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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
(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, 1996, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-28830
THE METZLER GROUP, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<C> <C>
DELAWARE 36-4094854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
520 LAKE COOK ROAD, SUITE 500, DEERFIELD, ILLINOIS 60015
(Address of principal executive offices, including zip code)
(847) 914-9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
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 14, 1997, [10,627,181] shares of the Registrants common stock,
par value $.001 per share ("Common Stock"), were outstanding. The aggregate
market value of shares of Common Stock held by non-affiliates, based upon the
closing sale price of the stock on the Nasdaq National Market, was approximately
$256,380,742 as of this date.
The Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be hold May 21, 1997 is incorporated by reference into Part III of
this Annual Report on Form 10-K.
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PART I
ITEM 1 -- BUSINESS
GENERAL
The Metzler Group, Inc. is a leading nationwide provider of consulting
services to electric utilities and other energy-related businesses. The Company
offers a wide range of consulting services related to information technology,
process/operations management, business strategy development, and marketing and
sales designed to assist its clients in succeeding in a business environment of
changing regulation, increasing competition and evolving technology. The Company
has competed successfully in this environment, having achieved revenue growth of
29% from 1994 to 1995 and over 60% in 1996.
The electric utility industry is one of the largest industries in the
United States. According to the Edison Electric Institute, in 1995 the total
assets of investor-owned utilities (which account for the vast majority of the
industry's generating capacity and revenues) exceeded $575 billion and electric
utility industry revenues from sales to end users totaled approximately $207
billion.
The demand for consulting services in the U.S. electric utility industry is
driven in significant part by the revolutionary change facing the industry as it
begins to convert from a regulated monopoly structure to an increasingly
competitive environment. Historically, due to the significant fixed costs
inherent in generating and transmitting electricity, electric utilities were
viewed as natural local monopolies, operating as an integrated entity to
generate, transmit and distribute retail electricity within designated
geographic service areas without competition from other suppliers.
However, as a result of recent market, regulatory and legislative factors,
competition in the electric utility industry is being encouraged at both the
state and federal regulatory levels, but the transformation to a competitive
market for electricity is proceeding unevenly. Although deregulation of the
transportation and telecommunications industries was accomplished relatively
rapidly, deregulation of the electric utility industry has been more difficult
due to the complex and overlapping web of over 200 federal and state regulatory
bodies and the presence of a large number of separate, regulated companies.
Accordingly, implementation will likely unfold on a state-by-state basis into
the next century and may well face challenges from utilities and state and local
governments.
The changing competitive environment in the electric utility industry has
forced utility companies to confront an evolving range of strategic options and
challenges. In order to deal with these challenges and address these
opportunities, electric utilities are formulating and implementing new
strategies and tactics, including redesigning business processes, re-engineering
work forces, acquiring more effective information technology and adopting or
restructuring customer service and marketing programs. Utilities are
increasingly turning to experienced outside consulting firms to assist in or
lead this process because: (i) the pace of change is eclipsing utilities'
internal resources; (ii) many utilities lack the depth and breadth of experience
to identify, evaluate and implement the full range of possible options and
solutions; (iii) outside specialists often enable electric utilities to develop
better solutions in shorter time frames; (iv) purchasing consulting expertise
converts fixed labor costs to variable costs and can be more cost-effective; and
(v) consultants can often formulate more objective advice, free of internal
cultural or political forces.
Metzler believes that several competitive factors distinguish it from other
participants in the consulting market including: (i) established electric
utility expertise developed over more than thirteen years of providing
consulting services to the electric utility industry; (ii) deep-rooted client
relationships supporting multiple engagements; (iii) proprietary knowledge base
that the Company has developed internally and continuously refines for
incorporation into analysis for new engagements; (iv) wide range of
industry-specific services that enables the Company to be a single-source
provider of consulting services to utilities while maintaining advanced skill
sets in each area; and (v) strategic planning methodology using a high-level
modeling tool developed by Metzler to support the comprehensive strategic
planning process of utilities.
Metzler's growth strategy includes the following elements: (i) further
penetrating its existing client base; (ii) seeking new clients and expanding its
geographic presence; (iii) continuing to recruit highly skilled
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professionals with skill sets and client relationships complementary to the
Company's existing professional base; (iv) pursuing strategic acquisitions that
provide the Company with an expeditious and cost-effective method of increasing
its number of consultants, broadening its client base, expanding its skill sets
or expanding its presence in a geographic region; and (v) expanding its service
offerings to include other service areas that the Company believes will be in
demand as the industry continues its move toward a more competitive environment.
SERVICES
The Company offers its consulting services in four principal areas:
information technology, process/operations management, strategy, and marketing
and sales. In order to understand the basic characteristics of a client,
organizational unit or project, the Company generally performs more than 75% of
the engagement at the client's site. This on-site presence helps avoid the
development of conclusions drawn from limited exposure to company personnel,
processes and facilities and enables Metzler consultants to be available to
service further or expanded client needs as they may evolve. Although extensive
time is spent on site, all Metzler consultants have portable computers running
common software for word processing and tabular and graphic presentations,
thereby allowing the project team to remain relatively independent of and
non-intrusive into the client's daily business operations.
The table below provides examples of the Company's service offerings in
each of these areas.
<TABLE>
<CAPTION>
CATEGORY OF SERVICE DESCRIPTION OF PROJECTS
------------------- -----------------------
<S> <C>
INFORMATION TECHNOLOGY - Total life cycle analysis and implementation of
activity-based management systems, including process
evaluation, activity definition, chart of accounts and
system design, construction and implementation
- Development of strategic information systems plans
- Development of information systems such as activity-based
management and marketing information systems
- Development of information requirements and package
evaluations for executive information systems, materials
management systems and work management systems
- Development of telecommunications systems, including
integrated communications planning, communications market
analysis, network traffic evaluation and customer
operations process design
PROCESS/OPERATIONS MANAGEMENT - Examination and reorganization of customer operations
- Evaluation of distribution operations
- Business process redesign of the material procurement and
contract function
- Consolidation options for transmission, distribution and
customer service operations
- Examination and restructuring of plant operations and
maintenance functions
- Consolidation and integration options for the marketing
and customer services operations
- Development of materials management programs
- Materials management support for outages
- Development of procurement strategies, policies and
procedures
- Examination of contract consolidation
</TABLE>
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<TABLE>
<CAPTION>
CATEGORY OF SERVICE DESCRIPTION OF PROJECTS
------------------- -----------------------
<S> <C>
STRATEGY - Identification and evaluation of candidates for merger,
consolidation or acquisition
- Evaluation of alternative regulatory and legislative
positions
- Identification of how market clearing prices would respond
to various strategic initiatives and activities within the
marketplace
- Development of non-regulated business plans and
objectives, including investment and spending objectives
- Examination of domestic and international energy market
sectors and identification of opportunities for competitive
leverage
- Development of negotiation strategies for the client in
the initiation and renewal of power commitment contracts
- Independent evaluation of the planning process and
products
- Quantification and prioritization of operational and
business strategies
MARKETING AND SALES - Marketing analysis, market surveys, competitive
assessments and profitability objectives
- Detailed analysis of the marketplace including potential
size and volume growth rates, customer preferences,
competitive strategies and market penetration options
- Market survey of industrial and commercial customers in
response to proposed unbundled energy services
- Development of market strategies and marketing plans
- Restructuring of account management programs
- Restructuring and consolidation of distribution system
networks to optimize service delivery
- Redesign and implementation of marketing and customer
service functions
</TABLE>
MARKETING AND SALES
The Company markets its services directly to senior executives of utilities
from its headquarters near Chicago, Illinois. The Company employs a variety of
business development and marketing techniques to communicate directly with
current and prospective clients, including on-site presentations to senior
utility executives, industry seminars featuring presentations by Metzler
personnel and authoring of articles and other publications regarding the utility
industry and the Company's methodologies.
