<PAGE>
PROSPECTUS FILED PURSUANT TO RULE NO. 424(b)(4)
FEBRUARY 25, 1998 REGISTRATION NO. 333-40489
5,000,000 SHARES
[LOGO] METZLER GROUP
MANAGEMENT CONSULTANTS
COMMON STOCK
Of the 5,000,000 shares of Common Stock offered hereby, 1,000,000 shares are
being sold by The Metzler Group, Inc. ("The Metzler Group" or the "Company")
and 4,000,000 shares are being sold by the Selling Stockholders. See "Selling
Stockholders." The Company will not receive any of the proceeds from the sale
of shares by the Selling Stockholders.
The Common Stock is traded on the Nasdaq National Market under the symbol
"METZ." On February 24, 1998, the last reported sale price of the Common Stock
was $39 3/4 per share. See "Price Range of Common Stock and Dividend Policy."
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................. $39.25 $1.96 $37.29 $37.29
Total(3)................... $196,250,000 $9,800,000 $37,290,000 $149,160,000
- --------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses, estimated at $1,000,000, which will be paid by
the Company.
(3) The Selling Stockholders have granted to the Underwriters a 30-day option
to purchase up to 662,500 additional shares of Common Stock at the Price
to the Public, less Underwriting Discounts and Commissions, solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to the Public, Underwriting Discounts and Commissions,
Proceeds to the Company and Proceeds to the Selling Stockholders will be
$222,253,125, $11,098,500, $37,290,000 and $173,864,625, respectively. The
Company will not receive any of the proceeds from the sale of shares of
Common Stock by the Selling Stockholders pursuant to the Underwriters'
over-allotment, if exercised. See "Selling Stockholders" and
"Underwriting."
The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including their right to reject orders in whole or
in part. It is expected that delivery of the share certificates will be made
in New York, New York, on or about March 2, 1998.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS
BANCAMERICA ROBERTSON STEPHENS
WILLIAM BLAIR & COMPANY
<PAGE>
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Prospectus, the words
"anticipate," "believe," "estimate," and "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute
to such differences include those discussed in "Risk Factors."
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus or incorporated by reference
herein. The Company acquired L.E. Burgess Consulting, Inc. ("Burgess") as of
January 1997; Resource Management International, Inc. ("RMI") as of July 1997;
Reed Consulting Group, Inc. ("Reed") as of August 1997; Sterling Consulting
Group, Inc. ("Sterling") as of December 1997; and Reed-Stowe & Co.,
Incorporated, which upon acquisition became a subsidiary of Reed ("Reed-
Stowe"), also as of December 1997. For financial reporting purposes, each of
these transactions (the "Acquisitions") was accounted for using the pooling of
interests method. As used in this Prospectus, except where the context clearly
requires otherwise, references made to the "Company" mean the Company and its
subsidiaries, including the acquired companies. The Consolidated Financial
Statements of the Company included herein include the Company's initial
subsidiary, Metzler & Associates, Inc. ("Metzler & Associates"), and only give
retroactive effect to the acquisitions of RMI and Reed. As a result, the
financial position, results of operations and cash flows are presented as if
RMI and Reed had been consolidated for all periods presented. As required by
generally accepted accounting principles, the Consolidated Financial Statements
became the historical financial statements of the Company upon issuance of the
financial statements for the quarter ending September 30, 1997. The
Consolidated Financial Statements, including the Notes thereto, should be read
in conjunction with the historical consolidated financial statements of the
Company and RMI incorporated by reference into this Prospectus.
Unless otherwise indicated, the information contained in this Prospectus: (i)
assumes that the Underwriters' over-allotment option is not exercised; (ii)
gives retroactive effect to the amendment adopted November 21, 1997 to the
Company's Amended and Restated Certificate of Incorporation, which amendment
increased the authorized Common Stock from 15 million shares to 75 million
shares; and (iii) gives retroactive effect to the amendment adopted November
21, 1997 to the Company's Long-Term Incentive Plan, which amendment increased
the number of shares available for grants thereunder from 1.3 million shares to
a total of 15% of the Common Stock from time to time issued and outstanding.
See "Underwriting."
THE COMPANY
The Metzler Group, Inc. is a leading nationwide provider of consulting
services to electric, gas and water utilities and other energy and utility-
related businesses. The Company offers a wide range of consulting services
designed to assist its clients in succeeding in a business environment of
changing regulation, increasing competition and evolving technology. The
Company's clients include the 50 largest investor-owned electric utilities
("IOUs") and the 20 largest gas distribution companies in the United States.
During 1997, the Company broadened its service offerings with the addition of
economic and regulatory and engineering and technical services; expanded its
domestic presence on the east and west coasts; expanded its base of non-utility
energy clients; established an international presence in Europe, Asia and
Australia; and since its initial public offering in October 1996, has more than
tripled its revenues, principally through the Acquisitions. With the addition
of these five consulting businesses, the Company's service offerings now
include: (i) management consulting; (ii) information technology; (iii) economic
and regulatory; and (iv) engineering and technical.
The Metzler Group acts as a holding company that manages five direct wholly-
owned subsidiaries: Metzler & Associates, Burgess, RMI, Reed and Sterling. This
organizational structure allows the Company to expand its breadth of service
offerings, increase its client base and add highly-skilled professionals
through acquisitions, and then to integrate these acquisitions into The Metzler
Group to achieve operational and cost benefits. Effective January 1, 1997, the
Company acquired Chicago-based Burgess, which provides litigation, regulatory
policy support and operations management consulting services to electric and
natural gas utilities. The Company acquired RMI as of July 31, 1997. RMI, based
in Sacramento, California, is a leading provider of consulting
3
<PAGE>
services to gas, water and electric utilities, with operations in the western
and eastern United States and international marketplace. RMI's operations
complement the Company's existing management consulting and information
technology services and expand the Company's service offerings to include a
broad range of engineering and technical services and economic and regulatory
services. The Company acquired Reed as of August 15, 1997. Reed, based in the
Boston, Massachusetts area, provides strategic planning, operations management
and economic and regulatory services to electric and natural gas utilities.
Reed's operations complement the Company's existing services and client base
and expand the Company's presence in the northeast United States and
internationally. The Company acquired Sterling as of December 1, 1997.
Sterling, based in Houston, Texas, provides strategy development and
implementation, competitive analysis, change management and other consulting
services principally to oil and gas exploration and production companies.
Sterling's operations expand the Company's service offerings to non-utility
energy clients. The Company acquired Reed-Stowe also as of December 1, 1997,
and the Company contributed all of the Reed-Stowe stock to the Company's Reed
subsidiary. Reed-Stowe, based in Richardson, Texas, provides litigation and
regulatory policy support and other consulting services to municipalities and
energy utilities. The Company has begun to integrate these acquisitions into
its operating model through operations and cost management.
The changing regulatory and competitive environment in the energy utility
industry has forced utility companies to confront an evolving range of
strategic options, challenges and opportunities. In order to deal with these
challenges and address these opportunities, energy utilities are formulating
and implementing new strategies and tactics, including redesigning business
processes, re-engineering work forces, acquiring more effective information
technology and adopting or restructuring customer service and marketing
programs. Electric and other utilities are increasingly turning to experienced
outside consulting firms to assist in or lead this process because: (i) the
pace of change is eclipsing utilities' internal resources; (ii) many utilities
lack the depth and breadth of experience to identify, evaluate and implement
the full range of possible options and solutions; (iii) outside specialists
often enable energy utilities to develop better solutions in shorter time
frames; (iv) purchasing consulting expertise converts fixed labor costs to
variable costs and can be more cost-effective; and (v) consultants can often
formulate more objective advice, free of internal cultural or political forces.
Industry sources estimate that in 1996 the market for consulting services to
the utility industry was approximately $3 billion, or 6% of the $50 billion
total market for consulting services, and project a growth rate of 15% per year
through 2000.
The Company believes that several competitive factors distinguish it from
other participants in the consulting market, including: (i) established energy
utility expertise developed over more than fifteen years of providing
consulting services to the energy utility industry; (ii) deep-rooted client
relationships supporting multiple engagements; and (iii) a wide range of
industry-specific services that enables the Company to be a single-source
provider of consulting services to energy utilities while maintaining advanced
skill sets in each area.
The Company's growth strategy is to: (i) capitalize on current energy
industry dynamics supporting increased reliance on consulting services; (ii)
continue to build a complementary spectrum of consulting services through
acquisitions; (iii) expand its client base in both domestic and international
markets while further penetrating its existing client base; (iv) continue to
recruit and retain highly skilled professionals; and (v) consolidate the
fragmented utility consulting industry by leveraging its public company status.
The Company maintains its principal executive offices at 520 Lake Cook Road,
Suite 500, Deerfield, Illinois 60015. The Company's telephone number is (847)
914-9100.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Compa-
ny................................ 1,000,000 shares
Common Stock offered by the Selling
Stockholders...................... 4,000,000 shares
Common Stock to be outstanding af-
ter the offering.................. 14,707,995 shares(1)
Use of proceeds.................... Expansion of existing operations, including
development of new service offerings and
possible acquisitions of related
businesses, and general corporate purposes,
including working capital.
Nasdaq National Market symbol...... METZ
</TABLE>
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(1) Based on 13,707,995 shares outstanding on February 9, 1998. Excludes: (i)
options outstanding on such date to purchase 1,495,410 shares of Common
Stock at a weighted average exercise price of $25.38 per share; and (ii)
710,789 shares of Common Stock reserved for issuance upon exercise of
options that may be thereafter granted in the future under the Company's
Long-Term Incentive Plan. See Note 9 of Notes to Consolidated Financial
Statements.
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- ------------------------
1992 1993 1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $35,158,575 $46,175,370 $47,103,998 $55,817,351 $63,553,337 $47,160,440 $59,417,571
Cost of services....... 20,345,306 31,344,460 32,059,131 37,085,413 42,315,400 30,776,522 35,169,117
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........... 14,813,269 14,830,910 15,044,867 18,731,938 21,237,937 16,383,918 24,248,454
Merger related costs... -- -- -- -- -- -- 1,311,959
Selling, general and
administrative
expenses.............. 14,102,138 14,356,299 14,548,285 17,811,846 15,609,906 10,651,889 13,233,069
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income....... 711,131 474,611 496,582 920,092 5,628,031 5,732,029 9,703,426
Other expense (income),
net................... (188,006) 43,122 300,309 240,819 73,278 290,812 (619,811)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income
tax expense........... 899,137 431,489 196,273 679,273 5,554,753 5,441,217 10,323,237
Income tax expense
(benefit)............. 420,311 546,393 262,541 392,908 (180,351) (71,342) 3,851,879
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ 478,826 $ (114,904) $ (66,268) $ 286,365 $ 5,735,104 $ 5,512,559 $ 6,471,358
=========== =========== =========== =========== =========== =========== ===========
Net income per share .. $ .49
===========
Pro forma net
income(1)............. $ 1,951,541 $ 2,916,241 $ 2,693,696
=========== =========== ===========
Pro forma net income
per share(1).......... $ .15 $ .23 $ .22
=========== =========== ===========
<CAPTION>
AS OF SEPTEMBER 30,
1997
------------------------
AS
ACTUAL ADJUSTED(2)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $20,611,754 $56,901,754
Working capital..................................................................... 30,601,662 66,891,662
Total assets........................................................................ 44,552,378 80,842,378
Long-term debt, less current portion................................................ 369,724 369,724
Total stockholders' equity.......................................................... 30,817,181 67,107,181
</TABLE>
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(1) Pro forma net income for the two years ended December 31, 1995 and 1996 and
the nine months ended September 30, 1996 reflect the impact of a Metzler &
Associates compensation plan that went into effect on July 1, 1996 and
Metzler & Associates' election to be treated as an S corporation effective
January 1, 1996. See Note 2 of Notes to Consolidated Financial Statements
and Note 2 of Notes to Unaudited Consolidated Financial Statements for the
nine months ended September 30, 1997.
(2) As adjusted to give effect to the sale of 1,000,000 shares of Common Stock
by the Company offered hereby and the receipt of the estimated net proceeds
therefrom. See "Use of Proceeds."
5
<PAGE>
RECENT UNAUDITED FINANCIAL DATA
The following table sets forth a summary of certain financial data for the
Company for the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------
1996 1997
<S> <C> <C>
Revenues................................................ $63,553,337 $83,661,306
Gross profit............................................ 21,237,937 34,093,799
Operating income........................................ 5,628,031 14,674,080
Net income.............................................. $ 9,687,427
Pro forma net income.................................... $ 2,916,241
</TABLE>
Revenues. Revenues increased 31.6% to $83.7 million in 1997 from $63.6
million in 1996. This increase was principally the result of continued strong
demand for the Company's management consulting, engineering and technical, and
economic and regulatory services for the electric and energy-related
industries. The growth in revenues was also due to increases in both the number
and average size of client projects.
Gross Profit. Gross profit in 1997 grew 60.5% to $34.1 million from $21.2
million in 1996. Gross profit as a percentage of revenues was 40.8% in 1997 as
compared to 33.4% in 1996. The improvement in gross profit margin was driven
primarily by increased utilization of the Company's professional consultants.
Merger Related Costs. In 1997, the Company incurred merger related costs of
$1.3 million related principally to the RMI and Reed acquisitions, which were
accounted for as poolings of interests. The merger costs include legal,
accounting and other transaction-related fees and expenses. There were no
acquisitions or corresponding related costs in the prior-year period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1997 increased approximately 16.0% to $18.1 million
from $15.6 million in 1996. After giving effect to pro forma adjustments for an
increase in officer compensation of $1.0 million in 1996 to reflect the impact
of a compensation plan adopted July 1, 1996, selling, general and
administrative expenses in 1997 increased approximately 9.0% to $18.1 million
from the pro forma $16.6 million in 1996. This increase is largely attributable
to the overall higher business volume in 1997, partially offset by economies of
scale and increased efficiencies in certain support functions.
6
<PAGE>
RISK FACTORS
In addition to the other information set forth in this Prospectus, investors
should carefully consider the following factors in connection with an
investment in the shares of Common Stock offered hereby.
RISKS OF ACQUISITION STRATEGY; RISKS OF COMPLETED ACQUISITIONS
Since its initial public offering in October 1996, the Company has more than
tripled its revenues and expanded its geographic presence and breadth of
service offerings, principally through the acquisition of five consulting
firms. The Company expects to continue this expansion as an element of its
growth strategy. However, there can be no assurance that the Company will be
able to identify suitable acquisition candidates or that, if identified, the
Company will be able to acquire such companies on suitable terms. Moreover,
other companies are competing for acquisition candidates, which could result
in an increase in the price of acquisition targets and a decrease in the
number of attractive companies available for acquisition.
The Company acquired RMI in July 1997, Reed in August 1997 and Sterling and
Reed-Stowe in December 1997. The Company is in the process of integrating the
operations of these companies, including their accounting and billing
functions. There can be no assurance that the anticipated economic,
operational and other benefits of any of the completed or future acquisitions
will be achieved or that the Company will be able to successfully integrate
acquired businesses in a timely manner without substantial costs, delays or
other operational or financial problems. The difficulties of such integration
may initially be increased by the necessity of integrating personnel with
disparate business backgrounds and corporate cultures. In addition,
acquisitions may involve the expenditure of significant funds. Failure to
effectively integrate the acquired companies may adversely affect the
Company's ability to bid successfully on certain engagements and otherwise
grow its business. Client dissatisfaction or performance problems at a single
acquired company could have an adverse effect on the reputation of the Company
as a whole, resulting in increased difficulty in marketing services or
acquiring companies in the future. In addition, there can be no assurance that
the acquired companies will operate profitably. Acquisitions also involve a
number of additional risks, including diversion of management attention,
potential loss of key clients or personnel, risks associated with
unanticipated problems, liabilities or contingencies and risks of entering
markets in which the Company has limited or no direct expertise. The
occurrence of some or all of the events described in these risks could have a
material adverse effect on the Company's business, operating results and
financial condition.
MANAGEMENT OF GROWTH
The Company is currently experiencing rapid growth that has strained, and
could continue to strain, the Company's managerial, administrative,
operational and other resources. The Company's ability to manage the growth of
its operations will require it to continue to improve its operational,
financial and other internal systems and to attract, develop, motivate and
retain its employees. The Company's rapid growth has presented and will
continue to present numerous operational challenges, such as the assimilation
of financial reporting systems and increased pressure on the Company's senior
management and will increase the demands on the Company's systems and internal
controls. If the Company's management is unable to manage growth or new
employees are unable to achieve anticipated performance or utilization levels,
the Company's business, operating results and financial condition could be
materially and adversely affected.
BENEFITS OF OFFERING TO SELLING STOCKHOLDERS
The Selling Stockholders, many of whom are officers of the Company or are
officers or key employees of the Company's operating subsidiaries, will
receive substantial proceeds from this offering and certain other benefits in
connection with this offering. After deduction of estimated underwriting
discounts and commissions, the aggregate net proceeds to the Selling
Stockholders as a result of this offering will be approximately $149.2 million
($173.9 million if the Underwriters' over-allotment option is exercised in
full). The Company will pay the offering expenses of the Selling Stockholders,
other than underwriting discounts and commissions. See "Use of Proceeds" and
"Selling Stockholders." In addition, this offering will increase the number of
shares freely available for trading in the public market. This increased float
will in turn provide increased liquidity to the Selling Stockholders for the
shares of Common Stock they will continue to own after this offering, a
substantial
7
<PAGE>
amount of which will be freely salable, subject to certain legal limitations,
within a relatively short period following the completion of this offering.
See "--Shares Eligible for Future Sale."
