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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 June 30, 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
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 August 10, 1999, the Company had 34,239,398 shares of Common
Stock, par value $0.01 per share, outstanding.
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METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
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 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 32,666 $ 27,613
Accounts receivable, net of allowance of $5,456 and $3,055 172,613 94,045
Prepaid expenses and other 20,070 10,608
Deferred income taxes and other 1,278 --
----------- -----------
Total current assets 226,627 132,266
Net Assets Held for Sale 316,949 278,176
Fixed Assets, net 45,642 27,970
Intangible Assets, net of accumulated amortization of $10,411 and $6,261 534,507 257,405
Investments and Other 9,137 7,851
----------- -----------
Total Assets $ 1,132,862 $ 703,668
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Term notes $ 19,000 $ --
Current maturities of long-term debt 43 2,124
Accounts payable and accrued expenses 41,640 23,141
Payroll and related taxes 21,176 27,821
Amounts due sellers of acquired businesses 17,907 51,311
Deferred income taxes and other 9,444 20,020
----------- -----------
Total current liabilities 109,210 124,417
Long-term Debt, net of current maturities 579,027 238,076
Deferred Income Taxes and Other 13,114 2,430
Minority Interests 2,032 --
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; 34,080,147
and 32,408,448 shares issued and outstanding 341 324
Additional paid-in capital 298,507 225,075
Retained earnings 133,885 114,361
Accumulated other comprehensive income (3,254) (1,015)
------------ -----------
Total stockholders' equity 429,479 338,745
------------ -----------
Total Liabilities and Stockholders' Equity $ 1,132,862 $ 703,668
============ ===========
</TABLE>
See notes to unaudited consolidated financial statements.
3
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METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues from Services $ 154,011 $ 82,820 $ 275,712 $ 147,756
Cost of Services 92,408 49,353 161,737 88,615
---------- ---------- ---------- ----------
Gross Profit 61,603 33,467 113,975 59,141
Operating Costs and Expenses:
Selling, general and administrative 40,654 21,915 75,899 39,496
Depreciation and amortization 5,175 2,129 8,971 3,734
---------- ---------- ---------- ----------
45,829 24,044 84,870 43,230
---------- ---------- ---------- ----------
Operating Income 15,774 9,423 29,105 15,911
Other Income (Expense):
Interest expense (5,676) (2,071) (8,758) (3,515)
Minority interests (273) - (1,498) -
Other, net 262 100 140 49
---------- ---------- ---------- ----------
(5,687) (1,971) (10,116) (3,466)
---------- ---------- ---------- ----------
Income from Continuing Operations before
Income Taxes 10,087 7,452 18,989 12,445
Provision for Income Taxes 4,237 3,130 7,975 5,227
---------- ---------- ---------- ----------
Income from Continuing Operations 5,850 4,322 11,014 7,218
Income from Discontinued Operations,
net of income taxes 3,860 5,783 8,510 11,694
---------- ---------- ---------- ----------
Net Income $ 9,710 $ 10,105 $ 19,524 $ 18,912
========== ========== ========== ==========
Earnings per Common Share (Basic and Diluted):
Income from Continuing Operations $ 0.17 $ 0.13 $ 0.33 $ 0.22
Income from Discontinued Operations 0.11 0.17 0.25 0.35
---------- ---------- ---------- ----------
Net Income $ 0.28 $ 0.30 $ 0.58 $ 0.57
========== ========== ========== ==========
Reconciliation of Net Income to Comprehensive Income:
Net Income $ 9,710 $ 10,105 $ 19,524 $ 18,912
Currency translation adjustments (2,241) (495) (2,239) (477)
---------- ---------- ---------- ----------
Comprehensive Income $ 7,469 $ 9,610 $ 17,285 $ 18,435
========== ========== ========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
4
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METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 19,524 $ 18,912
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 13,768 9,971
Amortization of debt costs and discount on convertible notes 2,783 2,674
Deferred income tax provision 3,548 204
Provision for doubtful accounts 783 2,535
Other 71 (1,584)
Changes in assets and liabilities net of effects of acquisitions:
Accounts receivable (53,771) (41,120)
Prepaid expenses and other (13,600) 7,065
Accounts payable 13,512 26,879
Accrued liabilities (15,767) (11,088)
----------- ------------
Net cash provided by (used in) operating activities (29,149) 14,448
----------- -----------
Cash Flows from Investing Activities:
Cash paid for acquisitions, net of cash acquired (283,617) (150,077)
Capital expenditures (23,584) (16,286)
