<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant
to Section l3 or l5(d) of the
Securities Exchange Act of l934
Date of report (date of earliest event reported): August 19, 1998
The Metzler Group, Inc.
-----------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware
--------
(State or Other Jurisdiction of Incorporation)
0-28830 36-4094854
------- ----------
(Commission File Number) (IRS Employer Identification No.)
615 N. Wabash, Chicago, Illinois 60015
----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(312) 573-5600
--------------
(Registrant's Telephone Number, Including Area Code)
520 Lake Cook Road, Suite 500, Deerfield, Illinois
--------------------------------------------------
(Former Address)
<PAGE>
The undersigned registrant hereby amends the following items, financial
statements, exhibits, or other portions of its Current Report on Form 8-K,
originally filed with Securities and Exchange Commission on September 3, 1998 as
set forth in the pages attached hereto.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
(1) The following Financial Statements of Peterson Consulting
L.L.C. ("PCLLC") are attached:
Report of Independent Auditors
Consolidated Balance Sheet as of December 31, 1997
Consolidated Statement of Operations for the year ended
December 31, 1997
Consolidated Statement of Members' Equity for the year ended
December 31, 1997
Consolidated Statement of Cash Flows for the year ended
December 31, 1997
Notes to the Consolidated Financial Statements
(2) The following Condensed Consolidated Financial Statements of
PCLLC are attached:
Condensed Consolidated Balance Sheet as of June 30, 1998
(unaudited)
Condensed Consolidated Statements of Operations for the six
months ended June 30, 1998 and 1997 (unaudited)
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 (unaudited)
Notes to the June 30, 1998 Condensed Consolidated Financial
Statements (unaudited)
(b) Pro forma financial information
The following unaudited Pro Forma Condensed Combined Financial
Statements are attached:
Pro Forma Condensed Combined Balance Sheet as of June 30, 1998
(unaudited)
Pro Forma Condensed Combined Statements of Operations for the
three years ended December 31, 1997 and for the six months ended
June 30, 1998 and 1997 (unaudited)
Notes to Pro Forma Condensed Combined Financial Statements
(unaudited)
(c) Exhibits
23.1 Consent of Crowe, Chizek and Company LLP
23.2 Consent of KPMG Peat Marwick LLP
99.1 Audited financial statements of LECG, Inc. as of December
31, 1997 and 1996 and for the years ended December 31, 1997,
1996 and 1995, as previously filed with the Securities and
Exchange Commission as part of the Company's Registration on
Form S-4 dated July 24, 1998.
99.2 Unaudited Pro Forma Condensed Combined Balance Sheet as of
March 31, 1998 and the unaudited Pro Forma Condensed
Combined Statements of Income for the three years ended
December 31, 1997, 1996 and 1995 and for the three months
ended March 31, 1998 and 1997, as previously filed with the
Securities and Exchange Commission as part of the Company's
Registration Statement on Form S-4 dated July 24, 1998.
99.3 The Metzler Group, Inc. audited consolidated financial
statements as of December 31, 1997 and 1996, and for each of
the three years in the period ended December 31, 1997, as
restated.
2
<PAGE>
Item 7(a)(1) Financial Statements of Peterson Consulting L.L.C.
REPORT OF INDEPENDENT AUDITORS
To the Members
Peterson Consulting L.L.C.
We have audited the accompanying consolidated balance sheet of Peterson
Consulting L.L.C. as of December 31, 1997, and the related consolidated
statements of operations, members' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides 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 Peterson Consulting
L.L.C. as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 17, 1998
<PAGE>
PETERSON CONSULTING L.L.C.
CONSOLIDATED BALANCE SHEET
December 31, 1997
<TABLE>
<CAPTION>
(In thousands)
- --------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 129
Accounts receivable, net of allowance for doubtful
accounts of $2,436 19,487
Prepaid expenses and other current assets 1,137
-------
Total current assets 20,753
Furniture, equipment, and leasehold improvements (Note 4) 7,300
Other assets 570
-------
$28,623
=======
LIABILITIES AND MEMBERS' EQUITY
Current liabilities
Notes payable (Note 5) $ 6,800
Current portion of capital lease obligation 627
Salaries, wages, and other compensation 7,960
Accounts payable 2,823
Other current liabilities 495
-------
Total current liabilities 18,705
Capital lease obligation 662
Deferred rent 128
Members' equity (Note 9)
Contributed capital 6,678
Undistributed income 2,450
-------
Total members' equity 9,128
-------
$28,623
=======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PETERSON CONSULTING L.L.C.
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 1997
(In thousands)
<TABLE>
<S> <C>
Net revenue $69,009
Costs and expenses
Compensation and benefits 35,641
Selling general and administrative expenses 22,917
Interest expense 387
Interest income (41)
-------
Total costs and expenses 58,904
-------
Income before incentive compensation and income taxes 10,105
Officer and employee incentive compensation (Note 6) 6,990
-------
Income before income taxes 3,115
Income tax expense
Current 219
Deferred (72)
-------
147
-------
Income distributable to members $ 2,968
=======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
PETERSON CONSULTING L.L.C.
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
Year ended December 31, 1997
<TABLE>
<CAPTION>
Con-
tributed Undistributed Net
(In thousands) Capital Income Capital
- -------------- ------- ------ -------
<S> <C> <C> <C>
Balance at January 1, 1997 $6,206 $1,969 $8,175
Distributions to members - (2,487) (2,487)
Interests repurchased (350) - (350)
Issuance of members' interests 822 - 822
Income distributable to members - 2,968 2,968
------ ------ ------
Balance at December 31, 1997 $6,678 $2,450 $9,128
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
PETERSON CONSULTING L.L.C.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1997
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Cash flows from operating activities:
Income distributable to members $ 2,968
Adjustments to reconcile income distributable to members
to net cash from operating activities:
Depreciation and amortization 1,974
Gain on disposal of equipment (4)
Provision for deferred income taxes (72)
Increase (decrease) in cash from changes
in working capital components:
Accounts receivable 2,630
Prepaid expenses and other current assets 88
Salaries, wages, and other compensation (2,543)
Accounts payable (269)
Deferred rent (518)
Other liabilities 126
-------
Net cash provided by operating activities 4,380
-------
Cash flows from investing activities:
Capital expenditures (4,500)
Proceeds from sale of equipment 7
-------
Net cash used in investing activities (4,493)
-------
Cash flows from financing activities:
Net proceeds on short-term borrowings 3,300
Members interests repurchased (350)
Payments on notes payable (347)
Capital contributions 210
Distributions to members (2,487)
Payments on capital lease obligations (244)
-------
Net cash provided by financing activities 82
-------
Decrease in cash and cash equivalents (31)
Cash and cash equivalents at beginning of year 160
-------
Cash and cash equivalents at end of year $ 129
=======
Supplemental schedule of noncash investing and financing activities
Capital lease obligation incurred for office equipment and software $ 1,224
Deferred incentive compensation exchanged for members' equity 612
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
PETERSON CONSULTING L.L.C.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
Peterson Consulting L.L.C. (Company or Peterson) operates in the consulting and
information services industries, primarily in the United States.
The Company designs, analyzes, and implements management information processes
to improve operations and to support dispute resolution efforts. The Company
provides services to large and small corporations, insurance and reinsurance
companies, financial institutions, public entities and their counsel.
Insurance Data Resources, Inc. (IDR) operates in the information management
market with an initial focus on providing services to the worker's compensation
industry. IDR provides value-added services to clients including actuarial
consulting services, system design, and litigation consulting.
Insurance Data Resources Statistical Services, Inc.'s (IDRSS or Co-op) is an
affiliated entity. Its primary function is to act as a statistical agent and
provide data collection and basic rate making services to insurers, state
regulatory agencies, and self-insured employers, who are members of the
cooperative. IDRSS also provides consulting services to IDR and Peterson.
NOTE 2 - BASIS OF PRESENTATION
The Company operates pursuant to the provisions of the Limited Liability Company
Operating Agreement (Operating Agreement) and will terminate on December 31,
2040, if not terminated sooner.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. A description of the significant
accounting policies applied in the preparation of the financial statements is
presented below:
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, IDR, and the accounts
of IDRSS. IDRSS is a cooperative entity that provides services, as described in
Note 1, to the members of the Co-op. At December 31, 1997, IDR had provided
significant advances to IDRSS and was the primary member of the Co-op.
Accordingly, the consolidated financial statements include the activities of the
Co-op. It is expected that in future periods additional members will join the
Co-op and IDR will be repaid for the advances it has made. As additional members
are obtained and IDR's interest diminishes, it is expected that IDR will
discontinue consolidation of IDRSS in the future. All material intercompany
balances and transactions have been eliminated in consolidation.
Revenue Recognition: Fees for professional services are recognized on the
accrual basis at the time services are rendered, after an estimated provision
for uncollectible and unbillable amounts.
Accounts Receivable: Accounts receivable includes engagements in process of
approximately $7,560 at December 31, 1997, which are generally stated at
estimated recoverable amounts, including reimbursable expenses incurred on
client service engagements. Some engagements have the risk of fee revision as
well as additional costs. On a limited basis, engagements may be modified by way
of upward adjustments for reasons of change in scope or for other developments.
Management Estimates and Assumptions: Management must make estimates and
assumptions in preparing financial statements that affect the amounts reported
therein and the disclosures provided. These estimates and assumptions may change
in the future and future results could differ. Estimates that are subject to
significant change in the near term are the allowance for doubtful accounts and
the estimated billable amount of engagements in process.
8
<PAGE>
PETERSON CONSULTING L.L.C.
The allowance for doubtful accounts is maintained by management at a level
considered adequate to cover losses that are currently anticipated based on past
loss experience, general economic conditions, information about specific
customers, and other factors and estimates which are subject to change over
time. Estimating the risk of loss and amount of loss is necessarily subjective
and ultimate losses may vary from current estimates. These estimates are
reviewed periodically, and as adjustments become necessary, they are reported in
earnings in the periods in which they become known.
Cash Equivalents: For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Furniture, Equipment, Software, and Leasehold Improvements: Furniture,
equipment, software, and leasehold improvements are stated at cost. Depreciation
is computed generally on the straight-line basis over the estimated useful lives
of the related assets ranging from 3 to 10 years. The cost of maintenance and
repairs is charged to income as incurred; significant betterments are
capitalized.
Income Taxes: The Company is generally not subject to federal and state income
taxes as a separate entity. Instead, its taxable income is included in the
income tax returns of the individual members. The Company uses the modified cash
basis for income tax purposes.
IDR is subject to taxation at the corporate level. IDR provides for income taxes
in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No.
109), "Accounting for Income Taxes". SFAS No. 109 generally provides that
deferred tax assets and liabilities be recognized for temporary differences
between the financial reporting basis and the tax basis of IDR's assets and
liabilities and expected benefits of operating loss carryforwards and credit
carryforwards. Deferred taxes are recognized for the estimated taxes ultimately
payable or recoverable based upon enacted tax laws. Changes in enacted tax rates
or laws will be reflected in the financial statements in the periods they occur.
Temporary differences result primarily from depreciation and amortization.
Related Parties: From time to time, the Company has transactions with related
parties. During 1997, there were no significant transactions with related
parties.
Accounting Policy: During 1997, the Company's Board of Directors approved a
change in the vacation policy whereby vice presidents, who are also members, are
no longer eligible to earn vacation benefits. Instead, vice presidents are
entitled to discretionary time off. Such time off has no limits, will not accrue
or carryover to future periods, and has no cash value upon the vice president's
departure from the Company. The impact of this change increased income
distributable to members by approximately $900,000 for the year ended December
31, 1997. This change in policy applies only to vice presidents.
