UNITED STATES
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 0-19239
LAW COMPANIES GROUP, INC.
--------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-0537111
- --------------------------------------- -------------------------------------
State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
114 TownPark Drive, Kennesaw, Georgia 30144
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 590-4600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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
The number of shares of Common Stock of the Company, par value $1.00 per
share, outstanding at April 30, 1998 was 1,889,176.
<PAGE>
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of March 31, 1998 and December 31, 1997 ...................................1
Condensed Consolidated Statements of Operations
for the Quarters Ended March 31, 1998 and 1997 ...............................3
Condensed Consolidated Statements of Cash Flows
for the Quarters Ended March 31, 1998 and 1997................................4
Notes to Condensed Consolidated
Financial Statements..........................................................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ................................................................6
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................11
SIGNATURE....................................................................13
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
LAW COMPANIES GROUP, INC.
(in thousands)
<CAPTION>
March 31 December 31
1998 1997
--------------------- -----------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 14,429 $ 9,527
Billed fees receivable, net of allowance 56,223 56,808
Unbilled work in progress 33,497 32,105
Other receivables 880 1,779
Employee advances 464 420
Prepaid expenses 3,703 3,268
Deferred income taxes 607 0
--------------------- -----------------------
Total current assets 109,803 103,907
Property and equipment:
Land and buildings 12,117 12,094
Equipment 37,296 36,507
Automobiles 2,929 3,088
Furniture and fixtures 12,344 12,386
Leasehold improvements 3,579 3,526
--------------------- -----------------------
68,265 67,601
Less accumulated depreciation and
amortization 45,485 44,095
--------------------- -----------------------
22,780 23,506
Other Assets:
Equity investments 1,254 1,361
Goodwill, net 13,716 13,775
Other assets 3,331 3,219
--------------------- -----------------------
18,301 18,355
--------------------- -----------------------
$ 150,884 $ 145,768
===================== =======================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
LAW COMPANIES GROUP, INC.
(in thousands)
<CAPTION>
March 31 December 31
1998 1997
----------------- -------------------
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Short-term borrowings $ 698 $ 904
Accounts payable 15,012 17,887
Billings in excess of costs and fees earned on contracts in
progress 15,188 15,168
Accrued payroll and other employee benefits 12,402 5,990
Accrued professional liability reserve 3,735 3,504
Other accrued expenses 18,996 21,339
Income taxes payable 5,798 3,768
Current portion of long-term debt 1,480 2,231
Deferred income taxes 0 701
----------------- ---------------
Total current liabilities 73,309 71,492
Long-term debt 43,985 42,483
Deferred income taxes 1,555 1,528
Minority interest in equity of subsidiaries 26 1,060
Cumulative redeemable preferred stock; issued and
outstanding: 956,613 shares in 1998 and
956,613 shares in 1997 9,870 9,864
Shareholders' equity:
Common stock--$1 par value: authorized: 10,000,000 shares;
issued and outstanding: 1,889,176
shares in 1998 and 1,872,000 shares in 1997 1,889 1,872
Additional paid in capital 15,949 14,957
Retained earnings 9,785 8,855
Foreign currency translation adjustment (5,484) (6,343)
----------------- -------------------
22,139 19,341
----------------- -------------------
$150,884 $ 145,768
================= ===================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
LAW COMPANIES GROUP, INC.
(in thousands, except per share data)
<CAPTION>
For the Quarter
Ended March 31
----------------------------------------------
1998 1997
------------------ --------------------
<S> <C> <C>
Gross fees $ 73,655 $ 75,491
Less: Cost of outside services 7,932 8,098
------------------ --------------------
Net fees 65,723 67,393
Direct costs and expenses:
Payroll 19,658 20,009
Job related expenses 7,343 7,669
------------------ --------------------
Gross profit 38,722 39,715
Indirect costs and expenses:
Payroll 15,628 15,968
Other expenses 19,689 20,656
------------------ --------------------
Operating income 3,405 3,091
Other expense:
Interest expense (1,055) (955)
Deferred financing costs (37) (345)
Other income (expense) 1 (23)
------------------ --------------------
Income before income taxes and
equity investments 2,314 1,768
Income tax provision (1,065) (813)
Equity investments (8) (49)
------------------ --------------------
Net income 1,241 906
Less: preferred stock dividend and
accretion (282) -
------------------ --------------------
Net income available to common
shareholders $ 959 $ 906
================== ====================
Net income per common share $ .51 $ .48
================== ====================
Net income per common share -
assuming dilution $ .42 $ .47
================== ====================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
LAW COMPANIES GROUP, INC.
