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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-28830
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Navigant Consulting, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 36-4094854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
615 North Wabash Avenue, Chicago, Illinois 60611
(Address of principal executive offices, including zip code)
(312) 573-5600
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $0.001 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in a definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 12, 2001, 40.4 million shares of the Registrant's common stock,
par value $.001 per share ("Common Stock"), were outstanding. The aggregate
market value of shares of Common Stock held by non-affiliates, based upon the
closing sale price of the stock on the New York Stock Exchange on March 12,
2001, was approximately $240.6 million.
The Registrant's Proxy Statement for the Annual Meeting of Shareholders,
scheduled to be on held April 26, 2001, is incorporated by reference into Part
III of this Annual Report on Form 10-K.
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PART I
Statements included in this report which are not historical in nature are
intended to be, and are hereby identified as, "forward-looking statements" for
purposes of the Private Securities Litigation Reform Act of 1995. Such
statements appear in a number of places in this report, including, without
limitation, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations." When used in this report, the words
"anticipate," "believe," "intend," "estimate," "expect," and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. The Company cautions readers that
forward-looking statements, including without limitation those relating to the
Company's future business prospects, revenues, working capital, liquidity, and
income are subject to certain risks and uncertainties that could cause actual
results to differ materially from those indicated in the forward-looking
statements, due to several important factors herein identified, among others,
and other risks and factors identified from time to time in the Company's
reports filed with the SEC. The Company undertakes no obligation to publicly
update or revise any forward-looking statements to reflect current or future
events or circumstances.
Item 1. Business.
General
Navigant Consulting, Inc., formerly The Metzler Group, Inc. (the
"Company"), is a management consulting firm to Fortune 500 companies,
government agencies, law firms, financial institutions and regulated
industries.
The Company is a Delaware corporation headquartered in Chicago, Illinois.
The Company's executive office is located at 615 North Wabash Avenue, Chicago,
Illinois 60611. Its telephone number is (312) 573-5600. The Company's stock is
traded on the New York Stock Exchange under the symbol NCI.
"NAVIGANT" is a service mark of Navigant International, Inc. The Company is
not affiliated, associated, or in any way connected with Navigant
International, Inc. and the Company's use of "NAVIGANT" is made under license
from Navigant International, Inc.
Business Units
The Company is comprised of two business units: Financial & Claims
Consulting and Energy & Water Consulting. The business units are managed with
a "holding company" model. Each business unit has direct responsibility and
accountability for its decisions, costs and profits. The Company's consultants
have the autonomy and authority to seek, engage, and complete assignments.
This business model and the Company's experience, reputation, and industry
focus will enable it to compete effectively in the consulting marketplace.
The Financial & Claims Consulting business unit is comprised of advisors
and consultants who specialize in assisting clients with the financial,
economic, accounting, and information aspects of its engagements. This
practice unit provides consulting services such as data management, quality
control, business and property valuation, research and analysis, litigation
support and expert testimony, bankruptcy and solvency management, outsourcing,
and claims management.
The Energy & Water Consulting business unit is comprised of advisors and
consultants who provide services to all areas of the energy industry. This
unit assists its clients in all stages of the energy business cycle, from
generation to transmission to distribution to retail supply. These services
include, among others, management consulting, regulatory compliance, merger
and acquisition consulting, generation asset divestiture, energy market
assessment, strategic resource allocation, and distribution management. This
business unit also provides planning and engineering services to the water
industry.
During 2000, the Company eliminated three business units: Economic & Policy
Consulting, Strategic Consulting and IT Solutions.
Strategy
With the Company's business model in place and the successful completion of
its restructuring plan in 2000, the Company is in position to grow. The
Company's clients are in industries undergoing rapid structural change, from
deregulation to globalization. Increased competition, globalization and
deregulation are forcing the
2
Company's clients and others to devise new ways to effectively compete, to
acquire and retain customers, or to move into new markets. The Company
believes it has the consulting resources and capabilities to offer its
existing and new clients the assistance in meeting the challenges described
above.
