<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
JUNE 30, 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 No
As of July 26, 2000, the registrant had issued and outstanding 15,122,712
shares of Common Stock, $.01 par value.
1
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METRO INFORMATION SERVICES, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. Consolidated Statements of Income for the
Three Months and Six Months Ended June 30, 1999 and 2000 (unaudited) 3
Consolidated Balance Sheets as of
December 31, 1999 and June 30, 2000 (unaudited) 4
Consolidated Statement of Changes in Shareholders' Equity for the
Six Months Ended June 30, 2000 (unaudited) 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 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 18
PART II. OTHER INFORMATION 19
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 Six months
ended June 30, ended June 30,
------------------------------------- ------------------------------------
1999 2000 1999 2000
----------------- ----------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Revenue $ 78,309,273 $ 77,812,334 $ 150,782,111 $ 158,009,431
Cost of revenue 55,286,088 54,948,513 106,788,457 112,734,125
------------- ------------- ------------- -------------
Gross profit 23,023,185 22,863,821 43,993,654 45,275,306
------------- ------------- ------------- -------------
Selling, general and administrative expenses 13,451,298 16,724,600 26,612,251 33,877,051
Depreciation expense 582,476 856,410 1,105,445 1,643,164
Amortization expense (Notes 3 and 4) 596,645 1,166,537 974,591 2,336,761
------------- ------------- ------------- -------------
Total operating expenses 14,630,419 18,747,547 28,692,287 37,856,976
Restructuring charge -- 746,600 -- 746,600
------------- ------------- ------------- -------------
Operating income 8,392,766 3,369,674 15,301,367 6,671,730
------------- ------------- ------------- -------------
Interest income 16,821 35,442 74,932 80,884
Interest expense (673,779) (1,460,042) (849,723) (2,852,133)
------------- ------------- ------------- -------------
Net interest expense (656,958) (1,424,600) (774,791) (2,771,249)
------------- ------------- ------------- -------------
Income before income taxes 7,735,808 1,945,074 14,526,576 3,900,481
Income taxes 3,133,002 797,480 5,883,263 1,589,420
------------- ------------- ------------- -------------
Net income $ 4,602,806 $ 1,147,594 $ 8,643,313 $ 2,311,061
============= ============= ============= =============
Net income per share:
Basic $ 0.31 $ 0.08 $ 0.58 $ 0.15
============= ============= ============= =============
Diluted $ 0.31 $ 0.08 $ 0.58 $ 0.15
============= ============= ============= =============
Weighted average number of shares of common stock
and potential dilutive securities outstanding:
Basic 14,913,921 15,074,268 14,900,541 15,054,077
============= ============= ============= =============
Diluted 15,007,495 15,074,268 15,005,138 15,097,639
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
METRO INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,612,538 $ 724,009
Accounts receivable, net 59,720,500 61,326,098
Prepaid expenses 4,442,488 4,291,189
Deferred income taxes 1,287,699 1,877,529
------------ ------------
Total current assets 70,063,225 68,218,825
Property and equipment, net 12,412,632 12,025,819
Goodwill and other intangibles, net (Notes 3 and 4) 107,395,150 104,695,124
Other assets 307,843 290,375
------------ ------------
Total assets $190,178,850 $185,230,143
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,952,391 $ 5,152,312
Accrued compensation and benefits 15,063,453 16,921,529
------------ ------------
Total current liabilities 28,015,844 22,073,841
Line of credit facilities (Note 5) 82,467,071 79,659,311
Deferred income taxes 1,555,131 1,920,283
------------ ------------
Total liabilities 112,038,046 103,653,435
------------ ------------
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,
15,122,712 shares at June 30, 2000 150,216 151,227
Paid in capital 39,336,189 40,460,021
Retained earnings 38,654,399 40,965,460
------------ ------------
Total shareholders' equity 78,140,804 81,576,708
------------ ------------
Total liabilities and shareholders' equity $190,178,850 $185,230,143
============ ============
</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 to
Employee Stock Purchase Plan 83,760 837 840,605 - 841,442
Net proceeds from issuance of
