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, 2003
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 30,
2003, the last business day of the registrant's most recently completed second
fiscal quarter, as reported by the New York Stock Exchange, was approximately
$695,179,314.
As of March 1, 2004 the number of shares outstanding of the Registrant's
common stock was 103,177,129.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Registrant's Proxy
Statement for its 2003 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 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,' 'can,' 'hopes,'
'perhaps,' '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 publicly update 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 170 offices throughout the United States, Canada,
the United Kingdom, and continental Europe. MPS delivers consulting, solutions,
and staffing services to virtually all industries in the following disciplines
and through the following brands:
Discipline Brand(s)
Information Technology (IT) Services Modis
Accounting and Finance Badenoch & Clark, Accounting Principals
Engineering Entegee
Legal Special Counsel
IT Solutions Idea Integration
Health Care Soliant Health
Executive Search Diversified Search
Human Capital Automation Beeline
MPS operates these brands under three divisions: the professional services
division; the IT services division; and the IT solutions division. The Company
generated revenue of $1.10 billion in 2003, of which 64% was contributed from
the United States. The remainder was earned 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, 2003.
MPS's common stock is 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
filing such material with, or furnishing it to, the Securities and Exchange
Commission. The information contained on the Company's website, or on other
websites linked to its website, is not part of this document.
Operations
Professional Services division
The professional services division represented approximately 47% of MPS's
revenue and 51% of its gross profit for 2003. This was up from 41% of its
revenue and 47% of its gross profit for 2002. Approximately 61% of the
division's revenue was generated in the United States with the remainder
contributed from the United Kingdom.
The professional services division provides professional business staffing and
solutions to a wide variety of clients, through its network of approximately 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, Soliant Health, and
Diversified Search brands.
Badenoch & Clark is a professional services recruitment consultancy with
offices located across the United Kingdom, primarily specializing in
finance & accounting. Badenoch & Clark has served clients for over 20 years
with a professional, consultative approach to permanent, temporary and
interim hiring solutions.
Entegee provides a strategic work force solution for technical and
engineering needs through its domestic network of national practice
branches. From on-site management consulting and in-house project services
to temporary and direct placement, Entegee combines industry knowledge and
experience to fill highly skilled technical and engineering positions.
Entegee also provides engineering and drafting design services through
company-owned centers that utilize state-of-the-art computer technology.
Special Counsel provides customized legal workforce solutions to Fortune
1000 companies and law firms through its network of offices located across
the United States. Special Counsel provides temporary, temporary-to-direct
hire, and direct hire solutions for workload management, litigation
support, business transaction support, pre-litigation and document
management support, as well as trial-related services.
Accounting Principals provides professional services recruitment and
placement of accounting and finance professionals with offices located
across the United States. Accounting Principals offers a complete range of
workforce solutions in accounting, finance, mortgage, and banking through
its nationwide branch network and team of experienced professionals.
Soliant Health provides specialized healthcare staffing services in
nursing, imaging, therapy, and other healthcare positions to hospitals and
healthcare providers. By supplying traveling nurses and allied healthcare
professionals on both temporary and direct hire assignments, Soliant Health
delivers comprehensive healthcare staffing services to leading facilities
across the United States.
Diversified Search provides senior-level executive and board of director
search services to clients ranging from small, private firms and
not-for-profits to large publicly held corporations in the United States.
The Company's 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 recognized and incurred 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 2003 was generated from permanent placement fees. Permanent placement
fees are generated when a client directly hires a skilled consultant.
In 2003, the Company acquired the legal staffing businesses of LawPros and
LawCorps. Purchase consideration for these two acquisitions totaled $16.0
million in cash, of which $15.3 million was paid at closing. LawPros and
Lawcorps generated $10.1 million of revenue in 2003. In 2002, the Company
acquired a health care staffing business, Elite Medical (subsequently re-branded
as Soliant Health). Purchase consideration totaled $15.9 million, which was paid
in a mixture of cash and stock. Soliant Health's revenue was $19.4 million and
$9.1 million in 2003 and 2002, respectively.
In December 2003, the Company sold certain operating assets and transferred
certain operating liabilities of its outplacement unit, Manchester, for $8.0
million in cash while retaining the working capital of the business of
approximately $2.0 million. This decision to sell Manchester was in keeping with
the Company's long-term strategy of focusing on the its core businesses. The
initial after-tax loss on the sale was $20.7 million. Manchester's 2003 revenue
was $21.0 million. As a result of the sale of Manchester and in accordance with
GAAP, the Company's Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations report
the results of operations of Manchester as discontinued operations for all
periods presented.
IT Services division
The IT services division includes the Modis and Beeline units. The division
represented approximately 47% of MPS's revenue and 40% of its gross profit for
2003. Approximately 63% of the division's revenue was generated in the United
States, with the remainder generated internationally, primarily in the United
Kingdom.
Modis is one of the world's largest providers of Information Technology Resource
Management (ITRM) services and solutions. ITRM is defined as deploying skilled
consultants to meet an organization's information technology goals using the
optimal mix of internal staff, outside consulting resources, and project
outsourcing. Today, Modis delivers world-class ITRM solutions to more than 1,000
clients in a wide variety of industries through its network of approximately 65
offices in the United States, United Kingdom, Canada and continental Europe.
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 2003 was generated from
permanent placement fees.
Beeline provides a software-based human capital management services solution to
principally Fortune 1000 clients. Beeline offers a wide range of human capital
solutions that automate the acquisition and management of both full-time and
contingent workers. Beeline offerings include Beeline for Contingent Labor,
Beeline for Managed Services, Beeline for Performance Appraisals, Beeline for
Direct Hire, and Beeline for RFPs. Companies and government agencies enhance
execution with these solutions by improving efficiency, visibility, discipline,
and communication. Beeline has operations in both the United States and the
United Kingdom.
Beeline maintains a full-time staff to support its operations and seeks to
collect a service charge based upon the usage of this service. 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.
IT Solutions division
The IT solutions division is comprised solely of Idea Integration ('Idea'). The
division represented approximately 6% of MPS's revenue and 9% of its gross
profit for 2003. All of the division's revenue was generated in the United
States.
Idea is an e-business consulting and systems integration solutions provider
serving Fortune 1000 companies, government, and middle-market clients, through a
combination of local, regional, and national practice groups located in nine
domestic markets. Specializing in Web design and development, information
management solutions, wireless workflow applications, portal solutions, and
enterprise resource management, Idea strives to deliver high-return business
applications for its clients.
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
MPS's ability 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
has 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 professional services division include Robert
Half International Inc., Resources Connection, Inc., Spherion Corporation,
Wallace Law Registry, Ajilon Consulting (a wholly owned subsidiary of Adecco
SA), Michael Page International, Robert Walters PLC, Cross Country Healthcare,
Inc., and CDI Corporation.
The principal competitors of the IT services division include Keane, Inc.,
Computer Horizons Corp., Comsys Information Technology Services, Inc., CIBER,
Inc., and Ajilon Consulting.
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 its core services offerings relating to professional
services, IT services, and IT solutions and, to a lesser extent, expansion into
new specialties. The Company looks to achieve this focus through a combination
of both internal growth and acquisitions. In addition, this focus is aided by
the shedding of non-core businesses, as illustrated by the 2003 sale of the
Company's outplacement unit, Manchester. 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.
The Company feels it has positioned itself for an upturn in the economy through
the consolidation of back office activities and the continued development of its
strategic management systems. Coming out of an economic downturn, employers
historically have turned to contingent labor first before hiring fixed cost
employees. As demand for the Company's services improves, the Company is looking
to further diversify its business mix through a combination of maintaining a
leadership position in both IT services and IT solutions, while growing the
professional services segment. Supported by favorable workforce demographics,
the Company looks to grow the professional services segment revenue in both
amount and overall percentage contribution through a broadening of existing
service lines and through strategic acquisitions primarily in the areas of
accounting and finance, legal and health care.
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 2003.
Employees
On March 1, 2004, the Company employed approximately 12,800 consultants and
approximately 1,900 corporate employees on a full-time equivalent basis.
Approximately 275 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 has 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 the temporary consultants
while the consultant is on assignment with a company client. 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 for a client in the delivery of its services, which the
Company may then license to other clients.
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
facilities are located in geographic areas subject to closure or reduced hours
due to inclement 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. For additional information on the
Company's 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.
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 2003.
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 NYSE (NYSE symbol - MPS). The
following table sets forth the high and low sale prices of MPS's Common Stock,
as reported by the NYSE, during the two years ended December 31, 2003:
2003 2002
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High Low High Low
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Period:
First Quarter..................... $ 6.24 $ 4.75 $ 8.94 $ 6.45
Second Quarter.................... 7.58 5.20 9.80 7.00
Third Quarter..................... 10.10 6.83 8.25 4.35
Fourth Quarter.................... 10.65 8.55 6.65 4.35
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 1, 2004, there were approximately 912 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 Board of Directors had authorized the repurchase of up to $65.0
million of the Company's Common Stock. Beginning in the third quarter of 2002
through the second quarter of 2003, 1.6 million shares at a cost of $9.1 million
have been repurchased under this authorization. There has been no activity under
this authorization since the second quarter of 2003.
