<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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
(State or other jurisdiction of
incorporation or organization)
36-4094854
(I.R.S. Employer
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 May 12, 1999, the Registrant had outstanding 42,393,735 shares of its
$.001 par value Common Stock.
<PAGE>
THE METZLER GROUP, INC.
Quarter Ended March 31, 1999
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART 1--FINANCIAL INFORMATION
Item 1 Financial Statements
Unaudited Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 ............................................... 3
Unaudited Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998........................................ 4
Unaudited Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998................................. 5
Notes to Unaudited Consolidated Financial Statements.................. 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 7
Item 3 Quantitative and Qualitative Disclosures About Market Risk........ 8
PART II--OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.................................. 9
SIGNATURES................................................................. 10
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
THE METZLER GROUP, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- --------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents............................... $ 95,255 $120,448
Accounts receivable, net................................ 104,535 100,993
Prepaid expenses and other.............................. 8,577 8,770
-------- --------
Total current assets................................. 208,367 230,211
Property and equipment, net............................... 29,204 27,624
Other non-current assets, net............................. 2,047 2,103
-------- --------
Total assets...................................... $239,618 $259,938
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt......................................... $ 1,466 $ 3,802
Accounts payable and accrued liabilities................ 17,553 20,092
Accrued compensation and project costs.................. 31,426 42,594
Income taxes payable.................................... 8,923 3,874
Deferred income taxes................................... 1,794 6,342
Other current liabilities............................... 5,797 12,046
-------- --------
Total current liabilities............................ 66,959 88,750
Deferred income taxes..................................... 4,944 2,034
Other non-current liabilities............................. 276 209
-------- --------
Total liabilities................................. 72,179 90,993
-------- --------
Stockholders' equity:
Common stock............................................ 43 42
Additional paid-in capital.............................. 124,903 136,861
Retained earnings....................................... 42,592 32,072
Accumulated other comprehensive income.................. (99) (30)
-------- --------
Total stockholders' equity........................... 167,439 168,945
-------- --------
Total liabilities and stockholders' equity........ $239,618 $259,938
======== ========
</TABLE>
3
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THE METZLER GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues.............................................................. $95,956 $78,658
Cost of services.................................................... 54,169 46,044
------- -------
Gross profit.......................................................... 41,787 32,614
General and administrative expenses................................. 20,791 22,563
Merger-related costs................................................ 3,585 --
------- -------
Operating income...................................................... 17,411 10,051
Other income, net................................................... (1,122) (532)
------- -------
Income before income tax expense...................................... 18,533 10,583
Income tax expense.................................................. 8,012 4,023
------- -------
Net income....................................................... $10,521 $ 6,560
======= =======
Earnings per common share:
Net income per basic share.......................................... $ 0.25 $ 0.17
Shares used in computing net income per basic share................. 42,429 38,892
Net income per dilutive share....................................... $ 0.23 $ 0.16
Shares used in computing net income per dilutive share.............. 44,813 39,986
Pro forma income data (unaudited):
Net income as reported............................................. $10,521 $ 6,560
Pro forma adjustments to executive compensation expense 1,191 1,654
Pro forma adjustments to income tax expense......................... (482) (918)
------- -------
Pro forma net income............................................. $11,230 $ 7,296
======= =======
Pro forma net income per basic share............................. $ .26 $ 0.19
Pro forma net income per dilutive share.......................... $ .25 $ 0.18
Other comprehensive income:
Foreign currency translation adjustments............................ $ (69) $ (13)
Comprehensive income................................................ $10,452 $ 6,547
</TABLE>
4
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THE METZLER GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................................ $ 10,521 $ 6,560
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 2,046 1,773
Deferred income taxes.............................................................. (1,638) (207)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net........................................................ (3,543) (9,536)
Prepaid expenses and other...................................................... 193 (1,870)
Accounts payable and other accrued liabilities.................................. (2,539) (858)
Accrued compensation and project costs.......................................... (11,167) 5,436
Income taxes payable............................................................ 5,049 (396)
Other current liabilities....................................................... (6,249) 389
-------- -------
Net cash provided by (used in) operating activities.......................... (7,327) 1,291
-------- -------
Cash flows from investing activities:
Purchase of property and equipment.................................................... (3,569) (3,914)
Other, net............................................................................ (3) 246
-------- -------
Net cash used in investing activities........................................ (3,572) (3,668)
-------- -------
Cash flows from financing activities:
Issuance of common stock.............................................................. 1,377 39,381
Payment of short term debt............................................................ (2,381) (3,532)
Purchase of certain minority interests in business combinations....................... (13,335) --
Payments of pre-acquisition undistributed income to former stockholders -- (5,798)
Other, net............................................................................ 45 1,966
-------- -------
Net cash provided by (used in) financing activities.......................... (14,294) 32,017
-------- -------
Net increase (decrease) in cash and cash equivalents.................................... (25,193) 29,640
Cash and cash equivalents, beginning of period.......................................... 120,448 47,168
-------- -------
Cash and cash equivalents, end of period................................................ $ 95,255 $76,808
======== =======
Supplemental information:
Interest payments..................................................................... $ 32 $ 315
Income tax payments................................................................... $ 3,345 $ 4,551
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
THE METZLER GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
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 three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 1999.