ATTRACTION AND RETENTION OF EMPLOYEES
The Company's business consists of the delivery of professional services and
is labor-intensive. The Company's success depends in large part upon its
ability to attract, develop, motivate and retain highly skilled consultants
and senior consultants possessing business generation skills. Qualified
consultants are in great demand and are likely to remain a limited resource
for the foreseeable future. There can be no assurance that the Company will be
able to attract and retain sufficient numbers of highly skilled consultants in
the future. The Company has increased its number of consultants substantially
as a result of the Acquisitions and there can be no assurance that the Company
will be able to retain a substantial majority of these consultants for the
long term. The loss of a significant number of consultants could adversely
affect its ability to secure and complete engagements and could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Human Resources."
CONCENTRATION OF REVENUES IN THE UTILITY INDUSTRY
The Company currently derives the majority of its revenues from consulting
engagements with electric utility companies and substantially all of its
revenues from utilities. Much of the Company's recent growth in this area has
arisen from the business opportunities presented by the trend to deregulate
the electric utility industry and introduce increased competition. If the
current trend towards government deregulation in the utility industry slows or
the industry becomes subject to more government regulation, the demand for
consulting work from utilities is likely to decrease. For example, if the
United States were to experience a shortage of electricity or a nuclear
accident should occur, increased governmental regulation of the electric
utility industry would be likely, and the Company's business, operating
results and regulatory financial condition could be materially and adversely
affected. Moreover, as a result of deregulation, the electric utility industry
is in a period of consolidation, which could have the effect of reducing the
number of the Company's current or potential clients or create conflicts of
interest between its clients. To date, the Company has lost one client from a
conflict of interest attributable to this industry consolidation trend.
Although this client loss did not have a material effect on the Company's
business, additional conflicts may develop, preventing the Company from
representing certain clients and potentially causing a material adverse effect
on the Company's business, operating results and financial condition.
Furthermore, the number of potential clients in the utility industry may
decrease. Additionally, current and future economic pressures may limit
spending by utilities for the types of services offered by the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Because of the nature and scope of many of the Company's projects, the
Company derives a significant portion of its revenues from a relatively
limited number of clients that operate exclusively in the utility industry.
There can be no assurance that these clients will continue to engage the
Company for additional significant projects. Clients engage the Company on an
assignment-by-assignment basis, and a client can generally terminate an
assignment at any time without penalty. The Company's typical engagement cycle
causes the Company's clients, absent project carryovers, to change from year
to year. The loss of significant clients could have a material adverse effect
on the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Representative Clients."
PROJECT AND SERVICE RISKS
Many of the Company's engagements involve projects that are critical to the
operations of its clients' business and provide benefits that may be difficult
to quantify, including advice on critical engineering matters, potential
mergers and acquisitions or other financial advisory and restructuring
matters. The Company's failure or inability to meet a client's expectations in
the performance of its services could have a material adverse effect
8
<PAGE>
on the Company's reputation, thereby adversely affecting its business,
operating results and financial condition. The Company's services involve
risks of professional, fiduciary and other liability, particularly in the
areas of engineering services, merger and acquisition consulting and other
financial services. If the Company were found to have been negligent or to
have breached its obligations or duties to its clients, the Company could be
exposed to significant liabilities and its reputation could be adversely
affected. Engineering engagements pose special risks because the consulting
services provided by the Company include construction project budgeting and
supervision and studies of critical project areas such as structural or stress
analysis. As a result, the Company is exposed to damage claims if a
construction project experiences time or budget overruns, fails to achieve a
client's expectations or suffers a catastrophic failure. See "--Certain
Litigation Proceedings." In connection with many of its public sector
engagements, the Company employs the services of local personnel and
consultants who are treated as independent contractors. Negligent or illegal
acts or ethical violations by these independent contractors could adversely
affect the Company. The Company maintains professional liability insurance to
an aggregate maximum of approximately $10 million. As a result of the nature
of the business of certain recently acquired companies, a portion of the
Company's projects are billed on a fixed-bid basis as opposed to the Company's
general method of billing on a time-and-expenses basis. The Company's failure
to estimate accurately the resources and related expenses required for these
fixed-bid projects or the Company's failure to complete its contractual
obligations in a manner consistent with the project plan upon which its fixed-
bid contact was based could have a material adverse effect on the Company's
business, operating results and financial condition.
RELIANCE ON KEY EXECUTIVES
The success of the Company is highly dependent upon the efforts, abilities,
business generation capabilities and project execution skills of many of its
executive officers and senior managers. With one limited exception, the
Company does not have an employment agreement with any of these executive
officers and senior employees. The loss of the services of any of these key
executives for any reason could have a material adverse effect upon the
Company's business, operating results and financial condition, including its
ability to secure and complete engagements. The Company maintains no key-man
life insurance policies on any of its executive officers or senior managers.
See "Management."
VARIABILITY OF QUARTERLY OPERATING RESULTS; SEASONALITY
Variations in the Company's revenues and operating results occur from
quarter to quarter as a result of a number of factors, including client
engagements commenced and completed during a quarter, the number of business
days in a quarter, employee hiring and utilization rates, the announcement and
market acceptance of acquisitions, the length of the Company's sales cycle,
the ability of clients to terminate engagements without penalty, the size and
scope of assignments and general economic conditions. Because a significant
portion of the Company's expenses are relatively fixed, a variation in the
number of client assignments or the timing of the initiation or the completion
of client assignments can cause significant variations in operating results
from quarter to quarter and could result in losses to the Company. To the
extent that increases in the number of professional personnel are not followed
by corresponding increases in revenues, the Company's operating results could
be materially and adversely affected. Furthermore, the Company has on occasion
experienced a seasonal pattern in its operating results, with a smaller
proportion of the Company's revenues and lower operating income occurring in
the fourth quarter of the year or a smaller sequential growth rate than in
other quarters. The Company believes these results can be attributed to
constraints on the annual budgets of utilities, and vacation and holidays
taken by both its clients and its consultants. In addition, material
settlement payments or judgments against the Company in connection with
certain litigation matters could have an adverse effect on the Company's
operating results in the quarter in which they occur. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Unaudited Quarterly Results" and "Business--Litigation."
INTERNATIONAL OPERATIONS
The Company operates offices in a total of four foreign countries and during
1997 was engaged in projects in approximately 30 foreign countries. The
Company expects to continue to expand its international operations and
offices. Expansion into new geographic regions requires considerable
management and financial resources
9
<PAGE>
and may negatively impact the Company's near-term results of operations. The
Company's international operations are subject to numerous potential
challenges and risks, including war, civil disturbances, varying and evolving
political, regulatory and economic conditions in various jurisdictions, such
as tariffs and other trade barriers, longer accounts receivable collection
cycles, fluctuations in currency and potentially adverse tax consequences.
There can be no assurance that such international factors will not have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business--Growth Strategy."
LIMITED PROTECTION OF PROPRIETARY SYSTEMS AND PROCEDURES
The Company's performance is in part dependent upon its internal information
and communication systems, databases, tools, and the methods and procedures
that it has developed to serve its clients. The Company relies on a
combination of nondisclosure and other contractual arrangements and copyright,
trademark and trade secret laws to protect its proprietary systems,
information and procedures. There can be no assurance that the steps taken by
the Company to protect its proprietary rights will be adequate to prevent
misappropriation of such rights or that the Company will be able to detect
unauthorized use and take appropriate steps to enforce its proprietary rights.
The Company believes that its systems and procedures and other proprietary
rights do not infringe upon the rights of third parties. There can be no
assurance, however, that third parties will not assert infringement claims
against the Company in the future or that any such claims will not require the
Company to enter into costly litigation or materially adverse settlements to
litigation, regardless of the merits of such claims.
INTENSE COMPETITION
The market for consulting services to electric and other energy-based
utilities is intensely competitive, highly fragmented and subject to rapid
change. The market includes a large number of participants from a variety of
market segments, including general management or marketing consulting firms,
the consulting practices of national accounting firms and local or regional
firms specializing in utility services. Many information technology consulting
firms also maintain significant practice groups devoted to the utility
industry. Many of these companies are national and international in scope and
have greater personnel, financial, technical and marketing resources than the
Company. There can be no assurance that the Company will compete successfully
with its existing competitors or with any new competitors. See "Business--
Competition."
CERTAIN LITIGATION PROCEEDINGS
The Company is currently defending a lawsuit that was commenced against RMI
prior to its acquisition by the Company. The lawsuit is at an early stage, and
although the Company believes that it has a meritorious defense to the claims
and intends to vigorously defend its position, there can be no assurance that
the Company will prevail. A substantial settlement or damage judgment against
the Company could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Litigation."
INFLUENCE OF PRINCIPAL STOCKHOLDERS
After completion of this offering, the Company's executive officers and
certain other key employees will beneficially own an aggregate of
approximately 36.9% of the Company's outstanding shares of Common Stock (32.6%
if the Underwriters' over-allotment option is exercised in full). As a result,
these stockholders will retain voting power to exercise significant influence
over the outcome of matters requiring a stockholder vote, including the
election of the members of the Board of Directors, thereby controlling the
affairs and management of the Company. Such control could adversely affect the
market price of the Common Stock or delay or prevent a change in control of
the Company. See "Selling Stockholders."
SIGNIFICANT UNALLOCATED NET PROCEEDS
None of the estimated net proceeds of this offering have been designated for
specific uses. Therefore, the Board of Directors of the Company will have
broad discretion with respect to the use of the net proceeds of this offering.
See "Use of Proceeds."
10
<PAGE>
STOCK PRICE VOLATILITY
The Common Stock was first publicly traded on October 4, 1996 after the
Company's initial public offering at $16 per share. Between October 4, 1996
and February 24, 1998, the closing sale price has ranged from a low of $20 per
share to a high of $47 1/2 per share. The market price of the Common Stock
could continue to fluctuate substantially due to a variety of factors,
including quarterly fluctuations in results of operations, adverse
circumstances affecting the introduction or market acceptance of new services
offered by the Company, announcements of new services by competitors, the
Company's loss of key employees, changes in the regulatory environment or
market conditions affecting the utility industry, changes in earnings
estimates by analysts, changes in accounting principles, sales of Common Stock
by existing holders, loss of key personnel, the announcement and market
acceptance of proposed acquisitions and other factors. The market price for
the Company's Common Stock may also be affected by the Company's ability to
meet analysts' expectations, and any failure to meet such expectations, even
if minor, could have a material adverse effect on the market price of the
Company's Common Stock. In addition, the stock market is subject to extreme
price and volume fluctuations. This volatility has had a significant effect on
the market prices of securities issued by many companies for reasons unrelated
to the operating performance of these companies. In the past, following
periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such a
company. Any such litigation instigated against the Company could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect on the Company's business,
operating results and financial condition. See "Price Range of Common Stock
and Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after completion of this offering, the Company will have
14,707,995 shares of Common Stock outstanding, of which the 5,000,000 shares
sold pursuant to this offering and the 4,025,000 shares sold in the Company's
initial public offering will generally be freely tradable without restriction
or further registration under the Securities Act. Approximately 3,729,363 of
the remaining 5,682,995 shares of Common Stock constitute "Restricted Shares"
under Rule 144 under the Securities Act ("Rule 144"). Of these Restricted
Shares, 1,877,283 are eligible for sale by the holders thereof subject,
however, to the manner of sale, volume, notice information requirements and
other restrictions (other than the holding period) of Rule 144, as applicable.
The remaining 1,852,080 Restricted Shares will become eligible for sale under
Rule 144 at various times between July and December 1998. The Company,
together with the Selling Stockholders and executive officers and directors of
the Company (holding in the aggregate approximately 5,555,006 shares of Common
Stock after completion of this offering), will enter into agreements not to,
subject to certain exceptions, register the sale of, sell, offer to sell,
contract to sell, grant any option to purchase or otherwise dispose of,
directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, other than
the shares offered hereby, for a period of 90 days after the date of this
Prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation. However, Donaldson, Lufkin & Jenrette Securities
Corporation may, in its discretion, waive the foregoing restrictions in whole
or in part, with or without a public announcement of such action. The sale of
a substantial number of shares of Common Stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for the
Common Stock. In addition, any such sale or such perception could make it more
difficult for the Company to sell equity securities or equity-related
securities in the future at a time and price that the Company deems
appropriate.
ABSENCE OF DIVIDENDS
The Company does not anticipate paying cash dividends in the foreseeable
future. The Company currently intends to retain all earnings for the
development of its business. See "Price Range of Common Stock and Dividend
Policy."
CERTAIN ANTITAKEOVER EFFECTS
The Company's Amended and Restated Certificate of Incorporation and By-Laws
and the Delaware General Corporation Law include provisions that may be deemed
to have antitakeover effects and may delay, defer or
11
<PAGE>
prevent a takeover attempt that stockholders might consider in their best
interests. Directors of the Company are divided into three classes and are
elected to serve staggered three-year terms. The Board of Directors of the
Company is authorized to issue up to 3,000,000 shares of preferred stock and
to determine the price, rights, preferences and privileges of such shares,
without any further stockholder action. The existence of this "blank-check"
preferred stock could render more difficult or discourage an attempt to obtain
control of the Company by means of a tender offer, merger, proxy contest or
otherwise. In addition, the existence or issuance of "blank-check" preferred
stock may have an adverse effect on the market price of the Common Stock.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Included in this Prospectus are various forward-looking statements,
including, among others, the Company's goals and strategies, the expected
growth of the utility consulting industry, the pace of change in the utility
marketplace, the demand for utility consulting services, the Company's goal to
expand service offerings and to pursue acquisitions, the ability to leverage
the Company's client base into additional contracts, and the ability to obtain
new outsourcing contracts.
These statements are forward-looking and reflect the Company's current
expectations. Such statements are subject to a number of risks and
uncertainties, including, but not limited to, changes in the economic and
political environments, changes to technology and changes in the energy
utility consulting marketplace. In light of the many risks and uncertainties
surrounding the Company and the energy utility consulting marketplace, there
can be no assurance that the events described in forward-looking statements
contained in this Prospectus will transpire.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company (after deducting underwriting discounts
and commissions and estimated offering expenses, all of which are payable by
the Company) are estimated to be approximately $36.3 million. The Company
anticipates that the net proceeds, including interest thereon, will be used
for expansion of existing operations, including development of new service
offerings, possible acquisitions of related businesses and general corporate
purposes, including working capital. The Company is continually involved in
the evaluation of, and discussions with, potential acquisition candidates, but
the Company has not reached any agreements with respect to any future
acquisitions. The Company currently has no agreements, understandings or
commitments regarding any future acquisitions. Pending such uses, the net
proceeds will be invested in short-term, interest-bearing investment grade
securities.
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Stockholders. See "Selling Stockholders."
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol METZ since October 4, 1996. The following table sets forth,
for the periods indicated, the range of high and low closing sale prices for
the Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1996
Fourth Quarter (from October 4, 1996)................... $34 1/2 $ 20
1997
First Quarter........................................... $33 5/8 $ 22
Second Quarter.......................................... $32 3/4 $ 20
Third Quarter........................................... $41 1/8 $ 31
Fourth Quarter.......................................... $41 1/8 $34 1/2
1998
First Quarter (through February 24, 1998)............... $47 1/2 $36
</TABLE>
On February 24, 1998, the last reported sale price of the Common Stock was
$39 3/4 per share. The Company had 33 stockholders of record on February 9,
1998.
The Company has not since its initial public offering paid cash dividends on
its Common Stock. The Company currently anticipates that all of its earnings
will be retained for development of the Company's business and does not
anticipate paying any cash dividends in the foreseeable future.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth the Company's Selected Consolidated Financial
Data, which are derived from the Company's Consolidated Financial Statements.
The Consolidated Financial Statements give retroactive effect to the
acquisitions of RMI as of July 31, 1997 and Reed as of August 15, 1997, each
of which has been accounted for using the pooling of interests method. As a
result, the financial position, results of operations and cash flows are
presented as if the combining companies had been consolidated for all periods
presented. The Company acquired Burgess effective January 1, 1997 and Sterling
and Reed-Stowe effective December 1, 1997. The stockholders' equity and
operations of Burgess, Sterling and Reed-Stowe were not material in relation
to those of the Company, and as such, the Company has recorded and, in the
case of Sterling and Reed-Stowe, will record these acquisitions without
restating prior periods' statements of operations. The financial data as of
and for the nine-month periods ended September 30, 1996 and 1997 are derived
from unaudited Consolidated Financial Statements, and include in the opinion
of management, all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the data for the periods. These
Selected Consolidated Financial Data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes
thereto contained elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- ------------------------
1992 1993 1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............... $35,158,575 $46,175,370 $47,103,998 $55,817,351 $63,553,337 $47,160,440 $59,417,571
Cost of services....... 20,345,306 31,344,460 32,059,131 37,085,413 42,315,400 30,776,522 35,169,117
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........... 14,813,269 14,830,910 15,044,867 18,731,938 21,237,937 16,383,918 24,248,454
Merger related costs... -- -- -- -- -- -- 1,311,959
Selling, general and
administrative
expenses.............. 14,102,138 14,356,299 14,548,285 17,811,846 15,609,906 10,651,889 13,233,069
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income....... 711,131 474,611 496,582 920,092 5,628,031 5,732,029 9,703,426
Other expense (income),
net................... (188,006) 43,122 300,309 240,819 73,278 290,812 (619,811)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income
tax expense........... 899,137 431,489 196,273 679,273 5,554,753 5,441,217 10,323,237
Income tax expense
(benefit)............. 420,311 546,393 262,541 392,908 (180,351) (71,342) 3,851,879
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ 478,826 $ (114,904) $ (66,268) $ 286,365 $ 5,735,104 $ 5,512,559 $ 6,471,358
=========== =========== =========== =========== =========== =========== ===========
Net income per share... $ .49
===========
Pro forma net
income(1)............. $ 1,951,541 $ 2,916,241 $ 2,693,696
=========== =========== ===========
Pro forma net income
per share(1).......... $ .15 $ .23 $ .22
=========== =========== ===========
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
-------------------------------------------------------------- ------------------------
1992 1993 1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 670,201 $ 132,107 $ 278,428 $ 701,206 $33,536,265 $ 1,284,658 $20,611,754
Working capital........ 1,793,785 3,761,717 3,945,584 5,202,147 36,428,859 7,434,565 30,601,662
Total assets........... 14,345,701 14,856,927 14,962,044 16,838,683 52,269,105 22,434,980 44,552,378
Long-term debt, less
current portion....... 621,661 668,273 832,563 1,002,703 1,400,553 1,968,821 369,724
Total stockholders'
equity................ 3,721,820 3,282,962 3,173,714 3,646,012 35,949,374 6,270,418 30,817,181
</TABLE>
- ---------------------
(1) Pro forma net income for the two years ended December 31, 1995 and 1996
and the nine months ended September 30, 1996 reflect the impact of a
Metzler & Associates compensation plan that went into effect on July 1,
1996 and Metzler & Associates' election to be treated as an S corporation
effective January 1, 1996. See Note 2 of Notes to Consolidated Financial
Statements and Note 2 of Notes to Unaudited Consolidated Financial
Statements for the nine months ended September 30, 1997.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section of the Prospectus, Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains certain
forward-looking statements that involve substantial risks and uncertainties.