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) 2003 2002 2001 2000 1999
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Consolidated Statements of Operations data:
Revenue $ 1,096,030 $ 1,119,156 $1,500,615 $ 1,777,540 $ 1,895,093
Cost of revenue 808,890 834,318 1,105,781 1,269,760 1,395,945
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Gross profit 287,140 284,838 394,834 507,780 499,148
Operating expenses 251,623 255,929 342,918 388,338 312,729
Amortization of goodwill (1) - - 37,312 35,937 30,618
Impairment of investment - 16,165 - (694) (2,275)
Exit costs (recapture) (284) 8,967 - - -
Asset write-down related to sale of
discontinued operations - - - 13,122 25,000
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Operating income 35,801 3,777 14,604 71,077 133,076
Other income (expense), net 553 (3,947) (9,199) (21,621) (7,794)
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Income (loss) from continuing operations
before income taxes and cumulative
effect of accounting change 36,354 (170) 5,405 49,456 125,282
Provision (benefit) for income taxes 14,519 13,832 3,102 (65,834) 47,571
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Income (loss) from continuing
operations before cumulative
effect of accounting change 21,835 (14,002) 2,303 115,290 77,711
Discontinued operations: (2)
Income (loss) from discontinued
operations, net of tax (2,395) 1,410 6,040 4,463 4,424
Gain (loss) on sale of discontinued
operations, net of tax (20,675) - - - 14,955
---------------------------------------------------------------------------------
Income (loss) before cumulative
effect of accounting change (1,235) (12,592) 8,343 119,753 97,090
Cumulative effect of accounting change,
net of tax (1) - (553,712) - - -
---------------------------------------------------------------------------------
Net income (loss) $ (1,235) $ (566,304) $ 8,343 $ 119,753 $ 97,090
=================================================================================
Basic income (loss) per common share:
From continuing operations $ 0.21 $ (0.14) $ 0.02 $ 1.19 $ 0.81
=================================================================================
From discontinued operations $ (0.02) $ 0.01 $ 0.06 $ 0.05 $ 0.05
=================================================================================
From sale of discontinued operations $ (0.20) $ - $ - $ - $ 0.16
=================================================================================
From accounting change $ - $ (5.49) $ - $ - $ -
=================================================================================
Basic income (loss) per common share $ (0.01) $ (5.62) $ 0.09 $ 1.24 $ 1.01
=================================================================================
Diluted income (loss) per common share:
From continuing operations $ 0.21 $ (0.14) $ 0.02 $ 1.18 $ 0.80
=================================================================================
From discontinued operations $ (0.02) $ 0.01 $ 0.06 $ 0.05 $ 0.05
=================================================================================
From sale of discontinued operations $ (0.20) $ - $ - $ - $ 0.15
=================================================================================
From accounting change $ - $ (5.49) $ - $ - $ -
=================================================================================
Diluted income (loss) per common share $ (0.01) $ (5.62) $ 0.08 $ 1.23 $ 1.00
=================================================================================
Basic average common shares
outstanding 101,680 100,833 97,868 96,675 96,268
=================================================================================
Diluted average common shares
outstanding 104,518 100,833 98,178 97,539 97,110
=================================================================================
December 31,
---------------------------------------------------------------------------------
(in thousands) 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet data:
Working capital $ 216,879 $ 171,154 $ 200,887 $ 242,872 $ 250,668
Total assets 893,151 892,974 1,533,863 1,645,414 1,581,049
Long term debt - - 101,000 194,000 238,615
Stockholders' equity 793,462 781,559 1,310,811 1,303,218 1,182,515
(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) For discontinued operations, the 1999 gain on sale related to the
discontinued Commercial operations and Teleservices division sold in
September 1998. The income (loss) from discontinued operations for the
periods presented above and the 2003 loss on sale related to the
discontinued outplacement unit, Manchester, sold in December 2003.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MPS (the 'Company') is a leading global provider of business services with over
170 offices throughout the United States, Canada, the United Kingdom, and
continental Europe. MPS delivers a mix of consulting, solutions, and staffing
services in disciplines such as IT services, finance and accounting, legal,
engineering, IT solutions, health care, executive search, and human capital
automation.
The following detailed analysis of operations contains certain financial
information on a 'constant currency' basis. Such constant currency financial
data is not a U.S. generally accepted accounting principles ('GAAP') financial
measure. Constant currency removes from financial data the impact of changes in
exchange rates between the U.S. dollar and the functional currencies of the
Company's foreign subsidiaries, by translating the current period financial data
into U.S. dollars using the same foreign currency exchange rates that were used
to translate the financial data for the previous period. The Company believes
presenting certain results on a constant currency basis is useful to investors
because it allows a more meaningful comparison of the performance of its foreign
operations from period to period. Additionally, certain internal reporting and
compensation targets are based on constant currency financial data for the
Company's various foreign subsidiaries. However, constant currency measures
should not be considered in isolation or as an alternative to financial measures
that reflect current period exchange rates, or to other financial measures
calculated and presented in accordance with GAAP.
The following detailed analysis of operations also presents the revenue
generated by the Company's professional services division in the United States
excluding the effect of acquisitions. Such financial data that excludes the
effect of acquisitions is not a GAAP financial measure. The Company believes
presenting some results excluding the effects of businesses we acquire is
helpful to investors because it permits a comparison of the performance of its
core internal operations from period to period. Additionally, certain internal
reporting and compensation targets are based on core internal operations. The
effect of acquisitions are excluded for the first 12 months following the
acquisition date. Subsequent to this, acquisitions are considered to be
integrated. Again however, such measures should be considered only in
conjunction with the correlative measures that include the results from
acquisitions, as calculated and presented in accordance with GAAP.
The following detailed analysis of operations also contains certain financial
information excluding the effect of a $25.1 million charge for an investment
impairment and exit costs in 2002, along with a $284,000 recapture for these
exit costs in 2003. The 2002 charge of $25.1 million 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; (2) The Company recorded an
$9.0 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.' In 2003, the Company recaptured $284,000 relating to the
settlement of abandoned real estate. See Note 17 to the Company's Consolidated
Financial Statements for further discussion. We believe presenting certain
financial information excluding the effect of the aforementioned charges
(recapture) provides a more meaningful comparison of changes from period to
period. Again however, you should consider such measures only in conjunction
with the correlative measures that include the charges (recapture), as
calculated and presented in accordance with GAAP.
In December 2003, the Company sold certain operating assets and transferred
certain operating liabilities of its outplacement unit, Manchester, for $8.0
million in cash while retaining the working capital of the business of
approximately $2.0 million. This decision to sell Manchester was in keeping with
the Company's long-term strategy of focusing on the its core businesses. The
initial after-tax loss on the sale was $20.7 million. As a result of the sale of
Manchester and in accordance with GAAP, the Company's Consolidated Financial
Statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations report the results of operations of Manchester as
discontinued operations for all periods presented. Manchester's revenue was
$21.0 million, $35.8 million, and $47.9 million, in 2003, 2002 and 2001,
respectively. Manchester's income (loss) before taxes was a $(3.7) million, $2.2
million, and $9.7, for 2003, 2002 and 2001, respectively.
The following detailed analysis of operations should be read in conjunction with
the 2003 Financial Statements and related notes included elsewhere in this Form
10-K.
2003 COMPARED TO 2002
Consolidated Results
Revenue. Revenue decreased $23.2 million, or 2.1%, to $1,096.0 million in 2003
from $1,119.2 million in 2002. The decrease was due to a reduction in 2003
revenue in both the Company's IT Services and IT Solutions divisions of 11.1%
and 16.9%, respectively. This decrease was offset by a 2003 revenue increase of
11.9% in the Company's professional services division.
Approximately 36% of the Company's 2003 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
2003 had a slight impact on revenue, as revenue, on a constant currency basis
decreased 4.8%, as compared to the decrease of 2.1% above.
In 2002, the Company acquired a health care staffing business, and in 2003, the
Company acquired two legal staffing businesses (together, the 'acquisitions').
The Company's health care staffing business, which was acquired in July 2002,
contributed $19.4 million and $9.1 million in revenue for 2003 and 2002,
respectively. The Company's acquisition of two legal staffing businesses in
February and August of 2003 (together, the 'legal acquisitions'), contributed
$10.1 million in revenue for 2003. See Note 3 to the Company's Consolidated
Financial Statements for a discussion of the acquisitions.
Gross profit. Gross profit increased $2.3 million, or 0.8%, to $287.1 million in
2003 from $284.8 million in 2002. However, on a constant currency basis, gross
profit decreased $2.5 million, or 0.8%, in 2003. Gross margin increased to 26.2%
in 2003, from 25.5% in 2002. The higher margin is due primarily to a higher
concentration of revenue being generated from the professional services division
for 2003.
Operating expenses. Total operating expenses decreased $29.8 million, or 10.6%,
to $251.3 million in 2003, from $281.1 million in 2002. Included in total
operating expenses for 2002 was a $25.1 million charge for an investment
impairment and exit costs. Included in total operating expenses for 2003 was a
$284,000 recapture for these exit costs. Excluding these aforementioned charges
(recapture), total operating expenses decreased $4.3 million, or 1.7%, to $251.6
million in 2003, from $255.9 million in 2002. The Company's general and
administrative ('G&A') expenses, which are included in operating expenses,
decreased $1.1 million, or 0.5%, to $234.6 million in 2003, from $235.7 million
in 2002. G&A expenses on a constant currency basis decreased $6.6 million, or
2.8%, in 2003. The decrease in G&A expenses was attributable to the elimination
of duplicative corporate infrastructure responsibilities and the decrease in
revenue for 2003. The decrease in revenue primarily reduces the variable
component of compensation for the Company's employees.
Operating income. Operating income increased $32.0 million to $35.8 million in
2003, from $3.8 million in 2002. Results for 2002 and 2003 included a $25.1
million charge for an investment impairment and exit costs, and a $284,000
recapture for these exit costs, respectively. Operating income as a percentage
of revenue increased to 3.3% in 2003, from 0.3% in 2002. The charge for an
investment impairment and exit costs in 2002 and the exit costs recapture in
2003, had a 2.3% and 0.1% impact, respectively, on operating income as a
percentage of revenue.
Other income (expense), net. Other expense, net consists primarily of interest
expense related to borrowings under the Company's credit facility and notes
issued in connection with acquisitions, net of interest income related to
investment income from (1) certain investments owned by the Company and (2) cash
on hand. Interest expense decreased $4.7 million, or 83.9%, to $0.9 million in
2003, from $5.6 million in 2002. The decrease in interest expense is related to
the lack of borrowings under the Company's credit facility during 2003. Interest
expense was offset by $1.5 million and $1.7 million of interest and other income
in 2003 and 2002, respectively.
Income taxes. The Company recognized an income tax provision of $14.5 million in
2003, compared to a provision of $13.8 million in 2002. Included in the
provision for 2002 is an $8.7 million charge for an agreed upon adjustment
related to an audit by the Internal Revenue Service of prior years' tax returns.
See Note 7 to the Company's Consolidated Financial Statements for further
discussion. This charge net of the tax benefit on the previously mentioned
investment impairment and exit costs in 2002 increased the 2002 income tax
provision by $3.5 million. The remaining decrease in the level of the Company's
income tax provision as a percentage of pre-tax income is due to the lower level
of non-deductible expenses for 2003.
Income from continuing operations before cumulative effect of accounting change.
As a result of the foregoing, income from continuing operations before
cumulative effect of accounting change increased $35.8 million, to $21.8 million
in 2003, from a $14.0 million loss in 2002.
Segment Results
Professional Services division
Revenue in the professional services division increased $54.8 million, or 11.9%,
to $514.1 million in 2003, from $459.3 million in 2002. On a constant currency
basis, revenue increased 8.4%. Acquisitions contributed $19.6 million in revenue
for 2003.
Of the division's revenue, approximately 61% was generated in the United States
in both 2002 and 2003. The remainder was generated in the United Kingdom.
Excluding the contribution from acquisitions, revenue generated in the United
States increased 5.2% for 2003. On a constant currency basis, revenue increased
2.6% for revenue generated in the United Kingdom.
Excluding the contribution from acquisitions and the favorable impact from
changes in foreign currency exchange rates, all of the professional division's
operating units, as listed below, increased revenue in 2003 from 2002. This
increase in revenue was attributable to the increased demand for the services
provided by the division. Revenue contribution from the professional services
division's operating units for 2003 and 2002 are as follows:
2003 2002
- ------------------------------------------------------------------
Accounting and finance 44.5% 46.0%
Engineering 34.9 37.6
Legal 15.3 12.8
Health care 3.8 2.0
Executive search 1.5 1.6
Gross profit for the professional services division increased $13.3 million, or
9.9%, to $147.4 million in 2003 from $134.1 million in 2002. The gross margin
decreased to 28.7% in 2003, from 29.2% in 2002. The decrease in gross margin is
primarily attributable to 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 4.8% of revenue in 2003,
from 5.4% in 2002. Gross margin for the division's staffing services remained
stable from 2002 to 2003.