A significant portion of new business arises from prior client engagements.
Clients frequently expand the scope of engagements during delivery to include
follow-on complementary activities. Also, the Company's on-site presence affords
it the opportunity to become aware of, and to help define, additional project
opportunities as they are identified by the client. The strong client
relationships arising out of many engagements often facilitate the Company's
ability to market additional capabilities to its clients in the future. In
addition, the Metzler senior management teamis actively engaged in meeting with
utilities that have not yet engaged the Company and newly appointed senior
managers in utilities where the Company has worked in the past to make them
aware of the Company's capabilities.
CLIENTS AND REPRESENTATIVE SERVICES
The Company has performed consulting assignments for more than 120 utility
industry clients, principally investor-owned electric utilities. The Company's
clients also include gas and water companies and other ownership structures such
as holding companies, electric cooperatives, public power agencies and state
regulatory commissions. The Company also serves independent power producers,
co-generators and power marketers and suppliers to the utility industry.
Because of the nature and scope of many of the Company's projects, the
Company derives a significant portion of its revenues from a relatively limited
number of clients that operate exclusively in the electric utility
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industry. For example, during 1996, revenues from the Company's ten most
significant clients accounted for approximately 80.1% of its revenues. In 1996,
a group of affiliated clients and the Company's then largest single client
accounted for approximately 20.5% and 15.5% of the Company's revenues,
respectively. The Company's largest clients typically engage the Company on
consulting projects that span from twelve to eighteen months and thereafter the
Company may not be rehired for a significant project for varying periods of
time. This typical engagement cycle causes the Company's ten most significant
clients, absent project carryovers, to change from year to year. For these
reasons, the Company believes that it is not materially dependent on any
particular client.
HUMAN RESOURCES
As of March 14, 1997, the Company's personnel consisted of 67 employees.
The Company's success depends in large part on attracting, retaining and
motivating talented, creative and experienced professionals at all levels. In
connection with its hiring efforts, the Company employs a full-time human
resources director, retains executive search firms and relies on personal and
business contacts to recruit professionals with significant utility industry or
consulting experience. The Company's hiring focus is not on finding a large
number of employees, but rather on identifying candidates who are well suited by
background and temperament to serve the Company's utility client base. The
Company's consultants are drawn from utility and related industries such as
engineering, construction and telecommunications, and from accounting and other
consulting organizations. The Company's fifteen senior most managers each
average a total of fifteen years of utility industry and consulting experience.
The Company has experienced consultant attrition of approximately 15% over each
of the last two years, predominately at the associate level.
The Company has developed mentoring programs to assist in training its
employees, and intends to further enhance its focus on employee training in the
future. The Company also develops its consultants through a training program, as
well as review of precedent from prior Company engagements.
The Company promotes loyalty and continuity of its consultants by offering
packages of base and incentive compensation and benefits that it believes are
significantly more attractive than those offered by the consulting industry in
general. In addition, to attract and retain consultants, the Company has
established several employee benefit plans.
In addition to the employees discussed above, Metzler supplements its
consultants on certain engagements with independent contractors, many of whom
are former employees of the Company. The Company is responsible for selecting
these individuals and integrating their work product into a total solution for
the Company's utility client. The Company believes that its practice of
retaining independent contractors on a per-engagement basis provides it with
greater flexibility in adjusting professional personnel levels in response to
changes in demand for its services.
COMPETITION
The market for consulting services to electric utilities is intensely
competitive, highly fragmented and subject to rapid change. The market includes
a large number of participants from a variety of market segments, including
general management consulting firms, the consulting practices of "Big Six"
accounting firms, and local or regional firms specializing in utility services.
Many information technology consulting firms also maintain significant practice
groups devoted to the utility industry. Many of these companies are national and
international in scope and have greater financial, technical and marketing
resources than the Company. The Company believes that its experience,
reputation, industry focus and broad range of services will enable it to compete
effectively in its marketplace.
ITEM 2 -- PROPERTIES
Metzler currently operates from 10,000 square feet of leased office space
located in Deerfield, Illinois. The Company believes that additional space will
be required as its business expands geographically and that it will be able to
obtain suitable space as needed.
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ITEM 3 -- LEGAL PROCEEDINGS
The Company is not a party to any litigation and is not aware of any
pending or threatened litigation that would have a material adverse effect on
the Company or its business.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996 and prior to the effective date of its
initial public offering, the Company submitted the approval of a Long Term
Incentive Plan (the "Plan") and the granting of options pursuant to the Plan to
its stockholders in anticipation of the offering. On October 2, 1996, holders of
100% of the issued and outstanding shares of Common Stock of the Company
approved the Plan and the options granted thereunder by unanimous written
consent.
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "METZ". The following table shows the range of reported high and low
bid quotations for the Company's Common Stock, for the fiscal periods indicated,
as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
FISCAL 1996: HIGH LOW
------------ ---- ---
<S> <C> <C>
January - March............................................. $ N/A $ N/A
April - June................................................ $ N/A $ N/A
July - September............................................ $ N/A $ N/A
October - December.......................................... $36.75 $19.50
</TABLE>
The Company had 10 holders of record of its Common Stock at March 14, 1997
and approximately 1,400 beneficial owners. The Company has never paid a cash
dividend on its Common Stock and does not expect to pay a cash dividend on its
Common Stock in the foreseeable future.
