<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file no. 0-28830
The Metzler Group, Inc.
-----------------------
(Exact name of Registrant as specified in its charter)
Delaware 36-4094854
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
520 Lake Cook Road, Suite 500, Deerfield, Illinois 60015
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(Address of principal executive offices, including zip code)
(847) 914-9100
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
----------------------------------------
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 13, 1998, 22,141,931 shares of the Registrants common stock, par
value $.001 per share ("Common Stock"), were outstanding. The aggregate market
value of shares of Common Stock held by non-affiliates, based upon the closing
sale price of the stock on the Nasdaq National Market on March 13, 1998, was
approximately $625,500,000. All reference to the Registrants common stock, par
value $.001 in this Form 10-K, unless otherwise noted, have been restated to
reflect a 3-2 stock split being effected in the form of a stock dividend. The
stock split was declared by the Board of Directors on March 4, 1998 and is
payable on or about April 1, 1998 to the owners of record at the close of
business on March 18, 1998.
The Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held May 20, 1998 is incorporated by reference into Part III of
this Annual Report on Form 10-K.
<PAGE>
PART I
Item 1 - Business
- -----------------
General
The Metzler Group, Inc. (the "Company" or "Metzler") 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 Metzler Group acts as a holding company that manages five direct
wholly-owned subsidiaries: Metzler & Associates, Inc., the company's initial
operating subsidiary, and four companies acquired during 1997. 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; and Sterling Consulting Group, Inc.
("Sterling") as of December 1997. For financial reporting purposes, each of
these transactions (the "Acquisitions") was accounted for using the pooling of
interests method. The consolidated financial statements of the Company included
herein 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.
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.
Services
The Company has performed consulting assignments for more than 200 utility
industry clients. The Company's clients include the 50 largest investor-owned
electric utilities (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.
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.
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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; (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
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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.
- 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.
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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.
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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.
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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. 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.
Item 2 - Properties
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The Company's headquarters are currently located in 10,000 square feet of
leased office space in Deerfield, Illinois. 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.
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The Company maintains principal offices in the following locations:
United States International
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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
Item 3 - Legal Proceedings
- --------------------------
The Company is currently defending a lawsuit which was commenced against RMI
prior to its acquisition by the Company. RMI is the defendant in an action
involving approximately $1.1 million in stated claims and other unspecified
compensatory damages that arose in connection with a co-generation construction
project in Connecticut with respect to which RMI provided consulting services.
The complaint also seeks punitive damages. The plaintiff claims that the RMI
consultant was hired with broad responsibilities for the design, construction
and budgeting of a proposed $1.0 million co-generation project that reached $2.0
million before it was abandoned. The plaintiff has subsequently filed for
bankruptcy. The Company believes that the plaintiff's claims are beyond the
scope of RMI's engagement responsibilities and that the Company has meritorious
defenses to this claim. RMI and the plaintiffs have reached a tentative
settlement which does not involve the payment by RMI of any material amount. The
settlement is subject to approval by the backruptcy court. Because this lawsuit
was identified at the time the Company acquired RMI, a specific indemnification
escrow was established with 85,105 shares, escrowed at a price of $23.17 per
share, the market value at the date of consumation of the acquisition. However,
no assurance can be given that the settlement will be approved or that, if the
proposed settlement is not finalized, the value of the escrowed shares will be
sufficient to cover damages that the Company may ultimately be responsible for
in connection with this lawsuit.
From time to time, the Company is party to other lawsuits, none of which
the Company believes are material.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At a special meeting held November 21, 1997 at the Company's headquarters,
the Company submitted for approval to its stockholders resolutions to (i) amend
the Company's amended and restated Certificate of Incorporation to increase the
authorized Common Stock to 75,000,000 shares and (ii) increase the number of
shares of the Company's Common Stock available for issuance pursuant to the
Incentive Plan to 3,000,000, and to provide for adjustments from time to time in
the number of shares available for issuance pursuant to the Incentive Plan so
that the number of shares available for issuance under the Incentive Plan
remains at a constant 15% of the number of outstanding shares of the Company's
Common Stock.
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<PAGE>
The results of those votes are as follows:
<TABLE>
<CAPTION>
Number of Votes
----------------------------------------------
<S> <C> <C> <C>
For Against Withheld
To amend the Company's
Amended and Restated
Certificate of
Incorporation to increase 15,091,221 903,740 1,050
the authorized Common Stock
to 75,000,000 shares
To increase the number of
shares of the Company's
Common Stock available for
issuance pursuant to the
Incentive Plan to
3,000,000, and to provide
for adjustments from time
to time in the number of
shares available for
issuance pursuant to the
Incentive Plan so that the
number of shares available
for issuance under the
Incentive Plan remains at a
constant 15% of the number
of outstanding shares of
the Company's Common Stock 15,001,772 993,189 1,050
</TABLE>
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Part II
Item 5 - Market for the Registrant's Common Stock and Related Stockholder
- -------------------------------------------------------------------------
Matters
- -------
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "METZ". The following table shows the range of reported high and low
sales information for the Company's Common Stock, for the fiscal periods
indicated, as reported on the Nasdaq National Market. (See Note 14 to
Consolidated Financial Statements).
<TABLE>
<CAPTION>
High Low High Low
------- ------- ---- ---
<S> <C> <C> <C> <C> <C>
Fiscal 1997: Fiscal 1996:
January - March $23.17 $14.00 January March $ N/A $ N/A
April - June $21.84 $13.17 April - June $ N/A $ N/A
July September $27.42 $20.67 July - September $ N/A $ N/A
October - December $27.67 $23.00 October - December $23.00 $13.33
</TABLE>
The Company had 33 holders of record of its Common Stock at March 13, 1998
and approximately 1,032 beneficial owners. The Company has never paid a cash
dividend on its Common Stock and does not expect to pay a cash dividend on its
Common Stock in the foreseeable future.
Item 6 - Selected Financial Data
- --------------------------------
The selected financial data set forth below should be read in conjunction
with the Company's Financial Statements and related Notes thereto and with
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
Years Ended December 31,(2)
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1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues................................. $83,661,306 $63,553,337 $55,817,351 $47,103,998 $46,175,370
Cost of services......................... 49,567,507 42,315,400 37,085,413 32,059,131 31,344,460
----------- ----------- ----------- ----------- -----------
Gross profit............................. 34,093,799 21,237,937 18,731,938 15,044,867 14,830,910
Merger related costs..................... 1,311,959 -- -- -- --
Selling, general and administrative
Expenses................................ 18,107,760 15,609,906 17,811,846 14,548,285 14,356,299
----------- ----------- ----------- ----------- -----------
Operating income......................... 14,674,080 5,628,031 920,092 496,582 474,611
Other expense (income), net.............. (799,495) 73,278 240,819 300,309 43,122
----------- ----------- ----------- ----------- -----------
Income before income tax
Expense................................. 15,473,575 5,554,753 679,273 196,273 431,489
Income tax expense (benefit)............. 5,786,148 (180,351) 392,908 262,541 546,393
----------- ----------- ----------- ----------- -----------
Net income (loss)........................ $ 9,687,427 $ 5,735,104 $ 286,365 $ (66,268) $ (114,904)
=========== =========== =========== =========== ===========
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
Pro forma net income(1).................. $ 2,916,241 $ 1,951,541
=========== ===========
Pro forma or net income per
basic share............................. $ .48 $ .15 $ .10
=========== =========== ===========
Pro forma or net income per
dilutive share ......................... $ .47 $ .15 $ .10
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,(2)
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1997 1996 1995 1994 1993
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents 21,572,740 $33,536,265 $ 701,206 $ 278,428 $ 132,107
Working capital 31,565,558 36,428,859 5,202,147 3,945,584 3,761,717
Total assets 50,763,973 52,269,105 16,838,683 14,962,044 14,856,927
Long-term debt, less
current portion 318,757 1,400,553 1,002,703 832,563 668,273
Total stockholders' equity 32,907,103 35,949,374 3,646,012 3,173,714 3,282,962
</TABLE>
(1) Pro forma net income and net income per share for the years ended December
31, 1996 and 1995 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.
(2) The amounts above have been restated to reflect the transactions accounted
for as poolings of interests as described in Note 3 of Notes to
Consolidated Financial Statements.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
Statements included in the Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in
nature, are intended to be, and are hereby identified as, "forward-looking
statements" for purposes of the safe harbor provided by Section 21E of the
Securities Exchange Act of 1934, as amended by Public Law 104-6. When used in
this section, the words "anticipate," "believe," "intends", "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 cautions
readers that forward-looking statements, including without limitation, those
relating to the Company's future business prospects, revenues, working capital,
liquidity, and income, are subject to certain risks and uncertainties that could
cause actual results to differ materially from those indicated in the forward
looking statements, due to several important factors herein identified, among
others, and other risks and factors identified from time to time in the
Company's reports with the SEC.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations relates to the Consolidated Financial Statements included
in this annual report on Form 10-K, which present Metzler & Associates, RMI and
Reed on a consolidated basis 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 have 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 63,272
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
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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.
