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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997 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_________________________________________________________
Integrated Systems Consulting Group, Inc.
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(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2528944
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
575 East Swedesford Road, Suite 200, Wayne, PA 19087
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 989-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.005 per share
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(Title of Class)
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 _________
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 16, 1998, the aggregate market value of the Registrant's voting
stock held by non-affiliates was $39,809,863. For purposes of this calculation,
shares of Common Stock held by directors, officers and stockholders whose
ownership exceeds five percent of the Common Stock outstanding at March 16, 1998
were excluded. Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to direct or
cause the direction of the management or policies of the Registrant, or that
such person is controlled by or under common control with the Registrant.
As of March 16, 1998, there were 7,993,537 shares of the Registrant's $.005 par
value common stock outstanding.
Certain portions of the Registrant's Proxy Statement for its 1998 annual meeting
of shareholders to be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 1997 are incorporated by reference into
Part III of this report.
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PART I
ITEM 1. BUSINESS
General
Integrated Systems Consulting Group, Inc. ("ISCG" or the "Company") provides
consulting services addressing its clients' information processing needs through
technologically advanced solutions. The Company focuses its marketing efforts
primarily on the pharmaceutical industry in order to exploit its extensive
experience in the development, implementation, integration, and management of
information systems used by the pharmaceutical industry. By virtue of this
experience, the Company's technical personnel have developed a strong
understanding of the drug development process and broad expertise in the
information systems and software applications required to support this
complicated and data intensive process. The Company's technical personnel have
developed a broad range of technical skills and capabilities with respect to
commercially available packaged software products that address drug development
information processing requirements. Pharmaceutical company engagements
accounted for an aggregate of approximately $26.8 million, or 62% of total
revenues in 1997, compared to $18.0 million and $13.5 million, or 59%, and 64%,
of the Company's revenues in 1996 and 1995, respectively.
Both within and outside the pharmaceutical industry, the Company provides
services based on its expertise in the latest technologies, including
client-server architecture, Internet or web-based applications, document
management solutions, relational and object oriented databases, and
cross-platform applications integration. The Company delivers consulting
services in two broad areas: applications development and systems and network
management. In the applications development area, the Company provides expertise
to its clients both across the full software development life cycle and in one
or more discrete phases of the software development process. The Company's
applications development activities accounted for approximately 78% of its
revenues in 1997. This compares with 79% and 78% in 1996 and 1995, respectively.
In the systems and network management area, the Company provides expertise to
its clients in the design, implementation, management, and support of
multi-vendor local and wide area networks, desktop computer systems, and
servers. The Company's network management activities accounted for approximately
22% of its revenues in 1997. This compares with 21% in 1996 and 22% in 1995.
The Company was incorporated in the Commonwealth of Pennsylvania in 1988. The
Company completed its initial public offering of common stock in May 1996
pursuant to a rights offering to the stockholders of Safeguard Scientifics, Inc.
The Company's principal executive offices are located at 575 East Swedesford
Road, Wayne, Pennsylvania 19087, and its telephone number is (610) 989-7000. The
Company's World Wide Web homepage address is www.iscg.com and its e-mail address
is [email protected].
ISCG's Consulting Services
The Company delivers applications development consulting services to its
customers on a project basis by providing full software development life cycle
services. These services are provided both from the Company's Software
Development Centers as well as at its clients' facilities, on either a time and
materials or fixed-fee basis. The Company has developed proprietary
methodologies to support the full development life cycle for building and
validating software in a regulated environment. The Company also delivers
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applications development and systems and network management consulting services
to its clients through providing staff augmentation on a time and materials
basis.
The Company delivers its applications development services through five main
practice areas:
Pharmaceutical Research Systems Practice. The Company's technical personnel in
this practice specialize in the analysis, development, and integration of
software solutions that support the drug development life cycle in
pharmaceutical research. The clients' research groups serviced by this practice
include the drug discovery, pre-clinical, and clinical organizations of
pharmaceutical and biotechnology companies. In addition to supporting these
research areas, the personnel in this practice are also proficient with the
analysis, development, and integration of clinical software systems that support
drug safety and adverse experience reporting. These technical personnel are
knowledgeable with respect to the research groups' focus on the collection,
analysis, and management of clinical and pre-clinical data required for global
regulatory submissions. The Company's technical personnel in this practice have
extensive experience in the development, validation and deployment of customized
systems for these applications. In addition to custom software development, the
Company's technical personnel have integrated and customized applications
software from vendors of commercially available packaged solutions.
Document Management Systems Practice. The Company's technical personnel in this
practice design, build, and integrate software solutions for document management
systems. These technical personnel are particularly knowledgeable in the
documentation requirements of the pharmaceutical regulatory approval process, as
well as the enabling technologies applicable to that process. These technologies
include user interface design, document repository management, imaging, and
publishing. The Company customizes packaged software products to support the
preparation and submission of New Drug Applications ("NDA"), Computer Assisted
NDAs ("CANDAs"), and a variety of multi-national regulatory submission
documents. These systems typically track and manage clinical documents and
support the automated assembly of regulatory submissions using both
client/server architectures, as well as Web-based technologies. In addition to
its document management engagements for pharmaceutical companies, the Company
has expanded into other industries, including process manufacturing, food and
beverage, petro-chemical, publishing, and consumer products. The Company
maintains a partnership with Documentum, Inc., as a Signature Partner, as well
as with other vendors of imaging and publishing technologies including
Electronic Submission Publishing Systems, Inc., (ESPS), Cornerstone Imaging,
Inc. and Kofax Image Products, Inc.. Client projects supported by this practice
often include the use of ISCG-developed application solution frameworks and
background technology.
Client-Server Systems Integration Practice. The Company's technical personnel in
this practice specialize in the architecture, development and integration of
client-server systems using integrated development environments that include
computer-aided design tools, graphical user interface ("GUI") and
state-of-the-art database technologies. GUI development platforms include
Sybase, Inc.'s PowerBuilder; Microsoft Corporation's Visual Basic, Access and
Visual C++; and Oracle Corporation's Designer/2000 and Developer/2000. Database
technologies used by this group include products from Oracle, Sybase, and
Microsoft, and operating systems such as Hewlett-Packard Company's HP/UX,
Digital Equipment Corporation's OpenVMS, Sun Microsystem, Inc.'s Sun/OS and
Solaris, Microsoft's Windows NT, and SCO UNIX. In addition to application
development and integration services, this group also provides database
administration, capacity planning, and migration services. Personnel in this
practice support both the Document Management and Pharmaceutical Research
Systems practices in addition to undertaking non-pharmaceutical industry
engagements.
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Internet Technologies Practice. The Company's technical personnel in this
developing practice specialize in the design, development, and implementation of
Internet, intranet, and extranet applications. Consulting services offered by
technical personnel in this group typically involve Web-based applications with
database integration. In addition to the development of new Web-based
applications, technical personnel in this group also build Web-based
applications to access legacy databases using languages such as HTML and Java,
and a variety of products from Microsoft, Netscape, Sun Microsystems, and Oracle
Corporation. As with the Client/Server Systems Integration Practice, personnel
in this practice support both the Document Management and Pharmaceutical
Research Systems practices in addition to conducting non-pharmaceutical industry
engagements.
Systems and Network Management Services. The Company's systems and network
management services unit provides clients with consulting expertise in the
evaluation, design, implementation, and support of local and wide area networks,
personal computers and server systems. Examples of the varied functions
performed by the Company's technical personnel include multi-network
integration, desktop system installation and management, server management,
capacity planning, performance analysis and data network evaluation and design.
The Company's technical personnel specialize in Windows 95, Windows NT, UNIX,
and Open/VMS technologies. Their technical skill set spans a wide range of
implementation technologies, including Hewlett- Packard's HP/UX; Sun
Microsytems' Solaris; Digital Equipment's Alpha; Novell Inc.'s Netware; and
TCP/IP. Consequently, the Company is able to provide systems and network
management services in diverse client environments.
Sales and Marketing
The Company has a direct sales force, consisting of a Vice President of Sales,
two sales Directors, and 15 account executives, responsible for all phases of
the selling process. Three account executives are located in the New Jersey
office; one account executive is based in the Chicago office, and one account
executive is based in the Virginia office, which was acquired in May of 1997.
The remainder of the direct sales force is based in the Company's Wayne,
Pennsylvania headquarters. Much of the Company's project-based work is sold from
the Wayne office. The efforts by the Company's sales force are supplemented by
its technical personnel, who, in the past, have been able to expand existing
engagements and generate new business while on assignment at clients' sites.
