<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
JUNE 30, 1998
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 July 31, 1998, the registrant had issued and outstanding 14,851,750
shares of Common Stock, $.01 par value.
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1
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METRO INFORMATION SERVICES, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
PART I. FINANCIAL INFORMATION:
<S> <C>
ITEM 1. Statements of Income for the Three Months and
Six Months Ended June 30, 1997 and 1998 (unaudited) 3
Balance Sheets as of
December 31, 1997 and June 30, 1998 (unaudited) 4
Statement of Changes in Shareholders' Equity for the
Six Months Ended June 30, 1998 (unaudited) 5
Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1998 (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
</TABLE>
2
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PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
METRO INFORMATION SERVICES, INC.
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
------------------------- -------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $35,883,470 $52,390,963 $68,928,783 $99,500,478
Cost of revenue 25,042,024 36,015,581 48,360,740 68,779,218
----------- ----------- ----------- -----------
Gross profit 10,841,446 16,375,382 20,568,043 30,721,260
----------- ----------- ----------- -----------
Selling, general and administrative expenses 7,178,306 10,218,693 13,925,330 19,509,150
Depreciation and amortization expense 253,893 441,489 492,637 834,177
----------- ----------- ----------- -----------
Total operating expenses 7,432,199 10,660,182 14,417,967 20,343,327
----------- ----------- ----------- -----------
Operating income 3,409,247 5,715,200 6,150,076 10,377,933
Net interest income 224,670 216,214 328,754 384,417
----------- ----------- ----------- -----------
Income before income taxes 3,633,917 5,931,414 6,478,830 10,762,350
Income taxes (Note 5) 1,453,567 2,372,566 2,466,608 4,304,940
----------- ----------- ----------- -----------
Net income $ 2,180,350 $ 3,558,848 $ 4,012,222 $ 6,457,410
=========== =========== =========== ===========
Net income per share:
Basic $ 0.15 $ 0.24 $ 0.28 $ 0.44
=========== =========== =========== ===========
Diluted $ 0.15 $ 0.24 $ 0.28 $ 0.43
=========== =========== =========== ===========
Weighted average number of shares of common stock
and common stock equivalents outstanding:
Basic 14,800,000 14,840,325 14,416,667 14,831,858
=========== =========== =========== ===========
Diluted 14,810,095 15,017,969 14,427,563 15,003,516
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
3
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METRO INFORMATION SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
----------- -----------
Assets
- ------ (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $22,028,594 $19,506,638
Accounts receivable, net 24,136,582 32,888,562
Prepaid expenses 402,115 530,326
Deferred income taxes (Note 5) 662,687 841,297
----------- -----------
Total current assets 47,229,978 53,766,823
Property and equipment, net 5,672,548 8,065,897
Goodwill, net (Notes 3 and 4) 5,327,622 5,221,769
Other assets 303,067 199,435
----------- -----------
Total assets $58,533,215 $67,253,924
=========== ===========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 4,118,209 $ 2,474,330
Accrued compensation and benefits 8,551,501 11,580,453
----------- -----------
Total current liabilities 12,669,710 14,054,783
Deferred income taxes (Note 5) 735,632 901,303
----------- -----------
Total liabilities 13,405,342 14,956,086
----------- -----------
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
14,819,984 shares at December 31, 1997,
14,850,530 shares at June 30, 1998 (Note 6) 148,200 148,505
Paid in capital 36,085,946 36,798,196
Retained earnings 8,893,727 15,351,137
----------- -----------
Total shareholders' equity 45,127,873 52,297,838
----------- -----------
Total liabilities and shareholders' equity $58,533,215 $67,253,924
=========== ===========
</TABLE>
See accompanying notes to financial statements
4
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METRO INFORMATION SERVICES, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Shareholders' Equity
-------------------------------------------------------------
Common Stock Paid in Retained
--------------------
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1997 14,819,984 $ 148,200 $36,085,946 $ 8,893,727 $45,127,873
Net proceeds from issuance of
21,486 shares of common stock to
Employee Stock Purchase Plan 21,486 215 567,380 -- $ 567,595
Net proceeds from issuance of
9,060 shares on exercise of
incentive stock options 9,060 90 144,870 -- $ 144,960
Net income -- -- -- 6,457,410 $ 6,457,410
----------- ----------- ----------- ----------- -----------
BALANCE AS OF JUNE 30, 1998 14,850,530 $ 148,505 $36,798,196 $15,351,137 $52,297,838
