<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
JUNE 30, 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 July 20, 1999, the registrant had issued and outstanding 14,939,450
shares of Common Stock, $.01 par value.
- --------------------------------------------------------------------------------
1
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METRO INFORMATION SERVICES, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. Consolidated Statements of Income for the
Three Months and Six Months Ended June 30, 1998 and 1999 (unaudited) 3
Consolidated Balance Sheets as of
December 31, 1998 and June 30, 1999 (unaudited) 4
Consolidated Statement of Changes in Shareholders' Equity for the
Six Months Ended June 30, 1999 (unaudited) 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 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
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION 24
SIGNATURES 26
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
METRO INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
----------------------------------- -----------------------------------
1998 1999 1998 1999
---------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Revenue $ 52,390,963 $ 78,309,273 $99,500,478 $ 150,782,111
Cost of revenue 36,015,581 55,286,088 68,779,218 106,788,457
---------------- ----------------- ------------------ ----------------
Gross profit 16,375,382 23,023,185 30,721,260 43,993,654
---------------- ----------------- ------------------ ----------------
Selling, general and administrative expenses 10,218,693 13,451,298 19,509,150 26,612,251
Depreciation expense 393,053 582,476 744,299 1,105,445
Amortization expense (Note 3) 48,436 596,645 89,878 974,591
---------------- ----------------- ------------------ ----------------
Total operating expenses 10,660,182 14,630,419 20,343,327 28,692,287
---------------- ----------------- ------------------ ----------------
Operating income 5,715,200 8,392,766 10,377,933 15,301,367
---------------- ----------------- ------------------ ----------------
Interest income 216,214 16,821 394,974 74,932
Interest expense - (673,779) (10,557) (849,723)
---------------- ----------------- ------------------ ----------------
Net interest income (expense) 216,214 (656,958) 384,417 (774,791)
---------------- ----------------- ------------------ ----------------
Income before income taxes 5,931,414 7,735,808 10,762,350 14,526,576
Income taxes 2,372,566 3,133,002 4,304,940 5,883,263
---------------- ----------------- ------------------ ----------------
Net income $3,558,848 $ 4,602,806 $ 6,457,410 $ 8,643,313
================ ================= ================== ================
Net income per share:
Basic $ 0.24 $ 0.31 $ 0.44 $ 0.58
================ ================= ================== ================
Diluted $ 0.24 $ 0.31 $ 0.43 $ 0.58
================ ================= ================== ================
Weighted average number of shares of common stock
and potential dilutive securities outstanding:
Basic 14,840,325 14,913,921 14,831,858 14,900,541
================ ================= ================== ================
Diluted 15,017,969 15,007,495 15,003,516 15,005,138
================ ================= ================== ================
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
METRO INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
----------------- -------------------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents (Note 2) $ 18,495,580 $ 4,219,900
Accounts receivable, net 35,994,170 49,510,189
Prepaid expenses 457,578 1,530,816
Deferred income taxes 851,653 1,013,863
----------------- -------------------
Total current assets 55,798,981 56,274,768
Property and equipment, net 9,655,638 11,365,990
Goodwill, net (Notes 3 and 4) 15,410,128 63,935,415
Other assets, net 134,951 765,122
----------------- -------------------
Total assets $ 80,999,698 $ 132,341,295
================= ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable (Note 2) $ 8,119,928 $ 3,590,289
Accrued compensation and benefits 10,902,482 15,498,096
----------------- -------------------
Total current liabilities 19,022,410 19,088,385
Line of credit facilities (Note 5) - 41,453,764
Deferred income taxes 732,195 1,093,372
----------------- -------------------
Total liabilities 19,754,605 61,635,521
----------------- -------------------
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,
14,939,010 shares at June 30, 1999 148,842 149,390
Paid in capital 37,585,480 38,402,300
Retained earnings 23,510,771 32,154,084
----------------- -------------------
Total shareholders' equity 61,245,093 70,705,774
----------------- -------------------
Total liabilities and shareholders' equity $ 80,999,698 $ 132,341,295
================= ===================
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
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
50,000 shares of common stock to
Employee Stock Purchase Plan 50,000 500 739,268 - 739,768
Net proceeds from issuance of 4,850
shares of common stock to Employee
Incentive Stock Option Plan 4,850 48 77,552 - 77,600
Net income - - - 8,643,313 8,643,313
-------------- ------------- ---------------- ---------------- ---------------
BALANCE AS OF JUNE 30, 1999 14,939,010 $149,390 $ 38,402,300 $ 32,154,084 $ 70,705,774
