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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, 1999
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, 1999, the registrant had issued and outstanding 14,913,710
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. Consolidated Statements of Income for the
Three Months Ended March 31, 1998 and 1999 (unaudited) 3
Consolidated Balance Sheets as of
December 31, 1998 and March 31, 1999 (unaudited) 4
Consolidated Statement of Changes in Shareholders'
Equity for the Three Months Ended March 31, 1999
(unaudited) 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1999 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION 23
SIGNATURES 25
2
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PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
METRO INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months
ended March 31,
----------------------------
1998 1999
------------ ------------
Revenue $ 47,109,515 $ 72,472,838
Cost of revenue 32,763,637 51,502,369
------------ ------------
Gross profit 14,345,878 20,970,469
------------ ------------
Selling, general and administrative expenses 9,290,457 13,160,953
Depreciation expense 351,246 522,969
Amortization expense (Note 4) 41,442 377,946
------------ ------------
Total operating expenses 9,683,145 14,061,868
------------ ------------
Operating income 4,662,733 6,908,601
------------ ------------
Interest income 182,770 58,112
Interest expense (14,567) (175,942)
------------ ------------
Net interest income (expense) 168,203 (117,830)
------------ ------------
Income before income taxes 4,830,936 6,790,771
Income taxes 1,932,374 2,750,262
------------ ------------
Net income $ 2,898,562 $ 4,040,509
============ ============
Net income per share:
Basic $ 0.20 $ 0.27
============ ============
Diluted $ 0.19 $ 0.27
============ ============
Weighted average number of shares of
common stock and potential dilutive
securities outstanding:
Basic 14,823,296 14,887,013
============ ============
Diluted 14,988,967 15,002,632
============ ============
See accompanying notes to consolidated financial statements
3
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METRO INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1998 1999
------------ ------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents (Note 2) $ 18,495,580 $ 2,134,536
Accounts receivable, net 35,994,170 51,724,424
Prepaid expenses 457,578 694,120
Deferred income taxes 851,653 1,005,733
------------ ------------
Total current assets 55,798,981 55,558,813
Property and equipment, net 9,655,638 10,859,596
Goodwill, net (Notes 4 and 5) 15,410,128 64,355,601
Other assets 134,951 878,442
------------ ------------
Total assets $ 80,999,698 $131,652,452
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable (Note 2) $ 8,119,928 $ 9,234,075
Accrued compensation and benefits 10,902,482 17,392,658
------------ ------------
Total current liabilities 19,022,410 26,626,733
Long-term liabilities:
Line of credit facilities (Note 6) -- 38,418,100
Deferred income taxes 732,195 875,532
------------ ------------
Total liabilities 19,754,605 65,920,365
------------ ------------
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
14,884,160 shares at December 31, 1998,
14,912,910 shares at March 31, 1999 148,842 149,129
Paid in capital 37,585,480 38,031,678
Retained earnings 23,510,771 27,551,280
------------ ------------
Total shareholders' equity 61,245,093 65,732,087
------------ ------------
Total liabilities and shareholders' equity $ 80,999,698 $131,652,452
============ ============
See accompanying notes to consolidated financial statements
4
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METRO INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED 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, 1998 14,884,160 $ 148,842 $37,585,480 $23,510,771 $61,245,093
Net proceeds from issuance of
25,000 shares of common stock to
Employee Stock Purchase Plan 25,000 250 386,235 -- 386,485
Net proceeds from issuance of 3,750
shares of common stock to Employee
Incentive Stock Option Plan 3,750 37 59,963 -- 60,000
Net income -- -- -- 4,040,509 4,040,509
----------- ----------- ----------- ----------- -----------
BALANCE AS OF MARCH 31, 1999 14,912,910 $ 149,129 $38,031,678 $27,551,280 $65,732,087
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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METRO INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months
ended March 31
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,898,562 $ 4,040,509
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization - cost of revenue 6,662 11,878
Depreciation and amortization - selling, general &
administrative expenses 392,688 900,915
Net loss on sale of property and equipment 7,144 5,478
Deferred income taxes (4,990) (10,743)
Changes in operating assets and liabilities increasing
(decreasing) cash, net of the effects of acquisitions:
Restricted cash (Note 2) -- (497,987)
Accounts receivable (4,928,862) (7,170,338)
Prepaid expenses (57,321) (178,701)
Other assets 182,562 (129,825)
Accounts payable 109,548 782,738
Accrued compensation and benefits 2,777,906 5,093,587
------------ ------------
Net cash provided by operating activities 1,383,899 2,847,511
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (1,113,180) (863,312)
Acquisition of computer software (797,018) (342,029)
Acquisition of businesses (1,284,024) (56,872,026)
Proceeds from sale of property and equipment 1,300 4,227
------------ ------------
Net cash used in investing activities (3,192,922) (58,073,140)
------------ ------------
Cash flows from financing activities:
Net borrowings under line of credit -- 38,418,100
Proceeds from issuance of shares to Employee Stock
Purchase Plan 289,428 386,485
Proceeds from issuance of shares to Employee
Incentive Stock Option Plan 105,280 60,000
------------ ------------
Net cash provided by financing activities 394,708 38,864,585
------------ ------------
Net decrease in cash and cash equivalents (1,414,315) (16,361,044)
Cash and cash equivalents at beginning of period 22,028,594 18,495,580
------------ ------------
Cash and cash equivalents at end of period $ 20,614,279 $ 2,134,536
============ ============
Supplemental disclosure of cash flow information -
Cash paid for interest $ 14,567 $ 175,942
============ ============
Cash paid for income taxes $ 284,150 $ 881,523
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
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METRO INFORMATION SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The information presented for March 31, 1998 and 1999, and for the
three-month periods then ended, is unaudited, but, in the opinion of the
Company's management, the accompanying unaudited consolidated 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, 1999 and the results of its
operations and its cash flows for the three-month periods ended March 31, 1998
and 1999. The consolidated 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 consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements for the
year ended December 31, 1998, which were included as part of the Company's
Annual Report on Form 10-K (File No. 000-22035). Certain 1998 amounts have been
reclassified for comparability with the 1999 financial statement presentation.
