<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
MARCH 31, 1998
COMMISSION FILE NO.: 000-22035
------------------------------
METRO INFORMATION SERVICES, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1112301
(State of incorporation) (I.R.S. Employer Identification Number)
POST OFFICE BOX 8888, VIRGINIA BEACH, VIRGINIA 23450
(Address of principal executive office) (Zip Code)
(757) 486-1900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and has been subject to the
filing requirements for the past 90 days. Yes /X/ No / /
As of April 30, 1998, the registrant had issued and outstanding 14,839,764
shares of Common Stock, $.01 par value.
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1
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METRO INFORMATION SERVICES, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION:
ITEM 1. Balance Sheets as of
December 31, 1997 and March 31, 1998 (unaudited) 3
Statements of Income for the
Three Months Ended March 31, 1997 and 1998 (unaudited) 4
Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1998 (unaudited) 5
Statement of Changes in Shareholders' Equity for the
Three Months Ended March 31, 1998 (unaudited) 6
Notes to Financial Statements (unaudited) 7
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION 14
SIGNATURES 16
2
<PAGE>
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
METRO INFORMATION SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $22,028,594 $20,614,279
Accounts receivable, net 24,136,582 29,065,444
Prepaid expenses 402,115 459,436
Deferred income taxes (Note 5) 662,687 714,908
------------ -----------
Total current assets 47,229,978 50,854,067
Property and equipment, net 5,672,548 7,216,394
Goodwill, net (Notes 3 and 4) 5,327,622 5,270,204
Other assets 303,067 136,481
------------ -----------
Total assets $58,533,215 $63,477,146
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,118,209 $ 2,943,733
Accrued compensation and benefits 8,551,501 11,329,407
------------ -----------
Total current liabilities 12,669,710 14,273,140
Deferred income taxes (Note 5) 735,632 782,863
------------ -----------
Total liabilities 13,405,342 15,056,003
------------ -----------
Shareholders' equity
Preferred stock, $0.01 par value; authorized
1,000,000 shares; none issued and outstanding -- --
Common stock, $0.01 par value, authorized
50,000,000 shares; issued and outstanding
14,819,984 shares at December 31, 1997,
14,838,564 shares at March 31, 1998 (Note 6) 148,200 148,386
Paid in capital 36,085,946 36,480,468
Retained earnings 8,893,727 11,792,289
------------ -----------
Total shareholders' equity 45,127,873 48,421,143
------------ -----------
Total liabilities and shareholders' equity $58,533,215 $63,477,146
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
METRO INFORMATION SERVICES, INC.
STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months
ended March 31,
-------------------------------------
1997 1998
----------- -----------
<S> <C> <C>
Revenue $33,045,313 $47,109,515
Cost of revenue 23,318,716 32,763,637
----------- -----------
Gross profit 9,726,597 14,345,878
----------- -----------
Selling, general and administrative expenses 6,747,023 9,290,457
Depreciation and amortization expense 238,744 392,688
----------- -----------
Total operating expenses 6,985,767 9,683,145
----------- -----------
Operating income 2,740,830 4,662,733
Interest income 104,083 168,203
----------- -----------
Income before income taxes 2,844,913 4,830,936
Income taxes (Note 5) 1,013,041 1,932,374
----------- -----------
Net income (Note 5) $ 1,831,872 $ 2,898,562
----------- -----------
----------- -----------
Net income per share:
Basic (Note 5) $ 0.13 $ 0.20
----------- -----------
----------- -----------
Diluted (Note 5) $ 0.13 $ 0.19
----------- -----------
----------- -----------
Weighted average number of shares of common stock
and common stock equivalents outstanding:
Basic 14,033,333 14,823,296
----------- -----------
----------- -----------
Diluted 14,045,029 14,988,967
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
METRO INFORMATION SERVICES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months
ended March 31
--------------------------------
1997 1998
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,831,872 $ 2,898,562
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization - cost of revenue - 6,662
Depreciation and amortization - selling, general & administrative expenses 238,744 392,688
Net loss on sale of property and equipment 37,114 7,144
Deferred income taxes (203,313) (4,990)
Changes in operating assets and liabilities increasing
(decreasing) cash, net of the effects of acquisitions:
Accounts receivable (3,257,575) (4,928,862)
Prepaid expenses (145,620) (57,321)
Other assets (7,136) 182,562
Accounts payable 343,416 109,548
Accrued compensation and benefits 1,832,086 2,777,906
----------- -----------
Net cash provided by operating activities 669,588 1,383,899