============== ============= ================ ================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
METRO INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months
ended June 30
------------------------------------------
1998 1999
------------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,457,410 $ 8,643,313
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization - cost of revenue 20,239 21,557
Depreciation and amortization - selling, general & administrative expenses 834,177 2,080,036
Net loss on sale of property and equipment 14,412 13,151
Deferred income taxes (12,939) 198,967
Changes in operating assets and liabilities increasing (decreasing) cash,
net of the effects of acquisitions:
Restricted cash (Note 2) - (967,459)
Accounts receivable (8,751,980) (4,967,140)
Prepaid expenses (128,211) (1,019,648)
Other assets, net 119,607 (80,992)
Accounts payable (359,855) (4,393,586)
Accrued compensation and benefits 3,028,952 3,200,077
------------------- -----------------
Net cash provided by operating activities 1,221,812 2,728,276
------------------- -----------------
Cash flows from investing activities:
Acquisition of property and equipment (1,910,507) (1,625,632)
Acquisition of computer software (1,264,886) (676,053)
Acquisition of businesses (1,284,024) (56,977,630)
Proceeds from sale of property and equipment 3,094 4,227
------------------- -----------------
Net cash used in investing activities (4,456,323) (59,275,088)
------------------- -----------------
Cash flows from financing activities:
Net borrowings under line of credit - 41,453,764
Proceeds from issuance of shares to Employee Stock Purchase Plan 567,595 739,768
Proceeds from issuance of shares to Employee Incentive Stock Option Plan 144,960 77,600
------------------- -----------------
Net cash provided by financing activities 712,555 42,271,132
------------------- -----------------
Net decrease in cash and cash equivalents (2,521,956) (14,275,680)
Cash and cash equivalents at beginning of period 22,028,594 18,495,580
------------------- -----------------
Cash and cash equivalents at end of period $ 19,506,638 $ 4,219,900
=================== =================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,557 $ 791,948
=================== =================
Cash paid for income taxes $ 3,441,679 $ 6,728,902
=================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
METRO INFORMATION SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The information presented for June 30, 1998 and 1999, and for the
three-month and six-month periods then ended, is unaudited, but, in the opinion
of the Company's management, the accompanying unaudited 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 June 30, 1999 and the results of its
operations and its cash flows for the three-month and six-month periods ended
June 30, 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 3. Results of operations of the Company
include the results of operations of the subsidiaries since the acquisitions as
follows:
<TABLE>
<CAPTION>
Name of Subsidiary D/B/A Date of Acquisition
- ------------------ ----- -------------------
<S> <C> <C>
Metro Information Services of Los Angeles, Inc. D.P. Specialists January 1, 1999
Metro Information Services of Orange County, Inc. The Professionals February 1, 1999
Krystal Solutions
Metro Information Services of Pennsylvania, Inc. Solution Technologies March 1, 1999
</TABLE>
2. Restricted Cash
Metro has agreed to act as payment agent for a client on an information
technology project. As of June 30, 1999, the Company held $297,065 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. 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 $10,070,000, including direct costs of the acquisition of
approximately $90,000. A portion of the purchase price was preliminarily
allocated to net
7
<PAGE>
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:
<TABLE>
<S> <C>
Assets purchased:
Accounts receivable $ 1,880,710
Prepaid expenses 6,622
Property and equipment 303,771
Goodwill 8,992,251
Non-compete agreement 25,000
Other assets 50,246
-----------
Total assets purchased $11,258,600
-----------
Liabilities assumed:
Note payable $ 514,977
Accounts payable 132,491
Accrued compensation and benefits 541,220
-----------
Total liabilities assumed 1,188,688
-----------
Purchase price $10,069,912
===========
</TABLE>
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 $18,511,000, of which $17,976,000 was paid at
closing, $352,000 was paid in April 1999 based on a net worth adjustment
calculation performed in April 1999 and approximately $183,000 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:
<TABLE>
<S> <C>
Assets purchased:
Accounts receivable $ 2,968,910
Prepaid expenses 6,562
Property and equipment 22,291
Goodwill 15,608,671
Non-compete agreement 50,000
Other assets 8,586
-----------
Total assets purchased $18,665,020
-----------
Liabilities assumed:
Accounts payable $ 144,069
Accrued compensation and benefits 10,304
-----------
Total liabilities assumed 154,373
-----------
Purchase price $18,510,647
===========
</TABLE>
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 $28,397,000, 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 $106,000 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