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
5
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METRO INFORMATION SERVICES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months
ended June 30
-------------------------------------
1997 1998
------------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,012,222 $ 6,457,410
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization - cost of revenue - 20,239
Depreciation and amortization - selling, general & administrative expenses 506,334 834,177
Net loss on sale of property and equipment 36,623 14,412
Deferred income taxes (391,254) (12,939)
Changes in operating assets and liabilities increasing (decreasing)
cash, net of the effects of acquisitions:
Accounts receivable (4,646,013) (8,751,980)
Prepaid expenses (294,917) (128,211)
Other assets (191,680) 119,607
Accounts payable 715,909 (359,855)
Accrued compensation and benefits 1,744,910 3,028,952
------------------ ---------------
Net cash provided by operating activities 1,492,134 1,221,812
------------------ ---------------
Cash flows from investing activities:
Acquisition of property and equipment (1,200,468) (1,910,507)
Acquisition of computer software - (1,264,886)
Acquisition of businesses - (1,284,024)
Proceeds from sale of property and equipment 9,200 3,094
------------------ ---------------
Net cash used in investing activities (1,191,268) (4,456,323)
------------------ ---------------
Cash flows from financing activities:
Net repayments under line of credit (2,547,388) -
Decrease in other assets related to issuance of 2,300,000 shares 471,849 -
Proceeds from issuance of 2,300,000 shares 33,143,634 -
Proceeds from issuance of shares to Employee Stock Purchase Plan - 567,595
Proceeds from issuance of shares on exercise of incentive stock options - 144,960
Distributions to shareholders (9,000,000) -
------------------ ---------------
Net cash provided by financing activities 22,068,095 712,555
------------------ ---------------
Net increase (decrease) in cash and cash equivalents 22,368,961 (2,521,956)
Cash and cash equivalents at beginning of period 157,372 22,028,594
------------------ ---------------
Cash and cash equivalents at end of period $ 22,526,333 $ 19,506,638
================== ===============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 36,607 $ 10,557
================== ===============
Cash paid for income taxes $ 2,502,400 $ 3,441,679
================== ===============
</TABLE>
See accompanying notes to financial statements.
6
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METRO INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The information presented for June 30, 1997 and 1998, and for the
three-month and six-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 June 30, 1998 and the results of its operations and its
cash flows for the three-month and six-month periods ended June 30, 1997 and
1998. 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, 1997, which were
included as part of the Company's Annual Report on Form 10-K (File No.
000-22035). Certain 1997 amounts have been reclassified for comparability with
the 1998 financial statement presentation.
Results for the interim periods presented are not necessarily
indicative of results that may be expected for the entire year.
2. Internal Use Software Costs
On March 4, 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1 ("SOP"), ACCOUNTING FOR THE COSTS
OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. This SOP provides
guidance on capitalizing certain costs related to computer software developed or
obtained for internal use. The SOP is effective for financial statements for
fiscal years beginning after December 15, 1998. Earlier application is
encouraged in fiscal years for which annual financial statements have not been
issued. The Company adopted the SOP effective January 1, 1998. The SOP causes
amounts that otherwise would have been charged to selling, general and
administrative expenses in the period incurred to be capitalized and amortized
over the useful life of the computer software, typically three to seven years.
Although the full impact of this SOP on future periods has not been estimated,
management of the Company expects the SOP will have a favorable impact on the
Company's 1998 financial statements. Through June 30, 1998, $382,000 in costs
have been capitalized by the Company pursuant to this SOP. For the three and six
months ended June 30, 1998, the effect of this change in accounting was to
increase net income by $142,000 and $229,000, respectively, increase basic net
income per share by $0.01 and $0.02, respectively, and increase diluted net
income per share by $0.01 for both periods. Because the SOP requires that
computer software be ready for its intended use before amortization begins, no
amortization expense has been recognized for these amounts through June 30,
1998.
