<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1998
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
_________ to_________
Commission file number 0-28206
Integrated Systems Consulting Group, Inc.
-----------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2528944
------------ ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
575 East Swedesford Road, Suite 200, Wayne, Pennsylvania 19087
--------------------------------------------------------------
(Address of principal executive offices, including zip code)
(610) 989-7000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) 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 (2) has been subject to such filing
requirements for the past 90 days. Yes X No_
There were 8,074,171 shares of the registrant's common stock, par value $.005
per share, outstanding at August 11, 1998.
<PAGE>
Integrated Systems Consulting Group, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997
Consolidated Statements of Operations for the three and six
months ended June 30, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
Integrated Systems Consulting Group, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30
1998 December 31
(Unaudited) 1997
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,110 $ 8,842
Short-term investments, at cost, which approximates market -- 601
Accounts receivable:
Trade, net of reserves of $677 and $312 12,892 8,789
Unbilled 86 148
Prepaid expenses 596 340
Other current assets 184 151
-------- --------
Total current assets 18,868 18,871
Property and equipment, net 3,753 3,507
Goodwill, net 4,521 1,413
Other assets 99 107
-------- --------
$ 27,241 $ 23,898
-------- --------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 1,975 $ 1,107
Accrued compensation payable 868 909
Income taxes payable 294 439
Deferred income taxes 341 86
-------- --------
Total current liabilities 3,478 2,541
-------- --------
Commitments
Stockholders' equity:
Preferred stock, $1.00 par value; 500,000 shares authorized;
none issued - -
Common stock, $.005 par value, 25,000,000 shares
authorized, 9,227,513 and 9,227,513 shares issued 46 46
Additional paid-in capital 12,809 12,654
Retained earnings 11,495 9,289
-------- --------
24,350 21,989
Treasury stock, at cost, 1,182,896 and 1,273,681 common shares (587) (632)
-------- --------
23,763 21,357
-------- --------
$ 27,241 $ 23,898
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Integrated Systems Consulting Group, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
- ---------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $15,597 $10,209 $29,673 $19,098
Operating expenses:
Direct costs 9,100 5,928 17,967 11,116
Selling expenses 1,108 631 2,015 1,233
General and administrative expenses 3,293 2,365 6,099 4,563
------- ------- ------- -------
Total operating expenses 13,501 8,924 26,081 16,912
------- ------- ------- -------
Income from operations 2,096 1,285 3,592 2,186
Interest income, net 59 94 161 229
------- ------- ------- -------
Income before income taxes 2,155 1,379 3,753 2,415
Provision for income taxes 896 579 1,547 1,014
------- ------- ------- -------
Net income $ 1,259 $ 800 $ 2,206 $ 1,401
------- ------- ------- -------
Net income per common share:
Basic $ .16 $ .10 $ .28 $ .18
------- ------- ------- -------
Diluted $ .14 $ .09 $ .25 $ .16
------- ------- ------- -------
Shares used in computing net income per common share:
Basic 8,027 7,918 8,006 7,909
------- ------- ------- -------
Diluted 9,045 8,851 8,978 8,872
------- ------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Integrated Systems Consulting Group, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Unaudited
<TABLE>
<CAPTION>
Six Months Ended
June 30
- -------------------------------------------------------------------------------------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,206 $ 1,401
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 881 634
Deferred income tax benefit 97 (217)
Changes in assets and liabilities:
Accounts receivable (3,227) (2,968)
Prepaid expenses (256) 47
Other assets (13) 38
Accounts payable and accrued expenses 689 (351)
Accrued compensation payable (175) (379)
Income taxes payable (149) 13
------- -------
Net cash provided by (used in) operating activities 53 (1,782)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (888) (1,031)
Purchases of short-term investments -- (4,260)
Maturity and sale of short-term investments 601 6,700
Acquisition of business, net of cash acquired (3,698) (1,893)
------- -------
Net cash used in investing activities (3,985) (484)
------- -------
Cash flows from financing activities:
Purchase of treasury stock -- --
Proceeds from issuance of common stock 200 41
------- -------
Net cash provided by financing activities 200 41
------- -------
Net change in cash and cash equivalents (3,732) (2,225)
Cash and cash equivalents, beginning 8,842 8,730
------- -------
Cash and cash equivalents, ending $ 5,110 $ 6,505
------- -------
Supplemental disclosure of cash flow information:
Income taxes paid $ 1,638 $ 1,219
Acquisition of business
Assets acquired 935 480
Liabilities assumed 475 80
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Integrated Systems Consulting Group, Inc.
