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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(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, 1999
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
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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)
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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 AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
AS OF MAY 7, 1999, THE COMPANY HAD 33,889,207 SHARES OF COMMON STOCK,
PAR VALUE $0.01 PER SHARE, OUTSTANDING.
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METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
MARCH 31, DECEMBER 31,
1999 1998
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(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 31,154 $ 21,593
Accounts receivable, net of allowance of $6,632 and $4,677 266,288 192,780
Prepaid expenses 20,028 16,260
Deferred income taxes and other 135 --
------------- -------------
Total current assets 317,605 230,633
Fixed Assets, net 58,589 45,381
Intangible Assets, net of accumulated amortization of $19,897 and $16,993 719,657 476,159
Investments and Other 8,701 9,826
------------- -------------
Total Assets $ 1,104,552 $ 761,999
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 2,000 $ 2,176
Accounts payable and accrued expenses 27,373 28,903
Payroll and related taxes 63,363 44,179
Amounts due sellers of acquired businesses 37,832 64,168
Amount due buyer of staffing services business 16,000 16,000
Deferred income taxes -- 1,656
Other 20,600 20,002
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Total current liabilities 167,168 177,084
Long-term Debt, net of current maturities 497,322 238,115
Deferred Income Taxes and Other 7,403 8,055
Minority Interests 10,239 --
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; 33,905,489
and 32,408,448 shares issued and outstanding 339 324
Additional paid-in capital 298,920 225,075
Retained earnings 124,174 114,361
Accumulated other comprehensive income (1,013) (1,015)
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Total stockholders' equity 422,420 338,745
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Total Liabilities and Stockholders' Equity $ 1,104,552 $ 761,999
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See notes to unaudited consolidated financial statements.
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METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
----------- -----------
Revenues from Services $ 249,101 $ 182,825
Cost of Services 161,241 124,278
----------- -----------
Gross Profit 87,860 58,547
Operating Costs and Expenses:
Selling, general and administrative 58,460 39,220
Depreciation and amortization 5,960 3,384
----------- -----------
64,420 42,604
----------- -----------
Operating Income 23,440 15,943
Other Income (Expense):
Interest expense (5,104) (3,946)
Minority interests (1,225) --
Other, net (192) (21)
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(6,521) (3,967)
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Income from Continuing Operations before
Income Taxes 16,919 11,976
Provision for Income Taxes 7,106 5,031
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Income from Continuing Operations 9,813 6,945
Income from Discontinued Operations,
net of income taxes of $1,348 -- 1,862
----------- -----------
Net Income $ 9,813 $ 8,807
=========== ===========
Earnings per Common Share:
Income from Continuing Operations $ 0.30 $ 0.21
Income from Discontinued Operations -- 0.06
----------- -----------
Net Income $ 0.30 $ 0.27
=========== ===========
Reconciliation of Net Income to Comprehensive Income:
Net Income $ 9,813 $ 8,807
Currency translation adjustments (2) (18)
----------- -----------
Comprehensive Income $ 9,811 $ 8,789
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See notes to unaudited consolidated financial statements.
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METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
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Cash Flows from Operating Activities:
Net income $ 9,813 $ 8,807
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization 5,960 4,625
Amortization of debt costs and discount on convertible notes 1,360 1,306
Amortization of deferred compensation -- 22
Deferred income tax provision (benefit) (187) 562
Provision for doubtful accounts 1,270 355
Other (1,335) (929)
Changes in assets and liabilities net of effects of acquisitions:
Accounts receivable (29,373) (25,393)
Prepaid expenses and other 3,384 1,484
Accounts payable (6,441) 8,808
Accrued liabilities (7,789) (3,039)
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Net cash used in operating activities (23,338) (3,392)
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Cash Flows from Investing Activities:
Cash paid for acquisitions, net of cash acquired (197,571) (116,503)
Capital expenditures (10,991) (7,827)
Other 543 (805)
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Net cash used in investing activities (208,019) (125,135)
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Cash Flows from Financing Activities:
Net proceeds from issuance of long-term debt 240,209 127,013
Payments on long-term debt -- (68)
Repurchase of common stock (1,903) --
Net proceeds from sale of common stock 2,612 3,803
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Net cash provided by financing activities 240,918 130,748
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Net increase in cash and cash equivalents 9,561 2,221
Cash and cash equivalents at beginning of period 21,593 13,374
----------- -----------
Cash and cash equivalents at end of period 31,154 15,595
Less - Cash and cash equivalents related to discontinued operations -- (5,727)
----------- -----------
Cash and cash equivalents related to continuing operations at end of period $ 31,154 $ 9,868
=========== ===========
Cash paid during the periods for:
Interest, net of amounts capitalized $ 4,841 $ 2,202
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Income taxes $ 3,851 $ 1,597
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See notes to unaudited consolidated financial statements.
