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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
COMMISSION FILE NO.: 000-22035
METRO INFORMATION SERVICES, INC.
(Exact name of registrant as specified in its charter)
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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)
Registrant's telephone number, including area code: (757) 486-1900
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.01 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES /X/ NO / /
The aggregate market value of the registrant's Common Stock held by
non-affiliates as of January 30, 1998 was approximately $182 million, based
on the average of the high and low prices of the registrant's Common Stock on
The Nasdaq Stock Market on such date.
As of January 30, 1998, the registrant had issued and outstanding
14,821,704 shares of Common Stock, $0.01 par value.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
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METRO INFORMATION SERVICES, INC.
1997 FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business................................................................................. 3
Item 2. Properties............................................................................... 10
Item 3. Legal Proceedings........................................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders...................................... 11
Executive Officers of the Registrant.............................................................. 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 12
Item 6. Selected Financial Data.................................................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................... 25
Item 8. Financial Statements and Supplementary Data.............................................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 41
PART III
Item 10. Directors and Executive Officers of the Registrant; Section 16(a) Beneficial
Ownership Reporting Compliance......................................................... 41
Item 11. Executive Compensation................................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 45
Item 13. Certain Relationships and Related Transactions........................................... 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................... 47
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PART I
ITEM 1. BUSINESS
This Report contains forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. For this purpose, any statements
contained in this Report that are not statements of historical fact are
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. The important factors
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors Associated with Future Operations" among
others, could cause actual results to differ materially from those indicated
by forward-looking statements made in this Report and those presented
elsewhere by management from time to time. Please refer to the cautionary
statement that appears at the beginning of "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for more
information.
DESCRIPTION OF THE BUSINESS
Metro Information Services, Inc. ("Metro" or the "Company") was
incorporated July 1, 1979 in Virginia. The Company's headquarters is located
in Virginia Beach, Virginia.
Metro provides a wide range of information technology ("IT") consulting
and custom software development services through 30 offices in the United
States and Puerto Rico. The Company's more than 1,700 consultants,
approximately 66% 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, Visual Basic
and C++ applications, implements and supports Windows NT, Novell and UNIX
based network environments and supports numerous other application
environments.
DEVELOPMENT OF THE BUSINESS
Over the last five years Metro has experienced continual growth. On
December 31, 1992, the Company had 14 offices and 548 full-time consultants.
Since December 31, 1992, Metro has grown its revenue at a compound annual
growth rate of 28%. This growth was aided by a strong economy, increased use
of and reliance on IT, significant changes in computer technologies, the
migration from centralized mainframe computer systems to distributed
client/server environments and a trend among corporate America towards
outsourcing IT services due to the shortage of in-house expertise and
resources to address the variety and complexity of IT projects. During the
last three years, the Company accelerated its rate of new office openings
from one office per year to as many as four offices per year. The Company
also invested heavily in computerized systems custom designed for Metro's
approach to the IT services industry and communications systems to enhance
the flow of information within the Company. On July 1, 1997, Metro completed
its first acquisitions, adding offices in Columbia, South Carolina and Kansas
City, Missouri. At the end of 1997, the Company had grown to 29 offices
located in 15 states and Puerto Rico and more than 1,700 full-time
consultants. The Company opened its 30th office in January 1998.
Metro was a privately-owned company until January 29, 1997, when the
Company consummated an initial public offering of 3,100,000 shares of its
Common Stock at a price of $16.00 per share. In the offering, 2,300,000
shares were issued by the Company and 800,000 shares were sold by a
shareholder of the Company. On February 3, 1997, the several underwriters of
the initial public offering exercised their over-allotment option, purchasing
465,000 shares of Common Stock from several other shareholders of the Company
at a price of $16.00 per share. The net proceeds to the Company from the
offering were $33,144,000. In connection with the public offering, the
Company terminated its S corporation election resulting in the Company
becoming fully subject to federal and state income taxes effective January 1,
1997. On January 20, 1997, the Company distributed $9,000,000 to its
shareholders,
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approximating the estimated aggregate undistributed amount of income on which
the Company's shareholders were required to pay income taxes for tax years
1987 through 1996.
The Company's shares are listed on The Nasdaq Stock Market under the
symbol "MISI."
INDUSTRY OVERVIEW
Rapid technological advances have accelerated the growth of the IT
industry in recent years. These advances include more powerful and less
expensive computer technology, the transition from mainframe computer systems
to open and distributed computing environments and the advent of capabilities
such as relational databases, imaging and software development productivity
tools. These advances have expanded the benefits that users can derive from
computer-based information systems and improved the price-to-performance
ratios of such systems. As a result, an increasing number of companies are
employing IT in new ways, often to gain competitive advantages in the
marketplace, and IT services have become an important component of their
long-term growth strategies. The same advances that have enhanced the
benefits of computer systems have rendered the development and implementation
of such systems increasingly complex. In addition, there is a shortage of IT
consultants qualified to support these systems. Accordingly, organizations
are turning to IT services firms such as Metro to develop, support and
strengthen their internal IT departments and systems. In October 1997,
Dataquest, an industry research organization, estimated that in 1996 the size
of the IT professional services market in the United States, consisting of
consulting services, development and integration services, education and
training and management services, was $73 billion. Dataquest estimates that
this market will grow at a compound annual rate of 15%, reaching $148 billion
by 2001.
BUSINESS STRATEGY
The key components of the Company's business strategy are:
ATTRACT, DEVELOP AND RETAIN QUALIFIED CONSULTANTS. The Company seeks to
attract, develop and retain qualified consultants by focusing primarily on IT
services, providing leadership and management support through effective and
open communication, developing consultants through professional and technical
training and education programs, providing challenging project opportunities
with significant client responsibility and offering competitive compensation
and benefits that recognize the individual needs of each consultant. The
Company maintains a proprietary database of current, prospective and former
consultants to help it identify and recruit qualified consultants. In
addition, the Company's presence in 30 metropolitan markets enhances the
Company's ability to match consultants' desired locations and technical
abilities with client needs. Metro recognizes that its success can be
sustained only through the efforts and quality of its consultants. To this
end, management provides responsive technical and professional support,
promotes a sense of responsibility and rewards quality performance through
numerous incentive programs and awards.
BUILD LONG-TERM PARTNERSHIPS WITH CLIENTS. The Company's goal is to have
its clients view Metro as an extension of their IT departments and as a
long-term partner that is able to fulfill their IT services requirements. As
a result, the Company emphasizes a partnership approach to its clients,
rather than a one-time project or assignment approach. To develop these
relationships, the Company spends a significant amount of time and resources
tracking and anticipating the needs of its clients. The Company works to
maintain close communications with its clients during and at the conclusion
of each project with a view to achieving quality results and assessing future
opportunities.
The Company serves clients operating in a wide variety of industries
including communications, distribution, retail, financial services,
government (state and local only), healthcare, IT services, manufacturing,
transportation, leisure and utilities. In 1995, 1996 and 1997, the Company
provided IT consultants to approximately 266, 324 and 396 clients,
respectively (excluding clients that generated less than $25,000 in revenue
during such year). In each of 1995, 1996 and 1997, at least 85% of the
Company's revenue came from clients who were clients in the prior year.
The Company's 10 largest clients by revenue in 1997 had each been a client
for over five years, while the Company's three largest clients for 1997 had each
been a client for over 10 years. The Company's 10 largest clients accounted for
approximately 33.4%, 29.1% and 29.8% of the Company's revenue in 1995, 1996 and
1997, respectively.
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The Company's largest client accounted for approximately 6.8%, 6.5% and 5.8%
of the Company's revenue in 1995, 1996 and 1997, respectively.
PROVIDE A WIDE RANGE OF VALUE-ADDED IT SERVICES. The Company's
consultants provide a wide range of IT services including planning, managing,
building, implementing and maintaining IT systems. The Company supports all
major computer technology platforms (mainframe, mid-range, client/server and
network environments) and supports projects using a broad range of software
applications. For example, the Company implements SAP's client/server
software, custom develops Oracle, Informix, DB2, Visual Basic and C++
applications, implements and supports Windows NT, Novell and UNIX based
network environments and supports numerous other application environments.
The Company continually seeks to broaden its services in the changing IT
market by providing its consultants with exposure to emerging technologies
and by hiring consultants with diverse IT backgrounds and skills.
PROVIDE HIGH-QUALITY, COST-EFFECTIVE SERVICES. The Company is dedicated
to providing its clients with the highest possible level of service at what
the Company believes is the "best value." The Company believes its
experienced consultants and proprietary systems allow the Company to deliver
high-quality, on-schedule services to its clients in a cost-effective and
efficient manner and that the quality of its services has been a
differentiating factor that has helped it successfully expand. The Company's
dedication to quality services and client satisfaction has resulted in
special recognition from clients. The Company's operating procedures and
quality assurance programs are ISO 9002 registered. The Company believes ISO
registration, an international standard for quality assurance and consistency
in operating procedures, enhances its reputation and helps it achieve
preferred vendor status with clients. The Company expects that many potential
and existing clients will require evidence of ISO registration in the future.
LEVERAGE PROPRIETARY SYSTEMS. The Company's internally designed and
developed proprietary business systems are used to support and enhance its
recruiting, marketing, training, consultant productivity, client scheduling
and client servicing processes. For example, Metro's Staff Sourcing Network
provides the Company with the ability to identify and hire qualified
consultants on a nationwide basis and match their skills and desired work
locations with an appropriate office in a time-critical manner. The Company's
scheduling system allows it to efficiently manage contract renewals and bill
rate increases and anticipate clients' needs for IT consultants and services.
These proprietary systems permit timely sharing of information on a
Company-wide basis.
GROWTH STRATEGY
The Company has competed successfully in the rapidly changing IT
environment and has capitalized on the growing demand for IT services. The
Company's success is evidenced by the fact that the Company's revenue has
increased at a compound annual growth rate of 30% over the last 10 years and
28% over the last five years. Revenue grew 33.9% for 1997 compared to 1996.
Until July 1, 1997, all of this growth was achieved through internal growth.
On July 1, 1997, the Company completed two acquisitions. The Company intends
to augment internal growth with selective acquisitions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview."
The Company's growth strategy consists of three primary components:
DEVELOP AND EXPAND CLIENT BASE. By providing a wide range of
high-quality services, the Company has historically expanded the scope of its
client relationships through additional assignments and by providing
additional services within client organizations. In addition, because many of
the Company's clients have offices throughout the United States, the Company
strives to leverage these relationships by providing IT services in multiple
locations. In addition to increasing sales with existing clients, the Company
seeks to develop new client relationships in each office.
OPEN NEW OFFICES. The Company anticipates that it will open three to
five offices annually for the next several years. During 1997, the Company
opened four new offices. In January 1998, the Company opened one new office.
The Company has developed a national expansion strategy and has successfully
replicated its business model in its newly opened offices. Historically, new
offices opened by the Company have generally achieved monthly operating
income within six to 12 months and cumulative operating income within 18 to
24 months. The Company's office network
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establishes a local presence in each market and demonstrates its commitment
to each local market thereby enhancing its ability to attract skilled, local
consultants for local assignments and assignments in its other offices.
SELECTIVELY ACQUIRE BUSINESSES. The Company's strategy is to supplement
its internal growth through selective acquisitions. The Company seeks out
"best reputation" IT services firms in new geographic markets to reduce
start-up costs and in markets Metro currently serves, provide business
synergies and increase market penetration. The Company also considers
specialty consulting practices and new IT services that the Company can
cross-sell to its existing client base. In identifying potential acquisition
candidates, the Company seeks firms with a culture, client base, geographic
presence and technical expertise complementary to its own. The Company
strives to improve the acquired firm's profitability by implementing the
Company's business strategies and proprietary business systems. The Company
currently has no agreements, understandings or commitments with respect to
any potential acquisitions.
SERVICES
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. For 1997, 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.
The Company offers IT services in five major service areas: application
systems development and maintenance, IT architecture and engineering, systems
consulting, project outsourcing and general support services. Application
systems development and maintenance services include consultant support of
projects on all major technology platforms including mainframe, mid-range,
client/server, object oriented, network and desktop computing environments.
IT architecture and engineering services include the support of major systems
foundations and operating systems. Systems consulting services include a
variety of strategic business services such as information systems and IT
planning. Project outsourcing services include full project services that
generally require a higher level of responsibility. General support services
include a variety of services such as help desks, call center support,
technical training and documentation and technical writing. As of December
31, 1997, approximately 70% of the Company's consultants were working in the
application systems development and maintenance services area, 7% in IT
architecture and engineering services, 5% in systems consulting services, 4%
in project outsourcing services and 14% in general support services. These
percentages change daily as consultant assignments change. Due to the
variation in bill rates in these service areas, these percentages do not
necessarily correspond to the percentage of revenue from each service area.
The Company estimates that, on December 31, 1997, approximately 13% of its
consultants were involved in providing Year 2000 ("Y2K") related IT services.
See, "--Year 2000 Issues."
SALES AND MARKETING
The Company's marketing objective is to develop long-term partnership
relationships with existing and new clients that will lead to the Company
becoming the preferred provider of IT services. The Company's primary
marketing approach is to introduce prospective clients to Metro's
capabilities and to learn about prospective clients' IT environments through
personal appointments with information systems managers, purchasing or human
resources managers and chief information officers. Other sales and marketing
methods include client referrals, networking, attending trade shows and
alliances with other vendors. The Company divides its sales and marketing
effort between new client acquisition and existing client development. At
December 31, 1997, the Company employed 20 individuals performing new client
acquisition functions and 37 individuals performing client development
functions. In addition to the Company's primary marketing approach, the
Company also has targeted marketing initiatives for Y2K services, project
outsourcing and managed services/vendor on premise IT services.
CLIENT SUPPORT STRUCTURE
Clients are the focus of the Company's client support structure, which
provides each client with "layers of support" from the Company. The first layer
of client support is the IT consultants who work at client sites on assignments
generally lasting six to 12 months. The next layer of support is each office's
Leadership Team which includes: (i) marketing account representatives, (ii)
client services coordinators, (iii) professional staff recruiters,
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(iv) staff support and training coordinators and (v) a director who leads the
office Leadership Team, all of whom are supported by administrative
assistants. Most office directors were promoted from within the Company and
have an appreciation for the Company's culture. Having a strong
core-leadership team that has "grown up" with the Company allows Metro to
maintain its focus on supporting consultants and servicing clients.
The Corporate Support Group furnishes a "layer of support" for the
Company's offices through its President and Chief Executive Officer, John H.
Fain, Chief Operating Officer, Andrew J. Downing, and Chief Financial
Officer, Robert J. Eveleigh, working in conjunction with the Vice Presidents
of Operations ("VPOs") and the Quality Operations, Information Services,
Finance and Human Resources Departments. The Corporate Support Group performs
as many back office functions as possible at the corporate headquarters to
allow the offices to focus primarily on client service and consultant support.
EXECUTIVE MANAGEMENT. During 1997, the Executive Management Team
consisted of Mr. Fain, Mr. Downing, Mr. Eveleigh and three VPOs. In January
1998, the Company increased the number of VPOs to five by promoting two of
its office directors. Each VPO typically supports a group of five to 10
offices.
QUALITY OPERATIONS. The Quality Operations Department coordinates the
Company's recruiting process and is responsible for its ISO 9002 registration
and compliance. ISO is an international standard for quality assurance and
consistency in operating procedures. The Company anticipates that many of its
existing and prospective clients will soon require their IT services vendors'
processes are ISO registered.
INFORMATION SERVICES. The Information Services Department supports
systems operations, office telecommunications and internal applications
systems development and support. The Company has committed significant
resources to the development of its recruiting systems to improve the
database search capabilities, ease data entry via scanning and imaging, ease
remote access to the database and implement a workgroup concept for using the
system.
FINANCE. The Finance Department is responsible primarily for financial
reporting, general accounting, time entry and reporting, billing, accounts
receivable, payroll, facilities acquisition and administration, risk
management and monitoring contract performance.
HUMAN RESOURCES. The Human Resources Department develops and refines
policies and procedures, administers personnel benefits and coordinates staff
hiring, training and development. The Human Resources Department has also
established a benefits help desk designed to respond quickly and accurately
to employee questions.
INTELLECTUAL PROPERTY
In accordance with industry practice, contracts between the Company and
its clients normally provide that all intellectual property created for a
client belongs exclusively to that client. Intellectual property used by the
Company to operate its business is owned by or licensed to the Company. The
Company relies on trade secret laws to protect its proprietary software. The
Company attempts to protect its trade secrets and other proprietary
information through agreements with employees and consultants. The Company
does not hold any patents and does not have any patent applications pending.
There can be no assurance that the steps taken by the Company to protect its
proprietary technology will be adequate to deter misappropriation of its
proprietary rights or third party development of similar proprietary software.
Metro Information Services-SM- is a registered service mark of the
Company. Other than Metro Information Services-SM-, the Company does not own
any registered service marks.
SEASONALITY
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
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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.
COMPETITION
The IT services industry is extremely competitive and highly fragmented.
The Company believes there are thousands of competitors in the United States
alone, many of which are privately owned. Although the market is
consolidating, management believes no one company is dominant. The Company's
competitors include general IT services firms, temporary staffing and
personnel placement companies, general management consulting firms, major
accounting firms, divisions of large hardware and software companies and
niche providers of IT services. Some of the Company's competitors possess
substantially greater resources, greater name recognition and a more
established client base than the Company. In addition, the services offered
by the Company have been and continue to be provided by client personnel. The
Company believes that the significant competitive factors in the sale of its
services include quality of consultant services, availability of consultants,
price, breadth of services offered and reputation.
As a result of intense competition, IT services engagements frequently
are subject to pricing pressure. Clients also require vendors to provide
services in multiple locations. Competition for contracts for many of Metro's
services takes the form of competitive bidding in response to requests for
proposals and quotes.
Prime Vendors present an additional competitive challenge. To reduce the
number of their IT service providers, certain businesses are beginning to use
a limited number of vendors and, in some cases, a single vendor (collectively
"Prime Vendors"). Prime Vendors enter into contractual arrangements with
clients to fill their IT services needs either directly or through
subcontractors. Because these Prime Vendors generally are given the first
opportunity to fill a client's consultant needs, the industry trend toward
the use of Prime Vendors may give the Company fewer opportunities to place
consultants. In those circumstances where the Prime Vendor subcontracts with
the Company to provide consultants, the Prime Vendor may place bill rate
pressure on the Company.
