<PAGE>
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
SEPTEMBER 30, 1997
COMMISSION FILE NO.: 000-22035
METRO INFORMATION SERVICES, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1112301
(State of incorporation) (I.R.S. Employer Identification Number)
POST OFFICE BOX 8888, VIRGINIA BEACH, VIRGINIA 23450
(Address of principal executive office) (Zip Code)
(757) 486-1900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and has been subject to the
filing requirements for the past 90 days. Yes /X/ No / /
As of October 31, 1997, the registrant had issued and outstanding
14,810,000 shares of Common Stock, $.01 par value.
- -------------------------------------------------------------------------------
1
<PAGE>
METRO INFORMATION SERVICES, INC.
FORM 10-Q
Table of Contents
Page
Number
------
PART I. FINANCIAL INFORMATION:
ITEM 1. Balance Sheets as of
December 31, 1996 and September 30, 1997 (unaudited) 3
Statements of Income for the Three Months and
Nine Months Ended September 30, 1996 and 1997 (unaudited) 4
Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1997 (unaudited) 5
Statements of Changes in
Redeemable Common Stock And Shareholders' Equity for the Nine
Months Ended September 30, 1997 (unaudited) 6
Notes to Financial Statements (unaudited) 7
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION 16
SIGNATURES 18
2
<PAGE>
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
METRO INFORMATION SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
IN THOUSANDS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 157 $ 19,459
Accounts receivable, net.......................................................... 16,666 24,337
Prepaid expenses.................................................................. 112 331
Deferred income taxes (Note 4).................................................... -- 833
------------ -------------
Total current assets............................................................ 16,935 44,960
Property and equipment, net......................................................... 4,070 5,061
Other assets (Note 2)............................................................... 567 4,225
------------ -------------
Total assets.................................................................... $ 21,572 $ 54,246
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit facilities......................................................... $ 2,547 $ --
Accounts payable.................................................................. 1,146 2,315
Accrued compensation and benefits................................................. 6,874 9,296
------------ -------------
Total current liabilities....................................................... 10,567 11,611
Deferred income taxes (Note 4)...................................................... -- 604
------------ -------------
Total liabilities............................................................... 10,567 12,215
------------ -------------
Redeemable common stock............................................................. 2,651 --
Shareholders' equity
Preferred stock, $0.01 par value; authorized 1,000,000 shares; none issued and
outstanding..................................................................... -- --
Common stock, $0.01 par value, authorized 50,000,000 shares; issued and
outstanding 8,768,239 shares at December 31, 1996, 14,810,000 shares at
September 30, 1997 (Note 5)..................................................... 88 148
Paid in capital................................................................... -- 35,901
Retained earnings................................................................. 8,266 5,982
------------ -------------
Total shareholders' equity...................................................... 8,354 42,031
------------ -------------
Total liabilities and shareholders' equity.................................. $ 21,572 $ 54,246
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
METRO INFORMATION SERVICES, INC.
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ---------------------
1996 1997 1996 1997
--------- --------- --------- ----------
IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C>
Revenue.............................................................. $ 29,142 $ 40,569 $ 83,282 $ 109,498
Cost of revenue...................................................... 20,325 27,989 58,287 76,350
--------- --------- --------- ----------
Gross profit..................................................... 8,817 12,580 24,995 33,148
--------- --------- --------- ----------
Selling, general and administrative expenses......................... 6,187 7,944 17,664 21,869
Depreciation and amortization expense................................ 199 322 545 815
--------- --------- --------- ----------
Total operating expenses......................................... 6,386 8,266 18,209 22,684
--------- --------- --------- ----------
Operating income................................................. 2,431 4,314 6,786 10,464
--------- --------- --------- ----------
Interest income...................................................... 10 195 43 560
Interest expense..................................................... (70) (4) (252) (40)
--------- --------- --------- ----------
Net interest income (expense).................................... (60) 191 (209) 520
--------- --------- --------- ----------
Income before income taxes....................................... 2,371 4,505 6,577 10,984
Income taxes (Note 4)................................................ -- 1,802 -- 4,269
--------- --------- --------- ----------
Net income (Note 4).............................................. $ 2,371 $ 2,703 $ 6,577 $ 6,715
--------- --------- --------- ----------
--------- --------- --------- ----------
Pro forma income data:
Income before income taxes....................................... $ 2,371 $ 4,505 $ 6,577 $ 10,984
Provision for income taxes....................................... 948 1,802 2,631 4,269
--------- --------- --------- ----------
Net income....................................................... $ 1,423 $ 2,703 $ 3,946 $ 6,715
--------- --------- --------- ----------
--------- --------- --------- ----------
Net income per share (Note 4)........................................ $ 0.11 $ 0.18 $ 0.31 $ 0.46
--------- --------- --------- ----------
--------- --------- --------- ----------
Weighted average number of shares of common stock and common stock
equivalents outstanding............................................ 12,862 14,800 12,849 14,544
--------- --------- --------- ----------
--------- --------- --------- ----------
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
METRO INFORMATION SERVICES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