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, 1998, included in the Annual Report on Form 10-K filed by the
Company with the Securities and Exchange Commission on March 31, 1999.
Note 2. Business Combinations
On August 19, 1998, the Company issued 7.3 million shares of common stock for
substantially all the outstanding common stock of LECG, Inc. (LECG).
Additionally, on August 31, 1998, the Company issued 5.6 million shares of
common stock for substantially all of the outstanding common stock of Peterson
Consulting L.L.C., (Peterson). Each of these transactions was accounted for as a
pooling of interests and, accordingly, the unaudited consolidated financial
statements have been restated as if the companies had been combined for all
periods presented. The Company's unaudited consolidated statements of operations
for the three months ended March 31, 1998 have been restated to reflect revenues
of $35,322 and net income of $1,801 for the aggregate of the operations of LECG
and Peterson combined.
Effective January 1, 1999, the Company issued 1.6 million shares of common
stock for all the outstanding common stock of Triad International, Inc. and
GeoData Solutions, Inc. Additionally, on February 7, 1999, the Company issued
2.4 million shares of common stock for substantially all of the outstanding
common stock of Strategic Decisions Group, Inc. (SDG). All of these transactions
were accounted for as poolings of interests and, accordingly, the unaudited
consolidated financial statements have been restated as if the companies had
been combined for all periods presented. The Company's unaudited consolidated
statement of operations for the three months ended March 31, 1998 has been
restated to reflect revenues of $17,849 and net income of $902 for the aggregate
of the operations of these acquired businesses on a combined basis. The
Company's unaudited consolidated statement of operations for the three months
ended March 31, 1999 has been restated to reflect revenues of $5,623 and net
income of $0 for these acquisitions. During the first quarter of 1999, the
Company completed one additional transaction which was accounted for as a
pooling of interests. The stockholders' equity and the operations of this
business were not material in relation to those of the Company. As such, the
Company recorded the combination by restating stockholders' equity as of the
effective date of the acquisition without restating prior period financial
statements.
The Company incurred certain costs and expenses in connection with these
acquisitions, including legal and accounting, and other various expenses. These
costs and expenses were recorded in the consolidated statements of operations
during the first quarter of 1999.
6
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THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Pro Forma Net Income
Pro forma net income for the three months ended March 31, 1998 has been
adjusted to reflect the impact of a Peterson executive compensation plan adopted
pursuant to the acquisition in 1998. Pro forma net income for the three months
ended March 31, 1999 has been adjusted to reflect the impact of an SDG executive
compensation plan adopted pursuant to the acquisition in 1999. The pro forma
adjustments to executive compensation expense are shown solely as a result of
changes in compensation that exist following consummation of the mergers. These
changes would have resulted in reduced compensation in the pre-merger periods
for Peterson and SDG executives, although their duties and responsibilities
would have been largely unchanged. The pro forma adjustments to income tax
expense represent adjustments to record the tax effect in 1998 and 1999
associated with the pro forma compensation expense adjustment described above
and an adjustment to reflect a provision for income taxes that would have been
recorded had all of the Company's subsidiaries been taxable entities in 1998.
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 risks and uncertainties that could cause actual
results to differ materially from those indicated in the forward looking
statements, due to important risks and factors herein identified or identified
from time to time in the Company's reports filed with the SEC.
Results of Operations
Revenues. Revenues increased by 22% to $96.0 million in the three months ended
March 31, 1999 from $78.7 million for the same period in 1998. The growth in
revenue was primarily due to expansion of services provided to existing clients,
engagements with new clients, continued strong demand for management consulting
services in energy based and other network and regulated industries, increased
selling and business development efforts and acquisitions. Reported year over
year revenue growth percentage was reduced by the effect of activities of
acquired companies which are no longer reflected as ongoing operations and the
departures of certain equity holders of acquired companies during the period
prior to acquisition. As a result, management believes that the Company's
inability to make pro forma adjustments to give effect to these differences
makes period over period comparisons not meaningful.
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 28% to $41.8 million in the first quarter of
1999 from $32.6 million in the corresponding period in 1998. Gross profit as a
percentage of revenues was 44% in the three month period ended March 31, 1999,
compared to 41% for the same period in 1998. For the first quarter of 1999,
gross margin as a percentage of revenue was higher than the prior year due to
increased utilization rates and higher billing rates.