shares of common stock to Employee
Incentive Stock Option Plan 17,400 174 283,227 - 283,401
Net income - - - 2,311,061 2,311,061
----------- ----------- ----------- ----------- -----------
BALANCE AS OF JUNE 30, 2000 15,122,712 $ 151,227 $40,460,021 $40,965,460 $81,576,708
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
METRO INFORMATION SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months
ended June 30,
---------------------------------------
1999 2000
----------------- -----------------
<S> <C>
Cash flows from operating activities:
Net income $ 8,643,313 $ 2,311,061
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization - cost of revenue 21,557 24,723
Depreciation and amortization - selling, general & administrative expenses 2,080,036 3,979,925
Net loss on sale of property and equipment 13,151 384,047
Deferred income taxes 198,967 (589,830)
Changes in operating assets and liabilities increasing (decreasing) cash,
net of the effects of acquisitions:
Restricted cash (967,459) -
Accounts receivable (4,967,140) (1,605,598)
Prepaid expenses (1,019,648) 151,299
Other assets (80,992) 17,898
Accounts payable (4,393,586) (512,916)
Current taxes payable - 365,152
Accrued compensation and benefits 3,200,077 1,858,076
------------ ------------
Net cash provided by operating activities 2,728,276 6,383,837
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (1,625,632) (1,387,446)
Acquisition of computer software (676,053) (289,820)
Acquisition of businesses (56,977,630) (6,924,328)
Proceeds from sale of property and equipment 4,227 12,145
------------ ------------
Net cash used in investing activities (59,275,088) (8,589,449)
------------ ------------
Cash flows from financing activities:
Net borrowings under line of credit 41,453,764 (2,807,760)
Proceeds from issuance of shares to Employee Stock Purchase Plan 739,768 841,442
Proceeds from issuance of shares to Employee Incentive Stock Option Plan 77,600 283,401
------------ ------------
Net cash provided by (used in) financing activities 42,271,132 (1,682,917)
------------ ------------
Net decrease in cash and cash equivalents (14,275,680) (3,888,529)
Cash and cash equivalents at beginning of period 18,495,580 4,612,538
------------ ------------
Cash and cash equivalents at end of period $ 4,219,900 $ 724,009
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 791,948 $ 2,604,997
============ ============
Cash paid for income taxes $ 6,728,902 $ 1,728,030
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
METRO INFORMATION SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The information presented for June 30, 2000 and 1999, and for the
three-month and six-month periods then ended, is unaudited, but, in the opinion
of the Company's management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) which the Company considers necessary for the fair presentation of
the Company's financial position as of June 30, 2000 and the results of its
operations and its cash flows for the three-month and six-month periods ended
June 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. Restricted Cash
Metro agreed to act as payment agent for a client on an information
technology project beginning in 1998. 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. As of December 31, 1999 and
June 30, 2000, the Company held no restricted cash for this client.
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. 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
7
<PAGE>
goodwill. The following summarizes the allocation of the purchase price based
on August 13, 1999 asset and liability balances:
<TABLE>
<CAPTION>
<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>
If ATS 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 period for ATS ends on August
31, 2000.
Unaudited pro forma consolidated results of operations for the six
months ended June 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>
SIX MONTHS
ENDED JUNE 30,
1999
------------------
<S> <C>
(In thousands, except per share data)
Revenue............................................ $176,778
Net income......................................... 8,751
Net income per share - basic....................... $ .59
Net income per share - diluted..................... $ .58
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 six months ended June 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 by which the carrying amount of the
assets exceeds the fair value of the assets.
