-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QwKvtVZwkLDaJn5Z2TCHQXs87FZtTnhCyCLsOOg2I4dWbxY542az+SCvmc55hmQm K+ZeEvWlY9KYFzHTgX4VZg== 0000912057-99-007954.txt : 19991203 0000912057-99-007954.hdr.sgml : 19991203 ACCESSION NUMBER: 0000912057-99-007954 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991130 ITEM INFORMATION: FILED AS OF DATE: 19991202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TMP WORLDWIDE INC CENTRAL INDEX KEY: 0001020416 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING AGENCIES [7311] IRS NUMBER: 133906555 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-21571 FILM NUMBER: 99767597 BUSINESS ADDRESS: STREET 1: 1633 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2129774200 MAIL ADDRESS: STREET 1: 1633 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10019 8-K 1 FORM 8-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 8-K --------------- CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report: December 1, 1999 TMP WORLDWIDE INC. (Exact name of Registrant as specified in its charter) ------------------------ DELAWARE 0-21571 13-3906555 (State of Incorporation) (Commission File No.) (I.R.S. Employer Identification No.)
1633 BROADWAY, NEW YORK, NEW YORK 10019 (Address of principal executive (Zip Code) offices)
Registrant's telephone number, including area code: 212-977-4200 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TMP WORLDWIDE INC. ITEM 5. OTHER EVENTS. During the period October 1, 1999 through November 19, 1999, TMP Worldwide Inc. and Subsidiaries (the "Company" or "TMP") consummated mergers with the following companies (the "Fourth Quarter 1999 Pooled Companies"), in transactions which provided for the exchange of all of the outstanding stock of each entity for a total of 758,613 shares of TMP common stock and which were accounted for as poolings of interests (the "Fourth Quarter 1999 Mergers").
NATURE OF REGION OF NUMBER OF TMP ENTITY OPERATIONS OPERATIONS ACQUISITION DATE SHARES ISSUED - ------ ------------------ ------------------ ---------------- ------------- Highland Search Group L.L.C. ("Highland")........ Search & selection North America October 21, 1999 699,333 TMC S.r.l. ("Amrop Italy")............. Search & selection Continental Europe October 27, 1999 59,280
The Company's consolidated financial statements have been retroactively restated as of September 30, 1999, December 31, 1998 and 1997, for the nine months ended September 30, 1999 and 1998 and for each of the three years in the period ended December 31, 1998, to reflect the consummation of the Fourth Quarter 1999 Mergers. The supplemental consolidated financial statements included herein give retroactive effect to the Fourth Quarter 1999 Mergers, which were accounted for using the pooling of interests method. As a result, the financial position, results of operations, and statements of comprehensive income (loss) and cash flows are presented as if the Fourth Quarter 1999 Pooled Companies had been consolidated for all periods presented. The supplemental consolidated statements of stockholders' equity reflect the accounts of TMP as if the common stock issued in connection with the Fourth Quarter 1999 Mergers had been issued for all periods presented. As required by generally accepted accounting principles, the supplemental consolidated financial statements will become the historical financial statements of the Company upon issuance of the financial statements for the period that includes the consummation of the Fourth Quarter 1999 Mergers. In the supplemental consolidated balance sheets, the balance sheets of TMP as of September 30, 1999 and December 31, 1998 and 1997 have been combined with those of the Fourth Quarter 1999 Pooled Companies as of September 30, 1999 and December 31, 1998 and 1997. The supplemental consolidated statements of operations combine the results of TMP for the nine months ended September 30, 1999 and 1998 and each year in the three year period ended December 31, 1998 with those of the Fourth Quarter 1999 Pooled Companies for the same periods. The supplemental consolidated financial statements, including the notes thereto, should be read in conjunction with TMP's historical consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 1998 and its supplemental consolidated financial statements included in the Company's Current Report on Form 8-K dated September 30, 1999. 2 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Management's Discussion and Analysis of Financial Condition and Results of Operations which follows is reflective of the supplemental consolidated financial statements referred to above. Statements in this Current Report on Form 8-K concerning our business outlook or future economic performance, anticipated profitability, gross billings, commissions & fees, expenses or other financial items and statements concerning assumptions made or exceptions as to any future events, conditions, performance or other matters are "forward-looking statements" as that term is defined under the federal securities laws. Forward-looking statements are subject to risks, uncertainties and other factors which would cause actual results to differ materially from those stated in such statements. Such risks, uncertainties and factors include, but are not limited to, (i) the uncertain acceptance of the Internet and our Internet content, (ii) that we have grown rapidly and there can be no assurance that we will continue to be able to grow profitably or manage our growth, (iii) risks associated with acquisitions, (iv) competition, (v) our quarterly operating results have fluctuated in the past and are expected to fluctuate in the future, (vi) our business experiences seasonality, (vii) the loss of services of certain key individuals could have a material adverse effect on our business, financial condition or operating results, (viii) we have entered into certain transactions with affiliated parties and (ix) that we are controlled by one stockholder, Andrew J. McKelvey. OVERVIEW A substantial part of our growth has been achieved through acquisitions. For the period January 1, 1996 through September 30, 1999, we completed 58 acquisitions which were accounted for under the purchase method and which had estimated annual gross billings of approximately $662.7 million. Given the significant number of acquisitions in each of the periods presented, the results of operations from period to period may not necessarily be comparable. In addition, for the period May 1, 1998 through October 30, 1999, we completed 20 mergers which were accounted for as poolings of interests. Of the pooling of interests mergers, the seven completed prior to April 1, 1999 are Johnson, Smith & Knisely Inc. ("JSK"), TASA Holding AG ("TASA"), Stackig, Inc. ("Stackig"), Recruitment Solutions Inc., Sunquest L.L.C. d.b.a. The SMART Group and The Consulting Group (International) Limited ("TCG"), in 1998 (the "1998 Mergers"), and Morgan & Banks Limited ("M&B") in January 1999 (the "M&B Merger"). In connection with these mergers, we issued approximately 8.7 million shares of our common stock in exchange for all of the outstanding common stock of these seven companies. From April 1, 1999 through June 30, 1999, we completed pooling of interests mergers (the "Second Quarter 1999 Mergers"), with six companies, Interquest, Pty. Limited ("Interquest"), LIDA Advertising Inc. ("LIDA"), Maes & Lunau ("M&L"), IN2, Inc. ("IN2"), Lemming & LeVan, Inc. ("L&L"), and Yellow Pages Unlimited, Inc. ("YPU"), (the "Second Quarter 1999 Pooled Companies"). In connection with the Second Quarter 1999 Mergers we issued a total of approximately 0.9 million shares of TMP common stock in exchange for all of the outstanding stock of the Second Quarter 1999 Pooled Companies. From July 1, 1999 through September 30, 1999, we completed pooling of interests mergers (the "Third Quarter 1999 Mergers"),with the five companies, Cameron-Newell Advertising, Inc. ("CNA"), Brook Street Bureau (QLD) Pty Ltd ("Brook St."), LAI Worldwide, Inc. ("LAI"), Fox Advertising Inc. ("Fox") and Lampen Group Limited ("Lampen") (the "Third Quarter 1999 Pooled Companies"). In connection with the Third Quarter 1999 Mergers we issued a total of approximately 2.2 million shares of TMP common stock in exchange for all of the outstanding stock of the Third Quarter 1999 Pooled Companies. Furthermore, from October 1, 1999 through November 19, 1999, we completed mergers with the two companies listed below (the "Fourth Quarter 1999 Pooled Companies"), which provided for the exchange of all of the outstanding stock of such 3 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) companies for a total of 758,613 shares of TMP common stock and which were accounted for as poolings of interests (the "Fourth Quarter 1999 Mergers").
NATURE OF REGION OF NUMBER OF TMP ENTITY OPERATIONS OPERATIONS ACQUISITION DATE SHARES ISSUED - ------ ------------------ -------------------- ---------------- ------------- Highland Search Group L.L.C. ("Highland")....... Search & selection North America October 21, 1999 699,333 TMC S.r.l. ("Amrop Italy")............ Search & selection Continental Europe October 27, 1999 59,280
Accordingly, the supplemental consolidated financial statements in our Current Report on Form 8-K filed on September 30, 1999, which reflect the consummation of the M&B Merger, and the Second Quarter 1999 Mergers and Third Quarter 1999 Mergers, are being retroactively restated to reflect the Fourth Quarter 1999 Mergers. As a result, the financial position, results of operations and statements of comprehensive income (loss) and cash flows are presented as if the Fourth Quarter 1999 Pooled Companies had been consolidated for all periods presented Gross billings refer to billings for advertising placed in telephone directories, newspapers, new media and other media, and associated fees for related services, fees earned for search & selection and related services, and fees from temporary contracting services. Gross billings are not included in our consolidated financial statements, because they include a substantial amount of funds that are collected from our clients but passed through to publishers for advertisements. However, the trends in gross billings directly impact the Company's total commissions & fees earned. For recruitment and yellow page advertising, we earn commissions based on a percentage of the media advertising purchased at a rate established by the related publisher, and associated fees for related services. Publishers typically bill us for the advertising purchased by clients and we in turn bill our clients for this amount. Generally, the payment terms with yellow page clients require payment to us prior to the date payment is due to publishers. The payment terms with recruitment advertising clients typically require payment when payment is due to publishers. Historically, we have not experienced substantial problems with unpaid accounts. For recruitment advertising placements in the U.S., publisher commissions historically average 15% of recruitment advertising gross billings. We also earn fees from related services such as campaign development and design, retention and referral programs, brochures and other collateral services, research and other creative and administrative services. Outside of the U.S., where, collectively, we derive the majority of our recruitment advertising commissions & fees, our commission rates for recruitment advertising vary, historically ranging from approximately 10% in Australia to 15% in Canada and the United Kingdom. We design and execute yellow page advertising programs, receiving an effective commission rate from directory publishers which historically approximated 20% of yellow page gross billings. However, due to reductions in commission rates by the publishers and higher discounts granted by us to clients, the rate has declined and for the current year is approximately 19% and is expected to decline to approximately 18% by the middle of 2000. In general, publishers consider orders renewed unless formally canceled. In addition to base commissions, certain yellow pages publishers pay increased commissions for volume placement by advertising agencies. We typically recognize this additional commission, if any, in the fourth quarter when it is certain that such commission has been earned. The amounts reported in the fourth quarters of 1998, 1997 and 1996 were $0.9 million, $2.2 million and $3.5 million, respectively. 4 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Through our search & selection services, we identify and screen candidates for hiring by clients based on criteria established by such clients. We entered this business in 1998 by acquiring, JSK, the 12th largest executive search firm in the U.S. according to Kennedy Publications, an official ranking service for the search industry, TASA, an international executive search firm, both of which were accounted for as poolings of interests, and five regional European firms, including TCG, whose acquisition was accounted for as a pooling of interests. In the first quarter of 1999 we merged with M&B, the largest search & selection firm in Australia, in a pooling of interests transaction and acquired two European search & selection firms (one with operations in eastern Europe and one in Belgium). In the second quarter of 1999, in pooling of interests transactions, we merged with three companies with search & selection operations, M&L in the Netherlands, L&L in the United States and Interquest in Australia. In the third quarter of 1999, in a pooling of interests transaction, we merged with LAI, the 5th largest executive search firm in the U.S. (according to Hunt-Scanlon Publishing, Inc., a publication that follows the executive search industry). In addition, we expanded our temporary contracting services in Australia, New Zealand and the United Kingdom with the additions of Brook St. and Lampen, which also have selection operations in those regions. In the fourth quarter of 1999, in pooling of interests transactions, we merged with Highland, based in the United States, and Amrop Italy. Commissions & fees related to our Internet business are derived from (a) recruitment advertisement and related services placed on the Internet, primarily TMP's own Website, Monster.com, (b) employment searches and temporary contracting services sourced through the Internet, (c) Internet related advertising services provided to our yellow page clients and (d) the providing of interactive advertising services and technologies, which allow advertisers to measure and track sales, repeat traffic and other key brand and e-commerce metrics enabling such advertisers to greatly reduce costs, while driving only the most qualified users to their websites. Recruitment advertising commissions & fees increased from $76.6 million in 1996 to $177.8 million in 1998, while yellow page advertising commissions & fees increased from $100.9 million in 1996 to $106.5 million in 1998. Both recruitment and yellow page advertising commissions & fees increased as a result of acquisitions made from January 1, 1996 through December 31, 1998 and which are included in the financial statements using the purchase method of accounting from their respective dates of acquisition. Search & selection commissions & fees grew from $185.4 million in 1996 to $276.1 million in 1998 primarily as a result of increased demand for these services by new and existing clients. Temporary contracting commissions & fees increased from $29.2 million in 1996 to $47.0 million in 1998 reflecting a greater demand for executive and information technology temporary contract personnel. Internet commissions & fees increased from $6.9 million in 1996 to $50.2 million in 1998 reflecting an increase in the acceptance of our Internet products from existing and new clients and increased sales and marketing activities. We are continuously monitoring the marketplace for opportunities to expand our presence in recruitment advertising, yellow page advertising, search & selection, temporary contracting and on the Internet, and intend to continue our acquisition strategy to supplement our internal growth and the expansion of our businesses. Based on our consolidated results for the years ended December 31, 1998, 1997 and 1996, 44%, 42%, and 40%, respectively, of our consolidated commissions & fees were attributable to clients outside the U.S. Our total operating expenses have increased significantly since 1996 primarily as a result of acquisitions and added expenses to support gross billings growth for our Internet and recruitment businesses and marketing for our Internet business. 5 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Salaries and related costs increased $150.5 million to $382.7 million for the year ended December 31, 1998 from $232.2 million for the year ended December 31, 1996, a 64.8% increase, supporting a $683.4 million or a 64.0% increase in gross billings over the same period. When measured as a percent of gross billings, salaries and related costs for the year ended December 31, 1998 were 21.9%, up slightly from 21.8% for the comparable 1996 period. Salaries and related costs include total payroll and associated benefits as well as payroll taxes, sales commissions, recruitment fees and training costs. Office and general expenses increased $75.0 million to $190.2 million for the year ended December 31, 1998 from $115.2 million for the year ended December 31, 1996, a 65.1% increase. This increase is due primarily to increased costs needed to support the increased gross billings, the expansion of recruitment and search & selection offices through acquisitions in the U.S. and foreign markets, and expansion of our infrastructure and marketing costs to promote the growth of our Internet business. When measured as a percent of gross billings, office and general expenses for the year ended December 31, 1998 were 10.9%, a slight increase from 10.8% for the comparable 1996 period. This cost category includes expenses for office operations, business promotion, market research, advertising, professional fees and fees paid to our primary lending institution for its services in the processing and collection of payments for accounts receivable, gains or losses from the sale of operating assets, and costs associated with legal settlements. Merger & integration costs are expenses incurred in connection with business combinations accounted for under the pooling of interests method of accounting. In general, these costs are comprised of transaction costs (such as advisory, legal and accounting fees, printing costs and costs incurred for the subsequent registration of shares in connection with the transactions), stay bonuses, costs to eliminate redundant facilities and personnel, costs to integrate operations of the pooled entities and acceleration of benefits and separation pay in accordance with pre-existing contractual change in control provisions. For the year ended December 31, 1998, the Company expensed merger & integration costs of $22.4 million in connection with the 1998 Mergers and the M&B Merger. These costs consist of (1) $11.9 million of non-cash employee stay bonuses, (2) $1.5 million of stay bonuses paid as cash to key personnel of the 1998 Pooled Companies and (3) $9.0 million of transaction related costs, including legal, accounting and advisory fees and the costs incurred for the subsequent registration of shares issued in the mergers. For the nine months ended September 30, 1999, the Company expensed merger & integration of $46.3 million compared with $9.6 million for the same period in 1998 an increase of $36.7 million or 383.1%. These costs are related to the 1998 Mergers, the M&B Merger, the Second Quarter 1999 Mergers, and the Third Quarter 1999 Mergers. The increase of $36.7 million primarily resulted from the pooling of interests transactions that occurred in the quarter ended September 30, 1999 and the planned integration of such companies. The increase is due to: (1) $4.8 million for separation pay and accelerated vesting of employee stock and stock option grants, both in accordance with pre-existing contractual change in control provisions, (2) $7.8 million more of transaction related costs, which include legal, accounting, printing and advisory fees and the costs incurred for the subsequent registration of shares issued in the transactions and (3) $25.2 million of office integration costs, which include the closing of excess leased facilities, the write-off of fixed assets which will not be used in the future and a reserve for the effect, after reduction for related compensation, of uncollectible search fees recorded as a result of a loss of executive search consultants, partially offset by $4.4 million less for employee stay bonuses paid with TMP shares and options to certain key personnel of the merged companies. Approximately $18.5 million of the $46.3 million are non-cash charges. The after tax effect of these charges on diluted earnings per share is $(0.73) and $(0.16) for the nine months ended September 30, 1999 and 1998, respectively. The Company anticipates that it will incur additional integration costs in connection with the Third Quarter 1999 Mergers in future 6 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) periods. These costs will be primarily related to severance and will be recorded when the associated integration plans are finalized. Furthermore, the Company will incur merger & integration costs associated with the Fourth Quarter 1999 Mergers, including amortization of the cost of 160,120 shares of TMP common stock that were issued as stay bonuses to certain key employees of Highland and that will vest one year from the date of grant. Restructuring costs for the year ended December 31, 1998 were $3.5 million or, on an after tax basis, $(0.05) per diluted share. These charges relate to LAI's closing of its London and Hong Kong offices, and include the write-off of leasehold improvements and fixed assets, severance benefits and costs for consolidation of facilities related to the restructuring. Amortization of intangibles includes amortization of acquisition related charges, including the costs in excess of fair market value of net assets of business acquisitions accounted for under the purchase method and capitalized costs for non-compete arrangements with the principals of acquired companies. This acquisition related amortization was $10.2 million, $6.9 million and $4.7 million for the years ended December 31, 1998, 1997 and 1996, respectively and $8.6 million and $7.4 million for the nine months ended September 30, 1999 and 1998, respectively. The special CEO bonus for the years ended December 31, 1998 and 1997 of $1.3 million and $1.5 million reflects non-cash charges, recorded in compliance with Staff Accounting Bulletin No. 79 ("SAB 79"), for a bonus mandated by the Principal Stockholder's employment contract, even though such bonus was irrevocably waived. The contractual obligation to pay such bonus was eliminated as of November 1998. The special compensation for the year ended December 31, 1996, reflects a non-cash, non-recurring charge of approximately $52.0 million resulting from the issuance of approximately 3.6 million shares of our common stock to stockholders of our predecessor companies in exchange for their shares in those companies. This charge was incurred because these stockholders had received such shares for nominal or no consideration as employees or as management of such companies and, accordingly, were not considered to have made substantive investments for their shares. Net interest expense includes interest: (i) on loans made by our primary lender under our financing agreement with such lender, (ii) to certain vendors, (iii) on capitalized lease obligations, (iv) on net amounts payable to the holders of seller financed notes and (v) on a term loan related to the purchase of certain transportation equipment. In addition, 1996 net interest expense includes a non-recurring charge of approximately $2.6 million to reflect, upon exercise of the warrant issued in connection with our financing agreement, the difference between the value of the stock issued at the initial public offering price of $14.00 per share and the value recorded for the warrant when it was originally issued. 7 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS The following table sets forth our gross billings, commissions & fees, commissions & fees as a percentage of gross billings, EBITDA and cash flow information.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------ ----------------------- 1996 1997 1998 1998 1999 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) GROSS BILLINGS: Recruitment advertising............ $ 369,979 $ 642,872 $ 849,563 $ 646,141 $ 615,488 Yellow page advertising............ 466,230 497,848 520,129 406,349 413,692 Search & selection................. 194,848 244,153 277,304 215,630 221,699 Internet(1)........................ 6,939 20,553 56,666 36,077 93,734 Temporary contracting(2)........... 29,210 41,285 46,989 33,027 44,866 ---------- ---------- ---------- ---------- ---------- Total billings..................... $1,067,206 $1,446,711 $1,750,651 $1,337,224 $1,389,479 ========== ========== ========== ========== ========== COMMISSIONS & FEES: Recruitment advertising............ $ 76,601 $ 134,291 $ 177,774 $ 133,858 $ 134,928 Yellow page advertising............ 100,883 103,941 106,455 82,534 79,522 Search & selection................. 185,406 242,841 276,110 214,765 219,213 Internet(1)........................ 6,939 19,470 50,158 32,688 82,952 Temporary contracting(2)........... 29,210 41,285 46,989 33,027 44,866 ---------- ---------- ---------- ---------- ---------- Total commissions & fees........... $ 399,039 $ 541,828 $ 657,486 $ 496,872 $ 561,481 ========== ========== ========== ========== ========== Commissions & fees as a percentage of gross billings: Recruitment advertising............ 20.7% 20.9% 20.9% 20.7% 21.9% Yellow page advertising............ 21.6% 20.9% 20.5% 20.3% 19.2% Search & selection................. 95.2% 99.5% 99.6% 99.6% 98.9% Internet(1)........................ 100.0% 94.7% 88.5% 90.6% 88.5% Temporary contracting.............. 100.0% 100.0% 100.0% 100.0% 100.0% Total commissions & fees........... 37.4% 37.5% 37.6% 37.2% 40.4% EBITDA(3).......................... $ 7,755 $ 92,420 $ 79,075 $ 77,492 $ 32,591 Cash provided by operating activities....................... $ 37,097 $ 51,251 $ 63,617 $ 32,686 $ 55,846 Cash used in investing activities....................... $ (46,401) $ (89,726) $ (66,519) $ (79,985) $ (31,952) Cash provided by (used in) financing activities............. $ 13,368 $ 65,524 $ 20,093 $ 32,680 $ (28,782) Effect of exchange rate changes on cash............................. $ (151) $ (298) $ (7) $ (56) $ (648)
- ------------------------ (1) Represents fees earned in connection with recruitment, yellow page and other advertisements placed on the Internet and employment searches and temporary contracting services sourced through the Internet. (2) Amounts for temporary contracting are reported after the costs paid to the temporary contractor. (3) Earnings before interest, income taxes, depreciation and amortization ("EBITDA") is presented to provide additional information about our ability to meet our future debt service, capital expenditures and working capital requirements and is one of the measures which determines our ability to borrow under our credit facility. EBITDA should not be considered in isolation or as a substitute for operating income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with generally accepted accounting principles or as a measure of our profitability or liquidity. 8 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EBITDA for the indicated periods is calculated as follows:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------- ------------------- 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- (IN THOUSANDS) Net income (loss)........................... $(31,841) $41,954 $20,542 $29,209 $(4,917) Interest expense, net....................... 14,358 8,443 9,828 7,035 6,272 Income tax expense.......................... 11,058 20,565 14,367 16,637 1,154 Depreciation and amortization............... 14,180 21,458 34,338 24,611 30,082 -------- ------- ------- ------- ------- EBITDA...................................... $ 7,755 $92,420 $79,075 $77,492 $32,591 ======== ======= ======= ======= =======
