10-Q 1 asciiform10qq201.txt FORM 10-Q FOR THE PERIOD ENDED 6/30/01 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 0-24484 Modis Professional Services, Inc. (Exact name of Registrant as specified in its charter) Florida 59-3116655 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1 Independent Drive Jacksonville, Florida 32202 (Address of principal executive offices) (Zip code) (904) 360-2000 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. July 31, 2001. Common Stock, $0.01 par value Outstanding: 97,742,653 (No. of shares) FORWARD LOOKING STATEMENTS This report on Form 10-Q contains forward-looking statements that are subject to certain risks, uncertainties or assumptions and may be affected by certain other factors, including but not limited to the specific factors discussed in Part I, Item 2 under 'Liquidity and Capital Resources', 'Seasonality', and 'Factors Which May Impact Future Results and Financial Condition'. In some cases, you can identify forward-looking statements by terminology such as 'will,' 'may,' 'should,' 'could,' 'expects,' 'plans,' 'indicates,' 'projects,' 'anticipates,' 'believes,' 'estimates,' 'appears,' 'predicts,' 'potential,' 'continues,' 'would,' or 'become' or the negative of these terms or other comparable terminology. In addition, except for historical facts, all information provided in Part I, Item 3, under 'Quantitative and Qualitative Disclosures About Market Risk' should be considered forward-looking statements. Should one or more of these risks, uncertainties or other factors materialize, or should underlying assumptions prove incorrect, actual results, performance or achievements of the Company may vary materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are based on beliefs and assumptions of the Company's management and on information currently available to such management. Forward looking statements speak only as of the date they are made, and the Company undertakes no obligation to update publicly any of them in light of new information or future events. Undue reliance should not be placed on such forward-looking statements, which are based on current expectations. Forward-looking statements are not guarantees of performance.
Modis Professional Services, Inc. and Subsidiaries Index Part I Financial Information Item 1 Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000.............................................................................. 3 Unaudited Condensed Consolidated Statements of Income for the Three and Six Months ended June 30, 2001 and 2000....................................................................... 4 Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2001 and 2000....................................................................... 5 Unaudited Notes to Condensed Consolidated Financial Statements......................................... 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 11 Item 3 Quantitative and Qualitative Disclosures About Market Risks............................................ 18 Part II Other Information Item 1 Legal Proceedings...................................................................................... 20 Item 2 Changes in Securities and Use of Proceeds.............................................................. 20 Item 3 Defaults Upon Senior Securities........................................................................ 20 Item 4 Submission of Matters to a Vote of Security Holders.................................................... 20 Item 5 Other Information...................................................................................... 21 Item 6 Exhibits and Reports on Form 8-K....................................................................... 21 Signatures............................................................................................. 22 Exhibits
2 Part I. Financial Information Item 1. Financial Statements Modis Professional Services, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
June 30, December 31, (dollar amounts in thousands except per share amounts) 2001 2000 ----------------------------------------------------------------------------------------------------------------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 16,907 $ 5,013 Accounts receivable, net 307,376 340,827 Prepaid expenses 11,686 9,404 Deferred income taxes 7,477 6,687 Other 10,906 10,376 ---------------------------------- Total current assets 354,352 372,307 Furniture, equipment and leasehold improvements, net 55,863 55,711 Goodwill, net 1,183,256 1,199,849 Other assets, net 26,301 25,693 ---------------------------------- Total assets $ 1,619,772 $ 1,653,560 ================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 6,836 $ 24,719 Accounts payable and accrued expenses 51,500 50,648 Accrued payroll and related taxes 40,134 41,540 Income taxes payable 871 7,012 ---------------------------------- Total current liabilities 99,341 123,919 Notes payable, long-term portion 174,000 194,000 Deferred income taxes 37,726 28,584 Other 4,740 3,839 ---------------------------------- Total liabilities 315,807 350,342 ---------------------------------- Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued and outstanding - - Common stock, $.01 par value; 400,000,000 shares authorized 97,742,511 and 96,522,867 shares issued and outstanding, respectively 977 965 Additional contributed capital 593,130 587,857 Retained earnings 731,741 721,742 Accumulated other comprehensive loss (16,687) (6,945) Deferred stock compensation (5,196) (401) ---------------------------------- Total stockholders' equity 1,303,965 1,303,218 ---------------------------------- Total liabilities and stockholders' equity $ 1,619,772 $ 1,653,560 ==================================
See accompanying notes to condensed consolidated financial statements. 3 Modis Professional Services, Inc. and Subsidiaries Condensed Consolidated Statements of Income
Three Months Ended Six Months Ended ------------------------------- ------------------------------- June 30, June 30, June 30, June 30, (dollar amounts in thousands except per share amounts) 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------------------------------ (unaudited) (unaudited) (unaudited) (unaudited) Revenue $ 409,639 $ 464,450 $ 854,049 $ 921,861 Cost of revenue 294,336 328,334 615,031 658,234 ------------- ------------- -------------- ------------- Gross profit 115,303 136,116 239,018 263,627 ------------- ------------- -------------- ------------- Operating expenses: General and administrative 90,915 96,814 185,421 185,623 Depreciation 5,385 4,085 10,753 7,721 Amortization 9,702 8,942 19,301 17,842 ------------- ------------- -------------- ------------- Total operating expenses 106,002 109,841 215,475 211,186 ------------- ------------- -------------- ------------- Income from operations 9,301 26,275 23,543 52,441 Other expense, net 2,207 5,787 5,384 10,436 ------------- ------------- -------------- ------------- Income before provision for income taxes 7,094 20,488 18,159 42,005 Provision for income taxes 3,513 8,093 8,160 16,592 ------------- ------------- -------------- ------------- Net income $ 3,581 $ 12,395 $ 9,999 $ 25,413 ============= ============= ============== ============= Basic net income per common share $ 0.04 $ 0.13 $ 0.10 $ 0.26 ============= ============= ============== ============= Average common shares outstanding, basic 98,018 96,699 97,596 96,627 ============= ============= ============== ============= Diluted net income per common share $ 0.04 $ 0.13 $ 0.10 $ 0.26 ============= ============= ============== ============= Average common shares outstanding, diluted 98,193 97,207 97,776 98,145 ============= ============= ============== =============
See accompanying notes to condensed consolidated financial statements. 4 Modis Professional Services, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows
Six months ended June 30, ------------------------------ (dollar amounts in thousands except per share amounts) 2001 2000 ------------------------------------------------------------------------------------------------------------ (unaudited) (unaudited) Cash flows from operating activities: Net income $ 9,999 $ 25,413 Adjustments to net income to net cash provided by by operating activities: Depreciation 10,753 7,721 Amortization 19,301 17,842 Deferred income taxes 8,882 6,648 Deferred compensation 462 - Changes in certain assets and liabilities: Accounts receivable 28,416 (35,806) Prepaid expenses and other assets (2,282) (2,173) Accounts payable and accrued expenses (2,770) 20,077 Accrued payroll and related taxes (1,136) 1,657 Other, net (1,728) 116 --------------- --------------- Net cash provided by operating activities 69,897 41,495 --------------- --------------- Cash flows from investing activities: Purchase of furniture, equipment and leasehold improvements, net of disposals (10,905) (13,784) Purchase of businesses, including additional earn-outs on acquisitions, net of cash acquired (3,807) (110,643) --------------- --------------- Net cash used in investing activities (14,712) (124,427) --------------- --------------- Cash flows from financing activities: Proceeds from stock options exercised 28 4,840 (Repayments) borrowings on indebtedness, net (37,883) 84,171 --------------- --------------- Net cash (used in) provided by financing activities (37,855) 89,011 --------------- --------------- Effect of exchange rate changes on cash and cash equivalents (5,436) 1,782 Net increase in cash and cash equivalents 11,894 7,861 Cash and cash equivalents, beginning of period 5,013 8,526 --------------- --------------- Cash and cash equivalents, end of period $ 16,907 $ 16,387 =============== ===============
See accompanying notes to condensed consolidated financial statements. 5 Modis Professional Services, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) (dollar amounts in thousands except for per share amounts) 1. Basis of Presentation. The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, certain information and footnote disclosures usually found in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Form 10-K, as filed with the SEC on April 2, 2001. The accompanying condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position and results of operations for the interim periods presented. The results of operations for an interim period are not necessarily indicative of the results of operations for a full fiscal year. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ('SFAS') No. 141 'Business Combinations' and No. 142, 'Goodwill and Other Intangible Assets.' SFAS No. 141 and SFAS No. 142 establish accounting and reporting standards for business combinations and for goodwill and intangible assets resulting from business combinations, respectively. SFAS No. 141 prohibits the use of the pooling-of-interests method of accounting for business combinations and applies to all business combinations initiated after June 30, 2001. SFAS No. 142 discontinues the periodic amortization of goodwill and requires impairment to be tested annually. Further, SFAS No. 142 replaces the measurement guidelines for impairment, whereby goodwill not considered impaired under previous accounting literature may be considered impaired under SFAS No. 142. SFAS No. 142 is effective for all fiscal years beginning after December 15, 2001, and cannot be applied retroactively. SFAS No. 142 is to be applied to all recorded goodwill and intangible assets as of the date of adoption. The Company has not yet quantified the impact of adopting SFAS No. 142 in the first quarter of 2002. 2. Comprehensive Income The Company discloses other comprehensive income in accordance with Statement of Financial Accounting Standards ("SFAS") No. 130, 'Reporting Comprehensive Income'. Comprehensive income includes unrealized gains and losses on foreign currency translation adjustments and changes in the fair value of certain derivative financial instruments which qualify for hedge accounting. A summary of comprehensive income for the three and six months ended June 30, 2001 and 2000 is as follows:
Three Months Ended Six Months Ended ------------------------------- ------------------------------- June 30, June 30, June 30, June 30, 2001 2000 2001 2000 -------------------------------------------------------------------------------------------------------------------- Net income $ 3,581 $ 12,395 $ 9,999 $ 25,413 Unrealized (loss) gain on foreign currency translation adjustments (a) (679) 440 (8,877) (1,444) Unrealized loss on derivative instruments, net of deferred taxes (245) - (865) - ------------- ------------- -------------- ------------- Total other comprehensive (loss) income (924) 440 (9,742) (1,444) Comprehensive income $ 2,657 $ 12,835 $ 257 $ 23,969 ============= ============= ============== =============
(a) The currency translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. 6 3. Derivative Instruments and Hedging Activities In the first quarter of 2001, the Company adopted SFAS No. 133, 'Accounting for Derivative Instruments and Hedging Activities'. The adoption of SFAS No. 133 did not have an initial impact on the Company as the Company did not hold any derivatives prior to fiscal 2001. Pursuant to SFAS No. 133, on a date the derivative contract is entered into, the Company designates the derivative as to its type and recognizes the fair value of the derivative on the balance sheet. In fiscal 2001, the Company has engaged in derivatives classified as cash flow hedges, and changes in the fair value of highly effective derivatives are recorded in 'Accumulated other comprehensive loss' on the balance sheet. The Company formally documents all relations between hedging instruments and the hedged items, as well as its risk-management objectives and strategy for undertaking hedging transactions. The Company formally assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. The Company has currently and in the future may enter into interest rate swap agreements in the normal course of business to manage and reduce the risk inherent in interest rate fluctuations. Interest rate swap agreements are considered hedges of specific borrowings and differences received under the swap agreements are recognized as adjustments to interest expense. On February 12, 2001, the Company entered into an interest rate swap agreement to convert certain floating rate debt outstanding under the Company's credit facilities into fixed rate debt by fixing the base rate, as defined by the applicable credit facility. The actual interest rate on the credit facilities is equal to this base rate plus an additional spread, determined by the Company's financial performance. This agreement had an initial balance of $110.4 million as of February 12, 2001, which amortizes to $55.7 million on January 2, 2003 in correlation with the Company's estimate of cash flow needs. On March 2, 2001, the Company entered into an additional interest rate swap agreement to convert an additional $25.0 million into fixed rate debt. The agreements, which were approved by the Board of Directors, had a total notional amount of $136.2 million at June 30, 2001, with underlying rates ranging from 4.85% to 5.185%. Hedging interest rate exposure through the use of swaps are specifically contemplated to manage risk in keeping with management policy. The Company does not utilize derivatives for speculative purposes. These swaps are transaction-specific so that a specific debt instrument determines the amount, maturity and specifics of each swap. 4. Stockholders' Equity In January 2001, the Company adopted the 2001 Voluntary Stock Option Exchange Plan (the 'Option Exchange Plan') in an effort to improve the retention and incentive aspects of the Company's 1995 Plan, and to provide