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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: March 31, 1998
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
Commission file number: 001-14512
LECG, INC.
(Exact name of registrant as specified in its charter)
California 94-3063119
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 Powell Street
Emeryville, California 94068
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(Address of principal executive offices)
(Zip Code)
(510) 653-9800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 13, 1998, registrant had outstanding 13,027,867 shares of Common
Stock.
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LECG, INC.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997....................... 4
Consolidated Statements of Income
three months ended March 31, 1998 and 1997................. 5
Consolidated Statements of Cash Flow
three months ended March 31, 1998 and 1997................. 6
Notes to Consolidated Financial Statements................. 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 8
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K........................... 11
Signatures................................................. 12
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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LECG, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $21,865 $24,165
Accounts receivable, net 20,870 16,280
Prepaid expenses 1,081 841
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Total current assets 43,816 41,286
Security deposits 246 186
Property and equipment, net 4,336 3,584
------- -------
Total assets $48,398 $45,056
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities $ 2,105 $ 2,216
Accrued expert and project origination fees:
Related party 5,388 3,553
Other 4,866 2,953
Client retainers 619 551
Income taxes payable 1,454 262
Deferred tax liability 703 915
Distribution payable 0 5,357
Other current liabilities 877 824
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Total current liabilities 16,012 16,631
Deferred tax liability 1,788 1,788
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Total liabilities 17,800 18,419
Shareholders' equity:
Common shares, $.001 par value; authorized 40,000,000 shares;
issued and outstanding, 13,027,867 shares as of March 31, 1998
and December 31, 1997 13 13
Additional paid-in capital 29,193 29,177
Notes receivable from shareholders (611) (2,755)
Retained earnings 2,003 202
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Total shareholders' equity 30,598 26,637
------- -------
Total liabilities and shareholders' equity $48,398 $45,056
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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LECG, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
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<S> <C> <C>
Revenues $15,780 $9,901
Cost of services:
Related party 2,489 2,206
Other 7,563 4,440
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Total cost of services 10,052 6,646
Gross profit 5,728 3,255
General and administrative expenses 2,868 1,415
Interest income 193 0
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Income before income taxes 3,053 1,840
Income taxes 1,252 64
------- ------
Net income $ 1,801 $1,776
Pro forma income data:
Net income as reported $ 1,801 $1,776
Pro forma adjustments 0 (690)
------- ------
Pro forma net income $ 1,801 $1,086
Pro forma basic earnings per share $0.14 $0.11
======= ======
Pro forma diluted earnings per share $0.14 $0.11
======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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LECG, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,801 $ 1,776
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 236 136
Bad debt expense 12 0
Loss on disposal of property and equipment 1 0
Increase in accounts receivable (4,602) (1,175)
Increase in prepaid expenses and security deposits (300) (12)
(Decrease) increase in accounts payable and accrued liabilities (111) 346
Increase in accrued expert and project origination fees 3,748 1,432
Increase in client retainers 68 54
Decrease in deferred tax liability (212) 0
Increase (decrease) in income taxes payable 1,192 (39)
Increase in other current liabilities 53 4
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Net cash provided by operating activities 1,886 2,522
Cash flows from investing activities:
Purchase of property and equipment (990) (276)
Proceeds from the disposal of property and equipment 1 1
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Net cash used in investing activities (989) (275)
Cash flows from financing activities:
Borrowing under line of credit 0 297
Repayments on line of credit 0 (297)
Sale of common shares 0 22
Shareholder advances (168) 0
Collection of notes receivable from shareholders 664 120
Distributions to shareholders (3,693) (1,937)
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Net cash used in financing activities (3,197) (1,795)
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Net (decrease) increase in cash (2,300) 452
Cash at beginning of period 24,165 3
------- -------
Cash at end of period $21,865 $ 455
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Supplemental cash flow information:
Cash paid for interest $ 1 $ 1
======= =======
Cash paid for income taxes $ 272 $ 95
======= =======
Noncash financing activities:
Sale of common shares through issuance of notes $ 0 $ 87
======= =======
Collection of notes through application of distributions $ 1,664 $ 305
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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LECG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. INTERIM CONSOLIDATED FINANCIAL INFORMATION
The accompanying Consolidated Financial Statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and, in management's opinion, include all adjustments
necessary for a fair statement of results for such interim periods. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to SEC rules or
regulations; however, the Company believes that the disclosures made are
adequate to make the information presented not misleading.