NOTE 4 - FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Furniture, equipment, and leasehold improvements consisted of the following at
December 31, 1997:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Furniture and equipment $ 14,415
Software 2,263
Leasehold improvements 891
--------
17,569
Accumulated depreciation and amortization (10,269)
--------
$ 7,300
========
</TABLE>
9
<PAGE>
PETERSON CONSULTING L.L.C.
NOTE 5 - NOTES PAYABLE
Line of Credit: The Company has two operating lines of credit with a commercial
bank which provide for maximum borrowings of $4,100,000 on demand notes.
Interest is payable at the prime rate, and the notes are collateralized
primarily by accounts receivable. The Company was obligated under these lines of
credit for $3,300,000 at December 31, 1997. The Company also had letters of
credit totaling approximately $775,000 outstanding at December 31, 1997.
Term Loan: On July 23, 1997, the Company entered into a $4,000,000 term loan.
Interest is payable at the prime rate, and the loan is collateralized by
accounts receivable. The loan requires monthly principal payments of $100,000
and is subject to renewal annually. The unpaid principal balance was $3,500,000
at December 31, 1997.
Interest paid for the year ended December 31, 1997 was approximately $380,000.
NOTE 6 - INCENTIVE COMPENSATION PLAN
The Operating Agreement provides for income before officer and employees'
incentive compensation to be allocated to officers and employees as additional
compensation based upon the discretion of the Board of Directors.
NOTE 7 - CONTINGENCIES
The Company is party to a lawsuit alleging copyright infringement and related
state law causes of action. The complaint is for injunctive relief and
unspecified compensatory and punitive damages. The original claim was dismissed
and granted in favor of the Company. On October 27, 1997, the Court of Appeals
reversed the previous judgment. The plaintiff has filed an amended complaint
alleging similar claims. The Company plans to file for summary judgment to
dismiss the plaintiff's complaint. Management believes they have significant
defenses for their position and intend to vigorously defend against the claims.
Any contemplated outcome of this litigation is not expected to prohibit the
Company from providing its services.
The Company is party to various legal proceedings in the ordinary course of its
business. The Company maintains insurance coverage to limit its exposure
regarding these proceedings. Management is of the opinion that, although the
outcome of this litigation and the matter described above cannot be predicted
with any certainty, the ultimate liability, if any, will not have a material
adverse effect on the Company's financial position or results of operations.
Success in the consulting industry is achieved by skill and by personal
relationships developed over a period of years. The Company has many client
relationships many of which are maintained by its key employees. Many of these
key employees also enjoy the high visibility which attends leadership positions
within their service lines. The departure of any one or more of these key
employees could have an adverse effect on the Company.
NOTE 8 - LEASES
The Company's principal leases are for office facilities and equipment. The
leases expire at various dates and include renewal options. Generally, the
leases provide that the Company will pay executory costs such as utilities,
insurance, taxes, and maintenance. Several of the office leases include periods
of free rent as well as periods with scheduled rent increases. The total amount
of rent payments is charged to expense on the straight-line basis over the terms
of the leases. The Company also leases office equipment and software under
capital leases.
Future minimum rental commitments under noncancelable leases consisted of the
following at December 31, 1997:
10
<PAGE>
PETERSON CONSULTING L.L.C.
<TABLE>
<CAPTION>
Capital Operating
(In thousands) Leases Leases
-------------- ------ ------
<S> <C> <C>
1998 $ 717 $3,280
1999 543 2,208
2000 162 991
2001 - 499
2002 - 79
------ ------
Total minimum lease payments 1,422 $7,057
======
Amount representing interest 133
------
Present value of future minimum lease payments $1,289
======
</TABLE>
Office equipment and software accounted for under capital leases are included in
the financial statements as follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Furniture and equipment $ 754
Software 482
Microcomputer 470
Accumulated depreciation and amortization (274)
------
$1,432
======
</TABLE>
Rental expense under operating leases for the year ended December 31, 1997
approximated $4,530,000.
NOTE 9 - CAPITALIZATION, RESTRICTIONS ON TRANSFERS OF UNITS, AND
MANAGEMENT AUTHORITY
Capitalization: The initial capital contributions to the Company were made by
members of the Company who received membership interests pursuant to the
liquidation plan of the former partnership. The Board of Directors may determine
at any time to increase or decrease the required capital contributions of any
one or more members. The Company considers there to be in substance two classes
of ownership interests, the Class A, which is voting, owned by certain members
who, through their membership on the Board, collectively hold voting and
operating control of the Company, and a second class, which is nonvoting, owned
by all other members.
Return of Capital Contributions: The Operating Agreement, subject to certain
exceptions, prohibits the withdrawal or return of any capital contributions or
claim to any capital of the Company prior to the termination of the Company,
unless otherwise approved by the Board of Directors.
Restrictions on Transfers of Membership Interests: Members may not dispose of
all or any portion of his, her, or its membership interest without the prior
written consent of the Board. The Company will purchase, and each Member agrees
to sell, the member's entire interest in the event of death, disability, or
retirement. The purchase price of a member's interest upon termination from the
Company, other than by death, disability, or retirement, is based on a formula
as defined in the Operating Agreement, subject to certain adjustments by the
Board of Directors.
Management Authority: The Board of Directors has the full power and authority to
manage and control the conduct and operations of the Company's business pursuant
to the provisions of the Operating Agreement.
Income Allocations: The Board of Directors has complete discretion in
determining incentive compensation, bonuses, equity returns, and other income
allocations. Such amounts are not vested until paid and are subject to certain
adjustments pursuant to the provisions in the Operating Agreement.
NOTE 10 - RETIREMENT PLAN
The Company maintains a retirement plan covering substantially all employees.
Employees may contribute to the plan through the 401(k) feature. Beginning in
1997, the Company matches 50% of the employee's contribution up to 6% of their
total compensation. Employer profit sharing contributions are at the discretion
of the Company. There were no discretionary Company contributions to the plan
for the year ended December 31, 1997. The Company's matching contribution was
approximately $482,000 for the year ended December 31, 1997.
11
<PAGE>
PETERSON CONSULTING L.L.C.
Item 7 (a), (2) Financial Statements of Business Acquired
PCLLC Condensed Consolidated Balance Sheet as of June 30, 1998 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents............................................. $ 681
Accounts receivable, net.............................................. 23,456
Prepaid expenses and other current assets............................. 4,423
-------
Total current assets............................................... 28,560
Property and equipment, net............................................ 6,201
-------
Total assets........................................................... $34,761
=======
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Line of Credit........................................................ $ 7,900
Accounts payable and accrued liabilities.............................. 2,843
Accrued compensation and project-related costs........................ 12,375
Other current liabilities............................................. 1,235
-------
Total current liabilities.......................................... 24,353
Other noncurrent liabilities.......................................... 347
-------
Total liabilities............................................... 24,700
-------
Members' Equity:
Contributed capital.................................................. 8,330
Undistributed Income................................................. 1,731
-------
Total members' equity........................................... 10,061
-------
Total liabilities and members' equity.................................. $34,761
=======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
12
<PAGE>
PETERSON CONSULTING L.L.C.
Item 7 (a), (2) Financial Statements of Business Acquired
PCLLC Condensed Consolidated Statements of Operations for the six months ended
June 30, 1998 and 1997 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1998 1997
-------- --------
<S> <C> <C>
Revenues...................................................... $ 40,567 $ 33,068
Cost of services.............................................. 23,023 18,227
-------- --------
Gross profit................................................ 17,544 14,841
General and administrative expenses........................... 17,240 12,949
-------- --------
Income from operations........................................ 304 1,892
Other expense, net............................................ 304 154
-------- --------
Income before income taxes.................................... -- 1,738
Income taxes.................................................. -- --
-------- --------
Income distributable to members............................... $ -- $ 1,738
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
13
<PAGE>
PETERSON CONSULTING L.L.C.
Item 7 (a), (2) Financial Statements of Business Acquired
PCLLC Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Income distributable to members...................................... $ -- $ 1,738
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................................... 1,302 865
Loss on disposal of property and equipment.......................... 29 --
Increase in accounts receivable, net................................ (3,969) (363)
Increase in prepaid expenses and other assets....................... (394) (39)
Decrease in accounts payable and accrued liabilities................ 20 (601)
Increase in accrued compensation and project-related costs.......... 5,525 2,977
Increase (Decrease) in other liabilities............................ 40 (814)
-------- --------
Net cash (used in) provided by operating activities................ 2,553 3,763
-------- --------
Cash flows from investing activities:
Purchase of property and equipment.................................. (2,571) (2,440)
Proceeds from the disposal of property and equipment................ 17 --
-------- --------
Net cash used in investing activities............................. (2,554) (2,440)
-------- --------
Cash flows from financing activities:
Net borrowing under line of credit.................................. 1,100 500
Capital contributions............................................... 573 160
Members' interests repurchases...................................... (100) --
Payment of capital lease obligations................................ (370) (98)
Distributions to members............................................ (650) (1,049)
-------- --------
Net cash used in financing activities............................. 553 (487)
-------- --------
Net (decrease) increase in cash....................................... 552 836
Cash at beginning of period........................................... 129 160
-------- --------
Cash at end of period................................................. $ 681 $ 996
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
14
<PAGE>
PETERSON CONSULTING L.L.C.
Item 7 (a), (2) Financial Statements of Business Acquired
Notes to the June 30, 1998 PCLLC Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC") and, in management's opinion, include all adjustments necessary for a
fair statement of results for such interim periods. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to SEC rules or regulations; however, the Company believes that
the disclosures made are adequate to make the information presented not
misleading.
The interim results for the six-month periods ended June 30, 1998 and 1997
are not necessarily indicative of results for the full year. It is suggested
that these consolidated financial statements be read in conjunction with the
consolidated financial statements as of and for the year ended December 31, 1997
and notes thereto included elsewhere in this filing.
2. Income Allocations
Prior to its acquisition by the Metzler Group, Inc., PCLLC operated
pursuant to the provisions of its Limited Liability Company Operating Agreement
("Operating Agreement"). Under the Operating Agreement the Board of Directors
had complete discretion in determining incentive compensation, bonuses, equity
returns and other income allocations. Such amounts were not vested until paid
and were subject to certain adjustments pursuant to the provisions in the
Operating Agreement. Not all of the income allocated to members in each period
was charged to expense. Certain income allocations remained as a residual Income
Distributable to Members. The amount of Income Distributable to Members was not
formula-based, and as such, it varied substantially from period to period. The
Income Distributable to Members of $1,738 for the six month period ended June
30, 1997 conforms with the historical financial statement presentation. The
Board of Directors resolved that all residual income was determined to be
incentive compensation for the six month period ended June 30, 1998.
15
<PAGE>
PETERSON CONSULTING L.L.C.
Item 7 (b) Pro Forma Financial Information
The Company completed its acquisition of PCLLC on August 31, 1998 by
exchanging 5.6 million shares of the Company's common stock for substantially
all of the outstanding Members' interest in PCLLC. The accompanying unaudited
pro forma condensed combined balance sheet combines the Company's historical
consolidated balance sheet and the balance sheet of PCLLC as if the transaction
had been consummated on June 30, 1998, and the unaudited pro forma condensed
combined statements of operations for year ended December 31, 1997 and for the
six month periods ended June 30, 1998 and 1997 reflect the merger with PCLLC,
applying the pooling-of-interests method of accounting. The unaudited pro forma
condensed combining financial statements give effect to the issuance of the
Company's common stock in exchange for substantially all the outstanding
Members' interest in PCLLC. The transaction will be accounted for by the pooling
of interests method of accounting.