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (565,115) (1,113,180)
Acquisition of computer software - (797,018)
Acquisition of businesses - (1,284,024)
Proceeds from sale of property and equipment 8,420 1,300
----------- -----------
Net cash used in investing activities (556,695) (3,192,922)
----------- -----------
Cash flows from financing activities:
Net repayments under line of credit (2,547,388) -
Decrease in other assets related to issuance of 2,300,000 shares 471,849 -
Proceeds from issuance of 2,300,000 shares 33,162,735 -
Proceeds from issuance of shares to Employee Stock Purchase Plan - 289,428
Proceeds from issuance of shares to Employee Incentive Stock Option Plan - 105,280
Distributions to shareholders (9,000,000) -
----------- -----------
Net cash provided by financing activities 22,087,196 394,708
----------- -----------
Net increase (decrease) in cash and cash equivalents 22,200,089 (1,414,315)
Cash and cash equivalents at beginning of period 157,372 22,028,594
----------- -----------
Cash and cash equivalents at end of period $22,357,461 $20,614,279
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information -
Cash paid for interest $ 31,757 $ 14,567
----------- -----------
----------- -----------
Cash paid for income taxes $ - $ 284,150
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
METRO INFORMATION SERVICES, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Shareholders' Equity
------------------------------------------------------------------------------
Common Stock
------------------------- Paid in Retained
Shares Amount Capital Earnings Total
----------- -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1997 14,819,984 $148,200 $36,085,946 $ 8,893,727 $45,127,873
Net proceeds from issuance of
12,000 shares of common stock to
Employee Stock Purchase Plan 12,000 120 289,308 -- $ 289,428
Net proceeds from issuance of 6,580
shares of common stock to Employee
Incentive Stock Option Plan 6,580 66 105,214 -- $ 105,280
Net income -- -- -- 2,898,562 $ 2,898,562
----------- -------- ----------- ---------- -----------
BALANCE AS OF MARCH 31, 1998 14,838,564 $148,386 $36,480,468 $11,792,289 $48,421,143
----------- -------- ----------- ---------- -----------
----------- -------- ----------- ---------- -----------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
METRO INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The information presented for March 31, 1997 and 1998, and for the
three-month periods then ended, is unaudited, but, in the opinion of the
Company's management, the accompanying unaudited financial statements contain
all adjustments (consisting only of normal recurring adjustments) which the
Company considers necessary for the fair presentation of the Company's
financial position as of March 31, 1998 and the results of its operations and
its cash flows for the three-month periods ended March 31, 1997 and 1998. The
financial statements included herein have been prepared in accordance with
generally accepted accounting principles and the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted. These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1997,
which were included as part of the Company's Annual Report on Form 10-K (File
No. 000-22035). Certain 1997 amounts have been reclassified for comparability
with the 1998 financial statement presentation.
Results for the interim periods presented are not necessarily
indicative of results that may be expected for the entire year.
2. Internal Use Software Costs
On March 4, 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-1, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. This SOP
provides guidance on capitalizing certain costs related to computer software
developed or obtained for internal use. The SOP is effective for financial
statements for fiscal years beginning after December 15, 1998. Earlier
application is encouraged in fiscal years for which annual financial
statements have not been issued. The Company adopted the SOP effective
January 1, 1998. The SOP causes amounts that otherwise would have been
charged to selling, general and administrative expenses in the period
incurred to be capitalized and amortized over the useful life of the computer
software, typically three to seven years. Although the full impact of this
SOP on future periods has not been estimated, management of the Company
expects the SOP will have a favorable impact on the Company's 1998 financial
statements. As of March 31, 1998, $145,000 in costs have been capitalized by
the Company pursuant to this SOP. For the three months ended March 31, 1998,
the effect of this change in accounting was to increase net income by $87,000
and increase basic and diluted net income per share by less than $0.01.
Because the SOP requires that computer software be ready for its intended use
before amortization begins, no amortization expense has been recognized for
these amounts through March 31, 1998.
