SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period to
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Commission File Number 0-28192
RENAISSANCE WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2920563
(State of Incorporation) (IRS Employer
Identification No.)
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189 WELLS AVENUE
NEWTON, MA 02159
(617) 527-6886
(Address, including zip code, and telephone number, including area code
of registrant's principal executive offices)
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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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
As of November 3, 1999, there were 56,507,938 shares of Common Stock,
no par value, outstanding.
RENAISSANCE WORLDWIDE, INC.
INDEX TO FORM 10-Q
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheet at December 26,
1998 and September 25, 1999 (Unaudited) 3
Condensed Consolidated Statement of Operations for the
three and nine months ended September 26, 1998 and
September 25, 1999 (Unaudited) 4
Condensed Consolidated Statement of Cash Flows for the
nine months ended September 26, 1998 and September 25,
1999 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
PART II. OTHER INFORMATION 14
SIGNATURES 14
This Quarterly Report on Form 10-Q contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," and
similar expressions are intended to identify forward-looking statements. The
important factors discussed below under the caption "Certain Factors That May
Affect Future Operating Results," among others, could cause actual results to
differ materially from those indicated by forward-looking statements made herein
and presented elsewhere by management from time to time.
2
RENAISSANCE WORLDWIDE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
December 26, September 25,
1998 1999
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,957 $ 14,428
Accounts receivable, net 196,190 194,476
Notes receivable 1,039 1,891
Deferred income taxes 10,335 7,834
Other current assets 22,879 6,317
--------- ---------
Total current assets 241,400 224,946
Fixed assets, net 31,157 40,408
Notes receivable from officers 1,049 1,570
Goodwill and other intangible assets 84,869 93,728
Other assets 11,511 7,976
Deferred income taxes 2,079 4,579
--------- ---------
Total assets $ 372,065 $ 373,207
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 92,476 $ 30,166
Current portion of long-term debt 2,070 1,631
Accounts payable 11,454 11,776
Accrued salaries and wages 15,761 17,347
Other accrued expenses 56,928 59,329
Deferred income taxes 4,181 4,877
--------- ---------
Total current liabilities 182,870 125,126
Deferred income taxes 5,928 5,182
Term loan -- 49,750
Other long-term debt 2,353 3,416
Other liabilities 1,129 924
--------- ---------
Total liabilities 192,280 184,398
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 4,725 4,725
Additional paid in capital 181,520 183,762
Notes receivable from stockholders (1,476) (1,500)
Retained earnings (deficit) (2,642) 4,794
Cumulative translation adjustment 204 (426)
Treasury stock (2,546) (2,546)
--------- ---------
Total stockholders' equity 179,785 188,809
--------- ---------
Total liabilities and stockholders' equity $ 372,065 $ 373,207
========= =========
The accompanying notes are an integral part of these financial statements.
3
RENAISSANCE WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In thousands except per share data)
(Unaudited)
For the quarter ended For nine months ended
-------------------------------- --------------------------------
September 26, September 25, September 26, September 25,
1998 1999 1998 1999
--------- --------- --------- ---------
Revenue $ 209,073 $ 189,409 $ 580,904 $ 608,166
Cost of revenue 137,681 131,236 384,142 421,133
--------- --------- --------- ---------
Gross Profit 71,392 58,173 196,762 187,033
Selling, general and administrative expenses 51,297 53,930 147,959 166,333
Restructuring charges and asset writedowns 8,980 -- 8,980 2,950
Acquisition related expenses -- -- 6,904 --
--------- --------- --------- ---------
Income from operations 11,115 4,243 32,919 17,750
Interest and other expense, net (1,811) (2,308) (3,743) (6,573)
--------- --------- --------- ---------
Income before taxes 9,304 1,935 29,176 11,177
Income tax provision 3,703 793 18,551 4,574
--------- --------- --------- ---------
Net income from continuing operations 5,601 1,142 10,625 6,603
Extraordinary item, net of taxes of $579 -- -- -- 833
--------- --------- --------- ---------
Net income $ 5,601 $ 1,142 $ 10,625 $ 7,436
========= ========= ========= =========
Basic earnings per share:
Income before extraordinary item $ 0.10 $ 0.02 $ 0.19 $ 0.12
Extraordinary item -- -- -- 0.01
--------- --------- --------- ---------
Net income $ 0.10 $ 0.02 $ 0.19 $ 0.13
========= ========= ========= =========
Diluted earnings per share:
Income before extraordinary item $ 0.10 $ 0.02 $ 0.18 $ 0.12
Extraordinary item -- -- -- 0.01
--------- --------- --------- ---------
Net income $ 0.10 $ 0.02 $ 0.18 $ 0.13
========= ========= ========= =========
Weighted average common shares:
Basic 55,544 56,507 55,318 56,274
========= ========= ========= =========
Diluted 57,496 56,705 58,088 56,677
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
4
RENAISSANCE WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
For nine months ended
------------------------------
September 26, September 25,
1998 1999
-------- --------
Cash flows from operating activities:
Net income $ 10,625 $ 7,436
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 6,785 10,573
Deferred income taxes 4,612 (49)
Extraordinary gain on sale of assets -- (833)
Writedown of assets -- 2,950
Changes in operating assets and liabilities:
Accounts receivable (57,416) (5,084)
Other current assets (4,117) 13,074
Other assets (9,336) 4,493
Accounts payable and accrued expenses 14,484 3,643
Other liabilities 700 (156)
-------- --------
Net cash (used for) provided by operating activities (33,663) 36,047
Cash flows from investing activities:
Cash disbursed for acquisitions, net of cash acquired (22,992) (12,149)
Proceeds from sale of assets -- 10,000
Increase of notes receivable from officers (420) (521)
Increase in notes receivable (390) (24)
Issuance of note receivable from related parties -- (883)
Sales and maturities of marketable securities 5,845 --
Purchases of fixed assets (8,843) (15,420)
-------- --------
Net cash used for investing activities (26,800) (18,997)
Cash flows from financing activities:
Net borrowings (repayments) on revolving credit 40,886 (62,310)
Principal payments on long-term debt (5,866) (2,226)
Proceeds from issuance of long-term debt 3,651 50,000
Debt issue costs on new credit facility -- (1,063)
Cash proceeds from exercise of stock options and purchase plans 10,601 2,175
Purchase of treasury stock (2,546) --
-------- --------
Net cash provided by (used for) financing activities 46,726 (13,424)
Effect of exchange rate changes on cash and cash equivalents (47) (155)
-------- --------
Net decrease in cash and cash equivalents (13,784) 3,471
Cash and cash equivalents, beginning of period 19,956 10,957
-------- --------
Cash and cash equivalents, end of period $ 6,172 $ 14,428
======== ========
The accompanying notes are an integral part of these financial statements.
5
RENAISSANCE WORLDWIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Renaissance Worldwide, Inc. ("Renaissance" or "the Company") is a
global provider of business and technology consulting services to organizations
with complex information technology ("IT') operations in a broad range of
industries. The Company's offerings are categorized into four segments: Business
Strategy, Enterprise Solutions, Government Solutions, and Information Technology
Consulting Services ("IT Consulting Services"). The Business Strategy Group
provides management consulting and technology integration services in connection
with performance support systems. The Enterprise Solutions Group provides IT
solutions design and implementation services. The Government Solutions Group
provides specialized management and technology consulting services to the public
sector. The IT Consulting Services Group provides consulting services centered
on application design, implementation and support. The Company's primary
locations are in North America with subsidiaries in Europe and Asia/Pacific.
Basis of Consolidation
The accompanying condensed consolidated financial statements include
the accounts of Renaissance Worldwide, Inc. and its wholly owned subsidiaries.
All intercompany balances and transactions have been eliminated.
Interim Financial Statements
The condensed consolidated balance sheet at September 25, 1999 and
condensed consolidated statements of operations and of cash flows for the nine
month periods ended September 26, 1998 and September 25, 1999 are unaudited and,
in the opinion of management, include all adjustments (consisting of normal and
recurring adjustments) necessary for a fair presentation of results for these
interim periods. Certain information and footnote disclosures normally included
in the Company's annual consolidated financial statements have been condensed or
omitted. The results of operations for the interim period ended September 25,
1999 are not necessarily indicative of the results to be expected for future
quarters or the entire year. The balance sheet at December 26, 1998 contained
herein has been derived from the audited consolidated financial statements at
that date but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
These interim condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year
ended December 26, 1998, which are contained in the Company's 1998 Report on
Form 10-K.
