<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant
to Section l3 or l5(d) of the
Securities Exchange Act of l934
Date of report (date of earliest event reported): June 9, 1999
The Metzler Group, Inc.
-----------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware
--------
(State or Other Jurisdiction of Incorporation)
0-28830 36-4094854
------- ----------
(Commission File Number) (IRS Employer Identification No.)
615 N. Wabash, Chicago, Illinois 60611
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(312) 573-5600
--------------
(Registrant's Telephone Number, Including Area Code)
<PAGE>
Item 5. Other Events
The Metzler Group, Inc. (the "Company") completed three business combinations
during the quarter ended March 31, 1999 which have been accounted for as
poolings of interests. Selected consolidated and supplemental financial
information that has been restated for these poolings of interests is provided
in the attached exhibits.
(a) 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, as
restated.
(b) Selected Financial Data as of and for each of the five years in the
period ended December 31, 1998, as restated.
(c) Unaudited Quarterly Operating Information, as restated.
<PAGE>
Item 5 (a) 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,
as restated.
INDEX TO THE FINANCIAL STATEMENTS
THE METZLER GROUP, INC.
<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>
Item 5 (b) Selected Financial Data as of and for each of the five years in the
period ended December 31, 1998, as restated.
Item 5 (c) Unaudited Quarterly Operating Information, as restated.
F-1
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
The Metzler Group, Inc.
We have audited the combination of The Metzler Group, Inc. and subsidiaries
("the Company"), Strategic Decisions Group, Inc., Triad International, and
GeoData Solutions, Inc. as reflected in the accompanying consolidated balance
sheets of the Company 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. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the combination of
the Company, Strategic Decisions Group, Inc., Triad International, and GeoData
Solutions, Inc. as reflected in these consolidated financial statements based on
our audit procedures.
We previously audited and reported on the consolidated balance sheets of the
Company 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, prior to their
restatement for the 1999 poolings-of-interests with Strategic Decisions Group,
Inc., Triad International, and GeoData Solutions, Inc. and have issued our
report thereon dated February 10, 1999 which report was based in part on
reliance of other auditors. Such report and the accompanying consolidated
financial statements are included in the Company's Annual Report on Form 10-K
dated December 31, 1998. The contribution of the Company to combined restated
assets as reflected in the consolidated financial statements represented 98
percent and 41 percent as of December 31, 1998 and 1997, respectively; to
combined restated revenues represented 97 percent, 37 percent and 42 percent;
and to combined restated net income represented 94 percent, 39 percent and 42
percent for the years ended December 31, 1998, 1997 and 1996, respectively.
Separate consolidated financial statements of GeoData Solutions, Inc. were
audited by other auditors who have issued their reports thereon dated February
12, 1999 and September 16, 1998, respectively.
In our opinion, the consolidated financial statements referred to above have
been properly combined on the basis described in Note 3 of the notes to the
consolidated financial statements.