a mechanism to return shares to the 1995 Plan for future issuance. All current employees as of February 12, 2001, who then held options under the Plan or who then held special grants received outside the 1995 Plan since the 1995 Plan was adopted were eligible to participate in the Option Exchange Plan. The Option Exchange Plan allowed eligible option holders to voluntarily cancel existing options in exchange for new options to be issued no earlier than six months and one day following termination of existing options. The exercise price of the new options will be the market price on the date of re-issue. Vested options that are cancelled will be re-granted on a one-for-one basis and will be completely vested upon re-grant. Unvested options that are cancelled will be 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 expects the Option Exchange Plan to be completed in the third quarter. The Company does not expect to incur any compensation charges in connection with the Option Exchange Plan. For further discussion on the Option Exchange Plan see Form 8-K filed by the Company on January 25, 2001. In January 2001, the Company's Board of Directors issued restricted stock grants of 200,000 shares and 50,000 shares to the Company's President and current Chief Executive Officer and the Company's Chief Financial Officer, respectively. In March 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 $5.26 million in total deferred compensation expense which will be amortized on a straight line basis over the vesting period of the grants. 7 5. Net Income per Common Share The calculation of basic net income per common share and diluted net income per common share is presented below:
Three Months Ended Six Months Ended -------------------------------- ------------------------------- June 30, June 30, June 30, June 30, 2001 2000 2001 2000 -------------------------------------------------------------------------------------------------------------------------------- Basic income per common share computation: Net income $ 3,581 $ 12,395 $ 9,999 $ 25,413 ============= ============= ============= ============= Average common shares outstanding 98,018 96,699 97,596 96,627 ============= ============= ============= ============= Basic net income per common share $ 0.04 $ 0.13 $ 0.10 $ 0.26 ============= ============= ============= ============= Diluted income per common share computation: Net income $ 3,581 $ 12,395 $ 9,999 $ 25,413 ============= ============= ============= ============= Basic average common shares outstanding 98,018 96,699 97,596 96,627 Incremental shares from assumed exercise of stock options 175 508 180 1,518 ------------- ------------- ------------- ------------ Diluted average common shares outstanding 98,193 97,207 97,776 98,145 ============= ============= ============= ============ Diluted net income per common share $ 0.04 $ 0.13 $ 0.10 $ 0.26 ============== ============= ============= ===========
Options to purchase 3,735,928 and 6,061,122 shares of common stock that were outstanding during the three and six months ended June 30, 2001, respectively, were not included in the computation of diluted earnings per share as the exercise prices of these options were greater than the average market price of the common shares. 6. Commitments and Contingencies Litigation The Company is a party to a number of lawsuits and claims arising out of the ordinary conduct of its business. In the opinion of management, based on the advice of in-house and external legal counsel, the lawsuits and claims pending are not likely to have a material adverse effect on the Company, its financial position, its results of operations, or its cash flows. 7. Segment Reporting The Company discloses segment information in accordance with SFAS No. 131, 'Disclosure About Segments of an Enterprise and Related Information,' which requires companies to report selected segment information on a quarterly basis and to report certain entity-wide disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports revenues. The Company has three reportable segments: professional services, e-Business solutions and information technology (IT) services. The Company's reportable segments are strategic divisions that offer different services and are managed separately as each division requires different resources and marketing strategies. The professional services division provides experienced expertise in a wide variety of disciplines including accounting and finance, law, engineering and technical, science, career management, executive search, and human resource consulting. The e-Business solutions division, operating under the brand Idea Integration, provides e-Business strategy consulting, design and branding, application development, and integration. The IT services division, operating under the brand Modis, offers value-added solutions such as IT project support and staffing, recruitment of full-time positions, project-based solutions, supplier management solutions, and on-site recruiting support. 8 The Company evaluates segment performance based on revenues, gross profit and income before provision for income taxes. The Company does not allocate income taxes or unusual items to the segments. The following table summarizes segment and geographic information:
Three Months Ended Six Months Ended ------------------------------- -------------------------------- June 30, June 30, June 30, June 30, 2001 2000 2001 2000 ----------------------------------------------------------------------------------------------------------------------- Revenue Professional services $ 158,315 $ 162,732 $ 328,499 $ 323,695 e-Business solutions 48,559 60,554 103,276 113,335 IT services 202,765 241,164 422,274 484,831 ------------ ------------ ------------ ------------ Total revenue $ 409,639 $ 464,450 $ 854,049 $ 921,861 ============ ============ ============ ============ Gross profit Professional services $ 51,912 $ 54,291 $ 108,863 $ 106,951 e-Business solutions 18,735 27,916 36,838 50,720 IT services 44,656 53,909 93,317 105,956 ------------ ------------ ------------ ------------ Total gross profit $ 115,303 $ 136,116 $ 239,018 $ 263,627 ============ ============ ============ ============ Income before provision for income taxes Professional services $ 11,098 $ 15,638 $ 26,176 $ 30,707 e-Business solutions (7,119) 3,312 (14,528) 5,611 IT services 5,322 7,325 11,895 16,123 ------------ ------------ ------------ ------------ 9,301 26,275 23,543 52,441 Corporate interest and other income (2,207) (5,787) (5,384) (10,436) ------------ ------------ ------------ ------------ Total income before provision for income taxes $ 7,094 $ 20,488 $ 18,159 $ 42,005 ============ ============ ============ ============ Geographic Areas Revenues United States $ 303,162 $ 357,620 $ 634,786 $ 698,613 U.K. 103,336 104,003 213,106 217,578 Other 3,141 2,827 6,157 5,670 ------------ ------------ ------------ ------------ Total $ 409,639 $ 464,450 $ 854,049 $ 921,861 ============ ============ ============ ============ June 30, December 31, 2001 2000 ---------------------------------------------------------------------------------------------- Assets Professional services $ 464,157 $ 454,127 e-Business solutions 327,008 331,732 IT services 813,928 851,992 ------------ ------------ 1,605,093 1,637,851 Corporate 14,679 15,709 ------------ ------------ Total assets $ 1,619,772 $ 1,653,560 ============ ============ Geographic Areas Identifiable Assets United States $ 1,186,512 $ 1,223,932 U.K. 413,020 408,339 Other 20,240 21,289 ------------ ------------ Total $ 1,619,772 $ 1,653,560 ============ ============