Cash paid to buyer of staffing services business (10,888) -
Other (1,280) (4,862)
----------- -----------
Net cash used in investing activities (319,369) (171,225)
----------- -----------
Cash Flows from Financing Activities:
Short-term borrowings 19,000 --
Net proceeds from issuance of long-term debt 334,302 169,787
Net proceeds from sale of common stock 6,210 5,678
Repurchase of common stock (5,912) -
----------- -----------
Net cash provided by financing activities 353,600 175,465
----------- -----------
Net increase in cash and cash equivalents 5,082 18,688
Cash and cash equivalents at beginning of period 28,855 14,767
----------- -----------
Cash and cash equivalents at end of period 33,937 33,455
Less-Cash and cash equivalents related to discontinued
operations (1,271) (5,738)
----------- -----------
Cash and cash equivalents related to continuing
operations $ 32,666 $ 27,717
=========== ===========
Cash paid during the periods for:
Interest, net of amounts capitalized $ 10,576 $ 5,000
=========== ===========
Income taxes $ 13,732 $ 11,526
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
5
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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. DISCONTINUED OPERATIONS
In 1998, the Company sold its staffing services business and in May
1999, its management and Board of Directors approved a plan to sell its project
support and software solutions businesses. Accordingly, the net assets and
operating results of these businesses (including prior periods) are reflected in
the accompanying consolidated financial statements as discontinued operations.
On August 6, 1999, the Company completed the sale of its software solutions
business (See Note 10).
Revenues from discontinued operations were $123.9 million and $247.8
million for the three months ended June 30, 1999 and 1998, respectively, and
$251.2 million and $482.4 million for the six months ended June 30, 1999 and
1998, respectively. Income from discontinued operations includes an allocation
of interest expense based on net assets of the business units included in
continuing and discontinued operations. Interest expense of $3.1 million and
$3.8 million for the three months ended June 30, 1999 and 1998, respectively,
and interest expense of $5.2 million and $8.0 million for the six months ended
June 30, 1999 and 1998, respectively, was allocated to discontinued operations.
Income taxes on discontinued operations were $2.8 million and $4.2 million for
the three months ended June 30, 1999 and 1998, respectively, and $6.2 million
and $8.5 million for the six months ended June 30, 1999 and 1998, respectively.
Net assets of the discontinued operations consist primarily of accounts
receivable, fixed assets, intangibles and liabilities to be assumed.
3. 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.
4. 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. Summary information on the businesses
acquired during the six months ended June 30, 1999 and 1998 follows:
6
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METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Acquisitions completed:
Continuing operations 2 8
Discontinued operations(1) 1 2
----------- -----------
Total 3 10
=========== ===========
Purchase consideration (in thousands):
Cash paid $ 299,419 $ 154,176
Fair value of common stock issued 73,151 13,896
Amounts due sellers 17,907 --
Liabilities assumed 50,914 9,714
----------- -----------
Fair value of assets acquired (including intangibles) $ 441,391 $ 177,786
=========== ===========
- -------------------
(1) These acquisitions are included in net assets held for sale. Results of
operations have been reported as discontinued operations (See Note 2).
</TABLE>
In February 1999, the Company acquired 42 percent of the common stock
of Decan Groupe ("Decan"), a publicly held, French-based business, and
instituted a cash tender offer for the remaining shares. In April, the Company
completed the tender offer and at June 30, 1999, owned 98.4 percent of Decan's
common stock and 94.9 percent of its convertible notes. The purchase
consideration for Decan totaled approximately $157.9 million, consisting of
$151.6 million in cash and 0.2 million shares of the Company's common stock
valued at $6.3 million.
In March 1999, the Company acquired GE Capital Consulting, a
wholly-owned subsidiary of GE Capital Corporation, for approximately $117.3
million, consisting of $52.0 million in cash and 1.2 million 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.
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
six months ended June 30, 1999, Earnouts of $89.6 million were paid to sellers.
At June 30, 1999, the maximum contractual amount of Earnouts based on future
increases in EBIT totaled $192.3 million. The payment of any contingent
consideration will increase goodwill.