3. Acquisitions
On July 1, 1997, the Company completed the acquisition of two
information services technology companies using a portion of the proceeds
from the Company's initial public offering completed in January 1997. The
Company acquired the business operations of Data Systems Technology, Inc.
(DST), which had offices in Columbia and Greensboro, South Carolina, for
$133,930 with up to an additional $366,070 contingency payment due in the
third quarter of 1998, assuming certain operating income targets are attained
by the acquired business. The Company also acquired the business operations
of Kansas City-based J2, Inc. d.b.a. DP Career Associates (DPCA), for $5.2
million, of which $3.9 million was paid on July 1, 1997 and $1.3 million was
paid on February 27, 1998 as a result of the acquired business attaining
certain gross profit targets. Each acquisition is accounted for as a
purchase. In connection with these acquisitions, the Company has recorded
approximately $5,396,000 of goodwill which is being amortized on a
straight-line basis over 30 years.
7
<PAGE>
4. Goodwill
Goodwill represents the excess of cost over fair value of net
tangible assets acquired through acquisitions and is amortized on a
straight-line basis over its estimated useful life, generally 30 years.
Management periodically assesses whether there has been a permanent
impairment in the value of goodwill. The amount of such impairment is
determined by comparing anticipated undiscounted future cash flows to the
carrying value of the related goodwill.
5. Income Taxes
Before January 1, 1997, the Company, with the consent of its
shareholders, was taxed under the provisions of Subchapter S of the Internal
Revenue Code of 1986, which provides that, in lieu of corporate income taxes,
the shareholders of the S Corporation are taxed on their proportionate share
of the Company's taxable income. Effective January 1, 1997, the Company
terminated its S Corporation election and became a C Corporation subject to
corporate income taxes. The cumulative effect of this change, through March
31, 1997, was to reduce income taxes appearing on the Statement of Income for
the three months ended March 31, 1997 by $125,000 and create a current
deferred tax asset and a long-term deferred tax liability. The balances of
the deferred tax accounts at December 31, 1997 and March 31, 1998 relate
primarily to differences in the timing of deductions of health care claims
reserves, vacation liabilities, depreciation and amortization for financial
statement and tax purposes.
6. Initial Public Offering
On January 29, 1997, the Company consummated an initial public
offering of 3,100,000 shares of its Common Stock at a price of $16.00 per
share, of which 2,300,000 shares were issued and sold by the Company and
800,000 shares were sold by a shareholder of the Company. Shortly thereafter
the representatives of the several underwriters exercised their
over-allotment option resulting in the sale of 465,000 shares by other
shareholders of the Company. The net proceeds to the Company from the
offering were $33,144,000. The Company did not receive any proceeds from the
sale of shares by the selling shareholders.
7. Credit Facilities
The Company maintains credit facilities of $39,900,000. The
facilities are provided in equal amounts by three banks and have a five-year
maturity which may be extended each year for an additional year. If the
facilities are not extended, principal on one of the facilities must be
repaid in four equal annual installments while the other two facilities
require principal repayment at the end of four years. Until that time,
interest only is payable monthly. Two of the facilities allow the Company to
select among prime rate and London Interbank Offered Rate (LIBOR) based
interest rates while the third has only LIBOR based interest rates. All of
the facilities have interest rates that increase as the balance outstanding
under the facilities increases. At March 31, 1998 and December 31, 1997, no
amounts were outstanding under the facilities. The Company has selected a
30-day LIBOR based rate and, if any borrowings were outstanding under the
facilities at March 31, 1998, the rate on such borrowings would have ranged
from 6.0% to 6.6%. The facilities also contain fees, ranging from 0.125% to
0.3125% annually, which are charged on the unused portion of the facilities.
The facilities are collateralized by accounts receivable of the Company.
The credit facilities include several covenants, including one
requiring the maintenance of a certain tangible net worth ratio, which limits
the amount of dividends that can be paid. The covenants also impose limits on
incurring additional debt and require a certain debt service coverage ratio
to be maintained. Amounts advanced under the facilities can be used for
acquisitions and general working capital purposes.
