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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, 2000
COMMISSION FILE NO.: 000-22035
METRO INFORMATION SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(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, 2000, the registrant had issued and outstanding 15,073,770
shares of Common Stock, $.01 par value.
- --------------------------------------------------------------------------------
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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 Ended March 31, 1999 and 2000 (unaudited) 3
Consolidated Balance Sheets as of
December 31, 1999 and March 31, 2000 (unaudited) 4
Consolidated Statement of Changes in Shareholders' Equity for the
Three Months Ended March 31, 2000 (unaudited) 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 2000 (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 20
SIGNATURES 21
</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
ended March 31,
----------------------------------------
1999 2000
----------------- -----------------
<S> <C> <C>
Revenue $ 72,472,838 $ 80,197,097
Cost of revenue 51,502,369 57,785,612
----------------- -----------------
Gross profit 20,970,469 22,411,485
----------------- -----------------
Selling, general and administrative expenses 13,160,953 17,152,451
Depreciation expense 522,969 786,754
Amortization expense (Notes 3 and 4) 377,946 1,170,224
----------------- -----------------
Total operating expenses 14,061,868 19,109,429
----------------- -----------------
Operating income 6,908,601 3,302,056
----------------- -----------------
Interest income 58,112 45,442
Interest expense (175,942) (1,392,091)
----------------- -----------------
Net interest income (expense) (117,830) (1,346,649)
----------------- -----------------
Income before income taxes 6,790,771 1,955,407
Income taxes 2,750,262 791,940
----------------- -----------------
Net income $ 4,040,509 $ 1,163,467
================= =================
Net income per share:
Basic $ 0.27 $ 0.08
================= =================
Diluted $ 0.27 $ 0.08
================= =================
Weighted average number of shares of common stock
and potential dilutive securities outstanding:
Basic 14,887,013 15,033,886
================= =================
Diluted 15,002,632 15,262,607
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
METRO INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2) $ 4,612,538 $ 3,419,609
Accounts receivable, net 59,720,500 64,799,975
Prepaid expenses 4,442,488 4,092,832
Deferred income taxes 1,287,699 1,517,790
------------------ ------------------
Total current assets 70,063,225 73,830,206
Property and equipment, net 12,412,632 12,600,336
Goodwill and other intangibles, net (Notes 3 and 4) 107,395,150 106,774,494
Other assets 307,843 277,781
------------------ ------------------
Total assets $ 190,178,850 $ 193,482,817
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable (Note 2) $ 12,952,391 $ 14,846,254
Accrued compensation and benefits 15,063,453 17,449,742
------------------ ------------------
Total current liabilities 28,015,844 32,295,996
Line of credit facilities (Note 5) 82,467,071 79,401,030
Deferred income taxes 1,555,131 1,782,586
------------------ ------------------
Total liabilities 112,038,046 113,479,612
------------------ ------------------
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
15,021,552 shares at December 31, 1999,
15,073,170 shares at March 31, 2000 150,216 150,732
Paid in capital 39,336,189 40,034,607
Retained earnings 38,654,399 39,817,866
------------------ ------------------
Total shareholders' equity 78,140,804 80,003,205
------------------ ------------------
Total liabilities and shareholders' equity $ 190,178,850 $ 193,482,817
================== ==================
</TABLE>
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, 1999 15,021,552 $150,216 $ 39,336,189 $ 38,654,399 $ 78,140,804
Net proceeds from issuance of
shares of common stock to
Employee Stock Purchase Plan 34,818 348 425,085 - 425,433
Net proceeds from issuance of
shares of common stock to Employee 16,800 168 273,333 - 273,501
Incentive Stock Option Plan
Net income - - 1,163,467 1,163,467
--------------- -------------- ----------------- ---------------- -----------------
Balance as of March 31, 2000 15,073,170 $150,732 $ 40,034,607 $ 39,817,866 $ 80,003,205