------------------------------
1996 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 6,576,577 $ 6,715,060
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization--cost of revenue............ -- 21,213
Depreciation and amortization--selling, general &
administrative expenses................................. 545,340 815,271
Net loss on sale of property and equipment................ 10,812 35,983
Deferred taxes............................................ -- (228,994)
Changes in operating assets and liabilities increasing
(decreasing) cash, net of the effects of acquisitions:
Accounts receivable..................................... (3,040,495) (7,403,998)
Prepaid expenses........................................ (74,359) (219,033)
Accounts payable........................................ 292,340 1,087,884
Accrued compensation and benefits....................... 2,269,403 2,394,601
----------- -----------
Net cash provided by operating activities............. 6,579,618 3,217,987
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment....................... (1,698,347) (1,750,903)
Acquisition of businesses, net of cash acquired............. -- (4,352,920)
Proceeds from sale of property and equipment................ 8,368 14,193
Increase in other assets.................................... (90,169) (62,542)
----------- -----------
Net cash used in investing activities................. (1,780,148) (6,152,172)
----------- -----------
Cash flows from financing activities:
Net repayments under line of credit......................... (2,649,977) (2,547,388)
Decrease in other assets related to issuance of
2,300,000 shares........................................... -- 471,849
Proceeds from issuance of redeemable common stock........... 476,595 --
Proceeds from issuance of 2,300,000 shares.................. -- 33,143,634
Proceeds from issuance of 10,000 shares to Employee Stock
Purchase Plan............................................... -- 167,350
Distributions to shareholders............................... (3,249,240) (9,000,000)
Advances on notes receivable--related parties............... (125,000) --
Repayment of notes receivable--related parties.............. 755,260 --
----------- -----------
Net cash provided (used) by financing activities...... (4,792,362) 22,235,445
----------- -----------
Net increase in cash and cash equivalents....................... 7,108 19,301,260
Cash and cash equivalents at beginning of period................ 116,835 157,372
----------- -----------
Cash and cash equivalents at end of period...................... $ 123,943 $ 19,458,632
----------- ------------
----------- ------------
Supplemental disclosure of cash flow information -
Cash paid for interest...................................... $ 252,063 $ 40,589
----------- ------------
----------- ------------
Cash paid for income taxes.................................. $ -- $ 4,307,557
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
METRO INFORMATION SERVICES, INC.
STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
REDEEMABLE -------------------------------------------------------
COMMON STOCK COMMON STOCK
--------------------- -------------------- PAID IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ---------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1996......... 3,731,761 $2,650,893 8,768,239 $ 87,682 $ -- $8,266,480 $8,354,162
Release of redemption feature on
redeemable common stock............... (3,731,761) (2,650,893) 3,731,761 37,318 2,613,575 -- 2,650,893
Distributions paid...................... -- -- -- -- -- (9,000,000) (9,000,000)
Net proceeds from issuance of 2,300,000
shares of common stock................ -- -- 2,300,000 23,000 33,120,634 -- 33,143,634
Net proceeds from issuance of 10,000
shares of common stock to Employee
Stock Purchase Plan................... -- -- 10,000 100 167,250 -- 167,350
Net income.............................. -- -- -- -- -- 6,715,060 6,715,060
--------- ---------- --------- --------- ---------- ---------- ---------
Balance as of September 30, 1997........ -- $ -- 14,810,000 $ 148,100 $35,901,459 $5,981,540 $42,031,099
--------- ---------- --------- --------- ---------- --------- ----------
--------- ---------- --------- --------- ---------- --------- ----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
METRO INFORMATION SERVICES, INC.
Notes to Financial Statements
(unaudited)
1. Basis of Presentation
The information presented for September 30, 1996 and 1997, and for the
three-month and nine-month periods then ended, is unaudited, but, in the
opinion of the Company's management, the accompanying unaudited financial
statements contain all adjustments (consisting only of normal recurring
adjustments) which the Company considers necessary for the fair presentation
of the Company's financial position as of September 30, 1997 and the results
of its operations and its cash flows for the three-month and nine-month
periods ended September 30, 1996 and 1997. The financial statements included
herein have been prepared in accordance with generally accepted accounting
principles and the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1996, which were
included as part of the Company's Annual Report on Form 10-K (File No.
000-22035) and in conjunction with the Company's Registration Statement on
Form S-1 (Registration No. 33-16585) declared effective by the Commission on
January 29, 1997. Certain 1996 amounts have been reclassified for
comparability with the 1997 financial statement presentation.
Results for the interim periods presented are not necessarily indicative of
results that may be expected for the entire year.
2. Acquisitions
On July 1, 1997, the Company completed the acquisition of two information
services technology companies using a portion of the proceeds from the
Company's initial public offering completed in January 1997. The Company
acquired the business operations of Data Systems Technology, Inc. (DST),
which had offices in Columbia and Greensboro, South Carolina, for $133,930
with up to an additional $366,070 contingency payment due in the third
quarter of 1998, assuming certain operating income targets are attained by
the acquired business. The Company also acquired the business operations of
Kansas City-based J2, Inc. d.b.a. DP Career Associates (DPCA), for $3.9
million with up to an additional $1.3 million contingency payment due in the
first quarter of 1998, assuming certain gross profit targets are attained by
the acquired business. Each acquisition is accounted for as a purchase. In
connection with these acquisitions, the Company recorded approximately
$4,096,000 of goodwill which is being amortized on a straight-line basis over
30 years.
