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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the twelve months ended December 29, 2000

Commission file number: 0-23198

SPHERION CORPORATION

(Exact name of registrant as specified in its charter)

2050 Spectrum Boulevard, Fort Lauderdale, Florida 33309

(Address of principal executive offices)    (Zip code)

(954) 938-7600
(Registrant's telephone number, including area code)

Interim Services Inc.
(Former name)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None
(Title of class)

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X  No   

    Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

    The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of the Registrant's Common Stock as of January 26, 2001 on the New York Stock Exchange, was $613,520,955.

    Number of shares of Registrant's Common Stock, par value $.01 per share ("Common Stock"), outstanding on January 26, 2001 was 60,853,486.

    Documents Incorporated by Reference:

    Certain specified portions of the registrant's definitive proxy statement to be filed within 120 days after December 29, 2000, are incorporated herein by reference in response to Part III, Items 10 through 13, inclusive.

PART I

Item 1. BUSINESS

Company Overview

    Spherion Corporation ("Spherion"), formerly Interim Services Inc., is a human capital management company. It maximizes talent, technology and outsourcing solutions for client organizations seeking increased efficiency. Solutions are delivered through a network of more than 1,000 offices across several distinct areas of specialization. These include information technology, outsourcing, professional recruiting, outplacement, talent assessment and measurement and staffing solutions. Spherion currently operates in 13 countries: Australia, Brazil, Canada, France, Germany, Hong Kong, Italy, New Zealand, Singapore, Spain, The Netherlands, the United Kingdom and the United States.

    Since its January 1994 initial public offering ("IPO"), excluding the HealthCare division which was sold effective September 1997, Spherion's network of offices has grown from 373 in North America to more than 1,000 offices in 13 countries as of December 29, 2000. Spherion's revenues, excluding HealthCare, increased from $537.3 million in fiscal 1994 to $3.7 billion in fiscal 2000. This growth has been accomplished through strategic acquisitions, internal growth and by capitalizing on cross-selling opportunities. The most significant recent acquisitions were Norrell Corporation ("Norrell") in July 1999 and Michael Page Group Plc ("Michael Page") in April 1997.

    On July 2, 1999, Spherion completed its acquisition of Norrell. Under the terms of the acquisition, the shareholders of Norrell received in exchange for each share of Norrell's common stock either a 0.9 share of Spherion's common stock or a cash payment of $18.76. The holders of approximately 13% of Norrell's common stock elected to receive the cash payment which amounted to approximately $75.6 million. Accordingly, Spherion issued approximately 20.8 million shares of Spherion's common stock to former Norrell shareholders and converted existing options to purchase Norrell common stock into options to purchase approximately 1.6 million shares of Spherion common stock. The value of the transaction including stock issued, cash paid and debt assumed, was approximately $650.0 million. Norrell is a strategic workforce management company focusing on information technology consulting, flexible staffing (including accounting, administrative and light industrial), outsourcing, search/recruitment (accounting and administrative) and managed staffing (administrative and light industrial). Operations of Norrell were combined with Spherion's existing operating segments effective with the completion of the acquisition.

    Michael Page is a premier international recruiting and staffing company providing flexible staffing and search/recruitment services primarily within the finance, banking and marketing fields. Michael Page's more than 90 offices are located in the United Kingdom, Australia, France, Germany, Hong Kong, Italy, New Zealand, Singapore, Spain, The Netherlands, Brazil and the United States. In January 2001, management announced its intention to sell 100% of Michael Page in an IPO on the London Stock Exchange. Management undertook a review of Michael Page's role within Spherion's overall operating structure and concluded that a sale of Michael Page was the best overall strategic decision in order to maximize Spherion's investment in Michael Page. Management currently expects the sale to be completed at the end of the first quarter or the beginning of the second quarter of 2001. Michael Page has been

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consolidated with Spherion's operating results in the Professional Services segment since its acquisition in April 1997 and Michael Page's summarized operating results are as follows (in thousands):

    Proceeds from the sale are currently expected to retire portions of existing debt and repurchase stock. Spherion's investment in Michael Page was approximately $300.0 million at December 29, 2000.

Industry Overview

    The global staffing services industry has experienced significant growth in response to the changing work environment worldwide. According to published industry sources, the total staffing services market had revenues of approximately $154.4 billion in 1999 (the latest available data). The staffing industry is evolving from employers' traditional use of staffing services to manage personnel costs and meet fluctuating staffing requirements to the reduction of administrative overhead by outsourcing human resources operations that are not part of an employer's core business competencies. In addition to the economic conditions driving staffing industry growth, Spherion believes that changing demographics of the workforces of developed economies and evolving attitudes concerning work patterns also contribute to growth in the staffing industry. These trends have accelerated with the pace of technological change and greater global competitive pressures.

    The U.S. remains the largest and most developed staffing services market in the world, representing approximately $76.9 billion or 49.8% of the total staffing market in 1999. Since 1994, the U.S. staffing market grew at an annual rate of 13.2%. According to the Staffing Industry Report, U.S. staffing industry revenue, including flexible staffing, managed staffing, outsourcing, search/recruitment and outplacement, grew to an estimated $103.2 billion in 2000. In addition, the American Staffing Association has estimated that more than 90% of all U.S. businesses utilize staffing services.

    The U.K. is the second largest national staffing services market in the world. According to published industry sources, staffing revenues in the U.K. to an estimated $26.5 billion in 1999, representing a five year annual growth rate of 12.0%. Published industry sources estimate the U.K.'s penetration rate of temporary workers at 2.1%, compared with the U.S. (2.2%) and The Netherlands (4.0%). Spherion believes that these factors, as well as the continued relatively rapid growth in the service sector, should increase the opportunities to provide services in the U.K.

    The total staffing services market in the European Union (excluding the U.K.) during 1999 was estimated by published industry sources to be approximately $33.2 billion, with France, Germany, The Netherlands and Belgium accounting for approximately 95% of such market. The European Commission has noted trends towards deregulation and greater labor market flexibility that Spherion believes will increase the use of temporary and contract labor throughout Europe.

    In certain countries in the Australia/Asia region, particularly Australia, the staffing services industry is well developed, and Spherion believes that opportunities exist for continued expansion within most of Spherion's service offerings. The Australian Bureau of Statistics figures indicate that 25% of the workforce now works in a "flexible" manner, i.e. as a contractor or temporary employee.

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    The staffing services market in most countries in which Spherion operates is highly fragmented and includes a large number of small businesses, many of which operate in a single geographic market. This fragmentation, combined with changing client demands and competitive pressures, has resulted in a trend towards industry consolidation. Faced with a client's desire to minimize the number of vendors, increase sophisticated management reporting and the expansion of professional level specialties, clients have begun to demand the services of large staffing companies capable of offering a full range of staffing services over a broad geographic area.

Business Strategy

    Spherion's goal is to drive revenue and earnings growth by delivering innovative integrated human capital solutions through its consultative diagnostic approach to strategic workforce management. Spherion intends to achieve this goal to further develop its client base by capitalizing on cross-selling opportunities, with particular emphasis on its higher-margin professional services (i.e. accounting, technology, legal, etc.). The company will also consider targeted acquisitions of companies focused in the professional services area. This growth strategy is complemented by an operating strategy of offering a comprehensive range of innovative services under a common brand.