The Company's strategies are to:
--Extend and broaden existing long-term relationships with its clients;
--Continue to recruit and retain highly skilled professionals;
--Capture new and emerging markets in which the Company has consulting
expertise; and
--Selectively acquire consulting firms complementary to the Company's core
business units.
Marketing
The Company markets its services directly to senior and mid-level
executives. A variety of business development and marketing channels are used
to communicate directly with current and prospective clients, including on-
site presentations, industry seminars and industry-specific articles.
A significant portion of new business arises from prior client engagements.
In addition, the Company seeks to leverage the client relationships of firms
that have been acquired by cross-selling existing services. Clients frequently
expand the scope of engagements during delivery to include follow-on
complementary activities. Also, on-site presence affords the Company's
consultants the opportunity to become aware of, and to help define, additional
project opportunities as they are identified by the client.
No client accounted for more than 5% of the Company's total revenue for the
year ended December 31, 2000. Revenues earned from the Company's top 20
clients represented 39% of total revenues. The Company acknowledges that the
existence and identity of its largest clients may change from year to year.
The Company has, on occasion, experienced a seasonal pattern in its operating
results, with a smaller proportion of the Company's revenues and lower
operating income occurring in the fourth quarter of the year, or a smaller
sequential growth rate than in other quarters.
Human Capital
As of December 31, 2000, the Company had approximately 1,200 employees,
including 950 billable consultants. Success depends in large part on
attracting, retaining and motivating talented, creative and experienced
professionals at all levels. In connection with recruiting, the Company
employs internal recruiters, retains executive search firms and utilizes
personal and business contacts to recruit professionals with significant
industry-specific consulting experience. Consultants are drawn from the
industries the Company serves and from accounting and other consulting
organizations. The Company seeks to retain its consultants by offering
competitive packages of base and incentive compensation, equity ownership, and
benefits. (See Note 9 to the Consolidated Financial Statements.)
Revenues are generated almost exclusively from services performed by the
Company's professional consultants. Future performance will continue to depend
in large part upon the Company's ability to attract and retain highly skilled
professionals possessing appropriate skills. Qualified professional
consultants are in great demand and are likely to remain a limited resource
for the foreseeable future. The loss of the services of, or the failure to
recruit, a significant number of consultants would adversely affect the
Company's ability to secure and complete engagements and would have a material
adverse effect on the Company's business.
In addition to the employees discussed above, independent contractors, some
of whom are former employees, supplement the Company's consultants on certain
engagements. The Company believes that the practice of retaining independent
contractors on a per-engagement basis provides greater flexibility in
adjusting professional personnel levels in response to changes in demand for
the Company's professional services.
3
Competition
The Company competes in the worldwide market for consulting services,
although its principal market is North America, which accounted for over 95%
of the Company's revenues in 2000 and 1999. The market for consulting services
is intensely competitive, highly fragmented and subject to rapid change. The
market includes a large number of participants from a variety of market
segments, including general management, information technology and marketing
consulting firms, as well as the consulting practices of national accounting
firms, and other local, regional, national and international firms. Many of
these companies are global in scope and have greater personnel, financial,
technical and marketing resources than the Company. The Company believes that
its experience, reputation, industry focus and broad range of services will
enable it to compete effectively in the consulting marketplace.
Item 2. Facilities.
The Company's headquarters is currently located in a 16,500 square foot
building in Chicago, Illinois, which is owned. In addition to the
headquarters, the Company has approximately forty operating leases for office
facilities worldwide. Additional space may be required as business expands
geographically, but the Company believes it will be able to obtain suitable
space as needed. Principal offices are located in the following cities:
Austin, Texas London, United KingdomPittsburgh, Pennsylvania
Baltimore, Maryland Los Angeles, California
Princeton, New Jersey
Boston, Massachusetts Melbourne, Australia Richmond, Virginia
Burlington, Massachusetts Nashville, Tennessee Sacramento, California
Chicago, Illinois New York, New York San Francisco, California
Dallas, Texas Orlando, Florida Tampa, Florida
Houston, Texas Phoenix, Arizona Washington, D.C.
Item 3. Legal Proceedings.