3. 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 $5.2
million, of which $3.9 million was paid on July 1, 1997 and $1.3 million was
paid on February 27, 1998 as a result of the acquired business attaining
certain gross profit targets. Each acquisition is accounted for as a
purchase. In connection with these acquisitions, the Company has recorded
approximately $5,396,000 of goodwill which is being amortized on a
straight-line basis over 30 years.
7
<PAGE>
4. 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.
5. 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. 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 June 30, 1997, was
to reduce income taxes appearing on the Statement of Income for the six months
ended June 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 at
December 31, 1997 and June 30, 1998 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.
6. 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.
7. Credit Facilities
The Company maintains credit facilities of $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 June 30, 1998 and
December 31, 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 June 30, 1998, the rate on such borrowings 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, including one
requiring the maintenance of a certain tangible net worth ratio, which limits
the amount of dividends that can be paid. The covenants also impose limits on
incurring additional debt and require a certain debt service coverage ratio to
be maintained. Amounts advanced under the facilities can be used for
acquisitions and general working capital purposes.
8. Risk Factors
Readers of the Financial Statements are encouraged to refer to the
Company's 1997 Annual Report on Form 10-K for a discussion of risk factors,
including those under the heading 'YEAR 2000 ISSUES.'
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, ANNUAL REPORTS 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," "SEEKS" 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 CONSULTANT 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
(INCLUDING INCREASED WAGE AND BENEFIT COSTS THAT ARE NOT OFFSET BY BILL RATE
INCREASES), 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 ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER
31, 1997 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.
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. THE COMPANY'S
FISCAL YEAR ENDS ON DECEMBER 31.
OVERVIEW
Metro Information Services, Inc. ("Metro" or the "Company") provides a
wide range of information technology ("IT") consulting and custom software
development services through 33 offices in the United States and Puerto Rico.
The Company's more than 1,950 consultants, 62% 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 June 30, 1998, the Company performed IT services for
436 clients (excluding clients that generated less than $25,000 in revenue
during such period).
IT services are primarily provided by the Company through supplemental
IT services arrangements and, to a lesser extent, through project outsourcing
services arrangements. Substantially all services are billed on a time and
materials basis. During the three months ended June 30, 1998, the Company
estimates that supplemental IT services accounted for more than 90% and project
outsourcing services accounted for less than 10% of the Company's revenue.
9
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Revenue growth is derived primarily from increases in the number of
consultants placed with existing and new clients. Between June 30, 1997 and June
30, 1998, the number of full time consultants grew from 1,442 to 1,980,
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.
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 JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE
30, 1997
REVENUE. Revenue increased $16.5 million, or 46.0%, to $52.4 million
for the three months ended June 30, 1998 from $35.9 million for the three months
ended June 30, 1997. 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.
COST OF REVENUE. Cost of revenue increased $11.0 million, or 43.8%, to
$36.0 million for the three months ended June 30, 1998 from $25.0 million for
the three months ended June 30, 1997. 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 68.7% for the three
months ended June 30, 1998 from 69.8% for the three months ended June 30, 1997
primarily because of bill rates to clients increasing faster than pay rates to
consultants during the period.
GROSS PROFIT. Gross profit increased $5.6 million, or 51.0%, to $16.4
million for the three months ended June 30, 1998 from $10.8 million for the
three months ended June 30, 1997. As a percentage of revenue, gross profit
increased to 31.3% for the three months ended June 30, 1998 from 30.2% for the
three months ended June 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.0 million, or 42.4%, to $10.2 million for
the three months ended June 30, 1998 from $7.2 million for the three months
ended June 30, 1997. 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 19.5% for the
three months ended June 30, 1998 from 20.0% for the three months ended June 30,
1997.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $187,000, or 73.9%, to $441,000 for the three months ended
June 30, 1998 from $254,000 for the three months ended June 30, 1997. This
increase is primarily attributable to depreciation on additions to computer
equipment and software and, to a lesser extent, amortization of goodwill related
to the Company's acquisitions. As a percentage of revenue, depreciation and
amortization expense increased to 0.9% for the three months ended June 30, 1998
from 0.7% for the three months ended June 30, 1997.
