<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
SEPTEMBER 30, 2000
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 October 27, 2000, the registrant had issued and outstanding
15,172,712 shares of Common Stock, $.01 par value.
--------------------------------------------------------------------------------
<PAGE>
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 Nine Months Ended September 30, 1999 and 2000 (unaudited) 3
Consolidated Balance Sheets as of
December 31, 1999 and September 30, 2000 (unaudited) 4
Consolidated Statement of Changes in Shareholders' Equity for the
Nine Months Ended September 30, 2000 (unaudited) 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 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 11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 19
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 Nine months
ended September 30, ended September 30,
-------------------------------- --------------------------------
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 81,253,123 $ 77,879,673 $ 232,035,234 $ 235,889,103
Cost of revenue 57,232,789 54,265,344 164,021,246 166,999,469
------------- ------------- ------------- -------------
Gross profit 24,020,334 23,614,329 68,013,988 68,889,634
------------- ------------- ------------- -------------
Selling, general and administrative expenses 15,383,816 17,270,771 41,996,067 51,147,822
Depreciation expense 730,249 783,709 1,835,694 2,426,873
Amortization expense (Notes 3 and 4) 840,115 1,204,897 1,814,706 3,541,657
------------- ------------- ------------- -------------
Total operating expenses 16,954,180 19,259,377 45,646,467 57,116,352
Restructuring charge -- (329,721) -- 416,879
------------- ------------- ------------- -------------
Operating income 7,066,154 4,684,673 22,367,521 11,356,403
------------- ------------- ------------- -------------
Interest income 31,126 7,063 106,058 87,947
Interest expense (Note 2) (865,177) (2,381,898) (1,714,900) (5,234,031)
------------- ------------- ------------- -------------
Net interest expense (834,051) (2,374,835) (1,608,842) (5,146,084)
------------- ------------- ------------- -------------
Income before income taxes 6,232,103 2,309,838 20,758,679 6,210,319
Income taxes 2,524,002 1,131,821 8,407,265 2,721,241
------------- ------------- ------------- -------------
Net income $ 3,708,101 $ 1,178,017 $ 12,351,414 $ 3,489,078
============= ============= ============= =============
Net income per share:
Basic $ 0.25 $ 0.08 $ 0.83 $ 0.23
============= ============= ============= =============
Diluted $ 0.25 $ 0.08 $ 0.82 $ 0.23
============= ============= ============= =============
Weighted average number of shares of common stock
and potential dilutive securities outstanding:
Basic 14,940,792 15,123,255 14,914,106 15,077,304
============= ============= ============= =============
Diluted 14,953,416 15,123,281 14,988,045 15,084,378
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
METRO INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,612,538 $ 198,449
Accounts receivable, net 59,720,500 63,894,145
Prepaid expenses 4,442,488 3,329,899
Other current assets, net (Note 2) -- 1,760,917
Deferred income taxes 1,287,699 2,476,861
------------ ------------
Total current assets 70,063,225 71,660,271
Property and equipment, net 12,412,632 11,922,368
Goodwill and other intangibles, net (Notes 3 and 4) 107,395,150 117,092,227
Other assets 307,843 278,870
------------ ------------
Total assets $190,178,850 $200,953,736
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,202,391 $ 6,804,399
Earnouts payable 8,750,000 12,600,000
Accrued compensation and benefits 15,063,453 17,967,213
------------ ------------
Total current liabilities 28,015,844 37,371,612
Line of credit facilities (Note 5) 82,467,071 78,345,955
Deferred income taxes 1,555,131 2,189,244
------------ ------------
Total liabilities 112,038,046 117,906,811
------------ ------------
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,
15,172,712 shares at September 30, 2000 150,216 151,727
Paid in capital 39,336,189 40,751,721
Retained earnings 38,654,399 42,143,477
------------ ------------
Total shareholders' equity 78,140,804 83,046,925
------------ ------------
Total liabilities and shareholders' equity $190,178,850 $200,953,736
============ ============
</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, 1999 15,021,552 $ 150,216 $39,336,189 $38,654,399 $78,140,804
Net proceeds from issuance of
shares of common stock under
Employee Stock Purchase Plan 133,760 1,337 1,132,305 -- 1,133,642
Net proceeds from issuance of
shares of common stock under Employee
Incentive Stock Option Plan 17,400 174 283,227 -- 283,401
Net income -- -- -- 3,489,078 3,489,078
----------- ----------- ----------- ----------- -----------