The Company's marketing department, under direction of the Vice President of
Marketing, is mainly focused on expanding the Company's presence and technical
reputation in the pharmaceutical industry, its largest marketplace. The
marketing group's responsibilities lie in two areas: the Company's general
marketing functions; and the business development and sales support functions of
the practices. The marketing department, which includes the practice directors
and managers, manages vendor relationships and marketing functions and supports
sales, business development and proposal writing. In developing and marketing
new service offerings, the marketing department works closely with both the
Company's sales force and delivery organization to develop offerings that meet
client needs and leverage the expertise and experience of the Company's
technical personnel.
The Company regularly exhibits and presents at pharmaceutical trade association,
technical, and vendor user group conferences. These conferences focus on
document management, drug discovery, adverse events reporting, clinical data
management, and various technologies. The Company also periodically writes and
distributes "white papers" or case studies about its experiences in utilizing a
variety of leading edge technologies. These white papers are often delivered at
trade association conferences and routinely distributed to current and
prospective clients. The purpose of these publications is to create and enhance
the Company's image as a technology leader.
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The Company views existing clients as a valuable source of additional work in
the form of both extensions to, and expansion of, ongoing engagements, and the
initiation of new engagements. The Company seeks to establish long-term
relationships with clients in which clients rely on the Company for ongoing
information technology solutions. These types of relationships have helped
create stable revenues for the Company. In 1997 and 1996, respectively,
approximately 81% and 86% of the Company's revenues were derived from clients to
which it had provided services in the previous year.
Vendor Relationships
The Company has established non-exclusive partnership arrangements with software
vendors that market technology or application solutions to the Company's current
and prospective clients. In 1997, the Company increased the number of formalized
relationships with vendors. The vendor partnership and alliance programs of
which the Company is a part have provided the Company with sales leads,
reselling commissions, marketing assistance revenues, increased publicity,
discounted software, specialized training programs, participation in beta
software programs and privileged information about vendors' technical and
marketing strategies. The Company currently maintains marketing partnerships
with Borland International, Inc., Cornerstone, Documentum, Inc., ESPS,
Hewlett-Packard, Kofax, Microframe Technologies, Inc., Microsoft, Oracle
Corporation, Silverstream Software Inc., and Sybase.
The Company has established partnerships with vendors of application software
such as Chemical Abstract Service (a division of the American Chemical Society),
Domain Solutions, Inc., Oxford Molecular Group, plc and The Automation
Partnership. The Company's history of integrating its partners' software
products into clients' systems has led to strong relationships with these
vendors, which enhances the Company's marketing efforts. These partnership
arrangements position the Company as a potential systems integrator should
clients or prospective clients select one of these vendors' products.
In partnership with software vendors such as Borland International, Inc.,
Documentum, and ESPS, the Company provides training courses in the vendors'
respective technologies to clients. These partnerships generally strengthen the
relationship between the Company and these vendors, enhance the Company's market
position with the vendors' products, create consulting opportunities, train the
Company's technical personnel in strategic technologies at lower costs,
introduce the Company to potential clients, and allow current clients a closer
view of the Company.
Concentration and Mix of Revenues
Historically, a small number of clients have each accounted for 10% or more of
the Company's revenues. In 1997, SmithKline Beecham accounted for approximately
11% of revenues. In 1996, Air Products and Chemicals, Inc. and Merck & Company,
Inc. each accounted for approximately 10% of revenues. In 1995, Air Products and
Merck accounted for approximately 13% and 11% of revenues, respectively.
Engagements by pharmaceutical companies accounted for approximately 62%, 59%,
and 64% of the Company's revenues in 1997, 1996 and 1995, respectively.
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Employees
General
As of December 31, 1997, the Company had 514 employees. This total included 440
technical personnel. The Company believes its future success will depend in
large part upon its ability to attract, retain and motivate highly skilled
personnel, particularly technical personnel. None of the Company's employees is
subject to a collective bargaining agreement. The Company believes its relations
with its employees are excellent.
Recruiting
The Company has implemented a variety of techniques to identify and recruit
ISCG-qualified candidates to support the growth of the Company. The Company
employs seven full time recruiters dedicated to the hiring of technical
personnel. One of the Company's most successful source of new hires is the
Coworker Referral Program, which encourages employees to recommend or refer
qualified candidates for employment with the Company, and rewards referring
employees with referral bonuses. The Company places advertisements in various
newspapers and utilizes professional search firms to identify candidates for
hire. The Company participates in job fairs in all the regions in which it
operates. Additionally, the Company sponsors independent recruiting events, such
as open houses or free technical seminars, several times a year.
The Company aggressively recruits technical personnel with strong experience in
client/server, Internet, document management, and systems and networking
technology. An active college recruiting program hired recent graduates into
four "Associate Programs" that provided entry-level technical training during
1997. The Company has developed an innovative "Boot Camp," which hires lateral
candidates with general technical work experience and re-trains them in
high-demand skills.
Training
The Company has established an extensive educational facility at its
headquarters comprised of three training rooms that accommodate a total of 50
students. During 1997, the Company established an additional educational
facility in its Somerset, New Jersey location that can accommodate 12 students.
Vendor training and Company designed and conducted day and evening school
classes are provided to the Company's technical personnel.
Competition
The commercial professional services segment of the information technology
industry includes a large number of participants and is highly competitive. The
industry includes participants from a variety of market segments including
systems consulting and integration firms, contract programming companies,
application software firms, the professional service groups of computer
equipment manufacturers such as IBM and Digital Equipment, "Big Six" consulting
firms, and general management consulting firms. The Company's competitors
include companies such as Andersen Consulting, Technology Solutions Corporation,
Cap Gemini America, Computer Sciences Corporation's consulting division, and
Cambridge Technology Partners, Inc.
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Many participants in the commercial professional services segment of the
information technology industry have significantly greater financial, technical,
and marketing resources and have greater name recognition than the Company. In
addition, the industry is highly fragmented and served by numerous firms, many
of which serve only their respective local markets. The Company also faces
competition from organizations providing staff augmentation services to, and
individuals who contract directly with, information systems departments of
existing and potential clients. The Company believes the principal competitive
factors in the commercial professional services segment of the information
technology industry include responsiveness to client needs, availability of
technical personnel, speed of application software development, quality of
service, price, project management capability and technical expertise.
While the Company's clients have historically been concentrated in the eastern
United States, it has a client base in the Midwestern United States, which it
serves primarily from the Wayne office. In addition, certain of the Company's
clients are located in Europe. The Company believes that geographic location
with respect to the performance of technical services is becoming a greater
competitive factor. The Company has a sales office in Chicago and a branch
office in Virginia. The Company uses relationships with global partners to
provide services to its multi-national clients.
The Company also believes that its ability to compete depends in part on a
number of competitive factors outside its control, including the ability of its
competitors to hire, retain, and motivate qualified technical personnel; the
ownership by competitors of software used by potential clients; the development
of software that would reduce or eliminate the need for the Company's services;
the price at which others offer comparable services; and the extent of its
competitors' responsiveness to customer needs.
Intellectual Property
The Company's business is not dependent on the ownership or exclusive use of any
specific information technology. The Company holds no patents or registered
copyrights. The Company's business does, however, include the development of
custom software applications in connection with specific client engagements.
Ownership of such software is generally assigned to the client.
The Company develops Background Technology for use in its software development
efforts. This Background Technology consists of pre-existing development tools,
objects, routines, sub-routines, and other programs along with associated data
and documentation, and is designed to increase competitiveness by improving
consultant productivity and leverage the Company's technical and market
experience. Background Technology is either developed internally and owned by
the Company, or is developed as part of customer projects, with the customer's
agreement to grant ownership to the Company.
The Company relies upon a combination of trade secret, nondisclosure, and other
contractual arrangements to protect its and its clients' proprietary rights. The
Company generally enters into confidentiality agreements with its clients and
potential clients and limits access to, and distribution of, its clients' or
software vendor partners' proprietary information. There can be no assurance
that the steps taken by the Company in this regard will be adequate to deter
misappropriation of the Company's, its clients' or vendor partners' proprietary
information or that the Company will be able to detect unauthorized use or take
appropriate steps to enforce its clients' and vendor partners' intellectual
property rights. In addition, all of the Company's employees execute restrictive
covenants upon joining the Company that require the employee to keep
confidential all proprietary information pertaining to the assets or business of
the Company and its clients and provide that during the term of employment, and
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for a certain time period thereafter, the employee may not be employed by,
solicit, or provide consulting services for any past, current or potential
clients of the Company.
ITEM 2. PROPERTIES
The Company's headquarters and principal administrative, sales and marketing,
and application development operations are located in approximately 39,000
square feet of leased space in Wayne, Pennsylvania, in suburban Philadelphia.
This lease expires in 2000. The Company leases an additional 12,500 square feet
of space in an office complex near its headquarters, under a lease expiring in
2000.