The professional services division's G&A expenses increased $9.6 million, or
9.1%, to $115.6 million in 2003, from $106.0 million in 2002. As a percentage of
revenue, the division's G&A expenses decreased to 22.5% in 2003, from 23.1% in
2002. The increase in the division's G&A expenses is associated primarily with
the increase in revenue for 2003, and to a lesser extent, from the impact of
changes in foreign currency exchange rates.
Operating income for the professional services division increased $4.8 million,
or 21.9%, to $26.7 million in 2003, from $21.9 million in 2002.
IT Services division
Revenue in the IT services division decreased $63.6 million, or 11.1%, to $511.7
million in 2003, from $575.3 million in 2002. On a constant currency basis,
revenue decreased 13.7%. 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 63% and 65% was generated in the United
States in 2003 and 2002, respectively. The remainder was generated
internationally, primarily in the United Kingdom. Revenue generated in the
United States decreased 15.0% in 2003. On a constant currency basis, revenue
decreased 11.0% for revenue generated internationally.
Gross profit for the IT services division decreased $7.6 million, or 6.2%, to
$114.7 million in 2003 from $122.3 million in 2002. However, the gross margin
increased to 22.4% in 2003, from 21.3% 2002. The increase in gross margin is
attributable to the division's domestic operations where the gross margin
increased to 26.9% in 2003, from 24.4% in 2002. In 2002, the division's domestic
operations experienced a decrease in bill rates and a shift in the mix of its
services, which exceeded the related decrease in pay rates of its primarily
hourly employees. The division was able to more effectively manage the
differential in the bill and pay rates throughout 2003, which resulted in an
increase in gross margin from 2002. For revenue generated internationally, the
gross margin decreased to 15.0% in 2003, from 15.4% in 2002, primarily due to a
shift in the mix of services provided internationally.
The IT services division's G&A expenses decreased $2.5 million, or 2.5%, to
$99.5 million in 2003, from $102.0 million in 2002. As a percentage of revenue,
the division's G&A expenses increased to 19.4% in 2003, from 17.7% in 2002. The
decrease in the division's G&A expenses is primarily associated with the
decrease in revenue for 2003.
Operating income for the IT services division decreased $4.3 million, or 40.6%,
to $6.3 million in 2003, from $10.6 million in 2002.
IT Solutions division
Revenue in the IT solutions division decreased $14.3 million, or 16.9%, to $70.2
million in 2003, from $84.5 million in 2002. 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 throughout 2002, the last of which occurred in August 2002. These
markets, while generating revenue, were not producing positive income or cash
flow from operations. Revenue generated from these closed markets was $4.3
million for 2002.
Gross profit for the IT solutions division decreased $3.3 million, or 11.6%, to
$25.1 million in 2003 from $28.4 million in 2002. However, the gross margin
increased to 35.7% in 2003, from 33.6% in 2002. 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 during 2002.
The IT solutions division's G&A expenses decreased $8.2 million, or 29.6%, to
$19.5 million in 2003, from $27.7 million in 2002. As a percentage of revenue,
the division's G&A expenses decreased to 27.8% in 2003, from 32.8% in 2002. The
decrease in the division's G&A expenses was primarily related to reductions in
its work force throughout 2002.
Operating income for the IT solutions division increased $6.1 million, to $2.5
million in 2003, from a $3.6 million loss in 2002.
2002 COMPARED TO 2001
Consolidated Results
Revenue. Revenue decreased $381.4 million, or 25.4%, to $1,119.2 million in 2002
from $1,500.6 million in 2001. The decrease was due to a reduction in 2002
revenue for all three divisions, whereby revenue decreased 18.1%, 25.4%, and
49.9%, in the Company's professional services, IT Services and IT Solutions
divisions, respectively.
Approximately 34% 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.
Gross profit. Gross profit decreased $110.0 million, or 27.9%, to $284.8 million
in 2002 from $394.8 million in 2001. Gross margin decreased to 25.5% in 2002,
from 26.3% in 2001. The lower margin is due primarily to changes in business
mix, and a decrease in direct hire and permanent placement fees, which generate
a higher margin.
Operating expenses. Total operating expenses decreased $99.1 million, or 26.1%,
to $281.1 million in 2002, from $380.2 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 $25.1 million charge for an investment impairment and exit costs. Included
in total operating expenses for 2001 was $37.3 million of goodwill amortization.
Excluding these aforementioned costs, total operating expenses decreased $87.0
million, or 25.4%, to $255.9 million in 2002, from $342.9 million in 2001. The
Company's G&A expenses decreased $86.2 million, or 26.8%, to $235.7 million in
2002, from $321.9 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.
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.
Operating income. Operating income decreased $10.8 million, or 74.0%, to $3.8
million in 2002, from $14.6 million in 2001. Results for 2001 and 2002 included
$37.3 million of goodwill amortization, and a $25.1 million charge for an
investment impairment and exit costs, respectively. Operating income as a
percentage of revenue decreased to 0.3% in 2002, from 1.0% in 2001. Goodwill
amortization in 2001 and the charge for an investment impairment and exit costs
in 2002, had a 2.5% and 2.3% negative impact, respectively, on operating income
as a percentage revenue.
Other income (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.
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 $13.8 million in
2002, compared to a provision of $3.1 million in 2001. Included in the provision
for 2002 is an $8.7 million charge recognized for an agree upon adjustment
related to an audit by the Internal Revenue Service of prior years' tax returns.
This charge net of the tax benefit on the previously mentioned investment
impairment and exit costs in 2002 increased the 2002 income tax provision by
$3.5 million. The remaining decrease in the level of the Company's income tax
provision as a percentage of pre-tax income 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 from continuing operations before cumulative effect of accounting change.
As a result of the foregoing, income from continuing operations before
cumulative effect of accounting change decreased $16.3 million, to a $14.0
million loss in 2002, from $2.3 million of income in 2001.
Segment Results
Professional Services division
Revenue in the professional services division decreased $101.7 million, or
18.1%, to $459.3 million in 2002, from $561.0 million in 2001. On a constant
currency basis, revenue decreased 19.4%. The decrease was attributable to the
diminished demand for staffing services and workforce solutions provided by the
division.
Of the division's revenue, approximately 61% and 66% 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 21.5% for 2002. On a local currency basis, revenue decreased 11.8% for
revenue in the United Kingdom.
Gross profit for the professional services division decreased $37.7 million, or
21.9%, to $134.1 million in 2002 from $171.8 million in 2001. The gross margin
decreased to 29.2% in 2002, from 30.6% 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
5.4% of revenue in 2002, from 6.9% in 2001.
The professional services division's G&A expenses decreased $19.8 million, or
15.7%, to $106.0 million in 2002, from $125.8 million in 2001. As a percentage
of revenue, the division's G&A expenses increased to 23.1% in 2002, from 22.4%
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.
Operating income for the professional services division decreased $8.2 million,
or 27.2%, to $21.9 million in 2002, from $30.1 million in 2001. Goodwill
amortization had a $10.5 million negative impact on operating income for 2001.
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.
Operating income for the IT services division decreased $2.8 million, or 20.9%,
to $10.6 million in 2002, from $13.4 million in 2001. Goodwill amortization had
a $19.4 million negative impact on operating income for 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.
The operating loss 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. Goodwill
amortization had a $7.4 million negative impact on operating income for 2001.
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 $216.9 million and $171.2 million as of
December 31, 2003 and 2002, respectively. The Company had cash and cash
equivalents of $124.8 million and $66.9 million as of December 31, 2003 and
2002, respectively.
For the years ended December 31, 2003, 2002, and 2001, the Company generated
$70.3 million, $111.5 million, and $173.9 million of cash flow from operations,
respectively. The reduction in cash flow from operations, from 2002 to 2003, was
primarily due to the normalizing of receivables collection. In 2001 and 2002,
the main elements of the Company's back office integration and consolidation
efforts were being completed. These efforts led to improvements in receivables
collection for 2001 and 2002. The reduction in cash flow from operations, from
2001 to 2002, was primarily due to a reduced level of earnings in 2002, which
was somewhat offset by this improvement in receivables collection.
For the year ended December 31, 2003, the Company used $22.7 million of cash for
investing activities, of which $15.9 million, net of cash acquired, was used
primarily for the legal acquisitions, and $6.8 million was used for capital
expenditures. For the year ended December 31, 2002, the Company used $12.7
million of cash for investing activities, of which $6.7 million, net of cash
acquired, was used for the purchase of the Company's health care business, and
$6.0 million was used for capital expenditures. For the year ended December 31,
2001, the Company used $14.8 million of cash for investing activities, primarily
for capital expenditures.
For the year ended December 31, 2003, the Company generated $2.7 million of cash
from financing activities, primarily from $10.9 million of stock option
exercises, net of $7.6 million used for the purchase of treasury stock. 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 $16.9 million was generated from stock option exercises. The
Company also used $1.4 million for the purchase of treasury stock in 2002. 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.
The Company's Board of Directors has authorized the repurchase of up to $65.0
million of the Company's Common Stock. Beginning in the third quarter of 2002
through the second quarter of 2003, 1.6 million shares at a cost of $9.1 million
have been repurchased under this authorization. There has been no activity under
this authorization since the second quarter of 2003.
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 $8 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, 2003:
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 $ 52,810 $ 14,462 $ 24,346 $ 9,387 $ 4,615
Other 891 891 - - -
------------------------------------------------------------------------------
Total Contractual Cash Obligations $ 53,701 $ 15,353 $ 24,346 $ 9,387 $ 4,615
==============================================================================
Amount of Commitment Expiration per Period
------------------------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Total 1 Year Years Years Years
Standby letters of credit $ 2,753 $ 2,753 $ - $ - $ -
------------------------------------------------------------------------------
Total Commercial Commitments $ 2,753 $ 2,753 $ - $ - $ -
==============================================================================
The Company had a revolving credit facility that expired in October 2003, with
no borrowings outstanding. In the fourth quarter of 2003, the Company closed on
a $150 million revolving credit facility syndicated to a group of leading
financial institutions. The credit facility contains certain financial and
non-financial covenants relating to the Company's operations, including
maintaining certain financial ratios. Repayment, if applicable, of the credit
facility is guaranteed by substantially of the subsidiaries of the Company. The
facility expires in November 2006. As of March 1, 2004, there are no borrowings
outstanding under this facility, other than the $2.8 million of standby letters
of credit.
CRITICAL ACCOUNTING POLICIES
The Company prepares its financial statements in conformity with accounting
principles generally accepted in the United States of America. Associated with
this, 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 substantially all 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.
In addition and to a lesser extent, the Company is involved in fixed price or
lump-sum engagements. The services rendered by the Company under the relevant
contracts generally require performance spanning more than one accounting
period. The Company recognizes revenue for these engagements under the
proportional performance accounting model.
Goodwill
In connection with SFAS No. 142, 'Goodwill and Other Intangible Assets,' the
Company is required to perform goodwill impairment reviews, at least annually,
utilizing a fair-value approach. Additionally, SFAS No. 142 required a
transitional goodwill impairment review upon adoption.