=============== ============== ================= ================ =================
</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,
----------------------------------------
1999 2000
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,040,509 $ 1,163,467
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization - cost of revenue 11,878 12,626
Depreciation and amortization - selling, general & administrative expenses 900,915 1,956,978
Net loss on sale of property and equipment 5,478 24,344
Deferred income taxes (10,743) (2,636)
Changes in operating assets and liabilities increasing (decreasing) cash,
net of the effects of acquisitions:
Restricted cash (Note 2) (497,987) -
Accounts receivable (7,170,338) (5,079,475)
Prepaid expenses (178,701) 349,656
Other assets (129,825) 30,492
Accounts payable 782,738 1,343,863
Accrued compensation and benefits 5,093,587 2,386,289
----------------- -----------------
Net cash provided by operating activities 2,847,511 2,185,604
----------------- -----------------
Cash flows from investing activities:
Acquisition of property and equipment (863,312) (687,929)
Acquisition of computer software (342,029) (323,741)
Acquisition of businesses (56,872,026) -
Proceeds from sale of property and equipment 4,227 244
----------------- -----------------
Net cash used in investing activities (58,073,140) (1,011,426)
----------------- -----------------
Cash flows from financing activities:
Net borrowings under line of credit 38,418,100 (3,066,041)
Proceeds from issuance of shares to Employee Stock Purchase Plan 386,485 425,433
Proceeds from issuance of shares to Employee Incentive Stock Option Plan 60,000 273,501
----------------- -----------------
Net cash provided by (used in) financing activities 38,864,585 (2,367,107)
----------------- -----------------
Net decrease in cash and cash equivalents (16,361,044) (1,192,929)
Cash and cash equivalents at beginning of period 18,495,580 4,612,538
----------------- -----------------
Cash and cash equivalents at end of period $ 2,134,536 $ 3,419,609
================= =================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 175,942 $ 1,149,427
================= =================
Cash paid for income taxes $ 881,523 $ 105,676
================= =================
</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 March 31, 1999 and 2000, 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, 2000 and the results of its
operations and its cash flows for the three-month periods ended March 31, 1999
and 2000. 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, 1999, which were included as part of the Company's
Annual Report on Form 10-K (File No. 000-22035). Certain 1999 amounts have been
reclassified for comparability with the 2000 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 Northern California, Inc. The Avery Group December 2, 1998
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
Metro Information Services - ATS, Inc. Acuity Technology Services August 13, 1999
</TABLE>
2. Restricted Cash
Metro agreed to act as payment agent for a client on an information
technology project beginning in 1998. As of March 31, 2000, the Company held no
restricted cash for this client. As of March 31, 1999, the Company held $766,537
of restricted cash for this client and this amount was included in cash and cash
equivalents and accounts payable presented in the consolidated balance sheet as
of that date. Client approved invoices were paid out of the restricted cash
held. Metro was not obligated to pay invoices that exceeded 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
approximately $11,849,000, of which $11 million was paid at closing, $754,000
was paid in February 1999 based on a net worth adjustment calculation performed
in February 1999 and direct costs of the acquisition were approximately $95,000.
On January 1, 1999, the Company acquired D.P. Specialists, Inc. and D.P.
Specialists Learning Center, LLC ("DPS" collectively), information technology
consulting services and personnel staffing businesses located in El Segundo,
California and Woodbridge, New Jersey for a purchase price of approximately
$18,820,000, including direct costs of the acquisition of approximately $90,000
and an estimated earnout of $8,750,000 based on the acquired business attaining
certain operating income targets for the twelve months ended December 31, 1999.
