1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 March 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 0-26970
--------------------
METAMOR WORLDWIDE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0407849
(State of Incorporation) (I.R.S. Employer Identification Number)
4400 Post Oak Parkway, Suite 1100
Houston, Texas 77027
(Address of Principal Executive Offices)
(Zip Code)
(713) 548-3400
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
As of April 25, 2000, the Company had 34,700,992 shares of Common Stock,
par value $0.01 per share, outstanding.
===============================================================================
2
METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 16
About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
MARCH 31, DECEMBER 31,
2000 1999
------------------- -------------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 31,495 $ 92,625
Accounts receivable, net of allowance of $5,620 and $5,074 194,031 178,129
Prepaid expenses and other 32,452 27,905
------------------- -------------------
Total current assets 257,978 298,659
Fixed Assets, net 61,734 53,526
Intangible Assets, net of accumulated amortization of $25,865 and $21,210 601,492 572,936
Investments and Other 46,930 46,688
------------------- -------------------
Total Assets $ 968,134 $ 971,809
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 30,880 $ 18,214
Payroll and related taxes 22,533 30,312
Amounts due sellers of acquired businesses 36,278 52,289
Deferred income taxes and other 25,572 14,141
------------------- -------------------
Total current liabilities 115,263 114,956
Long-term Debt, net of current maturities 218,922 209,193
Deferred Income Taxes and Other 5,697 15,957
Minority Interests 173,871 173,548
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.01; 5,000,000 shares authorized;
none outstanding - -
Common stock, par value $.01; 100,000,000 shares authorized; 34,635,402
and 34,552,217 shares issued and outstanding 346 346
Additional paid-in capital 308,574 308,118
Retained earnings 141,187 146,924
Accumulated other comprehensive income 4,274 2,767
------------------- -------------------
Total stockholders' equity 454,381 458,155
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 968,134 $ 971,809
=================== ===================
See notes to unaudited consolidated financial statements.
3
4
METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
THREE MONTHS ENDED
MARCH 31,
----------------------------------------
2000 1999
------------------- -------------------
Revenues from Services $ 158,364 $ 121,701
Cost of Services 96,855 69,329
------------------- -------------------
Gross Profit 61,509 52,372
Operating Costs and Expenses:
Selling, general and administrative 64,238 35,245
Stock compensation 1,413 -
Depreciation and amortization 8,832 4,579
------------------- -------------------
74,483 39,824
------------------- -------------------
Operating Income (Loss) (12,974) 12,548
Other Income (Expense):
Interest expense (3,004) (3,082)
Minority interests 761 (1,225)
Other, net 5,870 (122)
------------------- -------------------
3,627 (4,429)
------------------- -------------------
Income (Loss) from Continuing Operations before
Income Taxes (9,347) 8,119
Provision (Benefit) for Income Taxes (3,610) 3,555
------------------- -------------------
Income (Loss) from Continuing Operations (5,737) 4,564
Income from Discontinued Operations - 4,650
------------------- -------------------
Net Income (Loss) $ (5,737) $ 9,214
=================== ===================
Earnings (Loss) per Share (Basic and Diluted):
Income (loss) from continuing operations $ (0.16) $ 0.14
Income from discontinued operations - 0.14
------------------- -------------------
Net income (loss) $ (0.16) $ 0.28
=================== ===================
Reconciliation of Net Income (Loss) to Comprehensive
Income (Loss):
Net income (loss) $ (5,737) $ 9,214
Unrealized gain on investments 1,191 -
Currency translation adjustments 316 (2)
------------------- -------------------
Comprehensive income (loss) $ (4,230) $ 9,212
=================== ===================
See notes to unaudited consolidated financial statements.