During 1997, the Company moved its New Jersey operations to an
11,000-square-foot sales, training, and application development center in
Somerset, New Jersey, under a lease expiring in 2002. The Company also leases
shared facilities in Chicago, Illinois and Alexandria, Virginia, pursuant to
short-term agreements. In February 1998, the Company acquired all the
outstanding capital stock of WaveFront Consulting, Inc., a privately owned,
custom application development firm located in Vienna, Virginia. WaveFront
Consulting, Inc. leases approximately 3,000 square feet of office space pursuant
to a lease expiring in January 2000. The Company plans to combine the personnel
and operations of its Virginia facilities.
The Company anticipates that additional space will be required as business
expands and believes that it will be able to obtain suitable space as needed.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, there are no material legal proceedings pending
against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ National Market System
("Nasdaq") under the symbol "ISCG." The following table sets forth, for the
calendar periods indicated, the range of high and low sale prices for the
Company's Common Stock on Nasdaq. These prices do not include retail mark-up,
mark-down or commissions.
1997 High Low
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First Quarter.................................... $16.63 $7.13
Second Quarter .................................. 12.75 8.25
Third Quarter.................................... 13.63 8.75
Fourth Quarter................................... 12.63 9.25
1996
Second Quarter (commencing April 18)............. $30.00 $16.25
Third Quarter.................................... 21.50 13.25
Fourth Quarter................................... 20.75 11.50
As of March 16, 1998, there were approximately 457 holders of record of the
Company's common stock.
To date, the Company has not paid any cash dividends on its Common Stock. The
Company currently intends to retain future earnings for use in its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. The payment of future dividends, if any, will depend, among other
things, on the Company's results of operations and financial condition, any
restriction in the Company's loan agreements and on such other factors as the
Company's Board of Directors may, in its discretion, consider relevant. The
Company's bank loan agreement currently prohibits the payment of dividends.
The Company's registration statement on Form S-1 with respect to its initial
public offering (SEC file no. 333-00790) was declared effective on April 17,
1996. The following information reports the Company's use of the net proceeds of
its initial public offering. The Company has previously reported this
information on Form 10-Q and Form SR pursuant to Rule 463 under the Securities
Act of 1933. Only information that has changed since the filing of the last Form
10-Q is reported below.
From the effective date of the registration statement through December 31, 1997,
the net proceeds of the Company's initial public offering have been used in the
following amounts and for the following purposes.
Working Capital............................................. $ 3,447,000
Purchase of Equipment....................................... 3,279,000
Acquisition of Other Business............................... 1,894,000
Investment in U.S. Government Obligations................... 1,292,000
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All of the foregoing payments were direct or indirect payments to persons other
than; (i) directors, officers, general partners of the issuer or their
associates; (ii) to persons owning 10 percent or more of any class of equity
securities of the issuer; (iii) and to affiliates of the issuer.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company for each of
the five years in the period ended December 31, 1997 have been derived from the
Company's consolidated financial statements. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements and the notes
thereto and other financial information appearing elsewhere in this Report.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
In thousands, except per share data
Statement of Operations Data: 1997 1996 1995 1994 1993
-------- --------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $43,178 $30,607 $21,024 $13,543 $9,461
Income before income taxes and
cumulative effect of accounting change........... 5,961 5,270 3,245 2,088 1,339
Provision for income taxes......................... 2,448 2,266 1,395 880 495
Income before cumulative effect of
accounting change................................ 3,513 3,004 1,850 1,208 844
Cumulative effect of accounting change............. -- -- -- -- 144
------- ------- ------- ------- -------
Net income......................................... $3,513 $3,004 $1,850 $1,208 $ 703
====== ====== ====== ====== =======
Net income per common share:
Income before cumulative effect of
accounting change................................ $ .44 $ .43 $ .36 $ .20 $ .09
Cumulative effect of accounting change............. -- -- -- -- (.01)
------- ------- ------- ------- -------
Net income per common share:
Basic...................................... $ .44 $ .43 $ .36 $ .20 $ .08
------- ------- ------- ------- -------
Diluted.................................... $ .40 $ .37 $ .30 $ .17 $ .07
------- ------- ------- ------- -------
Shares used in computing net income per common share:
Basic...................................... 7,921 6,913 5,085 6,112 9,067
===== ===== ===== ===== =====
Diluted.................................... 8,881 8,091 6,181 6,933 9,841
===== ===== ===== ===== =====
Balance Sheet Data (at end of period):
Cash, cash equivalents and short-term investments.. $ 9,443 $11,267 $ 2,479 $ 757 $ 626
Working capital.................................... 16,330 14,728 3,327 1,393 991
Total assets....................................... 23,898 20,844 7,586 4,205 2,814
Long-term debt..................................... -- -- -- 2,088 5
Total stockholders' equity......................... 21,357 17,760 4,846 291 1,401
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following information should be read in connection with the information
contained in the Consolidated Financial Statements and notes thereto appearing
elsewhere in this Report. The following discussion includes forward-looking
statements that involve risk and uncertainties and are subject to change at any
time. The Company derives its forward-looking statements from its operating
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budgets, estimates and forecasts, which are based upon detailed assumptions
about many important factors. While the Company believes its assumptions are
reasonable, it cautions that there are inherent difficulties in predicting the
impact of certain factors, including client demand, dependence on the
pharmaceutical industry, the attraction and retention of technical personnel,
concentration and mix of revenues, third-party Year 2000 modification plans and
other factors, which could cause actual results to differ materially from
predicted results. These factors, as and when applicable, are disclosed
previously and from time to time in the Company's filings with the U.S.
Securities and Exchange Commission.
General
Since the Company began operations in late 1988, it has experienced substantial
growth in revenues, income from operations and net income. During 1997, 1996 and
1995, the Company's revenues increased by 41%, 46% and 55%, respectively, to
$43.2 million in 1997, $30.6 million in 1996 and $21.0 million in 1995. The
Company's income from operations increased by 13%, 50% and 51%, respectively, to
$5.5 million in 1997, $4.9 million in 1996 and $3.3 million in 1995. The
Company's net income increased by 17%, 62% and 53%, respectively, to $3.5
million in 1997, $3.0 million in 1996 and $1.9 million in 1995.
Substantially all of the Company's revenues are professional fees which
generally are billed at hourly rates. The Company's costs consist primarily of
employee-related costs and non-reimbursed travel expenses of its technical and
technical management employees. As employee related costs are relatively fixed,
variations in the Company's revenues and operating results can occur as a result
of variations in billing margins and utilization rates (i.e. the ratio of hours
billed to total available hours) of its technical personnel.
Since most of the Company's consulting engagements are on a time and materials
basis, the Company historically has been able to maintain its billing margins by
increasing its hourly rates to offset increases in costs related to its
professional staff. The Company manages its billing margins by establishing a
target billing rate for each of its technical personnel which is used as a goal
for the Company's account executives in negotiating and establishing billing
rates for specific projects or assignments; however, actual billing rates may be
higher or lower than the target billing rates. Hourly rate increases are
generally implemented by the Company when a technical person completes one
assignment and moves to the next assignment, although hourly rates are also
often adjusted during an assignment based on relevant contractual provisions.
The Company further manages its billing margins by basing a portion of all
account executives' incentive compensation on the annual aggregate billing
margin for their accounts.
Differences in personnel utilization rates can result from variations in the
amount of non-billed time, which has historically consisted of training time,
vacation and holiday time, time lost to illness and inclement weather and
unassigned time. Non-billed time also includes time devoted to other necessary
and productive activities such as sales support and interviewing prospective
employees. Unassigned time results from differences in the timing of the
completion of an existing assignment and the beginning of a new assignment. In
order to reduce and limit unassigned time, the Company actively manages
personnel utilization by monitoring and projecting estimated engagement start
and completion dates and matching employee availability with current and
projected client requirements. In addition, the number of new technical
personnel training programs and the amount of training incurred for existing
technical personnel varies and can affect the Company's personnel utilization
rates from period to period.
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During 1996 and 1995, the Company enjoyed a lower employee turnover rate than
that experienced by the industry in general. Although industry statistics are
not yet available for 1997, the Company believes this trend will continue for
1997 as well. The Company believes the continuity associated with its lower
employee turnover rate has helped it to respond more effectively to its clients'
needs as its business has grown. In addition, although the Company's growth has
resulted in increases in general and administrative expenses, such increases
would likely have been greater if the Company's employee turnover rate were
significantly higher.