8
<PAGE>
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 June 30, 2000 was
$79,659,311. 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 6.87% to 7.49% on June 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 JUNE 30, 1999 (NUMERATOR) (DENOMINATOR) PER SHARE
---------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share........................... $4,602,806 14,913,921 $ 0.31
========== ========
Effect of Dilutive Securities - Incentive
Stock Options deemed outstanding................. 93,574
----------
Diluted Earnings Per Share......................... $4,602,806 15,007,495 $ 0.31
========== ========== ========
<CAPTION>
SHARES
NET INCOME OUTSTANDING EARNINGS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 (NUMERATOR) (DENOMINATOR) PER SHARE
---------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share........................... $1,147,594 15,074,268 $ 0.08
========== ========
Effect of Dilutive Securities - Incentive
Stock Options deemed outstanding................. -
----------
Diluted Earnings Per Share......................... $1,147,594 15,074,268 $ 0.08
========== ========== ========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
SHARES
NET INCOME OUTSTANDING EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (NUMERATOR) (DENOMINATOR) PER SHARE
-------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share........................... $8,643,313 14,900,541 $ 0.58
========== ========
Effect of Dilutive Securities - Incentive
Stock Options deemed outstanding................. 104,597
----------
Diluted Earnings Per Share......................... $8,643,313 15,005,138 $ 0.58
========== ========== ========
<CAPTION>
SHARES
NET INCOME OUTSTANDING EARNINGS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 (NUMERATOR) (DENOMINATOR) PER SHARE
-------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share........................... $2,311,061 15,054,077 $ 0.15
========== ========
Effect of Dilutive Securities - Incentive
Stock Options deemed outstanding................ 43,562
----------
Diluted Earnings Per Share......................... $2,311,061 15,097,639 $ 0.15
========== ========== ========
</TABLE>
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.
The locations to be closed or merged, the individuals to be terminated and the
amounts to be paid are specifically identified in the plan.
By June 2, 2000 offices located in Memphis, Milwaukee, Minneapolis,
Orlando, Pittsburgh, Portland, Sacramento, and Salt Lake City had been closed.
By June 30, 2000, all of the employees at these closed locations identified to
be terminated had been terminated and all severance paid. Revenue from the
closed offices amounted to less than 1.5% of the Company's 1999 revenue.
During June 2000, the Company recorded a restructuring charge of
$746,600 ($440,494 or $0.03 per share net of tax benefit) which appears in
the Income Statement under the caption "Restructuring Charge". The charge
represents management's estimate of the ultimate obligations associated with
executing the plan at the time the estimates were made. The restructuring
charge for costs to exit certain facilities may change if closed office space
is subleased. 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 June 30, 2000:
<TABLE>
<CAPTION>
COSTS
INCURRED
INITIAL THROUGH REVISION TO BALANCE AS OF
BALANCE JUNE 30, 2000 ESTIMATES JUNE 30, 2000
---------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Cost to exit certain facilities $608,233 $ 76,645 $ - $531,588
Severance and termination related accruals 114,767 93,267 - 21,500
Relocation costs 23,600 - - 23,600
---------------- ---------------- -------------- --------------
Total restructuring costs $746,600 $ 169,912 $ - $576,688
================ ================ ============== ===============
</TABLE>
As a result of the closings and planned mergers, the Company identified
fixed assets and leasehold improvements that it would retire or abandon. The
carrying value of these retired and abandoned assets has been adjusted to net
realizable value in accordance with Financial Accounting Standards Board Opinion
No. 121 and the adjustment has been included as an expense in the second quarter
2000 Income Statement under the caption "Operating Expenses". This adjustment
totaled $343,000 ($202,370 or $0.01 per share net of tax benefit).
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,
ANALYST'S 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 more than 2,400 consultants, 61% of whom were salaried on June 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 June
30, 2000, the Company performed IT services for 798 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 June 30, 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.
Between June 30, 1999 and June 30, 2000, the number of full time
consultants decreased from 2,621 to
11
<PAGE>
2,470, including consultants gained through acquisitions. In addition, over the
same period, the Company increased the average billing rates charged to clients
for consultants in an attempt to keep pace with the increased costs of
consultants. The focus for revenue growth in 2000 will be derived primarily from
increases in 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.