The earnout is included in accounts payable at March 31, 2000. The Company has
made an allocation of a portion of the purchase price 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 allocation of the
7
<PAGE>
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 16,318,451
Other intangible assets 1,448,800
Other assets
50,246
-----------
Total assets purchased $20,008,600
-----------
Liabilities assumed:
Note payable $ 514,977
Accounts payable
132,491
Accrued compensation and benefits 541,220
-----------
Total liabilities assumed 1,188,688
-----------
Purchase price $18,819,912
===========
</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 $19,061,000 of which $17,976,000 was paid at
closing, approximately $183,000 represents direct costs related to the
acquisition and $352,000 was paid in April 1999 based on a net worth adjustment
calculation performed in April 1999. The remaining amount represents an
estimated earnout of $550,000 based on the acquired business attaining certain
operating targets for the twelve months ended January 31, 2000. The earnout is
included in accounts payable at March 31, 2000. The Company has made an
allocation of a portion of the purchase price 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 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 14,190,371
Other intangible assets 2,018,300
Other assets 8,586
-----------
Total assets purchased $19,215,020
-----------
Liabilities assumed:
Accounts payable $ 144,069
Accrued compensation and benefits 10,304
-----------
Total liabilities assumed 154,373
-----------
Purchase price $19,060,647
===========
</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 $28,398,000, 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 $107,000 represents direct costs of the acquisition. The Company
has made an allocation of a portion of the purchase price 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 allocation of the purchase price based on
March 1, 1999 asset and liability balances:
8
<PAGE>
<TABLE>
<S> <C>
Assets purchased:
Accounts receivable $ 3,699,259
Prepaid expenses 40,406
Property and equipment 217,107
Goodwill 22,813,915
Other intangible assets 2,493,199
Other assets 17,948
-----------
Total assets purchased $29,281,834
-----------
Liabilities assumed:
Accounts payable $ 39,869
Accrued compensation and benefits 844,013
-----------
Total liabilities assumed 883,882
-----------
Purchase price $28,397,952
===========
</TABLE>
On August 13, 1999, the Company acquired all of the membership and equity
interests of Acuity Technology Services, LLC and Acuity Technology Services of
Dallas, LLC ("ATS" collectively), both of which are information technology
consulting services and personnel staffing businesses located in Washington
D.C., Baltimore, Maryland and Dallas, Texas for a purchase price of
approximately $40,249,000, of which $39,425,000 was paid at closing, $666,000
was paid in November 1999 and approximately $158,000 represents direct costs
related to the acquisition. The Company has made an allocation of a portion of
the purchase price 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
allocation of the purchase price based on August 13, 1999 asset and liability
balances:
<TABLE>
<S> <C>
Assets purchased:
Accounts receivable $ 7,209,434
Prepaid expenses 69,319
Property and equipment 263,161
Goodwill 26,122,641
Other intangible assets 10,065,099
Other assets 72,058
-----------
Total assets purchased $43,801,712
-----------
Liabilities assumed:
Accounts payable $ 1,927,912
Accrued compensation and benefits 1,625,087
-----------
Total liabilities assumed 3,552,999
-----------
Purchase price $40,248,713
===========
</TABLE>
For each of these acquisitions, if the acquired company achieves certain
predetermined financial results during a twelve month measurement period, the
Company has or will make an additional payment which will be recorded as
additional goodwill. The measurement periods for the acquired companies end or
ended 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
Acuity Technology Services, LLC and Acuity Technology Services of Dallas, LLC August 31, 2000
</TABLE>
9
<PAGE>
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 lines of credit.
Unaudited pro forma consolidated results of operations for the three
months ended March 31, 1999 and 2000 would have been as follows had the
acquisitions of Avery, DPS, PCM, KSC, STI and ATS occurred as of the beginning
of the period:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------------------------------------
1999 2000
-------------------- -------------------
(In thousands, except per share data)
<S> <C> <C>
Revenue..................................................... $87,943 $80,197
Net income.................................................. 3,939 1,163
Net income per share - basic................................ $ .26 $ .08
Net income per share - diluted.............................. $ .26 $ .08
Weighted average number of shares of common stock
and potential dilutive securities outstanding:
Basic.................................................. 14,887 15,034
Diluted................................................ 15,003 15,263
</TABLE>
There is no difference between the pro forma and actual consolidated results of
operations for the three months ended March 31, 2000 since all acquisitions
occurred before January 1, 2000.
4. Goodwill and Other Intangible Assets
Goodwill and other intangible assets represent the excess of cost over
fair value of net tangible assets acquired through acquisitions and are
amortized on a straight-line basis over their estimated useful lives,
generally 30 years and 3 to 20 years, respectively. Management periodically
assesses whether there has been a permanent impairment in the value of
goodwill and other intangible assets. The amount of such impairment is
determined by comparing anticipated undiscounted future cash flows to the
carrying value of the related goodwill and other intangible assets.