As of July 31, 1997, the Company acquired substantially all of the common
stock of RMI in exchange for 3,205,767 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 were 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.
As of August 15, 1997, the Company acquired substantially all of the common
stock of Reed in exchange for 777,600 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.
As of December 1, 1997, the Company acquired substantially all of the
common stock of Sterling in exchange for 578,727 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 were 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 & Co., Inc. ("Reed-Stowe") in exchange for 45,000 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.
Results of Operations
The following table sets forth, for the periods indicated, selected
statement of operations data as a percentage of revenues:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
<S> <C> <C> <C>
Revenues............................................... 100.0% 100.0% 100.0%
Cost of services....................................... 59.2 66.6 66.5
----- ----- -----
Gross profit........................................... 40.8 33.4 33.5
Merger related costs................................... 1.6 -- --
Selling, general and administrative expenses........... 21.6 24.6 31.9
----- ----- -----
Operating income....................................... 17.6 8.8 1.6
Other expense (income), net............................ (0.9) 0.1 0.4
----- ----- -----
Income before income tax expense (benefit)............. 18.5 8.7 1.2
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Income tax expense (benefit)............ 6.9 (0.3) 0.7
----- ----- -----
Net income.............................. 11.6% 9.0% 0.5%
===== ===== =====
</TABLE>
1997 Compared to 1996
Revenues. Revenues increased 31.6% to $83.7 million in 1997 from $63.6
million in 1996. This increase was 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. Gross profit grew 60.5% to $34.1 million in 1997 from $21.2 million in
1996. Gross profit as a percentage of revenues was 40.8% in 1997 compared to
33.4% in 1996. The improvement in gross profit margins was driven primarily by
increased utilization of the Company's professional consultants.
Merger Related Costs. During 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 1997 increased approximately 16.0% to $18.1 million
from $15.6 million in 1996. The pro forma adjustments for 1996 include an
increase in officer compensation of $1.0 million 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 1997 increased
approximately 9.0% to $18.1 million from the pro forma $16.6 million for 1996.
This increase is largely attributable to the overall higher business volume in
1997, partially offset by economies of scale and increased efficiency in certain
support functions.
Other Expense (Income). In 1997 interest income increased to $1.1 million
due to average cash and cash equivalents outstanding of $27.6 million in 1997.
The cash and cash equivalents balance primarily relates to the proceeds from the
initial public offering that was completed in October,1996.
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
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. The pro forma tax adjustment for this
period includes additional federal and state taxes that would have been required
had the S-corporation election not been in effect and the net tax benefit
relating to the pro forma compensation expense adjustment described above.
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
-14-
<PAGE>
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.
Unaudited Quarterly Results
The following tables set forth certain unaudited quarterly operating
information for each of the 9 quarters ending December 31, 1997. These data have
been prepared on the same basis as the audited financial statements contained
elsewhere in this Form 10-K 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.
-15-
<PAGE>
<TABLE>
<CAPTION>
Quarters Ended
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996 1997 1997 1997 1997
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $15,318 $15,654 $16,189 $16,392 $18,084 $20,194 $21,140 $24,243
Cost of services.............. 9,609 10,344 10,824 11,538 11,154 11,948 12,067 14,399
Gross profit.................. 5,709 5,310 5,365 4,854 6,930 8,246 9,073 9,844
Merger related costs.......... -- -- -- -- -- -- 1,312 --
Selling, general and
Administrative
Expenses..................... 3,282 3,485 3,885 4,958 4,256 4,681 4,296 4,874
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)....... 2,427 1,825 1,480 (104) 2,674 3,565 3,465 4,970
Other expense (income),
Net.......................... 46 102 142 (218) (220) (209) (190) (180)
------- ------- ------- ------- ------- ------- ------- -------
Income before income tax
expense (benefit)............ 2,381 1,723 1,338 114 2,894 3,774 3,655 5,150
Income tax expense
(benefit).................... 167 (152) (86) (109) 1,088 1,437 1,327 1,934
------- ------- ------- ------- ------- ------- ------- -------
Net income.................... $ 2,214 $ 1,875 $ 1,424 $ 223 $ 1,806 $ 2,337 $ 2,328 $ 3,216
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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
Operating activities provided net cash flows of $6.4 million, $5.9 million
and $1.2 million in 1997, 1996 and 1995, respectively. In 1997, the cash flow
from operations is primarily the result of net income, increases in accounts
payable, accrued liabilities and income taxes payable balances offset by an
increase in accounts receivable. The increase in accounts receivable is
primarily due to a 48% increase in revenue in the fourth quarter of 1997 versus
the corresponding period in the prior year.
-16-
<PAGE>
Investing activities used net cash flows of $1.7 million, $1.8 million and
$.8 million in 1997, 1996 and 1995, respectively. Historically investing
activities have not required significant cash flows.
Net cash (used in) provided by financing activities was ($16.7) million,
$28.8 million and ($.1) million in 1997, 1996 and 1995, respectively. In 1997,
the Company completed the acquisition of RMI in a transaction accounted for as a
pooling of interests. In August 1997, the Company completed another
acquisition of privately owned Reed in a transaction also accounted for as a
pooling of interests. In connection with these acquisitions and the Sterling
acquisition, the Company made cash payments totaling approximately $9.7 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 long term debt and line of credit
obligations of RMI.
Also, in 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 former S-corporation shareholders and included in their
personal taxable income. These amounts were distributed to the former S-
Corporation stockholders in 1997.
The Company believes that the cash and cash equivalents as of year-end, the
net proceeds of approximately $37 million from the secondary stock offering
completed in February 1998, together with funds generated by operations, will
provide adequate cash to fund its anticipated cash needs, which may include
future acquisitions of complementary businesses, at least through the next
twelve months. Thereafter, the Company anticipates that its cash requirements
related to future operations and potential acquisitions will be funded with cash
generated from operations and short-term borrowings. The Company currently
anticipates that it will retain all of its earnings for development of the
Company's business and does not anticipate paying any cash dividends in the
foreseeable future.
The Company believes that the effect of the millenium on its internal
information systems will have an immaterial impact on the Company.
Recently Issued Financial Accounting Standards
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," in June 1997. In addition to net income, comprehensive income includes
items recorded directly to stockholders' equity such as the income tax benefit
related to the exercise of certain stock options. This statement establishes
new standards for reporting and displaying comprehensive income and its
components in a full set of general purpose financial statements. This
statement is effective for fiscal years beginning after December 15, 1997.
Adoption of this standard will only require additional financial statement
disclosure detailing the Company's comprehensive income.
In June of 1997, the FASB also issued SFAS No. 131,"Disclosures about
Segments of an Enterprise and Related Information." 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,
-17-
<PAGE>
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.
Item 8 - Consolidated Financial Statements and Supplemental Data
- ----------------------------------------------------------------
The Consolidated Financial Statements of the Company are annexed to the
report as pages F-1 through F-17. An index to such materials appears on page F-
1.
Item 9 - Changes in and Disagreement with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Discussions
- ---------------------
Not applicable
-18-
<PAGE>
Part III
The information required by this Part III will be provided in the
definitive proxy statement for the Company's 1997 Annual Meeting of Stockholders
(involving the election of directors), which definitive proxy statement (the
"Proxy Statement") will be filed pursuant to Regulation 14A no later than 120
days following the Company's fiscal year ended December 31, 1997, and is
incorporated herein by this reference to the extent provided below.
Item 10 - Directors and Executive Officers of the Registrant
- -------------------------------------------------------------
Information in response to this item is incorporated by reference herein
from the section of the Proxy Statement captioned "Board of Directors - Director
Compensation," "Management Compensation" and "Compliance with Section 16(a) of
the Exchange Act."
Item 11 - Executive Compensation
- --------------------------------
Information in response to this item is incorporated by reference herein
from the section of the Proxy Statement captioned "Board of Directors -
Director Compensation" and "Management Compensation."
Item 12 - Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Information in response to this item is incorporated by reference herein
from the section of the Proxy Statement captioned "Stock Ownership of Directors,
Executive Officers and Principal Holders."
Item 13 - Certain Relationships and Related Transactions
- --------------------------------------------------------
Information in response to this item is incorporated by reference herein
from the section of the Proxy Statement captioned "Certain Relationships and
Related Transactions."
Part IV
Item 14 - Exhibits, Financial Statements and Reports on Form 8-K
- -----------------------------------------------------------------
The consolidated financial statements filed as part of this report are
listed in the accompanying Index to Consolidated Financial Statements. The
exhibits filed as part of this report are listed in the accompanying Exhibit
Index.
On October 14, 1997, the Company filed with the Securities and Exchange
Commission, an interim report on Form 8-K/A showing the condensed consolidated
financial statements of Resource Management International, Inc. and subsidiaries
as of June 30, 1997.
