<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended
June 30, 1998
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
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
615 North Wabash Avenue, Chicago, Illinois 60611
(Address of principal executive office, including zip code)
(312) 573-5600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
As of July 31, 1998, the Registrant had outstanding 22,681,098 shares of its
$.001 par value Common Stock.
<PAGE> 2
THE METZLER GROUP, INC.
Quarter Ended June 30, 1998
INDEX
PART 1 - FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Balance Sheets as of June 30,
1998 (unaudited) and December 31, 1997................ 3
Consolidated Statements of Operations and
Comprehensive Income for the three months ended June
30, 1998 and 1997 (unaudited) ........................ 4
Consolidated Statements of Operations and
Comprehensive Income for the six months ended June 30,
1998 and 1997 (unaudited) ............................ 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and
1997 (unaudited) ..................................... 6
Notes to Consolidated Financial Statements
(unaudited) .......................................... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 8
Part II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 9
Item 6 Exhibits and Reports on Form 8-K .................... 10
SIGNATURES ..................................................... 11
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
THE METZLER GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $55,603 $21,573
Accounts receivable, net.............................. 25,092 23,630
Prepaid expenses and other............................ 2,078 1,359
-------------------- -------------------
Total current assets............................. 82,773 46,562
Property and equipment, net................................ 5,551 2,885
Other non-current assets, net.............................. 1,346 1,317
==================== ===================
Total assets .............................................. $89,670 $50,764
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit........................................ $ -- $ 1,062
Accounts payable...................................... 3,406 3,761
Accrued liabilities................................... 1,074 1,658
Accrued compensation and related costs................ 2,162 2,609
Income taxes payable.................................. 1,855 3,538
Deferred income taxes................................. 354 585
Other current liabilities............................. 866 1,783
-------------------- -------------------
Total current liabilities........................ 9,717 14,996
Deferred income taxes...................................... 1,068 2,163
Other non-current liabilities.............................. 182 698
-------------------- -------------------
Total liabilities................................ 10,967 17,857
-------------------- -------------------
Stockholders' equity:
Preferred stock, $.001 par value; 3,000 shares
authorized; no shares issued or outstanding........ -- --
Common stock, $.001 par value, 75,000 shares
authorized; 22,602 and 20,557 shares
issued and outstanding in 1998 and 1997............ 23 21
Additional paid-in capital............................ 58,008 20,725
Retained earnings..................................... 20,738 12,218
Accumulated other comprehensive income................ (66) (57)
-------------------- -------------------
Total stockholders' equity....................... 78,703 32,907
-------------------- -------------------
Total liabilities and stockholders' equity................. $89,670 $50,764
==================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
THE METZLER GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30
--------------------------------------------
1998 1997
-------------------- -------------------
<S> <C> <C>
Revenues................................................. $27,563 $20,194
Cost of services......................................... 15,323 11,948
-------------------- -------------------
Gross profit ............................................ 12,240 8,246
Selling, general and administrative expenses............. 5,250 4,681
-------------------- -------------------
Operating income......................................... 6,990 3,565
Other income, net........................................ (779) (209)
-------------------- -------------------
Income before income tax expense......................... 7,769 3,774
Income tax expense....................................... 2,969 1,437
-------------------- -------------------
Net income .............................................. $4,800 $2,337
==================== ===================
Net income per basic share..................... $0.21 $0.12
==================== ===================
Net income per diluted share................... $0.21 $0.12
==================== ===================
Basic shares used in computing net
income per share................................... 22,580 19,928
==================== ===================
Diluted shares used in computing net
income per share................................... 23,398 20,209
==================== ===================
Other comprehensive income:
Foreign currency translation adjustments............... $ 5 $ 0
Comprehensive income................................... $ 4,805 $ 2,337
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
THE METZLER GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30
-------------------------------------------
1998 1997
-------------------- -------------------
<S> <C> <C>
Revenues................................................ $53,050 $38,278
