<PAGE>
- --------------------------------------------------------------------------------
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
SEPTEMBER 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 October 31, 1998, the registrant had issued and outstanding
14,865,530 shares of Common Stock, $.01 par value.
- --------------------------------------------------------------------------------
<PAGE>
METRO INFORMATION SERVICES, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. Statements of Income for the Three Months and
Nine Months Ended September 30, 1997 and 1998 (unaudited) 3
Balance Sheets as of
December 31, 1997 and September 30, 1998 (unaudited) 4
Statement of Changes in Shareholders' Equity for the
Nine Months Ended September 30, 1998 (unaudited) 5
Statements of Cash Flows for the
Nine Months Ended September 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 20
SIGNATURES 22
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
METRO INFORMATION SERVICES, INC.
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
----------------------------- -----------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 40,569,201 $ 56,592,510 $109,497,985 $156,092,988
Cost of revenue 27,989,310 39,296,852 76,350,051 108,076,070
------------ ------------ ------------ ------------
Gross profit 12,579,891 17,295,658 33,147,934 48,016,918
------------ ------------ ------------ ------------
Selling, general and administrative expenses 7,943,253 10,283,462 21,868,582 29,792,612
Depreciation and amortization expense 322,634 473,754 815,271 1,307,931
------------ ------------ ------------ ------------
Total operating expenses 8,265,887 10,757,216 22,683,853 31,100,543
------------ ------------ ------------ ------------
Operating income 4,314,004 6,538,442 10,464,081 16,916,375
Net interest income 190,726 212,878 519,480 597,295
------------ ------------ ------------ ------------
Income before income taxes 4,504,730 6,751,320 10,983,561 17,513,670
Income taxes (Note 6) 1,801,892 2,700,528 4,268,501 7,005,468
------------ ------------ ------------ ------------
Net income $ 2,702,838 $ 4,050,792 $ 6,715,060 $ 10,508,202
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income per share:
Basic $ 0.18 $ 0.27 $ 0.46 $ 0.71
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted $ 0.18 $ 0.27 $ 0.46 $ 0.70
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of shares of common stock
and common stock equivalents outstanding
Basic 14,800,109 14,851,919 14,544,481 14,838,618
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted 14,871,265 15,031,537 14,575,463 15,012,930
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
METRO INFORMATION SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2) $22,028,594 $23,421,227
Accounts receivable, net 24,136,582 36,102,264
Prepaid expenses 402,115 439,923
Deferred income taxes (Note 6) 662,687 612,063
----------- -----------
Total current assets 47,229,978 60,575,477
Property and equipment, net 5,672,548 9,069,513
Goodwill, net (Notes 4 and 5) 5,327,622 5,529,605
Other assets 303,067 166,651
----------- -----------
Total assets $58,533,215 $75,341,246
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable (Note 2) $ 4,118,209 $ 5,547,277
Accrued compensation and benefits 8,551,501 12,080,811
----------- -----------
Total current liabilities 12,669,710 17,628,088
Deferred income taxes (Note 6) 735,632 976,992
----------- -----------
Total liabilities 13,405,342 18,605,080
----------- -----------
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,
14,865,530 shares at September 30, 1998 (Note 7) 148,200 148,655
Paid in capital 36,085,946 37,185,582
Retained earnings 8,893,727 19,401,929
----------- -----------
Total shareholders' equity 45,127,873 56,736,166
----------- -----------
Total liabilities and shareholders' equity $58,533,215 $75,341,246
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
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
34,786 shares of common stock to
Employee Stock Purchase Plan 34,786 348 927,583 -- $ 927,931
Net proceeds from issuance of
shares of common stock to Employee
Incentive Stock Option Plan 10,760 107 172,053 -- $ 172,160
Net income -- -- -- 10,508,202 $10,508,202
----------- ----------- ----------- ----------- -----------
BALANCE AS OF SEPTEMBER 30, 1998 14,865,530 $ 148,655 $37,185,582 $19,401,929 $56,736,166
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
METRO INFORMATION SERVICES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine months
ended September 30
--------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,715,060 $ 10,508,202
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization - cost of revenue 21,213 34,998
Depreciation and amortization - selling, general & administrative expenses 815,271 1,307,931
Net loss on sale of property and equipment 35,983 19,120
Deferred income taxes (228,994) 291,984
Changes in operating assets and liabilities increasing (decreasing) cash,
net of the effects of acquisitions:
Restricted cash (Note 2) -- 1,688,000
Accounts receivable (7,403,998) (11,965,682)
Prepaid expenses (219,033) (37,808)
Other assets (62,542) (203,678)
Accounts payable 1,087,884 1,389,067
Accrued compensation and benefits 2,394,601 3,529,310
------------ ------------
Net cash provided by operating activities 3,155,445 6,561,444
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (1,750,903) (2,876,755)