When used in this section, the words "anticipate," "believe," "estimate," and
"expect" and similar expressions as they relate to the Company or its
management are intended to identify such forward-looking statements. The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed in "Risk Factors."
As an integral part of the Company's growth strategy, it has recently
consummated the acquisitions of Burgess, RMI, Reed, Sterling and Reed-Stowe
(see "--Acquisitions"). This Management's Discussion and Analysis of Financial
Condition and Results of Operations (this "MD&A") relates to the Consolidated
Financial Statements included in this Prospectus, which are presented as if
Metzler & Associates, RMI and Reed had been consolidated for all periods
presented.
OVERVIEW
The Metzler Group, Inc. is a leading nationwide provider of consulting
services to electric, gas and water utilities and other energy and utility-
related businesses. The Company offers a wide range of consulting services
designed to assist its clients in succeeding in a business environment of
changing regulation, increasing competition and evolving technology. The
Company's service offerings include: (i) management consulting; (ii)
information technology; (iii) economic and regulatory; and (iv) engineering
and technical.
The Company derives substantially all of its revenues from fees for
professional services, which are billed at standard hourly or daily rates or
provided on a fixed-bid basis. Over the last three years, the substantial
majority of the Company's revenues has been generated under standard hourly or
daily rates billed on a time-and-expenses basis. Clients are typically
invoiced on a monthly basis with revenue recognized as the services are
provided.
The Company's most significant expenses are project personnel costs, which
consist of consultant salaries and benefits, and travel-related direct project
expenses. Project personnel are typically full-time professionals employed by
the Company, although the Company supplements its project professional
personnel through the use of independent contractors. The Company retains
contractors for specific client engagements on a task-specific, per diem basis
during the period their expertise or skills are required. The Company believes
that retaining contractors on a per-engagement basis provides it with greater
flexibility in adjusting professional personnel levels in response to changes
in demand for its services.
ACQUISITIONS
As part of its growth strategy, the Company expects to continue to pursue
complementary acquisitions to expand its geographic reach, expand the breadth
and depth of its service offerings and enhance the Company's consultant base.
In furtherance of this growth strategy, the Company has acquired five
additional consulting firms during 1997. Each of these five transactions was
accounted for as a pooling of interest.
As of January 1, 1997, the Company acquired Burgess in exchange for 42,181
shares of Common Stock (valued at approximately $0.9 million at the closing).
At the closing, Burgess' sole stockholder also entered into a three-year
employment agreement with Burgess providing for a base salary, performance
bonus and other standard benefits. Burgess, based in the Chicago area,
provides litigation, regulatory policy support and operations management
consulting services to electric and natural gas utilities. At the time of its
acquisition, Burgess had approximately four employees.
15
<PAGE>
As of July 31, 1997, the Company acquired substantially all of the common
stock of RMI in exchange for 2,137,178 shares of Common Stock (valued at
approximately $75.3 million at the closing) and acquired the remaining
minority interests in exchange for cash. Approximately 18% of the Common Stock
issued in this transaction was placed in an escrow to secure the general and
specific indemnity obligations of the selling shareholders. RMI, based in
Sacramento, California, is a leading provider of consulting services to gas,
water and electric utilities, with operations in the western and eastern
United States and international marketplace. RMI's operations complement the
Company's existing management consulting and information technology services
and expand the Company's service offerings to include a broad range of
engineering and technical and economic and regulatory services. At the time of
its acquisition, RMI had approximately 325 employees.
As of August 15, 1997, the Company acquired substantially all of the common
stock of Reed in exchange for 518,400 shares of Common Stock (valued at
approximately $17.6 million at the closing) and acquired the remaining
minority interests in exchange for cash. Ten percent of the Common Stock
issued in this transaction was placed in an escrow to secure the indemnity
obligations of the selling stockholders. Reed, based in the Boston area,
provides strategic planning, operations management and economic and regulatory
services to electric and natural gas utilities. Reed's operations complement
the Company's existing services and client base and expand the Company's
presence in the northeast United States and internationally. At the time of
its acquisition, Reed had approximately 51 employees.
As of December 1, 1997, the Company acquired substantially all of the common
stock of Sterling in exchange for 385,818 shares of Common Stock (valued at
approximately $15.2 million at the closing) and acquired the remaining
minority interest in exchange for cash. Approximately 10% of the Common Stock
issued in this transaction was placed in an escrow to secure the general
indemnity obligations of the selling shareholders. Sterling, based in Houston,
Texas, provides strategy development and implementation, competitive analysis,
change management and other consulting services principally to oil and gas
exploration and production companies. Sterling's operations expand the
Company's service offerings to non-utility energy businesses.
Also as of December 1, 1997, the Company acquired all of the common stock of
Reed-Stowe in exchange for 30,000 shares of Common Stock (valued at
approximately $1.2 million at the closing). All of the capital stock of Reed-
Stowe was immediately contributed by the Company to Reed, and Reed-Stowe
became a wholly owned subsidiary of Reed. Reed-Stowe, based in Richardson,
Texas, provides litigation and regulatory policy support and other consulting
services to municipalities and energy utilities.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of revenues:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED SEPTEMBER
DECEMBER 31, 30,
-------------------- ------------
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
Revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services........................ 68.1 66.5 66.6 65.3 59.2
----- ----- ----- ----- -----
Gross profit............................ 31.9 33.5 33.4 34.7 40.8
Merger related costs.................... -- -- -- -- 2.2
Selling, general and administrative
expenses............................... 30.9 31.9 24.6 22.6 22.3
----- ----- ----- ----- -----
Operating income (loss)................. 1.0 1.6 8.8 12.1 16.3
Other expense (income), net............. 0.6 0.4 0.1 0.6 (1.1)
----- ----- ----- ----- -----
Income (loss) before income tax expense
(benefit).............................. 0.4 1.2 8.7 11.5 17.4
Income tax expense (benefit)............ 0.5 0.7 (0.3) (0.2) 6.5
----- ----- ----- ----- -----
Net income (loss)....................... (0.1)% 0.5% 9.0% 11.7% 10.9%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
Revenues. Revenues for the first nine months of 1997 increased 26.0% to
$59.4 million from $47.2 million for the first nine months of 1996. These
increases were the result of continued strong demand for the Company's
management consulting, engineering and technical, and economic and financial
services for the electric and energy-related industries. The growth in
revenues was due to increases in both the number and average size of client
projects.
Gross Profit. Gross profit consists of revenues less cost of services, which
includes consultant salaries, benefits and travel-related direct project
expenses. For the first nine months of 1997, gross profit grew 48.0% to $24.2
million from $16.4 million in the comparable 1996 period. Gross profit as a
percentage of revenues was 40.8% for the nine months ended September 30, 1997
as compared to 34.7% for the nine months ended September 30, 1996. The
improvement in gross profit margins was driven primarily by increased
utilization of the Company's professional consultants.
Merger Related Costs. In the third quarter of 1997, the Company incurred
merger related costs of $1.3 million related to acquisitions accounted for as
poolings of interests. The merger costs include legal, accounting and other
transaction-related fees and expenses. There were no acquisitions or
corresponding related costs in the prior-year period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include salaries and benefits of management and
support personnel, facilities costs, recruiting and training, direct selling,
outside professional fees and all other corporate costs. Selling, general and
administrative expenses for the nine months ended September 30, 1997 increased
approximately 24.2% to $13.2 million from $10.7 million for the comparable
period in 1996. The pro forma adjustments for 1996 include an increase in
officer compensation of $1.0 million for the first nine months of the year to
reflect the impact of a compensation plan adopted July 1, 1996. After giving
effect to this pro forma adjustment, selling, general and administrative
expenses for the nine months ended September 30, 1997 increased approximately
13.4% to $13.2 million from the pro forma $11.7 million for the first nine
months of 1996. This increase is largely attributable to the overall higher
business volume in 1997, partially offset by economies and increased
efficiency in certain support functions.
Income Taxes. For the first nine months of 1996, one the Company's
subsidiaries was taxed under Subchapter S of the Internal Revenue Code. Under
the provisions of Subchapter S, federal income taxes were the responsibility
of the stockholders as were certain state income taxes. Accordingly, the
statement of operations
17
<PAGE>
for the three-month and nine-month periods ended September 30, 1996 did not
include a provision for federal or certain state income taxes with respect to
such subsidiary. The pro forma adjustments for these periods include
additional federal and state taxes that would have been required had the S-
corporation election not been in effect.
1996 COMPARED TO 1995
Revenues. Revenues increased 13.9% to $63.6 million in 1996 from $55.8
million in 1995. This increase was caused by increased demand for management
consulting services in the electric utility industry and increased selling and
business development efforts. These factors generated increases in both the
number of client projects and the average size of client projects.
Gross Profit. Gross profit increased 13.4% to $21.2 million in 1996 from
$18.7 million in 1995. Gross profit as a percentage of revenues was 33.4% in
1996 compared to 33.5% in 1995. The gross profit percentage was largely
consistent year to year based on comparable utilization rates in both periods
for the Company's full time professional personnel.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 12.4% to $15.6 million in 1996 from $17.8
million in the prior year. As a percentage of revenues, selling, general and
administrative expenses decreased to 24.6% in 1996 from 31.9% in 1995. In
connection with the change in the taxable status of one of the Company's
subsidiaries from a C corporation to an S corporation commencing January 1,
1996, the Company eliminated all other incentive compensation programs for
certain key executives. Effective July 1, 1996, in contemplation of the
termination of the S-corporation status in connection with the closing of the
Company's initial public offering of common stock, the Company adopted a new
executive compensation plan. The pro forma adjustments for 1996 and 1995
reflect the impact of this compensation plan. The pro forma adjustment for
1996 includes an increase in executive compensation of $1.0 million while the
pro forma adjustment for 1995 incorporates a decrease in executive
compensation of $2.8 million. After giving effect to these pro forma
adjustments, selling, general and administrative expenses would represent
$16.6 million, or 26.2% of revenues, in 1996 and $15.0 million, or 26.9% of
revenues, in 1995. The increase in selling, general and administrative
expenses was due primarily to higher business volume, offset in part by
increased efficiency in certain administrative functions.
Income Taxes. Effective January 1, 1996, the stockholders of one of the
Company's subsidiaries elected to be taxed under Subchapter S of the Internal
Revenue Code. As an S corporation, net income from January 1, 1996 was taxable
for federal (and some state) income tax purposes directly to the subsidiaries'
stockholders. The S-corporation status was terminated October 4, 1996 upon the
completion of the Company's initial public offering of its Common Stock.
Accordingly, the consolidated statement of operations for 1996 does not
include a provision for federal or certain state income taxes for this
subsidiary during the period January 1, 1996 through October 3, 1996.
1995 COMPARED TO 1994
Revenues. Revenues increased 18.5% to $55.8 million in 1995 from $47.1
million in 1994. The increase in revenues was attributable to an increase in
the number of client projects and an increase in the average size of client
projects. This growth was driven by strong demand for consulting services
within the utility industry and increases in the Company's business
development and selling activities.
Gross Profit. Gross profit increased 24.5% to $18.7 million in 1995 from
$15.0 million in 1994. Gross profit as a percentage of revenues increased to
33.5% in 1995 from 31.9% in 1994. The improvement in gross margin is due in
large part to higher utilization rates for professional personnel.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 22.4% to $17.8 million in 1995 from $14.5
million in 1994. The pro forma adjustments for 1995 reflect a decrease in
compensation of certain executives in the amount of $2.8 million. This
adjustment is consistent with the compensation plan adopted July 1, 1996 which
normalized 1995 compensation expense. After the adjustment, selling, general
and administrative expenses increased 3.4% to $15.0 million in 1995 from $14.5
million in 1994.
18
<PAGE>
UNAUDITED QUARTERLY RESULTS
The following tables set forth certain unaudited quarterly operating
information for each of the 11 quarters ending September 30, 1997. These data
have been prepared on the same basis as the audited financial statements
contained elsewhere in this Prospectus and include all normal recurring
adjustments necessary for the fair presentation of the information for the
periods presented, when read in conjunction with the Company's Consolidated
Financial Statements and related Notes thereto. Results for any previous
fiscal quarter are not necessarily indicative of results for the full year or
for any future quarter.
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........ $12,695 $13,987 $14,082 $15,054 $15,318 $15,654 $16,189 $16,392 $18,084 $20,194 $21,140
Cost of
services....... 8,423 9,289 8,936 10,437 9,609 10,344 10,824 11,538 11,154 11,948 12,067
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit.... 4,272 4,698 5,146 4,617 5,709 5,310 5,365 4,854 6,930 8,246 9,073
Merger related
costs.......... -- -- -- -- -- -- -- -- -- -- 1,312
Selling, general
and
administrative
expenses....... 4,107 4,521 4,559 4,626 3,282 3,485 3,885 4,958 4,256 4,681 4,296
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)......... 165 177 587 (9) 2,427 1,825 1,480 (104) 2,674 3,565 3,465
Other expense
(income), net.. 143 107 (22) 13 46 102 142 (218) (220) (209) (190)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss)
before income
tax expense
(benefit)...... 22 70 609 (22) 2,381 1,723 1,338 114 2,894 3,774 3,655
Income tax
expense
(benefit)...... 53 56 323 (39) 167 (152) (86) (109) 1,088 1,437 1,327
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income
(loss)......... $ (31) $ 14 $ 286 $ 17 $ 2,214 $ 1,875 $ 1,424 $ 223 $ 1,806 $ 2,337 $ 2,328
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
QUARTERS ENDED
------------------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues,
as previously
reported....... $ 2,526 $ 3,100 $ 3,692 $ 4,142 $ 5,344 $ 5,513 $ 5,603 $ 5,634 $ 6,258 $ 7,824
Adjustments(1).. 10,169 10,887 10,390 10,912 9,974 10,141 10,586 10,758 11,826 12,370
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues.. 12,695 13,987 14,082 15,054 15,318 15,654 16,189 16,392 18,084 20,194 $21,140
Gross profit, as
previously
reported....... 1,232 1,553 2,047 2,206 2,798 2,844 2,828 2,513 3,054 3,940
Adjustments(1).. 3,040 3,145 3,099 2,411 2,911 2,466 2,537 2,341 3,876 4,306
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit.... 4,272 4,698 5,146 4,617 5,709 5,310 5,365 4,854 6,930 8,246 9,073
Operating income
(loss), as
previously
reported....... (754) (484) 105 521 2,089 2,149 1,612 1,400 1,625 2,562
Adjustments(1).. 919 661 482 (530) 338 (324) (132) (1,504) 1,049 1,003
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)......... 165 177 587 (9) 2,427 1,825 1,480 (104) 2,674 3,565 3,465
Net income
(loss), as
previously
reported....... (534) (324) 67 318 2,034 2,106 1,547 1,167 1,230 1,801
Adjustments(1).. 503 338 219 (301) 180 (231) (123) (944) 576 536
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income
(loss)......... $ (31) $ 14 $ 286 $ 17 $ 2,214 $ 1,875 $ 1,424 $ 223 $ 1,806 $ 2,337 $ 2,328
</TABLE>
- ---------------------
(1) Adjustments give retroactive effect to the acquisitions accounted for as
poolings of interests on the amounts previously reported in the Company's
Registration Statement on Form S-1 (File No. 333-9019) and in the
Company's quarterly reports on Form 10-Q. See Note 3 of Notes to
Consolidated Financial Statements for a more detailed discussion of these
transactions.
19
<PAGE>
Revenues and operating results fluctuate from quarter to quarter as a result
of a number of factors, such as the significance of client engagements
commenced and completed during a quarter, the number of business days in a
quarter and employee hiring and utilization rates. The timing of revenues
varies from quarter to quarter because of the Company's sales cycle, the
ability of clients to terminate engagements without penalty, the size and
scope of assignments and general economic conditions. Because a significant
percentage of the Company's expenses are relatively fixed, a variation in the
number of client assignments or the timing of the initiation or the completion
of client assignments can cause significant variations in operating results
from quarter to quarter. Furthermore, the Company has on occasion experienced
a seasonal pattern in its operating results, with a smaller proportion of the
Company's revenues and lower operating income occurring in the fourth quarter
of the year or a smaller sequential growth rate than in other quarters.