8
<PAGE>
summarizes the preliminary allocation of the purchase price based on March 1,
1999 asset and liability balances:
<TABLE>
<S> <C>
Assets purchased:
Accounts receivable $ 3,699,259
Prepaid expenses 40,406
Property and equipment 217,107
Goodwill 24,826,233
Non-compete agreement 480,000
Other assets 17,948
-----------
Total assets purchased $29,280,953
-----------
Liabilities assumed:
Accounts payable $ 39,869
Accrued compensation and benefits 844,013
-----------
Total liabilities assumed 883,882
-----------
Purchase price $28,397,071
===========
</TABLE>
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:
<TABLE>
<CAPTION>
Acquired Company: Twelve Months Ended:
- ----------------- --------------------
<S> <C>
The Avery Group December 31, 1999
D.P. Specialists, Inc. and D.P. Specialists Learning Center, LLC December 31, 1999
The Professionals - Computer Management & Consulting, Inc. and Krystal Solutions, Inc. January 31, 2000
Solution Technologies, Inc. February 29, 2000
</TABLE>
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 $59,387,000 of goodwill which is being amortized on a
straight-line basis over 30 years.
Unaudited pro forma consolidated results of operations for the six
months ended June 30, 1998 and 1999 would have been as follows had the
acquisitions of Avery, DPS, PCM, KSC and STI occurred as of the beginning of the
period:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-----------------------------------------
1998 1999
------------------ ----------------
(In thousands, except per share data)
<S> <C> <C>
Revenue............................................ $133,265 $156,501
Net income......................................... 7,035 8,676
Net income per share - basic....................... $ 0.47 $ 0.58
Net income per share - diluted..................... $ 0.47 $ 0.58
Weighted average number of shares of common stock
and potential dilutive securities outstanding:
Basic......................................... 14,832 14,901
Diluted....................................... 15,022 15,005
</TABLE>
9
<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. Credit Facilities
The Company maintains credit facilities of $90,000,000. The facilities,
which are provided in equal amounts by three banks, mature on June 20, 2004 and
may be extended each year for an additional year. If the facilities are not
extended, principal repayment is required. Until that time, interest only is
payable monthly. Two of the facilities allow the Company to select among prime
rate and London Interbank Offered Rate (LIBOR) based interest rates while the
third has only LIBOR based interest rates. All of the facilities have interest
rates that increase as the balance outstanding under the facilities increases.
At June 30, 1999, $41,453,764 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 5.5% as of June 30, 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.
6. 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 JUNE 30, 1998 (NUMERATOR) (DENOMINATOR) PER SHARE
- ---------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share........................... $3,558,848 14,840,325 $ 0.24
========
Effect of Dilutive Securities - Incentive
Stock Options deemed outstanding................. -- 177,644
---------- ----------
Diluted Earnings Per Share......................... $3,558,848 15,017,969 $ 0.24
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
SHARES
NET INCOME OUTSTANDING EARNINGS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 (NUMERATOR) (DENOMINATOR) PER SHARE
- ---------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share........................... $4,602,806 14,913,921 $ 0.31
========
Effect of Dilutive Securities - Incentive
Stock Options deemed outstanding................. -- 93,574
---------- ----------
Diluted Earnings Per Share......................... $4,602,806 15,007,495 $ 0.31
========== ========== ========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
SHARES
NET INCOME OUTSTANDING EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (NUMERATOR) (DENOMINATOR) PER SHARE
- ---------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share........................... $6,457,410 14,831,858 $ 0.44
========
Effect of Dilutive Securities - Incentive
Stock Options deemed outstanding................. -- 171,658
---------- ----------
Diluted Earnings Per Share......................... $6,457,410 15,003,516 $ 0.43
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
SHARES
NET INCOME OUTSTANDING EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (NUMERATOR) (DENOMINATOR) PER SHARE
- ---------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share........................... $8,643,313 14,900,541 $ 0.58
========
Effect of Dilutive Securities - Incentive
Stock Options deemed outstanding................. -- 104,597
---------- ----------
Diluted Earnings Per Share......................... $8,643,313 15,005,138 $ 0.58
========== ========== ========
</TABLE>
11
<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 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 2,500 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
June 30, 1999, the Company performed IT services for 703 clients (excluding
clients that generated less than $25,000 in revenue during such period).