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ITEM 6 -- SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the Company's Financial Statements and related Notes thereto and with "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues........................................ $22,093 $13,460 $10,420 $10,380 $9,216
Cost of services................................ 11,111 6,422 5,263 5,797 5,644
------- ------- ------- ------- ------
Gross profit.................................... 10,982 7,038 5,157 4,583 3,572
Selling, general and administrative expenses.... 3,732 7,650 5,327 4,267 4,006
------- ------- ------- ------- ------
Operating income (loss)......................... 7,250 (612) (170) 316 (434)
Other expense (income), net..................... (295) 127 72 15 (24)
------- ------- ------- ------- ------
Income (loss) before income tax expense
(benefit)..................................... 7,545 (739) (242) 301 (410)
Income tax expense (benefit)(1)................. 691 (266) (58) 147 (145)
------- ------- ------- ------- ------
Net income (loss)............................... $ 6,854 $ (473) $ (184) $ 154 $ (265)
======= ======= ======= ======= ======
Pro forma income data:
Net income (loss) as reported................. $ 6,854 $ (473)
Pro forma adjustments to income tax
expense(2)................................. (1,799) (1,110)
Pro forma adjustments to executive
compensation expense(3).................... (1,020) 2,775
------- -------
Pro forma net income.......................... $ 4,035 $ 1,192
======= =======
Pro forma net income per share(4)............... $0.40 $0.12
======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....................... $32,733 $ 223 $ 64 $ 3 $ 2
Working capital................................. 33,872 34 310 348 85
Total assets.................................... 37,581 2,780 2,518 3,459 2,697
Obligations under capital lease, less current
portion....................................... 14 30 46 60 --
Total stockholders' equity...................... 34,092 243 655 860 752
</TABLE>
- -------------------------
(1) Prior to January 1, 1996, the Company had operated as a C-corporation.
Effective January 1, 1996, the stockholders of the Company elected to be
taxed under Subchapter S of the Internal Revenue Code. As an S-corporation,
the Company was not subject to federal (and some state) income taxes. These
taxes were the responsibility of the Company's stockholders. The
S-corporation election terminated in connection with the consummation of the
initial public offering of the Company's common stock on October 4, 1996.
See Note 2 of Notes to Consolidated Financial Statements.
(2) The pro forma adjustments for 1996 include federal and additional state
income tax expense of $1,799,403 that would have been required had the
Company not made the S-corporation election effective January 1, 1996. The
pro forma adjustments for 1995 include additional federal and state income
tax expense of $1,110,117 that would have been required had the Company's
compensation expense decreased in 1995 to the level commensurate with the
compensation plan adopted effective July 1, 1996, as noted below. See Note 2
of Notes to Consolidated Financial Statements.
(3) The pro forma adjustments for the years 1996 and 1995 reflect the impact of
a compensation plan effective July 1, 1996. Salary and bonuses for the
executive officers of the Company are included in
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selling, general and administrative expenses. The pro forma adjustments for 1996
represent an increase to selling, general and administrative expense of
$1,019,460; the amount by which officer compensation expense that would have
been paid under the compensation plan adopted July 1, 1996 exceeded officer
compensation actually paid. The pro forma adjustments for 1995 represent a
decrease in selling, general and administrative expense of $2,775,293; the
amount by which officer compensation actually paid exceeded the
compensation that would have been paid had the compensation plan adopted on
July 1, 1996 been in effect for all of 1995. See Note 2 of Notes to
Consolidated Financial Statements.
(4) Pro forma net income per share for the year ended December 31, 1996 is based
on the weighted average of 10,046,218 common and common stock equivalent
shares outstanding which includes 9,931,964 average actual common shares
outstanding and 114,254 common stock equivalent shares outstanding during
the year. Pro forma net income per share for the year ended December 31,
1995 is based on the weighted average of 9,781,051 common and common stock
equivalent shares outstanding which includes 9,692,134 average actual common
shares outstanding and 88,917 common stock equivalent shares outstanding
during the year. See Note 2 of Notes to Consolidated Financial Statements.
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended by Public Law 104-67. Forward-looking statements may be
identified by words including "anticipate," "believe," "intends," "estimates,"
"expect" and similar expressions. The Company cautions readers that
forward-looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity, and
income, are subject to certain risks and uncertainties that could cause actual
results to differ materially from those indicated in the forward looking
statements, due to several important factors herein identified, among others,
and other risks and factors identified from time to time in the Company's
reports filed with the SEC.
OVERVIEW
The Metzler Group, Inc. is a leading nationwide provider of consulting
services to electric utilities and other energy-related businesses. The Company
offers a wide range of consulting services related to information technology,
process/operations management, strategy, and marketing and sales designed to
assist its clients in succeeding in a business environment of changing
regulation, increasing competition and evolving technology.
The Company derives substantially all of its revenues from fees for
professional services, which are billed at standard daily rates or provided on a
fixed-bid basis. Over the last three years, the substantial majority of the
Company's revenues has been generated under standard daily rates billed on a
time and expenses basis. Clients are typically invoiced on a monthly basis with
revenue recognized as the services are provided. Fixed-bid revenue is recognized
by the percentage of completion method based on the ratio of costs incurred to
total estimated project costs. Although fixed-bid projects subject the Company
to the risk of cost overruns, the Company has not incurred a loss on a fixed-bid
contract during the last three years.
The Company's most significant expenses are project personnel costs, which
consist of consultant salaries and benefits, and travel-related direct project
expenses. Project personnel are typically full-time professionals employed by
the Company, although the Company supplements its project professional personnel
through the use of independent contractors. The Company retains contractors for
specific client engagements on a task-specific, per diem basis during the period
their expertise or skills are required. The Company believes that retaining
contractors on a per-engagement basis provides it with greater flexibility in
adjusting professional personnel levels in response to changes in demand for its
services.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of revenues:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues................................................ 100% 100% 100%
Cost of services........................................ 50 48 51
--- --- ---
Gross profit............................................ 50 52 49
Selling, general and administrative expenses............ 17 57 51
--- --- ---
Operating income (loss)................................. 33 (5) (2)
Other expense (income), net............................. (1) 1 1
--- --- ---
Income (loss) before income tax expense (benefit)....... 34 (6) (3)
Income tax expense (benefit)............................ 3 (2) (1)
--- --- ---
Net income (loss)....................................... 31% (4)% (2)%
=== === ===
</TABLE>
1996 COMPARED TO 1995
Revenues. Revenues increased 64% to $22.1 million in 1996 from $13.5
million in 1995. This increase was caused by increased demand for management
consulting services in the electric utility industry and a change in the
Company's management compensation structure that places more emphasis on the
generation of new client engagements. These factors generated increases in both
the number of client projects and the average size of client projects.