Results of Operations
The following table sets forth for the periods indicated selected statements of
operations data as a percentage of revenues:
Years Ended December 31,
-------------------------------
1997 1996 1995
----------- --------- --------
Revenues................................... 100.0% 100.0% 100.0%
Operating expenses:
Direct costs............................. 58.8 57.1 59.7
Selling expenses......................... 7.1 6.0 5.0
General and administrative expenses...... 21.3 20.8 19.7
----------- --------- --------
Total operating expenses................... 87.2 83.9 84.4
----------- --------- --------
Income from operations..................... 12.8 16.1 15.6
Interest income (expense), net........... 1.0 1.1 (.2)
----------- --------- --------
Income before income taxes................. 13.8 17.2 15.4
Provision for income taxes............... 5.7 7.4 6.6
----------- --------- --------
Net income................................. 8.1% 9.8% 8.8%
========== ========= ========
1997 Compared to 1996
Revenues. The Company's revenues for 1997 increased by $12.6 million, or 41%
from 1996. Approximately 67% of this increase resulted from an increase in the
volume of hours billed and approximately 33% from increases in the aggregate
average rates for hours billed during 1997. For 1997, revenue from clients in
the pharmaceutical industry increased to $26.8 million, or 62% of revenues, from
$18.0 million, or 59% of revenues, in 1996.
Direct costs. Direct costs consist primarily of employee-related costs and
non-reimbursed travel expenses for the Company's technical personnel. Direct
costs for 1997 increased by $7.9 million, or 45%, from 1996. This increase is
principally due to an increase in the number of technical personnel to 440 at
December 31, 1997 from 330 at December 31, 1996. As a percentage of revenues,
direct costs increased to 59% in 1997 from 57% in 1996. This increase resulted
principally from a lower utilization rate during 1997 compared to 1996. During
1997 the Company performed more project engagements than staff augmentation
assignments compared to 1996. As a result, the Company has experienced greater
non-billable time prior to the start of project engagements and between project
engagements. Also, during 1997, the Company experienced longer periods of
non-billable time for its less experienced new hires, after the completion of
their training, before their first assignments.
Selling expenses. Selling expenses principally consist of employee-related costs
as well as travel expenses of the Company's sales and marketing personnel.
Selling expenses for 1997 increased by $1.3 million to $3.1 million from $1.8
12
<PAGE>
million in 1996. This increase is principally due to the increase in the number
of sales and marketing personnel to 25 at December 31, 1997 from 13 at December
31, 1996. As a percentage of revenues, selling expenses increased to 7% for 1997
compared to 6% for 1996. This increase resulted principally from the Company
adding more experienced Account Executives in 1997, with the skills to sell
project engagements, and increased marketing initiatives in order to provide
existing and potential clients with essential information about the Company and
its service offerings.
General and administrative expenses. General and administrative expenses consist
of executive management costs, recruiting costs, accounting, human resources,
general expenses, office facilities costs, training and education expenses and
depreciation and amortization. General and administrative expenses for 1997
increased by $2.8 million to $9.2 million from $6.4 million in 1996 and were 21%
of revenues for 1997 and 1996. The increase is principally due to increases in
facilities costs (office rent and utilities) and facility related costs (such as
depreciation of computer equipment, amortization of software and leasehold
improvements, expansion of computer networks, additional software costs and the
costs of related support personnel) and recruiting expenses and administrative
personnel relating to an increase in the number of professional and supervisory
personnel, and performing client engagements in the Company's offices rather
than at client locations.
Interest Income. Net interest income was $418,000 in 1997 as compared with net
interest income of $354,000 in 1996. The increase in net interest income
resulted from higher invested cash and investment balances during 1997.
Effective Income Tax Rate. The Company's effective income tax rate in 1997
decreased to 41% from 43% in 1996. This decrease is principally the result of
tax planning strategies and incentive tax credits received by the Company.
1996 Compared to 1995
Revenues. The Company's revenues for 1996 increased by $9.6 million, or 46% from
1995. Approximately 64% of this increase resulted from an increase in the volume
of hours billed and approximately 36% from increases in the aggregate average
rates for hours billed during 1996. For 1996, revenue from clients in the
pharmaceutical industry increased to $18.0 million, or 59% of revenues, from
$13.5 million, or 64% of revenues, in 1995 and revenues from clients engaged in
software development increased to $3.5 million, or 11% of revenues, in 1996 from
$1.4 million, or 7% of revenues, in 1995.
Direct costs. Direct costs for 1996 increased by $4.9 million, or 39%, from
1995. This increase is principally due to an increase in the number of technical
personnel to 330 at December 31, 1996 from 254 at December 31, 1995. As a
percentage of revenues, direct costs declined to 57% in 1996 from 60% in 1995.
This decline resulted primarily from increases in aggregate average billing
rates during 1996 that exceeded increases in payroll and related expenses for
the Company's technical personnel. In response to such billing rate increases
and to competition for information services professionals in general, during the
second quarter of 1996 the Company increased the compensation levels for a
number of its technical professionals.
Selling expenses. Selling expenses for 1996 increased by $778,000 to $1.8
million from $1.0 million in 1995. This increase is principally due to the
increase in the number of sales and marketing personnel to 13 at December 31,
1996 from 8 at December 31, 1995. As a percentage of revenues, selling expenses
13
<PAGE>
increased to 6% for 1996 compared to 5% for 1995. This increase resulted from
the addition of three account executives (one in the Company's new Chicago sales
office) and the addition of two technical sales support personnel to assist in
the increased focus on project-oriented consulting.
General and administrative expenses. General and administrative expenses for
1996 increased by $2.3 million to $6.4 million from $4.1 million in 1995 and to
21% of revenues for 1996 compared to 20% for 1995. These increases are
principally due to increases in facilities costs (office rent and utilities) and
facility-related costs (such as depreciation of computer equipment, amortization
of software and leasehold improvements, expansion of computer networks,
additional software costs and the costs of related support personnel) to support
an increase during 1996 in the number of professional and supervisory personnel
performing client engagements in the Company's offices rather than at client
locations. During 1996, the Company also incurred certain new expenses and
increased insurance, legal and accounting expenses associated with public
company filing and compliance requirements and with investor and shareholder
relations.
Interest Income. Net interest income was $354,000 in 1996 as compared with net
interest expense of $33,000 in 1995. This increase in net interest income
resulted from higher invested cash balance during 1996 principally as a result
of the $9.9 million in net proceeds received from the Company's initial public
offering of common stock in May 1996 (the "Initial Public Offering"). See
"Liquidity and Capital Resources."
Effective Income Tax Rate. The Company's effective income tax rate in 1996 and
1995 was 43%.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments decreased $1.9 million to
$9.4 million at December 31, 1997 from $11.3 million at December 31, 1996. This
decrease resulted principally from the acquisition of Cutting Edge Computer
Solutions, Inc. At December 31, 1997 cash equivalents were invested in
short-term U. S. governmental agency issues, commercial paper, institutional
money-market funds and a repurchase agreement. By policy, the Company places its
investments in high credit-quality instruments.
In February 1998, the Company acquired all of the outstanding shares of capital
stock of WaveFront Consulting, Inc. for cash of $3.7 million, subject to certain
conditional payments based upon future operating income (see Note 14 to the
Consolidated Financial Statements).
In May 1996, the Company completed its Initial Public Offering. The Company
issued 2,175,000 shares of the Company's common stock and received net proceeds
of approximately $9.9 million.
In 1995, the Company sold 953,355 shares of Common Stock and received net
proceeds of approximately $2.7 million from such sale. The net proceeds
primarily were used by the Company to repay the outstanding bank indebtedness
and the note to the selling stockholder and the balance for general corporate
purposes. See Note 10 to the Consolidated Financial Statements appearing
elsewhere in this Report.
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. The Company may expand
its capabilities through the acquisition of other businesses that are
complementary to the Company's business. Should the Company's business expand
more rapidly than expected, the Company's $1.0 million bank line of credit would
14
<PAGE>
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 Company relies heavily on computer systems to run its business, including,
without limitation, recruiting, payroll and financial systems. Many of these
systems use dates to make computations necessary to process information
accurately. Many existing computer programs, including certain programs used by
the Company, 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 Year 2000 issue ("Y2K") affects virtually all companies and organizations.
The Company believes that Y2K involves the risk that the Company's internal
computer systems and those of its clients, suppliers, vendors, financial
institutions and others will be disrupted or fail. The Company has also
identified as a possible risk the possible loss of revenue as customers'
resources are diverted to the Y2K problem. The Company is unable to determine
the nature, scope, or effect, if any, of this phenomenon on the Company's
activities.
The Company is currently evaluating the extent of the Y2K problem with respect
to its internal systems. An initial evaluation indicates that making the
Company's internal systems Y2K compliant will not have a material effect on the
Company's business or financial condition.
The Company does not regularly transmit or receive financial information to or
from clients, suppliers, vendors, or financial institutions. In those
circumstances where such information is being exchanged electronically, the
Company believes that those clients, suppliers, vendors, or financial
institutions are taking steps to address their Y2K issues in a timely fashion.