5. Credit Facilities
The Company maintains credit facilities of $125,000,000. The facilities
are provided in equal amounts of $35,000,000 by three banks and $20,000,000 by a
fourth bank. The outstanding balance on these facilities as of March 31, 2000
was $79,401,030. The facilities mature in June 2005 and may be extended each
year for an additional year. Until June 2005, interest, but no principal, is
payable monthly. The interest rates on the Company's facilities change from time
to time. Two of the facilities allow the Company to select among prime rate and
London Interbank Offered Rate (LIBOR) based interest rates while the other two
have only LIBOR based interest rates. All of the facilities have interest rates
that increase as the balance outstanding under the facilities increases. The
Company has selected a variety of LIBOR based rates and the rate on such
borrowings ranged from 6.80% to 7.57% on March 31, 2000. The facilities also
contain fees, ranging from 0.125% to 0.380% annually, which are charged on the
unused portion of the facilities. The facilities are collateralized by accounts
receivable of the Company.
The credit facilities contain several covenants, including one requiring
the maintenance of a certain tangible net worth ratio, which limits the amount
of dividends that can be paid. The covenants also impose limits on incurring
other debt, limit the amount borrowed to a multiple of adjusted earnings before
interest, taxes, depreciation and amortization 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. Quarterly
testing dates are required for these covenants. These covenants may prevent the
Company from borrowing the full amount of the credit facilities or trigger a
default under the credit facilities.
10
<PAGE>
On March 20, 2000, the Company renegotiated the terms of its line of
credit facilities. The change increased the Maximum Funded Debt to EBITDA ratio
from 3.0 to 1.0 to 4.0 to 1.0 through September 30, 2001 and increased the
Funded Debt to Capitalization ratio through December 31, 2002.
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 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>
<TABLE>
<CAPTION>
SHARES
NET INCOME OUTSTANDING EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (NUMERATOR) (DENOMINATOR) PER SHARE
- ----------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share.................................... $1,163,467 15,033,886 $ 0.08
========== ========
Effect of Dilutive Securities - Incentive
Stock Options deemed outstanding......................... 228,721
----------
Diluted Earnings Per Share.................................. $1,163,467 15,262,607 $ 0.08
========== ========== ========
</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, 1999 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. provides a wide range of information
technology ("IT") consulting and custom software development services and
solutions through 46 offices in 44 metropolitan markets in the United States and
Puerto Rico. The Company's more than 2,500 consultants, 61% of whom were
salaried on March 31, 2000, work on all aspects of computer systems and
applications development. Services and solutions 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
(client/server, network, mainframe, Internet and mid-range environments) and
supports client projects using a broad range of software applications. For
example, the Company custom develops applications in Java, HTML, ASP and other
Web-related languages as well as Visual Basic, C++, Oracle, Informix and DB2.
The Company also 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, 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, 2000, the Company performed IT services for 838 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
arrangements. Substantially all services are billed on a time and materials
basis. During the three months ended March 31, 2000, the Company estimates that
supplemental IT services accounted for more than 90% and project outsourcing
accounted for less than 10% of the Company's revenue, although the Company wants
to increase the percentage of project outsourcing it performs.
12
<PAGE>
Between March 31, 1999 and March 31, 2000, the number of full time
consultants decreased from 2,657 to 2,592. Excluding the 855 consultants gained
through acquisitions, the number of full time consultants declined from 1,802 to
1,737 during the 12 month period. In addition, over the same period, the Company
increased the average billing rates charged to clients for consultants in an
attempt to keep pace with the increased costs of consultants. The focus for
revenue growth in 2000 will be derived primarily from increases in the number of
consultants placed with existing and new clients.
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 approximately
$11,849,000, of which $11 million was paid at closing, $754,000 was paid in
February 1999 based on a net worth adjustment calculation performed in February
1999 and direct costs of the acquisition were approximately $95,000.
On January 1, 1999, the Company acquired D. P. Specialists, Inc. and D.P.