8
<PAGE>
PART I
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT UNDER THE "SAFE-HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: INCLUDED IN THIS REPORT AND
OTHER INFORMATION PRESENTED BY MANAGEMENT FROM TIME TO TIME, INCLUDING, BUT
NOT LIMITED TO, ANNUAL REPORTS TO SHAREHOLDERS, QUARTERLY SHAREHOLDER
LETTERS, FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, NEWS RELEASES
AND INVESTOR PRESENTATIONS, ARE FORWARD-LOOKING STATEMENTS ABOUT BUSINESS
STRATEGIES, MARKET POTENTIAL, FUTURE FINANCIAL PERFORMANCE AND OTHER MATTERS
WHICH REFLECT MANAGEMENT'S EXPECTATIONS AS OF THE DATE OF THIS REPORT.
WITHOUT LIMITING THE FOREGOING, THE WORDS "BELIEVES," "ANTICIPATES," "PLANS,"
"EXPECTS," "SEEKS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. THERE ARE A NUMBER OF IMPORTANT FACTORS THAT
COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, WITHOUT
LIMITATION: THE COMPANY'S ABILITY TO ATTRACT, DEVELOP AND RETAIN QUALIFIED
CONSULTANTS, THE COMPANY'S ABILITY TO OPEN NEW OFFICES, THE COMPANY'S ABILITY
TO EFFECTIVELY IDENTIFY, MANAGE AND INTEGRATE ACQUISITIONS, CHANGES IN
CONSULTANT UTILIZATION AND PRODUCTIVITY RATES, THE COMPANY'S ABILITY TO
ACQUIRE OR DEVELOP ADDITIONAL SERVICE OFFERINGS, CLIENT DECISIONS TO REDUCE
OR INCREASE IT SERVICES OUTSOURCING, EARLY TERMINATION OF CLIENT CONTRACTS
WITHOUT PENALTY, CHANGES IN THE COMPANY'S DEPENDENCE ON SIGNIFICANT CLIENTS,
CHANGES IN GROSS MARGINS DUE TO A VARIETY OF FACTORS (INCLUDING INCREASED
WAGE AND BENEFIT COSTS THAT ARE NOT OFFSET BY BILL RATE INCREASES), THE TYPES
OF SERVICES PERFORMED BY THE COMPANY DURING A PARTICULAR PERIOD AND
COMPETITION. PLEASE REFER TO A DISCUSSION OF THESE AND OTHER FACTORS IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1997 AND OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS. THE COMPANY
DISCLAIMS ANY INTENT OR OBLIGATION TO UPDATE PUBLICLY THESE FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR
OTHERWISE.
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. THE COMPANY'S
FISCAL YEAR ENDS ON DECEMBER 31.
OVERVIEW
Metro Information Services, Inc. ("Metro" or the "Company") provides
a wide range of information technology ("IT") consulting and custom software
development services through 32 offices in the United States and Puerto Rico.
The Company's more than 1,800 consultants, 65% of whom are salaried, work
with clients' internal IT departments on all aspects of computer systems and
applications development. Services performed by Metro include application
systems development and maintenance, IT architecture and engineering, systems
consulting, project outsourcing and general support services. The Company
supports all major computer technology platforms (mainframe, mid-range,
client/server and network environments) and supports client projects using a
broad range of software applications. For example, the Company implements
SAP's client/server software, custom develops Oracle, Informix, DB2,
VisualBasic and C++ applications, implements and supports Windows NT, Novell
and UNIX based network environments and supports numerous other application
environments.
Metro's clients operate in a wide variety of industries including
communications, distribution, financial services, health care, information
technology, manufacturing and utilities. The Company emphasizes long-term
relationships with its clients rather than one-time projects or assignments.
During the 12 months ended March 31, 1998, the Company performed IT services
for 418 clients (excluding clients that generated less than $25,000 in
revenue during such period).
IT services are primarily provided by the Company through
supplemental IT services arrangements and, to a lesser extent, through
project outsourcing services arrangements. Substantially all services are
billed on a time and materials basis. During the three months ended March 31,
1998, the Company estimates that supplemental IT services accounted for more
than 90% and project outsourcing services accounted for less than 10% of the
Company's revenue.
9
<PAGE>
Revenue growth is derived primarily from increases in the number of
consultants placed with existing and new clients. Between March 31, 1997 and
March 31, 1998, the number of full time consultants grew from 1,358 to 1,802,
including consultants gained through acquisitions. In addition, over the same
period, the Company increased the average billing rates charged to clients
for consultants in an attempt to keep pace with the increased costs of
consultants.