The unaudited pro forma condensed combining financial statements are
presented for illustrative purposes only and do not purport to represent what
the Company's results of operations or financial position would have been had
the merger with PCLLC occurred on the dates indicated or for any future period
or date, and are therefore qualified in their entirety by reference to and
should be read in conjunction with the historical financial statements of the
Company and PCLLC.
16
<PAGE>
PETERSON CONSULTING L.L.C.
ITEM 7(b) Pro Forma Financial Information
Pro Forma Condensed Combined Balance Sheet as of June 30, 1998 (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Pro
ASSETS Metzler PCLLC Adjustment Forma
------- ----- ---------- -----
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 72,616 $ 681 $ 73,297
Accounts receivable 50,994 23,456 74,450
Prepaid expenses and other current assets 3,563 4,423 7,986
-------- ------- ------- --------
Total current assets 127,173 28,560 -- $155,733
Property and equipment, net 10,724 6,201 16,925
Other assets 1,606 -- 1,606
-------- ------- ------- --------
Total assets $139,503 $34,761 -- $174,264
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Line of Credit $ -- $ 7,900 $ 7,900
Accounts payable and accrued liabilities 6,997 4,188 7,000 18,185
Accrued compensation and project-related costs 13,321 11,030 24,351
Income taxes payable 1,855 -- 1,855
Deferred income taxes 1,057 -- 1,765 2,822
Other current liabilities 2,368 1,235 3,603
-------- ------- ------- --------
Total current liabilities 25,598 24,353 8,765 58,716
Deferred income taxes 2,564 -- 5,435 7,999
Other non-current liabilities 182 347 -- 529
-------- ------- ------- --------
Total liabilities 28,344 24,700 14,200 67,244
-------- ------- ------- --------
Stockholders' equity:
Preferred stock -- -- -- --
Common stock 31 -- 6 37
Additional paid-in capital 87,206 8,330 (6) 95,530
Notes receivable from shareholders (611) -- -- (611)
Retained Earnings 24,599 1,731 (14,200) 12,130
Accumulated other comprehensive income (66) -- -- (66)
-------- ------- ------- --------
Total Stockholders' Equity 111,159 10,061 (14,200) 107,020
-------- ------- ------- --------
Total liabilities and stockholders' equity $139,503 $34,761 -- $174,264
======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
combining financial statements.
17
<PAGE>
PETERSON CONSULTING L.L.C.
Item 7(b) Pro Forma Financial Information
Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1997
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Pro
Metzler PCLLC Adjustment Forma
-------- ------- ---------- --------
<S> <C> <C> <C> <C>
Revenues........................................ $127,771 $69,009 $196,780
Cost of services................................ 77,503 37,619 115,122
-------- ------- ------ --------
Gross profit.................................. 50,268 31,390 -- 81,658
Selling, general and administrative expenses.... 26,222 27,929 54,151
Merger related expenses......................... 1,312 1,312
-------- ------- ------ --------
Operating income.............................. 22,734 3,461 -- 26,195
Other (income) expense, net..................... (1,651) 346 (1,305)
-------- ------- ------ --------
Income before provision for income taxes........ 24,385 3,115 -- 27,500
Provision for income taxes.................... 8,934 147 9,081
-------- ------- ------ --------
Net income...................................... $ 15,451 $ 2,968 -- $ 18,419
======== ======= ====== ========
Earnings per common share:
Net income per basic share.................... $ 0.59 $ 0.58
Shares used in computing net income per basic
share........................................ 26,109 5,670 31,779
Net income per dilutive share................. $ 0.58 $ 0.57
Shares used in computing net income per
dilutive share............................... 26,618 5,670 32,288
Pro forma income data:
Net income as reported........................ $ 15,451 $ 2,968 -- $ 18,419
Pro forma adjustments to income tax expense... (1,064) (1,130) (2,194)
-------- ------- ------ --------
Pro forma net income....................... $ 14,387 $ 1,838 -- $ 16,225
======== ======= ====== ========
Pro forma net income per basic share.......... $ 0.55 $ 0.51
Pro forma net income per dilutive share....... $ 0.54 $ 0.50
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
combining financial statements.
18
<PAGE>
PETERSON CONSULTING L.L.C.
Item 7(b) Pro Forma Financial Information
Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1996
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Pro
Metzler PCLLC Adjustment Forma
-------- ------- ---------- --------
<S> <C> <C> <C> <C>
Revenues........................................ $94,945 $56,944 $151,889
Cost of services................................ 63,196 26,214 89,410
------- ------- ------ --------
Gross profit.................................. 31,749 30,730 -- 62,479
Selling, general and administrative expenses.... 20,868 26,160 47,028
------- ------- ------ --------
Operating income.............................. 10,881 4,570 -- 15,451
Other (income) expense, net..................... 73 212 285
------- ------- ------ --------
Income before provision for income taxes........ 10,808 4,358 -- 15,166
Provision for income taxes.................... 9 -- 9
------- ------- ------ --------
Net income...................................... $10,799 $ 4,358 -- $ 15,157
======= ======= ====== ========
Earnings per common share:
Net income per basic share.................... $ 0.43 $ 0.49
Shares used in computing net income per basic
share........................................ 25,263 5,670 30,933
Net income per dilutive share................. $ 0.42 $ 0.48
Shares used in computing net income per
dilutive share............................... 25,592 5,670 31,262
Pro forma income data:
Net income as reported........................ $10,799 $ 4,358 -- $ 15,157
Pro forma adjustments to income tax expense... (4,423) (1,787) (6,210)
------- ------- ------ --------
Pro forma net income....................... $ 6,376 $ 2,571 -- $ 8,947
======= ======= ====== ========
Pro forma net income per basic share.......... $ 0.25 $ 0.29
Pro forma net income per dilutive share....... $ 0.25 $ 0.29
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
combining financial statements.
19
<PAGE>
PETERSON CONSULTING L.L.C.
Item 7(b) Pro Forma Financial Information
Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1995
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Pro
Metzler PCLLC Adjustment Forma
-------- ------- ---------- --------
<S> <C> <C> <C> <C>
Revenues........................................ $80,652 $50,257 $130,909
Cost of services................................ 53,550 25,506 79,056
------- ------- ------ --------
Gross profit.................................. 27,102 24,751 -- 51,853
Selling, general and administrative expenses.... 21,860 30,275 52,135
------- ------- ------ --------
Operating income (loss)....................... 5,242 (5,524) -- (282)
Other (income) expense, net..................... 241 99 340
------- ------- ------ --------
Income (loss) before provision for income
taxes and extraordinary item................. 5,001 (5,623) -- (622)
Provision for income taxes.................... 476 -- 476
------- ------- ------ --------
Income (loss) before extraordinary item....... 4,525 (5,623) -- (1,098)
Extraordinary gain on extinguishment of debt.. -- 5,692 5,692
------- ------- ------ --------
Net income.................................... $ 4,525 $ 69 -- $ 4,594
======= ======= ====== ========
Earnings per common share:
Net income (loss) per basic share............. $ 0.18 $ (0.04)
Shares used in computing net income (loss)
per basic share.............................. 24,734 5,670 30,404
Net income (loss) per dilutive share.......... $ 0.18 $ (0.04)
Shares used in computing net income (loss)
per dilutive share........................... 24,734 5,670 30,404
Pro forma income data:
Net income (loss) as reported................. $ 4,525 $(5,623) -- $ (1,098)
Pro forma adjustments to income tax expense... (1,574) 2,305 731
------- ------- ------ --------
Pro forma net income (loss)................ $ 2,951 $(3,318) -- $ (367)
======= ======= ====== ========
Pro forma net income (loss) per basic
share..................................... $ 0.12 $ (0.01)
Pro forma net income (loss) per dilutive
share..................................... $ 0.12 $ (0.01)
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
combining financial statements.
20
<PAGE>
PETERSON CONSULTING L.L.C.
Item 7(b) Pro Forma Financial Information
Pro Forma Condensed Combined Statement of Operations
For the Six Months Ended June 30, 1998
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Pro
Metzler PCLLC Adjustment Forma
------- ----- ---------- -----
<S> <C> <C> <C> <C>
Revenues........................................ $85,105 $40,567 $125,672
Cost of services................................ 50,015 23,023 73,038
------- ------- ---------- --------
Gross profit.................................. 35,090 17,544 - 52,634
Selling, general and administrative expenses.... 16,394 17,240 33,634
------- ------- ---------- --------
Operating income.............................. 18,696 304 - 19,000
Other (income) expense, net..................... (1,644) 304 (1,340)
------- ------- ---------- --------
Income before provision for income taxes........ 20,340 - - 20,340
Provision for income taxes.................... 8,024 - 8,024
------- ------- ---------- --------
Net income...................................... $12,316 $ - - $ 12,316
======= ======= ========== ========
Earnings per common share:
Net income per basic share.................... $ 0.42 $ 0.35
Shares used in computing net income per basic
share........................................ 29,655 5,670 35,325
Net income per dilutive share................. $ 0.40 $ 0.34
Shares used in computing net income per
dilutive share............................... 30,625 5,670 36,295
Pro forma income data:
Net income as reported........................ $12,316 $ - - $ 12,316
Pro forma adjustments to executive
compensation expense, net of tax............ - 2,267 2,267
------- ------- ---------- --------
Pro forma net income...................... $12,316 $ 2,267 - $ 14,583
======= ======= ========== ========
Pro forma net income per basic share.......... $ 0.42 $ 0.41
Pro forma net income per dilutive share....... $ 0.40 $ 0.40
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
combining financial statements.
21
<PAGE>
PETERSON CONSULTING L.L.C.
Item 7(b) Pro Forma Financial Information
Pro Forma Condensed Combined Statement of Operations
For the Six Months Ended June 30, 1997
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Pro
Metzler PCLLC Adjustment Forma
------- ------- ---------- -------
<S> <C> <C> <C> <C>
Revenues ................................................... $59,064 $33,068 $92,132
Cost of services ........................................... 36,842 18,227 55,069
------- ------- ---------- -------
Gross profit ............................................. 22,222 14,841 -- 37,063
Selling, general and administrative expenses ............... 12,239 12,949 25,188
------- ------- ---------- -------
Operating income ......................................... 9,983 1,892 -- 11,875
Other (income), expense net ................................ (1,281) 154 (1,127)
------- ------- ---------- -------
Income before provision for income taxes ................... 11,264 1,738 -- 13,002
Provision for income taxes ............................... 2,704 -- 2,704
------- ------- ---------- -------
Net income ................................................. $ 8,560 1,738 -- 10,298
======= ======= ========== =======
Earnings per common share:
Net income per basic share ............................... $ 0.33 $ 0.33
Shares used in computing net income per basic share ...... 26,003 5,670 31,673
Net income per dilutive share ............................ $ 0.33 $ 0.32
Shares used in computing net income per basic share ...... 26,333 5,670 32,003
Pro forma income data:
Net income as reported ................................... $ 8,560 $ 1,738 -- $10,298
Pro forma adjustments to income tax expense .............. (1,914) (713) (2,627)
------- ------- ---------- -------
Pro forma net income ................................... $ 6,646 $ 1,025 -- $ 7,671
======= ======= ========== =======
Pro forma net income per basic share ..................... $ 0.26 $ 0.24
Pro forma net income per dilutive share .................. $ 0.25 $ 0.24
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
combining financial statements.