Results for the interim periods presented are not necessarily indicative
of results that may be expected for the entire year.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated. The subsidiaries were formed in conjunction with the
acquisitions discussed in Note 4. Results of operations of the Company include
the results of operations of the subsidiaries since the acquisitions as follows:
Date of
Name of Subsidiary D/B/A Acquisition
- ------------------ ----- -----------
Metro Information Services of Los D.P. Specialists January 1, 1999
Angeles, Inc.
Metro Information Services of Orange The Professionals February 1, 1999
County, Inc. Krystal Solutions
Metro Information Services of Solution Technologies March 1, 1999
Pennsylvania, Inc.
2. Restricted Cash
Metro has agreed to act as payment agent for a client on an information
technology project. As of March 31, 1999, the Company held $766,537 of
restricted cash for this client. This amount is included in cash and cash
equivalents and accounts payable presented in the consolidated balance sheets.
Client approved invoices will be paid out of the restricted cash held and Metro
will remit any remaining restricted cash to the client at the end of the
project. Metro is not obligated to pay invoices that exceed the amount of the
restricted cash held.
3. Internal Use Software Costs
On March 4, 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("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 was encouraged in fiscal
years for which annual financial statements had 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. Between January 1, 1998 and
March 31, 1999, $1,436,000 in costs have been capitalized by the Company
pursuant to this SOP. For the three months ended March 31, 1999 and 1998, the
effect of
7
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this change in accounting was to increase net income by $229,000 and $87,000,
respectively, increase basic net income per share by $0.01 and less than $0.01,
respectively and increase diluted net income per share by $0.02 and less than
$0.01, respectively. Because the SOP requires that computer software be ready
for its intended use before amortization begins, no material amortization
expense has been recognized for these amounts through March 31, 1999.
4. Acquisitions
On December 2, 1998, the Company completed the acquisition of The Avery
Group ("Avery"), an information technology services company with one office in
the Palo Alto/Silicon Valley area of California. The purchase price was
$11,754,000, of which $11 million was paid at closing and $754,000 was paid in
February 1999 based on a net worth adjustment calculation performed in February
1999.
On January 1, 1999, the Company acquired D.P. Specialists, Inc. and D.P.
Specialists Learning Center, LLC ("DPS" collectively), an information technology
consulting services and personnel staffing business located in El Segundo,
California and Woodbridge, New Jersey for a purchase price of approximately
$10,073,000, including direct costs of the acquisition of approximately $73,000,
subject to a net worth adjustment. A portion of the purchase price was
preliminarily allocated to net tangible and intangible assets acquired based on
their estimated fair values at the date of acquisition, with the excess purchase
price over the fair value assigned to goodwill. The following summarizes the
preliminary allocation of the purchase price based on January 1, 1999 asset and
liability balances:
Assets purchased:
Accounts receivable $ 1,880,710
Prepaid expenses 6,622
Property and equipment 303,771
Goodwill 8,995,362
Non-compete agreement 25,000
Other assets 50,246
-----------
Total assets purchased $11,261,711
-----------
Liabilities assumed:
Note payable $ 514,977
Accounts payable 132,491
Accrued compensation and benefits 541,220
-----------
Total liabilities assumed 1,188,688
-----------
Purchase price $10,073,023
===========
On February 1, 1999, the Company acquired The Professionals - Computer
Management & Consulting, Inc. ("PCM") and Krystal Solutions, Inc. ("KSC"), both
of which are information technology consulting services and personnel staffing
businesses located in Irvine, California and San Bruno, California for a
purchase price of approximately $18,474,000, of which $17,976,000 was paid at
closing, $368,000 was paid in April 1999 based on a net worth adjustment
calculation performed in April 1999 and approximately $130,000 represents direct
costs related to the acquisition. A portion of the purchase price was
preliminarily allocated to net tangible and intangible assets acquired based on
their estimated fair values at the date of acquisition, with the excess purchase
price over the fair value assigned to goodwill. The following summarizes the
preliminary allocation of the purchase price based on February 1, 1999 asset and
liability balances:
8
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Assets purchased:
Accounts receivable $ 2,979,947
Prepaid expenses 10,813
Property and equipment 22,291
Goodwill 15,556,111
Non-compete agreement 50,000
Other assets 8,586
-----------
Total assets purchased $18,627,748
-----------
Liabilities assumed:
Accounts payable $ 142,059
Accrued compensation and benefits 11,356
-----------
Total liabilities assumed 153,415
-----------
Purchase price $18,474,333
===========
On March 1, 1999, the Company acquired Solution Technologies, Inc.
("STI"), an information technology consulting services and personnel staffing
business located in Camp Hill (Harrisburg), Altoona and Pittsburgh,
Pennsylvania, Charlotte, North Carolina, Hagerstown, Maryland and Kansas City,
Missouri, for a purchase price of approximately $28,325,000, of which
$24,046,000 was paid at closing, $3,654,000 was paid in March 1999 based on a
consultant count adjustment on March 8, 1999, $591,000 was paid in April 1999
based on a net worth adjustment calculation performed in April 1999 and
approximately $34,000 represents direct costs of the acquisition. A portion of
the purchase price was preliminarily allocated to net tangible and intangible
assets acquired based on their estimated fair values at the date of acquisition,
with the excess purchase price over the fair value assigned to goodwill. The
following summarizes the preliminary allocation of the purchase price based on
March 1, 1999 asset and liability balances:
Assets purchased:
Accounts receivable $ 3,699,259
Prepaid expenses 40,406
Property and equipment 217,107
Goodwill 24,753,832
Non-compete agreement 480,000
Other assets 17,948
-----------
Total assets purchased $29,208,552
-----------
Liabilities assumed:
Accounts payable $ 39,869
Accrued compensation and benefits 844,013
-----------
Total liabilities assumed 883,882
-----------
Purchase price $28,324,670
===========
For each of these acquisitions, if the acquired company achieves certain
predetermined financial results during a twelve month measurement period, the
Company will make an additional payment which will be recorded as additional
goodwill. The measurement periods for the acquired companies end as follows:
Acquired Company: Twelve Months Ended:
- ----------------- --------------------
The Avery Group December 31, 1999
D.P. Specialists, Inc. and D.P. Specialists Learning December 31, 1999
Center, LLC
The Professionals - Computer Management & Consulting, January 31, 2000
Inc. and Krystal Solutions, Inc.