BALANCE AS OF SEPTEMBER 30, 2000 15,172,712 $ 151,727 $40,751,721 $42,143,477 $83,046,925
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
METRO INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine months
ended September 30,
--------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,351,414 $ 3,489,078
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization - cost of revenue 33,857 34,090
Depreciation and amortization - operating expenses 3,650,400 5,968,530
Net loss on sale of property and equipment 18,156 389,204
Deferred income taxes 670,096 (555,049)
Allowance for uncollectible sales tax -- 586,286
Changes in operating assets and liabilities increasing
(decreasing) cash, net of the effects of acquisitions:
Restricted cash (1,186,020) --
Accounts receivable (5,930,302) (4,173,645)
Prepaid expenses (3,906,816) 1,112,589
Other current assets -- (2,347,203)
Other assets (189,531) 28,973
Accounts payable (5,245,831) 2,602,008
Accrued compensation and benefits 6,195,391 2,903,760
------------- -------------
Net cash provided by operating activities 6,460,814 10,038,621
------------- -------------
Cash flows from investing activities:
Acquisition of property and equipment (2,431,706) (1,838,420)
Acquisition of computer software (856,652) (549,587)
Acquisition of businesses (97,159,838) (9,389,165)
Proceeds from sale of property and equipment 4,227 28,535
------------- -------------
Net cash used in investing activities (100,443,969) (11,748,637)
------------- -------------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit 78,314,784 (4,121,116)
Proceeds from shares issued under Employee Stock Purchase Plan 1,066,498 1,133,642
Proceeds from shares issued under Employee Incentive Stock Option Plan 113,640 283,401
------------- -------------
Net cash provided by (used in) financing activities 79,494,922 (2,704,073)
------------- -------------
Net decrease in cash and cash equivalents (14,488,233) (4,414,089)
Cash and cash equivalents at beginning of period 18,495,580 4,612,538
------------- -------------
Cash and cash equivalents at end of period $ 4,007,347 $ 198,449
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,714,900 $ 4,117,839
============= =============
Cash paid for income taxes $ 9,722,718 $ 2,604,433
============= =============
</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 September 30, 2000 and 1999, and for the
three-month and nine-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 September 30, 2000 and the results of its
operations and its cash flows for the three-month and nine-month periods ended
September 30, 2000 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, 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. 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. Sales Tax Assessment
The Tennessee Department of Revenue completed a tax audit during September
2000 and issued a Notice of Assessment on September 29, 2000. The audit resulted
in an assessment for sales and use tax of $2,357,147. The Department determined
that consulting services provided to clients connected with the installation,
alteration, development, or programming of computer software are subject to
Tennessee sales or use tax. The Department emphasized the responsibility of the
ultimate consumer to pay the sales tax and the Company has billed $2,347,203 for
the taxes owed. A portion of this amount may not be collectible. As a result,
the Company has recorded a reserve of $586,286 for uncollectible accounts. The
net current receivable on the balance sheet is $1,760,917 and appears in other
current assets at September 30, 2000. The interest assessed on the liability
through September 30, 2000 totaled $873,325 and is included in interest
expense on the income statements for three and nine months ended September
30, 2000. In addition, the Department assessed a delinquency penalty of
$550,000. The Company has filed a Petition of Waiver of the penalty. If the
Petition of Waiver is denied, the Company will be responsible for paying the
penalty before the end of 2000. The Company believes the Petition has merit,
but has determined that it is probable that $152,953 of the penalty will not
be waived. As a result, $152,953 of the assessed penalty has been recorded in
the third quarter and is included in selling, general and administrative
expenses.
7
<PAGE>
3. 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.
Because ATS achieved certain predetermined financial results during a
twelve-month measurement period, the Company will make an additional payment
of approximately $12,000,000, which is recorded as additional goodwill. The
additional payment is included in the current liabilities section of the
balance sheet and is expected to be paid in the fourth quarter.