Acquisition of computer software -- (1,747,672)
Acquisition of businesses (4,352,920) (1,647,999)
Proceeds from sale of property and equipment 14,193 3,524
------------ ------------
Net cash used in investing activities (6,089,630) (6,268,902)
------------ ------------
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 167,350 927,931
Proceeds from issuance of shares on exercise of incentive stock options -- 172,160
Distributions to shareholders (9,000,000) --
------------ ------------
Net cash provided by financing activities 22,235,445 1,100,091
------------ ------------
Net increase in cash and cash equivalents 19,301,260 1,392,633
Cash and cash equivalents at beginning of period 157,372 22,028,594
------------ ------------
Cash and cash equivalents at end of period $ 19,458,632 $ 23,421,227
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 40,589 $ 25,453
------------ ------------
------------ ------------
Cash paid for income taxes $ 4,307,557 $ 6,085,332
------------ ------------
------------ ------------
</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, 1997 and 1998, 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, 1998 and the results of its operations
and its cash flows for the three-month and nine-month periods ended September
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. Restricted Cash
Metro has agreed to act as payment agent for a client on an information
technology project. As of September 30, 1998, the Company held $1,688,000 of
restricted cash for this client. This amount is included in cash and cash
equivalents and accounts payable. Client approved project invoices will be paid
out of the restricted cash held and Metro will remit any remaining restricted
cash to the client at the end of the project. Metro is not obligated to pay
invoices that exceed the amount of the restricted cash held.
3. 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 September 30, 1998, $720,000 in
costs have been capitalized by the Company pursuant to this SOP. For the three
and nine months ended September 30, 1998, the effect of this change in
accounting was to increase net income by $203,000 and $432,000, respectively and
increase basic and diluted net income per share by $0.01 and $0.03,
respectively. 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 September 30, 1998.
4. 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
$500,000, of which $134,000 was paid on July 1, 1997 (including payoff of net
assumed liabilities), $2,000 was uncollected from assumed receivables and
$364,000 was paid on August 31, 1998 as a
7
<PAGE>
result of the acquired business attaining certain operating income targets. 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 $5.7 million of goodwill
which is being amortized on a straight-line basis over 30 years.
5. 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.
6. 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 September 30, 1997,
was 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 at December 31, 1997 and September 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.
7. 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.
8. 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 December 31, 1997 and
September 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 September 30, 1998, the rate on such
borrowings would have ranged from 5.7% to 6.3%. 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
<PAGE>
9. 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.
Please refer to the `YEAR 2000 ISSUES' section of this Report for an updated
discussion of the Year 2000 issue.
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, COMPETITION
AND YEAR 2000 ISSUES. 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
INCLUDING THIS REPORT. 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 2,000 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, utilities and state and local government.
The Company emphasizes long-term relationships with its clients rather than
one-time projects or assignments. During the 12 months ended September 30, 1998,
the Company performed IT services for 462 clients (excluding clients that
generated less than $25,000 in revenue during such period).
9
<PAGE>
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 September 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.
Revenue growth is derived primarily from increases in the number of
consultants placed with existing and new clients. Between September 30, 1997 and
September 30, 1998, the number of full time consultants grew from 1,644 to
2,035, 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 SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUE. Revenue increased $16.0 million, or 39.5%, to $56.6 million
for the three months ended September 30, 1998 from $40.6 million for the three
months ended September 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 $11.3 million, or 40.4%, to
$39.3 million for the three months ended September 30, 1998 from $28.0 million
for the three months ended September 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 increased to 69.4%
for the three months ended September 30, 1998 from 69.0% for the three months
ended September 30, 1997 primarily because the percentage of employees who are
hourly is higher in 1998 than in 1997. These employees have a higher pay rate in
relation to their billing rates but do not receive the same benefits as salaried
employees.