3. Goodwill
Goodwill represents the excess of cost over fair value of net tangible
assets acquired through acquisitions and is amortized on a straight-line
basis over its estimated useful life, generally 30 years. Management
periodically assesses whether there has been a permanent impairment in the
value of goodwill. The amount of such impairment is determined by comparing
anticipated undiscounted future cash flows to the carrying value of the
related goodwill.
4. Income Taxes and Pro Forma Income Taxes
Before January 1, 1997, the Company, with the consent of its
shareholders, was taxed under the provisions of Subchapter S of the Internal
Revenue Code of 1986, which provides that, in lieu of corporate income taxes,
the shareholders of the S Corporation are taxed on their proportionate share
of the Company's taxable income. Therefore, pro forma income taxes shown for
periods ending in 1996 represent the estimated amount of income taxes the
Company would have reported had the Company been a C Corporation for that
period taxable at an assumed effective tax rate of 40%.
7
<PAGE>
Effective January 1, 1997, the Company terminated its S Corporation
election and became a C Corporation subject to corporate income taxes. The
cumulative effect of this change, through September 30, 1997, is to reduce
income taxes appearing on the Statement of Income for the nine months ended
September 30, 1997 by $125,000 and create a current deferred tax asset and a
long-term deferred tax liability. The balances of the deferred tax accounts
relate primarily to differences in the timing of deductions of health care
claims reserves, vacation liabilities, depreciation and amortization for
financial statement and tax purposes.
5. Initial Public Offering
On January 29, 1997, the Company consummated an initial public offering
of 3,100,000 shares of its Common Stock at a price of $16.00 per share, of
which 2,300,000 shares were issued and sold by the Company and 800,000 shares
were sold by a shareholder of the Company. Shortly thereafter the
representatives of the several underwriters exercised their over-allotment
option resulting in the sale of 465,000 shares by other shareholders of the
Company. The net proceeds to the Company from the offering were $33,144,000.
The Company did not receive any proceeds from the sale of shares by the
selling shareholders.
6. Credit Facilities
On June 29, 1997, the Company completed an expansion and extension of its
credit facilities to $39,900,000. The facilities are provided in equal
amounts by three banks and have a five-year maturity which may be extended
each year for an additional year. If the facilities are not extended,
principal on one of the facilities must be repaid in four equal annual
installments while the other two facilities require principal repayment at
the end of four years. Until that time interest only is payable monthly.
Two of the facilities allow the Company to select among prime rate and London
Interbank Offered Rate (LIBOR) based interest rates while the third has only
LIBOR based interest rates. All of the facilities have interest rates that
increase as the balance outstanding under the facilities increases. At
September 30, 1997, no amounts were outstanding under the facilities. The
Company has selected a 30-day LIBOR based rate which at September 30, 1997
would have ranged from 6.0% to 6.6%. The facilities also contain fees,
ranging from 0.125% to 0.3125% annually, which are charged on the unused
portion of the facilities. The facilities are collateralized by accounts
receivable of the Company.
The credit facilities include several covenants requiring the maintenance
of certain tangible net worth and debt service coverage ratios and imposing
limits on incurring additional indebtedness. Amounts advanced under the
facilities can be used for acquisitions and general working capital purposes.
8
<PAGE>
PART I
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary statement under the "Safe-Harbor" provisions of the Private
Securities Litigation Reform Act of 1995: Included in this report and other
information presented by management from time to time, including, but not
limited to, the Annual Report to Shareholders, quarterly shareholder letters,
filings with the Securities and Exchange Commission, news releases and
investor presentations, are forward-looking statements about business
strategies, market potential, future financial performance and other matters
which reflect management's expectations as of the date of this report.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation: the
Company's ability to attract, develop and retain qualified consultants, the
Company's ability to open new offices, the Company's ability to effectively
identify, manage and integrate acquisitions, changes in staff utilization and
productivity rates, the Company's ability to acquire or develop additional
service offerings, client decisions to reduce or increase IT services
outsourcing, early termination of client contracts without penalty, changes
in the Company's dependence on significant clients, changes in gross margins
due to a variety of factors, the types of services performed by the Company
during a particular period and competition. Please refer to a discussion of
these and other factors in the Company's Prospectus dated January 29, 1997,
the Company's Annual Report on Form 10-K and other Securities and Exchange
Commission filings. The Company disclaims any intent or obligation to update
publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.
Overview
Metro Information Services, Inc. ("Metro" or the "Company") provides a
wide range of information technology ("IT") consulting and custom software
development services through 29 offices in the United States and Puerto Rico.
The Company's more than 1,640 consultants, 65% of whom are salaried, work
with clients' internal IT departments on all aspects of computer systems and
applications development. Services performed by Metro include application
systems development and maintenance, IT architecture and engineering, systems
consulting, project outsourcing and general support services. The Company
supports all major computer technology platforms (mainframe, mid-range,
client/server and network environments) and supports client projects using a
broad range of software applications. For example, the Company implements
SAP's client/server software, custom develops Oracle, Informix, DB2,
VisualBasic and C++ applications, implements and supports Windows NT, Novell
and UNIX based network environments and supports numerous other application
environments.
