<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1999
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 of (I.R.S. Employer
Incorporation or organization) Identification No.)
1105 Sanctuary Parkway, Suite 300, Alpharetta, GA 30004
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(770) 360-0600
(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 |_|
The number of shares of Common Stock of the Company, par value $1.00 per share,
outstanding at May 13, 1999 was 2,044,363.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
as of March 31, 1999 and December 31, 1998...........................1
Condensed Consolidated Statements of Income and Comprehensive Income
for the Quarters Ended March 31, 1999 and 1998.......................2
Condensed Consolidated Statements of Cash Flows
for the Quarters Ended March 31, 1999 and 1998.......................3
Notes to Condensed Consolidated
Financial Statements.................................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...................................9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................9
SIGNATURE.....................................................................10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
LAW COMPANIES GROUP, INC.
(unaudited - dollars in thousands, except per share data)
March 31, December 31,
1999 1998
----------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 7,821 $ 11,022
Billed fees receivable,
net of allowance 55,808 55,346
Unbilled work in progress 31,705 31,464
Other current assets 7,994 9,041
----------------- -----------------
Total current assets 103,328 106,873
Property and equipment, net 22,591 23,442
Equity investments 1,586 1,587
Goodwill, net 12,835 13,250
Other assets 5,516 5,759
----------------- -----------------
Total assets $ 145,856 $ 150,911
================= =================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings $ 1,400 $ 902
Accounts payable 14,199 15,858
Billings in excess of costs and fees
earned on contracts in progress 14,104 13,805
Current portion of long-term debt 5,084 5,220
Other accrued expenses 14,427 16,745
Other current liabilities 15,194 15,283
----------------- -----------------
Total current liabilities 64,408 67,813
Long-term debt 39,722 41,979
Deferred income taxes 1,956 1,983
Minority interest in equity of subsidiaries 199 208
Cumulative convertible redeemable preferred
stock; Issued and Outstanding: 956,613
shares in 1999 and 1998 9,891 9,886
Shareholders' equity:
Common stock--$1 par value:
authorized: 10,000,000 shares;
issued and outstanding: 2,043,863
shares in 1999 and 2,045,870 shares
in 1998 2,044 2,046
Additional paid - in capital 18,046 18,031
Retained earnings 17,378 15,931
Accumulated other comprehensive
income (7,773) (6,981)
----------------- -----------------
29,680 29,042
----------------- -----------------
Total Liabilities and
Shareholders' Equity $ 145,856 $ 150,911
================= =================
See accompanying notes.
1
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
LAW COMPANIES GROUP, INC.
(unaudited - dollars in thousands, except per share data)
For the Quarter
Ended March 31
----------------------------------------------
1999 1998
------------------ -------------------
Gross fees $ 74,905 $ 73,655
Less: Cost of outside services 8,277 7,932
------------------ -------------------
Net fees 66,628 65,723
Direct costs and expenses:
Payroll 20,275 19,658
Job related expenses 7,039 7,343
------------------ -------------------
Gross profit 39,314 38,722
Indirect costs and expenses:
Payroll 16,469 15,628
Other expenses 18,772 19,689
------------------ -------------------
Operating income 4,073 3,405
Other:
Interest expense (1,002) (1,055)
Deferred financing costs (23) (37)
Other income 27 1
------------------ -------------------
Income before income taxes
and equity investments 3,075 2,314
Income tax provision (1,292) (1,065)
Equity investments (1) (8)
------------------ -------------------
Net income 1,782 1,241
Less: Preferred stock dividend
and accretion (282) (282)
------------------ -------------------
Net income available to common
shareholders $ 1,500 $ 959
================== ===================
Earnings per common share
- basic $ .73 $ .51
================== ===================
Earnings per common share
- diluted $ .53 $ .42
================== ===================
Statements of Comprehensive Income
Net income $ 1,782 $ 1,241
Other comprehensive income:
Foreign currency
translation adjustment (792) 859
------------------ -------------------
Comprehensive income $ 990 $ 2,100
================== ===================
See accompanying notes.
2
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
LAW COMPANIES GROUP, INC.