Specialists Learning Center, LLC ("DPS" collectively), information technology
consulting services and personnel staffing businesses located in El Segundo,
California and Woodbridge, New Jersey for a purchase price of approximately
$18,820,000, including direct costs of the acquisition of approximately $90,000
and an estimated earnout of $8,750,000 based on the acquired business attaining
certain operating income targets for the twelve months ended December 31, 1999.
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 $19,061,000, of which $17,976,000 was paid at
closing, approximately $183,000 represents direct costs related to the
acquisition and $352,000 was paid in April 1999 based on a net worth adjustment
calculation performed in April 1999. The remaining amount represents an
estimated earnout of $550,000 based on the acquired business attaining certain
operating income targets for the twelve months ended January 31, 2000.
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 $28,398,000, 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 $107,000 represents direct costs of the acquisition.
On August 13, 1999, the Company acquired all of the membership and equity
interests of Acuity Technology Services, LLC and Acuity Technology Services of
Dallas, LLC ("ATS" collectively), both of which are information technology
consulting services and personnel staffing businesses located in Washington
D.C., Baltimore, Maryland and Dallas, Texas for a purchase price of
approximately $40,249,000, of which $39,425,000 was paid at closing, $666,000
was paid in November 1999 and approximately $158,000 represents direct costs
related to the acquisition.
The Company's financial statements do not include the effect of certain
payments the Company may be required to make to ATS if ATS meets certain
predetermined financial results as discussed below. For each of the
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 or ended December 31, 1999
for Avery, December 31, 1999 for DPS, January 31, 2000 for PCM and KSC,
February 29, 2000 for STI and August 31, 2000 for ATS. As of March 31, 2000,
goodwill and accounts payable include $9,300,000 of these additional payments.
Once additional payment amounts become known they will be recorded as goodwill
in the Company's financial statements.
Since May 1999, the Company and the IT services industry in general have
experienced a slowdown in demand for IT services. This slowdown has mostly
affected mainframe computer services. Management believes clients were reluctant
to start new IT projects until the full effect of computer problems associated
with the advent
13
<PAGE>
of the Year 2000 were known. This reluctance continued through the first
quarter of 2000 and we believe may continue at least into the second quarter
of 2000. The result has been to make it difficult for the Company to place
mainframe consultants on new assignments. Without new assignments, many
mainframe consultants have left the Company to seek other opportunities.
Although demand for client server, network and Internet related skills has
been generally high, it has not been sufficient to offset the loss of
mainframe consultants. This reduction in demand has resulted in slower
revenue growth in existing offices, lower bill rate increases and more
non-billable consultant time as compared to the first quarter of 1999. As a
result, earnings fell 70% between the first quarter of 1999 and the first
quarter of 2000.
The Company is also transitioning its work force towards more e-Business
related skill sets. These skill sets are in high demand at this time. During
this transition the Company is experiencing higher turnover in its workforce.
This higher turnover is expected to continue at least until the middle of 2000.
The Company's past financial performance should not be relied on as an
indication of future performance. Period-to-period comparisons of the Company's
financial results are not necessarily meaningful indicators of future
performance.