OPERATING INCOME. Operating income increased $2.3 million, or 67.6%, to
$5.7 million for the three months ended June 30, 1998 from $3.4 million for the
three months ended June 30, 1997. As a percentage of revenue, operating income
increased to 10.9% for the three months ended June 30, 1998 from 9.5% for the
three months ended June 30, 1997. 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. Interest income decreased by $9,000, or 3.8%, to
$216,000 for the three months ended June 30, 1998 from $225,000 for the three
months ended June 30, 1997.
10
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INCOME BEFORE INCOME TAXES. Income before income taxes increased $2.3
million, or 63.2%, to $5.9 million for the three months ended June 30, 1998 from
$3.6 million for the three months ended June 30, 1997. As a percentage of
revenue, income before income taxes increased to 11.3% for the three months
ended June 30, 1998 from 10.1% for the three months ended June 30, 1997.
INCOME TAXES. The Company's effective tax rate was 40% for the three
months ended June 30, 1998 and 1997. Income taxes increased $0.9 million or
63.2%, to $2.4 million for the three months ended June 30, 1998 from $1.5
million for the three months ended June 30, 1997. As a percentage of revenue,
income taxes increased to 4.5% for the three months ended June 30, 1998 from
4.0% for the three months ended June 30, 1997.
NET INCOME. Net income increased $1.4 million, or 63.2%, to $3.6
million for the three months ended June 30, 1998 from $2.2 million for the three
months ended June 30, 1997. As a percentage of revenue, net income increased to
6.8% for the three months ended June 30, 1998 from 6.1% for the three months
ended June 30, 1997.
NET INCOME PER SHARE. Diluted net income per share increased $0.09, or
60.0%, to $0.24 for the three months ended June 30, 1998 from $0.15 for the
three months ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30,
1997
REVENUE. Revenue increased $30.6 million, or 44.4%, to $99.5 million
for the six months ended June 30, 1998 from $68.9 million for the six months
ended June 30, 1997. 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.
COST OF REVENUE. Cost of revenue increased $20.4 million, or 42.2%, to
$68.8 million for the six months ended June 30, 1998 from $48.4 million for the
six months ended June 30, 1997. 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 69.1% for the six
months ended June 30, 1998 from 70.2% for the six months ended June 30, 1997
primarily because of bill rates to clients increasing faster than pay rates to
consultants during the period.
GROSS PROFIT. Gross profit increased $10.1 million, or 49.4%, to $30.7
million for the six months ended June 30, 1998 from $20.6 million for the six
months ended June 30, 1997. As a percentage of revenue, gross profit increased
to 30.9% for the six months ended June 30, 1998 from 29.8% for the six months
ended June 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5.6 million, or 40.1%, to $19.5 million for
the six months ended June 30, 1998 from $13.9 million for the six months ended
June 30, 1997. 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
six months ended June 30, 1998 from 20.2% for the six months ended June 30,
1997.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $341,000, or 69.3%, to $834,000 for the six months ended June
30, 1998 from $493,000 for the six months ended June 30, 1997. This increase is
primarily attributable to depreciation on additions to computer equipment and
software and, to a lesser extent, amortization of goodwill related to the
Company's acquisitions. As a percentage of revenue, depreciation and
amortization expense increased to 0.9% for the six months ended June 30, 1998
from 0.7% for the six months ended June 30, 1997.
OPERATING INCOME. Operating income increased $4.2 million, or 68.7%, to
$10.4 million for the six months ended June 30, 1998 from $6.2 million for the
six months ended June 30, 1997. As a percentage of revenue, operating income
increased to 10.4% for the six months ended June 30, 1998 from 8.9% for the six
months ended June 30, 1997. 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.