(unaudited - dollars in thousands, except per share data)
For the Quarter
Ended March 31
-----------------------------
1999 1998
------------- ------------
Operating activities
Net income $ 1,782 $ 1,241
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,683 1,676
Provision for losses on receivables 119 127
Deferred income taxes (34) (1,300)
Undistributed losses from equity investments 1 8
Loss on disposal of property and equipment 5 -
Changes in operating assets and liabilities:
Billed fees receivable (1,435) 1,665
Unbilled work in progress (735) 446
Other current assets 966 (527)
Accounts payable and accrued expenses (2,507) 2,353
Billings in excess of costs and fees earned
on contracts in progress (616) (255)
------------- ------------
Net cash provided (used) by operating activities (771) 5,434
Investing activities
Purchases of property and equipment (731) (715)
Proceeds from disposal of property and equipment 29 2
Other, net 524 81
------------- ------------
Net cash used by investing activities (178) (632)
Financing activities
Net (payments) proceeds on
short-term borrowings 498 (148)
Net (payments) proceeds on revolving
line of credit and long-term borrowings (2,395) 848
Deferred financing and preferred
stock issuance costs - (397)
Proceeds from exercise of stock options 13 -
Repurchase and retirement of shares (82) (60)
Preferred dividends paid (200) (200)
------------- ------------
Net cash provided (used) by financing activities (2,166) 43
Effect of exchange rate changes on cash (86) 56
------------- ------------
Increase (decrease) in cash and cash equivalents (3,201) 4,901
Cash and cash equivalents at beginning of period 11,022 9,527
------------- ------------
Cash and cash equivalents at end of period $ 7,821 $ 14,429
============= ============
See accompanying notes.
3
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LAW COMPANIES GROUP, INC.
(unaudited - dollars in thousands, except per share data)
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, 1998 in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (the "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, 1998 included in the Form 10-K. The accompanying condensed consolidated
financial statements at and for the first quarter ended March 31, 1999 and 1998
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 first
quarter ended March 31, 1999 may not be indicative of the results that may occur
during the year ending December 31, 1999.
NOTE 3 - The Company's operations are conducted principally in the United
States, Europe, and Africa. Accordingly, the Company considers its operating
segments to be defined as United States Operations and International Operations.
For financial reporting purposes, International Operations results are presented
separately for operations in the United Kingdom, Europe, Africa, and other
countries. The net fees for each segment as described in the table below
correspond directly to the net revenues attributable to the geographic areas
that are represented by these segments. Inter-segment revenues related to these
geographic areas were not material. The table that follows represents combined
disclosure for both business segment and geographic area information.
BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
For the Quarter Ended March 31
1999 1998
----------- ------------
Net Fees
United States Operations $ 44,826 $ 42,843
International Operations United Kingdom 7,656 7,789
Europe 4,371 4,375
Africa 5,985 6,637
Other 3,790 4,079
----------- -----------
$ 66,628 $ 65,723
Total =========== ===========
Operating Income
United States Operations $ 3,579 $ 3,053
International Operations United Kingdom 151 73
Europe 262 231
Africa 26 85
Other 55 (37)
----------- -----------
Total $ 4,073 $ 3,405
=========== ===========
Assets
United States Operations $ 82,149 $ 81,845
International Operations United Kingdom 35,007 36,782
Europe 5,743 6,127
Africa 14,661 16,018
Other 8,296 10,112
----------- -----------
Total $ 145,856 $ 150,884
=========== ===========
4
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NOTE 4 - Computation of Earnings Per Share
LAW COMPANIES GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
(unaudited - dollars in thousands, except per share data)
For the Quarter Ended
March 31
-------------------------------------
1999 1998
-------------------------------------
Numerator:
Net income $ 1,782 $ 1,241
Preferred stock dividends and accretion (282) (282)
-------------------------------------
Numerator for basic earnings per share -
Income available to common shareholders 1,500 959
Effect of dilutive securities:
Preferred stock dividends and accretion - -
-------------------------------------
Numerator for diluted earnings per share-
Income available to common shareholders $ 1,500 $ 959
Denominator:
Denominator for basic earnings per share -
weighted-average shares 2,044 1,878
Effect of dilutive securities:
Employee stock options 157 69
Other stock options 106 -
Cumulative convertible redeemable
preferred stock - -
Common stock warrants 548 336
-------------------------------------
Dilutive potential common shares 811 405
-------------------------------------
Denominator for diluted earnings per
share-adjusted weighted-average shares 2,855 2,283
=====================================
Earnings per common share - basic $ .73 $ .51
=====================================
Earnings per common share - diluted $ .53 $ .42
=====================================
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth, for the three months 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 the 1999 periods from the comparable periods
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.
The following 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.
