<PAGE>
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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, 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 offices, including zip code)
(312) 573-5600
(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. [_]
As of March 12, 1999, 40,488,540 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 12, 1999, was
approximately $1,511,761,828.
The Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held May 19, 1999 is incorporated by reference into Part III
of this Annual Report on Form 10-K.
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<PAGE>
PART I
Item 1--Business
General
The Metzler Group, Inc. ("We" or the "Company") is a leading provider of
consulting services to energy-based and other network and regulated
industries. The Company offers a wide range of consulting services designed to
assist our clients as they face changing regulations, increasing competition
and evolving technology. Our clients include the 50 largest investor-owned
utilities, the 20 largest gas distribution companies and the 12 largest local
exchange telecommunications companies in the United States, as well as other
Fortune 100 companies. Our services include: (1) management consulting; (2)
information technology; and (3) litigation support. Since our initial public
offering in October 1996, we have increased the scope and size of our service
offerings through a series of acquisitions and internal growth. We have also
expanded our base of non-utility energy clients and established a presence in
Europe, Asia and Australia.
We believe that several competitive factors distinguish us from other
participants in the consulting industry, including:
--Established, recognized expertise and academic reputation of our
consultants and affiliated experts;
--Deep-rooted client relationships supporting multiple engagements; and
--A wide range of industry-specific services that enable us to be a single-
source provider of consulting services while maintaining advanced skill
sets in each area.
Our growth strategy is to:
--Continue to build a complementary spectrum of consulting services;
--Leverage vertical focus to capitalize on current industry dynamics;
--Leverage existing relationships and expand our client base in both
domestic and international markets;
--Continue to recruit and retain highly skilled professionals; and
--Continue to acquire consulting companies that provide complementary
services or geographic presence.
At December 31, 1998, we had five principal operating subsidiaries: LECG,
Inc. ("LECG"), Metzler & Associates, Inc. ("Metzler & Associates"), Peterson
Consulting, L.L.C. ("Peterson"), Reed Consulting Group, Inc. ("Reed"), and
Resource Management International, Inc. ("RMI"). On February 7, 1999, we
acquired our sixth principal operating subsidiary, Strategic Decisions Group.
Our executive office is located at 615 North Wabash Avenue, Chicago, Illinois
60611. Our telephone number is (312) 573-5600.
Marketing and Sales
We market our services directly to mid-level and senior executives using a
variety of business development and marketing techniques to communicate
directly with current and prospective clients, including on-site
presentations, industry seminars and industry-specific articles and other
publications.
A significant portion of new business arises from prior client engagements.
In addition, we expect to leverage the client relationships of firms we have
acquired by cross-selling existing services. Clients frequently expand the
scope of engagements during delivery to include follow-on complementary
activities. Also, our on-site presence affords us 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 our ability to market additional capabilities to
clients in the future.
Human Resources
As of December 31, 1998, we had approximately 1,500 employees. Our success
depends in large part on attracting, retaining and motivating talented,
creative and experienced professionals at all levels. In connection with our
hiring efforts, we employ internal recruiters, retain executive search firms
and utilize personal and
2
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business contacts to recruit professionals with significant utility industry
or consulting experience. Our consultants are drawn from utility and related
industries, including engineering, construction and telecommunications, and
from accounting and other consulting organizations. We promote loyalty and
continuity of our consultants by offering packages of base and incentive
compensation and benefits that we believe are significantly more attractive
than those offered by the consulting industry in general.
We derive our revenues almost exclusively from services performed by our
professional consultants. Our future performance will continue to depend in
large part upon our ability to attract and retain highly-skilled professionals
possessing appropriate skills and senior academics with superior professional
reputations. Qualified professional consultants are in great demand and are
likely to remain a limited resource for the foreseeable future. We may not be
able to retain a substantial majority of our existing or future consultants
for the long term. The loss of the services of, or the failure to recruit, a
significant number of consultants could adversely affect our ability to secure
and complete engagements and could have an adverse effect on our business.
In addition to the employees discussed above, we supplement our consultants
on certain engagements with independent contractors, many of whom are former
employees. We believe that the practice of retaining independent contractors
on a per-engagement basis provides us with greater flexibility in adjusting
professional personnel levels in response to changes in demand for our
services.
Competition
The market for consulting services 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 we do. We believe that our experience,
reputation, industry focus and broad range of services will enable us to
compete effectively in the consulting marketplace.
Item 2--Facilities
Our headquarters are currently located in a 15,000 square foot building in
Chicago, Illinois which we own. In addition to our headquarters, we lease
office space in 41 cities. Additional space may be required as our business
expands geographically, but we believe we will be able to obtain suitable
space as needed.
We have principal offices in the following locations:
<TABLE>
<CAPTION>
Domestic International
---------------------------------------------- -----------------------
<S> <C> <C>
Albany, NY New York City, NY Brussels, Belgium
Austin, TX Oakbrook, IL Buenos Aires, Argentina
Boston, MA Orlando, FL Copenhagen, Denmark
Cambridge, MA Philadelphia, PA London, England
Chicago, IL Phoenix, AZ Manila, Philippines
Clearwater, FL Pittsburgh, PA Melbourne, Australia
Colorado Springs, CO Portland, OR Sydney, Australia
College Station, TX Princeton, NJ Toronto, Canada
Dallas, TX Richardson, TX Toulouse, France
Emeryville, CA Sacramento, CA Wellington, New Zealand
Evanston, IL Salt Lake City, UT
Fairfield, CT San Francisco, CA
Houston, TX Springfield, IL
Los Angeles, CA Tampa, FL
Menlo Park, CA Washington, DC
Westbury, NY
</TABLE>
3
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Item 3--Legal Proceedings
Peterson is a defendant in a lawsuit filed by National Council on
Compensation Insurance ("NCCI") against Peterson, its former subsidiary
Insurance Data Resources, Inc. ("IDR") and certain of their officers and
former directors. The lawsuit alleges, among other things, that IDR violated
certain copyrights and other intellectual property of NCCI and seeks to hold
Peterson liable as IDR's sole shareholder. We no longer own IDR, but continue
to have certain rights of indemnification against the former members of
Peterson and the purchaser of IDR. The parties to the lawsuit agreed in
principle to settle the dispute. The agreement would release all defendants,
including Peterson, without any payments to NCCI, but is subject to the
negotiation and execution of a definitive agreement. Although no assurances
can be given, we do not believe this lawsuit will have a material adverse
affect on our business. One of our directors, Governor James R. Thompson, is
also a member of the board of directors of NCCI.
In addition, from time to time, we are party to various other lawsuits. We
do not believe that any of our current lawsuits are material.
Item 4--Submission of Matters to a Vote of Security Holders
Not Applicable
Part II
Item 5--Market for the Registrant's Common Stock and Related Stockholder
Matters
Our 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.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal 1998:
January--March.................................................. $33.92 $24.00
April--June..................................................... $36.63 $34.25
July--September................................................. $37.75 $27.25
October--December............................................... $49.00 $28.85
Fiscal 1997:
January--March.................................................. $23.17 $14.00
April--June..................................................... $21.84 $13.17
July--September................................................. $27.42 $20.67
October--December............................................... $27.67 $23.00
</TABLE>
We had 215 holders of record of its Common Stock at March 12, 1999 and
approximately 9,497 beneficial owners. We have never paid a cash dividend on
its Common Stock and do not expect to pay a cash dividend on our Common Stock
in the foreseeable future.