IT services are primarily provided by the Company through supplemental
IT services arrangements and, to a lesser extent, through project outsourcing
services arrangements. Substantially all services are billed on a time and
materials basis. During the three months ended June 30, 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.
12
<PAGE>
Revenue growth is derived primarily from increases in the number of
consultants placed with existing and new clients. Between June 30, 1998 and June
30, 1999, the number of full time consultants grew from 1,980 to 2,621,
including 570 consultants gained through acquisitions. In addition, over the
same period, the Company increased the average billing rates charged to clients
for consultants.
During 1999, the Company has experienced slowing demand for its
services. This slowing in demand appears to be primarily the result of Client
uncertainty about starting new IT projects until their Year 2000 issues are
resolved, budget constraints and uncertainty about IT spending priorities. This
slowing in demand has resulted in slower revenue growth in existing offices,
lower bill rate increases than obtained in 1998, more non-billable consultants
and slower growth in profitability. Management believes these conditions may
continue into the first quarter of 2000.
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
$10,070,000, including direct costs of the acquisition of approximately $90,000.
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 $18,511,000, of which $17,976,000 was paid at
closing, $352,000 was paid in April 1999 based on a net worth adjustment
calculation performed in April 1999 and approximately $183,000 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
$28,397,000, 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 $106,000 represents direct costs of 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 JUNE 30, 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 JUNE 30, 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>
PERCENTAGE OF REVENUE
-----------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue........................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenue................................ 68.7 70.6 69.1 70.8
------------- -------------- ---------------- ---------------
Gross profit................................... 31.3 29.4 30.9 29.2
------------- -------------- ---------------- ---------------
Selling, general and administrative expenses... 19.5 17.2 19.6 17.7
Depreciation expense........................... 0.8 0.7 0.8 0.7
Amortization expense........................... 0.1 0.8 0.1 0.6
------------- -------------- ---------------- ---------------
Total operating expenses....................... 20.4 18.7 20.5 19.0
------------- -------------- ---------------- ---------------
Operating income............................... 10.9 10.7 10.4 10.2
------------- -------------- ---------------- ---------------
Interest income................................ 0.4 - 0.4 -
Interest expense............................... - (0.8) - (0.6)
------------- -------------- ---------------- ---------------
Net interest income (expense).................. 0.4 (0.8) 0.4 (0.6)
------------- -------------- ---------------- ---------------
Income before income taxes..................... 11.3 9.9 10.8 9.6
Income taxes................................... 4.5 4.0 4.3 3.9
------------- -------------- ---------------- ---------------
Net income..................................... 6.8% 5.9% 6.5% 5.7%
============= ============== ================= ===============
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
1999 OVER 1998
-----------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
<S> <C> <C>
Revenue........................................ 49.5% 51.5%
Cost of revenue................................ 53.5% 55.3%
Gross profit................................... 40.6% 43.2%
Selling, general and administrative expenses... 31.6% 36.4%
Depreciation expense........................... 48.2% 48.5%
Amortization expense........................... N/M N/M
Total operating expenses....................... 37.2% 41.0%
Operating income............................... 46.8% 47.4%
Interest income................................ (92.2)% (81.0)%
Interest expense............................... N/M N/M
Income before income taxes..................... 30.4% 35.0%
Income taxes................................... 32.1% 36.7%
Net income..................................... 29.3% 33.9%
</TABLE>
- -------------
N/M - Not Meaningful
14
<PAGE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE
30, 1998
REVENUE. Revenue increased $25.9 million, or 49.5%, to $78.3 million
for the three months ended June 30, 1999 from $52.4 million for the three months
ended June 30, 1998. $19.7 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 $19.3 million, or 53.5%, to
$55.3 million for the three months ended June 30, 1999 from $36.0 million for
the three months ended June 30, 1998. Cost of revenue increased primarily due to
compensation and benefits associated with growth in the number of consultants,
including consultants added through acquisitions. As a percentage of revenue,
cost of revenue increased to 70.6% for the three months ended June 30, 1999 from
68.7% for the three months ended June 30, 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 rate but do not receive the
same benefits as salaried employees. To a lesser extent, cost of revenue rose
due to lower utilization of salaried consultants. Salaried consultants are paid
even if they are not billing. In addition, pay rates rose faster than bill rates
during 1999.