The following results of operations have been prepared assuming the
acquisitions made through June 30, 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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1999 1998
--------------- ---------------
(in thousands, except
per share amounts)
<S> <C> <C>
Revenues from services $ 298,287 $ 243,820
Income from continuing operations $ 11,447 $ 4,467
Net income $ 22,169 $ 19,502
Earnings per share:
Basic
Income from continuing operations $ 0.34 $ 0.13
========== ==========
Net income $ 0.59 $ 0.51
========== ==========
Diluted
Income from continuing operations $ 0.34 $ 0.13
========== ==========
Net income $ 0.59 $ 0.50
========== ==========
</TABLE>
7
<PAGE> 8
METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. SHORT-TERM BORROWINGS
On June 30, 1999, the Company entered into a $50 million Term Loan
Agreement (the "Term Loan") with certain banks in its Senior Credit Agreement.
Borrowings under the Term Loan bear interest, at the Company's option, at LIBOR
plus 3 percent or the bank's base rate plus 1.75 percent and are payable October
14, 1999. As of June 30, 1999, the Company had $19 million outstanding under the
facility. The Term Loan was repaid on August 6, 1999 with proceeds from the
sale of the Company's software solutions business (See Note 10).
6. 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 June 30, 1999, the Company had $379.7 million of outstanding
borrowings under the Agreement and remaining availability (after deducting
outstanding letters of credit of $1.8 million) of $18.5 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 6.5 percent at
June 30, 1999.
7. COMMON STOCK
Under terms of a share repurchase program approved by the Board of
Directors, the Company purchased 0.4 million shares of common stock during the
six months ended June 30, 1999, at an average price per share of $14.46.
8
<PAGE> 9
METAMOR WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. 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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Income from continuing operations - numerator for
basic earnings per share $ 5,850 $ 4,322 $ 11,014 $ 7,218
Effect of dilutive securities:
2.94% convertible subordinated notes - - - -
--------- --------- --------- ---------
Numerator for diluted earnings per share - income
available to common stockholders after assumed
conversions $ 5,850 $ 4,322 $ 11,014 $ 7,218
========= ========= ========= =========
Denominator:
Denominator for basic earnings per share -
weighted-average shares 33,930 32,835 33,330 32,605
Effect of dilutive securities:
Stock options 224 708 220 657
2.94% convertible subordinated notes - - - -
--------- --------- --------- ---------
Dilutive potential common shares 224 708 220 657
--------- --------- --------- ---------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversions 34,154 33,543 33,550 33,262
========= ========= ========= =========
Basic earnings per share $ 0.17 $ 0.13 $ 0.33 $ 0.22
========= ========= ========= =========
Diluted earnings per share $ 0.17 $ 0.13 $ 0.33 $ 0.22
========= ========= ========= =========
</TABLE>
Options to purchase 2,284,214 shares and 62,367 shares of common stock
for the three months ended June 30, 1999 and 1998, respectively, and 2,284,214
shares and 88,494 shares of common stock for the six months ended June 30, 1999
and 1998, respectively, were outstanding, but were not included in the
computation of diluted earnings per share because the exercise prices of those
options exceeded 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.
9. SEGMENT REPORTING
The Company's continuing operations are comprised of five separate
service units. For segment reporting purposes, these units are aggregated and
reported as a single segment as they have very similar operational
characteristics, growth rates and margins. Services provided by these units
include application development and maintenance, systems integration and network
design and implementation.
The Company has both domestic and foreign operations. As of and for the
six-months ended June 30, 1999, the foreign operations had total assets of $177
million and total revenues of $30 million, respectively.
10. SUBSEQUENT EVENT
On August 6, 1999, the Company completed the sale of its software
solutions business (the "Software Business") to GTCR Fund VI, L.P. for
approximately $96 million. The purchase consideration consisted of $75.5 million
in cash and preferred stock in the Software Business having a stated value of
$20.5 million. The Company retained 2.7 million shares of common stock of the
Software Business representing 10 percent of the outstanding shares. The net
proceeds from the sale were used to repay the Company's term notes and the
remainder used to pay down outstanding borrowings under the Company's Senior
Credit Agreement.