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Item 6--Selected Financial Data
The selected financial data set forth below should be read in conjunction
with our 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,(1)
-------------------------------------
1998 1997 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................... $266,877 $196,780 $151,889 $130,909
Cost of services....................... 154,322 115,122 89,410 79,056
-------- -------- -------- --------
Gross profit........................... 112,555 81,658 62,479 51,853
General and administrative
expenses(2)........................... 60,893 54,151 47,028 52,135
Merger related costs................... 12,778 1,312 -- --
-------- -------- -------- --------
Operating income (loss)................ 38,884 26,195 15,451 (282)
Other expense (income), net(2)......... (2,652) (1,305) 285 (5,352)
-------- -------- -------- --------
Income before income tax expense....... 41,536 27,500 15,166 5,070
Income tax expense(3).................. 25,413 9,081 9 476
-------- -------- -------- --------
Net income............................. $ 16,123 $ 18,419 $ 15,157 $ 4,594
======== ======== ======== ========
Pro forma net income (loss)(4)......... $ 25,590 $ 16,225 $ 8,948 ($367)
======== ======== ======== ========
Pro forma net income (loss) per basic
share................................. $ 0.71 $ 0.51 $ 0.29 $ (0.01)
-------- -------- -------- --------
Pro forma net income (loss) per
dilutive share........................ $ 0.69 $ 0.50 $ 0.29 $ (0.01)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,(1)
---------------------------------
1998 1997 1996 1995
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................... $119,704 $ 45,867 $33,699 $ 1,878
Working capital.............................. 146,509 58,269 45,984 11,451
Total assets................................. 230,517 124,443 92,914 51,514
Long-term debt, less current portion......... -- 319 1,490 1,027
Total stockholders' equity................... 164,904 68,672 50,387 12,569
</TABLE>
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(1) The amounts above have been restated to reflect the transactions accounted
for as poolings of interest as described in Note 3 of Notes to
Consolidated Financial Statements.
(2) For the year ended December 31, 1995, general and administrative expenses
include $4.3 million reported by Peterson for a restructuring charge
related to the settlement of obligations under non cancelable operating
leases and other moving and transition costs. Other income for the year
ended December 31, 1995 includes an extraordinary gain of $5.7 million
recorded by Peterson in connection with the extinguishment of certain
other debt obligations.
(3) During the periods presented, certain of our operating subsidiaries were
entities not subject to federal income taxation. The provision for income
taxes for the year ended December 31, 1998 reflects a one-time, non-cash
charge of $7.2 million resulting from the conversion of Peterson from the
modified cash basis to the accrual basis for tax purposes.
(4) Pro forma net income: (1) for all periods presented prior to 1998 has been
adjusted to reflect a provision for income taxes assuming a tax rate of
41% that would have been recorded had all subsidiaries been taxable C
corporations during these periods; and (2) for the year ended December 31,
1998 has been increased by $2.3 million to reflect the impact of a new
executive compensation plan adopted by Peterson and increased by $7.2
million to reflect the effect of a one-time, non-cash charge to income tax
expense which resulted from Peterson's conversion from the modified cash
basis to the accrual basis for tax purposes.
5
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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," "intend," "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.
Overview
We are a leading nationwide provider of consulting services to energy based
and other network and regulated industries. We offer a wide range of
consulting services designed to assist our clients as they face changing
regulation, increasing competition and evolving technology. The Company's
services include: (1) management consulting; (2) information technology; and
(3) litigation support.
We derive substantially all of our revenues from fees for professional
services. Over the last three years, the substantial majority of our revenues
have been generated under standard hourly or daily rates billed on a time-and-
expenses basis. Our clients are typically invoiced on a monthly basis with
revenue recognized as the services are provided.
Our most significant expenses are project personnel costs, which consist of
consultant salaries and benefits, and travel-related direct project expenses.
We typically employ our project personnel on a full-time basis, although we
supplement our project personnel through the use of independent contractors.
We retain contractors for specific client engagements on a task-specific, per
diem basis during the period their expertise or skills are required. We
believe that retaining contractors on a per-engagement basis provides us with
greater flexibility in adjusting project personnel levels in response to
changes in demand for our services.
Acquisitions
As part of our growth strategy, we expect to continue to pursue
complementary acquisitions to expand our geographic reach, expand the breadth
and depth of our service offerings and enhance our consultant base. In
furtherance of this growth strategy, we have acquired fourteen consulting
firms during 1997 and 1998. All of these transactions were accounted for as
pooling of interests.
The following summarizes the significant pooling of interests acquisitions
that we have made since our initial public offering through the end of 1998:
RMI. As of July 31, 1997, we acquired substantially all of the common stock
of Resource Management International, Inc. in exchange for 3.2 million shares
of our common stock (valued at approximately $75.3 million) and acquired the
remaining minority interest in exchange for cash. 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 broad range of engineering, technical and
economic regulatory services complemented our management consulting and
information technology services.
Reed. As of August 15, 1997, we acquired substantially all of the common
stock of Reed Consulting Group, Inc. in exchange for 0.8 million shares of our
common stock (valued at approximately $17.6 million) and
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acquired the remaining minority interest in exchange for cash. Reed, based in
the Boston, Massachusetts area, provides strategic planning, operations
management and economic and regulatory services to electric and natural gas
utilities. Reed's operations expanded our services and client base in the
northeast United States and internationally.
LECG. As of August 19, 1998, we acquired substantially all of the common
stock of LECG, Inc. in exchange for 7.3 million shares of our common stock
(valued at approximately $228.9 million) and acquired the remaining minority
interest in exchange for cash. LECG, based in the San Francisco, California
area, is a leading provider of economic consulting and litigation support
services. LECG's operations further increased our economic and regulatory
expertise and expanded our presence in the telecommunications industry.
Peterson. As of August 31, 1998, we acquired substantially all of the common
stock of Peterson Worldwide, LLC in exchange for 5.6 million shares of our
common stock (valued at approximately $156.7 million) and acquired the
remaining minority interest in exchange for cash. Peterson, based in the
Chicago, Illinois area, is a leading provider of information management
services. Peterson's operations expanded our service offerings in the area of
information technology.
We acquired LECG and Peterson in August 1998. These acquisitions are the
largest we have made to date and we are in the process of integrating these
companies, including their accounting and billing functions, into our
operations. An inability to effectively integrate these or any companies
acquired in the future may adversely affect our ability to bid successfully on
engagements and to grow our business. Performance problems or dissatisfied
clients at one company could have an adverse effect on our reputation as a
whole. If our reputation were damaged, this could make it more difficult to
market our services or to acquire additional companies in the future. In
addition, acquired companies may not operate profitably. Acquisitions also
involve a number of additional risks, including, among others, the following:
--Diversion of management's attention;
--Potential loss of key clients or personnel;
--Risks associated with unanticipated assumed liabilities and problems; and
--Risks of managing businesses or entering markets in which we have limited
or no direct expertise.
We expect to continue to acquire companies as an element of our growth
strategy. Acquisitions involve certain risks that could cause our actual
growth to differ from our expectations. For example
--We may not be able to continue to identify suitable acquisition
candidates or to acquire additional consulting firms on favorable terms.
--We compete with other companies to acquire consulting firms. We cannot
predict whether this competition will increase. If competition does
increase, there may be fewer suitable consulting firms available to be
acquired and the price for suitable acquisitions may increase.
--We may not be able to integrate the operations (accounting and billing
functions, for example) of businesses we acquire to realize the economic,
operational and other benefits we anticipate.
--We may not be able to successfully integrate acquired businesses in a
timely manner or we may incur substantial costs, delays or other
operational or financial problems during the integration process.
--It may be difficult to integrate a business with personnel who have
different business backgrounds and corporate cultures.