Unaudited pro forma consolidated results of operations for the nine months
ended September 30, 1999 would have been as follows had the ATS and other
acquisitions completed in 1999 occurred as of the beginning of the period:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1999
------------
<S> <C>
(In thousands, except per share data)
Revenue ........................................... $263,382
Net income ........................................ 12,061
Net income per share - basic ...................... $ .81
Net income per share - diluted .................... $ .80
Weighted average number of shares of common stock
and potential dilutive securities outstanding:
Basic ........................................ 14,901
Diluted ...................................... 15,005
</TABLE>
There is no difference between the pro forma and actual consolidated results of
operations for the nine months ended September 30, 2000 since the 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. Impairment is determined by comparing anticipated undiscounted future
cash flows to the carrying value of the related goodwill and other intangible
assets. If such assets are considered impaired, the impairment is measured as
the amount by which the carrying amount of the assets exceeds the fair value of
the 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 September 30,
2000 was $78,345,955. The facilities mature in September 2005 and may be
extended each year for an additional year. Until September 2005, interest, but
not 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
8
<PAGE>
increases. The Company has selected a variety of LIBOR based rates and the
rate on such borrowings ranged from 7.53% to 7.79% on September 30, 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.
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 to 65% through December 31, 2000 and 60% through
December 31, 2001.
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 SEPTEMBER 30, 1999 (NUMERATOR) (DENOMINATOR) PER SHARE
--------------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share ................ $3,708,101 14,940,792 $ 0.25
========== ========
Effect of Dilutive Securities - Incentive
Stock Options deemed outstanding ...... 12,624
----------
Diluted Earnings Per Share .............. $3,708,101 14,953,416 $ 0.25
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
SHARES
NET INCOME OUTSTANDING EARNINGS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 (NUMERATOR) (DENOMINATOR) PER SHARE
--------------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share ................ $1,178,017 15,123,255 $ 0.08
========== ========
Effect of Dilutive Securities - Incentive
Stock Options deemed outstanding ...... 26
----------
Diluted Earnings Per Share .............. $1,178,017 15,123,281 $ 0.08
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
SHARES
NET INCOME OUTSTANDING EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (NUMERATOR) (DENOMINATOR) PER SHARE
-------------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share ................ $12,351,414 14,914,106 $ 0.83
=========== ========
Effect of Dilutive Securities - Incentive
Stock Options deemed outstanding ...... 73,939
----------
Diluted Earnings Per Share .............. $12,351,414 14,988,045 $ 0.82
=========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
SHARES
NET INCOME OUTSTANDING EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (NUMERATOR) (DENOMINATOR) PER SHARE
-------------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share ................ $3,489,078 15,077,304 $ 0.23
========== ========
Effect of Dilutive Securities - Incentive
Stock Options deemed outstanding ...... 7,074
----------
Diluted Earnings Per Share .............. $3,489,078 15,084,378 $ 0.23
========== ========== ========
</TABLE>
9
<PAGE>
7. Restructuring Liabilities
On May 25, 2000, the Company's Executive Management approved a plan to
close eight of its smaller offices and combine operations in two other markets.
By June 2, 2000, offices located in Memphis, Milwaukee, Minneapolis, Orlando,
Pittsburgh, Portland, Sacramento, and Salt Lake City had been closed.
During June 2000, the Company recorded a restructuring charge of
$746,600 ($440,494 or $0.03 per share net of tax benefit). The charge
represents management's estimate of the ultimate obligations associated with
executing the plan at the time the estimates were made. During the third
quarter, the restructuring charge for costs to exit certain facilities was
revised as the Company negotiated to end some leases early and subleased
other facilities. The Company expects to complete all steps in the
restructuring plan by May 31, 2001.