On October 14, 1997, the Company filed with the Securities and Exchange
Commission, an interim report on Form 8-K/A showing the consolidated financial
statements of Resource Management International, Inc. and subsidiaries as of
December 31, 1997 and the pro forma condensed combining financial statements as
of December 31, 1997.
-19-
<PAGE>
On October 21, 1997, the Company filed with the Securities and Exchange
Commission, an amended interim report on Form 8-K/A showing the condensed
consolidated proforma financial statements of Resource Management International,
Inc. and subsidiaries as of June 30, 1997.
On October 21, 1997, the Company filed with the Securities and Exchange
Commission, an amended interim report on Form 8-K/A showing the consolidated
financial statements of Resource Management International, Inc. and subsidiaries
as of December 31, 1997 and the pro forma condensed combining financial
statements as of December 31, 1997.
-20-
<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, 1997 and 1996........................................ F-3
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995....... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and
1995........................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995....... F-6
Notes to Consolidated Financial Statements....................................................... F-7
</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, 1997 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, 1997. 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 27 percent and 24 percent
as of December 31, 1997 and 1996, respectively, and total revenues constituting
53 percent, 56 percent and 67 percent for each of the years in the three-year
period ended December 31, 1997, 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
(signed) KPMG Peat Marwick LLP
February 11, 1998, except for Note 14, as
to which the date is March 5, 1998
Chicago, Illinois
F-2
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $21,572,740 $33,536,265
Accounts receivable, net of the allowance for doubtful accounts of
$1,254,238 and $706,000 in 1997 and 1996, respectively.................. 23,629,870 14,184,458
Prepaid and other current assets.......................................... 1,359,304 655,168
----------- -----------
Total current assets................................................... 46,561,914 48,375,891
Net property and equipment, net of accumulation depreciation of $7,164,824 2,885,256 2,713,793
and $6,343,404 in 1997 and 1996, respectively..............................
Other assets................................................................ 1,316,803 1,179,421
----------- -----------
Total assets........................................................... $50,763,973 $52,269,105
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit........................................................... $ 1,062,179 $ 1,685,133
Notes payable to related parties, current portion......................... -- 1,734,580
Long-term debt, current portion........................................... 208,309 606,621
Accounts payable.......................................................... 3,760,853 3,341,799
Accrued liabilities....................................................... 1,658,271 749,947
Accrued compensation and related costs.................................... 2,608,983 1,797,676
Income taxes payable...................................................... 3,537,585 771,157
Deferred income taxes..................................................... 585,335 711,626
Other current liabilities................................................. 1,574,841 548,493
----------- -----------
Total current liabilities.............................................. 14,996,356 11,947,032
Notes payable to related parties, less current portion...................... -- 88,725
Long-term debt, less current portion........................................ 318,757 1,400,553
Deferred income taxes....................................................... 2,162,944 2,305,639
Other non-current liabilities............................................... 378,813 577,782
----------- -----------
Total liabilities...................................................... 17,856,870 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; 20,557,359
and 20,201,637 shares issued and outstanding in 1997 and 1996,
respectively............................................................ 20,557 20,202
Additional paid-in capital................................................ 20,724,661 30,007,556
Cumulative translation adjustment......................................... (56,612) 6,066
Retained earnings......................................................... 12,218,497 5,915,550
----------- -----------
Total stockholders' equity............................................. 32,907,103 35,949,374
----------- -----------
Total liabilities and stockholders' equity............................. $50,763,973 $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,
-------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Revenues.......................................................... $83,661,306 $63,553,337 $55,817,351
Cost of services.................................................. 49,567,507 42,315,400 37,085,413
----------- ----------- -----------
Gross profit.................................................... 34,093,799 21,237,937 18,731,938
Merger related costs.............................................. 1,311,959 -- --
Selling, general and administrative expenses...................... 18,107,760 15,609,906 17,811,846
----------- ----------- -----------
Operating income................................................ 14,674,080 5,628,031 920,092
----------- ----------- -----------
Other expense (income):
Interest expense................................................ 44,374 578,642 247,971
Interest income................................................. (1,114,759) (370,750) (27,125)
Other, net...................................................... 270,890 (134,614) 19,973
----------- ----------- -----------
Total other expense.......................................... (799,495) 73,278 240,819
----------- ----------- -----------
Income before income tax expense (benefit)........................ 15,473,575 5,554,753 679,273
Income tax expense (benefit).................................... 5,786,148 (180,351) 392,908
----------- ----------- -----------
Net income ....................................................... $ 9,687,427 $ 5,735,104 $ 286,365
=========== =========== ===========
Pro forma income data (unaudited):
Net income as reported.......................................... $ 5,735,104 $ 286,365
Pro forma adjustments to executive compensation expense......... (1,019,460) 2,775,293
Pro forma adjustments to income tax expense..................... (1,799,403) (1,110,117)
----------- -----------
Pro forma net income......................................... 2,916,241 1,951,541
=========== ===========
Pro forma or net income per basic share....................... $0.48 $0.15 $0.10
=========== =========== ===========
Pro forma or net income per dilutive share.................... $0.47 $0.15 $0.10
=========== =========== ===========
Basic shares used in computing pro forma or net income per share.. 19,982,028 19,259,046 19,032,677
Diluted shares used in computing pro forma or net income per share 20,468,571 19,445,210 19,032,677
</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 Cumulative Total
--------------- ---------------------- Additional translation Retained stockholders'
Shares Amount Shares Amount paid-in capital adjustment earnings equity
------- ------ ----------- --------- --------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Retroactive restatement
for a three-for-two
common stock split
effective April 1,
1998.................... -- -- 6,379,72 6,380 (6,380) -- -- --
------- ------ ---------- ------- ----------- ----------- ----------- -----------
Balance at December 31,
1995.................... -- -- 19,139,187 19,140 851,126 -- 2,775,746 3,646,012
Net income............... -- -- -- -- -- -- 5,735,104 5,735,104
Purchase and retirement
of common stock......... -- -- (2,899,059) (2,899) (8,156,963) -- (395,300) (8,555,162)
Issuance of common
stock................... -- -- 3,961,509 3,961 37,313,393 -- -- 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.................... -- -- 20,201,637 20,202 30,007,556 6,066 5,915,550 35,949,374
Net income............... -- -- -- -- -- -- 9,687,427 9,687,427
Purchase and retirement
of common stock......... -- -- (377,733) (378) (9,678,701) -- -- (9,679,079)
Issuance of common
stock................... -- -- 733,455 733 395,806 -- 102,520 499,059
S-corporation
Distributions........... -- -- -- -- -- -- (3,487,000) (3,487,000)
Foreign currency
translation adjustment.. -- -- -- -- -- (62,678) -- (62,678)
------- ------ ---------- ------- ----------- ----------- ----------- -----------
Balance at December 31,
1997.................... -- -- 20,557,359 $20,557 $20,724,661 $(56,612) $12,218,497 $32,907,103
======= ====== ========== ======= =========== =========== =========== ===========
</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,
-------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 9,687,427 $ 5,735,104 $ 286,365
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization...................................... 917,268 1,063,986 1,071,984
Loss on sale of property and equipment............................. -- 71,225 93,115
Provision for bad debts............................................ 548,238 253,306 815,860
Deferred income taxes.............................................. (268,986) (952,213) 194,394
Changes in assets and liabilities, net of acquisitions:
Accounts receivable............................................. (9,993,650) (1,768,689) (1,997,479)
Prepaid expenses and other assets............................... (458,832) (135,395) (229,546)
Accounts payable and accrued liabilities........................ 1,327,378 1,517,756 140,046
Accrued compensation and related costs.......................... 811,307 (840,873) 662,592
Income taxes payable............................................ 2,766,428 553,072 208,676
Other current liabilities....................................... 1,026,348 392,066 (28,287)
------------ ----------- -----------
Net cash provided by operating activities............................ 6,362,926 5,889,345 1,217,720
------------ ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment................................. (992,883) (1,284,156) (620,359)
Sale of property and equipment..................................... -- 46,743 5,183
Cash paid for acquisitions......................................... -- (313,000) (80,000)
Other, net......................................................... (678,427) (285,156) (56,210)
------------ ----------- -----------
Net cash used in investing activities................................ (1,671,310) (1,835,569) (751,386)
------------ ----------- -----------
Cash flows from financing activities:
Purchase of common stock........................................... -- (8,555,162) (49,873)
Issuance of common stock........................................... 499,059 37,317,354 235,806
Repayment of notes payable......................................... (1,823,305) (648,449) (22,043)
Proceeds from notes payable........................................ -- 1,799,581 23,724
Repayment of long-term debt........................................ (1,480,108) (826,449) (691,445)
Proceeds from long-term debt....................................... -- 1,458,333 226,552
Net borrowings (repayments) on lines of credit..................... (622,954) 479,393 255,000
Purchase of dissenting shares issued in business combinations...... (9,679,079) -- --
Distributions to former S-corporation stockholders................. (3,487,000) (2,200,000) --
Payments for obligations under capital lease....................... (61,754) (43,318) (21,277)
------------ ----------- -----------
Net cash provided by (used in) financing activities.................. (16,655,141) 28,781,283 (43,556)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents................. (11,963,525) 32,835,059 422,778
Cash and cash equivalents at beginning of year....................... 33,536,265 701,206 278,428
------------ ----------- -----------
Cash and cash equivalents at end of year............................. $ 21,572,740 $33,536,265 $ 701,206
============ =========== ===========
Supplemental information:
Interest payments.................................................. $ 287,288 $ 532,383 $ 252,797
Income tax payments................................................ $ 3,228,706 $ 228,010 $ 17,469
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
The Metzler Group, Inc. (the ''Company'') is a leading provider of consulting
services to 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 Burgess Consulting, Inc. ("Burgess"), Metzler & Associates,
Inc. (''Metzler & Associates''), Reed Consulting Group, Inc. ("Reed"), Resource
Management International, Inc. (''RMI'') and Sterling Consulting Group, Inc
("Sterling"). The Company is headquartered in Chicago, Illinois and has regional
offices in various cities within the United States, and international offices in
Denmark, Australia, Czechoslovakia Republic 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. All significant intercompany transactions have been eliminated
in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates in which
it is reasonably possible that there could be a change in the estimates in the
near term include the calculation of contingency reserves and revenue recognized
on long-term contracts.