LIQUIDITY AND CAPITAL RESOURCES
In July 1997, the Company completed the acquisition of RMI in a transaction
accounted for as a pooling of interests. RMI is a leading provider of
consulting services to gas, water and electric utilities. In August 1997, the
Company completed another acquisition of privately owned Reed in a transaction
also accounted for as a pooling of interests. Reed provides strategic
planning, operations management and economic and regulatory services to
electric and natural gas utilities. In connection with these acquisitions, the
Company made cash payments totaling approximately $8.9 million to acquire
shares of the combining enterprises held by certain minority stockholders. The
Company also made payments of approximately $3.6 million to repay principal
and accrued interest on outstanding debt obligations of RMI.
In January 1997, the Company repaid notes payable to two stockholders in the
aggregate amount of $1.0 million. The notes, each with a principal amount of
$0.5 million, bore interest at a rate of 10%. The Company repaid notes payable
to other officers aggregating $0.8 million under various other pre-existing
arrangements at RMI and Reed.
During the period from January 1, 1996 to October 4, 1996, one of the
Company's subsidiaries was taxed as an S corporation. Approximately $3.5
million of net income for the period during which the subsidiary was an S
corporation was distributed to its shareholders and included in their personal
taxable income.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
was issued in February 1997. The Company will be required to adopt the new
standard for the year and quarter ended December 31, 1997. Early adoption of
this standard is not permitted. The primary requirements of this standard are:
(i) replacement of primary earnings per share with basic earnings per share,
which eliminates the dilutive effect of options and warrants; (ii) use of an
average share price in applying the treasury method to compute dilution for
options and warrants for diluted earnings per share; and (iii) disclosure
reconciling the numerator and denominator of earnings per share calculations.
The effect of applying this standard is not expected to be significant.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," was issued in June 1997.
The Company will be required to adopt the new standard for the year ending
December 31, 1998, although early adoption is permitted. This statement
requires use of the "management approach" model for segment reporting. The
management approach model is based on the way the Company's management
organizes segments within the Company for making operating decisions and
assessing performance. Reportable segments are based on products and services,
geography, legal structure, management structure, or any other manner in which
management disaggregates a company. The Company will adopt this statement in
fiscal year 1998. The effect of applying this standard is not expected to be
significant.
20
<PAGE>
BUSINESS
The Metzler Group, Inc. is a leading nationwide provider of consulting
services to electric, gas and water utilities and other energy and utility-
related businesses. The Company offers a wide range of consulting services
designed to assist its clients in succeeding in a business environment of
changing regulation, increasing competition and evolving technology. The
Company's clients include the 50 largest IOUs and the 20 largest gas
distribution companies in the United States.
During 1997, the Company broadened its service offerings with the addition
of economic and regulatory and engineering and technical services; expanded
its domestic presence on the east and west coasts; expanded its base of non-
utility energy clients; established an international presence in Europe, Asia
and Australia; and since its initial public offering in October 1996, has more
than tripled its revenues, principally through the Acquisitions. With the
addition of these five consulting businesses, the Company's service offerings
now include: (i) management consulting; (ii) information technology; (iii)
economic and regulatory; and (iv) engineering and technical.
The Metzler Group acts as a holding company that manages five direct wholly-
owned subsidiaries: Metzler & Associates, Burgess, RMI, Reed and Sterling.
This organizational structure allows the Company to expand its breadth of
service offerings, increase its client base and add highly skilled
professionals through acquisitions, and then to integrate these acquisitions
into The Metzler Group to achieve operational and cost benefits.
The Company believes that several competitive factors distinguish it from
other participants in the utility consulting market, including: (i)
established energy utility expertise developed over more than fifteen years of
providing consulting services to the energy utility industry; (ii) deep-rooted
client relationships supporting multiple engagements; and (iii) a wide range
of industry-specific services that enables the Company to be a single-source
provider of consulting services to energy utilities while maintaining advanced
skill sets in each area.
The Company's growth strategy is to: (i) capitalize on current energy
industry dynamics supporting increased reliance on consulting services; (ii)
continue to build a complementary spectrum of consulting services through
acquisitions; (iii) expand its client base in both domestic and international
markets while further penetrating its existing client base; (iv) continue to
recruit and retain highly-skilled professionals; and (v) consolidate the
fragmented utility consulting industry by leveraging its public company
status.
OVERVIEW
Background. The energy utility industry is one of the largest industries in
the United States, with revenues in excess of $250 billion. The gas
distribution industry has undergone deregulation and is now approaching a
fully competitive market, giving rise to expanded consulting needs. The
electric utility industry is in the early stages of deregulation and therefore
provides the greatest opportunities for energy utility consulting as industry
participants seek to address the ramifications of deregulation and position
themselves in anticipation of these changes. The Company believes that the
water industry will undergo deregulation in the mid-term future and will give
rise to increased demand for consulting services.
Like other businesses, energy utilities are increasingly turning to outside
consulting firms to assist in or lead the process by which the utility
industry addresses fundamental changes. In general, businesses engage
consultants because: (i) the pace of change is eclipsing the companies'
internal resources; (ii) many enterprises lack the depth and breadth of
experience to identify, evaluate and implement the full range of possible
options and solutions; (iii) outside specialists often enable their clients to
develop better solutions in shorter time frames;
21
<PAGE>
(iv) purchasing consulting expertise converts fixed labor costs to variable
costs and can be more cost-effective; and (v) consultants can often formulate
more objective advice, free of internal cultural or political forces.
Utility Consulting Opportunity. The energy utility industry represents a
significant market for consulting services. Industry sources estimate that the
market for utility consulting in the U.S. was $3.0 billion, or 6% of the $50
billion total market for consulting services in 1996, and that this market
will grow at a rate of 15% per year through 2000.
This demand for consulting services is driven in significant part by the
revolutionary change facing the U.S. electric utility industry as it begins to
convert from a regulated regional monopoly structure to an increasingly
competitive environment. Historically, due to the significant fixed costs
inherent in generating and transmitting electricity, electric utilities were
viewed as natural local monopolies, operating as integrated entities to
generate, transmit and distribute retail electricity within defined geographic
retail service areas without competition from other suppliers.
As a result of recent market, regulatory and legislative factors,
competition in the electric utility industry is being encouraged at both the
state and federal regulatory levels, but the transformation to a competitive
market is proceeding unevenly. Although deregulation of the transportation and
telecommunications industries was accomplished relatively rapidly,
deregulation of the electric utility industry has been more difficult due to
the complex and overlapping regulatory web imposed by over 200 federal and
state bodies and the presence of a large number of separate, regulated
companies. Accordingly, implementation of the change will likely unfold on a
state-by-state basis over the next decade and may well face challenges from
utilities and state and local governments.
Deregulation and the introduction of competition have created a significant
need for consulting services that provide solutions to the current problems
facing electric utilities as well as other energy-related businesses today.
The changing competitive environment has forced the entire utility industry to
confront an evolving range of strategic options and challenges, most of which
are unfamiliar to companies that have operated under a paradigm of
monopolistic assumptions since inception. Emerging strategies and challenges
presently identified include the following:
MANAGEMENT CONSULTING
. Strategic Planning. A number of energy utilities are abandoning their
traditional integrated corporate structure and are organizing into
distinct divisions responsible for power generation, transmission,
distribution, and billing and customer service in an effort to provide
these services more efficiently and effectively. These divisions need to
formulate their own strategies, develop their own administrative
infrastructure and implement their own marketing campaigns. As energy
utilities are faced with increasing competition, many have either
consummated or announced mergers and other consolidations. This trend is
expected to continue as energy utilities seek to achieve economies of
scale, increase geographic coverage, eliminate redundant infrastructure,
increase market leverage, reduce their cost of capital and expand their
customer base. After a combination is consummated, the new entity often
faces the difficult process of combining separate operations and
infrastructure to achieve the desired efficiencies.
. Marketing and Customer Service. In a fully deregulated utility market,
end users select their provider, much as they can choose their provider
of long-distance and cellular telephone services. Even other major
utilities such as telecommunications and cable companies or independent
suppliers can compete to provide energy to customers. In response, energy
utilities, which have historically enjoyed a captive customer base, are
developing marketing and sales skills to attract and retain customers,
develop customer awareness and loyalty enhancement programs in order to
establish brand identity and provide innovative services.
22
<PAGE>
. Operations Management. Energy utilities must reduce their costs in order
to improve margins and to offer more competitive prices. Many energy
utilities are already engaging in significant restructuring efforts,
including process redesigns, deploying innovative information systems and
technologies and redefining staffing and skill-mix requirements.
INFORMATION TECHNOLOGY
. Systems Planning. In general, the energy utility industry has been slow
to adopt the latest information technologies. Pressures from deregulation
have compelled organizations to improve the quality of products and
services, shorten response times, reduce costs and strengthen customer
relationships. Increasingly, organizations are addressing these issues by
utilizing information technology solutions that facilitate the rapid and
flexible collection, analysis and dissemination of information. Rapid
technological advances and competitive pressures are forcing energy
utilities to replace antiquated systems with new technology and to
undertake major, critical systems projects.
ECONOMIC AND REGULATORY
. Market Analysis/Economic Services. In order to meet the increased
expectations of the competitive marketplace, energy utilities are
evaluating new value-added services, such as the ability to monitor and
control electrical power usage with computerized metering devices. Energy
utilities have access to homes and businesses through their existing
connections, and they possess a significant infrastructure and related
property easements. In addition, energy utilities have long-standing
billing relationships with virtually every home and business in their
service area. These factors may permit energy utilities to offer their
customers a variety of new services--from security services in the near
future, to telecommunications services and direct access video services
in the distant future. In addition, many energy utilities are redirecting
and redeploying assets through diversification initiatives, primarily
within traditional business sectors such as energy services, fuel
resources and services, and energy project investments.
. Regulatory Policy. The advent of utility deregulation has created a
rapidly changing and uncertain regulatory landscape. Utilities are
increasingly turning to outside consultants for ongoing assessment of
regional and national directions, as well as to map new strategies as
needed to incorporate regulatory changes.
ENGINEERING AND TECHNICAL
. Transmission Distribution Planning. Changes in utilities almost always
have an effect on their service delivery profiles. These new strategies
require modification to the distribution network, long line transmission
grid and the operation of base and peak-load power plants. Integration of
these technical services into new business plans is becoming an almost
mandatory piece of all new profiles.
STRENGTHS AND DIFFERENTIATION
The Company offers a wide range of consulting services to electric, gas and
water utilities and other energy and utility-related businesses to assist them
in succeeding in a business environment of changing regulation, increasing
competition and evolving technology. The Company believes that several factors
distinguish it from many of the other participants in the utility consulting
industry, including the following:
Established Energy Utility Expertise. For over fifteen years, the Company
has focused primarily on providing consulting services to energy utilities.
The Company believes that its vertical focus and broad service offerings
differentiate it from both general consulting firms that serve multiple
industries and "niche" firms with limited skill sets that focus on individual
aspects of the energy utility industry. The Company's consultants have
significant industry and consulting experience across critical business
disciplines, including strategic planning, systems planning, accounting,
finance, economics, organizational design, engineering, marketing, sales,
customer service, systems analysis, resource acquisition and asset management.
23
<PAGE>
Deep-Rooted Client Relationships. The Company believes its wide exposure
across its broad client base provides opportunities for deepening its client
relationships. The Company's clients include the 50 largest IOUs and the 20
largest gas distribution companies in the United States. The Company has
developed numerous contacts at various levels within client organizations,
ranging from chief executive officers and other senior management to
functional managers. The Company's relationships can span multiple functional
areas, which often lead to follow-on engagements. Many of the Company's
relationships have moved beyond a relatively small initial project to span
multiple engagements over a period of as much as eighteen months.
Wide Range of Industry-Specific Services. Many energy utility consulting
engagements require the vendor to provide a broad array of service offerings,
something many "niche" players cannot provide. Engagements often require
creative solutions that must be drawn from diverse areas of expertise. The
Company's expertise in a wide range of services enables the Company to better
pursue such opportunities and to offer itself as a single-source provider of
services to utilities, including: (i) management consulting; (ii) information
technology; (iii) economic and regulatory; and (iv) engineering and technical.
GROWTH STRATEGY
The Company's goal is to become the preeminent provider of a full range of
consulting services to electric, gas and water utilities and other energy and
utility-related businesses. The Company's strategy to achieve this goal
includes the following elements:
Leverage Vertical Focus to Capitalize on Current Industry Dynamics. The
Company believes that its vertical focus on the energy utility industry
positions it to offer comprehensive services anchored by an in-depth knowledge
of the unique market dynamics and regulatory change facing the energy utility
industry. By leveraging the Company's vertical focus on this industry, which
is currently confronting such challenges as regulatory reform, industry
restructuring, increased competition and inadequate information systems, the
Company intends to enhance its position as a leading world-wide provider of
utility consulting services.
Continue To Build a Complementary Spectrum of Consulting Services. The
Company intends to continue to broaden its range of service offerings to offer
a comprehensive set of services necessary to respond to the evolving needs of
its clients. To date, the Company has completed five acquisitions. Through
these acquisitions, the Company has added significant consulting services in
both the gas and water utility industries, added economic and regulatory and
engineering and technical services, expanded its base of non-utility energy
clients and expanded its domestic and international presence. This broad range
of consulting services allows the Company to leverage its expertise and
provide follow-on engagements for many of its clients.
Leverage Existing Relationships and Expand Client Base in Both Domestic and
International Markets. Although the Company has provided consulting services
to many of the largest energy utilities in the United States, some of these
clients have historically engaged the Company to provide only limited types of
services or to provide services to a single division or business unit. The
Company believes that the provision of additional services to its existing
client base represents a significant growth opportunity that the Company can
better pursue by adding consultants and further developing its internal
resources. The access, contact and goodwill provided by its existing client
relationships afford the Company significant advantages in marketing
additional services and solutions on an enterprise-wide basis. The Company
intends to target new clients by increasing its domestic and international
presence and through the hiring of consultants with established client
relationships.
Continue to Recruit and Retain Highly Skilled Professionals. The Company
believes that its continued success and growth require it to expand its base
of highly-skilled professionals. In order to compete successfully for new
business and to obtain additional business from existing clients, the Company
continually strives to recruit qualified, experienced personnel possessing the
skills currently demanded by the changing dynamics of the energy utility
industry. The Company particularly targets senior professionals with skills
and client relationships that complement services currently offered by the
Company. The Company believes it enhances
24
<PAGE>
recruitment and retention of consultants by offering packages of base and
incentive compensation and benefits that are significantly more attractive
than those offered by the consulting industry in general. The Company also
believes that its status as a public company aids in recruiting, retaining and
incentivizing current and future employees.
Consolidate the Fragmented Industry; Leverage Public Company Position. Given
the highly fragmented nature of the consulting services marketplace, the
Company believes numerous acquisition opportunities exist. The Company
believes that acquisitions provide it with a fast, cost-effective method to
increase its number of consultants, broaden its client base, expand its
geographic presence and enhance and broaden its service offerings. In
addition, the Company intends to acquire or develop relationships with firms
whose services complement the Company's current offerings, thereby enabling
enhanced cross-selling and cross-marketing to the Company's existing clients
and those of the acquired firms. The Company may also pursue vertical
integration by acquiring businesses that it currently engages on a
subcontractor basis to provide specialized technical skills in certain
engagements. The Company believes its public company status makes it an
attractive consolidation partner and provides the Company with an acquisition
currency and the financial flexibility to effectively pursue this element of
its growth strategy.
25
<PAGE>
SERVICES
The Company offers its consulting services in four principal areas:
management consulting, information technology, economic and regulatory and
engineering and technical services. The table below provides examples of the
Company's service offerings in each of these areas:
CATEGORY
OF SERVICE
DESCRIPTION OF PROJECTS
MANAGEMENT . Develop non-regulated business plans and objectives,
CONSULTING including investment and spending objectives.
--Strategic . Examine domestic and international energy market
Planning sectors and identify opportunities for competitive
--Marketing and leverage.
Customer Service . Quantify and prioritize operational and business
--Operations strategies.
Management . Consolidate and integrate options for marketing and
--Financial customer services operations.
Services . Redesign and implement marketing and customer service
--Change functions.
Management . Examine and reorganize client operations.
. Develop procurement strategies, policies and
procedures.
. Restructure and consolidate distribution system
networks to optimize service delivery.
. Identify and evaluate candidates for merger,
consolidation or acquisition.
- -------------------------------------------------------------------------------
INFORMATION . Develop strategic information systems plans.
TECHNOLOGY . Perform total life cycle analysis and implement
--Systems activity-based management systems, including process
Planning evaluation, activity definition, chart of accounts
--General and system design, construction and implementation.
Business . Develop information systems, such as activity-based
Applications management and marketing information systems.
--Utility- . Develop information requirements and package
Specific evaluations for executive information systems,
Applications materials management systems and work management
--Network/ systems.
Communications . Develop telecommunications systems, including
integrated communications planning, communications
market analysis, network traffic evaluation and
customer operations process design.
- -------------------------------------------------------------------------------
ECONOMIC AND . Serve as expert witnesses.
REGULATORY . Evaluate alternative regulatory and legislative
--Litigation positions.
Support . Develop regulatory strategy and provide support.
--Regulatory . Develop environmental regulatory strategy.
Policy . Serve as community and agency liaison.
--Market . Develop resource economics.
Analysis/ . Create demand forecasting.
Economic . Develop competitive supply evaluation.
Services . Develop power market modeling and pricing.