The following table shows the initial accruals made by the Company and the
remaining liability as of September 30, 2000:
<TABLE>
<CAPTION>
COSTS
INCURRED
THROUGH BALANCE AS OF
INITIAL SEPTEMBER REVISION TO SEPTEMBER
BALANCE 30, 2000 ESTIMATES 30, 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cost to exit certain facilities $608,233 $ 262,885 $(314,429) $30,919
Severance and termination 114,767 93,267 (13,038) 8,462
related accruals
Relocation costs 23,600 21,346 (2,254) --
----------- ----------- ----------- -----------
Total restructuring costs $746,600 $ 377,498 $(329,721) $39,381
=========== =========== =========== ===========
</TABLE>
10
<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, ANALYSTS'
CONFERENCE CALLS 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 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 in 36 metropolitan markets in the United States and Puerto Rico.
The Company's 2,488 consultants, 61% of whom were salaried on September 30,
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
September 30, 2000, the Company performed IT services for 766 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 September 30, 2000, the Company estimates
that supplemental IT services accounted for more than 85% and project
outsourcing accounted for less than 15% of the Company's revenue, although the
Company wants to increase the percentage of project outsourcing it performs.
Between September 30, 1999 and September 30, 2000, the number of full
time consultants decreased from
11
<PAGE>
2,912 to 2,488. 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 achieving
revenue growth will be on increasing the number of consultants placed with
existing and new clients.
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.
Because ATS achieved certain predetermined financial results during a
twelve-month measurement period, the Company will make an additional payment of
approximately $12,000,000, which is recorded as additional goodwill. The
additional payment is included in the current liabilities section of the balance
sheet and is scheduled to be paid in the fourth quarter 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
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue .................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue ............................ 70.4 69.7 70.7 70.8
--------- --------- ---------- ---------
Gross profit ............................... 29.6 30.3 29.3 29.2
--------- --------- ---------- ---------
Selling, general and administrative expenses 18.9 22.2 18.1 21.7
Depreciation expense ....................... 0.9 1.0 0.8 1.0
Amortization expense ....................... 1.1 1.5 0.8 1.5
--------- --------- ---------- ---------
Total operating expenses ................... 20.9 24.7 19.7 24.2
--------- --------- ---------- ---------
Restructuring charge ....................... -- (0.4) -- 0.2
--------- --------- ---------- ---------
Operating income ........................... 8.7 6.0 9.6 4.8
--------- --------- ---------- ---------
Interest income ............................ -- -- -- --
Interest expense ........................... (1.0) (3.0) (0.7) (2.2)
--------- --------- ---------- ---------
Net interest expense ....................... (1.0) (3.0) (0.7) (2.2)
--------- --------- ---------- ---------
Income before income taxes ................. 7.7 3.0 8.9 2.6
Income taxes ............................... 3.1 1.5 3.6 1.1
--------- --------- ---------- ---------
Net income ................................. 4.6% 1.5% 5.3% 1.5%
========= ========= ========== =========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
2000 OVER 1999
--------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
<S> <C> <C>
Revenue .................................... (4.2)% 1.7%
Cost of revenue ............................ (5.2)% 1.8%
Gross profit ............................... (1.7)% 1.3%
Selling, general and administrative expenses 12.3% 21.8%
Depreciation expense ....................... 7.3% 32.2%
Amortization expense ....................... N/M N/M
Total operating expenses ................... 13.6% 25.1%
Restructuring charge ....................... (100.0)% 100.0%
Operating income ........................... (33.7)% (49.2)%
Interest income ............................ (77.3)% (17.1)%
Interest expense ........................... N/M N/M
Income before income taxes ................. (62.9)% (70.1)%
Income taxes ............................... (55.2)% (67.6)%
Net income ................................. (68.2)% (71.8)%
</TABLE>
-------------
N/M - Not Meaningful
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUE. Revenue decreased $3.4 million, or 4.2%, to $77.9 million for
the three months ended September 30, 2000 from $81.3 million for the three
months ended September 30, 1999. Excluding the ATS acquisition, revenue
decreased $10.3 million or 12.8%. The decline in revenue is a result of a
declining consultant count, which started during the last half of 1999 and
continued in the first six months of 2000. This decline was brought on by the
transition from mainframe to e-Business skilled consultants, slower revenue
growth in existing offices, lower bill rate increases and more non-billable
consultant time.