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. If ATS 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 period is August 31, 2000 for ATS. At present, the Company estimates
the additional payment may be in the range of $9,000,000 to $14,000,000. Once
the additional payment amount is known it will be recorded as goodwill in the
Company's financial statements.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue........................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenue................................ 70.6 70.6 70.8 71.3
------------ ------------- ------------ ------------
Gross profit................................... 29.4 29.4 29.2 28.7
------------ ------------- ------------ ------------
Selling, general and administrative expenses... 17.2 21.5 17.7 21.4
Depreciation expense........................... 0.7 1.1 0.7 1.0
Amortization expense........................... 0.8 1.5 0.6 1.5
------------ ------------- ------------ ------------
Total operating expenses....................... 18.7 24.1 19.0 23.9
------------ ------------- ------------ ------------
Restructuring charge........................... 0.0 1.0 0.0 0.5
------------ ------------- ------------ ------------
Operating income............................... 10.7 4.3 10.2 4.3
------------ ------------- ------------ ------------
Interest income................................ - - - -
Interest expense............................... (0.8) (1.8) (0.6) (1.8)
------------ ------------- ------------ ------------
Net interest expense........................... (0.8) (1.8) (0.6) (1.8)
------------ ------------- ------------ ------------
Income before income taxes..................... 9.9 2.5 9.6 2.5
Income taxes................................... 4.0 1.0 3.9 1.0
============ ============= ============ ============
Net income..................................... 5.9% 1.5% 5.7% 1.5%
============ ============= ============ ============
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
2000 OVER 1999
--------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ----------------------------
<S> <C> <C>
Revenue........................................ (1.0)% 4.8%
Cost of revenue................................ (1.0)% 5.6%
Gross profit................................... (1.0)% 2.9%
Selling, general and administrative expenses... 24.3% 27.3%
Depreciation expense........................... 47.0% 48.6%
Amortization expense........................... N/M N/M
Total operating expenses....................... 28.1% 31.9%
Restructuring charge........................... 100.0% 100.0%
Operating income............................... (59.9)% (56.4)%
Interest income................................ 110.7% 7.9%
Interest expense............................... N/M N/M
Income before income taxes..................... (74.9)% (73.2)%
Income taxes................................... (74.6)% (73.0)%
Net income..................................... (75.1)% (73.3)%
</TABLE>
-------------
N/M - Not Meaningful
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1999
REVENUE. Revenue decreased $0.5 million, or 1%, to $77.8 million for
the three months ended June 30, 2000 from $78.3 million for the three months
ended June 30, 1999. Excluding the ATS acquisition, revenue decreased $14.0
million or 17.8%. The decline in revenue is a result of a declining consultant
count during the last half of 1999 and the first half of 2000 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 as compared with the first half of 1999.
COST OF REVENUE. Cost of revenue decreased $0.3 million, or 1%, to $55
million for the three months ended June 30, 2000 from $55.3 million for the
three months ended June 30, 1999. As a percentage of revenue, cost of revenue
remained at 70.6% for the three months ended June 30, 2000 as compared to the
three months ended June 30, 1999.
GROSS PROFIT. Gross profit decreased $160,000, or 1%, to $22.8 million
for the three months ended June 30, 2000 from $23 million for the three months
ended June 30, 1999. As a percentage of revenue, gross profit remained at 29.4%
for the three months ended June 30, 2000 as compared to the three months ended
June 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.2 million, or 24.3%, to $16.7 million for
the three months ended June 30, 2000 from $13.4 million for the three months
ended June 30, 1999. As a percentage of revenue, selling, general and
administrative expenses increased to 21.5% for the three months ended June 30,
2000 from 17.2% for the three months ended June 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 on May 31, 2000. These one-time
costs total $343,000 and represent a write-down of the value of retired or
abandoned assets to net realizable value in accordance with Financial Accounting
Standards Board Opinion No. 121.