22
<PAGE>
EXHIBIT
23.1 CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Form 8K/A of our report dated March 17, 1998, on
our audit of the consolidated financial statements of Peterson Consulting L.L.C.
/s/ Crowe, Chizek and Company LLP
Oak Brook, Illinois
November 3, 1998
-25-
<PAGE>
Exhibit 23.2
Independent Auditors' Consent
The Board of Directors
The Metzler Group, Inc.:
We consent to the incorporation by reference in the registration statement on
Form S-3 of our report dated November 6, 1998 relating to the consolidated
balance sheets of The Metzler Group, Inc. and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997 (as restated to reflect certain acquisitions
accounted for under the pooling-of-interests method of accounting), which report
appears in the November 6, 1998 report on Form 8-K of The Metzler Group, Inc.
The report of KPMG Peat Marwick LLP is based partially upon the reports of other
auditors.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
November 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 45,867 33,699 0
<SECURITIES> 0 0 0
<RECEIVABLES> 63,547 51,446 0
<ALLOWANCES> (4,150) (4,016) 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 108,601 83,379 0
<PP&E> 33,123 24,762 0
<DEPRECIATION> (19,354) (16,780) 0
<TOTAL-ASSETS> 124,443 92,914 0
<CURRENT-LIABILITIES> 50,332 37,395 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 34 32 0
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 124,443 92,914 0
<SALES> 196,780 151,889 130,909
<TOTAL-REVENUES> 196,780 151,889 130,909
<CGS> 115,122 89,410 79,056
<TOTAL-COSTS> 170,585 136,438 131,191
<OTHER-EXPENSES> (1,305) 285 340
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 27,500 15,166 (622)
<INCOME-TAX> 9,081 9 476
<INCOME-CONTINUING> 18,419 15,157 (1,098)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 5,692
<CHANGES> 0 0 0
<NET-INCOME> 18,419 15,157 4,594
<EPS-PRIMARY> .58 .49 .15
<EPS-DILUTED> .58 .49 .15
</TABLE>
<PAGE>
Exhibit 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of LECG, Inc.:
We have audited the accompanying consolidated balance sheets of LECG, Inc. (a
California corporation) and Subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These financials statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of LECG, Inc. and Subsidiaries as
of December 31, 1996 and 1997, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Francisco, California
January 30, 1998
<PAGE>
LECG, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Assets
Current assets:
Cash.......................................................................... $ 2,889 $24,164,635
Accounts receivable, net...................................................... 11,128,887 16,280,006
Prepaid expenses.............................................................. 144,714 840,939
----------- -----------
Total current assets....................................................... 11,276,490 41,285,580
Security deposits............................................................... 114,326 186,349
Property and equipment, net..................................................... 1,806,888 3,584,277
----------- -----------
Total assets............................................................... $13,197,704 $45,056,206
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities...................................... $ 630,442 $ 2,216,127
Accrued expert and project origination fees:
Related party............................................................... 2,944,438 3,553,428
Other....................................................................... 1,732,727 2,953,065
Client retainers.............................................................. 497,876 550,960
Deferred purchase option deposit.............................................. 851,862 0
Income taxes payable.......................................................... 105,375 261,693
Deferred tax liability........................................................ 0 915,295
Distribution payable.......................................................... 0 5,356,566
Other current liabilities..................................................... 171,374 824,150
----------- -----------
Total current liabilities.................................................. 6,934,094 16,631,284
Deferred tax liability........................................................ 0 1,787,910
----------- -----------
Total liabilities.......................................................... 6,934,094 18,419,194
Shareholders' equity:
Common shares, $.001 par value; authorized 40,000,000 shares; issued and
outstanding, 10,014,996 and 13,027,867 shares as of December 31, 1996
and 1997, respectively...................................................... 10,014 13,028
Additional paid-in capital.................................................... 5,101,219 29,176,449
Notes receivable from shareholders............................................ (3,045,169) (2,754,726)
Retained earnings............................................................. 4,197,546 202,261
----------- -----------
Total shareholders' equity................................................. 6,263,610 26,637,012
----------- -----------
Total liabilities and shareholders' equity................................. $13,197,704 $45,056,206
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
LECG, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ------------ -----------
<S> <C> <C> <C>
Revenues................................. $24,835,188 $31,391,870 $44,110,167
Cost of Services:
Related party.......................... 6,440,823 7,329,346 9,073,377
Other.................................. 10,024,540 13,551,511 18,862,063
----------- ----------- -----------
Total cost of services.............. 16,465,363 20,880,857 27,935,440
----------- ----------- -----------
Gross profit........................ 8,369,825 10,511,013 16,174,727
General and Administrative Expenses...... 4,047,524 5,258,389 8,113,780
Other Expense (Income)................... 0 0 (851,862)
----------- ----------- -----------
Income before income taxes............. 4,322,301 5,252,624 8,912,809
Income Taxes............................. 83,005 188,650 3,148,343
----------- ----------- -----------
Net income............................. $ 4,239,296 $ 5,063,974 $ 5,764,466
=========== =========== ===========
Pro Forma Income Data (Unaudited):
Net income as reported................. $ 5,063,974 $ 5,764,466
Pro forma adjustments.................. (1,964,926) (505,909)
----------- -----------
Pro forma net income................ $ 3,099,048 $ 5,258,557
=========== ===========
Pro Forma Basic Earnings Per Share....... $ 0.31 $ 0.52
=========== ===========
Pro Forma Diluted Earnings Per Share..... $ 0.30 $ 0.51
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
LECG, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
Notes and
Interest
Common Stock Additional Receivable
--------------------- Paid-in from Retained
Shares Amount Capital Shareholders Earnings Total
---------- ------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994................. 9,083,119 $ 9,083 $ 981,933 $ (642,667) $ 5,191,000 $ 5,539,349
Net Income.................................. 4,239,296 4,239,296
Distributions to shareholders............... (3,344,644) (3,344,644)
Sale of common shares....................... 1,435,304 1,435 1,572,378 (982,930) 590,883
Repurchase of common shares................. (599,828) (600) (3,400) (800,268) (804,268)
Accrued interest on notes receivable
from shareholders.......................... 77,957 (77,957)
Collection of notes receivable from
shareholders............................... 127,562 127,562
---------- ------- ----------- ----------- ----------- -----------
Balance at December 31, 1995................. 9,918,595 9,918 2,628,868 (1,575,992) 5,285,384 6,348,178
Net income.................................. 5,063,974 5,063,974
Distributions to shareholders............... (4,901,995) (4,901,995)
Sale of common shares....................... 985,433 985 2,318,130 (1,619,174) 699,941
Repurchase of common shares................. (889,032) (889) (519) (1,249,817) (1,251,225)
Accrued interest on notes receivable
from shareholders.......................... 154,740 (154,740)
Collection of notes receivable from
shareholders............................... 466,926 466,926
Shareholder advances........................ (162,189) (162,189)
---------- ------- ----------- ----------- ----------- -----------
Balance at December 31, 1996................. 10,014,996 10,014 5,101,219 (3,045,169) 4,197,546 6,263,610
Net income.................................. 5,764,466 5,764,466
Distributions to shareholders............... (4,851,343) (4,851,343)
S corporation distribution declared......... (5,356,566) (5,356,566)
Sale of common shares before IPO............ 214,224 214 466,336 (87,014) 379,536
Proceeds from sale of common shares,
net of IPO costs and adjustments........... 3,060,000 3,060 23,725,030 676,588 24,404,678
Repurchase of common shares................. (261,353) (260) (311,236) 43,860 (228,430) (496,066)
Accrued interest on notes receivable
from shareholders.......................... 195,100 (195,100)
Collection of notes receivable from
shareholders............................... 879,420 879,420
Shareholder advances........................ (350,723) (350,723)
---------- ------- ----------- ----------- ----------- -----------
Balance at December 31, 1997................. 13,027,867 $13,028 $29,176,449 $(2,754,726) $ 202,261 $26,637,012
========== ======= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
LECG, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income........................................................... $ 4,239,296 $ 5,063,974 $ 5,764,466
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 340,245 435,163 687,204
Bad debt expense.................................................. 100,584 358,374 198,782
Expiration of deferred purchase option............................ 0 0 (851,862)
Deferred income taxes............................................. 0 0 2,703,205
Loss on disposal of property and equipment........................ 15,335 26,186 127,443
Decrease (increase) in accounts receivable........................ 61,759 (1,882,338) (5,349,901)
Decrease (increase) in prepaid expenses and security
deposits......................................................... 15,347 (90,114) (768,248)
Increase (decrease) in accounts payable and accrued
liabilities...................................................... (110,077) 311,635 1,585,685
Increase (decrease) in accrued expert and project origination
fees............................................................. (572,888) 1,130,449 1,829,328
Increase in client retainers...................................... 73,065 138,311 53,084
Increase (decrease) in income taxes payable....................... 9,353 (4,218) 156,318
Increase in other liabilities..................................... 10,069 140,091 652,776
----------- ----------- -----------
Net cash provided by operating activities........................ 4,182,088 5,627,513 6,788,280
----------- ----------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment................................... (563,358) (1,080,333) (2,606,796)
Proceeds from disposal of property and equipment..................... 2,700 6,323 14,760
----------- ----------- -----------
Net cash used in investing activities............................ (560,658) (1,074,010) (2,592,036)
----------- ----------- -----------
Cash Flows From Financing Activities:
Borrowings under line of credit...................................... 0 2,206,380 4,527,632
Repayments on line of credit......................................... 0 (2,206,380) (4,527,632)
Sale of common shares................................................ 590,883 699,941 24,784,214
Repurchase of common shares.......................................... (804,268) (1,251,225) (496,066)
Shareholder advances................................................. 0 (162,189) (350,723)
Collection of notes receivable from shareholders..................... 0 121,923 175,289
Distributions to shareholders........................................ (3,217,082) (4,556,992) (4,147,212)
----------- ----------- -----------
Net cash provided by (used in) financing activities.............. (3,430,467) (5,148,542) 19,965,502
----------- ----------- -----------
Net Increase (Decrease) in Cash....................................... 190,963 (595,039) 24,161,746
Cash at Beginning of Period........................................... 406,965 597,928 2,889
----------- ----------- -----------
Cash at End of Period................................................. $ 597,928 $ 2,889 $24,164,635
=========== =========== ===========
Supplemental Cash Flow Information:
Cash paid for interest............................................... $ 2,535 $ 12,008 $ 17,603
=========== =========== ===========
Cash paid for state income taxes..................................... $ 73,652 $ 200,488 $ 280,620
=========== =========== ===========
Noncash Financing Activities:
Sale of common stock through issuance of notes....................... $ 982,930 $ 1,619,174 $ 87,014
=========== =========== ===========
Collection of notes receivable through application of distributions.. $ 127,562 $ 345,003 $ 704,131
=========== =========== ===========
S corporation distribution declared.................................. $ 0 $ 0 $ 5,356,566
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
LECG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. Description of Business:
The accompanying consolidated financial statements present the consolidated
financial position and results of operations of LECG, Inc. (the "Company")
(formerly Law and Economics Consulting Group, Inc.), a California corporation
formed in March 1988, and its wholly owned subsidiaries: LECG Limited (United
Kingdom) and LECG Limited (also known as Law and Economics Consulting Group,
Limited), (New Zealand).