Cost of services........................................ 29,829 23,102
-------------------- -------------------
Gross profit ........................................... 23,221 15,176
Selling, general and administrative expenses............ 10,316 8,937
-------------------- -------------------
Operating income........................................ 12,905 6,239
Other income, net....................................... (1,260) (429)
-------------------- -------------------
Income before income tax expense........................ 14,165 6,668
Income tax expense...................................... 5,508 2,525
-------------------- -------------------
Net income ............................................. $8,657 $4,143
==================== ===================
Net income per basic share.................... $0.40 $0.21
==================== ===================
Net income per diluted share.................. $0.38 $0.21
==================== ===================
Basic shares used in computing net
income per share.................................... 21,838 19,926
==================== ===================
Diluted shares used in computing net
income per share................................ 22,706 20,209
==================== ===================
Other comprehensive income:
Foreign currency translation adjustments............... $ (9) $ 4
Comprehensive income................................... $ 8,648 $ 4,147
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
THE METZLER GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 8,657 $ 4,143
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization......................... 599 410
Gain on sale of property.............................. (310) _
Deferred income taxes................................. (1,326) (10)
Changes in assets and liabilities, net of acquisition:
Accounts receivable.............................. (1,462) (4,644)
Prepaid expenses and other....................... (515) (78)
Accounts payable and other accrued liabilities... (939) 146
Accrued compensation and related costs........... (447) 1,268
Income taxes payable............................. (1,683) 822
Other current liabilities........................ (917) (142)
-------------- --------------
Net cash provided by operating activities...................... 1,657 1,915
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment........................ (3,512) (301)
Proceeds from sale of property............................ 402 _
Other, net................................................ (88) (142)
-------------- --------------
Net cash used in investing activities.......................... (3,198) (443)
-------------- --------------
Cash flows from financing activities:
Issuance of common stock.................................. 37,149 133
Repayment of line of credit............................... (1,062) (194)
Payment of notes payable.................................. _ (1,823)
Distributions to former S-corporation stockholders........ _ (3,000)
Other, net................................................ (516) (628)
-------------- --------------
Net cash provided by (used in) financing activities............ 35,571 (5,512)
-------------- --------------
Net increase (decrease) in cash and cash equivalents........... 34,030 (4,040)
Cash and cash equivalents, at beginning of period.............. 21,573 33,536
-------------- --------------
Cash and cash equivalents, at end of period.................... $ 55,603 $ 29,496
============== ==============
Supplemental information:
Interest payments......................................... $ 24 $ 175
Income tax payments....................................... $ 7,772 $ 1,967
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited interim consolidated financial statements of
The Metzler Group, Inc. (the Company) have been prepared pursuant to the rules
of the Securities and Exchange Commission for quarterly reports on Form 10-Q
and do not include all of the information and note disclosures required by
generally accepted accounting principles. The information furnished herein
includes all adjustments, consisting of normal recurring adjustments, which
are, in the opinion of management, necessary for a fair presentation of
results for these interim periods.
The results of operations for the six months ended June 30, 1998 are
not necessarily indicative of the results to be expected for the entire fiscal
year ending December 31, 1998.
These financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto for the
year ended December 31, 1997, included in the Annual Report on Form 10-K filed
by the Company with the Securities and Exchange Commission on March 31, 1998.
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" as of January 1, 1998. Required changes
are reported in the Consolidated Statement of Operations and Comprehensive
Income and Consolidated Balance Sheets.
Note 2. Business Combinations
On July 31, 1997, the Company issued 3,206 shares of common stock for
substantially all the outstanding common stock of Resource Management
International, Inc. (RMI). Additionally, on August 15, 1997, the Company issued
778 shares of common stock for substantially all of the outstanding common stock
of Reed Consulting Group, Inc. (Reed). Each of these transactions was accounted
for as a pooling of interests and, accordingly, the consolidated financial
statements have been restated as if the combining companies had been combined
for all periods presented. The Company's consolidated statements of operations
and comprehensive income for the three months and six months ended June 30, 1997
have been restated to reflect revenues of $12,370 and $24,196, respectively and
net income of $536 and $1,112, respectively for the combined operations of RMI
and Reed.