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METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of Metamor Worldwide, Inc. and
its wholly-owned subsidiaries (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, 1998.
2. 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.
3. 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, 1999, the Company acquired two solutions businesses and summary information
on these acquisitions follows:
Purchase consideration (in thousands):
Cash paid $ 213,151
Fair value of common stock issued 73,151
Amounts due sellers 37,832
Liabilities assumed 59,298
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Fair value of assets acquired (including intangibles) $ 383,432
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In February 1999, the Company acquired 42 percent of the outstanding
shares and convertible debt of Decan, a publicly-traded, French-based solutions
company, and instituted a public tender offer for the remaining shares. As of
March 31, 1999, the Company had acquired approximately 62 percent of Decan for
$100.0 million, consisting of $95.0 million in cash and approximately 233,321
shares of the Company's common stock. In April 1999, the Company acquired an
additional 34 percent of Decan for $52.0 million in cash, bringing its total
ownership to approximately 96 percent.
In March 1999, the Company acquired GE Capital Consulting, a solutions
business and wholly-owned subsidiary of GE Capital Corporation, for $117.3
million, consisting of $52.0 million in cash and 1,186,364 shares of the
Company's common stock (the "Issued Stock") valued at $65.3 million. The Issued
Stock is subject to a price guarantee which provides that if its fair market
value, as defined, is less than $65.3 million as of March 2004, the Company
will pay the sellers, in cash or stock, the differential. The guarantee will be
adjusted for any Issued Stock sold prior to the measurement date.
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METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. During the
three months ended March 31, 1999, Earnouts of $64.2 million were paid to
sellers and an additional accrual of $25.4 million was recorded for Earnouts to
be paid in the second quarter of 1999. At March 31, 1999, the maximum
contractual amount of Earnouts based on future increases in EBIT totaled $184.5
million. The payment of any contingent consideration will increase goodwill.
The following results of operations have been prepared assuming the
acquisitions made through March 31, 1999 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,
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1999 1998
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(in thousands, except
per share amounts)
Revenues from Services $ 271,674 $ 239,625
Net income $ 9,356 $ 7,295
Earnings per common share:
Basic $ 0.29 $ 0.23
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Diluted $ 0.29 $ 0.22
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4. LONG-TERM DEBT
Under its Senior Credit Agreement (the "Agreement"), the Company may
borrow the lesser of $400 million or 3.5 times Pro Forma Adjusted EBITDA
(earnings before interest, income taxes, depreciation and amortization of all
acquired businesses for the preceding twelve-month period). The Agreement
contains certain covenants which, among other things, limit total debt to 5.25
times Pro Forma Adjusted EBITDA, 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 0.175 percent to
0.375 percent is payable on the unused portion of the commitment.
As of March 31, 1999, the Company had $283.0 million of outstanding
borrowings under the Agreement and remaining availability (after deducting
outstanding letters of credit of $1.8 million) of $115.2 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 5.91
percent at March 31, 1999.
5. COMMON STOCK
Under terms of a share repurchase program approved by the Board of
Directors, the Company purchased 160,100 shares of common stock during the
three months ended March 31, 1999, at an average price per share of $15.22.
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METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. 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,
------------------------
1999 1998
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Numerator:
Income from continuing operations - numerator for
basic earnings per share $ 9,813 $ 6,945
Effect of dilutive securities:
2.94% convertible subordinated notes -- --
---------- ----------
Numerator for diluted earnings per share - income
available to common stockholders after assumed
conversions $ 9,813 $ 6,945
========== ==========
Denominator:
Denominator for basic earnings per share -
weighted-average shares 32,723 32,371
Effect of dilutive securities:
Stock options 214 593
2.94% convertible subordinated notes -- --
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Dilutive potential common shares 214 593
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Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 32,937 32,964
========== ==========
Basic earnings per share $ 0.30 $ 0.21
========== ==========
Diluted earnings per share $ 0.30 $ 0.21
========== ==========
Options to purchase 1,871,158 and 133,277 shares of common stock for
the three months ended March 31, 1999 and 1998, respectively, were outstanding,
but were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of the
common shares. The effects of the conversion of the 2.94% convertible
subordinated notes were anti-dilutive for the periods presented.