. Develop transmission pricing.
- -------------------------------------------------------------------------------
ENGINEERING AND . Develop electric transmission and distribution
TECHNICAL strategy.
--Engineering . Develop water supply and conveyance strategy.
Services . Provide supply bidding advice.
--Project/ . Provide project and construction management.
Construction . Provide owner and lender engineering services.
Management . Provide infrastructure and facility environmental
--Environmental compliance.
Services . Develop environmental management systems.
--Outsourcing
26
<PAGE>
REPRESENTATIVE CLIENTS
The Company has performed consulting assignments for more than 200 utility
industry clients, principally IOUs. The Company's clients include the 50
largest IOUs and the 20 largest gas distribution companies in the United
States. The Company's clients also include gas and water companies and other
utility ownership structures such as holding companies, electric cooperatives,
public power agencies and state regulatory commissions. The Company also
serves independent power producers, co-generators and power marketers,
suppliers to the utility industry and oil and gas exploration and production
companies.
Because of the nature and scope of many of the Company's projects, the
Company derives a significant portion of its revenues from a relatively
limited number of clients that operate exclusively in the electric utility
industry.
A list of representative clients is set forth below:
ELECTRIC
Allegheny Power System, FPL Group PECO Energy
Inc. General Public Utilities Pinnacle West Capital
American Electric Power Corp. Corp.
Co. Houston Industries Potomac Electric Power
Baltimore Gas & Electric Incorporated PP&L Resources
Co. Illinova Corp. PSC of Colorado
Boston Edison LG&E Energy Public Service Enterprise
Carolina Power & Light Long Island Lighting Co. Group, Inc.
Co. MidAmerican Energy Public Service of
Centerior Energy Corp. Holdings Colorado
Central and South West New England Electric SCANA Corp.
Corp. System Southern Company
CINergy Corp. New York State Electric & TECO Energy
CMS Energy Corp. Gas Texas Utilities Company
Consolidated Edison Co. Niagara Mohawk Power Co. UGI Corp.
of NY NIPSCO Industries Unicom Corp.
DTE Energy Co. Northeast Utilities Union Electric Co.
Dominion Resources, Inc. Northern States Power Co. Utilicorp United
Duke Power OGE Energy Western Resources
Edison International Ohio Edison Co. Wisconsin Energy Corp.
Entergy Corp. Pacific Gas & Electric Co.
Enova Corp. PacifiCorp
Florida Progress Corp.
GAS
Atlanta Gas Light Co. Michigan Consolidated Gas Public Service Electric &
Brooklyn Union Gas National Fuel Gas Gas
Columbia Gas of Ohio Distribution Southern California Gas
Consolidated Edison of NorAm Energy Corp. Southern Union Gas
NY Northern Illinois Gas (Austin)
Consolidated Gas Pacific Gas & Electric Southwest Gas Corp.
Distribution Peoples Gas Light & Coke Utilicorp United
Consumers Power Public Service Co. of Washington Gas Light Co.
Entex (a unit of NorAm) Colorado
WATER
Arvin-Edison Water Storage District Phelps Dodge Morenci
Calleguas Municipal Water District Semitropic Water Storage District
Central Utah Water Conservancy Tulare Irrigation District
District U.S. Bureau of Reclamation Indefinite
Del Webb Corporation Services Contract
Metropolitan Water District of Yuba County Water Agency
Southern California
27
<PAGE>
MARKETING AND SALES
The Company markets its services directly to mid-level to senior executives
of energy and utility-related businesses from its headquarters near Chicago,
Illinois and through each of its subsidiaries. The Company employs a variety
of business development and marketing techniques to communicate directly with
current and prospective clients, including on-site presentations to senior
utility executives, industry seminars featuring presentations by the Company's
personnel and authoring of articles and other publications regarding the
energy utility industry and the Company's methodologies.
A significant portion of new business arises from prior client engagements.
In addition, the Company expects to leverage the client relationships of firms
it acquires by cross-selling its existing services. Clients frequently expand
the scope of engagements during delivery to include follow-on complementary
activities. Also, the Company's on-site presence affords it the opportunity to
become aware of, and to help define, additional project opportunities as they
are identified by the client. The strong client relationships arising out of
many engagements often facilitate the Company's ability to market additional
capabilities to its clients in the future. In addition, the Company's senior
management team actively meets with energy and utility-related businesses that
have not yet engaged the Company and newly appointed senior managers in energy
and utility-related businesses where the Company has worked in the past to
make them aware of the Company's capabilities.
HUMAN RESOURCES
As of February 1, 1998, the Company's personnel consisted of approximately
525 employees. The Company's success depends in large part on attracting,
retaining and motivating talented, creative and experienced professionals at
all levels. See "Risk Factors--Attraction and Retention of Employees." In
connection with its hiring efforts, the Company employs internal recruiters,
retains several executive search firms and relies on personal and business
contacts to recruit professionals with significant utility industry or
consulting experience. The Company's consultants are drawn from utility and
related industries, including engineering, construction and
telecommunications, and from accounting and other consulting organizations.
To assist in further development of its employees, the Company has developed
mentor programs. The Company also develops its consultants through a training
program, as well as review of precedent from prior Company engagements. The
Company promotes loyalty and continuity of its consultants by offering
packages of base and incentive compensation and benefits that it believes are
significantly more attractive than those offered by the consulting industry in
general.
In addition to the employees discussed above, the Company supplements its
consultants on certain engagements with independent contractors, many of whom
are former employees of the Company. The Company believes that its practice of
retaining independent contractors on a per-engagement basis provides it with
greater flexibility in adjusting professional personnel levels in response to
changes in demand for its services.
COMPETITION
The market for consulting services to energy and utility-related businesses
is intensely competitive, highly fragmented and subject to rapid change. The
market includes a large number of participants from a variety of market
segments, including general management or marketing consulting firms, the
consulting practices of national accounting firms, and local or regional firms
specializing in utility services. Many information technology consulting firms
also maintain significant practice groups devoted to the utility industry.
Many of these companies are national and international in scope and have
greater personnel, financial, technical and marketing resources than the
Company. The Company believes that its experience, reputation, industry focus
and broad range of services will enable it to compete effectively in its
marketplace. See "Risk Factors--Intense Competition."
28
<PAGE>
FACILITIES
The Company's headquarters are currently located in 10,000 square feet of
leased office space in Deerfield, Illinois. In addition to its headquarters,
the Company owns or leases office space as listed below. The Company believes
that additional space will be required as its business expands geographically
and that it will be able to obtain suitable space as needed.
The Company maintains principal offices in the following locations:
UNITED STATES INTERNATIONAL
Austin, TX Philadelphia, PA Copenhagen, Denmark
Boston, MA Phoenix, AZ Manila, Philippines
Chicago, IL Portland, OR Melbourne, Australia
Houston, TX Richardson, TX Prague, Czech Republic
Los Angeles, CA Sacramento, CA
New York City, NY Washington, DC
Orlando, FL
LITIGATION
The Company is currently defending a lawsuit which was commenced against RMI
prior to its acquisition by the Company. RMI is the defendant in an action
involving approximately $1.1 million in stated claims and other unspecified
compensatory damages that arose in connection with a co-generation construction
project in Connecticut with respect to which RMI provided consulting services.
The complaint also seeks punitive damages. The plaintiff claims that the RMI
consultant was hired with broad responsibilities for the design, construction
and budgeting of a proposed $1.0 million co-generation project that reached
$2.0 million before it was abandoned. The plaintiff has subsequently filed for
bankruptcy and the Company believes that the action against RMI is the
plaintiff's sole asset. The Company believes that the plaintiff's claims are
beyond the scope of RMI's engagement responsibilities and that the Company has
meritorious defenses to this claim. However, this action is in the early stages
of discovery and the Company is unable to predict the outcome of this matter at
this time. RMI's professional liability insurer has asserted that losses
resulting from supervision of subcontractors and project budgeting as well as
punitive damages claims are generally outside of the scope of coverage of RMI's
policies. However, the Company intends to challenge this position. In addition,
because this lawsuit was identified at the time the Company acquired RMI, a
specific indemnification escrow was established with 56,737 shares, escrowed at
an agreed price of $34.75 per share. However, no assurance can be given that
the value of the escrowed shares will be sufficient to cover damages that the
Company may ultimately be responsible for in connection with this lawsuit.
29
<PAGE>
MANAGEMENT
The following is a brief description of the Company's executive officers,
directors and certain key employees:
Robert P. Maher, 47, has served as a director of the Company since April
1991. He has served as Chief Executive Officer and President since January
1996 and as Chairman of the Board since June 1996. From August 1990 to
December 1995, Mr. Maher held various positions with the Company, most
recently as a Senior Vice President working primarily in the information
technology area. From 1988 to August 1990, he was a principal with the
consulting practice of Ernst & Young LLP where he organized and directed
information technology engagements for the regulated segment of the
communications industry practice. From 1983 to 1988, Mr. Maher served as the
Corporate Vice President--Chief Information Officer for Newell Companies Inc.,
a manufacturer of consumer hardgood products distributed through mass
merchandizers, where he was involved in the integration of 23 acquired
companies.
Gerald R. Lanz, 49, has served as a director of the Company since January
1996 and as Chief Operating Officer since June 1996. From December 1994 to
June 1996, Mr. Lanz held various management positions with the Company, most
recently as a Senior Vice President working in the area of strategic and
business practices. From July 1989 to June 1994, he was employed by Ameritech
Corporation in a series of management positions, most recently as Vice
President of Marketing and Business Development for its Small Business
Services division.
James F. Hillman, 40, has served as the Chief Financial Officer and
Treasurer since June 1996. From April 1996 to June 1996, Mr. Hillman served as
a Principal Associate of the Company. From July 1988 to March 1996, he was
employed by Ameritech Corporation, most recently as the Chief Financial
Officer of Ameritech Monitoring Services, Inc.
James T. Ruprecht, 38, has served as a director of the Company since
December 1994, as a Senior Vice President of the Company from January 1994 to
July 1997, and as President of Metzler & Associates since July 1997. From
April 1987 to January 1994, Mr. Ruprecht held various management positions
with the Company, working primarily in the areas of business process re-
engineering, customer operations and supply chain management. Prior to his
employment at the Company, he held various positions with the Northern
Illinois Gas Company, most recently as an Area Manager of Operations.
Peter B. Pond, 53, has served as a director of the Company since November
1996. Mr. Pond has served as the Midwest Head of Investment Banking for
Donaldson, Lufkin & Jenrette Securities Corporation since June 1991.
Mitchell H. Saranow, 52, has served as a director of the Company since
November 1996. Mr. Saranow has served as Chairman of The Saranow Group L.L.C.,
an investment company, since August 1996. He founded Fluid Management, LP, in
April 1987 and served as Chairman until January 1997.
Lee E. Burgess, 48, is the founder of Burgess and has served as its
President since its inception in March 1993. From January 1984 to February
1993, Mr. Burgess was a partner in Metzler & Associates.
Lloyd H. Harvego, 58, is the founder of RMI and has served as its President
since its inception in January 1980.
Deborah T. Kearns, 40, was a principal shareholder of Sterling at the time
of its acquisition by the Company and has served as its President since 1993.
John J. Reed, 43, is the founder of Reed and has served as its President
since its inception in July 1988.
Barry S. Cain, 55, has served as the Company's Vice President--Chief
Administrative Officer since September 1997. Mr. Cain joined the Company from
his position as a member of the law firm of Sachnoff &
30
<PAGE>
Weaver, Ltd., where he was co-chairman of the firm's Business Group and a
member of its board of directors. Prior to joining the Company, Mr. Cain
served as the Company's outside general counsel since its inception.
Charles A. Demirjian, 32, has served as the Company's General Counsel, Vice
President and Secretary since September 1997. Mr. Demirjian joined the Company
from his position as a member of the law firm of Sachnoff & Weaver, Ltd.
Stephen J. Denari, 44, has served as the Company's Vice President-Corporate
Development since July 1997. Prior to joining the Company, Mr. Denari served
as a turn-around specialist for a variety of companies, including Harley
Davidson, DMBS, Inc., American Capital Enterprises, and First National
Entertainment. Mr. Denari has also assisted the Company since 1990 in various
specialized projects for the Company's clients.
The Company has recently expanded its management team to include Messrs.
Cain, Demirjian and Denari in furtherance of its growth strategy. Working in
conjunction with the Company's other officers, Mr. Denari's principal role is
to identify and evaluate acquisition candidates for the Company. In addition
to assisting with the evaluation of acquisition candidates, Mr. Cain will
focus on integrating acquired businesses into the Company, facilitating
interaction and cross-marketing among the Company's subsidiaries and
developing and implementing opportunities to leverage economies of scale.
31
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth, as of February 24, 1998, certain information
regarding the beneficial ownership of outstanding Common Stock by each Selling
Stockholder, both before this offering and as adjusted to reflect the sale of
the shares of Common Stock in this offering. Except where otherwise noted,
each person named in the following table has, to the knowledge of the Company,
sole voting and investment power with respect to the shares beneficially
owned.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP PRIOR BENEFICIAL OWNERSHIP
TO OFFERING (1) NUMBER AFTER OFFERING (1)
----------------- OF -----------------------
NUMBER OF SHARES NUMBER OF
SELLING STOCKHOLDERS SHARES PERCENT OFFERED SHARES PERCENT
<S> <C> <C> <C> <C> <C>
Lloyd H. Harvego(2)........ 1,497,593 10.9% 697,593 800,000 5.4%
David J. Donovan(3)........ 1,060,000 7.7 412,820 647,180 4.4
Stephen R. Goldfield(3).... 1,060,000 7.7 412,820 647,180 4.4
Gerald R. Lanz(4).......... 1,060,000 7.7 412,820 647,180 4.4
James T. Ruprecht(5)....... 1,060,000 7.7 412,820 647,180 4.4
Robert P. Maher(6)......... 939,429 6.9 383,840 555,589 3.8
James R. Blomberg(3)....... 660,000 4.8 263,880 396,120 2.7
Richard J. Metzler(7)...... 600,000 4.4 466,837 133,163 *
Ronald O. Nichols(2)....... 359,557 2.6 130,000 229,557 1.6
Larry R. Gawlik(2)......... 280,028 2.0 101,200 178,828 1.2
Deborah T. Kearns(8)....... 203,062 1.5 40,612 162,450 1.1
John J. Reed(9)............ 162,000 1.2 64,800 97,200 *
Frederick J. Nemergut(9)... 113,400 * 45,360 68,040 *
Wayne J. Oliver(9)......... 108,000 * 43,200 64,800 *
Alan G. Carnrite(8)........ 101,531 * 25,000 76,531 *
Estate of Laurel Dell
Manning U/W/D November 22,
1996(8)................... 81,225 * 11,551 69,674 *
John C. Dalton(9).......... 72,000 * 28,800 43,200 *
Malcolm R. Ketchum(9)...... 60,000 * 24,000 36,000 *
Lee E. Burgess(10)......... 42,181 * 14,847 27,334 *
Jack E. Stowe, Jr.(11)..... 30,000 * 6,000 24,000 *
Mary Louise Zoukis(9)...... 3,000 * 1,200 1,800 *
</TABLE>
- ---------------------
* Less than one percent.
(1) Applicable percentage of ownership as of February 24, 1998 is based upon
13,707,995 shares of Common Stock outstanding. Applicable percentage
ownership after this offering is based upon 14,707,995 shares of Common
Stock outstanding. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission (the "Commission"),
and includes voting and investment power with respect to the shares shown
as beneficially owned. Assumes no exercise of the Underwriters' over-
allotment option to purchase up to an aggregate of 662,500 shares of
Common Stock from certain Selling Stockholders.
(2) Mr. Harvego is President and Messrs. Nichols and Gawlik are Vice
Presidents of RMI. The shares beneficially owned by Messrs. Harvego,
Nichols and Gawlik represent shares received by them in connection with
the Acquisition of RMI by the Company.
(3) Messrs. Donovan, Goldfield and Blomberg are Vice Presidents of Metzler &
Associates.
(4) Mr. Lanz is Chief Operating Officer and a director of the Company.
(5) Mr. Ruprecht is the President of Metzler & Associates and a director of
the Company.
(6) Mr. Maher is the Chairman, Chief Executive Officer, President and a
director of the Company and is Chairman, Chief Executive Officer, Vice
President and the sole director of each of the Company's subsidiaries.
32
<PAGE>
(7) Mr. Metzler is a Vice President of Metzler & Associates. Shares
beneficially owned prior to this offering and the number of shares
offered include 250,000 shares held by the Metzler Family Investments,
L.P., of which Mr. Metzler is the sole general partner.
(8) Ms. Kearns is the President and Mr. Carnrite is the Executive Vice
President of Sterling. Mr. Carnrite is the executor of The Estate of
Laurel Dell Manning, which is the estate of Mr. Carnrite's deceased wife.
The shares beneficially owned by Mr. Kearns, Mr. Carnrite and The Estate
of Laurel Dell Manning represent shares received by them in connection
with the acquisition of Sterling by the Company.
(9) Mr. Reed is the President and Messrs. Nemergut, Oliver, Dalton and
Ketchum and Ms. Zoukis are Vice Presidents of Reed. The shares
beneficially owned by Messrs. Reed, Nemergut, Oliver, Dalton and Ketchum
and Ms. Zoukis represent shares received by them in connection with the
acquisition of Reed by the Company.
(10) Mr. Burgess is the President of Burgess. The shares beneficially owned by
Mr. Burgess represent shares received by him in connection with the
acquisition of Burgess by the Company.