9 8. Income Taxes The Company is subject to periodic review by federal, state and local taxing authorities in the ordinary course of business. During the three months ended June 30, 2001, the Company was notified by the Internal Revenue Service that certain prior year income tax returns will be examined. As part of this examination, the tax benefit associated with an investment in a subsidiary that the Company recognized in 2000 will also be reviewed. The impact or adjustment, if any, as a result of this examination cannot be reasonably estimated at this time. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Modis Professional Services, Inc. ('MPS' or the 'Company') is a global provider of human capital solutions including professional staffing, e-Business and systems integration, information technology (IT) resource management, career management consulting, and knowledge worker e-procurement. MPS' solutions enable customers and clients to effectively locate, retain, and deploy strategic knowledge worker resources in the areas of information technology, accounting and finance, law, engineering and technical, and science. MPS consists of three divisions: the professional services division; the e-Business solutions division, operating under the brand Idea Integration; and the information technology services division, operating under the brand Modis. The following detailed analysis of operations should be read in conjunction with the 2000 Consolidated Financial Statements and related notes included in the Company's Form 10-K filed April 2, 2001. THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 Revenue. Revenue decreased $54.9 million, or 11.8%, to $409.6 million in the three months ended June 30, 2001, from $464.5 million in the year earlier period. The decrease was attributable primarily to a decrease in revenue for Modis which accounted for 49.5% and 51.9% of the Company's total revenue for the three months ended June 30, 2001 and 2000, respectively. Revenue in Modis decreased $38.4 million, or 15.9%, to $202.8 million in the three months ended June 30, 2001, from $241.2 million the year earlier period. This decrease in Modis' revenue was primarily attributable to the diminished demand for information technology services. The Company's customers continue to experience a constrained ability to spend on information technology initiatives due to uncertainties relating to the state of the economy. The Company has experienced a decrease in billable headcount for Modis subsequent to the three months ended June 30, 2001. This decrease will result in a lower level of revenue from Modis if this trend continues. Revenue in Idea Integration decreased $12.0 million, or 19.8%, to $48.6 million in the three months ended June 30, 2001, from $60.6 million in the year earlier period. This decrease in Idea Integration's revenue was primarily attributable to weak demand for e-Business consulting services which is being intensified by the uncertainties relating to the state of the economy. The Company has experienced a decrease in billable headcount for Idea Integration subsequent to the three months ended June 30, 2001. This decrease will result in a lower level of revenue from Idea Integration if this trend continues. Revenue in the professional services division decreased $4.4 million, or 2.7%, to $158.3 million in the three months ended June 30, 2001, from $162.7 million in the year earlier period. This decrease in the professional services division's revenue was primarily attributable to the diminished demand for knowledge worker resources in the services provided by the division. The professional services division operates primarily through five operating units consisting of the accounting and finance, legal, engineering/technical, career management and consulting and scientific units which contributed 40.4%, 12.2%, 34.6%, 9.1% and 3.7%, respectively, of the division's revenue by group during the three months ended June 30, 2001, as compared to 40.5%, 12.6%, 34.5%, 8.3% and 4.1%, respectively, during the year earlier period. The Company has experienced a decrease in billable headcount for the professional services division subsequent to the three months ended June 30, 2001. This decrease will result in a lower level of revenue from the division if this trend continues. Gross Profit. Gross profit decreased $20.8 million or 15.3% to $115.3 million in the three months ended June 30, 2001, from $136.1 million in the year earlier period. Gross margin decreased to 28.1% in the three months ended June 30, 2001, from 29.3% in the year earlier period. The gross margin in Idea Integration decreased to 38.6% in the three months ended June 30, 2001, from 46.1% in the year earlier period. Consultant utilization within Idea Integration decreased as a result of (1) Idea Integration's business model utilizing salaried consultants and (2) the weak demand for e-Business consulting services. The Company addressed consultant utilization within Idea Integration through the downsizing of its consultant base. Additionally, the gross profit generated from Idea Integration, which historically maintains the highest gross margin amongst the three divisions, decreased to 16.2% of the Company's total gross profit for the three months ended June 30, 2001, from 20.5% in the year earlier period. 11 The gross margin in Modis decreased slightly to 22.0% in the three months ended June 30, 2001, from 22.4% in the year earlier period. The decrease in gross margin in Modis is attributable to a lower level of direct hire and permanent placement fees, which generate a higher margin, in the three months ended June 30, 2001 as compared to the year earlier period. As a percentage of revenue, Modis' direct hire and permanent placement fees decreased to 0.5% of revenue in the three months ended June 30, 2001 from 1.2% in the year earlier period. The gross margin in the professional services division decreased to 32.8% in the three months ended June 30, 2001, from 33.4% in the year earlier period. The decrease in gross margin in the professional services division is attributable to a lower level of direct hire and permanent placement fees in the three months ended June 30, 2001 as compared to the year earlier period. As a percentage of revenue, the division's direct hire and permanent placement fees decreased to 6.6% of revenue in the three months ended June 30, 2001 from 8.8% in the year earlier period. Operating expenses. Operating expenses decreased $3.8 million or 3.5% to $106.0 million in the three months ended June 30, 2001, from $109.8 million in the year earlier period. The Company's general and administrative ("G&A") expenses decreased $5.9 million or 6.1% to $90.9 million in the three months ended June 30, 2001, from $96.8 million in the year earlier period. The overall decrease in G&A expenses is attributable to Modis. Modis' G&A expenses decreased $7.9 million, or 20.0%, to $31.6 million in the three months ended June 30, 2001, from $39.5 million in the year earlier period. As a percentage of revenue, Modis' G&A expenses decreased to 15.6% in the three months ended June 30, 2001, from 16.4% in the year earlier period. The decrease in Modis' G&A expenses is associated with the decrease in revenue for the three months ended June 30, 2001, and cost reduction initiatives implemented within Modis in both the first quarter of 2001 and the fourth quarter of 2000. Idea Integration's G&A expenses increased $0.5 million, or 2.2%, to $22.8 million in the three months ended June 30, 2001, from $22.3 million in the year earlier period. As a percentage of revenue, Idea Integration's G&A expenses increased to 47.0% in the three months ended June 30, 2001, from 36.8% in the year earlier period. The increase in Idea Integration's G&A expenses was related primarily to an incremental $7.1 million provision for uncollectible accounts and to a lesser extent severance costs associated with reductions in its workforce in the second quarter of 2001. The professional services division's G&A expenses increased $1.4 million, or 4.0%, to $36.4 million in the three months ended June 30, 2001, from $35.0 million in the year earlier period. As