The interim results for the three months ended March 31, 1998 and 1997 are
not necessarily indicative of results for the full year. It is suggested
that these consolidated financial statements be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
2. PRO FORMA FINANCIAL INFORMATION:
PRO FORMA ADJUSTMENTS TO CONSOLIDATED FINANCIAL STATEMENTS
The pro forma consolidated statements of income have been adjusted to
reflect a provision for income taxes assuming an effective tax rate of 41
percent that would have been recorded had the Company been a C Corporation
for all periods presented.
PRO FORMA EARNING PER SHARE
Pro forma earnings per share (EPS) are computed using the weighted average
common shares outstanding at each reporting date. The following table
reconciles numerators and denominators of the basic and diluted EPS
computations:
<TABLE>
<CAPTION>
EFFECT OF DILUTIVE
BASIC SECURITIES - OPTIONS DILUTED
<S> <C> <C> <C> <C>
Three Months Ended: March 31, 1998 13,027,867 94,884 13,122,751
March 31, 1997 10,057,841 131,626 10,189,467
</TABLE>
3. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities and certain equipment under
operating leases through the year 2007.
Future minimum rental payments under noncancellable leases with initial or
remaining lease terms in excess of one year are $2,444,214, $2,581,788,
$2,689,844, $2,811,106, $2,207,182 and $2,604,653 in 1998, 1999, 2000,
2001, 2002 and thereafter.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN RISK FACTORS SET FORTH IN THIS REPORT. SUCH
RISKS AND UNCERTAINTIES INCLUDE THOSE SET FORTH IN THE ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1997. UNLESS REQUIRED BY LAW, THE COMPANY
UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. HOWEVER,
READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS SET FORTH IN OTHER REPORTS OR
DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE
COMMISSION, PARTICULARLY THE QUARTERLY REPORTS ON FORM 10-Q AND ANY CURRENT
REPORTS ON FORM 8-K.
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OVERVIEW
The Company is an economic consulting services firm that provides sophisticated
economic and financial analysis, expert testimony, litigation support and
strategic management consulting to a broad range of public and private
enterprises. The Company's areas of expertise include antitrust, industry
deregulation, damages analyses, economic and financial modeling, intellectual
property valuation, environmental economics and public policy. Services are
provided by Experts who are supported by Professional Staff. The Experts
include Principals and Affiliates. The role of the Professional Staff is
critical as it enables the Experts to leverage their expertise allowing the
Company to deliver high quality work product to its clients. The Company
believes that its structure enables its Experts to provide sophisticated
economic consulting services efficiently and effectively to clients throughout
the world.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues. Revenues increased 59.4% to $15.8 million in the three months ended
March 31, 1998, from $9.9 million in the three months ended March 31, 1997.
This growth in revenues was primarily attributable to additional services
provided to existing clients and engagements with new clients. The Company
expanded the number of projects billed from 277 through the first three months
of 1997 to 338 through the same period in 1998. Additionally, revenues
increased due to an increased number of senior Professional Staff relative to
junior Professional Staff.
Gross Profit. Gross profit consists of revenues less cost of services, which
includes Expert fees, Professional Staff salaries and benefits, project
origination fees and other direct project expenses. Gross profit increased
76.0% to $5.7 million in the first three months of 1998 from $3.3 million in the
comparable period in 1997. Gross profit as a percentage of revenues was 36.3%
in the first three months of 1998 compared to 32.9% in 1997. To service
additional client projects, the Company increased the number of Principals and
employees, including Professional Staff to 277 at March 31, 1998 from 170 at
March 31, 1997. LECG's Experts leveraged Professional Staff resources more
effectively which resulted in a higher contribution to Company margins.