During the second quarter, the Company completed mergers with American
Corporate Resources, Inc., AUC Management Consultants, Inc., Hydrologic
Consultants, Inc. and Vision Trust, Inc. All of these companies will operate as
divisions of existing operating companies. Each of these transactions was
accounted for utilizing the pooling of interest method of accounting. The
consolidated financial statements have not been restated since these
acquisitions were deemed immaterial individually and in the aggregate.
Note 3. Subsequent Event
On July 1, 1998, the Company signed a definitive merger agreement with
LECG, Inc (LECG). LECG is an economic consulting services firm that provides
sophisticated economic and financial analysis, expert testimony, litigation
support and strategic management consulting. The merger is subject to the
approval of the stockholders of both LECG and the Company and other legal and
regulatory conditions customary in such agreements. The merger agreement
provides for all the outstanding LECG common stock to be exchanged for
approximately 7,800 shares of the Company's common stock. This merger will be
accounted for as a pooling-of-interest and accordingly, the Company's historical
consolidated financial statements presented in future reports will be restated
to include the accounts and results of operations of LECG.
7
<PAGE> 8
Item 2.
THE METZLER GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical
in nature, are intended to be, and are hereby identified as, "forward
looking statements" for purposes of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934, as amended by
Public Law 104-67. Forward-looking statements may be identified by
words including "anticipate," "believe," "intends," "estimates,"
"expect" and similar expressions. The Company cautions readers that
forward-looking statements, including without limitation, those
relating to the Company's future business prospects, revenues, working
capital, liquidity, and income, are subject to certain risks and
uncertainties that could cause actual results to differ materially
from those indicated in the forward looking statements, due to several
important factors herein identified, among others, and other risks and
factors identified from time to time in the Company's reports filed
with the SEC.
Results of Operations
Revenues. Revenues increased by 36% to $27.6 million in the three
months ended June 30, 1998 from $20.2 million for the same period in 1997.
Revenues for the first six months of 1998 increased by 39% to $53.1 million
compared to $38.3 million in the corresponding period in 1997. The growth in
revenue was primarily due to expansion of services provided to existing clients
and engagements with new clients, as a result of continued strong demand for
management consulting services in the electric and energy-related industries,
increased selling and business development efforts and immaterial acquisitions.
Gross Profit. Gross profit consists of revenues less cost of services,
which includes consultant salaries, benefits and travel-related direct project
expenses. Gross profit increased 48% to $12.2 million in the second quarter of
1998 from $8.2 million in the second quarter of 1997. For the first six months
of 1998, gross profit increased 53% to $23.2 million from $15.2 million in the
comparable 1997 period. Gross profit as a percentage of revenues was 44% in the
three and six month periods ended June 30, 1998, compared to 41% and 40% for the
in the three and six month periods ended June 30, 1997, respectively. The change
in gross margin percentage was primarily the result of increases in the
utilization rates of the Company's professional personnel and the introduction
of performance-based incentive compensation plans at certain acquired businesses
as of January 1, 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include salaries and benefits of management and support
personnel, facilities costs, training, direct selling, outside professional fees
and all other corporate costs. Selling, general and administrative expenses for
the three month and six month periods ended June 30, 1998 were $5.3 million and
$10.3 million, respectively, or 19% of revenues, as compared to $4.7 million and
$8.9 million or 23% of revenues in the corresponding periods in 1997. The
increase in selling, general and administrative expenses is primarily due to the
growth in revenue. The improvement in selling, general and administrative
expenses as a percent of revenue is attributable to economies of scale,
increased efficiency in certain support functions, reduction of administrative
headcount and closing certain facilities at the beginning of 1998.
Other Income, net. Other income, net includes interest expense,
interest income and other non-operating income and expenses. Other income, net
for the second quarter of 1998 was $0.8 million versus $0.2 million in the
comparable quarter last year. In the six month period ended June 30, 1998, other
income, net was $1.3 million verses $0.4 million in the corresponding period in
1997. The increase is the result of higher interest income due to larger average
cash balances outstanding during the period and a reduction in interest expense.
Income Tax Expense. The Company's effective income tax rate was 38.9%
for the first six months of 1998, as compared to 37.9% for the same period in
1997. The increase in the effective tax rate is primarily attributable to a
higher statutory federal tax rate associated with anticipated increased earnings
in 1998 and due to an increase in the effective state tax rate resulting from a
greater proportion of the Company's business coming from locations with higher
state tax rates.