Solution Technologies, Inc. February 29, 2000
9
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Each of these acquisitions is accounted for as a purchase. The acquisitions were
financed partially with proceeds remaining from the Company's initial public
offering of common stock on January 29, 1997. The remainder of the purchase
price was financed with the Company's cash on hand and borrowings from the
Company's line of credit. In connection with these acquisitions, the Company has
recorded approximately $59,261,000 of goodwill which is being amortized on a
straight-line basis over 30 years.
Unaudited pro forma consolidated results of operations for the three
months ended March 31, 1999 and 1998 would have been as follows had the
acquisitions of Avery, DPS, PCM, KSC and STI occurred as of the beginning of the
period:
THREE MONTHS
ENDED MARCH 31,
-------------------
1998 1999
------- -------
(In thousands,
except per share
data)
Revenue ................................................ $62,692 $78,192
Net income ............................................. 3,134 4,073
Net income per share - basic ........................... $ 0.21 $ 0.27
Net income per share - diluted ......................... $ 0.21 $ 0.27
Weighted average number of shares of common stock
and potential dilutive securites outstanding:
Basic ............................................... 14,823 14,887
Diluted ............................................. 15,003 15,001
5. Goodwill
Goodwill represents the excess of cost over fair value of net tangible
assets acquired through acquisitions and is amortized on a straight-line basis
over its estimated useful life, generally 30 years. Management periodically
assesses whether there has been a permanent impairment in the value of goodwill.
The amount of such impairment is determined by comparing anticipated
undiscounted future cash flows to the carrying value of the related goodwill.
6. Credit Facilities
The Company maintains credit facilities of $90,000,000. 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 repayment is required 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, 1999, $38,418,100 was outstanding under
the facilities. No amount was outstanding at December 31, 1998. The Company has
selected a 30-day LIBOR based rate and the rate on borrowings was 5.3% as of
March 31, 1999. 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.
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7. Earnings Per Share
The following reconciles the numerators and denominators of the basic and
diluted earnings per share computations of net income:
<TABLE>
<CAPTION>
SHARES
NET INCOME OUTSTANDING EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 (NUMERATOR) (DENOMINATOR) PER SHARE
- ----------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share ..................... $2,898,562 14,823,296 $ 0.20
=========
Effect of Dilutive Securities - Incentive
Stock Options deemed outstanding ........... -- 165,671
---------- ----------
Diluted Earnings Per Share ................... $2,898,562 14,988,967 $ 0.19
========== ========== =========
<CAPTION>
SHARES
NET INCOME OUTSTANDING EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 (NUMERATOR) (DENOMINATOR) PER SHARE
- ----------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share ..................... $4,040,509 14,887,013 $ 0.27
=========
Effect of Dilutive Securities - Incentive
Stock Options deemed outstanding ........... -- 115,619
---------- ----------
Diluted Earnings Per Share ................... $4,040,509 15,002,632 $ 0.27
========== ========== =========
</TABLE>
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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 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 THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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 CONSOLIDATED
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 45 offices in 42 metropolitan markets in the United
States and Puerto Rico. The Company's more than 2,600 consultants, 55% 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, C++ and Web-based 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), health care, 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 12 months ended
March 31, 1999, the Company performed IT services for 575 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, 1999, 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.
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Revenue growth is derived primarily from increases in the number of
consultants placed with existing and new clients. Between March 31, 1998 and
March 31, 1999, the number of full time consultants grew from 1,802 to 2,657,
including 570 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.
On December 2, 1998, the Company completed the acquisition of The Avery
Group, an information technology services company with one office in the Palo
Alto/Silicon Valley area of California. The purchase price was $11,754,000, of
which $11 million was paid at closing and $754,000 was paid in February 1999
based on a net worth adjustment calculation performed in February 1999. On
January 1, 1999, the Company acquired D. P. Specialists, Inc. and D.P.
Specialists Learning Center, LLC ("DPS" collectively), an information technology
consulting services and personnel staffing business located in El Segundo,
California and Woodbridge, New Jersey for a purchase price of approximately
$10,073,000, including direct costs of the acquisition of approximately $73,000,
subject to a net worth adjustment. On February 1, 1999, the Company acquired The
Professionals - Computer Management & Consulting, Inc. ("PCM") and Krystal
Solutions, Inc. ("KSC"), both of which are information technology consulting
services and personnel staffing businesses located in Irvine, California and San
Bruno, California for a purchase price of approximately $18,474,000, of which
$17,976,000 was paid at closing, $368,000 was paid in April 1999 based on a net
worth adjustment calculation performed in April 1999 and approximately $130,000
represents direct costs related to the acquisition. On March 1, 1999, the
Company acquired Solution Technologies, Inc. ("STI"), an information technology
consulting services and personnel staffing business located in Camp Hill
(Harrisburg), Altoona and Pittsburgh, Pennsylvania, Charlotte, North Carolina,
Hagerstown, Maryland and Kansas City, Missouri, for a purchase price of
approximately $28,325,000, of which $24,046,000 was paid at closing, $3,654,000
was paid in March 1999 based on a consultant count adjustment on March 8, 1999,
$591,000 was paid in April 1999 based on a net worth adjustment calculation
performed in April 1999 and approximately $34,000 represents direct costs
related to the acquisition. For each of these acquisitions, if the acquired
company achieves certain predetermined financial results during a twelve month
measurement period, the Company will make an additional payment which will be
recorded as additional goodwill. The measurement periods for the acquired
companies end December 31, 1999, December 31, 1999, January 31, 2000 and
February 29, 2000, respectively.