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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,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues....................................... 100.0% 100.0% 100.0%
Cost of services............................... 57.8 58.5 58.9
-------- -------- --------
Gross profit................................... 42.2 41.5 41.1
General and administrative expenses............ 22.8 27.5 31.0
Merger-related costs........................... 4.8 0.7 --
-------- -------- --------
Operating income............................... 14.6 13.3 10.1
Other expense (income), net.................... (1.0) (0.7) 0.1
-------- -------- --------
Income before income tax expense............... 15.6 14.0 10.0
Income tax expense............................. 9.6 4.6 0.0
-------- -------- --------
Net income..................................... 6.0% 9.4% 10.0%
======== ======== ========
</TABLE>
1998 Compared to 1997
Revenues. Revenues increased 35.6% to $266.9 million in 1998 from $196.8
million in 1997. This growth in revenues was due to several factors, including
the 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 as well as 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 37.8% to $112.6 million in 1998 from $81.7
million in 1997. Gross profit as a percentage of revenues was 42.2% in 1998
compared to 41.5% in 1997. The improvement in gross profit margin was the
result of increased utilization of the Company's professional consultants
coupled with higher average 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 support costs. General and administrative expenses for the year
ended December 31, 1998 were $60.9 million, or 23% of revenues compared to
$54.2 million or 28% of revenues in the comparable 1997 period. The decrease
of general and administrative costs as a percentage of revenues was primarily
due to decreases in executive incentive compensation at companies acquired in
1998 coupled with increased efficiencies in certain support functions,
improved economies of scale and the closing of certain duplicate facilities at
the beginning of 1998.
Merger-Related Costs. During 1998, the Company incurred merger-related costs
of $12.8 million related to the acquisitions of LECG and Peterson, which were
accounted for as pooling of interests. These costs include legal, accounting
and other transaction related fees and expenses, as well as accruals to
consolidate certain facilities. In the prior year period, the Company incurred
legal, accounting and other transaction related fees and expenses of $1.3
million related to the acquisitions of RMI and Reed, which were accounted for
as pooling of interests.
Other Income, Net. Other income, net includes interest expense, interest
income and other non-operating income and expenses. For the fiscal year ended
December 31, 1998, other income, net was $2.7 million versus $1.3 million at
1997 year end. This increase is largely the result of higher interest income
due to larger average cash balances outstanding during the period.
Income Tax Expense. The Company's effective income tax rate was 61.2% for
the year ended December 31, 1998. The effective rate for this period would
have been 39.4%, excluding the effect of the one-
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time, non-cash charge to income tax expense of $7.2 million related to the
conversion of Peterson from the modified cash basis to the accrual basis of
accounting for tax purposes and the effect of certain merger-related expenses
resulting from the acquisitions of LECG and Peterson that are not tax
deductible. The Company's effective income tax rate was 33% for the year ended
December 31, 1997. The effective rate would have been 38.2%, including federal
and certain state income taxes that would have been required had all the
Company's subsidiaries been taxable entities during this period.
1997 Compared to 1996
Revenues. Revenues increased 30% in 1997 to $196.8 million compared to
$151.9 in 1996. The growth in revenues was primarily due to increased selling
and business development efforts to generate new client engagements and
increased demand for management consulting services in the Company's principal
target industry segments.
Gross Profit. Gross profit increased 31% in 1997 to $81.7 million from $62.5
in 1996. Gross profit as a percentage of revenues increased to 42% in 1997
from 41% in 1996. The gross profit percentage was largely unchanged and
average utilization rates for full-time personnel and a similar proportion of
subcontracted labor were consistent in both periods.
General and Administrative Expenses. General and administrative expenses
increased 15% to $54.2 million in 1997 from $47.0 million in 1996. As a
percentage of revenues, general and administrative expenses decreased to 28%
in 1997 from 31% in 1996. The decrease is attributable to economies of scale
on certain fixed costs over the higher 1997 revenue base.
Other Income, Net. Other income, net for 1997 was $1.3 million, as opposed
to other expense, net of $0.3 million in 1996. The increase is due in large
part to a one-time gain in 1997 of $0.9 million related to the expiration of
an option agreement entered into in 1993. The agreement called for the
purchase of all of the assets or outstanding stock of LECG. The remainder of
the increase is the result of higher interest income due to larger average
cash balances during the period and a reduction in interest expense.
Income Tax Expense. The Company's effective income tax rate was 33% for 1997
and 0.1% for 1996. The effective tax rate would have been approximately 39%
for both periods had all of the Company's subsidiaries been taxable entities
during these periods.
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Unaudited Quarterly Results
The following table sets forth certain unaudited quarterly operating
information. 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.
<TABLE>
<CAPTION>
Quarters Ended
------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $44,011 $48,121 $49,964 $54,684 $60,809 $64,863 $68,311 $72,894
Cost of services........ 26,776 28,293 28,145 31,909 36,023 37,015 39,320 41,964
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 17,235 19,828 21,819 22,775 24,786 27,848 28,991 30,930
General and administra-
tive expenses.......... 12,043 13,145 13,991 14,971 15,887 17,747 13,304 13,955
Merger-related costs.... -- -- 1,312 -- -- -- 12,778 --
------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 5,192 6,683 6,516 7,804 8,899 10,101 2,909 16,975
Other income, net....... (146) (981) (105) (73) (550) (790) (538) (773)
------- ------- ------- ------- ------- ------- ------- -------
Income before income tax
expense................ 5,338 7,664 6,621 7,877 9,449 10,891 3,447 17,748
Income tax expense...... 1,152 1,552 1,492 4,885 3,791 4,233 10,420 6,968
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 4,186 $ 6,112 $ 5,129 $ 2,992 $ 5,658 $ 6,658 $(6,973) $10,780
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Revenues and operating results fluctuate from quarter to quarter as a result
of a number of factors, including 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 due to factors such as 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
Net cash provided by operating activities was $21.5 million for the year
ended December 31, 1998. During the year, the primary sources of cash provided
by operating activities were net income of $16.1 million and non-cash
depreciation of $5.1 million. The higher volume of business in 1998 resulted
in increases in both current assets and current liabilities for the year.
While operating cash flow was negatively affected by the $25.5 million
increase in accounts receivable and prepaid expenses and other assets, this
was more than offset by the positive impact of the $22.7 million increase in
current liabilities and the $3.0 million in other non-cash adjustments during
the period.
The current year investing activities used net cash flows of $14.0 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 provision of
information management consulting services by Peterson, and the purchase and
related improvements of the Company's corporate headquarters in Chicago.
10
<PAGE>
Financing activities provided net cash flows of $66.3 for the 1998 fiscal
year. In March 1998 and again in November 1998, the Company sold 1.5 million
shares of common stock in secondary offerings, raising approximately $35.6
million and $50.8 million, respectively, net of related offering costs. The
Company received an additional $10.6 million from transactions related to
stock option exercises, the employee stock purchase plan, and notes receivable
from stockholders. Cash flows used by financing activities included $18.9
million for the purchase of certain minority interests of LECG and Peterson
and included $8.1 million for the repayment of short-term debt and $6.1
million in payments of pre-acquisition, undistributed income to former
stockholders of acquired companies.
As of December 31, 1998, the Company had approximately $119.7 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 7A--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.
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-14. An index to such materials appears on page
F-1.
Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Discussions
Not Applicable.
Part III
The information required by this Part III will be provided in the definitive
proxy statement for the Company's 1999 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, 1998, 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."
11
<PAGE>
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 September 3, 1998, the Company filed with the Securities and Exchange
Commission, an interim report on Form 8-K dated August 19, 1998 showing the
condensed consolidated financial statements of LECG, Inc. as of December 31,
1997 and June 30, 1998 and the Company's Proforma Combined Balance Sheet as of
March 31, 1998 and Proforma Combined Statements of Operations for the three
years ended December 31, 1997.
On November 6, 1998 (and again on November 12, 1998 to correct an error by
our financial printer), the Company filed with the Securities and Exchange
Commission, an interim report on Form 8-K/A showing the following:
A) Peterson financial statements as of December 31, 1997.
B) The Company's Proforma Combined Balance Sheet as of June 30, 1998 and
Proforma Combined Statements of Operations for the three years ended
December 31, 1997.
C) The Company's audited consolidated financial statements as of December
31, 1997 and 1996, and for the three years ended December 31, 1997, as
restated.
12
<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.
The Metzler Group, Inc.