COST OF REVENUE. Cost of revenue decreased $2.9 million, or 5.2%, to $54.3
million for the three months ended September 30, 2000 from $57.2 million for the
three months ended September 30, 1999. As a percentage of revenue, cost of
revenue decreased to 69.7% for the three months ended September 30, 2000 from
70.4% for the three months ended September 30, 1999. This decrease is
primarily due to higher utilization of salaried consultants during the
quarter ended September 30, 2000. Salaried consultants are paid even if they
are not billing.
GROSS PROFIT. Gross profit decreased $406,000, or 1.7%, to $23.6 million
for the three months ended September 30, 2000 from $24 million for the three
months ended September 30, 1999. As a percentage of revenue, gross profit
increased to 30.3% for the three months ended September 30, 2000 from 29.6% for
the three months ended September 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.9 million, or 12.3%, to $17.3 million
for the three months ended September 30, 2000 from $15.4 million for the
three months ended September 30, 1999. As a percentage of revenue, selling,
general and administrative expenses increased to 22.2% for the three months
ended September 30, 2000 from 18.9% for the three months ended September 30,
1999. This increase is primarily due to the Company's sales, marketing and
e-Business initiatives. In addition, a bad debt reserve for uncollectible
Tennessee sales tax of $586,000 and an estimated penalty of $153,000 are
included in selling, general and administrative expenses.
DEPRECIATION EXPENSE. Depreciation expense increased $54,000, or 7.3%, to
$784,000 for the three months ended September 30, 2000 from $730,000 for the
three months ended September 30, 1999. This increase is primarily
13
<PAGE>
attributable to depreciation on additions to computer equipment and software.
As a percentage of revenue, depreciation expense remained at 1% for the three
months ended September 30, 2000, as compared to the three months ended
September 30, 1999.
AMORTIZATION EXPENSE. Amortization expense increased $365,000 to
$1,205,000 for the three months ended September 30, 2000 from $840,000 for
the three months ended September 30, 1999. This increase is attributable to
amortization of goodwill and other intangible assets related to the Company's
acquisitions completed during 1999. As a percentage of revenue, amortization
expense increased to 1.5% for the three months ended September 30, 2000 from
1.1% for the three months ended September 30, 1999.
RESTRUCTURING CHARGE. For the three months ended September 30, 2000, the
Company recorded a $330,000 recovery of the $747,000 restructuring charge
recorded in the second quarter related to the office closings and combinations
announced May 31, 2000. The recovery represents a reduction in the Company's
future lease obligations due to negotiations of early lease terminations and
subleases. The Company expects to complete all steps in the restructuring plan
by May 31, 2001.
OPERATING INCOME. Operating income decreased $2.4 million, or 33.7%, to
$4.7 million for the three months ended September 30, 2000 from $7.1 million for
the three months ended September 30, 1999. As a percentage of revenue, operating
income decreased to 6.0% for the three months ended September 30, 2000 from 8.7%
for the three months ended September 30, 1999. The decline in operating income
margin is a result of higher selling, general and administrative expenses and
higher depreciation and amortization expenses.
INTEREST INCOME. Interest income decreased by $24,000, or 77.3%, to $7,000
for the three months ended September 30, 2000 from $31,000 for the three months
ended September 30, 1999.
INTEREST EXPENSE. Interest expense increased by $1.5 million to $2.4
million for the three months ended September 30, 2000 from $865,000 for the
three months ended September 30, 1999. Of this amount, $873,000 relates to a
Tennessee Department of Revenue audit of the Nashville and Memphis Divisions
completed September 29, 2000. The State of Tennessee found that consulting
services provided to clients connected with the installation, alteration,
development, or programming of computer software are subject to Tennessee sales
or use tax. The remaining amount reflects an increase in the average level of
borrowings during the period related to the use of cash to make the ATS and
other 1999 acquisitions. See "Liquidity and Capital Resources" below.
INCOME BEFORE INCOME TAXES. Income before income taxes decreased $3.9
million, or 62.9%, to $2.3 million for the three months ended September 30, 2000
from $6.2 million for the three months ended September 30, 1999. As a percentage
of revenue, income before income taxes decreased to 3.0% for the three months
ended September 30, 2000 from 7.7% for the three months ended September 30,
1999.