Gross Profit. Gross profit consists of revenues less cost of services,
which includes consultant salaries, benefits and travel-related direct project
expenses. Gross profit increased 56% to $11.0 million in 1996 from $7.0 million
in 1995. Gross profit as a percentage of revenues was 50% in 1996 compared to
52% in 1995. The year over year decrease in the gross profit percentage was due
to lower utilization rates for full time professional personnel and a higher
proportion of subcontracted labor in 1996. Utilization rates in 1995 exceeded
the Company's expected standard levels and were reduced to levels that the
Company considers to be sustainable.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include salaries and benefits of management and support
personnel, facilities costs, training, direct selling, outside professional fees
and all other corporate costs. Selling, general and administrative expenses
decreased 51% to $3.7 million in 1996 from $7.6 million in the prior year. As a
percentage of revenues, selling, general and administrative expenses decreased
to 17% in 1996 from 57% in 1995. The decrease is attributable primarily to the
change in the taxable status of the Company from a C-corporation to an
S-corporation commencing January 1, 1996, with the Company's profits being
distributed to its principal executives. In conjunction with the change in
taxable status, the Company eliminated all other incentive compensation programs
for these key executives. Effective July 1, 1996, in contemplation of the
termination of the Company's S-corporation status in connection with the closing
of the Company's initial public offering of common stock, the Company adopted a
new executive compensation plan. The pro forma adjustments for 1996 and 1995
reflect the impact of this compensation plan. The pro forma adjustment for 1996
includes an increase in officer compensation of $1.0 million while the pro forma
adjustment for 1995 incorporates a decrease in officer compensation of $2.8
million. After giving effect to these pro forma adjustments, selling, general
and administrative expenses would represent $4.8 million, or 22% of revenues, in
1996 and $4.9 million, or 36% of revenues, in 1995. Although selling, general
and administrative expenses generally increase as the Company's revenues
increase, the Company believes it can continue to leverage its existing overhead
structure to lower selling, general and administrative expenses as a percentage
of revenue in the future.
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Operating Income (Loss). Operating income for 1996 was $7.2 million, as
opposed to an operating loss for 1995 of $0.6 million. The improvement is
attributable to the increased revenues and the decrease in selling, general and
administrative expenses resulting from the change in compensation for the
Company's key executives, as described above.
Income Taxes. Effective January 1, 1996, the stockholders of the Company
elected to be taxed under Subchapter S of the Internal Revenue Code. As an
S-corporation, the net income of the Company from January 1, 1996 was taxable
for federal (and some state) income tax purposes directly to the Company's
stockholders. The Company's S-corporation status was terminated October 4, 1996
upon the completion of the Company's initial public offering of its common
stock. Accordingly, the consolidated statement of operations for 1996 does not
include a provision for federal or certain state income taxes for the period
January 1, 1996 through October 3, 1996.
1995 COMPARED TO 1994
Revenues. Revenues increased 29% to $13.5 million in 1995 from $10.4
million in 1994. The increase in revenues was attributable to a 10% increase in
the Company's standard daily rates, an increase in the number of client projects
and an increase in the average size of client projects. The rate increase was
applicable to new client engagements that commenced after the third quarter of
1994, but the full effect was not evident until 1995 because of the high level
of work in process for the fourth quarter of 1994.
Gross Profit. Gross profit increased 36% to $7.0 million in 1995 from $5.2
million in 1994. Gross profit as a percentage of revenues increased to 52% in
1995 from 49% in 1994. This increase is attributable to higher utilization rates
for professional personnel, higher standard daily rates and reduced reliance on
independent subcontractors in 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 44% to $7.7 million in 1995 from $5.3 million
in 1994. This increase is attributable to higher 1995 compensation for the
Company's principal executive officers. The Company's 1995 executive incentive
plan provided for compensation payments that were largely commensurate with
increased gross profits generated from incremental revenues. Selling, general
and administrative expenses, as a percentage of revenues, increased to 57% in
1995 from 51% in 1994. Excluding the incentive compensation expense for key
executives, the remaining selling, general and administrative expenses were 11%
and 13% of revenues in 1995 and 1994, respectively.
Operating Income (Loss). The operating loss increased to $0.6 million in
1995 from $0.2 million in 1994. The higher operating loss in 1995 was driven by
increased compensation for the Company's principal executive officers, mitigated
to some degree by improved gross margins.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been cash flow from
operations, periodically supplemented by borrowings under a bank line of credit
and by loans from stockholders. Cash flow from operations amounted to
$5,140,000, $112,000 and $254,000 for 1996, 1995 and 1994, respectively. The
increase in cash flows from operations for 1996 is largely commensurate with the
increase in revenues and the decrease in selling, general and administrative
expenses for the period, as described above. Operating cash flows for 1995 and
1994 reflect the operating income and net income levels during those years and
the effects of changes in two key elements of working capital: accounts
receivable and accrued compensation and related costs. Accounts receivable
decreased in 1994 as improvements in year-end collections reduced the days
revenue outstanding at year end. At year end 1995, accounts receivable increased
as a result of higher revenues and billings, partially offset by improvements in
collections which further reduced the days revenue outstanding. The Company has
a substantial level of accrued compensation at each year end because salaries
are paid monthly, in arrears, and because annual incentives and bonuses earned
and accrued during the calendar year are typically paid in the first quarter of
the subsequent year. Incentives and bonuses are based on individual as well as
overall business performance and represent a significant proportion of total
compensation for both project personnel and executive management. In 1994,
accrued compensation decreased with the reduction in
9
<PAGE> 11
full time equivalent consultants. Accrued compensation for 1995 increased in
line with the growth in professional personnel and higher utilization rates.
Investing activities have not required significant cash flows historically.
Cash flow provided by financing activities was $27.6 million for 1996. On
October 4, 1996 the Company completed an initial offering of 2,585,000 shares of
its common stock which resulted in proceeds of approximately $37 million after
deducting underwriting discounts and commissions and other offering expenses.
Concurrent with this offering and pursuant to an agreement negotiated in July
1996, the Company redeemed 1,714,285 shares of common stock held by its founding
shareholder in exchange for a promissory note in the amount of $7,975,000. The
promissory note was repaid within 30 days after the effective date of the
offering. In January 1996, the Company issued notes payable to two shareholders
in the aggregate amount of $1.0 million. The notes, each with a principal amount
of $0.5 million, bear interest at a rate of 10%. The proceeds from these notes
were used to repay $406,000 in debt outstanding under a line of credit and to
provide working capital for operations during the interim periods prior to the
stock offering. During the period from January 1, 1996 to October 4, 1996 the
Company was taxed as an S-corporation. As an S-corporation, all the Company's
net income from that period will be distributed to its key executives and
included in their personal taxable income. During 1996, the Company distributed
$2.2 million of S-corporation earnings. Undistributed S-corporation earnings
amount to $3.5 million as of December 31, 1996.
The Company believes the net proceeds from the initial offering of its
common stock, together with funds generated by operations, will provide adequate
cash to fund its anticipated cash needs, which may include future acquisitions
of complementary businesses, at least through the next eighteen months.
Thereafter, the Company anticipates that its cash requirements related to future
operations and potential acquisitions will be funded with cash generated from
operations and short-term borrowings. The Company currently has no agreements,
understandings or commitments regarding future acquisitions. Pending such uses,
the net proceeds are invested in short-term, interest-bearing investment grade
securities. The Company currently anticipates that it will retain all of its
earnings for development of the Company's business and does not anticipate
paying any cash dividends in the foreseeable future.