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1998 Gross billings for the nine months ended September 30, 1999 were $1,389.5 million, a net increase of $52.3 million or 3.9% from $1,337.2 million for the nine months ended September 30, 1998. Commissions & fees for the nine months ended September 30, 1999 were $561.5 million, an increase of $64.6 million or 13.0% from $496.9 million in the first nine months of 1998. Recruitment commissions & fees were $134.9 million for the nine months ended September 30, 1999 compared with $133.9 million for the nine months ended September 30, 1998, an increase of $1.0 million or 0.8% due primarily to lower discounts to clients and increased ancillary services in North America offset, in part, by a loss of business in the Asia\Pacific Region which was ameliorated by an increase in business in Europe. Yellow page commissions & fees were $79.5 million for the nine months ended September 30, 1999, a decrease of $3.0 million or 3.6% from $82.5 million in the first nine months of 1998 primarily due to increased discounts to clients and lower commissions paid by publishers offset, in part by higher gross billings from internal growth and acquisitions. Search & selection commissions & fees were $219.2 million, an increase of $4.4 million or 2.1% from $214.8 million for the comparable nine months of 1998, due primarily to acquisitions and growth in Continental Europe offset by a decline in executive search due to a loss of consultants, as anticipated, at LAI and TASA, which resulted from the merger & integration of these companies. Internet commissions & fees for the nine months ended September 30, 1999 were $83.0 million, an increase of 153.8% or $50.3 million as compared with $32.7 million for the nine months ended September 30, 1998. This increase in Internet commissions & fees is due to: (i) an increasing acceptance of our Internet services and products from existing clients, new clients and Internet users, (ii) the benefits of Monster.com's marketing campaign, (iii) increases in the services and content available on our Websites, (iv) expansion into certain European markets and (v) price increases on certain products. Temporary contracting commissions & fees were $44.9 million, up $11.9 million or 35.8% from $33.0 million for the period ended September 30, 1998. TMP's temporary contracting operations are primarily conducted in Australia and New Zealand. The 35.8% increase reflects an increase in the number of contractors placed, particularly information technology personnel and executives, which have higher margins than general and support staff. Operating expenses for the nine months ended September 30, 1999 were $557.7 million compared with $442.8 million for the same period in 1998. The increase of $114.9 million or 25.9% is due to an increase of $36.7 million in merger & integration costs related to mergers accounted for as poolings of interests, acquisitions accounted for as purchases, higher operating and marketing costs to support our expanding Internet operations and $2.8 million in restructuring expenses resulting from the closings of LAI's Hong Kong and London offices. 9 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Salaries and related costs for the nine months ended September 30, 1999 were $327.0 million or 58.2% of total commissions & fees, compared with $288.0 million or 58.0% of total commissions & fees for the same period in 1998. The increase of $39.0 million or 13.5% is primarily due to increased staff for Internet operations additions and acquisitions in search & selection. Office and general expenses for the nine months ended September 30, 1999 were $173.1 million or 30.8% of total commissions & fees, compared with $136.6 million or 27.5% of commissions & fees for the same period in 1998. The increase of $36.5 million or 26.6% is primarily due to acquisitions and higher costs for our Internet operations, partially offset by reductions in expenses for the yellow page advertising and recruitment advertising businesses, due to improved efficiencies. Included in the increase for Internet was $15.9 million more in marketing costs for Monster.com and $13.8 million for search related Internet services at LAIcompass and Highland. The higher ratio of 30.7% compared 27.5% is due primarily to marketing costs for search related Internet services, a slight increase in costs at LAI and a decline in commissions & fees. (Please see discussion above.) Merger & integration costs for the nine months ended September 30, 1999 were $46.3 million compared with $9.6 million for the same period in 1998 an increase of $36.7 million or 383.1%. This increase primarily resulted from the pooling of interests transactions that occurred in the quarter ended September 30, 1999 and the planned integration of such companies and is due to: (1) $4.8 million for separation pay and accelerated vesting of employee stock and stock option grants, both in accordance with pre-existing contractual change in control provisions, (2) $7.8 million more of transaction related costs, which include legal, accounting, printing and advisory fees and the costs incurred for the subsequent registration of shares issued in the transactions and (3) $25.2 million of office integration costs, which include the closing of excess leased facilities, the write-off of fixed assets which will not be used in the future and a reserve for the effect, after reduction for related compensation, of uncollectible search fees recorded as a result of a loss of executive search consultants, partially offset by $4.4 million less for employee stay bonuses paid with TMP shares and options to certain key personnel of the merged companies. Approximately $18.5 million of the $46.3 million are non-cash charges. The after tax effect of these charges on diluted earnings per share is $(0.73) and $(0.16) for the nine months ended September 30, 1999 and 1998, respectively. Restructuring charges for the nine months ended September 30, 1999 were $2.8 million or, on an after tax basis, $(0.04) per diluted share. These charges relate to LAI's closing of its London and Hong Kong offices, and include $0.5 million for the write-off of leasehold improvements and fixed assets, $1.3 million for severance benefits payable to 24 employees and $1.0 million for consolidation of facilities related to the restructuring. As a result of the above, operating income for the nine months ended September 30, 1999 decreased $50.3 million or 91.7% to $3.8 million from $54.1 million for the comparable period last year. Net interest expense for the nine months ended September 30, 1999 was $6.3 million, a decrease of $0.7 million or 10.8% from $7.0 million for the same period in 1998, reflecting lower interest rates and borrowing costs resulting from the amended and restated financing agreement entered into by the Company on November 5, 1998, partially offset by increased borrowings. Taxes on income for the nine months ended September 30, 1999 were $1.2 million on a $2.7 million pretax loss, resulting in an effective tax rate of (43.4)% compared with a tax expense of $16.6 million on a $46.1 million pretax profit, resulting in an effective tax rate of 36.1% for the same period last year. The negative effective tax rate for the 1999 period is caused by expenses that are not tax deductible. Such expenses are primarily related to merger costs from pooling of interests transactions and amortization of 10 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) intangible assets. For both periods the effective tax rate is benefited by profits from Highland which were not taxed at the corporate level prior to the merger with TMP. Class B common stockholders for the nine months ended September 30, 1999 was $(0.12) per share, a decrease of $0.85 per share or 116.4% from the $0.73 per share for the comparable 1998 period. THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 Gross billings for the year ended December 31, 1998 were $1,750.7 million, a $304.0 million or 21.0% increase when compared to gross billings of $1,446.7 million for the year ended December 31, 1997. This increase in gross billings resulted primarily from acquisitions in recruitment advertising and growth in our temporary contracting and Internet businesses. Total commissions & fees for the year ended December 31, 1998 were $657.5 million, an increase of $115.7 million or 21.3% from $541.8 million for the year ended December 31, 1997. Recruitment advertising commissions & fees were $177.8 million for the year ended December 31, 1998 compared with $134.3 million for the year ended December 31, 1997, an increase of $43.5 million or 32.4%. This increase was primarily due to acquisitions, which contributed approximately $25.1 million, and approximately $21.4 million from increased client spending and new clients partially offset by client losses and a decrease in foreign currency translation rates, which had a negative effect of approximately $3.0 million. Yellow page commissions & fees were $106.5 million for the year ended December 31, 1998 compared with $103.9 million for the year ended December 31, 1997, an increase of 2.4% or $2.6 million due primarily to acquisitions. Search & selection commissions & fees were $276.1 million compared with $242.8 million for the year ended December 31, 1997, an increase of $33.3 million or 13.7%, due primarily to acquisitions and increased business from existing clients and new clients. Internet commissions & fees for the year ended December 31, 1998 were $50.2 million, an increase of 157.6% or $30.7 million from $19.5 million for the year ended December 31, 1997. The increase in Internet commissions & fees is due to (i) an increasing acceptance of our Internet services and products from existing clients and Internet users, (ii) the benefits of Monster.com's marketing campaign, (iii) increases in the service and content available on our Websites, (iv) expansion into certain European markets and (v) price increases on certain products. Temporary contracting commissions & fees increased to $47.0 million from $41.3 million, an increase of $5.7 million or 13.8%. This increase is primarily due to a greater number of temporary contract workers placed during 1998 as compared with the prior period, and reflects growth in the executive temporary contracting business, and to a lesser extent growth for clerical and support staff. Total operating expenses for the year ended December 31, 1998 were $610.3 million, compared with $471.4 million for 1997. The increase of $138.9 million or 29.5% is due primarily to acquisitions and internal growth, together with the addition of $22.4 million for merger & integration costs related to pooling of interests transactions and $3.5 million in restructuring charges for the closing of LAI's London, England and Hong Kong offices. Salaries and related costs for the year ended December 31, 1998 were $382.7 million or 58.2% of total commissions & fees, compared with $310.2 million or 57.2% of total commissions & fees for the same period in 1997, representing an increase of $72.5 million or 23.4%. This increase reflects acquisitions in search & selection and recruitment advertising and growth in Internet operations. 11 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Office and general expenses increased $37.4 million to $190.2 million for the year ended December 31, 1998, as compared with $152.8 million for the prior period primarily due to acquisitions and added marketing and other expenses to grow our Internet businesses. As a percent of total commissions & fees, office and general expenses increased to 28.9% for the year ended December 31, 1998 from 28.2% for the year ended December 31, 1997. Restructuring charges for the year ended December 31, 1998 were $3.5 million or, on an after tax basis, $(0.05) per diluted share and relate to LAI's plan to close its international offices in London, England and Hong Kong. These charges include $1.1 million for severance, and $2.4 million for the write-off of leasehold improvements and other costs to close these facilities. In connection with the 1998 Mergers and the M&B Merger, we expensed merger & integration costs of $22.4 million for the year ended December 31, 1998, consisting of (1) $11.9 million of non-cash employee stay bonuses, which included (a) $3.6 million for the amortization for TMP shares set aside for key personnel of JSK and TCG, who must remain employees for a full year in order to earn such shares and (b) $8.3 million for TMP shares to key personnel of TASA and Stackig as employee stay bonuses, (2) $1.5 million of stay bonuses paid as cash to key personnel of one of the companies merged in 1998 and (3) $9.0 million of transaction related costs, including fees for legal, accounting and advisory services and the costs incurred for the subsequent registration of shares issued in the acquisitions. The after tax effect of this charge is $16.7 million or $(0.43) per diluted share. (See Notes 1 and 5 to the Company's Supplemental Consolidated Financial Statements included elsewhere herein.) Amortization of intangibles was $10.2 million for the year ended December 31, 1998 compared to $6.9 million for the year ended December 31, 1997. The increase is due to our continued growth through acquisitions. As a percentage of total commissions & fees, amortization of intangibles was 1.5% and 1.3% for the year ended December 31, 1998 and 1997, respectively. As a result of all of the above, operating income decreased $23.3 million to $47.2 million for the year ended December 31, 1998 as compared with operating income of $70.5 million for the year ended December 31, 1997 and, as a percent of total commissions & fees, operating income decreased to 7.2% from 13.0%. Net interest expense increased $1.4 million to $9.8 million for the year ended December 31, 1998 as compared to $8.4 million for the year ended December 31, 1997, reflecting a net increase in debt as a result of acquisitions and capital expenditures. In addition, the Company's effective interest rate was 10.8% for the year ended December 31, 1998 compared with 10.4% for the year ended December 31, 1997. Taxes on income decreased $6.2 million to $14.4 million for the year ended December 31, 1998 from $20.1 million for the year ended December 31, 1997 primarily due to lower pre-tax income. The effective tax rate for the year ended December 31, 1998 was 40.7% compared with 32.7% for the year ended December 31, 1997. The higher effective rate in 1998 reflects the inability to deduct for tax, certain costs associated with the 1998 Mergers and the M&B Merger. For the year ended December 31, 1998, equity in losses of affiliates was $396,000, reflecting losses at our minority owned real estate advertising affiliate, as compared with a $33,000 loss for the same period in 1997. Minority interests in consolidated earnings for the year ended December 31, 1998 were $28,000 compared with $296,000 for the year ended December 31, 1997. As a result of all of the above, the net income applicable to common and Class B common stockholders was $20.5 million for the year ended December 31, 1998, or $0.52 per diluted share, 12 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) compared with net income of $41.8 million, or $1.13 per diluted share for the year ended December 31, 1997. THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 Gross billings for the year ended December 31, 1997 were $1,446.7 million, a $379.5 million or 35.6% increase when compared to gross billings of $1,067.2 million for the year ended December 31, 1996. The growth is primarily due to acquisitions in recruitment advertising, rate increases in yellow page advertising, increased clients and higher client spending for search & selection, and growing acceptance of the Company's Internet products. Total commissions & fees increased to $541.8 million for the year ended December 31, 1997 from $399.0 million for the year ended December 31, 1996, an increase of $142.8 million or 35.8%. This reflects increases, as compared to the prior year period, in commissions & fees for (a) recruitment advertising of $57.6 million or 75.3%, (b) yellow page advertising of $3.1 million or 3.0%, (c) search & selection of $57.4 million or 31.0%, (d) Internet of $12.5 million or 180.6% and (e) temporary contracting of $12.1 million or 41.3%. A substantial portion of the increase in commissions & fees for recruitment advertising was due to acquisitions, including $15.5 million from Austin Knight, acquired in August 1997, and the remainder was due to higher client spending and new clients. The increase in commissions & fees for yellow page advertising was due primarily to increased rates by the yellow page publishers and an acquisition, substantially offset by lower publisher incentives and the full year effect of accounts lost and resigned in 1996. The increase in commissions & fees for search & selection was primarily due to the healthy economy and related employment markets in the U.S. Fees derived from Internet were generated from job searches and recruitment advertising placed on the Internet, primarily on the Company's wholly owned websites Monster.com and occ.com, and reflects the continued customer acceptance of our Internet products both from our existing clients as well as new clients and price increases on certain products. The increase in temporary contracting commissions & fees is due to expansion of the temporary contracting market in Australia. Salaries and related costs increased $77.9 million to $310.2 million for the year ended December 31, 1997 but as a percent of total commissions & fees, salaries and related costs decreased to 57.2% for the year ended December 31, 1997 from 58.2% for the year ended December 31, 1996. This $77.9 million increase was primarily due to additional staff required to service increased recruitment advertising billings, increased sales staffing for Internet, and generally higher salaries and related costs for search & selection operations. Office and general expenses increased $37.6 million to $152.8 million for the year ended December 31, 1997 as compared with $115.2 million for the prior period. The increase was primarily due to growth across all lines of business. However, as a percent of total commissions & fees, office and general expenses decreased to 28.2% for the year ended December 31, 1997 from 28.9% for the year ended December 31, 1996. This decrease was primarily due to (1) consolidation of offices, which slowed the growth of office related expenses, (2) increased growth in recruitment advertising commissions & fees combined with the relatively fixed nature of some of these expenses and (3) increased temporary contracting operations which have relatively stable office and general expenses. Amortization of intangibles was $6.9 million for the year ended December 31, 1997 compared to $4.7 million for the year ended December 31, 1996. The increase is due to our continued growth through acquisitions. As a percentage of total commissions & fees, amortization of intangibles was 1.3% and 1.2%, respectively, for the years ended December 31, 1997 and 1996. 13 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For 1996, special compensation of $52.0 million consists of a non-cash, non-recurring charge that reflects the value of shares issued in connection with the acquisition of the minority interests in predecessors of the Company because the stockholders had received such shares for nominal or no consideration and, accordingly, were not considered to have made a substantive investment for their shares. The value of such shares was based on the per share initial public offering price of $14.00 for our common stock. As a result of the above, operating income for the year ended December 31, 1997 increased $75.7 million to $70.5 million as compared with an operating loss of $5.2 million for the year ended December 31, 1996 and as a percent of total commissions & fees increased to 13.0% from (1.3)% for the year ended December 31, 1996. Net interest expense decreased $5.9 million to $8.4 million for the year ended December 31, 1997 as compared to $14.3 million for the year ended December 31, 1996. This decrease in interest expense is due primarily to the repayment of a portion of the debt with the net cash proceeds of our initial public and supplemental offerings. In addition, in 1996 there was a $2.6 million non-cash, non-recurring charge to reflect, upon exercise of a warrant issued in connection with our financing agreement, the value of the stock issued at our initial public offering price of $14.00 per share and the value recorded for the warrant when it was originally issued. Our effective interest rate was 10.4% for the year ended December 31, 1997 compared with 15.8% for the year ended December 31, 1996. Taxes on income increased $9.5 million to $20.6 million for the year ended December 31, 1997 from $11.1 million for the year ended December 31, 1996 primarily due to higher pre-tax income. The effective tax rate for the year ended December 31, 1997 was 32.7% compared with (55.6)% for the year ended December 31, 1996. The effective tax rate for 1997 was lower than the U.S. Federal statutory rate of 34.0% primarily due to profits of pooled entities taxed directly to owners, partially offset by nondeductible expenses of approximately $2.9 million and state taxes of $1.1 million. The effective tax rate for 1996 reflects the non-deductability of a non-cash special compensation charge of $52.0 million, non-cash interest expense of $2.6 million and state taxes of $0.4 million, as well as our inability to offset profits at certain subsidiaries with losses incurred by others. As a result of all of the above, the net income applicable to common and Class B common stockholders was $41.8 million for the year ended December 31, 1997, or $1.13 per diluted share, compared with net loss of $32.1 million, or $(1.04) per diluted share for the year ended December 31, 1996. LIQUIDITY AND CAPITAL RESOURCES Our principal capital requirements have been to fund (i) acquisitions, (ii) working capital, (iii) capital expenditures and (iv) marketing and development of our Internet business. Our working capital requirements are generally higher in the quarters ending March 31 and June 30 during which payments to the major yellow page directory publishers are at their highest levels. We have met our liquidity needs over the last three years through (a) funds provided by operating activities, (b) equity offerings, (c) long-term borrowings, (d) capital leases and (e) vendor financing in 1996. In December 1996, we completed our initial public offering of an aggregate of 4,147,408 shares of Common Stock at a purchase price of $14.00 per share in an underwritten public offering managed by Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation and Ladenburg Thalmann & Co. Inc. In the initial public offering, certain stockholders sold an additional aggregate of 652,592 shares of Common Stock. The net proceeds that we received from the initial public offering of $50.8 million were used to repay debt and, in early 1997, to pay down accounts payable and to redeem preferred stock. In September 1997, we 14 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) completed a second public offering of an aggregate of 2,400,000 shares of Common Stock at a purchase price of $23.00 per share in an underwritten public offering managed by Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., BT Alex Brown Incorporated, Montgomery Securities and Ladenburg Thalmann & Co. Inc. In addition, certain stockholders sold an aggregate of 1,600,000 shares of common stock in such offering. Our net proceeds from this offering of $63.4 million, including net repayment of borrowings of $12.2 million, paid to us by certain stockholders were used to repay debt. In 1998, LAI received $41.4 million in net proceeds from its second public offering. Such proceeds were used to support its international expansion, support enhancements to its technology-based infrastructure, acquire two search & selection companies and provide additional working capital. Net cash provided by operating activities for the nine months ended September 30, 1999 was $55.8 million compared with $32.7 million provided by operating activities for the nine months ended September 30, 1998, an increase of $23.1 million. This increase was primarily due to (a) the net increase in funds from a $23.5 million greater increase in deferred revenue for the 1999 period over the 1998 period, related mostly to Internet operations (b) a $18.0 million increase in cash from work-in-process and prepaid and other assets, (c) $6.2 million more from tax benefits from the exercise of employee stock options, (d) a $3.8 million effect from inclusion of losses from companies accounted for as poolings of interests, in both the current period and the previous year, because of overlapping reporting periods and (e) a $0.3 million net increase in the use of funds from increases in accounts receivable over increases in accounts payable and accrued expenses for the 1999 period over the 1998 period, reduced by a $28.6 million decline in earnings after adjusting for non-cash items. EBITDA was $32.6 million for the nine months ended September 30, 1999, a decrease of $44.9 million or 57.9% from $77.5 million for the nine months ended September 30, 1998. The decrease primarily reflects, for the 1999 period, a $50.3 million decrease in operating profits partially offset by $5.5 million more in depreciation and amortization costs. As a percentage of commissions & fees, EBITDA decreased to 5.8% for the nine months ended September 30, 1999 as compared with 15.6% for the nine months ended September 30, 1998. The lower percent reflects the increase in merger & integration and restructuring costs, which were 8.7% and 1.9% of commissions & fees for the 1999 and 1998 periods, respectively. Our investing activities for the nine months ended September 30, 1999 used cash of $32.0 million, which is $48.0 million less than the $80.0 million for the nine months ended September 30, 1998. This decrease was primarily due to the use in 1998 of $33.4 million more in investments by a pooled company and $2.0 million more used for business acquisitions combined with $9.8 million received from the sale of fixed assets, primarily our plane, in the 1999 period. We estimate that our expenditures for computer equipment and software, furniture and fixtures and leasehold improvements will be approximately $30 million for the year ended 1999. Our financing activities include borrowings and repayments under our bank financing agreements and issuance of and payments against installment notes used principally to finance acquisitions and equipment. Our financing activities for the nine months ended September 30, 1999 used net cash of $28.8 million but provided $32.7 million for the nine months ended September 30, 1998. The change of $61.5 million resulted primarily from $41.4 million in proceeds from a common stock offering by LAI in the 1998 period and net repayments in the 1999 period of $29.9 million against credit facilities and capitalized lease obligations compared with a net borrowing of $1.5 million in the prior year period, offset in part by a $6.8 million increase in cash received from the exercise of employee stock options and a $4.3 million decline in dividends paid by pooled companies in the 1999 period from the 1998 period. 15 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net cash provided by operating activities for the years ended December 31, 1998, 1997 and 1996 was $63.6 million, $51.3 million and $37.1 million, respectively. The increase in cash of $12.3 million from operating activities for 1998 over 1997 was primarily due to an increase of $17.9 million in accounts payable, accrued expenses and other current liabilities, a $12.9 million increase in depreciation and amortization costs, $8.3 million for the utilization of our common stock to pay bonuses, a decrease of $7.3 million in accounts receivable and a $3.2 million increase in deferred revenue, partially offset by decreases in net income of $21.4 million, $8.1 million in deferred income taxes and $10.7 million in prepaid and other assets. In addition, in 1998 we paid approximately $13.6 million for restructuring. Such amount was applied against a reserve set up during 1997 in connection with acquisitions accounted for using the purchase method. This reserve was increased in 1998 by a $3.5 million charge to earnings and by $10.1 million, with a corresponding increase to intangible assets, and reduced by payments of $13.6 million, leaving a restructuring reserve at December 31, 1998 of $16.7 million. (See Note 5 to the Company's Supplemental Consolidated Financial Statements included elsewhere herein.) The increase in cash from operating activities for 1997 over 1996 was primarily due to increased net income, after adding back the effect of non-cash charges in 1996, partially offset by higher payments of accounts payable, including amounts to substantially repay vendor financed payables. EBITDA was $79.1 million for the year ended December 31, 1998, a decrease of $13.3 million from $92.4 million for the year ended December 31, 1997. As a percentage of total commissions & fees, EBITDA decreased to 12.0% for the year ended December 31, 1998 from 17.1% for the year ended December 31, 1997. The decrease resulted primarily from the $18.0 million charge for merger costs ($22.4 million less $4.4 million in amortization of deferred compensation), which was 2.7% of total commissions & fees for the year ended December 31, 1998, offset, in part, by increased depreciation and amortization of $12.9 million. For the year ended December 31, 1997, EBITDA was $92.4 million, an increase of $84.6 million from $7.8 million for the year ended December 31, 1996. As a percent of total commissions & fees, EBITDA increased to 17.1% for the year ended December 31, 1997 as compared to 1.9% for the year ended December 31, 1996 due to a higher operating profit. For the year ended December 31, 1996, EBITDA was $7.8 million primarily due to the $52.0 million non-cash special compensation charge. Net cash used in investing activities for the years ended December 31, 1998, 1997 and 1996 was $66.5 million, $89.7 million and $46.4 million, respectively. The $23.2 million decrease in 1998 as compared with 1997 was primarily due to $34.1 million less in payments for acquisitions, reflecting the use of company stock to make acquisitions of businesses, offset in part by $0.4 million more in capital expenditures and during 1997 our receipt of a net $11.4 million from the Principal Stockholder and certain other stockholders, who repaid borrowings with funds received primarily from their sale of shares included with our second public offering. Payments for businesses acquired using the purchase method of accounting, excluding $5.5 million in TMP stock, were $32.8 million in 1998, $66.9 million in 1997, of which $47.2 million was for Austin Knight, and $31.3 million in 1996. Capital expenditures, primarily for computer equipment and furniture and fixtures, were $31.9 million, $31.6 million and $15.4 million for the years ended December 31, 1998, 1997 and 1996, respectively. In addition, in 1997, we acquired certain transportation equipment and made capital improvements for a total of $6.8 million, replacing the transportation equipment sold during 1996 for $6.1 million, and simultaneously entered into a $7.8 million financing agreement to fund the purchase and provide additional operating funds. In December 1996, we sold certain transportation equipment for $6.1 million receiving a note for $2.7 million and retained $1.2 million in cash, after payment of related debt. 16 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Our financing activities include equity offerings, borrowings and repayments under our financing agreement and payments on (i) installment notes, principally to finance acquisitions, and (ii) capital leases. In the fourth quarter of 1996, we completed our initial public offering of 4,147,408 shares of Common Stock for net proceeds of $50.8 million and in the third quarter of 1997, we completed our second public offering of 2,400,000 shares of Common Stock for net proceeds of $51.2 million. With a portion of the proceeds received from our initial public offering in January 1997, we redeemed all of the shares of the cumulative preferred stock issued by a subsidiary, reported as a minority interest, and our previously issued preferred stock for approximately $3.1 million and $2.1 million, respectively. Such redemptions included approximately $100,000 each of premiums. Our financing activities provided net cash of $20.1 million, $65.5 million and $13.4 million in 1998, 1997 and 1996, respectively. In November, 1998 and 1997 we amended our financing agreement with our primary lender to provide for borrowings, under a revolving credit facility, of a minimum of $175 million. In May 1999 we increased this amount to $185 million. This facility is used to finance our acquisitions and for working capital requirements. As of December 31, 1998, there was $97.7 million outstanding and approximately $77.3 million available under such facility. Our current interest rate under the agreement is LIBOR plus 75 basis points. In addition, we had secured lines of credit aggregating $49.0 million for LAI and our operations in Australia, France, Belgium and the Netherlands of which approximately $42.5 million was unused at December 31, 1998. Upon consummation of the merger with TMP, LAI's $25.0 million line of credit was eliminated by TMP. We believe we will be able to fund our short-term cash needs through funds from operations, our credit facilities in the United States, the United Kingdom, Canada and Australia and, to a lesser extent, equipment leases. The borrowings are secured by a lien on substantially all of our assets. In addition, the financing agreement contains certain covenants which restrict, among other things, our ability to borrow, pay dividends, acquire businesses, guarantee debts of others and lend funds to affiliated companies and contains criteria on the maintenance of certain financial statement amounts and ratios. At September 30, 1999, we had a $185 million committed line of credit from our primary lender pursuant to a revolving credit agreement expiring June 30, 2001. Of such line, at September 30, 1999, approximately $58.2 million was unused and accounts receivable as defined in the agreement is sufficient to allow draw down of the entire amount. In addition, we have lines of credit aggregating $20.6 million for our operations in Australia, New Zealand, France, Belgium and the Netherlands of which approximately $12.0 million was unused at September 30, 1999. Cash and cash equivalents at September 30, 1999 were $68.0 million, an increase of $26.4 million from $41.6 million at September 30,1998. Part of our acquisition strategy is to pay, over time, a portion of the purchase price of certain acquisitions through seller financed notes. Accordingly, such notes are included in long-term debt, are generally payable over five years and totaled approximately $13.8 million at December 31, 1998. We intend to continue our acquisition strategy and marketing and promotion of our Internet business through the use of operating profits, borrowings against our long-term debt facility and seller financed notes. We believe that our anticipated cash flow from operations, as well as the availability of funds under our existing financing agreements and access to public equity and debt markets, will provide us with liquidity to meet our current foreseeable cash needs for at least the next year. However, if we determine that conditions are favorable, we would consider additional corporate equity or debt transactions. 