<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-28830
The Metzler Group, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 36-4094854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
520 Lake Cook Road
Suite 500
Deerfield, Illinois 60015
(Address of principal executive offices) (Zip code)
847-914-9100
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
As of May 15, 1998, the Registrant had outstanding 22,402,608 shares of its
$.001 par value Common Stock.
<PAGE>
THE METZLER GROUP, INC.
Quarter Ended March 31, 1998
INDEX
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
- ------------------------------ PAGE
----
<S> <C> <C>
Item 1 Consolidated Balance Sheets as of March 31,
1998 (unaudited) and December 31, 1997............ 3
Consolidated Statements of Operations and
Comprehensive Income for the three months ended
March 31, 1998 and 1997 (unaudited)............... 4
Consolidated Statements of Cash Flows for
the three months ended March 31, 1998 and
1997 (unaudited).................................. 5
Notes to Consolidated Financial Statements
(unaudited)....................................... 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................ 7
Item 3 N/A
Part II - OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings................................. 9
Item 6 Exhibits and Reports on Form 8-K.................. 9
SIGNATURES .................................................. 11
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
THE METZLER GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ----------
ASSETS (unaudited)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $53,702 $21,573
Accounts receivable........................................... 24,676 23,630
Prepaid expenses and other.................................... 1,776 1,359
------- -------
Total current assets....................................... 80,154 46,562
Property and equipment, net..................................... 4,902 2,885
Other non-current assets, net................................... 1,237 1,317
------- -------
Total assets.................................................... $86,293 $50,764
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Line of credit................................................ $ - $ 1,062
Accounts payable.............................................. 3,559 3,761
Accrued liabilities........................................... 1,578 1,658
Accrued compensation and related costs........................ 2,006 2,609
Income taxes payable.......................................... 2,991 3,538
Deferred income taxes......................................... 585 585
Other current liabilities..................................... 399 1,783
------- -------
Total current liabilities.................................. 11,118 14,996
Deferred income taxes........................................... 980 2,163
Other non-current liabilities................................... 308 698
------- -------
Total liabilities......................................... 12,406 17,857
------- -------
Stockholders' equity:
Preferred stock, $.001 par value; 3,000 shares
authorized; no shares issued or outstanding................ - -
Common stock, $.001 par value, 75,000 shares
authorized; 22,142 and 20,557 shares
issued and outstanding in 1998 and 1997.................... 22 21
Additional paid-in capital................................... 57,861 20,725
Retained earnings............................................ 16,075 12,218
Accumulated other comprehensive income....................... (71) (57)
------- -------
Total stockholders' equity................................ 73,887 32,907
------- -------
Total liabilities and stockholders' equity..................... $86,293 $50,764
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
THE METZLER GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------
1998 1997
--------------- ---------------
<S> <C> <C>
Revenues...................................... $25,487 $18,084
Cost of services.............................. 14,506 11,154
--------------- ---------------
Gross profit ................................. 10,981 6,930
Selling, general and administrative expenses.. 5,066 4,256
--------------- ---------------
Operating income.............................. 5,915 2,674
Other expense (income), net................... (481) (220)
--------------- ---------------
Income before income tax expense.............. 6,396 2,894
Income tax expense............................ 2,539 1,088
--------------- ---------------
Net income.................................... $ 3,857 $ 1,806
=============== ===============
Net income per basic share.................... $ 0.18 $ 0.09
=============== ===============
Net income per diluted share.................. $ 0.18 $ 0.09
=============== ===============
Basic shares used in computing net income
per share................................... 21,087 19,924
=============== ===============
Diluted shares used in computing net income
per share................................... 22,022 20,216
=============== ===============
Other comprehensive income:
Foreign currency translation adjustments...... $ (14) $ 4
Comprehensive income.......................... $ 3,843 $ 1,810
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
THE METZLER GROUP, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ 3,857 $ 1,806
Adjustments to reconcile net income to net cash
used in operating activities, net of acquisition:
Depreciation and amortization...................................... 297 211
Gain on sale of property........................................... (106) --
Deferred income taxes.............................................. (1,183) --
Changes in assets and liabilities:
Accounts receivable............................................. (1,046) (3,902)
Prepaid expenses................................................ (417) 47
Accounts payable and accrued liabilities........................ (283) 305
Accrued compensation and related costs.......................... (603) 610
Income taxes payable............................................ (546) 32
Other current liabilities....................................... (1,384) (1,384)
------- -------
Net cash provided by (used in) operating