GROSS PROFIT. Gross profit increased $4.7 million, or 37.5%, to $17.3
million for the three months ended September 30, 1998 from $12.6 million for the
three months ended September 30, 1997. As a percentage of revenue, gross profit
increased to 30.6% for the three months ended September 30, 1998 from 31.0% for
the three months ended September 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.4 million, or 29.5%, to $10.3 million for
the three months ended September 30, 1998 from $7.9 million for the three months
ended September 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 18.2% for the
three months ended September 30, 1998 from 19.6% for the three months ended
September 30, 1997. This decrease is in part the result of the Company's
centralization of administrative functions and leverage obtained from the
Company's proprietary business systems.
10
<PAGE>
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $151,000, or 46.8%, to $474,000 for the three months ended
September 30, 1998 from $323,000 for the three months ended September 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 remained constant at 0.8% for the three months ended
September 30, 1998 and 1997.
OPERATING INCOME. Operating income increased $2.2 million, or 51.6%, to
$6.5 million for the three months ended September 30, 1998 from $4.3 million for
the three months ended September 30, 1997. As a percentage of revenue, operating
income increased to 11.6% for the three months ended September 30, 1998 from
10.6% for the three months ended September 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. Net interest income increased by $22,000, or
11.6%, to $213,000 for the three months ended September 30, 1998 from $191,000
for the three months ended September 30, 1997.
INCOME BEFORE INCOME TAXES. Income before income taxes increased $2.3
million, or 49.9%, to $6.8 million for the three months ended September 30, 1998
from $4.5 million for the three months ended September 30, 1997. As a percentage
of revenue, income before income taxes increased to 11.9% for the three months
ended September 30, 1998 from 11.1% for the three months ended September 30,
1997.
INCOME TAXES. The Company's effective tax rate was 40% for the three
months ended September 30, 1998 and 1997. Income taxes increased $0.9 million or
49.9%, to $2.7 million for the three months ended September 30, 1998 from $1.8
million for the three months ended September 30, 1997. As a percentage of
revenue, income taxes increased to 4.8% for the three months ended September 30,
1998 from 4.4% for the three months ended September 30, 1997.
NET INCOME. Net income increased $1.4 million, or 49.9%, to $4.1
million for the three months ended September 30, 1998 from $2.7 million for the
three months ended September 30, 1997. As a percentage of revenue, net income
increased to 7.1% for the three months ended September 30, 1998 from 6.7% for
the three months ended September 30, 1997.
NET INCOME PER SHARE. Diluted net income per share increased $0.09, or
50.0%, to $0.27 for the three months ended September 30, 1998 from $0.18 for the
three months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUE. Revenue increased $46.6 million, or 42.6%, to $156.1 million
for the nine months ended September 30, 1998 from $109.5 million for the nine
months ended September 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 $31.7 million, or 41.6%, to
$108.1 million for the nine months ended September 30, 1998 from $76.4 million
for the nine months ended September 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 69.2%
for the nine months ended September 30, 1998 from 69.7% for the nine months
ended September 30, 1997 primarily because of billing rates to clients
increasing faster than pay rates to consultants during the period.
GROSS PROFIT. Gross profit increased $14.9 million, or 44.9%, to $48.0
million for the nine months ended September 30, 1998 from $33.1 million for the
nine months ended September 30, 1997. As a percentage of revenue, gross profit
increased to 30.8% for the nine months ended September 30, 1998 from 30.3% for
the nine months ended September 30, 1997.
11
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $7.9 million, or 36.2%, to $29.8 million for
the nine months ended September 30, 1998 from $21.9 million for the nine months
ended September 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 19.1% for the
nine months ended September 30, 1998 from 20.0% for the nine months ended
September 30, 1997. This decrease is in part the result of the Company's
centralization of administrative functions and leverage obtained from the
Company's proprietary business systems.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $493,000, or 60.4%, to $1,308,000 for the nine months ended
September 30, 1998 from $815,000 for the nine months ended September 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 nine months ended September 30,
1998 from 0.7% for the nine months ended September 30, 1997.