The Company's past financial performance should not be relied on as
an indication of future performance. Period-to-period comparisons of the
Company's financial results are not necessarily meaningful indicators of
future performance.
RESULTS OF OPERATIONS
FOR PURPOSES OF THE FOLLOWING DISCUSSION, A MATURE OFFICE IS AN
OFFICE THAT WAS OWNED BY THE COMPANY FOR AT LEAST 12 MONTHS AT THE BEGINNING
OF THE EARLIER PERIOD BEING COMPARED AND A NEW OFFICE IS AN OFFICE OPENED OR
ACQUIRED THEREAFTER.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1997
REVENUE. Revenue increased $14.1 million, or 42.6%, to $47.1 million
for the three months ended March 31, 1998 from $33.0 million for the three
months ended March 31, 1997. This increase is primarily a result of increased
billings to existing clients, the addition of new clients and increased
billing rates charged for the Company's consultants.
COST OF REVENUE. Cost of revenue increased $9.5 million, or 40.5%,
to $32.8 million for the three months ended March 31, 1998 from $23.3 million
for the three months ended March 31, 1997. Cost of revenue increased
primarily due to compensation and benefits associated with growth in the
number of consultants. As a percentage of revenue, cost of revenue decreased
to 69.5% for the three months ended March 31, 1998 from 70.6% for the three
months ended March 31, 1997 primarily because of bill rates to clients
increasing faster than pay rates to consultants during the period.
GROSS PROFIT. Gross profit increased $4.6 million, or 47.5%, to
$14.3 million for the three months ended March 31, 1998 from $9.7 million for
the three months ended March 31, 1997. As a percentage of revenue, gross
profit increased to 30.5% for the three months ended March 31, 1998 from
29.4% for the three months ended March 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.6 million, or 37.7%, to $9.3 million for
the three months ended March 31, 1998 from $6.7 million for the three months
ended March 31, 1997. This increase is due primarily to costs associated with
recently opened offices, growth of administrative staff in mature offices,
hiring additional corporate staff to support the increased number of offices
and development of the Company's proprietary business systems. As a
percentage of revenue, selling, general and administrative expenses decreased
to 19.7% for the three months ended March 31, 1998 from 20.4% for the three
months ended March 31, 1997.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased $154,000, or 64.5%, to $393,000 for the three months ended
March 31, 1998 from $239,000 for the three months ended March 31, 1997. This
increase is primarily attributable to depreciation on additions to computer
equipment and software and, to a lesser extent, amortization of goodwill
related to the Company's acquisitions. As a percentage of revenue,
depreciation and amortization expense increased to 0.9% for the three months
ended March 31, 1998 from 0.7% for the three months ended March 31, 1997.
OPERATING INCOME. Operating income increased $2.0 million or 70.1%,
to $4.7 million for the three months ended March 31, 1998 from $2.7 million
for the three months ended March 31, 1997. As a percentage of revenue,
operating income increased to 9.9% for the three months ended March 31, 1998
from 8.3% for the three months ended March 31, 1997. The improvement in
operating income margin is in part the result of the Company's centralization
of administrative functions and leverage obtained from the Company's
proprietary business systems.
10
<PAGE>
INTEREST INCOME. Interest income increased by $64,000, or 61.6%, to
$168,000 for the three months ended March 31, 1998 from $104,000 for the
three months ended March 31, 1997. This change reflects a decrease in the
average level of borrowings during the period and investment of a portion of
the proceeds of the Company's January 1997 initial public offering of Common
Stock in interest bearing instruments.
INCOME BEFORE INCOME TAXES. Income before income taxes increased
$2.0 million, or 69.8%, to $4.8 million for the three months ended March 31,
1998 from $2.8 million for the three months ended March 31, 1997. As a
percentage of revenue, income before income taxes increased to 10.3% for the
three months ended March 31, 1998 from 8.6% for the three months ended March
31, 1997.