Cash and Cash Equivalents
Cash equivalents are comprised of highly liquid instruments with original
maturities of 90 days or less.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method based on the estimated useful lives, ranging from
three to forty years, of the various classes of property and equipment.
Amortization of leasehold improvements is computed over the shorter of the lease
term or the estimated useful life of the asset.
Intangible Assets
Intangible assets consist principally of goodwill (excess of purchase price
over the fair value of net assets acquired) and covenants not to compete.
Goodwill is being amortized using the straight-line method from ten to forty
years. The non-compete covenants are recorded at cost and are being amortized
over their respective terms of 33 to 72 months.
F-7
<PAGE>
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.
Stock Based Compensation
The Company utilizes the intrinsic value-based method of accounting for its
stock-based compensation arrangements.
Income Taxes
Income taxes, including pro forma calculations, are accounted for in
accordance with the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Prior to January 1, 1996, Metzler & Associates had operated as a C-
corporation. Effective January 1, 1996, the stockholders of Metzler & Associates
elected to be taxed under Subchapter S of the Internal Revenue Code. During such
period, federal income taxes were the responsibility of Metzler & Associates'
stockholders as were certain state income taxes. As of the effective date of the
election, Metzler & Associates was responsible for Federal built-in-gain taxes
to the extent applicable. Accordingly, the consolidated statement of operations
for the year ended December 31, 1996 provides for such taxes. The S-corporation
election terminated in connection with the consummation of the initial public
offering of the Company's common stock on October 4, 1996.
Pro Forma Adjustments (unaudited)
The pro forma adjustments during the years 1996 and 1995 reflect the impact of
a Metzler & Associates compensation plan effective July 1, 1996. The pro forma
adjustments for 1996 include an increase to officer compensation expense of
$1,019,460. The pro forma adjustments for 1995 include a decrease to officer
compensation expense of $2,775,293.
The pro forma adjustments for 1996 include federal and additional state income
tax expense of $1,799,403 that would have been required had 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. The pro forma
adjustments for 1995 include additional federal and state income tax expense of
$1,110,117, that would have been required had
F-8
<PAGE>
Metzler & Associates' compensation expense decreased in 1995 to the level
commensurate with the compensation plan adopted effective July 1, 1996, as noted
above.
Earnings per Share
For the years ended December 31, 1997, 1996 and 1995, earnings per share was
computed in accordance with Statement of Financial Accounting Standards No. 128
"Earnings Per Share", which the Company adopted during the fourth quarter of
1997. Weighted-average and equivalent shares outstanding include the dilutive
effect of common stock options aggregating 486,543, 186,164 and 0 for the years
ended December 31, 1997, 1996 and 1995, respectively.
Foreign Currency Translation
The balance sheets of the Company's foreign subsidiaaries are translated into
U.S. dollars using the year-end exchange rate, and sales and expenses are
translated using the average exchange rate for the year. The resulting
translation gains or losses are recorded as a separate component of
stockholders' equity as a cumulative translation adjustment.
Reclassifications.
Certain 1996 and 1995 amounts have been reclassified to conform with the 1997
presentation.
3. Business Combinations
In January 1997, the Company issued 63,272 shares of common stock for all of
the outstanding common stock of Burgess. The stockholder's equity and operations
of Burgess 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.
On July 31, 1997, the Company issued 3,205,767 shares of common stock for
substantially all the outstanding common stock of RMI. Additionally, on August
15, 1997, the Company issued 777,600 shares of common stock for substantially
all of the outstanding common stock of Reed. Each of the transactions was
accounted for as a pooling of interests. The consolidated financial statements
have been restated as if RMI and Reed had been combined for all periods
presented. The Company's consolidated statement of operations for the year
ended December 31, 1997 includes revenues and net income from RMI and Reed
totaling $28,906,082 and $1,528,688, respectively, through the dates of
acquisition. The consolidated statements of operations for years ended December
31, 1996 and 1995 have been restated to reflect revenues of $41,460,368 and
$42,357,626, respectively. The consolidated statement of operations for the
year ended December 31, 1996 has been restated to reflect a net loss from RMI
and Reed totaling $1,119,045. The consolidated statement of operations for the
year ended December 31, 1995 has been restated to reflect net income from RMI
and Reed totaling $759,597.
In December 1997, the Company issued 578,727 shares of common stock for
substantially all of the outstanding common stock of Sterling. Additionally, in
December 1997, the Company issued 45,000 shares of common stock for
substantially all of the outstanding common stock of Reed-Stowe. The Company
contributed all of the Reed-Stowe stock to the Company's Reed subsidiary. Each
of these transactions was accounted for using the pooling of interest method of
accounting. The consolidated financial statements have not been restated since
these acquisitions were deemed immaterial.
F-9
<PAGE>
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. 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.
4. Initial Public Offering
On October 4, 1996 the Company completed an initial public offering of its
common stock in which 3,450,000 shares were sold by the Company, along with an
additional over-allotment of 427,500 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 2,571,428 shares of the
founding shareholder's common stock and issued to the shareholder a promissory
note for $7,975,000. See Note 12 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>
1997 1996
<S> <C> <C>
Land and buildings.......................................... $ 370,000 $ 370,000
Furniture, fixtures and equipment........................... 8,532,226 7,647,076
Leasehold improvements...................................... 1,147,854 1,040,121
----------- -----------
10,050,080 9,057,197
Less: accumulated depreciation and amortization.......... (7,164,824) (6,343,404)
----------- -----------
$ 2,885,256 $ 2,713,793
=========== ===========
</TABLE>
F-10
<PAGE>
6. Lines of Credit
The Company had $1,772,500 and $4,900,000 available under lines of credit at
December 31, 1997 and 1996, respectively. Amounts outstanding at December 31
are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
$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,
paid in 1997....................................................... $ -- $ 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,
paid in 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, paid in 1997................................ -- 95,000
$800,000 line of credit, interest payable quarterly at the bank's
prime rate (9.5% at December 31, 1997) plus 1.0% guaranteed
by officers of Sterling, due April 1, 1998......................... 620,000 --
$400,000 line of credit, interest payable quarterly at the bank's
prime rate (9.5% at December 31, 1997) plus 1.0%, guaranteed by
officers of Sterling, due April 1, 1998............................ 400,000 --
$72,500 in lines of credit, interest payable 12.5% to 15.0%,
guaranteed by officers of Reed-Stowe, outstanding balance due
on demand.......................................................... 42,179 --
---------- ----------
$1,062,179 $1,685,133
========== ==========
</TABLE>
At December 31, 1997, the Company had letters of credit available of
$1,500,000 of which $606,653 has been utilized. The letters of credit expire at
various dates through December 31, 2000.
F-11
<PAGE>
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.
Future minimum annual lease payments, for the years subsequent to 1997 and in
the aggregate, are as follows:
<TABLE>
<CAPTION>
Year ending December 31 Amount
<S> <C>
1998............................ $ 3,772,044
1999............................ 2,825,115
2000............................ 2,519,408
2001............................ 2,175,657
2002............................ 233,592
-----------
$11,525,816
===========
</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 for the year ending
December 31, 1998, is $77,020.