As previously disclosed, in August 2000, the Company agreed to settle for
$23 million the consolidated securities law class actions (the "Consolidated
Class Actions"), subject to court approval and certain other conditions. The
settlement calls for the dismissal, with prejudice, of the Consolidated Class
Actions and a release of the Company and the Company's former and current
officers and directors, among others. Under the final settlement agreement,
the Company has contributed $16.5 million into escrow pending such approval,
and Genesis Insurance Company, one of its insurers ("Genesis"), has
contributed $6.5 million under an agreement reached with the Company which is
also subject to certain conditions. The Company is seeking to recover from
Genesis an additional $0.5 million as reimbursement for certain attorneys'
fees.
In October 2000, the lead plaintiff filed a motion for preliminary approval
of the proposed settlement of the Consolidated Class Actions. In November
2000, the Court granted its preliminary approval for the proposed settlement.
Pursuant to this order, notice was provided to the class and the Court
established certain deadlines in February 2001 for Class members to opt-out of
or to object to the proposed settlement. These deadlines have now passed. Nine
persons, representing approximately 760,000 shares of the Company's Common
Stock, have opted out of the proposed settlement. These individuals include
Russell D. Chandler, Andrew M. Street, Scott Boocher, and Anthony Sileo whose
lawsuit against the Company is described below; and Mark Klein, whose lawsuit
is also described below, as well as other individuals who have not yet to the
Company's knowledge asserted any claim against the Company. Three former
officers of the Company, Robert Maher, Charles Demirjian and Stephen Denari,
who are individual defendants of the Consolidated Class Actions, have filed
objections to the proposed settlement. In addition, Charles Grimes and Gordon
Chaplin, in their capacity as trustees for certain trusts, have also filed
objections to the proposed settlement. The Court has scheduled a hearing on
March 22, 2001 with respect to the fairness and final approval of the proposed
settlement. The Company will vigorously support the terms of the proposed
settlement of the Consolidated Class Actions and will vigorously oppose the
objections.
4
As previously disclosed, in September 2000, the Company was served with
another shareholder class action complaint filed by Mr. Grimes in the United
States District Court for the District of Delaware. The factual allegations in
Mr. Grimes' complaint are very similar to the factual allegations in the
Consolidated Class Actions, except that Mr. Grimes seeks to extend the class
period (which the parties in the Consolidated Class Actions have stipulated,
for purposes of settlement only, extends from January 1, 1999 through November
19, 1999) through January 24, 2000. By agreement of the parties, this action
has been transferred to the Northern District of Illinois. The Company will
vigorously defend the Grimes action.
As previously disclosed, in September 2000 the Company and Mr. Maher, its
former Chief Executive Officer, were named in a complaint filed in the United
States District Court for the Northern District of Illinois by Messrs.
Chandler, Street and Boocher. The plaintiffs were the principal shareholders
and officers of GeoData Solutions, Inc., a business acquired by the Company in
the first quarter of 1999 in a stock-for-stock exchange and subsequently sold
in July 2000. Messrs. Chandler, Street and Boocher initially alleged
violations of federal and State of Colorado securities laws, common law fraud,
and negligent misrepresentation in connection with their acquisition of
Company stock as part of that transaction. In January 2001, the Court granted
the Company's motion to dismiss, in which Mr. Maher joined, with respect to
all counts except the common law fraud count, but granted plaintiffs leave to
file an amended complaint. In February 2001, the plaintiffs filed an amended
complaint alleging, in addition to common law fraud, violations of federal and
State of Illinois securities laws. Anthony Sileo, a former GeoData employee
and option-holder, was added as an additional plaintiff. In March 2001, the
Company moved to dismiss all counts of the amended complaint other than the
common law fraud count. The Company will vigorously defend the Chandler
action.