/s/ KPMG LLP
Chicago, Illinois
June 9, 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........................................... $120,448 $ 47,236
Accounts receivable, net............................................ 100,993 77,992
Prepaid and other current assets.................................... 8,770 4,896
-------- --------
Total current assets.............................................. 230,211 130,124
Property and equipment, net.......................................... 27,624 18,903
Other assets......................................................... 2,103 2,460
-------- --------
Total assets...................................................... $259,938 $151,487
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt..................................................... 3,802 11,398
Accounts payable and accrued liabilities............................ 20,092 11,863
Accrued compensation and project costs.............................. 42,594 24,806
Income taxes payable................................................ 3,874 3,916
Deferred income taxes............................................... 6,342 5,305
Stockholder distribution payable.................................... -- 5,357
Other current liabilities........................................... 12,046 7,071
-------- --------
Total current liabilities......................................... 88,750 69,716
Long-term debt....................................................... -- 453
Deferred income taxes................................................ 2,034 979
Other non-current liabilities........................................ 209 8,099
-------- --------
Total liabilities................................................. 90,993 79,247
-------- --------
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;
42,327 and 38,367 shares issued and outstanding in 1998
and 1997, respectively............................................. 42 38
Additional paid-in capital.......................................... 136,861 58,534
Notes receivable from stockholders.................................. -- (2,755)
Accumulated other comprehensive income.............................. (30) (59)
Retained earnings................................................... 32,072 16,482
-------- --------
Total stockholders' equity........................................ 168,945 72,240
-------- --------
Total liabilities and stockholders' equity........................ $259,938 $151,487
======== ========
</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.................................. $348,000 $256,655 $219,216
Cost of services.......................... 200,155 148,913 127,525
-------- -------- --------
Gross profit............................ 147,845 107,742 91,691
General and administrative expenses....... 92,618 78,393 74,048
Merger-related costs...................... 12,778 1,312 --
-------- -------- --------
Operating income........................ 42,449 28,037 17,643
-------- -------- --------
Other expense (income):
Interest income......................... (3,170) (1,156) (420)
Interest expense........................ 716 465 842
Other, net.............................. (303) (407) (12)
-------- -------- --------
Total other expense (income).......... (2,757) (1,098) 410
-------- -------- --------
Income before income tax expense.......... 45,206 29,135 17,233
Income tax expense...................... 26,497 9,357 368
-------- -------- --------
Net Income................................ $ 18,709 $ 19,778 $ 16,865
======== ======== ========
Earnings per basic share:
Net income.............................. $ 0.46 $ 0.55 $ 0.48
Shares used in computing earnings per
basic share............................ 40,271 36,102 35,256
Earnings per dilutive share:
Net income.............................. $ 0.45 $ 0.54 $ 0.47
Shares used in computing earnings per
dilutive share......................... 41,698 36,630 35,585
Pro forma income data
(unaudited):
Net income.............................. $ 18,709 $ 19,778 $ 16,865
Pro forma decrease (increase) to income
tax expense............................ 6,628 (2,588) (6,698)
Pro forma adjustment to executive
compensation expense, net of tax....... 2,267 -- --
-------- -------- --------
Pro forma net income.................... $ 27,604 $ 17,190 $ 10,167
======== ======== ========
Pro forma net income per basic share.... $ 0.69 $ 0.48 $ 0.29
Pro forma net income per dilutive share. $ 0.66 $ 0.47 $ 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................... -- $-- 35,084 $ 35 $ 9,094 $(1,576) $ -- $ 7,038 $ 14,591
Comprehensive income... -- -- -- -- -- -- 6 16,865 16,871
Issuance of common
stock................. -- -- 4,553 5 42,152 (1,619) -- -- 40,538
Purchase of common
stock................. -- -- (3,432) (4) (8,460) -- -- (1,794) (10,258)
Distributions.......... -- -- -- -- -- (162) -- (8,403) (8,565)
Interest on notes
receivable from
stockholders.......... -- -- -- -- 156 (156) -- -- --
Collection of notes
receivable from
stockholders.......... -- -- -- -- -- 468 -- -- 468
--- --- ------ ----- -------- ------- ---- -------- --------
Balance at December 31,
1996................... -- -- 36,205 36 42,942 (3,045) 6 13,706 53,645
Comprehensive income... -- -- -- -- -- -- (65) 19,778 19,713
Issuance of common
stock................. -- -- 2,697 3 25,737 (87) -- 780 26,433
Purchase of common
stock................. -- -- (535) (1) (10,340) 44 -- (228) (10,525)
Distributions.......... -- -- -- -- -- (351) -- (17,554) (17,905)
Interest on notes
receivable from
stockholders.......... -- -- -- -- 195 (195) -- -- --