(in thousands)
<CAPTION>
For the Quarter
Ended March 31
------------------------------
1998 1997
<S> <C> <C>
Operating activities
Net income $ 1,241 $ 906
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,676 2,037
Provision for losses on receivables 127 75
Provision for losses on claims 231 89
Deferred income taxes (1,300) (1,062)
Undistributed losses from equity investments 8 49
Gain (loss) on disposal of property and equipment 0 16
Changes in operating assets and liabilities:
Billed fees receivable 1,665 4,761
Unbilled work in progress 446 (594)
Other current assets (527) (495)
Accounts payable and accrued expenses 2,122 (151)
Billings in excess of costs and fees earned
on contracts in progress (255) (2,297)
------------ -------------
Net cash provided by operating activities 5,434 3,334
Investing activities
Purchases of property and equipment (715) (452)
Proceeds from disposal of property and equipment and equity
investments 2 5
Other, net 81 160
------------ -------------
Net cash used by investing activities (632) (287)
Financing activities
Net (payments) proceeds on short-term borrowings (148) 434
Net (payments) proceeds on revolving line of credit and long-term
borrowings 848 (1,804)
Deferred financing and preferred stock issuance costs (397) (1,348)
Repurchase and retirement of shares (60) (11)
Preferred dividends paid (200) 0
------------ -------------
Net cash used by financing activities 43 (2,729)
Effect of exchange rate changes on cash 56 (153)
------------ -------------
Increase in cash and cash equivalents 4,901 165
Cash and cash equivalents at beginning of period 9,527 8,097
------------ -------------
Cash and cash equivalents at end of period $ 14,429 $ 8,262
============ =============
</TABLE>
See accompanying notes.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LAW COMPANIES GROUP, INC.
NOTE 1 - There have been no significant changes in the accounting policies of
the Company during the periods presented. For a description of these policies,
see Note 1 of Notes to Consolidated Financial Statements for the year ended
December 31, 1997 in the Company's Form 10-K.
NOTE 2 - The unaudited condensed consolidated financial statements presented
herein have been prepared in accordance with the instructions to Form 10-Q and
do not include all of the information and note disclosures required by generally
accepted accounting principles. These statements should be read in conjunction
with the Consolidated Financial Statements and Notes for the year ended December
31, 1997 included in the Company's Form 10-K. The accompanying condensed
consolidated financial statements at and for the three months ended March 31,
1998 and 1997 have not been audited by independent auditors in accordance with
generally accepted auditing standards, but in the opinion of management such
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary to summarize fairly the Company's consolidated
financial position and results of operations. The results of operations for the
three months ended March 31, 1998 may not be indicative of the results that may
occur during the year ending December 31, 1998.
NOTE 3 - On January 15, 1998, the Company refinanced its credit facilities into
one credit facility with a global bank. For a description of these credit
facilities, see Note 4 of Notes to Consolidated Financial Statements for the
year ended December 31, 1997 in the Company's Form 10-K.
NOTE 4 - As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires foreign currency translation adjustments or other
adjustments, if any, which prior to adoption were reported separately in
shareholders' equity to be included in other comprehensive income.
During the first quarter of 1998 and 1997, total comprehensive income amounted
to $1,774 and $510.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth, for the three month periods indicated, (i) the
percentage of net fees represented by certain items reflected in the Company's
condensed consolidated statements of income and (ii) the percentage increase or
decrease in each of such items in 1998 from the comparable period in the prior
year. The Company measures its operating performance on the basis of net fees
since a substantial portion of gross fees flow through to clients as costs of
subcontractors and other project-specific outside services. Net fees are
determined by deducting the cost of these outside services from gross fees. This
table and the subsequent discussion should be read in conjunction with the
Condensed Consolidated Financial Statements and notes to Condensed Consolidated
Financial Statements contained elsewhere in this Form 10-Q.