Metro's clients operate in a wide variety of industries including
communications, distribution, financial services, health care, information
technology, manufacturing and utilities. The Company emphasizes long-term
relationships with its clients rather than one-time projects or assignments.
During the 12 months ended September 30, 1997, the Company performed IT
services for 376 clients (excluding clients that generated less than $25,000
in revenue during such period).
Revenue growth is derived primarily from increases in the number of
consultants placed with existing and new clients. Between September 30, 1996
and September 30, 1997, the number of full time consultants grew from 1,266
to 1,644, including consultants gained through acquisitions. In addition,
over the same period, the Company increased the average billing rates charged
to clients for consultants in an attempt to keep pace with the increased
costs of consultants.
The Company's past financial performance should not be relied on as an
indication of future performance. Period-to-period comparisons of the
Company's financial results are not necessarily meaningful indicators of
future performance.
9
<PAGE>
Results of Operations
For purposes of the following discussion, a mature office is an office
that was owned by the Company for at least 12 months at the beginning of the
earlier period being compared and a new office is an office opened or
acquired thereafter.
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
Revenue. Revenue increased $11.5 million, or 39.2%, to $40.6 million for
the three months ended September 30, 1997 from $29.1 million for the three
months ended September 30, 1996. This increase is primarily a result of
increased billings to existing clients, the addition of new clients
(including clients gained through acquisitions) and increased billing rates
charged for the Company's consultants.
Cost of revenue. Cost of revenue increased $7.7 million, or 37.7%, to
$28.0 million for the three months ended September 30, 1997 from $20.3
million for the three months ended September 30, 1996. Cost of revenue
increased primarily due to compensation and benefits associated with growth
in the number of consultants. As a percentage of revenue, cost of revenue
decreased to 69.0% for the three months ended September 30, 1997 from 69.7%
for the three months ended September 30, 1996 primarily because the costs of
certain fringe benefits grew more slowly during the quarter.
Gross profit. Gross profit increased $3.8 million, or 42.7%, to $12.6
million for the three months ended September 30, 1997 from $8.8 million for
the three months ended September 30, 1996. As a percentage of revenue, gross
profit increased to 31.0% for the three months ended September 30, 1997 from
30.3% for the three months ended September 30, 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.7 million, or 28.4%, to $7.9 million for
the three months ended September 30, 1997 from $6.2 million for the three
months ended September 30, 1996. This increase is due primarily to costs
associated with recently opened offices, growth of administrative staff in
mature offices, hiring additional corporate staff to support the increased
number of offices and development of the Company's proprietary business
systems. As a percentage of revenue, selling, general and administrative
expenses decreased to 19.6% for the three months ended September 30, 1997
from 21.3% for the three months ended September 30, 1996.
Depreciation and amortization expense. Depreciation and amortization
expense increased $123,000, or 61.8%, to $322,000 for the three months ended
September 30, 1997 from $199,000 for the three months ended September 30,
1996. This increase is primarily attributable to depreciation on new computer
equipment and software and, to a lesser extent, amortization of goodwill
related to the Company's recent acquisitions. As a percentage of revenue,
depreciation and amortization expense increased to 0.8% for the three months
ended September 30, 1997 from 0.7% for the three months ended September 30,
1996.
Operating income. Operating income increased $1.9 million, or 77.5%, to
$4.3 million for the three months ended September 30, 1997 from $2.4 million
for the three months ended September 30, 1996. As a percentage of revenue,
operating income increased to 10.6% for the three months ended September 30,
1997 from 8.3% for the three months ended September 30, 1996. The
improvement in operating income margin is in part the result of the Company's
centralization of administrative functions and leverage obtained from the
Company's proprietary business systems.
Net interest income (expense). Net interest income (expense) increased
by $251,000 to $191,000 of interest income for the three months ended
September 30, 1997 from $60,000 of interest expense for the three months
ended September 30, 1996. This change reflects a decrease in the average
level of borrowings during the period and investment of a portion of the
proceeds of the Company's January 1997 initial public offering of common
stock in interest bearing instruments.
10
<PAGE>
Income before income taxes. Income before income taxes increased $2.1
million, or 90.0%, to $4.5 million for the three months ended September 30,
1997 from $2.4 million for the three months ended September 30, 1996. As a
percentage of revenue, income before income taxes increased to 11.1% for the
three months ended September 30, 1997 from 8.1% for the three months ended
September 30, 1996.
Income taxes. In 1996, the Company was an S Corporation for federal and
certain state income tax purposes. The income statement for the three months
ended September 30, 1996 includes a pro forma provision for income taxes as
if the Company was subject to federal and state income taxes at an assumed
effective rate of 40%. The Company's effective tax rate for the three months
ended September 30, 1997 was 40.0%. Income taxes increased $854,000 or
90.1%, to $1.8 million for the three months ended September 30, 1997 from pro
forma income taxes of $948,000 for the three months ended September 30, 1996.