7. SEGMENT REPORTING
The Company has two reportable segments: Solutions and Project
Support. These segments offer different services and are managed separately,
primarily because of their different operating and marketing strategies. The
Company's Solutions segment is comprised of six separate service units, which
are aggregated since these units have very similar operational characteristics,
growth rates and margins. Services provided by the Solutions segment include:
application development and maintenance; systems integration; network design
and implementation; and software engineering. The Company's Project Support
segment provides technology consultants to support information technology
projects managed by the customer.
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METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 used
by the Company as a whole. Total Solutions assets increased from $350.1 million
at December 31, 1998 to $754.0 million at March 31, 1999 primarily as a result
of the Decan and GE Capital Consulting acquisitions.
THREE MONTHS ENDED MARCH 31, 1999
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PROJECT
SOLUTIONS SUPPORT CORPORATE ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(in thousands)
Revenues from external customers $ 135,568 $ 113,533 $ -- $ -- $ 249,101
Intersegment revenues 3,026 -- -- (3,026) --
Operating income 22,163 8,515 (6,570) (668) 23,440
THREE MONTHS ENDED MARCH 31, 1998
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PROJECT
SOLUTIONS SUPPORT CORPORATE ELIMINATIONS CONSOLIDATED
---------- ---------- ---------- ------------ ------------
(in thousands)
Revenues from external customers $ 66,569 $ 116,256 $ -- $ -- $ 182,825
Operating income 10,652 9,949 (4,658) -- 15,943
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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
through a result of acquisitions of businesses coupled with high internal
growth. Through March 31, 1999, the Company had completed the acquisition of 38
businesses in the Information Technology ("IT") Services sector. 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 to focus
exclusively on its core solutions and project support businesses, management
and the Board of Directors approved the sale of the Company's staffing services
business during 1998. The historical Consolidated Financial Statements covering
periods prior to the sale of this business in July 1998 have been restated to
reflect the staffing services business as discontinued operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998
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Revenues $ 249,101 $ 182,825
Gross profit $ 87,860 $ 58,547
Operating income $ 23,440 $ 15,943
Income from continuing operations $ 9,813 $ 6,945
Net income $ 9,813 $ 8,807
Earnings per share (diluted):
Continuing operations $ 0.30 $ 0.21
Discontinued operations -- 0.06
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Net income $ 0.30 $ 0.27
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SUMMARY. Income from continuing operations for the three months ended
March 31, 1999 was $9.8 million, or $0.30 per share, compared with $6.9
million, or $0.21 per share, for the three months ended March 31, 1998. Net
income for the three months ended March 31, 1999, included one-time charges of
$2.2 million or $0.03 per share after tax. The charges related to costs
incurred in connection with a terminated merger and severance paid to an
executive of the Company.
Revenues for the current quarter increased 36 percent to $249.1
million, up from $182.8 million in the first quarter of 1998. The Company's
solutions segment accounted for 55 percent of consolidated revenues in the
current quarter, up from 36 percent in the first quarter of 1998. The
improvement in mix was the result of internal growth, as well as the effects of
acquisitions made since the first quarter of 1998. All acquisitions made by the
company were purchases and, accordingly, the operating results of the acquired
businesses are included in the consolidated results from the date of
acquisition.
Gross profit for the current quarter increased 50 percent to $87.9
million. This improvement related to the 36 percent increase in revenues and an
expansion in gross margin. Gross margin for the current quarter was 35.3
percent, up from 32.0 percent in the first quarter of 1998. The expansion in
gross margin reflected the favorable shift in mix toward higher-margin
solutions services, as well as an improvement in margin of the Company's
solutions segment. Gross margin for the Company's solutions segment was 43.6
percent for the current quarter compared with 40.5 percent for the first
quarter of 1998. The Company's solutions segment accounted for 67
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percent of consolidated gross profit in the current quarter, up from 46 percent
in the first quarter of 1998. Gross margin for the Company's project support
business was 26.3 for the current quarter compared with 27.1 percent for the
first quarter of 1998. The decline in gross margin of this segment primarily
related to lower utilization.