<TABLE>
<CAPTION>
Year to Year
Dollar
Three Month Increase
Periods Ended March 31 (Decrease)
--------------------------------- ---------------------
1998 1997 1998 vs. 1997
----------------- --------------- ---------------------
<S> <C> <C> <C>
Net fees 100.0% 100.0% (2.5%)
Gross profit 58.9% 58.9% (2.5%)
Indirect costs and expenses 53.7% 54.3% (3.6%)
Operating income 5.2% 4.6% 10.2%
Net income (loss) 1.9% 1.3% 37.0%
</TABLE>
Results of Operations
Consolidated net fees of $65.7 million for the first three months of 1998
decreased 2.5% from net fees of $67.4 million for the same period in 1997. The
United States net fees decreased 1.2% from $43.4 million for the first three
months of 1997 to $42.8 million for the same period in 1998. United States net
fees have been negatively impacted by a lack of environmental regulatory
pressure which has softened the demand in the environmental markets and has
resulted in increased competition. This decrease has been largely mitigated by
the Company's efforts to improve its business development initiatives, which
have included sales and marketing programs introduced in the latter half of 1997
and the first quarter of 1998.
The International Group's net fees for the first quarter of 1998 decreased 4.7%
from $24.0 million in 1997 to $22.9 million. This quarter to quarter decrease is
attributable to a hold on government expenditures surrounding the United Kingdom
general election in the second quarter of 1997, which directly led to the
cancellation of a project which was ongoing in the first quarter of 1997.
<PAGE>
The gross profit margin for the first quarter of 1998 remained constant with
that of the same period in 1997 at 58.9%. The United States' gross profit margin
increased slightly to 65.0% in the first quarter of 1998 from 64.9% for the same
period in 1997. The small improvement in margin reflects the Company's focus on
improved project management and operating procedures in response to difficult
domestic market conditions. The International Group's gross profit margin
decreased slightly from 48.2% in the first quarter of 1997 to 47.6% for the same
period in 1998. This slight decrease was primarily due to project performance
issues.
Indirect costs and expenses were $35.3 million, or 53.7% of 1998 first quarter
net fees, compared with $36.6 million, or 54.3% of 1997 first quarter net fees.
This decrease of 3.6% is attributable to the continued positive impact of the
Company's cost reduction and labor utilization initiatives. These initiatives
were designed to maximize efficiency and profitability, to effect substantive
change in the culture of the Company, and to improve labor utilization. In 1997,
the Company advanced its efforts to lower real estate and office occupancy
costs, which has provided additional benefit to the first quarter 1998 results.
Interest expense was $1.1 million in 1998's first quarter compared to $1.0
million for the same period in 1997. This increase is attributable to higher
average outstanding debt in the first quarter of 1998. Interest rates charged on
bank borrowings, however, have improved over rates charged in the first quarter
of 1997. The amortization of deferred financing costs declined significantly
(from $.3 million in the first quarter of 1997 to $.04 million in the same
period of 1998) reflecting the successful efforts to negotiate a bank credit
facility with reduced fees and related legal costs.
The effective income tax rate was 46.0% for the first three months of both 1998
and 1997. The effective tax rates were higher than the statutory federal rate of
34% due primarily to the effect of state income taxes and certain nondeductible
expenses.
In the first quarter of 1998, the Company recorded net income of $1,241,000, or
$.51 per share (basic), compared to net income of $906,000, or $0.48 per share
(basic), for the first quarter of 1997.