Notes to Consolidated Financial Statements (Unaudited)
1. The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the six month period ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998. For
further information, refer to the consolidated financial statements and
footnotes thereto for the year ended December 31, 1997 included in the
Company's Annual Report on Form 10-K.
2. In February 1998, the Company acquired all of the outstanding shares of
capital stock of WaveFront Consulting, Inc. (WaveFront) for cash of
$3,650,000, subject to certain conditional payments based upon future
operating income. WaveFront is an information technology consulting firm
located in Vienna, Virginia, specializing in providing distributed
computing solutions, including client/server and internet development,
principally in the telecommunications industry. WaveFront had 30 employees
and reported revenues of $2.8 million for the year ended December 31, 1997.
This acquisition was accounted for using the purchase method of accounting.
The fair value of the identifiable net assets acquired was $460,000. The
remainder of the purchase price was allocated to goodwill. Pro forma
information as if the acquisition had occurred on January 1, 1997 has not
been provided since such pro forma results do not differ materially from
those reported in the accompanying financial statements.
3. In April 1997, the Company completed the acquisition of the assets and
certain liabilities of Cutting Edge Computer Solutions, Inc. (Cutting Edge)
for cash. Cutting Edge is an information services consulting firm with
primary offices in Malvern, PA, and Alexandria, VA, that specializes in the
design and development of business software using client-server, relational
database, and internet and intranet technologies. Cutting Edge had 26
employees and reported revenues of $2.2 million in calendar year 1996. This
acquisition was accounted for using the purchase method of accounting. The
fair value of the identifiable net assets acquired was $400,000. The
remainder of the purchase price was allocated to goodwill.
4. Statement of Financial Accounting Standards No. 128, Earnings per Share,
(SFAS 128) was adopted by the Company in December 1997. SFAS 128 changed
the method for computing and presenting earnings per share (EPS) and
requires dual presentation of basic and diluted earnings per share. Prior
period EPS data has been restated to conform with the provisions of SFAS
128.
5. The following statements were adopted by the Company on January 1, 1998.
SFAS 130 - Reporting Comprehensive Income, SFAS 131 Disclosure about
Segments of
<PAGE>
an Enterprise and Related Information, SFAS 132 - Employers' Disclosure
about Pensions and Other Post Retirement Benefits, SOP 97-2 - Software
Revenue Recognition. These standards are not expected to have a material
effect on the Company's financial conditions and results of operations and
the Company has no components of other comprehensive income to report.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Revenue. The Company's revenues for the quarter and six month periods ended June
30, 1998 increased by $5.4 million, or 53%, and $10.6 million, or 55%, compared
to the corresponding periods in 1997. Approximately $5.2 million and $9.7
million, or 96% and 92%, of these increases resulted from growth in professional
services revenue and approximately $190,000 and $888,000, or 4% and 8%, from
increases primarily in software revenue during the quarter and six months. The
increase in professional services revenue is attributed to an approximate 66%
and 70% increases in hours billed and approximately 34% and 30% increases in
aggregate average rates during the quarter and six months, respectively. For the
quarter and six month periods ended June 30, 1998, the percentage of
professional services revenue from clients in the pharmaceutical industry was
70% and 67% compared to 61% and 64% for the corresponding periods in 1997.
Direct costs. Direct costs for the quarter and six month periods ended June 30,
1998 increased by $3.2 million, or 54%, and $6.9 million, or 62%, compared to
the corresponding periods in 1997. These increases are principally due to the
growth in the professional staff to 517 technical personnel at June 30, 1998
from 400 at June 30, 1997. As a percentage of revenues, direct costs were 58%
and 61% for the quarter and six month periods ended June 30, 1998 compared to
58% for each of the corresponding periods in 1997. The increase for the six
month period resulted principally from a decline in the Company's utilization
rates (i.e. the ratio of hours billed to total available hours) in the first
quarter of 1998 compared with the first quarter of 1997.