The Company adopted SFAS No. 142 as of January 1, 2002. In connection, the
Company engaged an independent valuation consultant to assist with the required
transitional goodwill impairment review. As of December 31, 2001, the Company's
Consolidated Balance Sheet reflected goodwill of $1,166.0 million. After
performing the required transitional goodwill impairment tests, the Company
recognized a loss of $553.7 million, net of an income tax benefit of $113.0
million, and recorded the loss (net of the related tax benefit) as a cumulative
effect of an accounting change in the Company's Consolidated Statement of
Operations for 2002. The Company performed additional valuation testing during
the fourth quarter of 2002 and 2003 (the Company's designated timing of the
annual impairment test under SFAS No. 142) and did not incur any further
impairment. The Company plans to perform its next annual impairment review
during the fourth quarter of 2004. An impairment review prior to the Company's
next scheduled annual review may be required if certain events occur, including
lower than forecasted earnings levels for various reporting units. In addition,
changes to other assumptions could significantly impact our estimate of the fair
value of our reporting units. Such a change may result in a goodwill impairment
charge, which could have a significant impact on the reportable segments that
include the related reporting units and the Company's Consolidated Financial
Statements.
As part of the Company's goodwill impairment reviews, fair value was calculated
using an equally blended value of a discounted cash flow analysis and market
comparables. In contrast to SFAS 142, the prior accounting standard (SFAS No.
121) required the use of undiscounted cash flow estimates over the remaining
useful life of the goodwill and other long-lived assets as a step 1 test for
possible impairment. Under SFAS No. 121, the concept of recoverability of the
goodwill over the useful life of the asset was the underlying test for
impairment as opposed to fair value under SFAS No. 142. This fundamental
difference in the underlying methodologies of testing for impairment of goodwill
in SFAS No. 121 and SFAS No. 142 caused the Company to attribute the resulting
impairment from the initial valuation completed on January 1, 2002 to a change
in accounting principle upon the adoption of SFAS No. 142. Projected cash flows,
used for both SFAS No. 121 and No. 142 testing, considered the effects from the
then downturn in the Company's business.
As mentioned above, the Company used an equally blended value of a discounted
cash flow analysis and market comparables to arrive at fair value for SFAS No.
142. For the discounted cash flow analysis, significant assumptions included
expected future revenue growth rates, reporting unit profit margins, working
capital levels and a discount rate. The revenue growth rates and reporting unit
profit margins are based, in part, on the Company's expectation of an improving
economic environment. Market comparables included a comparison of the market
ratios and performance fundamentals from comparable companies. The use of these
measurement criteria is consistent with the underlying concepts used in
determining the fair value of a company or reportable unit under the market
approach. The market ratios the Company used refer to the multiples of revenue
and earnings of comparable companies and the performance fundamentals refer to
the consideration of the effects of the differences in the operating metrics,
ie. growth rates, operating margins, gross margins, etc. on the value of the
company versus the comparable companies. See Note 5 to the Company's
Consolidated Financial Statements for further discussion.
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 current 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 as of both December 31, 2003 and 2002,
primarily due to the impairment loss recorded as a change in accounting
principle associated with the Company's adoption of SFAS No. 142 in 2002. 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 $420.0 million of future tax deductions over the next 15 years.
MPS is subject to periodic review by federal, state, foreign and local taxing
authorities in the ordinary course of business. During 2001, MPS was notified by
the Internal Revenue Service that certain prior year income tax returns would be
examined. As part of this examination, the net tax benefit associated with an
investment in a subsidiary that MPS recognized in 2000 of $86.3 million is also
being reviewed. In 2002, the company recorded an $8.7 million charge for an
agreed upon adjustment related to its audit of prior years' tax returns. This
Internal Revenue Service examination will be finalized once it has been reviewed
by the Joint Committee on Taxation. For a further discussion, see Note 7 to the
Consolidated Financial Statements.
Exit Costs
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 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 $9.0
million of contract termination costs in 2002, mainly due to, costs that will
continue to be incurred under the lease contract for its remaining term without
economic benefit to the Company. These termination costs were recorded in
accordance with 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. In 2003, the
Company recaptured $284,000 of these costs relating to the settlement of the
abandoned space. 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 1.5 years. See
Note 17 to the Company's Consolidated Financial Statements for further
discussion.
For the Company's discontinued Manchester operations, the Company recorded $0.7
million of contract termination costs in 2002. As a result of the sale of
Manchester, the Company recorded an additional $0.7 million of contract
termination costs in 2003, which is included in 'Loss on Disposition, net of
tax' on the Company's Consolidated Statement of Operations. See Note 18 to the
Company's Consolidated Financial Statements for further discussion.
Impairment on Tangible Assets
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 January 2003, the FASB issued Interpretation No. 46, 'Consolidation of
Variable Interest Entities,' which clarifies the consolidation and disclosure
requirements related to variable interests in a variable interest entity. A
variable interest entity is an entity for which control is achieved through
means other than voting rights. The consolidation provisions of this
Interpretation, as revised, are effective immediately for interests created
after January 31, 2003 and are effective on December 31, 2003 for interests
created before February 1, 2003. This Interpretation will not have an impact on
the Company's Consolidated Financial Statements as it does not have any variable
interest entities that require consolidation.
During April 2003, the FASB issued SFAS No. 149, 'Amendment of Statement 133 on
Derivative Instruments and Hedging Activities,' which amends and clarifies
financial accounting and reporting for certain derivative instruments. The
adoption of this statement did not have an impact on the Company's Consolidated
Financial Statements, as it is not currently a party to derivative financial
instruments addressed by this standard.
During May 2003, the FASB issued SFAS No. 150, 'Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity,' which
establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. The
adoption of this statement did not have an impact on the Company's Consolidated
Financial Statements, as it is not currently a party to such instruments
addressed by this standard.
During December 2003, the FASB revised SFAS No. 132, 'Employers' Disclosures
about Pensions and Other Postretirement Benefits,' to require additional
disclosures about the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. The adoption of this statement did not have an impact on the Company's
Consolidated Financial Statements, as the Company does not offer a defined
benefit pension plan or other defined benefit postretirement plans within the
scope of the revised SFAS No. 132.
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 36% of its consolidated revenues
for 2003 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 2003, from 1.61 at December 31, 2002 to 1.78 at
December 31, 2003. 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 2003. 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, 2003, 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 Is Impacted By The Economic Climate In The
Industries And Markets The Company Serves. This Economic Climate Is Difficult To
Predict, With Downturns Weakening Demand.
MPS's revenues 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 we serve. While we have experienced a recent uptick in demand
related to the current economic environment, a downturn or deterioration in
global economic or political conditions could significantly hurt our revenues
and results of operations.
We cannot predict when the economic climate will significantly improve.
Although we are seeing an slight improvement in the economic climate, we cannot
predict to what extent the demand for our services will improve. Even though we
have a somewhat variable cost base, further declines in revenue will have a
material adverse impact on our results.
The current economic climate may also encourage customer downsizings, or
consolidations through mergers and otherwise of our major customers or between
our major customers with non-customers. These may result in redundant functions
or services and a resulting reduction in demand by those customers for our
services. Also, spending for outsourced business services may be put on hold
until the consolidations are completed.
Economic considerations may also encourage our customers to consolidate
their vendor lists in an attempt to achieve cost and expense savings, which
increases competitive pressure as described below.
Our Market Is Highly Competitive, Which Puts Pressure On The Profit Margins Of
Our Services.
Our industry is intensely competitive and highly fragmented, with few
barriers to entry by potential competitors. MPS faces significant competition in
the industries and markets it serves, and will face significant competition in
any geographic market that it may enter. In each market in which we operate, we
compete for both clients and qualified candidates with other firms offering
similar services. Competition creates an aggressive pricing environment, which
puts pressure on profit margins.
We have increasingly competed against service 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 our service offerings when we compete with
them. While we believe that our 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 our
profitability.
The effects of competition may be intensified by our customers'
consolidation of their vendor lists. As customers have consolidated their number
of vendors, often in an attempt to secure cost or expense savings in the face of
difficult economic conditions, competition to be an approved vendor has greatly
intensified. If we fail to remain on these consolidated vendor lists, our
results of operations will suffer accordingly. Competing to remain on, or get
on, these vendor lists could obligate us to offer our services at prices that
offer lower margins, and less profit, than we might otherwise be able to
achieve.
Our Business Depends On Key Personnel, Including Executive Officers, Local
Managers And Field Personnel; Our Failure To Retain Existing Key Personnel Or
Attract New People Will Reduce Business And Revenues.
MPS's operations depend on the continued efforts of our officers and
executive management. The loss of key officers and members of executive
management may cause a significant disruption to our business.
We also depend on the performance and productivity of our local managers
and field personnel. Our ability to attract and retain new business is
significantly affected by local relationships and the quality of service
rendered. The loss of key managers and field personnel may also jeopardize
existing client relationships with businesses that continue to use our services
based upon past relationships with local managers and field personnel. Our
revenues would decline in that event.
The Inability To Comply With Existing Government Regulation Along With Increased
Regulation Of The Workplace Could Adversely Effect The Company.
The Company's business is subject to regulation or licensing in many states
and in certain foreign countries. While the Company has had no material
difficulty complying with regulations in the past, there can be no assurance
that the Company will be able to continue to obtain all necessary licenses or
approvals or that the cost of compliance will not prove to be material. Any
inability of the Company to comply with government regulation or licensing
requirements could materially adversely effect the Company. Additionally, the
Company's temporary services business entails employing individuals on a
temporary basis and placing such individuals in clients' workplaces. Increased
government regulation of the workplace or of the employer-employee relationship
could materially adversely effect the Company.
The Company Is Exposed To Employment-Related Claims and Costs And Other
Litigation That Could Materially Adversely Effect The Company's Business,
Financial Condition, And Results Of Operations.
The Company's temporary services business entails employing individuals on
a temporary basis and placing such individuals in clients' workplaces. The
Company's ability to control the workplace environment is limited. As the
employer of record of its temporary employees, the Company incurs a risk of
liability to its temporary employees for various workplace events, including
claims of physical injury, discrimination, harassment, or retroactive
entitlement to employee benefits. The Company also incurs a risk of liability to
its clients resulting from allegations of errors, omissions, misappropriation,
or theft of property or information by its temporary employees. The Company
maintains insurance with respect to many of such claims. While such claims have
not historically had a material adverse effect on the Company, there can be no
assurance that the Company will continue to be able to obtain insurance at a
cost that does not have a material adverse effect upon the Company or that such
claims (whether by reason of the Company not having insurance or by reason of
such claims being outside the scope of the Company's insurance) will not have a
material adverse effect upon the Company.
Adjustments During Periodic Tax Audits May Increase Our Tax Liability And Hurt
Our Results Of Operations.
MPS is subject to periodic review by federal, foreign, state, and local
taxing authorities in the ordinary course of business. During 2001, MPS 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 MPS recognized in 2000 of
$86.3 million is also being reviewed. In 2002, the company recorded an $8.7
million charge for an agreed upon adjustment related to its audit of prior
years' tax returns. While MPS has not received notice of any additional
adjustments relating to its audit of prior years' tax returns, we cannot assure
you that the IRS will not propose additional adjustments. Additional adjustments
may affect our financial condition.
The Price Of Our Common Stock May Fluctuate Significantly, Which May Result In
Losses For Investors.