During the three months ended March 31, 1999, the Company recorded
one-time charges of $2.2 million, or $0.03 per share after income tax.
Approximately $1.1 million of the charge related to costs incurred in
connection with the proposed merger with SPR Inc. The merger was terminated in
March 1999 and the costs were primarily for outside legal and accounting
services. The remainder of the charge related to severance paid under terms of
an employment agreement to the former president of the Company's project
support business.
Operating income before one-time charges for the three months ended
March 31, 1999 increased 61 percent to $25.6 million, up from $15.9 million in
the same period of 1998. The operating margin for the current quarter was 10.3
percent, up from 8.7 percent for the first quarter of 1998. The expansion in
margins reflected the favorable business mix shift and the higher gross margin
of the Company's solutions segment, partially offset by investments in
infrastructure to support the growth of the Company.
OPERATING COSTS AND EXPENSES. Selling, general and administrative
("SG&A") expenses for the three months ended March 31, 1999 totaled $56.3
million, compared with $39.2 million for the three months ended March 31, 1998.
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) investments made to improve infrastructure and to develop technical
practices and (iv) higher expenses at the corporate level to support growth.
Depreciation totaled $3.1 million and $1.4 million for the three
months ended March 31, 1999 and 1998, respectively. The increase primarily
related to the fixed assets of the businesses acquired and, to a lesser extent,
capital expenditures. Amortization of $2.9 million and $1.9 million for the
first three months of 1999 and 1998, respectively, related to amortization of
intangible assets of the acquired businesses.
NON-OPERATING COSTS AND EXPENSES. Interest expense totaled $5.1
million and $5.6 million for the three months ended March 31, 1999 and 1998,
respectively. Interest expense was allocated in 1998 between continuing
operations and discontinued operations based on net assets of the respective
business units. Interest expense from continuing operations for the three
months ended March 31, 1998 totaled $3.9 million.
PROVISION FOR INCOME TAXES. The provision for income taxes for the
current quarter was $7.1 million, compared with $5.0 million for 1998. The
Company's effective tax rate of 42.0 percent includes the effects of state
income taxes and the portion of goodwill amortization not deductible for
federal income tax purposes.
INCOME FROM CONTINUING OPERATIONS. Due to the factors described above,
income from continuing operations for 1999 was $9.8 million (3.9 percent of
revenues) compared with $6.9 million (3.8 percent of revenues) for 1998.
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, 1999, the Company made cash
payments for acquisitions of $197.6 million. These payments were comprised of
(i) $133.4 million paid to sellers of businesses acquired in 1999 and (ii)
$64.2 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, 1999, the Company accrued $25.4
million for Earnouts that will be paid by the end of June 1999. The remaining
Earnouts are capped at $184.5 million and are generally tied to operating
performance for the full year 1999. Based on current growth rates and operating
trends, the Company estimates the remaining Earnouts will be approximately
$112.4 million. The majority of these Earnouts are expected to be paid in the
first half of 2000. The Company expects to fund the payment of the Earnouts out
of borrowings under its Senior Credit Agreement.
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Capital expenditures totaled $11.0 million and $7.8 million for the
three months ended March 31, 1999 and 1998, respectively. The majority of these
expenditures related to (i) the development of an integrated front and back
office information system for the staffing services business, which was
included with the sale of that business, (ii) development of an integrated
enterprise wide information system, (iii) computer equipment and software for
technical consultants and (iv) furniture, fixtures and equipment related to
business expansion.
The Company estimates that capital expenditures for 1999 will be
approximately $50.0 million, approximately one-half of which relates to the
development and implementation of a back office system for all business units
and the enhancement or replacement of the existing front office systems. The
new back office system is expected to be operational in mid-1999 and most of
the business units will be transitioned to the new system by the end of 1999.
The remaining planned capital expenditures for 1999 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 $150.4 million and $53.5 million at
March 31, 1999 and 1998, respectively. The Company had cash and cash
equivalents of $31.2 million and $21.6 million at March 31, 1999 and 1998,
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 $23.3 million and $3.4 million for the three months ended March 31, 1999
and 1998, respectively.