Collection of notes
receivable from
stockholders.......... -- -- -- -- -- 879 -- -- 879
--- --- ------ ----- -------- ------- ---- -------- --------
Balance at December 31,
1997................... -- -- 38,367 38 58,534 (2,755) (59) 16,482 72,240
Comprehensive income... -- -- -- -- -- -- 29 18,709 18,738
Issuance of common
stock................. -- -- 4,556 5 97,240 -- -- -- 97,245
Purchase of common
stock................. -- -- (596) (1) (18,921) -- -- -- (18,922)
Distributions.......... -- -- -- -- -- -- -- (3,119) (3,119)
Interest on notes
receivable from
stockholders.......... -- -- -- -- 8 (8) -- -- --
Collection of notes
receivable from
stockholders.......... -- -- -- -- -- 2,763 -- -- 2,763
--- --- ------ ----- -------- ------- ---- -------- --------
Balance at December 31,
1998................... -- $-- 42,327 $ 42 $136,861 $ -- $(30) $ 32,072 $168,945
=== === ====== ===== ======== ======= ==== ======== ========
</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...................................... $ 18,709 $ 19,778 $ 16,865
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................... 6,092 3,910 3,675
Provision for bad debts......................... 2,121 235 1,852
Deferred income taxes........................... 2,092 2,667 (695)
Other non-cash items, net....................... (107) (728) 80
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable........................... (25,122) (12,706) (15,071)
Prepaid expenses and other assets............. (3,874) (1,468) 823
Accounts payable and accrued
liabilities.................................. 8,229 3,177 3,375
Accrued compensation and project costs........ 11,214 (1,136) 11,406
Income taxes payable.......................... (42) 3,020 565
Other current liabilities..................... 4,975 2,375 (5,272)
-------- -------- --------
Net cash provided by operating activities... 24,287 19,124 17,603
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment.............. (15,008) (9,210) (5,749)
Other, net...................................... (627) (683) (406)
-------- -------- --------
Net cash used in investing activities....... (15,635) (9,893) (6,155)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock........................ 97,245 25,823 38,398
Purchase of common stock........................ (18,922) (10,175) (9,806)
Repayment of long-term debt..................... (453) (648)
Proceeds from long-term debt.................... -- 1,978 1,802
Net repayments of short-term debt............... (7,596) (2,045) (586)
Payments of pre-acquisition undistributed
income to former stockholders.................. (8,513) (11,527) (8,059)
Other, net...................................... 2,799 (800) (405)
-------- -------- --------
Net cash provided by financing activities......... 64,560 3,254 20,696
-------- -------- --------
Net increase in cash and cash equivalents......... 73,212 12,485 32,144
Cash and cash equivalents at beginning of
year............................................. 47,236 34,751 2,607
-------- -------- --------
Cash and cash equivalents at end of year.......... $120,448 $ 47,236 $ 34,751
======== ======== ========
Supplemental information:
Interest payments............................... $ 756 $ 420 $ 573
Income tax payments............................. $ 20,681 $ 3,567 $ 454
</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 operates as a broad
based consulting firm, and provides services through four integrated practice
groups: (1) Financial Services; (2) Strategic Services; (3) Expert Services; and
(4) Operational Services. 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. Prior to 1997, Strategic Decisions Group ("SDG") fiscal year
ended on or about March 31. SDG's financial position and results of operations
as of and for the 52 week period ended March 29, 1997 are included in the
Company's consolidated financial statements as of and for the year ended
December 31, 1996. Effective 1997, SDG changed its reporting period to a 52 week
fiscal year ending on or about December 31. As a result, the Company's
consolidated financial statements as of and for the year ended December 31, 1997
include the results of operations for SDG for a 40 week period ended January 3,
1998. The effect of including the additional 12 weeks of SDG's results of
operations in 1997, would have increased the Company's consolidated revenue by
$17.4 million. The effect of including SDG's net income for the period would not
be significant. The Company's consolidated financial statements as of and for
the year ended December 31, 1998 include the results of operations for SDG for a
52 week period ended January 2, 1999.
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.
F-7
<PAGE>
Stock Based Compensation
The Company utilizes the intrinsic value-based method of accounting for its
stock-based compensation arrangements.
Income Taxes
Income taxes, including pro forma calculations, are accounted for in
accordance with the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Prior to January 1, 1996, Metzler & Associates, Inc. ("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, Inc. ("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 Consulting, L.L.C. ("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 net reduction of income tax
expense
F-8
<PAGE>
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 offset by an increase of $0.6
million in income tax expense that would have been required if certain of the
Company's subsidiaries been taxable entities in 1998. 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.