4
5
METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
THREE MONTHS ENDED
MARCH 31,
-------------------------------------------
2000 1999
------------------ -------------------
Cash Flows from Operating Activities:
Net income (loss) $ (5,737) $ 9,214
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 8,832 6,743
Stock compensation 1,413 -
Amortization of debt costs and discount on convertible notes 1,462 1,360
Deferred income tax benefit (4,051) (187)
Gain on sale of investments (2,340) -
Provision for doubtful accounts 546 1,270
Other (800) (1,335)
Changes in assets and liabilities net of effects of acquisitions:
Accounts receivable (14,818) (29,373)
Prepaid expenses and other (6,938) 3,384
Accounts payable 10,776 (6,625)
Accrued liabilities 7,251 (7,789)
------------------ -------------------
Net cash used in operating activities (4,404) (23,338)
------------------ -------------------
Cash Flows from Investing Activities:
Cash paid for acquisitions, net of cash acquired (50,967) (197,571)
Proceeds from sale of investments 6,794 -
Capital expenditures (12,470) (10,991)
Other (8,560) 543
------------------ -------------------
Net cash used in investing activities (65,203) (208,019)
------------------ -------------------
Cash Flows from Financing Activities:
Net proceeds from issuance of long-term debt 8,321 240,209
Repurchase of common stock - (1,903)
Net proceeds from sale of common stock 373 2,612
------------------ -------------------
Net cash provided by financing activities 8,694 240,918
Effect of exchange rate changes on cash (217) -
------------------ -------------------
Net increase (decrease) in cash and cash equivalents (61,130) 9,561
Cash and cash equivalents at beginning of period 92,625 21,593
------------------ -------------------
Cash and cash equivalents at end of period 31,495 31,154
Less - Cash and cash equivalents related to discontinued operations - (132)
------------------ -------------------
Cash and cash equivalents related to continuing operations at end of period $ 31,495 $ 31,022
================== ===================
Cash paid during the periods for:
Interest, net of amounts capitalized $ 3,497 $ 4,841
================== ===================
Income taxes $ 677 $ 3,851
================== ===================
See notes to unaudited consolidated financial statements.
5
6
METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of Metamor Worldwide, Inc. and
its subsidiaries ("Metamor" or the "Company") included herein have been
prepared without audit pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. The Company believes that the
presentations and disclosures herein are adequate to make the information not
misleading. The consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the interim periods.
The results of operations for the interim periods are not
necessarily indicative of the results of operations to be expected for the full
year. These consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements included in its
Annual Report on Form 10-K for the year ended December 31, 1999.
2. DISCONTINUED OPERATIONS
In the third quarter of 1999, the Company sold its project support
and software solutions businesses. Accordingly, the operating results of these
businesses are reflected in the accompanying consolidated financial statements
as discontinued operations.
Revenues from discontinued operations were $127.4 million for the
three months ended March 31, 1999. Income from discontinued operations included
an allocation of interest expense of $4.0 million, which was determined based
on net assets of the business units included in continuing and discontinued
operations. Income taxes on discontinued operations were $3.4 million for the
three months ended March 31, 1999.
3. NEW ACCOUNTING PRONOUNCEMENT
In December of 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial
Statements", which the Company is required to adopt in the second quarter of
2000. SAB 101 clarifies how existing revenue recognition rules should be
applied. The Company is currently evaluating their revenue recognition policies
and the effect of adopting this Bulletin.
4. INCOME TAXES
The Company follows the liability method of accounting for income
taxes. Under this method, deferred income tax assets and liabilities are
determined based on differences between the financial statement and income tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. The Company's interim
provisions for income taxes were computed using its estimated effective tax
rate for the year.
5. ACQUISITIONS
All acquisitions made by the Company have been accounted for using
the purchase method of accounting. Accordingly, the results of operations of
the acquired businesses are included in the Company's consolidated results of
operations from the date of acquisition. During the three months ended March
31, 2000, the Company acquired NextLinx Services, a Virginia-based Oracle
eBusiness solutions business, for cash of $26 million. The sellers are not
entitled to any additional consideration.
In certain transactions, the sellers of the acquired businesses are
entitled to contingent consideration ("Earnouts") based on the post-acquisition
increase in earnings before interest and taxes ("EBIT"), as defined. The
Company has accrued $36.3 million for Earnouts that were based on results for
1999. These Earnouts increased the
6
7
METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
amount of goodwill related to the acquisitions. Earnouts attributable to future
operating performance are capped at $51.2 million and will be accrued in the
period they become probable and can be reasonably estimated.
The following results of operations have been prepared assuming the
acquisitions made through March 31, 2000 occurred as of the beginning of the
periods presented. The pro forma operating results are not necessarily
indicative of future operating results nor of results that would have occurred
had the acquisitions been consummated as of the beginning of the periods
presented.
