10-Q 1 b10q.txt 2ND QTR 10-Q 2001 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 June 30, 2001 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 LawGibb 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) N/A -------------------------------------------------------------------------------- (Former name, former address, and former fiscal year, if changed since last report) 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 August 14, 2001 was 2,617,348. TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000............................1 Condensed Consolidated Statements of Operations and Comprehensive Income for the Quarters and Six-Month Periods Ended June 30, 2001 and 2000.................................................................2 Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2001 and 2000...............4 . Notes to Condensed Consolidated Financial Statements.................................................5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ......................................8 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...10 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................10 SIGNATURE.....................................................................11 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS

4 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS LAWGIBB GROUP, INC. (unaudited - dollars in thousands, except per share data) NOTE 1 - There have been no significant changes in the accounting policies of LawGibb Group, Inc. (the "Company") during the periods presented. For a description of these policies, see Note 1 of Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (the "Form 10-K"). NOTE 2 - The unaudited condensed consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by generally accepted accounting principles required for complete financial statements. These statements should be read in conjunction with the Consolidated Financial Statements and Notes for the year ended December 31, 2000 included in the Form 10-K. The accompanying condensed consolidated financial statements for the quarter and six months ended June 30, 2001 and 2000 have not been audited by independent auditors in accordance with auditing standards generally accepted in the United States, but in the opinion of the Company's 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 quarter and six months ended June 30, 2001 may not be indicative of the results that may occur during the year ending December 31, 2001. NOTE 3 - In January 2001, the Company acquired the Fort Worth, Texas operation of Maxim Technologies, Inc. ("Maxim") for a purchase price of approximately $1.0 million in cash. The Company received $0.4 million in property and equipment and recorded $0.6 million in goodwill which is being amortized over a period of 15 years. The results of operations of Maxim have been included in the accompanying condensed consolidated statements of operations and comprehensive income since the acquisition date. NOTE 4 - On May 3, 2001, the Company completed the sale of its turnkey engineering services segment for $26.8 million in cash plus an assumption of debt by the purchaser of approximately $7.7 million. The cash proceeds include a $5.0 million escrow for certain defined possible liabilities. These services were provided in the United Kingdom, Europe, Africa and in certain other international locations. This business was a provider of multidisciplinary design, consulting and management services for infrastructure, industrial, and building projects at each stage from project conception to completion, with on going follow-up in the operation and maintenance phases. These services were provided to the owner or general contractors associated with large construction projects. This segment of the business has been accounted for as a discontinued operation and accordingly the accompanying consolidated financial statements reflect the operating results, balance sheet and cash flows of the discontinued operations separately from continuing operations for all periods presented. The continuing operations are composed of engineering support services, which are located in the United States. This business is a provider of geotechnical and materials analysis and testing and environmental services such as regulatory compliance planning, field data collection, laboratory analysis, data evaluation and interpretation, and waste site cleanup planning. Engineering support services are generally provided as a specific service to owners, sub-contractors of a general contractor or a sub-contractor of a sub-contractor of construction and construction related projects. The operating results of the discontinued operations were as follows with the 2001 results including operations through the date of sale:

5 Net assets of the discontinued operations at December 31, 2000 were as follows: Cash $ 4,647 Billed fees receivable, net 25,062 Unbilled work in progress 15,103 Other current assets 3,208 Property, plant & equipment, net 3,553 Intangible assets, net 10,751 Other assets 1,479 Short term borrowings (2,051) Accounts payable and accrued expenses (11,967) Billings in excess of costs (15,219) Long term debt (4,400) Deferred income taxes (679) Minority interest in equity (132) ------------ $ 29,355 ============ 6

7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following table sets forth, for the quarters and six months indicated, (i) the percentage of net fees represented by certain items reflected in the Company's condensed consolidated statements of operations and (ii) the percentage increase or decrease in each of these items in the 2001 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. On May 3, 2001, the Company completed the sale of its turnkey engineering services segment provided by its International business to Jacobs Engineering Group, Inc. The transaction was consummated pursuant to a Stock Purchase Agreement dated April 28, 2001. These operations have been classified as discontinued operations in the condensed consolidated financial statements and in the following discussion.