OPERATING INCOME. Operating income increased $6.4 million, or 61.7%, to
$16.9 million for the nine months ended September 30, 1998 from $10.5 million
for the nine months ended September 30, 1997. As a percentage of revenue,
operating income increased to 10.8% for the nine months ended September 30, 1998
from 9.6% for the nine months ended September 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. Net interest income increased by $78,000, or
15.0%, to $597,000 for the nine months ended September 30, 1998 from $519,000
for the nine months ended September 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 $6.5
million, or 59.5%, to $17.5 million for the nine months ended September 30, 1998
from $11.0 million for the nine months ended September 30, 1997. As a percentage
of revenue, income before income taxes increased to 11.2% for the nine months
ended September 30, 1998 from 10.0% for the nine months ended September 30,
1997.
INCOME TAXES. The Company's effective tax rate was 40% for the nine
months ended September 30, 1998 and 38.9% for the nine months ended September
30, 1997. Income taxes increased $2.7 million or 64.1%, to $7.0 million for the
nine months ended September 30, 1998 from $4.3 million for the nine months ended
September 30, 1997. As a percentage of revenue, income taxes increased to 4.5%
for the nine months ended September 30, 1998 from 3.9% for the nine months ended
September 30, 1997. In 1996, the Company was an S corporation for federal and
certain state income tax purposes. 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
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 nine months
ended September 30, 1997 would have been $4.4 million, the Company's effective
tax rate would have been 40% and income taxes for the nine months ended
September 30, 1998 would have represented an increase of $2.6 million or 59.5%.
NET INCOME. Net income increased $3.8 million, or 56.5%, to $10.5
million for the nine months ended September 30, 1998 from $6.7 million for the
nine months ended September 30, 1997. As a percentage of revenue, net income
increased to 6.7% for the nine months ended September 30, 1998 from 6.1% for the
nine months ended September 30, 1997.
12
<PAGE>
NET INCOME PER SHARE. Diluted net income per share increased $0.24, or
52.2%, to $0.70 for the nine months ended September 30, 1998 from $0.46 for the
nine months ended September 30, 1997. Excluding the $125,000 one-time credit
described under `INCOME TAXES' above, diluted net income per share for the nine
months ended September 30, 1997 would have been $0.45 and diluted net income per
share for the nine months ended September 30, 1998 would have represented an
increase of $0.25 or 55.6%.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- --------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue .................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue ............................ 69.0 69.4 69.7 69.2
Gross profit ............................... 31.0 30.6 30.3 30.8
Selling, general and administrative expenses 19.6 18.2 20.0 19.1
Depreciation and amortization expense ...... 0.8 0.8 0.7 0.9
Total operating expenses ................... 20.4 19.0 20.7 20.0
Operating income ........................... 10.6 11.6 9.6 10.8
Net interest income ........................ 0.5 0.3 0.4 0.4
Income before income taxes ................. 11.1 11.9 10.0 11.2
Income taxes ............................... 4.4 4.8 3.9 4.5
Net income ................................. 6.7% 7.1% 6.1% 6.7%
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
1998 OVER 1997
---------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
<S> <C> <C>
Revenue .................................... 39.5% 42.6%
Cost of revenue ............................ 40.4% 41.6%
Gross profit ............................... 37.5% 44.9%
Selling, general and administrative expenses 29.5% 36.2%
Depreciation and amortization expense ...... 46.8% 60.4%
Total operating expenses ................... 30.1% 37.1%
Operating income ........................... 51.6% 61.7%
Net interest income ........................ 11.6% 15.0%
Income before income taxes ................. 49.9% 59.5%
Income taxes ............................... 49.9% 64.1%
Net income ................................. 49.9% 56.5%
</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 September 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:
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
September.................................... 56,593 17,296 30.6 6,538 11.6
</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, $1,284,024 during the
first quarter of 1998 and $363,975 during the third quarter of 1998 for the
acquisitions of Data Systems Technology, Inc. and DP Career Associates
14
<PAGE>
described above.
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, 9,486 shares for $278,167 on June 30, 1998 and 13,300 shares
for $360,336 on September 30, 1998.
During the nine months ended September 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 nine months ended September 30, 1998 were
$172,160.