The Company is a provider of economic consulting services in matters
related to complex litigation, regulation, public policy and strategic
management and derives its revenues almost exclusively therefrom. The Company
provides its economic consulting services to a broad client base, which includes
national governments, regulatory agencies, and development institutes and
agencies in the United States and abroad. Services are provided by academics,
industry leaders and former high-level government officials (Experts), who are
supported by professional staff. The Company has offices in the United States in
California, Washington, D.C., Illinois, New York, Texas, Utah and Massachusetts,
as well as Toronto, Canada; Wellington, New Zealand; London, United Kingdom;
Brussels, Belgium; and Toulouse, France.
On December 18, 1997, the Company completed an initial public offering of
its common stock in which 3,060,000 shares were sold by the Company, resulting
in net proceeds of approximately $24.4 million, net of underwriters' discounts
and issuance costs of approximately $3.1 million.
2. Summary of Significant Accounting Policies:
Risks and Uncertainties
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
The Company's ability to retain current business and to attract new
business is highly dependent on the business generation capabilities and
consulting reputation of its Experts and Professional Staff and on the quality
of their work performed for the Company. There is no assurance that these
individuals will perform at previous levels, or that they will remain with the
Company. In the event that these individuals do not perform at previous levels
or do not remain with the Company, the Company's business, operating results and
financial condition could be materially and adversely affected. Additionally,
the Company's future performance depends in large part on its ability to
attract, develop and motivate highly-skilled Experts and Professional Staff. The
failure to recruit a significant number of Experts or qualified Professional
Staff could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company's services involve risks of professional and other liability.
If the Company were found to have been negligent or to have breached its
obligations to its clients, the Company could be exposed to significant
liabilities and its reputation could be adversely affected.
Revenue Recognition
Revenue is recognized when services are provided. An allowance is provided
for any amounts considered uncollectible. Amounts collected in advance of
providing services are recorded as client retainers.
The Company bills clients for hourly fees as well as reimbursable expenses.
Reimbursable expenses consist of direct out-of-pocket costs, telecommunication
charges and in-house reproduction services. In providing consulting services to
its clients, the Company engages Experts on both an exclusive and nonexclusive
basis. Once billings related to a specific job are collected, these Experts are
generally paid consulting fees for Expert services provided.
<PAGE>
Exhibit 99.2
Unaudited Pro Forma Consolidated Combined Condensed Financial Data
(In thousands, except per share data)
The accompanying unaudited pro forma combined condensed financial
information combines the historical results of Metzler and LECG as if the Merger
occurred on January 1, 1993. The unaudited pro forma condensed financial
statements are presented for illustrative purposes only and do not purport to
represent what the Company's results of operations or financial position would
have been had the merger between Metzler and LECG occurred on the dates
indicated or for any future period or date, and are therefore qualified in their
entirety by reference to and should be read in conjunction with the historical
financial statements of Metzler and LECG.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
-------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Pro Forma Statement of Income Data:
Revenues........................................ $66,492 $71,652 $80,652 $94,945 $127,771 $27,985 $41,267
Cost of services................................ 44,958 48,831 53,550 63,196 77,503 17,800 24,558
------- ------- ------- ------- -------- ------- -------
Gross profit.................................... 21,534 22,821 27,102 31,749 50,268 10,185 16,709
Selling, general and administrative expenses.... 17,893 18,187 21,860 20,868 26,222 5,671 7,934
Merger-related costs............................ -- -- -- -- 1,312 -- --
------- ------- ------- ------- -------- ------- -------
Income from operations.......................... 3,641 4,634 5,242 10,881 22,734 4,514 8,775
Other expense (income).......................... 43 300 241 73 (1,651) (220) (674)
------- ------- ------- ------- -------- ------- -------
Income before provision for income taxes........ 3,598 4,334 5,001 10,808 24,385 4,734 9,449
Provision for income taxes...................... 730 353 476 9 8,934 1,152 3,791
------- ------- ------- ------- -------- ------- -------
Net income...................................... $ 2,868 $ 3,981 $ 4,525 $10,799 $ 15,451 $ 3,582 $ 5,658
======= ======= ======= ======= ======== ======= =======
Pro forma or net income......................... $ 6,191 $ 6,015 $ 14,946 $ 2,892
======= ======= ======== =======
Pro forma net income per basic share............ $ 0.24 $ 0.57 $ 0.11 $ 0.20
======= ======== ======= =======
Pro forma or net income per dilutive share...... $ 0.24 $ 0.56 $ 0.11 $ 0.19
======= ======== ======= =======
Basic weighted average shares outstanding....... 25,263 26,109 25,959 28,904
Diluted weighted average shares outstanding..... 25,592 26,618 26,329 29,896
</TABLE>
<TABLE>
<CAPTION>
As of
March 31,
1998
----------
<S> <C>
Pro Forma Balance Sheet Data:
Cash and cash equivalents.......................................... $ 75,567
Working capital(1)................................................. 91,840
Total assets....................................................... 134,691
Long-term debt, less current portion.............................. --
Total stockholders' equity(1)...................................... 99,485
</TABLE>
- --------------
(1) Adjusted to reflect the expectation of the companies to incur an estimated
$5.0 million of non-recurring merger-related costs.
Unaudited Pro Forma Condensed Combining Financial Data
The following unaudited pro forma condensed combining balance sheet and
statements of income give pro forma effect to the Merger of Metzler and LECG as
if it had occurred on the first day of each period presented. The Merger will be
accounted for by the pooling of interests method of accounting. The unaudited
pro forma condensed combining balance sheet and statements of income do not
purport to be indicative of the financial position or the results of operations
of Metzler had the transaction actually been completed on the first day of each
period presented, or which may be obtained in the future.
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
March 31, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Pro
Metzler LECG Adjustment Forma
-------- ------- ---------- --------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............................. $53,702 $21,865 $ 75,567
Accounts receivable, net............................... 24,676 20,870 45,546
Prepaid expenses and other current assets.............. 1,776 1,081 2,857
------- ------- ------- --------
Total current assets................................ 80,154 43,816 -- 123,970
Property and equipment, net.............................. 4,902 4,336 9,238
Other assets............................................. 1,237 246 1,483
------- ------- ------- --------
Total assets........................................ $86,293 $48,398 -- $134,691
======= ======= ======= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities............... $ 5,137 $ 2,105 $ 5,000(b) $ 12,242
Accrued compensation and projected-related costs....... 2,006 10,254 12,260
Income taxes payable................................... 2,991 1,454 4,445
Deferred income taxes, current......................... 585 703 1,288
Other current liabilities.............................. 399 1,496 1,895
------- ------- ------- --------
Total current liabilities........................... 11,118 16,012 5,000 32,130
Deferred income taxes.................................... 980 1,788 2,768
Other non-current liabilities............................ 308 -- 308
------- ------- ------- --------
Total liabilities................................... 12,406 17,800 5,000 35,206
------- ------- ------- --------
Stockholders' equity:
Preferred stock........................................ -- -- --
Common stock........................................... 22 13 (5)(a) 30
Additional paid-in capital............................. 57,861 29,193 5 (a) 87,059
Notes receivable from stockholders..................... -- (611) (611)
Retained earnings...................................... 16,075 2,003 (5,000)(b) 13,078
Accumulated other comprehensive income................. (71) -- (71)
------- ------- ------- --------
Total stockholders' equity.......................... 73,887 30,598 (5,000) 99,485
------- ------- ------- --------
Total liabilities and stockholders' equity.......... $86,293 $48,398 -- $134,691
======= ======= ======= ========
</TABLE>
- --------------
(a) The pro forma amount assumes 7,816,720 shares of Metzler Common Stock are
issued in the Merger, based on the exchange ratio of .60 shares of Metzler
Common Stock for each share of LECG Common Stock outstanding as of March 31,
1998. The actual number of shares of Metzler Common Stock to be issued will
be determined at the time the Merger is consummated, based upon the number
of shares of LECG Common Stock then outstanding.
(b) Adjusted to reflect the expectation of the companies to incur an estimated
$5.0 million of non-recurring merger related costs.
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1998
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro
Metzler LECG Adjustment Forma
------- ------- ---------- -------
<S> <C> <C> <C> <C>
Revenues............................................................. $25,487 $15,780 $41,267
Cost of services..................................................... 14,506 10,052 24,558
------- ------- -------
Gross profit......................................................... 10,981 5,728 -- 16,709
Selling, general and administrative expenses......................... 5,066 2,868 7,934
------- ------- - ------
Income from operations............................................... 5,915 2,860 -- 8,775
Other income, net.................................................... 481 193 674
------- ------- - ------
Income before provision for income taxes............................. 6,396 3,053 -- 9,449
Provision for income taxes........................................... 2,539 1,252 3,791
------- ------- - ------
Net income........................................................... $ 3,857 $ 1,801 -- $ 5,658
======= ======= ====== =======
Net income per basic share........................................... $ 0.18 $ 0.14 -- $ 0.20
======= ======= ====== =======
Net income per dilutive share........................................ $ 0.18 $ 0.14 -- $ 0.19
======= ======= ====== =======
Basic shares used in computing pro forma or net income per share..... 21,087 13,028 (5,211) 28,904
Diluted shares used in computing pro forma or net income per
share............................................................... 22,022 13,123 (5,249) 29,896
</TABLE>
- --------------
(a) The calculation of basic and dilutive net income per common share for the
pro forma financial statements uses the applicable weighted average number
of outstanding shares of Metzler and LECG Common Stock adjusted to
equivalent shares of Metzler Common Stock.
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1997
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro
Metzler LECG Adjustment Forma
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues............................................................. $18,084 $ 9,901 $27,985
Cost of services..................................................... 11,154 6,646 17,800
------- ------- ----------- -------
Gross profit......................................................... 6,930 3,255 -- 10,185
Selling, general and administrative expenses......................... 4,256 1,415 5,671
------- ------- ----------- -------
Income from operations............................................... 2,674 1,840 -- 4,514
Other income, net.................................................... 220 -- 220
------- ------- ----------- -------
Income before provision for income taxes............................. 2,894 1,840 -- 4,734
Provision for income taxes........................................... 1,088 64 1,152
------- ------- ----------- -------
Net income........................................................... $ 1,806 $ 1,776 -- $ 3,582
======= ======= =========== =======
Pro forma or net income.............................................. $ 1,806 $ 1,086 -- $ 2,892
======= ======= =========== =======
Pro forma or net income per basic share.............................. $ 0.09 $ 0.11 -- $ 0.11
======= ======= =========== =======
Pro forma or net income per dilutive share........................... $ 0.09 $ 0.11 -- $ 0.11
======= ======= =========== =======
Basic shares used in computing pro forma or net income per share..... 19,924 10,058 (4,023) 25,959
Diluted shares used in computing pro forma or net income per
share............................................................... 20,216 10,189 (4,076) 26,329
</TABLE>
- --------------
(a) The calculation of basic and dilutive net income per common share for the
pro forma financial statements uses the applicable weighted average number
of outstanding shares of Metzler and LECG Common Stock adjusted to
equivalent shares of Metzler Common Stock.