The market price for our common stock has been and may continue to be
volatile. For example, during the period from January 1, 2003 until December 31,
2003, the closing price of the common stock as reported on the New York Stock
Exchange ranged from a high of $10.62 to a low of $4.85. Our stock price can
fluctuate as a result of a variety of factors, including factors listed above
and others, many of which are beyond our control. These factors include:
- actual or anticipated variations in quarterly operating results;
- announcement of new services by us or our competitors;
- announcements relating to strategic relationships or acquisitions;
- changes in financial estimates or other statements by securities
analysts;
- valuation fluctuations which may cause a negative impact to our
operating results as it relates to Statement of Financial Accounting
Standards No. 142; and
- changes in general economic conditions.
Because of this volatility, we may fail to meet the expectations of our
shareholders or of securities analysts, and our 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, 2003 and 2002
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002, and 2001
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001
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. and its subsidiaries (the Company) at December 31, 2003 and 2002,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2003, 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 12, 2004
MPS Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, December 31,
(dollar amounts in thousands except share amounts) 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 124,830 $ 66,934
Accounts receivable, net of allowance of $12,899 and $16,919 159,359 180,120
Prepaid expenses 6,417 4,703
Deferred income taxes 2,200 3,386
Other 10,662 11,632
----------------------------------
Total current assets 303,468 266,775
Furniture, equipment, and leasehold improvements, net 29,488 36,505
Goodwill, net 486,630 474,484
Deferred income taxes 62,464 67,562
Other assets, net 11,101 10,437
Net assets of discontinued operations - 37,211
----------------------------------
Total assets $ 893,151 $ 892,974
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 32,601 46,606
Accrued payroll and related taxes 37,848 34,104
Income taxes payable 16,140 14,911
----------------------------------
Total current liabilities 86,589 95,621
Other 13,100 15,794
----------------------------------
Total liabilities 99,689 111,415
----------------------------------
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;
104,576,204 and 102,531,491 shares issued, respectively 1,046 1,025
Additional contributed capital 634,492 622,079
Retained earnings 162,546 163,781
Accumulated other comprehensive income 6,933 66
Deferred stock compensation (2,495) (3,958)
Treasury stock, at cost (1,613,400 shares in 2003 and 290,400
shares in 2002) (9,060) (1,434)
----------------------------------
Total stockholders' equity 793,462 781,559
----------------------------------
Total liabilities and stockholders' equity $ 893,151 $ 892,974
==================================
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) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Revenue $ 1,096,030 $ 1,119,156 $ 1,500,615
Cost of revenue 808,890 834,318 1,105,781
------------------------------------------
Gross profit 287,140 284,838 394,834
------------------------------------------
Operating expenses:
General and administrative 234,614 235,673 321,939
Depreciation and intangibles amortization 17,009 20,256 20,979
Amortization of goodwill - - 37,312
Exit costs (recapture) (284) 8,967 -
Impairment of investment - 16,165 -
------------------------------------------
Total operating expenses 251,339 281,061 380,230
------------------------------------------
Operating income 35,801 3,777 14,604
Other income (expense), net 553 (3,947) (9,199)
------------------------------------------
Income (loss) from continuing operations before income taxes
and cumulative effect of accounting change 36,354 (170) 5,405
Provision (benefit) for income taxes 14,519 13,832 3,102
------------------------------------------
Income (loss) from continuing operations before
cumulative effect of accounting change 21,835 (14,002) 2,303
Discontinued operations (Note 18):
Income (loss) from discontinued operations (net of income taxes
of $(1,289), $759, and $3,702, respectively) (2,395) 1,410 6,040
Loss on disposition of discontinued operations (net of a
$11,133 income tax benefit) (20,675) - -
------------------------------------------
Income (loss) from operations before cumulative effect of
accounting change (1,235) 12,592 8,343
Cumulative effect of accounting change (net of a $112,953
income tax benefit) - (553,712) -
------------------------------------------
Net income (loss) $ (1,235) $ (566,304) $ 8,343
==========================================
Basic net income (loss) per common share:
Income (loss) from continuing operations before cumulative
effect of accounting change $ 0.21 $ (0.14) $ 0.02
Income (loss) from discontinued operations, net of tax (0.02) 0.01 0.06
Loss on disposition of discontinued operations, net of tax (0.20) - -
Cumulative effect of accounting change, net of tax - (5.49) -
------------------------------------------
Basic net income (loss) per common share $ (0.01) $ (5.62) $ 0.09
==========================================
Average common shares outstanding, basic 101,680 100,833 97,868
==========================================
Diluted net income (loss) per common share:
Income (loss) from continuing operations before cumulative
effect of accounting change $ 0.21 $ (0.14) $ 0.02
Income (loss) from discontinued operations, net of tax (0.02) 0.01 0.06
Loss on disposition of discontinued operations, net of tax (0.20) - -
Cumulative effect of accounting change, net of tax - (5.49) -
------------------------------------------
Diluted net income (loss) per common share $ (0.01) $ (5.62) $ 0.08
==========================================
Average common shares outstanding, diluted 104,518 100,833 98,178
==========================================
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 Contributed Retained Income Stock Treasury
except share amounts) Shares Amount Capital Earnings (Loss) Compensation Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
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 1,025 622,079 163,781 66 (3,958) (1,434) 781,559
Comprehensive loss:
Net loss - - - (1,235) - - -
Foreign currency translation - - - - 6,867 - -
Total comprehensive loss - - - - - - - 5,632
Exercise of stock options and related
tax benefit 2,044,713 21 12,413 - - - - 12,434
Purchase of treasury stock - - - - - - (7,626) (7,626)
Vesting of restricted stock - - - - - 1,463 - 1,463
-----------------------------------------------------------------------------------------
Balance, December 31, 2003 104,576,204 $1,046 $634,492 $ 162,546 $ 6,933 $(2,495) $(9,060) $ 793,462
=========================================================================================
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) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Income (loss) from continuing operations before cumulative
effect of accounting change $ 21,835 $ (14,002) $ 2,303
Adjustments to income (loss) from continuing operations before
cumulative effect of accounting change to net cash provided
by operating activities:
Exit costs (recapture) (284) 8,967 -
Impairment of investment - 16,165 -
Deferred income taxes 17,417 29,172 3,522
Deferred compensation 1,465 2,243 1,331
Depreciation and identified intangibles amortization 17,009 20,256 20,979
Amortization of goodwill - - 37,313
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 31,235 49,868 110,862
Prepaid expenses and other assets (1,712) (1,969) 3,350
Accounts payable and accrued expenses (15,974) 5,876 (1,351)
Accrued payroll and related taxes 2,204 (4,690) (2,084)
Other, net (2,857) (373) (2,294)
-----------------------------------------
Net cash provided by operating activities 70,338 111,513 173,931
-----------------------------------------
Cash flows from investing activities:
Purchase of furniture, equipment, and leasehold
improvements, net of disposals (6,880) (6,016) (14,287)
Purchase of businesses, including additional earn-outs on
acquisitions, net of cash acquired (15,864) (6,739) (509)
-----------------------------------------
Net cash used in investing activities (22,744) (12,755) (14,796)
-----------------------------------------
Cash flows from financing activities:
Repurchases of common stock (7,626) (1,434) -
Discount realized on employee stock purchase plan (389) (494) -
Proceeds from stock options exercised 10,867 16,881 373
Borrowings on indebtedness - - 2,000
Repayments on indebtedness (163) (101,423) (118,962)
-----------------------------------------
Net cash provided by (used in) financing activities 2,689 (86,470) (116,589)
-----------------------------------------
Effect of exchange rate changes on cash and cash equivalents 4,714 1,541 (7,484)
-----------------------------------------
Net increase in cash and cash equivalents 54,997 13,829 35,062
Net cash provided by discontinued operations 2,899 3,897 9,133
Cash and cash equivalents, beginning of year 66,934 49,208 5,013
-----------------------------------------
Cash and cash equivalents, end of year $ 124,830 $ 66,934 $ 49,208
=========================================
See accompanying notes to consolidated financial statements.
Years Ended December 31,
(dollar amounts in thousands except for per share amounts) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 1,234 $ 4,534 $ 12,711
Income taxes (refunded) paid (3,838) 6,214 13,873
COMPONENTS OF CASH PROVIDED BY DISCONTINUED OPERATIONS
Cash (used in) provided by operating activities $ (4,987) $ 4,368 $ 9,660
Cash provided by (used in) investing activities 7,886 (471) (527)
----------- ------------ ------------
Net cash provided by discontinued operations $ 2,899 $ 3,897 $ 9,133
=========== ============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company completed two acquisitions in 2003 and one acquisition in 2002.
There were no acquisitions in 2001. In connection with the acquisitions,
liabilities were assumed as follows:
Years Ended December 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------------
Fair value of assets acquired $ 18,839 $ 7,367
Cash paid (16,322) (7,000)
---------- -----------
Liabilities assumed $ 2,517 $ 367
========== ===========
1. DESCRIPTION OF BUSINESS
MPS Group, Inc. ('MPS' or the 'Company') (New York Stock Exchange
symbol:MPS) is a leading global provider of business services with over 170
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, health care, executive search, and human capital
automation.
MPS consists of three divisions: the professional services division; the IT
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. In connection with SFAS No. 142, the Company is required to
perform goodwill impairment reviews, at least annually, utilizing a fair-value
approach. Additionally, SFAS No. 142 required a transitional goodwill impairment
review upon adoption.
The Company adopted SFAS No. 142 as of January 1, 2002. In connection
therewith, the Company engaged an independent valuation consultant to assist
with the required transitional goodwill impairment review. As of December 31,
2001, the Company's Consolidated Balance Sheet reflected goodwill of $1,166.0
million. After performing the required transitional goodwill impairment tests,
the Company recognized a loss of $553.7 million, net of an income tax benefit of
$113.0 million, and recorded the loss (net of the related tax benefit) as a
cumulative effect of an accounting change in the Company's Consolidated
Statement of Operations for 2002. The Company performed additional valuation
testing during the fourth quarter of 2002 and 2003 (the Company's designated
timing of the annual impairment test under SFAS No. 142) and did not incur any
further impairment. The Company plans to perform its next annual impairment
review during the fourth quarter of 2004. An impairment review prior to the
Company's next scheduled annual review may be required if certain events occur,
including lower than forecasted earnings levels for various reporting units. In
addition, changes to other assumptions could significantly impact our estimate
of the fair value of our reporting units. Such a change may result in a goodwill
impairment charge, which could have a significant impact on the reportable
segments that include the related reporting units and the Company's Consolidated
Financial Statements.
As part of the Company's goodwill impairment reviews, fair value was
calculated using an equally blended value of a discounted cash flow analysis and
market comparables. In contrast to SFAS 142, the prior accounting standard (SFAS
No. 121) required the use of undiscounted cash flow estimates over the remaining
useful life of the goodwill and other long-lived assets as a step 1 test for
possible impairment. Under SFAS No. 121, the concept of recoverability of the
goodwill over the useful life of the asset was the underlying test for
impairment as opposed to fair value under SFAS No. 142. This fundamental
difference in the underlying methodologies of testing for impairment of goodwill
in SFAS No. 121 and SFAS No. 142 caused the Company to attribute the resulting
impairment from the initial valuation completed on January 1, 2002 to a change
in accounting principle upon the adoption of SFAS No. 142. Projected cash flows,
used for both SFAS No. 121 and No. 142 testing, considered the effects from the
then downturn in the Company's business.