The Company funds its operations primarily from cash generated by
operations. Net cash provided by operations was $6,561,444 for the nine months
ended September 30, 1998 and consisted primarily of net income of $10,508,202
and, excluding the effects of acquisitions, increases in accounts receivable of
$11,965,682, restricted cash of $1,688,000, accounts payable of $1,389,067 and
accrued compensation and benefits of $3,529,310. The increases in accounts
receivable and accrued compensation and benefits are primarily due to the
revenue growth experienced during the nine months ended September 30, 1998. The
Company's working capital was $42,947,000 at September 30, 1998 compared to
$34,560,000 at December 31, 1997.
Net cash used in investing activities was $6,268,902 for the nine
months ended September 30, 1998 and included normal acquisitions of property and
equipment used in operations for $2,876,755 and payments for the acquisitions of
Data Systems Technology, Inc. and DP Career Associates as a result of the
acquired businesses attaining certain income targets for $1,647,999. The
Company's investing activities also include $1,747,672 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 $2.5
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 September 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
September 30, 1998, the rate on such borrowings would have ranged from 5.7% to
6.3%. 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>
YEAR 2000 ISSUES
Many computer systems use dates to correctly process information. Until
recently, computer systems used a two-digit date to indicate a year. For
example, the year 1958 is indicated in these systems by the digits "58." As the
year 2000 approaches, these systems will need to process information involving
the year 2000 and later years. Systems that use only a two-digit year may
confuse the year 2000 for the year 1900, causing the systems to produce
incorrect results. This problem is commonly known as the year 2000 ("Year 2000")
problem.
As an investor, you should be aware that the full extent of the Year
2000 problem is unknown. The Securities and Exchange Commission ("SEC") recently
issued an Interpretation in which it indicated that, "... the extent of the
potential impact of the Year 2000 problem is not yet known, and if not timely
corrected, it could affect the global economy." The SEC's Interpretation
requires publicly traded companies such as us to disclose additional
information about their Year 2000 problems. This disclosure is the result of our
effort to inform the investing public of the risks we believe are likely to
affect us. All readers of this document are encouraged to read the SEC
Interpretation.
Estimates of the cost to fix Year 2000 problems worldwide run to the
hundreds of billions of dollars. Additional costs in the form of business
interruptions, additional repair costs and litigation costs may be incurred if
the fixes do not work. It appears there is no way to predict with certainty what
will happen after December 31, 1999. It is certain, however, that the year 2000
will arrive soon. As a result, all companies should be undertaking a study to
determine how they may be affected by the Year 2000 problem and take steps to
address the effects where appropriate. Failure to do so could cause injury not
only to the company that is not ready for the year 2000, but every other person
dealing with that company. As a result, it is difficult for any company,
including Metro, to evaluate effectively the impact that third party failures
may have on its business. In this disclosure, we have assumed we will not be
Year 2000 compliant under the Interpretation until all third parties with whom
we have a material relationship provide us with written assurance that they
expect to be Year 2000 compliant in time. We have treated written responses to
our requests for this information, information provided on third parties' web
sites and information filed with the SEC by our U.S. public company clients as
written assurance under this disclosure.
METRO'S STATE OF READINESS
Metro's approach to the Year 2000 problem involves: 1) assessing,
correcting and testing our internal systems; 2) obtaining assurance from third
parties who exchange information electronically with us that the information
they provide will be Year 2000 compliant; 3) obtaining assurance or information
on the state of Year 2000 readiness of our material clients and suppliers; and
4) developing contingency plans, when practical, to address expected Year 2000
failures. A discussion of each of these areas follows.
INTERNAL RISKS. We completed an initial assessment of our systems in
1997. Additional information received by us led to a second assessment during
the third quarter of 1998.
These assessments covered embedded computer chips, computer software,
computer hardware, telephones, communications equipment, facsimile machines,
scanners, copiers and voice mail which we own and were able to identify as
critical to our ability to provide services to our clients. These assessments
identified a limited amount of software that displayed dates in an ambiguous
2-digit format, but processed dates correctly in 4-digit format. We corrected
this ambiguity in the third quarter of 1998. The assessment also identified a
variety of BIOS programs (programs that allow personal computers to run) that
require additional upgrades to make them Year 2000 compliant according to the
manufacturer of the personal computers. We expect to finish upgrading these BIOS
programs by December 31, 1998. We will also upgrade certain non-compliant
computer operating systems by December 31, 1998 with patches provided by the
computer manufacturers. We will perform additional testing of our systems
through June 30, 1999.