RESULTS OF OPERATIONS For the first six months of 2001, a $12.7 million loss on the disposal of discontinued operations (discussed below) lead to a net loss of $10.7 million. For the second quarter of 2001, the Company recorded a net loss of $11.1 million ($4.36 loss per common share - basic and $3.34 loss per common share - diluted) which is a decrease from net income of $3.4 million in 2000 ($1.18 per common share - basic and $0.89 per common share- diluted). For the first six months of 2001, the Company recorded a net loss of $10.7 million ($4.30 loss per common share - basic and $3.28 loss per common share - diluted) which is a decrease from net income of $4.6 million in 2000 ($1.54 per common share - basic and $1.18 per common share - diluted). Continuing Operations The Company continues to concentrate on growing its net fees and increasing project wins. Net fees increased 5.3% from $43.9 million for the second quarter of 2000 to $46.3 million for the same period in 2001. For the first six months of 2001, net fees increased 6.8% from $85.1 million for the first six months of 2000 to $90.9 million. 8 The gross profit margin of 60.9% for the second quarter of 2001 reflected a decrease compared to 63.1% for the same period of 2000. For the six months ended June 30, 2001, the gross profit margin of 61.1% also reflected a decrease compared to 63.4% for the same period of 2000. Gross profit was adversely affected by project labor inefficiencies experienced on specific projects and in certain regions of the United States during the first six months of 2001. Indirect costs and expenses, which includes non-billable direct labor, operations support personnel as well as administrative support functions, were $52.5 million, or 57.8% of net fees, for the first six months of 2001, compared with $49.1 million, or 57.7% of net fees, for the same period in 2000. Indirect costs and expenses were $25.2 million, or 54.4% of net fees, for the second quarter of 2001, compared with $23.9 million, or 54.5% of net fees, for the second quarter of 2000. Indirect expenses for the first six months of 2001 include labor costs in excess of current needs and $1.0 million of severance recorded in the quarter to bring the labor costs back into balance. Interest expense was $0.1 million and $0.4 million for the second quarter and first six months of 2001, respectively. This compares to interest expense of $0.3 million for the second quarter and first six months of 2000. In the first six months of 2000, interest expense was reduced as the Company recognized a gain of $0.3 million related to the early termination of its interest rate swap agreement. Also the Company's average debt balance for the first six months of 2001 decreased to $15.5 million from $22.0 million for the first six months of 2000. The effective income tax rate was 38.0% for the first six months of 2001, compared to 27.6% for the first six months of 2000. The 2000 annual effective income tax rate benefited from anticipated research and development credits and adjustments for balance sheet tax accruals that were deemed to be no longer necessary. For the second quarter of 2001, the Company recorded income from continuing operations of $1.9 million ($0.63 per common share - basic and $0.49 per common share - diluted) which is a decrease from $2.6 million in 2000 ($0.88 per common share - basic and $0.68 per common share- diluted). For the first six months of 2001, the Company recorded income from continuing operations of $1.6 million ($0.40 per common share - basic and $0.30 per common share - diluted) which is a decrease from $3.2 million in 2000 ($1.01 per common share - basic and $0.77 per common share - diluted). Discontinued Operations In the second quarter of 2001, the Company recognized a loss of $12.7 million on the sale of its International operations. The loss consisted of $12.5 million from the reclassification of the accumulated foreign currency translation losses previously included as a separate component of shareholders' equity and $0.2 million loss on the sale. The proceeds from the sale of $26.8 million, less $5.0 million held in escrow, were used to liquidate all outstanding debt obligations. Net fees for discontinued operations were $9.1 million and $33.3 million for the second quarter and first six months of 2001, respectively. Results of the discontinued operations were a net loss of $0.4 for the second quarter of 2001 and net income of $0.4 million for the six months ended June 30, 2001. For the second quarter of 2001, the Company recorded a loss from discontinued operations of $13.1 million ($4.99 loss per common share - basic and $3.83 loss per common share - diluted) which is a decrease from income of $0.8 million in 2000 ($0.30 per common share - basic and $0.21 per common share- diluted). For the first six months of 2001, the Company recorded a loss from discontinued operations of $12.3 million ($4.70 loss per common share - basic and $3.58 loss per common share - diluted) which is a decrease from income of $1.4 million in 2000 ($0.53 per common share - basic and $0.41 per common share - diluted). FINANCIAL CONDITION Cash provided by operations over the first six months of 2001 was $6.5 million as compared to cash used by operations of $6.3 million during the first six months of 2000. This increase was primarily due to improved working capital management. Capital expenditures during the first six months of 2001 and the first six months of 2000 were $1.4 million and $1.9 million, respectively. In order to continue to enhance productivity the Company has continued, and will continue, its capital spending programs, particularly for computers 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. 9 Cash balances increased significantly to $10.5 million at June 30, 2001 from $2.3 million at December 31, 2000 as a result of the net proceeds from the sale of the International business. A portion of the proceeds from the sale of discontinued operations was used to repay outstanding debt. As a result, the Company reported no short-term borrowings or debt at June 30, 2001, compared to $14.9 million at December 31, 2000. The Company believes that, in addition to strengthening its balance sheet, the sale and resulting cash balances position the Company to invest in higher return opportunities. While the Company anticipates continuing capital requirements to support growth, expansion of services, and capital expenditures, the Company believes that its cash balances, 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 six months of 2001, 1,899 shares were traded out of the Plan totaling approximately $51,000. 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 credit facility, the Company paid dividends to the holders of the Preferred Stock. For the second quarter, dividends totaled $0.2 million, or $0.21 per preferred share. For the six months ended June 30, 2001, dividends totaled $0.4 million, or $0.42 per preferred share. 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. 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, 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. 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. 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. At the end of the second quarter 2001, however, the Company has no debt recorded on its balance sheet. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.27 Second Amendment to Supplemental Executive Retirement Plan effective April 1, 2001. (b) Reports on Form 8-K Current Report on Form 8-K, filed May 18, 2001, reporting under Item 2 the sale of the international business, which operated under the Gibb name, to Jacobs Engineering Group, Inc. 10 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant, LawGibb Group, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LAWGIBB GROUP, INC. /s/ Robert B. Fooshee ------------------------------------------------------------ Robert B. Fooshee Executive Vice President, Chief Financial Officer and Treasurer Dated: August 15, 2001 11

LAWGIBB GROUP INC 10-Q