9
<PAGE> 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 to focus
exclusively on its core solutions business, the Company sold its staffing
services business in 1998, and in May 1999, approved a plan to sell its project
support and software solutions businesses. The software solutions business was
sold in August 1999. Accordingly, the operating results of these businesses
(including prior periods) are reflected in the historical Consolidated Financial
Statements as discontinued operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999
COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Revenues $ 154,011 $ 82,820
Gross profit $ 61,603 $ 33,467
Operating income $ 15,774 $ 9,423
Income from continuing operations $ 5,850 $ 4,322
Net income $ 9,710 $ 10,105
Earnings per share (diluted):
Continuing operations $ 0.17 $ 0.13
Discontinued operations 0.11 0.17
---------- ----------
Net income $ 0.28 $ 0.30
========== ==========
</TABLE>
SUMMARY. Income from continuing operations for the three months ended
June 30, 1999 was $5.9 million, or $0.17 per share, compared with $4.3 million,
or $0.13 per share, for the three months ended June 30, 1998. Revenues for the
current quarter increased 86 percent to $154.0 million, up from $82.8 million in
the second quarter of 1998. This increase was the result of strong internal
growth, as well as the effects of acquisitions made after the second 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 84 percent to $61.6
million. This improvement is the result of the increase in revenues. Gross
margin for the current quarter was 40.0 percent compared with 40.4 percent in
the second quarter of 1998. The modest decline in gross margin primarily
resulted from acquisitions of businesses that had lower gross margins than the
Company's consolidated margin for the second quarter of 1998. On a pro forma
basis, which assumes all acquisitions were completed as of the beginning of the
periods presented, gross margin for the current quarter was 40.0 percent, up
from 39.6 percent for the second quarter of 1998. This improvement reflected pro
forma margin expansion in most of the business units.
Operating income for the three months ended June 30, 1999 increased 67
percent to $15.8 million, up from $9.4 million in the same period of 1998. The
operating margin for the current quarter was 10.2 percent compared with 11.4
percent for the second quarter of 1998. The decline in margin primarily related
to the acquisitions of
10
<PAGE> 11
businesses with lower operating margins (after considering the purchase
accounting adjustments) than the Company's consolidated margin for the second
quarter of 1998. On a pro forma basis, the consolidated operating margin was
10.2 percent, up from 9.7 percent for the second quarter of 1998. This
improvement reflected margin expansion in most of the business units.
OPERATING COSTS AND EXPENSES. Selling, general and administrative
("SG&A") expenses for the three months ended June 30, 1999 totaled $40.7
million, compared with $21.9 million for the three months ended June 30, 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 $2.6 million and $1.1 million for the three months
ended June 30, 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 $2.6 million and $1.0 million for the three months
ended June 30, 1999 and 1998, respectively, related to amortization of
intangible assets of the acquired businesses.
NON-OPERATING COSTS AND EXPENSES. Interest expense totaled $8.8 million
and $5.9 million for the three months ended June 30, 1999 and 1998,
respectively. Interest expense was allocated between continuing operations and
discontinued operations based on net assets of the respective business units.
Interest expense from continuing operations for the current quarter totaled $5.7
million compared with $2.1 million for 1998.
PROVISION FOR INCOME TAXES. The provision for income taxes for the
current quarter was $4.2 million, compared with $3.1 million for 1998. The
Company's effective tax rate of 42 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 $5.9 million compared with $4.3
million for 1998.
INCOME FROM DISCONTINUED OPERATIONS. Income from discontinued
operations, net of applicable income taxes, for the current quarter was $3.9
million compared with $5.8 million for the second quarter of 1998. The decline
in income related to the sale of the Company's staffing services business in
July 1998 and a modest decline in revenues in the project support unit, which
was partially offset by improved operating leverage.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Revenues $ 275,712 $ 147,756
Gross profit $ 113,975 $ 59,141
Operating income $ 29,105 $ 15,911
Income from continuing operations $ 11,014 $ 7,218
Net income $ 19,524 $ 18,912
Earnings per share (diluted):
Continuing operations $ 0.33 $ 0.22
Discontinued operations 0.25 0.35
---------- ----------
Net income $ 0.58 $ 0.57
========== ==========
</TABLE>
SUMMARY. Income from continuing operations for the six months ended
June 30, 1999 was $11.0 million, or $0.33 per share, compared with $7.2 million,
or $0.22 per share, for the six months ended June 30, 1998. Net income for the
six months ended June 30, 1999, included one-time charges of $2.2 million, or
$0.04 per share after tax, that were incurred in the first quarter. The charges
related to costs incurred in connection with a terminated merger and severance
paid to an executive of the Company.