The Company has taken steps, when practical, to become a Prime Vendor of
IT services for certain clients. The Company has experienced and anticipates
continued pricing pressure from these clients as a condition to becoming or
remaining a Prime Vendor. The Company evaluates these situations on an
individual basis to determine whether these arrangements contribute to the
overall profitability of the Company.
RECRUITING AND HIRING
Because recruiting and hiring qualified consultants is critical to the
Company's success, the Company spends significant resources and effort to
locate and retain high-quality consultants. The Company's structured
recruiting approach is based on: the use of a proprietary resume tracking
database which allows qualified candidates to be identified based on specific
client requirements, effective communication between the local offices and
corporate headquarters which allows all offices to share information and
match candidates to the appropriate office and client and a strict
qualification process that utilizes Company-stated standards to qualify
candidates both on a technical and professional basis.
The Company identifies candidates through a variety of sources, including
local and national advertising, recruiting agencies, referrals from employees
and clients, the Internet, career fairs and professional associations. The
Company believes its national presence and local office network enables it to
recruit consultants with specialized skill sets, which are generally in
higher demand and more difficult to locate. Candidate resume information is
entered into the Company's proprietary database, which allows the Company's
30 offices equal access to candidate qualifications. Office staff can search
for candidates based on a variety of search criteria including skill sets,
experience and location preferences. The Company's Quality Operations
Department trains new recruiters (through an in-house training program known
internally as Recruiter University), monitors the recruiting process and
coordinates the sharing of information among all offices so candidates are
quickly and efficiently pursued for hire throughout the Company. At December
31, 1997, the Company had 72 individuals performing recruiting functions.
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CONSULTANT TRAINING AND EDUCATION
The Company believes consultant training and education is essential to
meeting client requirements for ever-changing skills and for retaining
consultants. In 1997, the Company began to focus on programs that train less
experienced individuals in new skills to increase the supply of qualified
consultants. The Company offers a variety of training in technical and
professional competencies on a Company-wide level, through its Human
Resources Department and, on an individual office level, through each
office's training coordinator. The Human Resources Department oversees
professional and technical training, the licensing of computer-based training
courses, development or licensing of instructor-led training, utilization of
corporate training hardware and software and tuition reimbursement. Office
training coordinators work closely with their office staff to provide
effective training through the development of training plans, coordination of
class logistics and the sponsorship of informal special interest training
sessions. During 1997, approximately 0.7% of revenue was spent on training
and education.
EMPLOYEES
Virtually all of the Company's consultants are employees of the Company
for federal and state tax purposes. For such individuals, the Company pays
social security taxes (FICA), federal and state unemployment taxes and
workers' compensation insurance premiums. The Company has few consultants
that are independent contractors.
As of December 31, 1997, the Company had 2,074 employees of which 2,010
were full-time and 64 were part-time (working 30 hours or less in a week). Of
the 2,010 full-time employees, 1,716 were consultants and 294 were general
and administrative staff. Of the 1,716 consultants, the Company classifies
1,133 as Regular Staff Members ("RSMs") and 583 as Associate Staff Members
("ASMs"). RSMs are entitled to full benefits and substantially all are
salaried and continue to earn full salary and benefits even if not working
for a client. The Company markets RSMs to new clients in anticipation of
completion of current project assignments. ASMs are entitled to only
statutory benefits and the majority are paid on an hourly basis. In addition
to statutory benefits, ASMs are permitted to participate in a limited number
of other benefits, but are required to pay substantially all of the cost of
these benefits. ASMs are employed only for specific client projects. As a
result, even though the Company markets most ASMs to new clients in
anticipation of completion of current project assignments, they are at
greater risk of not being retained by the Company.
Competition for qualified IT consultants to fill client needs is intense.
The Company believes that its core philosophy and values, developed at the
Company's inception, help it attract and retain high-quality IT
professionals. Consultants sign agreements that limit their ability to
compete with the Company for a 12-month period after leaving the Company. In
addition, certain of the Company's agreements limit the client's ability to
hire employees of the Company working at the client's facility.
The Company completes an annual comprehensive staff survey detailing
employee satisfaction and areas for improvement. The survey results are
published in special editions of the Company newsletter, MetroExpress, and
shared with employees and clients. The survey helps the Company identify
changing employee needs and desires which the Company believes increases
employee satisfaction and reduces employee turnover. The Company is not a
party to any collective bargaining agreements and considers its relationships
with its employees to be excellent.
YEAR 2000 ISSUES
Year 2000 ("Y2K") issues are being addressed by the Company and many of
its clients, suppliers, vendors and financial institutions. Y2K issues relate
to the inability of some computer programs to make calculations correctly
that involve dates after December 31, 1999. Y2K issues have the potential to
disrupt normal business operations and decrease the profitability of affected
companies. The Company provides some of its clients with consultants to
address Y2K issues. The Company estimates that, on December 31, 1997,
approximately 13% of its consultants were involved in Y2K activities. See,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Issues."
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ITEM 2. PROPERTIES
The Company's executive office is located at Reflections II, 200 Golden Oak
Court, Virginia Beach, Virginia 23452. This facility currently serves as the
headquarters for the Corporate Support Group. The Company's headquarters is
located in a leased facility with approximately 22,000 square feet at a current
annual rent of $352,150, and a term expiring in 2001. The Company's 30 offices
aggregate approximately 100,590 square feet and are leased at aggregate current
annual rents of approximately $1,481,000 for various terms, with no lease
commitment extending past the year 2003. In addition, in support of its
geographic expansion plan, the Company occasionally leases residential
apartments for terms of two to six months in those cities where new offices are
located. The Company believes that its properties are adequate for its current
needs. Further, the Company believes that suitable additional or replacement
space will be available when required on terms the Company believes will be
acceptable.
The following table sets forth additional information concerning the
Company's facilities:
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DATE OPENED/ACQUIRED OFFICE LOCATION
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July 1979........................... Tidewater (Virginia Beach), Virginia
September 1982...................... Research Triangle (Raleigh), North Carolina
November 1982....................... Richmond, Virginia
August 1984......................... Tampa Bay (Tampa), Florida
November 1984....................... Charlotte, North Carolina
October 1985........................ Triad (Winston-Salem), North Carolina
March 1987.......................... Atlanta, Georgia
October 1987........................ South Florida (Ft. Lauderdale), Florida
August 1988......................... Caribbean Islands (Hato Rey), Puerto Rico
August 1989......................... Orlando (Winter Park), Florida
November 1989....................... Greenville, South Carolina
March 1990.......................... Roanoke, Virginia
April 1991.......................... Nashville (Brentwood), Tennessee
September 1992...................... Dallas/Ft. Worth (Dallas), Texas
July 1993........................... Jacksonville, Florida
July 1994 .......................... Houston, Texas
April 1995.......................... Cincinnati (Fort Mitchell, KY), Ohio
May 1995............................ Chicago (Des Plaines), Illinois
September 1995...................... Phoenix, Arizona
November 1995....................... Delaware Valley (Wayne), Pennsylvania
April 1996.......................... Puget Sound (Bellevue), Washington
June 1996........................... Washington, D.C. (Fairfax, VA)
October 1996........................ Columbus (Worthington), Ohio
January 1997........................ Rocky Mountain (Denver), Colorado
April 1997.......................... St. Louis, Missouri
July 1997*.......................... Columbia, South Carolina
July 1997*.......................... Kansas City, Missouri
July 1997........................... Austin, Texas
September 1997...................... Memphis, Tennessee
January 1998........................ Pittsburgh, Pennsylvania
</TABLE>
* Indicates an office acquired in 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings, other than
ordinary routine litigation incidental to the business.
Page 10
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of the year ended December 31, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth information as to each Director, Executive Officers
and other key personnel of Metro, including his or her age, present principal
occupation, other business experience during the last five years, directorships
in other publicly-held companies, membership on committees of the Board of
Directors and period of service with Metro.
DIRECTORS AND CERTAIN EXECUTIVE OFFICERS OF THE REGISTRANT
RAY E. BECKER, 61, is founder and President of Consultants to Management,
Inc. of Ellsworth, Maine (management consulting services), and has held those
positions since 1995. From 1985 to 1994, Mr. Becker served in a variety of roles
with Keane, Inc., retiring as Vice President and Western Regional Manager for
Keane in 1994. Mr. Becker has served on Metro's Board of Directors since April
1997. Mr. Becker's term as a director expires at Metro's 1998 Annual Meeting.
Mr. Becker is a member of Metro's Audit Committee and its Compensation
Committee.
ANDREW J. DOWNING, 42, is a Director and Executive Vice President and Chief
Operating Officer of the Company. Between 1983 and July 1996, Mr. Downing served
in various marketing capacities in the Company's Virginia Beach, Virginia
office, as a Regional Vice President and a Vice President of Operations. In July
1996, Mr. Downing became Executive Vice President and Chief Operating Officer of
the Company. Mr. Downing has served on the Board of Directors since January
1997. Mr. Downing's term as a director expires at Metro's 1998 Annual Meeting.
ROBERT J. EVELEIGH, 38, is a Director and Vice President of Finance,
Treasurer and Chief Financial Officer of the Company. Between August 1988 and
January 1997, Mr. Eveleigh was an attorney with Clark & Stant, P.C., the
Company's general counsel. Mr. Eveleigh is also a certified public accountant.
Mr. Eveleigh became Metro's Vice President of Finance, Treasurer and Chief
Financial Officer on January 29, 1997. Mr. Eveleigh has served on Metro's Board
of Directors since January 1997. Mr. Eveleigh's term as a director expires at
Metro's 1999 Annual Meeting.
JOHN H. FAIN, 49, is Chairman of the Board of Directors, President and Chief
Executive Officer of the Company. Mr. Fain is Chairman of Metro's Compensation
Committee and has been a Director since 1979. Mr. Fain's current term as a
director expires at Metro's 2000 Annual Meeting.
A. EUGENE LOVING, Jr., 55, is Chairman of the Board and Chief Executive
Officer of Max Media Properties LLC ("Max"). Mr. Loving has held these positions
with Max and its predecessors since 1991. Mr. Loving has served on the Board of
Directors since April 1997. Mr. Loving's term as a director expires at Metro's
1999 Annual Meeting. Mr. Loving is a member of Metro's Audit Committee and its
Compensation Committee.
OTHER EXECUTIVE OFFICERS OF THE REGISTRANT
FRANK B. BRACKEN, JR., 49, is a Vice President of Operations. Mr. Bracken
joined the Company in July 1984 and has served as a Vice President of Operations
since July 1996. He served as Division Director in the Company's Richmond,
Virginia office from January 1996 until being named a Vice President of
Operations. From January 1994 to December 1995, Mr. Bracken served as Metro's
National Account Marketing Director. From July 1984 to December 1993, he served
in various marketing positions in the Company's Richmond, Virginia office.
RONALD D. CHEATHAM, 44, became a Vice President of Operations effective
January 1, 1998. Mr. Cheatham joined the Company in 1993 and served as marketing
account representative until 1995. From 1995 to 1997, he served as director of
Metro's Nashville, Tennessee office.
Page 11
<PAGE>
RICHARD C. JAECKLE, 52, is a Vice President of Operations. Mr. Jaeckle
joined the Company in 1987 and has served as a Vice President of Operations
since January 1994. From July 1989 to December 1993, he was responsible for the
selection and development of new offices.
MICHAEL G. MARTIN, 42, became a Vice President of Operations effective
January 1, 1998. Mr. Martin joined the Company in 1989 and served as marketing
director of Metro's Winston-Salem, North Carolina office through 1997.
KATHLEEN A. NEFF, 47, is a Vice President of Operations. Ms. Neff joined
Metro in 1980 and from January 1983 to December 1995, she served as the
Technical Director of the Company's Richmond, Virginia office. She was named to
her current position in January 1996.
CERTAIN KEY PERSONNEL
BRADLEY B. BRESEMEN, 47, is Director of Quality Operations. He has served in
this position since he joined the Company in April 1995. Before joining Metro,
Mr. Breseman spent 22 years with A.B. Dick Company in various capacities, last
serving as Vice President, Service and Distribution.
STEVEN A. LURUS, 42, is Secretary, Director of Finance and Chief Accounting
Officer of the Company. Mr. Lurus joined Metro in 1984 as Controller and became
Director of Finance in 1986. In 1991, he was named Secretary and Treasurer. In
1997, Mr. Lurus resigned his position as Treasurer to accommodate Mr. Eveleigh
being named Treasurer. Mr. Lurus is a certified public accountant.
MARILYNN C. MOSCHEL, 50, is Director of Human Resources. She has served in
this position since she joined Metro in 1988. Before joining the Company, she
served as Director of Marketing and Human Resources for Goodman & Company CPA's.
R. LAWRENCE WHITLEY, 37, is Director of Information Services. From September
1988, when he joined the Company, through March 1989, Mr. Whitley was an
Information Systems Consultant working on the Company's recruiting systems. From
April 1989 through June 1992, he served as the Manager of Information Services
and, in July 1992, was named to his current position.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET. The Company completed its initial public offering of stock on
January 29, 1997. The Company's Common Stock, $0.01 par value, trades on The
Nasdaq Stock Market under the symbol "MISI." Before January 29, 1997, there
was no established market for the Company's stock.
The following table sets forth the quarterly range of high and low trade
price per share of the Company's Common Stock since January 29, 1997 as
reported by The Nasdaq Stock Market:
<TABLE>
<CAPTION>
1997: HIGH LOW
- ----- --------- ---------
<S> <C> <C>
First Quarter............................ $ 20.750 $ 12.500
Second Quarter........................... $ 20.500 $ 12.500
Third Quarter............................ $ 24.000 $ 16.625
Fourth Quarter........................... $ 29.250 $ 20.625
</TABLE>
HOLDERS. The Company estimates that there were approximately 3,000 holders
of the Company's Common Stock on January 30, 1998.
DIVIDENDS. In 1987, the Company became an S corporation for federal and
certain state income tax purposes. As such, the Company's income was allocated
and taxable to the Company's individual shareholders, rather than to the
Company. Between 1987 and December 31, 1996, the Company declared and made
quarterly distributions to its
Page 12
<PAGE>
shareholders, generally in amounts in excess of amounts needed by the
shareholders to pay the taxes on the income allocated to them. Total
distributions paid to shareholders during the year ended December 31, 1996
were $5.1 million. In addition, on January 20, 1997, the Company distributed
to its shareholders $9.0 million, approximating the estimated aggregate
undistributed amount of income on which the shareholders were required to pay
income taxes for tax years 1987 through 1996. No other amounts were
distributed to shareholders during 1997. In connection with the January 29,
1997 initial public offering, the Company terminated its S corporation
election on January 1, 1997.
The Company currently anticipates that all of its earnings will be retained
for development and expansion of the Company's business and does not anticipate
paying any cash dividends in the foreseeable future. The payment of dividends is
subject to the discretion of the Board of Directors and will depend on the
Company's results of operations, financial position, capital requirements,
general business conditions, restrictions imposed by financing arrangements
(including, without limitation, the Company's credit facilities), legal and
regulatory restrictions on the payment of dividends and other factors the Board
of Directors deems relevant. See, "Management Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
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
December 31, 1997, the expenses incurred in connection with the issuance and
distribution of the securities registered were as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED ON ADDITIONAL
FORM 10-Q EXPENSES INCURRED EXPENSES INCURRED
FOR PERIOD ENDING THROUGH TO DATE AS OF
DIRECT OR INDIRECT PAYMENTS TO OTHERS: SEPTEMBER 30, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
- ------------------------------------------------------------- ---------------------- ------------------ -------------------
<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 December 31, 1997, net offering proceeds of
$33,143,634 were used for the following purposes:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED ON
FORM 10-Q USE OF PROCEEDS
FOR THE PERIOD ENDING CHANGES THROUGH
DIRECT OR INDIRECT PAYMENTS TO OTHERS: SEPTEMBER 30, 1997 IN USE OF PROCEEDS DECEMBER 31, 1997
- ----------------------------------------------------- --------------------- --------------------- -----------------
<S> <C> <C> <C>
Acquisition of other businesses...................... $ 4,352,920 -- $ 4,352,920
Repayment of indebtedness............................ 11,962,829 -- 11,962,829
Temporary investments:
Municipal Bonds.................................... 16,827,885 -- 16,827,885
--------------------- --------------------- -----------------
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 or on Form 10-Q for the period ended September 30, 1997.
Page 13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain financial and operating data and is
qualified by the more detailed Financial Statements and Notes thereto included
elsewhere in this Report. The Balance Sheet Data as of December 31, 1994, 1995,
1996 and 1997 and the Statements of Income Data for the years ended December 31,
1993, 1994, 1995, 1996 and 1997 were derived from the Company's Financial
Statements and Notes thereto that have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The Balance Sheet Data as of December
31, 1993 have been derived from the unaudited financial statements of the
Company which, in the opinion of management, have been prepared on the
same basis as the audited financial statements and include all adjustments,
consisting of normal recurring adjustments, which management considers necessary
for a fair presentation of the selected financial data shown. The Operating Data
have been derived from the unaudited internal records of the Company. The
financial data shown below should be read in conjunction with the Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1993 1994 1995(1) 1996 1997
--------- --------- --------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenue................................................. $ 53,344 $ 68,669 $ 85,904 $ 113,963 $ 152,578
Cost of revenue......................................... 37,646 48,221 61,074 79,752 106,080
--------- --------- --------- ---------- ----------
Gross profit............................................ 15,698 20,448 24,830 34,211 46,498
--------- --------- --------- ---------- ----------
Selling, general and administrative expense............. 11,186 14,238 18,970 24,347 30,264
Depreciation and amortization........................... 275 357 537 763 1,158
--------- --------- --------- ---------- ----------
Total operating expenses................................ 11,461 14,595 19,507 25,110 31,422
--------- --------- --------- ---------- ----------
Operating income........................................ 4,237 5,853 5,323 9,101 15,076
Net interest income (expense)........................... 8 (215) (323) (260) 729
--------- --------- --------- ---------- ----------
Income before income taxes.............................. 4,245 5,638 5,000 8,841 15,805
Income taxes(2)......................................... -- -- -- -- 6,178
--------- --------- --------- ---------- ----------
Net income.............................................. $ 4,245 $ 5,638 $ 5,000 $ 8,841 $ 9,627
--------- --------- --------- ---------- ----------
--------- --------- --------- ---------- ----------
Income before income taxes.............................. $ 4,245 $ 5,638 $ 5,000 $ 8,841
Pro forma provision for income taxes(2)................. 1,698 2,255 2,000 3,536
--------- --------- --------- ----------
Pro forma net income(2)................................. $ 2,547 $ 3,383 $ 3,000 $ 5,305
--------- --------- --------- ----------
--------- --------- --------- ----------
Pro forma net income per share--basic and
diluted(2)............................................ $ 0.24 $ 0.42
--------- ----------
--------- ----------
Net income per share -- basic and diluted............... $ 0.66
----------
----------
Weighted average shares outstanding:
Basic.................................................. 12,756 12,762 14,611
Diluted................................................ 12,756 12,762 14,662
</TABLE>
- ------------------------
(1) Includes $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.