RESULTS OF OPERATIONS
FOR PURPOSES OF THE FOLLOWING DISCUSSION, AS OF MARCH 31, 1999, A MATURE
OFFICE IS AN OFFICE THAT WAS OWNED BY THE COMPANY FOR AT LEAST 24 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, 2000, 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 CHANGE
MARCH 31,
PERCENTAGE OF REVENUE 2000 OVER 1999
------------------------------------ ------------------------
1999 2000
---------------- --------------
<S> <C> <C> <C>
Revenue..................................................... 100.0% 100.0% 10.7%
Cost of revenue............................................. 71.1 72.0 12.2
---------------- --------------
Gross profit................................................ 28.9 28.0 6.9
---------------- --------------
Selling, general and administrative expenses................ 18.2 21.4 30.3
Depreciation expense........................................ 0.7 1.0 50.4
Amortization expense........................................ 0.5 1.5 N/M
---------------- --------------
Total operating expenses.................................... 19.4 23.9 35.9
---------------- --------------
Operating income............................................ 9.5 4.1 (52.2)
---------------- --------------
Interest income............................................. 0.1 0.0 (21.8)
Interest expense............................................ (0.2) (1.7) N/M
---------------- --------------
Net interest income (expense)............................... (0.1) (1.7) N/M
---------------- --------------
Income before income taxes.................................. 9.4 2.4 (71.2)
Income taxes................................................ 3.8 1.0 (71.2)
================ ===============
Net income.................................................. 5.6% 1.4% (71.2)
================ ===============
</TABLE>
- -------------
N/M - Not Meaningful
14
<PAGE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1999
REVENUE. Revenue increased $7.7 million, or 10.7%, to $80.2 million
for the three months ended March 31, 2000 from $72.5 million for the three
months ended March 31, 1999. Of this increase $13.4 million is attributable
primarily to acquisitions during 1999 and revenue without the acquisitions
decreased $5.7 million. The decline in revenue is a result of a declining
consultant count during the last half of 1999 and the first quarter of 2000,
slower revenue growth in existing offices, lower bill rate increases and more
non-billable consultant time as compared to the first quarter of 1999.
COST OF REVENUE. Cost of revenue increased $6.3 million, or 12.2%, to
$57.8 million for the three months ended March 31, 2000 from $51.5 million for
the three months ended March 31, 1999. Cost of revenue increased primarily due
to compensation and benefits associated with growth in the number of
consultants, including consultants added through acquisitions. Cost of revenue
also rose due to lower productivity of salaried consultants. Salaried
consultants are paid even if they are not billable to clients. As a percentage
of revenue, cost of revenue increased to 72.1% for the three months ended March
31, 2000 from 71.1% for the three months ended March 31, 1999 primarily because
of an increase in non-billable consultant time.
GROSS PROFIT. Gross profit increased $1.4 million, or 6.9%, to $22.4
million for the three months ended March 31, 2000 from $21.0 million for the
three months ended March 31, 1999. As a percentage of revenue, gross profit
decreased to 28.0% for the three months ended March 31, 2000 from 28.9% for the
three months ended March 31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4.0 million, or 30.3%, to $17.2 million for
the three months ended March 31, 2000 from $13.2 million for the three months
ended March 31, 1999. 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
increased to 21.4% for the three months ended March 31, 2000 from 18.2% for the
three months ended March 31, 1999. This increase is the result of administrative
costs added in 1999 not being reduced at the same rate as revenue declined
during the last half of 1999 and first quarter 2000.
DEPRECIATION EXPENSE. Depreciation expense increased $264,000 or 50.4%,
to $787,000 for the three months ended March 31, 2000 from $523,000 for the
three months ended March 31, 1999. This increase is primarily attributable to
depreciation on additions to computer equipment and software and depreciation of
acquired equipment and software. As a percentage of revenue, depreciation
expense increased to 1.0% as a percentage of revenue for the three months ended
March 31, 2000 from 0.7% for the three months ended March 31, 1999.
AMORTIZATION EXPENSE. Amortization expense increased $792,000 to $1.2
million for the three months ended March 31, 2000 from $378,000 for the three
months ended March 31, 1999. This increase is attributable to amortization of
goodwill and other intangibles related to the Company's acquisitions. As a
percentage of revenue, amortization expense increased to 1.5% for the three
months ended March 31, 2000 from 0.5% for the three months ended March 31, 1999.
OPERATING INCOME. Operating income decreased $3.6 million, or 52.2%, to
$3.3 million for the three months ended March 31, 2000 from $6.9 million for the
three months ended March 31, 1999. As a percentage of revenue, operating income
decreased to 4.1% for the three months ended March 31, 2000 from 9.5% for the
three months ended March 31, 1999. The decline in operating income margin is the
result of a declining consultant count during the last half of 1999 and the
first quarter of 2000, lower gross margins, higher selling, general and
administrative expenses and higher depreciation and amortization expenses.
INTEREST INCOME. Interest income decreased by $13,000, or 21.8%, to
$45,000 for the three months ended March 31, 2000 from $58,000 for the three
months ended March 31, 1999. This change reflects a decrease in cash equivalents
due to cash used for acquisitions.