Rent expense for operating leases entered into by the Company and charged to
operations amounted to $3,417,639, $3,072,500 and $2,660,513 for the years ended
December 31, 1997, 1996, and 1995, 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>
1998................................................ $ 74,060
1999................................................ 61,614
2000................................................ 25,673
--------
Net minimum rentals................................. 161,347
Less interest portion............................... (19,115)
--------
Present value of net minimum rentals at
December 31, 1997................................. $142,232
========
</TABLE>
F-12
<PAGE>
8. Income Tax Expense (Benefit)
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Federal:
Current......................................... $5,000,637 $ 477,323 $168,171
Deferred........................................ (262,756) (574,015) 146,215
---------- --------- --------
Total........................................... 4,737,881 (96,692) 314,386
---------- --------- --------
State:
Current......................................... 1,054,497 219,806 43,626
Deferred........................................ (6,230) (303,465) 34,896
---------- --------- --------
Total........................................... 1,048,267 (83,659) 78,522
---------- --------- --------
Total federal and state income tax expense
(benefit)........................................ $5,786,148 $(180,351) $392,908
========== ========= ========
</TABLE>
Income tax expense (benefit) differs from the amounts estimated by applying
the statutory income tax rates to income before income tax expense (benefit) as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Federal tax at statutory rate.......................... 35% 34% 34%
State tax at statutory rate, net of federal tax
benefits.............................................. 4.8 4.7 7.8
Effect of nontaxable interest and dividends............ (1.6) (1.6) --
Effect of S-corporation election....................... 0 (40.7) 12.0
Other.................................................. (.8) 1.7 4.1
---- ----- ----
37.4% (3.3%) 57.9%
==== ===== ====
</TABLE>
Deferred income taxes result from temporary differences between years in the
recognition of certain expense items for income tax and financial reporting
purposes. The source and income tax effect of these differences are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
Deferred tax assets: 1997 1996
<S> <C> <C>
State income taxes.................................................. $ 154,773 157,076
Accrued rent........................................................ 110,024 201,240
Allowance for uncollectible receivables............................. 340,000 -
Reorganization cost................................................. 382,032 -
Other............................................................... 126,465 50,724
---------- ----------
Total deferred tax assets............................................. $1,113,294 $ 409,040
---------- ----------
Deferred tax liabilities:
Adjustment resulting from changes in the method of accounting
used for tax purposes.............................................. $3,548,074 $3,104,306
Investments in partnerships......................................... 213,598 200,532
Other............................................................... 99,901 121,467
---------- ----------
Deferred tax liabilities.............................................. 3,861,573 3,426,305
---------- ----------
Net deferred tax liabilities.......................................... $2,748,279 $3,017,265
========== ==========
</TABLE>
F-13
<PAGE>
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 3,000,000 shares. As of December 31, 1997, the
Company has 2,246,115 options outstanding at a weighted average exercise price
of $16.79 per share which was equal to the estimated fair market value of common
stock at the dates of grant. As of December 31, 1997, 13,500 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 years ended
December 31, 1997 and 1996 would have been increased by $1,113,000 and
$102,000, respectively, net of related income taxes. As a result, the Company's
pro forma net earnings available to common stockholders and earnings per common
and common equivalent shares would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Pro forma earnings per common and common equivalent share:
As reported............................................. $9,687,427 $2,916,241
Pro forma--fair value method............................ $8,574,427 $2,814,241
Pro forma net earnings available to common stockholders:
As reported............................................. $ 0.48 $ 0.15
Pro forma--fair value method............................ $ 0.43 $ 0.15
</TABLE>
The weighted average fair value of options granted in 1997 and 1996 was $4.07
and $2.00 respectively. For purposes of calculating compensation cost under
FASB 123, the fair value of each option grant is estimated as of the date of
grant using the Black-Scholes option pricing model. The following weighted
average assumptions were used in the model for grants made in 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Expected volatility........... 45% 40%
Risk free interest rate....... 5.7% 6.5%
Dividend yield................ 0% 0%
Expected lives................ 2.6 years 3.0 years
</TABLE>
Additional information on the shares subject to options is as follows:
<PAGE>
<TABLE>
<CAPTION>
1997 1996
Weighted- Weighted-
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 689,387 $ 10.67 0 $ --
Granted 1,795,365 19.06 724,888 10.00
Exercised (3,000) (8.00) -- --
Forfeited (235,637) (16.35) (35,501) 8.00
--------- ------- --------
Options outstanding at end of year 2,246,115 $ 16.79 689,387 10.37
========= ======= ========
Options exercisable at year end 13,500 $ 18.45 -- --
========= ======= ========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------------------------------------
Weighted- Weighted-
Weighted- Average Weighted- Average
Average Remaining Average Remaining
Number of Exercise Contractual Number of Exercise Contractual
Range of Exercise Prices Shares Price Life Shares Price Life
<S> <C> <C> <C> <C> <C> <C>
$6 to $13................ 462,369 $ 7.79 1.47 years 512,138 $ 8.03 2.46 years
$13 to $17................ 694,998 14.50 1.02 years 12,000 16.21 .65 years
$17 to $21................ 230,748 18.00 2.39 years 156,249 17.21 3.30 years
$21 to $23................ 345,000 22.15 2.33 years -- -- --
$23 to $27................ 513,000 24.00 2.47 years -- -- --
--------- ------ -------------- ------- ------ --------------
2,246,115 $16.79 1.80 years 689,387 $10.37 2.60 years
========= ===== ============== ======= ====== ==============
</TABLE>
10. Employee Benefit Plans
The Company maintains three profit sharing and pension plans (Metzler &
Associates Profit Sharing and Savings Plan and Trust, RMI, Inc. 401(k) and
Profit Sharing Plan, and RMI Utility Purchase Pension Plan).
The Metzler & Associates 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, makes profit sharing contributions.
Under the RMI, Inc. 401(k) and Profit Sharing Plan, eligible employees may
contribute up to 12% of their compensation to this plan 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 RMI Utility Money Purchase Pension Plan was amended prior to January 1,
1997, to freeze entry into the plan and benefits accruals. Participants are not
allowed to make contributions to this plan.
The Company, as sponsor of the plans, uses independent third parties to
provide administrative services to the plans. The Company has the right to
terminate the plans at any time.
F-15
<PAGE>
The Company contributions to the various plans which were charged to operations
were the following:
<TABLE>
<CAPTION>
Period ended Total
<S> <C>
December 31, 1995........... $1,384,083
December 31, 1996........... 1,356,014
December 31, 1997........... 25,255
</TABLE>
11. Long-term Debt
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Term loans, variable interest at the prime rate (8.25% through 10.0% at December
31, 1997) plus 1.0% through 2.0%, with due dates 1998 though 2001....................... $145,297 $1,458,333
Mortgage payable, interest at 10.0%, collateralized by land and building, payable in
equal monthly installments of principal and interest due in 2001........................ 78,366 94,771
Covenants not to compete, payable through July 2001...................................... 303,403 454,070
-------- ----------
527,066 2,007,174
Less portion due within one year......................................................... 208,309 606,621
-------- ----------
$318,757 $1,400,553
======== ==========
</TABLE>
Future aggregate annual maturities of long-term debt as of December 31, 1997,
are as follows:
<TABLE>
<S> <C>
1998............... $208,309
1999............... 128,525
2000............... 111,775
2001............... 78,457
--------
$527,066
========
</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 had 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, whom, at that time, was the beneficial owner of 15% of the
Company's common stock, to redeem 2,571,428 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.
F-16
<PAGE>
13. Supplemental Noncash Investing and Financing Activities and Cash Flow
Information
During 1996, RMI recorded equipment under capital leases of $207,484 and
recorded an obligation under capital lease of the same amount in connection with
acquisition of SRC and SRC Group (Note 3).
14. Subsequent Events
On February 11, 1998, the Company completed a registration statement on Form
S-3 for a secondary offering of its common stock, par value $.001. Through the
offering, the Company issued an additional 1,500,000 shares of its common stock
which yielded net proceeds to the Company of approximately $37 million.
On March 5, 1998, the Board of Directors authorized a three-for-two stock
split to be distributed on April 1, 1998, to shareholders of record on March 18,
1998. All references in the consolidated financial statements to number of
shares and per share amounts of the Company's common stock have been
retroactively restated to reflect the increased number of common shares
outstanding.
F-17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: March 31, 1998
THE METZLER GROUP, INC.
By: /s/ Robert P. Maher
-----------------------------------------------
Robert P. Maher
Chairman, President and Chief Executive Officer
By: /s/ James F. Hillman
-----------------------------------------------
James F. Hillman
Chief Financial Officer
By: /s/ Gerald R. Lanz
-----------------------------------------------
Gerald R. Lanz
Chief Operating Officer
By: /s/ Peter B. Pond
-----------------------------------------------
Peter B. Pond
Director
By: /s/ James T. Ruprecht
-----------------------------------------------
James T. Ruprecht
Director
By: /s/ Mitchell H. Saranow
-----------------------------------------------
Mitchell H. Saranow
Director
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
Exhibit No. Description Number
- ----------------- -------------------------------------------------------------------------- -------------
<C> <S> <C>
2.1 Form of Merger Agreement Among The Metzler Group, Inc., Metzler (1)
Acquisition, Inc. and Metzler & Associates, Inc.