Earnings Per Share
Basic earnings per share has been computed by dividing net income by
the weighted average number of common shares outstanding. Diluted earnings per
share has been computed by dividing net income by the weighted average number of
common shares and dilutive potential common stock outstanding. Potential common
stock includes stock options and warrants, calculated using the treasury stock
method. A reconciliation of the weighted average number of common shares
outstanding is as follows:
6
RENAISSANCE WORLDWIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
For the quarter ended For nine months ended
---------------------------- ----------------------------
September 26, September 25, September 26, September 25,
1998 1999 1998 1999
------ ------ ------ ------
Weighted average number of common shares
outstanding-basic 55,544 56,507 55,318 56,274
Assumed exercise of stock options, using the
treasury stock method 1,497 198 2,467 403
Escrow shares related to acquisitions 455 -- 303 --
------ ------ ------ ------
Weighted average number of common and
potential common shares outstanding - diluted 57,496 56,705 58,088 56,677
====== ====== ====== ======
Translation of Foreign Currencies
The functional currency for the Company's subsidiaries is the local
currency. Assets and liabilities are translated into U.S. dollars at exchange
rates in effect at the balance sheet date. Income and expense items and cash
flows are translated at average exchange rates for the period. Cumulative net
translation adjustments are included in stockholders' equity. Gains and losses
resulting from foreign currency transactions, not significant in amount, are
included in the results of operations as other income (expense).
Other Comprehensive Income
The Company accounts for comprehensive income in accordance with
Statement of Financial Accounting Standards No. 130, "Reporting of Comprehensive
Income." This Statement requires disclosure of comprehensive income and its
components in interim and annual reports. For the quarters ended September 26,
1998 and September 25, 1999, comprehensive income (expense) items included in
stockholders' equity consisted of translation adjustments of $(128) and $(1).
For the nine months ended September 26, 1998 and September 25, 1999,
comprehensive income (expense) items included in stockholders' equity consisted
of translation adjustments of $(55) and $(630).
2. Acquisition of Subsidiaries--Purchases
In January 1999, the Company completed the acquisition of
Infosolutions.edu for approximately $5,200 including a $2,500 notes payable.
Infosolutions.edu is an addition to the Company's Enterprise Solutions Group and
specializes in providing services to universities and other non-profit
organizations.
In connection with certain earnout agreements related to previous
acquisitions, the Company paid $9,500 in contingent consideration during the
nine months ended September 25, 1999, which was recorded as additional purchase
price.
7
RENAISSANCE WORLDWIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
3. Acquisition of Subsidiaries--Pooling of Interests
In the second quarter of 1998, the Company, through a wholly owned
subsidiary, acquired all of the outstanding stock of Neoglyphics Media
Corporation ("Neoglyphics") and Triad Data, Inc. ("Triad"). In total, 4,554,759
shares of the Company's Common Stock were exchanged for all of the outstanding
common stock of Neoglyphics and Triad. In addition, outstanding stock options to
purchase Neoglyphics common stock were converted into options to purchase
119,940 shares of the Company's Common Stock. These transactions were accounted
for as pooling of interests and, therefore, the financial statements were
restated to include the financial condition, results of operations and cash
flows of these two companies for all periods presented. The Company incurred
$6,904 in acquisition-related expenses during the period related to these
transactions. These costs are disclosed as a separate line in the statement of
income for the period.
4. Long-Term Debt
The Company's line of credit existing at December 26, 1998 was
terminated on March 24, 1999. In February of 1999, the Company entered into a
new line of credit ("Interim Facility") with a different bank to provide a
borrowing base of 85% of eligible accounts receivable as defined, up to a
maximum borrowing of $110,000. Interest was payable monthly in arrears at the
LIBOR rate plus 2.00% or the higher of the bank's prime rate or the Fed Funds
rate plus 0.50%, plus 0.75%, at the Company's option. The Interim Facility was
collateralized by all of the assets of the Company, contained certain
restrictions, and required maintenance of certain financial covenants. The
Interim Facility was a short-term facility to be used until syndication of a
senior term loan facility committed to by the bank. The Interim Facility was
used to repay the outstanding borrowings on the existing line of credit that was
terminated on March 24, 1999.