    In addition to expanding existing services, a critical element to Spherion's growth strategy is the continued development of innovative products and services and advanced recruitment methods, enabled by technology. For example, Spherion's On-Premise offering utilizes proprietary software that provides "qualitative" measurement of performance, quantitative analysis of staffing efficiencies and customized reporting. In addition, Spherion's Assessment Group utilizes proprietary interactive voice and web-based response systems to pre-screen and behaviorally assess candidates. The Saratoga Institute offers clients the most comprehensive database of human performance metrics and Spherion assists clients with workforce planning using emerging workforce trends identified in its nationwide survey conducted with Lou Harris and Associates.

    Spherion recognizes that the Internet is an important tool in the identification and recruitment of qualified candidates and is expanding its recruiting efforts through the Internet. During 2000, Spherion made further investment in internet-based assets, including JobOptions.com and the creation of its Enthusian Corp. subsidiary, in partnership with Accenture, LLP (formerly Andersen Consulting, LLP). JobOptions.com, now combined with Spherion's CareerZone.com, is a comprehensive career site where job seekers register their skills and can access strategic tools that allow individuals to plan and manage their careers from first job through to retirement. Enthusian's primary product, Talent Axis, geared for larger clients, is a web-based tool that serves as an electronic order system for clients to procure pre-screened, prequalified candidates from multiple vendors. Spherion believes the use of the Internet as a recruiting tool will expand over time.

Acquisitions

    Spherion's corporate management team has extensive experience in identifying acquisition candidates and integrating acquired operating companies into Spherion's network. Spherion believes its decentralized, entrepreneurial management structure facilitates its efforts to acquire companies seeking alliances with a value-focused provider of a broad range of human resources services.

    Since the IPO, Spherion has acquired 34 companies providing consulting, managed staffing, outsourcing, search/recruitment and flexible staffing services. In addition to external acquisitions, Spherion is generally the purchaser of choice when a Spherion franchisee or licensee decides to sell its business. Spherion has a first right of refusal on any franchise sale at the same terms and conditions as may be agreed with another purchaser and has a standard purchase option on licenses. In 2000, as part of an overall strategy to reduce market overlap, Spherion repurchased 7 franchisees, representing approximately $41.0 million of annualized acquired revenues and repurchased 48 licensed offices, which do not impact Spherion's reported revenues, as sales by the licensed offices are included in Spherion's revenues, and sold several company-owned branches. Market overlap is created when a Norrell franchise operates in a market

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where a Spherion branch, licensee or franchisee operates or where a Spherion licensee or franchisee operates in a market where a Norrell branch or franchise operates. Overall, Spherion-owned branches yield higher profits than franchised or licensed offices, and Spherion therefore believes that the purchase of these offices can be accretive to overall earnings. Spherion regularly evaluates potential acquisitions of companies that can be integrated into existing operations and strategic acquisitions that provide entry into new geographic markets or service lines. Certain information related to external acquisitions is summarized in the following table.

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(1)

Office count at time of acquisition.

(2)

Represents annualized revenues for the year ended prior to acquisition.

Operations Overview

    Spherion operates through three operating segments: Information Technology, Professional Services and Commercial Staffing. Within these operating segments, Spherion provides five services—consulting, managed staffing, outsourcing, search/recruitment and flexible staffing. The following presents the percentage of 2000 revenues derived from each of these services:

    The activities of the three segments are as follows:

    Information Technology—Consulting is provided in the U.S., Australia, The Netherlands and in the U.K. and includes the areas of e-business, enterprise application integration, software quality management, information design services and education. Flexible staffing is provided in the U.S. and Australia and includes supplying highly qualified professionals for short-term and long-term assignments to supplement customers' existing IT departments, such as networking, desktop support, help desk and data centers. Managed staffing is provided primarily in the U.S. and includes managing customers' staffing for help desk operations.

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    Professional Services—Flexible staffing is provided in the U.S., U.K. and throughout continental Europe and includes providing staff on a short-term and long-term basis in the areas of accounting, banking and finance, marketing, and legal professionals. Search/recruitment finds professionals for full-time career opportunities from entry level up through executives across a wide range of professions—accounting, finance, information technology, human resources, legal services, engineering, manufacturing, sales, marketing and general management. These services are provided in the U.S., U.K., continental Europe, Australia, Asia and in Brazil.

    Outsourcing assumes responsibility for client functions in customer care, workforce selection, distribution and fulfillment and administrative services. Spherion offers outsourcing services in the U.S. whereby its clients delegate to Spherion all responsibility for staffing and performance. Consulting services are provided to help clients assess, develop and transition talent. Additional consulting services are provided, which offer tools to measure workforce productivity, and to provide technology-enabled prehire screening to find the best few candidates.

    Commercial Staffing—Flexible staffing is provided in the U.S., U.K., The Netherlands and in Spain. Flexible staffing provides staffing solutions for office and light-industrial skills. For office skills, Spherion supplies executive assistants, customer service representatives and word processing specialists, among others. For light-industrial skills, Spherion supplies assembly, mailroom and product packaging support, among others. Managed staffing includes managing all of a client's staffing vendors for consistent quality, performance and pricing. Managed staffing is provided mainly through On-Premise, which is onsite management of a client's flexible workforce.

HealthCare Operations

    During 1997, Spherion sold its health care operations that represented 11.8% of total revenues for the year ended December 26, 1997. During December 2000, Spherion sold Norrell's home health aide business. This business had been classified as an asset held for sale and the results of operations of this business are not included in Spherion's Consolidated Statements of Earnings in fiscal 2000 or 1999.

Office Structure

    Spherion offices are company-owned, franchised and licensed. Most offices serve multiple clients in their respective geographic area, with the exception of On-Premise sites, which are established at the client's location to serve only that client. Spherion believes that it can better leverage profitability through its branch locations. Currently 85% of revenues are derived from Spherion-owned branches, with the remaining being franchised and licensed. The following table details the number of offices, which are Spherion-owned, franchised and licensed as of the end of the periods listed.

Branch Offices

    As of December 29, 2000, Spherion operated 883 branch offices, which increased from the prior year due to the opening of offices at Michael Page, new On-Premise locations and buybacks from licensees and franchisees. Branch office expansion is generally pursued in markets where Spherion has an established presence and is used to increase market penetration. Additional expansion is achieved by establishing On-Premise operations at client sites. Spherion intends to continue to expand Spherion-owned branches in those locations where it can "cluster" multiple offices in close geographic proximity to utilize centralized

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regional and area management and other administrative functions which should increase growth opportunities and increase profitability.

Licensed Offices

    Spherion grants licenses, which give the licensee the right to establish a business utilizing Spherion's trade names, service marks, advertising materials, sales programs, operating procedures, manuals and forms within a designated territory. As of December 29, 2000, Spherion's 96 licensees operated 261 licensed offices. The decrease from 1999 is due primarily to Spherion's overall strategy to reduce market overlap created in the Norrell acquisition.

    Licensees are required to observe Spherion's operating procedures and standards and act as a representative of Spherion in recruiting, screening, classifying, employing and placing flexible staff in response to client orders. The licensee is responsible for establishing the office and paying related administrative and operating expenses, such as rent, utilities and salaries of full-time employees. Spherion is responsible for paying the wages of the flexible staff and all related payroll taxes and insurance. As a result, Spherion provides a substantial portion of the working capital needed for the licensed businesses.

    Sales by the licensed offices are included in Spherion's revenues, and the direct costs of services are included in Spherion's cost of services. The licensee receives a commission from Spherion, which ranges between 50% and 75% of the licensed offices' gross profits. The licensee is required to use Spherion's billing, payroll and other data processing services.