INCOME TAXES. The Company's effective tax rate was 40% for the three
months ended March 31, 1998 and 35.6% for the three months ended March 31,
1997. Income taxes increased $0.9 million or 90.7%, to $1.9 million for the
three months ended March 31, 1998 from $1.0 million for the three months
ended March 31, 1997. As a percentage of revenue, income taxes increased to
4.1% for the three months ended March 31, 1998 from 3.1% for the three months
ended March 31, 1997. In 1996, the Company was an S corporation for federal
and certain state income tax purposes. Income taxes for the three months
ended March 31, 1997 include a one-time reduction in income tax expense of
$125,000, which represents the cumulative effect of the Company converting
from an S corporation to a C corporation effective January 1, 1997. Excluding
the $125,000 one-time reduction in income taxes, income taxes for the three
months ended March 31, 1997 would have been $1.1 million, the Company's
effective tax rate would have been 40% and income taxes for the three months
ended March 31, 1998 would have represented an increase of $0.8 million or
69.8%.
NET INCOME. Net income increased $1.1 million, or 58.2%, to $2.9
million for the three months ended March 31, 1998 from $1.8 million for the
three months ended March 31, 1997. As a percentage of revenue, net income
increased to 6.2% for the three months ended March 31, 1998 from 5.5% for the
three months ended March 31, 1997.
EARNINGS PER SHARE. Diluted earnings per share increased $0.06, or
46.2%, to $0.19 for the three months ended March 31, 1998 from $0.13 for the
three months ended March 31, 1997. Excluding the $125,000 one-time credit
described under `INCOME TAXES' above, diluted earnings per share for the
three months ended March 31, 1997 would have been $0.12 and diluted earnings
per share for the three months ended March 31, 1998 would have represented an
increase of $0.07 or 58.3%.
The following table sets forth the percentage of revenue and the percentage
change from the prior period of certain items reflected in the statements of
income for the:
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERCENTAGE
MARCH 31, CHANGE
PERCENTAGE OF REVENUE 1998 OVER 1997
----------------------- --------------
1997 1998
------ -----
<S> <C> <C> <C>
Revenue 100.0% 100.0% 42.6%
Cost of revenue 70.6 69.5 40.5
------ -----
Gross profit 29.4 30.5 47.5
------ -----
Selling, general and administrative expenses 20.4 19.7 37.7
Depreciation and amortization expense 0.7 0.9 64.5
------ -----
Total operating expenses 21.1 20.6 38.6
------ -----
Operating income 8.3 9.9 70.1
Interest income 0.3 0.4 61.6
------ -----
Income before income taxes 8.6 10.3 69.8
Income taxes 3.1 4.1 90.7
------ -----
Net income 5.5% 6.2% 58.2
------ -----
------ -----
</TABLE>
11
<PAGE>
SELECTED QUARTERLY RESULTS AND SEASONALITY
The following table sets forth certain quarterly operating
information for each of the 13 quarters ending with the quarter ended March
31, 1998, both in dollars and as a percentage of revenue. This information
was derived from the unaudited financial statements of the Company which, in
the opinion of management, were prepared on the same basis as the financial
statements contained elsewhere in this report and include all adjustments,
consisting of normal recurring adjustments, which management considers
necessary for the fair presentation of the information for the periods
presented. The financial data shown below should be read in conjunction with
the financial statements and notes thereto included in this report. Results
for any fiscal quarter are not necessarily indicative of results for the full
year or for any future quarter.
<TABLE>
<CAPTION>
Gross Profit Operating Income
--------------- ----------------
% of % of
Statements of Income Data Revenue Amount Revenue Amount Revenue
- ------------------------- ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1995:
March............................ 19,760 5,732 29.0 1,422 7.2
June............................. 20,695 6,195 29.9 1,683 8.1
September........................ 21,881 6,117 28.0 1,428 6.5
December......................... 23,568 6,786 28.8 790(1) 3.4(1)
1996:
March............................ 26,328 7,726 29.3 2,107 8.0
June............................. 27,812 8,452 30.4 2,248 8.1
September........................ 29,142 8,817 30.3 2,431 8.3
December......................... 30,681 9,216 30.0 2,314 7.5
1997:
March............................ 33,045 9,727 29.4 2,741 8.3
June............................. 35,883 10,841 30.2 3,409 9.5
September........................ 40,569 12,580 31.0 4,314 10.6
December......................... 43,080 13,351 31.0 4,612 10.7
1998:
March............................ 47,110 14,346 30.5 4,663 9.9
</TABLE>
- --------------
(1) Includes the $770,000 of non-recurring, non-cash compensation expense
charged to selling, general and administrative expenses accrued in the
fourth quarter of 1995 for stock issued for services performed by
employees in 1995. Excluding the effect of such expense, income from
operations and income from operations as a percentage of revenue for the
fourth quarter of 1995 would have been $1.6 million and 6.6%, respectively.