(11) Mr. Stowe is the President of Reed-Stowe. The shares beneficially owned
by Mr. Stowe represent shares received by him in connection with the
acquisition of Reed-Stowe by the Company.
33
<PAGE>
UNDERWRITING
Subject to certain terms and conditions of an Underwriting Agreement dated
February 24, 1998 (the "Underwriting Agreement"), the underwriters named below
(the "Underwriters"), who are represented by Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), Lehman Brothers Inc., BancAmerica Robertson
Stephens and William Blair & Company, L.L.C. (the "Representatives"), have
agreed severally to purchase from the Company and the Selling Stockholders,
and the Company and the Selling Stockholders have agreed severally to sell to
each of the Underwriters, an aggregate of 5,000,000 shares of Common Stock at
the public offering price per share less the underwriting discounts and
commissions set forth on the cover of this Prospectus. The number of shares of
Common Stock that each Underwriter has agreed to purchase is set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation................... 2,500,000
Lehman Brothers Inc................................................... 1,000,000
BancAmerica Robertson Stephens........................................ 750,000
William Blair & Company, L.L.C........................................ 750,000
---------
Total............................................................. 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal
matters and to certain other conditions. The Underwriters are obligated to
purchase and accept delivery of all shares of Common Stock offered hereby
(other than those covered by the over-allotment option described below) if any
are purchased.
The Underwriters propose to initially offer the shares of Common Stock in
part directly to the public at the price to the public set forth on the cover
page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $1.17 per
share. The Underwriters may allow, and such dealers may re-allow to certain
other dealers, a concession not in excess of $0.10 per share. After this
offering, the offering price and other selling terms may be changed by the
Underwriters.
Certain Selling Stockholders have granted to the Underwriters an option,
exercisable not later than 30 calendar days after the date of the Underwriting
Agreement, to purchase from time to time, in whole or in part, up to an
aggregate of 662,500 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus, less the underwriting
discounts and commissions. The Underwriters may exercise such option solely to
cover over-allotments, if any, made in connection with this offering. To the
extent that the Underwriters exercise such option, each Underwriter will
become obligated, subject to certain conditions, to purchase its pro rata
portion of such additional shares based on such Underwriter's percentage
underwriting commitment as indicated in the preceding table.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under
the Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company and each of the Selling Stockholders and the executive officers
and directors of the Company has agreed subject to certain exceptions, not to:
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock; or (ii) enter into any swap or
other arrangement that transfers all or a portion of the economic consequences
associated with the ownership of any Common Stock (regardless of whether any
of the transactions described in clause (i) or (ii) is to be settled by the
delivery of Common Stock, or such other securities, in cash or otherwise) for
a period of 90 days after the date of this Prospectus without the
34
<PAGE>
prior written consent of DLJ. In addition, during such period, the Company has
also agreed not to file any registration statement with respect to, and each
of its executive officers, directors and certain stockholders of the Company
(including the Selling Stockholders) has agreed not to make any demand for, or
exercise any right with respect to, the registration of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock without DLJ's prior written consent.
Other than in the United States, no action has been taken by the Company,
the Selling Stockholders or the Underwriters that would permit a public
offering of the shares of Common Stock offered hereby in any jurisdiction
where action for that purpose is required. The shares of Common Stock offered
hereby may not be offered or sold, directly or indirectly, nor may this
Prospectus or any other offering material or advertisements in connection with
the offer and sale of any such shares of Common Stock be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of such jurisdiction.
Persons into whose possession this Prospectus comes are advised to inform
themselves about and to observe any restrictions relating to the offering of
the Common Stock and the distribution of this Prospectus. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
shares of Common Stock offered hereby in any jurisdiction in which such an
offer or a solicitation is unlawful.
In the event the Common Stock does not constitute an excepted security under
the provisions of Regulation M promulgated by the Commission, the Underwriters
and dealers may engage in passive market making transactions in accordance
with Rule 103. In general, a passive market maker may not bid for or purchase
shares of Common Stock at a price that exceeds the highest independent bid. In
addition, the net daily purchases made by any passive market maker generally
may not exceed 30% of its average daily trading volume in the Common Stock
during a specified two-month prior period, or 200 shares, whichever is
greater. A passive market maker must identify passive market making bids as
such on the Nasdaq electronic inter-dealer reporting system. Passive market
making may stabilize or maintain the market price of the Common Stock above
independent market levels. Underwriters and dealers are not required to engage
in passive market making and may end passive market making activities at any
time.
In connection with this offering, certain Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot this offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase shares of Common Stock in the open market to cover syndicate
short positions or to stabilize the price of the Common Stock. These
activities may stabilize or maintain the market price of the Common Stock
above independent market levels. The Underwriters are not required to engage
in these activities and may end any of these activities at any time.
Peter B. Pond, a director of the Company, is a principal of DLJ. DLJ from
time to time provides and in the past has provided investment banking services
to the Company and is serving as the lead manager in this offering. The
Company granted Mr. Pond options to acquire 3,000 and 9,000 shares,
respectively, on the date of his initial appointment to the Board in 1996 and
upon his re-election at the Company's annual stockholders' meeting in May
1997. These options were granted pursuant to the outside directors' formula
plan under the Company's Long-Term Incentive Plan and become exercisable over
a three-year period at a per share exercise price equal to the fair market
value of the Common Stock on the respective grant dates. In May 1997, the
Company granted Mr. Pond options to acquire an additional 15,000 shares of
Common Stock in connection with Mr. Pond's services and duties as a director.
This later option has an exercise price equal to the fair market value of the
Common Stock on the date of grant. Fifty percent of this later option becomes
exercisable on the second anniversary of the date of grant and twenty-five
percent on each of the third and fourth anniversaries of the date of grant.
35
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the Commission
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K, and amendments thereto, for
the fiscal year ended December 31, 1996;
2. The Company's Quarterly Report on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997;
3. The Company's Current Reports on Form 8-K, and amendments thereto,
dated July 31, 1997 and August 15, 1997; and
4. The description of the Common Stock, contained in the Company's
Registration Statement on Form 8-A filed pursuant to Section 12 of the
Exchange Act and all amendments thereto and reports filed for the purpose
of updating such description.
All documents filed by the Company pursuant to Section 13(a), 13 (c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of this offering shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained herein or in a document
incorporated or deemed to be incorporated herein by reference shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained in any subsequently filed document which is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide, without charge, to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of such person, a
copy of any or all of the documents incorporated herein by reference (other
than exhibits thereto, unless such exhibits are specifically incorporated by
reference into the information that this Prospectus incorporates). Written or
telephone requests for such copies should be directed to the Company's
principal office: The Metzler Group, Inc., 520 Lake Cook Road, Suite 500,
Deerfield, Illinois 60015, Attn: Investor Relations, telephone: (847) 914-
9100.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at the public reference room of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
DC 20549, and at the public reference facilities at the Commission's Regional
Offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and
North-West Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may be obtained at prescribed rates by
writing to the Commission, Public Reference Section, Judiciary Plaza, 450
Fifth Street, N.W., Washington, DC 20549. In addition, material filed by the
Company may be inspected at the offices of the National Association of
Securities Dealers, Inc., Reports Section, 1735 K Street, N.W., Washington, DC
20006. These Company reports, proxy statements and other information may be
obtained from the Commission's web site at www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act with respect to the shares of Common
Stock offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement. Such additional information may be obtained from the public
reference section of
36
<PAGE>
the Commission at 450 Fifth Street, N.W., Washington, DC 20549. The
Registration Statement, including the exhibits and schedules thereto, may be
obtained from the Commission's web site at www.sec.gov. Statements contained
in this Prospectus as to the contents of any contract or other document
referred to herein are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other documents filed as an
exhibit to the Registration Statement, each such statement being qualified in
its entirety by such reference.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Sachnoff & Weaver, Ltd., Chicago, Illinois. Certain
legal matters in connection with the offering will be passed upon for the
Underwriters by Winston & Strawn, Chicago, Illinois.
EXPERTS
The historical consolidated financial statements of The Metzler Group, Inc.
as of December 31, 1995 and 1996, and for each of the years in the three-year
period ended December 31, 1996, incorporated by reference herein and elsewhere
in the Registration Statement from the 1996 Form 10-K, have been audited by
KPMG Peat Marwick LLP, independent certified public accountants, as set forth
in their report thereon included therein and incorporated herein by reference.
Such consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of said firm as experts in
accounting and auditing.
The Consolidated Financial Statements of The Metzler Group, Inc. as of
December 31, 1995 and 1996 and for each of the years in the three-year period
ended December 31, 1996, appearing in this Prospectus and the Registration
Statement relating to this Prospectus have been audited by KPMG Peat Marwick
LLP, independent certified public accountants, as set forth in their report
thereon appearing elsewhere herein and in the Registration Statement, and
which is based in part on the report of Coopers & Lybrand L.L.P., independent
accountants, whose report is included herein. Such Consolidated Financial
Statements are included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated balance sheet of Resource Management International, Inc.
and Subsidiaries as of December 31, 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
then ended, incorporated by reference herein and elsewhere in the Registration
Statement from the Company's report on Form 8-K/A, as amended, have been
incorporated herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given upon the authority of that firm as experts in
accounting and auditing.
37
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
THE METZLER GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of KPMG Peat Marwick LLP........................................... F-2
Consolidated Balance Sheets at December 31, 1995 and 1996................. F-3
Consolidated Statements of Operations for the years ended December 31,
1994, 1995 and 1996...................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996......................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Consolidated Balance Sheet as of September 30, 1997 (unaudited)........... F-19
Consolidated Statements of Operations for the three- and nine-month
periods ended September 30, 1996 and 1997 (unaudited).................... F-20
Consolidated Statements of Cash Flows for the nine-month periods ended
September 30, 1996 and 1997 (unaudited).................................. F-21
Notes to Unaudited Consolidated Financial Statements...................... F-22
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
The Metzler Group, Inc.:
We have audited the consolidated balance sheets of The Metzler Group, Inc.
and subsidiaries as of December 31, 1995 and 1996 and the related statements
of operations, stockholders' equity and cash flows for each of the years in
the three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of
Resource Management International, Inc., a wholly owned subsidiary, which
financial statements reflect total assets constituting 73 percent and 24
percent as of December 31, 1995 and 1996, respectively, and total revenues
constituting 70 percent, 67 percent and 56 percent for each of the years in
the three-year period ended December 31, 1996, respectively, of the related
consolidated totals. Those financial statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it
relates to the amounts included for Resource Management International, Inc.,
is based solely on the reports of the other auditors.
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, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Metzler Group, Inc. and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
(signed) KPMG Peat Marwick LLP
November 14, 1997
Chicago, Illinois
F-2
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 701,206 $33,536,265
Accounts receivable, net of the allowance for
doubtful accounts of $650,000 and $706,000 in 1995
and 1996, respectively.............................. 12,535,075 14,184,458
Prepaid expenses..................................... 352,367 525,957
Other current assets................................. 167,406 129,211
----------- -----------
Total current assets............................... 13,756,054 48,375,891
----------- -----------
Net property and equipment............................. 2,404,368 2,713,793
Intangible assets, net of the accumulated amortization
of $93,842 and $113,176 in 1995 and 1996,
respectively.......................................... 570,084 749,345
Other assets........................................... 108,177 430,076
----------- -----------
Total assets....................................... $16,838,683 $52,269,105
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft....................................... $ -- $ 642,124
Lines of credit...................................... 1,205,740 1,685,133
Notes payable to related parties, current portion.... 648,449 1,734,580
Long-term debt, current portion...................... 372,587 606,621
Accounts payable..................................... 1,987,851 2,699,675
Accrued liabilities.................................. 586,139 749,947
Accrued compensation and related costs............... 2,638,549 1,797,676
Income taxes payable................................. 218,085 771,157
Deferred income taxes................................ 740,080 711,626
Other current liabilities............................ 156,427 548,493
----------- -----------
Total current liabilities.......................... 8,553,907 11,947,032
Long-term debt, less current portion................... 1,002,703 1,400,553
Notes payable to related parties, less current portion. 23,724 88,725
Deferred income taxes.................................. 3,229,398 2,305,639
Other noncurrent liabilities........................... 382,939 577,782
----------- -----------
Total liabilities.................................. 13,192,671 16,319,731
----------- -----------
Stockholders' equity:
Preferred stock, $.001 par value; 3,000,000 shares
authorized; no shares issued or outstanding......... -- --
Common stock, $.001 par value; 75,000,000 shares
authorized; 12,759,458 and 13,467,758 shares issued
and outstanding in 1995 and 1996, respectively...... 12,760 13,468
Additional paid-in capital........................... 857,506 30,014,290
Cumulative translation adjustment.................... -- 6,066
Retained earnings.................................... 2,775,746 5,915,550
----------- -----------
Total stockholders' equity......................... 3,646,012 35,949,374
----------- -----------
Total liabilities and stockholders' equity......... $16,838,683 $52,269,105
=========== ===========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-3
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
<S> <C> <C> <C>
Revenues................................ $47,103,998 $55,817,351 $63,553,337
Cost of services........................ 32,059,131 37,085,413 42,315,400
----------- ----------- -----------
Gross profit.......................... 15,044,867 18,731,938 21,237,937
Selling, general and administrative
expenses............................... 14,548,285 17,811,846 15,609,906
----------- ----------- -----------
Operating income...................... 496,582 920,092 5,628,031
----------- ----------- -----------
Other expense (income):
Interest expense...................... 287,556 247,971 578,642
Interest income....................... (11,726) (27,125) (370,750)
Other, net............................ 24,479 19,973 (134,614)
----------- ----------- -----------
Total other expense................. 300,309 240,819 73,278
----------- ----------- -----------
Income before income tax expense
(benefit).............................. 196,273 679,273 5,554,753
Income tax expense (benefit).......... 262,541 392,908 (180,351)
----------- ----------- -----------
Net income (loss)....................... $ (66,268) $ 286,365 $ 5,735,104
=========== =========== ===========
Pro forma income data (unaudited):
Net income as reported................ $ 286,365 $ 5,735,104
Pro forma adjustments to income tax
expense.............................. (1,110,117) (1,799,403)
Pro forma adjustments to executive
compensation expense................. 2,775,293 (1,019,460)
----------- -----------
Pro forma net income................ 1,951,541 2,916,241
=========== ===========
Pro forma net income per share...... $ 0.15 $ 0.23
=========== ===========
Shares used in computing pro forma net
income per share....................... 12,688,451 12,953,618
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-4
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED
STOCK COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
------------- ------------------- PAID-IN TRANSLATION RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS EQUITY
------ ------ ---------- ------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... -- -- 3,053,904 $ 3,054 $ 691,258 $ -- $ 2,588,650 $ 3,282,962
Retroactive restatement
for a 9,714.285 to 1
stock split in the form
of a common stock
dividend effective
September 20, 1996..... -- -- 9,616,152 9,616 (9,616) -- -- --
--- --- ---------- ------- ----------- ------ ----------- -----------
As restated............. -- -- 12,670,056 12,670 681,642 -- 2,588,650 3,282,962
Net loss................ -- -- -- -- -- -- (66,268) (66,268)
Purchase and retirement
of common stock........ -- -- (619,027) (619) (285,625) -- (13,001) (299,245)
Issuance of common
stock.................. -- -- 478,679 479 255,786 -- -- 256,265
--- --- ---------- ------- ----------- ------ ----------- -----------
Balance at December 31,
1994................... -- -- 12,529,708 12,530 651,803 -- 2,509,381 3,173,714
Net income.............. -- -- -- -- -- -- 286,365 286,365
Purchase and retirement
of common stock........ -- -- (23,902) (24) (29,849) -- (20,000) (49,873)
Issuance of common
stock.................. -- -- 253,652 254 235,552 -- -- 235,806
--- --- ---------- ------- ----------- ------ ----------- -----------
Balance at December 31,
1995................... -- -- 12,759,458 12,760 857,506 -- 2,775,746 3,646,012
Net income.............. -- -- -- -- -- -- 5,735,104 5,735,104
Purchase and retirement
of common stock........ -- -- (1,932,706) (1,933) (8,157,929) -- (395,300) (8,555,162)
Issuance of common
stock.................. -- -- 2,641,006 2,641 37,314,713 -- -- 37,317,354
S-corporation
distributions.......... -- -- -- -- -- -- (2,200,000) (2,200,000)
Foreign currency
translation adjustment. -- -- -- -- -- 6,066 -- 6,066
--- --- ---------- ------- ----------- ------ ----------- -----------
Balance at December 31,
1996................... -- -- 13,467,758 $13,468 $30,014,290 $6,066 $ 5,915,550 $35,949,374
=== === ========== ======= =========== ====== =========== ===========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-5
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $ (66,268) $ 286,365 $ 5,735,104
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Depreciation and amortization.......... 805,388 1,071,984 1,063,986
Loss on sale of property and equipment. 25,246 93,115 71,225
Provision for bad debts................ 436,060 815,860 253,306
Deferred income taxes.................. 186,846 194,394 (952,213)
Changes in assets and liabilities, net
of acquisitions:
Accounts receivable.................. (536,421) (1,997,479) (1,768,689)
Prepaid expenses and other assets.... 138,011 (229,546) (135,395)
Accounts payable and accrued
liabilities......................... 195,054 622,901 875,632
Accrued compensation and related
costs............................... (469,762) 662,592 (840,873)
Income taxes payable................. 9,409 208,676 553,072
Other current liabilities............ (235,144) (28,287) 392,066
--------- ----------- -----------
Net cash provided by operating
activities.............................. 488,419 1,700,575 5,247,221
--------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment..... (855,763) (620,359) (1,284,156)
Sale of property and equipment......... 20,500 5,183 46,743
Cash paid for acquisitions............. -- (80,000) (313,000)
Other, net............................. 300,532 (56,210) (285,156)
--------- ----------- -----------
Net cash used in investing activities.... (534,731) (751,386) (1,835,569)
--------- ----------- -----------
Cash flows from financing activities:
Purchase of common stock............... (299,245) (49,873) (8,555,162)
Sale of common stock................... 256,265 235,806 37,317,354
Repayment of notes payable to related
parties............................... (60,649) (22,043) (648,449)
Proceeds from notes payable to related
parties............................... 213,077 23,724 1,799,581
Repayment of long-term debt............ (524,487) (691,445) (826,449)
Proceeds from long-term debt........... 700,000 226,552 1,458,333
Net borrowings on lines of credit...... (84,260) 255,000 479,393
Distributions to former S-corporation
stockholders.......................... -- -- (2,200,000)
Increase (reduction) in book overdraft. 172,328 (482,855) 642,124
Payments for obligations under capital
lease................................. (180,396) (21,277) (43,318)
--------- ----------- -----------
Net cash provided by (used in) financing
activities.............................. 192,633 (526,411) 29,423,407
--------- ----------- -----------
Net increase in cash and cash
equivalents............................. 146,321 422,778 32,835,059
Cash and cash equivalents at beginning of
year.................................... 132,107 278,428 701,206
--------- ----------- -----------
Cash and cash equivalents at end of year. $ 278,428 $ 701,206 $33,536,265
========= =========== ===========
Supplemental information:
Interest payments...................... $ 358,024 $ 252,797 $ 532,383
Income tax payments.................... $ 112,088 $ 17,469 $ 228,010
========= =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Metzler & Associates, Inc. ("Metzler &
Associates"), Resource Management International, Inc., ("RMI") and Reed
Consulting Group, Inc. ("Reed"). The Company is headquartered in Chicago,
Illinois and has regional offices in various cities within the United States,
Denmark, Australia, Czechoslovakia Republic, China, Indonesia, and the
Philippines.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries: Metzler & Associates, RMI, Reed, Bookman-Edmonston
Engineering, Inc., RMI Utility Services, Synergic Resources Corporation (SRC)
and Synergic Resources Group (SRC Group). All significant intercompany
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents are comprised of highly liquid instruments with original
maturities of 90 days or less.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are computed using the straight-line and declining balance methods based on
the estimated useful lives, ranging from three to forty years, of the various
classes of property and equipment. Depreciation related to capital lease
obligations is amortized over the shorter of their useful lives or the term of
the related leases by use of the straight-line method.