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.
13
<PAGE>
RESULTS OF OPERATIONS
FOR PURPOSES OF THE FOLLOWING DISCUSSION, AS OF MARCH 31, 1998, 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. AS OF MARCH 31, 1999, A MATURE OFFICE IS AN
OFFICE THAT WAS OWNED BY THE COMPANY FOR AT LEAST 24 MONTHS AND A NEW OFFICE IS
AN OFFICE OPENED OR ACQUIRED WITHIN THE LAST 24 MONTHS.
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 1999 OVER 1998
--------------------- --------------
1998 1999
---- ----
<S> <C> <C> <C>
Revenue ..................................... 100.0% 100.0% 53.8%
Cost of revenue ............................. 69.5 71.1 57.2
----- -----
Gross profit ................................ 30.5 28.9 46.2
----- -----
Selling, general and administrative expenses 19.7 18.2 41.7
Depreciation expense ........................ 0.8 0.7 48.9
Amortization expense ........................ 0.1 0.5 N/M
----- -----
Total operating expenses .................... 20.6 19.4 45.2
----- -----
Operating income ............................ 9.9 9.5 48.2
----- -----
Interest income ............................. 0.4 0.1 (68.2)
Interest expense ............................ -- (0.2) N/M
----- -----
Net interest income (expense) ............... 0.4 (0.1) N/M
----- -----
Income before income taxes .................. 10.3 9.4 40.6
Income taxes ................................ 4.1 3.8 42.3
----- -----
Net income .................................. 6.2% 5.6% 39.4
===== =====
</TABLE>
- ----------
N/M - Not Meaningful
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
REVENUE. Revenue increased $25.4 million, or 53.8%, to $72.5 million for
the three months ended March 31, 1999 from $47.1 million for the three months
ended March 31, 1998. $14.1 million of this increase is attributable to
acquisitions during 1998 and 1999. This increase is also 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 $18.7 million, or 57.2%, to
$51.5 million for the three months ended March 31, 1999 from $32.8 million for
the three months ended March 31, 1998. Cost of revenue increased primarily due
to compensation and benefits associated with growth in the number of
consultants, including consultants added through acquisitions. To a lesser
extent, cost of revenue rose due to lower productivity of salaried consultants.
Salaried consultants are paid even if they are not billing. As a percentage of
revenue, cost of revenue increased to 71.1% for the three months ended March 31,
1999 from 69.5% for the three months ended March 31, 1998 primarily because the
percentage of employees who are hourly is higher in 1999 than in 1998. Hourly
employees have a higher pay rate in relation to their billing rates but do not
receive the same benefits as salaried employees.
GROSS PROFIT. Gross profit increased $6.7 million, or 46.2%, to $21.0
million for the three months ended March 31, 1999 from $14.3 million for the
three months ended March 31, 1998. As a percentage of revenue, gross profit
decreased to 28.9% for the three months ended March 31, 1999 from 30.5% for the
three months ended March 31, 1998.
14
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.9 million, or 41.7%, to $13.2 million for
the three months ended March 31, 1999 from $9.3 million for the three months
ended March 31, 1998. This increase is due primarily to costs associated with
recently opened offices, acquired offices, growth of administrative staff in
mature offices, hiring additional corporate staff to support the increased
number of offices and development of the Company's proprietary business systems.
As a percentage of revenue, selling, general and administrative expenses
decreased to 18.2% for the three months ended March 31, 1999 from 19.7% for the
three months ended March 31, 1998. This decrease is in part the result of the
Company's centralization of administrative functions and leverage obtained from
the Company's proprietary business systems.
DEPRECIATION EXPENSE. Depreciation expense increased $172,000, or 48.9%,
to $523,000 for the three months ended March 31, 1999 from $351,000 for the
three months ended March 31, 1998. This increase is primarily attributable to
depreciation on additions to computer equipment and software. As a percentage of
revenue, depreciation and amortization expense remained constant at 0.7% for the
three months ended March 31, 1999 and 1998.
AMORTIZATION EXPENSE. Amortization expense increased $337,000 to $378,000
for the three months ended March 31, 1999 from $41,000 for the three months
ended March 31, 1998. This increase is attributable to amortization of goodwill
related to the Company's acquisitions. As a percentage of revenue, amortization
expense increased to 0.5% for the three months ended March 31, 1999 from 0.1%
for the three months ended March 31, 1998.
OPERATING INCOME. Operating income increased $2.2 million, or 48.2%, to
$6.9 million for the three months ended March 31, 1999 from $4.7 million for the
three months ended March 31, 1998. As a percentage of revenue, operating income
decreased to 9.5% for the three months ended March 31, 1999 from 9.9% for the
three months ended March 31, 1998. The decline in operating income margin is the
result of lower gross margins and higher amortization expenses not being fully
offset by the improvements in operating expenses the Company realized from its
centralized administrative functions and leverage obtained from the Company's
proprietary business systems.
INTEREST INCOME. Interest income decreased by $125,000, or 68.2%, to
$58,000 for the three months ended March 31, 1999 from $183,000 for the three
months ended March 31, 1998. This change reflects a decrease in cash equivalents
due to cash used for acquisitions.
INTEREST EXPENSE. Interest expense increased by $161,000 to $176,000 for
the three months ended March 31, 1999 from $815,000 for the three months ended
March 31, 1998. This change reflects an increase in the average level of
borrowings during the period related to the use of cash to make several
acquisitions.