DEPRECIATION EXPENSE. Depreciation expense increased $274,000, or 47%,
to $856,000 for the three months ended June 30, 2000 from $582,000 for the three
months ended June 30, 1999. This increase is primarily attributable to
13
<PAGE>
depreciation on additions to computer equipment and software. As a percentage of
revenue, depreciation expense increased 0.4% to 1.1% for the three months ended
June 30, 2000 from 0.7% for the three months ended June 30, 1999.
AMORTIZATION EXPENSE. Amortization expense increased $571,000 to
$1,167,000 for the three months ended June 30, 2000 from $596,000 for the three
months ended June 30, 1999. This increase is attributable to amortization of
goodwill 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 June 30, 2000 from 0.8% for the three months ended June 30, 1999.
RESTRUCTURING CHARGE. For the three months ended June 30, 2000, the
Company recorded a restructuring charge of $747,000 related to the office
closings and combinations announced May 31, 2000. The charge represents
management's estimate of the ultimate obligations associated with executing
the plan at the time the estimates were made. The restructuring charge for
costs to exit certain facilities may change if closed office space is
subleased. The Company expects to complete all steps in the restructuring
plan by May 31, 2001.
OPERATING INCOME. Operating income decreased $5.0 million, or 59.9%, to
$3.4 million for the three months ended June 30, 2000 from $8.4 million for the
three months ended June 30, 1999. As a percentage of revenue, operating income
decreased to 4.3% for the three months ended June 30, 2000 from 10.7% for the
three months ended June 30, 1999. The decline in operating income margin is
result of higher selling, general and administrative expenses, higher
depreciation and amortization expenses, and a one-time restructuring charge of
$747,000.
INTEREST INCOME. Interest income increased by $19,000 or 110.7%, to
$35,000 for the three months ended June 30, 2000 from $17,000 for the three
months ended June 30, 1999.
INTEREST EXPENSE. Interest expense increased by $786,000 or 116.7%, to
$1,460,000 for the three months ended June 30, 2000 from $674,000 for the three
months ended June 30, 1999. This change 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.
INCOME BEFORE INCOME TAXES. Income before income taxes decreased $5.8
million, or 74.9%, to $1.9 million for the three months ended June 30, 2000 from
$7.7 million for the three months ended June 30, 1999. As a percentage of
revenue, income before income taxes decreased to 2.5% for the three months ended
June 30, 2000 from 9.9% for the three months ended June 30, 1999.
INCOME TAXES. The Company's effective tax rate increased to 41.0%
for the three months ended June 30, 2000 as compared to 40.5% for the three
months ended June 30, 1999. Income taxes decreased $2.3 million or 74.6%, to
$0.8 million for the three months ended June 30, 2000 from $3.1 million for
the three months ended June 30, 1999. As a percentage of revenue, income
taxes decreased to 1.0% for the three months ended June 30, 2000 from 4.0%
for the three months ended June 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 $3.5 million, or 75.1%, to $1.1
million for the three months ended June 30, 2000 from $4.6 million for the three
months ended June 30, 1999. As a percentage of revenue, net income decreased to
1.5% for the three months ended June 30, 2000 from 5.9% for the three months
ended June 30, 1999.
EARNINGS PER SHARE. Diluted earnings per share decreased $0.23, or
74.2%, to $0.08 for the three months ended June 30, 2000 from $0.31 for the
three months ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED
JUNE 30, 1999
REVENUE. Revenue increased $7.2 million, or 4.8%, to $158.0 million
for the six months ended June 30, 2000 from $150.8 million for the six months
ended June 30, 1999. Of this increase, 26.1 million is attributable to the
1999 ATS acquisition. Excluding the ATS acquisition revenue decreased $18.9
million or 12.5%. The decline in revenue is a result of a declining
consultant count during the last half of 1999 and the first half of 2000
brought on by the transition from mainframe to e-Business skilled
consultants, slower revenue growth in existing offices, lower bill rate
14
<PAGE>
increases and more non-billable consultant time as compared with the first
half of 1999.