As a result, the Company does not expect these Y2K issues to have a material
effect on the Company's business or financial condition.
A greater risk is posed if the Company's clients, suppliers, vendors and
financial institutions are not Y2K compliant and their noncompliance causes a
material disruption to their businesses. 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; and other
interruptions to the normal conduct of business by the Company, the nature and
extent of which the Company cannot foresee. The Company is unable to determine
the nature, length or effect such interruptions, if any, may have on the
Company.
Recently Issued Accounting Standards
The following new statements are effective for financial statements for periods
beginning after December 15, 1997. SFAS 130 - Reporting Comprehensive Income,
SFAS 131 - Disclosure about Segments of an Enterprise and Related Information,
SFAS 132 - Employers' Disclosure About Pensions and Other Post Retirement
15
<PAGE>
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.
Quarterly Financial Results
Set forth below are selected unaudited statements of operations data for the
last eight fiscal quarters of the Company. In management's opinion, the results
below have been prepared on the same basis as the audited financial statements
contained herein and include all material adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of the information for
the periods presented when read in conjunction with the audited financial
statements and notes thereto contained elsewhere in this Report.
Unaudited Quarterly Statements of Operations
In thousands, except per share data
<TABLE>
<CAPTION>
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1997
Revenues...................................... $ 12,602 $ 11,478 $ 10,209 $ 8,889
Income before income taxes.................... 1,916 1,630 1,379 1,036
Net income.................................... 1,167 945 800 601
Net income per common share:
Basic..................................... .15 .12 .10 .08
Diluted.................................. .13 .11 .09 .07
Shares used in computing net income per share:
Basic..................................... 7,939 7,924 7,918 7,902
Diluted.................................. 8,865 8,911 8,851 8,895
1996
Revenues...................................... $ 8,560 $ 7,538 $ 7,444 $ 7,065
Income before income taxes.................... 1,316 1,200 1,270 1,484
Net income.................................... 751 683 724 846
Net income per common share:
Basic..................................... .10 .09 .11 .15
Diluted.................................. .08 .08 .09 .13
Shares used in computing net income per share:
Basic..................................... 7,846 7,835 6,364 5,608
Diluted.................................. 8,974 9,000 7,663 6,728
</TABLE>
The Company believes that its business is generally not seasonal; however,
fluctuations in personnel utilization rates and the timing of additional general
and administrative expenses may cause profitability to fluctuate from one
quarter to another. Quarterly results may also vary due to the timing of new
hires, the timing of training for new and existing technical personnel and the
number of business days in a particular quarter. Results of operations for any
previous fiscal quarter are not necessarily indicative of results for any future
periods, and future quarterly results could be adversely impacted by these, and
other factors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's annual consolidated financial statements are included in Item
14(c)(1) of this Report, beginning on page 20.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's Proxy Statement for its 1998 Annual
Meeting to be filed with the Securities and Exchange Commission not later than
120 days after December 31, 1997 (the "1998 Proxy").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's 1998 Proxy.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's 1998 Proxy.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
similarly named section of the Registrant's 1998 Proxy.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
(a) (1) The following financial statements are filed as
part of this Annual Report on Form 10-K:
Consolidated Balance Sheets at December 31, 1997 and
December 31, 1996................................................... 20
Consolidated Statements of Operations for the three years ended
December 31, 1997, 1996 and 1995.................................... 21
Consolidated Statements of Stockholders' Equity for the three
years ended December 31, 1997, 1996 and 1995...................... 22
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997, 1996 and 1995.................................... 23
Notes to Consolidated Financial Statements.......................... 24
Report of KPMG Peat Marwick LLP, Independent Auditors............... 36
(2) The following financial statements schedule for the
years ended December 31, 1997 and 1996, read in
conjunction with the financial statements of
Integrated Systems Consulting Group, Inc., is filed
as part of this Annual Report on Form 10-K:
Schedule II - Valuation and Qualifying Accounts and Reserves........ 37
Schedules other than that listed above have been
omitted since they are either not required, not
applicable, or because the information required is
included in the financial statements or the notes
thereto.
(3) The exhibits listed in the Exhibit Index hereof are
attached hereto or incorporated herein by reference
and filed as a part of this report.
(b) Reports on Form 8-K
None.
19
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Consolidated Balance Sheets
(in thousands, except share data)
December 31, 1997 and 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Assets 1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,842 $ 8,730
Short-term investments, at cost, which approximates market 601 2,537
Accounts receivable:
Trade, net of reserves of $312 and $196 8,789 5,643
Unbilled 148 144
Prepaid expenses 340 562
Other current assets 151 196
-------- --------
Total current assets 18,871 17,812
Property and equipment, net 3,507 2,935
Goodwill, net 1,413 --
Other assets 107 97
-------- --------
$ 23,898 $ 20,844
-------- --------
Liabilities and Stockholders' Equity
Current
liabilities:
Accounts payable and accrued expenses $ 1,107 $ 1,590
Accrued compensation payable 909 1,104
Income taxes payable 439 27
Deferred income taxes 86 363
-------- --------
Total current liabilities 2,541 3,084
-------- --------
Commitments (note 12)
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 shares issued in 1997 and 1996 46 46
Additional paid-in capital 12,654 12,612
Retained earnings 9,289 5,776
-------- --------
21,989 18,434
Treasury stock, at cost, 1,273,681 and 1,370,840 common shares
in 1997 and 1996, respectively (632) (674)
-------- --------
21,357 17,760
-------- --------
$ 23,898 $ 20,844
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 43,178 $ 30,607 $ 21,024
Operating expenses:
Direct costs 25,402 17,497 12,559
Selling expenses 3,054 1,822 1,044
General and administrative expenses 9,179 6,372 4,143
------------ ------------ ------------
Total operating expenses 37,635 25,691 17,746
------------ ------------ ------------
Income from operations 5,543 4,916 3,278
------------ ------------ ------------
Interest income 419 359 80
Interest expense (1) (5) (113)
------------ ------------ ------------
Income before income taxes 5,961 5,270 3,245
Provision for income taxes 2,448 2,266 1,395
------------ ------------ ------------
Net income $ 3,513 $ 3,004 $ 1,850
============ ============ ============
Net income per common share:
Basic $ .44 $ .43 $ .36
============ ============ ============
Diluted $ .40 $ .37 $ .30
============ ============ ============
Shares used in computing net income per common share:
Basic 7,921 6,913 5,085
============ ============ ============
Diluted 8,881 $ 8,091 $ 6,181
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Consolidated Statements of Stockholders' Equity
(in thousands, except number of shares)
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Treasury Stock
----------------------- Paid-in Retained ------------------------
Shares Amount Capital Earnings Shares Amount Total
---------- --------- ---------- --------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1995 6,015,751 $ 30 $ 3 $ 922 (1,406,880) (664) 291
Purchase of treasury stock, at cost -- -- -- -- (4,980) (8) (8)
Exercise of stock options 48,435 -- 15 -- -- -- 15
Issuance of common stock and 953,355 5 2,693 -- -- -- 2,698
warrants
Net income -- -- -- 1,850 -- -- 1,850
---------- --------- ---------- --------- ------------ -------- ---------
Balances, December 31, 1995 7,017,541 35 2,711 2,772 (1,411,860) (672) 4,846
Purchase of treasury stock, at cost -- -- -- -- (7,800) (26) (26)
Exercise of stock options 34,972 -- 43 -- 48,820 24 67
Issuance of common stock 2,175,000 11 9,858 -- -- -- 9,869
Net income -- -- -- 3,004 -- -- 3,004
---------- --------- ---------- --------- ------------ -------- ---------
Balances, December 31, 1996 9,227,513 46 12,612 5,776 (1,370,840) (674) 17,760
Exercise of stock options -- -- 42 -- 97,159 42 84
Net income -- -- -- 3,513 -- -- 3,513
---------- --------- ---------- --------- ------------ -------- ---------
Balances, December 31, 1997 9,227,513 $ 46 12,654 $ 9,289 (1,273,681) (632) 21,357
---------- --------- ---------- --------- ------------ -------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Consolidated Statements of Cash Flows
(in thousands)
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,513 $ 3,004 $ 1,850
Adjustments to reconcile net income to net cash provided by operating
activities, net of effects of acquisition:
Depreciation and amortization 1,343 725 312
Deferred income tax benefit (277) (237) (297)
Changes in assets and liabilities:
Accounts receivable (3,150) (2,609) (708)
Prepaid expenses 231 (358) (23)
Other assets 455 20 3
Accounts payable and accrued expenses (563) 596 496
Accrued compensation payable (195) 358 500
Income taxes payable 412 (373) 179
----------- ------------ ------------
Net cash provided by operating activities 1,769 1,126 2,312
----------- ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (1,783) (2,248) (1,243)
Purchase of short-term investments (10,414) (15,942) --
Maturity and sale of short-term investments 12,350 13,405 --
Acquisition of business, net of cash acquired (1,894) -- --
----------- ------------ ------------
Net cash used in investing activities (1,741) (4,785) (1,243)
----------- ------------ ------------
Cash flows from financing activities:
Repayment of note payable to stockholder -- -- (1,350)
Repayments on bank debt -- -- (703)
Purchase of treasury stock, net -- (2) (8)
Proceeds from issuance of common stock 84 9,912 2,714
----------- ------------ ------------
Net cash provided by financing activities 84 9,910 653
----------- ------------ ------------
Net increase in cash and cash equivalents 112 6,251 1,722
Cash and cash equivalents, beginning of year 8,730 2,479 757
----------- ------------ ------------
Cash and cash equivalents, end of year $ 8,842 $ 8,730 $ 2,479
=========== ============ ============
Supplemental disclosure of cash flow information:
Income taxes paid $ 2,440 $ 2,879 $ 1,514
Interest paid $ -- $ 5 $ 118
Noncash investing and financing transactions:
Conversion of accounts receivable to note receivable $ -- $ 94 $ 100
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Nature of Operations and Basis of Presentation
Integrated Systems Consulting Group, Inc. (ISCG or the Company) through
its wholly-owned operating subsidiary provides consulting services that
address its clients' information processing needs, including
client-server architecture, graphical user interface applications,
object-oriented and relational databases, and cross platform
applications integration. The Company operates in one business segment
delivering its services in two broad areas, software applications
development and systems and network management. The Company's
applications development activities accounted for approximately 78% and
79% of its revenues in 1997 and 1996, respectively.