INCOME BEFORE INCOME TAXES. Income before income taxes increased $2.0
million, or 40.6%, to $6.8 million for the three months ended March 31, 1999
from $4.8 million for the three months ended March 31, 1998. As a percentage of
revenue, income before income taxes increased to 9.4% for the three months ended
March 31, 1999 from 10.3% for the three months ended March 31, 1998.
INCOME TAXES. The Company's effective tax rate was 40.5% for the three
months ended March 31, 1999 and 40% for the three months ended March 31, 1998.
Income taxes increased $0.9 million or 42.3%, to $2.8 million for the three
months ended March 31, 1999 from $1.9 million for the three months ended March
31, 1998. As a percentage of revenue, income taxes decreased to 3.8% for the
three months ended March 31, 1999 from 4.1% for the three months ended March 31,
1998.
NET INCOME. Net income increased $1.1 million, or 39.4%, to $4.0 million
for the three months ended March 31, 1999 from $2.9 million for the three months
ended March 31, 1998. As a percentage of revenue, net income decreased to 5.6%
for the three months ended March 31, 1999 from 6.2% for the three months ended
March 31, 1998.
EARNINGS PER SHARE. Diluted earnings per share increased $0.08, or 42.1%,
to $0.27 for the three months ended March 31, 1999 from $0.19 for the three
months ended March 31, 1998.
15
<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, 1999, both in
dollars and as a percentage of revenue. This information was derived from the
unaudited consolidated financial statements of the Company which, in the opinion
of management, were prepared on the same basis as the consolidated 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 consolidated
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>
1996:
March.......................... 26,328 7,726 29.3 2,107 8.0
June........................... 27,812 8,452 30.4 2,248 8.1
September...................... 29,142 8,817 30.3 2,431 8.3
December....................... 30,681 9,216 30.0 2,314 7.5
1997:
March.......................... 33,045 9,727 29.4 2,741 8.3
June........................... 35,883 10,841 30.2 3,409 9.5
September...................... 40,569 12,580 31.0 4,314 10.6
December....................... 43,080 13,351 31.0 4,612 10.7
1998:
March.......................... 47,110 14,346 30.5 4,663 9.9
June........................... 52,391 16,375 31.3 5,715 10.9
September...................... 56,593 17,296 30.6 6,538 11.6
December....................... 57,799 17,553 30.4 6,454 11.2
1999:
March.......................... 72,473 20,970 28.9 6,909 9.5
</TABLE>
- ----------
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.
LIQUIDITY AND CAPITAL RESOURCES
In January 1997, the Company completed an initial public offering ("IPO")
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 $1,284,024 of the proceeds from the
initial public offering during the first quarter of 1998, $363,975 during the
third quarter of 1998, $10,795,772 during the fourth quarter of 1998 and
$4,384,114 during the first quarter of 1999, for the acquisitions of DP Career
Associates, Data Systems Technology, Inc., The Avery Group, D.P. Specialists,
Inc. and D.P. Specialists Learning Center, LLC, The Professionals - Computer
Management & Consulting, Inc. and Krystal Solutions, Inc. described in Note 4 of
Notes to Consolidated Financial Statements. The acquisitions during the first
quarter of 1999 caused the Company to exhaust the balance of the proceeds from
the IPO and incur $38,418,100 in debt on its credit facilities.
16
<PAGE>
The Company sold 12,000 shares of stock under the Metro Information
Services, Inc. Employee Stock Purchase Plan for an aggregate purchase price of
$289,428 on March 31, 1998, 9,486 shares for $278,167 on June 30, 1998, 13,300
shares for $360,336 on September 30, 1998, 18,320 shares for $395,125 on
December 31, 1998 and 25,000 shares for $386,485 on March 31, 1999.
During 1998 and 1999, 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 were
$105,280 during the quarter ended March 31, 1998, $39,680 during the quarter
ended June 30, 1998, $27,200 during the quarter ended September 30, 1998, $4,960
during the quarter ended December 31, 1998 and $60,000 during the quarter ended
March 31, 1999.
The Company funds its operations primarily from cash generated by
operations. Net cash provided by operations was $2,847,511 for the three months
ended March 31, 1999 and consisted primarily of net income of $4,040,509 and,
excluding the effects of acquisitions, increases in accounts receivable of
$7,170,338 and accrued compensation and benefits of $5,093,587. 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, 1999. The
Company had working capital of $28,932,080 at March 31, 1999 compared to
$36,776,571 at December 31, 1998. This change was primarily due to the increase
in accrued compensation and benefits of the acquisitions made during the first
quarter of 1999.
Net cash used in investing activities was $58,073,140 for the three months
ended March 31, 1999 and included normal acquisitions of property and equipment
used in operations of $863,312 and $56,872,026 of payments for the acquisitions
described above. The Company's investing activities also include $342,029 spent
on developing new computer systems for financial accounting, human resources and
payroll activities. See "New Systems Implementation."
On January 15, 1999, the Company increased its credit facilities from
$39,900,000 to $90,000,000. The credit facilities are provided in equal amounts
by three banks. The Company has borrowed $38,418,000 against these facilities,
leaving $51,582,000 available as of March 31, 1999. The facilities have a
five-year maturity, which may be extended each year for an additional year. If
the facilities are not extended, principal repayment is required 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. The Company has selected a
30-day LIBOR based rate and the rate on such borrowings was 5.3% as of March 31,
1999. 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 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.
17
<PAGE>
YEAR 2000 ISSUES
Many computer systems use dates to correctly process information. Until
recently, computer systems used a two-digit date to indicate a year. For
example, the year 1958 is indicated in these systems by the digits "58." As the
year 2000 approaches, these systems will need to process information involving
the year 2000 and later years. Systems that use only a two-digit year may
confuse the year 2000 for the year 1900, causing the systems to produce
incorrect results. This problem is commonly known as the Year 2000, Y2K or
Millenium Bug ("Year 2000") problem.