On July 15, 1999 the Company entered into a three-year, $150,000
revolving credit and term loan agreement (the "Credit Facility") with a bank
syndicate. The Credit Facility consists of a revolving line of credit of
$100,000 ("Revolving Credit Facility") and a term loan of $50,000 ("Term Loan").
The Credit Facility bears interest at the higher of the Federal Funds Rate plus
0.50% or the prime rate, plus up to 1.75% or LIBOR plus up to 3.0%, depending on
the Company's level of compliance with certain financial ratios. The Credit
Facility requires the Company to make quarterly principal payments of $250 on
the Term Loan beginning September 15, 2000 and each quarter thereafter until
June 15, 2002. The remaining obligations under the Term loan would be repaid on
July 15, 2002 along with any outstanding borrowings under the Revolving Credit
Facility. The Credit Facility contains various covenants, including the
maintenance of defined financial ratios and is secured by all of the assets of
the Company and contains certain restrictions.
On September 15, 1999, the Company announced that it was revising its
revenue and earnings estimates for the third and fourth quarters of 1999 due to
a softening in the demand for services in two of its core industry sectors -
Enterprise Solutions and IT Consulting Services. Based upon this revised
outlook, the Company informed the bank syndicate that it would not be in
compliance with certain of its financial covenants for the third quarter of
1999. On November 4, 1999, the Company and the banks signed an amendment to the
Credit Facility amending certain financial covenants for the third quarter of
1999 through the third quarter of 2000, reverting back to the original financial
covenants established in the Credit Facility thereafter. The Credit Facility, as
amended, now bears interest at the higher of the Federal Funds Rate plus 0.50%
or the prime rate, plus up to 2.25% or LIBOR plus up to 3.5%, depending on the
Company's level of compliance with certain financial ratios. In connection with
this amendment, the Company will be required to pay amendment fees to the banks
and related expenses of approximately $500 which was recorded in the third
quarter of 1999 as interest and other expense, net.
As of September 25, 1999, the availability under the Credit Facility
was approximately $18,500. The weighted average interest rate on the Credit
Facility at September 25, 1999 was 8.39%.
8
RENAISSANCE WORLDWIDE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In thousands)
5. Extraordinary Item and Writedown of Assets
In May 1999, the Company sold certain assets related to the Enterprise
Solutions group for $10,000 in cash and $2,000 in notes receivable. In
connection with this sale, the Company recognized an after tax gain of $833. The
gain on sale has been classified as an extraordinary item because the pooling of
interests method of accounting was applied to the original acquisition of these
assets within the last two years. The Company also recorded a $2,950 charge
associated with this sale which has been classified as a writedown of assets
within income from operations. This charge relates to other assets, not related
to prior pooling of interests transaction, disposed of in the sale of this
business.
6. Segment Reporting
The Company adopted SFAS 131 in fiscal 1998. The Company's four primary
business segments include: Business Strategy, Enterprise Solutions, Government
Solutions and IT Consulting Services. The following presents information about
reported segments for the three and nine months ended September 26, 1998 and
September 25, 1999. Certain amounts previously reported have been reclassified
to conform to the Company's current basis of presentation.
For the quarter ended For nine months ended
---------------------------- -----------------------------
September 26, September 25, September 26, September 25,
1998 1999 1998 1999
------- ------- ------- -------
Revenues:
Business Strategy 11,868 8,510 35,755 27,071
Enterprise Solutions 61,025 40,439 156,677 139,438
Government Solutions 5,472 9,248 13,535 26,827
IT Consulting Services 130,708 131,212 374,937 414,830
------- ------- ------- -------
Total(1) 209,073 189,409 580,904 608,166
======= ======= ======= =======
Income from operations:
Business Strategy 2,010 2,699 6,603 4,554
Enterprise Solutions 9,944 2,324 24,017 7,532
Government Solutions 597 1,265 3,075 3,867
IT Consulting Services 11,119 9,141 23,144 33,375
------- ------- ------- -------
Total(1) 23,670 15,429 56,839 49,328
======= ======= ======= =======
Corporate expenses(2) 12,555 11,186 23,920 31,578
Interest and other expense, net 1,811 2,308 3,743 6,573
------- ------- ------- -------
Total income before taxes 9,304 1,935 29,176 11,177
======= ======= ======= =======
(1) Intersegment revenues were not material and have been eliminated in the
above presentation.