Franchised Offices

    Spherion has been granting franchises for approximately 40 years. The average tenure of franchise ownership is approximately 10 years, and a number of franchisees are second generation owners. Most franchisees operate more than one franchise. As of December 29, 2000, Spherion's 14 franchisees operated 113 offices. The decrease from 1999 is due primarily to Spherion's overall strategy to reduce market overlap created in the Norrell acquisition.

    Spherion grants franchisees the right to market and furnish flexible staffing services within a designated geographic area using Spherion's trade names, service marks, advertising materials, sales programs, operating procedures, manuals and forms. Spherion provides franchises with its national, regional and local advertising. Franchisees operate their businesses autonomously within the framework of Spherion's policies and standards and recruit, employ and pay their own full-time and flexible staff. Spherion receives royalty fees from each franchise based upon its sales, and in return, supplies a variety of support and marketing services.

Competition

    The staffing services industry is intensely competitive and highly fragmented, with few barriers to entry by potential competitors at the local level. Spherion faces significant competition in the markets it serves and will continue to face significant competition in any geographic market or industry sector that it may enter. In each market in which Spherion operates, it competes for both clients and qualified personnel with other firms offering staffing services. The majority of competitors are significantly smaller than Spherion. However, certain of Spherion's competitors have greater marketing and financial resources than Spherion. Many clients use more than one staffing services company and it is common for a major client to use several staffing services companies at the same time.

    Spherion's largest competitors are Adecco S.A., Manpower Inc., Randstad Holdings, Kelly Services, Inc., Vedior, Robert Half International, Inc., Modis Professional Services, Inc., Keane, Inc. and CDI Corporation. Spherion believes that it is currently one of the ten largest worldwide providers of staffing services based upon revenue.

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    Spherion believes that a primary competitive factor in obtaining and retaining clients is the breadth of services provided as clients seek out providers that can service all of their staffing needs. Additionally, other critical competitive factors include an understanding of clients' specific job requirements through consultative assessments, the ability to provide personnel in a timely manner, the ability to measure the quality of job performance and pricing. The primary competitive factors in obtaining qualified candidates for employment assignments are quality of available opportunities, wages, responsiveness to work schedules and number of available work hours. Spherion believes it has a competitive advantage over its competitors because it offers a wide range of services and broad availability of skills to its customers.

Trademarks

    In 2000, Spherion changed its name and primary identifying trademark from "INTERIM" to "SPHERION" and related "SPHERION" marks. Spherion, through its subsidiaries, maintains a number of trademarks, trade names and service marks in the United States and certain other countries. Spherion believes that many of these marks and trade names, including SPHERION^SM, INTERIM®, JOBOPTIONS®, NORRELL®, STRATFORD GROUP®, ENTHUSIAN^SM, SARATOGA^SM, TECHNOLOGY ARCHITECTS^SM and WORKFORCE ARCHITECTS^SM have significant value and are materially important to its business. In addition, Spherion maintains other intangible property rights.

    Spherion, through its subsidiaries, currently uses and has applications for registration pending on the following: SPHERION^SM, ENTHUSIAN^SM, SARATOGA^SM, TECHNOLOGY ARCHITECTS^SM and WORKFORCE ARCHITECTS^SM.

    Spherion's U.S. trademark registration for INTERIM® expires April 6, 2003, but is renewable indefinitely for successive ten-year terms. Spherion's U.S. trademark registration for NORRELL® expires on March 8, 2003, but is renewable indefinitely for successive ten-year terms.

Governmental Regulation

    Flexible staffing firms are generally subject to one or more of the following types of government regulations: (i) regulation of the employer/employee relationship between a firm and its flexible staff, (ii) registration, licensing, record keeping and reporting requirements and (iii) substantive limitations on its operations. Flexible staffing firms are the legal employers of their flexible workers. Therefore, the firm is governed by laws regulating the employer/employee relationship such as tax withholding or reporting, social security or retirement, anti-discrimination and workers' compensation.

    Spherion has significant operations in a number of foreign countries. In some of these countries, particularly in Europe, there is significant national and local regulation of flexible staffing services. These laws generally require that part-time, temporary and contract workers receive benefits similar to full-time workers, such as vacation, welfare plan contributions and severance pay. In some cases, hours of work and the duration of assignments are limited and workers may not be assigned to certain industries. Industry-wide union membership is also a requirement in some countries. Spherion does not anticipate that these legal structures and requirements will have a material effect on its growth or prospects. However, any material change in national or local regulation of flexible staffing services could have a material adverse effect on Spherion.

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    Spherion's sale of franchises and licenses is regulated by the Federal Trade Commission and by authorities in approximately 17 states and one Canadian province. Spherion must deliver a franchise offering circular (similar to a prospectus) to prospective franchisees or licensees. Spherion has filed either the appropriate registration or obtained an exemption from registration in states which require franchisers to register in order to sell franchises. Spherion does not anticipate that these requirements will have any material effect on its ability to sell franchises or licenses.

Employees

    Spherion estimates that it employed approximately 547,000 people in 2000. Approximately 9,000 individuals were employed full-time in both its national and international operations and the remaining 538,000 individuals were flexible personnel assigned with its clients, of whom approximately 103,000 were assigned, on average, at any given time.

Executive Officers of the Registrant

    The executive officers of Spherion, each of whom has been elected to serve at the discretion of the Board of Directors of Spherion, are:

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Item 2.  PROPERTIES

    The executive offices of Spherion are located at 2050 Spectrum Boulevard, Fort Lauderdale, Florida 33309, in a 113,000 square-foot building owned by Spherion. Spherion also leases on a short-term basis approximately 24,705 square feet in buildings within one mile of its Florida executive offices for operations associated with its corporate headquarters. In addition, Spherion leases approximately 113,075 square feet in Atlanta, Georgia, which housed Norrell's executive offices. Of the 113,075 square feet, approximately 20,461 square feet is available for sublease due to downsizing and redundancies of headquarters operations. All other offices of Spherion and its subsidiaries are operated in premises held primarily under short-term leases providing fixed monthly rentals, usually with renewal options.

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Item 3.  LEGAL PROCEEDINGS

    Spherion, in the ordinary course of its business, is threatened with or named as a defendant in various lawsuits. Spherion's management does not expect that the outcome of any of these lawsuits, individually or collectively, will have a material adverse effect on the company's financial condition, results of operations or cash flows. Spherion maintains insurance in such amounts and with such coverages and deductibles as management believes are reasonable and prudent. The principal risks that Spherion insures against are workers' compensation, personal injury, bodily injury, property damage, professional malpractice, errors and omissions, employment practices and fidelity losses.

    On March 7, 2001, Spherion was notified by Interim HealthCare Inc., Catamaran Acquisition Corp. and Cornerstone Equity Investors IV, L.P. (collectively, the "Interim HealthCare Plaintiffs") of their plans to file on April 2, 2001, an amended complaint in connection with Spherion's divestiture of Interim HealthCare and for a transfer from the Superior Court of the State of Delaware in New Castle County to the Delaware Court of Chancery. The amended complaint outlines three counts: breach of contract, reformation and equitable rescission. The Interim HealthCare Plaintiffs are seeking damages of $20 million, a reduction of the purchase price of $50 million or rescission of the contract. Management believes that the resolution of this matter will not have a material impact on Spherion's consolidated financial position, liquidity or results of operations.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    No matters were submitted to a vote of security holders during the fourth quarter of the twelve months ended December 29, 2000.