As mentioned above, the Company used an equally blended value of a
discounted cash flow analysis and market comparables to arrive at fair value for
SFAS No. 142. For the discounted cash flow analysis, significant assumptions
included expected future revenue growth rates, reporting unit profit margins,
working capital levels and a discount rate. The revenue growth rates and
reporting unit profit margins are based, in part, on the Company's expectation
of an improving economic environment. Market comparables included a comparison
of the market ratios and performance fundamentals from comparable companies. The
use of these measurement criteria is consistent with the underlying concepts
used in determining the fair value of a company or reportable unit under the
market approach. The market ratios the Company used refer to the multiples of
revenue and earnings of comparable companies and the performance fundamentals
refer to the consideration of the effects of the differences in the operating
metrics, ie. growth rates, operating margins, gross margins, etc. on the value
of the company versus the comparable companies. See Note 5 to the Company's
Consolidated Financial Statements for further discussion.
In 2002 and 2003, the Company acquired a health care staffing business and
two legal staffing businesses, respectively. These acquisition were recorded in
accordance with the provisions of SFAS No. 141 'Business Combinations'. See Note
3 and Note 5 to the Consolidated Financial Statements for further discussion.
Revenue Recognition
The Company recognizes substantially all 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.
In addition and to a lesser extent, the Company is involved in fixed price
or lump-sum engagements. The services rendered by the Company under the relevant
contracts generally require performance spanning more than one accounting
period. The Company recognizes revenue for these engagements under the
proportional performance accounting model.
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 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) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss)
As reported $ (1,235) $ (566,304) $ 8,343
Total stock-based employee compensation expense determined
under fair value based method for all awards, net of
related tax effects (4,796) (4,451) (11,037)
-----------------------------------------
Pro forma $ (6,031) $ (570,755) $ (2,694)
=========================================
Basic net income (loss) per common share
As reported $ (0.01) $ (5.62) $ 0.09
Pro forma $ (0.06) $ (5.66) $ (0.03)
Diluted net income (loss) per common share
As reported $ (0.01) $ (5.62) $ 0.08
Pro forma $ (0.06) $ (5.66) $ (0.03)
The weighted average fair values of options granted during 2003, 2002, and
2001 were $5.44, $3.99, and $2.68 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:
2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Expected dividend yield - - -
Expected stock price volatility .70 .77 .42
Risk-free interest rate 3.78 3.78 4.88
Expected life of options (years) 5.00 5.00 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'). The Company's adoption of SFAS
No. 133, as amended, in the first quarter of 2001 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, 2003 and 2002, there were no interest rate swap
agreements outstanding.
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.
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, foreign 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 an agreed upon 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 101.7 million, 100.8 million, and 97.9 million in 2003, 2002
and 2001, respectively. The only difference in the computation of basic and
diluted earnings per share is the inclusion of 2.8 million and 310,000 potential
common shares in 2003 and 2001, respectively. As the Company was in loss
position for 2002 from continuing operations, 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
The Company recorded a $9.0 million charge in 2002, of which $284,000 was
recaptured in 2003, relating to its abandonment of excess real estate
obligations for certain vacant office space.
For the Company's discontinued Manchester operations, the Company recorded
$732,000 of contract termination costs in 2002. As a result of the sale of
Manchester, the Company recorded an additional $705,000 of contract termination
costs in 2003, which is included in 'Loss on Disposition, net of tax' on the
Company's Consolidated Statement of Operations.
These charges (recapture) were recorded in accordance with 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. See Note 17 and Note 18 to the
Consolidated Financial Statements for further discussion.
Discontinued Operations
In December 2003, the Company sold certain operating assets and transferred
certain operating liabilities of its outplacement unit, Manchester, for $8.0
million in cash while retaining the working capital of the business of
approximately $2.0 million. The initial after-tax loss on the sale was $20.7
million. The Company recorded the disposition in accordance with SFAS no. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." See Note 18 to
the Consolidated Financial Statements for further discussion.
Impairment of Investment
The Company had a minority investment in a privately held company that was
recorded as a non-current asset. 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. In 2002, this privately held company recapitalized at terms
which diluted the value of the Company's investment. 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 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 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.
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 2001 and 2002 to conform to the
2003 presentation.
3. BUSINESS COMBINATIONS
In February and August of 2003, the Company acquired the legal staffing
businesses of LawPros and LawCorps, respectively. Purchase consideration totaled
$16.0 million in cash, of which $15.3 million was at closing. In July 2002, the
Company acquired a health care staffing business, Elite Medical (subsequently
re-branded as Soliant Health). Purchase consideration totaled $15.9 million,
$7.2 million in cash, and 1.1 million shares of MPS Common Stock valued at $8.7
million. The Company did not make any acquisitions in 2001.
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'. The Company has not made any material
earn-out payments in 2001, 2002 or 2003.
4. INDEBTEDNESS
Indebtedness at December 31, 2003 and 2002 consisted of the following:
(dollar amounts in thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------------------
Notes payable to former stockholders of acquired companies
(interest ranging from 2.5% to 7.0%) $ 891 $ 334
---------------------------
891 334
Current portion of notes payable 891 334
---------------------------
Long-term portion of notes payable $ - $ -
===========================
The notes payable are included in the line item 'Accounts payable and
accrued expenses' on the Consolidated Balance Sheet
The Company had a revolving credit facility that expired in October 2003,
with no borrowings outstanding. In the fourth quarter of 2003, the Company
closed on a $150 million revolving credit facility syndicated to a group of
leading financial institutions. The credit facility contains certain financial
and non-financial covenants relating to the Company's operations, including
maintaining certain financial ratios. Repayment, if applicable, of the credit
facility is guaranteed by substantially of the subsidiaries of the Company. The
facility expires in November 2006. The Company incurred certain costs directly
related to obtaining the credit facility in the amount of approximately $1.0
million. These costs have been capitalized and are being amortized over the life
of the credit facility, and are included in the line item 'Other assets, net' on
the Consolidated Balance Sheet. As of December 31, 2003, there are no borrowings
outstanding under this facility.
5. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
The Company adopted SFAS No. 142 effective January 1, 2002. The changes in
the carrying amount of goodwill for 2003 and 2002, are as follows:
Professional IT IT
(dollar amounts in thousands) Services Services Solutions Total
- -------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2001 $ 312,952 $ 592,037 $ 260,972 $1,165,961
Impairment losses from change in
accounting principle (87,969) (338,449) (240,247) (666,665)
2002 acquisition 12,500 - - 12,500
----------- ----------- ----------- -----------
Balance as of December 31, 2002 $ 237,483 $ 253,588 $ 20,725 $ 511,796
2003 acquisitions 12,146 - - 12,146
Reduction of goodwill as a result of
the disposition of Manchester (37,312) - - (37,312)
----------- ----------- ----------- -----------
Balance as of December 31, 2003 $ 212,317 $ 253,588 $ 20,725 $ 486,630
=========== =========== =========== ===========
The Company allocated the purchase price of acquisitions in accordance with
SFAS No. 141 "Business Combinations." At December 31, 2003 and 2002, there was
$1.6 million and $466,000, respectively, of identifiable intangible assets on
the Company's Consolidated Balance Sheets relating to the Company's acquisitions
in 2002 and 2003. Identifiable intangible assets relate to both the existing
value of the target's customer relationships at the date of the acquisition and
trade names, if applicable. See Note 3 to the Company's Consolidated Financial
Statements for further discussion of the Company's acquisitions.
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) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
cumulative effect of accounting change, as reported $ 21,835 $ (14,002) $ 2,303
Goodwill amortization, net of tax - - 26,237
------------ ------------ ------------
Income (loss) from continuing operations before
cumulative effect of accounting change, as adjusted 21,835 (14,002) 28,540
Income (loss) from discontinued operations, net of tax (2,395) 1,410 6,040
Loss on disposition of discontinued operations, net of tax (20,675) - -
Cumulative effect of accounting change, net of tax - (553,712) -
------------ ------------ ------------
Net income (loss), as adjusted $ (1,235) $ (566,304) $ 34,580
============ ============ ============
Basic income (loss) per common share:
Income (loss) from continuing operations before
cumulative effect of accounting change, as reported $ 0.21 $ (0.14) $ 0.02
Goodwill amortization, net of tax - - 0.27
------------ ------------ ------------
Income (loss) from continuing operations before
cumulative effect of accounting change, as adjusted 0.21 (0.14) 0.29
Income (loss) from discontinued operations, net of tax (0.02) 0.01 0.06
Loss on disposition of discontinued operations, net of tax (0.20) - -
Cumulative effect of accounting change, net of tax - (5.49) -
------------ ------------ ------------
Basic net income (loss) per common share, as adjusted $ (0.01) $ (5.62) $ 0.35
============ ============ ============
Diluted income (loss) per common share:
Income (loss) from continuing operations before
cumulative effect of accounting change, as reported $ 0.21 $ (0.14) $ 0.02
Goodwill amortization, net of tax - - 0.27
------------ ------------ ------------
Income (loss) from continuing operations before
cumulative effect of accounting change, as adjusted 0.21 (0.14) 0.29
Income (loss) from discontinued operations, net of tax (0.02) 0.01 0.06
Loss on disposition of discontinued operations, net of tax (0.20) - -
Cumulative effect of accounting change, net of tax - (5.49) -
------------ ------------ ------------
Diluted net income (loss) per common share, as adjusted $ (0.01) $ (5.62) $ 0.35
============ ============ ============
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
- -------------------------------------------------------------------------------------------------------
2004 $ 14,462
2005 10,960
2006 7,269
2007 6,117
2008 5,151
Thereafter 8,851
--------
$ 52,810
========
Total rent expense for 2003, 2002, and 2001 was $23.4 million, $25.4
million, and $23.9 million, respectively. See Note 17 to the Consolidated
Financial Statements for discussion of a charge for exit costs that the Company
recorded in 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 for income taxes from continuing
operations, before cumulative effect of accounting change, is as follows (dollar
amounts in thousands):
2003 2002 2001
- --------------------------------------------------------------
Current:
Federal $ 7,050 $ (20,605) $ (5,652)
State 611 1,557 1,365
Foreign 574 3,708 3,867
------------------------------------
8,235 (15,340) (420)
------------------------------------
Deferred:
Federal 6,267 32,042 11,573
State 114 (1,428) 3,080
Foreign (97) (1,442) (11,131)
------------------------------------
6,284 29,172 3,522
------------------------------------
$ 14,519 $ 13,832 $ 3,102
====================================
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 and cumulative
effect of accounting change is attributable to the following (dollar amounts in
thousands except percentage amounts):
2003 2002 2001
-------------------------------------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- ----------------------------------------------------------------------------------------------------------------------------
Tax computed using the federal statutory rate $ 12,724 35.0% $ (60) (35.0)% $ 1,892 35.0%
State income taxes, net of federal income tax effect 725 2.0 129 76.0 4,445 82.2
Non-deductible goodwill - - - - 3,187 59.0
Foreign tax credit carryforward - - (49) (29.0) 525 9.7
Investment in subsidiary - - 8,660 5,094.0 - -
Reorganization of subsidiary - - - - (7,909) (146.3)
Capital loss carryforward - - 3,661 2,153.5 - -
Other permanent differences 1,070 2.9 1,491 877.0 962 17.8
-------------------------------------------------------------------
$ 14,519 39.9% $ 13,832 8,136.5% $ 3,102 57.4%
===================================================================
The components of the deferred tax assets and liabilities recorded in the
Consolidated balance sheets are as follows:
(dollar amounts in thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets:
Self-insurance reserves $ 1,394 $ 1,669
Allowance for doubtful accounts receivable 2,704 3,781
Foreign tax credit carryforward 19,507 21,611
Net operating loss carryforward 24,905 7,342
Capital loss carryforward 3,661 3,661
Leases 1,630 3,395
Amortization of goodwill 41,321 57,265
Other 5,002 4,950
---------------------------
Total gross deferred tax assets 100,124 103,674
---------------------------
Valuation allowance (27,171) (25,050)
---------------------------
Total gross deferred tax assets, net of valuation allowance 72,953 78,624
---------------------------
Gross deferred tax liabilities:
Other (8,289) (7,676)
---------------------------
Total gross deferred tax liabilities (8,289) (7,676)
---------------------------
Net deferred tax asset $ 64,664 $ 70,948
===========================
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, 2003, consisted of $14.7
million in foreign tax credit carryforwards, $8.8 million in state net operating
loss carryforwards, and $3.7 million for a capital loss carryforward. The
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 Company generated a federal net operating loss carryforward in 2003
resulting in a deferred tax asset of $16.1 million. This federal net operating
loss carryforward will expire in 2024.