INCOME TAXES. The Company's effective tax rate increased to 49% for the
three months ended September 30, 2000 as compared to 40.5% for the three
months ended September 30, 1999. The rate increase is the result of higher
than expected non-deductible expenses, which increased the Company's taxable
income above previous estimates, and non-federal income taxes. Income taxes
decreased $1.4 million, or 55.2%, to $1.1 million for the three months ended
September 30, 2000 from $2.5 million for the three months ended September 30,
1999. As a percentage of revenue, income taxes decreased to 1.5% for the
three months ended September 30, 2000 from 3.1% for the three months ended
September 30, 1999. These decreases are a result of the earnings decline the
Company has experienced over the last 12 months.
NET INCOME. Net income decreased $2.5 million, or 68.2%, to $1.2 million
for the three months ended September 30, 2000 from $3.7 million for the three
months ended September 30, 1999. As a percentage of revenue, net income
decreased to 1.5% for the three months ended September 30, 2000 from 4.6% for
the three months ended September 30, 1999.
EARNINGS PER SHARE. Diluted earnings per share decreased $0.17, or 68.8%,
to $0.08 for the three months ended September 30, 2000 from $0.25 for the three
months ended September 30, 1999.
14
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
REVENUE. Revenue increased $3.9 million, or 1.7%, to $235.9 million for
the nine months ended September 30, 2000 from $232.0 million for the nine
months ended September 30, 1999. Excluding the ATS acquisition, revenue
decreased $29.5 million, or 12.7%. The decline in revenue is a result of a
declining consultant count, which started during the last half of 1999 and
continued in the first six months of 2000. This decline was brought on by the
transition from mainframe to e-Business skilled consultants, slower revenue
growth in existing offices, lower bill rate increases and more non-billable
consultant time.
COST OF REVENUE. Cost of revenue increased $3.0 million, or 1.8%, to
$167.0 million for the nine months ended September 30, 2000 from $164.0 million
for the nine months ended September 30, 1999. Cost of revenue increased
primarily due to increases in compensation and benefits associated with
consultants. As a percentage of revenue, cost of revenue increased to 70.8% for
the nine months ended September 30, 2000 from 70.7% for the nine months ended
September 30, 1999. Cost of revenue rose due to lower utilization of salaried
consultants during the nine months ended September 30, 2000. Salaried
consultants are paid even if they are not billing.
GROSS PROFIT. Gross profit increased $876,000, or 1.3%, to $68.9 million
for the nine months ended September 30, 2000 from $68.0 million for the nine
months ended September 30, 1999. As a percentage of revenue, gross profit
decreased to 29.2% for the nine months ended September 30, 2000 from 29.3% for
the nine months ended September 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $9.1 million, or 21.8%, to $51.1 million
for the nine months ended September 30, 2000 from $42.0 million for the nine
months ended September 30, 1999. As a percentage of revenue, selling, general
and administrative expenses increased to 21.7% for the nine months ended
September 30, 2000 from 18.1% for the nine months ended September 30, 1999.
This increase is primarily due to the Company's sales, marketing and
e-Business initiatives and one-time costs related to the offices closed May
31, 2000. These one-time costs include a write-down of $343,000 for the value
of retired or abandoned assets to net realizable value in accordance with
Financial Accounting Standards Board Opinion No. 121. In addition, a bad debt
reserve for uncollectible Tennessee sales tax of $586,000 and an estimated
penalty of $153,000 are included in selling, general and administrative
expenses.
DEPRECIATION EXPENSE. Depreciation expense increased $591,000, or 32.2%,
to $2.4 million for the nine months ended September 30, 2000 from $1.8 million
for the nine months ended September 30, 1999. This increase is primarily
attributable to depreciation on additions to computer equipment and software. As
a percentage of revenue, depreciation expense increased to 1.0% for the nine
months ended September 30, 2000 from 0.8% for the nine months ended September
30, 1999.
AMORTIZATION EXPENSE. Amortization expense increased $1.7 million to
$3.5 million for the nine months ended September 30, 2000 from $1.8 million
for the nine months ended September 30, 1999. This increase is attributable
to amortization of goodwill and other intangible assets related to the
Company's acquisitions completed during 1999. As a percentage of revenue,
amortization expense increased to 1.5% for the three months ended September
30, 2000 from 0.8% for the nine months ended September 30, 1999.