a percentage of revenue, the division's G&A expenses increased to 23.0% in the three months ended June 30, 2001, from 21.5% in the year earlier period. The increase in the professional services division's G&A expenses was related to an increase in the level of spending to establish the corporate infrastructure in the division. During the second quarter of 2001, the Company eliminated many of these duplicative corporate infrastructure responsibilities in the division, integrating these efforts into the MPS corporate structure. Integrating these efforts are expected to lower the level of spending in the professional services division for the remainder of fiscal 2001. Income from operations. Income from operations decreased $17.0 million, or 64.6%, to $9.3 million in the three months ended June 30, 2001, from $26.3 million in the year earlier period. The decrease in operating income is due to the lower contribution of operating income primarily from Idea Integration and to a lesser extent the professional services division and Modis. Income from operations for Idea Integration decreased $10.4 million, to a $7.1 million loss in the three months ended June 30, 2001, from income of $3.3 million in the year earlier period. Income from operations for the professional services division decreased $4.5 million, or 28.8%, to $11.1 million in the three months ended June 30, 2001, from $15.6 million in the year earlier period. Income from operations for Modis decreased $2.0 million, or 27.4 %, to $5.3 million in the three months ended June 30, 2001, from $7.3 million in the year earlier period. For the Company as a whole, income from operations as a percentage of revenue decreased to 2.3% in the three months ended June 30, 2001, from 5.7% in the year earlier period. Other expense, net. Other expense, net consists primarily of interest expense related to borrowings under the Company's credit facilities and notes issued in connection with acquisitions, net of interest income related to investment income from (1) certain investments owned by the Company and (2) cash on hand. Interest expense decreased $3.7 million, or 58.7%, to $2.6 million in the three months ended June 30, 2001, from $6.3 million in the year earlier period. The decrease in interest expense is related to the lower level of borrowings under the Company's credit facilities during the second quarter of 2001. Interest expense was offset by $0.4 million of interest and other income in the three 12 months ended June 30, 2001, as compared to $0.5 million in the year earlier period. Income Taxes. The Company's effective tax rate increased to 49.5% in the three months ended June 30, 2001, as compared to 39.5% in the year earlier period, due to the increased effect of non-deductible expense items on a lower level of income in the three months ended June 30, 2001. Net Income. As a result of the foregoing, net income decreased $8.8 million, or 71.0%, to $3.6 million in the three months ended June 30, 2001, from $12.4 million in the year earlier period. Net income as a percentage of revenue decreased to 0.9% in the three months ended June 30, 2001, from 2.7% in the year earlier period. As a result of the aforementioned revenue trends in each of the Company's divisions, the Company anticipates its net income will be negatively impacted during the remainder of fiscal 2001 as compared to the level of net income produced during the three months ended June 30, 2001. SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 Revenue. Revenue decreased $67.9 million, or 7.4%, to $854.0 million in the six months ended June 30, 2001, from $921.9 million in the year earlier period. The decrease was attributable primarily to a decrease in revenue for Modis which accounted for 49.4% and 52.6% of the Company's total revenue for the six months ended June 30, 2001 and 2000, respectively. Revenue in Modis decreased $62.5 million, or 12.9%, to $422.3 million in the six months ended June 30, 2001, from $484.8 million the year earlier period. This decrease in Modis' revenue was primarily attributable to the diminished demand for information technology services. The Company's customers continue to experience a constrained ability to spend on information technology initiatives due to uncertainties relating to the state of the economy. The Company has experienced a decrease in billable headcount for Modis subsequent to the six months ended June 30, 2001. This decrease will result in a lower level of revenue from Modis if this trend continues. Revenue in Idea Integration decreased $10.0 million, or 8.8%, to $103.3 million in the six months ended June 30, 2001, from $113.3 million in the year earlier period. This decrease in Idea Integration's revenue was primarily attributable to weak demand for e-Business consulting services which is being intensified by the uncertainties relating to the state of the economy. The Company has experienced a decrease in billable headcount for Idea Integration subsequent to the six months ended June 30, 2001. This decrease will result in a lower level of revenue from Idea Integration if this trend continues. Revenue in the professional services division increased $4.8 million, or 1.5%, to $328.5 million in the six months ended June 30, 2001, from $323.7 million in the year earlier period. The increase in revenue is due to internal growth. The professional services division operates primarily through five operating units consisting of the accounting and finance, legal, engineering/technical, career management and consulting and scientific units which contributed 40.5%, 12.3%, 34.7%, 8.8% and 3.7%, respectively, of the division's revenue by group during the six months ended June 30, 2001, as compared to 40.4%, 12.9%, 33.9%, 8.6% and 4.2%, respectively, during the year earlier period. Contrary to the year-over-year results, the professional services division is experiencing a diminished demand for knowledge worker resources in the services provided by its operating units. Further, the Company has experienced a decrease in billable headcount for the professional services division subsequent to the six months ended June 30, 2001. This decrease will result in a lower level of revenue from the division if this trend continues. Gross Profit. Gross profit decreased $24.6 million or 9.3% to $239.0 million in the six months ended June 30, 2001, from $263.6 million in the year earlier period. Gross margin decreased to 28.0% in the six months ended June 30, 2001, from 28.6% in the year earlier period. This decrease in gross margin was attributable to Idea Integration. The gross margin in Idea Integration decreased to 35.7% in the six months ended June 30, 2001, from 44.8% in the year earlier period. Consultant utilization within Idea Integration decreased as a result of (1) Idea Integration's business model utilizing salaried consultants and (2) the weak demand for e-Business consulting services. The Company addressed consultant utilization within Idea Integration through the downsizing of its consultant base. Additionally, the gross profit generated from Idea Integration, which historically maintains the highest gross margin amongst the three divisions, decreased to 15.4% of the Company's total gross profit for the six months ended June 30, 2001, from 19.2% in the year earlier period. The gross margin in Modis increased to 22.1% in the six months ended June 30, 2001, from 21.9% in the year earlier period. The gross margin in the professional services division increased slightly to 33.1% in the six months ended June 30, 2001, from 33.0% in the year earlier period. 