Liquidity and Capital Resources
Net cash provided by operating activities was $1.7 million for the
first six months of 1998. Net income for the period of $8.7 million was
primarily offset by a $3.0 million decrease in deferred and current tax
liabilities, a $1.4 million net decrease in accounts payable and accrued
liabilities and compensation, a $1.5 million increase in accounts receivable and
a $0.9 million payment for the purchase of dissenting shares issued in
connection with a merger completed in the fourth quarter of 1997.
8
<PAGE> 9
Investing activities used net cash flows of $3.2 million in the first
and second quarters of 1998. The net cash used in investing activities was
primarily due to the purchase and related improvements of the Company's new
corporate headquarters in Chicago. Historically, investing activities have not
required significant cash flows.
Financing activities provided net cash flows of $35.6 million in the
first six months of 1998. In March 1998, the Company sold 1.5 million shares of
common stock in a secondary offering, raising approximately $36.0 million
dollars, net of related offering costs. During 1998, the Company repaid
approximately $1.6 million of pre-existing notes and other obligations relating
to business combinations during 1997 and 1998.
The Company believes that the cash and cash equivalents as of the end
of the second quarter and funds generated by operations, will provide adequate
cash to fund its anticipated cash needs, which may include future acquisitions
of complementary businesses, at least through the next twelve months.
Thereafter, the Company anticipates that its cash requirements related to future
operations and potential acquisitions will be funded with cash generated from
operations and short-term borrowings. The Company currently anticipates that it
will retain all of its earnings for development of the Company's business and
does not anticipate paying any cash dividends in the foreseeable future.
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
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," was issued in June 1997. The
Company will be required to adopt the new standard for the year ending December
31, 1998, although early adoption is permitted. This statement requires use of
the "management approach" model for segment reporting. The management approach
model is based on the way the Company's management organizes segments within the
Company for making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure,
management structure, or any other manner in which management disaggregates a
company. The Company will adopt this statement in 1998. The effect of applying
this standard is not expected to be significant.
PART II-OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 20, 1998, The Metzler Group, Inc. held its 1998 Annual Meeting to
Stockholders, and two items were voted upon by the Company's stockholders.
First, the stockholders elected Mr. James T. Ruprecht and Mr. Barry S. Cain
as directors to serve until the Annual Meeting of Stockholders in the year 2001.
The voting results were as follows:
<TABLE>
<CAPTION>
Number of Votes
Name of Nominee For Withheld
<S> <C> <C>
James T. Ruprecht 8,883,972 550,151
Barry S. Cain 8,883,972 550,151
</TABLE>
Secondly, the stockholders approved the second amendment to The Metzler Group,
Inc.'s Incentive Plan (the "Plan"). The purpose of the second amendment to the
Plan is to increase the number of shares of the Company's common stock available
for grant. The voting results were as follows:
<TABLE>
<CAPTION>
For Against Withheld
<S> <C> <C>
5,779,244 3,654,092 787
</TABLE>
9
<PAGE> 10
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1998.
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE METZLER GROUP, INC.
Date: August 14, 1998 By: /s/ Robert P. Maher
----------------------------------
Robert P. Maher
Chairman of the Board, President and
Chief Executive Officer
Date: August 14, 1998 By: /s/ James F. Hillman
-----------------------------------
James F. Hillman
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 55,603
<SECURITIES> 0
<RECEIVABLES> 26,092
<ALLOWANCES> 1,000
<INVENTORY> 0
<CURRENT-ASSETS> 82,773
<PP&E> 13,568
<DEPRECIATION> (8,017)
<TOTAL-ASSETS> 89,670
<CURRENT-LIABILITIES> 9,717
<BONDS> 0
<COMMON> 23
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 89,670
<SALES> 53,050
<TOTAL-REVENUES> 53,050
<CGS> 29,829
<TOTAL-COSTS> 40,145
<OTHER-EXPENSES> (1,260)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,165
<INCOME-TAX> 5,508
<INCOME-CONTINUING> 14,165
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,657
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.38
</TABLE>