PART II

Item 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Common Stock is traded on The New York Stock Exchange under the symbol "SFN." On July 7, 2000, Spherion began using the "SFN" symbol which replaced its previous symbol, "IS." High and low prices for the Common Stock by quarter appear in "Quarterly Financial Data" on page 48. On January 26, 2001, there were approximately 2,344 holders of record of Spherion's Common Stock.

    Spherion has not paid cash dividends and does not intend to pay cash dividends in the foreseeable future.

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Item 6.  SELECTED FINANCIAL DATA

(footnotes continued on following page)

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(1)

The 1999 fiscal year contained 53 weeks. All other years contained 52 weeks.

(2)

Revenues for HealthCare are included through the date of disposition of September 26, 1997.

(3)

Write-down of investment represents the decline in value of an equity investment, which was determined to be "other than temporary."

(4)

Year 2000 costs represent the costs associated with remediating Norrell's application systems.

(5)

On July 2, 1999, Spherion acquired Norrell Corporation. Restructuring and integration costs were related to a plan adopted by management in which certain redundant functions and assets of Spherion were eliminated.

(6)

On September 26, 1997, Spherion sold its HealthCare business. Amount represents pre-tax gain on sale. Taxes on the gain were $5,272.

(7)

On May 23, 1996, Spherion completed a pooling with Brandon Systems Corporation, an IT staffing company. Merger expense represents all fees and expenses related to the merger, consolidation and restructuring of the combined companies.

(8)

On August 7, 1997, Spherion announced a two-for-one stock split in the form of a 100% stock dividend to stockholders of record as of the close of business on August 18, 1997, payable on September 5, 1997. The effect has been reflected and applied on a retroactive basis.

(9)

At end of period.

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Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

    Spherion is a leader in the area of human capital management. Spherion is organized into three operating segments, Information Technology, Professional Services and Commercial Staffing. Through these operating segments, Spherion provides the following five services: (1) consulting— including outplacement, executive coaching and information technology consulting; (2) managed staffing— such as temporary and permanent workforce management, which includes On-Premise and vendor management; (3) outsourcing— includes functional management and staffing of various administrative functions, including full service call center management; (4) search/recruitment— such as contingency recruiting and executive retained search; and (5) flexible staffing— temporary personnel from administrative personnel to executives.

    In January 2001, Spherion announced that the company continues to review strategic alternatives related to Michael Page and now expects to offer, subject to market conditions, 100% of Michael Page's common stock for sale through an initial public offering and listing on the London Stock Exchange early in 2001. Management expects to use the proceeds from the sale for the repayment of debt and for the repurchase of common stock.

    During 2000, Spherion repurchased licensed and franchised offices to reduce market overlap, which resulted primarily from the Norrell acquisition discussed below. In addition, Spherion made various acquisitions during 2000 which did not materially impact operating results or financial position.

    On July 2, 1999, Spherion completed its acquisition of Norrell. Under the terms of the acquisition, the shareholders of Norrell received in exchange for each share of Norrell's common stock either a 0.9 share of Spherion's common stock or a cash payment of $18.76. The holders of approximately 13% of Norrell's common stock elected to receive the cash payment, which amounted to approximately $75.6 million. Accordingly, Spherion issued approximately 20.8 million shares of Spherion's common stock to former Norrell shareholders and converted existing options to purchase Norrell common stock into options to purchase approximately 1.6 million shares of Spherion common stock. The value of the transaction including stock issued, cash paid and debt assumed, was approximately $650.0 million. Norrell is a strategic workforce management company focusing on IT consulting, flexible staffing (including accounting, administrative and light industrial), outsourcing, search/recruitment (accounting and administrative) and managed staffing (administrative and light industrial). Operations of Norrell were combined with Spherion's existing operating segments effective with the completion of the acquisition. As such, all the discussion in the following Management's Discussion and Analysis includes Norrell's operations in Spherion's operating segments and services from July 2, 1999, unless otherwise stated.

    In 1998, Spherion made one significant acquisition, Computer Power Group Limited (Australian and Asian Operations) or ("Computer Power"). The Computer Power acquisition expanded both Spherion's technology consulting and flexible staffing into Australia and Southeast Asia.

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Operating Segments

    Effective in the first quarter of 2000, Spherion changed its basis of segmentation from a geographic approach to the following: Information Technology, Professional Services and Commercial Staffing. Management believes that the new reportable segments better reflect the management and fiscal responsibilities within Spherion subsequent to the Norrell acquisition and integration of its operations. Spherion evaluates the performance of its operating segments and allocates resources based on revenues, gross profit and segment operating margin. Segment operating margin is defined as income before unallocated central costs, net interest expense, income taxes and special charges (write-down of investment, Year 2000, restructuring and integration costs). All material intercompany revenues and expenses have been eliminated. All previous year amounts have been restated for comparative purposes. See notes to the consolidated financial statements included herein for further discussion and financial information regarding these operating segments.

    Information on operating segments and a reconciliation to earnings before income taxes and extraordinary item for the periods indicated are as follows (in thousands):

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Fiscal 2000 Compared with 1999

    Information Technology.  Revenues decreased 3% to $755.6 million in 2000 from $781.7 million in 1999 due primarily to industry-related decreases in customer demand and absence of longer duration ERP and Y2K-related projects in the 2000 period. Information Technology revenues were also impacted by the trend toward smaller and shorter duration e-solutions projects and away from traditional IT services. On a pro forma basis (including Norrell as if it were acquired at the beginning of 1999), revenues were down 15% from $890.2 million in 1999. The decline in revenues from 1999 pro forma levels was primarily due to the reasons outlined above. Revenues by service line for the year within the group were comprised of 65% consulting, 7% managed staffing, 1% outsourcing, 1% search/recruitment and 26% flexible staffing. As a percentage of total Information Technology revenues, managed staffing increased from a 1999 pro forma level of 5% reflecting increases in help desk services, while consulting revenue decreased from 67% due to the industry-related decreases previously described. All other service line revenue percentages were about the same in 2000 as compared with 1999.

    Gross profit decreased 9% to $241.9 million in 2000 from $266.3 million in 1999 and the overall gross profit percentage decreased to 32.0% in 2000 from 34.1% in 1999 due primarily to lower utilization of consultants. On a pro forma basis, gross profit percentage for 2000 was lower than the 1999 level of 33.4%. This decrease was also due to lower utilization of consultants.

    Segment operating margin (earnings before unallocated central costs, net interest expense, income taxes and special charges) decreased 45% to $38.6 million in 2000 from $70.1 million in 1999. Lower operating margin in 2000 was due primarily to the decrease in gross profit of $24.4 million discussed above, higher operating expenses of $5.4 million and higher amortization expense of $1.7 million. Operating costs as a percentage of revenues, net of the impact from cost reduction initiatives, increased from 24% in 1999 to 26% in 2000 due to Norrell-related integration costs and the overall decline in revenue. Cost-reduction initiatives within this segment have been ongoing and include office closures and headcount reductions. Management has actively addressed the level of infrastructure costs for this business unit, but cost reduction actions have not kept pace with sequential quarterly revenue declines. A major portion of management effort for 2001 is being directed at properly sizing this segment's infrastructure.