11
<PAGE> 12
Revenues for the first six months increased 87 percent to $275.7
million, up from $147.8 million in the second quarter of 1998. This increase was
the result of strong internal growth, as well as the effects of acquisitions
made since the second 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 first six months increased 93 percent to $114.0
million. This improvement related to the 87 percent increase in revenues and an
expansion in gross margin. Gross margin for the first six months was 41.3
percent, up from 40.0 percent in 1998.
During the six months ended June 30, 1999, the Company recorded
one-time charges of $2.2 million, or $0.04 per share after income tax.
Approximately $1.1 million of the charges 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 one-time charges 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 six months ended June
30, 1999 increased 83 percent to $29.1 million, up from $15.9 million in the
same period of 1998. The operating margin for the first six months was 10.6
percent compared with 10.8 percent for the same period in 1998. The decline in
margin primarily related to the acquisitions of businesses with lower operating
margins (after considering the purchase accounting adjustments) than the
Company's consolidated margin for the same period in 1998. On a pro forma basis,
the consolidated operating margin was 9.9 percent, up from 9.2 percent for the
first six months of 1998. This improvement reflected pro forma margin expansion
in most of the business units.
OPERATING COSTS AND EXPENSES. Selling, general and administrative
("SG&A") expenses for the six months ended June 30, 1999 totaled $75.9 million,
compared with $39.5 million for the six months ended June 30, 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 $4.8 million and $2.0 million for the six months
ended June 30, 1999 and 1998, respectively. Amortization of $4.2 million and
$1.7 million for the first six months of 1999 and 1998, respectively, related to
amortization of intangible assets of the acquired businesses.
NON-OPERATING COSTS AND EXPENSES. Interest expense totaled $13.9
million and $11.5 million for the six months ended June 30, 1999 and 1998,
respectively. Interest expense was allocated between continuing operations and
discontinued operations based on net assets of the respective business units.
Interest expense from continuing operations totaled $8.8 million and $3.5
million for the six months ended June 30, 1999 and 1998, respectively.
PROVISION FOR INCOME TAXES. The provision for income taxes for the
first six months was $8.0 million, compared with $5.2 million for 1998. The
Company's effective tax rate of 42 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 $11.0 million compared with $7.2
million for 1998.
INCOME FROM DISCONTINUED OPERATIONS. Income from discontinued
operations, net of applicable income taxes, for the first six months of 1999
was $8.5 million compared with $11.7 million for the same period in 1998. The
decline in income related to the sale of the Company's staffing services
business in July 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 six months ended June 30, 1999, the Company made cash
payments for acquisitions of $299.4 million. These payments were comprised of
(i) $209.8 million paid to sellers of businesses acquired in 1999 and (ii) $89.6
million of post-closing purchase consideration ("Earnouts") paid to sellers
based on the post-acquisition
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<PAGE> 13
increase in earnings before interest and taxes ("EBIT"), as defined. The
remaining Earnouts are capped at $192.3 million and are generally tied to
operating performance for the full year 1999 and 2000. Based on current growth
rates and operating trends, the Company estimates the remaining Earnouts will be
approximately $77.7 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.
Capital expenditures totaled $24 million and $16 million for the six
months ended June 30, 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 the remainder of
1999 will be approximately $15 million. 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 $117.4 million and $7.8 million at
June 30, 1999 and 1998, respectively. The Company had cash and cash equivalents
of $33 million and $28 million at June 30, 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
generally receives payments from customers within 30 to 80 days from the date of
invoice. Cash flows provided by (used in) operating activities were $(29)
million and $14 million for the six months ended June 30, 1999 and 1998,
respectively.
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.
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 June 30, 1999, the Company had outstanding borrowings under the
Senior Credit Agreement of $379.7 million and remaining availability (after
deducting outstanding letters of credit of $1.8 million) of $18.5 million. The
weighted average interest rate of the Company's outstanding borrowings under the
Senior Credit Agreement was 6.5 percent at June 30, 1999.
On June 30, 1999, the Company entered into a term loan agreement with
certain banks in its Senior Credit Agreement. Under terms of this agreement, the
Company may borrow up to $50 million. Borrowings under the agreement are due
October 14, 1999, bear interest, at the Company's option, at LIBOR plus 3
percent or the bank's base rate plus 1.75 percent. As of June 30, 1999, the
Company had $19 million outstanding under the agreement. The term loan was
repaid on August 6, 1999 with proceeds from the sale of the Company's software
solutions unit (see discussion below).