(2) For the periods 1993 through 1996, the Company was an S corporation for
federal and certain state income tax purposes. The pro forma provision
for income taxes for each period shown reflects a provision for income
taxes, as if the Company was a C corporation for income tax purposes
during such periods, at an assumed effective tax rate of 40%. See Note 6
of Notes to Financial Statements. Effective January 1, 1997, the Company
revoked its S corporation election subjecting it to corporate income
taxes at federal, state and local levels.
Page 14
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
----------- --------- --------- --------- ---------
(Unaudited)
(In thousands, except operating data)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 2,649 $ 3,724 $ 2,368 $ 6,369 $ 34,560
Total assets................................................ 11,356 13,466 19,786 21,572 58,533
Line of credit facilities................................... 3,119 3,596 7,256 2,547 --
Redeemable common stock..................................... 732 1,070 1,404 2,651 --
Total shareholders' equity.................................. 3,913 4,425 4,613 8,354 45,128
OPERATING DATA:(1)
Offices..................................................... 15 16 20 23 29
Consultants................................................. 675 838 1,074 1,279 1,716
Total employees............................................. 779 963 1,239 1,493 2,010
</TABLE>
- ------------------------
(1) Consultant data include only the Company's full-time consultants and total
employee data include only the Company's full-time employees.
ITEM 7. 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
WRITTEN AND ORAL 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 MADE. WITHOUT
LIMITING THE FOREGOING, THE WORDS "BELIEVES," "ANTICIPATES," "PLANS," "EXPECTS,"
"SEEKS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. FUTURE EVENTS AND THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS REFLECTED IN THESE 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 THIS REPORT, INCLUDING "-RISKS ASSOCIATED WITH FUTURE OPERATIONS" AND THE
COMPANY'S OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS. THE COMPANY
DISCLAIMS ANY INTENT OR OBLIGATION TO UPDATE 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 30 offices in the United States and Puerto Rico.
The Company's more than 1,700 consultants, 66% of whom were salaried on December
31, 1997, 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,
Page 15
<PAGE>
DB2, Visual Basic 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, retail, financial services, government (state and
local only), healthcare, information technology, manufacturing, transportation,
leisure and utilities. The Company emphasizes long-term relationships with its
clients rather than one-time projects or assignments. During the year ended
December 31, 1997, the Company performed IT services for 396 clients (excluding
clients that generated less than $25,000 in revenue during the year).
Revenue growth is derived primarily from increases in the number of
consultants placed with existing and new clients. The number of full-time
consultants grew from 1,074 at December 31, 1995 to 1,279 at December 31, 1996
and to 1,716 at December 31, 1997, including consultants gained through
acquisitions. In addition, over the same period, the Company increased the
average bill rates charged to clients for consultants to keep pace with the
increased costs of consultants.
Metro's revenue grew 25.1% in 1995 to $85.9 million, 32.7% in 1996 to $114.0
million and 33.9% in 1997 to $152.6 million. In 1995, 1996 and 1997, the
Company's 10 largest clients accounted for approximately 33.4%, 29.1% and 29.8%,
respectively, of the Company's revenue and its largest client accounted for
approximately 6.8%, 6.5% and 5.8%, respectively, of revenue.
Revenue growth has been achieved almost entirely through internal growth,
although 1997 revenue growth includes revenue from two acquisitions. Without
these acquisitions the growth rate for 1997 would have been approximately 31.0%.
Between January 1, 1995 and December 31, 1997, the Company opened 11 new offices
and acquired two new offices. New offices opened by the Company have generally
produced monthly operating losses or marginal operating income for six to 12
months and have required 18 to 24 months to reach cumulative operating income.
In addition, to support its growth strategy, the Company continues to invest in
its proprietary business systems and its communications network.
On July 1, 1997, the Company completed the acquisition of two information
technology services companies. The Company acquired the business operations of
Data Systems Technology, Inc., which had offices in Columbia and Greenville,
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). The purchase price for DPCA is $5.2 million, $3.9 million of which was
paid July 1, 1997 and $1.3 million of which is due in the first quarter of 1998
as a result of the acquired business attaining certain gross profit targets.
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.
Page 16
<PAGE>
RESULTS OF OPERATIONS
FOR PURPOSES OF THE FOLLOWING DISCUSSION, A MATURE OFFICE IS ONE 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 ONE THAT WAS OPENED OR ACQUIRED
THEREAFTER.
The following tables set forth, for the periods indicated, the percentage
of revenue and the percentage change from the prior period of certain items
reflected in the Company's statements of income:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
---------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------
1995(1) 1996 1997
----------- --------- ---------
<S> <C> <C> <C>
Revenue...................................................... 100.0% 100.0% 100.0%
Cost of revenue.............................................. 71.1 70.0 69.5
----- --------- ---------
Gross profit................................................. 28.9 30.0 30.5
----- --------- ---------
Selling, general and administrative expenses................. 22.1 21.3 19.8
Depreciation and amortization expense........................ 0.6 0.7 0.8
----- --------- ---------
Total operating expenses..................................... 22.7 22.0 20.6
----- --------- ---------
Operating income............................................. 6.2 8.0 9.9
Net interest income (expense)................................ (0.4) (0.2) 0.5
----- --------- ---------
Income before income taxes................................... 5.8 7.8 10.4
Pro forma provision for income taxes(2)...................... 2.3 3.1
----- ---------
Pro forma net income(2)...................................... 3.5% 4.7%
----- ---------
----- ---------
Income taxes(2).............................................. 4.1
---------
Net income(2)................................................ 6.3%
---------
---------
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE CHANGES
----------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
<S> <C> <C>
1996 COMPARED TO 1995(3) 1997 COMPARED TO 1996
--------------------------- -----------------------
Revenue.............................................. 32.7% 33.9%
Cost of revenue...................................... 30.6 33.0
Gross profit......................................... 37.8 35.9
Selling, general and administrative expenses......... 28.3 24.3
Depreciation and amortization expense................ 42.2 51.6
Total operating expenses............................. 28.7 25.1
Operating income..................................... 71.0 65.7
Net interest income (expense)(4)..................... (19.7) N/M
Income before income taxes........................... 76.8 78.8
Pro forma provision for income taxes(2).............. 76.8 74.7
Pro forma net income(2).............................. 76.8 81.5
</TABLE>
- ------------------------
(1) Includes $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, the percentage of revenue of: selling,
general and administrative expenses would have been 21.2%, total operating
expenses would have been 21.8%, operating income would have been 7.1%,
income before income taxes would have been 6.7%, pro forma provision for
income taxes would have been 2.7% and pro forma net income would have
been 4.0%.
(2) For 1995 and 1996, the Company was an S corporation for federal and certain
state income tax purposes. The pro forma provision for income taxes for
these years reflects a provision for income taxes as if the Company were a C
corporation for all income tax purposes during such period, at an assumed
effective tax rate of 40%. See Note 6 of Notes to Financial Statements.
Effective as of January 1, 1997, the Company revoked its S corporation
election subjecting it to corporate income taxes at federal, state and local
levels. Accordingly percentage of revenue amounts for 1997 are computed
using actual 1997 figures. Percentage changes for 1997 compared to 1996 are
computed using actual 1997 figures and pro forma 1996 figures.
Page 17
<PAGE>
(3) Includes $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, the percentage change in: selling,
general and administrative expenses would have been 33.8%, total operating
expenses would have been 34.0%, operating income would have been 49.4% and
income before income taxes, pro forma provision for income taxes and pro
forma net income would have been 53.2%.
(4) N/M--Not Meaningful.
1997 COMPARED TO 1996
REVENUE. Revenue increased $38.6 million, or 33.9%, to $152.6 million
for 1997 from $114.0 million for 1996. This increase is primarily a result of
increased billings to existing clients, the addition of new clients
(including clients gained through acquisitions) and increased bill rates
charged for the Company's consultants. As of December 31, 1997, compared to
December 31, 1996, the total number of full-time consultants increased to
1,716 from 1,279, respectively, and clients (excluding clients that generated
less than $25,000 in revenue during such year) increased to 396 from 324,
respectively. Revenue from the Company's 16 mature offices increased $25.1
million, or 23.4%, from the earlier period and the 13 new offices (including
two acquired offices) accounted for the remaining $13.5 million increase in
revenue.
COST OF REVENUE. Cost of revenue increased $26.3 million, or 33.0%, to
$106.1 million for 1997 from $79.8 million for 1996. Cost of revenue
increased primarily due to compensation and benefits associated with growth
in the number of consultants. As a percentage of revenue, cost of revenue
decreased to 69.5% for 1997 from 70.0% for 1996 primarily because of bill
rates to clients increasing faster than pay rates to consultants during the
period.
GROSS PROFIT. Gross profit increased $12.3 million, or 35.9%, to $46.5
million for 1997 from $34.2 million for 1996. As a percentage of revenue,
gross profit increased to 30.5% for 1997 from 30.0% for 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $6.0 million, or 24.3%, to $30.3 million
for 1997 from $24.3 million for 1996. This increase is due primarily to costs
associated with recently opened offices, growth of administrative staff in
mature offices, hiring additional corporate staff to support the increased
number of offices and development of the Company's proprietary business
systems. As a percentage of revenue, selling, general and administrative
expenses decreased to 19.8% for 1997 from 21.3% for 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$395,000, or 51.6%, to $1,158,000 for 1997 from $763,000 for 1996. 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 recent acquisitions. As a percentage of revenue,
depreciation and amortization increased to 0.8% for 1997 from 0.7% for 1996.
OPERATING INCOME. Operating income increased $6.0 million, or 65.7%, to
$15.1 million for 1997 from $9.1 million for 1996. As a percentage of
revenue, operating income increased to 9.9% for 1997 from 8.0% for 1996. The
improvement in operating income margin is in part the result of the Company's
centralization of administrative functions and leverage obtained from the
Company's proprietary business systems.
NET INTEREST INCOME (EXPENSE). Net interest income (expense) increased by
$989,000 to $729,000 of interest income for 1997 from $260,000 of interest
expense for 1996. This change reflects a decrease in the average level of
borrowings during the period and investment of a portion of the proceeds of
the Company's January 1997 initial public offering of Common Stock in
interest bearing instruments.
INCOME BEFORE INCOME TAXES. Income before income taxes increased $7.0
million, or 78.8%, to $15.8 million for 1997 from $8.8 million for 1996. As a
percentage of revenue, income before income taxes increased to 10.4% for 1997
from 7.8% for 1996.
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INCOME TAXES. In 1996, the Company was an S corporation for federal and
certain state income tax purposes. The income statement for 1996 includes a
pro forma provision for income taxes as if the Company was subject to federal
and state income taxes at an assumed effective rate of 40%. The Company's
effective tax rate for 1997 was 39.1%. Income taxes increased $2.7 million or
74.7%, to $6.2 million for 1997 from pro forma income taxes of $3.5 million
for 1996. As a percentage of revenue, income taxes increased to 4.1% for 1997
from the pro forma amount of 3.1% for 1996. Income taxes for 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 1997 would have increased $2.8
million, or 78.2%, to $6.3 million and the Company's effective tax rate would
have been 39.9%.
NET INCOME. Net income increased $4.3 million, or 81.5%, to $9.6 million
for 1997 from pro forma net income of $5.3 million for 1996. As a percentage
of revenue, net income increased to 6.3% for 1997 from the pro forma amount
of 4.7% for 1996.
EARNINGS PER SHARE. Diluted earnings per share increased $0.24, or
57.1%, to $0.66 for 1997 from pro forma earnings per share of $0.42 for 1996.
Excluding the $125,000 one-time credit described under "Income taxes' above,
diluted earnings per share for 1997 would have increased $0.23, or 54.8%, to
$0.65.
1996 COMPARED TO 1995
REVENUE. Revenue increased $28.1 million, or 32.7%, to $114.0 million
for 1996 from $85.9 million for 1995. This increase is primarily a result of
increased billings to existing clients, the addition of new clients and
increased bill rates charged for the Company's consultants. As of December
31, 1996 compared to December 31, 1995, the total number of full-time
consultants increased to 1,279 from 1,074, respectively, and clients
(excluding clients that generated less than $25,000 in revenue during such
year) increased to 324 from 266, respectively. Revenue from the Company's 15
mature offices increased $20.7 million, or 24.6%, from the earlier period and
the eight new offices accounted for the remaining $7.4 million increase in
revenue.
COST OF REVENUE. Cost of revenue increased $18.7 million, or 30.6%, to
$79.8 million for 1996 from $61.1 million for 1995. 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 70.0% for 1996 from 71.1% for 1995 primarily because of bill rates to
clients increasing faster than pay rates to consultants during the period.
GROSS PROFIT. Gross profit increased $9.4 million, or 37.8%, to $34.2
million for 1996 from $24.8 million for 1995. As a percentage of revenue,
gross profit increased to 30.0% for 1996 from 28.9% for 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $5.3 million, or 28.3%, to $24.3 million
for 1996 from $19.0 million for 1995. 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 21.3% for 1996 from 22.1% for 1995. Selling, general
and administrative expenses for 1995, however, include a non-recurring
$770,000 non-cash compensation expense accrued in the fourth quarter of 1995
for stock issued for services performed by employees in 1995. Excluding the
non-recurring $770,000 charge, selling, general and administrative expenses
for 1996 would have increased $6.1 million, or 33.8%, from $18.2 million for
1995 and, as a percentage of revenue, would have increased to 21.3% for 1996
from 21.2% for 1995.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$227,000, or 42.2%, to $763,000 for 1996 from $537,000 for 1995. This
increase is primarily attributable to depreciation on additions to computer
equipment and software. As a percentage of revenue, depreciation and
amortization increased to 0.7% for 1996 from 0.6% for 1995.
OPERATING INCOME. Operating income increased $3.8 million, or 71.0%, to
$9.1 million for 1996 from $5.3 million for 1995. As a percentage of revenue,
operating income increased to 8.0% for 1996 from 6.2% for 1995. Excluding the
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$770,000 charge to selling, general and administrative expenses, operating
income would have been $6.1 million for 1995 and, as a percentage of revenue,
would have been 7.1% for 1995.
NET INTEREST INCOME (EXPENSE). Net interest expense decreased by $63,000
to $260,000 for 1996 from $323,000 for 1995. This decrease reflects a
decrease in the average level of borrowings during the period.
INCOME BEFORE INCOME TAXES. Income before income taxes increased $3.8
million, or 76.8%, to $8.8 million for 1996 from $5.0 million for 1995. As a
percentage of revenue, income before income taxes increased to 7.8% for 1996
from 5.8% for 1995. Excluding the $770,000 charge to selling, general and
administrative expenses, income before income taxes for 1995 would have
increased $3.1 million, or 53.2%, to $5.8 million and, as a percentage of
revenue, would have been 6.7% for 1995.
INCOME TAXES. In 1996 and 1995, the Company was an S corporation for
federal and certain state income tax purposes. The income statements for 1996
and 1995 include a pro forma provision for income taxes as if the Company was
subject to federal and state income taxes at an assumed effective rate of
40%. Pro forma income taxes increased $1.5 million or 76.8%, to $3.5 million
for 1996 from pro forma income taxes of $2.0 million for 1995. As a
percentage of revenue, pro forma income taxes increased to 3.1% for 1996 from
the pro forma amount of 2.3% for 1995.
NET INCOME. Pro forma net income increased $2.3 million, or 76.8%, to
$5.3 million for 1996 from pro forma net income of $3.0 million for 1995. As
a percentage of revenue, net income increased to 4.7% for 1996 from the pro
forma amount of 3.5% for 1995.
EARNINGS PER SHARE. Pro forma earnings per share increased $0.18, or
75.0%, to $0.42 for 1996 from pro forma earnings per share of $0.24 for 1995.
LIQUIDITY AND CAPITAL RESOURCES
In January 1997, the Company completed an initial public offering of
3,100,000 shares of its Common Stock at a price of $16.00 per share. Of the
3,100,000 shares, 2,300,000 shares were issued and sold by the Company and
800,000 shares were sold by a shareholder of the Company. Shortly thereafter,
the representatives of the several underwriters exercised their
over-allotment option resulting in the sale of 465,000 shares by other
shareholders of the Company. The net proceeds to the Company were
approximately $33,144,000. The Company did not receive any of the proceeds
from the sale of shares by the selling shareholders. During the third quarter
of 1997, the Company used $4,352,920 of the proceeds from the initial public
offering for the acquisitions of Data Systems Technology, Inc. and DP Career
Associates described in Note 2 of Notes to Financial Statements.
On September 30, 1997, the Company made its first quarterly sale of stock
under the Metro Information Services, Inc. Employee Stock Purchase Plan (the
"ESPP") and sold 10,000 shares of Common Stock for $167,350. On December 31,
1997, the Company sold 9,984 shares of Common Stock to the ESPP for $184,587.
The ESPP is described in Note 8 of Notes to Financial Statements.