As a percentage of revenue, income taxes increased to 4.4% for the three
months ended September 30, 1997 from the proforma amount of 3.2% for the
three months ended September 30, 1996.
Net Income. Net income increased $1.3 million, or 90.0%, to $2.7 million
for the three months ended September 30, 1997 from pro forma net income of
$1.4 million for the three months ended September 30, 1996. As a percentage
of revenue, net income increased to 6.7% for the three months ended September
30, 1997 from the pro forma amount of 4.9% for the three months ended
September 30, 1996.
Earnings Per Share. Earnings per share increased $0.07, or 63.6%, to
$0.18 for the three months ended September 30, 1997 from pro forma earnings
per share of $0.11 for the three months ended September 30, 1996.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Revenue. Revenue increased $26.2 million, or 31.5%, to $109.5 million
for the nine months ended September 30, 1997 from $83.3 million for the nine
months ended September 30, 1996. This increase is primarily a result of
increased billings to existing clients, the addition of new clients and
increased billing rates charged for the Company's consultants. As of
September 30, 1997, compared to September 30, 1996, the total number of
full-time consultants increased to 1,644 from 1,266, respectively, and
clients (excluding clients that generated less than $25,000 in revenue during
each preceding 12-month period) increased to 376 from 303, respectively.
Revenue from the Company's sixteen mature offices increased $17.2 million, or
21.8%, from the earlier period and the thirteen new offices (including two
acquired offices) accounted for the remaining $9.0 million increase in
revenue.
Cost of revenue. Cost of revenue increased $18.1 million, or 31.0%, to
$76.4 million for the nine months ended September 30, 1997 from $58.3 million
for the nine months ended September 30, 1996. Cost of revenue increased
primarily due to compensation and benefits associated with growth in the
number of consultants. As a percentage of revenue, cost of revenue decreased
to 69.7% for the nine months ended September 30, 1997 from 70.0% for the nine
months ended September 30, 1996 primarily because of bill rates increasing
faster than pay rates during the period.
Gross profit. Gross profit increased $8.1 million, or 32.6%, to $33.1
million for the nine months ended September 30, 1997 from $25.0 million for
the nine months ended September 30, 1996. As a percentage of revenue, gross
profit increased to 30.3% for the nine months ended September 30, 1997 from
30.0% for the nine months ended September 30, 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $4.2 million, or 23.8%, to $21.9 million
for the nine months ended September 30, 1997 from $17.7 million for the nine
months ended September 30, 1996. This increase is due primarily to costs
associated with recently opened offices, growth of administrative staff in
mature offices, hiring additional corporate staff to support the increased
number of offices and development of the Company's proprietary business
systems. As a percentage of revenue, selling, general and administrative
expenses decreased to 20.0% for the nine months ended September 30, 1997 from
21.2% for the nine months ended September 30, 1996.
11
<PAGE>
Depreciation and amortization expense. Depreciation and amortization
expense increased $270,000, or 49.5%, to $815,000 for the nine months ended
September 30, 1997 from $545,000 for the nine months ended September 30,
1996. This increase is primarily attributable to depreciation on new computer
equipment and software and, to a lesser extent, amortization of goodwill
related to the Company's recent acquisitions. As a percentage of revenue,
depreciation and amortization expense remained constant at 0.7% for the nine
month periods ended September 30, 1997 and 1996.
Operating income. Operating income increased $3.7 million, or 54.2%, to
$10.5 million for the nine months ended September 30, 1997 from $6.8 million
for the nine months ended September 30, 1996. As a percentage of revenue,
operating income increased to 9.6% for the nine months ended September 30,
1997 from 8.1% for the nine months ended September 30, 1996. The improvement
in operating income margin is in part the result of the Company's
centralization of administrative functions and leverage obtained from the
Company's proprietary business systems.
Net interest income (expense). Net interest income (expense) increased
by $729,000 to $520,000 of interest income for the nine months ended
September 30, 1997 from $209,000 of interest expense for the nine months
ended September 30, 1996. This change reflects a decrease in the average
level of borrowings during the period and investment of a portion of the
proceeds of the Company's January 1997 initial public offering of common
stock in interest bearing instruments.
Income before income taxes. Income before income taxes increased $4.4
million, or 67.0%, to $11.0 million for the nine months ended September 30,
1997 from $6.6 million for the nine months ended September 30, 1996. As a
percentage of revenue, income before income taxes increased to 10.0% for the
nine months ended September 30, 1997 from 7.9% for the nine months ended
September 30, 1996.
Income taxes. In 1996, the Company was an S Corporation for federal and
certain state income tax purposes. The income statement for the nine months
ended September 30, 1996 includes a pro forma provision for income taxes as
if the Company was subject to federal and state income taxes at an assumed
effective rate of 40%. The Company's effective tax rate for the nine months
ended September 30, 1997 was 38.9%. Income taxes increased $1,638,000, or
62.3%, to $4.3 million for the nine months ended September 30, 1997 from the
pro forma income taxes of $2.6 million for the nine months ended September
30, 1996. As a percentage of revenue, income taxes increased to 3.9% for the
nine months ended September 30, 1997 from the pro forma amount of 3.2% for
the nine months ended September 30, 1996. Income taxes for the nine months
ended September 30, 1997 include a one-time reduction in income tax expense
of $125,000 which represents the cumulative effect of the Company converting
from a S Corporation to a C Corporation effective January 1, 1997. Excluding
the $125,000 one-time reduction in income taxes, income taxes for the nine
months ended September 30, 1997 would have increased $1,763,000, or 67.0%, to
$4.4 million. Excluding the $125,000 one-time reduction in income taxes, as
a percentage of revenue, income taxes would have increased to 4.0% for the
nine months ended September 30, 1997 from the pro forma amount of 3.2% for
the nine months ended September 30, 1996.
