.
See Note 17 to the Consolidated Financial Statements.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Although management believes these estimates and assumptions are
adequate, actual results may differ from the estimates and assumptions used.
Reclassifications
Certain amounts have been reclassified in 2000 and 2001 to conform to the
2002 presentation.
3. BUSINESS COMBINATIONS
In July 2002, the Company acquired Elite Medical, Inc. (the 'Elite
acquisition'), a health care staffing business. Purchase consideration included
$7.0 million cash at closing, 1.1 million shares of MPS Common Stock valued at
$8.7 million, and the entitlement of additional consideration of up to $1.0
million worth of MPS Common Stock.
The Company did not make any acquisitions in 2001. During 2000, the Company
acquired the following companies which were accounted for under the purchase
method of accounting: Catapult Technology, Inc.; Brahma Software Solutions,
Inc.; Brahma Technolutions, Inc.; T1 Design, Inc.; Red Eye Digital Media, LLC;
ITIC, Inc.; Integral Results, Inc.; G.B. Roberts & Associates, Inc. d/b/a
Ramworks; and Corporate Consulting Services, Inc. Purchase consideration for
these 2000 acquisitions totaled $70.9 million, comprised of $63.6 million in
cash and $7.4 million in notes payable to former stockholders.
As the aforementioned acquisitions did not have a material effect on
results of operations, pro forma information has not been shown.
The Company, in the past, has been obligated under certain acquisition
agreements to make earn-out payments to former stockholders of certain acquired
companies, accounted for under the purchase method of accounting, upon
attainment of certain earnings targets of the acquired companies. The Company
recorded these payments as goodwill in accordance with EITF 95-8, 'Accounting
for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise
in a Purchase Business Combination', rather than compensation expense. All
earn-out payments were tied to the ownership interests of the selling
stockholders of the acquired companies rather than being contingent upon any
further employment with the Company. Any former owners who remained as employees
of the Company received a compensation package which was comparable to other
employees of the Company at the same level of responsibility. The Company has
not made any material earn-out payments since 2000.
4. INDEBTEDNESS
Indebtedness at December 31, 2002 and 2001 consisted of the following:
(dollar amounts in thousands) 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Credit facility (weighted average interest rate of 5.8%) $ - $ 101,000
Notes payable to former stockholders of acquired companies
(interest ranging from 5.0% to 7.0%) 334 757
---------------------------
334 101,757
Current portion of notes payable 334 757
---------------------------
Long-term portion of notes payable $ - $ 101,000
===========================
The Company has a $200 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. In 2002, the Company reduced the notional amount of the
facility from $350 million to $200 million to more closely align the Company's
facility with its anticipated capital needs. The Company incurred certain costs
directly related to obtaining the credit facility in the amount of approximately
$2.4 million. These costs have been capitalized and are being amortized over the
life of the credit facility.
The $334,000 note payable to a former stockholder of an acquired company is
included in the line item 'Accounts payable and accrued expenses' in the
Consolidated Balance Sheet. The note payable matures in 2003.
5. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
The Company adopted SFAS No. 142 effective January 1, 2002. In connection
with the adoption of SFAS No. 142, the Company discontinued amortizing goodwill.
The changes in the carrying amount of goodwill for the year ended December 31,
2002, are as follows:
IT Professional IT
(dollar amounts in thousands) Services Services Solutions Total
- -------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2001 $ 592,037 $ 312,952 $ 260,972 $1,165,961
Impairment losses (338,449) (87,969) (240,247) (666,665)
Acquisition of Elite Medical, Inc. - 12,500 - 12,500
----------- ----------- ----------- -----------
Balance as of December 31, 2002 $ 253,588 $ 237,483 $ 20,725 $ 511,796
=========== =========== =========== ===========
In accordance with SFAS No. 142, the Company performed transitional
goodwill impairment tests at the reporting unit level as defined in SFAS No.
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 $553.7 million, net of an income tax benefit of $113.0 million, was
recognized and recorded as a cumulative effect of accounting change in the
Consolidated Statements of Operations.
During the fourth quarter of 2002, the Company completed the annual
goodwill impairment tests, in which no additional impairment was recorded.
However, the Company is subject to performing goodwill impairment tests on at
least an annual basis going forward. If the fair value of the reporting units
decrease below their respective carrying values, the Company may be subject to a
material charge to earnings as a result of the impairment loss that will need to
be recognized.