In December 2000, the Company, Mr. Maher and Mr. Demirjian, the Company's
former Vice President, General Counsel and Secretary, were named as defendants
in a complaint filed in the Superior Court of the State of California for the
County of San Mateo by Mark Klein. Mr. Klein is a former employee and
shareholder of Strategic Decisions Group ("SDG"), a business acquired by the
Company in a stock-for-stock transaction in the first quarter of 1999 and
disposed of by the Company in October 2000 to SDG LLC, a group of former
Company employees. SDG and SDG LLC are also named as defendants in the
lawsuit. Mr. Klein received approximately 45,000 shares of the Company's stock
in the 1999 stock-for-stock transaction. In his complaint, Mr. Klein claims
that he was induced to agree to the Company's acquisition of SDG, rather than
asserting his dissenter's rights under California law, because he was told
that he could protect against a decline in the price of the Company's stock
that he received in such transaction by performing hedging transactions, and
that the Company subsequently prevented him from carrying out such hedging
transactions. Mr. Klein alleges fraud, negligent misrepresentation, breach of
fiduciary duty, conversion and trespass. The Company will vigorously defend
the Klein action.
As previously disclosed, in November 2000, the Company was served with a
lawsuit filed in the Circuit Court of Cook County, Illinois by Messrs. Denari
and Demirjian. The lawsuit names as defendants the Company, three of its
directors, its auditors, KPMG LLP ("KPMG"), one of its law firms, Winston &
Strawn, and one of its insurers, Genesis. The lawsuit initially sought an
injunction prohibiting Genesis from giving up its subrogation rights against
KPMG and others as provided in the proposed settlement of the Consolidated
Class Actions. The lawsuit also seeks compensatory and punitive damages from
defendants based on various legal theories, including defamation, conspiracy,
breach of contract, breach of fiduciary duty, legal malpractice and negligent
misrepresentation. In December 2000 Genesis moved in federal court for an
injunction and removal. In January 2001, after the plaintiffs amended their
complaint to eliminate their request for an injunction, the federal court
denied Genesis' motion for an injunction and removal "without prejudice to its
renewal at an appropriate future time," and the case was remanded back to
state court. In March 2001, the Company and other defendants filed motions to
dismiss the amended complaint in its entirety. The Company will vigorously
defend the lawsuit.
As previously disclosed, in July 1999, Navigant International, Inc., a
national travel agency headquartered in Denver, Colorado sued the Company in
the United States District Court for the District of Colorado claiming that
the use of "Navigant" in the Company's name infringes on their use of and
rights in such name. In January 2001, the Company reached a preliminary
agreement with Navigant International to settle this lawsuit, wherein
5
Navigant International will sublicense to the Company the right to use
"Navigant" in its name, subject to certain restrictions, in exchange for a
one-time fee. Both parties also agreed to cooperate and take certain measures
to avoid any future customer or investor confusion.
In addition, from time to time, the Company is party to various other
lawsuits and claims in the ordinary course of business. While the outcome of
these lawsuits or claims cannot be predicted with certainty, the Company does
not believe that any of those lawsuits or claims will have a material adverse
affect on its business.
Item 4. Submission of Matters to a Vote of Security Holders.
The 2000 annual meeting of shareholders of the Company was held on November
30, 2000. The Company solicited proxies for the annual meeting pursuant to
Section 14 of the Securities Exchange Act of 1934, as amended, and Regulation
14A thereunder. One nominee, Peter B. Pond, was elected for a term expiring at
the annual meeting of shareholders in 2003 by a vote of 31,259,443 shares for,
no shares against, 3,490,394 shares withhold authority and no broker non-
votes. The shareholders approved an amendment to the Company's employee stock
purchase plan by a vote of 20,519,001 shares for, 2,139,840 shares against,
405,416 shares abstaining and 11,685,580 broker non-votes. The shareholders
approved an amendment to the Company's long-term incentive plan by a vote of
18,479,877 shares for, 4,280,886 shares against, 404,562 shares abstaining and
11,584,512 broker non-votes.
The amendment to the employee stock purchase plan, among other things,
increased the total number of shares authorized to be issued under the plan
from 450,000 to 750,000 and provided for subsequent annual increases of the
total authorized shares by the lesser of 500,000 shares for 1.2 percent of the
Company's then outstanding shares. The amendment to the long-term incentive
plan, among other things, reduced the cash compensation of non-employee
directors, provided for a one-time grant of stock options to non-employee
directors of 15,000 shares immediately following the annual meeting, provided
for one-time grants of stock options to new non-employee directors of 15,000
shares following their initial election or appointment to the Board and
provided for annual awards of stock options to non-employee directors of 5,000
shares beginning in January 2001.