Net Income. Net income increased $2.8 million, or 70.2%, to $6.7
million for the nine months ended September 30, 1997 from pro forma net
income of $3.9 million for the nine months ended September 30, 1996. As a
percentage of revenue, net income increased to 6.1% for the nine months ended
September 30, 1997 from the pro forma amount of 4.7% for the nine months
ended September 30, 1996.
Earnings Per Share. Earnings per share increased $0.15, or 48.4%, to
$0.46 for the nine months ended September 30, 1997 from pro forma earnings
per share of $0.31 for the nine months ended September 30, 1996. Excluding
the $125,000 one time credit described under 'Income taxes' above, earnings
per share for the nine months ended September 30, 1997 would have increased
$0.14, or 45.2%, to $0.45.
12
<PAGE>
The following table sets forth the percentage of revenue and the percentage
change from the prior period of certain items reflected in the statements of
income for the:
Percentage of Revenue
-------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1996 1997 1996 1997
---- ---- ---- ----
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 69.7 69.0 70.0 69.7
------- ------ -------- -------
Gross profit 30.3 31.0 30.0 30.3
------ ------ ------- ------
Selling, general and 21.3 19.6 21.2 20.0
administrative expenses
Depreciation and 0.7 0.8 0.7 0.7
amortization expense ------ ------ ------ ------
Total operating expenses 22.0 20.4 21.9 20.7
------ ------ ------ ------
Operating income 8.3 10.6 8.1 9.6
Net interest income (expense) (0.2) 0.5 (0.2) 0.4
------- ------ ------ ------
Income before income taxes 8.1 11.1 7.9 10.0
Pro forma provision for 3.2 4.4 3.2 3.9
income taxes(1) ------ ------ ------ ------
Pro forma net income(1) 4.9% 6.7% 4.7% 6.1%
------ ------ ------ ----
------ ------ ------ ----
Percentage Change
1997 over 1996
---------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
Revenue 39.2% 31.5%
Cost of revenue 37.7% 31.0%
Gross profit 42.7% 32.6%
Selling, general and 28.4% 23.8%
administrative expenses
Depreciation and amortization 61.8% 49.5%
expense
Total operating expenses 29.4% 24.6%
Operating income 77.5% 54.2%
Net interest income (expense)(2) N/M N/M
Income before income taxes 90.0% 67.0%
Pro forma provision for income 90.1% 62.3%
taxes(1)
Pro forma net income(1) 90.0% 70.2%
- ------------------------
(1) For 1996, the Company was an S corporation for federal and certain
state income tax purposes. The pro forma provision for income taxes for
1996 reflects a provision for income taxes as if the Company were a C
corporation for all income tax purposes during such period, at an assumed
effective tax rate of 40%.
(2) N/M - Not Meaningful.
13
<PAGE>
Selected Quarterly Results and Seasonality
The following table sets forth certain quarterly operating information
for each of the 13 quarters ending with the quarter ended September 30, 1997,
both in dollars and as a percentage of revenue. This information was derived
from the unaudited financial statements of the Company which, in the opinion
of management, were prepared on the same basis as the financial statements
contained elsewhere in this report and include all adjustments, consisting of
normal recurring adjustments, which management considers necessary for the
fair presentation of the information for the periods presented. The financial
data shown below should be read in conjunction with the financial statements
and notes thereto included in this report. Results for any fiscal quarter are
not necessarily indicative of results for the full year or for any future
quarter.
Gross Profit Operating Income
---------------- ----------------
% of % of
Statements of Income Data Revenue Amount Revenue Amount Revenue
- ------------------------- ------- ------ ------- ------ -------
1994: (Dollars in thousands)
September 17,787 5,487 30.8 1,672 9.4
December 18,101 5,382 29.7 1,559 8.6
1995:
March 19,760 5,732 29.0 1,422 7.2
June 20,695 6,195 29.9 1,683 8.1
September 21,881 6,117 28.0 1,428 6.5
December 23,568 6,786 28.8 790(1) 3.4(1)
1996:
March 26,328 7,726 29.3 2,107 8.0
June 27,812 8,452 30.4 2,248 8.1
September 29,142 8,817 30.3 2,431 8.3
December 30,681 9,216 30.0 2,314 7.5
1997:
March 33,045 9,727 29.4 2,741 8.3
June 35,883 10,841 30.2 3,409 9.5
September 40,569 12,580 31.0 4,314 10.6
- ------------------
(1) Includes the $770,000 of non-recurring, non-cash compensation expense
charged to selling, general and administrative expenses accrued in the
fourth quarter of 1995 for stock issued for services performed by
employees in 1995. Excluding the effect of such expense, income from
operations and income from operations as a percentage of revenue for the
fourth quarter of 1995 would have been $1.6 million and 6.6%, respectively.