As an investor, you should be aware that the full extent of the Year 2000
problem is unknown. In 1998, the Securities and Exchange Commission ("SEC")
issued an Interpretation in which it indicated that, "... the extent of the
potential impact of the Year 2000 problem is not yet known, and if not timely
corrected, it could affect the global economy." The SEC's Interpretation
requires publicly traded companies such as us to disclose additional information
about their Year 2000 problems. This disclosure is the result of our effort to
inform the investing public of the risks we believe are likely to affect us. All
readers of this document are encouraged to read the SEC Interpretation.
Estimates of the cost to fix Year 2000 problems worldwide run to the
hundreds of billions of dollars. Additional costs in the form of business
interruptions, additional repair costs and litigation costs may be incurred if
the fixes do not work. It appears there is no way to predict with certainty what
will happen after December 31, 1999. It is certain, however, that the year 2000
will arrive soon. As a result, all companies should be undertaking a study to
determine how they may be affected by the Year 2000 problem and take steps to
address the effects where appropriate. Failure to do so could cause injury not
only to the company that is not ready for the year 2000, but every other person
dealing with that company. As a result, it is difficult for any company,
including Metro, to evaluate effectively the impact that third party failures
may have on its business. In this disclosure, we have assumed we will not be
Year 2000 compliant under the Interpretation until all third parties with whom
we have a material relationship provide us with written assurance that they
expect to be Year 2000 compliant in time. We have treated written responses to
our requests for this information, information provided on third parties' web
sites and information filed with the SEC by our U.S. public company clients as
written assurance under this disclosure.
METRO'S STATE OF READINESS
Metro's approach to the Year 2000 problem involves: 1) assessing,
correcting and testing our internal systems; 2) obtaining assurance from third
parties who exchange information electronically with us that the information
they provide will be Year 2000 compliant; 3) obtaining assurance or information
on the state of Year 2000 readiness of our material clients and suppliers; and
4) developing contingency plans, when practical, to address expected Year 2000
failures. A discussion of each of these areas follows.
INTERNAL RISKS
We completed an initial assessment of our systems in 1997. Additional
information received by us led to a second assessment during the third quarter
of 1998.
These assessments covered embedded computer chips, computer software,
computer hardware, telephones, communications equipment, facsimile machines,
scanners, copiers and voice mail which we own and were able to identify as
critical to our ability to provide services to our clients. These assessments
identified a limited amount of software that displayed dates in an ambiguous
2-digit format, but processed dates correctly in 4-digit format. We corrected
this ambiguity in the third quarter of 1998. The assessment also identified a
variety of BIOS programs (programs that allow personal computers to run) that
require additional upgrades to make them Year 2000 compliant according to the
manufacturer of the personal computers. We finished upgrading these BIOS
programs by December 31, 1998. On May 5, 1999, we finished upgrading certain
non-compliant computer operating systems with patches provided by the computer
manufacturers. Should further Year 2000 related upgrades become available and be
deemed necessary, we plan to apply them in a timely manner. As of the date of
this filing, we expect our
18
<PAGE>
Year 2000 related remediation to be completed by June 30, 1999. We will continue
to perform additional testing of our systems through September 30, 1999.
After the assessments described above were made, we acquired five
companies: The Avery Group, D.P. Specialists, Inc. and D.P. Specialists Learning
Center, LLC ("DPS" collectively), The Professionals - Computer Management &
Consulting, Inc., Krystal Solutions, Inc. and Solution Technologies, Inc. We
have completed an assessment of The Avery Group and the upgrade of noncompliant
BIOS and operating systems. We are conducting an assessment of the systems used
by the other acquired companies and expect to complete these assessments by June
30, 1999. We expect all systems to be Year 2000 compliant except for certain
accounting software and development systems and non-Metro recruiting systems
which we plan to replace or upgrade by December 31, 1999.
We are seeking information from other companies with whom we have a
material relationship. We have sent letters to these companies requesting
confirmation that they will be able to continue their relationship with us at
the same level and without interruption before and after the Year 2000. As of
March 31, 1999, we had not received responses from 17% of these companies. We
are continuing our efforts to obtain information from these companies. If these
companies do not respond by June 30, 1999, we plan to switch to alternate
suppliers or develop other contingency plans. When respondents have indicated
they will not be compliant we have either made plans to switch to alternate
suppliers or developed other contingency plans.
We are implementing other systems which we have received written
assurances are Year 2000 compliant. See "New Systems Implementation." We are not
treating the costs of these new systems as Year 2000 costs because we did not
accelerate their implementation due to Year 2000 problems.
EXTERNAL RISKS. We are installing new software that we expect to begin
using in 1999. See "-Liquidity and Capital Resources." This new system will
increase the amount of information we exchange with our banks and 401(k) plan
administrator. In some cases, the Year 2000 problem does not affect the
information being received. In other cases, we have received assurances from
these institutions that they will be Year 2000 compliant in a timely fashion. In
one case, we have made arrangements to receive the information in a usable
2-digit year format. We are relying on these assurances as part of our Year 2000
planning. If these assurances are wrong, they could have a material adverse
effect on our business, financial condition and results of operations.
We have reviewed filings made by our U.S. public company clients who
provided more than 0.2% of revenue during the 12 months ended March 31, 1999.