Selling expenses. Selling expenses for the quarter and six month periods ended
June 30, 1998 increased by $477,000, or 76%, and $782,000, or 63%, compared to
the corresponding periods in 1997. As a percentage of revenues, selling expenses
were 7% for the quarter and six month periods ended June 30, 1998 compared to 6%
for each of the corresponding periods in 1997. These increases are principally
due to the increase in the number of sales and marketing personnel to 25 at June
30, 1998 from 19 at June 30, 1997.
General and administrative expenses. General and administrative expenses for the
quarter and six month periods ended June 30, 1998 increased by $928,000, or 39%,
and $1.5 million, or 34%, compared to the corresponding periods in 1997. These
increases are principally due to increases in administrative expenses to support
the Company's growth, bad debt expense, facilities and facilities related costs
and the amortization of goodwill. The increases in facilities costs (office
rent, utilities, depreciation of computer equipment, amortization of software
and leasehold improvements, expansion of computer networks, additional software
costs and the costs of related support personnel) is related to the growth in
the number of professional and supervisory personnel performing client
engagements in the Company's offices, rather than at client locations. As a
percentage of revenues, general and administrative expenses were 21% for each of
the quarter and six month periods ended June 30, 1998 compared to 23% and 24%
for the quarter and six month periods of 1997. These decreases were principally
a result of increased revenues, which did not require a corresponding increase
in general and administrative expenses.
<PAGE>
The Company believes its general and administrative expenses as a percentage of
revenue will be less for the full year 1998 than in the corresponding period in
1997.
Interest income. Interest income for the quarter and six month periods ended
June 30, 1998 decreased to $59,000 from $94,000 and $161,000 from $229,000 in
the corresponding periods in 1997. These decreases are principally due to lower
average cash equivalents and short-term investment balances.
Effective income tax rate. The Company's effective income tax rate in 1998
decreased to 41% from 42% in 1997.
<PAGE>
Liquidity and Capital Resources:
Cash and cash equivalents and short-term investments decreased $4.3 million to
$5.1 million at June 30, 1998 from $9.4 million at December 31, 1997. The
decrease resulted principally from the acquisition of WaveFront, working capital
requirements, payments for income taxes and capital expenditures. At June 30,
1998 cash equivalents were invested in institutional money-market funds. By
policy, the Company places its investments in high credit-quality instruments.
The Company currently anticipates that cash generated from operations and
existing cash balances will be sufficient to satisfy its operating requirements
and ordinary capital spending for the foreseeable future. Should the Company's
business expand more rapidly than expected, the Company's $1.0 million bank line
of credit would be available to fund such operating and capital requirements. In
addition, the Company could consider seeking additional public or private debt
or equity financing to fund growth opportunities, including acquisitions.
Impact of Year 2000:
The Year 2000 ("Y2K") issue concerns the fact that many existing computer
programs and systems, including certain of those used by the Company for its own
internal purposes and those used by its clients, suppliers, vendors and others,
and possibly some custom applications designed, built or modified by the Company
for its clients, use only two digits to identify the year in the date field.
These programs were designed and developed without considering the impact of the
upcoming change in the century. If not corrected, computer applications that
utilize this two-digit year format could fail or create erroneous results by or
at the year 2000.
The Company has identified four main areas of its Y2K risk:
1. The Company's internal computer systems could be disrupted or
fail, causing an interruption or decrease in the Company's
ability to continue its operations;
2. The computer systems of third parties with whom the Company
regularly deals, including but not limited to its clients,
suppliers, vendors, utilities, financial institutions and others
("Material Third Parties") could be disrupted or fail, causing an
interruption or decrease in the Company's ability to continue its
operations;
3. The Company could be exposed to liabilities if certain of the
custom applications designed, built or modified by the Company for
its clients are disrupted or fail and the Company is obligated to
remediate those applications; and
4. The Company's sources of revenue could decline if clients'
resources are diverted to the Y2K problem.