Executive Officers of the Company
At March 12, 2001, the Company had the following executive officers:
William M. Goodyear, 52, has served as Chairman of the Board and Chief
Executive Officer of the Company since May 19, 2000. He has served as a
director since December 15, 1999. Prior to December 1999, he served as
Chairman and Chief Executive Officer of Bank of America, Illinois. From 1972
to 1999, Mr. Goodyear held a variety of assignments with Continental Bank,
subsequently Bank of America, including corporate finance, corporate lending,
trading and distribution. During this 28 year period, Mr. Goodyear was
stationed in London for 5 years (1986 to 1991) to manage Continental Bank's
European and Asian Operations. He was Vice Chairman and a member of the Board
of Directors of Continental Bank prior to the 1994 merger between Continental
Bank Corporation and BankAmerica Corporation. He was President of the Bank of
America's Global Private Bank until January 1999.
Ben W. Perks, 59, has served as Executive Vice President and Chief
Financial Officer since May 19, 2000. Prior to joining the Company, Mr. Perks
was a senior Chicago partner in the Financial Advisory Services Group with
PricewaterhouseCoopers LLP. With PricewaterhouseCoopers and Price Waterhouse
LLP, he had more than 32 years of professional service experience, including
22 years as an audit and consulting partner providing financial reporting,
accounting, auditing, tax, economic, and litigation consulting services to
clients.
Philip P. Steptoe, 49, has served as the Company's Vice President, General
Counsel and Secretary since February 2000. Previously, Mr. Steptoe was a
partner with the national law firm of Sidley & Austin. Prior to joining Sidley
& Austin in 1988, he was an associate and later a partner in the Chicago law
firm of Isham, Lincoln & Beale. During 1994 to 1995 he served for four months
as Acting General Counsel for Orange and Rockland Utilities, Inc., a New York
electric and gas utility.
6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
The shares of Common Stock of the Company are traded on the New York Stock
Exchange (the "NYSE") under the symbol "NCI."
The following table sets forth, for the periods indicated, the high and low
closing sale prices per share. Prices for periods beginning July 27, 1999 are
as reported on the NYSE Composite Tape. Prior to July 27, 1999 the Company's
Common Stock was traded on the Nasdaq National Market under the symbol "METZ"
and prices for such periods are as reported on the Nasdaq National Market.
High Low
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2000
Fourth quarter.............................................. $ 4.13 $ 2.81
Third quarter............................................... $ 4.44 $ 3.00
Second quarter.............................................. $11.00 $ 3.63
First quarter............................................... $11.69 $ 7.00
1999
Fourth quarter.............................................. $48.50 $ 8.69
Third quarter............................................... $54.25 $26.13
Second quarter.............................................. $36.13 $22.81
First quarter............................................... $52.00 $28.44
Holders
As of March 12, 2001, there were approximately 149 holders of record of
shares of Common Stock of the Company.
Distributions
The Company has not paid any cash dividends since its organization and does
not anticipate that it will make any such distributions in the foreseeable
future.
7
Sale of Unregistered Securities
Within the past three years, the Company has issued the following securities
which were not registered under the Securities Act of 1933:
Type of Number Exemption
Date Securities of Shares Purchaser Consideration(1) Claimed
---- ---------- --------- --------- ---------------- ---------
April 3, Common 137,931 Former All Outstanding Section
1998 Stock Stockholders Shares of AUC 4(2)
of AUC Management Management
Consultants, Inc. Consultants, Inc.
April 3, Common 51,562 Former All Outstanding Section
1998 Stock Stockholders Shares of 4(2)
of Hydrologic Hydrologic
Consultants, Inc. Consultants, Inc.
of California. of California.