Currency Translation
The translation of the Company's foreign subsidiaries' financial statements into
U.S. dollars is done in multiple steps. First, all foreign operations are
measured into the functional currencies of the foreign subsidiaries' economic
environments by utilizing a combination of current, average, and historic
exchange rates, with translation impacts included in income. The foreign
subsidiaries' functional currency financial statements are translated into U.S.
dollars, the Company's reporting currency, utilizing current and average
exchange rates, resulting in an adjustment to shareholders' equity. In addition,
transactions denominated in different currencies result in exchange gains or
losses which are included in income. The impact of foreign currency translation
and exchange transactions included in income was not significant in the first
quarter of 1998. The translation of the Company's foreign subsidiaries in the
first quarter of 1998 resulted in a $.9 million change in the Foreign Currency
Translation Adjustment component of shareholders' equity. This change was caused
by a decrease in the strength of the dollar relative to the pound sterling and
the Rand from December 31, 1997 to March 31, 1998.
<PAGE>
Debt and Short-term Borrowings
The Company reported debt and short-term borrowings of $46.2 million at March
31, 1998, compared to $45.6 million at December 31, 1997. Debt and short-term
borrowings as a percentage of total capitalization amounted to 59% at March 31,
1998, compared to 61% at December 31, 1997.
On January 15, 1998, the Company refinanced its credit facilities (the "1998
Facility") with a bank with which the Company had no previous relationship. For
a description of these credit facilities, see Note 4 of Notes to Consolidated
Financial Statements for the year ended December 31, 1997 in the Company's Form
10-K. The 1998 Facility bears a three-year term and two one-year extension
options. The 1998 Facility includes certain restrictions relating to, among
other things, limitations on capital expenditures and achievement of certain
leverage and fixed charge ratios, as well as other customery convenants. The
1998 Facility is secured by substantially all of the assets of the Company's
United States and United Kingdom operating subsidiaries. See also "Liquidity and
Capital Resources."
Liquidity and Capital Resources
While the Company anticipates continuing capital requirements to support growth,
expansion of services, and capital expenditures, the Company believes that its
cash provided by operations and borrowings available under the bank credit
facility will be sufficient to meet its requirements for the foreseeable future.
Prior to 1995, certain of the Company's subsidiaries filed their federal income
tax returns on the cash basis of accounting. Effective January 1, 1995, these
subsidiaries changed their method of accounting from the cash to the accrual
method for federal income tax purposes. Accordingly, previously deferred income
of approximately $47 million at January 1, 1995 will be included in taxable
income over a four year period, which began in 1995, resulting in an accelerated
tax liability of $16 million. The Company anticipates additional income tax
payments of approximately $4.5 million for the remainder of 1998 related to this
change in income tax accounting.
The Company's 401(k) Savings Plan (the "Plan") permitted employees to elect to
invest their Plan contributions in Company Common Stock, and provided that the
Company's matching contributions, if any, under the Plan be made in the form of
Company Common Stock. As of May 10, 1996, the Board of Directors of the Company
decided to terminate the Company Common Stock fund under the Plan, whether as
employee contributions or as Company matching contributions. Consistent with
that decision, employees are allowed to trade out of (but not into) shares of
the Company's Common Stock held in their individual 401(k) accounts, in
accordance with Plan provisions. In the first quarter of 1998, 3,480 shares were
traded out of the Plan totaling $60,000.
Cash Provided by Operations
Cash provided by operations in the first quarter of 1998 of $5.4 million
increased from $3.3 million in 1997. This increase is primarily due to
improvements in working capital management as compared to the first quarter of
1997.
<PAGE>
Capital Expenditures
Capital expenditures for the first three months of 1998 were $.7 million
compared to $.5 million for the first three months of 1997. This slight increase
was in line with the Company's 1998 capital expenditures plan. In order to
continue to enhance productivity and potentially increase earnings, the Company
has continued, and will continue, its capital spending programs, particularly
for computer and other technology-related equipment. The Company believes that
the limit of capital spending imposed by its credit facility ($7.0 million per
year) is sufficient to meet foreseeable requirements. The Company has no other
material commitments for purchases of additional equipment.
Dividends
Cash dividends on Common Stock have been and continue to be prohibited under the
current and previous bank credit facilities. As required by the terms of the
Preferred Stock, the Company paid dividends to the holders of the Preferred
Stock. These dividends totaled $0.2 million, or $.21 per preferred share.