2.2 Form of Promissory note of Metzler-Illinois to Richard J. Metzler in the (1)
amount of $7,975,000
3.1 Amended and Restated Certificate of Incorporation of the Company (2)
3.2 Amendment No. 1 to Amended and Restated Certificate of Incorporation of (4)
the Company
3.2 Amended and Restated By-Laws of the Company (5)
4.1 Specimen Common Stock Certificate (3)
4.2 Form of Registration Agreement
10.1 Form of Indemnification Agreement between the Company and each of its (3)
directors and officers
10.2 The Metzler Group, Inc. Long-Term Incentive Plan (1)
10.3 Form of Stock Redemption Agreement among the Company, Richard J. Metzler, (1)
Robert P. Maher, David J. Donovan, James T. Ruprecht, James R. Blomberg,
Stephen R. Goldfield and Gerald R. Lanz
10.4 Lease dated October 29, 1991 between Metzler-Illinois and American (1)
National Bank and Trust Company of Chicago, as Land Trustee, regarding
the space at 520 Lake Cook Road, Deerfield, Illinois (a/k/a Corporate 500
Centre), and the First Amendment to Lease dated April 17, 1996, and the
Third Amendment to Lease dated May, 1996
10.5 Amendment No. 1 to The Metzler Group, Inc. Long Term Incentive Plan, (5)
dated November 1, 1997.
10.6 The Metzler Group, Inc. Employee Stock Purchase Plan (6)
10.7 Amendment No. 1 to The Metzler Group, Inc. Employee Stock Purchase Plan
10.8 Amendment No. 2 to The Metzler Group, Inc. Employee Stock Purchase Plan
10.9 Plan and Agreement of Merger and Purchase Agreement as of July 31, 1997 (7)
by and among The Metzler Group, Inc., a Delaware corporation, RMI
Acquisition Co., a Delaware corporation, Resource Management
International, Inc., a California corporation, and each of the
shareholders of Resource Management International, Inc.
21.1 Significant Subsidiaries of The Metzler Group, Inc. (2)
23.0 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule - for the period ended December 31, 1997
27.2 Restated Financial Data Schedule - For the nine months ended September 30, 1996
27.3 Restated Financial Data Schedule - For the three months ended March 31, 1997
27.4 Restated Financial Data Schedule - For the year ended December 31, 1996
27.5 Restated Financial Data Schedule - For the nine months ended September 30, 1997
27.6 Restated Financial Data Schedule - For the six months ended June 30, 1997
</TABLE>
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (Registration No. 333-9019) filed with the SEC on July 26, 1996.
(2) Incorporated by reference from the Registrant's Amendment No. 1 to
Registration Statement on Form S-1 (Registration No. 333-9019) filed with
the SEC on September 4, 1996.
(3) Incorporated by reference from the Registrant's Amendment No. 2 to
Registration Statement on Form S-1 (Registration No. 333-9019) filed with
the SEC on September 20, 1996.
(4) Incorporated by reference from the Registrant's Registration Statement on
Form S-3 (Registration No. 333-40489) filed with the SEC on November 18,
1997.
E-1
<PAGE>
(5) Incorporated by reference from the Registrant's Amendment No. 1 to
Registration Statement on Form S-3 (Registration No. 333-40489) filed with
the SEC on February 12, 1998.
(6) Incorporated by reference from the Registrant's Regisration Statement on
Form S-8 (Registration No. 333-30265) filed with the SEC on June 27, 1997.
(7) Incorporated by reference from the Registrant's 8-K filed with the SEC on
August 14, 1997.
E-2
<PAGE>
Exhibit 4.2
FORM OF REGISTRATION AGREEMENT
------------------------------
THIS REGISTRATION AGREEMENT (this "Agreement") is made as of _________ ___,
199___, between The Metzler Group, Inc., a Delaware corporation (the "Company"),
and the individual identified on the signature page hereto ("Holder").
WHEREAS, the parties to this Agreement are parties to a Stock Exchange
Agreement dated as of _______ __, 199___ (the "Exchange Agreement"), pursuant to
which __________ ("XXX") will become a wholly-owned subsidiary of the Company
and in connection therewith the Company shall issue shares of Common Stock (as
defined below) to Holder. In order to induce the Holder to enter into the
Exchange Agreement, the Company has agreed to provide the registration rights
set forth in this Agreement. Unless otherwise provided in this Agreement,
capitalized terms used herein shall have the meanings set forth in paragraph 8
hereof.
NOW, THEREFORE, the parties hereto agree as follows:
1. Piggyback Registrations.
-----------------------
(a) Right to Piggyback. If, at any time during which any Registrable
Stock remains outstanding, the Company proposes to register any of its Common
Stock under the Securities Act in an underwritten public offering, other than
pursuant to a registration on Form S-8 or Form S-4, or any similar forms then in
effect (a "Piggyback Registration"), the Company will give prompt written notice
to the Holder of its intention to effect such a registration and will, subject
to paragraphs 2(c) and 2(d), include in such registration all Registrable
Securities with respect to which the Company has received written requests for
inclusion therein within 15 days after the receipt of the Company's notice, not
to exceed a maximum number of shares for the Holder equal to the product
obtained when the Holder's pre-registration holdings of Registrable Securities
are multiplied by a fraction, the numerator of which is the total number of
shares proposed to be sold in the Piggyback Registration by all other selling
shareholders and the denominator of which is the total pre-transaction
shareholdings of all other selling shareholders.
(b) Piggyback Expenses. The Registration Expenses of the Holder will
be paid by the Company in all Piggyback Registrations.
(c) Priority on Primary Registrations. If a Piggyback Registration
includes primary shares to be sold on behalf of the Company, and the managing
underwriter or underwriters advise the Company that in their opinion the number
of securities requested to be included in such registration exceeds the number
which can be sold in such offering without materially adversely affecting the
marketability of the offering, the Company will include in such registration,
(i) first, the securities the Company proposes to sell; (ii) second, the
securities requested to be included in such registration by the holders having
priority registration commitments entered into by the Company prior to the date
hereof ("Priority Holders"); and (iii) third, the Registrable Securities
requested to be included in such registration and all other Common Stock
requested to be included in such registration (the "Other Common Stock"), to be
included pro rata on the basis of the number of shares of such securities for
which the Company has been given written requests for inclusion therein by each
such holder thereof. Notwithstanding the foregoing, the Company shall use all
commercially reasonable efforts to include, but shall not be obligated to
include, any Registrable Securities in any registered offering contemplated by
the Company's registration statement on Form S-3 (File No. 333-40489),
regardless of when such offering occurs.
(d) Priority on Secondary Registrations. If a Piggyback Registration
is an underwritten secondary registration on behalf of holders of the Company's
securities not including primary shares, and the managing underwriters advise
the Company in writing that in their opinion the number of securities requested
to be included in such registration exceeds the number which can be sold in such
offering without adversely affecting the marketability of the offering, the
Company will include in such registration (i) first, the securities requested to
be included therein by the holders requesting such registration and the
securities requested to be
<PAGE>
included by any other Priority Holder, and (ii) second, the Registrable
Securities requested to be included in such registration and all Other
Common Stock requested to be included in such registration, to be included
pro rata on the basis of the number of shares of such securities for which
the Company has been given written requests for inclusion therein by each
such holder thereof. Notwithstanding the foregoing, the Company shall use
all commercially reasonable efforts to include, but shall not be obligated
to include, any Registrable Securities in any registered offering
contemplated by the Company's registration statement on Form S-3 (File No.
333-40489), as the same may be amended, regardless of when such offering
occurs.
(e) Exchange Agreement Compliance. Notwithstanding any provision of
this Agreement to the contrary, the Company's obligation to include
Registrable Securities in any Piggyback Registration are expressly
conditioned upon there being no uncured breach of any of the
representations, warranties or covenants made by the Holder or XXX in the
Exchange Agreement, and the Company will not be obligated to include any
Registrable Securities in any registration at any time after which any such
breach has occurred and has not been cured, paid and/or otherwise
appropriately resolved in accordance with the Exchange Agreement.
2. Holdback Agreements. The Holder of Registrable Securities agrees not
to effect any public sale or distribution (including sales pursuant to Rule 144)
of equity securities of the Company, or any securities convertible into or
exchangeable or exercisable for such securities, during the seven days prior to
and the 90-day period beginning on the effective date of any Piggyback
Registration in which Registrable Securities are included (except as part of
such underwritten registration), unless the underwriters managing the registered
public offering otherwise agree.