(2) During 1998, certain back office operations and expenses were
centralized into corporate office control thereby increasing the
expenses in the corporate area. These expenses are not specifically
identifiable to any specific business unit and also include all charges
associated with restructuring charges, asset writedowns and acquisition
related expenses.
9
RENAISSANCE WORLDWIDE, INC.
Item II: Management's Discussion and Analysis of Financial Condition
and Results of Operations
On September 15, 1999 the Company announced that it expected revenue
and earnings per share for the third quarter ending September 25, 1999 to be
below published estimates of security analysts. The Company attributes the
expected shortfalls in revenue and earnings to a softening in demand for
services in two of its core business units; Enterprise solutions and IT
Consulting Services. The Company also believes that the slowdown in demand for
enterprise resource planning ("ERP") and IT consulting and staffing services
will continue through the end of the year, and that's its revenue and earnings
for the fourth quarter would be similarly affected. The Company believes this
softening has resulted from its customers and potential customers curtailing
current projects or deferring new project development and spending to next year
because of concerns about the impact of the Year 2000 (Y2K) issue. The Company
believes that this Y2K issue has created a significant slowdown in the industry
and a hesitation in the marketplace as clients shift their staffing and spending
priorities away from initiating new IT projects.
RESULTS OF OPERATION:
Three months ended September 26, 1998 and September 25, 1999
Revenue. Total revenue decreased 9.4% to $189,409 for the third quarter
of fiscal 1999 from $209,073 in the third quarter of 1998. This revenue decrease
was attributable to a 33.7% decrease in Enterprise Solutions revenue which
decreased to $40,439 for the third quarter of 1999 from $61,025 for the
corresponding period of 1998 and a 28.3% decrease in Business Strategy revenue
which decrease to $8,510 for the third quarter of 1999 from $11,868 for the
corresponding period of 1998. These decreases were partially offset by a 69%
increase in Government Solutions revenue which increased to $9,248 in the third
quarter of 1999 from $5,472 for the corresponding period of 1998 while IT
Consulting Services revenue increased only 0.4% to $131,212 from $130,708 for
the corresponding period of 1998. The Company believes that the overall decrease
in Enterprise Solutions and IT Consulting Services revenue can be attributed to
the previously mentioned Y2K issues mentioned above. In addition, Enterprise
Solutions was impacted by the disposition of Neoglyphics Media business in the
second quarter of 1999. Business Strategy experienced a decrease in revenue
primarily due to the disposition of the COBA UK and Technomics subsidiaries
during the first quarter of 1999.
Gross Profit. Gross profit decreased 18.5% to $58,173 for the third
quarter of 1999 from $71,392 for the comparable prior period. As a percentage of
revenue, gross profit decreased to 30.7% for the period compared to 34.1% for
the comparable prior period. The decrease in gross profit percentage was
attributable primarily to a shift in the mix of the Company's business as the
percentage of revenue derived from the higher margin Business Strategy,
Enterprise Solutions and Government Solutions Groups decreased in relation to
the lower margin IT Consulting Services for the third quarter of 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 5.1% to $53,930 for the third quarter of
1999 from $51,297 for the comparable prior period. As a percentage of revenue,
selling, general and administrative expenses increased to 28.5% from 24.5% for
the comparable prior period. This increase was attributable primarily to
investments in the Company's information technology, corporate finance and
administrative functions and telecommunications and facilities infrastructure to
accommodate the growth of the past year.
Restructuring Charges and Asset Writedowns. Restructuring charges and
asset writedowns of $8,980 in the third quarter of 1998 were incurred in
connection with the implementation of a restructuring plan designed to eliminate
redundant facilities and processes. The charges included $3,528 to writedown
non-performing assets, $1,254 for ongoing lease payments in excess of estimated
sublease income for facilities vacated and employee severance and other payments
of $4,198 related to the restructuring.