ITEM 8 -- CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Consolidated Financial Statements of the Company are annexed to the
report as pages F-1 through F-13. An index to such materials appears on page
F-1.
ITEM 9 -- CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCUSSIONS
Not applicable
PART III
The information required by this Part III will be provided in the
definitive proxy statement for the Company's 1997 Annual Meeting of Stockholders
(involving the election of directors), which definitive proxy statement (the
'Proxy Statement") will be filed pursuant to Regulation 14A no later than 120
days following the Company's fiscal year ended December 31, 1996, and is
incorporated herein by this reference to the extent provided below.
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this item is incorporated by reference herein
from the section of the Proxy Statement captioned "Board of Directors --
Director Compensation," "Management Compensation" and "Compliance with Section
16(a) of the Exchange Act."
10
<PAGE> 12
ITEM 11 -- EXECUTIVE COMPENSATION
Information in response to this item is incorporated by reference herein
from the section of the Proxy Statement captioned "Board of Directors" --
Director Compensation" and "Management Compensation."
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this item is incorporated by reference herein
from the section of the Proxy Statement captioned "Stock Ownership of Directors,
Executive Officers and Principal Holders."
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this item is incorporated by reference herein
from the section of the Proxy Statement captioned "Certain Relationships and
Related Transactions."
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
The consolidated financial statements filed as part of this report are
listing in the accompanying Index to Consolidated Financial Statements. The
exhibits filed as part of this report are listed in the accompanying Exhibit
Index. No reports of Form 8-K were filed by the Company during the last quarter
of the period covered by this report. All financial statement schedules have
been omitted because the information is not required.
11
<PAGE> 13
THE METZLER GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent auditor's report................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and
1995...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995and 1994........................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 14
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
The Metzler Group, Inc.
We have audited the accompanying consolidated balance sheets of The Metzler
Group, Inc. and subsidiary as of December 31, 1996 and 1995 and related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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 believe 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 The Metzler
Group, Inc. and subsidiary as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 6, 1997
F-2
<PAGE> 15
THE METZLER GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $32,732,670 $ 223,235
Accounts receivable....................................... 4,333,968 2,288,878
Prepaid expenses and other................................ 155,531 7,939
----------- ----------
Total current assets................................... 37,222,169 2,520,052
----------- ----------
Property and equipment, at cost:
Office furniture and equipment............................ 778,464 599,466
Computer software......................................... 58,729 55,109
Other..................................................... 62,410 64,471
----------- ----------
899,603 719,046
Less accumulated depreciation and amortization............ (540,894) (459,520)
----------- ----------
Net property and equipment.................................. 358,709 259,526
----------- ----------
Total assets........................................... $37,580,878 $2,779,578
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable.............................................. $ -- $ 405,740
Notes payable to officers................................. 1,000,000 --
Current portion of obligations under capital lease........ 15,495 15,443
Accounts payable.......................................... 531,719 177,576
Accrued compensation and related costs.................... 783,346 1,659,290
Income taxes payable...................................... 734,994 14,859
Deferred income taxes..................................... 25,000 160,000
Deferred revenue.......................................... 93,875 15,348
Other current liabilities................................. 166,000 37,786
----------- ----------
Total current liabilities.............................. 3,350,429 2,486,042
Obligations under capital lease, less current maturities.... 13,600 30,443
Deferred income taxes....................................... 125,000 20,000
----------- ----------
Total liabilities...................................... 3,489,029 2,536,485
----------- ----------
Stockholders' equity:
Preferred stock, $.001 par value; 3,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common stock, $.001 par value, 15,000,000 shares
authorized; 10,585,000 and 9,714,285 shares issued and
outstanding in 1996 and 1995; respectively............. 10,585 9,714
Additional paid-in capital................................ 29,301,418 107,682
Retained earnings......................................... 4,779,846 125,697
----------- ----------
Total stockholders' equity............................. 34,091,849 243,093
----------- ----------
Total liabilities and stockholders' equity............. $37,580,878 $2,779,578
=========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> 16
THE METZLER GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues.............................................. $22,092,969 $13,459,725 $10,419,878
Cost of services...................................... 11,110,696 6,421,560 5,262,922
----------- ----------- -----------
Gross profit.......................................... 10,982,273 7,038,165 5,156,956
Selling, general and administrative expenses.......... 3,731,794 7,650,047 5,326,668
----------- ----------- -----------
Operating income (loss)............................... 7,250,479 (611,882) (169,712)
Other expense (income):
Interest expense.................................... 113,487 50,893 51,111
Interest income..................................... (367,278) (17,469) (5,097)
Other, net.......................................... (40,497) 93,926 26,048
----------- ----------- -----------
Total other expense (income).......................... (294,288) 127,350 72,062
----------- ----------- -----------
Income (loss) before income tax expense (benefit)..... 7,544,767 (739,232) (241,774)
Income tax expense (benefit).......................... 690,618 (266,000) (58,000)
----------- ----------- -----------
Net income (loss)..................................... $ 6,854,149 $ (473,232) $ (183,774)
=========== =========== ===========
Pro forma income data (unaudited):
Net income (loss) as reported....................... $ 6,854,149 $ (473,232)
Pro forma adjustments to income tax expense......... (1,799,403) (1,110,117)
Pro forma adjustments to executive compensation
expense.......................................... (1,019,460) 2,775,293
----------- -----------
Pro forma net income............................. $ 4,035,286 $ 1,191,944
=========== ===========
Pro forma net income per share................... $0.40 $0.12
=========== ===========
Shares used in computing pro forma net income per
share............................................... 10,046,218 9,781,051
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 17
THE METZLER GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
----------------------- -------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993....... -- $ -- 990 $ 1 $ 76,989 $ 782,703 $ 859,693
Retroactive restatement
for a 9,714,285 for 1
stock split in the form
of a common stock
dividend effective
September 20, 1996...... -- -- 9,616,152 9,616 (9,616) -- --
--------- ----------- ---------- ------- ----------- ----------- -----------
As restated............... -- -- 9,617,142 9,617 67,373 782,703 859,693
Net loss.................. -- -- -- -- -- (183,774) (183,774)
Purchase of common
stock................... -- -- (485,714) (486) (140,662) -- (141,148)
Issuance of common
stock................... -- -- 388,571 389 119,586 -- 119,975
--------- ----------- ---------- ------- ----------- ----------- -----------
Balance at
December 31, 1994....... -- -- 9,519,999 9,520 46,297 598,929 654,746