During 1997, the Company funded its operations from cash generated by
operations and, to a lesser extent, from borrowings under the Company's
revolving credit facilities. These borrowings were repaid with proceeds from
the initial public offering. Net cash provided by operations was $6,681,000
for 1997 and consisted primarily of net income of $9,627,000 and, excluding
the effects of acquisitions, increases in accounts receivable of $7,203,000,
accounts payable of $1,591,000 and accrued compensation and benefits of
$1,650,000. The increases in accounts receivable, accounts payable, and
accrued compensation and benefits are primarily due to the revenue growth
experienced during 1997. The Company's working capital was $34,560,000 at
December 31, 1997 compared to $6,369,000 at December 31, 1996.
The Company has $39,900,000 of credit facilities provided in equal amounts
by three banks, all of which is available. 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
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(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 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 December 31, 1997, the rate on such borrowings would have borne
interest rates ranging from 6.1% 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 contain 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.
SEASONALITY
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 renewals related to clients' budget approval processes.
INFLATION
Due to the high demand for IT services and a shortage of qualified IT
consultants, wage inflation in the IT services industry surpassed normal wage
inflation during 1997. If this trend continues, it could have a material
adverse effect on the Company's business, operating results and financial
condition if the Company is unable to pass increased payroll costs on to its
clients. The Company attempts to obtain bill rate increases from clients to
offset these increases whenever possible. The Company expects to obtain bill
rate increases in 1998 to offset pay rate increases in 1998, although there
can be no assurance that this will occur. Average pay rates for 1997
increased 5.3% over average pay rates for 1996. Average pay rates for 1996
increased 5.4% over average pay rates for 1995. The Company expects average
pay rate increases in 1998 will equal or exceed these percentages.
YEAR 2000 ISSUES
The Company relies heavily on computer systems to run its business,
including, without limitation, recruiting, candidate tracking, payroll, human
resources, benefits and financial accounting systems. Many of these systems
use dates to make computations necessary to process information accurately.
Until recently computer programs used a two-digit date to indicate a year.
For example, the year 1958 is indicated in these programs by the digits "58."
As the year 2000 approaches, these programs will need to make computations
involving 2000 and later years. Programs that use only a two-digit year may
misinterpret the year 2000 for the year 1900, resulting in an incorrect
calculation.
Almost all companies using computerized systems face year 2000 ("Y2K")
issues. The Company believes that Y2K issues involve the risk that the
Company's computerized systems and those of its clients, suppliers, vendors,
financial institutions and others will be disrupted or fail. The Company has
also identified as a risk the possible loss of revenue when consultants on
Y2K assignments complete their assignments. These risks are discussed below.
INTERNAL RISKS. Fixing the Y2K problem in the Company's systems involves
ongoing evaluations of the Company's computerized systems, identifying the
affected systems and fixing or replacing them. The Company completed an
initial evaluation of its systems in 1997. The Company's initial evaluation
indicated that its proprietary
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systems are Y2K compliant. The Company is implementing other systems which it
believes are Y2K compliant. See "-New Systems Implementation."
EXTERNAL RISKS. The Company does not regularly transmit or receive
financial information from clients, suppliers, vendors or financial
institutions. In those circumstances where information is being exchanged
electronically, the Company believes that these clients, suppliers, vendors
and financial institutions are taking steps to address their Y2K issues in a
timely fashion. As a result, the Company does not expect Y2K issues to cause
a material adverse effect in this area.
A greater risk is posed if the Company's clients, suppliers, vendors and
financial institutions are not Y2K compliant and their noncompliance causes a
material disruption to their businesses. These disruptions could include,
among other things: a client's inability to process payments to the Company;
a financial institution's inability to process checks drawn on the Company's
bank accounts, accept deposits or process wire transfers; a client's,
supplier's, vendor's or financial institution's business failure; an
interruption in deliveries of computer equipment and other supplies from
vendors; a loss of voice and data connections the Company uses to share
information; and other interruptions to the normal conduct of business by the
Company, the nature and extent of which the Company cannot foresee. The
Company is unable to determine the nature, length or effect such
interruptions, if any, may have on the Company.
BUSINESS RISKS. As an IT services company, the Company has benefited
from Y2K issues by providing consultants with the skills necessary to help
address these issues for its clients. The Company faces the risk of reduced
business opportunities and revenue as clients resolve their Y2K issues if Y2K
assignments are not replaced with other assignments. The Company believes
that when consultants complete Y2K assignments, many of these consultants
will be re-assigned to perform activities delayed by clients while addressing
Y2K issues. In other cases, the Company will need to find other assignments
for these consultants. The Company estimates that, at December 31, 1997,
approximately 13% of the Company's consultants were involved in Y2K
assignments.
NEW SYSTEMS IMPLEMENTATION
The Company has licensed new human resources, payroll and financial
accounting software. These systems provide enhanced capabilities and
integration of information and are believed to be Y2K compliant. A
combination of Metro employees and outside consultants will be used to
implement these systems. The Company's current estimate of the cost to
replace these systems is $1.5 million. The Company expects to capitalize and
amortize these costs over these systems' useful lives.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE
INCOME, which establishes standards for reporting and display of
comprehensive income and its components in financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. In the
opinion of management, SFAS No. 130 is not expected to have a material impact
on the Company's financial statements.
RISK ASSOCIATED WITH FUTURE OPERATIONS
DEPENDENCE ON QUALIFIED PERSONNEL. The Company's success depends on its
ability to attract and retain consultants with the technical skills and
experience required to meet its clients' specific needs. The Company must
continually identify and recruit technical personnel in each of its markets
to fill new positions and to replace consultants who have left the Company.
The IT industry has high consultant turnover rates and the demand for
consultants has, to date, substantially exceeded supply. This has resulted in
intense competition for consultants and the Company expects such competition
for consultants to increase in the future. There can be no assurance that the
Company will attract and retain the personnel it requires to conduct its
operations successfully or attract additional personnel for expanded
operations. Failure to attract and retain such personnel or an increase in
the Company's
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consultant turnover rate could have a material adverse effect on the
Company's business, operating results and financial condition.
RISK ASSOCIATED WITH OPENING NEW OFFICES. The Company recently
accelerated its office expansion program by opening four new offices in 1995,
three new offices in 1996 and four new offices in 1997 in geographic markets
where the Company had no previous presence. In addition, the Company expects
to open three to five offices annually for the next several years.
Historically, for approximately six to 12 months after opening, new offices
have generally produced monthly operating losses or marginal operating income
and have placed significant demands on the Company's operational,
administrative and financial resources. In addition, the Company's future
performance and profitability will depend, in part, on its ability to
successfully attract and retain qualified personnel to manage the growth and
operations of the new offices. The opening of additional offices,
individually or in the aggregate, may have a material adverse effect on the
Company's business, operating results and financial condition.
RISK ASSOCIATED WITH GROWTH THROUGH ACQUISITIONS. The Company intends to
grow, in part, through the acquisition of other IT businesses. The Company's
acquisition strategy depends on its ability to identify, finance and complete
acquisitions. There is significant competition for acquisition opportunities
which may increase the cost of acquisition candidates. Some competitors for
these candidates have greater resources than the Company. The Company will
face a variety of additional risks if it completes acquisitions, including
the inability to integrate the acquired businesses into the Company's
operations, the inability to achieve expected financial results from the
acquired businesses, the diversion of management's attention, the inability
to retain key personnel of the acquired businesses, losses due to liabilities
and contingencies of the acquired businesses and the adverse impact on net
income caused by amortization of acquired intangible assets. The Company's
failure or inability to successfully implement and manage its acquisition
strategy may have a material adverse effect on the Company's business,
operating results and financial condition. In addition, the value of Company
stock held by shareholders at the time of any acquisition may be diluted if
the Company issues stock to complete any acquisition.
RISK ASSOCIATED WITH NEW SERVICES. The Company intends to grow, in part,
through the development or acquisition of IT services beyond the scope of
services presently provided by the Company. The Company's ability to
successfully develop new services depends on a number of factors, including
its ability to identify and effectively integrate new services into the
Company's existing operating structure. The identification and offering of
new services in which the Company has no or little experience or expertise
could result in diversion of management's attention and place
disproportionate demands on the Company's operational, administrative and
financial resources. There can be no assurance that the performance of any
new service offerings, whether acquired or developed by the Company, will
meet management's expectations or provide the same profit margins as the
Company's existing operations.
COMPETITION. The IT services industry is extremely competitive and
highly fragmented. Although the market is consolidating, management believes
no one company is dominant. The Company's competitors include general IT
services firms, temporary staffing and personnel placement companies, general
management consulting firms, major accounting firms, divisions of large
hardware and software companies and niche providers of IT services. Some of
the Company's competitors possess substantially greater resources, greater
name recognition and a more established client base than the Company. In
addition, the services offered by the Company have been and continue to be
provided by clients' in-house personnel. There can be no assurance that the
Company will be able to compete successfully against existing or new
competitors as the industry continues to evolve.
TREND TOWARD PRIME VENDORS. To reduce the number of their IT service
providers, certain businesses are beginning to use a limited number of
vendors and, in some cases, a single vendor (collectively, "Prime Vendors").
These Prime Vendors fill client needs directly or through subcontractors.
Metro anticipates that this trend toward Prime Vendors may become
increasingly common in the marketplace and may result in pricing pressure and
the loss of business opportunities. There can be no assurance that this trend
will not lead to reduced gross profit margins and fewer opportunities to
place consultants and will not have a material adverse effect on the
Company's business, operating results and financial condition.
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The Company has taken steps, when practical, to become a Prime Vendor of
IT services. In certain cases, the Company experiences pricing pressure from
clients as a condition to becoming or remaining a Prime Vendor. In other
cases, the Company experiences demands to provide consultants in multiple
locations to become or remain a Prime Vendor. Although the Company believes
it can effectively meet its clients' requirements, there can be no assurance
that the Company will be able to compete effectively with other Prime Vendors
or remain a Prime Vendor.
ABSENCE OF LONG-TERM CONTRACTS; DEPENDENCE ON KEY CLIENTS. Substantially
all of the Company's contracts to perform services may be canceled or
modified by the Company's clients at will without penalty. Approximately 66%
of the Company's consultants are salaried employees and unless terminated,
receive full compensation and benefits even if not engaged in billable work.
As a result, cancellation or reduction of a contract may result in a loss of
revenue without a corresponding reduction in cost of revenue. Although the
Company has a broad client base, the loss of one or more large clients could
have a material adverse effect on the Company's business, operating results
and financial condition. In 1995, 1996 and 1997, the Company's 10 largest
clients accounted for approximately 33.4%, 29.1% and 29.8%, respectively, of
the Company's revenue and its largest client accounted for approximately
6.8%, 6.5% and 5.8%, respectively, of revenue.
CONTRACT PERFORMANCE AND PROJECT OUTSOURCING RISKS. Project outsourcing
is distinguishable from the Company's core business in that project
outsourcing requires the Company to assume a greater level of responsibility
for developing or maintaining systems on behalf of its clients. Many of the
Company's project outsourcing engagements are critical to the operations of
its clients' businesses. The Company's failure or inability to complete such
engagements to its clients' satisfaction could have a material adverse effect
on its clients' operations and, consequently, may give rise to claims against
the Company for actual or consequential damages or otherwise damage its
reputation, any of which could have a material adverse effect on the
Company's business, operating results and financial condition.
RAPID TECHNOLOGICAL CHANGE. Rapid technological advances, frequent
product introductions and enhancements, and changes in client requirements
characterize the market for IT services. The Company's future success
depends, in part, on its ability to provide consultants possessing the skills
to service past, current and next generation products and technologies. These
factors will require the Company to provide adequately trained personnel to
address the increasing and evolving needs of its clients. Any failure by the
Company to anticipate or respond rapidly to technological advances, new
products and enhancements or changes in client requirements could have a
material adverse effect on the Company's business, operating results and
financial condition.
EMPLOYMENT LIABILITY RISKS. Metro employs and places its consultants and
other employees at its clients' businesses. Risks associated with this
activity include possible claims of discrimination and harassment,
liabilities for errors and omissions by the Company's employees, misuse of
client proprietary information or intellectual property, injury to Company
and client employees, misappropriation of client funds, theft of client
property, other criminal activity, torts and other similar claims. In certain
circumstances, the Company may be held responsible for the actions of persons
not under the Company's direct control. Although the Company has not had
significant problems with respect to such employment liability, there can be
no assurance that the Company will not experience such problems in the future.
RELIANCE ON TECHNOLOGY AND COMPUTER SYSTEMS. The Company relies on its
computer and communications systems, the hub of which is located at its
corporate headquarters in Virginia Beach, Virginia. Although the Company has
a disaster recovery plan, temporary or permanent loss of these systems from
fire, power loss, natural disaster, operating malfunction or any other cause
could have a material adverse effect on the Company's business, operating
results and financial condition. The Company's property and business
interruption insurance may not be adequate to compensate the Company for all
losses that may occur. In addition, the Company is in the process of
implementing new human resources, payroll and financial accounting software
systems. An unsuccessful implementation of these new systems or significant
delays in their implementation could have a material adverse effect on the
Company's business operations.
DEPENDENCE ON SENIOR MANAGEMENT. The continued growth and success of the
Company is largely dependent on the efforts, direction and guidance of its
existing senior management and on its ability to attract and retain qualified
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managers. The Company has entered into employment agreements with its
executive officers, each of which contains provisions limiting these
employees' rights to compete with the Company and hire its employees. The
loss of any of the Company's senior management or key personnel and, in
particular, John H. Fain, President and Chief Executive Officer, or Andrew J.
Downing, Executive Vice President and Chief Operating Officer, or the
inability to attract and retain key management personnel in the future, could
have a material adverse effect on the Company's business, operating results
and financial condition. The Company carries no key man life insurance on Mr.
Fain or Mr. Downing.
HEALTH PLAN SELF INSURANCE RISKS. The Company self-insures a portion of
its group health and dental plan. On December 31, 1997, 1,384 of the
Company's 2,074 employees were covered by the group health plan. The Company
self-insures up to $125,000 of claims per covered employee per year with a
Company maximum annual aggregate liability of 125% of expected claims as
computed at the end of each year based on the number of covered persons
during the year. Self insurance charges may fluctuate materially from quarter
to quarter and may cause a material adverse effect on the Company's quarterly
and annual business, operating results and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This section is not applicable to the Company until fiscal years
beginning after June 15, 1998.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Metro Information Services, Inc.:
We have audited the accompanying balance sheets of Metro Information
Services, Inc. as of December 31, 1996 and 1997, and the related statements
of income, changes in redeemable common stock and shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Metro Information Services,
Inc. as of December 31, 1996 and 1997 and the results of its operations and
its cash flows for each of the years in the three-year period ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Norfolk, Virginia
February 2, 1998
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METRO INFORMATION SERVICES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
<S> <C> <C> <C>
1995 1996 1997
------------- -------------- --------------
Revenue.......................................................... $ 85,904,026 $ 113,962,932 $ 152,578,107
Cost of revenue.................................................. 61,074,051 79,751,603 106,079,583
------------- -------------- --------------
Gross profit..................................................... 24,829,975 34,211,329 46,498,524
------------- -------------- --------------
Selling, general and administrative expenses (Notes 3 and 11).... 18,969,732 24,346,933 30,264,143
Depreciation and amortization.................................... 536,986 763,760 1,158,228
------------- -------------- --------------
Total operating expenses....................................... 19,506,718 25,110,693 31,422,371
------------- -------------- --------------
Operating income................................................. 5,323,257 9,100,636 15,076,153
------------- -------------- --------------
Interest income.................................................. 57,440 49,622 788,752
Interest expense................................................. (380,420) (309,076) (60,100)
------------- -------------- --------------
Net interest income (expense).................................. (322,980) (259,454) 728,652
------------- -------------- --------------
Income before income taxes....................................... 5,000,277 8,841,182 15,804,805
Income taxes (Note 6)............................................ -- -- 6,177,558
------------- -------------- --------------
Net income....................................................... $ 5,000,277 $ 8,841,182 $ 9,627,247
------------- -------------- --------------
------------- -------------- --------------
Pro forma income data:
Income before income taxes..................................... $ 5,000,277 $ 8,841,182
Pro forma provision for income taxes (unaudited) (Note 6)...... 2,000,111 3,536,473
------------- --------------
Pro forma net income (unaudited)............................... $ 3,000,166 $ 5,304,709
------------- --------------
------------- --------------
Pro forma net income per share--basic and diluted (unaudited)
(Note 7)..................................................... $ 0.24 $ 0.42
------------- --------------
------------- --------------
Net income per share--basic and diluted (Note 7)............. $ 0.66
--------------
--------------
Weighted average number of shares of common stock and common
stock equivalents outstanding (Note 7):
Basic.......................................................... 12,755,789 12,761,685 14,610,888
Diluted........................................................ 12,755,789 12,761,685 14,662,257
</TABLE>
See accompanying notes to financial statements.
Page 27
<PAGE>
METRO INFORMATION SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1996 1997
------------- -------------
ASSETS:
Current assets:
Cash and cash equivalents........................................................ $ 157,372 $ 22,028,594
Accounts receivable less allowance for doubtful accounts of $113,886 and $152,201
at December 31, 1996 and 1997.................................................. 16,665,989 24,136,582
Prepaid expenses................................................................. 112,281 402,115
Deferred income taxes (Note 6)................................................... -- 662,687
------------- -------------
Total current assets........................................................... 16,935,642 47,229,978
Property and equipment, net (Note 4)............................................... 4,069,816 5,672,548
Goodwill, net (Note 2)............................................................. -- 5,327,622
Other assets....................................................................... 566,689 303,067
------------- -------------
Total assets....................................................................... $ 21,572,147 $ 58,533,215
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Line of credit facilities (Note 5)............................................... $ 2,547,388 $ --
Accounts payable................................................................. 1,146,010 4,118,209
Accrued compensation and benefits................................................ 6,873,694 8,551,501
------------- -------------
Total current liabilities...................................................... 10,567,092 12,669,710
Deferred income taxes (Note 6)..................................................... -- 735,632
------------- -------------
Total liabilities.............................................................. 10,567,092 13,405,342
------------- -------------
Redeemable common stock (Note 11).................................................. 2,650,893 --
Shareholders' equity:
Preferred stock, $0.01 par value; authorized 1,000,000 shares; none issued and
outstanding (Note 11).......................................................... -- --
Common stock, $0.01 par value, authorized 50,000,000 shares; issued and
outstanding 8,768,239 shares at December 31, 1996 and 14,819,984 shares at
December 31, 1997 (Note 11).................................................... 87,682 148,200
Paid in capital.................................................................. -- 36,085,946
Retained earnings................................................................ 8,266,480 8,893,727
------------- -------------
Total shareholders' equity..................................................... 8,354,162 45,127,873
------------- -------------
Commitments, contingencies and subsequent events (Notes 10 and 14)
Total liabilities and shareholders' equity......................................... $ 21,572,147 $ 58,533,215
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements.