GROSS PROFIT. Gross profit increased $6.6 million, or 40.6%, to $23.0
million for the three months ended June 30, 1999 from $16.4 million for the
three months ended June 30, 1998. As a percentage of revenue, gross profit
decreased to 29.4% for the three months ended June 30, 1999 from 31.3% for the
three months ended June 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.2 million, or 31.6%, to $13.4 million for
the three months ended June 30, 1999 from $10.2 million for the three months
ended June 30, 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 17.2% for the three months ended June 30, 1999 from 19.5% for the
three months ended June 30, 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 $189,000, or
48.2%, to $582,000 for the three months ended June 30, 1999 from $393,000 for
the three months ended June 30, 1998. This increase is primarily attributable to
depreciation on additions to computer equipment and software. As a percentage of
revenue, depreciation expense decreased to 0.7% for the three months ended June
30, 1999 from 0.8% for the three months ended June 30, 1998.
AMORTIZATION EXPENSE. Amortization expense increased $548,000 to
$596,000 for the three months ended June 30, 1999 from $48,000 for the three
months ended June 30, 1998. This increase is attributable to amortization of
goodwill related to the Company's acquisitions. As a percentage of revenue,
amortization expense increased to 0.8% for the three months ended June 30, 1999
from 0.1% for the three months ended June 30, 1998.
OPERATING INCOME. Operating income increased $2.7 million, or 46.8%, to
$8.4 million for the three months ended June 30, 1999 from $5.7 million for the
three months ended June 30, 1998. As a percentage of revenue, operating income
decreased to 10.7% for the three months ended June 30, 1999 from 10.9% for the
three months ended June 30, 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 $199,000, or 92.2%, to
$17,000 for the three months ended June 30, 1999 from $216,000 for the three
months ended June 30, 1998. This change reflects a decrease in cash and cash
equivalents due to cash used for acquisitions.
INTEREST EXPENSE. Interest expense was $674,000 for the three months
ended June 30, 1999. There was no interest expense for the three months ended
June 30, 1998. This change is due to borrowings made during the period to pay
for several acquisitions.
15
<PAGE>
INCOME BEFORE INCOME TAXES. Income before income taxes increased $1.8
million, or 30.4%, to $7.7 million for the three months ended June 30, 1999 from
$5.9 million for the three months ended June 30, 1998. As a percentage of
revenue, income before income taxes decreased to 9.9% for the three months ended
June 30, 1999 from 11.3% for the three months ended June 30, 1998.
INCOME TAXES. The Company's effective tax rate was 40.5% for the three
months ended June 30, 1999 and 40% for the three months ended June 30, 1998.
Income taxes increased $0.7 million or 32.1%, to $3.1 million for the three
months ended June 30, 1999 from $2.4 million for the three months ended June 30,
1998. As a percentage of revenue, income taxes decreased to 4.0% for the three
months ended June 30, 1999 from 4.5% for the three months ended June 30, 1998.
NET INCOME. Net income increased $1.0 million, or 29.3%, to $4.6
million for the three months ended June 30, 1999 from $3.6 million for the three
months ended June 30, 1998. As a percentage of revenue, net income decreased to
5.9% for the three months ended June 30, 1999 from 6.8% for the three months
ended June 30, 1998.
EARNINGS PER SHARE. Diluted earnings per share increased $0.07, or
29.2%, to $0.31 for the three months ended June 30, 1999 from $0.24 for the
three months ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30,
1998
REVENUE. Revenue increased $51.3 million, or 51.5%, to $150.8 million
for the six months ended June 30, 1999 from $99.5 million for the six months
ended June 30, 1998. $33.9 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 $38.0 million, or 55.3%, to
$106.8 million for the six months ended June 30, 1999 from $68.8 million for the
six months ended June 30, 1998. Cost of revenue increased primarily due to
compensation and benefits associated with growth in the number of consultants,
including consultants added through acquisitions. As a percentage of revenue,
cost of revenue increased to 70.8% for the six months ended June 30, 1999 from
69.1% for the six months ended June 30, 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 rate but do not receive the same
benefits as salaried employees. To a lesser extent, cost of revenue rose due to
lower utilization of salaried consultants. Salaried consultants are paid even if
they are not billing. In addition, pay rates rose faster than bill rates during
1999.