COST OF REVENUE. Cost of revenue increased $5.9 million, or 5.6%, to
$112.7 million for the six months ended June 30, 2000 from $106.8 million for
the six months ended June 30, 1999. Cost of revenue increased primarily due to
compensation and benefits associated with growth in the number of consultants,
including consultants added through acquisitions. As a percentage of revenue,
cost of revenue increased to 71.3% for the six months ended June 30, 2000 from
70.8% for the six months ended June 30, 1999. Cost of revenue rose due to lower
utilization of salaried consultants during the six months ended June 30, 2000.
Salaried consultants are paid even if they are not billing.
GROSS PROFIT. Gross profit increased $1.3 million, or 2.9%, to $45.3
million for the six months ended June 30, 2000 from $44.0 million for the six
months ended June 30, 1999. As a percentage of revenue, gross profit decreased
to 28.7% for the six months ended June 30, 2000 from 29.2% for the six months
ended June 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $7.3 million, or 27.3%, to $33.9 million for
the six months ended June 30, 2000 from $26.6 million for the six months ended
June 30, 1999. As a percentage of revenue, selling, general and administrative
expenses increased to 21.4% for the six months ended June 30, 2000 from 17.7%
for the six months ended June 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 on May 31, 2000. These one-time costs total $343,000 and
represent a write-down of the value of retired or abandoned assets to net
realizable value in accordance with Financial Accounting Standards Board Opinion
No. 121.
DEPRECIATION EXPENSE. Depreciation expense increased $538,000, or
48.6%, to $1,643,000 for the six months ended June 30, 2000 from $1,105,000 for
the six months ended June 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 1.1% for the six months ended June
30, 2000 from 0.7% for the six months ended June 30, 1999.
AMORTIZATION EXPENSE. Amortization expense increased $1,362,000 to
$2,337,000 for the six months ended June 30, 2000 from $975,000 for the six
months ended June 30, 1999. This increase is attributable to amortization of
goodwill 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 June 30, 2000 from 0.6% for the six months ended June 30, 1999.
RESTRUCTURING CHARGE. For the three months ended June 30, 2000, the
Company has recorded a restructuring charge of $747,000 related to the office
closings and combinations announced May 31, 2000. The charge represents
management's estimate of the ultimate obligations associated with executing
the plan at the time the estimates were made. The restructuring charge for
costs to exit certain facilities may change if closed office space is
subleased. The Company expects to complete all steps in the restructuring
plan by May 31, 2001.
OPERATING INCOME. Operating income decreased $8.6 million, or 56.4%, to
$6.7 million for the six months ended June 30, 2000 from $15.3 million for the
six months ended June 30, 1999. As a percentage of revenue, operating income
decreased to 4.3% for the six months ended June 30, 2000 from 10.2% for the six
months ended June 30, 1999. The decline in operating income margin is result of
higher selling, general and administrative expenses, higher depreciation and
amortization expenses, and a one-time restructuring charge of $747,000.
INTEREST INCOME. Interest income increased by $6,000, or 7.9%, to
$81,000 for the six months ended June 30, 2000 from $75,000 for the six months
ended June 30, 1999.
INTEREST EXPENSE. Interest expense increased by $2.0 million to $2.8
million for the six months ended June 30, 2000 from $850,000 for the six
months ended June 30, 1999. This change 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.
INCOME BEFORE INCOME TAXES. Income before income taxes decreased
$10.6 million, or 73.2%, to $3.9 million for the six months ended June 30,
2000 from $14.5 million for the six months ended June 30, 1999. As a
percentage of revenue, income before income taxes decreased to 2.5% for the
six
15
<PAGE>
months ended June 30, 1999. As a percentage of revenue, income before income
taxes decreased to 2.5% for the six months ended June 30, 2000 from 9.6% for
the six months ended June 30, 1999.
INCOME TAXES. The Company's effective tax rate was 40.7% for the six
months ended June 30, 2000 and 40.5% for the six months ended June 30, 1999.