Page 28
<PAGE>
METRO INFORMATION SERVICES, INC.
STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
REDEEMABLE -------------------------------------------------------------------------
COMMON STOCK COMMON STOCK
-------------------------- ---------------------------- PAID IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- ------------- ------------ -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF
DECEMBER 31,
1994............ 3,202,161 $ 1,070,400 8,768,239 $ 87,682 -- $ 4,337,797 $ 4,425,479
Issuance of
redeemable
common stock.... 242,003 359,421 -- -- -- -- --
Stock
redemption...... (24,551) (25,523) -- -- -- (10,940) (10,940)
Distributions
paid............ -- -- -- -- -- (4,801,836) (4,801,836)
Net income for
1995............ -- -- -- -- -- 5,000,277 5,000,277
----------- ------------- ------------ -------------- ------------- ------------- -------------
BALANCE AS OF
DECEMBER 31,
1995............ 3,419,613 1,404,298 8,768,239 87,682 -- 4,525,298 4,612,980
Issuance of
redeemable
common stock.... 312,148 1,246,595 -- -- -- -- --
Distributions
paid............ -- -- -- -- -- (5,100,000) (5,100,000)
Net income for
1996............ -- -- -- -- -- 8,841,182 8,841,182
----------- ------------- ------------ -------------- ------------- ------------- -------------
BALANCE AS OF
DECEMBER 31,
1996............ 3,731,761 2,650,893 8,768,239 87,682 -- 8,266,480 8,354,162
Release of
redemption
feature on
redeemable
common stock.... (3,731,761) (2,650,893) 3,731,761 37,318 2,613,575 -- 2,650,893
Distributions
paid............ -- -- -- -- -- (9,000,000) (9,000,000)
Net proceeds from
issuance of
2,300,000 shares
of common
stock........... -- -- 2,300,000 23,000 33,120,634 -- 33,143,634
Net proceeds from
issuance of
19,984 shares of
common stock to
ESPP............ -- -- 19,984 200 351,737 -- 351,937
Net income for
1997............ -- -- -- -- -- 9,627,247 9,627,247
----------- ------------- ------------ -------------- ------------- ------------- -------------
BALANCE AS OF
DECEMBER 31,
1997............ -- $ -- 14,819,984 $ 148,200 $ 36,085,946 $ 8,893,727 $ 45,127,873
----------- ------------- ------------- ------------ -------------- ------------- -------------
----------- ------------- ------------- ------------ -------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
Page 29
<PAGE>
METRO INFORMATION SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------ ------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 5,000,277 $ 8,841,182 $ 9,627,247
Adjustments to reconcile net income to net cash Provided by
operating activities:
Depreciation and amortization--cost of revenue.................... -- -- 28,777
Depreciation and amortization--selling, general and administrative
expenses.......................................................... 536,986 763,760 1,158,228
Net loss on sale of property and equipment........................ 4,839 39,509 45,750
Deferred taxes.................................................... -- -- 72,945
Changes in operating assets and liabilities increasing
(decreasing) cash, net of the effects of acquisitions:
Accounts receivable............................................... (4,367,288) (884,450) (7,203,422)
Prepaid expenses.................................................. (71,685) 107,962 (289,834)
Accounts payable.................................................. 402,999 189,381 1,591,112
Accrued compensation and benefits................................. 1,736,083 2,087,054 1,650,251
------------ ------------ -------------
Net cash provided by operating activities....................... 3,242,211 11,144,398 6,681,054
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment............................... (1,617,562) (2,267,638) (2,701,722)
Acquisition of businesses, net of cash acquired..................... -- -- (4,352,920)
Proceeds from sale of property and equipment........................ 16,707 9,779 27,176
Increase in other assets............................................ (24,399) (496,045) (202,398)
------------ ------------ -------------
Net cash used in investing activities........................... (1,625,254) (2,753,904) (7,229,864)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit.................... 3,659,191 (4,708,234) (2,547,388)
Decrease in other assets related to issuance of 2,300,000 shares.... -- -- 471,849
Proceeds from issuance of redeemable common stock................... 359,421 476,595 --
Redemption of redeemable common stock............................... (36,463) -- --
Proceeds from issuance of 2,300,000 shares.......................... -- -- 33,143,634
Proceeds from issuance of shares to Employee Stock Purchase Plan.... -- -- 351,937
Distributions to shareholders....................................... (4,801,836) (5,100,000) (9,000,000)
Advances on notes receivable--related parties....................... (800,000) (175,000) (550,000)
Repayment of notes receivable--related parties...................... 19,680 1,156,682 550,000
------------ ------------ -------------
Net cash provided by (used in) financing activities............. (1,600,007) (8,349,957) 22,420,032
------------ ------------ -------------
Net increase in cash............................................ 16,950 40,537 21,871,222
Cash and cash equivalents at beginning of year........................ 99,885 116,835 157,372
------------ ------------ -------------
Cash and cash equivalents at end of year.............................. $ 116,835 $ 157,372 $ 22,028,594
------------ ------------ -------------
------------ ------------ -------------
Supplemental disclosure of cash flow information:
Cash paid for interest.............................................. $ 380,420 $ 309,076 $ 60,100
------------ ------------ -------------
------------ ------------ -------------
Cash paid for income taxes.......................................... $ -- $ -- $ 6,466,602
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
During 1997 non-cash financing activities associated with acquisitions
totaled $1,300,000.
See accompanying notes to financial statements.
Page 30
<PAGE>
METRO INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Metro Information Services, Inc. ("Metro" or the "Company") is an
information technology ("IT") consulting services company providing IT
consultants on a contract basis to organizations with complex IT operations. On
December 31, 1997, the Company had 29 offices in the United States and Puerto
Rico.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
The Company derives substantially all of its revenue from consulting
services. Revenue is recognized as services are performed. Concentration of
credit risk with respect to accounts receivable is limited due to the number and
diversity of the Company's client base.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid debt instruments with
original maturities of three months or less. Cash equivalents at December 31,
1997 consisted of overnight money market investments and seven-day maturity tax
exempt obligations backed by a letter of credit from a bank.
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, primarily
accounts receivable, line of credit facilities, accounts payable and accrued
compensation and benefits, approximate fair value due to the short maturity of
these instruments.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property and
equipment is calculated on the straight-line method over their estimated useful
lives. Depreciation on leasehold improvements is calculated on the straight-line
method over the lesser of the length of the lease term or their estimated useful
lives.
GOODWILL
Goodwill represents the excess of cost over fair value of net assets
purchased in acquisitions and is amortized on a straight-line basis over the
expected benefit period, 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 future cash
flows to the carrying value of the related goodwill.
INCOME TAXES AND PRO FORMA INCOME TAXES
Before January 1, 1997, the Company, with the consent of its shareholders,
was taxed under the provisions of Subchapter S of the Internal Revenue Code of
1986, which provides that, in lieu of corporate income taxes, the shareholders
of the S corporation are taxed on their proportionate share of the Company's
taxable income. Therefore, pro forma income taxes shown for periods ending in
1995 and 1996 represent the estimated amount of income taxes the Company would
have reported had the Company been a C corporation for those periods taxable at
an assumed effective tax rate of 40%.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying
Page 31
<PAGE>
amounts of existing assets and liabilities and their respective tax bases
and, if applicable, operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
UNAUDITED PRO FORMA NET INCOME AND PRO FORMA NET INCOME PER SHARE
The pro forma net income presented in the statements of income reflects the
pro forma effects for income taxes at an effective rate of 40%, as if the
Company had been a taxable entity for all periods presented.
The pro forma net income per common share is computed based on the weighted
average number of common shares and common equivalent shares (using the treasury
stock method) outstanding after giving effect to the stock split discussed in
Note 12. In accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 83, all common and common equivalent shares issued during the
12-month period before filing the initial public offering, even if
anti-dilutive, have been included in the calculation as if they were outstanding
for all periods, at the initial public offering price of $16.00 per share. In
addition, weighted average shares for each period are increased in accordance
with Securities and Exchange Commission Staff Accounting Bulletin Topic 1B3 to
reflect certain distributions in excess of earnings.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on January 1, 1996. This Statement
requires that the Company review long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstance indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount and fair value less costs to sell. Adoption of this
Statement did not have a material impact on the Company's financial position,
results of operations or liquidity.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of revenue and expense, assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
(2) ACQUISITIONS
On July 1, 1997, the Company completed the acquisition of two IT services
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., which had offices in Columbia and Greenville,
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,
for $5.2 million, $3.9 million of which was paid on July 1, 1997 and $1.3
million of which is payable in the first quarter of 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
Page 32
<PAGE>
has recorded approximately $5,396,000 of goodwill which is being amortized on
a straight-line basis over 30 years. Amortization expense for 1997 and
accumulated amortization as of December 31, 1997 was $68,265.
(3) RELATED PARTY TRANSACTIONS
During 1996 there were several related party notes receivable
outstanding. As of January 1, 1996, these related party notes receivable
consisted of $800,000 due on a $1,000,000 line of credit note from the
majority shareholder requiring annual interest payments at 8%, which was
secured by Deed of Trust on real property (the "Line of Credit Note");
$168,322 due on an unsecured note from a partnership in which the majority
shareholder and two other shareholders were general partners, requiring
monthly payments of principal and interest at 8%; and $13,360 of other notes
receivable from employees. As of December 31, 1996, all of the notes
receivable, except for the Line of Credit Note, had been repaid in full and
the notes canceled. Shortly before the Company's January 29, 1997 initial
public offering, the majority shareholder repaid his outstanding Line of
Credit Note in full. The Company then canceled the Line of Credit Note and
released the Deed of Trust on real property securing the note. The highest
balance outstanding on the Line of Credit Note during 1997 was $550,000.
Until December 31, 1996, the Company leased its corporate headquarters
from a partnership in which the majority shareholder of the Company and his
spouse were the general partners. The lease agreement provided for an annual
rental of $144,000 payable in monthly installments of $12,000. The Company
leased a new corporate headquarters facility from an unrelated third party
beginning December 15, 1996. The lease for the old facility was terminated on
December 31, 1996.
In September 1996, the Company purchased two condominiums from
partnerships in which the majority shareholder and certain other shareholders
of the Company are general partners. The total purchase price of $380,000 was
determined by independent appraisals. Before the purchase, these condominiums
were leased by the Company from the partnerships for annual rentals of
$69,000 and were generally made available to the Company's employees as a
benefit.
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL --------------------------
LIFE 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Land.................................................................... n.a. $ 94,376 $ 94,376
Buildings............................................................... 31.5 years 607,297 607,297
Computer equipment and software......................................... 3-7 years 4,166,220 6,056,484
Furniture and equipment................................................. 5-7 years 1,370,312 2,011,907
Leasehold improvements.................................................. Various 203,953 291,602
------------ ------------
6,442,158 9,061,666
Less accumulated depreciation and amortization...................... 2,372,342 3,389,118
------------ ------------
$ 4,069,816 $ 5,672,548
------------ ------------
------------ ------------
</TABLE>
(5) LINE OF 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, no
amounts were outstanding under the facilities. As of December 31, 1996,
borrowings outstanding under these facilities totaled $2,547,388. The
Page 33
<PAGE>
Company has selected a 30-day LIBOR based rate and, if any borrowings were
outstanding under the facilities at December 31, 1997, the rate on such
borrowings would have ranged from 6.1% 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 contain 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.
(6) INCOME TAXES
The unaudited pro forma provision for income taxes presented on the
statements of income for 1995 and 1996 represents the estimated taxes that
would have been recorded had the Company been a C
corporation for income tax purposes for those periods. The pro forma provision
for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
<S> <C> <C>
Pro Forma (unaudited): 1995 1996
------------ ------------
Federal............................................................................. $ 1,700,094 $ 3,006,002
State............................................................................... 300,017 530,471
------------ ------------
Total pro forma.................................................................. $ 2,000,111 $ 3,536,473
------------ ------------
------------ ------------
</TABLE>
During 1997, the Company was a C corporation for income tax purposes. The
provision for income taxes for 1997 includes federal and state income taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax bases of assets and liabilities. The
provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------
<S> <C>
Current:
Federal........................................................................... $ 5,047,918
State............................................................................. 1,056,695
Deferred:
Federal........................................................................... 60,586
State............................................................................. 12,359
-----------
Total income tax expense....................................................... $ 6,177,558
-----------
-----------
</TABLE>
The 1995 and 1996 pro forma tax expense and 1997 actual tax expense
differ from the amount which would be provided by applying the statutory
federal rate to income before income taxes primarily as a result of state
income taxes. A reconciliation of the statutory federal income tax rate and
the effective rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1995 1996 1997
----- ----- -----
Statutory tax rate........................................................................... 34% 34% 34%
Effect of:
State and local income taxes, net of
Federal tax benefit...................................................................... 5 5 5
Other...................................................................................... 1 1 1
Termination of S election.................................................................. 0 0 (1)
-- -- --
Effective tax rate......................................................................... 40% 40% 39%
-- -- --
-- -- --
</TABLE>
Page 34
<PAGE>
The components of the deferred tax asset and liability at December 31,
1997 are as follows:
<TABLE>
<S> <C>
Current deferred tax asset:
Self-insurance reserves........................................................ $ 309,265
Accrued expenses............................................................... 294,620
Allowance for doubtful accounts................................................ 58,802
---------
$ 662,687
---------
---------
Long-term deferred tax liability:
Depreciation and amortization.................................................. $(426,515)
Accrued expenses for financial reporting purposes.............................. (309,117)
---------
$(735,632)
---------
---------
</TABLE>
In assessing whether deferred tax assets may be realized, management
considers whether it is more likely than not that some or all of the deferred
taxes will not be realized. Based on the availability of carrybacks of future
deductible amounts to 1995, 1996 and 1997 taxable income and management's
projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes the existing net deductible
temporary differences will reverse during periods in which carrybacks are
available and/or in which the Company generates net taxable income. There can
be no assurance, however, that the Company will generate any income or any
specific level of continuing income in future years.
(7) EARNINGS PER SHARE
The Company adopted SFAS No. 128, EARNINGS PER SHARE, which revised the
calculation of earnings per share and requires disclosure of basic and
diluted earnings per share in the income statement, as well as footnote
disclosure for the reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for net income. During 1995
and 1996, there were no dilutive securities outstanding. Therefore, the
calculation of basic and diluted earnings per share was identical in these
two years. The reconciliation for 1997 is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------
SHARES EARNINGS
NET INCOME OUTSTANDING PER
(NUMERATOR) (DENOMINATOR) SHARE
---------- ------------ ---------
<S> <C> <C> <C>
Basic Earnings Per Share...................................... $9,627,247 14,610,888 $ 0.66
---------
---------
Effect of Dilutive Securities -- Incentive Stock Options
deemed outstanding.......................................... -- 51,369
---------- ----------
Diluted Earnings Per Share.................................... $9,627,247 14,662,257 $ 0.66
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See Note 8 of Notes to Financial Statements for a description of the
Incentive Stock Option Plan.
(8) STOCK OPTION PLANS
SFAS NO. 123 DISCLOSURE
As permitted by SFAS No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, the
Company applies APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, to
account for its three stock-based compensation plans. In accordance with APB
Opinion No. 25, the Company recorded no compensation expense related to these
plans in 1997. There is no compensation expense related to the Metro Information
Services, Inc. Employee Stock Purchase Plan (the "ESPP") because it qualifies as
a non-compensatory plan under APB Opinion No. 25. There was no compensation
expense recorded for either of the stock option plans discussed below because
the exercise price of each option equaled the fair value of the underlying
Page 35
<PAGE>
common stock as of the grant date. If compensation expense for the Company's
three stock-based compensation plans had been determined based on the fair
value of the underlying common stock at the grant dates as calculated in
accordance with SFAS No. 123, the Company's net income and net income per
share for the year ended December 31, 1997 would have been reduced to the pro
forma amounts indicated below. No options or shares were issued under the
plans before 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
<S> <C> <C>
AS SFAS NO. 123
REPORTED PRO FORMA
------------ ---------------
Net
income........................................................................... $ 9,627,247 $ 9,233,358
------------ ------------
------------ ------------
Net income per share--
Basic and diluted.............................................................. $ 0.66 $ 0.63
------------ ------------
------------ ------------
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income and net income per
share amounts presented above because compensation cost is recognized over
the options' vesting periods.
OUTSIDE DIRECTORS STOCK PLAN
On December 24, 1996, the Company adopted a non-qualified stock option
plan (the "Outside Directors Stock Plan") for the outside directors of the
Company. Each outside director is granted an option for 3,000 shares of
Common Stock on such director's initial election. At each Annual Meeting
thereafter, such director is granted an additional option for 1,000 shares of
Common Stock. The options granted to outside directors are immediately
exercisable in full at a price equal to the fair market value of Common Stock
on the date of grant. The options expire 10 years after the date of grant or
one year after the outside director is no longer a director of the Company,
whichever is earlier. The Company has reserved 50,000 shares for issuance
under this plan. During 1997, the Outside Directors Stock Plan issued 8,000
options to the outside directors and no options were exercised.
INCENTIVE STOCK OPTION PLAN
On December 24, 1996, the Company adopted the 1997 Employee Incentive
Stock Option Plan which provides for the grant of incentive stock options to
purchase up to an aggregate of 770,000 shares of Common Stock. In connection
with the initial public offering, certain employees of the Company were
granted options to purchase 374,300 shares of Common Stock at the initial
public offering price of $16.00 per share. The options issued in 1997 vest
ratably over five years and expire not later than nine years and 11 months
after the date of grant.