Under terms of the Company's Senior Credit Agreement, the Company may
borrow under its revolving credit facility the lesser of $400 million or 3.5
times Pro Forma Adjusted EBITDA (earnings before interest, income taxes,
depreciation and amortization of all acquired businesses for the preceding
twelve-month period). 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 0.175 percent to 0.375 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 5.25 times Pro Forma Adjusted EBITDA, limit
the payment of dividends and require the maintenance of certain financial
ratios.
As of March 31, 1999, the Company had outstanding borrowings under the
Senior Credit Agreement of $283.0 million and remaining availability (after
deducting outstanding letters of credit of $1.8 million) of $115.2 million. The
weighted average interest rate of the Company's outstanding borrowings under
the Senior Credit Agreement was 5.91 percent at March 31, 1999.
In March 1999, the Company reinstated its stock repurchase program and
since that time has repurchased approximately 0.4 million shares of common stock
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.
To meet its longer-term capital requirements, the Company is involved
in discussions with its lead commercial banks to expand its senior borrowing
capacity. Based on the growth that has occurred in the Company's Pro Forma
EBITDA since the commitment levels were last set, the Company believes that it
will be able to sufficiently increase its senior borrowing capacity to meet its
longer-term capital requirements. The Company expects the expanded credit
facility to be in place by the end of the second quarter of 1999.
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.
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YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. Any of
the Company's computer programs or hardware that have date-sensitive software
or embedded chips may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it will be
required to modify, replace or delete portions of its software and hardware so
that those systems will properly utilize dates beyond December 31, 1999. The
Company currently believes that, with modifications of existing software and
hardware, the Year 2000 issue can be mitigated. However, if such modifications
and replacements are not made, or are not completed timely, the Year 2000 issue
could have a material adverse impact on the operations of the Company.
The Company's plan to resolve the Year 2000 issue involves the
following four phases: assessment, remediation, testing and implementation. To
date, the Company has completed its assessment of all critical systems that
could be significantly affected by the Year 2000. Based on this assessment, the
Company has selected Year 2000 compliant software and hardware to replace
certain systems that are not Year 2000 compliant.
For its information technology exposures, to date the Company is 100
percent complete on the remediation phase and expects to complete reprogramming
and replacement no later than mid-1999. Once the applicable software and
hardware is reprogrammed or replaced, the Company begins testing and
implementation. These phases run concurrently for different systems. To date,
the Company has completed 75 percent of its testing and has implemented 50
percent of its remedied systems. Completion of the testing phase for all
significant systems is expected by mid-1999, with all remedied systems fully
tested and implemented with 100 percent completion targeted for September 30,
1999.
The Company has completed its initial assessment of key vendors,
customers and other parties to assess the impact, if any, on the Company's
business operations. The Company has not encountered any material Year 2000
compliance issues. However, the Company will continue to assess new
relationships formed with key vendors, customers and other parties. The Company
has not incurred and does not expect to incur significant costs related to Year
2000 issues other than the time of internal personnel to complete the Company's
Year 2000 plans.
Management believes that it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all phases of the Year 2000 program. In the event that the
Company does not complete any additional phases, the Company would be unable to
service and invoice customers or collect payments in a timely manner. In
addition, disruptions in the economy generally resulting from Year 2000 issues
could also materially adversely affect the Company. The Company could be subject
to litigation for computer systems product failure. The amount of potential
liability and lost revenue cannot be reasonably estimated at this time.
The Company has contingency plans for certain critical applications
and is working on such plans for others. These contingency plans involve, among
other actions, manual workarounds and adjusting staffing strategies. Manual
workarounds would consist of preparing billings and cash disbursements from
hard copy source documents, which are currently maintained by 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
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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, 1998.
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, 1998.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
A Form 8-K Current Report dated January 10, 1999 was filed
with the Securities and Exchange Commission reporting that
the Company had entered into an Agreement and Plan of
Reorganization with SPR Inc. The Company also reported that
it had rescinded its stock repurchase program.
A Form 8-K Current Report dated March 15, 1999 was filed with
the Securities and Exchange Commission reporting the
announcement of the termination of the Agreement and Plan of
Reorganization with SPR Inc. and the reinstatement of the
Company's stock repurchase program.
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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, 1999 By: /s/ EDWARD L. PIERCE
-----------------------------------
Edward L. Pierce
Senior Vice President, Chief Financial
Officer and Assistant Secretary
(Duly Authorized Officer and Principal
Financial Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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27 Financial Data Schedule