Metro's operating results are adversely affected when client facilities
close due to holidays or inclement weather. The Company generally experiences
a certain amount of seasonality in the fourth quarter due to the number of
holidays and closings of client facilities during that quarter. Further, the
Company generally experiences lower operating results in the first quarter
due in part to the timing of unemployment and FICA tax accruals and delays in
clients' contract renewal related to clients' budget approval processes.
14
<PAGE>
Liquidity and Capital Resources
In January 1997, the Company completed an initial public offering of
3,100,000 shares of its Common Stock at a price of $16.00 per share. Of the
3,100,000 shares, 2,300,000 shares were issued and sold by the Company and
800,000 shares were sold by a shareholder of the Company. Shortly thereafter
the representatives of the several underwriters exercised their
over-allotment option resulting in the sale of 465,000 shares by other
shareholders of the Company. The net proceeds to the Company were
approximately $33,144,000. The Company did not receive any of the proceeds
from the sale of shares by the selling shareholders. During the third
quarter of 1997, the Company used $4,352,920 of the proceeds from the initial
public offering for the acquisitions of Data Systems Technology, Inc. and DP
Career Associates described above.
On September 30, 1997, the Company made its first sale of stock under the
Metro Information Services, Inc. Employee Stock Purchase Plan and sold 10,000
shares for an aggregate purchase price of $167,350.
The Company funded its operations primarily from cash generated by
operations and, to a lesser extent, from borrowings under the Company's
revolving credit facilities. Net cash provided by operations was $3,218,000
for the nine months ended September 30, 1997 and consisted primarily of net
income of $6,715,000 and, excluding the effects of acquisitions, operations
related increases in accounts receivable of $7,404,000, accounts payable of
$1,088,000, and accrued compensation and benefits of $2,395,000. The
increases in accounts receivable, accounts payable, and accrued compensation
and benefits are primarily due to the revenue growth experienced in the first
nine months of 1997. The Company's working capital was $33,349,000 at September
30, 1997 compared to $6,369,000 at December 31, 1996.
The Company has $39,900,000 of credit facilities provided in equal
amounts by three banks. The facilities have a five-year maturity which may
be extended each year for an additional year. If the facilities are not
extended, principal on one of the facilities must be repaid in four equal
annual installments while the other two facilities require principal
repayment at the end of four years. Until that time interest only is payable
monthly. Two of the facilities allow the Company to select among prime rate
and London Interbank Offered Rate (LIBOR) based interest rates while the
third has only LIBOR based interest rates. All of the facilities have
interest rates which increase as the balance outstanding under the facilities
increases. At September 30, 1997, no amounts were outstanding under the
facilities. The Company has selected a 30-day LIBOR based rate and, if any
borrowings were outstanding under the facilities at September 30, 1997, they
would have borne interest rates ranging from 6% to 6.6%. The facilities also
contain fees, ranging from 0.125% to 0.3125% annually, which are charged on
the unused portion of the facilities. The facilities are collateralized by
accounts receivable of the Company.
The credit facilities include several covenants requiring the maintenance
of certain tangible net worth and debt service coverage ratios and imposing
limits on incurring additional debt. Amounts advanced under the facilities
can be used for acquisitions and general working capital purposes.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share, which revised the calculation of earnings per share for publicly held
companies in certain situations. SFAS No. 128 is effective for both interim
and annual periods ending after December 15, 1997. In the opinion of
management, SFAS No. 128 is not expected to have a material impact on the
Company's calculation of earnings per share.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income, which establishes standards for
reporting and display of comprehensive income and its components in financial
statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. In the opinion of management, SFAS No. 130 is not expected
to have a material impact on the Company's financial statements.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d ) Use of proceeds from registered securities:
The effective date of the Company's Securities Act registration statement was
January 29, 1997. The Commission file number is 000-22035. Between the
effective date and September 30, 1997, the expenses incurred in connection
with the issuance and distribution of the securities registered were as
follows:
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Direct or indirect As previously reported Additional expenses Expenses incurred to
payments to others: on Form SR for period incurred through date as of September 30,
ending April 30, 1997 September 30, 1997 1997
- ------------------------------------------------------------------------------------------------------------------------
Underwriting discounts
and commissions $2,576,000 $- $2,576,000
- ------------------------------------------------------------------------------------------------------------------------
Other expenses 1,061,265 19,101 1,080,366
- ------------------------------------------------------------------------------------------------------------------------
Total expenses $3,637,265 $19,101 $3,656,366
- ------------------------------------------------------------------------------------------------------------------------
Net offering proceeds after
total expenses above $33,143,634
---------------------
---------------------
Between the effective date and September 30, 1997, the net offering proceeds of
$33,143,634 were used for the following purposes:
- ------------------------------------------------------------------------------------------------------------------------
Direct or indirect payments As previously reported Changes in use of proceeds Use of proceeds through
to others: on Form SR for period September 30, 1997
ending April 30, 1997
- ------------------------------------------------------------------------------------------------------------------------
Acquisition of other $- $4,352,920 $4,352,920
businesses
- ------------------------------------------------------------------------------------------------------------------------
Repayment of
indebtedness $11,962,829 $- $11,962,829
- ------------------------------------------------------------------------------------------------------------------------
Temporary investments:
- ------------------------------------------------------------------------------------------------------------------------
Municipal Bonds $18,186,039 $(1,358,154) $16,827,885
- ------------------------------------------------------------------------------------------------------------------------
Money Market Account $3,013,867 $(3,013,867) $-
- ------------------------------------------------------------------------------------------------------------------------
Total use of proceeds $33,143,634
----------------
----------------
</TABLE>
The use of proceeds does not represent a material change in the use of
proceeds described in the prospectus. There have been no other changes to
the information which was provided by the Company on Form SR for the period
ending April 30, 1997.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
( i ) 11 Computation of pro forma earnings per share
( ii ) 27 Financial Data Schedule
(b) Reports on Form 8-K:
( i ) Report dated July 11, 1997 reporting the acquisition of
the assets of Data Systems Technology, Inc.