The following table provides comparative disclosure of adjusted net income
excluding goodwill amortization expense, net of income taxes, for the periods
presented:
Years Ended December 31,
-------------------------------------------------
(dollar amounts in thousands except per share amounts) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting change,
as reported $ (12,592) $ 8,343 $ 119,753
Goodwill amortization, net of income taxes - 27,001 25,283
------------ ------------ ------------
Income (loss) before cumulative effect of accounting change,
as adjusted (12,592) 35,344 145,036
Cumulative effect of accounting change, net of income taxes (553,712) - -
------------ ------------ ------------
Net income (loss), as adjusted $ (566,304) $ 35,344 $ 145,036
============ ============ ============
Basic income (loss) per common share:
Income (loss) before cumulative effect of accounting change,
as reported $ (0.12) $ 0.09 $ 1.24
Goodwill amortization, net of income taxes - 0.28 0.26
------------ ------------ ------------
Income (loss) before cumulative effect of accounting change,
as adjusted (0.12) 0.36 1.50
Cumulative effect of accounting change, net of income taxes (5.49) - -
------------ ------------ ------------
Basic net income (loss) per common share, as adjusted $ (5.62) $ 0.36 $ 1.50
============ ============ ============
Diluted income (loss) per common share:
Income (loss) before cumulative effect of accounting change,
as reported $ (0.12) $ 0.08 $ 1.23
Goodwill amortization, net of income taxes - 0.28 0.26
------------ ------------ ------------
Income (loss) before cumulative effect of accounting change,
as adjusted (0.12) 0.36 1.49
Cumulative effect of accounting change, net of income taxes (5.49) - -
------------ ------------ ------------
Diluted net income (loss) per common share, as adjusted $ (5.62) $ 0.36 $ 1.49
============ ============ ============
In July 2002, the Company completed the Elite acquisition, which was
subsequently re-branded as Soliant Health, and is included in the Company's
professional services division. For the Elite acquisition, approximately $12.5
million was allocated to goodwill and the Company recorded a $932,000
amortizable intangible asset. The intangible asset relates to the existing value
of the target's customer relationships at the date of acquisition. The Company
recorded $466,000 of amortization expense on this asset in 2002. The remainder
will be amortized in 2003.
6. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under various noncancelable operating
leases. The following is a schedule of future minimum lease payments with terms
in excess of one year (dollar amounts in thousands):
Year
- -------------------------------------------------------------------------------------------------------
2003 $ 19,739
2004 16,657
2005 12,476
2006 6,935
2007 5,906
Thereafter 15,307
--------
$ 77,020
========
Total rent expense for 2002, 2001, and 2000 was $29.8 million, $28.2
million, and $25.8 million, respectively. See Note 17 to the Consolidated
Financial Statements for discussion of a charge for exit costs that the Company
recorded in the fourth quarter of 2002.
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.
7. INCOME TAXES
A comparative analysis of the provision (benefit) for income taxes, before
extraordinary items, is as follows (dollar amounts in thousands):
2002 2001 2000
- --------------------------------------------------------------
Current:
Federal $ (18,891) $ (2,273) $ (76,659)
State 1,557 1,657 2,945
Foreign 3,708 3,867 6,193
------------------------------------
(13,626) 3,251 (67,521)
------------------------------------
Deferred:
Federal 31,087 11,604 3,220
State (1,428) 3,080 (3,032)
Foreign (1,442) (11,131) 4,234
------------------------------------
28,217 3,553 4,422
------------------------------------
$ 14,591 $ 6,804 $ (63,099)
====================================
The difference between the actual income tax provision and the tax
provision computed by applying the statutory federal income tax rate to income
from continuing operations before provision for income taxes is attributable to
the following (dollar amounts in thousands except percentage amounts):
2002 2001 2000
-------------------------------------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- ----------------------------------------------------------------------------------------------------------------------------
Tax computed using the federal statutory rate $ 700 35.0% $ 5,301 35.0% $ 19,829 35.0%
State income taxes, net of federal income tax effect 129 6.5 4,737 31.3 (87) (0.1)
Non-deductible goodwill - - 3,187 21.0 2,957 5.2
Foreign tax credit carryforward (49) (2.5) 525 3.5 13,378 23.6
Investment in subsidiary 8,660 433.2 - - (99,705) (176.0)
Reorganization of subsidiary - - (7,909) (52.2) - -
Capital loss carryforward 3,661 183.2 - - - -
Other permanent differences 1,490 74.5 963 6.3 529 0.9
-------------------------------------------------------------------
$ 14,591 729.9% $ 6,804 44.9% $ (63,099) (111.4)%
===================================================================
The components of the deferred tax assets and liabilities recorded in the
Consolidated balance sheets are as follows:
(dollar amounts in thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets:
Self-insurance reserves $ 1,669 $ 2,003
Allowance for doubtful accounts receivable 3,781 5,968
Foreign tax credit carryforward 21,611 21,389
Net operating loss carryforward 7,342 17,734
Capital loss carryforward 3,661 -
Leases 3,395 -
Amortization of goodwill 53,829 -
Other 4,950 6,083
---------------------------
Total gross deferred tax assets 100,238 53,177
---------------------------
Valuation allowance (25,050) (16,303)
---------------------------
Total gross deferred tax assets, net of valuation allowance 75,188 36,874
---------------------------
Gross deferred tax liabilities:
Amortization of goodwill - (44,558)
Other (7,717) (8,657)
---------------------------
Total gross deferred tax liabilities (7,717) (53,215)
---------------------------
Net deferred tax asset (liability) $ 67,471 $ (16,341)
===========================
Recognition of deferred tax assets is based on management's belief that it
is more likely than not that the tax benefit associated with temporary
differences, operating loss carryforwards and tax credits will be utilized. A
valuation allowance is recorded for those deferred tax assets for which it is
more likely than not that realization will not occur.