Net loss.................. -- -- -- -- -- (473,232) (473,232)
Issuance of common
stock................... -- -- 194,286 194 61,385 -- 61,579
--------- ----------- ---------- ------- ----------- ----------- -----------
Balance at
December 31, 1995....... -- -- 9,714,285 9,714 107,682 125,697 243,093
Net income................ -- -- -- -- -- 6,854,149 6,854,149
Purchase and retirement of
common stock............ -- -- (1,714,285) (1,714) (7,973,286) -- (7,975,000)
Issuance of common
stock................... -- -- 2,585,000 2,585 37,167,022 -- 37,169,607
S-Corporation
distributions........... -- -- -- -- -- (2,200,000) (2,200,000)
--------- ----------- ---------- ------- ----------- ----------- -----------
Balance at
December 31, 1996....... -- $ -- 10,585,000 $10,585 $29,301,418 $ 4,779,846 $34,091,849
========= =========== ========== ======= =========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 18
THE METZLER GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ 6,854,149 $(473,232) $(183,774)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 102,688 136,024 186,297
Loss on sale of property and equipment.............. 665 93,622 25,246
Deferred income taxes............................... (30,000) (273,000) (80,000)
Changes in assets and liabilities:
Accounts receivable............................... (2,045,090) (284,637) 695,518
Prepaid expenses and other assets................. (147,592) 2,677 (10,616)
Salary advances to officer........................ -- -- 57,502
Advances to affiliate............................. -- -- 72,842
Accounts payable.................................. 354,143 133,371 (19,726)
Accrued compensation and related costs............ (875,944) 779,401 (474,210)
Income taxes payable.............................. 720,135 -- --
Other accrued liabilities......................... 128,214 (17,509) (15,330)
Deferred revenues................................. 78,527 15,348 --
----------- --------- ---------
Net cash provided by operating activities................ 5,139,895 112,065 253,749
----------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment..................... (249,279) (51,329) (45,081)
Proceeds from sale of property and equipment........... 46,743 1,458 20,500
----------- --------- ---------
Net cash used in investing activities.................... (202,536) (49,871) (24,581)
----------- --------- ---------
Cash flows from financing activities:
Purchase of common stock............................... (7,975,000) -- (141,148)
Sale of common stock................................... 37,169,607 61,579 119,975
Repayment of note payable.............................. (405,740) (200,000) (506,260)
Issuance of note payable............................... -- 250,000 372,000
Issuance of notes payable to officers.................. 1,000,000 -- --
Distributions to stockholders.......................... (2,200,000) -- --
Payments for obligation under capital lease............ (16,791) (14,169) (12,999)
----------- --------- ---------
Net cash provided by (used in) financing activities...... 27,572,076 97,410 (168,432)
----------- --------- ---------
Net increase in cash..................................... 32,509,435 159,604 60,736
Cash and cash equivalents at beginning of year........... 223,235 63,631 2,895
----------- --------- ---------
Cash and cash equivalents at end of year................. $32,732,670 $ 223,235 $ 63,631
=========== ========= =========
Noncash investing activity:
Exchange of like-kind property......................... -- $ 28,500 --
=========== ========= =========
Supplemental information:
Interest payments...................................... $ 67,228 $ 51,119 $ 48,435
Income tax payments.................................... $ 12,168 $ 7,830 $ 52,226
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 19
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
The Metzler Group, Inc. (the "Company") is a leading provider of consulting
services to electric utilities and other energy-related businesses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. Intercompany accounts and transactions have
been eliminated.
Cash and Cash Equivalents
Cash equivalents are comprised of highly liquid instruments with original
maturities of 90 days or less.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are computed using the straight-line method based on the estimated useful lives,
ranging from three to five years, of the various classes of property and
equipment. Depreciation related to capital lease obligations is amortized over
the shorter of their useful lives or the term of the related leases by use of
the straight-line method.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments approximates
fair value because of the short maturity of those instruments.
Revenue Recognition
The Company recognizes revenues as the related services are performed.
Stock Based Compensation
The Company utilizes the intrinsic value-based method of accounting for its
stock-based compensation arrangements.
Income Taxes
Income taxes, including pro forma calculations, are accounted for in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (Statement 109). Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets
F-7
<PAGE> 20
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Prior to January 1, 1996, the Company had operated as a C-corporation.
Effective January 1, 1996, the stockholders of the Company elected to be taxed
under Subchapter S of the Internal Revenue Code. Federal income taxes are the
responsibility of the Company's stockholders as are certain state income taxes.
As of the effective date of the election, the Company is responsible for Federal
built-in-gain taxes to the extent applicable. Accordingly, the consolidated
statement of operations for the year ended December 31, 1996 provides for such
taxes. The S-corporation election terminated in connection with the consummation
of the initial public offering of the Company's common stock on October 4, 1996.
Pro Forma Net Income Per Share
Pro forma net income per common and common equivalent share is computed
based on the weighted average of 10,046,218 common and common equivalent shares
outstanding during the year ended December 31, 1996 and 9,781,051 common and
common equivalent shares outstanding during the year ended December 31, 1995.
Net income per share is computed using the weighted average number of
shares of common stock and dilutive common equivalent shares resulting from the
grant of 363,666 common stock options during the period from June 30, 1996 to
September 30, 1996 (using the treasury stock method). Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, common and common
equivalent shares issued by the Company during the twelve-month period prior to
the initial public offering have been included in the calculation of common and
common equivalent shares using the treasury stock method and the initial public
offering price per share as if they were outstanding for all periods presented.
The pro forma adjustments during the years 1996 and 1995 reflect the impact
of a compensation plan effective July 1, 1996. The pro forma adjustments for
1996 include an increase to officer compensation expense of $1,019,460. The pro
forma adjustments for 1995 include a decrease to officer compensation expense of
$2,775,293.
The pro forma adjustments for 1996 include federal and additional state
income tax expense of $1,799,403 that would have been required had the Company
not made the S-corporation election effective January 1, 1996. The pro forma
adjustments for 1995 include additional federal and state income tax expense of
$1,110,117, that would have been required had the Company's compensation expense
decreased in 1995 to the level commensurate with the compensation plan adopted
effective July 1, 1996, as noted above.
Use of 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. INITIAL PUBLIC OFFERING
On October 4, 1996 the Company completed an initial public offering of its
common stock in which 2,300,000 shares were sold by the Company, along with an
additional over-allotment of 285,000 shares, resulting in net proceeds of
approximately $37 million, net of issuance costs of approximately $4 million.
F-8
<PAGE> 21
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Concurrent with the completion of the initial public offering and in
accordance with an agreement entered into during July 1996 between the Company
and its founding shareholder, the Company redeemed 1,714,285 shares of the
shareholder's common stock and issued to the shareholder a promissory note for
$7,975,000. See Note 10 of the Notes to Consolidated Financial Statements
regarding repayment of the promissory note.