June 1, Common 9,200 Former Members All Membership Section
1998 Stock of The VisionTrust Interest of The 4(2)
Marketing Group, LLC VisionTrust
Marketing Group,
LLC
August Common 5,596,488 Former Members of All Outstanding Section
31, Stock Peterson Membership 4(2)
1998 Consulting Interest of
LLC Peterson
Consulting LLC
August Common 616,737 Former All Outstanding Section
31, Stock Stockholders Saraswati Systems 4(2)
1998 of Saraswati Corporation
Systems
Corporation
August Common 103,900 Former All Outstanding Section
31, Stock Stockholders Shares of Applied 4(2)
1998 of Applied Health Health Outcomes,
Outcomes, Inc. Inc.
February Common 2,437,223 Former All Outstanding Section
7, 1999 Stock Stockholders Shares of 4(2)
of Strategic Strategic
Decisions Group, Decisions Group,
Inc. Inc.
March Common 952,227 Former All Outstanding Section
31, Stock Stockholders Shares of Triad 4(2)
1999 of Triad International, Inc.
International, Inc.
March Common 670,592 Former Stockholders All Outstanding Section
31, Stock of GeoData Shares of GeoData 4(2)
1999 Solutions, Inc. Solutions, Inc.
March Common 234,109 Former All Outstanding Section
31, Stock Stockholders Shares of Dowling 4(2)
1999 of Dowling Associates, Inc.
Associates, Inc.
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(1) Does not take into account assumed debt or cash paid to dissenting
shareholders or for fractional shares.
8
Item 6. Selected Financial Data.
The following financial and operating data should be read in conjunction
with the information set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of the Company and related notes thereto appearing elsewhere in
this report. The amounts are shown in thousands, except for per share data.
For the years ended December 31, (1)
-----------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------
Revenues...................... $ 244,629 $219,491 $202,582 $183,795 $149,983
Cost of services (excluding
Value Sharing Retention
Program--"VSRP")............. 158,720 142,965 122,040 116,684 96,678
Value sharing retention
program cash compensation
expense (VSRP)............... 5,890 -- -- -- --
--------- -------- -------- -------- --------
Gross profit.................. 80,019 76,526 80,542 67,111 53,305
General and administrative
expenses (excluding VSRP)
(2).......................... 59,846 58,742 43,194 47,447 42,773
Value sharing retention
program cash compensation
expense (VSRP)............... 467 -- -- -- --
Depreciation expense (2)...... 6,797 9,550 3,858 -- --
Amortization expense.......... 4,573 900 -- -- --
Merger-related and
restructuring costs
(credits).................... 10,229 (881) 7,370 1,312 --
Litigation and settlement
provisions................... 16,500 2,335 -- -- --
Stock option non-cash
compensation expense......... 492 3,850 -- -- --
--------- -------- -------- -------- --------
Operating income (loss) from
continuing operations........ (18,885) 2,030 26,120 18,352 10,532
Other income (loss), net...... (1,666) (2,653) 2,053 383 (332)
--------- -------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes........................ (20,551) (623) 28,173 18,735 10,200
Income tax expense (benefit)
(3).......................... (6,194) 1,534 19,920 5,571 (92)
--------- -------- -------- -------- --------
Net income (loss) from
continuing operations........ (14,357) (2,157) 8,253 13,164 10,292
--------- -------- -------- -------- --------
Income (loss) from
discontinued operations, net
of income taxes.............. (10,193) (12,465) 7,328 5,500 5,064
(Loss) on dispositions of
discontinued operations, net
of income taxes.............. (155,003) -- -- -- --
--------- -------- -------- -------- --------
Net income (loss)............. $(179,553) $(14,622) $ 15,581 $ 18,664 $ 15,356
========= ======== ======== ======== ========
Basic earnings (loss) per
common share:
Net income (loss) from
continuing operations........ $ (0.35) $ (0.05) $ 0.23 $ 0.40 $ 0.32
Net income (loss) from
discontinued operations...... $ (0.25) $ (0.30) $ 0.20 $ 0.17 $ 0.15
(Loss) on dispositions of
discontinued operations...... $ (3.79) $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net income (loss)............. $ (4.39) $ (0.35) $ 0.43 $ 0.56 $ 0.47
Shares used in computing net
income (loss) per basic
share........................ 40,895 41,601 36,476 33,289 32,672
Diluted earnings (loss) per
diluted share:
Net income (loss) from
continuing operations........ $ (0.35) $ (0.05) $ 0.22 $ 0.39 $ 0.32
Net income (loss) from