The Company's valuation allowance at December 31, 2002, consisted of $14.0
million in foreign tax credit carryforwards, $7.3 million in state net operating
loss carryforwards, and $3.7 million for a capital loss carryforward. The
valuation allowance at December 31, 2001, consisted of $13.9 million in foreign
tax credit carryforwards and $2.4 million in state net operating loss
carryforwards.
In addition to deferred tax expense, the Company's deferred tax asset
increased by $113.0 million in 2002 for the income tax benefit recognized
associated with the adoption of SFAS 142, and decreased $924,000 for derivative
instruments recorded in equity.
The Company has a net deferred tax asset in 2002 resulting primarily from
its tax basis in deductible goodwill being greater than the associated financial
statement carrying amount. The Company recognized an impairment loss recorded as
a change in accounting principle associated with the Company's adoption of SFAS
No. 142. This impairment reduced the financial statement carrying amount of
goodwill. The Company's tax basis in its tax deductible goodwill will be
deducted in the Company's income tax returns, generating $441.2 million of
future tax deductions over the next 15 years.
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 would be examined. As part of this examination, the Company recorded a
tax provision of $8.7 million in 2002 for a proposed adjustment with the
Internal Revenue Service.
8. EMPLOYEE BENEFITS
Profit Sharing Plans
The Company has a qualified contributory 401(k) profit sharing plan which
covers all full-time employees over age twenty-one with over 90 days of
employment and 375 hours of service. The Company made matching contributions of
approximately $7.1 million, $7.0 million, net of forfeitures, to the profit
sharing plan for 2001 and 2000, respectively. During 2002, management elected
not to match employee deferrals. The Company reinstated the match for the 2003
plan year. Upon reinstatement, the Company redefined the terms to match at least
25% of employee contributions up to the first 5% of total eligible compensation,
as defined in the various profit sharing plans.
The Company has assumed many 401(k) plans of acquired subsidiaries. From
time to time, the Company merges these plans into the Company's plan. Company
contributions relating to these merged plans are included in the aforementioned
total.
Deferred Compensation Plan
The Company also has a non-qualified deferred compensation plan for its
highly compensated employees. While the deferred compensation plan provides for
matching contributions, management elected not to match employee deferrals for
2002, 2001 and 2000. The Company looks to invest the assets of the deferred
compensation plan based on investment allocations of the employees. The
liability to the employees for amounts deferred is included in 'Other' in the
Liabilities section of the Consolidated Balance Sheet.
Effective the beginning of 2002, the Company purchased insurance on the
lives of its highly compensated employees. This company-owned life insurance is
utilized to settle the Company's obligations of deferred compensation. The
policies are issued by Mutual of New York ('MONY'). The Company has directed
MONY to invest the assets consistent with the investment allocations of the
employees. The cash surrender value of the company-owned life insurance is
included in 'Other assets, net' in the Consolidated Balance Sheet.
9. STOCKHOLDERS' EQUITY
Stock Repurchase Plan
The Company's Board of Directors had authorized the repurchase of up to
$65.0 million of the Company's Common Stock. The Company began to utilize this
authorization in the third quarter of 2002. As of December 31, 2002, 290,400
shares at a cost of $1.4 million have been repurchased under this authorization.
Incentive Employee Stock Plans
During 1993, the Board of Directors approved the 1993 Stock Option Plan
(the 1993 Plan) which provided for the granting of options for the purchase of
up to an aggregate of 2.4 million shares of common stock to key employees.
Under the 1993 Plan, the Stock Option Committee (the Committee) of the
Board of Directors has the discretion to award stock options, stock appreciation
rights (SARS) or restricted stock awards or non-qualified options and the option
price shall be established by the Committee. Incentive stock options may be
granted at an exercise price not less than 100% of the fair market value of a
share on the effective date of the grant and non-qualified options may be
granted at an exercise price not less than 50% of the fair market value of a
share on the effective date of the grant. The Committee has not issued
non-qualified options at an exercise price less than 100% of the fair market
value and, therefore, the Company has not been required to recognize
compensation expense for its stock option plans.