    Professional Services.  Revenues increased 37% to $1.31 billion in 2000 from $951.8 million in 1999, with most of the increase due to the acquisition of Norrell's outsourcing business and strong organic growth in the domestic and European search/recruitment businesses. On a pro forma basis, revenues increased 15% from $1.13 billion in 1999 due primarily to growth in outsoucing and European search/recruitment. Revenues by service line within the group were comprised of 4% consulting, 24% outsourcing, 32% search/recruitment and 40% flexible staffing. As a percentage of total Professional Services revenues, search/recruitment revenues increased from a 1999 pro forma level of 28%, while flexible staffing decreased from a 1999 pro forma level of 42%. The shift in mix was due primarily to a strong permanent placement market as unemployment levels were low in most of Spherion's markets during 2000.

    Gross profit increased 37% to $639.7 million in 2000 from $468.4 million in 1999 and the gross profit percentage decreased slightly from 49.2% in 1999 to 49.0% in 2000. On a pro forma basis, gross profit percentage for 2000 was higher than the 1999 level of 45.3% due to the increase in proportion of search/recruitment revenues to total revenue.

    Segment operating margin increased 39% to $142.4 million in 2000 from $102.3 million in 1999. Higher operating margin compared with the prior year was due primarily to the increase in gross profit of $171.3 million discussed above, which was partially offset by higher operating expenses of $128.8 million, mostly for permanent placement commissions, and higher amortization expense of $2.4 million. As a percentage of revenues, operating expenses decreased slightly from 37% in 1999 to 36% in 2000 due primarily to the inclusion of the outsourcing business in 2000 (which classifies most of its expenses in gross profit) and greater leveraging of operating expenses.

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    Commercial Staffing.  Revenues increased 17% to $1.68 billion in 2000 from $1.43 billion in 1999 due to the Norrell acquisition. On a pro forma basis, revenues decreased 10% from $1.86 billion due primarily to the impact of Norrell acquisition-related integration efforts, economic slowdown in the U.S. in the fourth quarter of 2000 and elimination of unprofitable and lower margin business. Revenues by service line within the group were comprised of 35% managed staffing, 2% search/recruitment and 63% flexible staffing. As a percentage of total Commercial Staffing revenues, flexible staffing and search/recruitment increased from 1999 pro forma levels of 62% and 1%, respectively, while managed staffing decreased from a 1999 pro forma level of 37%.

    Gross profit increased 18% to $360.1 million in 2000 from $304.1 million in 1999 due primarily to the Norrell acquisition. The gross profit percentage increased to 21.5% in 2000 from 21.2% in 1999 and 21.0% on a 1999 pro forma basis, due to the elimination of lower margin business, reduction in state unemployment taxes and an increase in search/recruitment business.

    Segment operating margin increased 27% to $71.6 million in 2000 from $56.2 million in 1999. Higher operating margin in 2000 was due primarily to the increase in gross profit of $56.0 million discussed above partially offset by higher operating expenses of $35.5 million and higher amortization of $5.1 million, due primarily to the Norrell acquisition. Operating expenses as a percentage of revenue decreased from 17% for 1999 to 16% for 2000, as Spherion was able to leverage fixed costs by eliminating redundant personnel and offices at the time of the Norrell acquisition. The segment operating margin increased from 3.9% of revenues in 1999 to 4.3% in 2000.

    Unallocated Central Costs.  Unallocated central costs increased 48% to $51.1 million in 2000 from $34.4 million in 1999, due primarily to the Norrell acquisition and related integration costs. These costs as a percentage of consolidated revenues increased to 1.4% in 2000 from 1.1% in 1999 due primarily to costs associated with the delay in conversion of Norrell's back and front office systems to common platforms which was substantially completed late in the fourth quarter of 2000.

    Interest Expense, Net.  Interest expense, net increased 39% to $50.4 million in 2000 from $36.3 million in 1999. The increase reflects higher average borrowings outstanding during 2000 related to the Norrell acquisition and increased borrowings to fund higher working capital needs due to an increase in day's sales outstanding, franchise buybacks and earnouts, as well as slightly higher overall average interest rates. Spherion had average borrowings outstanding during 2000 of $813.4 million at an average interest rate including the effects of interest rate swaps of 6.8%. During 1999, Spherion had average borrowings outstanding of $635.4 million at an average interest rate including the effects of interest rate swaps of 6.0%. Interest income remained relatively unchanged at $2.5 million in 2000 compared with $3.0 million in 1999.

    Write-down of Investment.  During the second quarter of 2000, Spherion made an equity investment in Worldwide Xceed Group, Inc., an internet-focused consulting group. In the fourth quarter of 2000, Spherion determined that the decline in value of this investment was other than temporary and recorded a pre-tax charge to earnings of $24.8 million ($15.4 million after-tax, or $0.22 per diluted share).

    Income Taxes.  The effective income tax rate for 2000 was 41.0% compared with 42.8% (or 42.0% before Year 2000 costs and restructuring and integration costs) in 1999. The decrease in the effective rate resulted primarily from higher levels of Work Opportunity tax credits.

    Net Earnings.  Net earnings increased 5% to $74.5 million ($1.16 per diluted share) in 2000 from $70.8 million ($1.27 per diluted share) in the prior year period. Excluding the after-tax impact of special charges (write-down of investment, Year 2000 costs, and restructuring and integration costs) diluted earnings per share were $1.38 in 2000 compared with $1.61 in 1999. The weighted average number of shares (as adjusted for the dilutive impact of common stock equivalents) increased from 60.8 million in 1999 to 69.8 million in 2000 due to the issuance of 20.8 million shares in July 1999 related to the Norrell acquisition, partially offset by stock repurchases. For 1999, Spherion's fiscal year included 53 weeks

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whereas 2000 included 52 weeks. The extra week in 1999 resulted in approximately $40.4 million in additional revenue, but net earnings benefited by less than $500,000 as the 53^rd week was a holiday week.

Fiscal 1999 Compared with 1998

    Information Technology.  Revenues increased 92% from $407.7 million in 1998 to $781.7 million in 1999. Excluding the impact of Norrell, revenues increased 65% in 1999 compared with 1998. The increase in revenues is due primarily to fourth quarter 1998 acquisitions of Computer Power in Australia and Ouranos in The Netherlands and strong organic growth in IT consulting during the first half of 1999. On a pro forma basis (including Norrell as if it were acquired at the beginning of 1999), revenues by service line for 1999 within this business segment were comprised of 67% consulting, 5% managed staffing, 2% outsourcing, 1% search/recruitment and 25% flexible staffing. As a percentage of total Information Technology revenues, consulting increased from a 1998 level of 63%, while managed staffing revenue decreased from 8% due primarily to the previously mentioned acquisitions. All other service line revenue percentages were about the same in 1999 on a pro forma basis as compared with 1998.

    Gross profit increased 77% from $150.0 million in 1998 to $266.3 million in 1999, however the overall gross profit percentage decreased to 34.1% in 1999 from 36.8% in 1998. Excluding the impact of Norrell in 1999, the gross profit percentage was 35.0%. The decrease in gross profit percentage was due primarily to the inclusion of Computer Power's flexible staffing business in 1999.

    Segment operating margin increased 66% from $42.3 million in 1998 to $70.1 million in 1999. Higher operating margin in 1999 was due primarily to the increase in gross profit of $116.3 million partially offset by increased operating expenses of $83.5 million and higher amortization expense of $5.0 million due primarily to the Computer Power and Norrell acquisitions. Operating costs as a percentage of revenues decreased from 26% in 1998 to 24% in 1999 with higher revenues allowing greater leveraging of expenses.