11
<PAGE>
NET INTEREST INCOME. Interest income increased by $55,000, or 16.9%, to
$384,000 for the six months ended June 30, 1998 from $329,000 for the six months
ended June 30, 1997. 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 $4.3
million, or 66.1%, to $10.8 million for the six months ended June 30, 1998 from
$6.5 million for the six months ended June 30, 1997. As a percentage of revenue,
income before income taxes increased to 10.8% for the six months ended June 30,
1998 from 9.4% for the six months ended June 30, 1997.
INCOME TAXES. The Company's effective tax rate was 40% for the six
months ended June 30, 1998 and 38.1% for the six months ended June 30, 1997.
Income taxes increased $1.8 million or 74.5%, to $4.3 million for the six months
ended June 30, 1998 from $2.5 million for the six months ended June 30, 1997. As
a percentage of revenue, income taxes increased to 4.3% for the six months ended
June 30, 1998 from 3.6% for the six months ended June 30, 1997. In 1996, the
Company was an S corporation for federal and certain state income tax purposes.
Income taxes for the six months ended June 30, 1997 include a one-time reduction
in income tax expense of $125,000, which represents the cumulative effect of the
Company converting from an S corporation to a C corporation effective January 1,
1997. Excluding the $125,000 one-time reduction in income taxes, income taxes
for the six months ended June 30, 1997 would have been $2.6 million, the
Company's effective tax rate would have been 40% and income taxes for the six
months ended June 30, 1998 would have represented an increase of $1.7 million or
66.1%.
NET INCOME. Net income increased $2.5 million, or 60.9%, to $6.5
million for the six months ended June 30, 1998 from $4.0 million for the six
months ended June 30, 1997. As a percentage of revenue, net income increased to
6.5% for the six months ended June 30, 1998 from 5.8% for the six months ended
June 30, 1997.
NET INCOME PER SHARE. Diluted net income per share increased $0.15, or
53.6%, to $0.43 for the six months ended June 30, 1998 from $0.28 for the six
months ended June 30, 1997. Excluding the $125,000 one-time credit described
under 'INCOME TAXES' above, diluted net income per share for the six months
ended June 30, 1997 would have been $0.27 and diluted net income per share for
the six months ended June 30, 1998 would have represented an increase of $0.16
or 59.3%.
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:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
----------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue........................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenue................................ 69.8 68.7 70.2 69.1
Gross profit................................... 30.2 31.3 29.8 30.9
Selling, general and administrative expenses... 20.0 19.5 20.2 19.6
Depreciation and amortization expense.......... 0.7 0.9 0.7 0.9
Total operating expenses....................... 20.7 20.4 20.9 20.5
Operating income............................... 9.5 10.9 8.9 10.4
Interest income................................ 0.6 0.4 0.5 0.4
Income before income taxes..................... 10.1 11.3 9.4 10.8
Income taxes................................... 4.0 4.5 3.6 4.3
Net income..................................... 6.1% 6.8% 5.8% 6.5%
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
1998 OVER 1997
---------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------ ---------
<S> <C> <C>
Revenue........................................ 46.0% 44.4%
Cost of revenue................................ 43.8% 42.2%
Gross profit................................... 51.0% 49.4%
Selling, general and administrative expenses... 42.4% 40.1%
Depreciation and amortization expense.......... 73.9% 69.3%
Total operating expenses....................... 43.4% 41.1%
Operating income............................... 67.6% 68.7%
Interest income................................ (3.8%) 16.9%
Income before income taxes..................... 63.2% 66.1%
Income taxes................................... 63.2% 74.5%
Net income..................................... 63.2% 60.9%
</TABLE>
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 June 30, 1998, 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.