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
For the Year Ended December 31, 1997
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro
Metzler LECG Adjustment Forma
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues......................................................... $83,661 $44,110 $127,771
Cost of services................................................. 49,567 27,936 77,503
------- ------- ----------- --------
Gross profit..................................................... 34,094 16,174 -- 50,268
Merger-related costs............................................. 1,312 -- 1,312
Selling, general and administrative expenses..................... 18,108 8,114 26,222
------- ------- ----------- --------
Income from operations........................................... 14,674 8,060 -- 22,734
Other income, net................................................ 799 852 1,651
------- ------- ----------- --------
Income before provision for income taxes......................... 15,473 8,912 -- 24,385
Provision for income taxes....................................... 5,786 3,148 8,934
------- ------- ----------- --------
Net income....................................................... $ 9,687 $ 5,764 -- $ 15,451
======= ======= =========== ========
Pro forma or net income.......................................... $ 9,687 $ 5,259 -- $ 14,946
======= ======= =========== ========
Pro forma or net income per basic share.......................... 0.48 0.52 -- 0.57
======= ======= =========== ========
Pro forma or net income per dilutive share....................... $ 0.47 $ 0.51 -- $ 0.56
======= ======= =========== ========
Basic shares used in computing pro forma or net income per
share........................................................... 19,982 10,211 (4,084) 26,109
Diluted shares used in computing pro forma or net income per
share........................................................... 20,469 10,249 (4,100) 26,618
</TABLE>
- --------------
(a) The calculation of basic and dilutive net income per common share for the
pro forma financial statements uses the applicable weighted average number
of outstanding shares of Metzler and LECG Common Stock adjusted to
equivalent shares of Metzler Common Stock.
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
For the Year Ended December 31, 1996
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Pro
Metzler LECG Adjustment Forma
------- ------- ----------- -------
<S> <C> <C> <C> <C>
Revenues............................................................. $63,553 $31,392 $94,945
Cost of services..................................................... 42,315 20,881 63,196
------- ------- ----------- -------
Gross profit......................................................... 21,238 10,511 -- 31,749
Selling, general and administrative expenses......................... 15,610 5,258 20,868
------- ------- ----------- -------
Income from operations............................................... 5,628 5,253 -- 10,881
Other expense, net................................................... 73 73
------- ------- ----------- -------
Income before provision for income taxes............................. 5,555 5,253 -- 10,808
Provision for income taxes (benefit)................................. (180) 189 9
------- ------- ----------- -------
Net income........................................................... $ 5,735 $ 5,064 -- $10,799
======= ======= =========== =======
Pro forma net income................................................. $ 2,916 $ 3,099 -- $ 6,015
======= ------- ----------- -------
Pro forma net income per basic share................................. $ 0.15 $ 0.31 -- $ 0.24
======= ======= =========== =======
Pro forma net income per dilutive share.............................. $ 0.15 $ 0.30 -- $ 0.24
======= ======= =========== =======
Basic shares used in computing pro forma or net income per share..... 19,259 10,006 (4,002) 25,263
Diluted shares used in computing pro forma or net income per
share............................................................... 19,445 10,245 (4,098) 25,592
</TABLE>
- --------------
(a) The calculation of basic and dilutive net income per common share for the
pro forma financial statements uses the applicable weighted average number
of outstanding shares of Metzler and LECG Common Stock adjusted to
equivalent shares of Metzler Common Stock.
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
For the Year Ended December 31, 1995
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Pro
Metzler LECG Adjustment Forma
--------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Revenues....................................... $55,817 $24,835 $80,652
Cost of services............................... 37,085 16,465 53,550
------- ------- ---------- -------
Gross profit................................... 18,732 8,370 -- 27,102
Selling, general and administrative expenses... 17,812 4,048 21,860
------- ------- ---------- -------
Income from operations......................... 920 4,322 -- 5,242
Other expense, net............................. 241 -- 241
------- ------- ---------- -------
Income before provision for income taxes....... 679 4,322 -- 5,001
Provision for income taxes..................... 393 83 476
------- ------- ---------- -------
Net income..................................... $ 286 $ 4,239 -- $ 4,525
======= ======= ========== =======
Pro forma or net income........................ $ 1,952 $ 4,239 -- $ 6,191
======= ======= ========== =======
</TABLE>
<PAGE>
Exhibit 99.3
INDEX TO THE FINANCIAL STATEMENTS
THE METZLER GROUP, INC.
<TABLE>
<S> <C>
Audited Consolidated Financial Statements as of December 31, 1997 and 1996,
and for each of the three years in the period ended December 31, 1997
Independent Auditors' Report............................................... 2
Consolidated Balance Sheets................................................ 3
Consolidated Statements of Operations...................................... 4
Consolidated Statements of Stockholders' Equity............................ 5
Consolidated Statements of Cash Flows...................................... 6
Notes to Consolidated Financial Statements................................. 7
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
The Metzler Group, Inc.:
We have audited the combination of The Metzler Group, Inc. and subsidiaries
("the Company"), LECG, Inc. and Peterson Consulting L.L.C. as reflected in the
accompanying consolidated balance sheets of the Company as of December 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the combination of the Company, LECG, Inc. and Peterson Consulting
L.L.C. as reflected in these consolidated financial statements based on our
audit procedures.
We previously audited the consolidated balance sheets of the Company as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997, prior to their restatement for the
1998 pooling-of-interests with LECG, Inc. and Peterson Consulting L.L.C. and
have issued our report thereon dated February 11, 1998, except for Note 14 as to
which the date is March 5, 1998, which report was based in part on reliance of
other auditors. Such report and the accompanying consolidated financial
statements are included in the Company's Annual Report on Form 10-K dated
December 31, 1997. The contribution of the Company to combined restated assets
as reflected in the consolidated financial statements represented 41 percent and
56 percent as of December 31, 1997 and 1996, respectively; to combined restated
revenues represented 43 percent, 42 percent and 43 percent; and to combined
restated net income represented 53 percent, 38 percent and 6 percent for the
years ended December 31, 1997, 1996 and 1995, respectively. Separate
consolidated financial statements of LECG, Inc. and Peterson Consulting L.L.C.
were audited by other auditors who have issued their reports thereon dated
January 30, 1998 and March 17, 1998, respectively.
In our opinion, the consolidated financial statements referred to above
have been properly combined on the basis described in Note 3 of the notes to the
consolidated financial statements.
Chicago, Illinois /s/ KMPG Peat Marwick LLP
November 6, 1998
2
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 45,867 $33,699
Accounts receivable, net............................. 59,397 47,430
Prepaid and other current assets..................... 3,337 2,250
-------- -------
Total current assets............................... 108,601 83,379
Property and equipment, net............................ 13,769 7,982
Other assets........................................... 2,073 1,553
-------- -------
Total assets....................................... $124,443 $92,914
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt...................................... 8,070 7,527
Accounts payable and accrued liabilities............. 10,458 7,601
Accrued compensation and project costs............... 17,075 17,555
Income taxes payable................................. 3,800 876
Deferred income taxes................................ 1,500 712
Stockholder distribution payable..................... 5,357 --
Other current liabilities............................ 4,072 3,124
-------- -------
Total current liabilities.......................... 50,332 37,395
Long-term debt......................................... 319 1,490
Deferred income taxes.................................. 3,951 2,306
Other non-current liabilities.......................... 1,169 1,336
-------- -------
Total liabilities.................................. 55,771 42,527
-------- -------
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; 34,043 and 31,881 shares issued and
outstanding in 1997 and 1996, respectively......... 34 32
Additional paid-in capital........................... 56,580 41,313
Notes receivable from stockholders................... (2,755) (3,045)
Cumulative translation adjustment.................... (57) 6
Retained earnings.................................... 14,870 12,081
-------- -------
Total stockholders' equity......................... 68,672 50,387
-------- -------
Total liabilities and stockholders' equity......... $124,443 $92,914
======== =======
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
3
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues............................... $196,780 $151,889 $130,909
Cost of services....................... 115,122 89,410 79,056
-------- -------- --------
Gross profit......................... 81,658 62,479 51,853
General and administrative expenses.... 54,151 47,028 47,858
Restructuring costs.................... -- -- 4,277
Merger-related costs................... 1,312 -- --
-------- -------- --------
Operating income (loss).............. 26,195 15,451 (282)
-------- -------- --------
Other expense (income):
Interest expense..................... 432 840 405
Interest income...................... (1,156) (420) (85)
Other, net........................... (581) (135) 20
-------- -------- --------
Total other expense (income)....... (1,305) 285 340
-------- -------- --------
Income (loss) before income tax
expense............................... 27,500 15,166 (622)
Income tax expense................... 9,081 9 476
-------- -------- --------
Net income (loss) before extraordinary
item................................. 18,419 15,157 (1,098)
Extraordinary gain..................... -- -- 5,692
-------- -------- --------
Net Income............................. $ 18,419 $ 15,157 $ 4,594
======== ======== ========
Earnings per basic share:
Net income (loss) before
extraordinary item................. $ 0.58 $ 0.49 $ (0.04)
Extraordinary gain................... -- -- 0.19
-------- -------- --------
Net income........................... $ 0.58 $ 0.49 $ 0.15
======== ======== ========
Shares used in computing earnings
per basic share.................... 31,779 30,933 30,404
Earnings per dilutive share:
Net income (loss) before
extraordinary item.................. $ 0.57 $ 0.48 $ (0.04)
Extraordinary gain................... -- -- 0.19
-------- -------- --------
Net income........................... $ 0.57 $ 0.48 $ 0.15
======== ======== ========
Shares used in computing earnings
per dilutive share................. 32,288 31,262 30,404
Pro forma income data (unaudited):
Net income (loss) before
extraordinary item.................. $ 18,419 $ 15,157 $ (1,098)
Pro forma (increase) decrease to
income tax expense.................. (2,194) (6,209) 731
-------- -------- --------
Pro forma net income (loss)......... $ 16,225 $ 8,948 $ (367)
======== ======== ========
Pro forma net income (loss) per
basic share........................ $ 0.51 $ 0.29 $ (0.01)
Pro forma net income (loss) per
dilutive share..................... $ 0.50 $ 0.29 $ (0.01)
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
4
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION> NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE CUMULATIVE TOTAL
--------------- --------------- PAID-IN FROM TRANSLATION RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS ADJUSTMENT EARNINGS EQUITY
------ ------ ------ ------ ------- ------------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994.... -- $ -- 19,943 $21 $ 6,628 $ (643) $ -- $ 7,131 $13,137
Net income.................... -- -- 0 0 0 0 -- 4,594 4,594
Purchase and retirement
of common stock.............. -- -- (264) (1) (791) 0 -- (820) (1,612)
Issuance of common stock...... -- -- 827 1 1,808 (983) -- 0 826
Retroactive restatement
for a three-for-two common
stock split effective
April 1, 1998................ -- -- 10,254 10 (10) 0 -- 0 0
Distributions................. 0 0 0 0 -- (4,504) (4,504)
Interest on notes receivable
from stockholders........... 0 0 78 (78) -- 0 0
Collection of notes receivable
from stockholders........... 0 0 0 128 0 128
------ ------ ------ --- ------- ------- ---- ------- -------
Balance at December 31, 1995.... -- -- 30,760 31 7,713 (1,576) -- 6,401 12,569
Net income.................... -- -- 0 0 0 0 -- 15,157 15,157
Purchase and retirement
of common stock.............. -- -- (3,432) (4) (8,460) 0 -- (1,794) (10,258)
Issuance of common stock...... -- -- 4,553 5 41,905 (1,619) -- 0 40,291