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include U.S. Government securities,
commercial paper, and money market accounts with an original maturity
of three months or less.
Investments
The Company has classified its marketable debt securities as
held-to-maturity. Securities classified as held-to-maturity are
reported at amortized cost. Realized gains and losses and declines in
value of securities judged to be other-than-temporary are included in
income. Interest and dividends on all securities are included in
interest income.
Since held-to-maturity securities are short-term in nature, changes in
market interest rates would not have a significant impact on fair value
of these securities. These securities are carried at amortized cost
which approximate fair value.
Investments with maturities between three and twelve months are
considered short-term investments. Short-term investments consist of
commercial paper and United States Government debt securities.
The carrying amounts reflected in the consolidated balance sheets for
cash and cash equivalents, accounts receivable, and accounts payable
approximate fair value due to the short maturities of these
instruments.
24
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (Continued)
Property and Equipment
Property and equipment are stated at cost net of depreciation.
Expenditures for improvements which significantly extend the useful
life of an asset are capitalized. Expenditures for repairs and
maintenance are expensed as incurred. Property and equipment acquired
under capital leases are stated at the lower of fair market value or
the present value of the minimum lease payments at the inception of the
lease. Depreciation and amortization is provided using the
straight-line method over the estimated useful lives of the assets as
follows:
Computers and software (commercially available packages) 3 to 5 years
Furniture, fixtures and equipment 3 to 10 years
Leasehold improvements are amortized over the shorter of their
estimated useful lives or the related lease term.
Goodwill
Goodwill is being amortized over ten years on a straight-line basis.
The realizability of goodwill is subject to periodic review by the
Company. Such review is based on various analyses, including cash flow
and profitability projections that incorporate, as applicable, the
impact on existing Company businesses. The analyses necessarily
involve significant management judgment in evaluating the capacity of
an acquired business to perform in accordance with projections.
Accumulated amortization at December 31, 1997 and 1996 was $101,000
and $--, respectively.
Revenue Recognition
Revenues under time and material contracts are recognized in the period
in which services are provided.
Revenues under fixed price contracts are recognized under the
percentage-of-completion method. Under this method, revenues are
recognized based upon costs incurred as a percentage of estimated total
costs of individual contracts. Anticipated losses are recognized when
they become known. Revisions in estimated profits are made in the month
in which the circumstances requiring the revision become known.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995
consolidated financial statements to conform to the 1997 presentation.
25
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(2) Summary of Significant Accounting Policies (Continued)
Net Income Per Share
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. As required by Staff Accounting Bulletin 98 (SAB 98) issued by
the Securities and Exchange Commission, certain common equivalent
shares issued by the Company prior to the effective date of the initial
public offering ("IPO"), which is discussed in note 10, have been
included as if they were outstanding for all periods prior to the IPO.
Prior period EPS data has been restated to conform with the provisions
of SFAS 128 and SAB 98.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates. Estimates made in the preparation of the
accompanying financial statements include the percentage of completion
of fixed price contracts and the amount of reserves established for
uncollectible amounts included in accounts receivable.
(3) Concentration of Credit Risk and Major Clients
The Company derives a significant portion of its revenues from
companies in the pharmaceutical industry. In particular, the Company's
revenues are highly dependent on research and development expenditures
by the pharmaceutical industry. Further, the Company's business could
be impacted by changes in government regulations applicable to the drug
development process. Revenues derived from clients in the
pharmaceutical industry were approximately 62%, 59% and 64% of total
revenues in the years ending December 31, 1997, 1996, and 1995,
respectively. At December 31, 1997, $3,659,000 or 41% of trade and
unbilled receivables are due from companies in the pharmaceutical
industry.
The following table summarizes the percentage of revenues from the
Company's significant clients (listing those clients that exceed 10% in
the applicable year):
26
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------
Client 1997 1996 1995
- --------------------------------------------------------------------------------
A 11% 10% 13%
B * * 11%
- --------------------------------------------------------------------------------
* Less than 10%
The Company generally extends 30-day credit terms to, and requires no
collateral from, its clients. The Company performs an initial credit
evaluation and, on an ongoing basis, monitors the payment patterns and
balances of its clients' accounts. The Company maintains an allowance
for uncollectible amounts based on past experience.
There were no significant revenues derived from foreign operations
during the periods covered by the accompanying financial statements.
(4) Acquisition
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 was 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. This acquisition was accounted for using the purchase
method of accounting, resulting in goodwill of $1,514,000 as the excess
of cash paid over the fair value of assets acquired of $461,000 and
liabilities assumed of $80,000. Pro forma information as if the
acquisition had occurred on January 1, 1996 has not been provided since
such pro forma results do not differ materially from those reported in
the accompanying financial statements.
27
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(5) Property and Equipment
Property and equipment consists of the following:
December 31
- -----------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
(in thousands)
Software $ 704 $ 450
Computers and office equipment 3,424 2,542
Leasehold improvements 478 378
Furniture and fixtures 1,555 995
- -----------------------------------------------------------------------------
6,161 4,365
Less: Accumulated depreciation
and amortization (2,654) (1,430)
- -----------------------------------------------------------------------------
$ 3,507 $ 2,935
- -----------------------------------------------------------------------------
(6) Line of Credit
The Company maintains a bank line of credit which provides for maximum
borrowings of $1,000,000, with interest on outstanding borrowings at
the bank's national commercial rate, which was 8.50% at December 31,
1997. The agreement requires the Company to maintain a compensating
balance of $50,000, meet certain financial covenants, prohibits the
payment of dividends, and expires in September 1998 if not extended.
The highest borrowings outstanding under this line were $--, $200,000,
and $375,000 during 1997, 1996, and 1995, respectively. There were no
amounts outstanding at December 31, 1997 or 1996.
(7) Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Components of the Company's net deferred tax liabilities are
as follows:
December 31,
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
(in thousands)
Modified cash vs. accrual
method of accounting $ 244 $ 491
Allowance for doubtful accounts (125) (79)
Other (33) (49)
- --------------------------------------------------------------------------------
Net deferred tax liabilities $ 86 $ 363
- --------------------------------------------------------------------------------
28
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Significant components of the provision for income taxes are as
follows:
Year Ended December 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
( in thousands)
Current:
Federal $ 2,473 $ 1,954 $ 1,298
State 252 549 394
- --------------------------------------------------------------------------------
2,725 2,503 1,692
- --------------------------------------------------------------------------------
Deferred:
Federal (213) (169) (192)
State (64) (68) (105)
- --------------------------------------------------------------------------------
(277) (237) (297)
- --------------------------------------------------------------------------------
$ 2,448 $ 2,266 $ 1,395
- --------------------------------------------------------------------------------
The following is a reconciliation of the federal income tax computed at
the statutory rates to the actual income tax. The Federal statutory
rate was 34% for the years 1997, 1996 and 1995.