activities................................................................ (1,414) (503)
------- -------
Cash flows from investing activities:
Purchase of property and equipment...................................... (2,585) (224)
Proceeds from sale of property.......................................... 402 --
Other, net.............................................................. (350) 364
------- -------
Net cash provided by (used in) investing activities....................... (2,533) 140
------- -------
Cash flows from financing activities:
Issuance of common stock................................................ 37,138 97
Payment of notes payable................................................ -- (1,480)
Repayments on lines of credits.......................................... (1,062) (170)
Distributions to former S-corporation
stockholders............................................................ (3,000)
------- -------
Net cash provided by (used in) financing activities....................... 36,076 (4,553)
------- -------
Net increase (decrease) in cash and cash equivalents...................... 32,129 (4,916)
Cash and cash equivalents at beginning of period.......................... 21,573 33,536
------- -------
Cash and cash equivalents at end of period................................ $53,702 $28,620
======= =======
Supplemental information:
Interest payments....................................................... $ 20 $ 97
Income tax payments..................................................... $ 3,701 $ 730
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
Note 1. Basis of Presentation
- -------------------------------
The accompanying unaudited interim consolidated financial statements of The
Metzler Group, Inc. (the Company) have been prepared pursuant to the rules of
the Securities and Exchange Commission for quarterly reports on Form 10-Q and do
not include all of the information and note disclosures required by generally
accepted accounting principles. The information furnished herein includes all
normal recurring adjustments which are, in the opinion of management, necessary
for a fair presentation of results for these interim periods.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 1998.
These financial statements should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the year ended
December 31, 1997, included in the Annual Report on Form 10-K filed by the
Company with the Securities and Exchange Commission on March 31, 1998.
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" for the quarter ended March 31, 1997.
Required changes are reported in the Consolidated Statements of Operations and
Comprehensive Income and Consolidated Balance Sheets.
Note 2. Business Combinations
- -------------------------------
On July 31, 1997, the Company issued 3,206 shares of common stock for
substantially all the outstanding common stock of Resource Management
International, Inc. (RMI). Additionally, on August 15, 1997, the Company issued
778 shares of common stock for substantially all of the outstanding common stock
of Reed Consulting Group, Inc. (Reed). Each of these transactions was accounted
for as a pooling of interests and, accordingly, the consolidated financial
statements have been restated as if the combining companies had been combined
for all periods presented. The Company's consolidated statements of operations
and comprehensive income for the three months ended March 31, 1997 have been
restated to reflect revenues and net income of $11,826 and $1,806, respectively
for the combined operations of RMI and Reed.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
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
important risks and factors identified herein or identified from time to
time in the Company's reports filed with the SEC.
Results of Operations
Revenues. Revenues increased by 41% to $25.5 million in the three months
ended March 31, 1998 from $18.1 million in the first quarter of 1997. The growth
in revenue was primarily due to expansion of services provided to existing
clients and engagements with new clients, as a result of continued strong demand
for management consulting services in the electric and energy-related
industries, increased selling and business development efforts, and immaterial
acquisitions completed in the fourth quarter of 1997.
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 59% to $11.0 million in the first quarter of
1998 from $6.9 million in the first quarter of 1997. Gross profit as a
percentage of revenues was 43% for the first quarter of 1998 as compared to 38%
in the year earlier period. The change in gross margin percentage was primarily
the result of increases in the utilization rates of the Company's professional
personnel and the introduction of performance-based incentive compensation plans
at certain acquired businesses as of January 1, 1998.
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. As a percentage of revenue, selling, general and
administrative expenses for the three months ended March 31, 1998 and 1997 were
20% and 24%, respectively. The improvement in selling, general and
administrative expenses as a percent of revenues is attributable to economies of
scale, increased efficiency in certain support functions, reduction of
administrative headcount and closing certain facilities at the beginning of
1998.
Other Expense (Income). Other operating expense (income) includes interest
expense, interest income and other, net. Net other income for the three months
ended March 31, 1998 was $0.5 million versus $0.2 million in the comparable
quarter last year. The increase was due to an increase in interest income as a
result of the higher average cash balances outstanding during the period and due
to a reduction in interest expense.
7
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Income Taxes. The Company's effective income tax rate was 39.7% for the
first quarter of 1998 as compared to 37.6% for the same period in 1997. The
increase in the effective tax rate is primarily attributable to a higher
statutory federal tax rate associated with anticipated increased earnings in
1998 and due to an increase in the effective state tax rate resulting from a
greater proportion of the Company's business coming from locations with higher
state tax rates.