General and Administrative. General and administrative includes salaries and
benefits of management and the administrative staff, facilities costs, supplies,
outside professional fees not billed to clients and all other corporate costs.
General and administrative increased 102.6% to $2.9 million in the three month
period ended March 31, 1998 from $1.4 million in the prior year period. As a
percentage of revenues, general and administrative increased to 18.2% in the
first three months of 1998 from 14.3% in the first three months of 1997. This
increase is the result of investments made in recruiting and office
infrastructure to support growth.
Income before income taxes. Income before income taxes for the three months
ended March 31, 1998 was $3.1 million, compared with $1.8 million for the three
months ended March 31, 1997. The improvement is attributable to increased
revenues while maintaining profit margins.
Pro forma Results. The pro forma presentation in the Consolidated Statements of
Income for the three months ended March 31, 1997 assumes the Company had been
operating as a C Corporation and reflects an effective tax rate of 41.0%.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been cash flow from operations,
supplemented by the net proceeds from the sale of common stock in 1997. Cash
flows provided by operations was $1.9 million and $2.5 million for the three
months ended March 31, 1998 and 1997, respectively. A large component of the
decrease is due to the Company now being taxed as a C Corporation.
Cash flows used in investing activities was $1.0 million and $.3 million for the
three months ended March 31, 1998 and 1997, respectively. This increase is the
result of the significant increase in the number of individuals employed by the
firm which has required the Company to invest in equipment to support staff.
Cash flows used in financing activities was $3.2 million and $1.8 million for
the three months ended March 31, 1998 and 1997, respectively. Concurrent with
the consummation of the initial public offering in 1997, the Company declared a
Subchapter S Corporation distribution of $5.4 million. During the first quarter
of 1998, the Company paid $3.7 million of this distribution to shareholders and
the remaining $1.7 million was applied to notes receivable from shareholders.
The distributions paid was partially funded by the net proceeds from the sale of
common stock. During the first quarter of 1997, the Company paid $1.9 million
in Subchapter S Corporation distributions to its shareholders which was
partially funded by the Company's line of credit. The line expires May 31, 2000
and provides maximum borrowings of $3.0 million. Borrowings are limited to
working capital requirements and bear interest at the bank's prime rate (8.5% at
March 31, 1998). Borrowings are secured by accounts receivable and fixed
assets.
The Company believes the net proceeds from the sale of common stock in 1997,
together with funds generated by operations, will provide adequate cash to fund
its anticipated cash needs, at least through the next twelve months. Pending
such uses, the net proceeds will be invested in short-term, interest-bearing
investment grade securities. The Company currently anticipates that it will
retain all of its earnings for development of the Company's business and does
not anticipate paying any cash dividends in the foreseeable future.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1998.
Items 1, 2, 3, 4 and 5 are not applicable and have been omitted.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LECG, INC.
Date: May 15, 1998 By: /s/ Thomas M. Jorde
---------------------------------
Name: Thomas M. Jorde
Title: President
Date: May 15, 1998 By: /s/ Kimberly D. Gilmour
---------------------------------
Name: Kimberly D. Gilmour
Title: Chief Financial Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 21,865
<SECURITIES> 0
<RECEIVABLES> 21,329
<ALLOWANCES> (459)
<INVENTORY> 0
<CURRENT-ASSETS> 43,816
<PP&E> 6,482
<DEPRECIATION> (2,146)
<TOTAL-ASSETS> 48,398
<CURRENT-LIABILITIES> 16,012
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 30,585
<TOTAL-LIABILITY-AND-EQUITY> 48,398
<SALES> 15,760
<TOTAL-REVENUES> 15,780
<CGS> 10,052
<TOTAL-COSTS> 12,920
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 3,053
<INCOME-TAX> 1,252
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,801
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