During 1995, the Board of Directors approved the 1995 Stock Option Plan
(the 1995 Plan) which originally provided for the granting of options up to an
aggregate of 3.0 million shares of Common Stock to key employees under terms and
provisions similar to the 1993 Plan. The 1995 plan was later amended to provide
for the granting of an additional 11.0 million shares and, among other things,
require the exercise price of non-qualified stock options to not be less than
100% of the fair market value of the stock on the date the option is granted, to
limit the persons eligible to participate in the plan to employees, to eliminate
the Company's ability to issue SARS and to amend the definition of a director to
comply with Rule 16b-3 of the Securities Exchange Act of 1934, as amended and
with Section 162(m) of the Internal Revenue Code of 1986, as amended. There were
no material amendments to the 1995 Plan from 2000 to 2002.
Additionally, the Company assumed the stock option plans of some its
subsidiaries upon acquisition in accordance with terms of the respective merger
agreements. As of December 31, 2002 and 2001, the assumed plans had an
immaterial number of options outstanding.
Non-Employee Director Stock Plan
During 1993, the Board of Directors of the Company approved a stock option
plan (Director Plan) for non-employee directors, whereby 600,000 shares of
common stock, subsequently amended in 1997 to 1.6 million shares, have been
reserved for issuance to non-employee directors. The Director Plan allows each
non-employee director to purchase 60,000 shares at an exercise price equal to
the fair market value at the date of the grant upon election to the Board. In
addition, the Director Plan provides for an annual issuance of non-qualified
options to purchase 20,000 shares to each director, upon reelection, at an
exercise price equal to the fair market value at the date of grant. The Board of
Directors may also grant additional options to non-employee directors from time
to time as the Board may determine in its discretion. The Committee has not
issued non-qualified options at an exercise price less than 100% of the fair
market value and, therefore, the Company has not been required to recognize
compensation expense for its stock option plans. The options become exercisable
ratably over a three-year period and expire ten years from the date of the
grant. However, the options are exercisable for a maximum of three years after
the individual ceases to be a director and, if the director ceases to be a
director within one year of appointment, the options are cancelled. In 2002,
2001 and 2000, the Company granted 180,000, 490,000 and 500,000 options,
respectively, at an average exercise price of $6.31, $3.88 and $5.13,
respectively.
The following table summarizes the Company's Stock Option Plans:
Weighted
Range of Average
Shares Exercise Prices Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 15,052,688 $ 1.25 - $33.38 $ 14.32
Granted 3,365,768 $ 3.56 - $18.00 $ 9.70
Exercised (379,597) $ 1.25 - $14.70 $ 12.22
Canceled (3,421,498) $ 2.54 - $33.38 $ 12.00
----------------------------------------------
Balance, December 31, 2000 14,617,361 $ 1.25 - $33.38 $ 13.83
Granted 12,489,156 $ 3.85 - $ 6.90 $ 5.46
Exercised (150,566) $ 1.25 - $ 7.87 $ 6.31
Canceled (11,666,729) $ 3.63 - $33.38 $ 14.83
----------------------------------------------
Balance, December 31, 2001 15,289,222 $ 1.25 - $33.38 $ 6.50
Granted 3,064,503 $ 5.24 - $ 8.45 $ 5.44
Exercised (2,871,696) $ 2.85 - $ 9.65 $ 8.18
Canceled (955,513) $ 3.63 - $17.38 $ 7.98
----------------------------------------------
Balance, December 31, 2002 14,526,516 $ 1.25 - $33.38 $ 6.19
==============================================
In 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. The Option Exchange Plan allowed eligible
option holders, as defined, 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 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 of 2001 with the re-grant of 8.2 million
options. The Company did not incur any compensation charges in connection with
the Option Exchange Plan.
The following table summarizes information about stock options outstanding
at December 31, 2002:
Outstanding Exercisable
------------------------------------------- -----------------------------
Average Average
Average Exercise Exercise
Shares Life (a) Price Shares Price
- --------------------------------------------------------------------------------------------------------------------
$ 1.25 - $ 3.85 2,745,625 8.55 $ 3.78 972,969 $ 3.68
$ 3.94 - $ 5.24 3,311,299 9.08 5.13 645,249 4.77
$ 5.60 - $ 6.00 6,087,904 8.62 6.00 5,323,650 6.00
$ 6.35 - $ 11.00 1,449,183 7.62 8.13 799,977 8.49
$ 11.06 - $ 22.38 812,505 5.90 13.61 630,755 13.78
$ 22.88 - $ 33.38 120,000 4.51 26.66 120,000 26.66
-------------------------------------------------------------------------
Total 14,526,516 8.42 $ 6.19 8,492,600 $ 6.74
=========================================================================
(a) Average contractual life remaining in years.