Qtr to Qtr
Dollar
Quarters Ended Increase
March 31 (Decrease)
------------------------- -----------------
1999 1998 1999 vs. 1998
----------- ----------- -----------------
Net fees 100.0% 100.0% 1.4%
Gross profit 59.0% 58.9% 1.5%
Indirect costs and
Expenses 52.9% 53.7% (0.2%)
Operating income 5.2% 19.6%
6.1%
Net income 2.7% 1.9% 43.6%
Results of Operations
An increase in net fees along with improved management of indirect labor and
expenses for the quarter ended March 31, 1999 resulted in a 43.6% improvement in
net income. Consolidated net fees of $66.6 million for the first quarter of 1999
represented a 1.4% increase from net fees of $65.7 million for the same period
in 1998. All primary margin measurements: gross profit, indirect costs and
expenses, operating income, and net income improved as a percentage of net fees
compared to 1998
Net fees from the Company's United States operations increased 4.6% from $42.8
million for the first three months of 1998 to $44.8 million for the same period
in 1999. The improvement in United States net fees reflects the results of the
company's ongoing investments in business development initiatives, including
sales and marketing programs, introduced since 1997.
Net fees from the Company's International Group for the first quarter of 1999
decreased 4.7% from $22.9 million in 1998 to $21.8 million in 1999. This
decrease was primarily the result of a strengthening in the value of the United
States dollar compared to the local currencies for these operations.
The Company's gross profit margin of 59.0% for the first three months of 1999
compared to 58.9% for the same period of 1998 reflected a small increase. The
gross profit margin of 64.2% for United States operations in 1999 decreased
compared to 64.9% for the first three months of 1998. The International Group's
gross profit margin increased to 48.4% from 47.6% for the first quarter of 1999
compared to the same period in 1998, primarily as a result of improved
management of direct costs. Indirect costs and expenses, which include expenses
related to both operations support as well as administrative support functions,
were $35.2 million, or 52.9% of net fees, for the first three months of 1999,
compared with $35.3 million, or 53.7% of net fees, for the same period in 1998.
This decrease as a percentage of net fees is attributable to the continued
positive impact of the Company's expense reduction initiatives in insurance
costs, professional services, and other areas.
Interest expense of $1.0 million for the first three months of 1999 remained
flat compared to the same period in 1998. The amortization of deferred financing
costs declined compared to 1998 due to the October 1998 amendment and extension
of the Company's 1998 credit facility for one additional year. The 1998 credit
facility now expires in 2002. The amortization period for deferred financing
cost was extended to be concurrent with the term of the credit facility.
6
<PAGE>
The effective income tax rate was 42.0% for the first quarter of 1999, compared
to 46.0% for the first quarter of 1998. This decrease was attributable to
changes in permanent book versus tax differences.
For the first quarter of 1999, the Company recorded net income of $1.8 million
($.73 per common share - basic and $.53 per common share - diluted) which is an
increase from $1.2 million in 1998 ($.51 per common share - basic and $.42 per
common share - diluted).
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' operating
environments by utilizing a combination of current, monthly 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 month-end and
monthly average exchange rates, resulting in an adjustment to shareholders'
equity. In addition, transactions denominated in different currency 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 during the first quarter of 1999. The translation of the Company's
foreign subsidiaries for the first three months of 1999 resulted in a change of
$0.8 million in the foreign currency translation adjustment component of
shareholders' equity. This component is reported on the company's condensed
consolidated balance sheet in the line item entitled Accumulated Other
Comprehensive Income. This fluctuation was caused primarily by increased
strength of the U.S. dollar relative to the pound sterling and the South African
rand from December 31, 1998 to March 31, 1999.
Debt and Short-term Borrowings
The Company reported debt and short-term borrowings of $46.2 million at March
31, 1999, compared to $48.1 million at December 31, 1998. Debt and short-term
borrowings as a percentage of total capitalization amounted to 53.8% at March
31, 1999, compared to 55.3% at December 31, 1998.
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 its credit facility
will be sufficient to meet its requirements for the foreseeable future.
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 use of Company Common Stock 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. Over the first three months of 1999, 3,004
shares were traded out of the Plan totaling $82,000.
Cash Provided by Operations
Cash used by operations over the first quarter of 1999 of $0.8 million decreased
from cash provided by operations of $5.4 million during the first quarter of
1998. This decrease was primarily due to increased working capital requirements
for billed fees receivable as well as accounts payable and accrued other
expenses.