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 $420.0 million of
future tax deductions over the next 15 years.
The Company is subject to periodic review by federal, foreign, 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 an agreed upon adjustment
with the Internal Revenue Service. This Internal Revenue Service examination
will be finalized once it has been reviewed by the Joint Committee on Taxation.
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 $2.1 million and $7.1 million, net of forfeitures, to the profit
sharing plan for 2003 and 2001, respectively. During 2002, management elected
not to match employee deferrals. When the Company reinstated the match for the
2003 plan year, it 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. For 2003, the Company matched 40%.
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
2003, 2002 and 2001. 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. Beginning in the third quarter of
2002 through the second quarter of 2003, 1.6 million shares at a cost of $9.1
million have been repurchased under this authorization. There has been no
activity under this authorization since the second quarter of 2003.
Incentive Employee Stock Plan
The Company's employee stock option plan (Employee Plan) provides for the
granting of options for the purchase of the Company's common stock to key
employees. The Employee Plan, among other things, requires 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, and defines 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 Employee Plan from 2001 to 2003.
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, 2003 and 2002, the assumed plans had an
immaterial number of options outstanding.
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 Employee Plan, and to provide a mechanism to return
shares to the Employee 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.
Non-Employee Director Stock Plan
The Company's director stock option plan (Director Plan) provided for the
granting of options for the purchase of the Company's common stock to
non-employee directors. The Director Plan expired of its own term December 2003.
The Director Plan allowed 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 provided 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 were also able to grant additional
options to non-employee directors from time to time as the Board determined 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 2003, 2002 and 2001, the Company
granted 260,000, 180,000 and 490,000 options, respectively, at an average
exercise price of $7.82, $6.31 and $3.88, respectively.
The following table summarizes the Company's Stock Option Plans:
Weighted
Range of Average
Shares Exercise Prices Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 14,617,361 $ 1.25 - $33.38 $ 13.83
Granted 12,389,156 $ 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 15,189,222 $ 1.25 - $33.38 $ 6.50
Granted 3,011,170 $ 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 14,373,183 $ 1.25 - $33.38 $ 6.12
Granted 429,000 $ 5.29 - $ 9.14 $ 6.99
Exercised (2,044,713) $ 1.25 - $ 9.88 $ 5.23
Canceled (957,412) $ 3.63 - $33.38 $ 9.73
----------------------------------------------
Balance, December 31, 2003 11,800,058 $ 3.56 - $22.88 $ 6.10
==============================================
The following table summarizes information about stock options outstanding
at December 31, 2003:
Outstanding Exercisable
------------------------------------------- -----------------------------
Average Average
Average Exercise Exercise
Shares Life (a) Price Shares Price
- --------------------------------------------------------------------------------------------------------------------
$ 3.56 - $ 3.85 2,092,116 7.71 $ 3.84 1,259,467 $ 3.84
$ 3.94 - $ 5.24 2,752,536 8.40 5.17 1,091,724 5.10
$ 5.29 - $ 6.64 5,249,990 7.71 6.00 4,486,884 6.00
$ 6.88 - $ 8.13 521,132 6.59 7.67 424,565 7.77
$ 8.19 - $ 11.00 588,110 7.07 9.24 330,800 9.44
$ 11.06 - $ 15.38 470,374 4.89 13.00 414,014 13.02
$ 16.06 - $ 22.88 125,800 4.65 20.39 116,200 20.70
-------------------------------------------------------------------------
Total 11,800,058 7.64 $ 6.10 8,123,654 $ 6.35
=========================================================================
(a) Average contractual life remaining in years.
At year-end 2002, options with an average exercise price of $6.74 were
exercisable on 8.5 million shares; at year-end 2001, options with an average
exercise price of $6.82 were exercisable on 9.6 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 $1.5 million, $2.2 million
and $1.3 million of compensation expense in 2003, 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. There were no
restricted stock grants for 2003.
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) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Basic income (loss) per common share computation:
Income (loss) from continuing operations before
cumulative effect of accounting change $ 21,835 $ (14,002) $ 2,303
Income (loss) from discontinued operations, net of tax (2,395) 1,410 6,040
Loss on disposition of discontinued operations, net of tax (20,675) - -
Cumulative effect of accounting change, net of tax - (553,712) -
------------ ------------ ------------
Net income (loss) $ (1,235) $ (566,304) $ 8,343
============ ============ ============
Basic average common shares outstanding 101,680 100,833 97,868
============ ============ ============
Basic income (loss) per common share:
Income (loss) from continuing operations before
cumulative effect of accounting change $ 0.21 $ (0.14) $ 0.02
Income (loss) from discontinued operations, net of tax (0.02) 0.01 0.06
Loss on disposition of discontinued operations, net of tax (0.20) - -
Cumulative effect of accounting change, net of tax - (5.49) -
------------ ------------ ------------
Basic net income (loss) per common share $ (0.01) $ (5.62) $ 0.09
============ ============ ============
Diluted income (loss) per common share computation:
Income (loss) from continuing operations before
cumulative effect of accounting change $ 21,835 $ (14,002) $ 2,303
Income (loss) from discontinued operations, net of tax (2,395) 1,410 6,040
Loss on disposition of discontinued operations, net of tax (20,675) - -
Cumulative effect of accounting change, net of tax - (553,712) -
------------ ------------ ------------
Net income (loss) $ (1,235) $ (566,304) $ 8,343
============ ============ ============
Basic average common shares outstanding 101,680 100,833 97,868
Incremental shares from assumed exercise of stock options 2,838 - 310
------------ ------------ ------------
Diluted average common shares outstanding 104,518 100,833 98,178
============ ============ ============
Diluted income (loss) per common share:
Income (loss) from continuing operations before
cumulative effect of accounting change $ 0.21 $ (0.14) $ 0.02
Income (loss) from discontinued operations, net of tax (0.02) 0.01 0.06
Loss on disposition of discontinued operations, net of tax (0.20) - -
Cumulative effect of accounting change, net of tax - (5.49) -
------------ ------------ ------------
Diluted net income (loss) per common share $ (0.01) $ (5.62) $ 0.08
============ ============ ============
Options to purchase 1.6 million, 2.3 million, and 7.8 million shares of
common stock that were outstanding during 2003, 2002, and 2001 respectively,
were not included in the computation of diluted earnings per share as the
exercise prices of these options were greater than the average market price of
the common shares.