17 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not expect the adoption of this statement to have a significant impact on the Company's results of operations, financial position or cash flows. YEAR 2000 ISSUE Many currently installed computer systems and software products are coded to accept or recognize only two digit entries in the date code field. These systems and software products will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and/or software used by many companies and governmental agencies may need to be upgraded to comply with such Year 2000 requirements or risk system failure or miscalculations causing disruptions of normal business activities. STATE OF READINESS Since early in 1999, we have been working to position TMP as Year 2000 ready before December 31, 1999. We have developed a comprehensive plan to deal with the Year 2000 issue and have engaged internal and external resources to focus on this effort. The plan is an evolving document as we continue to acquire and integrate companies throughout 1999. The plan is intended to achieve three basic objectives: to ensure that computer systems and other equipment function in the same manner after December 31, 1999 as it did before the century date change, to ensure that each business unit follows a consistent approach for assessment renovation, and validation of all IT and non-IT assets, and to track the status of all Year 2000 efforts. In addition to our internal assets, we are assessing and monitoring the Year 2000 readiness of our key vendors and service providers. We are also monitoring the readiness of public infrastructure service providers such as power, communications, and transportation providers. Our Year 2000 task force has conducted an inventory of and has developed testing procedures for all software and other systems that we believe might be affected by Year 2000 issues. Since third parties developed and currently support many of the systems used, a significant part of this effort will be to ensure that these third-party systems are Year 2000 ready. Our plan is to confirm this readiness by obtaining representations by these third parties that their products' are year 2000 ready and through specific testing of these systems. We have substantially completed this process as of the end of the third quarter of 1999 and plan to complete this process by the end of the fourth quarter. Until such testing is completed and such vendors and providers are contacted, we will not be able to completely evaluate whether our systems will need to be revised or replaced. COSTS We expect to incur approximately $3.0 million, globally, during 1999 in connection with identifying, evaluating and addressing Year 2000 readiness issues. Most of these costs relate to time spent by employees and consultants in making our systems Year 2000 ready. Such costs are not expected to have a material adverse effect on the Company's business, results of operations and financial condition. 18 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RISKS While we are making every effort to address the Year 2000 issue, there are inherent risks. We are not currently aware of any Year 2000 readiness problems relating to our systems that would have a material adverse effect on our business, results of operations and financial condition, without taking into account our efforts to avoid or fix such problems. There can be no assurance that we will not discover Year 2000 readiness problems in our systems and equipment that will require substantial revision. In addition, there can be no assurance that third-party software, hardware or services incorporated into our material systems will not need to be revised or replaced, all of which could be time-consuming and expensive. Our failure to fix or replace our internally developed proprietary software or third-party software, hardware or services on a timely basis could result in lost commissions & fees, increased operating costs, the loss of customers and other business interruptions, any of which could have a material adverse effect on our business, results of operations and financial condition. Moreover, the failure to adequately address Year 2000 readiness issues in our internally developed proprietary software could result in claims of mismanagement, misrepresentation or breach of contract and related litigation, which could be costly and time-consuming to defend. We are heavily dependent on a significant number of third party vendors to provide both network services and equipment. A significant Year 2000 related disruption of the network, services or equipment that third-party vendors provide to us could cause our members and visitors to consider seeking alternate providers or cause an unmanageable burden on our technical support, which in turn could materially and adversely affect our business, financial condition and results of operations. In addition, we cannot assure you that governmental agencies, utility companies, internet access companies, third party service providers and others outside of our control will be Year 2000 ready. The failure by such entities to be Year 2000 ready could result in a systemic failure beyond our control, such as a prolonged internet, telecommunications or electrical failure, which could also prevent us from delivering our services to our customers, decrease the use of the internet or prevent users from accessing our websites which could have a material adverse effect on our business, results of operations and financial condition. CONTINGENCY PLAN We have developed contingency plans for those systems and equipment which we consider at risk of not being Year 2000 ready at least four weeks before year-end. The results of our Year 2000 simulation testing and the responses received from third-party vendors and service providers will be taken into account in determining the nature and extent to which our contingency plans will be implemented. In addition, we are developing an event planning procedure to monitor the function of our global operations before, during and after the century date change. FLUCTUATIONS OF QUARTERLY RESULTS Our quarterly commissions & fees are affected by the timing of yellow page directory closings which currently have a concentration in the third quarter. Yellow page publishers may change the timing of directory publications which may have an effect on our quarterly results. Our yellow page advertising results are also affected by commissions earned for volume placements for the year, which are typically reported in the fourth quarter. Our quarterly commissions & fees for recruitment advertising are typically highest in the first quarter and lowest in the fourth quarter. However, the cyclicality in the economy and our clients' employment needs have an overriding impact on our quarterly results in recruitment advertising, search & selection and temporary contracting. (See Note 2 to the Company's Supplemental Consolidated Financial Statements included elsewhere herein.). 19 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table sets forth summary quarterly unaudited financial information for the nine months ended September 30, 1999 and the years ended December 31, 1998 and 1997. Amounts have been restated to reflect the effect of the retroactive restatement for the Fourth Quarter 1999 Mergers: (in millions, except share and per share amounts).
1999 QUARTERS ----------------------------------- MARCH 31 JUNE 30, SEPTEMBER 30, -------- -------- ------------- Commissions & fees: Recruitment advertising..................................... $ 45.6 $ 46.3 $ 43.0 Yellow page advertising..................................... 23.8 27.2 28.5 Search & selection.......................................... 66.3 70.2 82.7 Internet.................................................... 20.5 25.8 36.7 Temporary contracting....................................... 12.8 16.6 15.5 ------ ------ ------ Total commissions & fees.................................... $169.0 $186.1 $206.4 ====== ====== ====== Operating income (loss)..................................... $ (1.2) $ 7.4 $ (2.4) Net income (loss) applicable to common and Class B common stockholders.............................................. $ (2.3) $ 3.2 $ (5.8) Net income (loss) per common and Class B common share: Basic....................................................... $(0.06) $ 0.08 $(0.15) Diluted..................................................... $(0.06) $ 0.08 $(0.15) Weighted average shares outstanding (in thousands): Basic....................................................... 39,323 39,876 39,992 Diluted..................................................... 39,323 41,596 39,992
1998 QUARTERS --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ Commissions & fees: Recruitment advertising........................... $ 45.8 $ 45.7 $ 42.3 $ 43.9 Yellow page advertising........................... 23.3 27.1 32.1 23.9 Search & selection................................ 69.9 74.0 70.9 61.3 Internet.......................................... 8.0 11.0 13.7 17.5 Temporary contracting............................. 5.6 13.6 13.8 14.0 ------ ------ ------ ------ Total commissions & fees.......................... $152.6 $171.4 $172.8 $160.6 ====== ====== ====== ====== Operating income (loss)........................... $ 17.2 $ 21.2 $ 15.7 $ (6.9) Net income (loss) applicable to common and Class B common stockholders............................. $ 9.7 $ 11.6 $ 7.9 $ (8.7) Net income (loss) per common and Class B common share: Basic............................................. $ .25 $ .30 $ .20 $(0.22) Diluted........................................... $ .24 $ .29 $ .20 $(0.22) Weighted average shares outstanding (in thousands): Basic............................................. 38,421 38,748 38,811 38,857 Diluted........................................... 39,735 39,806 39,970 38,857
20 TMP WORLDWIDE INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
1997 QUARTERS --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ Commissions & fees: Recruitment advertising........................... $ 27.7 $ 30.8 $ 35.4 $ 40.4 Yellow page advertising........................... 21.9 25.1 30.6 26.3 Search & selection................................ 56.8 63.4 59.6 63.0 Internet.......................................... 4.0 4.7 5.0 5.8 Temporary contracting............................. 5.3 24.2 5.8 6.0 ------ ------ ------ ------ Total commissions & fees.......................... $115.7 $148.2 $136.4 $141.5 ====== ====== ====== ====== Operating income.................................. $ 18.5 $ 19.4 $ 19.9 $ 12.7 Net income applicable to common and Class B common stockholders.................................... $ 11.2 $ 11.9 $ 11.0 $ 7.7 Net income per common and Class B common share: Basic............................................. $ 0.32 $ 0.33 $ 0.31 $ 0.20 Diluted........................................... $ 0.31 $ 0.33 $ 0.30 $ 0.20 Weighted average shares outstanding (in thousands): Basic............................................. 35,355 35,578 36,171 38,257 Diluted........................................... 35,798 36,204 36,847 38,896
Earnings (loss) per share calculations for each quarter include the weighted average effect for the quarter; therefore, the sum of the quarters may not equal the full year earnings (loss) per share amount, which reflects the weighted average effect on an annual basis. In addition, diluted earnings per share calculations for each quarter include the effect of stock options and warrants, when dilutive to the quarter. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS The following are the supplemental consolidated financial statements and exhibits of TMP Worldwide Inc. and Subsidiaries, which are filed as part of this report. 21 TMP WORLDWIDE INC. AND SUBSIDIARIES
PAGE NO. -------- SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED): Balance sheet as of September 30, 1999...................... F-2 Statements of operations for the nine months ended September 30, 1999 and 1998......................................... F-3 Statements of comprehensive income (loss) for the nine months ended September 30, 1999 and 1998............................................. F-4 Statement of stockholders' equity for the nine months ended September 30, 1999........................................ F-5 Statements of cash flows for the nine months ended September 30, 1999 and 1998......................................... F-6 Notes to supplemental consolidated condensed financial statements................................................ F-7 SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Certified Public Accountants.......... F-16 Independent Auditor's Report to the Members of Morgan & Banks Limited............................................. F-17 Report of Independent Certified Public Accountants (with respect to LAI)........................................... F-18 Statements of consolidated balance sheets for the years ended December 31, 1998 and 1997.......................... F-19 Statements of operations for the years ended December 31, 1998, 1997 and 1996....................................... F-20 Statements of comprehensive income (loss) for the years ended December 31, 1998, 1997 and 1996.................... F-21 Statements of stockholders' equity (deficit) for the years ended December 31, 1998, 1997 and 1996.................... F-22 Statements of cash flows for the years ended December 31, 1998, 1997 and 1996....................................... F-24 Notes to supplemental consolidated financial statements..... F-25 Report of Independent Certified Public Accountants.......... F-58 Report of Independent Certified Public Accountants (with respect to LAI)........................................... F-59 Supplemental Schedule II: Valuation and qualifying accounts for the years ended December 31, 1998, 1997 and 1996...... F-60
All other schedules are omitted because the required information is either inapplicable or is included in the supplemental consolidated financial statements or the notes thereto. F-1 TMP WORLDWIDE INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED CONDENSED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
SEPTEMBER 30, 1999 ------------- ASSETS Current assets: Cash and cash equivalents................................... $ 67,964 Accounts receivable, net.................................... 417,326 Work-in-process............................................. 19,593 Prepaid and other........................................... 24,995 --------- Total current assets................................ 529,878 Property and equipment, net................................. 62,691 Deferred income taxes....................................... 15,817 Intangibles, net............................................ 257,807 Other assets................................................ 17,491 --------- $ 883,684 ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................................ $ 302,184 Accrued expenses and other liabilities...................... 122,452 Accrued restructuring costs................................. 25,041 Deferred commissions & fees................................. 47,016 Deferred income taxes....................................... 278 Current portion of long term debt........................... 8,898 --------- Total current liabilities........................... 505,869 Long term debt, less current portion........................ 101,198 Other liabilities........................................... 16,572 --------- Total liabilities................................... 623,639 --------- Stockholders' equity: Preferred stock, $.001 par value, authorized 800,000 shares; issued and outstanding: none.............................. -- Common stock, $.001 par value, authorized 200,000,000 shares; issued and outstanding: 37,788,761 shares......... 38 Class B common stock, $.001 par value, authorized 39,000,000 shares; issued and outstanding: 2,381,000................. 2 Additional paid-in capital.................................. 300,413 Other comprehensive loss.................................... (4,363) Deficit..................................................... (36,045) --------- Total stockholders' equity.................................. 260,045 --------- $ 883,684 =========
See accompanying notes to supplemental consolidated condensed financial statements. F-2 TMP WORLDWIDE INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1999 1998 -------- -------- Commissions & fees.......................................... $561,481 $496,872 -------- -------- Operating expenses: Salaries and related costs.............................. 327,046 288,045 Office and general expenses............................. 173,053 136,639 Merger & integration costs.............................. 46,262 9,577 Restructuring charges................................... 2,789 -- Amortization of intangibles............................. 8,564 7,394 CEO special bonus....................................... -- 1,125 -------- -------- Total operating expenses................................ 557,714 442,780 -------- -------- Operating income........................................ 3,767 54,092 -------- -------- Other expense: Interest expense, net................................... (6,272) (7,035) Other, net.............................................. (851) (932) -------- -------- Total other expense, net............................ (7,123) (7,967) -------- -------- Income (loss) before provision for income taxes, minority interests and equity in losses of affiliates.............. (3,356) 46,125 Provision for income taxes.................................. 1,154 16,637 -------- -------- Income (loss) before minority interests and equity in losses of affiliates............................................. (4,510) 29,488 Minority interests.......................................... 107 (18) Equity in losses of affiliates.............................. (300) (297) -------- -------- Net income (loss)........................................... $ (4,917) $ 29,209 ======== ======== Net income (loss) per common and Class B common share: Basic....................................................... $ (0.12) $ 0.75 ======== ======== Diluted..................................................... $ (0.12) $ 0.73 ======== ======== Weighted average shares outstanding: Basic....................................................... 39,611 38,696 ======== ======== Diluted..................................................... 39,611 39,802 ======== ========
See accompanying notes to supplemental consolidated condensed financial statements. F-3 TMP WORLDWIDE INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1999 1998 -------- -------- Net income (loss)........................................... $(4,917) $29,209 Foreign currency translation adjustment..................... (1,289) (580) ------- ------- Comprehensive income (loss)................................. $(6,206) $28,629 ======= =======
See accompanying notes to supplemental consolidated condensed financial statements. F-4 TMP WORLDWIDE INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
CLASS B COMMON STOCK COMMON STOCK, OTHER $.001 PAR VALUE $.001 PAR VALUE ADDITIONAL COMPRE- UNAMORTIZED --------------------- ---------------------- PAID-IN HENSIVE STOCK-BASED SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS COMPENSATION DEFICIT ---------- -------- --------- ---------- ---------- -------- ------------- -------- Balance December 31, 1998................ 36,592,847 $37 2,381,000 $ 2 $262,399 $(3,074) $(2,732) $(27,882) Issuance of common stock in connection with the exercise of options............. 649,781 1 -- -- 8,158 -- -- -- Issuance of common stock in connection with business combinations........ 341,981 -- -- -- 17,113 -- -- -- Issuance of common stock for matching contribution to 401(k) plan......... 21,477 -- -- -- 902 -- -- -- Issuance of common stock for employee stay bonuses........ 163,244 -- -- -- 5,316 -- -- -- Issuance of common stock for purchase of minority interest............ 19,431 -- -- -- 1,210 -- -- -- Issuance of compensatory stock options............. -- -- -- -- 134 -- -- -- Tax benefit from the exercise of stock options............. -- -- -- -- 6,214 -- -- -- Forfeiture of stock based compensation due to departure of employees of pooled entity.............. -- -- -- -- (1,033) -- 1,033 -- Pooled company losses included in both current and previous years............... -- -- -- -- -- -- -- 3,784 Accelerated vesting of stock-based compensation by pooled company...... -- -- -- -- -- -- 1,699 -- Foreign currency translation adjustment.......... -- -- -- -- -- (1,289) -- -- Net income (loss)..... -- -- -- -- -- -- -- (4,917) Dividends declared by pooled companies.... -- -- -- -- -- -- -- (7,030) ---------- --- --------- ---------- -------- ------- ------- -------- Balance, September 30, 1999................ 37,788,761 $38 2,381,000 $ 2 $300,413 $(4,363) $ -- $(36,045) ========== === ========= ========== ======== ======= ======= ======== TOTAL STOCKHOLDERS' EQUITY ------------- Balance December 31, 1998................ $228,750 Issuance of common stock in connection with the exercise of options............. 8,159 Issuance of common stock in connection with business combinations........ 17,113 Issuance of common stock for matching contribution to 401(k) plan......... 902 Issuance of common stock for employee stay bonuses........ 5,316 Issuance of common stock for purchase of minority interest............ 1,210 Issuance of compensatory stock options............. 134 Tax benefit from the exercise of stock options............. 6,214 Forfeiture of stock based compensation due to departure of employees of pooled entity.............. -- Pooled company losses included in both current and previous years............... 3,784 Accelerated vesting of stock-based compensation by pooled company...... 1,699 Foreign currency translation adjustment.......... (1,289) Net income (loss)..... (4,917) Dividends declared by pooled companies.... (7,030) -------- Balance, September 30, 1999................ $260,045 ========
See accompanying notes to supplemental consolidated condensed financial statements. F-5 TMP WORLDWIDE INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 1999 1998 --------- -------- Cash flows from operating activities: Net income (loss)........................................... $ (4,917) $ 29,209 --------- -------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment..... 17,524 14,586 Amortization of intangibles and deferred costs.............. 8,564 7,394 Amortization of deferred compensation....................... 3,994 2,631 Provision for doubtful accounts............................. 8,596 3,336 Common stock issued for stay bonuses and contributions to 401(k) plan............................................... 2,031 4,040 CEO special bonus........................................... -- 1,125 Minority interests.......................................... 107 (18) Provision for deferred income taxes......................... (8,202) 778 Net loss on disposal of fixed assets........................ 7,297 13 Tax benefit from the exercise of employee stock options..... 6,214 -- Other....................................................... -- 497 Effect of companies accounted for as poolings of interests included in both the current period and the previous year...................................................... 3,784 -- Changes in assets and liabilities, net of effects of purchases of businesses: Increase in accounts receivable, net........................ (68,987) (54,777) Increase in accounts payable and accrued liabilities........ 39,153 24,617 Increase in work-in process prepaid and other............... 9,327 (8,644) Increase in deferred revenue................................ 31,361 7,899 --------- -------- Total adjustments..................................... 60,763 3,477 --------- -------- Net cash provided by operating activities............. 55,846 32,686 --------- -------- Cash flows from investing activities: Capital expenditures........................................ (19,684) (20,546) Proceeds from sale of assets................................ 9,761 (5) Advances & loan repayments to shareholders & officers of pooled companies.......................................... -- (580) Payments for purchases of businesses, net of cash acquired.................................................. (22,029) (24,058) Purchases of investments by a pooled company................ -- (33,363) Investment in life insurance................................ -- (1,433) --------- -------- Net cash used in investing activities................. (31,952) (79,985) --------- -------- Cash flows from financing activities: Payments on capitalized leases.............................. (3,988) (1,787) Borrowings under lines of credit and proceeds from issuance of debt................................................... 926,951 756,338 Repayments under lines of credit and principal payments on debt...................................................... (952,874) (753,014) Proceeds from common stock offering of pooled company....... -- 41,392 Cash received from the exercise of employee stock options... 8,159 1,405 Distributions to minority interests......................... -- (115) Dividends paid by pooled entities........................... (7,030) (11,347) Other....................................................... -- (192) --------- -------- Net cash (used in) provided by financing activities... (28,782) 32,680 --------- -------- Effect of exchange rate changes on cash..................... (648) (56) --------- -------- Net decrease in cash and cash equivalents................... (5,536) (14,675) --------- -------- Cash and cash equivalents, beginning of period.............. 73,500 56,316 --------- -------- Cash and cash equivalents, end of period.................... $ 67,964 $ 41,641 ========= ========
See accompanying notes to supplemental consolidated condensed financial statements. F-6 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) NOTE 1--BASIS OF PRESENTATION The supplemental consolidated condensed interim financial statements included herein have been prepared by TMP Worldwide Inc. ("TMP" or the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments which, in the opinion of management, are necessary for fair presentation of the information contained herein. It is suggested that these supplemental consolidated condensed financial statements be read in conjunction with (1) the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and (2) its supplemental consolidated financial statements included elsewhere herein. The Company follows the same accounting policies in preparation of interim financial statements. Results of operations for the interim periods may not be indicative of annual results. For the period April 1, 1998 through September 30, 1999, the Company completed 18 mergers which were accounted for as poolings of interests. The seven that the Company completed prior to April 1, 1999 are Johnson, Smith & Knisely Inc. ("JSK"), TASA Holding AG ("TASA"), Stackig, Inc. ("Stackig"), Recruitment Solutions Inc., Sunquest L.L.C. d.b.a. The SMART Group and The Consulting Group (International) Limited ("TCG"), in 1998 (the "1998 Mergers") and Morgan & Banks Limited ("M&B") in January 1999 (the "M&B Merger"). In connection with these mergers, the Company issued 8,789,455 shares of our common stock in exchange for all of the outstanding common stock of these seven companies. From April 1, 1999 through June 30, 1999, the Company completed pooling of interests mergers (the "Second Quarter 1999 Mergers"), with six companies, Interquest, Pty. Limited ("Interquest"), LIDA Advertising Inc. ("LIDA"), Maes & Lunau ("M&L"), IN2, Inc. ("IN2"), Lemming & LeVan, Inc. ("L&L"), and Yellow Pages Unlimited, Inc. ("YPU"), (the "Second Quarter 1999 Pooled Companies"). In connection with the Second Quarter 1999 Mergers the Company issued a total of 900,240 shares of TMP common stock in exchange for all of the outstanding stock of the Second Quarter 1999 Pooled Companies. In addition from July 1, 1999 through September 30, 1999 the Company completed pooling of interests mergers (the "Third Quarter 1999 Mergers") with five companies, Cameron-Newell Advertising, Inc ("CNA"), Brook Street Bureau (QLD) Pty Ltd ("Brook Street"), LAI Worldwide Inc. ("LAI"), Fox Advertising Inc ("Fox") and Lampen Group Limited ("Lampen"), (the "Third Quarter 1999 Pooled Companies"). In connection with the Third Quarter 1999 Mergers the Company issued a total of 2,153,456 shares of TMP common stock in exchange for all of the outstanding stock of the Third Quarter 1999 Pooled Companies. Furthermore, from October 1, 1999 through November 19, 1999, the Company completed mergers with the two companies listed below (the "Fourth Quarter 1999 Pooled Companies"), which provided for the exchange of all of the outstanding stock of such companies for a total of 758,613 shares of TMP F-7 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) NOTE 1--BASIS OF PRESENTATION (CONTINUED) common stock and which were accounted for as poolings of interests (the "Fourth Quarter 1999 Mergers").