16
<PAGE>
We are seeking information from other companies with whom we have a
material relationship. We have or will send letters to these companies
requesting confirmation that they will be able to continue their relationship
with us at the same level and without interruption before and after the Year
2000. The response rate on these letters through October 31, 1998 has been low.
We are implementing other systems which we have received written
assurances are Year 2000 compliant. See "-Liquidity and Capital Resources." We
are not treating the costs of these new systems as Year 2000 costs because we
did not accelerate their implementation due to Year 2000 problems.
EXTERNAL RISKS. We are installing new software that we expect to begin
using in 1999. See "-Liquidity and Capital Resources." This new system will
increase the amount of information we exchange with our banks and 401(k) plan
administrator. In some cases, the Year 2000 problem does not affect the
information being received. In other cases, we have received assurances from
these institutions that they will be Year 2000 compliant in a timely fashion. In
one case, we have made arrangements to receive the information in a usable
2-digit year format. We are relying on these assurances as part of our Year 2000
planning. If these assurances are wrong, they could have a material adverse
effect on our business, financial condition and results of operations.
We have reviewed filings made by our U.S. public company clients who
provided more than 0.2% of revenue during the 12 months ended September 30,
1998. This review covered filings through October 31, 1998, and was performed to
determine the extent of the risk that our clients may not be Year 2000
compliant. These companies represented 53.1% of our revenue for the 12 months
ending September 30, 1998. This review furnished the following information on
our clients' expected completion date for their year 2000 efforts:
<TABLE>
<CAPTION>
Will not
be Year Year 2000
Not 2000 Compliant by by by by by
Disclosed Compliant Now 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% Of Metro
Revenue 12.4% 0% 0.2% 13.4% 1.8% 7.5% 1.2% 16.6%
</TABLE>
We have treated the information furnished in these reports as written
assurance provided by these clients on the status of their Year 2000 problem. In
some cases these clients have indicated they will be substantially complete or
will have completed Year 2000 efforts for their mission critical systems by the
date indicated. We have treated this disclosure as an indication that these
companies will be able to continue their business relationships with us without
disruption or failure. We have or will request additional information from those
clients who indicated they will not be compliant or provided no disclosure. At
present, we plan to monitor disclosures made by these publicly traded clients in
Forms 10-Q and 10-K.
We are also requesting assurance from our other clients who provided
more than 0.2% of revenue during the 12 months ended September 30, 1998. These
clients represented 28.6% of revenue during the 12 months ended September 30,
1998. We have reviewed written assurances from these clients representing 11.7%
of revenue during the 12 months ended September 30, 1998. This review furnished
the following information on our clients' expected completion date for their
year 2000 efforts:
<TABLE>
<CAPTION>
Will not
be Year
Not 2000 Year 2000 by by by by by
Disclosed Compliant Compliant 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99
Now
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% Of Metro
Revenue 0% 0% 0% 5.7% 0% 5.3% 0% 0.7%
</TABLE>
17
<PAGE>
We have not yet received assurance from the rest of these companies. We
expect to have more information on these companies when we file our Annual
Report on Form 10-K in early 1999. If these clients do not become Year 2000
compliant in a timely fashion, our business, financial condition and results
of operations could be materially adversely affected.
BUSINESS RISKS. We are seeking written assurance from our clients. See
EXTERNAL RISKS above.
LITIGATION RISKS. We have limited our involvement in Year 2000 projects
and worked primarily on a time and materials basis. We have also sought
limitations on our liability for Year 2000 related problems arising from our
services when appropriate. We are not able to estimate the cost of any
litigation that may arise in the future.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 PROBLEM
Our internal information technology staff will perform repairs to our
internal systems. We believe our internal systems will be Year 2000 complaint by
July 1, 1999. We may perform additional assessments, remediation and testing if
information about Year 2000 risks to our internal systems changes.
Our internal information technology staff is also requesting
information from our material clients and suppliers to address external risks.
We do not expect to incur material incremental costs to gather this information.
We will defer other projects these individuals could have worked on by about 6
months. We do not consider these deferred projects mission critical or expect
their delay to have a material adverse effect on our business, results of
operations or financial condition.