13 Operating expenses. Operating expenses increased $4.3 million or 2.0% to $215.5 million in the six months ended June 30, 2001, from $211.2 million in the year earlier period. The Company's G&A expenses decreased $0.2 million or 0.1% to $185.4 million in the six months ended June 30, 2001, from $185.6 million in the year earlier period. The overall decrease in G&A expenses is attributable to Modis. Modis' G&A expenses decreased $10.1 million, or 13.3%, to $66.0 million in the six months ended June 30, 2001, from $76.1 million in the year earlier period. As a percentage of revenue, Modis' G&A expenses decreased slightly to 15.6% in the six months ended June 30, 2001, from 15.7% in the year earlier period. The decrease in Modis' G&A expenses is associated with the decrease in revenue for the six months ended June 30, 2001, and cost reduction initiatives implemented within Modis in both the first quarter of 2001 and the fourth quarter of 2000. Idea Integration's G&A expenses increased $4.7 million, or 11.5%, to $45.4 million in the six months ended June 30, 2001, from $40.7 million in the year earlier period. As a percentage of revenue, Idea Integration's G&A expenses increased to 44.0% in the six months ended June 30, 2001, from 35.9% in the year earlier period. The increase in Idea Integration's G&A expenses was related primarily to an incremental $9.9 million provision for uncollectible accounts and to a lesser extent severance costs associated with reductions in its workforce in the first six months of 2001. The professional services division's G&A expenses increased $5.1 million, or 7.4%, to $73.9 million in the six months ended June 30, 2001, from $68.8 million in the year earlier period. As a percentage of revenue, the division's G&A expenses increased to 22.5% in the six months ended June 30, 2001, from 21.3% in the year earlier period. The increase in the professional services division's G&A expenses was related to an increase in the level of spending to establish the corporate infrastructure in the division. During the second quarter of 2001, the Company eliminated many of these duplicative corporate infrastructure responsibilities in the division, integrating these efforts into the MPS corporate structure. Integrating these efforts are expected to lower the level of spending in the professional services division for the remainder of fiscal 2001. Income from operations. Income from operations decreased $28.9 million, or 55.2%, to $23.5 million in the six months ended June 30, 2001, from $52.4 million in the year earlier period. The decrease in operating income is due to the lower contribution of operating income primarily from Idea Integration and to a lesser extent the professional services division and Modis. Income from operations for Idea Integration decreased $20.1 million, to a $14.5 million loss in the six months ended June 30, 2001, from income of $5.6 million in the year earlier period. Income from operations for the professional services division decreased $4.5 million, or 14.7%, to $26.2 million in the six months ended June 30, 2001, from $30.7 million in the year earlier period. Income from operations for Modis decreased $4.2 million, or 26.1%, to $11.9 million in the six months ended June 30, 2001, from $16.1 million in the year earlier period. For the Company as a whole, income from operations as a percentage of revenue decreased to 2.8% in the six months ended June 30, 2001, from 5.7% in the year earlier period. Other expense, net. Other expense, net consists primarily of interest expense related to borrowings under the Company's credit facilities and notes issued in connection with acquisitions, net of interest income related to investment income from (1) certain investments owned by the Company and (2) cash on hand. Interest expense decreased $4.9 million, or 43.8%, to $6.3 million in the six months ended June 30, 2001, from $11.2 million in the year earlier period. The decrease in interest expense is related to the lower level of borrowings under the Company's credit facilities during the first six months of 2001. Interest expense was offset by $0.9 million of interest and other income in the six months ended June 30, 2001, as compared to $0.8 million in the year earlier period. Income Taxes. The Company's effective tax rate increased to 44.9% in the six months ended June 30, 2001, as compared to 39.5% in the year earlier period, due to the increased effect of non-deductible expense items on a lower level of income in the six months ended June 30, 2001. Net Income. As a result of the foregoing, net income decreased $15.4 million, or 60.6%, to $10.0 million in the six months ended June 30, 2001, from $25.4 million in the year earlier period. Net income as a percentage of revenue decreased to 1.2% in the six months ended June 30, 2001, from 2.8% in the year earlier period. As a result of the aforementioned revenue trends in each of the Company's divisions, the Company anticipates its net income will be negatively impacted during the remainder of fiscal 2001 as compared to the level of net income produced during the six months ended June 30, 2001. 14 LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements have principally been related to the acquisition of businesses, working capital needs and capital expenditures. These requirements have been met through a combination of bank debt and internally generated funds. The Company's operating cash flows and working capital requirements are affected significantly by the timing of payroll and by the receipt of payment from the customer. Generally, the Company pays its consultants weekly or semi-monthly, and receives payments from customers within 30 to 90 days from the date of invoice. The Company had working capital of $255.0 million and $248.4 million as of June 30, 2001 and December 31, 2000, respectively. The Company had cash and cash equivalents of $16.9 million and $5.0 million as of June 30, 2001 and December 31, 2000, respectively. For the six months ended June 30, 2001 and 2000, the Company generated $69.9 million and $41.5 million of cash flow from operations, respectively. The increase in cash flow from operations in the six months ended June 30, 2001 related to improved receivables collection, decreasing the cash needed to fund accounts receivable. For the six months ended June 30, 2001, the Company used $14.7 million of cash for investing activities, of which $10.9 million were used for capital expenditures and $3.8 million for earn-out payments. For the six months ended June 30, 2000, the Company used $124.4 million of cash for investing activities, of which $110.6 million were used primarily for acquisitions in Idea Integration and to a lesser extent earn-out payments. The Company also used $13.8 million for capital expenditures. For the six months ended June 30, 2001, the Company used $37.9 million of cash for financing activities. This amount primarily represented net repayments on the Company's credit facility and on notes issued in connection with the acquisition of certain companies. These repayments were mainly funded from cash flow from operations. For the six months ended June 30, 2000, the Company generated $89.0 million from financing activities. This amount primarily represented net borrowings from the Company's credit facility, which was used primarily to pay for acquisitions in Idea Integration and to a lesser extent earn-out payments. On November 4, 1999, the Company's Board of Directors authorized the repurchase of up to $65.0 million of the Company's common stock. As of June 30, 2001, no shares have been repurchased under this authorization. The Company anticipates that capital expenditures for furniture and equipment, including improvements to its management information and operating systems during the remainder of fiscal 2001 will be approximately $10.0 million. The Company believes that funds provided by operations, available borrowings under the credit facility, and current amounts of cash will be sufficient to meet its presently anticipated needs for working capital, capital expenditures and acquisitions for at least the next 12 months. 