Capital Expenditures
Capital expenditures during each of the first quarter of 1999 and the first
quarter of 1998 were $0.7 million. In order to continue to enhance productivity
the Company has continued, and will continue, its capital spending programs,
particularly for computer and other technology-related equipment. The Company
believes that the capital spending amount allowed by its credit facility ($7.0
million per year) is sufficient to meet foreseeable requirements.
7
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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
Company's outstanding Cumulative Convertible Redeemable Preferred Stock and
permitted by the 1998 credit facility, the Company paid dividends to the holders
of the Preferred Stock. These dividends totaled $0.2 million, or $0.21 per
preferred share for the three months ended March 31, 1999.
Year-2000
The Company recognizes the need to address potential problems in both
information technology and non-information technology systems, which could
result in improper handling of the date change to the year 2000. As the
Company's core business services are engineering and environmental science
professional consulting services, delivery of these services is not critically
dependent on any mainframe, mini-computer or personal computer-based systems or
software applications. Where computer systems and software applications are used
to support the delivery of services to clients, these systems and applications
are largely personal computer-based and are not considered likely to experience
year-2000 related problems. For certain applications which are used to support
administrative operations of the Company and certain systems and applications
used to support the Company's international operations, year-2000 readiness
projects are currently in the process of being implemented. These projects are
expected to be completed in mid-1999.
The Company expects to spend a total of approximately $150,000 to address known
year-2000 issues, with approximately $35,000 of the total spent to date.
Additionally, the Company does not anticipate a material adverse effect on the
Company's business, results of operations, or financial condition associated
with any currently identified or anticipated year-2000 readiness issue,
inclusive of internal systems and software applications and those systems of
other parties with whom the Company does business. As part of the Company's
contingency plan to address year-2000 matters, a centralized task force has been
established to coordinate identification, evaluation, and implementation of any
year-2000 contingency plans or future compliance requirements. This task force
is evaluating all of its major external providers of essential goods and
services for year-2000 readiness. Based on the critical nature of any goods or
services, the task force is developing a contingency plan regardless of the
reported year-2000 readiness of the provider or industry. The Company expects
all phases to be substantially complete by mid-1999.
While the Company is taking steps that it believes to be reasonable and prudent
to assess the year-2000 readiness of third parties with whom the Company does
business, the failure of any of these third parties to correct a material
year-2000 problem could result in an interruption in, or a failure of, certain
normal business activities or operations. Due to the general uncertainty
inherent in the year-2000 problem, resulting in part from the uncertainty of the
year-2000 readiness of third party suppliers and customers, the Company is
unable to determine at this time whether the consequences of year-2000 failures
will have a material impact on the Company's results of operations, liquidity,
or financial condition. Readers are cautioned that forward-looking statements
contained in this year-2000 update should be read in conjunction with the
Company's disclosures under the heading: "Forward Looking Statements," which
follow this section.
Forward Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995 which
represent the company's expectations or beliefs. 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, but
not limited to, the factors described in the Company's filings with the
Securities and Exchange Commission, the uncertain timing of awards and
contracts, increasing competition by foreign and domestic competitors, the
impact of year-2000 issues, general economic and regulatory conditions in each
of the geographic regions served by the Company, industry trends, and other
risks could cause actual results or outcomes to differ materially from those
expressed in any forward-looking statements.
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.
8
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various types of market risks in the normal course of
business, including the impact of interest rate changes and foreign currency
exchange rate fluctuations. There have been no material changes in theses
exposures during the periods presented. For a description of these market risks,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Form 10-K .
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.00 Financial Data Schedule
(b) Reports on Form 8-K
None
9
<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 13, 1999
10
<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-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<CASH> 7,821
<SECURITIES> 0
<RECEIVABLES> 58,929
<ALLOWANCES> 3,121
<INVENTORY> 31,705
<CURRENT-ASSETS> 103,328
<PP&E> 68,109
<DEPRECIATION> 45,518
<TOTAL-ASSETS> 145,856
<CURRENT-LIABILITIES> 64,408
<BONDS> 0
9,891
0
<COMMON> 2,044
<OTHER-SE> 27,636
<TOTAL-LIABILITY-AND-EQUITY> 145,856
<SALES> 74,905
<TOTAL-REVENUES> 74,905
<CGS> 0
<TOTAL-COSTS> 27,314
<OTHER-EXPENSES> 35,118
<LOSS-PROVISION> 119
<INTEREST-EXPENSE> 1,002
<INCOME-PRETAX> 3,075
<INCOME-TAX> 1,292
<INCOME-CONTINUING> 1,782
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,782
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.53
</TABLE>