NATURE OF REGION OF NUMBER OF TMP ENTITY OPERATIONS OPERATIONS ACQUISITION DATE SHARES ISSUED - ------ ------------------ ------------------ ---------------- ------------- Highland Search Group, L.L.C. ("Highland")........ Search & selection North America October 21, 1999 699,333 TMC S.r.l. ("Amrop Italy")..... Search & selection Continental Europe October 27, 1999 59,280
Consequently, the Company's consolidated condensed financial statements have been retroactively restated as of September 30, 1999, and for the nine months ended September 30, 1999 and 1998, to reflect the consummation of the Fourth Quarter 1999 Mergers. The supplemental consolidated condensed financial statements included herein give retroactive effect to the Fourth Quarter 1999 Mergers, which have been accounted for using the pooling of interests method and, as a result, the financial position, results of operations, comprehensive income (loss) and cash flows are presented as if the Fourth Quarter 1999 Pooled Companies had been consolidated for all periods presented. Furthermore, the Company's consolidated financial statements had previously been retroactively restated for the nine months ended September 30, 1998 to reflect the consummation of the Third Quarter 1999 Mergers and Second Quarter 1999 Mergers, which have been accounted for using the pooling of interests method. As a result, the supplemental consolidated condensed balance sheets, statements of operations, statements of comprehensive income (loss) and statements of cash flows included herein are presented as if the combining companies had been consolidated for all periods presented. In addition, the supplemental consolidated condensed statement of stockholders' equity reflects the accounts of TMP as if the additional common stock issued in connection with the mergers had been issued for all periods presented. As required by generally accepted accounting principles, the supplemental consolidated condensed financial statements will become the historical financial statements of the Company upon issuance of the financial statements for the period that includes the consummation of the Fourth Quarter 1999 Mergers. TEMPORARY CONTRACTING The amounts charged to clients for Temporary Contracting services are now reported after deducting the costs of the temporary contractors. The details for such amounts are (in thousands):
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1999 1998 -------- -------- Temporary Contracting Revenue........................... $245,015 $184,942 Temporary Contracting Costs............................. 200,149 151,915 -------- -------- Temporary Contracting Billings\Commissions & fees....... $ 44,866 $ 33,027 ======== ========
F-8 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) NOTE 1--BASIS OF PRESENTATION (CONTINUED) EARNINGS PER SHARE Basic earnings per share assumes no dilution, and is computed by dividing income (loss) available to common and Class B common shareholders by the weighted average number of common and Class B common shares outstanding during each period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effects of common shares issuable upon exercise of stock options and warrants, and contingent shares. A reconciliation of shares used in calculating basic and diluted earnings per common and Class B common share follows (in thousands):
NINE MONTHS ENDED SEPTEMBER 30, ------------------- 1999 1998 -------- -------- Basic................................................... 39,611 38,696 Effect of assumed conversion of stock options and other................................................. * 1,106 -------- -------- Diluted................................................. 39,611 39,802 ======== ========
- ------------------------ * Effect of diluted shares is anti-dilutive. NOTE 2--NATURE OF BUSINESS AND CREDIT RISK The Company operates in five business segments: recruitment advertising, yellow page advertising, Internet, search & selection and temporary contracting. The Company earns commission income for selling and placing recruitment and yellow page advertising to a large number of customers in many different industries, fees for executive and mid-level search & selection services, fees for advertisements placed on its Internet Websites and other Internet related recruitment and advertising services and fees in connection with providing temporary contracting services. The Company operates principally throughout North America, the Asia/Pacific Region (primarily in Australia, New Zealand and Japan), the United Kingdom and Continental Europe. NOTE 3--BUSINESS ACQUISITIONS ACQUISITIONS ACCOUNTED FOR USING THE POOLING OF INTERESTS METHOD During the period October 1, 1999 through November 19, 1999, the Company completed the following mergers which provided for the exchange of all the outstanding stock of each entity for shares of TMP common stock and are being accounted for as poolings of interests:
NATURE OF REGION OF NUMBER OF TMP ENTITY OPERATIONS OPERATIONS ACQUISITION DATE SHARES ISSUED - ------ ------------------ ------------------ ---------------- ------------- Highland.............. Search & selection North America October 21, 1999 699,333 Amrop Italy........... Search & selection Continental Europe October 27, 1999 59,280
F-9 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) NOTE 3--BUSINESS ACQUISITIONS (CONTINUED) Commissions & fees, net income (loss) applicable to common and Class B common stockholders and net income (loss) per common and Class B common share of the combining companies, after giving retroactive effect to the pooling of interests transactions, are as follows:
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1999 1998 --------- --------- COMMISSIONS & FEES TMP, as previously reported on Form 10-Q for the period ended September 30, 1999.......... $539,546 $479,903 Highland....................................... 19,708 14,517 Amrop Italy.................................... 2,227 2,452 -------- -------- TMP, as restated............................... $561,481 $496,872 ======== ========
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1999 1998 --------- --------- NET INCOME (LOSS) APPLICABLE TO COMMON AND CLASS B COMMON STOCKHOLDERS TMP, as previously reported on Form 10-Q....... $ (7,803) $ 22,401 Highland....................................... 2,838 6,704 Amrop Italy.................................... 48 104 -------- -------- TMP, as restated............................... $ (4,917) $ 29,209 ======== ======== NET INCOME (LOSS) PER COMMON AND CLASS B COMMON SHARE As previously reported on Form 10-Q: Basic........................................ $ (0.20) $ 0.59 Diluted...................................... $ (0.20) $ 0.57 Restated: Basic........................................ $ (0.12) $ 0.75 Diluted...................................... $ (0.12) $ 0.73
MERGER & INTEGRATION COSTS INCURRED WITH POOLING OF INTERESTS TRANSACTIONS In connection with pooling of interests transactions completed during 1999 and 1998, the Company expensed merger & integration costs of $46,262 for the nine months ended September 30, 1999. Of this amount $21,018 is for merger costs and $25,244 is for integration costs. The merger costs for the nine months ended September 30, 1999, consist of (1) $3,251 of non-cash employee stay bonuses, which include (a) $2,133 for the amortization of $5,986, recorded as prepaid compensation and a corresponding long-term liability, being expensed over the eighteen months from April 1, 1998 to September 30, 1999 for TMP shares set aside for key personnel of JSK and TCG who must remain employees of the Company for a full year in order to earn such shares, (b) $351 which is related to an option grant to employees of a pooled company and which represents the difference between the option exercise price and the stock price F-10 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) NOTE 3--BUSINESS ACQUISITIONS (CONTINUED) on the day the options were granted and (c) $767 for TMP shares given to key personnel of a pooled company as employee stay bonuses, (2) $1,132 paid in cash to key personnel of pooled companies as employee stay bonuses, (3) $11,850 of transaction related costs, including legal, accounting, printing and advisory fees and the costs incurred for the subsequent registration of shares issued in the acquisitions and (4) $4,785 in severance costs for managers of LAI, who, in accordance with the terms of their employment agreements, chose to resign from LAI after the merger with TMP seemed likely. The $25,244 of integration costs consist of: (a) $8,703 for assumed obligations of closed facilities, (b) $12,110 for consolidation of acquired facilities, (c) $575 for severance, relocation and other employee costs and (d) a $3,856 provision for uncollectible accounts receivable. See schedule in ACCRUED RESTRUCTURING AND INTEGRATION COSTS in the section below. During the nine months ended September 30, 1998, the Company expensed merger & integration costs of $9,577 which were related to the pooling of interests transactions with JSK, TASA and Stackig, and are comprised of transaction costs and the amortization of employee stay bonuses. ACQUISITIONS ACCOUNTED FOR USING THE PURCHASE METHOD In addition to the pooling of interests transactions discussed above, in the nine month period ended September 30, 1999, the Company completed seventeen acquisitions using the purchase method of accounting: eight search & selection companies, seven recruitment advertising companies, one Internet company and one yellow page advertising company. The purchase price of these acquisitions was approximately $45.8 million, including 337,466 shares of TMP common stock. Operations of these businesses have been included in the consolidated financial statements from their acquisition dates. The summarized unaudited pro forma results of operations set forth below for the nine month periods ended September 30, 1999 and 1998 and the year ended December 31, 1998 assume that the acquisitions in 1999 and 1998 occurred as of the beginning of the period. The unaudited pro forma results of operations are not necessarily indicative of what actually would have occurred if the acquisitions had been completed at the beginning of each of the periods presented, nor are the results of operations necessarily indicative of the results that will be attained in the future.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, -------------------------------- ----------------------- 1999 1998 1998 --------- --------- ----------------------- Commissions & fees.......................... $573,925 $520,258 $697,888 Net income (loss) applicable to common and Class B common stockholders............... $ (4,687) $ 27,587 $ 19,603 Net income (loss) per common and Class B common share: Basic..................................... $ (0.12) $ 0.70 $ 0.50 Diluted................................... $ (0.12) $ 0.68 $ 0.49
F-11 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) NOTE 3--BUSINESS ACQUISITIONS (CONTINUED) ACCRUED RESTRUCTURING AND INTEGRATION COSTS In connection with the acquisitions made in 1997 and accounted for using the purchase method, the Company developed plans to restructure the operations of the acquired companies. Such plans involve the closure of certain offices of the acquired companies and the termination of certain management and employees. The objective of the plans is to create a single brand in the related markets in which the Company operates. The preliminary plans were finalized in July 1998. In addition, in 1999 LAI completed plans to close its London, England and Hong Kong offices and, in connection with these office closings, charged earnings $2,789 for the nine months ended September 30, 1999. Including the effects of integration plans related to business combinations accounted for as pooling of interests discussed above, the costs and liabilities of these plans include:
BALANCE APPLIED AGAINST BALANCE 12/31/98 EXPENSED RELATED ASSET PAYMENTS 9/30/99 -------- -------- --------------- -------- -------- Assumed obligations on closed leased facilities............................... $ 9,590 $ 9,219 -- $(1,333) $17,476 Consolidation of acquired facilities....... 2,745 13,145 $ (9,255) (2,321) 4,314 Contracted lease payments exceeding current market costs............................. 707 -- -- (108) 599 Severance, relocation and other employee costs.................................... 1,952 1,813 -- (2,844) 921 Provision for uncollectable receivables.... -- 3,856 (3,856) -- -- Pension obligations........................ 1,753 -- -- (22) 1,731 ------- ------- -------- ------- ------- Total.................................... $16,747 $28,033 $(13,111) $(6,628) $25,041 ======= ======= ======== ======= =======
Accrued liabilities for surplus property in the amount of $17,476 as of September 30, 1999 relate to 20 leased office locations of the acquired companies that were either unutilized prior to the acquisition date or were closed by September 30, 1999 in connection with the restructuring and integration plans. The amount is based on the present value of minimum future lease obligations, net of sublease revenue on existing leases. Other costs associated with the closure of existing offices of acquired companies in the amount of $4,314 as of September 30, 1999, relate to the write-off of leasehold improvements and other fixed assets and termination costs of contracts relating to billing systems, external reporting systems and other contractual agreements with third parties. Above market lease costs in the amount of $599 as of September 30, 1999 relate to the present value of contractual lease payments in excess of current market lease rates. Estimated severance payments, employee relocation expenses and other employee costs in the amount of $921 as of September 30, 1999 relate to estimated severance for terminated employees at closed locations, costs associated with employees to be transferred to continuing offices and other related costs. Employee groups affected include sales, service, administrative and management personnel at duplicate locations as well as duplicate corporate headquarters' management and administrative personnel. As of September 30, 1999, the accrual related to approximately 40 employees including senior management, sales, service and administrative personnel. F-12 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) NOTE 3--BUSINESS ACQUISITIONS (CONTINUED) Pension obligations in the amount of $1,731 were assumed in connection with the acquisition of Austin Knight. The Company continues to evaluate and assess the impact of duplicate responsibilities and office locations. Future costs incurred resulting from revised plan actions will be charged to operations in the period in which they occur. NOTE 4--SEGMENT AND GEOGRAPHIC DATA The Company is engaged in five lines of business: recruitment advertising, yellow page advertising, Internet, search & selection and temporary contracting. Operations are conducted in several geographic regions: North America, the Asia/Pacific Region (primarily in Australia, New Zealand and Japan), the United Kingdom and Continental Europe. The following is a summary of the Company's operations by business segment and by geographic segment, for the nine months ended September 30, 1999 and 1998.
RECRUITMENT YELLOW PAGE SEARCH & TEMPORARY ADVERTISING ADVERTISING INTERNET SELECTION CONTRACTING TOTAL ----------- ----------- -------- --------- ----------- -------- INFORMATION BY BUSINESS SEGMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999: Commissions & fees: Traditional sources.................. $134,928 $79,522 $ -- $219,213 $44,866 $478,529 Internet............................. 8,526 3,223 66,243 4,026 934 82,952 -------- ------- -------- -------- ------- -------- Commissions & fees................... 143,454 82,745 66,243 223,239 45,800 561,481 -------- ------- -------- -------- ------- -------- Operating expenses: Salaries & related costs and office & general expenses................... 117,661 51,592 -- 209,203 31,408 409,864 Internet expenses(a)................. 7,694 3,127 61,596 17,270 (b) 548 90,235 Restructuring charges................ -- -- -- 2,789 -- 2,789 Merger & integration costs........... 401 376 -- 44,575 910 46,262 Amortization of intangibles.......... 4,833 1,550 175 1,923 83 8,564 -------- ------- -------- -------- ------- -------- Total operating expenses............. 130,589 56,645 61,771 275,760 32,949 557,714 -------- ------- -------- -------- ------- -------- Operating income (loss): Traditional sources.................. 12,033 26,004 -- (39,277) 12,465 11,225 Internet............................. 832 96 4,472 (13,244) 386 (7,458) -------- ------- -------- -------- ------- -------- Operating income (loss).............. $ 12,865 $26,100 $ 4,472 $(52,521) $12,851 3,767 ======== ======= ======== ======== ======= Total other expense, net............. (7,123) -------- Loss before provision for income taxes, minority interests and equity in losses of affiliates..... * * * * * $ (3,356) ========
- ------------------------ (a) Is comprised of salaries & related costs and office & general expenses. (b) Includes $13,806 for the marketing of search & selection related Internet services offered by LAIcompass and Highland. * Not allocated. F-13 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) NOTE 4--SEGMENT AND GEOGRAPHIC DATA (CONTINUED)
RECRUITMENT YELLOW PAGE SEARCH & TEMPORARY ADVERTISING ADVERTISING INTERNET SELECTION CONTRACTING TOTAL ----------- ----------- -------- --------- ----------- -------- INFORMATION BY BUSINESS SEGMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 Commissions & fees: Traditional sources.................. $133,858 $82,534 -- $214,765 $ 33,027 $464,184 Internet............................. 4,560 1,751 $ 26,377 -- -- 32,688 -------- ------- -------- -------- -------- -------- Commissions & fees................... 138,418 84,285 26,377 214,765 33,027 496,872 -------- ------- -------- -------- -------- -------- Operating expenses: Salaries & related costs, office & general expenses and CEO special bonus.............................. 126,263 49,409 -- 189,896 28,367 393,935 Internet expenses(a)................. 4,747 1,210 25,917 -- -- 31,874 Merger & integration costs........... 36 -- -- 9,541 -- 9,577 Amortization of intangibles.......... 4,088 1,788 173 1,257 88 7,394 -------- ------- -------- -------- -------- -------- Total operating expenses............. 135,134 52,407 26,090 200,694 28,455 442,780 -------- ------- -------- -------- -------- -------- Operating income (loss): Traditional sources.................. 3,471 31,337 -- 14,071 4,572 53,451 Internet............................. (187) 541 287 -- -- 641 -------- ------- -------- -------- -------- -------- Operating income..................... $ 3,284 $31,878 $ 287 $ 14,071 $ 4,572 54,092 ======== ======= ======== ======== ======== Total other expense, net............. (7,967) -------- Income before provision for income taxes, minority interests and equity in losses of affiliates..... * * * * * $ 46,125 ========
- ------------------------ (a) Is comprised of salaries & related costs and office & general expenses. * Not allocated F-14 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) NOTE 4--SEGMENT AND GEOGRAPHIC DATA (CONTINUED)
ASIA/PACIFIC UNITED CONTINENTAL NORTH AMERICA REGION KINGDOM EUROPE TOTAL ------------- ------------ -------- ----------- -------- INFORMATION BY GEOGRAPHIC REGION FOR THE NINE MONTHS ENDED: SEPTEMBER 30, 1999 Commissions & fees..................... $308,161 $121,244 $68,513 $63,563 $561,481 Income (loss) before income taxes, minority interests and equity in losses of affiliates........................ $(25,126) $ 17,909 $ (407) $ 4,268 $ (3,356) SEPTEMBER 30, 1998 Commissions & fees..................... $295,244 $ 95,310 $65,188 $41,130 $496,872 Income before income taxes, minority interests and equity in losses of affiliates........................... $ 18,276 $ 11,668 $ 9,221 $ 6,960 $ 46,125
NOTE 5--PROPOSED ACQUISITION OF HW GROUP PLC On November 24, 1999 the Company and HW Group PLC ("HW") entered into an agreement subject to shareholder approval, whereby the Company will acquire all of the outstanding stock of HW in a stock for stock transaction. HW is a recruitment consultancy firm based in the UK specializing in the financial and legal markets with a presence in executive, information technology and international recruitment disciplines. HW places both permanent and contract professional staff across a broad range of sectors and clients. Under the terms of the agreement, each share of HW stock will be exchanged for TMP common stock at a ratio that is based on the average closing price of a TMP share, and will be subject to a minimum average price of $58 per new TMP share. Based upon an estimated exchange value of 130 pence per HW common share and $93 per TMP common share, TMP expects to issue approximately 0.6 million shares, including the effect of options. The agreement is subject to customary closing conditions, and the transaction is expected to be accounted for as a pooling of interests. F-15 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TMP Worldwide Inc. New York, New York We have audited the accompanying supplemental consolidated balance sheets of TMP Worldwide Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related supplemental consolidated statements of operations, comprehensive income (loss), stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. The supplemental consolidated financial statements give retroactive effect to the merger of TMP Worldwide Inc. and Subsidiaries with Highland Search Group, L.L.C. on October 21, 1999 and TMC S.r.l on October 27, 1999, which have been accounted for as poolings of interests as described in Notes 1 and 5 to the supplemental consolidated financial statements. 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 did not audit the financial statements of Morgan & Banks Limited as of December 31, 1998 and March 31, 1998 and for the year ended December 31, 1998 and for each of the two years in the period ended March 31, 1998 which were combined with the Company's financial statements as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, which financial statements reflect total assets of approximately $52.3 million and $54.4 million as of December 31, 1998 and March 31, 1998 and total commissions & fees of approximately $255.4 million, $174.4 million and $235.8 million for the year ended December 31, 1998 and for each of the two years in the period ended March 31, 1998, respectively. Those financial statements were audited by another auditor whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Morgan & Banks Limited, is based solely on the report of the other auditor. We did not audit the financial statements of LAI Worldwide, Inc. and subsidiaries as of February 28, 1999 and 1998 and for each of the three years in the period ended February 28, 1999 which were combined with the Company's financial statements as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, which financial statements reflect total assets of approximately $103.8 million and $88.9 million as of February 28, 1999 and 1998 and total commissions & fees of approximately $46.4 million, $61.8 million and $86.8 million for each of the three years in the period ended February 28, 1999, respectively. Those financial statements were audited by another auditor whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for LAI Worldwide, Inc. and subsidiaries, is based solely on the report of the other auditor. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the supplemental consolidated financial statements referred to above present fairly, in all material respects, the financial position of TMP Worldwide Inc. and Subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, after giving retroactive effect to the mergers referred to above, in conformity with generally accepted accounting principles. /s/ BDO SEIDMAN, LLP ------------------------ BDO Seidman, LLP
New York, New York November 19, 1999 F-16 INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF MORGAN & BANKS LIMITED SCOPE We have audited the financial statements of Morgan & Banks Limited for the financial years ended 31 December 1998, 31 March 1998 and 31 March 1997. The financial statements include the consolidated accounts of the economic entity, comprising the company and the entities it controlled at the year's end or from time to time during the financial year. The company's directors are responsible for the preparation and presentation of these financial statements and the information they contain. We have conducted an independent audit of the financial statements and the information they contain in order to express an opinion on them to the members of the company. Our audit has been conducted in accordance with Australian Auditing Standards, which are substantially the same as generally accepted auditing standards in the United States of America, to provide reasonable assurance as to whether the financial statements are free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial statements, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion as to whether, in all material respects, the financial statements are presented fairly in accordance with Australian Accounting Standards and other mandatory professional reporting requirements and statutory requirements so as to present a view which is consistent with our understanding of the company's and the economic entity's financial position and the results of its operations and its cash flows. The audit opinion expressed in this report has been formed on the above basis. AUDIT OPINION In our opinion, the financial statements of Morgan & Banks Limited are properly drawn up: (a) so as to give a true and fair view of the state of affairs as at 31 December 1998 and 31 March 1998, the profit for the financial years ended on 31 December 1998, 31 March 1998 and 31 March 1997 and the cash flows for the nine month period ended 31 December 1998, and the years ended 31 March 1998 and 31 March 1997, of the company and the economic entity; (b) in accordance with applicable Australian Accounting Standards and other mandatory professional reporting requirements. /s/ PANNELL KERR FORSTER /s/ A.P. WHITING - ------------------------ ------------------------ Pannell Kerr Forster A.P. Whiting Chartered Accountants PARTNER New South Wales Partnership SYDNEY, 15 APRIL 1999