/s/ Robert P. Maher
By: _________________________________
Robert P. Maher
Chairman, President and Chief
Executive Officer, Director
/s/ Barry S. Cain
By: _________________________________
Barry S. Cain
Director
/s/ James F. Hillman
By: _________________________________
James F. Hillman
Chief Financial Officer
/s/ Peter B. Pond
By: _________________________________
Peter B. Pond
Director
/s/ Mitchell H. Saranow
By: _________________________________
Mitchell H. Saranow
Director
/s/ Govenor James R. Thompson
By: _________________________________
Govenor James R. Thompson
Director
Dated: March 31, 1999
13
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
THE METZLER GROUP, INC.
Audited Consolidated Financial Statements as of December 31, 1998 and 1997,
and for each of the three years in the period ended December 31, 1998
<TABLE>
<S> <C>
Independent Auditors' Report................................................ F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... 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 accompanying consolidated balance sheet of The Metzler
Group, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Metzler Group, Inc. and subsidiaries as of December 31, 1998, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
We previously audited and reported on the consolidated balance sheet of The
Metzler Group, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1997 and 1996, prior to their restatement for the
1998 pooling of interests, which report was based in part on reliance of other
auditors. The contribution of the Company to combined restated assets
represented 41 percent as of December 31, 1997; to combined restated revenues
represented 43 percent and 42 percent; and to combined restated net income
represented 53 percent and 38 percent for the years ended December 31, 1997
and 1996, respectively. Separate financial statements of the other companies
included in the 1997 restated balance sheet and the 1997 and 1996 restated
statements of operations, stockholders' equity and cash flows were audited and
reported on separately by other auditors. We also audited the combination of
the accompanying consolidated balance sheet as of December 31, 1997 and the
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1997 and 1996, after restatement for the 1998 pooling of
interests; in our opinion, such consolidated statements have been properly
combined on the basis described in Note 3 of the notes to the consolidated
financial statements.
/s/ KPMG LLP
Chicago, Illinois
February 10, 1999
F-2
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $119,704 $ 45,867
Accounts receivable, net................................. 80,163 59,397
Prepaid and other current assets......................... 6,979 3,337
-------- --------
Total current assets................................... 206,846 108,601
Property and equipment, net................................ 22,197 13,769
Other assets............................................... 1,474 2,073
-------- --------
Total assets........................................... $230,517 $124,443
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.......................................... -- 8,070
Accounts payable and accrued liabilities................. 17,955 10,458
Accrued compensation and project costs................... 28,142 17,075
Income taxes payable..................................... 2,942 3,800
Deferred income taxes.................................... 2,171 1,500
Stockholder distribution payable......................... -- 5,357
Other current liabilities................................ 9,127 4,072
-------- --------
Total current liabilities.............................. 60,337 50,332
Long-term debt............................................. -- 319
Deferred income taxes...................................... 5,276 3,951
Other non-current liabilities.............................. -- 1,169
-------- --------
Total liabilities...................................... 65,613 55,771
-------- --------
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;
38,004 and 34,043 shares issued and outstanding in 1998
and 1997, respectively.................................. 38 34
Additional paid-in capital............................... 134,624 56,580
Notes receivable from stockholders....................... -- (2,755)
Accumulated other comprehensive income................... (30) (57)
Retained earnings........................................ 30,272 14,870
-------- --------
Total stockholders' equity............................. 164,904 68,672
-------- --------
Total liabilities and stockholders' equity............. $230,517 $124,443
======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-3
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues................................... $ 266,877 $ 196,780 $ 151,889
Cost of services........................... 154,322 115,122 89,410
---------- ---------- ----------
Gross profit............................. 112,555 81,658 62,479
General and administrative expenses........ 60,893 54,151 47,028
Merger-related costs....................... 12,778 1,312 --
---------- ---------- ----------
Operating income......................... 38,884 26,195 15,451
---------- ---------- ----------
Other expense (income):
Interest income.......................... (3,061) (1,156) (420)
Interest expense......................... 672 432 840
Other, net............................... (263) (581) (135)
---------- ---------- ----------
Total other expense (income)........... (2,652) (1,305) 285
---------- ---------- ----------
Income before income tax expense........... 41,536 27,500 15,166
Income tax expense....................... 25,413 9,081 9
---------- ---------- ----------
Net Income................................. $ 16,123 $ 18,419 $ 15,157
========== ========== ==========
Earnings per basic share:
Net income............................... $ 0.45 $ 0.58 $ 0.49
Shares used in computing earnings per
basic share............................. 35,948 31,779 30,933
Earnings per dilutive share:
Net income............................... $ 0.43 $ 0.57 $ 0.48
Shares used in computing earnings per
dilutive share.......................... 37,179 32,288 31,262
Pro forma income data (unaudited):
Net income............................... $ 16,123 $ 18,419 $ 15,157
Pro forma decrease (increase) to income
tax expense............................. 7,200 (2,194) (6,209)
Pro forma adjustment to executive
compensation expense, net of tax........ 2,267 -- --
---------- ---------- ----------
Pro forma net income..................... $ 25,590 $ 16,225 $ 8,948
========== ========== ==========
Pro forma net income per basic share..... $ 0.71 $ 0.51 $ 0.29
Pro forma net income per dilutive share.. $ 0.69 $ 0.50 $ 0.29
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-4
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Preferred Notes Accumulated
Stock Common Stock Additional Receivable Other Total
------------- -------------- Paid-In From Comprehensive Retained Stockholders'
Shares Amount Shares Amount Capital Stockholders Income Earnings Equity
------ ------ ------ ------ ---------- ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... -- -- 30,760 $ 31 $ 7,713 $(1,576) $-- $ 6,401 $ 12,569
Comprehensive income... -- -- -- -- -- -- 6 15,157 15,163
Issuance of common
stock................. -- -- 4,553 5 41,905 (1,619) -- -- 40,291
Purchase of common
stock................. -- -- (3,432) (4) (8,460) -- -- (1,794) (10,258)
Distributions.......... -- -- -- -- -- (162) -- (7,683) (7,845)
Interest on notes
receivable from
stockholders.......... -- -- -- -- 155 (155) -- -- --
Collection of notes
receivable from
stockholders.......... -- -- -- -- -- 467 -- -- 467
--- ---- ------ ---- -------- ------- ---- -------- --------
Balance at December 31,
1996................... -- -- 31,881 32 41,313 (3,045) 6 12,081 50,387
Comprehensive income... -- -- -- -- -- -- (63) 18,419 18,356
Issuance of common
stock................. -- -- 2,697 2 25,412 (87) -- 780 26,107
Purchase of common
stock................. -- -- (535) -- (10,340) 44 -- (228) (10,524)
Distributions.......... -- -- -- -- -- (351) -- (16,182) (16,533)
Interest on notes
receivable from
stockholders.......... -- -- -- -- 195 (195) -- -- --
Collection of notes
receivable from
stockholders.......... -- -- -- -- -- 879 -- -- 879
--- ---- ------ ---- -------- ------- ---- -------- --------
Balance at December 31,
1997................... -- -- 34,043 34 56,580 $(2,755) (57) 14,870 68,672
Comprehensive income... -- -- -- -- -- -- 27 16,123 16,150
Issuance of common
stock................. -- -- 4,556 5 96,957 -- -- -- 96,962
Purchase of common
stock................. -- -- (595) (1) (18,921) -- -- -- (18,922)
Distributions.......... -- -- -- -- -- -- -- (721) (721)
Interest on notes
receivable from
stockholders.......... -- -- -- -- 8 -- -- -- 8
Collection of notes
receivable from
stockholders.......... -- -- -- -- -- 2,755 -- -- 2,755
--- ---- ------ ---- -------- ------- ---- -------- --------
Balance at December 31,
1998................... -- $-- 38,004 $ 38 $134,624 $ -- $(30) $ 30,272 $164,904
=== ==== ====== ==== ======== ======= ==== ======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
F-5
<PAGE>
THE METZLER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 16,123 $ 18,419 $ 15,157
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 5,098 3,578 2,833
Provision for bad debts.................. 1,094 172 1,831
Deferred income taxes.................... 1,996 2,363 (952)
Other non-cash items, net................ (107) (728) 80
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable.................... (21,861) (12,138) (8,940)
Prepaid expenses and other assets...... (3,641) (1,139) (444)
Accounts payable and accrued
liabilities........................... 7,497 2,644 3,419
Accrued compensation and project
costs................................. 11,066 97 6,164
Income taxes payable................... (857) 2,922 549
Other current liabilities.............. 5,056 1,340 (4,861)
---------- ---------- ---------
Net cash provided by operating
activities.......................... 21,464 17,530 14,836
---------- ---------- ---------
Cash flows from investing activities:
Purchase of property and equipment....... (13,723) (8,100) (3,879)
Other, net............................... (238) (656) (499)
---------- ---------- ---------
Net cash used in investing
activities.......................... (13,961) (8,756) (4,378)
---------- ---------- ---------
Cash flows from financing activities:
Issuance of common stock................. 96,962 25,493 38,151
Purchase of common stock................. (18,922) (10,175) (9,806)
Repayment of long-term debt.............. (319) (1,480) (648)
Proceeds from long-term debt............. -- 3,300 1,799
Net repayments of short-term debt........ (8,070) (2,793) (389)
Payments of pre-acquisition undistributed
income to former stockholders........... (6,079) (10,121) (7,338)
Other, net............................... 2,762 (830) (406)
---------- ---------- ---------
Net cash provided by financing activities.. 66,334 3,394 21,363
---------- ---------- ---------
Net increase in cash and cash equivalents.. 73,837 12,168 31,821
Cash and cash equivalents at beginning of
year...................................... 45,867 33,699 1,878
---------- ---------- ---------
Cash and cash equivalents at end of year... $ 119,704 $ 45,867 $ 33,699
========== ========== =========
Supplemental information:
Interest payments........................ $ 672 $ 305 $ 544
Income tax payments...................... $ 17,720 $ 3,509 $ 428
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts and unless as otherwise indicated)
1. DESCRIPTION OF BUSINESS
The Metzler Group, Inc. (the "Company") is a leading provider of consulting
services to energy-based and related industries. The Company's services
include: (1) management consulting; (2) information technology; and (3)
litigation support. The Company's operating subsidiaries include LECG, Inc.