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
2000 1999
------------------- -------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues from services $ 160,087 $ 151,170
Income (loss) from continuing operations $ (5,866) $ 3,928
Net Income (loss) $ (5,866) $ 8,578
Earnings (loss) per share:
Basic -
Income (loss) from continuing operations $ (0.17) $ 0.12
=================== ===================
Net income (loss) $ (0.17) $ 0.26
=================== ===================
Diluted -
Income (loss) from continuing operations $ (0.17) $ 0.12
=================== ===================
Net income (loss) $ (0.17) $ 0.26
=================== ===================
6. LONG-TERM DEBT
Under its Senior Credit Agreement (the "Agreement"), the Company may
borrow up to $80 million and has the ability to raise the commitment to $125
million under certain circumstances. The Agreement contains certain covenants
which, among other things, limit total debt to 4.5 times and senior debt to 2.0
times Pro Forma Adjusted EBITDA (earnings before interest, income taxes,
depreciation and amortization of all acquired businesses for the preceding
twelve-month period), limit the payment of dividends and require the
maintenance of certain financial ratios. The Agreement is secured by a pledge
of the stock of the Company's material subsidiaries. A fee of 0.25 percent is
payable on the unused portion of the commitment.
As of March 31, 2000, the Company had $9.1 million of outstanding
borrowings under the Agreement and remaining availability (after deducting
outstanding letters of credit of $3.2 million) of $67.7 million. Borrowings
under the Agreement bear interest, at the Company's option, at LIBOR or the
bank's base rate, plus the applicable margin. The weighted average interest
rate of the Company's outstanding borrowings under the Agreement was 8.47
percent at March 31, 2000.
7
8
METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share from continuing operations (in thousands, except per share
amounts):
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------- ------------
Numerator:
Income from continuing operations - numerator for basic earnings
per share $ (5,737) $ 4,564
Effect of dilutive securities:
2.94% convertible subordinated notes - -
------------- ------------
Numerator for diluted earnings per share - income available to common
stockholders after assumed conversions
$ (5,737) $ 4,564
============= ============
Denominator:
Denominator for basic earnings per share - weighted-average
shares 34,790 32,723
Effect of dilutive securities:
Stock options - 214
2.94% convertible subordinated notes - -
------------- ------------
Dilutive potential common shares - 214
------------- ------------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversions 34,790 32,937
============= ============
Basic earnings per share $ (0.16) $ 0.14
============= ============
Diluted earnings per share $ (0.16) $ 0.14
============= ============
Options to purchase 1,871,158 shares of common stock for the three
months ended March 31, 1999, were outstanding, but were not included in the
computation of diluted earnings per share because the option price exceeded the
average market price for that period. Options of 4,544,121 were not included in
the calculation of loss per share for the current quarter, as their inclusion
would have been anti-dilutive. The effects of the conversion of the 2.94%
convertible subordinated notes were anti-dilutive for the periods presented.
8. CONTINGENCIES
Metamor and NDC Group, Inc. ("NDC") filed suit in May 1999 against
certain former officers and shareholders of NDC and other parties for several
causes of action, including breaches of fiduciary duties and numerous covenants
and agreements. Metamor and NDC are seeking monetary and injunctive relief
against the defendants. Some of the defendants have filed Cross-Bills alleging
breach of employment and other agreements and duties of good faith and fair
dealings and other tort claims against NDC, Metamor and Xpedior. Additionally,
some of these same defendants have filed similar claims in the United States
District Court for the Eastern District of Virginia. The defendants that filed
the Cross-Bills and the complaint in District Court are seeking indeterminable
damages.
A trial of these actions is currently anticipated to begin in June
2000 and management believes that Xpedior, NDC and Metamor have strong cases in
these matters and strong defenses against each of the complaints. However, NDC
and Metamor may not prevail in this litigation because litigation is subject to
inherent uncertainties.
8
9
9. SEGMENT REPORTING
The Company has three reportable segments: Metamor Solutions,
Xpedior and European Solutions. These segments are managed separately,
primarily because of their different operating and marketing strategies. The
Company's Metamor Solutions segment is comprised of its Enterprise Solutions,
Global Solutions and Industry Solutions units, which are aggregated since these
units have very similar operational characteristics, growth rates and margins.
Services provided by all of the segments include: eBusiness development,
application development and maintenance, systems integration, network design
and implementation.