4. NOTE PAYABLE
The Company had a line of credit with a bank which provided for maximum
borrowings limited to 65% of eligible accounts receivable. The line of credit,
which expired on December 31, 1996, had maximum borrowing of $1,200,000 and bore
interest at the bank's prime rate (8.25% at December 31, 1996) plus 1/2%. There
were no outstanding borrowings under the line of credit were at December 31,
1996. At December 31, 1995 the line of credit had maximum borrowing of $800,000
and bore interest at the bank's prime rate (8.5% at December 31, 1995) plus 1%.
Outstanding borrowings under the line of credit were $405,740 at December 31,
1995.
5. REVENUES AND ACCOUNTS RECEIVABLE FROM SIGNIFICANT CUSTOMERS
The Company's customers are located throughout the United States and
Canada. In 1996, 1995, and 1994 the Company's five largest clients accounted for
approximately, 58%, 55% and 58% of the Company's total revenues, respectively.
The balance due from the largest single customer represented 17% and 15% of the
Company's accounts receivable at December 31, 1996 and 1995, respectively.
6. LEASE COMMITMENTS
The Company leases its office facilities and certain equipment under
operating and capital lease arrangements which expire at various dates through
January 31, 2002.
Operating Leases
The Company leases office facilities under a noncancelable operating lease
which includes scheduled base rent increases over the term of the lease and
provides for monthly payments of real estate taxes, insurance and other
operating expenses applicable to the property. The total amount of the base rent
payments is being charged to expense as incurred. In addition, the Company
leases equipment under a noncancelable operating lease.
Future minimum annual lease payments, for the years subsequent to 1996 and
in the aggregate, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 AMOUNT
- ----------- ------
<C> <S> <C>
1997 .......................................................... $ 194,207
1998 .......................................................... 199,463
1999 .......................................................... 205,353
2000 .......................................................... 208,300
2001 .......................................................... 211,500
Thereafter .......................................................... 20,972
----------
$1,039,795
==========
</TABLE>
Rent expense for operating leases entered into by the Company and charged
to operations amounted to $186,000 for the year 1996, and $156,000 for each of
the years 1995 and 1994.
F-9
<PAGE> 22
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Capital Lease
The Company leases equipment which is classified within the Company's
consolidated financial statements as a capital lease. Included in the property,
plant and equipment in the accompanying consolidated balance sheets is the
following asset held under capital lease:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
---- ----
<S> <C> <C>
Property and equipment..................................... $75,863 $75,863
Less accumulated amortization.............................. 53,105 37,932
------- -------
Asset held under capital lease, net........................ $22,758 $37,931
======= =======
</TABLE>
The future minimum annual lease payments under the noncancelable capital
lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 AMOUNT
----------- ------
<S> <C>
1997........................................................ $18,808
1998........................................................ 14,105
-------
Net minimum rentals......................................... 32,913
-------
Less interest portion....................................... (3,818)
-------
Present value of net minimum rentals at December 31, 1996... $29,095
=======
</TABLE>
7. INCOME TAX EXPENSE (BENEFIT)
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal:
Current.......................................... $510,000 $ -- $ 9,000
Deferred......................................... (26,000) (218,000) (64,000)
-------- --------- --------
Total......................................... 484,000 (218,000) (55,000)
-------- --------- --------
State:
Current.......................................... 210,618 7,000 13,000
Deferred......................................... (4,000) (55,000) (16,000)
-------- --------- --------
Total......................................... 206,618 (48,000) (3,000)
-------- --------- --------
Total federal and state income tax expense
(benefit)........................................ $690,618 $(266,000) $(58,000)
======== ========= ========
</TABLE>
F-10
<PAGE> 23
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income tax expense (benefit) differs from the amounts estimated by applying
the statutory income tax rates to income (loss) before income tax expense
(benefit) as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate.......... $ 2,640,000 $(258,000) $(85,000)
State tax (benefit) at statutory rate............ 358,000 (35,000) (2,000)
Effect of nontaxable interest and dividends...... (88,000)
Effect of nondeductible expenses................. 25,000 27,000 29,000
Effect of S-corporation election................. (2,207,187)
Other............................................ (37,195) -- --
----------- --------- --------
$ 690,618 $(266,000) $(58,000)
=========== ========= ========
</TABLE>
Deferred income taxes result from temporary differences between years in
the recognition of certain expense items for income tax and financial reporting
purposes. The source and income tax effect of these differences are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax liabilities:
Built-in gain--resulting from the change in the method of
accounting used for tax purposes from the cash basis to
the accrual basis...................................... 120,000 160,000
Depreciation--resulting from the difference between using
straight-line and accelerated methods.................. 30,000 20,000
-------- --------
Deferred tax liability...................................... $150,000 $180,000
======== ========
</TABLE>
8. LONG-TERM INCENTIVE PLAN
On June 30, 1996, the Company adopted a Long-Term Incentive Plan which
provides for common stock, common stock-based, and other performance incentives
to employees, consultants, directors, advisors, and independent contractors of
the Company. The maximum number of shares of common stock which may be issued
and sold under the plan is 1,300,000 shares. As of December 31, 1996, the
Company has granted 458,166 options at a weighted average exercise price of
$15.53 per share which was equal to the estimated fair market value of common
stock at the dates of grant. As of December 31, 1996 no options were
exercisable. In general, the options are exercisable in three or four annual
installments commencing on the second anniversary of the date of grant.
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its plan. Accordingly,
no compensation cost has been recognized. Had compensation cost for the plan
been determined based on the fair value at the grant dates for awards under the
plan consistent with the method of FASB Statement 123, Accounting for
Stock-Based Compensation, (FASB 123), the Company's compensation expense for the
year ended December 31, 1996 would have been increased by $102,000, net of
related income taxes. As a result,the Company's proforma net earnings,
available to common stockholders and earnings
F-11
<PAGE> 24
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
per common and common equivalent shares would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Pro forma net earnings available to common stockholders:
As reported............................................... $4,035,286
Pro forma -- fair value method............................ $3,933,286
Pro forma earnings per common and common equivalent share:
As reported............................................... $0.40
Pro forma -- fair value method............................ $0.39
</TABLE>
For purposes of calculating compensation cost under FASB 123, the fair
value of each option grant is estimated as of the date of grant using the
Black-Scholes option pricing model. The following weighted average assumptions
were used in the model for grants made in 1996:
<TABLE>
<S> <C>
Expected volatility......................................... 40%
Risk free interest rate..................................... 6.5%
Dividend yield.............................................. 0%
Expected lives.............................................. 3 years
</TABLE>
Additional information on the shares subject to options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Options outstanding at December 31, 1995................. 0 $--
Granted.................................................. 481,833 15
Exercised................................................ 0 --
Forfeited................................................ (23,667) 12
-------
Options outstanding at December 31, 1996................. 458,166 16
-------
Options exercisable at December 31, 1996................. 0 --
Weighted average fair value of options granted during the
year................................................... $3
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
RANGE OF EXERCISE PRICES OF SHARES EXERCISE PRICE
- ------------------------ --------- --------------
<S> <C> <C>
$12 to $16............................................... 340,000 $12
$20 to $24............................................... 2,000 22
$24 to $28............................................... 116,166 26
------- ---
458,166 $16
</TABLE>
9. EMPLOYEE BENEFIT PLANS
The Company has a Profit Sharing and Savings Plan and Trust ("Savings
Plan"). The Savings Plan covers employees upon the completion of one year of
service. Participants may contribute up to 15% of their eligible compensation.