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.
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.
F-7
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK BASED COMPENSATION
The Company utilizes the intrinsic value-based method of accounting for its
stock-based compensation arrangements.
INCOME TAXES
Income taxes, including pro forma calculations, are accounted for in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (Statement 109). Under the asset and liability
method of Statement 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets 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.
PRO FORMA NET INCOME PER SHARE (UNAUDITED)
Pro forma net income per common and common equivalent share is computed
based on the weighted average of 12,688,451 common and common equivalent
shares outstanding during the year ended December 31, 1995 and 12,953,618
common and common equivalent shares outstanding during the year ended December
31, 1996.
Net income per share is computed using the weighted average number of shares
of common stock and dilutive common equivalent shares outstanding during the
period using the treasury stock method. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, common and common equivalent
shares issued by the Company during the twelve-month period prior to the
initial public offering have been included in the calculation of common and
common equivalent shares using the treasury stock method and the initial
public offering price per share as if they were outstanding for all periods
presented.
The pro forma adjustments during the years 1995 and 1996 reflect the impact
of a Metzler & Associates compensation plan effective July 1, 1996. The pro
forma adjustments for 1995 include a decrease to officer compensation expense
of $2,775,293. The pro forma adjustments for 1996 include an increase to
officer compensation expense of $1,019,460.
The pro forma adjustments for 1995 include additional federal and state
income tax expense of $1,110,117, that would have been required had Metzler &
Associates' compensation expense decreased in 1995 to the level commensurate
with the compensation plan adopted effective July 1, 1996, as noted above. The
pro forma adjustments for 1996 include federal and additional state income tax
expense of $1,799,403 that would have been required had Metzler & Associates
not made the S-corporation election effective January 1, 1996, partially
offset by a reduction in taxes that would have been incurred had Metzler &
Associates adopted the officers' compensation plan referred to above.
F-8
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
3. BUSINESS COMBINATIONS
On July 31, 1997, the Company issued 2,137,178 shares of common stock for
substantially all the outstanding common stock of Resource Management
International, Inc. (RMI). Additionally, on August 15, 1997, the Company
issued 518,400 shares of common stock for substantially all of the outstanding
common stock of Reed Consulting Group, Inc. (Reed). Each of the transactions
were 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 following information shows total revenues and net income (loss) of The
Metzler Group, Inc. and the combining companies during the three years ended
December 31, 1994, 1995, and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
--------------------------------------
METZLER (1) RMI AND REED TOTAL
<S> <C> <C> <C>
Revenues................................ $10,419,878 $36,684,120 $47,103,998
Net income (loss)....................... (183,774) 117,506 (66,268)
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------
METZLER (1) RMI AND REED TOTAL
<S> <C> <C> <C>
Revenues................................ $13,459,725 $42,357,626 $55,817,351
Net income (loss)....................... (473,232) 759,597 286,365
Pro forma net income (loss) (2)......... 1,191,944 759,597 1,951,541
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------
METZLER (1) RMI AND REED TOTAL
<S> <C> <C> <C>
Revenues................................ $22,092,969 $41,460,368 $63,553,337
Net income (loss)....................... 6,854,149 (1,119,045) 5,735,104
Pro forma net income (loss) (2)......... 4,035,286 (1,119,045) 2,916,241
</TABLE>
- ---------------------
(1) Represents the historical data of The Metzler Group, Inc. without
considering the effect of the poolings.
(2)See discussion of pro forma adjustments in Note 2.
In May 1996, RMI purchased the outstanding shares of SRC and SRC Group. The
acquired companies provide consulting and technical research services to
governmental agencies, public and private utilities, research institutions and
industrial firms located throughout the world. RMI paid approximately $313,000
in cash for combined net assets of approximately $134,000. The acquisition has
been accounted for by the purchase method of accounting. The excess of the
purchase price over the fair value of net assets acquired has been recorded as
goodwill which is being amortized on a straight-line basis over ten years. The
operating results of the acquired companies are included in RMI's results of
operations from the date of acquisition.
F-9
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the SRC and SRC Group purchase agreement, RMI entered into
employment and covenant not to compete agreements with certain officers of the
acquired companies. These agreements provide for the officers to receive
salaries totaling approximately $600,000 annually through May 1998, bonus
payments totaling $480,000 and covenant payments totaling approximately
$120,000. The covenant payments are to be paid out with interest in monthly
installments over a 36-month period.
During 1995, the Company issued 59,366 shares of Common Stock in exchange
for the remaining minority shareholders' stock of Bookman-Edmonston
Engineering, Inc. (B-E). The fair market value of the B-E stock approximated
the carrying value. No gain or loss was recorded on the transaction.
In addition, in 1995 RMI purchased all of the outstanding stock of JanCom
Engineering Company and Robert E. Meyer Consultants, Inc. The acquired
companies provide environmental engineering services and are based in the
western United States. RMI paid $80,000 in cash for assets and liabilities of
approximately $377,000 and $297,000, respectively. The acquisitions have been
accounted for by the purchase method of accounting. The excess of the fair
market value of net assets acquired over the purchase price reduced long-term
assets. The operating results of the acquired companies are included in RMI's
consolidated results of operations from the dates of acquisition. The purchase
agreements provide covenants for the former shareholders not to compete
totaling $520,000. Additionally, one of the purchase agreements provides for
monthly salaries to the former shareholders of $8,125 through December 1997,
increased each year based upon the Consumer Price Index.
4. INITIAL PUBLIC OFFERING
On October 4, 1996 the Company completed an initial public offering of its
common stock in which 2,300,000 shares were sold by the Company, along with an
additional over-allotment of 285,000 shares, resulting in 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 its founding shareholder, the Company redeemed 1,714,285 shares of the
founding shareholder's common stock and issued to the shareholder a promissory
note for $7,975,000. See Note 13 of the Notes to Consolidated Financial
Statements regarding repayment of the promissory note.
5. PROPERTY AND EQUIPMENT
Property and equipment, at cost, as of December 31 consisted of:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Land and buildings................................ $ 370,000 $ 370,000
Furniture, fixtures and equipment................. 6,081,525 7,151,716
Computer software................................. 55,109 58,729
Leasehold improvements............................ 915,994 1,040,121
Transportation equipment.......................... 409,933 386,521
Other............................................. 32,500 50,110
---------- ----------
7,865,061 9,057,197
Less: accumulated depreciation and amortization. (5,460,693) (6,343,404)
---------- ----------
$2,404,368 $2,713,793
========== ==========
</TABLE>
F-10
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LINES OF CREDIT
The Company had $4,500,000 and $4,900,000 available under lines of credit at
December 31, 1995 and 1996, respectively. Amounts outstanding at December 31
are as follows:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Line of credit, maximum borrowings of $800,000 at
December 31, 1995 and $1,200,000 at December 31,
1996, expired on December 31, 1996.............. $ 405,740 $ --
$2,500,000 line of credit, interest payable
monthly at the bank's prime rate (8.25% at
December 31, 1996) plus .375%, collateralized by
substantially all assets of RMI, outstanding
balance due on demand........................... -- 590,133
$1,000,000 line of credit, interest payable
monthly at the bank's prime rate (8.25% at
December 31, 1996) plus 1.0%, collateralized by
substantially all assets of RMI, outstanding
balance due on April 30, 1997................... -- 1,000,000
$200,000 line of credit, interest payable at
bank's prime rate (8.25% at December 31, 1996)
plus 1.0%, collateralized by all assets of Reed,
guaranteed by officers of Reed.................. -- 95,000
$2,500,000 line of credit, paid in May 1996...... 800,000 --
---------- ----------
$1,205,740 $1,685,133
========== ==========
</TABLE>
Covenants under the lines of credit and term loan agreements contain
provisions that limit capital expenditures or incurrence of new debt or
leases, require maintaining profitable operations, minimum levels of net
worth, tangible net worth, and minimum ratio of current assets to current
liabilities.
At December 31, 1996, the Company had letters of credit available of
$800,000 of which $255,272 has been utilized. The letters of credit expire on
April 30, 1997.
7. LEASE COMMITMENTS
The Company leases its office facilities and certain equipment under
operating and capital lease arrangements which expire at various dates through
2002 with renewal options of two to five years.
OPERATING LEASES
The Company leases office facilities under noncancelable operating leases
which include fixed or minimum payments plus, in some cases, scheduled base
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.
F-11
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum annual lease payments, for the years subsequent to 1996 and
in the aggregate, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
<S> <C>
1997.................................. $ 3,206,142
1998.................................. 2,896,139
1999.................................. 2,135,844
2000.................................. 2,106,739
2001.................................. 1,993,257
Thereafter............................ 98,319
-----------
$12,436,440
===========
</TABLE>
The Company also subleases some of these buildings to others under
noncancelable operating leases. The leases expire through November 1998,
without renewal options. Future minimum rentals to be received are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
<S> <C>
1997..................................... $ 89,832
1998..................................... 77,023
--------
$166,855
========
</TABLE>
Rent expense for operating leases entered into by the Company and charged to
operations amounted to $2,631,415, $2,660,513 and $3,072,500 for the years
ended December 31, 1994, 1995, and 1996, respectively.
CAPITAL LEASES
The Company leases certain equipment under capital lease agreements which
expire through May 2000. Future minimum payments under the capital lease
agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
<S> <C>
1997............................................................ $ 80,422
1998............................................................ 75,719
1999............................................................ 61,614
2000............................................................ 31,111
--------
Net minimum rentals............................................. 248,866
Less interest portion........................................... (44,880)
--------
Present value of net minimum rentals at December 31, 1996....... $203,986
========
</TABLE>
F-12
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAX EXPENSE (BENEFIT)
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995 1996
<S> <C> <C> <C>
Federal:
Current.................................. $(19,069) $168,171 $ 477,323
Deferred................................. 167,044 146,215 (574,015)
-------- -------- ---------
Total.................................... 147,975 314,386 (96,692)
-------- -------- ---------
State:
Current.................................. 74,137 43,626 219,806
Deferred................................. 40,429 34,896 (303,465)
-------- -------- ---------
Total.................................... 114,566 78,522 (83,659)
-------- -------- ---------
Total federal and state income tax expense
(benefit)................................. $262,541 $392,908 $(180,351)
======== ======== =========
</TABLE>
Income tax expense (benefit) differs from the amounts estimated by applying
the statutory income tax rates to income (loss) before income tax expense
(benefit) as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995 1996
<S> <C> <C> <C>
Federal tax at statutory rate.................. $ 68,316 $238,007 $1,943,496
State tax at statutory rate, net of federal tax
benefits...................................... 25,159 52,864 262,242
Effect of nontaxable interest and dividends.... -- -- (88,000)
Effect of nondeductible expenses............... 101,159 63,791 80,246
Effect of S-corporation election............... (1,118) 81,303 (2,260,499)
Other.......................................... 69,024 (43,058) (117,837)
-------- -------- ----------
$262,541 $392,908 $(180,351)
======== ======== ==========
</TABLE>
F-13
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
---------------------
1995 1996
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................ $ -- $ 6,365
State income taxes..................................... 264,911 157,076
Accrued rent........................................... 61,595 201,240
Alternative minimum tax carryforward................... 36,663 35,426
Other.................................................. -- 8,933
---------- ----------
Total deferred tax assets................................ $ 363,169 $ 409,040
---------- ----------
Deferred tax liabilities:
Built-in gain--resulting from the change in the method
of accounting used for tax purposes from the cash
basis to the accrual basis............................ $ -- $ 120,000
Accrual to cash adjustment............................. 3,902,158 2,984,306
Depreciation--resulting from the difference between
using straight-line and accelerated methods........... 193,335 112,436
Other assets Investments in partnerships............... 226,491 200,532
Other.................................................. 10,663 9,031
---------- ----------
Deferred tax liabilities................................. 4,332,647 3,426,305
---------- ----------
Net deferred tax liabilities............................. $3,969,478 $3,017,265
========== ==========
</TABLE>
9. LONG-TERM INCENTIVE PLAN
On June 30, 1996, the Company adopted a Long-Term Incentive Plan which
provides for common stock, common stock-based, and other performance
incentives to employees, consultants, directors, advisors, and independent
contractors of the Company. The maximum number of shares of common stock which
may be issued and sold under the plan is 2,000,000 shares. As of December 31,
1996, the Company has 459,591 options outstanding at a weighted average
exercise price of $15.53 per share which was equal to the estimated fair
market value of common stock at the dates of grant. As of December 31, 1996 no
options were exercisable. In general, the options are exercisable in three or
four annual installments commencing on the second anniversary of the date of
grant.
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its plan.
Accordingly, no compensation cost has been recognized. Had compensation cost
for the plan been determined based on the fair value at the grant dates for
awards under the plan consistent with the method of FASB Statement 123,
Accounting for Stock-Based Compensation, (FASB 123) the Company's compensation
expense for the year ended December 31, 1996 would have been increased by
$102,000, net of related income taxes. As a result, the Company's 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:
<TABLE>
<CAPTION>
1996
<S> <C>
Pro forma earnings per common and common equivalent share:
As reported................................................ $2,916,241
Pro forma--fair value method............................... $2,814,241
Pro forma net earnings available to common stockholders:
As reported................................................ $ 0.23
Pro forma--fair value method............................... $ 0.22
</TABLE>
F-14
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of calculating compensation cost under FASB 123, the fair value
of each option grant is estimated as of the date of grant using the Black-
Scholes option pricing model. The following weighted average assumptions were
used in the model for grants made in 1996:
<TABLE>
<S> <C>
Expected volatility............................................... 40%
Risk free interest rate........................................... 6.5%
Dividend yield.................................................... 0%
Expected lives.................................................... 3 years
</TABLE>
Additional information on the shares subject to options is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF AVERAGE EXERCISE
SHARES PRICE
<S> <C> <C>
Options outstanding at December 31, 1995...... 0 $ --
Granted....................................... 483,258 15
Exercised..................................... 0 --
Forfeited..................................... (23,667) 12
--------
Options outstanding at December 31, 1996...... 459,591 16
--------
Options exercisable at December 31, 1996...... 0 --
======== ====
Per share weighted average fair value of
options granted during the year.............. $ 3
========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE EXERCISE
RANGE OF EXERCISE PRICES SHARES PRICE
<S> <C> <C>
$12 to $16................................... 341,425 $12
$20 to $24................................... 2,000 22
$24 to $28................................... 116,166 26
-------
459,591 $16
======= ===
</TABLE>
10. EMPLOYEE BENEFIT PLANS
As of January 1, 1996, the Company maintained four profit sharing plans
(Profit Sharing and Savings Plan and Trust, RMI Profit Sharing Plan, Bookman-
Edmonston Profit Sharing Plan, and Robert E. Meyer Consultants, Inc. Profit
Sharing Plan) and two money purchase pension plans (RMI, Inc. Money Purchase
Pension Plan and RMI Utility Services Money Purchase Pension Plan). In
connection with RMI's acquisition of SRC Group and SRC as discussed in Note 3,
RMI assumed the SRC Profit Sharing Plan.
The Company amended to suspend participation, cease benefit accruals and
terminate the Robert E. Meyer Consultants, Inc. Profit Sharing Plan and the
RMI, Inc. Money Purchase Pension Plan in 1996, and the SRC Profit Sharing Plan
effective January 1, 1997. Eligible employees under these plans became 100%
vested upon termination.