Year Ended December 31
- ------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------
( in thousands)
Federal income taxes at
statutory rate $ 2,027 $ 1,792 $ 1,103
State income taxes, net
of federal tax benefit 124 317 260
Other 297 157 32
- ------------------------------------------------------------------------------
$ 2,448 $ 2,266 $ 1,395
- ------------------------------------------------------------------------------
(8) Employee Savings Plan
The Company sponsors an employee savings plan under Section 401(k) of
the Internal Revenue Code which covers substantially all employees. The
Company's contribution was $345,000, $203,000 and $86,000 for 1997,
1996, and 1995, respectively.
29
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(9) Computation of Earnings Per Share
The following is a reconciliation of the numerator and denominators of
the basic and diluted EPS computations:
December 31
-------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------
(in thousands, except per share)
Net income $3,513 $3,004 $1,850
Basic shares 7,921 6,913 5,085
Effect of dilutive
options and warrants 960 1,178 1,096
-------------------------------------------------------------------
Diluted shares 8,881 8,091 6,181
-------------------------------------------------------------------
Net income per common share:
Basic $ .44 $ .43 $ .36
-------------------------------------------------------------------
Diluted $ .40 $ .37 $ .30
-------------------------------------------------------------------
During 1997 and 1996, options to purchase an average of 146,875 and
7,250 shares of common stock at prices ranging from $10.75 to $15.25
and $13.50 to $15.25 per share were outstanding, respectively, but were
not included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the common
stock.
(10) Stockholders' Equity
Capital Structure
Prior to June 1995, the Company had two classes of common stock (A and
B) which were similar in all respects except that class A common shares
had voting rights and class B common shares did not. Effective June 30,
1995, the Company's articles of incorporation were amended to combine
the class A and class B shares into a single class of voting common
stock. This combination of the separate classes of common stock has
been given retroactive effect in the accompanying financial statements
and related note disclosures for all periods presented.
Stock Transactions
On May 31, 1996, the Company completed its IPO. The Company issued
2,175,000 shares of the Company's common stock and received proceeds of
approximately $9,900,000, net of issuance costs of approximately
$975,000.
30
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
In June and August 1995, Safeguard Scientifics, Inc. (Safeguard) and
two venture capital funds (collectively, the Investors) acquired
2,080,048 shares of the Company's common stock from the Company and its
principal shareholder and also acquired warrants to purchase 339,862
shares of common stock at an exercise price of $3.68 per share. The
Company sold 953,355 common shares and the warrants directly to the
investors for cash of $2,750,000. The balance of the Investors shares
were acquired from the Company's principal stockholder. In connection
with these transactions, the Company also issued warrants to acquire
339,861 shares of its common stock at an exercise price of $3.68 per
share to the principal stockholder, who is also the Company's chief
executive officer. No value was assigned to these warrants since their
exercise price exceeded the estimated fair value of the Company's
common stock as of the issuance date.
The warrants discussed in the preceding paragraph became exercisable on
the effective date of the registration statement on Form S-1 with
respect to the IPO. The warrants issued to the Investors expire three
years after they become exercisable and the warrants issued to the
principal stockholder expire June 30, 1999. The warrants contain
customary provisions requiring proportionate adjustment of the exercise
price in the event of a stock split, stock dividend, or dilutive
financing. The Investors also obtained certain other rights which
include piggyback and demand registration rights in certain
circumstances following an IPO of the Company's common stock.
(11) Stock Option Plan
Under the Company's amended 1989 Stock Option Plan (the "Plan"), the
Company may grant incentive stock options to employees and nonqualified
stock options to employees and directors. The Compensation Committee of
the Board of Directors administers the Plan, subject to approval by the
Board of Directors. All options are granted at not less than fair
market value at the date of grant and generally expire ten years from
the date of grant. Options granted prior to July 25, 1996 generally
vest at a rate of 20% per annum beginning on the second anniversary of
the grant date. Options granted on or after July 25, 1996 generally
vest ratably over a five-year period.
31
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Stock option activity, both incentive and nonqualified, under the Plan
is presented as follows:
Option Weighted-Average
Shares Exercise Price
--------------------------------------------------------------------
Outstanding at January 1, 1995 326,080 $ .59
Granted 556.551 2.49
Exercised (48,435) .32
Canceled (23,140) 1.97
--------------------------------------------------------------------
Outstanding at December 31, 1995 811,056 1.89
Granted 13,760 14.35
Exercised (83,792) .81
Canceled (30,778) 2.51
--------------------------------------------------------------------
Outstanding at December 31, 1996 710,246 2.33
Granted 498,675 11.39
Exercised (97,159) .98
Canceled (189,692) 11.68
--------------------------------------------------------------------
Outstanding at December 31, 1997 922,070 $ 5.32
--------------------------------------------------------------------
At December 31, 1997, 1996 and 1995, 208,257, 152,914 and 140,492
options were exercisable, respectively, under the Plan. In 1997, the
Company's Board of Directors amended the Plan, with subsequent
stockholder approval, to increase the number of shares of common stock
authorized for issuance under the Plan from 1,250,000 to 1,650,000
shares. In 1995, the Company's Board of Directors amended the Plan,
with subsequent stockholder approval, to increase the number of shares
of common stock authorized for issuance under the Plan from 930,000 to
1,250,000 shares. In March 1997 the Company modified the terms of
certain nonvested stock options granted in January 1997 by decreasing
the exercise price from $13.25 to $10.75.
32
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION?
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
--------------------- ---------------- ---------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
$ .05 to $1.21 128,446 4.5 Years $ .71 65,632 $ .52
1.52 to 2.88 236,455 7.2 Years 1.75 76,501 1.63
3.33 219,094 7.9 Years 3.33 62,524 3.33
8.88 to 15.25 338,075 9.2 Years 10.86 3,600 14.28
--------------------- ---------------- ---------------- ---------------- -------------- -----------------
$ .05 to $15.25 922,070 7.7 Years $ 5.32 208,257 $ 2.01
--------------------- ---------------- ---------------- ---------------- -------------- -----------------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations
in accounting for the Plan. Accordingly, no compensation expense has
been recognized for options granted. Had compensation expense for the
Company been consistent with the methodology prescribed under Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS 123), the Company's net income and net income per
share would have been reduced to the pro forma amounts indicated below:
December 31
1997 1996 1995
--------------------------------------------------------------------
(in thousands, except per share)
Net income As reported $ 3,513 $3,004 $1,850
Pro forma 2,846 2,917 1,811
Basic earnings per share As reported .44 .43 .36
Pro forma .36 .42 .36
Diluted earnings per share As reported .40 .37 .30
Pro forma .32 .36 .29
--------------------------------------------------------------------
The fair value of the options granted under the Plan in 1997 and 1996
calculated using the Black-Scholes pricing model were $4.51 and $3.22
per share, respectively. The following assumptions were used in the
Black-Scholes pricing model: expected dividend yield 0%, risk-free
interest rate ranging from 5.55% to 7.18%, expected volatility factor
of .6 for 1997 and an expected life ranging from six to seven years.
Pro forma net income reflects only options granted on or after to
January 1, 1995 and excludes the effect of a volatility assumption
33
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
prior to the Company becoming publicly traded in 1996. Therefore, the
full impact of calculating compensation expense for stock options under
SFAS 123 is not reflected in the pro forma net income amounts presented
above because compensation expense is reflected over the options'
vesting period and compensation expense for options granted prior to
January 1, 1995 is not considered.
(12) Commitments
Leases
The Company is obligated to pay rent for office space under operating
leases which expire at various dates through September 2002.
Rent expense for 1997, 1996, and 1995 was $990,000, $614,000, and
$293,000 respectively.
Future minimum lease payments under noncancelable operating leases at
December 31, 1997 are as follows (in thousands):
1998 $ 1,081
1999 1,101
2000 949
2001 233
2002 165
----------------------------------------------------------------------
Total minimum lease payments $ 3,529
----------------------------------------------------------------------
Salary Continuation Agreements
The Company has employment agreements with certain members of
management. These agreements contain provisions for salary continuation
payments (aggregating approximately $1,312,000 at December 31, 1997) if
all such employees are terminated without cause.
(13) Related Party Transactions
A member of the Company's Board of Directors is the chief executive
officer of a client. Revenues from this client were $2,101,000,
$78,000, and $-- in 1997, 1996 and 1995, respectively. Outstanding
trade accounts receivable from this client were $108,000 and $161,000
at December 31, 1997 and 1996, respectively.
A former member of the Company's Board of Directors was the chief
executive officer of a client. Revenues from this client were $418,000,
34
<PAGE>
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
$2,858,000, and $587,000 in 1997, 1996 and 1995, respectively.
Outstanding trade accounts receivable from this client were $170,000
and $572,000 at December 31, 1997 and 1996, respectively. The same
former member of the Company's Board of Directors was a member of a
client's Board of Directors. Revenues from this client were $--,
$114,000, and $395,000 in 1997, 1996 and 1995. Outstanding accounts
receivable from this client were $-- at December 31, 1997 and 1996.