("LECG"), Metzler & Associates, Inc. ("Metzler & Associates"), Peterson
Consulting, L.L.C. ("Peterson"), Reed Consulting Group, Inc. ("Reed"), and
Resource Management International, Inc. ("RMI"). The Company is headquartered
in Chicago, Illinois and has regional offices in various cities within the
United States, and several international offices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents are comprised of highly liquid instruments with original
maturities of 90 days or less. The carrying amount of these financial
instruments approximates fair value because of the short maturities.
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.
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
F-7
<PAGE>
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Prior to January 1, 1996, Metzler & Associates had operated as a C-
corporation. Effective January 1, 1996, the stockholders of Metzler &
Associates elected to be taxed under Subchapter S of the Internal Revenue
Code. During such period, federal income taxes were the responsibility of
Metzler & Associates' stockholders as were certain state income taxes. As of
the effective date of the election, Metzler & Associates was responsible for
Federal built-in-gain taxes to the extent applicable. Accordingly, the
consolidated statement of operations for the year ended December 31, 1996
provides for such taxes. The S-corporation election terminated in connection
with the consummation of the initial public offering of the Company's common
stock on October 4, 1996.
Prior to December 18, 1997, LECG had elected to be taxed under Subchapter S
of the Internal Revenue Code for income tax purposes. During such period,
federal income taxes were the responsibility of LECG's stockholders as were
certain state income taxes. Therefore, the financial statements do not include
a provision for federal (and some state) income taxes prior to LECG's initial
public offering on December 18, 1997. LECG's S-corporation status terminated
on December 18, 1997, thereby subjecting LECG's income to federal and certain
other state income taxes at the corporate level. Accordingly, LECG applied the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," for the period ended December 31, 1997. In
addition, LECG converted from a cash basis to accrual basis for tax purposes
in conjunction with its conversion to a C-corporation. Due to temporary
differences in recognition of revenue and expenses, income for financial
reporting purposes exceeded income for income tax purposes. The conversion to
accrual basis along with these temporary differences resulted in the
recognition of a net deferred tax liability (and a corresponding one-time
charge to expense) of $2.7 million as of December 31, 1997.
Prior to August 14, 1998, Peterson was a limited liability company, which,
for income tax purposes, was treated as a partnership. Accordingly, the income
of Peterson was reported on the individual income tax returns of its members
and federal income taxes, as well as certain state income taxes, were the
responsibility of its members. Subsequent to August 14, 1998, and based on
events unrelated to its acquisition by the Company, Peterson elected C-
corporation status, thereby subjecting its income to federal and certain state
income taxes at the corporate level. As a result of its acquisition of
Peterson, the Company has applied the provisions of SFAS No. 109, and has
converted Peterson from the modified cash basis to the accrual basis for tax
purposes. Due to temporary differences in recognition of revenue and expense,
income for financial reporting purposes has exceeded income for tax reporting
purposes. The conversion to accrual basis, along with these temporary
differences, resulted in the recognition of a one-time, non-cash charge of
$7.2 million to be recorded during the period in which the merger occurred.
Pro Forma Adjustments (unaudited)
The pro forma adjustments for 1998 include a reduction of income tax expense
to exclude the effect of the one-time, non-cash charge of $7.2 million which
resulted from the conversion of Peterson from the modified cash basis to the
accrual basis of accounting for tax purposes. The pro forma adjustments for
1998 also reflect a $2.3 million adjustment, net of tax, relating to the
impact of a new compensation plan for Peterson executives adopted pursuant to
the acquisition. This pro forma presentation, net of related tax effects, is
shown solely as the result of changes in compensation that existed following
consummation of the merger. These changes would have resulted in reduced
compensation in prior periods for Peterson executives, although their duties
and responsibilities would have remained largely unchanged.
F-8
<PAGE>
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The pro forma adjustments for 1997 and 1996 include federal and additional
state income tax expense of $2,194 and $6,209, respectively, that would have
been required if certain of the Company's subsidiaries which were not taxable
entities during those periods had been subject to federal, and certain state,
income taxes at the corporate level.
Earnings Per Share
For the years ended December 31, 1998, 1997 and 1996, earnings per share was
computed in accordance with SFAS No. 128 "Earnings Per Share", which the
Company adopted during the fourth quarter of 1997. The difference between
basic and dilutive shares represents the dilutive effect of common stock
options aggregating 1,231, 509 and 329 for the years ended December 31, 1998,
1997 and 1996, respectively.
Foreign Currency Translation
The balance sheets of the Company's foreign subsidiaries are translated into
U.S. dollars using the year-end exchange rate, and sales and expenses are
translated using the average exchange rate for the year. The resulting
translation gains or losses are recorded as a separate component of
stockholders' equity as other comprehensive income.
3. BUSINESS COMBINATIONS
On July 31, 1997, the Company issued 3.2 million shares of common stock for
substantially all the outstanding common stock of RMI. Additionally, on August
15, 1997, the Company issued 0.8 million shares of common stock for
substantially all of the outstanding common stock of Reed. Each of the
transactions was accounted for as a pooling of interests. The consolidated
financial statements have been restated as if RMI and Reed had been combined
for all periods presented. The Company's consolidated statement of operations
for the year ended December 31, 1997 includes revenues and net income from RMI
and Reed totaling $28,906 and $1,529, respectively, through the dates of
acquisition. The consolidated statement of operations for the year ended
December 31, 1996 includes revenues and net loss from RMI and Reed totaling
$41,460 and $1,119, respectively.