Effective July 1996, the Company amended the RMI and Bookman-Edmonston
Profit Sharing Plans converting these plans to the RMI, Inc. 401(k) and Profit
Sharing Plan. Former employees of Robert E. Meyer Consultants, Inc. also
became eligible to participate in the RMI, Inc. 401(k) and Profit Sharing
Plan. SRC employees became eligible to participate in the RMI, Inc. 401(k) and
Profit Sharing Plan effective January 1, 1997.
F-15
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the RMI, Inc. 401(k) and Profit Sharing Plan, eligible employees may
contribute up to 12% of their compensation to these plans and the Company
matches a percentage of employees' contributions as determined by the Board of
Directors. The Company may also make an annual profit sharing contribution at
its discretion. Employees are eligible to participate after age 21 and six
months of service. After the second year of service, vesting of all
contributions made by the Company occurs ratably at 20% per year.
The Profit Sharing and Savings Plan and Trust covers certain employees upon
the completion of one year of service. Participants may contribute up to 15%
of their eligible compensation. The Company, at its discretion, matches
participant contributions as defined within the Savings Plan. In addition, the
Company, at its discretion, makes profit sharing contributions.
Under the RMI Utility Services Money Purchase Pension Plan, the Company
contributes the greater of 5.72% or the OASDI limit of the employees' total
wages. Only union employees may participate and are eligible upon the date of
employment and after the first year of service, contributions made by the
Company vest 100%.
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 plans at any time.
The Company contributions to the various plans which were charged to
operations were the following:
<TABLE>
<CAPTION>
PERIOD ENDED TOTAL
<S> <C>
December 31, 1994.............................................. $1,217,748
December 31, 1995.............................................. 1,384,083
December 31, 1996.............................................. 1,356,014
</TABLE>
11. LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Term loan to bank, variable interest at the bank's prime
rate (8.25% at December 31, 1996) plus 1.0%,
collateralized by substantially all assets of RMI,
monthly principal and interest installments of $36,458,
through April 2000...................................... $ -- $1,458,333
Term loan to bank, variable interest at the bank's prime
rate plus 1.25%, collateralized by substantially all
assets of RMI, paid in May 1996......................... 490,000 --
Term loan to bank, variable interest at the bank's prime
rate plus 1.25%, collateralized by substantially all
assets of RMI, paid in May 1996......................... 262,500 --
Covenant not to compete, payable in equal monthly
installments of $5,000 including imputed interest of
10%, through December 1997.............................. 209,924 56,872
Covenant not to compete, payable in equal annual
installments of $60,000 plus interest of 4%, commencing
July 1997 through July 2001............................. 300,000 300,000
Covenants not to compete, payable in equal monthly
installments from $3,220 to $3,864 plus interest of 6%,
payable through May 1999................................ -- 97,198
Mortgage payable, interest at 10%, collateralized by land
and building, payable in equal monthly installments of
principal and interest of $2,095, due in 2001........... 108,442 94,771
Other.................................................... 4,424 --
---------- ----------
1,375,290 2,007,174
Less portion due within one year......................... 372,587 606,621
---------- ----------
$1,002,703 $1,400,553
========== ==========
</TABLE>
F-16
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future aggregate annual maturities of long-term debt as of December 31,
1996, are as follows:
<TABLE>
<S> <C>
1997................................... $ 606,621
1998................................... 566,134
1999................................... 542,681
2000................................... 228,461
2001................................... 63,277
----------
$2,007,174
==========
</TABLE>
12. RELATED-PARTY TRANSACTIONS
During January 1996, the Company entered into note payable agreements with
two officers. The notes, each with a principal amount of $500,000, bear
interest at a rate of 10%. The notes matured on December 31, 1996 and were
repaid on January 2, 1997. In addition, the Company has notes payable
outstanding to related parties including RMI and Reed employees, officers, and
stockholders. The notes are without collateral, bear interest at rates ranging
from 5% to 10%, and mature during 1997 and 1998.
In May 1996, the Company made an advance of $725,000 to an officer as part
of an employment agreement and entered into a note receivable agreement with
the officer. The note receivable bore interest at a rate of 6%. The note, plus
accrued interest, was repaid on November 8, 1996.
During July 1996, the Company entered into an agreement with its founding
shareholder, who, at that time, was the beneficial owner of 15% of the
Company's common stock, to redeem 1,714,285 shares of the shareholder's common
stock in exchange for a promissory note in the amount of $7,975,000. The
redemption value per share was negotiated by the Company's other executive
officers, who collectively owned the remaining 85% of the Company's common
stock at the time of the agreement. The Company redeemed the stock on October
4, 1996 in accordance with the agreement and repaid the promissory note within
30 days of the redemption.
RMI leases office space from a company in which a related party holds a
minority interest. Rent expenses amounted to $74,412 for the year ended
December 31, 1996.
13. SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES AND CASH FLOW
INFORMATION
During 1996, RMI acquired SRC and SRC Group (Note 3) which included non-
compete agreements with the former owners. RMI recorded the fair value of
intangible assets and notes payable totaling $115,934. Additionally, as part
of these acquisitions RMI recorded equipment under capital leases of $207,484
and recorded an obligation under capital lease of the same amount.
During 1995, the Company issued 59,366 shares of common stock in exchange
for 950 shares of Bookman Edmonston Engineering, Inc. stock valued at
$174,727. As a result, the minority interest was eliminated as of the date of
the exchange.
During 1995, RMI acquired two companies which included non-compete
agreements with the former owners. RMI recorded the fair value of intangible
assets and notes payable totaling $481,299.
In 1995, Metzler & Associates, exchanged like-kind property amounting to
$28,500.
14. CONTINGENCIES
The Company is currently defending two lawsuits regarding the preparation of
engineering reports that were commenced against RMI prior to its acquisition
by the Company. Management believes that the subsidiary acted
F-17
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
in accordance with their contract and is not liable. Although it is too early
to conclude on the outcome of these actions, management believes that it is
unlikely that the outcome will have a material impact on the financial
condition of the Company. Management intends to defend these actions
vigorously.
15. SUBSEQUENT EVENTS (UNAUDITED)
During 1997, the Company issued 42,181 shares of common stock for all of the
outstanding common stock of Burgess Consulting, Inc. (BCI). The stockholder's
equity and operations of BCI were not material in relation to those of the
Company. As such, the Company recorded the combination by restating
stockholders' equity as of January 1, 1997 without restating prior period
statements of operations to reflect the pooling-of-interest combination.
Also during 1997, the Company's Board of Directors approved an amendment to
the Company's Amended and Restated Certificate of Incorporation to increase
the authorized Common Stock from 15.0 million shares to 75.0 million shares
and an amendment to the Company's Long-Term Incentive Plan to increase the
number of shares available for grants thereunder from 1.3 million shares to
2.0 million shares. The Company's shareholders have not yet approved such
increases. These increases in the number of shares have been included in the
accompanying consolidated financial statements.
F-18
<PAGE>
THE METZLER GROUP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER
30,
1997
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents........................................ $20,611,754
Accounts receivable, net......................................... 19,078,159
Prepaid expenses................................................. 1,054,218
Other current assets............................................. 326,112
-----------
Total current assets........................................... 41,070,243
Property and equipment, net........................................ 2,487,504
Intangible assets.................................................. 743,710
Other assets....................................................... 250,921
-----------
Total assets................................................... $44,552,378
===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
Current liabilities:
Book overdraft................................................... $ --
Line of credit................................................... 1,191,924
Notes payable to related parties................................. --
Current portion of long-term debt................................ 183,780
Accounts payable................................................. 1,941,442
Accrued liabilities.............................................. 860,400
Accrued compensation and related costs........................... 3,277,944
Income taxes payable............................................. 1,993,405
Deferred income taxes............................................ 425,545
Other current liabilities........................................ 594,141
-----------
Total current liabilities...................................... 10,468,581
Long-term debt, less current maturities............................ 369,724
Notes payable to related parties, less current portion............. --
Deferred income taxes.............................................. 2,639,268
Other noncurrent liabilities....................................... 257,624
-----------
Total liabilities.............................................. 13,735,197
-----------
Stockholders' equity:
Preferred stock, $.001 par value; 3,000,000 shares authorized, no
shares issued or outstanding...................................... --
Common stock, $.001 par value; 75,000,000 shares authorized,
13,287,449 shares issued and outstanding ......................... 13,287
Additional paid-in capital......................................... 21,266,146
Retained earnings.................................................. 9,537,748
-----------
Total stockholders' equity..................................... 30,817,181
-----------
Total liabilities and stockholders' equity......................... $44,552,378
===========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
F-19
<PAGE>
THE METZLER GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1996 1997 1996 1997
<S> <C> <C> <C> <C>
Revenues................... $16,189,157 $21,139,574 $47,160,440 $59,417,571
Cost of services........... 10,824,079 12,066,962 30,776,522 35,169,117
----------- ----------- ----------- -----------
Gross profit............... 5,365,078 9,072,612 16,383,918 24,248,454
Merger related costs....... -- 1,311,959 -- 1,311,959
Selling, general and
administrative expenses... 3,885,602 4,295,668 10,651,889 13,233,069
----------- ----------- ----------- -----------
Operating income........... 1,479,476 3,464,985 5,732,029 9,703,426
Other (income) expense,
net....................... 141,704 (190,633) 290,812 (619,811)
----------- ----------- ----------- -----------
Income before income tax
expense (benefit)......... 1,337,772 3,655,618 5,441,217 10,323,237
Income tax expense
(benefit)................. (86,080) 1,327,424 (71,342) 3,851,879
----------- ----------- ----------- -----------
Net income................. $ 1,423,852 $ 2,328,194 $ 5,512,559 $ 6,471,358
=========== =========== =========== ===========
Pro forma income data :
Net income as reported..... $ 1,423,852 $ 2,328,194 $ 5,512,559 $ 6,471,358
Pro forma adjustments to
income tax expense........ (602,759) -- (1,799,403) --
Pro forma adjustments to
executive compensation
expense................... -- -- (1,019,460) --
----------- ----------- ----------- -----------
Pro forma net income....... $ 821,093 $ 2,328,194 2,693,696 6,471,358
=========== =========== =========== ===========
Pro forma net income per
share..................... $ 0.07 $ 0.18 $ 0.22 $ 0.49
=========== =========== =========== ===========
Shares used in computing
pro forma net income per
share..................... 12,458,781 13,287,449 12,458,781 13,285,115
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
F-20
<PAGE>
THE METZLER GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1997
<S> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 5,512,559 $ 6,471,358
Adjustments to reconcile net income to net cash
provided by operating activities, net of
acquisition:
Depreciation and amortization..................... 737,501 769,893
Loss on sale of property and equipment............ 665 --
Deferred income taxes............................. (1,218,690) (18,452)
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable............................. (2,809,909) (4,718,923)
Prepaid expenses and other current assets....... (867,800) (725,162)
Accounts payable and accrued liabilities........ 159,575 (647,780)
Accrued compensation and related costs.......... 1,988,107 1,480,268
Other current liabilities....................... 861,129 45,648
Taxes payable................................... (77,916) 1,222,248
----------- -----------
Net cash provided by operating activities........... 4,285,221 3,879,098
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment................ (803,617) (537,969)
Other, net........................................ (147,773) (83,201)
Cash paid for acquisitions........................ (313,000) --
----------- -----------
Net cash used in investing activities............... (1,264,390) (621,170)
----------- -----------
Cash flows from financing activities:
Issuance of common stock.......................... -- 155,562
Repurchase of common stock........................ (618,476) --
Reduction in book overdraft....................... -- (642,124)
Issuance of notes payable......................... 1,128,592 --
Principal payments on notes payable............... (324,082) (1,453,670)
Payments for obligations under capital lease...... (35,902) (57,802)
Net repayments of lines of credit................. (106,323) (493,209)
Issuance of notes payable to officers............. 1,000,000 --
Repayment of notes payable to officers............ (536,340) (1,823,305)
Issuance of notes receivable to officers.......... (744,848) --
Purchase of dissenting shares issued in business
combinations..................................... -- (8,867,891)
Distribution to former S-corporation stockholders. (2,200,000) (3,000,000)
----------- -----------
Net cash used in financing activities............. (2,437,379) (16,182,439)
----------- -----------
Net increase (decrease) in cash................... 583,452 (12,924,511)
Cash and cash equivalents at beginning of period.... 701,206 33,536,265
----------- -----------
Cash and cash equivalents at end of period.......... $ 1,284,658 $20,611,754
=========== ===========
Supplemental information:
Interest payments................................. $ 369,649 $ 262,561
Income tax payments............................... $ 165,763 $ 2,595,077
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
F-21
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1997
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of The
Metzler Group, Inc. (the "Company") have been prepared pursuant to the rules
of the Securities and Exchange Commission and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The information furnished herein includes all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of results for these interim
periods.
The results of operations for the nine months ended September 30, 1997 are
not necessarily indicative of the results to be expected for the entire fiscal
year ending December 31, 1997.
The consolidated financial statements include the accounts of The Metzler
Group, Inc. and its subsidiaries. As discussed in Note 3, during the three
months ended September 30, 1997, the Company entered into business
combinations with Resource Management International, Inc. ("RMI") and Reed
Consulting Group, Inc. ("Reed"). Each of these transactions was accounted for
as a pooling of interests and, accordingly, the consolidated financial
statements have been restated as if the combining companies had been combined
for all periods presented.
In addition, these financial statements should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto for
the year ended December 31, 1996 included in the Annual Report on Form 10-K
filed by the Company with the Securities and Exchange Commission on March 31,
1997, which reflect the historical financial statements of the Company prior
to the business combinations discussed in Note 3, as well as with the interim
reports on Form 8-K filed by the Company with the Securities and Exchange
Commission on August 14th.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pro Forma Net Income Per Share
Net income per common and common equivalent share is computed based on the
weighted average of common and common equivalent shares (stock options)
outstanding during the period.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common and common equivalent shares issued during the twelve months
immediately preceding the initial public offering date (using the treasury
stock method and the initial public offering price per share) have been
included in the calculation of common and common equivalent shares as if they
were outstanding for all periods presented.
The pro forma adjustments during the nine month period ended September 30,
1996 reflect the impact of a compensation plan effective July 1, 1996. The pro
forma effect of this compensation plan was an increase in officer compensation
of $1,019,460 for the nine month period ended September 30, 1996.
The pro forma adjustments for the three and nine month periods ended
September 30, 1996 include additional federal and state income tax expense of
$602,759 and $1,799,403, respectively. This represents the additional tax that
would have been required had one of the Company's subsidiaries not made an S-
corporation election effective January 1, 1996, partially offset by a
reduction in taxes that would have occurred had the Company adopted the
officers compensation plan referred to above.
F-22
<PAGE>
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. BUSINESS COMBINATIONS
On July 31, 1997, the Company issued 2,137,178 shares of common stock for
substantially all the outstanding common stock of RMI. Additionally, on August
15, 1997, the Company issued 518,400 shares of common stock for substantially
all of the outstanding common stock of Reed. Each of these transactions was
accounted for as a pooling of interests and, accordingly, the consolidated
financial statements have been restated as if the combining companies had been
combined for all periods presented.
The Company's consolidated statements of operations for the three month and
nine month periods ended September 30, 1996 have been restated to reflect
revenues of $10,586,472 and $30,701,108, respectively, for the combined
operations of RMI and Reed. The Company's consolidated statements of
operations for the nine months ended September 30, 1997 include revenues from
RMI and Reed totaling $24,195,771 through the six months ended June 30, 1997
and $4,710,311 for the period from July 1, 1997 through the dates of
acquisition.
The Company's restated consolidated statements of operations for the three
month and nine month periods ended September 30, 1996 reflect net losses of
$122,737 and $174,099, respectively, for the combined operations of RMI and
Reed. The Company's restated consolidated statements of operations for the
nine months ended September 30, 1997 include net income from RMI and Reed
totaling $1,112,130 through the six months ended June 30, 1997 and $416,558
for the period from July 1, 1997 through the dates of acquisition.
The Company incurred significant costs and expenses in connection with these
acquisitions, including legal and accounting, and other various expenses.
These costs and expenses were recorded in the statement of operations during
the third quarter of 1997.
NOTE 4. SUBSEQUENT EVENT
Also during 1997, the Company's Board of Directors approved an amendment to
the Company's Amended and Restated Certificate of Incorporation to increase
the authorized Common Stock from 15.0 million shares to 75.0 million shares
and an amendment to the Company's Long-Term Incentive Plan to increase the
number of shares available for grants thereunder from 1.3 million to 2.0
million shares. The Company's stockholders have not yet approved such
increases. These increases in the number of shares have been included in the
accompanying consolidated financial statements.
F-23
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELLING
STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CRE-
ATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANYTIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 13
Price Range of Common Stock and Dividend Policy........................... 13
Selected Consolidated Financial Data...................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 15
Business.................................................................. 21
Management................................................................ 30
Selling Stockholders...................................................... 32
Underwriting.............................................................. 34
Incorporation of Certain Documents by Reference........................... 36
Available Information..................................................... 36
Legal Matters............................................................. 37
Experts................................................................... 37
Index to Consolidated Financial Statements................................ F-1
</TABLE>
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5,000,000 SHARES
[LOGO] METZLER GROUP
MANAGEMENT CONSULTANTS
COMMON STOCK
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PROSPECTUS
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DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS
BANCAMERICA ROBERTSON STEPHENS
WILLIAM BLAIR & COMPANY
FEBRUARY 25, 1998
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