Distributions................. -- -- 0 0 0 (162) -- (7,683) (7,845)
Interest on notes receivable
from stockholders........... 0 0 155 (155) -- 0 0
Collection of notes receivable
from stockholders........... 0 0 0 467 0 467
Foreign currency
adjustment.................. -- -- 0 0 -- 0 6 0 6
------ ------ ------ --- ------- ------- ---- ------- -------
Balance at December 31, 1996.... -- -- 31,881 32 41,313 (3,045) 6 12,081 50,387
Net income.................... -- -- 0 0 0 0 -- 18,419 18,419
Purchase of common stock...... -- -- (535) 0 (10,340) 44 -- (228) (10,524)
Issuance of common stock...... -- -- 2,697 2 25,412 (87) -- 780 26,107
Distributions................. -- -- 0 0 0 (351) -- (16,182) (16,533)
Interest on notes receivable
from stockholders........... 0 0 195 (195) -- 0 0
Collection of notes receivable
from stockholders........... 0 0 0 879 0 879
Foreign currency
adjustment.................. -- -- 0 0 0 0 (63) 0 (63)
------ ------ ------ --- ------- ------- ---- ------- --------
Balance at December 31, 1997.... -- $ -- 34,043 $34 $ 56,580 $(2,755) $(57) $14,870 $ 68,672
====== ====== ====== === ======== ======= ==== ======= ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
5
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 18,419 $15,157 $ 4,594
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization............. 3,578 2,833 2,745
Provision for bad debts................... 172 1,831 (418)
Deferred income taxes..................... 2,363 (952) 194
Extraordinary gain on settlement of
royalty obligation....................... -- -- (5,692)
Other non-cash items, net................. (728) 80 (200)
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable..................... (12,138) (8,940) 1,352
Prepaid expenses and other assets....... (1,139) (444) 331
Accounts payable and accrued
liabilities............................ 2,644 3,419 (1,492)
Accrued compensation and project
costs.................................. 97 6,164 4,236
Income taxes payable.................... 2,922 549 209
Other current liabilities............... 1,340 (4,861) (52)
-------- ------- -------
Net cash provided by operating
activities................................. 17,530 14,836 5,807
-------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment........ (8,100) (3,879) (2,672)
Other, net................................ (656) (499) 37
-------- ------- -------
Net cash used in investing activities....... (8,756) (4,378) (2,635)
-------- ------- -------
Cash flows from financing activities:
Purchase of common stock.................. (496) (9,806) (1,293)
Issuance of common stock.................. 25,493 38,151 826
Repayment of long-term debt............... (1,480) (648) --
Proceeds from long-term debt.............. 3,300 1,799 226
Net borrowings (repayments) of short-term
debt..................................... (2,793) (389) 4,566
Purchase of dissenting shares issued
in business combinations................. (9,679) -- --
Payments of pre-acquisition undistributed
income to former stockholders............ (10,121) (7,338) (4,376)
Settlement payment of royalty obligation.. -- -- (3,628)
Other, net................................ (830) (406) (135)
-------- ------- -------
Net cash provided by (used in)
financing activities....................... 3,394 21,363 (3,814)
-------- ------- -------
Net increase (decrease) in cash and
cash equivalents........................... 12,168 31,821 (642)
Cash and cash equivalents at beginning
of year.................................... 33,699 1,878 2,520
-------- ------- -------
Cash and cash equivalents at end of
year....................................... $ 45,867 $33,699 $ 1,878
======== ======= =======
Supplemental information:
Interest payments......................... $ 305 $ 544 $ 255
Income tax payments....................... $ 3,509 $ 428 $ 91
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE>
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts and
unless as otherwise indicated)
1. DESCRIPTION OF BUSINESS
The Metzler Group, Inc. (the "Company") is a leading provider of consulting
services to energy-based and related industries. The Company's services include:
(i) management consulting; (ii) information technology; (iii) economic and
regulatory; and (iv) engineering and technical. The Company's operating
subsidiaries include LECG, Inc. ("LECG"), Metzler & Associates, Inc. ("Metzler &
Associates"), Peterson Consulting, Inc. ("Peterson"), Reed Consulting Group,
Inc. ("Reed"), and Resource Management International, Inc. ("RMI"). The Company
is headquartered in Chicago, Illinois and has regional offices in various cities
within the United States, and several international offices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
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. Significant
estimates in which it is reasonably possible that there could be a change in the
estimates in the near term include the calculation of contingency reserves and
revenue recognized on long-term contracts.
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 is computed using
the straight-line method based on the estimated useful lives, ranging from three
to forty years, of the various classes of property and equipment. Amortization
of leasehold improvements is computed over the shorter of the lease term or the
estimated useful life of the asset.
Intangible Assets
Intangible assets consist principally of goodwill (excess of purchase price
over the fair value of net assets acquired) and covenants not to compete.
Goodwill is being amortized using the straight-line method from ten to forty
years. The non-compete covenants are recorded at cost and are being amortized
over their respective terms of 33 to 72 months.
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.
7
<PAGE>
Revenue Recognition
The Company recognizes revenues as the related services are provided.
Certain contracts are accounted for on the percentage of completion method
whereby revenues are recognized based upon costs incurred in relation to total
estimated costs at completion. Provision is made for the entire amount of
estimated losses, if any, at the time when they are known.
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 the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
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, Metzler & Associates had operated as a C-
corporation. Effective January 1, 1996, the stockholders of Metzler & Associates
elected to be taxed under Subchapter S of the Internal Revenue Code. During such
period, federal income taxes were the responsibility of Metzler & Associates'
stockholders as were certain state income taxes. As of the effective date of the
election, Metzler & Associates was 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.
Prior to December 18, 1997, LECG had elected to be taxed under Subchapter S
of the Internal Revenue Code for income tax purposes. During such period,
federal income taxes were the responsibility of LECG's stockholders as were
certain state income taxes. Therefore, the financial statements do not include a
provision for federal (and some state) income taxes prior to LECG's initial
public offering on December 18, 1997. LECG's S-corporation status terminated on
December 18, 1997, thereby subjecting LECG's income to federal and certain other
state income taxes at the corporate level. Accordingly, LECG applied the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," for the period ended December 31, 1997. In
addition, LECG converted from a cash basis to accrual basis for tax purposes in
conjunction with its conversion to a C-corporation. Due to temporary differences
in recognition of revenue and expenses, income for financial reporting purposes
exceeded income for income tax purposes. The conversion to accrual basis along
with these temporary differences resulted in the recognition of a net deferred
tax liability (and a corresponding one-time charge to expense) of $2.7 million
as of December 31, 1997.
For the three years ended December 31, 1997, Peterson was a limited
liability company, which, for income tax purposes, was treated as a partnership.
Accordingly, the income of Peterson was reported on the individual income tax
returns of its members and federal income taxes, as well as certain state income
taxes, were the responsibility of its members. Subsequent to December 31, 1997,
and based on events unrelated to its acquisition by the Company, Peterson
elected C-corporation status, thereby subjecting its income to federal and
certain state income taxes at the corporate level. As a result of its
acquisition of Peterson, the Company has applied the provisions of SFAS No. 109,
and has converted Peterson from the modified cash basis to the accrual basis for
tax purposes. Due to temporary differences in recognition of revenue and
expense, income for financial reporting purposes has exceeded income for tax
reporting purposes. The conversion to accrual
8
<PAGE>
basis, along with these temporary differences, will result in the recognition of
a one-time, non-cash charge of $7.2 million to be recorded during the period in
which the merger occurred.
Pro Forma Adjustments (unaudited)
The pro forma adjustments for 1997 and 1996 include federal and additional
state income tax expense of $2,194 and $6,209, respectively, and the pro forma
adjustment for 1995 includes a tax benefit of $731 that would have been required
if certain of the Company's subsidiaries which were not taxable entities during
those periods had been subject to federal, and certain state, income taxes at
the corporate level.
Earnings per Share
For the years ended December 31, 1997, 1996 and 1995, earnings per share
was computed in accordance with Statement of Financial Accounting Standards No.
128 "Earnings Per Share", which the Company adopted during the fourth quarter of
1997. Weighted-average and equivalent shares outstanding include the dilutive
effect of common stock options aggregating 509, 329 and 0 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Foreign Currency Translation
The balance sheets of the Company's foreign subsidiaries are translated
into U.S. dollars using the year-end exchange rate, and sales and expenses are
translated using the average exchange rate for the year. The resulting
translation gains or losses are recorded as a separate component of
stockholders' equity as a cumulative translation adjustment.
3. BUSINESS COMBINATIONS
On July 31, 1997, the Company issued 3.2 million shares of common stock for
substantially all the outstanding common stock of RMI. Additionally, on August
15, 1997, the Company issued 0.8 million shares of common stock for
substantially all of the outstanding common stock of Reed. Each of the
transactions was accounted for as a pooling of interests. The consolidated
financial statements have been restated as if RMI and Reed had been combined for
all periods presented. The Company's consolidated statement of operations for
the year ended December 31, 1997 includes revenues and net income from RMI and
Reed totaling $28,906 and $1,529, respectively, through the dates of
acquisition. The consolidated statements of operations for years ended December
31, 1996 and 1995 have been restated to reflect revenues of $41,460 and $42,357,
respectively. The consolidated statement of operations for the year ended
December 31, 1996 has been restated to reflect a net loss from RMI and Reed
totaling $1,119. The consolidated statement of operations for the year ended
December 31, 1995 has been restated to reflect net income from RMI and Reed
totaling $760.
On August 19, 1998, the Company issued 7.3 million shares of common stock
for substantially all the outstanding common stock of LECG. Additionally, on
August 31, 1998, the Company issued 5.6 million shares of common stock for
substantially all of the outstanding common stock of Peterson. Each of these
transactions was accounted for as a pooling of interests and, accordingly, the
consolidated financial statements have been restated as if the companies had
been combined for all periods presented. The Company's consolidated statements
of operations for 1997, 1996 and 1995 have been restated to reflect revenues of
$113,119,
9
<PAGE>
$88,336 and $75,092, respectively, and net income of $8,732, $9,422 and $4,308,
respectively, for the aggregate of the operations of LECG and Peterson.
During 1997, the Company completed three additional transactions which were
accounted for as poolings of interests. The stockholders' equity and the
operations of these businesses were not material, individually or in the
aggregate, in relation to those of the Company. As such, the Company recorded
the combinations by restating stockholders' equity as of the effective date of
each acquisition without restating prior period financial statements.
4. STOCKHOLDERS' EQUITY
On October 4, 1996 the Company completed an initial public offering of its
common stock in which 3.9 million shares were sold by the Company, resulting in
proceeds of approximately $37 million, net of issuance costs of approximately $4
million.
Concurrent with the completion of the initial public offering and in
accordance with an agreement entered into during July 1996 between the Company
and a stockholder, the Company redeemed 2.6 million shares of the stockholder's
common stock for $7,975.
On December 18, 1997, LECG completed an initial public offering, resulting
in net proceeds of approximately $24.4 million, net of underwriters' discounts
and issuance costs of approximately $3.1 million.
5. ACCOUNTS RECEIVABLE
The components of accounts receivable as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Billed amounts...........................$ 51,595 $ 38,938
Engagements in process................... 11,952 12,508
Allowance for uncollectible accounts..... (4,150) (4,016)
-------- --------
$ 59,397 $ 47,430
======== ========
</TABLE>
Engagements in process represent balances accrued by the Company for
services that have been performed but have not been billed to the customer.
Billings are generally done on a monthly basis for the prior month's services.