The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<S> <C>
Expected life...................................................................... 5 years
Risk free interest rate............................................................ 6.3%
Expected volatility................................................................ 51%
Annual dividend yield.............................................................. 0%
</TABLE>
Page 36
<PAGE>
A summary of the status of the Company's 1997 Employee Incentive Stock
Option Plan and Outside Directors Stock Plan as of December 31, 1997, and
changes during the year then ended, is presented below:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
----------------- -----------------------------
<S> <C> <C>
Options at beginning of year.................................... -- --
Granted......................................................... 382,300 $ 15.98
Exercised....................................................... -- --
Forfeited....................................................... 68,100 $ 16.00
-------
Options at end of year.......................................... 314,200 $ 15.97
-------
-------
Options exercisable at year-end................................. 69,320 $ 15.88
-------
-------
Weighted average estimated fair value of options granted during
the year...................................................... $ 8.30
-------
-------
</TABLE>
Following is a summary of the range of exercise prices and the weighted
average contractual life of outstanding stock options at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED
REMAINING AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------ --------- ----------------- -------------- ------- --------------
<C> <C> <S> <C> <C> <C>
$13.50............... 6,000 9.3 years $ 13.50 6,000 $ 13.50
$16.00............... 306,200 9.0 years $ 16.00 61,320 $ 16.00
$19.25............... 2,000 9.4 years $ 19.25 2,000 $ 19.25
------- ------
$13.50 TO $19.25..... 314,200 9.0 years $ 15.97 69,320 $ 15.88
------- ------
------- ------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted the ESPP on December 24, 1996. Under the ESPP, an
aggregate of 250,000 shares of Common Stock may be purchased from the Company
by the employees through payroll withholding pursuant to a series of
offerings. All full-time employees who have met certain service requirements
(as defined in the ESPP), except for employees who own Common Stock of the
Company or options on such stock which represent more than 5% of Common Stock
of the Company, are eligible to participate. The purchase price of Common
Stock is 85% of the lesser of the fair market value of Common Stock on the
first trading day of the calendar quarter and the last trading day of the
quarter. During 1997, the Company sold 19,984 shares of Common Stock to the
ESPP for a total of $351,937.
The fair value of the employees' purchase rights of ESPP shares was
estimated using the Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<S> <C>
Expected life.................................................................... 3 months
Risk free interest rate.......................................................... 5.1%
Expected volatility.............................................................. 27%
Annual dividend yield............................................................ 0%
</TABLE>
The weighted average fair value of those purchase rights granted in 1997 was
$4.15.
Page 37
<PAGE>
(9) PROFIT SHARING PLAN
The Company sponsors a 401(k) employee benefit plan covering all eligible
employees with a minimum of three months of service. Eligible employees are
permitted to make voluntary deductible contributions to the plan and the Company
makes matching contributions of one-half of the eligible employee's
contribution, up to a maximum of 6% of the employee's compensation.
The Company made matching contributions of $939,223, $1,181,665 and
$1,342,860 to the plan for the years ended December 31, 1995, 1996 and 1997,
respectively.
(10) COMMITMENTS AND CONTINGENCIES
The Company is obligated under various non-cancelable operating leases for
office space. Rent expense for the years ended December 31, 1995, 1996 and 1997
was $854,539, $1,094,436 and $1,424,822, respectively, and is included in
selling, general and administrative expenses in the accompanying statements of
income. Renewal options are available at most locations. Future minimum lease
payments, including contingent rentals, as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.................. $ 1,481,139
1999.................. 1,311,830
2000.................. 1,052,944
2001.................. 769,213
2002.................. 82,115
Thereafter............ 67,800
------------
$4,765,041
------------
------------
</TABLE>
The Company self-insures against employees' health insurance claims up to
a stop loss limit of $125,000 per employee per year and a variable, aggregate
stop loss limit. Amounts charged to income related to insurance claims were
$2,206,861, $3,143,431 and $3,965,692 for the years ended December 31, 1995,
1996 and 1997, respectively. Included in accrued compensation and benefits on
the accompanying balance sheet is a reserve for claims incurred but not yet
reported of $485,434 and $800,494 at December 31, 1996 and 1997,
respectively.
(11) SHAREHOLDERS' EQUITY
On October 22, 1996, the Company's shareholders amended and restated the
articles of incorporation. Under the amended and restated articles of
incorporation, the Company authorized 1,000,000 shares of Preferred Stock,
par value $0.01 and 50,000,000 shares of Common with a par value of $0.01 per
share, of which 49,000,000 shares are designated as Common Stock and
1,000,000 shares are designated as Nonvoting Common Stock. The
recapitalization and the 3,507.2952 for one stock split described in Note 12,
are reflected in these financial statements and the accompanying notes.
PREFERRED STOCK
The Company's Board of Directors has the authority to issue shares of
Preferred Stock and determine the stock terms without obtaining shareholders
approval. There are currently no issued or outstanding shares of Preferred
Stock and the Company has no present plans to issue any shares of Preferred
Stock.
COMMON STOCK
The Common Stock shareholders have the sole right to vote. Those shares
of Common Stock that were subject to certain contractual redemption
obligations in 1996 have been classified as redeemable common stock (the
"Redeemable Common Stock"). In all other respects, the Common Stock and
Redeemable Common Stock had identical rights.
Page 38
<PAGE>
Redeemable Common Stock was offered to key members of management under
individual stock purchase agreements annually on April 1 and the individuals
had 30 days to purchase the stock. The number of shares offered was
determined by the Company's president based on the prior fiscal year's
operating income and each individual's performance in that year. The purchase
price was determined by a formula based on operating income.
Certain shares of Redeemable Common Stock were issued within 12 months of
the Company's initial public offering date. As a result, the Company's 1995
income statement includes $770,000 of selling, general and administrative
expenses which represents the excess of the fair value of the stock, as
determined by an independent appraisal obtained by the Company, over its
purchase price.
(12) 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 approximately
$33,144,000. The Company did not receive any proceeds from the sale of shares
by the selling shareholders.
The following corporate actions were taken in connection with the initial
public offering:
DISTRIBUTIONS
On January 20, 1997, the Company distributed $9,000,000 to its
shareholders, approximating the estimated aggregate undistributed amount of
income on which the Company's shareholders were required to pay income taxes
for tax years 1987 through 1996.
STOCK SPLIT
On January 24, 1997, the Company effected a 3,507.2952 for one stock
split by means of a stock dividend. All share and per share data in these
financial statements reflect this stock split.
CONVERSION OF NONVOTING COMMON STOCK
The nonvoting Redeemable Common Stock was released from any agreement
requiring its redemption and was converted into voting Common Stock. As a
result, the 3,731,761 shares of Redeemable Common Stock have been
reclassified as Common Stock in the December 31, 1997 financial statements.
TERMINATION OF S CORPORATION ELECTION
Effective January 1, 1997, the Company terminated its S corporation
election resulting in the Company becoming a C corporation for all income tax
purposes.
CANCELATION OF RELATED PARTY NOTE
Shortly before the initial public offering, the Company's majority
shareholder repaid his outstanding line of credit note in full. The Company
then canceled the line of credit note and released the Deed of Trust on real
property securing the note.
EMPLOYMENT AGREEMENTS
In connection with the Company's January 29, 1997 initial public
offering, the Company entered into employment agreements with six executive
officers. The agreements became effective in January 1997, and provide for an
initial term of one year with total annual base salaries of $1,200,000 for
1997 and automatically renew for successive one-year terms unless terminated
by either party. The six executive officers are also entitled to a
performance bonus. The agreements contain a two-year non-competition
provision following termination of employment.
Page 39
<PAGE>
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following table sets forth certain quarterly operating information for
each of the 12 quarters ending with the quarter ended December 31, 1997. 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>
FIRST SECOND THIRD FOURTH
STATEMENTS OF INCOME DATA QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands except per share data)
1995:
Revenue............................................................. $ 19,760 $ 20,695 $ 21,881 $ 23,568
Gross profit........................................................ 5,732 6,195 6,117 6,786
Operating income.................................................... 1,422 1,683 1,428 790 (1)
Net income.......................................................... 1,361 1,596 1,342 700 (1)
Pro forma net income................................................ 817 958 805 420 (1)
Pro forma net income per share -- basic and diluted................. $ 0.06 $ 0.08 $ 0.06 $ 0.03 (1)
Gross profit percentage............................................. 29.0% 29.9% 28.0% 28.8%
Operating income percentage......................................... 7.2% 8.1% 6.5% 3.4%(1)
1996:
Revenue............................................................. $ 26,328 $ 27,812 $ 29,142 $ 30,681
Gross profit........................................................ 7,726 8,452 8,817 9,216
Operating income.................................................... 2,107 2,248 2,431 2,314
Net income.......................................................... 2,021 2,184 2,371 2,265
Pro forma net income................................................ 1,213 1,310 1,423 1,359
Pro forma net income per share -- basic and diluted................. $ 0.09 $ 0.10 $ 0.11 $ 0.11
Gross profit percentage............................................. 29.3% 30.4% 30.3% 30.0%
Operating income percentage......................................... 8.0% 8.1% 8.3% 7.5%
1997:
Revenue............................................................. $ 33,045 $ 35,883 $ 40,569 $ 43,080
Gross profit........................................................ 9,727 10,841 12,580 13,351
Operating income.................................................... 2,741 3,409 4,314 4,612
Net income.......................................................... 1,832 2,180 2,703 2,912
Net income per share -- basic and diluted........................... $ 0.13(2) $ 0.15 $ 0.18 $ 0.20
Gross profit percentage............................................. 29.4% 30.2% 31.0% 31.0%
Operating income percentage......................................... 8.3% 9.5% 10.6% 10.7%
</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, for the fourth quarter of
1995, operating income would have been $1.6 million, net income would have
been $1.5 million, pro forma net income would have been $882,000, pro forma
net income per share would have been $0.07 and, as a percentage of revenue,
operating income would have been 6.6%.
(2) Net income per share for the three months ended March 31, 1997 includes a
one-time reduction in income tax expense of $125,000 which represents the
cumulative effect of the Company converting from a S corporation to a C
corporation effective January 1, 1997. Excluding the $125,000 one-time
reduction in income taxes, earnings per share for the three months ended
March 31, 1997 would have been $0.12.
Page 40
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; SECTION 16(A)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company is required to identify any director or officer who failed to
timely file with the Securities and Exchange Commission a required report
relating to ownership and change in ownership of the Company's equity
securities. One officer, Steven A. Lurus, inadvertently did not report shares
owned by his spouse at the time they were married on a Form 4 for February
1997. These shares were reported on a subsequently filed Form 4.
Another officer, Andrew J. Downing, inadvertently did not report a gift
of shares to charity from his Form 4 for December 1997. This gift was
reported on a subsequently filed Form 5.
The other information required by this Item is included in Part I as
permitted by Rule 401 of Regulation S-K and the General Instructions.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning
compensation paid to or earned by the Company's President and Chief Executive
Officer and each of the Company's four other most highly compensated
executive officers who earned more than $100,000 (the "Named Executive
Officers") for services rendered during the years ended December 31, 1997,
1996 and 1995.
<TABLE>
<CAPTION>
LONG-TERM
COMPEN-
ANNUAL COMPENSATION SATION
--------------------------------------------- ---------------
OTHER
ANNUAL SHARES OF
COMPEN- COMMON STOCK
SALARY BONUS SATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) OPTIONS(#) COMPENSATION ($)
- ----------------------------------------------- --------- --------- --------- ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
John H. Fain, 1997 300,000 195,000 -- -- 16,339(2)
Chairman of the Board, President 1996 600,000 -- -- -- 7,889(3)
and Chief Executive Officer 1995 600,000 -- 216,292 -- 14,489(3)
Andrew J. Downing, 1997 240,000 159,914 -- 5,000 5,300(2)
Executive Vice President and 1996 210,000 180,810 -- 5,000 749(3)
Chief Operating Officer 1995 144,000 166,930 43,258 -- 7,591(3)
Frank B. Bracken, Jr., 1997 180,000 145,729 -- 5,000 7,206(2)
Vice President of Operations 1996 170,000 143,891 -- 5,000 --
1995 127,083 68,675 43,258 -- 761(3)
Richard C. Jaeckle, 1997 180,000 138,750 -- 5,000 6,086(2)
Vice President of Operations 1996 180,000 99,787 -- 5,000 --
1995 144,000 88,618 43,258 -- 949(3)
Kathleen A. Neff, 1997 180,000 128,567 -- 5,000 10,673(2)
Vice President of Operations 1996 165,000 100,203 -- 5,000 475(3)
1995 127,083 68,675 43,258 -- 7,494(3)
</TABLE>
- ------------------------
Page 41
<PAGE>
(1) Includes non-recurring, non-cash compensation accrued in the fourth quarter
of 1995 for Redeemable Common Stock issued for services performed in 1995 in
an amount equal to the excess of the fair market value of such stock over
the amount paid. The stock was issued pursuant to 30-day options and was
fully vested with the same rights to dividends as other issued and
outstanding Common Stock of the Company. Other compensation representing
less than $50,000 or 10% of the officer's salary and bonus has been omitted.
Does not include distributions to shareholders.
(2) Retirement Savings Plan and Trust contributions were $4,750 for each of the
Named Executive Officers. Amounts paid for excess accrued vacation and sick
leave amounted to $8,939 for Mr. Fain, $0 for Mr. Downing, $2,106 for Mr.
Bracken, $0 for Mr. Jaeckle and $5,413 for Ms. Neff. The remaining amounts
represent non-cash compensation for use of Company condominiums and other
miscellaneous amounts.
(3) Includes certain health insurance premiums paid by the Company for 1995 and
1996, amounts the Company contributed to the Metro Information Services,
Inc. Retirement Savings Plan and Trust, amounts paid for excess accrued
vacation and sick leave, non-cash compensation for use of Company
condominiums and other miscellaneous amounts.
1997 OPTION GRANTS TABLE
The following table sets forth the number of options to purchase shares of
Common Stock granted to the Named Executive Officers during 1997.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL PRESENT
SHARES OPTIONS GRANTED EXERCISE OR VALUE ON
UNDERLYING TO EMPLOYEES BASE PRICE EXPIRATION DATE OF
NAME OPTIONS GRANTED IN 1997 ($/SHARE) (1) DATE GRANT ($) (2)
- ------------------------------------------- ----------------- ----------------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
John H. Fain............................... -- -- -- -- --
Andrew J. Downing.......................... 5,000 1.3 16.00 12/29/06 41,550
Frank B. Bracken, Jr....................... 5,000 1.3 16.00 12/29/06 41,550
Richard C. Jaeckle......................... 5,000 1.3 16.00 12/29/06 41,550
Kathleen A. Neff........................... 5,000 1.3 16.00 12/29/06 41,550
</TABLE>
- ------------------------
(1) All options were granted on January 29, 1997 at an exercise price equal to
the fair market value of the underlying securities on that date. The options
vest ratably over five years and will expire, at the latest, nine years and
11 months after the date of grant.
(2) This value is based on the Black-Scholes option pricing model which includes
assumptions for variables such as interest rates, stock price volatility and
future dividend yield. The Company's use of this model is not an endorsement
of its accuracy. Whether the model assumptions used will prove to be
accurate cannot be known at the date of grant or as of the date of this
Report. The Black-Scholes model produces a value based on freely tradable
securities. Because the stock options awarded in 1997 are non-transferable,
the "present value" shown cannot be realized by the holder. Recognizing
these limitations of the model, the following assumptions were used to
estimate the present value on the date of grant: dividend yield of 0%,
risk-free rate of return of 6.3%, estimated volatility of 51% and estimated
average expected option term of 5 years. These options vest ratably over
five years beginning December 31, 1997.
1997 YEAR-END OPTION VALUE TABLE
During 1997, no stock options were exercised by any of the Named Executive
Officers. The following table sets forth the number and value of all unexercised
options at year end for these individuals:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT YEAR IN-THE-MONEY OPTIONS AT
END (#) YEAR END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------------- ------------------------- -------------------------
<S> <C> <C>
JOHN H. FAIN............................... 0/0 0/0
ANDREW J. DOWNING.......................... 1,000/4,000 8,310/33,240
FRANK B. BRACKEN, JR....................... 1,000/4,000 8,310/33,240
RICHARD C. JAECKLE......................... 1,000/4,000 8,310/33,240
KATHLEEN A. NEFF........................... 1,000/4,000 8,310/33,240
</TABLE>
Page 42
<PAGE>
DIRECTOR COMPENSATION
Directors who are executive officers of the Company receive no
compensation for their service as members of either the Board of Directors or
committees thereof. During 1997, the Outside Directors, Mr. Becker and Mr.
Loving, each received an annual fee of $3,000, plus $500 for each Board of
Directors and committee meeting attended and reimbursement for their
expenses. In addition, under the Company's non-qualified stock option plan
for Outside Directors (the "Outside Directors Stock Plan"), each Outside
Director received an option for 3,000 shares of the Common Stock on such
director's initial election as a director in April 1997 and an additional
option for 1,000 shares of the Common Stock for their participation in
Metro's 1997 Annual Meeting, held June 10, 1997. At each Annual Meeting of
shareholders thereafter, such director shall be granted an additional option
for 1,000 shares of the Common Stock. The options granted to Outside
Directors may be exercised immediately at a price equal to the fair market
value of the Common Stock on the date of grant. The options expire 10 years
after the date of grant or one year after the Outside Director is no longer a
director of the Company, whichever is earlier. Options for an aggregate of
50,000 shares of the Common Stock may be granted under the Outside Directors
Stock Plan. The Company granted options for 8,000 shares under this plan
during 1997.
EMPLOYMENT AGREEMENTS
In connection with the Company's January 29, 1997 initial public offering,
the Company entered into employment agreements with each of its Named Executive
Officers effective January 1, 1997. The employment agreements provide for an
initial term of one year. Thereafter, each agreement will automatically renew
for successive one-year terms unless terminated by either party. Each employment
agreement provides that an officer's compensation will include a base salary, a
performance bonus and other bonus programs and benefit plans. The performance
bonus is based on the Company's achievement of specified levels of revenue and
operating income as determined by the Compensation Committee. The agreements
contain provisions protecting against use of the Company's confidential
information and protecting the Company against competition from each officer for
a two-year period after termination of employment in any market in which the
Company operates. For 1998, the base salaries of the Named Executive Officers
are as follows: Mr. Fain, $330,000; Mr. Downing, $264,000; Mr. Bracken,
$200,000; Mr. Jaeckle, $200,000; and Ms. Neff, $200,000.