General and Administrative Expenses. 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. General and administrative expenses for the three months ended
March 31, 1999 were $20.8 million or 22% of revenues compared to $22.6 million
and 29% of revenues in the prior corresponding period. The percentage decrease
of general and administrative costs is principally due to the difference in
structure between a privately held enterprise designed to generate minimum
taxable income as compared to the Company's structure as a public company. As a
result, management believes that the Company's inability to make pro forma
adjustments to give effect to these differences makes period over period
comparisons not meaningful.
7
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In the current period the Company also realized some improvement in general and
administrative expenses attributable to economies of scale, increased
efficiencies in certain support functions, and reduction of administrative
headcount.
Merger-Related Costs. In the first quarter of 1999, the Company incurred
merger-related costs of $3.6 million related to acquisitions which were
accounted for as poolings of interests. These costs include legal, accounting
and other transaction related fees and expenses, as well as accruals to
consolidate certain facilities.
Other Income, Net. Other income, net includes interest expense, interest
income and other non-operating income and expenses. Other income, net for the
first quarter of 1999 was $1.1 million versus $0.5 million in the comparable
quarter last year. 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 43.2% for the
first three months of 1999. The effective rate for this period would be 39.2%
excluding the effect of certain merger-related expenses resulting from the
mergers completed during the first quarter of 1999. The Company's effective
income tax rate was 38.0% for the first three months of 1998. The effective rate
would have been 40.4% including federal and certain state income taxes that
would have been required had all of the Company's subsidiaries been taxable
entities during this period.
Liquidity and Capital Resources
Operating activities used net cash of $7.3 million during the quarter ended
March 31, 1999. For the period, the primary sources of cash provided by
operating activities were net income of $10.5 million, non-cash depreciation of
$2.0 million and an increase in income taxes payable of $5.0 million. The higher
volume of business in 1998 resulted in increases in accounts receivable for the
quarter which negatively affected operating cash flow by $3.5 million. Current
liabilities were reduced during the first quarter of 1999. Operating cash flow
was negatively affected by decreases in accounts payable and accrued liabilities
of $2.5 million, accrued compensation and project costs of $11.2 million, and
other current liabilities of $6.2 million.
Year to date investing activities used net cash flows of $3.6 million,
principally to support growth in personnel and services. These investments
included leasehold improvements, furniture and equipment for new leased
facilities, additional computer and related equipment for information management
consulting services, and the purchase of an enterprise financial and
project software license.
Net cash used in financing activities was $14.3 million in the first three
months of 1999. During the quarter, the Company received $1.4 million from
transactions related to stock option exercises and the employee stock purchase
plan. Cash flows used by financing activities included $2.4 million of net
payments of short term debt and $13.3 million for the purchase of certain
minority interests of acquired companies.
As of March 31, 1999, the Company had approximately $95.3 million in cash and
cash equivalents, resulting principally from cash flows from operations and the
various public stock offerings during the previous three years. The Company
believes that current cash and cash equivalents will provide adequate cash to
fund its anticipated cash need over at least the next twelve months.
In general, the Company's internal information technology ("IT") and Non-IT
systems are Year 2000 compliant. The Company does not expect to incur any
additional costs for the purpose of Year 2000 compliance, nor does the Company
believe that there is a significant risk of a material potential liability to
third parties arising from Year 2000 issues.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Company's primary exposure to market risks relates to changes in interest
rates associated with its investment portfolio included in cash equivalents on
the consolidated balance sheet. The Company does not currently use derivative
securities. The Company's general policy is to limit the risk of principal loss
by limiting market and credit risks. The Company does not expect any material
loss with respect to its investment portfolio.
The Company operates in foreign countries which exposes it to market risk
associated with foreign currency exchange rate fluctuations; however, such risk
is immaterial at this time to the Company's consolidated financial statements.
8
<PAGE>
PART II--OTHER INFORMATION
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 three
months ended March 31, 1999.
9
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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: May 17, 1999 By: /s/ Robert P. Maher
------------------------------------
Robert P. Maher
Chairman of the Board, President and
Chief Executive Officer
/s/ Timothy D. Kingsbury
------------------------------------
Timothy D. Kingsbury
Chief Accounting Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 95,255 76,809
<SECURITIES> 0 0
<RECEIVABLES> 104,535 86,290
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 208,367 170,890
<PP&E> 54,420 46,019
<DEPRECIATION> (25,216) (24,976)
<TOTAL-ASSETS> 239,618 193,895
<CURRENT-LIABILITIES> 66,959 64,802
<BONDS> 0 0
0 0
0 0
<COMMON> 43 39
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 239,618 193,895
<SALES> 95,956 78,658
<TOTAL-REVENUES> 95,956 78,658
<CGS> 54,169 46,044
<TOTAL-COSTS> 78,545 68,607
<OTHER-EXPENSES> (1,122) (532)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 18,533 10,583
<INCOME-TAX> 8,012 4,023
<INCOME-CONTINUING> 10,521 6,560
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,521 6,560
<EPS-PRIMARY> 0.25 0.17
<EPS-DILUTED> 0.23 0.16
</TABLE>