F-17 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To LAI Worldwide, Inc: We have audited the consolidated balance sheets of LAI Worldwide, Inc. (a Florida corporation) and subsidiaries as of February 28, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, comprehensive income and cash flows for each of the three years in the period ended February 28, 1999. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LAI Worldwide, Inc. and subsidiaries as of February 28, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 1999, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Tampa, Florida April 7, 1999 F-18 TMP WORLDWIDE INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, ------------------- 1998 1997 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 73,500 $ 56,316 Accounts receivable, net.................................. 350,091 350,848 Work-in-process........................................... 18,569 15,903 Prepaid and other......................................... 32,922 21,077 -------- -------- Total current assets.................................... 475,082 444,144 Property and equipment, net................................. 73,752 61,078 Deferred income taxes....................................... 11,618 8,901 Intangibles, net............................................ 222,866 192,339 Other assets................................................ 19,217 14,604 -------- -------- $802,535 $721,066 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $271,664 $243,079 Accrued expenses and other current liabilities............ 106,906 120,080 Accrued restructuring costs............................... 16,747 16,801 Deferred commissions & fees............................... 15,650 8,491 Deferred income taxes..................................... 4,241 8,850 Current portion of long-term debt......................... 16,235 16,977 -------- -------- Total current liabilities............................... 431,443 414,278 Long-term debt, less current portion........................ 123,106 130,011 Other liabilities........................................... 18,727 9,901 -------- -------- Total liabilities....................................... 573,276 554,190 -------- -------- Minority interests.......................................... 509 431 -------- -------- Stockholders' equity: Preferred stock, $.001 par value, authorized 800,000 shares; issued and outstanding: none.................... -- -- Common stock, $.001 par value, authorized 200,000,000 shares; issued and outstanding: 36,592,847 and 24,678,113 shares, respectively......................... 37 25 Class B common stock, $.001 par value, authorized 39,000,000 shares; issued and outstanding: 2,381,000 and 13,587,541 shares, respectively......................... 2 14 Additional paid-in capital................................ 262,399 200,141 Other comprehensive loss.................................. (3,074) (1,165) Unamortized stock-based compensation...................... (2,732) -- Deficit................................................... (27,882) (32,570) -------- -------- Total stockholders' equity.............................. 228,750 166,445 -------- -------- $802,535 $721,066 ======== ========
See accompanying notes to supplemental consolidated financial statements F-19 TMP WORLDWIDE INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Commissions & fees.......................................... $657,486 $541,828 $399,039 -------- -------- -------- Operating expenses: Salaries and related costs................................ 382,689 310,168 232,249 Office and general........................................ 190,204 152,824 115,191 Merger & integration costs................................ 22,412 -- -- Restructuring charges..................................... 3,543 -- -- Amortization of intangibles............................... 10,185 6,866 4,732 Special compensation and CEO bonus........................ 1,250 1,500 52,019 -------- -------- -------- Total operating expenses................................ 610,283 471,358 404,191 -------- -------- -------- Operating income (loss)................................. 47,203 70,470 (5,152) -------- -------- -------- Other income (expense): Interest expense, net..................................... (9,828) (8,443) (14,358) Other, net................................................ (2,042) 821 (370) -------- -------- -------- (11,870) (7,622) (14,728) -------- -------- -------- Income (loss) before provision for income taxes, minority interests and equity in earnings (losses) of affiliates... 35,333 62,848 (19,880) Provision for income taxes.................................. 14,367 20,565 11,058 -------- -------- -------- Income (loss) before minority interests and equity in earnings (losses) of affiliates........................... 20,966 42,283 (30,938) Minority interests.......................................... 28 296 1,017 Equity in earnings (losses) of affiliates................... (396) (33) 114 -------- -------- -------- Net income (loss)........................................... 20,542 41,954 (31,841) Preferred stock dividend and redemption premium............. -- (123) (210) -------- -------- -------- Net income (loss) applicable to common and Class B common stockholders.............................................. $ 20,542 $ 41,831 $(32,051) ======== ======== ======== Net income (loss) per common and Class B common share: Basic..................................................... $ 0.53 $ 1.15 $ (1.04) ======== ======== ======== Diluted................................................... $ 0.52 $ 1.13 $ (1.04) ======== ======== ======== Weighted average shares outstanding: Basic..................................................... 38,736 36,333 30,954 ======== ======== ======== Diluted................................................... 39,639 36,954 30,954 ======== ======== ========
See accompanying notes to supplemental consolidated financial statements. F-20 TMP WORLDWIDE INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Net income (loss)........................................... $20,542 $41,954 $(31,841) Foreign currency translation adjustment..................... (1,909) (4,055) (193) ------- ------- -------- Comprehensive income (loss)................................. $18,633 $37,899 $(32,034) ======= ======= ========
See accompanying notes to supplemental consolidated financial statements. F-21 TMP WORLDWIDE INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CLASS B COMMON STOCK, COMMON STOCK OTHER $.001 PAR VALUE $.001 PAR VALUE ADDITIONAL COMPREHEN- UNAMORTIZED --------------------- ---------------------- PAID-IN SIVE INCOME STOCK-BASED SHARES AMOUNT SHARES AMOUNT CAPITAL (LOSS) COMPENSATION ---------- -------- ----------- -------- ---------- ----------- ------------- Balance, December 31, 1995......... 15,719,591 $16 14,787,541 $15 $ 6,925 $ 3,083 -- Stock repurchase agreements........ -- -- -- -- 1,185 -- -- Issuance of common stock for purchase of minority interests in subsidiaries..................... 205,581 -- -- -- 1,727 -- -- Issuance of common stock as compensation..................... 142,740 -- -- -- 20 -- -- Repurchase and cancellation of common stock..................... (481,284) -- -- -- (2,160) -- -- Issuance of common stock........... 4,147,408 4 -- -- 50,779 -- -- Issuance of common stock in connection with the exercise of options.......................... 85,354 -- -- -- 347 -- -- Issuance of common stock in connection with exercise of warrant.......................... 228,768 -- -- -- 2,603 -- -- Foreign currency translation adjustment....................... -- -- -- -- -- (193) -- Dividends on preferred stock....... -- -- -- -- -- -- -- Special compensation............... -- -- -- -- 50,175 -- -- Issuance of common stock in connection with business combinations..................... 58,892 -- -- -- 1,139 -- -- Shares issued in connection with a pooled company formed in 1996.... 289,031 1 -- -- -- -- -- Dividends declared by pooled companies........................ -- -- -- -- -- -- -- Net loss........................... -- -- -- -- -- -- -- ---------- --- ----------- --- -------- ------- ------- Balance, December 31, 1996......... 20,396,081 21 14,787,541 15 112,740 2,890 -- Issuance of common stock in connection with the exercise of options.......................... 104,621 -- -- -- 659 -- -- Tax benefit of stock options exercised........................ -- -- -- -- 175 -- -- Capital contribution from Principal Stockholder re: CEO bonus and other............................ -- -- -- -- 1,775 -- -- Issuance of common stock in connection with business combinations..................... 135,028 -- -- -- 3,136 -- -- Issuance of common stock for purchase of an equity interest in a subsidiary..................... 61,848 -- -- -- 1,000 -- -- Conversion of Class B shares to shares of common stock........... 1,200,000 1 (1,200,000) (1) -- -- -- Issuance of common stock........... 2,400,000 3 -- -- 51,166 -- -- Issuance of common stock for matching contribution to 401(k) plan............................. 43,548 -- -- -- 555 -- -- Initial public offering of pooled entity........................... 303,830 -- -- -- 24,628 -- -- Other issuance of common stock of pooled entity.................... 33,157 -- -- -- 4,307 -- -- Foreign currency translation adjustment....................... -- -- -- -- -- (4,055) -- Dividend and redemption premium on preferred stock.................. -- -- -- -- -- -- -- Dividends declared by pooled companies........................ -- -- -- -- -- -- -- Net income......................... -- -- -- -- -- -- -- ---------- --- ----------- --- -------- ------- ------- Balance, December 31, 1997......... 24,678,113 $25 13,587,541 $14 $200,141 $(1,165) -- ========== === =========== === ======== ======= ======= TOTAL STOCKHOLDERS EQUITY DEFICIT (DEFICIT) -------- ------------ Balance, December 31, 1995......... $ (3,986) $ 6,053 Stock repurchase agreements........ -- 1,185 Issuance of common stock for purchase of minority interests in subsidiaries..................... -- 1,727 Issuance of common stock as compensation..................... -- 20 Repurchase and cancellation of common stock..................... -- (2,160) Issuance of common stock........... -- 50,783 Issuance of common stock in connection with the exercise of options.......................... -- 347 Issuance of common stock in connection with exercise of warrant.......................... -- 2,603 Foreign currency translation adjustment....................... -- (193) Dividends on preferred stock....... (210) (210) Special compensation............... -- 50,175 Issuance of common stock in connection with business combinations..................... -- 1,139 Shares issued in connection with a pooled company formed in 1996.... -- 1 Dividends declared by pooled companies........................ (14,371) (14,371) Net loss........................... (31,841) (31,841) -------- -------- Balance, December 31, 1996......... (50,408) 65,258 Issuance of common stock in connection with the exercise of options.......................... -- 659 Tax benefit of stock options exercised........................ -- 175 Capital contribution from Principal Stockholder re: CEO bonus and other............................ -- 1,775 Issuance of common stock in connection with business combinations..................... -- 3,136 Issuance of common stock for purchase of an equity interest in a subsidiary..................... -- 1,000 Conversion of Class B shares to shares of common stock........... -- -- Issuance of common stock........... -- 51,169 Issuance of common stock for matching contribution to 401(k) plan............................. -- 555 Initial public offering of pooled entity........................... -- 24,628 Other issuance of common stock of pooled entity.................... -- 4,307 Foreign currency translation adjustment....................... -- (4,055) Dividend and redemption premium on preferred stock.................. (123) (123) Dividends declared by pooled companies........................ (23,993) (23,993) Net income......................... 41,954 41,954 -------- -------- Balance, December 31, 1997......... $(32,570) $166,445 ======== ========
F-22 TMP WORLDWIDE INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CLASS B COMMON STOCK, COMMON STOCK OTHER $.001 PAR VALUE $.001 PAR VALUE ADDITIONAL COMPREHEN- UNAMORTIZED --------------------- ---------------------- PAID-IN SIVE INCOME STOCK-BASED SHARES AMOUNT SHARES AMOUNT CAPITAL (LOSS) COMPENSATION ---------- -------- ----------- -------- ---------- ----------- ------------- Balance, December 31, 1997......... 24,678,113 $25 13,587,541 $14 $200,141 $(1,165) -- Issuance of common stock in connection with the exercise of options.......................... 209,949 -- -- -- 1,494 -- -- Issuance of common stock in connection with acquisitions..... 201,406 -- -- -- 5,546 -- -- Issuance of compensatory options... -- -- -- -- 295 -- -- Redemption of common stock......... (287,352) -- -- -- (668) -- -- Issuance of common stock for matching contribution to 401(k) plan............................. 27,273 -- -- -- 627 -- -- Conversion of Class B common shares to common shares................. 11,206,541 12 (11,206,541) (12) -- -- -- Issuance of common stock for employee stay bonuses............ 221,779 -- -- -- 8,312 -- -- Foreign currency translation adjustment....................... -- -- -- -- -- (1,909) -- Capital contribution by Principal Stockholder re: CEO bonus........ -- -- -- -- 1,250 -- -- Second public offering of common stock by pooled entity........... 299,207 -- -- -- 41,365 -- -- Issuance of common stock for stock-based compensation of pooled entity.................... 35,931 -- -- -- 4,072 -- $(3,900) Acquisition of treasury stock by pooled entity.................... -- -- -- -- (442) -- 592 Tax benefit of stock options exercised........................ -- -- -- -- 407 -- -- Amortization of stock-based compensation of pooled entity.... -- -- -- -- -- -- 576 Net income......................... -- -- -- -- -- -- -- Earnings of companies pooled in second quarter of 1999 included in both December 31, 1997 and 1998 income statements........... -- -- -- -- -- -- -- Pooled company's earnings from August 1, 1997 to December 31, 1997 excluded from 1997 statement of operations.................... -- -- -- -- -- -- -- Dividends declared by pooled companies........................ -- -- -- -- -- -- -- ---------- --- ----------- --- -------- ------- ------- Balance, December 31, 1998......... 36,592,847 $37 2,381,000 $ 2 $262,399 $(3,074) $(2,732) ========== === =========== === ======== ======= ======= TOTAL STOCKHOLDERS EQUITY DEFICIT (DEFICIT) -------- ------------ Balance, December 31, 1997......... $(32,570) $166,445 Issuance of common stock in connection with the exercise of options.......................... -- 1,494 Issuance of common stock in connection with acquisitions..... -- 5,546 Issuance of compensatory options... -- 295 Redemption of common stock......... -- (668) Issuance of common stock for matching contribution to 401(k) plan............................. -- 627 Conversion of Class B common shares to common shares................. -- -- Issuance of common stock for employee stay bonuses............ -- 8,312 Foreign currency translation adjustment....................... -- (1,909) Capital contribution by Principal Stockholder re: CEO bonus........ -- 1,250 Second public offering of common stock by pooled entity........... -- 41,365 Issuance of common stock for stock-based compensation of pooled entity.................... -- 172 Acquisition of treasury stock by pooled entity.................... -- 150 Tax benefit of stock options exercised........................ -- 407 Amortization of stock-based compensation of pooled entity.... -- 576 Net income......................... 20,542 20,542 Earnings of companies pooled in second quarter of 1999 included in both December 31, 1997 and 1998 income statements........... (3,182) (3,182) Pooled company's earnings from August 1, 1997 to December 31, 1997 excluded from 1997 statement of operations.................... 873 873 Dividends declared by pooled companies........................ (13,545) (13,545) -------- -------- Balance, December 31, 1998......... $(27,882) $228,750 ======== ========
See accompanying notes to supplemental consolidated financial statements. F-23 TMP WORLDWIDE INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 ----------- --------- --------- Cash flows from operating activities: Net income (loss)........................................... $ 20,542 $ 41,954 $ (31,841) ----------- --------- --------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of property and equipment... 19,802 14,592 9,448 Amortization of intangibles............................... 10,185 6,866 4,732 Amortization of deferred compensation in connection with employee stay bonuses................................... 4,351 -- -- Provision for doubtful accounts........................... 6,139 4,047 3,337 Write-off of fixed assets by pooled company............... 2,907 -- -- Common stock issued for matching contribution to 401(k) plan and employee stay bonuses.......................... 8,939 606 -- Special compensation...................................... -- -- 52,019 Interest expense for shares issued upon exercise of warrant................................................. -- -- 2,603 Provision for deferred income taxes....................... (1,709) 6,243 3,228 CEO bonus and indemnity payment........................... 1,250 1,775 -- Minority interests........................................ 28 296 1,017 Other..................................................... 222 (594) 822 Effect of pooled companies' earnings included in both December 31, 1998 and 1997.............................. (3,182) -- -- Effect of pooled company excluded from the periods presented............................................... 873 -- -- Changes in assets and liabilities, net of effects from purchases of businesses: Increase in accounts receivable, net...................... (16,099) (23,381) (20,525) Increase in work-in-process, prepaid and other............ (14,318) (3,666) (2,532) Increase in deferred revenue.............................. 7,159 3,925 3,649 Increase in accounts payable, accrued expenses and other current liabilities..................................... 16,528 (1,412) 11,140 ----------- --------- --------- Total adjustments....................................... 43,075 9,297 68,938 Net cash provided by operating activities............... 63,617 51,251 37,097 ----------- --------- --------- Cash flows from investing activities: Payments pursuant to notes and advances to Principal Stockholder............................................... -- (3,064) (12,878) Repayments from Principal Stockholder....................... -- 14,477 7,994 Capital expenditures........................................ (31,934) (31,574) (15,372) Payments for purchases of businesses, net of cash acquired.................................................. (32,845) (66,901) (31,302) Purchases of short term investments......................... (38,271) -- -- Sales of short term investments............................. 39,047 -- -- Investment in life insurance................................ (1,968) (2,109) (1,048) Proceeds from sale of assets................................ 659 78 6,215 Advances by pooled entities to officers and affiliates...... (1,207) (955) (10) Proceeds from life insurance................................ -- 322 -- ----------- --------- --------- Net cash used in investing activities................... (66,519) (89,726) (46,401) ----------- --------- --------- Cash flows from financing activities: Payments on capitalized leases.............................. (3,355) (3,051) (2,435) Borrowings under line of credit and proceeds from issuance of long-term debt......................................... 1,052,097 724,268 496,459 Repayments under line of credit and principal payments on long-term debt............................................ (1,055,439) (705,172) (516,042) Distribution to minority interests.......................... -- -- (457) Net proceeds from stock issuance............................ 41,563 76,900 51,985 Cash received from the exercise of stock options............ 1,494 846 344 Repurchase of common stock.................................. -- (77) (348) Redemptions of minority interest and preferred stock (including premiums)...................................... -- (5,238) (2,160) Dividends on preferred stock................................ -- (123) (210) Dividends paid by pooled companies.......................... (16,267) (22,829) (13,768) ----------- --------- --------- Net cash provided by financing activities............... 20,093 65,524 13,368 ----------- --------- --------- Effect of exchange rate changes on cash..................... (7) (298) (151) ----------- --------- --------- Net increase in cash and cash equivalents................... 17,184 26,751 3,913 Cash and cash equivalents, beginning of year................ 56,316 29,565 25,652 ----------- --------- --------- Cash and cash equivalents, end of year...................... $ 73,500 $ 56,316 $ 29,565 =========== ========= =========
See accompanying notes to supplemental consolidated financial statements. F-24 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION TMP Worldwide Inc. ("TMP" or the "Company") is the successor to businesses formerly conducted by TMP Worldwide Inc. and subsidiaries ("Old TMP"), Worldwide Classified Inc. and subsidiaries ("WCI"), McKelvey Enterprises, Inc. and subsidiaries ("MEI") and certain other entities under the control of Andrew J. McKelvey (the "Principal Stockholder"). Immediately prior to the reorganization, the Principal Stockholder owned 100% of the common stock of MEI (which owned approximately 86% of the common stock of Old TMP) and approximately 33% of the common stock of WCI. In addition to his approximately 33% ownership of WCI, the Principal Stockholder had voting proxy on the remaining outstanding shares of WCI. WCI was organized in 1993 to sell recruitment advertising. On December 9, 1996, Old TMP, which sells yellow page advertising, merged into MEI. Thereafter, WCI merged into MEI, MEI then merged into Telephone Marketing Programs Incorporated and MEI acquired the outstanding minority interest of a subsidiary (the "1996 Mergers"). Concurrent with the Mergers, Telephone Marketing Programs Incorporated changed its name to TMP Worldwide Inc. Due to the control of these companies by the Principal Stockholder, the companies have been consolidated on a retroactive basis in a manner similar to a pooling of interests, the interests previously owned by the Principal Stockholder are carried at predecessor basis, and in December 1996 (i) goodwill in the amount of approximately $1.6 million was recorded for the issuance of 271,278 shares of common stock of the Company to Old TMP stockholders who had been previously issued shares of Old TMP in exchange for their minority interests in certain operating subsidiaries in which they were original owners and, accordingly, were considered to have made a substantive investment, and is based on an initial public offering price of $14.00 per share, less approximately $2.2 million previously recorded on the issuance of these shares, and (ii) special compensation in the amount of approximately $52.0 million was recorded for the issuance of 3,584,790 shares of common stock of the Company to Old TMP, WCI and the MEI subsidiary stockholders in exchange for their shares in those companies which they had received for nominal or no consideration, as employees or as management of businesses financed substantially by the Principal Stockholder and, accordingly, were not considered to have made substantive investments for their minority shares, and is based on an initial public offering price of $14.00 per share. The minority stockholders of Old TMP had received compensation in lieu of their share of earnings of Old TMP in exchange for waiving their rights to such earnings, and WCI and the MEI subsidiary had cumulative losses. Accordingly, no amounts were attributable to these minority interests in the accompanying consolidated financial statements. In addition, in 1996, the Principal Stockholder sold or contributed to the Company his majority interests, and in one case a 49% interest, in five companies primarily engaged in yellow page and Internet-based advertising. Due to the element of common control of these companies, all of these transactions have been accounted for in a manner similar to a pooling of interests and each of the five companies has been included in the accompanying consolidated financial statements from their respective dates of acquisition by the Principal Stockholder. For the period April 1, 1998 through September 30, 1999, the Company completed 18 mergers which were accounted for as poolings of interests. The seven that the Company completed prior to April 1, 1999 are Johnson, Smith & Knisely Inc. ("JSK"), TASA Holding AG ("TASA"), Stackig, Inc. ("Stackig"), Recruitment Solutions Inc., Sunquest L.L.C. d.b.a. The SMART Group and The Consulting Group (International) Limited ("TCG"), in 1998 (the "1998 Mergers"); and Morgan & Banks Limited ("M&B") F-25 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) in January 1999: (the "M&B Merger"). In connection with these mergers, the Company issued 8,789,455 shares of our common stock in exchange for all of the outstanding common stock of these seven companies. From April 1, 1999 to June 30, 1999:, the Company completed pooling of interests mergers (the "Second Quarter 1999 Mergers") with six companies Interquest, Pty. Limited ("Interquest"), LIDA Advertising Inc. ("LIDA"), Maes & Lunau ("M&L"), IN2, Inc. ("IN2"), Lemming & LeVan, Inc. ("L&L"), and Yellow Pages Unlimited, Inc. ("YPU"), (the "Second Quarter 1999 Pooled Companies") (the "Second Quarter 1999 Mergers"). In connection with the Second Quarter 1999 Mergers the Company issued a total of 900,240 shares of TMP common stock in exchange for all of the outstanding stock of the Second Quarter 1999 Pooled Companies. In addition, from July 1, 1999 through September 30, 1999, the Company completed pooling of interests mergers (the "Third Quarter 1999 Mergers") with the five companies, Cameron-Newell Advertising, Inc. ("CNA"), Brook Street Bureau (QLD) Pty Ltd, ("Brook St."), LAI Worldwide, Inc. ("LAI"), Fox Advertising Inc. ("Fox") and Lampen Group Limited ("Lampen") ("the Third Quarter 1999 Pooled Companies"). In connection with the Third Quarter 1999 Mergers the Company issued a total of 2,153,457 shares of TMP common stock in exchange for all of the outstanding stock of the Third Quarter 1999 Pooled Companies. Furthermore, from October 1, 1999 through November 19, 1999, the Company completed mergers with the two companies listed below (the "Fourth Quarter 1999 Pooled Companies"), which provided for the exchange of all of the outstanding stock of such companies for a total of 758,613 shares of TMP common stock and which were accounted for as poolings of interests (the "Fourth Quarter 1999 Mergers").