RESTRUCTURING CHARGE. For the nine months ended September 30, 2000, the
Company recorded a $417,000 restructuring charge. This charge consisted of a
$747,000 restructuring charge recorded in the second quarter related to the
office closings and combinations announced May 31, 2000. During the third
quarter, the Company recorded a $330,000 recovery of the restructuring
charge, which represents a reduction in the Company's future lease
obligations due to negotiation of early lease terminations and subleases. The
Company expects to complete all steps in the restructuring plan by May 31,
2001.
OPERATING INCOME. Operating income decreased $11.0 million, or 49.2%, to
$11.4 million for the nine months ended September 30, 2000 from $22.4 million
for the nine months ended September 30, 1999. As a percentage of revenue,
operating income decreased to 4.8% for the nine months ended September 30, 2000
from 9.6% for the nine months ended September 30, 1999. The decline in operating
income margin is a result of higher selling, general and
15
<PAGE>
administrative expenses and higher depreciation and amortization expenses.
INTEREST INCOME. Interest income decreased by $18,000, or 17.1%, to
$88,000 for the nine months ended September 30, 2000 from $106,000 for the nine
months ended September 30, 1999.
INTEREST EXPENSE. Interest expense increased by $3.5 million to $5.2
million for the nine months ended September 30, 2000 from $1.7 million for the
nine months ended September 30, 1999. Of this amount $873,000 relates to a
Tennessee Department of Revenue audit of the Nashville and Memphis Divisions
completed September 29, 2000. The State of Tennessee found that consulting
services provided to clients connected with the installation, alteration,
development, or programming of computer software are subject to Tennessee sales
or use tax. The remaining amount reflects an increase in the average level of
borrowings during the period related to the use of cash to make the ATS and
other 1999 acquisitions. See "Liquidity and Capital Resources" below.
INCOME BEFORE INCOME TAXES. Income before income taxes decreased $14.6
million, or 70.1%, to $6.2 million for the nine months ended September 30, 2000
from $20.8 million for the nine months ended September 30, 1999. As a percentage
of revenue, income before income taxes decreased to 2.6% for the nine months
ended September 30, 2000 from 8.9% for the nine months ended September 30, 1999.
INCOME TAXES. The Company's effective tax rate was 43.8% for the nine
months ended September 30, 2000 and 40.5% for the nine months ended September
30, 1999. The rate increase is the result of higher than expected non-
deductible expenses which increased the Company's taxable income above
previous estimates, and non-federal income taxes. Income taxes decreased
$5.7 million, or 67.6%, to $2.7 million for the nine months ended September
30, 2000 from $8.4 million for the nine months ended September 30, 1999. As a
percentage of revenue, income taxes decreased to 1.1% for the nine months
ended September 30, 2000 from 3.6% for the nine months ended September 30,
1999. These decreases are a result of the earnings decline the Company has
experienced over the last 12 months.
NET INCOME. Net income decreased $8.9 million, or 71.8%, to $3.5 million
for the nine months ended September 30, 2000 from $12.4 million for the nine
months ended September 30, 1999. As a percentage of revenue, net income
decreased to 1.5% for the nine months ended September 30, 2000 from 5.3% for the
nine months ended September 30, 1999.
EARNINGS PER SHARE. Diluted earnings per share decreased $0.59, or 71.8%,
to $0.23 for the nine months ended September 30, 2000 from $0.82 for the nine
months ended September 30, 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 September 30, 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> <C>
1997:
September .......... 40,569 12,580 31.0 4,314 10.6
December ........... 43,080 13,351 31.0 4,612 10.7
</TABLE>
16
<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>
1998:
March .............. 47,110 14,346 30.5 4,663 9.9
June ............... 52,391 16,375 31.3 5,715 10.9
September .......... 56,593 17,296 30.6 6,538 11.6
December ........... 57,799 17,553 30.4 6,454 11.2
1999:
March .............. 72,473 20,970 28.9 6,909 9.5
</TABLE>
<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>
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
June ............... 77,812 22,864 29.4 3,370 4.3
September .......... 77,880 23,614 30.3 4,685 6.0
</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
The acquisitions during 1999 caused the Company to incur $82,467,071 in
debt on its credit facilities as of December 31, 1999. For third quarter of
2000, the debt on its credit facilities decreased $4,121,116 to $78,345,955.