Metro's operating results are adversely affected when client
facilities close due to holidays or inclement weather. The Company generally
experiences a certain amount of seasonality in the fourth quarter due to the
number of holidays and closings of client facilities during that quarter.
Further, the Company generally experiences lower operating results in the
first quarter due in part to the timing of unemployment and FICA tax accruals
and delays in clients' contract renewal related to clients' budget approval
processes.
12
<PAGE>
Liquidity and Capital Resources
In January 1997, the Company completed an initial public offering of
3,100,000 shares of its Common Stock at a price of $16.00 per share. Of the
3,100,000 shares, 2,300,000 shares were issued and sold by the Company and
800,000 shares were sold by a shareholder of the Company. Shortly thereafter
the representatives of the several underwriters exercised their
over-allotment option resulting in the sale of 465,000 shares by other
shareholders of the Company. The net proceeds to the Company were
approximately $33,144,000. The Company did not receive any of the proceeds
from the sale of shares by the selling shareholders. The Company used
$4,352,920 of the proceeds from the initial public offering during the third
quarter of 1997 and $1,284,024 during the three months ended March 31, 1998
for the acquisitions of Data Systems Technology, Inc. and DP Career
Associates described above.
The Company made its first sale of stock under the Metro Information
Services, Inc. Employee Stock Purchase Plan on September 30, 1997. The
Company sold 10,000 shares for an aggregate purchase price of $167,350 on
September 30, 1997, 9,984 shares for $184,587 on December 31, 1997 and 12,000
shares for $289,428 on March 31, 1998.
During the three months ended March 31, 1998, certain employees
exercised stock options which vested on December 31, 1997 pursuant to the
1997 Employee Incentive Stock Option Plan. Total proceeds from the issuance
of stock for option exercises during the three months ended March 31, 1998
were $105,280.
The Company funded its operations primarily from cash generated by
operations. Net cash provided by operations was $1,383,899 for the three
months ended March 31, 1998 and consisted primarily of net income of
$2,898,562 and, excluding the effects of acquisitions, increases in accounts
receivable of $4,928,862 and accrued compensation and benefits of $2,777,906.
The increases in accounts receivable and accrued compensation and benefits
are primarily due to the revenue growth experienced during the three months
ended March 31, 1998. The Company's working capital was $36,581,000
at March 31, 1998 compared to $34,560,000 at December 31, 1997.
The Company has $39,900,000 of credit facilities provided in equal
amounts by three banks. The facilities have a five-year maturity which may be
extended each year for an additional year. If the facilities are not
extended, principal on one of the facilities must be repaid in four equal
annual installments while the other two facilities require principal
repayment at the end of four years. Until that time interest only is payable
monthly. Two of the facilities allow the Company to select among prime rate
and London Interbank Offered Rate (LIBOR) based interest rates while the
third has only LIBOR based interest rates. All of the facilities have
interest rates which increase as the balance outstanding under the facilities
increases. At March 31, 1998, no amounts were outstanding under the
facilities. The Company has selected a 30-day LIBOR based rate and, if any
borrowings were outstanding under the facilities at March 31, 1998, the rate
on such borrowings would have ranged from 6% to 6.6%. The facilities also
contain fees, ranging from 0.125% to 0.3125% annually, which are charged on
the unused portion of the facilities. The facilities are collateralized by
accounts receivable of the Company.
The credit facilities include several covenants, 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.