At year-end 2001, options with an average exercise price of $6.82 were
exercisable on 9.6 million shares; at year-end 2000, options with an average
exercise price of $14.98 were exercisable on 8.9 million shares.
During 2002 and 2001, the Company's Board of Directors issued restricted
stock grants of 100,000 and 200,000 shares, respectively, to the Company's
President and Chief Executive Officer, and grants of 103,333 shares and 200,000
shares to other members of senior management in 2002 and 2001, respectively.
Additionally, in 2001, 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
$1.3 million and $5.8 million in Stockholders' equity for deferred compensation
in 2002 and 2001, respectively. The Company recorded $2.2 million and $1.3
million of compensation expense in 2002 and 2001, respectively, for the vesting
of these grants. The deferred compensation is amortized on a straight line basis
over the vesting period of the grants.
10. NET INCOME PER COMMON SHARE
The calculation of basic net (loss) income per common share and diluted net
(loss) income per common share is presented below:
(dollar amounts in thousands except per share amounts) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Basic income (loss) per common share computation:
Income (loss) before cumulative effect of accounting change $ (12,592) $ 8,343 $ 119,753
Cumulative effect of accounting change, net of
income taxes (553,712) - -
------------ ------------ ------------
Net income (loss) $ (566,304) $ 8,343 $ 119,753
============ ============ ============
Basic average common shares outstanding 100,833 97,868 96,675
============ ============ ============
Basic income (loss) per common share:
Income (loss) before cumulative effect of accounting change $ (0.12) $ 0.09 $ 1.24
Cumulative effect of accounting change, net of
income taxes (5.49) - -
------------ ------------ ------------
Basic net income (loss) per common share $ (5.62) $ 0.09 $ 1.24
============ ============ ============
Diluted income (loss) per common share computation:
Income (loss) before cumulative effect of accounting change $ (12,592) $ 8,343 $ 119,753
Cumulative effect of accounting change, net of
income taxes (553,712) - -
------------ ------------ ------------
Net income (loss) $ (566,304) $ 8,343 $ 119,753
============ ============ ============
Basic average common shares outstanding 100,833 97,868 96,675
Incremental shares from assumed exercise of stock options - 310 864
------------ ------------ ------------
Diluted average common shares outstanding 100,833 98,178 97,539
============ ============ ============
Diluted income (loss) per common share:
Income (loss) before cumulative effect of accounting change $ (0.12) $ 0.08 $ 1.23
Cumulative effect of accounting change, net of
income taxes (5.49) - -
------------ ------------ ------------
Diluted net income (loss) per common share $ (5.62) $ 0.08 $ 1.23
============ ============ ============
Options to purchase 2.3 million, 7.8 million, and 12.8 million shares of
common stock that were outstanding during 2002, 2001, and 2000 respectively,
were not included in the computation of diluted earnings per share as the
exercise prices of these options were greater than the average market price of
the common shares.
11. RELATED PARTY
During 2001, the Company's President and Chief Executive Officer issued the
Company a promissory note for $1.5 million, bearing interest at 4.7%. Under the
conditions of the note, if employment terms are met over 2001 and 2002, the
unpaid principal and accrued interest will be forgiven. Accordingly, $0.75
million of unpaid principal and accrued interest was forgiven and recorded as
compensation expense in the Company's Consolidated Statements of Operations in
both 2002 and 2001.
12. CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company
places its cash and cash equivalents with what management believes to be high
credit quality institutions. At times such investments may be in excess of the
FDIC insurance limit. The Company routinely assesses the financial strength of
its customers and, as a consequence, believes that its accounts receivable
credit risk exposure is limited.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
other assets, accounts payable and accrued expenses, and notes payable to former
target shareholders approximate fair value due to the short-term maturities of
these assets and liabilities. Borrowings under the revolving credit facility
have variable rates that reflect currently available terms and conditions for
similar debt. The carrying amount of this debt is considered by management to be
a reasonable estimate of its fair value.
14. FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
A summary of furniture, equipment, and leasehold improvements at December
31, 2002 and 2001 is as follows (dollar amounts in thousands):
Estimated
Useful Life
in Years 2002 2001
------------- -------------------------------
Furniture, equipment, and leasehold 5 - 15 /
improvements lease term $ 97,770 $ 98,871
Software 3 8,299 10,353
Software development 5 20,103 18,469
------------- --------------
126,172 127,693
Accumulated depreciation and amortization 87,380 78,951
------------- --------------
Total furniture, equipment, and leasehold
improvements, net $ 38,792 $ 48,742
============= ==============
Total depreciation and amortization expense on furniture, equipment and
leasehold improvements was $20.6 million, $21.7 million, and $16.9 million for
2002, 2001, and 2000, respectively.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
For the Three Months Ended For the
---------------------------------------------------------- Year Ended
(dollar amounts in thousands Mar. 31, June 30, Sept. 30, Dec. 31, Dec. 31,
except per share amounts) 2002 2002 2002 2002 2002
- ------------------------------------------------------------------------------------------------- ---------------
Revenue $ 296,453 $ 288,653 $ 289,428 $ 280,436 $ 1,154,970
Gross profit 76,258 74,521 75,935 75,072 301,786
Income (loss) before cumulative effect
of accounting change 1,946 4,176 5,290 (24,004) (12,592)
Net income (loss) (551,766) 4,176 5,290 (24,004) (566,304)
Basic income (loss) per common share 0.02 0.04 0.05 (0.23) (0.12)
Basic loss per common share from
accounting change (5.62) - - - (5.49)
Basic net income (loss) per
common share (5.60) 0.04 0.05 (0.23) (5.62)
Diluted income (loss) per common share 0.02 0.04 0.05 (0.23) (0.12)
Diluted loss per common share from
accounting change (5.49) - - - (5.49)
Diluted net income (loss) per
common share (5.47) 0.04 0.05 (0.23) (5.62)
For the Three Months Ended For the
---------------------------------------------------------- Year Ended
(dollar amounts in thousands Mar. 31, June 30, Sept. 30, Dec. 31, Dec. 31,
except per share amounts) 2001 2001 2001 2001 2001
- ------------------------------------------------------------------------------------------------- ---------------
Revenue $ 444,410 $ 409,639 $ 368,853 $ 325,587 $ 1,548,489
Gross profit 123,715 115,303 98,009 84,018 421,045
Net income (loss) 6,418 3,581 1,078 (2,734) 8,343
Basic net income (loss) per
common share 0.07 0.04 0.01 (0.03) 0.09
Diluted net income (loss) per
common share 0.07 0.04 0.01 (0.03) 0.08
16. 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: IT services, professional
services, and IT solutions. 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 IT services
division offers value-added solutions such as IT project support and staffing,
recruitment of full-time positions, project-based solutions, supplier management
solutions, and on-site recruiting support. The professional services division
provides expertise in a wide variety of disciplines including accounting and
finance, law, engineering and technical, workforce management, executive search,
human resource consulting, and health care. The IT solutions division, operating
under the brand Idea Integration, provides IT strategy consulting, design and
branding, application development, and integration. The professional services
division's results for 2001 and 2000, include the results of the Company's
scientific operating unit. Results for 2002 do not include this unit as it was
sold in December 2001. 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 accounting policies of the segments are consistent with those described
in the summary of significant accounting policies in Note 2 and all intersegment
sales and transfers are eliminated.
No one customer represents more than 5% of the Company's overall revenue.
Therefore, the Company does not believe it has a material reliance on any one
customer as the Company is able to provide services to numerous Fortune 1000 and
other leading businesses.
The following table summarizes segment and geographic information:
(dollar amounts in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------
<s> <c> <c> <c>
Revenue
IT services $ 575,312 $ 770,830 $ 933,968
Professional services 495,157 608,850 652,626
IT solutions 84,501 168,809 241,092
------------ ------------ ------------
Total revenue $ 1,154,970 $ 1,548,489 $ 1,827,686
============ ============ ============
Gross profit
IT services $ 122,294 $ 168,317 $ 208,463
Professional services 151,061 197,997 217,464
IT solutions 28,431 54,731 104,925
------------ ------------ ------------
Total gross profit $ 301,786 $ 421,045 $ 530,852
============ ============ ============
Income (loss) before provision for income taxes
and cumulative effect of accounting change
IT services $ 10,639 $ 32,811 $ 52,882
Professional services 24,820 51,416 72,488
IT solutions (3,649) (21,483) 9,599
------------ ------------ ------------
31,810 62,744 134,969
Amortization of goodwill - (38,398) (37,029)
Charges (a) (25,864) - (19,665)
Corporate interest and other income (3,947) (9,199) (21,621)
------------ ------------ ------------
Total income before provision for income taxes
and cumulative effect of accounting change $ 1,999 $ 15,147 $ 56,654
============ ============ ============
Geographic Areas
Revenue
United States $ 778,266 $ 1,123,360 $ 1,398,876
U.K. 364,304 412,528 417,414
Other 12,400 12,601 11,396
------------ ------------ ------------
Total revenue $ 1,154,970 $ 1,548,489 $ 1,827,686
============ ============ ============
December 31,
-------------------------------
(dollar amounts in thousands) 2002 2001
- ----------------------------------------------------------------------------------------------
Assets
IT services $ 457,163 $ 781,845
Professional services 380,340 426,547
IT solutions 59,700 319,284
------------ ------------
897,203 1,527,676
Corporate 780 15,946
------------ ------------
Total assets $ 897,983 $ 1,543,622
============ ============
Geographic Areas
Identifiable Assets
United States $ 636,351 $ 1,133,372
U.K. 254,169 399,259
Other 7,463 10,991
------------ ------------
Total assets $ 897,983 $ 1,543,622
============ ============
(a) Charges for the year ended December 31, 2002 include (1) $16.2 million
impairment of minority investment, and (2) 9.7 million exit costs. Charges
for the year ended December 31, 2000 include (1) $13.1 million asset write
down related to the sale of discontinued operations, (2) $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 IT solutions
division and (3) $753,000 exit recapture.