The Company funds its operations primarily from cash generated by
operations. Net cash provided by operations was $10,038,621 for the nine months
ended September 30, 2000 and consisted primarily of net income of $3,489,078 and
accrued compensation and benefits of $2,903,760 offset by increases in accounts
receivable of $4,173,645. The Company had working capital of $34,288,659 at
September 30, 2000 compared to $42,047,381 at December 31, 1999.
Net cash used in investing activities was $11,748,637 for the nine months
ended September 30, 2000 and included the $9,337,164 earnout payments for the
1999 acquisitions. The Company also spent $1,838,420 on normal
acquisitions of property and equipment used in operations.
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 September 30, 2000 was
$78,345,955. The facilities mature in September 2005 and may be extended each
year for an additional year. Until September 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 7.53% to 7.79% as of September 30, 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. At September 30, 2000, approximately
$22.717
17
<PAGE>
million was available for additional 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 to 65% through December 31, 2000 and 60% through
December 31, 2001.
The Tennessee Department of Revenue completed a tax audit during 2000.
The audit resulted in the Company's receipt of a Notice of Assessment on
September 29, 2000 that proposed the imposition of additional Tennessee sales
and use taxes and related interest attributable to the performance by Company
employees of services in the State of Tennessee, which the Department
determined to be taxable as "computer software." In the Notice, the
Department assessed sales and use tax of $2,357,147, which the Company paid
in October 2000. Under Tennessee law, the ultimate consumer is responsible
for paying the assessed sales and use tax. Accordingly, the Company has
billed the assessed amount to its customers. A portion of this amount may not
be collectible. As a result, the Company has recorded a reserve of $586,286
for uncollectible accounts. The net current receivable on the balance sheet
is $1,760,917 and appears in other current assets at September 30, 2000. The
interest assessed on the liability through September 30, 2000 totaled
$873,325, which the Company paid in October 2000. In addition, the Department
assessed delinquency penalties in an amount equal to 25% of the sales and use
taxes assessed. The delinquency penalty relates to the Company's failure to
separately register and file sales and use tax returns for one of the
Company's Tennessee locations for the tax years 1991 through July 31, 2000.
The Company has filed a Petition of Waiver of these penalties based
principally on the fact that the Company registered as a dealer for another
of its Tennessee offices in 1997 and reported what it believed to be all of
its sales and use tax responsibilities for both of its Tennessee operations.
If the Petition of Waiver is denied, the Company will be responsible for
paying the penalty prior to the end of 2000. The Company believes its
Petition has merit, but also believes it is probable that $152,953 of the
penalty will not be waived. As a result, this portion of the penalty has been
recorded in the third quarter selling, general and administrative expenses.
Collectively, the reserve, interest, and recorded penalty reduced the net
income before taxes for the third quarter by $1,612,564.
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 earnout payment to Acuity of approximately $12,000,000. New
acquisitions, however, are likely to require additional debt and equity
financing. The payment to Acuity is expected to increase goodwill
amortization by approximately $67,000 per quarter over third quarter costs.
In addition, the borrowing of funds to pay the earnout payment is expected to
increase the Company's interest expense. The amount of this increase will
depend on the interest rate the Company incurs each quarter.
The Company sold 133,760 shares of stock under the Metro Information
Services, Inc. Employee Stock Purchase Plan for an aggregate purchase price of
$1,133,642 during the nine months ended September 30, 2000 and 80,000 shares for
$1,066,498 during the nine months ended September 30, 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 17,400 shares of stock for option
exercises during the nine months ended September 30, 2000 and 7,090 during the
nine months ended September 30, 1999. Total proceeds from the issuance of stock
for option exercises were $283,401 and $113,640, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
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. Implementation of SAB 101 was
extended by SAB 101B to the fourth quarter 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.
18
<PAGE>
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.
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. 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 third 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 3rd day of November, 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