The pro forma adjustments for 1997 and 1996 include federal and additional
state income tax expense of $2,588 and $6,698, 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 1,427, 528 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 Resource Management
International, Inc. ("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 Consulting Group, Inc. ("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
during the third quarter in each of the years 1998 and 1997. In 1998, these
merger-related costs were $9,589 net of income tax expense of $3,189, and in
1997, these merger-related costs were $774 net of income tax expense of $538.
F-9
<PAGE>
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 combinations by restating stockholders' equity as of the effective date of
each acquisition without restating prior period financial statements.
Effective January 1, 1999, the Company issued 1.6 million shares of common
stock for all the outstanding common stock of GeoData Solutions, Inc. (GeoData)
and Triad International, Inc. (Triad). Additionally, on February 7, 1999,
the Company issued 2.4 million shares of common stock for substantially all of
the outstanding common stock of SDG. All of these transactions were accounted
for as poolings of interests and, accordingly, the unaudited consolidated
financial statements have been restated as if the companies had been combined
for all periods presented. The Company's consolidated statements of operations
for 1998, 1997 and 1996 have been restated to reflect revenues of $81,123,
$59,875 and $67,327, respectively, and net income of $2,587, $1,359 and $1,708,
respectively, for the aggregate of the operations of GeoData, SDG and Triad.
The amounts in 1997 reflect revenue and net income for SDG for a 40 week time
period as described in Note 2 of Notes to Consolidated 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 ...................................... $ 80,234 $64,610
Engagements in process............................... 27,332 17,834
Allowance for uncollectible accounts................. (6,573) (4,452)
-------- -------
$100,993 $77,992
======== =======
</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:
F-10
<PAGE>
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land and buildings................................................... $ 2,878 $ 370
Furniture, fixtures and equipment.................................... 35,737 34,267
Software............................................................. 6,250 3,113
Leasehold improvements............................................... 6,159 4,282
-------- --------
51,024 42,032
Less: accumulated depreciation and amortization...................... (23,400) (23,129)
-------- --------
$ 27,624 $ 18,903
======== ========
</TABLE>
7. SHORT-TERM AND LONG-TERM DEBT
The Company had total short-term debt of $3,802 and $11,398 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
$6,500 revolving line of credit, interest payable daily at the
average rate for 30 day commercial paper as published by the
Wall Street Journal (4.9% at December 31, 1998 and 8.5% at
December 31, 1997) plus 2.65%, collateralized by certain
assets of SDG, due October 31, 1999................................ 3,344 3,128
$300 line of credit, interest payable monthly at the bank's
prime rate (8.75% at December 31, 1998 and 10.0% at December 31,
1997) plus 1.0% in 1998 and plus 1.5% in 1997, collateralized by
the assets and guaranteed by officers of a subsidiary, due
May 2000........................................................... 174 134
$200 line of credit, interest payable monthly at 8.93%,
collateralized by the assets and guaranteed by the
assets and guaranteed by officers of a subsidiary.................. 140 --
Other term loans, at variable rates of interest of 9.25%
through 15.0% with due dates 1999 through 2001..................... 144 624
------ -------
Total debt.......................................................... 3,802 11,851
Portion classified as long-term..................................... -- 453
------ -------
Short-term debt..................................................... $3,802 $11,398
====== =======
</TABLE>
The Company maintains line of credit agreements in the aggregate amount of
$21,000 expiring through July 1999. Of this total, $6,575 is available
to secure commercial and standby letters of credit. At December 31, 1998, the
Company had letters of credit of $2,057 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
F-11
<PAGE>
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.......................................................... $13,448
2000.......................................................... 12,370
2001.......................................................... 11,826
2002.......................................................... 8,842
2003.......................................................... 6,866
Thereafter.................................................... 12,532
-------
$65,884
=======
</TABLE>
Rent expense for operating leases entered into by the Company and charged to
operations amounted to $13,211 for 1998, $11,980 for 1997, and $9,586 for 1996.