The Company, at its discretion, matches participant contributions as defined
within the
F-12
<PAGE> 25
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Savings Plan. In addition, the Company, at its discretion, makes profit sharing
contributions. Company contributions to the Savings Plan which were charged to
operations were the following:
<TABLE>
<CAPTION>
PERIOR ENDED TOTAL
------------ -----
<S> <C>
December 31, 1994........................................... $168,203
December 31, 1995........................................... 231,477
December 31, 1996........................................... 235,075
</TABLE>
10. RELATED-PARTY TRANSACTIONS
During January 1996, the Company entered into note payable agreements with
two officers. The notes, each with a principal amount of $500,000, bear interest
at a rate of 10%. The notes matured on December 31, 1996 and were repaid on
January 2, 1997.
In May 1996, the Company made an advance of $725,000 to an officer as part
of an employment agreement and entered into a note receivable agreement with the
officer. The note receivable bore interest at a rate of 6%. The note, plus
accrued interest, was repaid on November 8, 1996.
During July 1996, the Company entered into an agreement with its founding
shareholder, who, at that time, was the beneficial owner of 15% of the Company's
common stock, to redeem 1,714,285 shares of the shareholder's common stock in
exchange for a promissory note in the amount of $7,975,000. The redemption value
per share was negotiated by the Company's other executive officers, who
collectively owned the remaining 85% of the Company's common stock at the time
of the agreement. The Company redeemed the stock on October 4, 1996 in
accordance with the agreement and repaid the note promissory within 30 days of
the redemption.
F-13
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: March 31, 1997
THE METZLER GROUP, INC.
By: /s/ ROBERT P. MAHER
------------------------------------
Robert P. Maher
Chairman, President and Chief
Executive Officer
By: /s/ JAMES F. HILLMAN
------------------------------------
James F. Hillman
Chief Financial Officer
By: /s/ GERALD R. LANZ
------------------------------------
Gerald R. Lanz
Chief Operating Officer
By: /s/ PETER B. POND
------------------------------------
Peter B. Pond
Director
By: /s/ JAMES T. RUPRECHT
------------------------------------
James T. Ruprecht
Director
By: /s/ MITCHELL H. SARANOW
------------------------------------
Mitchell H. Saranow
Director
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
- ----------- ----------- ------
<C> <S> <C>
2.1 Form of Merger Agreement Among The Metzler Group, Inc.,
Metzler Acquisition, Inc. and Metzler & Associates, Inc. ... (1)
2.2 Form of Promissory note of Metzler-Illinois to Richard J.
Metzler in the amount of $7,975,000......................... (1)
3.1 Amended and Restated Certificate of Incorporation of the
Company..................................................... (1)
3.2 By-Laws of the Company...................................... (1)
4.1 Specimen Common Stock Certificate........................... (3)
10.1 Form of Indemnification Agreement between the Company and
each of its directors and officers.......................... (3)
10.2 Long-Term Incentive Plan.................................... (1)
10.3 Form of Stock Redemption Agreement among the Company,
Richard J. Metzler, Robert P. Maher, David J. Donovan, James
T. Ruprecht, James R. Blomberg, Stephen R. Goldfield and
Gerald R. Lanz.............................................. (1)
10.4 Lease dated October 29, 1991 between Metzler-Illinois and
American National Bank and Trust Company of Chicago, as Land
Trustee, regarding the space at 520 Lake Cook Road,
Deerfield, Illinois (a/k/a Corporate 500 Centre), and the
First Amendment to Lease dated April 17, 1996, and the Third
Amendment to Lease dated May, 1996.......................... (1)
10.5 Promissory Note of Metzler-Illinois to Robert P. Maher in
the amount of $500,000 dated January 19, 1996............... (1)
10.6 Promissory Note of Metzler-Illinois to Richard J. Metzler in
the amount of $500,000 dated January 19, 1996............... (1)
10.7 Promissory Note of Richard J. Metzler to the Company in the
amount of $725,000 dated May 1, 1996, as amended July,
1996........................................................ (1)
10.8 Line of Credit Agreement between NBD Bank and Metzler &
Associates, Inc. dated May 31, 1996 for $1,200,000.......... (1)
10.9 Stock Purchase Agreement among Richard J. Metzler, David J.
Donovan, Robert P. Maher, James T. Ruprecht, James R.
Blomberg, Stephen R. Goldfield and Gerald R. Lanz dated as
of December 15, 1995........................................ (1)
10.10 Shareholders' Agreement of Metzler & Associates, Inc. among
Richard J. Metzler, David J. Donovan, Robert P. Maher, James
T. Ruprecht, James R. Blomberg, Stephen R. Goldfield and
Gerald R. Lanz and Metzler & Associates, Inc. dated as of
January 1, 1996............................................. (2)
10.11 Amendment of Promissory Note of Richard J. Metzler in the
amount of $725,000 dated September 3, 1996.................. (2)
21.1 Subsidiaries of The Metzler Group, Inc...................... (2)
27 Financial Data Schedule -- for the period ended December 31,
1996........................................................
</TABLE>
- -------------------------
(1) Incorporated by reference from the Registrant's Form S-1 Registration
Statement No. 333-9019 as filed with the SEC on July 26, 1996.
(2) Incorporated by reference from the Registrant's Amendment No. 1 to Form S-1
Registration Statement No. 333-9019 as filed with the SEC on September 4,
1996.
(3) Incorporated by reference from the Registrant's Amendment No. 2 to Form S-1
Registration Statement No. 333-9019 as filed with the SEC on September 20,
1996.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,064,287
<SECURITIES> 30,668,383
<RECEIVABLES> 4,333,968
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,222,169
<PP&E> 899,603
<DEPRECIATION> (540,894)
<TOTAL-ASSETS> 37,580,878
<CURRENT-LIABILITIES> 3,350,429
<BONDS> 0
0
0
<COMMON> 10,585
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 37,580,878
<SALES> 22,092,969
<TOTAL-REVENUES> 22,092,969
<CGS> 11,110,696
<TOTAL-COSTS> 14,892,490
<OTHER-EXPENSES> (294,288)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,487
<INCOME-PRETAX> 7,544,767
<INCOME-TAX> 690,618
<INCOME-CONTINUING> 6,854,149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,854,149
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