<TABLE>
<CAPTION>
Gross Profit Operating Income
-------------------- ------------------------
% of % of
Statements of Income Data Revenue Amount Revenue Amount Revenue
- -------------------------- ------- ------- ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1995:
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
December..................................... 43,080 13,351 31.0 4,612 10.7
1998:
March........................................ 47,110 14,346 30.5 4,663 9.9
June......................................... 52,391 16,375 31.3 5,715 10.9
</TABLE>
- ------------------
(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.
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. The Company used $4,352,920 of the proceeds from the
initial public offering during the third quarter of 1997 and $1,284,024 during
the first quarter of 1998 for the acquisitions of Data Systems Technology, Inc.
and DP Career Associates described above.
14
<PAGE>
The Company made its first sale of stock under the Metro Information
Services, Inc. Employee Stock Purchase Plan on September 30, 1997. The Company
sold 10,000 shares for an aggregate purchase price of $167,350 on September 30,
1997, 9,984 shares for $184,587 on December 31, 1997, 12,000 shares for $289,428
on March 31, 1998 and 9,486 shares for $278,167 on June 30, 1998.
During the six months ended June 30, 1998, certain employees exercised
stock options which vested on December 31, 1997 pursuant to the 1997 Employee
Incentive Stock Option Plan. Total proceeds from the issuance of stock for
option exercises during the six months ended June 30, 1998 were $144,960.
The Company funded its operations primarily from cash generated by
operations. Net cash provided by operations was $1,221,812 for the six months
ended June 30, 1998 and consisted primarily of net income of $6,457,410 and,
excluding the effects of acquisitions, increases in accounts receivable of
$8,751,980 and accrued compensation and benefits of $3,028,952. The increases in
accounts receivable and accrued compensation and benefits are primarily due to
the revenue growth experienced during the six months ended June 30, 1998. The
Company's working capital was $39,712,000 at June 30, 1998 compared to
$34,560,000 at December 31, 1997.
The Company's investing activities include $1,264,886 spent on
developing new computer systems for financial accounting, human resources and
payroll activities. These systems, which the Company expects to deploy in 1999,
are expected to provide enhanced information processing capabilities and
integration. Management expects these systems will be year 2000 compliant. A
combination of Metro employees and outside consultants will implement these
systems. The Company's current estimate of the cost of these systems is $2.2
million. The Company expects to capitalize and amortize these costs over these
systems' useful lives.
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 June 30, 1998, 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 June
30, 1998, the rate on such borrowings 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, including one
requiring the maintenance of a certain tangible net worth ratio, which limit the
amount of dividends that can be paid. The covenants also impose limits on
incurring additional debt and require a certain debt service coverage ratio to
be maintained. Amounts advanced under the facilities can be used for
acquisitions and general working capital purposes.
The Company believes that the net proceeds from its initial public
offering, combined with available funds under its credit facilities and cash
flows from operations will be adequate to meet its needs for working capital and
capital expenditures for at least the next two years. Any significant
acquisitions, however, may require additional debt and equity financing.
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 on Form S-1 was January 29,
1997. The Commission file number is 000-22035. Between the effective date and
June 30, 1998, the expenses incurred in connection with the issuance and
distribution of the securities registered were as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY REPORTED
ON FORM 10-Q FOR THE ADDITIONAL EXPENSES EXPENSES INCURRED TO
PERIOD ENDING INCURRED THROUGH DATE AS OF
DIRECT OR INDIRECT PAYMENTS TO OTHERS: MARCH 31, 1998 JUNE 30, 1998 JUNE 30, 1998
- ------------------------------------- ---------------------- ------------------- --------------------
<S> <C> <C> <C>
Underwriting discounts and commissions $ 2,576,000 --- $ 2,576,000
Other expenses 1,080,366 --- 1,080,366
----------- --------- ------------
Total expenses $ 3,656,366 --- $ 3,656,366
----------- --------- -----------
----------- --------- -----------
Net offering proceeds after total expenses
above $33,143,634
-----------
-----------
</TABLE>
Between the effective date and June 30, 1998, net offering proceeds of
$33,143,634 were used for the following purposes:
<TABLE>
<CAPTION>
AS PREVIOUSLY REPORTED
ON FORM 10-Q FOR THE USE OF PROCEEDS
PERIOD ENDING CHANGES THROUGH
DIRECT OR INDIRECT PAYMENTS TO OTHERS: MARCH 31, 1998 IN USE OF PROCEEDS JUNE 30, 1998
- --------------------------------------- ---------------------- ------------------ ---------------
<S> <C> <C> <C>
Acquisition of other businesses $ 5,636,944 -- $ 5,636,944
Repayment of indebtedness 11,962,829 -- 11,962,829
Temporary investments:
Municipal Bonds 15,543,861 -- 15,543,861
---------- -------- -----------
Total Use of Proceeds $33,143,634 -- $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
provided by the Company on Form SR for the period ended April 30, 1997, on Form
10-Q for the period ended September 30, 1997, on Form 10-K for the period ended
December 31, 1997 or on Form 10-Q for the period ended March 31, 1998.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders of Metro Information
Services, Inc. held on June 9, 1998, the following matters
were voted on with the results indicated below.