    Professional Services.  Revenues increased 58% from $601.9 million in 1998 to $951.8 million in 1999. Excluding the impact of Norrell, revenues increased 27% in 1999 compared with 1998. The increase in revenue is due primarily to strong organic growth in European flexible staffing and both European and domestic search/recruitment business. On a pro forma basis, revenues by service line for 1999 within the group were comprised of 5% consulting, 25% outsourcing, 28% search/recruitment and 42% flexible staffing. As a percentage of total Professional Services revenues, outsourcing revenues increased from a 1998 level of 1%, while search/recruitment and flexible staffing decreased from 40% and 54%, respectively. The shift in mix was due primarily to acquired outsourcing business from the Norrell acquisition.

    Gross profit increased 37% from $340.9 million in 1998 to $468.4 million in 1999 and the gross profit percentage decreased from 56.6% in 1998 to 49.2% in 1999. Excluding the impact of Norrell in 1999, the gross profit percentage was 55.9%. The decline in gross profit percentage was due primarily to a change in mix in our European operations as flexible staffing increased as a percentage of total European Professional Services revenue and search/recruitment decreased.

    Segment operating margin increased 46% from $69.8 million in 1998 to $102.3 million in 1999. Higher operating margin compared with the prior year was due primarily to the increase in gross profit of $127.5 million, which was partially offset by higher operating expenses of $92.2 million, due to growth in European search/recruitment business and the impact of the Norrell acquisition, and higher amortization expense of $2.8 million, due to the Norrell acquisition. As a percentage of revenues, operating expenses decreased from 42% for 1998 to 36% in 1999 due primarily to the addition of Norrell's outsourcing business which has a lower proportionate amount of selling, general and administrative expenses.

    Commercial Staffing.  Revenues increased 63% from $880.5 million in 1998 to $1.43 billion in 1999. Excluding the impact of Norrell, revenues increased 19% in 1999 compared with 1998. The increase in revenue was due primarily to increased managed staffing revenue through the expansion in North America of the On-Premise program, increased flexible staffing revenue from the acquisitions of AGO in The Netherlands in July 1998 and Tutor in March 1999, and conversion of a franchise operation to company-

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owned. On a pro forma basis, revenues by service line for 1999 within the group were comprised of 37% managed staffing, 1% search/recruitment and 62% flexible staffing. As a percentage of total Commercial Staffing revenues, managed staffing increased from a 1998 level of 30%, while flexible staffing decreased from 68% due primarily to the mix of business acquired in the Norrell acquisition and expansion of On-Premise mentioned previously.

    Gross profit increased 48% from $205.3 million in 1998 to $304.1 million in 1999 and the overall gross profit percentage decreased to 21.2% from 23.3%. Excluding the impact of Norrell in 1999, the gross profit percentage was 21.5%. The decline in gross profit percentage was due primarily to lower pricing associated with business expansion at existing On-Premise clients and higher self-insured workers' compensation costs.

    Segment operating margin increased 41% from $39.9 million in 1998 to $56.2 million in 1999. Higher operating margin in 1999 was due primarily to the increase in gross profit of $98.8 million partially offset by higher operating expenses of $78.6 million and higher amortization expense of $3.9 million, due primarily to the Norrell acquisition. In addition, the increase in operating expenses was due to an increase in licensee commissions. Excluding Norrell, licensee commissions increased consistent with the increase in Spherion licensee revenue. Operating expenses as a percentage of revenue decreased from 18% for 1998 to 17% for 1999 due primarily to the leveraging of expenses and Norrell-related licensee commissions being paid at a lower rate than Spherion licensees.

    Unallocated Central Costs.  Unallocated central costs increased 51% from $22.8 million in 1998 to $34.4 million in 1999 due primarily to costs related to the Norrell acquisition. These costs as a percentage of consolidated revenues of 1.1% in 1999 were slightly lower than the 1998 level of 1.2%.

    Interest Expense, Net.  Interest expense, net increased 52% to $36.3 million in 1999 from $23.8 million in 1998. The increase reflects higher average borrowings outstanding during 1999 to fund acquisitions and lower interest income partially offset by lower average interest rates. Spherion had average borrowings outstanding during 1999 of $635.4 million at an average interest rate including the effects of interest rate swaps of 6.0%. During 1998, Spherion had average borrowings outstanding of $452.5 million at an average interest rate including the effects of interest rate swaps of 6.5%. Interest income was $3.3 million lower in 1999 compared with 1998 due to higher cash balances as a result of second quarter 1998 common stock and notes offerings.

    Year 2000 Costs.  Year 2000 costs represent the costs associated with remediating Norrell's application systems. These costs include both personnel costs related to project management, programming and hardware and software upgrades. Year 2000 costs expensed in 1999 were $4.4 million (or $0.04 per diluted share).

    Restructuring and Integration Costs.  During 1999, Spherion incurred approximately $29.5 million (or $0.30 per diluted share) of restructuring and integration costs related to a plan adopted by management in which certain redundant functions and assets of Spherion, as a result of the Norrell acquisition, were eliminated. See further discussion on these costs in the "Restructuring and Integration" section below.

    Income Taxes.  The effective income tax rate was 42.8% (or 42.0% before Year 2000 costs and restructuring and integration costs) in 1999 compared with 44.4% in 1998. The decrease in the effective rate resulted primarily from an increase in pre-tax earnings, Work Opportunity tax credits and lower state income taxes.

    Net Earnings.  Net earnings increased 21% to $70.8 million ($1.27 per diluted share) from $58.6 million ($1.29 per diluted share) in 1998 before the extraordinary item. Excluding the after-tax impact of special charges (Year 2000 costs and restructuring and integration costs) diluted earnings per share were $1.61. This per share amount represents an increase in 1999 of 25% compared with 1998 (before the extraordinary item). The weighted average number of shares (as adjusted for the dilutive impact of

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common stock equivalents) increased from 48.2 million in 1998 to 60.8 million in 1999 due to the issuance of 20.8 million shares in July 1999 related to the Norrell acquisition. For 1999, Spherion's fiscal year included 53 weeks whereas 1998 included 52 weeks. The extra week in 1999 resulted in approximately $40.4 million in additional revenue, but net earnings benefited by less than $500,000 as the 53^rd week was a holiday week.

Liquidity And Capital Resources

Cash Flow

    Historically, Spherion has financed its operations through cash generated by operating activities and bank lines of credit. Spherion's principal uses of cash are funding acquisitions, capital expenditures, working capital needs and repayment of debt. The nature of Spherion's business requires payment of wages to its flexible staff and consultants on a weekly or bi-weekly basis, while payments from clients are generally received 30-60 days after billing. Spherion believes that its internally generated funds and lines of credit are sufficient to support operating activities during the next 12 months.