Year 2000 Consequences
As the Company's core business services are engineering and environmental
science professional consulting services, the delivery of these services is not
critically dependent on any mainframe, mini-computer or personal computer based
applications. Where computer applications are used to support the delivery of
services to clients, the applications are personal computer based and fully Year
2000 compliant.
Of the Company's administrative support systems which are not Year 2000
compliant, the Company does not anticipate adverse difficulties or material
costs associated with migrating to Year 2000 compliant systems. Implementation
plans for compliant systems have been developed and are currently being executed
so that all administrative support systems will be fully Year 2000 compliant by
mid-1999.
Forward Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1993, as amended (the
"Securities Act"), which represent the Company's expectations or beliefs. When
used in this report, the words "may," "could," "should," "would," "believe,"
"anticipate," "estimate," "expect," "intend," "plan" and similar expressions are
intended to identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties, certain of which are beyond
the Company's control. The Company cautions that various factors, including the
factors described in the Company's filings with the Securities and Exchange
Commission (the "Commission"), as well as general economic conditions in each of
the geographic regions served by the Company and industry trends could cause
actual results or outcomes to differ materially from those expressed in any
forward-looking statements of the Company. Any forward-looking statement speaks
only as of the date of this report and the Company undertakes no obligation to
update any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of an unanticipated event. New factors emerge from time to time, and
it is not possible for the Company to predict all of such factors. Further, the
Company cannot assess the impact of each such factor on its business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
<PAGE>
Effect of Inflation
General economic inflation had the effect of increasing the Company's basic
costs of operations. These increased costs were generally recovered through
increases in contract prices.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.01 Computation of Earnings Per Share
27.00 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
<TABLE>
EXHIBIT 11
LAW COMPANIES GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
<CAPTION>
For the Quarter Ended
-------------------------------------------
March 31 March 31
1998 1997
-------------------------------------------
<S> <C> <C>
Numerator:
Net income $ 1,241 $ 906
Preferred stock dividends and accretion (282) -
-------------------------------------------
-------------------------------------------
Numerator for basic earnings per share - income
available to common shareholders 959 906
Effect of dilutive securities:
None - -
-------------------------------------------
Numerator for diluted earnings per share -
income available to common shareholders $ 959 $ 906
Denominator:
Denominator for basic earnings per share -
weighted-average shares 1,878 1,905
Effect of dilutive securities:
Employee stock options 69 3
Common stock warrants 336 -
-------------------------------------------
Dilutive potential common shares 405 3
-------------------------------------------
Denominator for diluted earnings
per share - adjusted weighted-average shares
2,283 1,908
===========================================
Basic earnings per share $ .51 $ .48
===========================================
Diluted earnings per share $ .42 $ .47
===========================================
</TABLE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Law Companies Group, Inc., has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LAW COMPANIES GROUP, INC.
/s/ R. B. Fooshee
- -----------------------------------------------------------
Robert B. Fooshee
Chief Financial Officer and Treasurer
Dated: May 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<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> 14,429
<SECURITIES> 0
<RECEIVABLES> 58,878
<ALLOWANCES> 2,655
<INVENTORY> 33,497
<CURRENT-ASSETS> 109,803
<PP&E> 68,265
<DEPRECIATION> 45,485
<TOTAL-ASSETS> 150,884
<CURRENT-LIABILITIES> 73,309
<BONDS> 0
9,870
0
<COMMON> 1,889
<OTHER-SE> 20,250
<TOTAL-LIABILITY-AND-EQUITY> 150,884
<SALES> 73,655
<TOTAL-REVENUES> 73,655
<CGS> 0
<TOTAL-COSTS> 34,933
<OTHER-EXPENSES> 35,190
<LOSS-PROVISION> 127
<INTEREST-EXPENSE> 1,055
<INCOME-PRETAX> 2,314
<INCOME-TAX> 1,065
<INCOME-CONTINUING> 1,241
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,241
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.42
</TABLE>