Interest and Other Expense, Net. Interest and other expense, net,
increased to $2,308 for the third quarter of fiscal 1999 from $1,811 in expense
for the comparable prior period. This increase was primarily associated with
bank amendment fees and related expenses incurred in connection with the
amendment of the Company's financial covenants under its Credit Facility (see
Note 4 -Long-Term Debt).
10
RENAISSANCE WORLDWIDE, INC.
Nine months ended September 26, 1998 and September 25, 1999
Revenue. Total revenue increased 4.7% to $608,166 for the first nine
months of fiscal 1999 from $580,904 in the first nine months of 1998. These
increase was attributable to a 98.2% increase in Government Solutions revenue
which increased to $26,827 in the first nine months of 1999 from $13,525 for the
corresponding period of 1998 while IT Consulting Services revenue increased
10.6% to $414,830 from $374,937 for the corresponding period of 1998. These
revenue increases were partially offset by a 11.0% decrease in Enterprise
Solutions revenue which decreased to $139,438 for the first nine months of 1999
from $156,677 for the corresponding period of 1998 and a 24.3% decrease in
Business Strategy revenue which decreased to $27,071 for the first nine months
of 1999 from $35,755 for the corresponding period of 1998. The Company believes
that the overall decrease in Enterprise Solutions and the slow down in the IT
Consulting Services revenue can be attributed to the previously mentioned Y2K
issues. In addition, Enterprise Solutions was impacted by the disposition of
Neoglyphics Media business in the second quarter of 1999. Business Strategy
experienced a decrease in revenue primarily due to the disposition of the COBA
UK and Technomics subsidiaries during the first quarter of 1999.
Gross Profit. Gross profit decreased 4.9% to $187,033 for the third
quarter of 1999 from $196,762 for the comparable prior period. As a percentage
of revenue, gross profit decreased to 30.8% for the period compared to 33.9% for
the corresponding period of 1998. The decrease in gross profit percentage was
attributable primarily to a shift in the mix of the Company's business as the
percentage of revenue derived from the higher margin Business Strategy,
Enterprise Solutions and Government Solutions Groups decreased in relation to
the lower margin IT Consulting Services for the third quarter of 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 12.4% to $166,333 for first nine months of
fiscal 1999 from $147,959 in the corresponding period of 1998. As a percentage
of revenue, selling, general and administrative expenses increased to 27.4% from
25.5% for the comparable prior period. This increase was attributable primarily
to investments in the Company's information technology, corporate finance and
administrative functions and telecommunications and facilities infrastructure to
accommodate the growth of the past year.
Restructuring Charges and Asset Writedowns. The Company recorded asset
writedowns of $2,950 for the second quarter of fiscal 1999 which were incurred
in connection with the sale of assets during the quarter. Assets written down
were not related to prior pooling of interests transactions. Restructuring
charges and asset writedowns of $8,980 in the third quarter of 1998 were
incurred in connection with the implementation of a restructuring plan designed
to eliminate redundant facilities and processes. The charge included $3,528 to
writedown non-performing assets, $1,254 for ongoing lease payments in excess of
estimated sublease income for facilities vacated and employee severance and
other payments of $4,198 related to the restructuring.
Acquisition Related Expenses. Acquisition related expenses of $6,904 for
the first nine months of fiscal 1998 were incurred in connection with the
Neoglyphics and Triad acquisitions.
Interest and Other Expense, Net. Interest and other expense, net,
increased to $6,573 for the first nine months of fiscal 1999 from $3,743 in
expense for the comparable prior period. This change was a result of increased
balances under the Company's credit facilities due to payments for acquisitions
made in 1998, other contingent payments made for acquisitions, fixed asset
expenditures as well as increased working capital needs and bank amendment fees
and related expenses incurred in connection with the amendment of the Company's
financial covenants under its Credit Facility (See Note 4 - Long-Term Debt).