15 Indebtedness of the Company The Company has a $350 million revolving credit facility which is syndicated to a group of 13 banks with Bank of America, as the principal agent. This facility expires on October 27, 2003. In addition, the Company also has a $50 million 364 day credit facility that expires on October 24, 2001. The credit facilities contain certain financial and non-financial covenants relating to the Company's operations, including maintaining certain financial ratios. Repayment of the credit facilities are guaranteed by the material subsidiaries of the Company. In addition, approval is required by the majority of the lenders when the cash consideration of an individual acquisition exceeds 10% of consolidated stockholders' equity of the Company. As of July 31, 2001, the Company had a balance of approximately $156.0 million outstanding under the $350 million credit facility. The Company also had outstanding letters of credit in the amount of $2.0 million, reducing the amount of funds available under the credit facilities to approximately $242.0 million as of July 31, 2001. On February 12, 2001, the Company entered into an interest rate swap agreement to convert certain floating rate debt outstanding under the Company's credit facilities into fixed rate debt by fixing the base rate, as defined by the applicable credit facility. The actual interest rate on the credit facilities is equal to this base rate plus an additional spread, determined by the Company's financial performance. This agreement had an initial balance of $110.4 million as of February 12, 2001, which amortizes to $55.7 million on January 2, 2003 in correlation with the Company's estimate of cash flow needs. On March 2, 2001, the Company entered into an additional interest rate swap agreement to convert an additional $25.0 million into fixed rate debt. The agreements, which were approved by the Board of Directors, had a total notional amount of $136.2 million at June 30, 2001, with underlying rates ranging from 4.85% to 5.185%. The Company has certain notes payable to shareholders of acquired companies which bear interest at rates ranging from 5.0% to 7.0%, the majority of which mature by November 2001. As of July 31, 2001, the Company owed approximately $6.8 million in such acquisition indebtedness. 16 SEASONALITY The Company's quarterly operating results are affected primarily by the number of billing days in the quarter and the seasonality of its customers' businesses. Demand for professional services is typically lower during the first quarter until customers' operating budgets are finalized and the profitability of the Company's consultants is generally lower in the fourth quarter due to fewer billing days because of the higher number of holidays and vacation days. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ('SFAS') No. 141 'Business Combinations' and No. 142, 'Goodwill and Other Intangible Assets.' SFAS No. 141 and SFAS No. 142 establish accounting and reporting standards for business combinations and for goodwill and intangible assets resulting from business combinations, respectively. SFAS No. 141 prohibits the use of the pooling-of-interests method of accounting for business combinations and applies to all business combinations initiated after June 30, 2001. SFAS No. 142 discontinues the periodic amortization of goodwill and requires impairment to be tested annually. Further, SFAS No. 142 replaces the measurement guidelines for impairment, whereby goodwill not considered impaired under previous accounting literature may be considered impaired under SFAS No. 142. SFAS No. 142 is effective for all fiscal years beginning after December 15, 2001, and cannot be applied retroactively. SFAS No. 142 is to be applied to all recorded goodwill and intangible assets as of the date of adoption. The Company has not yet quantified the impact of adopting SFAS No. 142 in the first quarter of 2002. 17 Item 3. Quantitative And Qualitative Disclosures About Market Risk The following assessment of the Company's market risks does not include uncertainties that are either nonfinancial or nonquantifiable, such as political, economic, tax and credit risks. Interest Rates. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's short-term and long-term debt obligations and to the Company's investments. The Company's investment portfolio consists of cash and cash equivalents including deposits in banks, government securities, money market funds, and short-term investments with maturities, when acquired, of 90 days or less. The Company is adverse to principal loss and seeks to preserve its invested funds by placing these funds with high credit quality issuers. The Company constantly evaluates its invested funds to respond appropriately to a reduction in the credit rating of any investment issuer or guarantor. The Company's short-term and long-term debt obligations totaled $180.8 million as of June 30, 2001 and the Company had $224.0 million available under its credit facilities. The short-term debt obligations include notes payable to former shareholders of acquired corporations, which are at a fixed rate of interest, the majority of which mature by November 2001. The interest rate risk on these notes is immaterial due to the dollar amount of these obligations. On February 12, 2001, the Company entered into an interest rate swap agreement to convert certain floating rate debt outstanding under the Company's credit facilities into fixed rate debt by fixing the base rate, as defined by the applicable credit facility. The actual interest rate on the credit facilities is equal to this base rate plus an additional spread, determined by the Company's financial performance. This agreement had an initial balance of $110.4 million as of February 12, 2001, which amortizes to $55.7 million on January 2, 2003 in correlation with the Company's estimate of cash flow needs. On March 2, 2001, the Company entered into an additional interest rate swap agreement to convert an additional $25.0 million into fixed rate debt. The agreements, which were approved by the Board of Directors, had a total notional amount of $136.2 million at June 30, 2001, with underlying rates ranging from 4.85% to 5.185%. Hedging interest rate exposure through the use of swaps are specifically contemplated to manage risk in keeping with management policy. The Company does not utilize derivatives for speculative purposes. These swaps are transaction-specific so that a specific debt instrument determines the amount, maturity and specifics of each swap. The Company prepared sensitivity analyses of its borrowings under the credit facilities and its financial instruments to determine the impact of hypothetical changes in interest rates on the Company's results of operations, cash flows and the fair value of its financial instruments. The interest-rate analysis assumed a 50 basis point adverse change in interest rates on all borrowings under the credit facilities and financial instruments, representing approximately 10% of the Company's weighted average borrowing rate. However, the interest-rate analysis did not consider the effects of the reduced level of economic activity that could exist in such an environment. A 50 basis point adverse move in interest rates on the Company's outstanding borrowings under the credit facilities would have an immaterial impact on the Company's results of operations and cash flows. However, a 50 basis point adverse move in interest rates would decrease the fair value of the Company's interest rate swap agreements by $0.6 million. Foreign currency exchange rates. Foreign currency exchange rate changes impact translations of foreign denominated assets and liabilities into U.S. dollars and future earnings and cash flows from transactions denominated in different currencies. The Company generated approximately 26% of its consolidated revenues for the six months ended June 30, 2001 from international operations, approximately 97% of which were from the United Kingdom. The exchange rate has decreased approximately 5% in the six months ended June 30, 2001, from 1.49 at December 31, 2000 to 1.42 at June 30, 2001. The Company prepared sensitivity analyses to determine the adverse impact of hypothetical changes in the British pound sterling, relative to the U.S. Dollar, on the Company's results of operations and cash flows. However, the analysis did not include the potential impact on sales levels resulting from a change in the British pound sterling. An additional 10% adverse movement in the exchange rate would have had an immaterial impact on the Company's cash flows and financial position for the six months ended June 30, 2001. While fluctuations in the British pound sterling did not historically have a material impact on the Company's results of operations, the lower level of earnings resulting from a decrease in demand for the services provided by the Company's domestic operations have increased the impact of exchange rate fluctuations. However, the Company did not hold or enter into any foreign currency derivative instruments as of June 30, 2001. 