The Company utilizes the following information for purposes of
making decisions about allocating resources to a segment and assessing a
segment's performance. The accounting policies of the segment are the same as
those described in the preceding notes.
Three Months Ended March 31, 2000
---------------------------------------------------------------------------
Metamor European
Solutions Xpedior Solutions Corporate Consolidated
----------- ---------- -------------- ------------- --------------
(in thousands)
Revenues from Services $ 84,370 $ 50,974 $23,020 $ - $ 158,364
Gross Profit 28,793 24,376 8,340 - 61,509
Operating Costs and Expenses:
Selling, general and administrative 23,945 26,883 4,673 8,737 64,238
Stock compensation - 1,413 - - 1,413
Depreciation and amortization 4,196 3,197 1,220 219 8,832
Operating income (loss) 654 (7,117) 2,447 (8,958) (12,974)
Three Months Ended March 31, 1999
---------------------------------------------------------------------------
Metamor European
Solutions Xpedior Solutions Corporate Consolidated
----------- ----------- -------------- ------------- --------------
(in thousands)
Revenues from Services $ 75,966 $ 27,769 $17,966 $ - $ 121,701
Gross Profit 32,534 11,725 8,113 - 52,372
Operating Costs and Expenses:
Selling, general and administrative 18,674 6,685 4,034 5,852 35,245
Depreciation and amortization 1,783 2,053 582 161 4,579
Operating income (loss) 12,077 2,987 3,497 (6,013) 12,548
10. PROPOSED MERGER
On March 21, 2000, the Company entered into an Agreement and Plan
of Merger with PSINet Inc. ("PSI"), a provider of Internet and eCommerce
solutions to businesses, and PSINet Shelf IV Inc. Pursuant to the agreement,
each share of Metamor common stock will be exchanged for 0.9 of a share of PSI
common stock upon closing of the merger. Completion of the transaction is
subject to a number of conditions, including the approval of PSI and Metamor
stockholders and certain regulatory approvals. The transaction is expected to
be completed by mid-2000.
9
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements.
INTRODUCTION
Since its inception in July 1993, the Company's growth has been the
result of acquisitions of businesses and internal growth. All acquisitions
completed by the Company have been accounted for as purchases. Accordingly, the
historical Consolidated Financial Statements of the Company include the
operating results of the acquired businesses from the date of acquisition.
As a result of the strategic repositioning of the Company as an IT
solutions business, Metamor sold its staffing services business in 1998 and its
project support and software solutions businesses in 1999. The operating
results of these businesses (including prior periods) are reflected in the
historical Consolidated Financial Statements as discontinued operations.
Proceeds from those sales were used to pay down borrowings under the Company's
senior credit facility.
In December 1999, the Company completed the sale of 9.8 million
shares of Xpedior Incorporated ("Xpedior"), its eBusiness solutions unit.
Proceeds from the sale were used to repay intercompany borrowings between
Xpedior and the Company and the remainder used for general corporate purposes
of Xpedior.
On March 21, 2000, the Company entered into an Agreement and Plan
of Merger with PSINet Inc. ("PSI"), a provider of Internet and eCommerce
solutions to businesses, and its wholly-owned subsidiary, PSINet Shelf IV Inc.
Pursuant to the agreement, each share of Metamor common stock will
be exchanged for 0.9 of a share of PSI common stock upon closing of the
proposed merger. Completion of the transaction is subject to a number of
conditions, including the approval of PSI and Metamor stockholders and certain
regulatory approvals. PSI and Metamor each filed applicable notification and
report forms with the Antitrust Division and the Federal Trade Commission on
April 10, 2000, and were granted early termination of the waiting period on
April 26, 2000.