9. INCOME TAX EXPENSE
Income tax expense consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Federal:
Current....................................... $20,779 $5,166 $ 577
Deferred...................................... 1,688 2,746 (455)
------- ------ ------
Total........................................ 22,467 7,912 122
------- ------ ------
State:
Current....................................... 3,559 1,489 486
Deferred...................................... 404 (78) (240)
------- ------ ------
Total........................................ 3,963 1,411 246
------- ------ ------
Foreign:
Total........................................ 67 34 --
------- ------ ------
Total income tax expense........................ $26,497 $9,357 $ 368
======= ====== ======
</TABLE>
F-12
<PAGE>
Income tax expense differs from the amounts estimated by applying the
statutory income tax reates 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........ (1.4%) (0.85%) (0.5%)
Effect of nontaxable entities...................... (1.2%) (5.20%) (39.0%)
Effect of conversion from cash to accrual method of
accounting for acquired company................... 16.0% 0.0% 0.0%
Effect of non-deductible merger-related costs...... 4.1% 0.0% 0.0%
Other.............................................. 1.2% (1.4%) 2.0%
---- ---- ----
58.6% 32.1% 2.1%
==== ==== ====
</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.............................. $ 285 $ (39)
Allowance for uncollectible receivables......... 194 340
Deferred compensation........................... 2,826 2,826
Merger-related costs............................ 1,427 382
Other........................................... 655 621
------- -------
Total deferred tax assets...................... 5,387 4,130
------- -------
Deferred tax liabilities:
Change in accounting method....................... 12,847 9,775
Other........................................... 916 639
------- -------
Deferred tax liabilities....................... 13,763 10,414
------- -------
Net deferred tax liabilities................... $ 8,376 $ 6,284
======= =======
</TABLE>
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 5,564 options outstanding
at a weighted average exercise price of $23.96 per share which was equal to the
fair market value of common stock at the dates of grant. As of December 31,
1998, 166 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 $4,833, $1,211 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:
F-13
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Earnings per common share, as reported:
Net income............................................... $18,709 $19,778 $16,865
Net income per basic share............................... $ 0.46 $ 0.55 $ 0.48
Net income per dilutive share............................ $ 0.45 $ 0.54 $ 0.47
Earnings per common share, fair value method:
Net income, with compensation expense from fair
value options........................................... $13,876 $18,567 $16,763
Fair value method net income per basic share............. $ 0.34 $ 0.51 $ 0.48
Fair value method net income per dilutive share.......... $ 0.33 $ 0.51 $ 0.47
</TABLE>
The weighted average fair value of options granted in 1998, 1997 and 1996 was
$5.85, $4.79 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...... 2,643 $16.41 689 $10.37 -- $ --
Granted................. 3,883 28.22 2,193 18.19 725 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............ 5,564 $23.96 2,643 $16.41 689 $10.37
===== ====== ===== ====== === ======
Options exercisable at
year end............. 166 $12.03 33 $ 7.96 -- $ --
===== ====== ===== ====== === ======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998 and 1997:
F-14
<PAGE>
<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............... 1,079 $11.85 0.7 years 1,554 $12.45 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 -- -- --
----- -----
5,564 $23.96 2.8 years 2,643 $16.41 1.8 years
===== =====
</TABLE>
11. EMPLOYEE BENEFIT PLANS
The Company maintained eight profit sharing and savings plans 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 $3,247, $2,509 and $3,186 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.
F-15
<PAGE>
Item 5 (b) Selected Financial Data as of and for each of the five years in the
period ended December 31, 1998, as restated.
The selected financial data set forth below should be read in conjunction with
our Financial Statements and related Notes thereto.