In May 1999, the Company's management and Board of Directors approved
a plan covering the sale of its project support and software solution units and
the sale to the public of up to 20 percent of the common shares of its eBusiness
unit. The Company expects to complete the sale of the project support unit by
September 30, 1999 and the initial public offering of the eBusiness common
stock by the end of 1999.
On August 6, 1999, the Company completed the sale of its software
solutions business. The cash proceeds of approximately $76 million were used to
repay all outstanding borrowings under its term loan agreement and the remainder
used to pay down borrowings under its Senior Credit Agreement.
Proceeds from the sale of the project support unit will be used to
pay down borrowings under the Company's Senior Credit Agreement. Upon closing of
the sale, the Company expects to replace its existing Senior Credit Agreement
with a new credit facility. This facility is expected to be sufficient to meet
its longer-term capital requirements.
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<PAGE> 14
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 its 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.
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 assessments performed in 1998, 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, the Company is 100 percent
complete on the remediation phase and has substantially completed its
reprogramming and replacement efforts. The Company is in the final stages of
testing and implementation of its internal systems and expects to be fully
compliant by 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
14
<PAGE> 15
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, 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.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ANNUAL MEETING OF STOCKHOLDERS HELD MAY 20, 1999
At the Annual Meeting of Stockholders held on May 20, 1999, there were
four matters submitted to a vote of stockholders. The first matter was the
election of Class I directors as set forth in the Company's Proxy Statement
relating to the meeting. With respect to such election, proxies were solicited
pursuant to Regulation 14 under the Exchange Act and there was no solicitation
in opposition to such nominees. Of the Company's 32,841,625 shares of record on
March 19, 1999, 31,492,469 were voted at the meeting in person or by proxy.
The following number of votes were cast as to the Class I Director nominees:
Kenneth R. Johnsen, 31,366,984 votes for and 125,485 votes withheld; Michael T.
Reddy, 31,366,984 votes for and 125,485 votes withheld; and Michael T.
Willis, 31,365,734 votes for and 126,735 votes withheld.
The second matter submitted was the approval of an amendment to the
Company's Employee Stock Purchase Plan as described in the Proxy Statement
relating to the meeting. The amendment was approved by the stockholders with
25,555,281 voting for approval, 783,449 voting against and 62,331 abstaining
from voting.
The third matter submitted was the approval of an amendment to the
Company's Long-Term Incentive Plan as described in the Proxy Statement relating
to the meeting. The amendment was approved by the stockholders with 19,139,707
voting for approval, 7,189,474 voting against and 71,880 abstaining from voting.
The fourth matter submitted was the approval and ratification of the
appointment of Ernst & Young LLP as the Company's independent auditors for the
fiscal year ending December 31, 1999. The appointment was approved by the
stockholders with 31,399,686 voting for approval, 77,786 voting against and
14,997 abstaining from voting.
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 April 19, 1999 was filed with
the Securities and Exchange Commission reporting that the
Company had completed its tender offer for the publicly held
shares of Decan Groupe, a French company listed on the Paris
Stock Exchange Secondary Market and registered with the Lyon
Registry of Commerce and Companies.
16
<PAGE> 17
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: August 14, 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)
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
27 Financial Data Schedule
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 32,666
<SECURITIES> 0
<RECEIVABLES> 178,069
<ALLOWANCES> 5,456
<INVENTORY> 0
<CURRENT-ASSETS> 226,627
<PP&E> 45,642
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,132,862
<CURRENT-LIABILITIES> 109,208
<BONDS> 579,027
0
0
<COMMON> 341
<OTHER-SE> 429,140
<TOTAL-LIABILITY-AND-EQUITY> 1,132,862
<SALES> 0
<TOTAL-REVENUES> 275,712
<CGS> 0
<TOTAL-COSTS> 161,737
<OTHER-EXPENSES> 84,870
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,758
<INCOME-PRETAX> 18,989
<INCOME-TAX> 7,975
<INCOME-CONTINUING> 11,014
<DISCONTINUED> 8,510
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,524
<EPS-BASIC> 0.58
<EPS-DILUTED> 0.58
</TABLE>