On August 19, 1998, the Company issued 7.3 million shares of common stock
for substantially all the outstanding common stock of LECG. Additionally, on
August 31, 1998, the Company issued 5.6 million shares of common stock for
substantially all of the outstanding common stock of Peterson. Each of these
transactions was accounted for as a pooling of interests and, accordingly, the
consolidated financial statements have been restated as if the companies had
been combined for all periods presented. The Company's consolidated statement
of operations for the year ended December 31, 1998 includes revenues and net
income from LECG and Peterson totaling $97,910 and $6,070, respectively,
through the dates of acquisition. The Company's consolidated statements of
operations for 1997 and 1996 have been restated to reflect revenues of
$113,119 and $88,336, respectively, and net income of $8,732 and $9,422,
respectively, for the aggregate of the operations of LECG and Peterson.
The Company incurred significant costs and expenses in connection with these
acquisitions, including legal and accounting, and other various expenses.
These costs and expenses were recorded in the consolidated statements of
operations and comprehensive income during the third quarter in each of the
years 1997 and 1998.
During 1998 and 1997, the Company completed nine additional transactions
which were accounted for as poolings of interests. The stockholders' equity
and the operations of these businesses were not material, individually or in
the aggregate, in relation to those of the Company. As such, the Company
recorded the
F-9
<PAGE>
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
combinations by restating stockholders' equity as of the effective date of
each acquisition without restating prior period financial statements.
4. STOCKHOLDERS' EQUITY
On October 4, 1996 the Company completed an initial public offering of its
common stock in which 3.9 million shares were sold by the Company, resulting
in proceeds of approximately $37 million, net of issuance costs. Concurrent
with the completion of the initial public offering and in accordance with an
agreement entered into during July 1996 between the Company and a stockholder,
the Company redeemed 2.6 million shares of the stockholder's common stock for
$7,975.
On December 18, 1997, LECG completed an initial public offering, resulting
in net proceeds of approximately $24.4 million, net of issuance costs.
On March 2, 1998, the Company completed a secondary offering of its common
stock in which an additional 1.5 million shares were sold by the Company,
resulting in net proceeds of approximately $36 million. On November 19, 1998,
the Company completed a secondary offering of its common stock in which an
additional 1.5 million shares were sold by the Company, resulting in net
proceeds of approximately $51 million.
5. ACCOUNTS RECEIVABLE
The components of accounts receivable as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Billed amounts ............................................ $81,508 $51,595
Engagements in process..................................... 3,899 11,952
Allowance for uncollectible accounts....................... (5,244) (4,150)
------- -------
$80,163 $59,397
======= =======
</TABLE>
Engagements in process represent balances accrued by the Company for
services that have been performed but have not been billed to the customer.
Billings are generally done on a monthly basis for the prior month's services.
6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, as of December 31 consisted of:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Land and buildings......................................... $ 2,878 $ 370
Furniture, fixtures and equipment.......................... 27,877 27,418
Software................................................... 5,338 2,263
Leasehold improvements..................................... 4,736 3,072
------- -------
40,829 33,123
Less: accumulated depreciation and amortization............ (18,632) (19,354)
------- -------
$22,197 $13,769
======= =======
</TABLE>
F-10
<PAGE>
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. SHORT-TERM AND LONG-TERM DEBT
The Company had total short-term debt and other current debt obligations of
$0 and $8,070 at December 31, 1998 and 1997, respectively. Amounts outstanding
at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ------
<S> <C> <C>
$1,200 in two lines of credit, interest payable quarterly at
the bank's prime rate (8.5% at December 31, 1997) plus 1.0%,
guaranteed by officers of a subsidiary, due April 1, 1998..... -- $1,020
Two lines of credit, $4,100 each, interest payable quarterly at
the bank's prime rate (8.5% at December 31, 1997),
collateralized by accounts receivable of Peterson, outstanding
balance due on demand......................................... -- 3,300
$3,645 term loan, payable in monthly installments of $100
including interest at the bank's prime rate (8.5% at December
31, 1997), collateralized by accounts receivable of Peterson,
and subject to renewal annually............................... -- 3,645
Other term loans, at variable rates of interest of 9.25%
through 15.0% with due dates 1998 through 2001................ -- 424
---- ------
Total debt..................................................... -- 8,389
Portion classified as long-term................................ -- 319
---- ------
Short-term debt................................................ $-- $8,070
==== ======
</TABLE>
The Company maintains line of credit agreements in the aggregate amount of
$14.0 million expiring through July 1999. Of this total, $6,175 is available
to secure commercial and standby letters of credit. At December 31, 1998, the
Company had letters of credit of $1,657 outstanding. The letters of credit
expire at various dates through 1999.
8. LEASE COMMITMENTS
The Company leases its office facilities and certain equipment under
operating lease arrangements which expire at various dates through 2008 with
renewal options of two to five years. The Company leases office facilities
under noncancelable operating leases which include fixed or minimum payments
plus, in some cases, scheduled base 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 1998 and
in the aggregate, are as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ ------
<S> <C>
1999.......................................................... $ 9,781
2000.......................................................... 8,623
2001.......................................................... 8,146
2002.......................................................... 5,195
2003.......................................................... 3,149
Thereafter.................................................... 5,449
-------
$40,343
=======
</TABLE>
Rent expense for operating leases entered into by the Company and charged to
operations amounted to $9,982 for 1998, $9,791 for 1997, and $7,150 for 1996.
F-11
<PAGE>
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. INCOME TAX EXPENSE
Income tax expense consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997 1996
------- ------ ----
<S> <C> <C> <C>
Federal:
Current.............................................. $19,980 $5,108 $477
Deferred............................................. 1,600 2,648 (574)
------- ------ ----
Total.............................................. 21,580 7,756 (97)
------- ------ ----
State:
Current.............................................. 3,437 1,392 409
Deferred............................................. 396 (67) (303)
------- ------ ----
Total.............................................. 3,833 1,325 106
------- ------ ----
Total federal and state income tax expense............. $25,413 $9,081 $ 9
======= ====== ====
</TABLE>
Income tax expense differs from the amounts estimated by applying the
statutory income tax rates to income before income tax expense as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997 1996
---- ---- -----
<S> <C> <C> <C>
Federal tax at statutory rate........................... 35.0% 35.0% 35.0%
State tax at statutory rate, net of federal tax
benefits............................................... 4.9 4.6 4.6
Effect of nontaxable interest and dividends............. (1.9) (0.9) (0.6)
Effect of nontaxable entities........................... -- (5.2) (39.0)
Effect of conversion from cash to accrual method of
accounting for acquired company........................ 17.3 -- --
Effect of non-deductible merger-related costs........... 4.5 -- --
Other................................................... 1.4 (0.5) 0.1
---- ---- -----
61.2% 33.0% 0.1%
==== ==== =====
</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,
-------------
1998 1997
------ ------
<S> <C> <C>
Deferred tax assets:
State income taxes......................................... $ 479 $ 155
Allowance for uncollectible receivables.................... 194 340
Merger-related costs....................................... 1,427 382
Other...................................................... 315 236
------ ------
Total deferred tax assets................................ 2,415 1,113
------ ------
Deferred tax liabilities:
Adjustment resulting from changes in the method of
accounting used for tax purposes.......................... 9,136 6,080
Other...................................................... 726 484
------ ------
Deferred tax liabilities................................. 9,862 6,564
------ ------
Net deferred tax liabilities............................. $7,447 $5,451
====== ======
</TABLE>
F-12
<PAGE>
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. LONG-TERM INCENTIVE PLAN
On June 30, 1996, the Company adopted a Long-Term Incentive Plan which
provides for common stock, common stock-based, and other performance
incentives to employees, consultants, directors, advisors, and independent
contractors of the Company. As of December 31, 1998, the Company had 5,510
options outstanding at a weighted average exercise price of $24.19 per share
which was equal to the fair market value of common stock at the dates of
grant. As of December 31, 1998, 138 options were exercisable. In general, the
options have a ten year term and are exercisable in annual installments over a
four year period following the date of grant.
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its plan.