This review covered filings through April 30, 1999, and was performed to
determine the extent of the risk that our clients may not be Year 2000
compliant. These companies represented 55.0% of our revenue for the 12 months
ending March 31, 1999. This review furnished the following information on our
clients' expected completion date for their Year 2000 efforts:
Will not
be Year Year 2000
Not 2000 Compliant by by by
Disclosed Compliant Now 6/30/99 9/30/99 12/31/99
% Of Metro
Revenue 0.2% 0% 4.6% 22.4% 21.4% 6.4%
We have treated the information furnished in these reports as written
assurance provided by these clients on the status of their Year 2000 problem. In
some cases these clients have indicated they will be substantially complete or
will have completed Year 2000 efforts for their mission critical systems by the
date indicated. We have treated this disclosure as an indication that these
companies will be able to continue their business relationships with us without
disruption or failure. We have or will request additional information from those
clients who indicated they will not be compliant or provided no disclosure. At
present, we plan to monitor disclosures made by these publicly traded clients in
Forms 10-Q and 10-K.
We are also requesting assurance from our other clients who provided more
than 0.2% of revenue during the 12 months ended March 31,
19
<PAGE>
1999. These clients represented 24.4% of revenue during the 12 months ended
March 31, 1999. We have reviewed written assurances from these clients
representing 12.5% of revenue during the 12 months ended March 31, 1999. This
review furnished the following information on our clients' expected completion
date for their Year 2000 efforts:
Will not
be Year Year 2000
Not 2000 Compliant by by by
Disclosed Compliant Now 6/30/99 9/30/99 12/31/99
% Of Metro
Revenue 0% 0% 0.8% 5.2% 0.7% 5.8%
We have not yet received assurance from the rest of these companies. We
expect to have more information on these companies when we file our Quarterly
Report on Form 10-Q in August 1999. If these clients do not become Year 2000
compliant in a timely fashion, our business, financial condition and results of
operations could be materially adversely affected.
BUSINESS RISKS. We are seeking written assurance from our clients. See
EXTERNAL RISKS above.
LITIGATION RISKS. We have limited our involvement in Year 2000 projects
and worked primarily on a time and materials basis. We have also sought
limitations on our liability for Year 2000 related problems arising from our
services when appropriate. We are not able to estimate the cost of any
litigation that may arise in the future.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 PROBLEM
Our internal information technology staff will perform repairs to our
internal systems. We believe our internal systems will be Year 2000 complaint by
July 1, 1999. We may perform additional assessments, remediation and testing if
information about Year 2000 risks to our internal systems changes.
Our internal information technology staff is also requesting information
from our material clients and suppliers to address external risks. We do not
expect to incur material incremental costs to gather this information. We will
defer other projects these individuals could have worked on by about 6 months.
We do not consider these deferred projects mission critical or expect their
delay to have a material adverse effect on our business, results of operations
or financial condition.
The cost of our Year 2000 activities is expected to be approximately
$230,000, approximately $60,000 of which had been incurred at March 31, 1999.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
The Year 2000 problem involves several risks for us. One risk is that our
computerized systems and embedded systems (such as minicontrollers and chips in
elevators, machinery and equipment) ("internal risks") and those of our clients,
suppliers, vendors, financial institutions and others ("external risks") will be
disrupted or fail. We also consider the possible loss of revenue when
consultants on Year 2000 assignments complete their assignments and possible
slow downs in demand for our services in the latter half of 1999 Year 2000
related risks. We may also become involved in litigation over the Year 2000
services we have rendered to our clients. These risks have the capacity to cause
a material adverse effect on our business, results of operations and financial
condition although we are uncertain what risks we will actually suffer. These
risks are discussed below.
Internal Risks. We rely heavily on computer systems to run our business.
Internal risks consist of potential disruptions and failures of our proprietary
and purchased computer software, computer hardware, office equipment, office
systems and turnover in our information technology staff. Software systems
include recruiting, candidate tracking, payroll, human resources, benefits and
financial accounting systems. Disruptions and failures of these systems could
hurt our ability to bill our clients, collect money from clients, pay our
employees in a timely manner and continue in business.
20
<PAGE>
EXTERNAL RISKS.
External risks are risks that third parties will suffer Year 2000 problems
that adversely affect us. These risks include the inability of certain third
parties to exchange electronic data with us and the risk of disruptions and
failures of persons with whom we do business. These third parties include our
clients, suppliers, vendors, financial institutions and others with whom we do
business.
If we are not able to exchange information electronically with third
parties, our ability to receive and pay money as needed may be slowed and
information on 401(k) account and cash balances may be delayed. If our clients,
suppliers, vendors and financial institutions are not Year 2000 compliant, their
noncompliance may cause a material disruption to their businesses. These
disruptions could negatively impact us in many ways, including: a client may be
unable to pay us; a financial institution may be unable to process checks drawn
on our bank accounts, accept deposits or process wire transfers; a client,
supplier, vendor or financial institution may fail; vendor deliveries of
computer equipment and other supplies may be delayed or cease; voice and data
connections we use to share information may be interrupted and brokers who make
a market in our stock may not be able to trade our stock. This list is not
comprehensive. Other interruptions to the normal conduct of business by us, the
nature and extent of which we cannot fully foresee, may also occur. We are
unable to determine the nature or length or effect such interruptions, if any,
may have on us.
BUSINESS RISKS. As an IT services company, we have benefited from the Year
2000 problem by providing consultants with the skills necessary to help address
these issues for our clients. We face the risk of reduced business
opportunities, revenue and profits as clients resolve their Year 2000 problem if
Year 2000 assignments are not replaced with other assignments. We believe that
when consultants complete Year 2000 assignments, many of these consultants will
be re-assigned to perform activities delayed by clients while addressing the
Year 2000 problem. In other cases, we will need to find other assignments for
these consultants. We estimate that, at March 31, 1999, approximately 13% of our
consultants were involved in Year 2000 assignments. There is also a possibility
that clients will delay implementation of new software during the latter half of
1999 to avoid the risk of introducing non-compliant software into previously
tested systems. We believe this risk will only affect a portion of our clients
who use mainframe systems and in most cases only during the fourth quarter of
1999 and into February 2000, typically a slow growth period for us. If these
delays, sometimes referred to as "lockdowns", occur earlier than the fourth
quarter of 1999, our growth and prospects for the balance of 1999 will be
adversely affected. As of March 31, 1999, approximately 37% of our consultants
were working with mainframe computer systems.