3. Registration Procedures. The Company will use all commercially
reasonable efforts to effect the registration and the sale of such Registrable
Securities in accordance with the provisions of this Agreement, and pursuant
thereto the Company will, as expeditiously as possible but subject to the terms
hereof:
(a) prepare and file with the Securities and Exchange Commission a
Registration Statement with respect to such Registrable Securities on such
appropriate and legally available form as the Company in its discretion
shall elect (the "Registration Statement") and use all commercially
reasonable efforts to cause such Registration Statement to become
effective;
(b) prepare and file with the Securities and Exchange Commission such
amendments and supplements to such Registration Statement and the
prospectus used in connection therewith (the "Prospectus") as may be
necessary to keep such Registration Statement effective for a period of not
less than six months from the Closing Date and comply with the provisions
of the Securities Act with respect to the disposition of all securities
covered by such Registration Statement during such period;
(c) furnish each seller of Registrable Securities such number of
copies of such Registration Statement, each amendment and supplement
thereto, the prospectus included in such Registration Statement (including
each preliminary prospectus) and such other documents as such seller may
reasonably request in order to facilitate the disposition of the
Registrable Securities owned by such seller;
(d) use all commercially reasonable efforts to register or qualify
such Registrable Securities under the securities or blue sky laws of such
states and the District of Columbia as any seller of Registrable Securities
reasonably requests and do any and all other acts and things which may be
reasonably necessary or advisable to enable such seller to consummate the
disposition in such states and the District of Columbia of the Registrable
Securities owned by Holder (provided that the Company will not be required
to (i) qualify generally to do business in any jurisdiction where it would
not otherwise be required to qualify but for this subparagraph (d), (ii)
subject itself to taxation in any such jurisdiction or (iii) consent to
general service of process in any such jurisdiction);
(e) notify each seller of such Registrable Securities of the
happening of any event of which the Company becomes aware, as a result of
which the prospectus included in such Registration Statement contains an
untrue statement of a material fact or omits any fact necessary to make the
statements therein not
2
<PAGE>
misleading, and the Company will prepare a supplement or amendment to the
Prospectus so that, as thereafter delivered to the purchasers of such
Registrable Securities, such Prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make
the statements therein not misleading;
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are
then listed and, if not so listed, to be listed on the Nasdaq National
Market;
(g) otherwise use all commercially reasonable efforts to comply with
all applicable rules and regulations of the Securities and Exchange
Commission, and make available to its security holders, as soon as
reasonably practicable, an earnings statement covering the period of at
least twelve months beginning with the first day of the Company's first
full calendar quarter after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 thereunder; and
(h) in the event of the issuance of any stop order suspending the
effectiveness of a Registration Statement, or of any order suspending or
preventing the use of any related prospectus or suspending the
qualification of any common stock included in such Registration Statement
for sale in any jurisdiction, the Company will use all commercially
reasonable efforts promptly to obtain the withdrawal of such order.
4. Holder Procedures.
(a) In connection with any Registration Statement, the Company may
require the Holder to furnish to the Company such information regarding the
Holder and his or her proposed distribution of Registrable Securities, to
the extent necessary to comply with the Securities Act, as the Company may
from time to time reasonably request in writing.
(b) The Holder agrees to cooperate with the Company in all reasonable
respects in connection with the preparation and filing of each Registration
Statement and any amendment thereof, any Prospectus relating thereto and
any Prospectus supplement relating thereto with respect to the offer and
sale of Registrable Securities of the Holder.
5. Registration Expenses.
(a) All expenses incident to the Company's performance of or
compliance with this Agreement, including all registration and filing fees,
fees and expenses of compliance with securities or blue sky laws, listing
fees, printing expenses, messenger and delivery expenses, and fees and
disbursements of counsel for the Company and all independent certified
public accountants, and other Persons retained by the Company (all such
expenses being herein called "Registration Expenses"), will be borne by the
Company; provided, that Registration Expenses shall not include, and the
Holder shall pay, all underwriting discounts and commissions applicable to
Registrable Securities sold by them pursuant to this Agreement and all
legal fees and expenses of counsel retained by the Holder.
(b) To the extent Registration Expenses are not required to be paid
by the Company pursuant to paragraph 5(a), the Holder will pay those
Registration Expenses allocable to the registration of the Holder's
securities so included, and any Registration Expenses not so allocable will
be borne by all sellers of securities included in such registration in
proportion to the aggregate selling price of the securities to be so
registered.
6. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless, to the fullest
extent permitted by law, the Holder against all losses, claims, damages,
liabilities and expenses (including reasonable fees and legal expenses)
resulting from any untrue or alleged untrue statement of a material fact
contained in the
3
<PAGE>
Registration Statement, any Prospectus, or any amendment or supplement thereto,
or any omission or alleged omission of a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except in each case
insofar as the same arises out of or is based upon an untrue statement or
alleged untrue statement of a material fact or an omission or alleged omission
to state a material fact in such Registration Statement, Prospectus, amendment
or supplement, as the case may be, made or omitted, as the case may be, in
reliance upon and in conformity with information furnished to the Company by the
Holder for use therein or by the Holder's failure to deliver a copy of the
Registration Statement or Prospectus or any amendments or supplements thereto
after the Company has furnished Holder with a sufficient number of copies of the
same.
(b) The Holder, if he participates in any Registration Statement, shall
indemnify and hold harmless, to the fullest extent permitted by law, the
Company, its officers, directors, employees, representatives and agents, and
each Person who controls (within the meaning of the Securities Act) the Company,
against all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation and legal expenses) resulting from any untrue
or alleged untrue statement of a material fact contained in any Registration
Statement, any Prospectus, or any amendment or supplement thereto, and any
omission or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, to the extent the same arises out of or is
based upon any untrue statement or alleged untrue statement of a material fact
or any omission or alleged omission to state a material fact in such
Registration Statement, Prospectus, amendment or supplement, as the case may be,
made or omitted, as the case may be, in reliance upon and in conformity with
information furnished to the Company by Holder for use therein.
(c) Each party entitled to indemnification under this paragraph 6 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
Party, who will conduct the defense of such claim or litigation, is approved by
the Indemnified Party (whose approval will not be unreasonably withheld or
delayed); and provided, further, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations except to the extent that its defense of the claim or litigation
involved is prejudiced by such failure. The Indemnified Party may participate in
such defense at such Indemnified party's expense. No Indemnifying Party, in the
defense of any such claim or litigation, except with the prior consent of each
Indemnified Party, shall consent to entry of any judgment or enter into any
settlement that does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect of any claim or litigation, and no Indemnified Party will
consent to entry of any judgment or settle any claim or litigation without the
prior written consent of the Indemnifying Party. Each Indemnified Party shall
furnish such information regarding himself, herself or itself and the claim in
question as the Indemnifying Party may reasonably request and as shall be
reasonably required in connection with the defense of such claim and litigation
resulting therefrom.
(d) If for any reason the indemnification provided for in this paragraph 6
from an Indemnifying Party, although otherwise applicable by its terms, is
determined by a court of competent jurisdiction to be unavailable to an
Indemnified Party hereunder, then the Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by the Indemnified Parties as a result of such losses, claims, damages,
liabilities or expenses in such proportion as is appropriate to reflect the
relative fault of such Indemnifying Party and the Indemnified Parties in
connection with the actions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and the Indemnified Parties shall
be determined by reference to, among other things, whether any action in
question, including any untrue or alleged untrue statement of a material fact,
has been made by, or relates to information supplied by, such Indemnifying Party
or the Indemnified Parties, and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such action. The amount
paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to
4
<PAGE>
above shall be deemed to include, subject to the limitations set forth in
paragraph 6(c), any legal or other fees or expenses reasonably incurred by such
party in connection with any investigation or proceeding.
7. Participation in Underwritten Registrations. No Person may participate
in any registration hereunder which is underwritten unless such Person (a)
agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Company and other Person or Persons
entitled hereunder to approve such arrangements and (b) completes and executes
all questionnaires, powers of attorney, share custody agreements, indemnities,
underwriting agreements and other documents required under the terms of such
underwriting arrangements.
8. Definitions.
"Common Stock" means the Company's Common Stock, par value $0.001 per
share.
"Person" means any natural person and any corporation, partnership,
limited liability company or other business entity.
"Registrable Securities" means (i) the Payment Shares (as defined in
the Exchange Agreement) issued to the Holder pursuant to the Exchange Agreement,
and (ii) any Common Stock or other equity securities issued or issuable with
respect to the securities referred to in clause (i) by way of a stock dividend
or stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization. As to any particular Registrable
Securities, such securities will cease to be Registrable Securities (A) when
they have been distributed to the public pursuant to a offering registered under
the Securities Act or (B) one year after the Registrable Securities held by the
Holder first become eligible for sale pursuant to Rule 144 under the Securities
Act (or any similar rule then in force).
"Securities Act" means the Securities Act of 1933, as amended.