1) Election of two Class 2 Directors to serve for a term
of three years or until a successor is elected.
<TABLE>
<CAPTION>
FOR WITHHELD
---------- --------
<S> <C> <C>
Ray E. Becker 12,743,705 22,463
Andrew J. Downing 12,743,453 22,715
</TABLE>
The term of office of directors Robert J. Eveleigh,
John H. Fain and A. Eugene Loving, Jr.
continued after the meeting.
2) Ratification of the appointment of KPMG Peat Marwick LLP as
independent auditors for the Company for the year ending
December 31, 1998.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
12,761,219 3,558 1,391
</TABLE>
3) Amendment of the Metro Information Services, Inc. Employee
Stock Purchase Plan to no longer allow terminated staff
members to purchase stock after their termination of
employment.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
<S> <C> <C> <C> <C>
12,707,396 56,227 2,545 0
</TABLE>
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 net income per share
( ii ) 27 Financial Data Schedule
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 12th day of August, 1998.
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
18
<PAGE>
EXHIBIT 11
METRO INFORMATION SERVICES, INC.
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
---------------------- -------------------
1997 1998 1997 1998
------ ------- ------ ------
SHARES
<S> <C> <C> <C> <C>
Average outstanding during the period and
number of shares on which published
basic net income per share is based 14,800,000 14,840,325 14,416,667 14,831,858
Add: Incremental shares from assumed
exercise of stock options 10,095 177,644 10,896 171,658
---------- ---------- ---------- ----------
Number of shares on which published
diluted net income per share is based 14,810,095 15,017,969 14,427,563 15,003,516
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS
Net income applicable to common
shareholders $ 2,180,350 $ 3,558,848 $ 4,012,222 $ 6,457,410
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per share:
Basic $ 0.15 $ 0.24 $ 0.28 $ 0.44
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted $ 0.15 $ 0.24 $ 0.28 $ 0.43
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
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 SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS' LEGEND.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 19,507 19,507
<SECURITIES> 0 0
<RECEIVABLES> 33,020 33,020
<ALLOWANCES> 131 131
<INVENTORY> 0 0
<CURRENT-ASSETS> 53,767 53,767
<PP&E> 12,135 12,135
<DEPRECIATION> 4,069 4,069
<TOTAL-ASSETS> 67,254 67,254
<CURRENT-LIABILITIES> 14,055 14,055
<BONDS> 0 0
0 0
0 0
<COMMON> 149 149
<OTHER-SE> 36,798 36,798
<TOTAL-LIABILITY-AND-EQUITY> 67,254 67,254
<SALES> 0 0
<TOTAL-REVENUES> 52,391 99,500
<CGS> 0 0
<TOTAL-COSTS> 36,016 68,779
<OTHER-EXPENSES> 10,660 20,343
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 5,931 10,762
<INCOME-TAX> 2,372 4,305
<INCOME-CONTINUING> 3,559 6,457
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,559 6,457
<EPS-PRIMARY> 0.24 0.44
<EPS-DILUTED> 0.24 0.43
</TABLE>