On May 15, 2000, the Company and PSI commenced mailing a joint proxy
statement/prospectus to stockholders of record as of April 25, 2000. The special
meetings of stockholders have been scheduled for June 15, 2000, and the merger
is expected to be completed thereafter.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 1999
(in thousands, except per share amounts)
2000 1999
------------ -------------
Revenues $ 158,364 $ 121,701
Gross profit 61,509 52,372
Operating income (loss) (12,974) 12,548
Income (loss) from continuing operations (5,737) 4,564
Net income (loss) (5,737) 9,214
Earnings (loss) per share (diluted):
Continuing operations $ (0.16) $ 0.14
Discontinued operations - 0.14
------------ -------------
Net income (loss) $ (0.16) $ 0.28
============ =============
REVENUES. Revenues for the current quarter increased 30 percent to
$158.4 million, up from $121.7 million for the first quarter of 1999. The
improvement reflected strong internal growth in the Company's eBusiness
solutions unit, Xpedior, as well as the effects of acquisitions made since the
first quarter of 1999. For the current quarter, Xpedior reported revenues of
$51.0 million, or 32 percent of consolidated revenues. This reflected an
internal growth rate of 64 percent over the first quarter of 1999 and a
sequential growth rate of 26 percent over the fourth quarter of 1999.
10
11
Excluding Xpedior, the Company's other units on a combined basis
(collectively referred to as the "Core Business") generated revenues of $107.4
million for the current quarter, or 68 percent of consolidated revenues.
Revenues for the current quarter approximated that reported for the fourth
quarter of 1999 and were down from the first quarter of 1999, primarily as a
result of system lockdowns related to customer focus on Y2K issues. Demand in
the Core Business improved steadily over the course of the quarter and demand
is expected to improve significantly over the remainder of 2000.
GROSS PROFIT. Gross profit for the current quarter increased 17
percent to $61.5 million, primarily as a result of the 30 percent increase in
revenues, partially offset by lower gross margins in the Core Business. Gross
margin for the current quarter was 38.8 percent down from 43.0 percent for the
first quarter of 1999. The decline in gross margin of the Core Business
reflected lower utilization related to the effects of Y2K runoff and system
lockdowns and to a change from a 40 to a 35-hour work week in France. The
effects of the lower margin in the Core Business was partially offset by the
higher gross margin in Xpedior, which was 47.8 percent, up from 42.2 percent in
the same period of 1999. The higher margin of Xpedior reflects the high demand
for Xpedior's services.
OPERATING COSTS AND EXPENSES. Selling, general and administrative
("SG&A") expenses for the current quarter totaled $64.2 million, compared with
$35.2 million for the three months ended March 31, 1999. The increase in SG&A
expenses primarily related to (i) the effects of the acquisitions, (ii)
internal growth of the operating companies post-acquisition, (iii) increased
spending in Xpedior on sales, marketing, and recruiting to accommodate its high
rate of growth, (iv) approximately $3.0 million in investments in the Core
Business to enhance its sales and marketing infrastructure and drive higher
revenue growth, (v) non-recurring legal expenses of $2.5 million related to the
prosecution of claims against former principals and officers of an acquired
business, and (vi) a $1.4 million non-cash stock compensation charge of
Xpedior.
Depreciation totaled $4.2 million and $2.1 million for the three
months ended March 31, 2000 and 1999, respectively. The increase primarily
related to the fixed assets of the businesses acquired and, to a lesser extent,
capital expenditures. Amortization of $4.6 million and $2.5 million for the
first three months of 2000 and 1999, respectively, related to amortization of
intangible assets of the acquired businesses.
OPERATING INCOME (LOSS). For the current quarter, the company
generated an operating loss of $10.5 million, compared with operating income of
$13.8 million for the first quarter of 1999. The operating loss related to the
significant increase in SG&A expenses (described above), as well as higher
depreciation and amortization.
NON-OPERATING COSTS AND EXPENSES. Interest expense for the current
quarter totaled $3.0 million, a slight reduction from the $3.1 million reported
in the first quarter of 1999. Other income for the quarter totaled $3.4 million
up from $0.5 million in the first quarter of 1999. The increase primarily
related to interest income in Xpedior from its cash investments and a gain on
the sale of marketable securities.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision (benefit) for
income taxes for the current quarter was $(3.6) million (an effective tax rate
of 38.6 percent), compared with $3.6 million (an effective tax rate of 43.8
percent) for 1999. The Company's effective tax rate includes the effects of
state and foreign income taxes and the portion of goodwill not deductible for
federal income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have principally related to the
acquisition of businesses, working capital needs and capital expenditures.
These requirements have been met through a combination of bank debt, issuances
of securities and internally generated funds.