The cost of our Year 2000 activities is expected to be approximately
$300,000, approximately $20,000 of which had been incurred at September 30,
1998.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
The Year 2000 problem involves several risks for us. One risk is that
our computerized systems and embedded systems (such as minicontrollers and chips
in elevators, machinery and equipment) ("internal risks") and those of our
clients, suppliers, vendors, financial institutions and others ("external
risks") will be disrupted or fail. We also consider the possible loss of revenue
when consultants on Year 2000 assignments complete their assignments a Year 2000
related risk. We may also become involved in litigation over the Year 2000
services we have rendered to our clients. These risks have the capacity to cause
a material adverse effect on our business, results of operations and financial
condition although we are uncertain what risks we will actually suffer.
These risks are discussed below.
INTERNAL RISKS. We rely heavily on computer systems to run our
business. Internal risks consist of potential disruptions and failures of our
proprietary and purchased computer software, computer hardware, office
equipment, office systems and turnover in our information technology staff.
Software systems include recruiting, candidate tracking, payroll, human
resources, benefits and financial accounting systems. Disruptions and failures
of these systems could hurt our ability to bill our clients, collect money
from clients, pay our employees in a timely manner and continue in business.
EXTERNAL RISKS. External risks are risks that third parties will suffer
Year 2000 problems that adversely affect us. These risks include the inability
of certain third parties to exchange electronic data with us and the risk of
disruptions and failures of persons with whom we do business. These third
parties include our clients, suppliers, vendors, financial institutions and
others with whom we do business.
If we are not able to exchange information electronically with third
parties, our ability to receive and pay money as needed may be slowed and
information on 401(k) account and cash balances may be delayed. If our clients,
suppliers, vendors and financial institutions are not Year 2000 compliant, their
noncompliance may cause a material disruption to their businesses. These
disruptions could negatively impact us in many ways, including: a client may be
unable to pay us; a financial institution may be unable to process checks drawn
on our bank accounts,
18
<PAGE>
accept deposits or process wire transfers; a client, supplier, vendor or
financial institution may fail; vendor deliveries of computer equipment and
other supplies may be delayed or cease; voice and data connections we use to
share information may be interrupted and brokers who make a market in our
stock may not be able to trade our stock. This list is not comprehensive.
Other interruptions to the normal conduct of business by us, the nature and
extent of which we cannot fully foresee, may also occur. We are unable to
determine the nature or length or effect such interruptions, if any, may have
on us.
BUSINESS RISKS. As an IT services company, we have benefited from the
Year 2000 problem by providing consultants with the skills necessary to help
address these issues for our clients. We face the risk of reduced business
opportunities, revenue and profits as clients resolve their Year 2000 problem if
Year 2000 assignments are not replaced with other assignments. We believe that
when consultants complete Year 2000 assignments, many of these consultants will
be re-assigned to perform activities delayed by clients while addressing the
Year 2000 problem. In other cases, we will need to find other assignments for
these consultants. We estimate that, at September 30, 1998, approximately 16% of
our consultants were involved in Year 2000 assignments.
LITIGATION RISKS. Approximately 70% of our services involve writing
custom software for clients and maintaining software for clients. Clients may
sue us over work we have performed that causes or fails to fix a Year 2000
problem. This risk exists regardless of the steps we may take to provide
error free Year 2000 services and make our internal systems Year 2000 ready.
Any litigation may have a material adverse effect on our business, financial
condition and results of operations and may distract management's attention
from running the business. This distraction could have further adverse
effects on the business.
The SEC has directed us to describe our "most reasonably likely
worst case scenario" posed by the Year 2000 issues we face. Based on our
current understanding of the Year 2000 issues facing the Company, we believe
our most reasonably likely worst case scenario is that we will suffer little
or no disruptions or failures in our internal systems, but minor disruptions
and failures among our material clients, suppliers, vendors and financial
institutions. Nonetheless, as we learn more from our material clients,
suppliers, vendors and financial institutions, it is possible that this
belief could change.