Accordingly, no compensation cost has been recognized. Had compensation cost
for the plan been determined based on the fair value at the grant dates for
awards under the plan consistent with the method of SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's compensation expense for the
years ended December 31, 1998, 1997 and 1996 would have been increased by
$4,591, $1,138 and $102, respectively, net of related income taxes. As a
result, the Company's pro forma net earnings available to common stockholders
and earnings per common and common equivalent shares would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Earnings per common share, as reported:
Net income....................................... $16,123 $18,419 $15,157
Net income per basic share....................... $ 0.45 $ 0.58 $ 0.49
Net income per dilutive share.................... $ 0.43 $ 0.57 $ 0.48
Earnings per common share, fair value method:
Net income, with compensation expense from fair
value options................................... $11,532 $17,281 $15,055
Fair value method net income per basic share..... $ 0.32 $ 0.54 $ 0.49
Fair value method net income per dilutive share.. $ 0.31 $ 0.54 $ 0.48
</TABLE>
The weighted average fair value of options granted in 1998, 1997 and 1996
was $5.68, $4.46 and $2.00 respectively. For purposes of calculating
compensation cost under SFAS No. 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 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected volatility......................... 45% 45% 40%
Risk free interest rate..................... 5.0% 5.7% 6.5%
Dividend yield.............................. 0% 0% 0%
Expected lives.............................. 2.8 years 2.5 years 3.0 years
</TABLE>
Additional information on the shares subject to options is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- ----------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year...... 2,623 $16.53 689 $10.37 -- $ --
Granted................. 3,849 28.47 2,173 18.35 725 10.00
Exercised............... (361) 13.07 (3) 8.00 -- --
Forfeited............... (601) 24.90 (236) 16.35 (36) 8.00
----- ----- ---
Options outstanding at
end of year............ 5,510 $24.19 2,623 $16.53 689 $10.37
===== ====== ===== ====== === ======
Options exercisable at
year end............... 138 $14.41 14 $18.45 -- $ --
===== ====== ===== ====== === ======
</TABLE>
F-13
<PAGE>
THE METZLER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
Weighted-Average Weighted-Average
------------------------- -------------------------
Exercise Remaining Exercise Remaining
Shares Price Life Shares Price Life
Range of Exercise Price ------ -------- --------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
$0 to $15............... 1,025 $12.46 0.7 years 1,534 $12.60 1.5 years
$16 to $25.............. 1,277 20.99 2.5 years 1,089 22.14 2.2 years
$26 to $35.............. 3,174 29.06 3.6 years -- -- --
$36 to $45.............. 34 39.30 3.8 years -- -- --
----- -----
5,510 $24.19 2.8 years 2,623 $16.53 1.8 years
===== =====
</TABLE>
11. EMPLOYEE BENEFIT PLANS
The Company maintained profit sharing and savings plans for six of our
operating subsidiaries through December 31, 1998. Eligible employees may
contribute a portion of their compensation to their respective operating
subsidiaries' plan. The Company, at its discretion matches a percentage of
employees' contributions. The Company may also make an annual profit sharing
contribution at its discretion. The Company, as sponsor of the plans, uses
independent third parties to provide administrative services to the plans. The
Company has the right to terminate the plans at any time. The Company
contributions to the various plans which were charged to operations were
$1,018, $976 and $1,356 in the years ended December 31, 1998, 1997, and 1996,
respectively.
12. SEGMENT INFORMATION
The Company has applied the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. This statement establishes
standards for reporting information regarding operating segments, products and
services, geographic areas and major customers. The Company's operations
represent a single reportable segment under the provisions of SFAS No. 131.
The Company's operations have a high degree of similarity in their economic
and operational characteristics, including the nature of the services
provided, the type or class of customers for those services, and the methods
used for delivering such services. While the Company has retained certain
brand identities associated with its principal operating subsidiaries, these
distinctions have not been a critical factor for management in making
operating decisions or in assessing performance. In addition, the structure of
the Company's internal organization has changed from time to time as a result
of acquisition activity and in response to customer, project, personnel or
geographic requirements and, as such, discrete financial information is not
available on a consistent basis at the operating subsidiary level.
13. SUBSEQUENT EVENT (unaudited)
Effective February 7, 1999 (the "Effective Date"), the Company completed the
acquisition of all of the outstanding securities of Strategic Decisions Group
("SDG"), a consulting firm organized under the laws of California. Pursuant to
a Merger Agreement dated February 7, 1999, a wholly owned subsidiary of the
Company, MGI Acquisition III, Inc., merged with and into SDG on the Effective
Date. Consequently, SDG is now a wholly owned subsidiary of the Company. SDG
stockholders received Company common stock valued at approximately $125
million, calculated by using the final closing bid for the Company's common
stock on the Effective Date, in exchange for substantially all outstanding SDG
shares. The Company exchanged 2.7 million shares of its common stock for
substantially all of the outstanding common stock of SDG. The transaction will
be accounted for by the pooling of interests method of accounting and will
qualify as a tax-free reorganization. Following the combination with SDG, the
Company had 40.5 million issued and outstanding shares.
F-14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
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 the Company (4)
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 directors and officers (3)
10.2 The Metzler Group, Inc. Long-Term Incentive Plan (1)
10.3 Amendment No. 1 to The Metzler Group, Inc. Long Term Incentive
Plan, dated November 1, 1997 (6)
10.4 Amendment No. 2 to the Metzler Group, Inc. Long-Term Incentive
Plan, effective May 1, 1998 (6)
10.5 The Metzler Group, Inc. Employee Stock Purchase Plan (7)
10.6 Amendment No. 1 to The Metzler Group, Inc. Employee Stock
Purchase Plan
10.7 Amendment No. 2 to The Metzler Group, Inc. Employee Stock
Purchase Plan
21.1 Significant Subsidiaries of The Metzler Group, Inc.
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule--for the period ended December 31, 1998
</TABLE>
- --------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (Registration No. 333-30267 filed with the SEC on June 27, 1997.
(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.
(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 Post-Effective Amendment
No. 1 to Registration Statement on Form S-8 (Registration No. 333-30267)
filed with the SEC on March 31, 1999.
(7) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (Registration No. 333-30265) filed with the SEC on June 27, 1997.
<PAGE>
Exhibit 4.2
FORM OF REGISTRATION AGREEMENT
THIS REGISTRATION AGREEMENT (this "Agreement") is made effective as of
________ ___, 1999, between The Metzler Group, Inc., a Delaware corporation (the
"Company"), and each of the holders who execute and deliver a signature page
hereto (individually a "Holder" and collectively, the "Holders").
RECITAL
The parties to this Agreement are parties to that certain Stock Exchange
Agreement dated as of ______ ___, 1998 (the "Stock Exchange Agreement") by and
among the Company, _______________, an __________ corporation ("XXX"), and the
Holders, pursuant to which the Company is acquiring from the Holders all of the
capital stock of XXX and in connection therewith the Company is issuing shares
of Common Stock (as defined below) to the Holders. In order to induce the
Holders to enter into the Stock 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 Section 7 hereof.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing Recital and the mutual
covenants and agreements herein contained and intending to be legally bound
hereby, the parties hereby agree as follows:
1. Piggyback Registrations.
(a) Right to Piggyback. If, at any time during which any Registrable
Securities remain outstanding (other than during a Lock-Up Period (as defined in
the Stock Exchange Agreement)), 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 all Holders of its intention to effect such a registration
(the "Registration Notice") and will, subject to the terms of this Agreement,
include in such registration all Registrable Securities of the Holders 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 each such Holder equal to 20% of such Holder's
Registrable Securities.
(b) 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 and (ii) second, the
Registrable Securities requested to be included in such registration and all
other Common Stock requested to be included in such
<PAGE>
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.
(c) 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 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 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 Priority Holders, and (ii)
second, the Registrable Securities requested to be included in such registration
by the Holders 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.
(d) Holdback Agreements. Each 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, whether or not such Holder's Registrable Securities are included
therein (except as part of such underwritten registration), unless the Company
and the underwriters managing the registered public offering otherwise agree.