Income taxes decreased $4.3 million or 73.3%, to $1.6 million for the six
months ended June 30, 2000 from $5.9 million for the six months ended June
30, 1999. As a percentage of revenue, income taxes decreased to 1.0% for the
six months ended June 30, 2000 from 3.9% for the six months ended June 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 $6.3 million, or 73.3%, to $2.3
million for the six months ended June 30, 2000 from $8.6 million for the six
months ended June 30, 1999. As a percentage of revenue, net income decreased to
1.5% for the six months ended June 30, 2000 from 5.7% for the six months ended
June 30, 1999.
EARNINGS PER SHARE. Diluted earnings per share decreased $0.43, or
74.1%, to $0.15 for the six months ended June 30, 2000 from $0.58 for the six
months ended June 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 June 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:
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
June......................................... 77,812 22,864 29.4 3,370 4.3
</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
16
<PAGE>
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 second quarter of
2000, the debt on its credit facilities decreased $2,897,760 to $79,659,311.
The Company funds its operations primarily from cash generated by
operations. Net cash provided by operations was $6,383,837 for the six months
ended June 30, 2000 and consisted primarily of net income of $2,311,061 and
accrued compensation and benefits of $1,858,076 offset by increases in accounts
receivable of $1,605,598. The Company had working capital of $46,144,948 at June
30, 2000 compared to $42,047,381 at December 31, 1999.
Net cash used in investing activities was $8,589,449 for the six months
ended June 30, 2000 and included the $7,837,164 earnout payment for the 1999
acquisition of DP Specialists. The Company also spent $1,387,446 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 June 30, 2000 was
$79,659,311. 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 6.87% to 7.49% as of June 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 June 30, 2000, approximately $26.8
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 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 $9,000,000 to
$14,000,000. New acquisitions, however, are likely to require additional debt
and equity financing.
The Company sold 83,760 shares of stock under the Metro Information
Services, Inc. Employee Stock Purchase Plan for an aggregate purchase price
of $841,442 during the six months ended June 30, 2000 and 50,000 shares for
$739,768 during the six months ended June 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 six months ended June 30, 2000 and 4,850 during the six
months ended June 30,
17
<PAGE>
1999. Total proceeds from the issuance of stock for option exercises were
$283,401 and $77,600, respectively.
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. In June 2000, SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE
INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, was released as an amendment to SFAS
No. 133. SFAS No. 138 amends and clarifies a limited number of issues in SFAS
No. 133 that have caused application difficulties. The Company does not expect
SFAS No. 133 or SFAS No. 138 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. 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.
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. These transactions may be
subject to SFAS No. 133 and SFAS No. 138 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.
18
<PAGE>
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders of Metro Information
Services, Inc. held on June 13, 2000 the following matters
were voted on with the results indicated below.
1) Election of one Class 1 Director to serve for a term of
three years or until a successor is elected.
FOR WITHHELD
--- --------
John H. Fain 13,154,565 1,202,528
The term of office of directors Ray E. Becker, Andrew J.
Downing and Robert J. Eveleigh, and A. Eugene Loving, Jr.
continued after the meeting.
2) Amendment of the Metro Information Services, Inc. Articles
of Incorporation.
FOR AGAINST ABSTAIN
--- ------- -------
12,150,827 180,125 19,144
This vote was sufficient under Virginia law and under the
Company's article of incorporation to amend the articles as
presented.
3) Ratification of the appointment of KPMG LLP as Independent
Auditors for the Company for the year ending December 31,
2000.
FOR AGAINST ABSTAIN
--- ------- -------
14,203,902 140,272 12,919
ITEM 5. OTHER INFORMATION
None
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
2.1 Audit Committee Charter, dated June 12, 2000
3.1 Amended and Restated Articles of Incorporation,
effective as of June 13, 2000
3.2 Amended and Restated By-laws, effective as of
June 13, 2000
10.1 Registrant's 1997 Employee Stock Purchase Plan
as amended and restated through January 1, 2000
27 Financial Data Schedule
(b) Reports on Form 8-K during second quarter of 2000:
Press release dated May 31, 2000, reporting office closings
and reduction in staff.
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 4th day of August, 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