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 were met over 2001 and 2002, the
unpaid principal and accrued interest would be forgiven. Accordingly, $785,300
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, 2003 and 2002 is as follows (dollar amounts in thousands):
Estimated
Useful Life
in Years 2003 2002
------------- -------------------------------
Furniture, equipment, and leasehold 5 - 15 /
improvements lease term $ 87,476 $ 86,824
Software 3 8,437 8,115
Software development 5 22,698 20,031
------------- --------------
118,611 114,970
Accumulated depreciation and amortization 89,123 78,465
------------- --------------
Total furniture, equipment, and leasehold
improvements, net $ 29,488 $ 36,505
============= ==============
Total depreciation and amortization expense on furniture, equipment, and
leasehold improvements was $16.1 million, $19.8 million, and $21.0 million for
2003, 2002, and 2001, 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) 2003 2003 2003 2003 2003
- --------------------------------------------------------------------------------------------------- ---------------
Revenue $ 264,263 $ 273,167 $ 274,669 $ 283,931 $ 1,096,030
Gross profit 67,005 73,581 73,697 72,857 287,140
Income from continuing operations 2,933 6,463 7,166 5,273 21,835
Income (loss) from discontinued
operations, net of tax 5 (644) (1,177) (579) (2,395)
Loss on disposition of discontinued
operations, net of tax - - - (20,675) (20,675)
Net income (loss) 2,938 5,819 5,989 (15,981) (1,235)
Basic income per common share
from continuing operations 0.03 0.06 0.07 0.05 0.21
Basic income (loss) per common share
from discontinued operations,
net of tax 0.00 (0.01) (0.01) (0.01) (0.02)
Basic loss per common share from
disposition, net of tax - - - (0.20) (0.20)
Basic net income (loss) per
common share 0.03 0.05 0.06 (0.15) (0.01)
Diluted income per common share
from continuing operations 0.03 0.06 0.07 0.05 0.21
Diluted income (loss) per common share
from discontinued operations,
net of tax 0.00 (0.01) (0.01) (0.01) (0.02)
Diluted loss per common share from
disposition, net of tax - - - (0.19) (0.20)
Diluted net income (loss) per
common share 0.03 0.05 0.06 (0.15) (0.01)
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 $ 285,059 $ 279,867 $ 281,825 $ 272,405 $ 1,119,156
Gross profit 70,340 70,644 72,550 71,304 284,838
Income (loss) from continuing
operations before cumulative effect
of accounting change 377 4,115 5,285 (23,779) (14,002)
Income (loss) from discontinued
operations, net of tax 1,569 61 5 (225) 1,410
Cumulative effect of accounting
change, net of tax (553,712) - - - (553,712)
Net income (loss) (551,766) 4,176 5,290 (24,004) (566,304)
Basic income (loss) per common share
from continuing operations 0.00 0.04 0.05 (0.23) (0.14)
Basic income (loss) per common share
from discontinued operations,
net of tax 0.02 0.00 0.00 (0.00) 0.01
Basic loss per common share from
accounting change, net of tax (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
from continuing operations 0.00 0.04 0.05 (0.23) (0.14)
Diluted income (loss) per common share
from discontinued operations
net of tax 0.02 0.00 0.00 (0.00) 0.01
Diluted loss per common share from
accounting change, net of tax (5.37) - - - (5.49)
Diluted net income (loss) per
common share (5.35) 0.04 0.05 (0.23) (5.62)
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: professional services, IT
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 professional
services division provides expertise in a wide variety of disciplines including
accounting and finance, law, engineering, health care, and executive search. 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 IT solutions division
provides IT strategy consulting, design and branding, application development,
and integration. The professional services division's results for 2003, include
the results of the Company's health care staffing unit, which was acquired by
the Company in July 2002, and the results from the acquisitions of two legal
staffing businesses, which were acquired in February and August of 2003. The
Company evaluates segment performance based on revenues, gross profit, and
income before provision for income taxes. The Company does not allocate income
taxes, interest 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) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------
<s> <c> <c> <c>
Revenue
Professional services $ 514,100 $ 459,343 $ 560,976
IT services 511,739 575,312 770,830
IT solutions 70,191 84,501 168,809
------------ ------------ ------------
Total revenue $ 1,096,030 $ 1,119,156 $ 1,500,615
============ ============ ============
Gross profit
Professional services $ 147,365 $ 134,113 $ 171,786
IT services 114,704 122,294 168,317
IT solutions 25,071 28,431 54,731
------------ ------------ ------------
Total gross profit $ 287,140 $ 284,838 $ 394,834
============ ============ ============
Income (loss) from continuing operations before
provision for income taxes and cumulative
effect of accounting change
Professional services $ 26,708 $ 21,919 $ 40,588
IT services 6,310 10,639 32,811
IT solutions 2,499 (3,649) (21,483)
------------ ------------ ------------
35,517 28,909 51,916
Amortization of goodwill - - (37,312)
Recapture (charges) (a) 284 (25,132) -
Corporate other income (expense), net 553 (3,947) (9,199)
------------ ------------ ------------
Total income (loss) from continuing operations
before provision for income taxes and
cumulative effect of accounting change $ 36,354 $ (170) $ 5,405
============ ============ ============
Geographic Areas
Revenue
United States $ 705,914 $ 742,452 $ 1,075,486
U.K. 379,081 364,304 412,528
Other 11,035 12,400 12,601
------------ ------------ ------------
Total revenue $ 1,096,030 $ 1,119,156 $ 1,500,615
============ ============ ============
December 31,
-------------------------------
(dollar amounts in thousands) 2003 2002
- ----------------------------------------------------------------------------------------------
Assets
Professional services $ 379,959 $ 375,331
IT services 464,538 457,163
IT solutions 48,654 59,700
------------ ------------
893,151 892,194
Corporate - 780
------------ ------------
Total assets $ 893,151 $ 892,974
============ ============
Geographic Areas
Identifiable Assets
United States $ 633,810 $ 631,342
U.K. 250,640 254,169
Other 8,701 7,463
------------ ------------
Total assets $ 893,151 $ 892,974
============ ============
(a) Charges for 2002 include (1) $16.2 million impairment of minority
investment, and (2) 9.0 million exit costs. 2003 includes a $284,000
recapture relating to the settlement of abandoned real estate associated
with the 2002 exit costs.
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 by vacating and reorganizing
certain office space.
In 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 a
charge for 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 1.5 years.
The following table summarizes the activity of the charge for contract
termination costs from origination through December 31, 2003 by reportable
segment:
Professional IT IT
(dollar amounts in thousands) Services Services Solutions Total
- -------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2002 $ 431 $ 675 $ 7,861 $ 8,967
Costs paid or otherwise settled
during 2003 (223) (431) (3,620) (4,274)
Amounts recaptured during 2003 (39) (229) (16) (284)
----------- ----------- ----------- -----------
Balance as of December 31, 2003 $ 169 15 4,225 4,409
=========== =========== =========== ===========
18. Discontinued Operations
In December 2003, the Company sold certain operating assets and transferred
certain operating liabilities of its outplacement unit, Manchester. Revenue
generated from Manchester was $21.0 million, $35.8 million, and $47.9 million,
in 2003, 2002 and 2001, respectively. Income before taxes was a $3.7 million
loss, $2.2 million of income, and $9.7 million of income, for 2003, 2002 and
2001, respectively. The major classes of assets and liabilities as of December
31, 2003 and 2002 are as follows, with the remaining net assets of $109,000 at
December 31, 2003 being included in the line item 'Other' in the Current Assets
section of the Company's Consolidated Balance Sheet:
December 31,
-------------------------------
(dollar amounts in thousands) 2003 2002
- ----------------------------------------------------------------------------------------------
<s> <c> <c>
Assets
Accounts receivable, net $ 3,071 $ 5,390
Goodwill - 37,312
Other assets 332 2,995
------------ ------------
Total assets 3,403 45,697
------------ ------------
Liabilities
Accounts payable and accrued liabilities 2,161 3,228
Other liabilities 1,133 5,258
------------ ------------
Total liabilities $ 3,294 $ 8,486
============ ============
Included in the 'Accounts payable and accrued liabilities' line item above
are amounts for exit costs associated with abandoned real estate. At December
31, 2003 and 2002, there was $1.1 million and $732,000 of contract termination
costs, respectively.
19. Equity Investment
The Company had a minority investment in a privately held company that was
recorded as a non-current asset. 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. In 2002, this privately held company recapitalized at terms
which diluted the value of the Company's investment. 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 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.
ITEM 9A. CONTROLS AND PROCEDURES
Our management, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange Act Rule 13(a)-15(e))
as of the end of the period covered by this Annual Report on Form 10-K. Based on
that evaluation, the Chief Executive officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
to provide reasonable assurance that the objectives of disclosure controls and
procedures are met.
There have been no changes in the Company's internal control structure over
financial reporting (as defined in Exchange Act Rule 13(a)-15(f)) that occurred
during the Company's last fiscal quarter that has materially affected or is
reasonably likely to materially affect the Company's internal controls over
financial reporting.
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), Certain Relationships and Related Transactions (Item 13),
Principal Accountant Fees and Services (Item 14), and the Audit Committee
Charter 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.
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, 2003 and 2002
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002, and 2001
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001
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.
On October 28, 2003, we furnished a Report on Items 7 and 12 of Form
8-K pertaining to the issuance of a press release announcing our financial
results for the three and nine months ended September 30, 2003. This Form
8-K is not deemed incorporated by reference into any of our filings with
the Securities and Exchange Commission.
(c) Exhibits.
3.1 Amended and restated Articles of Incorporation. (9)
3.2 Amended and Restated Bylaws. (12)
4 Form of stock certificate (13)
10.1 Modis Professional Services, Inc. (now MPS Group, Inc.) 2001 Employee
Stock Purchase Plan. (8) ^
10.2 AccuStaff Incorporated (now MPS Group, Inc.) amended and restated
Non-Employee Director Stock Plan. (3)
10.3 Form of Non-Employee Director Stock Option Award Agreement, as
amended. (5)
10.4 Profit Sharing Plan. (1) ^
10.5 Revolving Credit Agreement by and between the Company and The Its
Material Domestic Subsidiaries and Wachovia Bank, National Association
as Administration Agent and certain lenders named therein, dated
November 21, 2003.
10.6 Modis Professional Services, Inc. (now MPS Group, Inc.) Amended
and Restated Stock Option Plan. (7) ^
10.7 Form of Stock Option Agreement under Modis Professional
Services, Inc. (now MPS Group, Inc.) amended and restated 1995
Stock Option Plan. (7) ^
10.8 Chairman Employment Agreement with Derek E. Dewan. (6) ^
10.8(a) Restricted Stock Agreement with Derek E. Dewan. (6) ^
10.9 Amended and Restated Executive Employment Agreement with
Timothy D. Payne. (6) ^
10.9(a) Restricted Stock Agreement with Timothy D. Payne. (10) ^
10.10 Amended and Restated Executive Employment Agreement with
Robert P. Crouch. (6) ^
10.10(a)Restricted Stock Agreement with Robert P. Crouch. (10) ^
10.11 Modis Professional Services, Inc. (now MPS Group, Inc.) Executive
Option Plan (2) ^
10.12 Senior Executive Annual Incentive Plan. (4) ^
10.13 Form of Director's Indemnification Agreement. (5)
10.14 Form of Officer's Indemnification Agreement. (5)
10.15 Form of Award Notification under the Modis Professional Services, Inc.
(now MPS Group, Inc.) Senior Executive Annual Incentive Plan. (7 ^
10.16 Amended and Restated Executive Deferred Compensation Plan. (12) ^
10.17 Form of Executive Employment Agreement entered into by Gregory D.
Holland, Tyra H. Tutor, and Richard L. White. (12) ^
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
24 Form of Power of Attorney (11).
31.1 Certification of Timothy D. Payne pursuant to Rule 13a-14a.
31.2 Certification of Robert P. Crouch pursuant to Rule 13a-14a.
32.1 Certification of Timothy D. Payne pursuant to 18 U.S.C. Section 1350.
32.2 Certification of Robert P. Crouch pursuant to 18 U.S.C. Section 1350.
^ This Exhibit is a management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the Company's Registration on Form S-1 (No.
33-78906).
(2) Incorporated by reference to the Company's Registration on Form S-8 (No.
33-88329).
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed August 16, 1999.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed November 15, 1999.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K filed
March 30, 2000.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed May 16, 2001.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed August 8, 2001.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed May 14, 2002.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K filed
March 26, 2002.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed November 14, 2002.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K filed
March 31, 2003.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed May 14, 2003.
(13) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 333-106855) filed July 7, 2003.
EXHIBIT INDEX
10.5 Revolving Credit Agreement by and between the Company and The Its
Material Domestic Subsidiaries and Wachovia Bank, National Association
as Administration Agent and certain lenders named therein, dated
November 21, 2003.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
31.1 Certification of Timothy D. Payne pursuant to Rule 13a-14 and 15e-14.
31.2 Certification of Robert P. Crouch pursuant to Rule 13a-14 and 15e-14.
32.1 Certification of Timothy D. Payne pursuant to 18 U.S.C. Section 1350.
32.2 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 15, 2004
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 15, 2004
Timothy D. Payne Executive Officer and
Director
/s/ Robert P. Crouch Senior Vice President, Chief March 15, 2004
Robert P. Crouch Financial Officer, Treasurer,
and Chief Accounting Officer
/s/ Derek E. Dewan * Chairman of the Board March 15, 2004
Derek E. Dewan
/s/ Michael D. Abney * Director March 15, 2004
Michael D. Abney
Director March 15, 2004
T. Wayne Davis
/s/ Arthur B. Laffer * Director March 15, 2004
Arthur B. Laffer
Director March 15, 2004
Richard D. Heckmann
/s/ William M. Isaac * Director March 15, 2004
William M. Isaac
/s/ John R. Kennedy * Director March 15, 2004
John R. Kennedy
/s/ Darla D. Moore * Director March 15, 2004
Darla D. Moore
/s/ Peter J. Tanous * Director March 15, 2004
Peter J. Tanous
/s/ Robert P. Crouch *By Attorney-in-Fact March 15, 2004
Robert P. Crouch