During the three months ended March 31, 2000, the Company made cash
payments for acquisitions of $51.6 million. These payments were comprised of
(i) $26.2 million paid to sellers of businesses acquired in 2000 and (ii) $25.4
million of post-closing purchase consideration ("Earnouts") paid to sellers
based on the post-acquisition increase in earnings before interest and taxes
("EBIT"), as defined. At March 31, 2000, the Company had accrued $36.3 million
for Earnouts that were fixed and determinable. The remaining Earnouts are
capped at $51.2 million and are tied to future operating performance. Based on
current growth rates and operating trends, the Company estimates the remaining
Earnouts will be approximately $11.0 million, the majority of which will be
paid
11
12
in the first half of 2001. The Company expects to fund the payment of the
Earnouts out of cash flows from operating activities or borrowings under its
Senior Credit Agreement.
The Company has paid $3.6 million of the maximum $15 million Earnout
on NDC Group, Inc. ("NDC") that is attributable to results for 1999. Accrual of
the remaining $11.4 million will depend on the outcome of claims by the Company
against certain former shareholders and officers of NDC. If paid, up to
one-half of this obligation may be paid in common stock of the Company. The
Company has also guaranteed the value of approximately 308,000 shares of
Metamor common stock issued in connection with the acquisition of NDC. If the
fair market value of these shares is less than $14.0 million based upon the
average market price for the 20 trading days preceding April 16, 2000, it is
obligated to pay the difference to the former NDC shareholders. Management
expects that the settlement of this guarantee, if triggered, will be paid
one-half in cash and one-half in Metamor common stock.
Capital expenditures totaled $12.5 million and $11.0 million for the
three months ended March 31, 2000 and 1999, respectively. The majority of these
expenditures related to (i) the development of an integrated front and back
office information system for the project support business, which was included
with the sale of that business, (ii) computer equipment and software for
technical consultants and (iii) furniture, fixtures and equipment related to
business expansion.
The Company estimates that capital expenditures for 2000 will be
approximately $30 million. The planned capital expenditures for 2000 are normal
recurring items necessary to support business expansion and the anticipated
growth in the number of technical consultants. The Company expects to fund
these capital expenditures primarily out of cash flows from operations and with
borrowings under its Senior Credit Agreement.
The Company had working capital of $142.7 million and $80.7 million
at March 31, 2000 and 1999, respectively. The Company had cash and cash
equivalents of $31.5 million and $31.0 million at March 31, 2000 and 1999,
respectively. The Company's operating cash flows and working capital
requirements are significantly affected by the timing of payroll and the
receipt of payment from the customer. Generally, the Company pays its
consultants semi-monthly and receives payments from customers on average within
30 to 80 days from the date of invoice. Cash flows used in operating activities
were $4.4 million and $23.3 million for the three months ended March 31, 2000
and 1999, respectively.
Under terms of the Company's Senior Credit Agreement, the Company
may borrow under its revolving credit facility up to $80 million and has the
ability to raise the commitment to $125 million under certain circumstances.
Borrowings under the facility bear interest, at the Company's option, at LIBOR
or the bank's base rate, plus the applicable margin. A fee of 0.25 percent is
payable on the unused portion of the commitment. The Senior Credit Agreement
contains certain covenants which, among other things, limit total debt to 4.5
times and senior debt to 2.0 times Pro Forma Adjusted EBITDA (earnings before
interest, income taxes, depreciation and amortization of all acquired
businesses for the preceding twelve-month period), limit the payment of
dividends and require the maintenance of certain financial ratios.
As of March 31, 2000, the Company had outstanding borrowings under
the Senior Credit Agreement of $9.1 million and remaining availability (after
deducting outstanding letters of credit of $3.2 million) of $67.7 million. The
weighted average interest rate of the Company's outstanding borrowings under
the Senior Credit Agreement was 8.47 percent at March 31, 2000.
On August 15, 1997, the Company sold $230 million of 2.94 percent
convertible subordinated notes due 2004. The notes were issued at an original
price of 83.991 percent of the principal amount at maturity. The notes are
convertible into common stock of the Company at a conversion rate of 23.7397
shares per $1,000 note. The notes are redeemable by the Company, in whole or in
part, after August 18, 2000, at a redemption price equal to the original price
of the note plus accrued original issue discount. Net proceeds of approximately
$187.8 million from the sale of the notes were used to repay a portion of the
indebtedness under the Senior Credit Agreement. At March 31, 2000, the face
amount of the notes was $227 million, which reflected a repurchase of $3 million
by the Company in 2000 and the carrying value of the notes was $199.4 million.