LITIGATION RISKS. Approximately 70% of our services involve writing custom
software for clients and maintaining software for clients. Clients may sue us
over work we have performed that causes or fails to fix a Year 2000 problem.
This risk exists regardless of the steps we may take to provide error free Year
2000 services and make our internal systems Year 2000 ready. Any litigation may
have a material adverse effect on our business, financial condition and results
of operations and may distract management's attention from running the business.
This distraction could have further adverse effects on the business.
The SEC has directed us to describe our "most reasonably likely worst case
scenario" posed by the Year 2000 issues we face. Based on our current
understanding of the Year 2000 issues facing the Company, we believe our most
reasonably likely worst case scenario is that we will suffer little or no
disruptions or failures in our internal systems, but minor disruptions and
failures among our material clients, suppliers, vendors and financial
institutions. We also expect some reduction in our growth rate in the last
quarter of 1999 due to normal seasonality and the potential for client
"lockdowns" related to Year 2000 concerns. Nonetheless, as we learn more from
our material clients, suppliers, vendors and financial institutions, it is
possible that this belief could change.
CONTINGENCY PLANS
We are developing Year 2000 contingency plans where practical. These plans
address alternatives to electronic processing of candidate resumes, hires of new
employees, terminations of existing employees, payroll, supplier payments, cash
receipts from clients, invoices to clients and initiatives without e-mail. These
plans also address furnishing required reports to clients, furnishing required
governmental reports, gaining access to leased
21
<PAGE>
office space, shipping intracompany correspondence and communicating Company
reports. These plans include stockpiling supplies and equipment, identifying
alternative sources of goods and services and performing certain tasks manually.
For example, we may store paper copies of electronically stored data (such as
candidate resumes) at locations likely to need them if we believe that the data
will not be accessible due to a Year 2000 failure. In some situations, however,
it is not practical to have an effective contingency plan. For example, a
failure by our primary banking institution may interrupt our cash receipts and
our ability to pay our employees in a timely manner. Our contingency plan may
call for paying employees in cash, but may not be practical due the amount of
cash involved, the number of Company locations and the number of employees who
must be paid. Our payroll is currently several million dollars per pay period
paid through 45 locations in 42 metropolitan markets to over 3,100 employees.
As an investor, you should be aware that the number of Year 2000 failures
suffered by us may exceed our ability to address them all at one time. In
addition, significant Year 2000 failures by third parties, including clients,
may jeopardize our financial strength. In severe circumstances, our ability to
continue as a going concern may be threatened or we may fail. We believe,
however, that we are taking reasonable and prudent steps to address the Year
2000 problem based on the information currently available to us. We will
continue to monitor this issue and plan to modify our approach to the problem if
we believe the circumstances warrant such a change.
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 Year 2000 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 $2.8
million. The Company expects to capitalize and amortize these costs over these
systems' estimated useful lives.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into the market risk sensitive transactions
required to be disclosed under this Item.
22
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(D) USE OF PROCEEDS FROM REGISTERED SECURITIES. The effective date of the
Company's Securities Act registration statement on Form S-1 was January 29,
1997. The Commission file number is 333-16585. Between the effective date and
March 31, 1999, the expenses incurred in connection with the issuance and
distribution of the securities registered were as follows:
AS PREVIOUSLY
REPORTED ON ADDITIONAL
FORM 10-K FOR EXPENSES EXPENSES
PERIOD ENDING INCURRED INCURRED TO
DIRECT OR INDIRECT PAYMENTS DECEMBER 31, THROUGH DATE AS OF
TO OTHERS: 1998 MARCH 31, 1999 MARCH 31, 1999
- --------------------------- ------------- -------------- --------------
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
===========
Between the effective date and March 31, 1999, net offering proceeds of
$33,143,634 were used for the following purposes:
AS PREVIOUSLY
REPORTED ON FORM USE OF
10-K FOR THE CHANGES PROCEEDS
DIRECT OR INDIRECT PAYMENTS PERIOD ENDING IN USE OF THROUGH
TO OTHERS: DECEMBER 31, 1998 PROCEEDS MARCH 31, 1999
- --------------------------- ----------------- --------- --------------
Acquisition of other
businesses $16,796,691 4,384,114 $21,180,805
Repayment of indebtedness 11,962,829 -- 11,962,829
Temporary investments:
Municipal Bonds 4,384,114 (4,384,114) --
----------- ----------- -----------
Total Use of Proceeds $33,143,634 -- $33,143,634
=========== =========== ===========
The use of proceeds does not represent a material change in the use of proceeds
described in the prospectus. There have been no other changes to the information
provided by the Company on Form SR for the period ended April 30, 1997, on Form
10-Q for the period ended September 30, 1997, on Form 10-K for the period ended
December 31, 1997, on Form 10-Q for the periods ended March 31, 1998, June 30,
1998 and September 30, 1998 or on Form 10-K for the period ended December 31,
1998.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
23
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
(i) 27 Financial Data Schedule
(b) Reports on Form 8-K during first quarter of 1999:
Report dated January 1, 1999 reporting under Item 2 the acquisition
of certain assets and liabilities of D.P. Specialists, Inc. and D.P.
Specialists Learning Center, LLC.
Report dated February 1, 1999 reporting under Item 2 the acquisition
of certain assets and liabilities of The Professionals - Computer
Management & Consulting, Inc. and Krystal Solutions, Inc.
Report dated March 1, 1999 reporting under Item 2 the acquisition of
certain assets and liabilities of Solution Technologies, Inc.
24
<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 17th day of May, 1999.
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
25
<TABLE> <S> <C>
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS' LEGEND.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
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<PERIOD-END> MAR-31-1999
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0
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