6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, as of December 31 consisted of:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and buildings.......................$ 370 $ 370
Furniture, fixtures and equipment........ 27,418 21,131
Software................................. 2,263 979
Leasehold improvements................... 3,072 2,282
-------- --------
33,123 24,762
Less: accumulated depreciation and
amortization......................... (19,354) (16,780)
-------- --------
$ 13,769 $ 7,982
======== ========
</TABLE>
7. SHORT-TERM AND LONG-TERM DEBT
The Company had total short-term debt and other current debt obligations of
$8,070 and $7,527 at December 31, 1997 and 1996, respectively. Amounts
outstanding at December 31 are as follows:
10
<PAGE>
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
$3,700 in three lines of credit, interest payable monthly at
the bank's prime rate (8.25% at December 31, 1996) plus
.375% to 1.0%, collateralized by substantially all assets
of RMI and Reed, paid in 1997............................ $ -- $ 1,685
Notes payable to officers and employees, at rates of
interest ranging from 5% to 10%, paid in 1997............ -- 1,825
$1,200 in two lines of credit, interest payable quarterly at
the bank's prime rate (8.5% at December 31, 1997) plus
1.0%, guaranteed by officers of a subsidiary, due
April 1, 1998............................................ 1,020 --
Two lines of credit, $4,100 each, interest payable
quarterly at the bank's prime rate (8.5% at December 31,
1997), collateralized by accounts receivable of Peterson,
outstanding balance due on demand......................... 3,300 3,500
$3,645 term loan, payable in monthly installments of $100
including interest at the bank's prime rate (8.5% at
December 31, 1997), collateralized by accounts receivable
of Peterson, and subject to renewal annually............. 3,645 --
Other term loans, at variable rates of interest of 9.25%
through 15.0% with due dates 1998 through 2001........... 424 2,007
$3,000 line of credit, interest payable at the
bank's prime rate (8.5% at December 31, 1997),
collateralized by the receivables and fixed assets
of LECG................................................... -- --
------ -------
Total debt.............................................. $8,389 $ 9,017
Portion classified as long-term..................... 319 1,490
------ -------
Short-term debt....................................... $8,070 $ 7,527
====== =======
</TABLE>
At December 31, 1997, the Company had letters of credit available of
$2,610, of which $941 has been utilized. The letters of credit expire at various
dates through December 31, 2000.
8. LEASE COMMITMENTS
The Company leases its office facilities and certain equipment under
operating lease arrangements which expire at various dates through 2007 with
renewal options of two to five years. The Company leases office facilities under
noncancelable operating leases which include fixed or minimum payments plus, in
some cases, scheduled base
11
<PAGE>
rent increases over the term of the lease and additional rents based on the
Consumer Price Index. Certain leases provide 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
noncancelable operating leases.
Future minimum annual lease payments, for the years subsequent to 1997 and
in the aggregate, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
----------------------- -------
<S> <C>
1998....................................... $ 9,321
1999....................................... 7,315
2000....................................... 5,900
2001....................................... 5,185
2002....................................... 2,219
Thereafter................................. 2,480
-------
$32,420
=======
</TABLE>
Rent expense for operating leases entered into by the Company and charged
to operations amounted to $9,791 for 1997, $7,150 for 1996, and $9,766 for 1995.
9. INCOME TAX EXPENSE
Income tax expense consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Federal:
Current........................................... $5,108 $ 477 $ 168
Deferred.......................................... 2,648 (574) 146
----- ----- -----
Total............................................. 7,756 (97) 314
----- ----- -----
State:
Current........................................... 1,392 409 127
Deferred.......................................... (67) (303) 35
----- ----- -----
Total............................................. 1,325 106 162
----- ----- -----
Total federal and state income
tax expense ...................................... $9,081 $ 9 $ 476
====== ===== =====
</TABLE>
Income tax expense differs from the amounts estimated by applying the
statutory income tax rates to income (loss) before extraordinary and before
income tax expense as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal tax at statutory rate....................... 35.0% 35.0% 34.0%
State tax at statutory rate, net of federal tax benefits.... 4.6 4.6 (13.3)
Effect of nontaxable interest and dividends................. (0.9) (0.6) --
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Effect of nontaxable entities............. (5.2) (39.0) (97.2)
Other..................................... (0.5) 0.1 0.0
------ ------ -------
33.0% 0.1% (76.5%)
====== ====== =======
</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,
-------------------
1997 1996
------- ------
<S> <C> <C>
Deferred tax assets:
State income taxes..................................... $ 155 $ 157
Accrued rent........................................... 110 201
Allowance for uncollectible receivables................ 340 --
Reorganization costs................................... 382 --
Other.................................................. 126 51
------- ------
Total deferred tax assets............................... 1,113 409
------- ------
Deferred tax liabilities:
Adjustment resulting from changes in the method of
accounting used for tax purposes...................... 6,080 3,104
Other.................................................. 484 323
------- ------
Deferred tax liabilities................................ 6,564 3,427
------- ------
Net deferred tax liabilities............................ $ 5,451 $3,018
======= ======
</TABLE>
10. 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. As of December 31, 1997, the Company had 2,623 options outstanding
at a weighted average exercise price of $16.53 per share which was equal to the
estimated fair market value of common stock at the dates of grant. As of
December 31, 1997, 14 options were exercisable. In general, the options are
exercisable in annual installments over a four year period following 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 years
ended December 31, 1997 and 1996 would have been increased by $1,138 and $102,
respectively, net of related income taxes. As a result, the Company's pro forma
net earnings available to common stockholders and earnings per common and common
equivalent shares would have been reduced to the pro forma amounts indicated
below:
13
<PAGE>
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Earnings per common share, as reported:
Net income............................................ $18,419 $15,157
Net income per basic share............................ $ 0.58 $ 0.49
Net income per dilutive share......................... $ 0.57 $ 0.48
Earnings per common share, fair value method:
Net income, with compensation expense from fair
value options........................................ $17,281 $15,055
Fair value method net income per basic share.......... $ 0.54 $ 0.49
Fair value method net income per dilutive share....... $ 0.54 $ 0.48
</TABLE>
The weighted average fair value of options granted in 1997 and 1996 was
$4.46 and $2.00 respectively. 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 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Expected volatility......................... 45% 40%
Risk free interest rate..................... 5.7% 6.5%
Dividend yield.............................. 0% 0%
Expected lives.............................. 2.5 years 3.0 years
</TABLE>
Additional information on the shares subject to options is as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
WEIGHTED- WEIGHTED-
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year........... 689 $10.37 -- --
Granted...................... 2,173 18.35 725 $10.00
Exercised.................... (3) 8.00 -- --
Forfeited.................... (236) 16.35 (36) 8.00
------ ----
Options outstanding at end
of year..................... 2,623 $16.53 689 $10.37
====== ====
Options exercisable at year
end......................... 14 $18.45 -- --
====== ====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
------------------ -------------------
RANGE OF EXERCISE REMAINING EXERCISE REMAINING
EXERCISE PRICE SHARES PRICE LIFE SHARES PRICE LIFE
- -------------- ------ -------- --------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 6 to $13.... 462 $ 7.79 1.5 years 512 $ 8.03 2.5 years
$13 to $17.... 1,072 14.68 1.4 years 12 16.21 0.7 years
$17 to $21.... 231 18.00 2.4 years 165 17.21 3.3 years
$21 to $23.... 345 22.15 2.3 years -- -- --
$23 to $27.... 513 24.00 2.5 years -- -- --
----- -----
2,623 $16.53 1.8 years 689 $10.37 2.6 years
===== =====
</TABLE>
14
<PAGE>
11. EMPLOYEE BENEFIT PLANS
The Company maintained four profit sharing and savings plans through
December 31, 1997.
The Metzler & Associates Profit Sharing and Savings Plan and Trust covers
certain employees upon the completion of one year of service. Participants may
contribute a portion of their eligible compensation. The Company, at its
discretion, makes matching contributions. The Company may also make an annual
profit sharing contribution at its discretion.
The RMI, Inc. 401(k) and Profit Sharing Plan provides that eligible
employees may contribute a portion of their compensation. The Company, at its
discretion matches a percentage of employees' contributions. The Company may
also make an annual profit sharing contribution at its discretion.
LECG has a defined contribution plan under Section 401(k) of the Internal
Revenue Code. Eligible employees may contribute a portion of their eligible
compensation. LECG has the option of matching a portion of the employee
contribution to the plan on a current or retroactive basis.
Peterson maintains a retirement plan covering substantially all of their
employees. Employees may contribute to the plan through the 401(k) feature and
are eligible to receive a matching contribution from the Company.
The Company, as sponsor of the plans, uses independent third parties to
provide administrative services to the plans. The Company has the right to
terminate the plans at any time.
The Company contributions to the various plans which were charged to
operations were $976, $1,356 and $1,384 in the years ended December 31, 1997,
1996, and 1995, respectively.
12. RELATED PARTY TRANSACTIONS
Included in stockholders' equity are notes receivable from stockholders
arising from the sale of common shares prior to LECG'S initial public offering
as well as other advances to stockholders. These amounts are unsecured and due
on or before December 31, 2002. The notes bear interest at 7 percent.
15
<PAGE>
13. OTHER INCOME-DEFERRED PURCHASE OPTION DEPOSIT
In June 1993, another major consulting firm purchased from LECG an option
to buy all of its assets at a formula price based on a multiple of earnings and
equity. LECG received $1,000 for granting this option, which was deferred in the
consolidated balance sheet, net of applicable expenses. During 1997, the option
agreement expired and LECG recognized the $852 as other income in 1997.
14. RESTRUCTURING COSTS AND EXTRAORDINARY GAIN
Beginning in 1994, Peterson initiated a program which resulted in the
restructuring of its operations and ownership structure. This initiative had two
elements. First, Peterson negotiated a lump sum payment in the amount of $3,500,
as final settlement of certain royalty obligations. In the year ended December
31, 1995, Peterson recognized an extraordinary gain of $5,692 in connection with
the extinguishment of these obligations. Second, Peterson incurred restructuring
charges of $4,277 for the year ended December 31, 1995, which consisted of
$2,970 for settlement of commitments under noncancelable operating leases and
$1,307 for severance, moving and other transition costs. Over a two year period,
the restructuring program resulted in charges to income of $6,504, of which
$4,277 was charged to expense in 1995 and $2,227 in 1994. The $6,504 in total
restructuring costs over the two year period consisted of $4,652 for settlement
of commitments under noncancelable operating leases and $1,852 for severance,
moving and other transition costs.
15. CONTINGENCIES
One of the Company's subsidiaries is party to a lawsuit alleging copyright
infringement and related state law causes of action. The complaint is for
injunctive relief and unspecified compensatory and punitive damages. The
original claim was dismissed and granted in favor of the Company's subsidiary.
On October 27, 1997, the Court of Appeals reversed the previous judgment. The
plaintiff has filed an amended complaint alleging similar claims. The Company
plans to file for summary judgment to dismiss the plaintiff's complaint.
Management believes they have significant defenses for their position and intend
to vigorously defend against the claims. Any contemplated outcome of this
litigation is not expected to have a material adverse affect on our business.
16. SUBSEQUENT EVENTS
On February 11, 1998, the Company completed a registration statement on
Form S-3 for a secondary offering of its common stock, par value $.001. At the
completion of the offering on March 2, 1998, the Company issued an additional
1.5 million shares of its common stock which yielded net proceeds of
approximately $37 million.
On March 5, 1998, the Board of Directors authorized a three-for-two stock
split to be distributed on April 1, 1998, to shareholders of record on March
18, 1998. All references in the consolidated financial statements to number of
shares and per share amounts of the Company's common stock have been
retroactively restated to reflect the increased number of common shares
outstanding.
16