GROSS PROFIT. Gross profit increased $13.3 million, or 43.2%, to $44.0
million for the six months ended June 30, 1999 from $30.7 million for the six
months ended June 30, 1998. As a percentage of revenue, gross profit decreased
to 29.2% for the six months ended June 30, 1999 from 30.9% for the six months
ended June 30, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $7.1 million, or 36.4%, to $26.6 million for
the six months ended June 30, 1999 from $19.5 million for the six months ended
June 30, 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
17.7% for the six months ended June 30, 1999 from 19.6% for the six months ended
June 30, 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 $361,000, or
48.5%, to $1,105,000 for the six months ended June 30, 1999 from $744,000 for
the six months ended June 30, 1998. This increase is primarily attributable to
depreciation on additions to computer equipment and software. As a percentage of
revenue, depreciation expense decreased to 0.7% for the six months ended June
30, 1999 from 0.8% for the six months ended June 30, 1998.
16
<PAGE>
AMORTIZATION EXPENSE. Amortization expense increased $885,000 to
$975,000 for the six months ended June 30, 1999 from $90,000 for the six months
ended June 30, 1998. This increase is attributable to amortization of goodwill
related to the Company's acquisitions. As a percentage of revenue, amortization
expense increased to 0.6% for the three months ended June 30, 1999 from 0.1% for
the six months ended June 30, 1998.
OPERATING INCOME. Operating income increased $4.9 million, or 47.4%, to
$15.3 million for the six months ended June 30, 1999 from $10.4 million for the
six months ended June 30, 1998. As a percentage of revenue, operating income
decreased to 10.2% for the six months ended June 30, 1999 from 10.4% for the six
months ended June 30, 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 $320,000, or 81.0%, to
$75,000 for the six months ended June 30, 1999 from $395,000 for the six months
ended June 30, 1998. This change reflects a decrease in cash and cash
equivalents due to cash used for acquisitions.
INTEREST EXPENSE. Interest expense increased by $839,000 to $850,000
for the six months ended June 30, 1999 from $11,000 for the six months ended
June 30, 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 $3.7
million, or 35.0%, to $14.5 million for the six months ended June 30, 1999 from
$10.8 million for the six months ended June 30, 1998. As a percentage of
revenue, income before income taxes decreased to 9.6% for the six months ended
June 30, 1999 from 10.8% for the six months ended June 30, 1998.
INCOME TAXES. The Company's effective tax rate was 40.5% for the six
months ended June 30, 1999 and 40% for the six months ended June 30, 1998.
Income taxes increased $1.6 million or 36.7%, to $5.9 million for the six months
ended June 30, 1999 from $4.3 million for the six months ended June 30, 1998. As
a percentage of revenue, income taxes decreased to 3.9% for the six months ended
June 30, 1999 from 4.3% for the six months ended June 30, 1998.
NET INCOME. Net income increased $2.1 million, or 33.9%, to $8.6
million for the six months ended June 30, 1999 from $6.5 million for the six
months ended June 30, 1998. As a percentage of revenue, net income decreased to
5.7% for the six months ended June 30, 1999 from 6.5% for the six months ended
June 30, 1998.
EARNINGS PER SHARE. Diluted earnings per share increased $0.15, or
34.9%, to $0.58 for the six months ended June 30, 1999 from $0.43 for the six
months ended June 30, 1998.
SELECTED QUARTERLY RESULTS AND SEASONALITY
The following table sets forth certain quarterly operating information
for each of the 13 quarters ending with the quarter ended June 30, 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.
17
<PAGE>
<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:
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
June......................................... 78,309 23,023 29.4 8,393 10.7
</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
During the first quarter of 1999, the Company acquired The Avery Group,
D.P. Specialists, Inc. and D.P. Specialists Learning Center, LLC, The
Professionals - Computer Management & Consulting, Inc., Krystal Solutions, Inc.
and Solution Technologies, Inc. as described in Note 3 of Notes to Consolidated
Financial Statements. The acquisitions caused the Company to exhaust the balance
of the proceeds from its January 1997 initial public offering and incur
$38,418,100 in debt on its credit facilities.