The Company is currently evaluating the nature and extent of the Y2K issues
related to its internal systems. An initial evaluation indicates that the
process of making the Company's internal systems Y2K compliant should be
substantially completed with respect to all material systems before December 31,
1999.
If any of the Company's Material Third Parties are not Y2K compliant and their
noncompliance causes a material disruption to any of their businesses, the
business of the Company could be materially adversely impacted. These
disruptions could include, among other things: a client's inability to process
payments to the Company; a financial institution's inability to process checks
drawn on the Company's bank accounts, accept deposits or process wire transfers;
a client's, supplier's, vendor's or financial institution's business failure; an
interruption in deliveries of computer equipment and other supplies from
vendors; a loss of voice and data connections the Company uses to share
information; a loss of electric power to the Company's facilities; and other
interruptions to the normal conduct of business by the Company, the nature and
extent of which the Company cannot foresee. The Company will evaluate the nature
and extent of this risk, but at this time is unable to determine the probability
that any of such risks will be realized, or if they are, the nature or length
thereof, or effect, if any, they may have on the Company.
The Company is in the process of evaluating the extent to which applications the
Company has built, designed or modified for its clients may be non-Y2K
compliant, and of determining the extent, if any, of the Company's obligations
to make these applications Y2K compliant. Currently, the Company is unable to
determine or estimate the cost, if any, of remediating any non-Y2K compliance of
software applications previously delivered by the Company.
While the Company believes that it is addressing the Y2K issue, there can be no
assurance that the Company's Y2K analyses will be completed on a timely basis,
or that the costs and liabilities associated with the Y2K issue will not
materially aversely impact the business, prospects, revenues or financial
position of the Company.
Safe Harbor Statement:
Statements made in this filing that are forward-looking, including, among
others, statements describing the Company's plans and expectations regarding the
Y2K issue, involve risks and uncertainties and are subject to change at any
time. Such risks and uncertainties could cause the Company's actual results or
experience to be materially different from the results predicted in such forward
looking statements. These risks and uncertainties involve, among other things,
including client demand, dependence on the pharmaceutical industry, the
attraction and retention of technical employees, concentration and mix of
revenues, and the impact of the Y2K issue. These factors, as and when
applicable, are disclosed previously and from time to time in the Company's
filing with the Securities and Exchange Commission.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
The Company held its Annual Meeting of Stockholders on May 20, 1998. At the
meeting, the shareholders voted in favor of (1) electing eleven directors, (2)
amending the Corporation's By-laws by deleting Section 2.02(b)(2) thereof, which
currently allows the holders of 25% of the Corporation's Common Stock to call
special shareholder meetings, (3) amending Section 9.01 of the Corporation's
By-laws to authorize the Board of Directors to amend or repeal the By-laws and
to adopt new By-laws, (4) amending Section 2.06 of the Corporation's By-laws to
reduce the affirmative shareholder vote required for various corporate actions
to a majority of the votes cast at shareholders meetings, (5) amending Section
3.02 of the Corporation's By-laws to provide for the election of directors by
plurality vote of the shareholders and to allow vacancies on the Board of
Directors to be filled by vote of the remaining directors, and (6) ratifying the
appointment of KPMG Peat Marwick LLP as the independent public accountants to
audit the Company's accounts for the current year. The number of votes cast were
as follows:
<TABLE>
<CAPTION>
Broker
Votes Votes Votes Votes Non-
For Against Withheld Abstained Votes
-------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(1) David S. Lipson 7,288,776 N/A 22,043 N/A -
David G. Gathman 7,288,776 N/A 22,043 N/A -
Frank Baldino, Jr., Ph.D. 7,170,579 N/A 140,240 N/A -
Melvyn E. Bergstein 7,176,404 N/A 134,415 N/A -
Donald R. Caldwell 7,268,824 N/A 41,995 N/A -
Mark J. Denino 7,268,824 N/A 41,995 N/A -
David S. Fehr 7,287,511 N/A 23,308 N/A -
James L. Mann 7,288,976 N/A 21,843 N/A -
Donna J. Pedrick 7,288,676 N/A 22,143 N/A -
Michael D. Stern 7,288,357 N/A 22,462 N/A -
Edward S. J. Tomezsko, Ph.D. 7,288,976 N/A 21,843 N/A -
(2) Section 2.02(b) of by-laws 5,811,638 345,942 N/A 17,851 1,135,388
(3) Section 9.01 of by-laws 5,797,339 357,400 N/A 20,692 1,135,388
(4) Section 9.01 of by-laws 6,086,998 70,939 N/A 17,494 1,135,388
(5) Section 9.01 of by-laws
5,988,518 168,792 N/A 18,121 1,135,388
(6) KPMG Peat Marwick LLP 7,284,315 5,422 N/A 21,082 -
</TABLE>
<PAGE>
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
3.1 Articles of Incorporation*
3.2 By-laws*
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K/A, dated February 27, 1998, filed on May 11, 1998,
relating to financial information in connection with the
Company's agreement to acquire WaveFront Consulting, Inc.