During the years ended December 31, 1997, 1996, and 1995, the Company
made insurance premium payments of $116,000, $143,000 and $116,000,
respectively, under certain insurance policies on the life of the Chief
Executive Officer of the Company for which the Company is not the
beneficiary.
(14) Subsequent Event
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 has 30
employees and reported revenues of $2,800,000 for the year ended
December 31, 1997. This acquisition will be accounted for using the
purchase method of accounting.
35
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of
Integrated Systems Consulting Group, Inc.:
We have audited the accompanying consolidated balance sheets of Integrated
Systems Consulting Group, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We beleive that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Integrated Systems
Consulting Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
January 23, 1998, except as to note 14, which is as of February 27, 1998
36
<PAGE>
Schedule II
INTEGRATED SYSTEMS CONSULTING GROUP, INC.
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------
Additions
---------------------------
For the year Balance at Charged to Charged to Balance
ended beginning cost and other at end of
December 31 Description of period expenses accounts Deductions period
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 Billing $ 196,000 $ 64,000 $ 84,000 (1) $ (32,000) $ 312,000
adjustments
and uncollectible
amounts
1996 Billing adjustments 200,000 -- 23,000 (1) (27,000) 196,000
and uncollectible
amounts
1995 Billing adjustments 100,000 41,000 59,000 (1) -- 200,000
and uncollectible
amounts
</TABLE>
(1) Charged against revenue.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ DAVID S. LIPSON
----------------------------------
David S. Lipson
Chairman, Chief Executive Officer,
President & Treasurer
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title(s) Date
---------- -------- ----
<S> <C> <C>
/s/ DAVID S. LIPSON Chief Executive Officer, President and March 31, 1998
- -------------------------- Treasurer (Principal Executive Officer) and
David S. Lipson Chairman
/s/ DAVID D. GATHMAN Chief Financial Officer, Executive Vice President, March 31, 1998
- -------------------------- Secretary and Assistant Treasurer (Principal
David D. Gathman Financial and Accounting Officer) and
Director
/s/ FRANK BALDINO, Jr. Director March 31, 1998
- --------------------------
Frank Baldino, Jr.
Director March 31, 1998
- --------------------------
Melvyn E. Bergstein
Director March 31, 1998
- --------------------------
Donald R. Caldwell
/s/ MARK J. DENINO Director March 31, 1998
- --------------------------
Mark J. DeNino
/s/ DAVID FEHR Director March 31, 1998
- --------------------------
David Fehr
/s/ JAMES L. MANN Director March 31, 1998
- --------------------------
James L. Mann
/s/ DONNA J. PEDRICK Director March 31, 1998
- --------------------------
Donna J. Pedrick
Director March 31, 1998
- --------------------------
Michael D. Stern
Director March 31, 1998
- --------------------------
Edward S.J. Tomezsko
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibits
3.1 Articles of Incorporation of the Company.*
3.2 By-laws of the Company.*
4 Specimen stock certificate.*
10.1 Stock Option Plan, as amended.**
10.2 Amended and Restated Employment Agreement dated January 1, 1995 between
the Registrant and David S. Lipson.*
10.3 Employment Agreement dated April 1, 1994 between the Registrant and
David D. Gathman.*
10.4 Employment Agreement dated January 1, 1993 between the Registrant and
Edward P. Kaiserian, as modified on January 1, 1995.*
10.5 Employment Agreement dated January 9, 1992 between the Registrant and
David F. Elderkin.*
10.6 Employment Agreement dated November 25, 1995 between the Registrant and
Jay M. Rose.*
11 Statement Regarding Computation of Earnings Per Share.
21 Subsidiaries of the Registrant.*
23 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
27.3 Restated Financial Data Schedule.
27.4 Restated Financial Data Schedule.
27.5 Restated Financial Data Schedule.
27.6 Restated Financial Data Schedule.
27.7 Restated Financial Data Schedule.
27.8 Restated Financial Data Schedule.
27.9 Restated 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.
** Filed as an exhibit to the Company's Form 10-Q filed on August 14, 1997 and
incorporated herein by reference.
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Year Ended December 31
----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Shares used in computing basic net income per common share:
Shares outstanding at beginning of period 7,857 5,606 4,609
Weighted impact of common shares issued
during the period 64 1,315 481
Weighted impact of common shares repurchased
during the period -- (8) (5)
----------- ----------- -----------
Total shares used in computing basic net income per
common share 7,921 6,913 5,085
----------- ----------- -----------
Net income $ 3,513 $ 3,004 $ 1,850
----------- ----------- -----------
Basic net income per common share $ .44 $ .43 $ .36
----------- ----------- -----------
Shares used in computing diluted net income per common share:
Shares outstanding, beginning of period 7,857 5,606 4,609
Stock options issued prior to April 17, 1996 presented
as if outstanding for all periods -- 129 310
Warrants issued prior to April 17, 1996 presented
as if outstanding for all periods -- 142 340
Net incremental shares resulting from assumed exercise of
of stock options and warrants using the treasury stock 960 907 446
method
Weighted impact of common shares issued
during the period 64 1,315 481
Weighted impact of common shares repurchased
during the period -- (8) (5)
----------- ----------- -----------
Total shares used in computing diluted net income per
common share 8,881 8,091 6,181
----------- ----------- -----------
Net income $ 3,513 $ 3,004 $ 1,850
----------- ----------- -----------
Diluted net income per common share $ .40 $ .37 $ .30
----------- ----------- -----------
</TABLE>
<PAGE>
EXHIBIT 23
The Board of Directors
Integrated Systems Consulting Group, Inc.
We consent to incorporation by reference in the registration statement No.
333-05473 on Form S-8 of Integrated Systems Consulting Group, Inc. of our report
dated January 23, 1998, except as to note 14, which is as of February 27, 1998,
relating to the consolidated balance sheets of Integrated Systems Consulting
Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997, and related
schedule, which report appears in the December 31, 1997 annual report on Form
10-K of Integrated Systems Consulting Group, Inc.
KPMG Peat Marwick LLP
Philadelphia, PA
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001007020
<NAME> INTEGRATED SYSTEMS CONSULTING GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,842
<SECURITIES> 601
<RECEIVABLES> 8,937
<ALLOWANCES> 312
<INVENTORY> 0
<CURRENT-ASSETS> 18,871
<PP&E> 6,161
<DEPRECIATION> 2,654
<TOTAL-ASSETS> 23,898
<CURRENT-LIABILITIES> 2,541
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 21,311
<TOTAL-LIABILITY-AND-EQUITY> 23,898
<SALES> 43,178
<TOTAL-REVENUES> 43,178
<CGS> 0
<TOTAL-COSTS> 37,635
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 5,961
<INCOME-TAX> 2,448
<INCOME-CONTINUING> 3,513
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,513
<EPS-PRIMARY> .44
<EPS-DILUTED> .40
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0001007020
<NAME> INTEGRATED SYSTEMS CONSULTING GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,730
<SECURITIES> 2,537
<RECEIVABLES> 5,787
<ALLOWANCES> 196
<INVENTORY> 0
<CURRENT-ASSETS> 17,812
<PP&E> 4,365
<DEPRECIATION> 1,430
<TOTAL-ASSETS> 20,844
<CURRENT-LIABILITIES> 3,084
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 17,714
<TOTAL-LIABILITY-AND-EQUITY> 20,844
<SALES> 30,607
<TOTAL-REVENUES> 30,607
<CGS> 0
<TOTAL-COSTS> 25,691
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 5,270
<INCOME-TAX> 2,266
<INCOME-CONTINUING> 3,004
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,004
<EPS-PRIMARY> .43
<EPS-DILUTED> .37
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0001007020
<NAME> INTEGRATED SYSTEMS CONSULTING GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,479
<SECURITIES> 0
<RECEIVABLES> 3,272
<ALLOWANCES> 200
<INVENTORY> 0
<CURRENT-ASSETS> 6,067
<PP&E> 2,133
<DEPRECIATION> 721
<TOTAL-ASSETS> 7,586
<CURRENT-LIABILITIES> 2,740
<BONDS> 0
0
0
<COMMON> 35
<OTHER-SE> 4,811
<TOTAL-LIABILITY-AND-EQUITY> 7,586
<SALES> 21,024
<TOTAL-REVENUES> 21,024
<CGS> 0
<TOTAL-COSTS> 17,746
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113
<INCOME-PRETAX> 3,245
<INCOME-TAX> 1,395
<INCOME-CONTINUING> 1,850
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,850
<EPS-PRIMARY> .36
<EPS-DILUTED> .30
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0001007020
<NAME> INTEGRATED SYSTEMS CONSULTING GROUP, INC.
<MULTIPLIER> 1,000
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