The Company sold 50,000 shares of stock under the Metro Information
Services, Inc. Employee Stock Purchase Plan for an aggregate purchase price of
$739,768 during the six months ended June 30, 1999.
During 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 $77,600
during the six months ended June 30, 1999.
The Company funds its operations primarily from cash generated by
operations. Net cash provided by operations was $2,728,276 for the six months
ended June 30, 1999 and consisted primarily of net income of $8,643,313 and,
excluding the effects of acquisitions, increases in accounts receivable of
$4,967,140 and accrued compensation and benefits of $3,200,077 and a decrease in
accounts payable of $4,393,586. The increases in accounts receivable and accrued
compensation and benefits are primarily due to the revenue growth experienced
during the six months ended June 30, 1999. The decrease in accounts payable is
due to the Company paying the majority of accounts payable at June 30, 1999.
This was done to ease the Company's implementation of new financial accounting
software on July 1, 1999. The Company had working capital of $37,186,383 at June
30, 1999 compared to $36,776,571 at December 31, 1998.
18
<PAGE>
Net cash used in investing activities was $59,275,088 for the six
months ended June 30, 1999 and included normal acquisitions of property and
equipment used in operations of $1,625,632 and $56,977,630 of payments for the
acquisitions described above. The Company's investing activities also include
$676,053 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 $41,453,764 against these facilities,
leaving $48,546,236 available as of June 30, 1999. The facilities mature in June
2004 and may be extended each year for an additional year. 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 5.5% as of June 30, 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 year. Any
significant acquisitions, however, may require additional debt and equity
financing.
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 problem. In this disclosure, the problem is referred to as the
"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
19
<PAGE>
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 have remediated substantially all of the Year 2000 problems
we know exist. We will continue to perform additional testing of our systems
through September 30, 1999. If those tests reveal additional Year 2000
problems, we plan to fix those issues before December 31, 1999 or put into
effect contingency plans.
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 these companies and the upgraded noncompliant
BIOS and operating systems. 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
June 30, 1999, we had not received responses from 2.8% of these companies. We
are continuing our efforts to obtain information from these companies. For
companies that did not respond by June 30, 1999 or indicated they will not be
compliant, we are identifying alternate suppliers or developing other
contingency plans.
On July 1, 1999 we implemented 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 have installed new software that we began using July
1, 1999. See "New Systems Implementation." This new system increases 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.
20
<PAGE>
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 June 30, 1999.
This review covered filings through June 30, 1999, and was performed to
determine the extent of the risk that our clients may not be Year 2000
compliant. These companies represented 49.5% of our revenue for the 12 months
ending June 30, 1999. This review furnished the following information on our
clients' expected completion date for their Year 2000 efforts:
<TABLE>
<CAPTION>
Will not
Not Be Year 2000 Year 2000 By By By
Disclosed Compliant Compliant Now 6/30/99 9/30/99 12/31/99
<S> <C> <C> <C> <C> <C> <C>
% Of Metro
Revenue 0% 0% 9.2% 11.8% 22.9% 5.6%
</TABLE>
We have treated the information furnished in these reports as written
assurance provided by these clients on the status of their Year 2000 problem. In
some cases these clients have indicated they will be substantially complete or
will have completed Year 2000 efforts for their mission critical systems by the
date indicated. We have treated this disclosure as an indication that these
companies will be able to continue their business relationships with us without
disruption or failure. We have or will request additional information from those
clients who indicated they will not be compliant or provided no disclosure. At
present, we plan to monitor disclosures made by these publicly traded clients in
Forms 10-Q and 10-K. Please note that these filings reflect the position of
these companies on the date of their filings and may change in subsequent
filings.
We are also requesting assurance from our other clients who provided
more than 0.2% of revenue during the 12 months ended June 30, 1999. These
clients represented 25.1% of revenue during the 12 months ended June 30, 1999.
We have reviewed written assurances from these clients representing 12.5% of
revenue during the 12 months ended June 30, 1999. This review furnished the
following information on our clients' expected completion date for their Year
2000 efforts:
<TABLE>
<CAPTION>
Will not
Not be Year 2000 Year 2000 By By By
Disclosed Compliant Compliant Now 6/30/99 9/30/99 12/31/99
<S> <C> <C> <C> <C> <C> <C>
% Of Metro
Revenue 0% 0% 1.7% 1.3% 0.8% 8.7%
</TABLE>
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 November 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 has made repairs to our
internal systems. We believe our internal systems are Year 2000 compliant. 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
21
<PAGE>
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 $70,000 of which had been incurred at June 30, 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 to be
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.