13
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(D) USE OF PROCEEDS FROM REGISTERED SECURITIES. The effective date of the
Company's Securities Act registration statement on Form S-1 was January 29,
1997. The Commission file number is 000-22035. Between the effective date and
March 31, 1998, the expenses incurred in connection with the issuance and
distribution of the securities registered were as follows:
<TABLE>
<CAPTION>
AS PREVIOUSLY ADDITIONAL
REPORTED ON FORM 10- EXPENSES INCURRED EXPENSES INCURRED
K FOR PERIOD ENDING THROUGH TO DATE AS OF
DIRECT OR INDIRECT PAYMENTS TO OTHERS: DECEMBER 31, 1997 MARCH 31, 1998 MARCH 31, 1998
- -------------------------------------- -------------------- ------------------ -----------------
<S> <C> <C> <C>
Underwriting discounts and commissions $2,576,000 -- $ 2,576,000
Other expenses 1,080,366 -- 1,080,366
---------- --------- -----------
Total expenses $3,656,366 -- $ 3,656,366
---------- --------- -----------
---------- --------- -----------
Net offering proceeds after total expenses
above $33,143,634
-----------
-----------
</TABLE>
Between the effective date and March 31, 1998, net offering proceeds of
$33,143,634 were used for the following purposes:
<TABLE>
<CAPTION>
AS PREVIOUSLY REPORTED
ON FORM 10-K FOR THE USE OF PROCEEDS
PERIOD ENDING CHANGES THROUGH
DIRECT OR INDIRECT PAYMENTS TO OTHERS: DECEMBER 31, 1997 IN USE OF PROCEEDS MARCH 31, 1998
- -------------------------------------- -------------------- ------------------ -----------------
<S> <C> <C> <C>
Acquisition of other businesses $ 4,352,920 1,284,024 $ 5,636,944
Repayment of indebtedness 11,962,829 -- 11,962,829
Temporary investments:
Municipal Bonds 16,827,885 (1,284,024) 15,543,861
----------- ---------- -----------
Total Use of Proceeds $33,143,634 -- $33,143,634
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
The use of proceeds does not represent a material change in the use of
proceeds described in the prospectus. There have been no other changes to the
information provided by the Company on Form SR for the period ended April 30,
1997, on Form 10-Q for the period ended September 30, 1997 or on Form 10-K
for the period ended December 31, 1997.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
<PAGE>
ITEM 5. OTHER INFORMATION
On April 24, 1998, Steven A. Lurus, then the Company's Secretary,
Director of Finance and Chief Accounting Officer, tendered his resignation
from all positions he holds with the Company effective May 31, 1998.
Effective April 30, 1998, Robert J. Eveleigh, Director, Vice President of
Finance, Treasurer and Chief Financial Officer of the Company, was named to
replace Mr. Lurus as Secretary of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
( i ) 11 Computation of earnings per share
( ii ) 27 Financial Data Schedule
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Virginia Beach,
Commonwealth of Virginia on the 15th day of May, 1998.
Metro Information Services, Inc.
By /s/ John H. Fain
-----------------------------------------
John H. Fain
President and Principal Executive Officer
By /s/ Robert J. Eveleigh
-----------------------------------------
Robert J. Eveleigh
Principal Financial Officer
16
<PAGE>
EXHIBIT 11
METRO INFORMATION SERVICES, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
SHARES
Average outstanding during the period and
number of shares on which published
basic earnings per share is based 14,033,333 14,823,296
Add: Incremental shares from assumed
exercise of stock options 11,696 165,671
----------- -----------
Number of shares on which published
diluted earnings per share is based 14,045,029 14,988,967
----------- -----------
----------- -----------
EARNINGS
Net income applicable to common
shareholders $ 1,831,872 $ 2,898,562
----------- -----------
----------- -----------
Earnings Per Share:
Basic $ 0.13 $ 0.20
----------- -----------
----------- -----------
Diluted $ 0.13 $ 0.19
----------- -----------
----------- -----------
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF METRO INFORMATION SERVICES, INC. AS PRESENTED IN THE
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS' LEGEND.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 20,614
<SECURITIES> 0
<RECEIVABLES> 29,213
<ALLOWANCES> 148
<INVENTORY> 0
<CURRENT-ASSETS> 50,854
<PP&E> 10,947
<DEPRECIATION> 3,731
<TOTAL-ASSETS> 63,477
<CURRENT-LIABILITIES> 14,273
<BONDS> 0
0
0
<COMMON> 148
<OTHER-SE> 36,480
<TOTAL-LIABILITY-AND-EQUITY> 63,477
<SALES> 0
<TOTAL-REVENUES> 47,110
<CGS> 0
<TOTAL-COSTS> 32,764
<OTHER-EXPENSES> 9,683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,831
<INCOME-TAX> 1,932
<INCOME-CONTINUING> 2,899
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,899
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.19
</TABLE>