Each employment agreement also includes a salary continuation arrangement in
the event of a serious illness or accident that leads to long-term disability or
in the event of termination of the agreement by the Company without cause. The
amount payable under these arrangements from Metro's funds and group disability
policy could exceed $100,000 under each employment agreement.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors has responsibility for
establishing and monitoring compensation programs of the Company's executive
officers, which include the Company's President and Chief Executive Officer,
Executive Vice President and Chief Operating Officer, Vice President and Chief
Financial Officer and each Vice President of Operations. The Compensation
Committee is composed of John H. Fain, the Company's Chairman of the Board,
President and Chief Executive Officer, and two outside Directors. Mr. Fain does
not participate in the Compensation Committee's consideration of his
compensation.
The Compensation Committee was formed on April 18, 1997 after the Company's
January 1997 initial public offering. The 1997 Compensation Plans ("1997
Compensation Plans") for the Company's executive officers were established
before the initial public offering. Accordingly, the Compensation Committee was
not involved in the determination of the 1997 Compensation Plans. Mr. Fain, who
was then the Company's sole Director, made those compensation decisions. The
Compensation Committee met once in 1997 to consider the 1998 compensation plans
for the Company's executive officers.
The Company's 1997 Compensation Plans were designed and administered so
that a significant portion of each executive officer's compensation was
linked to the Company's financial performance and so that the interests of
the Company's executive officers were aligned with the interests of its
shareholders. The Company's compensation plans include base salary, incentive
awards based on financial performance of the Company for each quarter and the
year and
Page 43
<PAGE>
incentive stock option awards. The base salary of the executive officers is
based on a number of factors, including base salary for executives in similar
companies, the experience and training of the executive officer and the
length of service of the executive officer with the Company. A significant
percentage of the executive officers' compensation for 1997 was based on the
Company achieving certain revenue, operating income and other performance
goals, including consultant growth, productivity and consultant retention.
These goals were met or exceeded by the Company.
Before the Company's initial public offering, the Company established the
Metro Information Services, Inc. 1997 Employee Incentive Stock Option Plan (the
"Incentive Stock Plan") to provide incentive to the Company's key employees,
including the executive officers of the Company, to increase the value of the
Company's stock. In 1997, each of the executive officers (other than Mr. Fain,
who is ineligible to participate in the Incentive Stock Plan) received grants of
options under the Incentive Stock Plan. The options granted executive officers
under the Incentive Stock Plan vest over a five-year period.
This report is submitted by the members of the Compensation Committee:
Ray E. Becker
John H. Fain
A. Eugene Loving, Jr.
PERFORMANCE GRAPH
The following graph provides a comparison of the cumulative total
stockholder return on the Common Stock with the cumulative total return on
The Nasdaq Stock Market and a group of 10 peer companies during the period
from the Company's initial public offering on January 29, 1997 through
December 31, 1997. The comparison assumes that $100 was invested at the
beginning of the period in the stock or index and assumes the reinvestment of
any dividends. The Company selected a peer group of other IT services
companies with similar service offerings. The peer companies are: Analysts
International Corp., Ciber, Inc., Computer Horizons Corp., Computer
Management Sciences, Inc., Computer Task Group, Inc., Cotelligent Group,
Inc., Data Processing Resources Corp., Keane, Inc., Renaissance Worldwide,
Inc. and SCB Computer Technology, Inc. The peer group index reflects the
weighted average market capitalization of the group.
[PERFORMANCE GRAPH]
This graph depicts the performance of $100 invested on January 29, 1997, in
the Company's Common Stock, Nasdaq Stock Market (U.S.) and peer group IT
services companies, including reinvestment of any dividends for the fiscal year
ended December 31, 1997.
Corresponding index value and Common Stock price values are given below:
<TABLE>
<CAPTION>
JANUARY 29, 1997 DECEMBER 31, 1997
---------------- -----------------
<S> <C> <C>
Metro Information Services, Inc.......... $100.00 $173.44
The Nasdaq Stock Market (U.S.)........... $100.00 $116.86
Peer Group............................... $100.00 $183.33
</TABLE>
Page 44
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of January 30, 1998, certain
information regarding the beneficial ownership of Metro Common Stock, by (i)
each of the Company's directors, (ii) each of the executive officers named in
the Summary Compensation Table, (iii) all directors and officers of the
Company as a group and (iv) each person known by the Company to own
beneficially more than 5% of Common Stock. Unless otherwise indicated in the
footnotes to the table below, each person or entity named below has an
address in care of the Company's principal office. All share amounts have
been rounded to the nearest whole share.
<TABLE>
<CAPTION>
DIRECTORS, OFFICERS TOTAL
AND 5% SHAREHOLDERS OWNERSHIP (1) PERCENTAGE
- ------------------- ------------- -----------
<S> <C> <C>
John H. Fain(2)...................................................... 8,377,665 56.5%
Andrew J. Downing(3)................................................. 563,363 3.8
Robert J. Eveleigh(4)................................................ 1,609 *
Ray E. Becker(5)..................................................... 4,000 *
Frank B. Bracken, Jr.(6)............................................. 236,148 1.6
Richard C. Jaeckle(7)................................................ 82,032 *
A. Eugene Loving, Jr.(8)............................................. 4,100 *
Kathleen A. Neff(9).................................................. 232,102 1.6
The Fain Family Irrevocable Trust 1993(10)........................... 1,206,510 8.1
All directors and executive officers as a group (8 persons)(2)....... 9,501,019 64.1
</TABLE>
- ------------------------
* Indicates less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission (the "Commission") and includes
general voting power or investment power with respect to securities.
Shares of the Common Stock subject to options and warrants currently
exercisable or exercisable within 60 days of the date of this Report are
deemed outstanding for computing the percentage of the person holding
such options, but are not deemed outstanding for computing the percentage
of any other person. Except as otherwise specified below, the persons
named in the table above have sole voting and investment power with
respect to all shares of the Common Stock shown as beneficially owned by
them.
(2) Includes 1,206,510 shares of the Common Stock owned by a trust
established by Mr. Fain of which his wife, Joyce L. Fain, and his sister,
Cynthia L. Akins, are the co-trustees and of which Mr. Fain disclaims
beneficial ownership, 227,974 shares of the Common Stock held by a trust
of which Mr. Fain's son is the beneficiary and Mr. Fain is the trustee
and of which Mr. Fain disclaims beneficial ownership and 206,930 shares
of the Common Stock held by Ms. Akins as custodian for the benefit of Mr.
Fain's daughter under the Virginia Uniform Transfers to Minors Act of
which Mr. Fain disclaims beneficial ownership.
(3) Includes 60,759 shares of the Common Stock owned by a trust established
by Mr. Downing and his wife, Cheryl O. Downing, of which his wife is the
sole trustee. Also includes 1,000 option shares awarded in 1997 and
currently exercisable under the Incentive Stock Option Plan. The business
address of The Downing Irrevocable Trust 1997 is 2401 Haversham Close,
Virginia Beach, VA 23454.
(4) Includes 1,500 option shares awarded in 1997 and currently exercisable
under the Incentive Stock Option Plan.
(5) Includes 4,000 option shares awarded in 1997 and currently exercisable
under the Outside Directors Stock Plan. Mr. Becker's business address is
P.O. Box 1448, Ellsworth, ME 04605.
(6) Includes 1,000 option shares awarded in 1997 and currently exercisable
under the Incentive Stock Option Plan.
(7) Includes 1,000 option shares awarded in 1997 and currently exercisable
under the Incentive Stock Option Plan.
(8) Includes 4,000 option shares awarded in 1997 and currently exercisable
under the Outside Directors Stock Plan. Mr. Loving's business address is
900 Laskin Road, Virginia Beach, Virginia 23451.
(9) Includes 1,000 option shares awarded in 1997 and currently exercisable
under the Incentive Stock Option Plan.
(10) The business address of The Fain Family Irrevocable Trust 1993 is P.O.
Box 8888, Virginia Beach, Virginia 23450.
Page 45
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of January 1, 1997, Mr. Fain did not owe anything under a March 1,
1995, $1.0 million credit line deed of trust note to the Company. The highest
amount outstanding under this note during 1997 was $550,000 in principal.
This note was secured by real property owned by Mr. Fain. This loan was
repaid in full and the note was canceled in January 1997 before the Company's
initial public offering on January 29, 1997.
In 1987, the Company became an S corporation for federal and certain state
income tax purposes. As such, the Company's income was allocated and taxable to
the Company's individual shareholders, rather than to the Company. Between 1987
and December 31, 1996, the Company declared and made quarterly distributions to
its shareholders aggregating $25.7 million. These distributions were generally
in amounts in excess of amounts needed by the shareholders to pay the taxes on
the income allocated to them. In addition, on January 20, 1997, the Company
distributed $9.0 million to its shareholders, approximating the estimated
aggregate undistributed amount of income on which the Company's shareholders
were required to pay income taxes for tax years 1987 through 1996. In connection
with the January 29, 1997 initial public offering, the Company terminated its S
corporation election effective January 1, 1997.
The Company entered into an agreement with its existing shareholders before
the initial public offering providing for, among other things, the
indemnification of the Company by them for any federal, state and other income
taxes (including interest) incurred by the Company for any period for which it
reported its taxable income as an S corporation, but only to a maximum amount
equal to the aggregate distributions received by each existing shareholder from
the Company with respect to periods during which the Company was an S
corporation.
Before joining the Company on January 29, 1997 as Vice President of Finance,
Treasurer and Chief Financial Officer, Robert J. Eveleigh was an attorney with
Clark & Stant, P.C., the Company's general counsel. Mr. Eveleigh spent the
majority of his time during his last few months of employment with Clark &
Stant, P.C. working on Metro's initial public offering. During 1997, Clark &
Stant, P.C. served as general counsel to the Company.
The Audit Committee of the Board of Directors is responsible for reviewing
all transactions between the Company and any officer or director of the Company
or any entity in which an officer or director has a material interest. Any such
transactions must be on terms no less favorable than those that could be
obtained on an arms-length basis from independent third parties. The Audit
Committee was formed in April 1997 and met once during the year.
Page 46
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
The following financial statements are included in Part II, Item 8 of
this report:
Independent Auditors' Report
Statements of Income for the Years Ended December 31, 1995,
1996 and 1997
Balance Sheets as of December 31, 1996 and 1997
Statements of Changes in Redeemable Common Stock and Shareholders'
Equity for the Years Ended December 31, 1995, 1996 and 1997
Statements of Cash Flows for the Years Ended December 31, 1995,
1996 and 1997
(2) Financial Statement Schedules:
Financial statement schedules required to be included in this report
are shown in Schedule II attached or in the financial statements and
notes thereto included in Item 8 of this report or have been omitted
because they are not applicable.
(3) Exhibits:
1.1 Form of Underwriting Agreement by and among Registrant and
Selling Shareholders and the Underwriters, incorporated by
reference to Exhibit 1.1 to the Registration Statement on Form
S-1 as previously filed with the Commission on January 6, 1997.
3.1 Amended and Restated Articles of Incorporation of Registrant, as
filed in Virginia on November 20, 1996, incorporated by reference
to Exhibit 3.1 to the Registration Statement on Form S-1 as
previously filed with the Commission on December 12, 1996.
3.2 Amended and Restated Bylaws of Registrant, incorporated by
reference to Exhibit 3.2 to the Registration Statement on Form
S-1 as previously filed with the Commission on December 12, 1996.
4.1 See Amended and Restated Articles of Incorporation of Registrant,
incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-1 as previously filed with the Commission on
December 12, 1996 (included as Exhibit 3.1).
4.2 Specimen Stock Certificate, incorporated by reference to Exhibit
4.2 to the Registration Statement on Form S-1 as previously filed
with the Commission on January 22, 1997.
5.1 Opinion of Clark & Stant, P.C., a Virginia professional
corporation, as to the legality of the shares being registered,
incorporated by reference to Exhibit 5.1 to the Registration
Statement on Form S-1 as previously filed with the Commission on
January 6, 1997.
10.1 Registrant's 1997 Stock Incentive Plan and related form of stock
option agreement, incorporated by reference to Exhibit 10.1 to
the Registration Statement on Form S-1 as previously filed with
the Commission on January 6, 1997.
10.2 Registrant's 1997 Employee Stock Purchase Plan as amended through
June 10, 1997.
10.3 Registrant's Outside Directors Stock Plan, incorporated by
reference to Exhibit 10.3 to the Registration Statement on Form
S-1 as previously filed with the Commission on January 6, 1997.
10.4 Employment Agreement dated as of December 10, 1996 between
Registrant and John H. Fain, incorporated by reference to Exhibit
10.11 to the Registration Statement on Form S-1 as previously
filed with the Commission on January 6, 1997.
10.5 Employment Agreement dated as of December 10, 1996 between
Registrant and Andrew J. Downing, incorporated by reference to
Exhibit 10.12 to the Registration Statement on Form S-1 as
previously filed with the Commission on January 6, 1997.
Page 47
<PAGE>
10.6 Employment Agreement dated as of December 10, 1996 between
Registrant and Frank B. Bracken, Jr., incorporated by reference
to Exhibit 10.13 to the Registration Statement on Form S-1 as
previously filed with the Commission on January 6, 1997.
10.7 Employment Agreement dated as of December 10, 1996 between
Registrant and Richard C. Jaeckle, incorporated by reference to
Exhibit 10.14 to the Registration Statement on Form S-1 as
previously filed with the Commission on January 6, 1997.
10.8 Employment Agreement dated as of December 10, 1996 between
Registrant and Kathleen A. Neff, incorporated by reference to
Exhibit 10.15 to the Registration Statement on Form S-1 as
previously filed with the Commission on January 6, 1997.
10.9 Lease dated September 19, 1996 between Tidewater Partners Limited
Partnership and Registrant for premises located at Reflections II
Office Building, Suite 300, 200 Golden Oak Court, Virginia Beach,
VA 23452, incorporated by reference to Exhibit 10.16 to the
Registration Statement on Form S-1 as previously filed with the
Commission on January 6, 1997.
10.10 Tax Indemnification Agreement dated as of December 24, 1996
between Shareholders of Registrant and Registrant, incorporated
by reference to Exhibit 10.18 to the Registration Statement on
Form S-1 as previously filed with the Commission on January 6,
1997.
10.11 Employment Agreement dated as of January 29, 1997 between
Registrant and Robert J. Eveleigh, incorporated by reference to
Exhibit 10.20 to the Registration Statement on Form S-1 as
previously filed with the Commission on January 22, 1997.
11 Computation of earnings per share and pro forma earnings per
share.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Andrew J. Downing to serve as director, incorporated
by reference to Exhibit 23.3 to the Registration Statement on
Form S-1 as previously filed with the Commission on January 22,
1997.
23.3 Consent of Robert J. Eveleigh to serve as director, incorporated
by reference to Exhibit 23.4 to the Registration Statement on
Form S-1 as previously filed with the Commission on January 22,
1997.
27 Financial Data Schedule.
99 Credit Agreement with NationsBank, N.A., Signet Bank and Crestar
Bank dated June 20, 1997, incorporated herein by reference to
Exhibit 99 to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.
(b) Reports on Form 8-K during last quarter of 1997:
None
Page 48
<PAGE>
SCHEDULE II
METRO INFORMATION SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE WRITE-OFF BALANCE
AT OF AT
BEGINNING CHARGES TO UNCOLLECTIBLE END OF
OF PERIOD REVENUE ACCOUNTS PERIOD
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended December 31, 1995.................... $ 68,641 $ 42,346 $ 24,980 $ 86,007
Year ended December 31, 1996.................... 86,007 110,010 82,131 113,886
Year ended December 31, 1997.................... 113,886 100,908 62,593 152,201
</TABLE>
Page 49
<PAGE>
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Shareholders
Metro Information Services, Inc.:
Under date of February 2, 1998, we reported on the balance sheets of Metro
Information Services, Inc. as of December 31, 1996 and 1997, and the related
statements of income, changes in redeemable common stock and shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997, which are included herein. In connection with our audits of
the aforementioned financial statements, we also audited the related financial
statement schedule. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
Norfolk, Virginia
February 2, 1998
Page 50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
METRO INFORMATION SERVICES, INC.
Date: February 27, 1998 By /s/ JOHN H. FAIN
------------------------------------------
John H. Fain
President and Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------------------ --------------------------- -------------------
/s/ JOHN H. FAIN President and Director February 27 , 1998
- ------------------------------ (Principal Executive
John H. Fain Officer)
/s/ ANDREW J. DOWNING Director and Executive February 27, 1998
- ------------------------------ Vice President
Andrew J. Downing
/s/ ROBERT J. EVELEIGH Treasurer, Chief Financial February 27, 1998
- ------------------------------ Officer and Director (Principal
Robert J. Eveleigh Financial Officer)
/s/ STEVEN A. LURUS Director of Finance February 27, 1998
- ------------------------------ (Principal Accounting
Steven A. Lurus Officer)
Page 51
<PAGE>
EXHIBIT 10.2
METRO INFORMATION SERVICES, INC.
EMPLOYEE STOCK PURCHASE PLAN
AMENDED AND RESTATED THROUGH JUNE 10, 1997
1. PURPOSE.
The Metro Information Services, Inc. Employee Stock Purchase Plan (the
"Plan") is intended to provide certain employees ("Participants") of Metro
Information Services, Inc. (the "Company") with an opportunity to acquire a
proprietary interest in the Company through their participation in a plan
designed to qualify as an employee stock purchase plan under Section 423 of the
Internal Revenue Code of 1986 (the "Code").