15
<PAGE>
INTEREST EXPENSE. Interest expense increased by $1.2 million to $1.4
million for the three months ended March 31, 2000 from $176,000 for the three
months ended March 31, 1999. 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 decreased $4.8
million, or 71.2%, to $2.0 million for the three months ended March 31, 2000
from $6.8 million for the three months ended March 31, 1999. As a percentage of
revenue, income before income taxes decreased to 2.4% for the three months ended
March 31, 2000 from 9.4% for the three months ended March 31, 1999.
INCOME TAXES. The Company's effective tax rate was 40.5% for the three
months ended March 31, 2000 and March 31, 1999. Income taxes decreased $2.0
million or 71.2%, to $792,000 for the three months ended March 31, 2000 from
$2.8 million for the three months ended March 31, 1999. As a percentage of
revenue, income taxes decreased to 1.0% for the three months ended March 31,
2000 from 3.8% for the three months ended March 31, 1999.
NET INCOME. Net income decreased $2.9 million, or 71.2%, to $1.2 million
for the three months ended March 31, 2000 from $4.0 million for the three months
ended March 31, 1999. As a percentage of revenue, net income decreased to 1.5%
for the three months ended March 31, 2000 from 5.6% for the three months ended
March 31, 1999.
EARNINGS PER SHARE. Diluted earnings per share decreased $0.19, or 71.3%,
to $0.08 for the three months ended March 31, 2000 from $0.27 for the three
months ended March 31, 1999.
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, 2000, 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>
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
September.................................. 81,253 24,020 29.6 7,066 8.7
December................................... 82,611 23,951 29.0 5,874 7.1
2000:
March...................................... 80,197 22,411 28.0 3,302 4.1
</TABLE>
16
<PAGE>
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 3 of
Notes to Consolidated Financial Statements. The acquisitions during 1999 caused
the Company to exhaust the balance of the proceeds from the IPO and incur
$82,467,071 in debt on its credit facilities as of December 31, 1999. For first
quarter of 2000, the debt on its credit facilities decreased $3,066,043 to
$79,401,030.
The Company sold 34,818 shares of stock under the Metro Information
Services, Inc. Employee Stock Purchase Plan for an aggregate purchase price of
$425,433 on March 31, 2000, and 25,000 shares for $386,485 on March 31, 1999.
During 1999, certain employees exercised stock options which vested on
December 31, 1997, December 31, 1998 and March 18, 1999 pursuant to the 1997
Employee Stock Option Plan. The Company issued 16,800 shares of stock for option
exercises during the three months ended March 31, 2000 and 3,750 during the
three months ended March 31, 1999. Total proceeds from the issuance of stock for
option exercises were $273,501 and $60,000, respectively.
The Company funds its operations primarily from cash generated by
operations. Net cash provided by operations was $2,185,604 for the three months
ended March 31, 2000 and consisted primarily of net income of $1,163,467,
accounts payable of $1,343,863 and accrued compensation and benefits of
$2,386,289 offset by increases in accounts receivable of $5,079,475. The
increases in accounts receivable and accrued compensation and benefits are
primarily due to delays in billing and collection caused by the integration of
the Company's subsidiaries. The Company had working capital of $41,534,210 at
March 31, 2000 compared to $42,047,381 at December 31, 1999.
Net cash used in investing activities was $1,011,426 for the three months
ended March 31, 2000 and included normal acquisitions of property and equipment
used in operations of $842,893. The Company's investing activities also include
$168,777 spent on developing new web enabled computer systems for internal use.
See "New Systems Implementation."
The Company maintains credit facilities of $125,000,000. The credit
facilities are provided in equal amounts of $35,000,000 by three banks and
$20,000,000 by a fourth bank. The outstanding balance at March 31, 2000 was
$79,401,030. The facilities mature in June 2005 and may be extended each year
for an additional year. Until June 2005, interest but no principal 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
other two have 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 variety of LIBOR based rates and the
rate on such borrowings ranged from 6.80% to 7.57% as of March 31, 2000. The
facilities also contain fees, ranging from 0.125% to 0.380% annually, which
are charged on the unused portion of the facilities. The facilities are
collateralized by accounts receivable of the Company.