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 June 30, 1999, approximately 13% of our
consultants were involved in Year 2000 assignments. In addition, some clients
are delaying implementation of new software during the latter half of 1999 to
avoid the risk of introducing non-compliant software into previously tested
systems. It appears these delays, sometimes referred to as "lockdowns," will
only affect a portion of our clients and in most cases only during the fourth
quarter of 1999 and the first quarter of 2000, typically a slow growth period
for us. If more clients impose lockdowns or begin them earlier or extend
22
<PAGE>
their length, our growth and prospects for the balance of 1999 and 2000 will be
adversely affected. As of June 30, 1999, approximately 34% 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 little or no growth in the last quarter of 1999 due
to normal seasonality and client "lockdowns." Nonetheless, as we learn more from
our material clients, suppliers, vendors and financial institutions, it is
possible that this belief could change for better or worse.
CONTINGENCY PLANS
We are developing Year 2000 contingency plans where practical. These
plans address alternatives to electronic processing of candidate resumes, hires
of new employees, terminations of existing employees, payroll, supplier
payments, cash receipts from clients, invoices to clients and initiatives
without e-mail. These plans also address furnishing required reports to clients,
furnishing required governmental reports, gaining access to leased office space,
shipping intracompany correspondence and communicating Company reports. These
plans include stockpiling supplies and equipment, identifying alternative
sources of goods and services and performing certain tasks manually. For
example, we may store paper copies of electronically stored data (such as
candidate resumes) at locations likely to need them if we believe that the data
will not be accessible due to a Year 2000 failure. In some situations, however,
it is not practical to have an effective contingency plan. For example, a
failure by our primary banking institution may interrupt our cash receipts and
our ability to 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 3,000 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 implemented 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 implemented these systems. The Company
spent $2.8 million on these systems. The Company capitalized these costs and
will amortize them over seven years.
ITEM 3. 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.
23
<PAGE>
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders of Metro Information
Services, Inc. held on June 8, 1999, the following matters
were voted on with the results indicated below.
1) Election of two Class 3 Directors to serve for a term of
three years or until a successor is elected.
FOR WITHHELD
--- --------
A. Eugene Loving, Jr. 14,636,031 105,249
Robert J. Eveleigh 14,624,898 116,382
The term of office of directors Ray E. Becker, Andrew J.
Downing and John H. Fain continued after the meeting.
2) Amendment of the Metro Information Services, Inc. Employee
Stock Purchase Plan.
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
12,603,267 166,970 6,998 1,964,045
3) Approval of the Amended and Restated Metro Information
Services, Inc. 1997 Stock Option Plan.
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
11,313,626 1,455,866 7,743 1,964,045
4) Ratification of the appointment of KPMG LLP as Independent
Auditors for the Company for the year ending December 31,
1999.
FOR AGAINST ABSTAIN
--- ------- -------
14,524,461 213,177 3,642
24
<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/A during second quarter of 1999:
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.
25
<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 30th day of July, 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
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF METRO INFORMATION SERVICES, INC. AS PRESENTED IN THE
FORM 10-Q FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS' LEGEND.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 4,220 4,220
<SECURITIES> 0 0
<RECEIVABLES> 49,865 49,865
<ALLOWANCES> 355 355
<INVENTORY> 0 0
<CURRENT-ASSETS> 56,275 56,275
<PP&E> 16,699 16,699
<DEPRECIATION> 5,333 5,333
<TOTAL-ASSETS> 132,341 132,341
<CURRENT-LIABILITIES> 19,088 19,088
<BONDS> 0 0
0 0
0 0
<COMMON> 149 149
<OTHER-SE> 38,402 38,402
<TOTAL-LIABILITY-AND-EQUITY> 132,341 132,341
<SALES> 0 0
<TOTAL-REVENUES> 78,309 150,782
<CGS> 0 0
<TOTAL-COSTS> 55,286 106,788
<OTHER-EXPENSES> 14,630 28,692
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 7,736 14,527
<INCOME-TAX> 3,133 5,883
<INCOME-CONTINUING> 4,603 8,643
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,603 8,643
<EPS-BASIC> 0.31 0.58
<EPS-DILUTED> 0.31 0.58
</TABLE>