17. Excess Real Estate Obligations
In 2001 and 2002, the Company experienced a material decrease in demand for
its domestic operations. To reflect this decreased demand, the Company made
attempts to realign its real estate capacity needs and thus vacate and
reorganize certain office space.
In the fourth quarter of 2002, management determined that the Company would
not be able to utilize this vacated office space and, therefore, notified the
respective lessors of their intentions. This determination eliminated the
economic benefit associated with the vacated office space. As a result, the
Company recorded $9.7 million of contract termination costs, mainly due to,
costs that will continue to be incurred under the lease contract for its
remaining term without economic benefit to the Company. While the Company looks
to settle excess lease obligations, the current economic environment has made it
difficult for the Company to either settle or find acceptable subleasing
opportunities. The average remaining lease term for the lease obligations
included herein is approximately 2.5 years. The Company expects to realize $3.3
million in lease savings during 2003 as a result of the charge.
The $9.7 million charge is included in the line item 'Exit costs
(recapture)' in the Consolidated Statements of Operations for 2002. The
following details the charge by reportable segment:
(dollar amounts in thousands) 2002
- -----------------------------------------------------------------
<s> <c>
IT services $ 675
Professional services 1,163
IT solutions 7,861
------------
Total revenue $ 9,699
============
18. Equity Investment
The Company had a minority investment in a privately held company that was
recorded as a non-current asset, and was included in 'Other Assets, net' in the
Consolidated Balance Sheet as of December 31, 2001. The asset was carried at its
original cost plus accrued interest. The investment was originally made in 1996
and was set to mature in 2004. The Company was notified during the third quarter
of 2002, that this privately held company was trying to raise additional capital
through a recapitalization, at terms which would dilute the value of the
Company's investment, should (a) the Company elect not to participate in the
recapitalization and (b) the recapitalization be completed. In the fourth
quarter, this privately held company completed the recapitalization. he Company
elected not to participate in the recapitalization, which resulted in the
investment being impaired. As a result, the Company wrote off the investment in
its entirety recognizing a $16.2 million charge in the fourth quarter of 2002.
The process of assessing whether a particular equity investment's net
realizable value is less than its carrying cost requires a significant amount of
judgment. The Company periodically monitors the investment for impairment by
considering, among other things, the investee's cash position, projected cash
flows, financing needs, liquidation preference, most recent valuation data
(including the duration and extent to which the fair value is less than cost),
the current investing environment, competition, and the Company's intent and
ability to hold the investment.
PART III
Information required by Part III with respect to Directors and Executive
Officers of the Registrant (Item 10), Executive Compensation (Item 11), Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters (Item 12), and Certain Relationships and Related Transactions (Item 13)
is to be included in the Registrant's Definitive Proxy Statement to be filed
pursuant to Regulation 14A (the 'Proxy Statement') not later than 120 days after
the end of the fiscal year covered by this report. Such Proxy Statement, when
filed, is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Our management, including the Chief Executive Officer and Chief Financial
Officer, have conducted an evaluation of the effectiveness of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based on their
evaluation, the Chief Executive officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that all
material information required to be filed in this report has been made known to
them in a timely fashion. There have been no significant changes in internal
controls, or in factors that could significantly affect internal controls,
subsequent to the date that Chief Executive Officer and Chief Financial Officer
completed their evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The following consolidated financial statements of the Company and its
subsidiaries are included in Item 8 of this report:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001, and 2000
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules.
Financial statement schedules required to be included in this report are
either shown in the financial statements and notes thereto included in Item 8 of
this report or have been omitted because they are not applicable.
(a) 3. Exhibits.
See (c) below.
(b) Reports on Form 8-K.
A report on Form 8-K dated November 14, 2002 was filed by the
Company in November 2002. The report was filed under Item 9,
Regulation FD Disclosure.
(c) Exhibits.