NATURE OF REGION OF NUMBER OF TMP ENTITY OPERATIONS OPERATIONS ACQUISITION DATE SHARES ISSUED - ------ ------------------ ------------------ ---------------- ------------- Highland Search Group October 21, L.L.C. ("Highland") Search & selection North America 1999............ 699,333 TMC S.r.l. ("Amrop Italy")............. Search & selection Continental Europe October 27, 1999 59,280
The consolidated financial statements of the Company reflect the effect of the 1996 Mergers, the 1998 Mergers, the M & B Merger, the Second Quarter 1999 Mergers and the Third Quarter 1999 Mergers, because such mergers have been accounted for as poolings of interests (see Note 5). Accordingly, the supplemental consolidated financial statements in the Company's Current Report on Form 8-K filed on September 30, 1999, which reflect the consummation of the M & B Merger and the Second 1999 Mergers and the Third Quarter 1999 Mergers, are hereby being retroactively restated to reflect the Fourth Quarter 1999 Mergers. As a result, the financial position, results of operations, and statements of comprehensive income (loss) and cash flows included herein are presented as if the combining companies had been consolidated for all periods presented and the supplemental consolidated statements of stockholders' equity reflect the accounts of TMP as if the additional common stock issued in connection with the Fourth Quarter 1999 Mergers had been issued for all periods presented. As required by generally accepted accounting principles, these supplemental consolidated financial statements will become the historical financial statements of the Company upon issuance of the financial statements for the period that includes the date of the Fourth Quarter 1999 Mergers. In the supplemental consolidated balance sheets, the balance sheets of TMP as of December 31, 1998 and 1997 have been combined with those of the Fourth Quarter 1999 Pooled Companies as of December 31, 1998 and 1997. The supplemental consolidated F-26 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) statements of operations combine the results of TMP for each year in the three year period December 31, 1998 with those of the Fourth Quarter Pooled Companies for the same periods. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The supplemental consolidated financial statements include the accounts of the Company and all of its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in unconsolidated affiliates are accounted for using the equity method when the Company owns at least 20% but no more than 50% of such affiliates. Under the equity method, the Company records its proportionate share of profits and losses based on its percentage interest in earnings of companies 50% or less owned. USE 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 amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of commissions & fees and expenses during the reporting period. Actual results could differ from those estimates. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed primarily using the straight-line method over the following estimated useful lives:
YEARS -------- Buildings and improvements.................................. 5-32 Furniture and equipment..................................... 3-10 Transportation equipment.................................... 3-18
Leasehold improvements are amortized over their estimated useful lives or the lives of the related leases, whichever is shorter. INTANGIBLE ASSETS Intangible assets represent acquisition costs in excess of the fair value of net tangible assets of businesses purchased and consist primarily of the value of ongoing client relationships and goodwill. These costs are being amortized over periods ranging from three to thirty years on a straight-line basis. LONG-LIVED ASSETS Long-lived assets, such as ongoing client relationships, goodwill and property and equipment, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows resulting from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. F-27 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In connection with its office closings in London, England and Hong Kong, for the year ended 1998 LAI wrote off $2,907 of fixed assets. No other impairment losses have been incurred through December 31, 1998. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS The financial position and results of operations of the Company's foreign subsidiaries are determined using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included in the other comprehensive loss account in stockholders' equity. Gains and losses resulting from foreign currency transactions are included in other income (expense). COMMISSIONS & FEES RECOGNITION AND WORK-IN-PROCESS A significant portion of the Company's commissions & fees are derived from commissions for advertisements placed in telephone directories, newspapers and other media, plus associated fees for related services. In addition, the Company earns fees for the placement of advertisements on the Internet, including its career websites. Commissions & fees are generally recognized upon placement date for newspapers and other media and on publication close date for yellow page advertisements. The Company also earns fees for executive and mid-level search & selection services. Commissions & fees are recognized as clients are billed. Billings begin with the client's acceptance of a contract. For search, a retainer equal to 33 1/3% of a candidate's first year estimated annual cash compensation is billed in equal installments over three consecutive months (at which time, in general, the retainer has been substantially earned). A final invoice is issued in the event that the candidate's actual compensation package exceeds the original estimate. For selection, a fee equal to between 20% and 30% of a candidate's first year estimated annual cash compensation is billed in equal installments over three consecutive months (the average length of time needed to successfully complete an assignment). Temporary contracting commissions & fees are recorded when earned. The amounts charged to clients for Temporary Contracting services are now reported after deducting the costs of the temporary contractors. The details for such amounts are (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Temporary Contracting Revenue............................... $258,393 $227,627 $163,337 Temporary Contracting Costs................................. 211,404 186,342 134,127 -------- -------- -------- Temporary Contracting Billings/Commissions & fees........... $ 46,989 $ 41,285 $ 29,210 ======== ======== ========
The Company's quarterly commissions & fees are affected by the cyclical nature of its operating segments. The timing of yellow page directory closings is currently concentrated in the third quarter. However, yellow page publishers may change the timing of directory publications which may have an effect on the Company's quarterly results. The Company's yellow page advertising results are also affected by commissions earned for volume placements for the year, which are typically reported in the fourth quarter. Amounts reported in the three months ended December 31, 1998, 1997 and 1996 for commissions on F-28 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) volume placements were $0.9 million, $2.2 million and $3.5 million, respectively. The Company's quarterly commissions & fees for recruitment advertising are typically highest in the first quarter and lowest in the fourth quarter; however, the cyclicality in the economy and the Company's clients' employment needs have an overriding impact on the Company's quarterly results in recruitment advertising. Direct operating costs incurred that relate to future commissions & fees, principally for yellow page advertisements, are deferred (recorded as work-in-process in the accompanying consolidated balance sheets) and are subsequently charged to expense when the directories are closed for publication and the related commission is recognized as income. INCOME TAXES The provision for income taxes is computed on the pretax income (loss) based on the current tax law. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates. NATURE OF BUSINESS AND CREDIT RISK The Company operates in five business segments; yellow pages advertising, recruitment advertising, Internet, search & selection and temporary contracting. The Company earns commission income for selling and placing yellow page and recruitment advertising to a large number of customers in many different industries, fees for executive and mid-level search & selection services, fees for advertisements placed on its Internet websites and commissions & fees in connection with the providing of temporary contracting services. The Company operates principally throughout North America, the United Kingdom, Continental Europe and the Asia/Pacific Region. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes standards for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of a company about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS No. 131 became effective for financial statements for periods beginning after December 15, 1997. As required by SFAS No. 131, all periods presented have been restated. Financial instruments which potentially subject the Company to concentrations of credit risk are primarily accounts receivable. The Company performs continuing credit evaluations of its customers and does not require collateral. For the most part, the Company has not experienced significant losses related to receivables from individual customers or groups of customers in any particular industry or geographic area. F-29 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported for long-term debt approximates fair value because, in general, the interest on the underlying instruments fluctuates with market rates. STOCK-BASED COMPENSATION The Company accounts for its stock option awards under the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. The Company makes pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied as required by SFAS No. 123, "Accounting for Stock-Based Compensation." EARNINGS PER SHARE During 1997, the FASB issued SFAS No. 128, "Earnings per Share," which provides for the calculation of "basic" and "diluted" earnings per share. This Statement is effective for financial statements issued for periods ending after December 15, 1997. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the effect of common shares issuable upon exercise of stock options and warrants. As required by SFAS No. 128 all periods presented have been restated. A reconciliation of shares used in calculating basic and diluted earnings per common and Class B common share follows (in thousands): December 31, 1998: Basic....................................................... 38,736 Effect of assumed exercise of stock options and other....... 903 ------ Diluted..................................................... 39,639 ====== December 31, 1997: Basic....................................................... 36,333 Effect of assumed exercise of stock options................. 621 ------ Diluted..................................................... 36,954 ======
F-30 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A reconciliation of shares used in calculating basic and diluted earnings per common and Class B common share follows (in thousands): (continued) December 31, 1996: Basic....................................................... 30,954 Effect of assumed exercise of stock options................. * ------ Diluted..................................................... 30,954 ======
- ------------------------ - - Effect of diluted shares is anti-dilutive. - - STATEMENTS OF CASH FLOWS For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments and other short-term investments with an initial maturity of three months or less to be cash equivalents. COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company adopted SFAS No. 130 in the first quarter of 1998. The only item of comprehensive income (loss) is foreign currency translation adjustments. POSTRETIREMENT BENEFITS In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", which standardizes the disclosure requirements for pensions and other postretirement benefits. The adoption of SFAS No. 132 in 1998 did not have a material impact on the Company's financial statement disclosures. EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1. "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for financial statements for years beginning after December 15, 1998. SOP 98-1 provides guidance over accounting for computer software developed or obtained for internal use including the requirement to capitalize specified costs and amortization of such costs. The Company does not expect the adoption of this standard to have a material effect on its capitalization policy. F-31 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities", which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not expect the adoption of this statement to have a significant impact on the Company's results of operations, financial position or cash flows. NOTE 3--ACCOUNTS RECEIVABLE, NET Accounts receivable, net consists of the following:
DECEMBER 31, ------------------- 1998 1997 -------- -------- Trade................................................... $355,166 $350,266 Earned commissions(a)................................... 12,811 14,491 -------- -------- 367,977 364,757 Less: Allowance for doubtful accounts................... 17,886 13,909 -------- -------- Accounts receivable, net................................ $350,091 $350,848 ======== ========
- ------------------------ (a) Earned commissions receivable represent commissions on advertisements that have not been published, and relate to yellow page advertisements only. Upon publication of the related yellow page directories, the earned commissions plus the related advertising cost at December 31, 1998 and 1997 are recorded as accounts receivable of $67,955 and $75,058, respectively, and the related advertising costs are recorded as accounts payable of $55,144 and $60,567, respectively. NOTE 4--PROPERTY AND EQUIPMENT, NET Property and equipment, net consists of the following:
DECEMBER 31, ------------------- 1998 1997 -------- -------- Buildings and improvements................................ $ 1,168 $ 1,048 Furniture and equipment................................... 107,435 87,684 Leasehold improvements.................................... 18,483 14,046 Transportation equipment.................................. 9,576 10,114 Computer equipment........................................ 4,470 2,931 ------- ------- 141,132 115,823 Less: Accumulated depreciation and amortization........... 67,380 54,745 ------- ------- Property and equipment, net........................... $73,752 $61,078 ======= =======
F-32 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 4--PROPERTY AND EQUIPMENT, NET (CONTINUED) Furniture and equipment includes equipment under capital leases at December 31, 1998 and 1997 with a cost of $76,348 and $75,199, respectively, and accumulated amortization of $65,111 and $46,733, respectively. During 1997, the Company acquired certain transportation equipment and made capital improvements thereto for a total of $6,800 and simultaneously entered into a $7,800 financing agreement (see Note 9) to fund the purchase and provide additional funds. NOTE 5--BUSINESS ACQUISITIONS ACQUISITIONS ACCOUNTED FOR USING THE POOLING OF INTERESTS METHOD During the period of October 1, 1999 through November 19, 1999, the Company completed the following mergers which provided for the exchange of all of the outstanding stock of each entity for shares of TMP stock and are accounted for as poolings of interests (See Note 1):
NATURE OF NUMBER OF TMP ENTITY OPERATIONS REGION OF OPERATIONS ACQUISITION DATE SHARES ISSUED - ------ ------------------ -------------------- ---------------- ------------- Highland............. Search & selection North America October 21, 1999 699,333 Amrop Italy.......... Search & selection Continental Europe October 27, 1999 59,280
Commissions & fees, net income (loss) applicable to common and Class B common stockholders and net income (loss) per common and Class B common share of the combining companies for the three years ending December 31, are as follows:
COMMISSIONS & FEES 1998 1997 1996 - ------------------ -------- -------- -------- TMP as previously reported on Form 8--K filed September 30, 1999...................................................... $637,516 $518,501 $384,057 Amrop Italy................................................. 3,031 3,946 2,730 Highland.................................................... 16,939 19,381 12,252 -------- -------- -------- TMP, as restated............................................ $657,486 $541,828 $399,039 ======== ======== ========
NET INCOME (LOSS) APPLICABLE TO COMMON AND CLASS B COMMON STOCKHOLDERS 1998 1997 1996 - ------------------------------------------------------------ -------- -------- -------- TMP, as previously reported on Form 8--K filed September 30, 1999...................................................... $13,925 $30,482 $(38,333) Amrop Italy................................................. -- 31 28 Highland.................................................... 6,617 11,318 6,254 ------- ------- -------- TMP, as restated............................................ $20,542 $41,831 $(32,051) ======= ======= ========
F-33 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 5--BUSINESS ACQUISITIONS (CONTINUED)
NET INCOME (LOSS) PER COMMON AND CLASS B COMMON SHARE 1998 1997 1996 - ----------------------------------------------------- -------- -------- -------- TMP s previously reported on Form 8--K filed September 30, 1999: Basic..................................................... $0.37 $0.86 $(1.27) Diluted................................................... $0.36 $0.84 $(1.27) Restated: Basic..................................................... $0.53 $1.15 ($1.04) Diluted................................................... $0.52 $1.13 ($1.04)
MERGER & INTEGRATION COSTS INCURRED WITH POOLING OF INTERESTS TRANSACTIONS In connection with the pooling of interests transactions completed during 1998 and the M&B Merger, (see Note 1), the Company expensed merger & integration related costs of $22,412. The $22,412 of merger & integration costs for the year ended December 31, 1998 consists of (1) $11,934 of non-cash employee stay bonuses, which included (a) $3,622 for the amortization of $5,986, recorded as prepaid compensation and a corresponding long-term liability, being expensed over the eighteen months from April 1, 1998 to September 30, 1999 for TMP shares set aside for key personnel of JSK and TCG who must remain employees of the Company for a full year in order to earn such shares and (b) $8,312 for TMP shares to key personnel of TASA and Stackig as employee stay bonuses and (2) $1,461 of stay bonuses paid as cash to key personnel of the 1998 Pooled Companies and (3) $9,017 of transaction related costs, including legal, accounting and advisory fees and the costs incurred for the subsequent registration of shares issued in the acquisitions. ACQUISITIONS ACCOUNTED FOR USING THE PURCHASE METHOD In addition to the pooling of interests transactions discussed above, the Company has acquired 41 businesses (primarily recruitment advertising businesses) between January 1, 1996 and December 31, 1998 including, on August 26, 1997, all of the outstanding stock of Austin Knight Limited and subsidiaries ("Austin Knight") for approximately $47,200 net of approximately $11,500 of cash acquired relating to the sale, in July 1997, of real property by Austin Knight and on July 2, 1996, all of the outstanding shares of Neville Jeffress Australia Pty Limited ("Neville Jeffress"). Austin Knight had commissions & fees of approximately $47,600 for the year ended September 30, 1996, and Neville Jeffress had commissions & fees of approximately $24,000 for the year ended June 30, 1996. The total amount of cash paid and promissory notes and Common Stock of the Company issued for these acquisitions was approximately $30,668, $74,500 and $25,400 for 1998, 1997 and 1996, respectively. The shares of Common Stock issued by the Company in connection with certain of the above mentioned acquisitions were 200,753 and 135,028 for 1998 and 1997, respectively. These acquisitions have been accounted for under the purchase method of accounting and accordingly, operations of these businesses have been included in the consolidated financial statements from their acquisition dates. On February 27, 1998, LAI completed the acquisition of Ward Howell International, Inc. ("WHI"). The purchase price was approximately $19,500 including $7,600 in notes payable and approximately $3,050 in LAI common stock. The remaining $8,850 of the purchase consideration was payable to the former WHI stockholders as of February 28, 1998 and is accrued for in the accompanying balance sheets. The acquisition was accounted for as a purchase with goodwill being recognized for the excess of the purchase amount over the fair market value of the assets acquired. F-34 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 5--BUSINESS ACQUISITIONS (CONTINUED) On January 2, 1998, LAI acquired Chartwell Partners International, Inc. ("CPI"). The acquisition cost was approximately $3,100 and consisted of approximately $1,400 in cash, a $1,250 convertible subordinated note payable and $400 of LAI common stock. The acquisition was accounted for as a purchase with goodwill being recognized for the excess of the purchase amount over the fair value of the assets acquired. The convertible subordinated note is payable in three equal installments, plus accrued interest and bears interest at 6.75%. The subordinated note is convertible into shares of common stock at each anniversary at prices specified in the asset purchase agreement. The summarized unaudited pro forma results of operations set forth below for the years ended December 31, 1998 and 1997 assume the acquisitions accounted for under the purchase method in 1998 and 1997 occurred as of the beginning of the year of acquisition and the beginning of the preceding year.
YEAR ENDED DECEMBER 31, ----------------------- 1998 1997 -------- -------- Total commissions & fees.................................... $669,229 $635,223 Net income applicable to common and Class B common stockholders.............................................. $ 20,172 $ 43,183 Net income per common and Class B common share: Basic..................................................... $ 0.52 $ 1.18 Diluted................................................... $ 0.51 $ 1.16
The unaudited pro forma results of operations are not necessarily indicative of what actually would have occurred if the acquisitions had been completed at the beginning of each of the years presented, nor are the results of operations necessarily indicative of the results that will be attained in the future. ACCRUED RESTRUCTURING COSTS In connection with the acquisitions made in 1997 and accounted for using the purchase method, the Company began to assess and formulate preliminary plans to restructure the operations of the acquired companies. Such plans involved the closure of certain offices of the acquired companies and the termination of certain management and employees. The objective of the plans was to create a single brand in the related markets in which the Company operates. The preliminary plans were finalized in July 1998 and, accordingly intangible assets were increased by $10,020. In addition, in 1998 LAI formulated plans to close its London England and Hong Kong offices and, in connection with these office closings, charged earnings for the year ended December 31, 1998 for $3,543. These costs and liabilities include:
BALANCE BALANCE DECEMBER 31, 1997 ADDITIONS PAYMENTS DECEMBER 31, 1998 ----------------- --------- -------- ----------------- Assumed obligations on leased facilities to be closed............................ $ 7,830 $ 3,190 $ (1,430) $ 9,590 Consolidation of acquired facilities...... 2,521 5,720 (5,496) 2,745 Contracted lease payments exceeding current market costs.................... 783 73 (149) 707 Severance, relocation and other employee costs................................... 4,017 4,477 (6,542) 1,952 Pension obligations....................... 1,650 103 -- 1,753 ------- ------- -------- ------- Total..................................... $16,801 $13,563 $(13,617) $16,747 ======= ======= ======== =======
F-35 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 5--BUSINESS ACQUISITIONS (CONTINUED) Accrued liabilities for surplus property in the amount of $9,590 as of December 31, 1998 relate to 20 leased office locations of the acquired companies that were either unutilized prior to the acquisition date or will be closed by March 31, 1999 in connection with the restructuring plans. The amount is based on the present value of minimum future lease obligations, net of sublease commissions & fees on existing subleases. Other costs associated with the closure of existing offices of acquired companies in the amount of $2,745 as of December 31, 1998 relate to termination costs of contracts relating to billing systems, external reporting systems and other contractual arrangements with third parties. Above market lease costs in the amount of $707 as of December 31, 1998 relate to the present value of contractual lease payments in excess of current market lease rates. Estimated severance payments, employee relocation expenses and other employee costs in the amount of $1,952 as of December 31, 1998 relate to estimated severance for terminated employees at closed locations, costs associated with employees transferred to continuing offices and other related costs. Employee groups affected include sales, service, administrative and management personnel at duplicate locations, as well as duplicate corporate headquarters management and administrative personnel. As of December 31, 1998 the accrual related to approximately 50 employees including senior management, sales, service and administrative personnel. Pension obligations in the amount of $1,753 were assumed in connection with the acquisition of Austin Knight. During the year ended December 31, 1998, payments of $6,542 were made to 50 members of senior management and employees for severance and charged against the reserve. In connection with the finalization of the restructuring plans, the Company recorded additional charges of $10,020 as additional costs of the acquired companies and $3,543 as restructuring costs expensed in the supplemental consolidated statement of operations during the year ended December 31, 1998. The Company continues to evaluate and assess the impact of duplicate responsibilities and office locations. Additional future costs incurred, resulting from revised plan actions occurring after December 31, 1998, in excess of the amounts previously recorded as goodwill will be charged to operations in the period in which they occur. F-36 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 6--INTANGIBLES, NET Intangibles, net consists of the following:
DECEMBER 31, AMORTIZATION ------------------- PERIOD 1998 1997 (YEARS) -------- -------- ------------ Client lists, net of accumulated amortization of $5,709 and $4,662, respectively.............................. $ 9,981 $ 10,145 5 to 30 Covenants not to compete, net of accumulated amortization of $2,551 and $2,056, respectively.............................. 2,080 2,218 3 to 6 Excess of cost of investments over fair value of net assets acquired, net of accumulated amortization of $19,990 and $11,668, respectively..................... 210,464 179,179 10 to 30 Other, net of accumulated amortization of $1,931 and $2,103, respectively........... 341 797 4 to 10 -------- -------- $222,866 $192,339 ======== ========
NOTE 7--SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes amounted to the following:
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Interest......................................... $11,642 $13,739 $11,932 Income taxes..................................... 14,671 14,902 10,184
In conjunction with business acquisitions, the Company used cash as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Fair value of assets acquired, excluding cash... $46,033 $129,126 $60,991 Less: Liabilities assumed and created upon acquisition................................... 13,188 62,225 29,689 ------- -------- ------- Net cash paid................................... $32,845 $ 66,901 $31,302 ======= ======== ======= Capital lease obligations incurred.............. $ 217 $ 5,874 $ 4,873 ======= ======== =======
NOTE 8--FINANCING AGREEMENTS The Company obtains its primary financing from a financial institution under a five year financing agreement as amended and restated on June 27, 1996, further amended on November 14, 1997, and amended and restated again on November 5, 1998 (the "Agreement"). Subsequent to the five year term, which expires on November 4, 2003, the Agreement provides for one year extensions subject to bank approval unless terminated by either party at least 90 days prior to expiration of the initial term or any F-37 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 8--FINANCING AGREEMENTS (CONTINUED) renewal term. The Agreement, as amended, provides for borrowings of up to $175,000 at the higher of (a) prime rate or, (b) Federal Funds rate less 1/2 of 1% or, (c) LIBOR plus a margin determined by the ratio of the Company's debt to earnings before interest, taxes, depreciation and amortization (EBITDA) as defined on the Agreement. At December 31, 1998 the margin equaled .875%. Borrowings under the Agreement are based on 90% of eligible accounts receivable, which are amounts billed under 120 days old and amounts to be billed as defined in the Agreement. Substantially all of the assets of the Company are pledged as collateral for borrowings under the Agreement. The Agreement contains certain covenants which restrict, among other things, the ability of the Company to borrow, pay dividends, acquire businesses, guarantee debts of others and lend funds to affiliated companies and contains criteria on the maintenance of certain financial statement amounts and ratios, all as defined in the Agreement. The Agreement also provides for a fee on any unused portion of the commitment based upon a rate determined by the ratio of the Company's debt to EBITDA. At December 31, 1998, this rate equaled .25%. In addition, the Agreement provides for a declining termination fee of $1,000, $500, $0 for the annual periods ended November 5, 1999, 2000, and 2001, respectively. In October 1993, the Company issued a warrant to the lender to purchase one percent of the issued and outstanding common stock of the Company (as defined in the agreement) for an exercise price of $.01 per share. The warrant was independently appraised at $600, which amount was being amortized over the remaining term of the original financing agreement of 30 months from October 1993 until December 1996, when the warrant was exercised. At that time, the unamortized balance was expensed. In addition, in December 1996, upon the exercise of such warrant there was an additional interest charge of $2,603 to reflect the difference between the value of the stock issued (228,768 shares) at the initial public offering price of $14.00 per share and the original amount recorded. At December 31, 1998, the prime rate, Federal funds rate and one month LIBOR were 7.75%, 5.75% and 5.06% respectively, and borrowings outstanding were at a weighted average interest rate of 6.56%. LAI maintained a line of credit which provided for maximum borrowings of $25,000 bearing interest at various rates based on either a LIBOR index or the bank's prime lending rate (7.75% at February 28, 1999) as determined at its option. Interest is payable monthly and the principal balance is due upon demand. The line of credit is collateralized by accounts receivable with borrowings limited to 75% of qualifying receivables. Additionally, LAI is required to comply with certain working capital and liquidity covenants. LAI is in compliance with or has obtained waivers for the terms and covenants of its debt agreements as of February 28, 1998 and 1999. No amounts were outstanding under the line of credit as of February 28, 1998 and 1999. Effective with the consummation of the merger with TMP, TMP cancelled this line of credit. F-38 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 9--LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ------------------- 1998 1997 -------- -------- Borrowings under financing agreement (see Note 8)........... $ 97,720 $ 95,800 Borrowings under other financing agreements, interest payable at rates varying from 5.0% to 9.2%, and collateralized by assets in certain foreign countries..... 8,251 10,184 Notes payable to former WHI stockholders dated February 27, 1998, payable in three equal annual installments plus accrued interest bearing interest at 5.0%................. 4,892 7,552 Convertible subordinated promissory note issued by LAI in connection with an acquisition, dated January 2, 1998, payable in three equal annual installments plus accrued interest, bearing interest at 6.75%, and convertible into shares of common stock at each anniversary date at prices specified in the asset purchase agreement................. 833 1,250 Other acquisition notes payable, noninterest bearing, interest imputed at 6.7% to 8.0%, in varying installments through 2001.............................................. 8,121 9,461 Capitalized lease obligations, payable with interest from 9% to 15%, in varying installments through 2001 (see Note 14).................................................. 9,156 7,623 Term note payable in sixty consecutive monthly installments from July 1997 through June 2002, collateralized by transportation equipment and with interest at 8.43% for the first 36 months. Thereafter the interest rate will be based on two year U.S. Treasury Notes..................... 7,557 7,760 Notes payable, in varying monthly installments maturing through 2003, with interest at rates ranging from 6.5% to 9.5%...................................................... 2,811 7,358 -------- -------- 139,341 146,988 Less: Current portion....................................... 16,235 16,977 -------- -------- $123,106 $130,011 ======== ========
Long-term debt matures as follows: 2000........................................................ $ 10,785 2001........................................................ 5,329 2002........................................................ 9,006 2003........................................................ 97,936* Thereafter.................................................. 50 -------- $123,106 ========
- ------------------------ * Of this amount, $97,720 is subject to one year extensions after 2003. See Note 8. F-39 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 10--MINORITY INTERESTS In connection with an acquisition in 1990, a subsidiary of the Company issued 88,425 shares of nonvoting convertible 10% cumulative preferred stock in exchange for 88,425 shares (58%) of the outstanding common stock of the acquired company held by the acquired company's employee stock ownership trust. These shares were redeemed in January 1997 for a total of $3,133, which included a redemption premium of $133. NOTE 11--REDEEMABLE PREFERRED STOCK During 1991, the Company sold 200,000 shares of 10.5% non-voting cumulative preferred stock ($10.00 par value) to the Company's profit sharing plan for $2,000. These shares were redeemed in January 1997 for a total of $2,105, which included a redemption premium of $105. NOTE 12--STOCKHOLDERS' EQUITY (A) COMMON AND CLASS B COMMON STOCK Common and Class B common stock have identical rights except that each share of Class B common stock is entitled to ten votes and is convertible, at any time, at the option of the stockholder into one share of common stock. LAI completed its initial public offering of common stock on July 1, 1997. The proceeds of $24,700 net of underwriters' discounts and other offering costs, were used to repay outstanding indebtedness under the Company's credit facilities, finance business acquisitions and provide additional working capital. On June 9, 1998, LAI completed a second public offering of common stock, which included shares offered by certain LAI stockholders. The proceeds to the Company of approximately $41,400 net of underwriters' discounts and other offering costs, were used to support the Company's international expansion efforts, pursue strategic acquisitions, support continued enhancements to the Company's technology-based infrastructure and provide additional working capital. (B) STOCK OPTIONS The disclosures below include options issued by LAI and M&B, as if such options were issued for the purchase of the Company's common stock, and are based on the exchange ratios of the Company's common stock for LAI's and M&B's common stock pursuant to the related merger agreements. LAI had two employee stock option plans, the 1997 Omnibus Stock and Incentive Plan (the "1997 Plan") and the 1998 Omnibus Stock and Incentive Plan (the "1998 Plan"). Generally incentive stock options, nonqualified stock options, restricted stock and restricted stock units granted by LAI will vest each year beginning on the first anniversary of the date of grant at 20-25% per year and will expire after ten years. In accordance with the terms of the grants the options vested 100% upon the consummation of the merger with TMP. The following table summarizes the status of options issued by LAI, as if such options were issued for the purchase of TMP's common stock, and are based on the exchange ratio of TMP's common stock for LAI's common stock pursuant to the merger agreement between TMP and LAI as provided for in that agreement. F-40 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED) (B) STOCK OPTIONS (CONTINUED)
NUMBER OUTSTANDING AS OF WEIGHTED AVERAGE RANGE OF EXERCISE PRICES DECEMBER 31, 1998 REMAINING CONTRACTUAL LIFE AMOUNT EXERCISABLE ------------------------ ------------------------ -------------------------- ------------------ $ 42.62-$ 60.50................. 110,742 10 years 1,734 $ 64.35-$ 90.84................. 49,253 9 years 6,159 $135.35-$162.76................. 55,901 9 years 10,123 ------- ------ 215,896 18,016 ======= ======
On November 10, 1994 options to purchase, at an exercise price of $4.77 per share, the market price on the date of grant, an aggregate of approximately 129,458 shares of common stock were granted to officers and employees of M&B. Of this amount, options to purchase 30,719 shares were subsequently cancelled, 93,253 were exercised and 5,486 were vested and exercisable at December 31, 1998. Such options will expire five years from date of grant. On April 21, 1995, options to purchase, at an exercise price of $4.46 per share, the market price on the date of grant, 104,746 shares of common stock were granted to officers and employees of M&B. Of this amount, options for 48,437 shares were subsequently cancelled, options for 41,818 shares were exercised and options to purchase 14,491 shares were vested and exercisable at December 31, 1998. Such options will expire five years from the date of grant. In January 1996, the Company's Board of Directors (the "Board") adopted the 1996 Employee Stock Option Plan (the "Stock Option Plan"), which provides for the issuance of both incentive stock options within the meaning of Section 422 of the Internal Commissions & fees Code of 1986, as amended (the "Code"), and nonqualified stock options, to purchase an aggregate of up to 900,000 shares (amended to 3,000,000 on April 27, 1998) of the common stock of the Company. The Stock Option Plan permits the granting of options to officers, employees and consultants of the Company, its subsidiaries and affiliates. Under the Stock Option Plan, the exercise price of an incentive stock option must be at least equal to 100% of the fair market value of the common stock on the date of grant (110% of the fair market value in the case of options granted to employees who hold more than ten percent of the voting power of the Company's capital stock on the date of grant). The exercise price of a nonqualified stock option must be not less than the par value of a share of the common stock on the date of grant. The term of an incentive or nonqualified stock option is not to exceed ten years (five years in the case of an incentive stock option granted to a ten percent holder). The Stock Option Plan provides that the maximum option grant which may be made to an executive officer in any calendar year is 45,000 shares (amended to 150,000 on June 25, 1997). In December 1998, the Company also adopted, subject to stockholder approval, a long-term incentive plan (the "1999 Plan"), pursuant to which stock options, stock appreciation rights, restricted stock and other equity based awards may be granted. Stock options which may be granted may be incentive stock options and nonqualified stock options within the meaning of the Code. The total number of shares of the common stock of the Company which may be granted under the 1999 Plan is the sum of 3,000,000 and the number of shares available for new awards under the Stock Option Plan. On January 3, 1996, options to purchase, at an exercise price equal to $6.65 per share, the fair market value of the common stock on the date of grant as determined by the Board, an aggregate of 296,640 F-41 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED) (B) STOCK OPTIONS (CONTINUED) shares of common stock were granted to officers, employees and consultants of the Company. Such options vest at the rate of 25% per year commencing one year after the date of grant. As of December 31, 1998, 25,879 options were cancelled, 71,343 options were exercised and, of the outstanding options, 64,038 options were exercisable and will expire ten years from the date of grant. On August 19, 1996, options to purchase, at an exercise price of $10.37 per share, the market price on the date of grant, 173,068 shares of common stock were granted to officers and employees of M&B. Of this amount, options for 53,045 shares were subsequently cancelled. The remaining options to purchase 120,023 shares of common stock will vest three years from the date of grant and will expire five years from the date of grant. At December 31, 1998, none of these options were exercisable. On January 6, 1997 options to purchase, at an exercise price of $12.88 per share, the market price on the date of grant, an aggregate of approximately 1,203,782 shares of common stock were granted to officers and employees, of the Company and options for 7,091 shares were subsequently cancelled. Of such options, options for approximately 29,000 shares of common stock vest at the rate of 25% per year beginning one year from the date of grant and the balance of these options were vested at December 31, 1997. At December 31, 1998, 31,355 options were exercised and 7,157 were exercisable. The balance are exercisable after January 5, 1999. Such options will expire ten years from date of grant. On April 3, 1997, options to purchase, at an exercise price of $17.25 per share, the market price on the date of grant, 8,400 shares of common stock were granted to an officer of the Company. Such options were exercised during 1998. On June 18, 1997, options to purchase, at an exercise price of $19.00 per share, the market price on the date of grant, 28,256 shares of common stock were granted to officers and employees of the Company. Options for 5,815 shares were subsequently cancelled. Generally, such options were vested as of December 31, 1997, are exercisable after January 5, 1999, and will expire ten years from the date of grant. On June 24, 1997, options to purchase 50,000 shares of common stock, at an exercise price of $21.50 per share, the market price on the date of grant, were granted to MLE Consultants Inc, with 25,000 options exercisable one year from the date of grant and 25,000 options exercisable eighteen months from the date of grant. At December 31, 1998, 5,000 options were exercised and 45,000 were exercisable. Such options will expire ten years from the date of grant. On August 28, 1997, options to purchase, at an exercise price of $15.00 per share, the market price on the date of grant, 35,000 shares of common stock were granted to various Austin Knight officers and individuals. Such options TMP generally vest at the rate of 25% per year commencing one year after the date of grant and will expire ten years from the date of grant. At December 31, 1998, 8,750 options were exercisable. On October 17, 1997 options to purchase, at an exercise price of $29.59 per share, the market price on the date of grant, 116,293 shares of common stock were granted to officers and employees of M&B and options for 17,554 shares were subsequently cancelled. The remaining options to purchase 98,739 shares of common stock will expire five years from the date of grant. At December 31, 1998, none of these options were exercisable. F-42 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED) (B) STOCK OPTIONS (CONTINUED) On December 12, 1997, options to purchase, at an exercise price of $15.00 per share, the market price on the date of grant, an aggregate of 700,000 shares of common stock were granted to officers and employees of the Company. Such options vest at the rate of 25% per year commencing one year after the date of grant and will expire ten years from the date of grant. At December 31, 1998, 175,491 options were cancelled, 6,000 options were exercised and 129,628 were exercisable at December 31, 1998. On May 1, 1998 options to purchase, at an exercise price of $24.00 per share, the market price on the date of grant, 42,604 shares of common stock were granted to officers and employees of M&B and options for 2,925 shares were subsequently cancelled. The remaining options to purchase 39,678 shares will expire five years from the date of grant. At December 31, 1998 none of these options were exercisable. On May 4, 1998, options to purchase at an exercise price of $25.50 per share, the market price on the date of grant, 5,346 shares of common stock were granted to two employees. Such options vest at the rate of 25% per year commencing one year after the date of grant and will expire ten years from the date of grant. At December 31, 1998, 3,846 options were cancelled and none of the options were exercisable. On May 19, 1998, options to purchase at an exercise price of $26.25 per share, the market price on the date of grant, 5,370 shares of common stock were granted to an employee of the Company. Such options vest at the rate of 25% per year commencing one year after the date of grant and will expire ten years from the date of grant. At December 31, 1998 none of the options were exercisable. On May 20, 1998, options to purchase at an exercise price of $25.625 per share, the market price on the date of grant, 104,755 shares of common stock were granted to certain officers and employees of JSK. Such options vest at a rate of 25% per year commencing one year after the date of grant and will expire ten years from the date of grant. At December 31, 1998 none of these options were exercisable. On June 15, 1998, options to purchase at an exercise price of $26.13 per share, the market price on the date of grant, an aggregate of approximately 2,100 shares of common stock were granted to an employee of the Company. Such options vest at the rate of 25% per year commencing one year after the date of grant and will expire ten years from the date of grant. At December 31, 1998 none of these options were exercisable. On October 30, 1998, options to purchase at an exercise price of $30.00 per share, the market price on the date of grant, an aggregate of approximately 184,000 shares of common stock to the officers and employees of the Company. Such options vest at the rate of 25% per year commencing one year after the date of grant and will expire ten years from the date of grant. At December 31, 1998, none of these options were exercisable. On November 5, 1998, options to purchase at an exercise price of $25.125 per share, the market price on the date of grant, 100,000 shares of common stock to the officers and employees of Stackig. Such options vest at the rate of 25% per year commencing one year after the date of grant and will expire ten years from the date of grant. At December 31, 1998, none of these options were exercisable. On November 13, 1998, options to purchase at an exercise price of $23.75 per share, the market price on the date of grant, 24,450 shares of common stock to the officers and employees of the Company. Such F-43 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED) (B) STOCK OPTIONS (CONTINUED) options vest at the rate of 25% per year commencing one year after the date of grant and will expire ten years from the date of grant. At December 31, 1998, none of these options were exercisable. On December 9, 1998, options to purchase at an exercise price of $26.875 per share, the market price on the date of grant, an aggregate of approximately 800,000 options of common stock to the officers and employees of the Company. Such options vest at the rate of 25% per year commencing one year after the date of grant and will expire ten years from the date of grant. At December 31, 1998, none of these options were exercisable. On December 11, 1998, options to purchase at an exercise price of $29.50 per share, the closing market price on the date of grant, 50,000 shares of common stock to the officers and employees of TASA Holding AG. Such options vest at the rate of 25% per year commencing one year after the date of grant and will expire ten years from the date of grant. At December 31, 1998, none of these options were exercisable. On December 28, 1998, options to purchase at an exercise price of $38.00 per share, the market price on the date of grant, an aggregate of approximately 400,000 shares of common stock to the officers and employees of TASA. Such options vest at the rate of 25% per year commencing one year after the date of grant and will expire ten years from the date of grant. At December 31, 1998, none of these options were exercisable. In January 1996, the Company also adopted a stock option plan for non-employee directors (the "Directors' Plan"), pursuant to which options to acquire a maximum aggregate of 180,000 shares of common stock may be granted to non-employee directors. Options granted under the Directors' Plan do not qualify as incentive stock options within the meaning of Section 422 of the Code. The Directors' Plan provides for an automatic grant to each of the Company's non- employee directors of an option to purchase 11,250 shares of common stock on the date of such director's initial election or appointment to the Board. The options will have an exercise price of 100% of the fair market value of the common stock on the date of grant, have a ten-year term and become exercisable in accordance with a vesting schedule determined by the Board of Directors. Options to purchase 11,250 shares of common stock at a purchase price per share equal to $6.65 per share, the fair market value of the common stock on the date of grant, were granted on January 24, 1996 to one non-employee director. Half of these options vested on the date of the grant and the balance vested in two equal annual installments commencing one year after the date of grant. As of December 31, 1998, all were exercised. In September 1996, options to purchase an aggregate of 33,750 shares of common stock were granted to three directors under this plan at an exercise price per share equal to the initial public offering price per share, the fair value on the date of grant. Vesting is on terms similar to that of the previous director's grant. In December 1996, 11,250 of these options were cancelled and options to purchase 125,000 shares of common stock were granted at an exercise price of $14.00 (the initial public offering price). Of the total, 50,000 of such options vested on the closing of the initial public offering. In April 1997, in connection with this former director's resignation, the Company agreed that an additional 12,500 of such stock options would vest on June 1, 1997 and the unvested options totaling, 62,500 were cancelled. As of December 31, F-44 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED) (B) STOCK OPTIONS (CONTINUED) 1998, 42,880 options were exercised and 42,120 options are exercisable and will expire ten years from the date of grant. On October 7, 1997, a newly appointed director of the Company was granted options to purchase 11,250 shares of common stock at $23.625 per share, the market price on the date of grant. Half of these options vested on the date of the grant and the balance vests in two equal annual installments commencing one year after the date of grant. Such options will expire ten years from the date of grant. At December 31, 1998, 8,438 options were exercisable. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The weighted average fair values of options granted during 1998, 1997 and 1996 were $11.72, $6.55 and $5.76, respectively. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of approximately 4.6%, 6.5% and 6.1% in 1998, 1997 and 1996 respectively; volatility factor of the expected market price of the Company's common stock of 24%, 27% and 25% in 1998, 1997 and 1996, respectively; a weighted average expected life of the option of 9 years in 1998 and 8 years in both 1997 and 1996 and no dividend yield in 1998, 1997 and 1996. Under the accounting provisions of SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 -------- -------- -------- Net income (loss) applicable to common and Class B common stockholders.............................................. $15,637 $39,532 $(32,395) Net income (loss) per common and Class B common share Basic..................................................... $ 0.40 $ 1.09 $ (1.05) Diluted................................................... $ 0.39 $ 1.07 $ (1.05)
F-45 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED) (B) STOCK OPTIONS (CONTINUED) A summary of the status of the Company's fixed stock option plans as of December 31, 1998, 1997 and 1996, and changes during the years ending on those dates is presented.