17
<PAGE>
The credit facilities contain several covenants, including one requiring
the maintenance of a certain tangible net worth ratio, which limits the amount
of dividends that can be paid. The covenants also impose limits on incurring
other debt, limit the amount borrowed to a multiple of adjusted earnings before
interest, taxes, depreciation and amortization 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. Quarterly
testing dates are required for these covenants. These covenants may prevent the
Company from borrowing the full amount of the credit facilities or trigger a
default under the credit facilities. At March 31, 2000, approximately $45.6
million was available for borrowing without default.
On March 20, 2000, the Company renegotiated the terms of its line of
credit facilities. The change increased the Maximum Funded Debt to EBITDA ratio
from 3.0 to 1.0 to 4.0 to 1.0 through September 30, 2001 and increased the
Funded Debt to Capitalization ratio through December 31, 2002.
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 through the year 2000. These needs include the
estimated earnout payments of approximately $9,300,000 included in accounts
payable at March 31, 2000 and the potential earnout payment payable by the
Company in 2000 on the ATS acquisition. New acquisitions, however, are likely to
require additional debt and equity financing.
YEAR 2000 ISSUES
The Company has not experienced and management is not aware of clients
who have experienced any material Year 2000 problems.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS No. 133"), ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
June 15, 2000. The Company does not expect SFAS No. 133 to have a material
effect on its financial condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The bulletin does not change
existing rules on revenue recognition. SAB 101 is effective for all fiscal
quarters of fiscal years beginning after December 15, 1999. The Company does not
expect SAB 101 to have a material effect on its financial condition or results
of operations.
The Financial Accounting Standards Board (FASB) has proposed a new
statement that would require all business combinations to be recorded using the
purchase method of accounting and any resulting excess purchase price over the
fair value of acquired net assets would be charged to earnings over a period not
to exceed 20 years. The proposal would also allow the reporting of earnings per
share excluding amortization of goodwill and other intangibles. The proposed
accounting would be effective for business combinations after the effective
date. The actual pronouncement, if issued, will likely have changes from the
exposure draft. If issued, this pronouncement would increase the amortization
charge against earnings for any subsequent business combinations due to the 20
year amortization period requirement. The Company has previously used a 30 year
life for goodwill. As a result of these changes, the Company believes investors
may place increasing emphasis on net income before amortization of purchased
intangible assets, net of tax effects, per share.
18
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into derivative financial or commodity
instrument transactions. The Company is exposed to market risk due to variable
interest rates on the Company's credit facilities. The Company may enter into
transactions that reduce the interest rate risk. These transactions may be
subject to SFAS No. 133 described above under "Recent Accounting
Pronouncements". The Company's exposure to market risk from other types of
financial instruments, such as accounts receivable and accounts payable, is not
material.
19
<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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
27 Financial Data Schedule
(b) Reports on Form 8-K during first quarter of 2000:
None
20
<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 9th day of May, 2000.
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
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF METRO INFORMATION SERVICES, INC. AS PRESENTED IN THE
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS' LEGEND.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,420
<SECURITIES> 0
<RECEIVABLES> 65,706
<ALLOWANCES> 906
<INVENTORY> 0
<CURRENT-ASSETS> 73,830
<PP&E> 19,940
<DEPRECIATION> 7,340
<TOTAL-ASSETS> 193,483
<CURRENT-LIABILITIES> 32,296
<BONDS> 0
0
0
<COMMON> 151
<OTHER-SE> 40,035
<TOTAL-LIABILITY-AND-EQUITY> 193,483
<SALES> 0
<TOTAL-REVENUES> 80,197
<CGS> 0
<TOTAL-COSTS> 57,786
<OTHER-EXPENSES> 19,109
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,392
<INCOME-PRETAX> 1,955
<INCOME-TAX> 792
<INCOME-CONTINUING> 1,163
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,163
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.08
</TABLE>