9. Miscellaneous.
(a) Amendments and Waivers. Except as otherwise provided herein, the
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and holders of at least a majority of the
Registrable Securities.
(b) Successors and Assigns. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto will bind and inure to
the benefit of the respective successors and permitted assigns.
(c) Severability. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
this Agreement.
(d) Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together will constitute
one and the same agreement.
(e) Descriptive Headings. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
(f) Governing Law. The corporate law of Delaware will govern all
issues concerning the relative rights of the Company and its stockholders. All
other questions concerning the construction, validity and interpretation of this
Agreement and the exhibits and schedules hereto will be governed by the internal
law, and not the law of conflicts, of Illinois.
5
<PAGE>
(i) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given (i) three (3)
business days after it is sent by registered or certified mail, return receipt
requested, postage prepaid; (ii) one day after receipt is electronically
confirmed, if sent by fax (provided that a hard copy shall be promptly sent by
first class mail); or (iii) one (1) business day following deposit with a
recognized national overnight courier service for next day delivery charges
prepaid, and, in each case, addressed to the intended recipient as set forth
below:
<TABLE>
<CAPTION>
If to Metzler: With a copy to:
<S> <C>
The Metzler Group, Inc. Sachnoff & Weaver, Ltd.
520 Lake Cook Road 30 South Wacker Drive
Suite 500 Suite 2900
Deerfield, Illinois 60015 Chicago, Illinois 60606
Attn: General Counsel Attn: _____________
Fax: 847/914-9999 Fax: 312/207-6400
If to the Holder: With a copy to:
To his address ____________________________________
set forth on the signature ____________________________________
page hereto ____________________________________
____________________________________
Attn:_______________________________
Fax: _______________________________
</TABLE>
Any party may give any notice, request, demand, claim, or other communication
hereunder using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is delivered to the individual
for whom it is intended. Any party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Parties notice in the manner herein set forth.
* * * *
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
THE COMPANY:
-----------
THE METZLER GROUP, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
HOLDER:
------
---------------------------------------
Address:
7
<PAGE>
Exhibit 10.5
FIRST AMENDMENT TO THE METZLER GROUP, INC. LONG TERM INCENTIVE PLAN
The Metzler Group, Inc.'s Long-Term Incentive Plan shall be amended, effective
November 1, 1997, as follows:
The first paragraph of Article III ("Shares Subject to the Plan") shall be
amended to read as follows:
The aggregate number of Shares as to which Awards my be granted from
time to time shall be Two Million (2,000,000) Shares (subject to adjustments for
stock splits, stock dividends, and other adjustments described in Article XVII
hereof); provided, however, that the number of Shares available for issuance
under the Plan shall automatically increase, but not decrease, on a continuing
basis by an amount equal to fifteen percent (15%) of the increase from time to
time, in the number of shares of the capital stock of the Company then
outstanding. No Incentive Options may be granted on the basis of the additional
Shares resulting from such increases.
This First Amendment is adopted effective the 1st day of November, 1997.
<PAGE>
Exhibit 10.7
FIRST AMENDMENT TO THE METZLER GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN
1. Section 8 shall be amended to add the following sentence to the second
paragraph thereof:
If, within two (2) years of an Offering Date or within one (1) year of
the Purchase Date associated with such Offering Date, the Participant
requests delivery to him of the shares of Common Stock held in his
Account and purchased during such Offering Period, or otherwise
notifies the Committee to sell such associated shares of Common Stock
held in his Account, the Participant shall be required to cease
participation in the Plan effective as of the date of such request or
notification. The Participant may recommence participation in the Plan
thereafter in accordance with Section 9 of the Plan.
2. Section 9 of the Plan shall be amended to add the following sentence:
After ceasing participation in the Plan, as required under Section 8
hereof, a Participant may reenter the Plan no earlier than the
Offering Date that is coincident with or next follows the six (6)
month anniversary of the date such cessation became effective.
<PAGE>
Exhibit 10.8
SECOND AMENDMENT TO THE METZLER GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN
1. The definition of "Employee" is deleted and replaced with the
following:
"Employee" means any person who is employed by the Company or an
Affiliate on a regular full-time basis. A person shall be considered
employed on a regular full-time basis if he is customarily employed
for more than twenty (20) hours per week.
2. Section 3 regarding Eligibility is deleted and replaced with the
following:
3. Eligibility
All Employees except those individuals listed on Exhibit A,
Section 16 Individuals, of the Insider Trading and Tipping Policy of
The Metzler Group, Inc., shall be eligible to participate in the Plan
on the Effective Date. Subject to the enrollment limitations of
Section 6, each other Employee of the Company shall be eligible to
participate on the first to occur of (i) the Offering Date coincident
with or next following the Employee's first day of employment, or (ii)
the first day of any calendar month coincident with or next following
the Employee's first day of employment.
<PAGE>
Exhibit 23.0
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
The Metzler Group, Inc.:
We consent to the incorporation by reference in the registration statements (No.
333-30267 and No. 333-30265) on Form S-8 of The Metzler Group, Inc. of our
report dated February 11, 1998, except for Note 14, as to which the date is
March 5, 1998, relating to the consolidated balance sheets of The Metzler Group,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997, which report
appears in the December 31, 1997 annual report on Form 10-K of The Metzler
Group, Inc. The report of KPMG Peat Marwick LLP is based partially upon the
reports of other accounts.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE METZLER
GROUP, INC'S., BALANCE SHEET AT DECEMBER 31, 1997 AND STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 21,573
<SECURITIES> 0
<RECEIVABLES> 24,884
<ALLOWANCES> (1,254)
<INVENTORY> 0
<CURRENT-ASSETS> 46,562
<PP&E> 10,050
<DEPRECIATION> (7,165)
<TOTAL-ASSETS> 50,764
<CURRENT-LIABILITIES> 14,996
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 50,764
<SALES> 83,661
<TOTAL-REVENUES> 83,661
<CGS> 49,568
<TOTAL-COSTS> 68,987
<OTHER-EXPENSES> (799)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 15,474
<INCOME-TAX> 5,786
<INCOME-CONTINUING> 9,687
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,687
<EPS-PRIMARY> .48
<EPS-DILUTED> .47
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION TO
REFLECT THE POOLING OF INTEREST OF RMI AND REED DURING THE THIRD QUARTER OF
1997. FOLLOWING ARE AMOUNTS FROM THE METZLER GROUP, INC'S., BALANCE SHEET AT
SEPTEMBER 30, 1996 AND STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,284
<SECURITIES> 0
<RECEIVABLES> 16,051
<ALLOWANCES> (706)
<INVENTORY> 0
<CURRENT-ASSETS> 18,892
<PP&E> 8,829
<DEPRECIATION> (6,105)
<TOTAL-ASSETS> 22,434
<CURRENT-LIABILITIES> 11,258
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,434
<SALES> 47,160
<TOTAL-REVENUES> 47,160
<CGS> 30,777
<TOTAL-COSTS> 41,428
<OTHER-EXPENSES> 7
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 297
<INCOME-PRETAX> 5,441
<INCOME-TAX> (71)
<INCOME-CONTINUING> 5,512
<DISCONTINUED> 0
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION TO
REFLECT THE POOLING OF INTEREST OF RMI AND REED DURING THE THIRD QUARTER OF
1997. FOLLOWING ARE AMOUNTS FROM THE METZLER GROUP, INC'S., BALANCE SHEET AT
MARCH 31, 1997 AND STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31
1997.
</LEGEND>
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<S> <C>
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0
0
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION TO
REFLECT THE POOLING OF INTEREST OF RMI AND REED DURING THE THIRD QUARTER OF
1997. FOLLOWING ARE AMOUNTS FROM THE METZLER GROUP, INC'S., BALANCE SHEET AT
DECEMBER 31, 1996 AND STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
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0
0
<COMMON> 20
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION TO
REFLECT THE POOLING OF INTEREST OF RMI AND REED DURING THE THIRD QUARTER OF
1997. FOLLOWING ARE AMOUNTS FROM THE METZLER GROUP, INC'S., BALANCE SHEET AT
SEPTEMBER 30, 1997 AND STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
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<PP&E> 9,595
<DEPRECIATION> (7,107)
<TOTAL-ASSETS> 44,552
<CURRENT-LIABILITIES> 10,468
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 44,552
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION TO
REFLECT THE POOLING OF INTEREST OF RMI AND REED DURING THE THIRD QUARTER OF
1997. FOLLOWING ARE AMOUNTS FROM THE METZLER GROUP, INC'S., BALANCE SHEET AT
JUNE 30, 1997 AND STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30,
1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
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<PERIOD-END> JUN-30-1997
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<CURRENT-ASSETS> 49,409
<PP&E> 9,358
<DEPRECIATION> (6,753)
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<BONDS> 0
0
0
<COMMON> 20
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<EPS-PRIMARY> .21
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</TABLE>