Liquidity and Capital Resources
Net cash used by operating activities was $1.4 million in the first quarter
of 1998. Net income for the period of $3.9 million was primarily offset by $1.7
million in tax payments in excess of current period accruals, a $0.6 million net
decrease in accrued compensation and related costs due to first quarter payments
related to prior year accrued bonuses, a $1.0 million increase in accounts
receivable resulting from higher revenues and a $0.9 million payment for the
purchase of minority interest in a company acquired in the fourth quarter of
1997.
Investing activities used net cash flows of $2.5 million in the first three
months of 1998. The net cash used in investing activities was primarily due to
the purchase of a building located in Chicago that will be used for the
Company's corporate headquarters. Historically, investing activities have not
required significant cash flows.
Financing activities provided net cash flows of $36.1 million in the first
quarter of 1997. In March 1998, the Company sold 1.5 million shares of common
stock in a secondary offering, raising approximately $36 million dollars, net of
related offering costs. During the first quarter of 1998, the Company repaid
approximately $1.1 million of pre-existing notes and other obligations of
businesses acquired during 1997.
The Company believes that the cash and cash equivalents as of the end of
the first quarter and 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 twelve 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 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.
Recently Issued Financial Accounting Standards
Statement of Financial Accounting Standards No. 131, ''Disclosures about
Segments of an Enterprise and Related Information,'' was issued in June 1997.
The Company will be required to adopt the new standard for the year ending
December 31, 1998, although early adoption is permitted. This statement requires
use of the ''management approach'' model for segment reporting. The management
approach model is based on the way the Company's management organizes segments
within the Company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure, management structure, or any other manner in which management
disaggregates a company. The Company will adopt this statement in 1998. The
effect of applying this standard is not expected to be significant.
8
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The Company is currently defending a lawsuit which was commenced against
RMI prior to its acquisition by the Company. RMI is the defendant in an action
involving approximately $1.1 million in stated claims and other unspecified
compensatory damages that arose in connection with a co-generation construction
project in Connecticut with respect to which RMI provided consulting services.
The complaint also seeks punitive damages. The plaintiff claims that the RMI
consultant was hired with broad responsibilities for the design, construction
and budgeting of a proposed $1.0 million co-generation project that reached $2.0
million before it was abandoned. The plaintiff has subsequently filed for
bankruptcy. The Company believes that the plaintiff's claims are beyond the
scope of RMI's engagement responsibilities and that the Company has meritorious
defenses to this claim. RMI and the plaintiffs have reached a tentative
settlement which does not involve the payment by RMI of any material amount. The
settlement is subject to approval by the bankruptcy court. Because this lawsuit
was identified at the time the Company acquired RMI, a specific indemnification
escrow was established with 85,105 shares, escrowed at a price of $23.17 per
share, the market value at the date of consummation of the acquisition. However,
no assurance can be given that the settlement will be approved or that, if the
proposed settlement is not finalized, the value of the escrowed shares will be
sufficient to cover damages that the Company may ultimately be responsible for
in connection with this lawsuit.
From time to time, the Company is party to other lawsuits, none of which
the Company believes are material.
Item 6. Exhibits and Reports on Form 8-K
1. Financial Data Schedule.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
The Metzler Group, Inc.
May 15, 1998 By: /s/ Robert P. Maher
- ----------------- -----------------------------------------
Date Robert P. Maher, Chairman, President and
Chief Executive Officer
May 15, 1998 By: /s/ James F. Hillman
- ----------------- -----------------------------------------
Date James F. Hillman, Chief Financial Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE METZLER GROUP, INC.'S, CONSOLIDATED BALANCE SHEET AT MARCH 31, 1998 AND
CONSOLIDATED STATMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THREE MONTHS
ENDED MARCH 31, 1998 (IN THOUSANDS).
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 53,702
<SECURITIES> 0
<RECEIVABLES> 25,934
<ALLOWANCES> (1,258)
<INVENTORY> 0
<CURRENT-ASSETS> 80,154
<PP&E> 4,902
<DEPRECIATION> 0
<TOTAL-ASSETS> 86,293
<CURRENT-LIABILITIES> 11,118
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 86,293
<SALES> 25,487
<TOTAL-REVENUES> 25,487
<CGS> 14,506
<TOTAL-COSTS> 19,572
<OTHER-EXPENSES> (481)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,396
<INCOME-TAX> 2,539
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,857
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