CONTINGENCY PLANS
We are developing Year 2000 contingency plans where practical. These
plans address alternatives to electronic processing of candidate resumes, hires
of new employees, terminations of existing employees, payroll, supplier
payments, cash receipts from clients, invoices to clients and initiatives
without e-mail. These plans also address furnishing required reports to clients,
furnishing required governmental reports, gaining access to leased office space,
shipping intracompany correspondence and communicating Company reports. These
plans include stockpiling supplies and equipment, identifying alternative
sources of goods and services and performing certain tasks manually. For
example, we may store paper copies of electronically stored data (such as
candidate resumes) at locations likely to need them if we believe that the data
will not be accessible due to a Year 2000 failure. In some situations, however,
it is not practical to have an effective contingency plan. For example, a
failure by our primary banking institution may interrupt our cash receipts and
our ability to timely pay our employees. Our contingency plan may call for
paying employees in cash, but may not be practical due the amount of cash
involved, the number of Company locations and the number of employees who must
be paid. Our payroll is currently several million dollars per pay period paid
through over 30 locations to over 2,400 employees.
As an investor, you should be aware that the number of Year 2000
failures suffered by us may exceed our ability to address them all at one time.
In addition, significant Year 2000 failures by third parties, including clients,
may jeopardize our financial strength. In severe circumstances, our ability to
continue as a going concern may be threatened or we may fail. We believe,
however, that we are taking reasonable and prudent steps to address the Year
2000 problem based on the information currently available to us. We will
continue to monitor this issue and plan to modify our approach to the problem if
we believe the circumstances warrant such a change.
19
<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 333-16585. Between the effective date and
September 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
PERIOD ENDING INCURRED THROUGH TO DATE AS OF
DIRECT OR INDIRECT PAYMENTS TO OTHERS: JUNE 30, 1998 SEPTEMBER 30, 1998 SEPTEMBER 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 September 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: JUNE 30, 1998 IN USE OF PROCEEDS SEPTEMBER 30, 1998
- -------------------------------------- ------------- ------------------ ------------------
<S> <C> <C> <C>
Acquisition of other businesses $ 5,636,944 $363,975 $ 6,000,919
Repayment of indebtedness 11,962,829 -- 11,962,829
Temporary investments-
Municipal Bonds 15,543,861 (363,975) 15,179,886
----------- ---------- -----------
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, on Form 10-Q for the period ended March 31, 1998 or on Form
10-Q for the period ended June 30, 1998.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
20
<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 net income per share
( ii ) 27 Financial Data Schedule
21
<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 16th day of November, 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
22
<PAGE>
EXHIBIT 11
METRO INFORMATION SERVICES, INC.
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
------------------------------ ------------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SHARES
Average outstanding during the period and
number of shares on which published
basic net income per share is based 14,800,109 14,851,919 14,544,481 14,838,618
Add: Incremental shares from assumed
exercise of stock options 71,156 179,618 30,982 174,312
----------- ----------- ----------- -----------
Number of shares on which published
diluted net income per share is based 14,871,265 15,031,537 14,575,463 15,012,930
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
EARNINGS
Net income applicable to common
shareholders $ 2,702,838 $ 4,050,792 $ 6,715,060 $10,508,202
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per share:
Basic $ 0.18 $ 0.27 $ 0.46 $ 0.71
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted $ 0.18 $ 0.27 $ 0.46 $ 0.70
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<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, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 23,421 23,421
<SECURITIES> 0 0
<RECEIVABLES> 36,249 36,249
<ALLOWANCES> 147 147
<INVENTORY> 0 0
<CURRENT-ASSETS> 60,575 60,575
<PP&E> 12,984 12,984
<DEPRECIATION> 3,915 3,915
<TOTAL-ASSETS> 75,341 75,341
<CURRENT-LIABILITIES> 17,628 17,628
<BONDS> 0 0
0 0
0 0
<COMMON> 149 149
<OTHER-SE> 37,185 37,185
<TOTAL-LIABILITY-AND-EQUITY> 75,341 75,341
<SALES> 0 0
<TOTAL-REVENUES> 56,593 156,093
<CGS> 0 0
<TOTAL-COSTS> 39,297 108,076
<OTHER-EXPENSES> 10,758 31,101
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 6,751 17,513
<INCOME-TAX> 2,700 7,005
<INCOME-CONTINUING> 4,051 10,508
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,051 10,508
<EPS-PRIMARY> 0.27 0.71
<EPS-DILUTED> 0.27 0.70
</TABLE>