On June 24, 1997, the Company entered into a three-year interest
rate swap agreement to reduce a portion of its interest rate exposure on
borrowings under the Senior Credit Agreement. Under terms of this agreement,
the Company will pay the counterparty 6.05% on notional principal of $25.0
million and the counterparty will pay the Company interest at a variable rate
based on the LIBOR rate.
12
13
In March 1999, the Company reinstated its stock repurchase program
and thereafter repurchased approximately 0.4 million shares of common stock
during 1999 at an average price per share of $14.46. Under terms of the program,
the Company can expend an additional $26.0 million to repurchase shares or its
convertible notes. In the current quarter, the Company repurchased $3 million of
the convertible notes and none of its common stock in 2000.
In December 1999, Xpedior, the Company's eBusiness solutions
subsidiary, completed the initial public offering of 9.8 million shares of
common stock of Xpedior. Metamor continues to own 80 percent of Xpedior. Net
proceeds from the offering totaled $169.1 million and were used to repay
amounts owed to the Company from Xpedior and for general working capital
purposes of Xpedior.
The Company's capital requirements, which include funding for its
acquisition program, are dependent upon the number, quality and pricing of the
acquisition opportunities and its capital availability. Although the Company
believes it will be able to maintain a moderately sized acquisition program, a
significantly larger program would require capital over and above the expected
increase in the Company's senior borrowing capacity, as noted above. Although
management believes that the Company will be able to obtain sufficient capital
to fund acquisitions, there can be no assurance that such capital will be
available to the Company at the time it is required or on terms acceptable to
the Company.
SEASONALITY
The Company's quarterly operating results are affected by the number
of billing days, consultants' vacations and paid time off and the seasonality
of its customers' businesses. Demand for services in the IT services business
is typically lower during the first quarter until customers' operating budgets
are finalized and the productivity of the Company's salaried technical
consultants is lower in the third and fourth quarters due to fewer billing days
because of the higher number of holidays and vacation days.
INFLATION
The effects of inflation on the Company's operations were not
significant during the periods presented in the financial statements.
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Form 10-Q contains forward-looking statements and information
that are based on management's beliefs, as well as assumptions made by, and
information currently available to, management. All statements and information
relating to the Company, other than statements of historical fact, are
forward-looking statements. When used in this document, the words "believe,"
"anticipate," "will," "should," "would," "estimate," "project," "expect," and
similar expressions, and the negative thereof, are intended to identify
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Such
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, projected or expected. Among the key factors that may
have a direct bearing on the Company's operating results are fluctuations in
the economy, the degree and nature of competition, demand for the Company's
services, and the Company's ability to acquire businesses that are accretive to
earnings, to integrate the operations of acquired businesses, to recruit and
place temporary professionals, to expand into new markets, to complete fixed
price agreements in accordance with their terms and to maintain profit margins
in the face of pricing pressures. In addition, important factors that could
cause results to differ materially are set forth under the caption "Risk
Factors" in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
13
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the applicable disclosures
since those set forth in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
14
15
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
2 Agreement and Plan of Merger dated as of
March 21, 2000 among PSINet Inc., PSINet
Shelf IV Inc. and Metamor Worldwide, Inc.
(incorporated by reference from exhibit
number 2.1 to the Company's Form 8-K
Current Report dated March 21, 2000)
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
A Form 8-K Current Report dated March 21, 2000
was filed with the Securities and Exchange
Commission reporting that the Company had
entered into an Agreement and Plan of Merger
with PSINet Inc. and PSINet Shelf IV Inc.
15
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
METAMOR WORLDWIDE, INC.
(REGISTRANT)
Date: May 12, 2000 By: /s/ EDWARD L. PIERCE
--------------------
Edward L. Pierce
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer)
Date: May 12, 2000 By: /s/ KEVIN P. COHN
-----------------
Kevin P. Cohn
Vice President and
Corporate Controller
(Chief Accounting Officer)
16
17
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
2 Agreement and Plan of Merger dated as of March 21, 2000
among PSINet Inc., PSINet Shelf IV Inc. and Metamor
Worldwide, Inc. (incorporated by reference from exhibit
number 2.1 to the Company's Form 8-K Current Report dated
March 21, 2000)
27 Financial Data Schedule