( ii ) Report dated July 11, 1997 reporting the acquisition of
the assets of J2, Inc. d/b/a DP Career Associates.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Virginia Beach,
Commonwealth of Virginia on the 5th day of November, 1997.
Metro Information Services, Inc.
By /s/ John H. Fain
-----------------------------------
John H. Fain
President and Principal Executive Officer
By /s/ Robert J. Eveleigh
-----------------------------------
Robert J. Eveleigh
Principal Financial Officer
By /s/ Steven A. Lurus
------------------------------------
Steven A. Lurus
Principal Accounting Officer
18
<PAGE>
<TABLE>
EXHIBIT 11
METRO INFORMATION SERVICES, INC.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE (1)
<S> <C> <C>
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
------------------- -------------------
1996 1997 1996 1997
---- ---- ---- ----
SHARES (2)
Average outstanding during the period (3) 12,187,851 14,800,000 12,187,851 14,544,444
Add: Incremental shares related to stock issued
within the year preceding the Company's
initial public offering under the treasury
stock method using the offering price of
$16 per share (4) 312,149 _ 298,911 _
Add: The number of shares obtained by dividing
the amount by which the distributions
during the period exceeded earnings for
the period, by the offering price of $16
per share (5) 362,152 _ 362,152 _
Add: Incremental average shares outstanding
during the period related to shares
issued under the Employee Stock
Purchase Plan (6) _ 109 _ 37
Number of shares on which published earnings
per share is based 12,862,152 14,800,109 12,848,914 14,544,481
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS
Pro forma net income applicable to common
shareholders $ 1,423,000 $ 2,703,000 $ 3,946,000 $ 6,715,000
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Pro Forma Earnings Per Share $ 0.11 $ 0.18 $ 0.31 $ 0.46
------------ ---------- ------------ ------------
------------ ----------- ------------ ------------
</TABLE>
- ----------------------
(1) There is no difference between primary and fully-diluted earnings per
share. Therefore, only primary earnings and related per share data are
presented.
(2) All share amounts give effect to the 3,507.2952 for 1 stock split effected
in the form of a stock dividend before the Company's January 29,1997 initial
public offering.
(3) Average shares outstanding for the nine-month period ended September 30,
1997 are calculated based on 12,500,000 shares outstanding for the first month
of the nine-month period and 14,800,000 thereafter. This calculation excludes
the 10,000 shares issued on September 30, 1997 (See note 6).
(4) Gives effect to 312,149 shares issued May 1, 1996, as if they were
outstanding for all periods, using the treasury stock method.
(5) Includes $9,000,000 of S corporation earnings distributed before the
completion of the Company's initial public offering.
(6) Gives effect to the 10,000 shares issued September 30, 1997 under the
Metro Information Services, Inc. Employee Stock Purchase Plan.
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF METRO INFORMATION SERVICES, INC. AS PRESENTED IN THE
FORM 10-Q FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS' LEGEND.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 19,459 19,459
<SECURITIES> 0 0
<RECEIVABLES> 24,445 24,445
<ALLOWANCES> 108 108
<INVENTORY> 0 0
<CURRENT-ASSETS> 44,960 44,960
<PP&E> 8,188 8,188
<DEPRECIATION> 3,127 3,127
<TOTAL-ASSETS> 54,246 54,246
<CURRENT-LIABILITIES> 11,611 11,611
<BONDS> 0 0
0 0
0 0
<COMMON> 148 148
<OTHER-SE> 35,901 35,901
<TOTAL-LIABILITY-AND-EQUITY> 54,246 54,246
<SALES> 0 0
<TOTAL-REVENUES> 40,569 109,498
<CGS> 0 0
<TOTAL-COSTS> 27,989 76,350
<OTHER-EXPENSES> 8,266 22,684
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4 40
<INCOME-PRETAX> 4,505 10,984
<INCOME-TAX> 1,802 4,269
<INCOME-CONTINUING> 2,703 6,715
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,703 6,715
<EPS-PRIMARY> 0.18 0.46
<EPS-DILUTED> 0.18 0.46
</TABLE>