2. Certain Procedures. In connection with any Piggyback Registration, the
Company will, as expeditiously as possible but subject to the terms hereof:
(a) 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;
(b) 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 subsection (b), (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction);
(c) notify each seller of such Registrable Securities of the happening
of any event (other than a possible acquisition) 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 misleading,
2
<PAGE>
(d) 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; and
(e) otherwise use all commercially reasonable efforts to comply with
all applicable rules and regulations of the 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.
3. Holder Procedures.
(a) In connection with any Registration Statement, the Company may
require each Holder to furnish to the Company such information regarding such
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) Each 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 such Holder.
4. Registration Expenses. All expenses incident to the Company's
performance of or compliance with this Agreement, including all NASD
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 Holders
of Registrable Securities shall pay, any underwriting discounts or brokers fees
and commissions applicable to Registrable Securities sold by them pursuant to
this Agreement and all legal fees and expenses of counsel retained by the
Holders.
5. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless, to the fullest
extent permitted by law, each 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 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 such Holder for use therein or by such Holder's failure to deliver a copy of
the Registration Statement or
3
<PAGE>
prospectus or any amendments or supplements thereto after the Company has
furnished Holder with a sufficient number of copies of the same.
(b) The Holders participating 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 such Holder for use therein.
(c) Each party entitled to indemnification under this Section 5 (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 Section
5 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
4
<PAGE>
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 above shall be deemed to
include, subject to the limitations set forth in Section 5(c), any legal or
other fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
6. 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.
7. Definitions.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions in the City of Chicago
are authorized or obligated by law or executive order to close.
"Common Stock" means the Company's Common Stock, par value $0.001 per
share.
"Commission" means the Securities and Exchange Commission.
"Person" means any natural person and any corporation, partnership,
limited liability company or other business entity.
"Registration Statement" means a registration statement filed with the
Commission under the Securities Act in connection with a Piggyback Registration.
"Registrable Securities" means, with respect to each Holder, (i) the
Metzler Common (as defined in the Stock Exchange Agreement) issued to such
Holder pursuant to the Stock 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) after the Registrable Securities held by such Holder first become
eligible for sale pursuant to Rule 144 under the Securities Act (or any similar
rule then in force), subject to any restrictions in the amount and manner of
sale and notice requirements contained therein.
"Securities Act" means the Securities Act of 1933, as amended.
5
<PAGE>
8. 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; provided,
however, that rights to cause the Company to register Registrable Securities
pursuant to this Agreement may be assigned by a Holder to a transferee or
assignee of such securities only if (i) such assignment is made with all related
obligations, (ii) the Company is, within a reasonable time after such transfer,
furnished with written notice of the name and address of such transferee or
assignee and the securities with respect to which such registration rights are
being assigned; (iii) such transferee or assignee agrees in writing to be bound
by and subject to the terms and conditions of this Agreement; and (iv)
immediately following such transfer the further disposition of such securities
by the transferee or assignee is restricted under the Securities Act.
(c) Construction. The parties have jointly participated in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumptions or burdens of proof
shall arise favoring any party by virtue of the authorship of any of the
provisions of this Agreement. The term "include" and its derivatives shall have
the same construction as the phrase "include, without limitation," and its
derivatives. The section headings contained in this Agreement are inserted for
convenience or reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
(d) Severability. It is the intent and desire of the parties that the
provisions of this Agreement be enforced to the fullest extent permissible under
the laws and public policies as applied in each jurisdiction in which
enforcement of the provisions of this Agreement are sought. If any particular
provision of this Agreement shall be adjudicated by a court of competent
jurisdiction to be invalid or unenforceable, such provision shall be amended,
without any action on the part of any party hereto, to delete therefrom the
portion so adjudicated to be invalid or unenforceable, such deletion to apply
only with respect to the operation of such provision in the particular
jurisdiction in which such adjudication is made. If any provision of this
Agreement is adjudicated by a court of competent jurisdiction to be invalid or
unenforceable in its entirety, this Agreement shall be amended to delete such
provision therefrom and the remainder of this Agreement shall remain in full
force and effect in such jurisdiction and without such deletion in all other
jurisdictions.
(e) 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.
(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
6
<PAGE>
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.
(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.
615 N. Wabash Suite 2900
Chicago, Illinois 60611 Chicago, Illinois 60606
Attn: General Counsel Attn: J. Todd Arkebauer
Fax: 312/573-5676 Fax: 312/207-6400
If to the Holders: With a copy to:
----------------- --------------
To their respective addresses --------------------------
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.
(g) Aggregation of Stock. All shares of Registrable Securities held or
acquired by affiliated Persons shall be aggregated together for the purpose of
determining the availability of any rights under this Agreement.
(h) Termination. The Company's obligations hereunder shall terminate
upon the earlier of (i) with respect to a particular Holder, such Holder having
sold 20% of the Registrable Securities and (ii) after the Registrable Securities
held by such Holder first become eligible for sale pursuant to Rule 144 under
the Securities Act (or any similar rule then in force), subject to any
restrictions in the amount and manner of sale and notice requirements contained
therein.
7
<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:
--------------------------
HOLDERS:
----------------------------------
----------------------------------
Address:
--------------------------
--------------------------
Fax:
_____________________
----------------------------------
----------------------------------
Address:
--------------------------
--------------------------
Fax:
_____________________
----------------------------------
----------------------------------
Address:
--------------------------
--------------------------
Fax:
_____________________
----------------------------------
----------------------------------
8
<PAGE>
EX-10.6
FIRST AMENDMENT TO
METZLER GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
The Metzler Group, Inc. Employee Stock Purchase Plan (the "Plan") is hereby
amended, effective October 1, 1997, as follows:
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>
EX-10.7
SECOND AMENDMENT TO
THE METZLER GROUP, INC.
EMPLOYEE STOCK PURCHASE PLAN
The Metzler Group, Inc. Employee Stock Purchase Plan (the "Plan") is hereby
amended, effective October 1, 1997, as follows:
1. Section 2(i) of the Plan shall be amended in its entirety to change
the definition of "Employee" to read as follows:
"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 of the Plan shall be amended in its entirety to change the
paragraph entitled "Eligibility" to read as follows:
"All employees shall be eligible to participate in the Plan on the
Effective Date. Subject to the enrollment limitations of Section 6, each
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 21.1
------------
SIGNIFICANT SUBSIDIARIES OF THE METZLER GROUP, INC.
Name State of Incorporation Doing Business As
- ---- ---------------------- -----------------
LECG, Inc. California
Metzler & Associates, Inc. Illinois
Peterson Consulting, L.L.C. Illinois Peterson Worldwide LLC
Reed Consulting Group, Inc. Delaware
Resource Management
International, Inc. California
Strategic Decisions Group California
<PAGE>
Consent of KPMG LLP
The Board of Directors
The Metzler Group, Inc.
We consent to incorporation by reference in the registration statement No.
333-30267) on Form S-8 of The Metzler Group, Inc. of our report dated February
10, 1999, relating to the consolidated balance sheets of The Metzler Group, Inc.
and subsidiaries as of December 31, 1998 and 1997, 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, 1998, which report appears in
the December 31, 1998, annual report on Form 10-K of The Metzler Group, Inc.
KPMG LLP
Chicago, Illinois
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 119,704
<SECURITIES> 0
<RECEIVABLES> 85,407
<ALLOWANCES> (5,244)
<INVENTORY> 0
<CURRENT-ASSETS> 206,846
<PP&E> 40,829
<DEPRECIATION> (18,632)
<TOTAL-ASSETS> 230,517
<CURRENT-LIABILITIES> 60,337
<BONDS> 0
0
0
<COMMON> 38
<OTHER-SE> 164,866
<TOTAL-LIABILITY-AND-EQUITY> 230,517
<SALES> 0
<TOTAL-REVENUES> 266,877
<CGS> 154,322
<TOTAL-COSTS> 227,993
<OTHER-EXPENSES> (3,324)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 672
<INCOME-PRETAX> 41,536
<INCOME-TAX> 25,413
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,123
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.43
</TABLE>