Extraordinary gain. The extraordinary gain recognized during the second
quarter of 1999 related to the sale of certain assets related to the Enterprise
Solutions Group for $10,000 in cash and $2,000 in notes receivable. In
connection with this sale, the Company recognized an after tax gain of $833. The
gain on sale has been classified as an extraordinary item because the pooling of
interests method of accounting was applied to the original acquisition of these
assets within the last two years.
11
RENAISSANCE WORLDWIDE, INC.
Liquidity and Capital Resources
The Company's line of credit existing at December 26, 1998 was
terminated on March 24, 1999. In February of 1999, the Company entered into a
new line of credit ("Interim Facility") with a different bank to provide a
borrowing base of 85% of eligible accounts receivable as defined, up to a
maximum borrowing of $110,000. Interest was payable monthly in arrears at the
LIBOR rate plus 2.00% or the higher of the bank's prime rate or the Fed Funds
rate plus 0.50%, plus 0.75%, at the Company's option. The Interim Facility was
collateralized by all of the assets of the Company, contained certain
restrictions, and required maintenance of certain financial covenants. The
Interim Facility was a short-term facility to be used until syndication of a
senior term loan facility committed to by the bank. The Interim Facility was
used to repay the outstanding borrowings on the existing line of credit that was
terminated on March 24, 1999.
On July 15, 1999 the Company entered into a three-year, $150,000
revolving credit and term loan agreement (the "Credit Facility") with a bank
syndicate. The Credit Facility consists of a revolving line of credit of
$100,000 ("Revolving Credit Facility") and a term loan of $50,000 ("Term Loan").
The Credit Facility bears interest at the higher of the Federal Funds Rate plus
0.50% or the prime rate, plus up to 1.75% or LIBOR plus up to 3.0%, depending on
the Company's level of compliance with certain financial ratios. The Credit
Facility requires the Company to make quarterly principal payments of $250 on
the Term Loan beginning September 15, 2000 and each quarter thereafter until
June 15, 2002. The remaining obligations under the Term loan would be repaid on
July 15, 2002 along with any outstanding borrowings under the Revolving Credit
Facility. The Credit Facility contains various covenants, including the
maintenance of defined financial ratios and is secured by all of the assets of
the Company and contains certain restrictions.
On September 15, 1999, the Company announced that it was revising its
revenue and earnings estimates for the third and fourth quarters of 1999 due to
a softening in the demand for services in two of its core industry sectors -
Enterprise Solutions and IT Consulting Services. Based upon this revised
outlook, the Company informed the bank syndicate that it would not be in
compliance with certain of its financial covenants for the third quarter of
1999. On November 4, 1999, the Company and the banks signed an amendment to the
Credit Facility amending certain financial covenants for the third quarter of
1999 through the third quarter of 2000, reverting back to the original financial
covenants established in the Credit Facility thereafter. The Credit Facility, as
amended, now bears interest at the higher of the Federal Funds Rate plus 0.50%
or the prime rate, plus up to 2.25% or LIBOR plus up to 3.5%, depending on the
Company's level of compliance with certain financial ratios. In connection with
this amendment, the Company will be required to pay amendment fees to the banks
and related expenses of approximately $500 which was recorded in the third
quarter of 1999 as interest and other expense, net.
As of September 25, 1999, the availability under the Credit Facility
was approximately $18,500. The weighted average interest rate on the Credit
Facility at September 25, 1999 was 8.39%.
The Company had cash flows from operations of $36,047 for the nine
months ended September 25, 1999. The operating cash flows were due primarily to
a $17,567 decrease in other current assets and other assets primarily attributed
to a reduction in prepaid expenses, security deposits on facilities and the
refund on income taxes offset partially by an increase in accounts receivable of
$5,084.
The Company used cash of $18,997 for investing activities for the nine
months ended September 25, 1999. The Company used $12,149 of cash for
acquisitions, of which approximately $9,500 was for certain earnout agreements
related to previous acquisitions which was recorded as additional purchase
price, and $15,420 for fixed asset purchases during the period. This use of
funds was partially offset by $10,000 of cash received from the sales of certain
assets in the Enterprise Solutions Group.
The Company used $13,424 of cash for financing activities for the nine
months ended September 25, 1999. This use of cash was attributable primarily to
repayments on the Company's credit facilities, net of the establishment of the
Term Loan portion under the new Credit Facility.