    Cash provided by operating activities in 2000 was $146.1 million compared with cash provided in 1999 of $148.1 million and cash provided in 1998 of $70.4 million. Lower operating cash flows during 2000, compared with 1999, resulted from increased working capital needs, partially offset by higher earnings and the impact of higher amortization, depreciation and other non-cash charges. Cash used by changes in working capital was $59.1 million this year compared with $15.4 million last year. The increase in cash used for working capital items resulted primarily from: (1) a decrease in accounts payable, accrued expenses and other liabilities due primarily to the payout of acquisition and restructuring related items; (2) an increase in receivables due to an increase in days sales outstanding offset by (3) a decrease in other assets resulting primarily from the liquidation of certain insurance-related deposits of $12.0 million and the receipt of an $8.0 million tax refund related to the final Norrell tax return. Higher operating cash flows during 1999 compared with 1998 resulted from increased earnings before restructuring costs, higher amortization and depreciation, and increased deferred income tax expense primarily due to the Norrell acquisition. Higher 1999 operating cash flow also resulted from lower receivable levels due to a decrease in day's sales outstanding, the liquidation of certain investments previously held by Norrell and an increase in participants and contributions in the deferred compensation plan. The increase in 1999 operating cash flow was partially offset by higher cash payments to settle liabilities assumed in the acquisition of Norrell and a change in the timing of estimated tax payments in the U.K.

    Investing activities used $168.1 million, $320.5 million and $158.3 million in 2000, 1999 and 1998, respectively. Cash used for investing activities in 2000 reflects the repurchase of license operations to reduce market overlap created by the Norrell acquisition, earnout payments associated with prior acquisitions and strategic investments in eBusiness alliance partners. Investing activities in 2000 also included $56.2 million of capital expenditures primarily for new computer hardware and software to continue to upgrade and expand Spherion's information technology capabilities. Cash used for investing activities in 1999 reflects the acquisition of Norrell, which included cash payments of $87.8 million, the remaining payments of $111.0 million made in the first quarter of 1999 on the December 1998 acquisition of Computer Power, various buybacks of Spherion's license operations, and $55.8 million of capital expenditures primarily related to new computer hardware and software to upgrade and expand Spherion's information technology capabilities including the new front office system within domestic flexible staffing and expenditures associated with Spherion's outsourcing business. Investing activities used $158.3 million in 1998 primarily due to acquisitions in the areas of outplacement and career consulting, technology consulting, accounting search/recruitment and flexible staffing and European flexible staffing. Cash used for investing activities in 1998 also included capital expenditures of $37.5 million primarily also for new computer hardware and software and new office-related expenditures. Spherion expects the level of capital expenditures for 2001 to be approximately 30% lower than 2000. In addition, Spherion plans to pay approximately $23.0 million for earnouts (contingent consideration) associated with prior acquisitions.

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    Cash provided by financing activities was $22.9 million, $56.5 million and $225.7 million in 2000, 1999 and 1998, respectively. Cash provided by financing activities in 2000 primarily reflects net borrowings, proceeds from employee stock option and purchase plan activity and treasury share purchases of $33.8 million. During 2000, Spherion purchased approximately 2.6 million shares of its common stock at an average price of $13.04 per share. At December 29, 2000, Spherion had 3.5 million shares remaining to be repurchased under a 4.0 million share repurchase program approved in November 2000. Cash provided by financing activities in 1999 primarily reflects net borrowings for the Norrell and other acquisitions offset by $89.4 million of purchases of Spherion's common stock. As part of the acquisition of Norrell, Spherion assumed $125.5 million in existing Norrell debt, which was repaid with the proceeds of borrowings under Spherion's credit facilities. Cash provided by financing activities in 1998 primarily reflects proceeds from the common stock and notes offerings, offset by repayment of borrowings under Spherion's existing credit facilities. In May 1998, Spherion completed an offering of 7.0 million shares of its common stock, resulting in proceeds to Spherion of approximately $197.0 million net of issuance costs and offering expenses. Concurrently with the common stock Offering, Spherion completed an offering of $207.0 million of 4¹/2% Convertible Subordinated Notes due 2005, resulting in proceeds to Spherion of approximately $201.3 million net of issuance costs and offering expenses. A portion of the proceeds from the common stock and notes offerings was used to repay borrowings under Spherion's existing credit facilities and for acquisitions. The balance of the proceeds was used for general corporate purposes, including strategic acquisitions.

Financing

    Spherion has a multi-currency syndicated credit agreement ("Revolving Loan Facility") with a total capacity of $675.0 million, which terminates in 2004. Outstanding borrowings at December 29, 2000 subject to this Revolving Loan Facility were $242.0 million in revolving loans and $9.5 million in loan notes to prior shareholders of Michael Page with $221.5 million of the revolving loans and loan notes denominated in British pound sterling and $30.0 million denominated in U.S. dollars. Borrowings under this Revolving Loan Facility are unsecured. The Revolving Loan Facility is available to fund Spherion's acquisitions, to supply working capital and to provide for general corporate needs. Interest rates on amounts outstanding under the Revolving Loan Facility are based on LIBOR plus a variable margin. The Revolving Loan Facility contains customary covenants, which include restrictions on the payment of cash dividends, as well as the maintenance of certain financial ratios including minimum net worth, restrictions on the incurrence of liens and additional indebtedness.

    In July 1999, Spherion also added a loan facility secured by Spherion's accounts receivable of $250.0 million ($214.4 million outstanding at December 29, 2000) ("Accounts Receivable Securitization") and issued a $53.0 million Australian dollar term financing ($37.4 million outstanding at December 29, 2000). Interest rates on the Accounts Receivable Securitization borrowings and the Australian dollar term financing are based on commercial paper market rates and Australian bank bills plus a variable margin, respectively. In addition, Spherion has established short-term, unsecured lines of credit with certain banks. Interest rates on these lines of credit are based on LIBOR and are available to fund Spherion's short-term capital requirements. There was approximately $403.8 million available for future borrowings under these agreements at December 29, 2000.

    As part of the sale of Michael Page, Spherion expects to repay the borrowings under the Revolving Loan Facility, the Australian dollar-term financing and the Accounts Receivable Securitization and renegotiate terms on its remaining credit facilities to more closely match future borrowing requirements.

    In October 2000, Spherion issued $8.0 million of interest-bearing convertible promissory notes due October 1, 2005 in conjunction with the purchase of 80% of the membership interests of JobOptions, LLC. In May 1998, Spherion issued $207.0 million of 4¹/2% Convertible Subordinated Notes due June 1, 2005. See notes to the consolidated financial statements for discussion of the 4¹/2% Convertible Subordinated Notes.

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Restructuring and Integration

    During 1999, Spherion incurred approximately $29.5 million of restructuring and integration costs related to a plan (the "Plan") adopted by management in which certain redundant functions and assets of Spherion, as a result of the Norrell acquisition, would be eliminated. This included restructuring charges of $12.8 million and nonrecurring integration costs of $16.7 million.

    Restructuring costs and charges of $12.8 million include employee severance costs of approximately $3.7 million and facility closure costs of $7.0 million primarily relating to the elimination of redundant branch locations. The facility closure costs include approximately $5.0 million in lease termination costs and approximately $2.0 million in losses on the disposition of facility related fixed assets, primarily the write-off of leasehold improvements on closed branch locations and write-down of furniture and fixtures to their estimated fair value, determined by comparable market information. In addition, as part of the Plan, Spherion recorded a charge of approximately $2.1 million for the write-off of certain software programs that will no longer be utilized as a result of the acquisition. These assets were taken out of service at the time of the write-down and consequently were not depreciated further after the write-down.

    During the second quarter of 2000, remaining accruals of approximately $3.0 million were identified that were not needed, primarily the result of the buyout of existing lease obligations at better than expected rates and this $3.0 million was reversed to income. Spherion then undertook additional restructuring actions in the amount of $3.2 million. These additional actions included the elimination of 71 positions, with most of these positions being administrative personnel within the Information Technology segment, and the closure of an additional 14 offices.