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------- -------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- -------- --------- -------- -------- -------- Outstanding at beginning of year.... 2,741,587 $19.50 781,003 $ 8.35 206,173 $ 4.64 Granted............................. 1,995,975 35.39 2,262,990 22.29 639,708 9.48 Exercised........................... (213,719) 8.05 (104,621) 8.65 Forfeited/cancelled................. (318,282) 71.22 (197,785) 12.96 (64,878) 7.72 --------- --------- ------- Outstanding at end of year.......... 4,205,561 $23.73 2,741,587 $13.31 781,003 $ 8.35 ========= ========= ======= Options exercisable at year-end..... 343,124 $19.20 158,463 $ 8.44 66,875 $13.38 ========= ========= ======= Weighted average fair value of options granted during the year... $11.72 $ 6.55 $ 5.76
F-46 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED) (B) STOCK OPTIONS (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 1998.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------- ----------------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE EXERCISE PRICE DECEMBER 31, 1998 CONTRACTUAL LIFE (YEARS) EXERCISE PRICE DECEMBER 31, 1998 EXERCISE PRICES - -------------- ----------------- ------------------------ -------------- ----------------- --------------- $ 4.46.............. 14,491 1.4 $ 4.46 14,491 $ 4.46 4.77.............. 5,485 0.9 4.77 5,486 4.77 6.65.............. 199,418 7.0 6.65 64,038 6.65 10.37.............. 120,022 1.7 10.37 -- -- 12.88.............. 1,165,336 8.0 12.88 7,157 12.88 14.00.............. 42,120 7.9 14.00 42,120 14.00 15.00.............. 518,509 8.9 15.00 129,628 15.00 15.00.............. 35,000 8.8 15.00 8,750 15.00 19.00.............. 22,441 8.6 19.00 -- -- 21.50.............. 45,000 7.0 21.50 45,000 21.50 23.63.............. 11,250 8.8 23.63 8,438 23.63 23.75.............. 24,450 9.9 23.75 -- -- 24.00.............. 39,679 4.4 24.00 -- -- 25.13.............. 100,000 9.8 25.13 -- -- 25.50.............. 1,500 8.3 25.50 -- -- 25.63.............. 104,755 8.5 25.63 -- -- 26.13.............. 2,100 8.6 26.13 -- -- 26.25.............. 5,370 8.5 26.25 -- -- 26.88.............. 800,000 9.9 26.88 -- -- 29.50.............. 50,000 9.9 29.50 -- -- 29.59.............. 98,739 3.8 29.59 -- -- 30.00.............. 184,000 9.8 30.00 -- -- 38.00.............. 400,000 10.0 38.00 -- -- 44.21.............. 1,982 9.6 44.21 -- 44.21 42.62.............. 27,081 9.6 42.62 -- 42.62 47.31.............. 8,719 9.6 47.31 -- 47.31 48.75.............. 1,585 9.6 48.75 -- 48.75 50.19.............. 6,605 9.6 50.19 -- 50.19 56.78.............. 6,192 9.6 56.78 1,734 56.78 60.56.............. 58,578 9.6 60.56 -- 60.56 64.35.............. 4,425 9.3 64.35 -- 64.35 67.68.............. 13,210 9.3 67.68 -- 67.68 75.70.............. 18,679 9.3 75.70 -- 75.70 90.84.............. 12,939 9.3 90.84 6,159 90.84 135.35.............. 3,302 9.0 135.35 826 135.35 138.15.............. 1,189 9.0 138.15 -- 138.15 148.07.............. 51,278 9.0 148.07 9,297 148.07 162.76.............. 132 9.0 162.76 -- 162.76 --------- ------- 4,205,561 343,124 $ 19.20 ========= =======
F-47 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 13--PROVISION (BENEFIT) FOR INCOME TAXES The components of income (loss) before the provision (benefit) for income taxes, minority interests and equity in earnings (losses) of affiliates are as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Domestic........................................ $ 6,583 $34,539 $(39,522) Foreign......................................... 28,750 28,309 19,642 ------- ------- -------- Total income (loss) before provision (benefit) for income taxes, minority interests and equity in earnings (losses) of affiliates..... $35,333 $62,848 $(19,880) ======= ======= ========
The provision (benefit) for income taxes is as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Current tax provision: U.S. Federal..................................... $ 1,124 $ 3,326 $ 545 State and local.................................. 1,607 2,823 1,390 Foreign.......................................... 13,345 8,173 5,895 ------- ------- ------- Total current.................................. 16,076 14,322 7,830 ------- ------- ------- Deferred tax provision (benefit): U.S. Federal..................................... 2,379 2,053 1,620 State and local.................................. (684) 525 (377) Foreign.......................................... (3,404) 3,665 1,985 ------- ------- ------- Total deferred................................. (1,709) 6,243 3,228 ------- ------- ------- Total provision................................ $14,367 $20,565 $11,058 ======= ======= =======
The tax effects of temporary differences that give rise to the Company's deferred tax asset (liability) are below:
YEAR ENDED DECEMBER 31, ------------------- 1998 1997 -------- -------- Current deferred tax assets (liabilities): Earned commissions........................................ $(5,124) $(5,796) Allowance for doubtful accounts........................... 6,630 4,904 Work-in-process........................................... (5,224) (6,222) Prepaid and other......................................... (692) (241) Accrued expenses and other liabilities.................... (122) (2,103) Accrued compensation...................................... (418) (117) Tax loss carryforwards.................................... 709 725 ------- ------- Total current deferred tax liability.................. (4,241) (8,850) ------- -------
F-48 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 13--PROVISION (BENEFIT) FOR INCOME TAXES (CONTINUED)
YEAR ENDED DECEMBER 31, ------------------- 1998 1997 -------- -------- Noncurrent deferred tax assets (liabilities): Property and equipment.................................... (2,146) (1,860) Intangibles............................................... (541) (627) Accrued expenses and other liabilities.................... 4,080 (2,584) Accrued rent.............................................. 499 408 Deferred compensation..................................... 3,213 2,798 Tax loss carryforwards.................................... 8,405 12,985 Valuation allowance....................................... (1,892) (2,219) ------- ------- Total noncurrent deferred tax asset................... 11,618 8,901 ------- ------- Net deferred tax asset.................................... $ 7,377 $ 51 ======= =======
At December 31, 1998, the Company had net operating loss carryforwards for U.S. Federal tax purposes of approximately $18,000 which expire through 2018. The Company has concluded that, based on expected future results and the future reversals of existing taxable temporary differences, it is more likely than not that the deferred tax assets will be realized. In addition, certain subsidiaries have operating loss carryforwards which are only useable by such subsidiary. Consequently, there is no reasonable assurance that the benefit of such loss carryforward can be used. Accordingly, a valuation allowance has been established. The provision for income taxes differs from the amount computed using the Federal statutory income tax rate as follows:
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Provision (benefit) at Federal statutory rate.... $12,365 $21,160 $(6,668) State income taxes, net of Federal income tax effect......................................... 634 1,845 642 Nondeductible expenses(1)........................ 5,316 1,206 972 Nondeductible special charge and CEO bonus....... 438 510 18,574 Foreign income taxes at other than the Federal statutory rate................................. (1,387) 721 (522) Profits of pooled entities taxed directly to owners......................................... (2,428) (4,146) (2,291) Other............................................ (571) (731) 351 ------- ------- ------- Income tax provision............................. $14,367 $20,565 $11,058 ======= ======= =======
- ------------------------ (1) Primarily due to expense for amortization of intangible assets and meals & entertainment expenses, in addition, for 1998, nondeductible merger costs of $6.9 million which at the Federal statutory rate would have been a tax benefit of $2.4 million. Provision has not been made for U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries. Such earnings have been and will continue to be reinvested but could become subject to additional tax if they were remitted as dividends, or were loaned to the Company or a U.S. affiliate, or if F-49 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 13--PROVISION (BENEFIT) FOR INCOME TAXES (CONTINUED) the Company should sell its stock in the foreign subsidiaries. It is not practicable to determine the amount of additional tax, if any, that might be payable on the foreign earnings; however, the Company believes that foreign tax credits would substantially offset any U.S. tax. At December 31, 1998, the cumulative amount of reinvested earnings was approximately $14,000. NOTE 14--COMMITMENTS AND CONTINGENCIES (A) LEASES The Company leases its facilities and certain equipment under operating leases and certain equipment under capital leases. Future minimum lease commitments under both noncancellable operating leases and capital leases at December 31, 1998 are as follows:
CAPITAL OPERATING LEASES LEASES -------- --------- 1999..................................................... $ 4,888 $ 26,538 2001..................................................... 3,670 25,410 2001..................................................... 1,639 22,851 2002..................................................... 592 15,280 2003..................................................... 127 9,980 Thereafter............................................... -- 55,001 ------- -------- 10,916 $155,060 ======== Less: Amount representing interest....................... 1,760 ------- Present value of minimum lease payments.................. 9,156 Less: Current portion.................................... 4,258 ------- $ 4,898 =======
Rent and related expenses under operating leases amounted to $28,825, $25,619 and $22,087 for the years ended December 31, 1998, 1997 and 1996, respectively. (B) CONSULTING, EMPLOYMENT AND NON-COMPETE AGREEMENTS The Company has entered into various consulting, employment and noncompete agreements with certain management personnel and former owners of acquired businesses. These agreements are generally two to five years in length, with one for a term of fifteen years and two providing aggregate annual lifetime payments of approximately $135. Effective November 15, 1996, the Company entered into an employment agreement with its Principal Stockholder for a term ending on November 14, 2001. The agreement provides for automatic renewal for successive one year terms unless either party notifies the other to the contrary at least 90 days prior to its expiration. Under the agreement, the Principal Stockholder is entitled to a base salary of $1,500 per year and mandatory bonuses of $375 per quarter through November 1998 when the bonus provision of the agreement was eliminated. Such bonuses were waived by the Principal Stockholder. However, in compliance with the SEC's interpretation of the application of Staff Accounting Bulletin 79, Topic 5T "Accounting for Expenses or Liabilities paid by Principal Stockholder," the Company recorded in equal quarterly F-50 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 14--COMMITMENTS AND CONTINGENCIES (CONTINUED) amounts for 1997 a total of $1,500 in bonus expense and $1,250 for 1998, and increased the Additional Paid-in Capital account to complete the concept that the amount of the waived bonus was contributed to the Company by the Principal Stockholder. Because the amount was not and will never be paid, no tax benefit was accrued for this charge. The agreement also provides that the Company will pay the Principal Stockholder his base salary for the remaining term of the agreement in the event he is terminated for reasons other than cause. LAI has entered into employment agreements with certain executive officers which provide for minimum compensation under certain circumstances. The agreements also provide for a payment of amounts up to three times their annual salary if a change in control, as defined, of LAI occurs and include a covenant against competition with LAI which extends for two to three years after termination. In the event all the covered executives elected to terminate their employment during a specified period following a change in control, LAI's maximum liability would be approximately $5,200. In connection with the merger with TMP, these costs will be accrued as merger costs. (See Note 5). The above agreements provide for the following aggregate annual payments:
DECEMBER 31, 1998 ------------ 1999........................................................ $ 6,408 2000........................................................ 6,246 2001........................................................ 5,216 2002........................................................ 819 2003........................................................ 754 Thereafter.................................................. 1,704 ------- $21,147 =======
(C) EMPLOYEE BENEFIT PLANS The Company has a 401(k) profit sharing plan covering all eligible employees. Employer matching contributions, which are a maximum of 2% of payroll of participating employees, amounted to $867, $762, and $687 for the years ended December 31, 1998, 1997 and 1996, respectively. LAI maintains a defined contribution profit sharing plan covering substantially all employees. In August 1998, the plan was amended to add a 401(k) savings and company matching feature. LAI profit sharing and matching contributions are discretionary and are funded annually as approved by the LAI Board of Directors. As of February 28, 1998, LAI had accrued for contributions totaling approximately $1,600 which is included in the accrued expenses in the accompanying consolidated balance sheets. LAI did not accrue an amount as of February 28, 1999. Effective upon the merger with TMP, LAI's 401(k) plan was combined with that of TMP. Outside of the United States, the Company has employee benefit plans in the countries in which it operates. The costs for these plans amounted to $5,102, $4,438 and $3,868 for the years ended December 31, 1998, 1997 and 1996, respectively. F-51 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 14--COMMITMENTS AND CONTINGENCIES (CONTINUED) In addition, the Company had a defined contribution profit sharing plan covering all eligible employees. Contributions, which are at the discretion of the Board of Directors, were not made in the years ended December 31, 1997 and 1996. The plan was terminated during 1997. LAI has deferred compensation agreements with 69 employees and former employees. Under the terms of the agreements, employees are eligible to make annual elections, on calendar year basis, to defer a portion of their compensation. This compensation, together with accrued interest, is paid upon termination of the agreements, as defined. Effective January 1, 1999, the plan was amended to prohibit future deferrals of compensation to the plan. The present value of the obligation is recorded as a long-term liability in the accompanying consolidated balance sheets. Interest is earned on deferred amounts at a rate determined annually by LAI (6.25% at February 28, 1999). LAI is the beneficiary of whole life insurance policies with an aggregate cash surrender value of approximately $5,800 and $4,400, and an aggregate face amount of $22,300 and $13,500 as of February 28, 1999 and 1998, respectively. The Company is in the process of surrendering the policies and intends to use the proceeds, approximately $5,800, for general corporate purposes. (D) LITIGATION The Company is subject to various claims, suits and complaints arising in the ordinary course of business. Although the outcome of these legal matters cannot be determined, it is the opinion of management that the final resolution of these matters will not have a material adverse effect on the Company's financial condition, operations or liquidity. On February 19, 1998, a class action complaint was filed against the Company by five former employees. The claims brought by the plaintiffs in the complaint are that the Company (a) misclassified the named plaintiffs and purported class members as exempt from the overtime requirements of California wage and hour law and failed to pay them overtime wages, (b) failed to pay accrued but unused vacation days at the time of termination, and (c) failed to pay accrued but unused personal days at the time of termination. The plaintiffs purport to represent a class of 450 former and current employees who are similarly situated. The Company intends to vigorously defend the claims brought by the plaintiffs and on March 18, 1998 responded to the complaint by filing an answer denying all allegations. Management presently believes that the disposition of these claims will not have a material adverse effect on the Company's financial position, operations or liquidity. In June 1997, a settlement of $275, which was paid by the Principal Stockholder under an indemnity agreement with the Company, was made relating to a November 1996 action of a former employee against Old TMP, WCI and the Principal Stockholder. The complaint alleged, among other things, that the defendants breached purported contractual obligations pursuant to which the former employee was entitled to an ownership interest in the Company's recruitment advertising business. M & B has had proceedings issued against it for an amount of $3,400. These proceedings are in relation to the acquisition of the claimant's business in New Zealand prior to Morgan & Banks New Zealand Limited becoming a controlled entity of the M & B group. The directors of M & B are of the opinion that the claim is without substance and accordingly the action is being vigorously defended. F-52 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 14--COMMITMENTS AND CONTINGENCIES (CONTINUED) (E) OTHER (i) The Company is contingently liable on a note of the Principal Stockholder in the amount of approximately $1,600. (ii) The majority stockholder of an unconsolidated equity investee has an agreement which requires the Company to purchase his interest, based on a formula value, upon death. The value of his shares at December 31, 1998 is approximately $5,741 based on the formula. (iii) As of February 28, 1999, LAI has four standby letters of credit totaling approximately $2,600. The letters of credit, which were required by certain lessors as security deposits, expire between August and December 1999. NOTE 15--RELATED PARTY TRANSACTIONS (A) In August 1996, the Company entered into an agreement whereby it acquired the minority interest of a subsidiary for 46,350 shares of common stock. Such shares, valued at $672, were recorded as special compensation because the stockholder had received his shares in the subsidiary for no consideration and, accordingly, was not considered to have made a substantive investment for his shares. (B) The Company charged management and other fees to affiliates for services provided of approximately $651, $788 and $602 for the years ended December 31, 1998, 1997 and 1996, respectively. Such fees are reflected as a reduction of salaries and related costs in the accompanying supplemental consolidated statements of operations. (C) In January 1994, the Company acquired a 50% interest in an agency selling real estate advertising. In connection with this acquisition, the Company agreed to provide the agency with certain office and administrative services which amounted to $321 for the nine months ended September 30, 1997 at which time the arrangement was terminated. Payments of $875 and $725 were made in the years ended December 31, 1996 and 1995, respectively, in exchange for 50% of the agency's profits, as defined in the agreement. The Company also entered into three-year employment and consulting agreements with the two other stockholders of the agency and granted them the right to convert their agency shares into Company shares after an initial public offering. That conversion right, as amended, provided that those two stockholders may convert 25% of the agency's stock into unregistered common stock of the Company with a total value of $1,000 as of the effective date of conversion. The conversion was exercised in February 1997 and 61,848 shares of common stock were issued to these stockholders pursuant to the above agreement. Simultaneously, the Company transferred to such stockholders 50% of its interest in the agency, thus retaining a 25% interest and terminated its obligation to provide office and administrative services effective October 1, 1997. (D) The Company leases three offices from entities in which the Principal Stockholder and other stockholders have between a 49% and 90% ownership interest. Annual rent expense under these leases, which expire on various dates through the year 2013, amounts to approximately $863. In addition, an investee of the Company leases an office, at an annual rental of approximately $119, from a partnership in which the Principal Stockholder holds a 49% interest. F-53 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 16--SEGMENT AND GEOGRAPHIC DATA The Company is engaged in five lines of business, recruitment advertising, yellow page advertising, Internet, search & selection and temporary contracting. Operations are conducted in several geographic regions: North America, the Asia/Pacific Region (primarily in Australia, New Zealand and Japan) and Europe. The following is a summary of the Company's operations by business segment and by geographic segment, as of and for the years ended December 31, 1998, 1997, and 1996.
RECRUITMENT YELLOW PAGE SEARCH & TEMPORARY INFORMATION BY BUSINESS SEGMENT ADVERTISING ADVERTISING INTERNET SELECTION CONTRACTING TOTAL - ------------------------------------ ----------- ----------- --------- --------- ----------- -------- For the year ended December 31, 1998 Commissions & fees: Traditional sources............... $177,774 $106,455 $ -- $276,110 $ 46,989 $607,328 Internet.......................... 2,436 1,056 46,421 245 -- 50,158 -------- -------- --------- -------- -------- -------- Commissions & fees.................. 180,210 107,511 46,421 276,355 46,989 657,486 -------- -------- --------- -------- -------- -------- Operating expenses: Salaries & related costs, office & general expenses and CEO special bonus........................... 160,925 75,679 -- 253,127 36,107 525,838 Internet expenses(a).............. 1,917 739 45,586 63 -- 48,305 Merger & integration costs........ 2,004 596 -- 19,812 -- 22,412 Restructuring charges............. -- -- -- 3,543 -- 3,543 Amortization of intangibles....... 5,626 2,904 234 1,318 103 10,185 -------- -------- --------- -------- -------- -------- Total operating expenses............ 170,472 79,918 45,820 277,863 36,210 610,283 -------- -------- --------- -------- -------- -------- Operating income (loss): Traditional sources............... 9,219 27,276 -- (1,690) 10,779 45,584 Internet.......................... 519 317 601 182 -- 1,619 -------- -------- --------- -------- -------- -------- Operating income (loss)............. $ 9,738 $ 27,593 $ 601 $ (1,508) $ 10,779 47,203 ======== ======== ========= ======== ======== Total other expense, net:........... (11,870) -------- Income before provision for income taxes, minority interests and equity in losses of affiliates.... * * * * * $ 35,333 ======== Total Assets........................ $259,862 $298,417 $ 34,682 $174,763 $ 34,811 $802,535 ======== ======== ========= ======== ======== ========
- ------------------------ (a) Is comprised of salaries & related costs and office & general expenses. * Not allocated F-54 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 16--SEGMENT AND GEOGRAPHIC DATA (CONTINUED)
RECRUITMENT YELLOW PAGE SEARCH & TEMPORARY INFORMATION BY BUSINESS SEGMENT ADVERTISING ADVERTISING INTERNET SELECTION CONTRACTING TOTAL - ------------------------------------ ----------- ----------- --------- --------- ----------- -------- For the year ended December 31, 1997 Commissions & fees: Traditional sources............... $134,291 $103,941 $ -- $242,841 $ 41,285 $522,358 Internet.......................... 2,206 485 16,779 -- -- 19,470 -------- -------- --------- -------- -------- -------- Total commissions & fees............ 136,497 104,426 16,779 242,841 41,285 541,828 -------- -------- --------- -------- -------- -------- Operating expenses: Salaries and related costs, office & general and CEO bonus......... 122,024 75,714 -- 210,628 31,290 439,656 Internet expenses(a).............. 1,678 340 22,818 -- -- 24,836 Amortization of intangibles....... 3,850 2,143 167 582 124 6,866 -------- -------- --------- -------- -------- -------- Total operating expenses............ 127,552 78,197 22,985 211,210 31,414 471,358 -------- -------- --------- -------- -------- -------- Operating income (loss) Traditional sources............... 8,417 26,084 -- 31,631 9,871 76,003 Internet.......................... 528 145 (6,206) -- -- (5,533) -------- -------- --------- -------- -------- -------- Operating income (loss)............. $ 8,945 $ 26,229 $ (6,206) $ 31,631 $ 9,871 70,470 ======== ======== ========= ======== ======== Total other expense, net:........... (7,622) -------- Income before provision for income taxes, minority interests and equity in losses of affiliates.... * * * * * $ 62,848 ======== Total Assets........................ $249,774 $259,311 $ 13,928 $165,794 $ 32,259 $721,066 ======== ======== ========= ======== ======== ========
- ------------------------ (a) Is comprised of salaries & related costs and office & general expenses. * Not allocated. F-55 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 16--SEGMENT AND GEOGRAPHIC DATA (CONTINUED)
RECRUITMENT YELLOW PAGE SEARCH & TEMPORARY INFORMATION BY BUSINESS SEGMENT ADVERTISING ADVERTISING INTERNET SELECTION CONTRACTING TOTAL - -------------------------------------- ----------- ----------- -------- --------- ----------- -------- For the year ended December 31, 1996 Commissions & fees: Traditional sources................. $ 76,601 $100,883 $ -- $185,406 $29,210 $392,100 Internet............................ 661 -- 6,278 -- -- 6,939 -------- -------- ------- -------- ------- -------- Commissions & fees.................... 77,262 100,883 6,278 185,406 29,210 399,039 -------- -------- ------- -------- ------- -------- Operating expenses: Salaries & related costs, office & general expenses and CEO special bonus............................. 72,886 77,533 -- 167,222 20,750 338,391 Internet expenses(a)................ 496 -- 8,553 -- -- 9,049 Special compensation................ 22,451 29,568 -- -- -- 52,019 Amortization of intangibles......... 2,289 1,927 224 231 61 4,732 -------- -------- ------- -------- ------- -------- Total operating expenses.............. 98,122 109,028 8,777 167,453 20,811 404,191 -------- -------- ------- -------- ------- -------- Operating income (loss): Traditional sources................. (21,025) (8,145) -- 17,953 8,399 (2,818) Internet............................ 165 -- (2,499) -- -- (2,334) -------- -------- ------- -------- ------- -------- Operating income (loss)............... $(20,860) $ (8,145) $(2,499) $ 17,953 $ 8,399 (5,152) ======== ======== ======= ======== ======= Total other expense, net:............. (14,728) -------- Loss before provision for income taxes, minority interests and equity in losses of affiliates............. * * * * * $(19,880) ======== Total Assets.......................... $110,654 $238,763 $ 5,481 $ 92,028 $28,593 $475,519 ======== ======== ======= ======== ======= ========
- ------------------------ (a) Is comprised of salaries & related costs and office & general expenses. * Not allocated F-56 TMP WORLDWIDE INC. AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) NOTE 16--SEGMENT AND GEOGRAPHIC DATA (CONTINUED)
ASIA/PACIFIC UNITED CONTINENTAL INFORMATION BY GEOGRAPHIC REGION: NORTH AMERICA REGION KINGDOM EUROPE TOTAL - --------------------------------- ------------- ------------ -------- ----------- -------- December 31, 1998 Total commissions & fees.............. $376,104 $106,559 $117,153 $57,670 $657,486 Income (loss) before taxes, minority interests and equity in earnings of affiliates..................... 21,985 16,085 (4,491) 1,754 35,333 Long-lived assets................... 126,172 32,918 89,439 48,089 296,618 December 31, 1997 Total commissions & fees............ $322,084 $113,620 $ 82,739 $23,385 $541,828 Income before taxes, minority interests and equity in earnings of affiliates..................... 34,333 17,560 6,413 4,542 62,848 Long-lived assets................... 116,798 33,054 81,721 21,844 253,417 December 31, 1996 Total commissions & fees............ $247,700 $ 91,561 $ 34,508 $25,270 $399,039 Income (loss) before taxes, minority interests and equity in earnings of affiliates*.................... (39,912)* 15,827 3,300 905 (19,880) Long-lived assets................... 79,706 32,617 7,434 1,629 121,386
- ------------------------ * Includes non-cash, non-recurring special compensation and interest expense of $52,019 and $2,603, respectively. F-57 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TMP Worldwide Inc. New York, New York The audits referred to in our report dated November 19, 1999, relating to the supplemental consolidated financial statements of TMP Worldwide Inc. and Subsidiaries, included the audits of the supplemental consolidated financial statement schedule listed in the accompanying index. This supplemental consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the supplemental consolidated financial statement schedule based upon our audits. We did not audit the financial statement schedule of LAI Worldwide, Inc. and subsidiaries which was combined with the Company's financial statement schedule. That financial statement schedule was audited by another auditor whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for LAI Worldwide, Inc., and subsidiaries is based solely on the report of the other auditor. In our opinion, based on our audits and the report of the auditor, the supplemental consolidated financial statement schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO SEIDMAN, LLP ------------------------------- BDO Seidman, LLP
New York, New York November 19, 1999 F-58 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To LAI Worldwide, Inc: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of LAI Worldwide, Inc. included in this Form 10-K and have issued our report thereon dated April 7, 1999. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index in Item 16(b) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP
Tampa, Florida April 7, 1999 F-59 SUPPLEMENTAL SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT BALANCE AT BEGINNING OF CHARGED TO CHARGED TO END OF DESCRIPTIONS PERIOD COSTS AND OTHER DEDUCTIONS PERIOD COLUMN A COLUMN B EXPENSES ACCOUNTS COLUMN D COLUMN E - ------------ ------------ ---------- ---------- ---------- ---------- COLUMN C ADDITIONS Allowance for doubtful accounts Year ended December 31, 1996....... $ 5,581 $3,337 $ 3,099(1) $ 2,364 $ 9,653 Year ended December 31, 1997....... $ 9,653 $4,047 $ 3,326(1) $ 3,117 $13,909 Year ended December 31, 1998....... $13,909 $6,139 $ 1,780(1) $ 3,942 $17,886 Restructuring reserves Year ended December 31, 1997....... -- -- $17,663 $ 862 $16,801 Year ended December 31, 1998....... $16,801 $3,543 $10,020 $13,617 $16,747
- ------------------------ (1) Initial reserves of acquired companies. F-60 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TMP WORLDWIDE INC. By: /s/ BART CATALANE ----------------------------------------- Bart Catalane CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Dated: December 1, 1999 EX-27.1 2 EXHIBIT 27.1
5 0001020416 TMP WORLDWIDE 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 67,964 0 440,843 23,517 0 529,878 144,359 81,668 883,684 505,869 101,198 0 0 38 260,007 883,684 561,481 561,481 0 552,444 851 5,270 6,272 (3,356) 1,154 (4,917) 0 0 0 (4,917) (0.12) (0.12)
EX-27.2 3 EXHIBIT 27.2
5 0001020416 TMP WORLDWIDE 9-MOS DEC-31-1999 JAN-01-1998 SEP-30-1998 41,641 0 419,285 17,246 0 522,240 136,399 69,179 825,312 447,827 133,745 0 0 39 231,600 825,612 496,872 496,872 0 438,130 932 4,650 7,035 46,125 16,637 29,209 0 0 0 29,209 0.75 0.73
EX-27.3 4 EXHIBIT 27.3
5 0001020416 TMP WORLDWIDE 12-MOS DEC-31-1999 JAN-01-1998 DEC-31-1998 73,500 0 367,977 17,886 0 475,082 141,132 67,380 802,535 431,443 123,106 0 0 37 228,713 802,535 657,486 657,486 0 604,144 2,042 6,139 9,828 35,333 14,367 20,542 0 0 0 20,542 0.53 0.52
EX-27.4 5 EXHIBIT 27.4
5 0001020416 TMP WORLDWIDE 12-MOS DEC-31-1999 JAN-01-1997 DEC-31-1997 56,316 0 364,757 13,909 0 444,144 115,823 54,745 721,066 414,278 130,011 0 0 25 166,420 721,066 541,828 541,828 0 467,311 (821) 4,047 8,443 62,848 20,565 41,831 0 0 0 41,831 1.15 1.13
EX-27.5 6 EXHIBIT 27.5
5 0001020416 TMP WORLDWIDE 12-MOS DEC-31-1999 JAN-01-1996 DEC-31-1996 29,565 0 274,118 9,653 0 321,761 80,360 41,308 475,519 320,038 78,151 0 0 20 65,237 475,519 399,039 399,039 0 400,854 370 3,337 14,358 (19,880) 11,058 (32,051) 0 0 0 (32,051) (1.04) (1.04)
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