18 FACTORS WHICH MAY IMPACT FUTURE RESULTS AND FINANCIAL CONDITION Effect of Fluctuations in the General Economy Demand for the Company's business services is significantly affected by the general level of economic activity in the markets served by the Company. During periods of slowing economic activity, companies may reduce the use of outside consultants and staff augmentation services prior to undertaking layoffs of full-time employees. Also during such periods, companies may elect to defer installation of new IT systems and platforms (such as Enterprise Resource Planning systems) or upgrades to existing systems and platforms. As a result, any significant economic downturn could have a material adverse effect on the Company's results of operations or financial condition. The Company may also be adversely affected by consolidations through mergers and otherwise of major customers or between major customers with non-customers. These consolidations as well as corporate downsizings may result in redundant functions or services and a resulting reduction in demand by such customers for the Company's services. Also, spending for outsourced business services may be put on hold until the consolidations are completed. Competition The Company's industry is intensely competitive and highly fragmented, with few barriers to entry by potential competitors. The Company faces significant competition in the markets that it serves and will face significant competition in any geographic market that it may enter. In each market in which the Company operates, it competes for both clients and qualified professionals with other firms offering similar services. Competition creates an aggressive pricing environment and higher wage costs, which puts pressure on gross margins. Ability to Recruit and Retain Professional Employees The Company depends on its ability to recruit and retain employees who possess the skills, experience and/or professional certifications necessary to meet the requirements of the Company's clients. Competition for individuals possessing the requisite criteria is intense, particularly in certain specialized IT and professional skill areas. The Company often competes with its own clients in attracting and retaining qualified personnel. There can be no assurance that qualified personnel will be available and recruited in sufficient numbers on economic terms acceptable to the Company. Ability to Continue Acquisition Strategy; Ability to Integrate Acquired Operations The Company has experienced significant growth in the past through acquisitions. Although the Company continues to seek acquisition opportunities, there can be no assurance that the Company will be able to negotiate acquisitions on economic terms acceptable to the Company or that the Company will be able to successfully identify acquisition candidates and integrate all acquired operations into the Company. Possible Changes in Governmental Regulations From time to time, legislation is proposed in the United States Congress, state legislative bodies and by foreign governments that would have the effect of requiring employers to provide the same or similar employee benefits to consultants and other temporary personnel as those provided to full-time employees. The enactment of such legislation would eliminate one of the key economic reasons for outsourcing certain human resources and could significantly adversely impact the Company's staff augmentation business. In addition, the Company's costs could increase as a result of future laws or regulations that address insurance, benefits or other employment-related matters. There can be no assurance that the Company could successfully pass any such increased costs to its clients. Financial Covenants The Company's credit facilities require that specified financial ratios be maintained. The Company's ability to meet these financial ratios can be affected by events beyond its control. Failure to meet those financial ratios could allow its lenders to terminate the credit facilities and to declare all amounts outstanding under those facilities to be immediately due and payable. Further, the Company may not be able to obtain replacement credit facilities on terms and conditions or at interest rates as favorable as those in current agreements. 19 Part II. Other Information Item 1. Legal Proceedings No disclosure required. Item 2. Changes in Securities and Use of Proceeds No disclosure required. Item 3. Defaults Upon Senior Securities No disclosure required. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of the Company's shareholders was held on May 30, 2001. Proxies were solicited from shareholders of record on the close of business on April 4, 2001. On April 4, 2001, there were 96,731,561 shares outstanding and entitled to vote at the Annual Meeting. The shareholder vote on the issues presented at the Annual Meeting was as follows: ELECTION OF DIRECTORS All of the following persons nominated were elected to serve as directors and received the number of votes set opposite their names:
Name For Withhold Authority ------------------------------------------------------------------------------- Derek E. Dewan 81,908,579 6,735,561 Timothy D. Payne 82,398,134 6,246,006 George A. Bajalia 83,073,891 5,570,249 Peter J. Tanous 82,637,997 6,006,143 T. Wayne Davis 82,615,039 6,029,101 John R. Kennedy 83,126,240 5,517,900 Michael D. Abney 82,093,410 6,550,730 William M. Isaac 83,119,297 5,524,843 George J. Mitchell 80,839,612 7,804,528 Michael L. Huyghue 83,067,847 5,576,293 Effective June 15, 2001, Mr. George A. Bajalia resigned from both his role as an officer of the Company and as a director of the Company. APPROVAL OF 2001 EMPLOYEE STOCK PURCHASE PLAN The 2001 Employee Stock Purchase Plan was approved with the following mix of votes: Name -------------------------------------------------------- Voting for 87,826,062 Voting against 764,425 Withhold authority 53,653
20 Item 5. Other Information No disclosure required. Item 6. Exhibits and Reports on Form 8-K A. Exhibits 10.1 Modis Professional Services, Inc. 2001 Employee Stock Purchase Plan. 10.2 Modis Professional Services, Inc. Amended and Restated Stock Option Plan. 10.3 Form of Award Notification under the Modis Professional Professional Services, Inc. Senior Executive Annual Incentive Plan. 10.4 Executive Employment Agreement with John L. Marshall III. B. Reports on Form 8-K No disclosure required. 21 SIGNATURES Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date /s/ Timothy D. Payne President, Chief August 8, 2001 Timothy D. Payne Executive Officer and Director /s/ Robert P. Crouch Senior Vice President, Chief August 8, 2001 Robert P. Crouch Financial Officer, Treasurer, and Chief Accounting Officer 22