- ------------
* Filed as an exhibit to the Company's registration statement on Form S-1
(File No. 333-00790) and incorporated herein by reference.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Integrated Systems Consulting Group, Inc.
Date: August 14, 1998 By: /s/DAVID S. LIPSON
------------------
David S. Lipson
Chairman, Chief Executive Officer,
President and Treasurer
Date: August 14, 1998 By /s/DAVID D. GATHMAN
-------------------
David D. Gathman
Executive Vice President, Finance and
Administration, Chief Financial
Officer and Secretary (Principal
Financial and Accounting Officer)
<PAGE>
EXHIBIT INDEX
Number Description
3.1 Articles of Incorporation*
3.2 By-laws*
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule
- ------------
* Filed as an exhibit to the Company's registration statement on Form S-1
(File No. 333-00790) and incorporated herein by reference.
<PAGE>
Integrated Systems Consulting Group, Inc.
(in thousands, except per share data)
Exhibit 11.1 - Computation of Net Income Per Share
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares used in computing basic net income
per common share:
Shares outstanding, beginning of period 7,997 7,915 7,954 7,857
Weighted impact of common shares issued
during the period 30 3 52 52
------ ------ ------ ------
Total shares used in computing basic
net income per common share 8,027 7,918 8,006 7,909
------ ------ ------ ------
Net income $1,259 $ 800 $2,206 $1,401
------ ------ ------ ------
Basic net income per common share $ .16 $ .10 $ .28 $ .18
------ ------ ------ ------
Shares used in computing diluted net income
per common share:
Shares outstanding, beginning of period 7,997 7,915 7,954 7,857
Net incremental shares resulting from assumed
exercise of stock options and warrants using
the treasury stock method 1,018 933 972 963
Weighted impact of common shares issued
during the period 30 3 52 52
------ ------ ------ ------
Total shares used in computing diluted
net income per common share 9,045 8,851 8,978 8,872
------ ------ ------ ------
Net income $1,259 $ 800 $2,206 $1,401
------ ------ ------ ------
Diluted net income per common share $ .14 $ .09 $ .25 $ .16
------ ------ ------ ------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001007020
<NAME> INTEGRATED SYSTEMS
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,110
<SECURITIES> 0
<RECEIVABLES> 12,978
<ALLOWANCES> 677
<INVENTORY> 0
<CURRENT-ASSETS> 18,868
<PP&E> 7,131
<DEPRECIATION> 3,378
<TOTAL-ASSETS> 27,241
<CURRENT-LIABILITIES> 3,478
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 23,717
<TOTAL-LIABILITY-AND-EQUITY> 27,241
<SALES> 29,673
<TOTAL-REVENUES> 29,673
<CGS> 0
<TOTAL-COSTS> 26,081
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,753
<INCOME-TAX> 1,547
<INCOME-CONTINUING> 2,206
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,206
<EPS-PRIMARY> .28
<EPS-DILUTED> .25
</TABLE>