    An analysis of the restructuring accrual is as follows (dollar amounts in thousands):

    The remaining accruals, which are included in accounts payable and accrued expenses, relate to lease payments on closed offices that will be paid out through 2004 and severance costs which will be paid out during 2001.

    Nonrecurring integration costs of approximately $16.7 million included approximately $7.6 million in cost relating to employees whose positions were eliminated and were involved solely in exit functions and systems integrations, approximately $5.0 million in consulting costs primarily related to systems integrations, approximately $2.6 million for a one-time acquisition completion incentive bonus, approximately $0.7 million in relocation of employees and approximately $0.8 million in other related integration costs. Substantially all these costs were paid by December 31, 1999, and any remaining amounts were paid by December 29, 2000.

Inflation

    The effects of inflation on Spherion's operations were not significant during the periods presented in the financial statements.

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Impact of the Euro

    The Euro was introduced on January 1, 1999, at which time the participating European Monetary Union member countries established fixed conversion rates between their existing currencies (legacy currencies) and the Euro. The legacy currencies will continue to be used as legal tender through January 1, 2002. Spherion has initiated an internal analysis regarding the business and systems issues related to the Euro conversion and has begun a comprehensive action plan to ensure that all necessary modifications are made on a timely basis. The costs of addressing the Euro conversion are not expected to be material. Depending upon the type of cost, the amount will be charged to operations as incurred or capitalized as software consistent with Spherion's policies. Spherion believes that the conversion to the Euro will not have a significant impact on the marketing strategy for Spherion's international operations. Spherion has studied the implications of the overall Euro conversion and does not expect it to have a material impact on Spherion's financial condition or results of operations upon adoption.

Seasonality And Cyclicality Of Business

    Spherion's businesses are not seasonal in nature. However, the staffing industry has historically been considered to be cyclical, often acting as a coincidental indicator of both economic downswings and upswings. Spherion believes that the balance between its service lines somewhat reduces the impact of cyclicality, but the company remains subject to economic downswings and upswings. Spherion's business unit, Talent Solutions, which specializes in outplacement, is also expected to mitigate the impact of cyclicality as outplacement growth rates amplify during a slower economy, offsetting other services, which may be fairly sensitive to economic declines.

Other

    In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (the "Statement" or "SFAS No. 133"). The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Spherion will adopt the provisions of SFAS No. 133, as amended, in the first quarter of 2001 and record a cumulative pre-tax reduction to earnings of $1.8 million ($1.1 million after-tax).

    In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides specific guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. Spherion's revenue recognition policies were conformed to the provisions of SAB 101 in the fourth quarter of 2000. Such action did not have a material impact on results of operations.

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Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    As of December 29, 2000, Spherion maintains a portion of its cash and cash equivalents in financial instruments with original maturities of three months or less. These financial instruments are subject to interest rate risk and will decline in value if interest rates increase. Due to the short duration of these financial instruments, an immediate increase of 1% in interest rates would not have a material effect on Spherion's financial condition.

    Spherion's outstanding variable rate debt at December 29, 2000 and December 31, 1999 was $569.1 million and $522.7 million, respectively. Interest rates on the Revolving Loan Facility and other short-term borrowings are based on LIBOR plus a variable margin. Interest rates on the Accounts Receivable Securitization borrowings and the Australian dollar term financing are based on commercial paper market rates and Australian bank bills plus a variable margin, respectively. Based on the outstanding balance, a change of 1% in the interest rate would cause a change in interest expense of approximately $5.7 million and $5.2 million in 2000 and 1999, respectively, on an annual basis not considering the offset of the interest rate swap discussed below.

    Spherion utilizes interest rate swap agreements to reduce the impact on interest expense of fluctuating interest rates on its variable-rate debt. Spherion had a variable-to-variable interest rate swap agreement outstanding as of December 29, 2000 and December 31, 1999 with the notional amount of $112.0 million and $121.4 million, respectively, which effectively converts interest from a British pound LIBOR basis to a broader index and caps Spherion's exposure to upward movement in rates at 8.5%. This agreement expires in 2002. The fair value of the outstanding interest rate swap as of December 29, 2000 and December 31, 1999 was $1.6 million and $1.3 million, respectively. Spherion expects to terminate this swap agreement as a result of the anticipated sale of Michael Page as most variable-rate debt is expected to be retired.

    In May 1998, Spherion issued $207.0 million of 4¹/2% Convertible Subordinated Notes due June 2005. The fair value of Spherion's fixed rate convertible subordinated debt as of December 29, 2000 and December 31, 1999 was $140.6 million and $183.7 million, respectively, compared with the related carrying value of $207.0 million.

    The purpose of Spherion's foreign exchange hedging activities is to mitigate the impact of changes in foreign currency exchange rates. Spherion attempts to hedge transaction exposures through natural offsets. To the extent this is not practicable, exposure areas that are considered for hedging include foreign currency denominated receivables and payables, intercompany loans, firm committed transactions and dividends related to foreign subsidiaries. Spherion uses financial instruments, principally forward exchange contracts, in its management of foreign currency exposures. Spherion does not enter into forward contracts for trading purposes. At December 29, 2000 and December 31, 1999, Spherion had outstanding foreign currency forward contracts to sell Australian dollars in the notional amount of $82.6 million and $76.9 million, respectively. Termination of the foreign currency forward contracts as of December 29, 2000 and December 31, 1999 would have resulted in a gain of $11.4 million and a loss of $0.1 million, respectively.

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Forward-looking Statements

    The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of Spherion. Spherion and its representatives may from time to time make written or oral statements that are "forward-looking," including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to Spherion's stockholders. Statements contained in this Annual Report filed on Form 10-K which may be forward-looking but are not limited to statements regarding the following: (i) Spherion's plans, intentions and expectations with respect to its future prospects, including its business and growth strategies; (ii) industry trends and competitive conditions; (iii) expected capital expenditures to be made in the future; (iv) resolution of pending litigation without material adverse effect on Spherion; (v) Spherion's expectations about the transition to the Euro; (vi) Spherion's quantitative and qualitative estimates as to market risk; and (vii) Spherion's plans with respect to the sale of Michael Page. These forward-looking statements are subject to a number of risks and uncertainties. Among others, factors that could cause actual results to differ materially from Spherion's beliefs or expectations are the following: industry trends and trends in the general economy; competitive factors in the markets in which Spherion operates; changes in regulatory requirements which are applicable to Spherion's business; and other factors referenced herein or from time to time in Spherion's filings with the Securities and Exchange Commission.

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INDEPENDENT AUDITORS' REPORT

To the Board of Directors
  of Spherion Corporation
Fort Lauderdale, Florida

We have audited the accompanying consolidated balance sheets of Spherion Corporation (formerly Interim Services Inc.) and subsidiaries ("Spherion") as of December 29, 2000 and December 31, 1999, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 29, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of Spherion's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Spherion Corporation and subsidiaries as of December 29, 2000 and December 31, 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

DELOITTE & TOUCHE LLP
Certified Public Accountants

Fort Lauderdale, Florida
February 8, 2001, except for paragraph 5 of the Commitments and Contingencies footnote, as to which the date is March 7, 2001

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

SPHERION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(amounts in thousands, except per share amounts)

See notes to Consolidated Financial Statements.

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SPHERION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)

See notes to Consolidated Financial Statements.

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SPHERION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For Fiscal Years Ended December 29, 2000, December 31, 1999 and December 25, 1998
(amounts in thousands, except share data)