3.1 Amended and restated Articles of Incorporation. (10)
3.2 Amended and Restated Bylaws. (2)
10.1 Modis Professional Services, Inc. (now MPS Group, Inc.) 2001 Employee
Stock Purchase Plan. (9)
10.2 AccuStaff Incorporated (now MPS Group, Inc.) amended and restated
Non-Employee Director Stock Plan. (4)
10.3 Form of Non-Employee Director Stock Option Award Agreement, as
amended. (6)
10.4 Profit Sharing Plan. (1)
10.5 Revolving Credit and Reimbursement Agreement by and between the
Company and NationsBank National Association as Administration Agent
and certain lenders named therein, dated October 30, 1998. (2)
10.5(a) Amendment agreement No. 1 to revolving credit and reimbursement
agreement, dated October 27, 1999. (5)
10.5(b) Amendment agreement No. 3 to revolving credit and reimbursement
agreement, dated October 25, 2000. (7)
10.6 Modis Professional Services, Inc. (now MPS Group, Inc.) Amended
and Restated Stock Option Plan. (9)
10.7 Form of Stock Option Agreement under Modis Professional
Services, Inc. (now MPS Group, Inc.) amended and restated 1995
Stock Option Plan. (9)
10.8 Chairman Employment Agreement with Derek E. Dewan. (8)
10.8(a) Restricted Stock Agreement with Derek E. Dewan. (8)
10.9 Amended and Restated Executive Employment Agreement with
Timothy D. Payne. (8)
10.9(a) Restricted Stock Agreement with Timothy D. Payne. (12)
10.10 Amended and Restated Executive Employment Agreement with
Robert P. Crouch. (8)
10.10(a)Restricted Stock Agreement with Robert P. Crouch. (12)
10.11 Modis Professional Services, Inc. (now MPS Group, Inc.) Executive
Option Plan (3)
10.12 Senior Executive Annual Incentive Plan. (5)
10.13 Form of Director's Indemnification Agreement. (6)
10.14 Form of Officer's Indemnification Agreement. (6)
10.15 Form of Award Notification under the Modis Professional Services, Inc.
(now MPS Group, Inc.) Senior Executive Annual Incentive Plan. (9)
10.16 Executive Deferred Compensation Plan. (11)
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
24 Form of Power of Attorney.
99.1 Report of the Audit Committee.
99.2 Certification of Timothy D. Payne pursuant to Rule 13a-14 and 15d-14.
99.3 Certification of Robert P. Crouch pursuant to Rule 13a-14 and 15d-14.
99.4 Certification of Timothy D. Payne pursuant to 18 U.S.C. Section 1350.
99.5 Certification of Robert P. Crouch pursuant to 18 U.S.C. Section 1350.
(1) Incorporated by reference to the Company's Registration on Form S-1 (No.
33-78906).
(2) Incorporated by reference to the Company's Annual Report on Form 10-K filed
March 31, 1999.
(3) Incorporated by reference to the Company's Registration on Form S-8 (No.
33-88329).
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed August 16, 1999.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed November 15, 1999.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K filed
March 30, 2000.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K filed
April 2, 2001.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed May 16, 2001.
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed August 8, 2001.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed May 14, 2002.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K filed
March 26, 2002.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed November 14, 2002.
EXHIBIT INDEX
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
24 Form of Power of Attorney.
99.1 Report of the Audit Committee.
99.2 Certification of Timothy D. Payne pursuant to Rule 13a-14 and 15d-14.
99.3 Certification of Robert P. Crouch pursuant to Rule 13a-14 and 15d-14.
99.4 Certification of Timothy D. Payne pursuant to 18 U.S.C. Section 1350.
99.5 Certification of Robert P. Crouch pursuant to 18 U.S.C. Section 1350.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MPS GROUP, INC.
By: /s/ Timothy D. Payne
Timothy D. Payne
President and Chief Executive Officer
Date: March 31, 2003
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 March 31, 2003
Timothy D. Payne Executive Officer and
Director
/s/ Robert P. Crouch Senior Vice President, Chief March 31, 2003
Robert P. Crouch Financial Officer, Treasurer,
and Chief Accounting Officer
/s/ Derek E. Dewan * Chairman of the Board March 31, 2003
Derek E. Dewan
/s/ Michael D. Abney * Director March 31, 2003
Michael D. Abney
/s/ T. Wayne Davis * Director March 31, 2003
T. Wayne Davis
/s/ Michael L. Huyghue * Director March 31, 2003
Michael L. Huyghue
Director
William M. Isaac
/s/ John R. Kennedy * Director March 31, 2003
John R. Kennedy
/s/ Darla D. Moore * Director March 31, 2003
Darla D. Moore
/s/ Peter J. Tanous * Director March 31, 2003
Peter J. Tanous
/s/ Robert P. Crouch *By Attorney-in-Fact March 31, 2003
Robert P. Crouch