2. ADMINISTRATION.
(a) Committee. This Plan shall be administered by a committee (the
"Committee") composed of at least two (2) members of the Board of Directors of
the Company (the "Board"). No person shall serve as a member of the Committee,
or if a member of the Committee, shall not participate in decisions concerning
the timing, pricing or amount of Stock to be made available for purchase
hereunder, unless such person is a disinterested person as described in Rule
16b-3 promulgated pursuant to Section 16(b) of the Securities Exchange Act of
1934, as amended, or any successor rule ("Rule 16b-3"). This Plan is intended to
meet the requirements of Rule 16b-3 and shall be interpreted and administered so
as to comply with such rule. The Committee shall have full authority to
administer this Plan and to adopt such rules and regulations for administering
this Plan as it may deem necessary to comply with the requirements of Section
423 of the Code. The Committee may delegate to an agent or agents any of its
responsibilities under this Plan except its responsibilities to: (1) establish
the number of shares available for purchase by employees during any purchase
period; (2) establish the maximum and minimum percentage of base compensation to
be paid by any single employee for the purchase of stock during any purchase
period and its authority and (3) construe and interpret the provisions of this
Plan.
(b) Actions of the Committee. All actions taken and all interpretations and
determinations made by the Committee in good faith (including determinations of
fair market value) shall be final and binding on all Participants, the Company
and all other interested persons. No member of the Committee shall be personally
liable for any action, determination or interpretation made in good faith with
respect to this Plan and all members of the Committee shall, in addition to
their rights as directors, be fully protected by the Company with respect to any
such action, determination or interpretation.
3. PURCHASE PERIODS.
The first purchase period under this Plan shall commence on the effective
date of the Company's registration statement filed with the Securities and
Exchange Commission and shall terminate on March 31, 1997. Unless otherwise
determined by the Committee, a purchase period shall commence on the first day
of each succeeding calendar quarter and shall terminate on the last day of each
such quarter. The Committee may, from time to time, establish purchase periods
with differing commencement dates and durations. No two purchase periods shall
run concurrently.
4. ELIGIBILITY AND PARTICIPATION.
(a) Subject to Section 6(c)(iii), every employee of the Company who, on
the commencement date of the purchase period, has been employed by the
Company for at least six (6) months without a break in service of more than
thirty (30) calendar days is eligible to participate in this Plan during a
purchase period.
(b) An employee may become a Participant in this Plan for a particular
purchase period only by completing the enrollment forms prescribed by the
Committee (including a purchase agreement and a payroll deduction authorization)
and filing such forms before the commencement of the purchase period with the
person designated by the Committee. No enrollment forms will be accepted from an
individual who is not on the active payroll of the Company on the filing date,
unless such individual is temporarily off the payroll by reason of illness,
vacation, jury duty or other employer-sponsored absence.
Page 52
<PAGE>
5. STOCK SUBJECT TO PLAN.
(a) Common Stock. The stock that is purchasable by Participants shall be the
Company's authorized but unissued Common Stock, par value $.01 per share (the
"Common Stock"). To have sufficient shares available for sale under this Plan,
the Company may repurchase shares of Common Stock on the open market, issue
authorized but unissued stock or otherwise. The maximum number of shares that
may be sold to employees during any single purchase period shall be established
by the Committee before the beginning of the purchase period; provided, however,
that the total number of shares that may be sold to Participants throughout the
entire duration of this Plan shall not exceed 250,000 shares (subject to
adjustment under subparagraph (b) below).
(b) Changes in Capital Structure. If any change is made to the Common Stock
purchasable under this Plan (whether by reason of merger, consolidation,
reorganization, recapitalization, stock dividend in excess of twenty percent
(20%) at any single time, stock splits, combination of shares, exchange of
shares, changes in corporate structure or otherwise), then appropriate
adjustments shall be made to the maximum number of shares purchasable under this
Plan and the number of shares and price per share of stock subject to rights to
purchase stock outstanding under this Plan.
6. PURCHASE OF COMMON STOCK.
(a) Right to Purchase. An employee who becomes a Participant for a
particular purchase period shall have the right, as of the beginning of the
purchase period, to purchase Common Stock on the terms and conditions set forth
in this Plan and shall execute a purchase agreement embodying such terms and
conditions and such other provisions, not inconsistent with this Plan, as the
Committee may deem advisable.
(b) Purchase Price Per Share. Except as provided in Section 6(j), the
purchase price per share shall be eighty-five percent (85%) of the fair market
value of a share of Common Stock on the commencement date of the purchase
period. The fair market value of a share of Common Stock on any date shall be
the closing sales price, as quoted by the National Association of Securities
Dealers through the NASDAQ National Market System for the date in question, or,
if the Common Stock is listed on a national stock exchange, the
officially-quoted closing sales price on such exchange on the date in question.
If the Common Stock is not traded publicly, the fair market value of a share of
Common Stock on any date shall be determined, in good faith, by the Board or the
Committee after consultation with outside legal, accounting or other experts as
the Board or the Committee may deem advisable. If the Common Stock is not traded
publicly, the Board or the Committee shall maintain a written record of its
method of determining such value.
(c) Total Purchase Price. Each Participant shall, for any purchase period,
have the right to purchase Common Stock with a total purchase price equal to a
designated percentage of his Compensation. A Participant's "Compensation" for a
particular purchase period shall be the amount of the Participant's (i) base
salary or wages or (ii) base salary or wages, plus overtime, bonuses and other
compensation, that is payable to the Participant at any time or from time to
time during the purchase period. Each Participant shall designate in his
purchase agreement the whole percentage of the Participant's Compensation the
Participant wishes to use to pay for the purchase of Common Stock for the
particular purchase period, subject to the provisions set forth below which
shall be uniformly applied to all Participants in a particular purchase period:
(i) The maximum percentage of a Participant's Compensation that may be used
to pay for the Common Stock in a particular purchase period shall be five
percent (5%); provided, however, that the Committee shall establish before the
beginning of the purchase period a maximum number of shares (subject to
adjustment under Section 6(b)) that may be purchased during the purchase period
by each Participant.
(ii) The minimum percentage of a Participant's Compensation that may be used
to pay for the purchase of Common Stock in a particular period shall be one
percent (1%).
(iii) No right to purchase shares under this Plan shall be granted to an
employee if such employee would, immediately after the grant, own stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes
Page 53
<PAGE>
of stock of the Company. An employee's stock ownership shall be determined
under Section 424(d) of the Code and stock that an employee may purchase
under any outstanding options shall be treated as stock owned by the employee.
Notwithstanding the provisions of paragraphs (i) and (ii) above, the
Committee may, in its discretion, establish any other maximum and minimum
percentages of Compensation to be used to pay for Common Stock under this Plan.
(d) Allocation of Available Shares. If the total number of shares of Common
Stock that may be purchased under the purchase agreements of all Participants
for a particular purchase period exceeds the number of shares available for sale
under this Plan, then the Committee shall make a pro rata allocation of the
available shares and shall notify each Participant of such allocation.
(e) Payment. Payment of the purchase price for Common Stock under this Plan
shall be effected by means of payroll deductions, which shall begin with the
first pay period, the payment date for which occurs coincident with or
immediately following the commencement date of the relevant purchase period and
shall terminate with the last pay period, the payment date for which occurs on
or before the last day of the purchase period. Each payroll deduction shall be
an amount equal to the percentage of the Compensation included in that payroll
payment that was designated by the Participant in his purchase agreement
(subject to reduction as provided in Section 6(g)).
(f) Termination of Right to Purchase. A Participant may, at any time before
the last day of the purchase period, terminate his right to purchase stock under
this Plan by filing the prescribed notification form with the Committee or its
delegate. Any amounts deducted from the Participant's pay or otherwise collected
from him by reason of his participation in this Plan for such purchase period
shall be refunded and no further amounts will be collected from the Participant
(by payroll deduction or otherwise) during the remainder of the purchase period.
A Participant's termination of his right to purchase shall be irrevocable with
respect to the purchase period to which it pertains.
(g) Reduction of Compensation Percentage. A Participant may, once and only
once during a purchase period, other than after his termination of employment
with the Company, reduce the percentage of his Compensation to be paid for
shares of Common Stock under the purchase agreement to a lesser whole percentage
by giving written notice to the Committee.
(h) Termination of Employment. If a Participant ceases to be an employee of
the Company for any reason (including, without limitation, death or retirement)
during a purchase period, the Participant or his personal representative:
(i) receive a stock certificate for the number of shares (in five (5)
share lots) of Common Stock paid for pursuant to payroll deductions made on
behalf of the Participant during the purchase period up to the day before the
date of the Participant's cessation of employment and receive any balance
remaining in the Participant's account after such purchase; or
(ii) will receive a cash refund of all sums previously collected from the
Participant during the purchase period.
Any election provided by this Section 6(h) shall be exercisable only during
the 90-day period following the date of the Participant's cessation of
employment (but in no event later than the last date of the purchase period) and
the underlying right to purchase stock under this Plan shall terminate on the
exercise of such election. If a Participant or his personal representative fails
to make a timely election under this Section 6(h), the Company shall treat such
failure as an election to exercise alternative (ii) above.
(i) Exercise. Each right to purchase stock under this Plan, other than a
right to purchase Common Stock that has been accelerated under this Plan or that
has previously terminated under this Plan, shall be exercised automatically on
the last day of the purchase period. Promptly after the date of exercise, the
Participant or the Participant's nominee, shall be issued a stock certificate
for the whole number of shares that is divisible by five (5) shares for which
the Participant's right to purchase has been exercised. Not more than one
certificate shall be issued pursuant to the exercise of any right to purchase
Common Stock under this Plan. Any excess of amounts collected during the
purchase period, plus any beginning balance over the purchase price of the
issued shares, shall be, at the sole option of the Company, promptly refunded or
left on deposit for the ensuing quarterly period, and, in any case, refunded
after termination.
Page 54
<PAGE>
(j) Reduction of Purchase Price. If the fair market value of a share of
Common Stock on the last day of the purchase period is less than the fair market
value of such share on the commencement date of the purchase period, then the
purchase price per share under this Plan on the last day of the purchase period
shall be reduced to eighty-five percent (85%) of the fair market value of such
share on the last day of the purchase period. Each right to purchase stock in
five (5) share multiples under this Plan not previously exercised or terminated
shall be automatically exercised on the last day of the purchase period for the
number of whole shares (in five (5) share lots) obtained by dividing the sum on
deposit from the Participant (and not refunded) by the purchase price per share
determined under this Section 6(j), but in no event shall any right to purchase
stock under this Plan be exercised for more than the specified number of shares,
if any, (subject to adjustment under Section 5(b)) established by the Committee
pursuant to Section 6(c)(i) before the beginning of the purchase period, and the
balance shall be, at the sole option of the Company, promptly refunded or left
on deposit for the ensuing quarterly period. For example, if a Participant has
$100.00 on account and the Company's stock price pursuant to this paragraph is
determined to be $9.00, then ten (10) shares will be issued (10 x $9.00; with
ten (10) being divisible by 5) and $10.00 will be left on deposit or refunded as
herein stated.
(k) Rights as Stockholder. A Participant shall have no rights as a
stockholder with respect to shares subject to a right to purchase Common Stock
granted under this Plan until such right to purchase is exercised and a share
certificate is delivered to the Participant. No adjustments shall be made for
dividends, distributions or other rights for which the record date is before the
date of exercise.
(l) Assignability. No right to purchase Common Stock granted under this Plan
shall be assignable or transferable by a Participant other than by will or by
the laws of descent and distribution, and, during the lifetime of the
Participant, such rights to purchase Common Stock shall be exercisable only by
the Participant.
(m) Accrual Limitations. No Participant shall be entitled to accrue rights
to purchase Common Stock under this Plan that, when aggregated with purchase
rights accruable by him under other qualified employee stock purchase plans
(within the meaning of Section 423 of the Code) of the Company, would permit
such Participant to purchase more than $25,000 worth of Common Stock (determined
on the basis of the fair market value of such Common Stock on the date the
Participant accrues purchase rights under the Plan) for each calendar year such
purchase rights are at any time outstanding.
(n) Merger or Liquidation of the Company. If the Company or its shareholders
enter into an agreement to dispose of all or substantially all of the assets of
the Company or to dispose of greater than fifty percent (50%) of the outstanding
capital stock of the Company by means of sale, merger, reorganization or
liquidation, each Participant shall be entitled to receive, as nearly as
reasonably may be determined, the cash, securities or property (or any
combination thereof) that a holder of one share of the Common Stock was entitled
to receive at the time of such transaction. The Board or the Committee shall
take such steps in connection with such transactions as the Board or the
Committee shall deem necessary to assure that the provisions of this Section
shall thereafter be applicable, as nearly as reasonably may be determined, to
the said cash, securities or property (or any combination thereof) as to which
such Participant might thereafter be entitled to receive.
(o) No Interest. No interest shall be paid on any monies refunded to
Participants pursuant to the provisions of this Plan.
(p) Withholding. The Company may withhold any taxes required by any law or
regulation of any governmental authority, whether federal, state or local, in
connection with the purchase of Common Stock under this Plan or the sale of such
stock that is not held for at least two (2) years after the beginning of the
purchase period during which the Common Stock was purchased. Such withholding
may include all or any portion of any payment or other compensation payable to
the Participant, unless the Participant reimburses the Company for such amount.
Page 55
<PAGE>
7. AMENDMENT.
The Board may from time to time alter, amend, suspend or discontinue this
Plan; provided, however, that no such action shall adversely affect rights and
obligations with respect to rights to purchase stock at the time outstanding
under this Plan and provided, further, that no such action of the Board may,
without the approval of the shareholders of the Company, increase the number of
shares subject to this Plan or the maximum number of shares for which a right to
purchase Common Stock under this Plan may be exercised (unless necessary to
effect the adjustments required by Section 5(b)), extend the term of this Plan,
alter the per share purchase price formula so as to reduce the purchase price
per share specified in this Plan, otherwise materially increase the benefits
accruing to Participants under the Plan or materially modify the requirements
for eligibility to participate in this Plan. Furthermore, the Plan may not,
without the approval of the shareholders of the Company, be amended in any
manner that will cause this Plan to fail to meet the requirements of an
"employee stock purchase plan" under Section 423 of the Code.
8. EFFECTIVE DATE
This Plan, as amended and restated, supersedes all prior versions of this
Plan. This Plan has been approved by the Board and shall become effective on the
date the shareholders of the Company approve this Plan.
Date: As amended and approved by the shareholders through June 10, 1997.
METRO INFORMATION SERVICES, INC.
By: /s/ JOHN H. FAIN
-----------------------------
John H. Fain, President
Page 56
<PAGE>
EXHIBIT 11
METRO INFORMATION SERVICES, INC.
COMPUTATION OF EARNINGS PER SHARE AND PRO FORMA EARNINGS PER SHARE (1)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
SHARES (2) 1995 1996 1997
- --------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Average outstanding during the year (3)................... 12,111,275 12,187,851 14,610,888
Add: Incremental shares related to stock issued within
the year preceding the Company's initial public offering
under the treasury stock method using the offering price
of $16 per share (4).................................... 282,362 302,220 --
Add: The number of shares obtained by dividing the amount
by which the distributions during the period exceeded
earnings for the period, by the offering price of
$16 per share (5)....................................... 362,152 271,614 --
---------- ---------- -----------
Number of shares on which published basic earnings per
share is based.......................................... 12,755,789 12,761,685 14,610,888
Add: Incremental shares from assumed exercise of stock
options................................................. -- -- 51,369
----------- ---------- -----------
Number of shares on which published diluted earnings per
share is based.......................................... 12,755,789 12,761,685 14,662,257
----------- ---------- -----------
----------- ---------- -----------
EARNINGS
Pro forma net income applicable to common shareholders.... $ 3,000,166 $ 5,304,709
----------- -----------
----------- -----------
Pro forma earnings per share -- basic and diluted......... $ 0.24 $ 0.42
----------- -----------
----------- -----------
Net income applicable to common shareholders.............. $ 9,627,247
-----------
-----------
Earnings per share -- basic and diluted................... $ 0.66
-----------
-----------
</TABLE>
- ------------------------
(1) There is no difference between basic and diluted earnings per share.
Therefore, basic and diluted earnings per share are presented on one line.
(2) All share amounts give effect to the 3,507.2952 for one stock split effected
in the form of a stock dividend before the Company's January 29, 1997
initial public offering.
(3) Average shares outstanding for 1997 are calculated based on 12,500,000
shares outstanding for the first month of the year, 14,800,000 through
September 29, 1997, 14,810,000 through December 30, 1997 and 14,819,984
outstanding for the last day of the year.
(4) Gives effect to 312,149 shares issued May 1, 1996, as if they were
outstanding for all periods, using the treasury stock method.
(5) Includes $9,000,000 of S corporation earnings distributed before the
completion of the Company's initial public offering.
Page 57
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Metro Information Services, Inc.:
We consent to incorporation by reference in registration statements (Nos.
333-22751, 333-22753 and 333-22777) on Form S-8 of Metro Information Services,
Inc. of our reports dated February 2, 1998, relating to the balance sheets of
Metro Information Services, Inc. as of December 31, 1997 and 1996, and the
related statements of income, cash flows and changes in redeemable common stock
and shareholders' equity and the schedule for each of the years in the
three-year period ended December 31, 1997, which reports appear in the December
31, 1997 Report on Form 10-K of Metro Information Services, Inc.
/s/ KPMG PEAT MARWICK LLP
Norfolk, Virginia
February 27, 1998
Page 58
<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-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS' LEGEND.
</LEGEND>
<CIK> 0001026965
<NAME> METRO INFORMATION SERVICES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 22,029
<SECURITIES> 0
<RECEIVABLES> 24,288
<ALLOWANCES> 152
<INVENTORY> 0
<CURRENT-ASSETS> 47,230
<PP&E> 9,061
<DEPRECIATION> 3,389
<TOTAL-ASSETS> 58,533
<CURRENT-LIABILITIES> 12,670
<BONDS> 0
0
0
<COMMON> 148
<OTHER-SE> 36,086
<TOTAL-LIABILITY-AND-EQUITY> 58,533
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<TOTAL-REVENUES> 152,578
<CGS> 0
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<OTHER-EXPENSES> 31,422
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<INTEREST-EXPENSE> 60
<INCOME-PRETAX> 15,805
<INCOME-TAX> 6,178
<INCOME-CONTINUING> 9,627
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<EXTRAORDINARY> 0
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<NET-INCOME> 9,627
<EPS-PRIMARY> 0.66
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