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RENAISSANCE WORLDWIDE, INC.
The Company anticipates that its primary uses of working capital
in future periods will be for funding growth, either through acquisitions, the
internal development of existing branch offices or the development of new branch
offices and new service offerings. The Company also anticipates making
approximately $18,000 in capital expenditures in the next twelve months
principally to upgrade its computer systems and facilities. In connection with
certain of its acquisitions, the Company may be obligated to make certain
contingent payments during the next several years, including approximately
$9,000 which the Company is currently required to pay over the next 12 months.
The Company does not believe that such payments will have a material impact on
the Company's liquidity, results of operations or capital requirements. The
Company's principal capital requirement is working capital to support the
accounts receivable associated with its revenue growth. The Company believes
that its new Credit Facility, together with cash flows from operations, will be
sufficient to meet the Company's presently anticipated working capital and
financing needs for at least the next 12 months.
Year 2000
Generally, the Company has completed an assessment of Year 2000 issues
with respect to its business systems and has already begun to take actions to
ensure their compliance. Plans and associated milestones are being executed to
ensure that those business systems not currently certified as compliant are
either upgraded to certified status or replaced well in advance of December 31,
1999. Based on the completed assessment, management does not expect that the
costs of bringing the Company's systems into compliance with Year 2000 to have a
material adverse effect on the Company's financial position, results of
operations or liquidity. The Company does not believe that it is subject to
significant business risks related to its customers' and suppliers' Year 2000
efforts.
The Company does not currently have contingency plans with respect to
the Year 2000 problem. Should any Year 2000 issues be identified in the current
months which the Company believes could remain unresolved at year end, the
Company will develop contingency plans. Consultants' internal work for the
Company could negatively impact the Company's ability to employ its consultants
on billable projects which could have a material adverse effect on the Company's
results of operations, financial position or cash flow.
Item III. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to a variety of risks, including foreign
currency fluctuations and changes in interest rates on its borrowings. The
Company does not engage in trading market risk sensitive instruments for
speculative purposes. There have been no material changes in market risk
exposures from the information disclosed in the Form 10-K for the year ended
December 26, 1998.
Certain Factors That May Affect Future Operating Results
The foregoing forward-looking statements involve risks and
uncertainties. The Company's actual performance and results may differ
materially due to many important factors, including, but not limited to, the
Company's dependence on the availability of qualified IT consultants, its
ability to sustain and manage growth, the risks associated with acquisitions,
its dependence on key clients, risks associated with international operations,
its dependence on key personnel, the relatively short history of profitability,
the impact of the government regulation on immigration, fluctuations in
operating results due in part to the opening of new branch offices, general
economic conditions, employment liability risks, and the like. For additional
and more comprehensive discussion of the risks associated with ownership of
Common Stock of the Company, please see the Risk Factors section of the
Company's Report on Form 10-K. As a result of these and other factors, there can
be no assurance that the Company will not experience material fluctuations in
future operating results on a quarterly or annual basis.
13
RENAISSANCE WORLDWIDE, INC.
Part II. Other Information
Item 1--Legal Proceedings
Not applicable
Item 2--Change in Securities
Not applicable
Item 3--Defaults Upon Senior Securities
Not applicable
Item 4--Submission of Matters to a Vote of Security Holders
Non applicable
Item 5--Other Information
Not applicable
Item 6--Exhibits and Reports on Form 8-K
a. Exhibits
10.6 First Amendment to the Amended and Restated Credit
Agreement among Renaissance Worldwide. Inc., Bank of
America, N.A., BNY Factoring LLC, and Lenders named
within.
27.1 Financial Data Schedule
b. Reports on Form 8-K
Not applicable
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 thereunto duly authorized.
RENAISSANCE WORLDWIDE, INC.
(Registrant)
Date: November 9, 1999 By: /s/ G. DREW CONWAY
-------------------------------------
G. Drew Conway,
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 9, 1999 By: /s/ JOSEPH F. PESCE
-------------------------------------
Joseph F. Pesce,
Executive Vice President of
Finance, Chief Financial
Officer and Treasurer
14