<TABLE>
<CAPTION>
Years Ended December 31,(1)
----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues............................................ $348,000 $256,655 $219,216 $183,784 $173,848
Cost of services.................................... 200,155 148,913 127,525 109,485 104,771
-------- -------- -------- -------- --------
Gross profit........................................ 147,845 107,742 91,691 74,299 69,077
General and administrative
expenses(2)........................................ 92,618 78,393 74,048 72,158 64,697
Merger related costs................................ 12,778 1,312 -- -- --
-------- -------- -------- -------- --------
Operating income.................................... 42,449 28,037 17,643 2,141 4,380
Other expense (income), net(2)...................... (2,757) (1,098) 410 (5,364) 1,155
-------- -------- -------- -------- --------
Income before income tax expense.................... 45,206 29,135 17,233 7,505 3,225
Income tax expense(3)............................... 26,497 9,357 368 913 634
-------- -------- -------- -------- --------
Net income.......................................... $ 18,709 $ 19,778 $ 16,865 $ 6,592 $ 2,591
======== ======== ======== ======== ========
Pro forma net income(4)............................. $ 27,604 $ 17,190 $ 10,167 $ 1,070 $ 1,903
======== ======== ======== ======== ========
Pro forma net income per
basic share........................................ $ 0.69 $ 0.48 $ 0.29 $ 0.03 $ 0.44
======== ======== ======== ======== ========
Pro forma net income per
dilutive share..................................... $ 0.66 $ 0.47 $ 0.29 $ 0.03 $ 0.44
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,(1)
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................... $120,448 $ 47,236 $ 34,751 $ 2,228 $ 3,144
Working capital..................................... 141,461 60,408 48,216 13,093 23,942
Total assets........................................ 259,938 151,487 117,966 70,470 69,830
Long-term debt, less current portion................ -- 453 1,490 1,027 15,961
Total stockholders' equity.......................... 168,945 72,240 53,644 14,591 16,985
- ---------
</TABLE>
(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 years ended December 31, 1995 and 1994, general and administrative
expenses include $4.3 million and $2.2 million, respectively, 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 offset by an increase of $0.6
million in income tax expense that would have been required if certain of
the Company's subsidiaries been taxable entities in 1998.
F-16
<PAGE>
Item 5 (c) Unaudited Quarterly Operating Information, as restated.
The following table sets forth certain unaudited quarterly operating
information. Except as described below regarding the treatment of including
SDG's results of operations for the period ended March 31, 1997, these data have
been prepared on the same basis as the audited financial statements contained
elsewhere in this Form 10-K and include all normal recurring adjustments
necessary for the fair presentation of the information for the periods
presented, when read in conjunction with the Company's Consolidated Financial
Statements and related Notes thereto. Results for any previous fiscal quarter
are not necessarily indicative of results for the full year or for any future
quarter. As described in note 2 to the Company's Consolidated Financial
Statements, effective in 1997, SDG changed its reporting period to a 52 week
fiscal year ending on or about December 31 from a 52 week fiscal year ending on
or about March 31. As a result, the Company's Consolidated Statement of
Operation for the year ended December 31, 1997 includes SDG's results of
operation for a 40 week period. As such, the four quarters for 1997 as shown
below do not equal the amounts presented on a fiscal year basis included within
the Company's Consolidated Financial Statements.
<TABLE>
<CAPTION>
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1997 1997 1997 1997
-------- -------- -------- -------- -------- -------- --------- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue........................ $ 78,658 $ 84,468 $ 90,711 $ 94,163 $ 63,350 $ 65,978 $ 70,478 $ 74,217
Cost of Sales.................. 46,043 47,901 51,863 54,348 36,836 38,228 39,906 43,027
-------- -------- --------- -------- -------- -------- --------- --------
Gross Profit................... 32,615 36,567 38,848 39,815 26,514 27,750 30,572 31,190
General and administrative
expenses...................... 22,563 25,619 21,785 22,651 21,198 20,227 22,054 23,136
Merger-related costs........... 0 0 12,778 0 0 0 1,312 0
-------- -------- -------- -------- -------- -------- --------- --------
Operating Income............... 10,052 10,948 4,285 17,164 5,316 7,523 7,206 8,054
Other Expense (Income), net... (532) (942) (606) (677) (124) (955) (71) 52
-------- -------- -------- -------- -------- -------- --------- --------
Pre-Tax Income................. 10,584 11,890 4,891 17,841 5,440 8,478 7,277 8,002
Income taxes................... 4,023 4,410 10,797 7,267 1,265 1,583 1,562 5,012
-------- -------- -------- -------- -------- -------- --------- --------
Net Income (loss).............. $ 6,561 $ 7,480 $ (5,906) $ 10,574 $ 4,175 $ 6,895 $ 5,715 $ 2,990
======== ======== ========= ======== ======== ======== ========= ========
</TABLE>
F-17