discontinued operations...... $ (0.25) $ (0.30) $ 0.19 $ 0.16 $ 0.15
(Loss) on dispositions of
discontinued operations...... $ (3.79) $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net income (loss)............. $ (4.39) $ (0.35) $ 0.41 $ 0.55 $ 0.47
Shares used in computing net
income (loss) per diluted
share........................ 40,895 41,601 37,707 33,798 32,672
As of December 31,
-----------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------
Balance Sheet Data:
Cash and cash equivalents..... $ 48,798 $ 42,345 $119,704 $ 45,972 $ 33,859
Working capital............... $ 63,656 $ 67,598 $146,509 $ 58,708 $ 45,551
Total assets.................. $ 163,482 $414,676 $230,517 $125,827 $ 94,542
Long-term debt, less current
portion...................... $ -- $ -- $ -- $ 319 $ 1,561
Total stockholders' equity.... $ 115,725 $300,669 $164,904 $ 69,215 $ 50,686
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(1) The amounts above have been restated as described in Note 6 to the
Consolidated Financial Statements. Certain business units that have
previously been presented in revenues and expenses have been discontinued
in the year 2000 and reclassified as discontinued operations. As a result,
revenues and expenses for the years 1999, 1998, 1997, and 1996 have been
reclassified to "Income (loss) from discontinued operations, net of income
taxes."
(2) For the years 1997 and 1996, depreciation expense is included in "General
and administrative expenses."
(3) During the periods presented, certain 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 one of the Company's
subsidiaries from the modified cash basis to the accrual basis for tax
purposes.
9
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations relates to the Consolidated Financial Statements
included in this Annual Report on Form 10-K.
Overview
The Company is a management consulting firm to Fortune 500 companies,
government agencies, law firms, financial institutions and regulated
industries. The Company derives substantially all of its revenues from fees
for professional services. Over the last three years, the substantial majority
of the Company's revenues have been generated under standard hourly or daily
rates billed on a time and expenses basis. Clients are typically invoiced on a
monthly basis, with revenue recognized as the services are provided.
The Company's most significant expense is project personnel costs, which
consist of consultant salaries and benefits, and travel-related direct project
expenses. Project personnel are typically employed on a full-time basis,
although independent contractors supplement project personnel as needed.
Independent contractors are retained for specific client engagements on a
task-specific, per diem basis during the period their expertise or skills are
required. Retaining contractors on a per-engagement basis provides the Company
with greater flexibility in adjusting project personnel levels in response to
changes in demand for its services.
Acquisitions and Divestitures
The Company acquired 24 consulting firms since its initial public offering
in October 1996. As part of a major realignment of the Company, three large
strategic divestitures were completed in 2000. (See Note 6 to the Consolidated
Financial Statements.) In addition, the Company has shut down or sold a number
of other business units that had been unprofitable or were not deemed
complementary to its current business model. Of the 24 consulting firms
acquired since its initial public offering in October 1996, the basic elements
of 9 consulting firms plus the founding company, Metzler & Associates, Inc.,
still remain and represent the ongoing core business.
Financial & Claims Consulting Energy & Water Consulting
----------------------------- -------------------------
Applied Health Outcomes, Inc. AUC Management Consultants, Inc.
PENTA Advisory Services LLC Hydrologic Consultants, Inc. of California
Peterson Consulting, LLC L.E. Burgess Consultants, Inc.
The Barrington Consulting Group, Metzler & Associates, Inc.
Inc. Reed Consulting, Inc.
Resource Management International, Inc.
Of the above-referenced twenty-four acquisitions, nineteen consulting firms
were acquired during the past three years. During 2000, thirteen consulting
firms that had been acquired during the three year period were discontinued,
shut down or sold.
1998 Acquisitions. During 1998, the Company acquired eight companies: LECG,
Inc. (LECG), Peterson Consulting, LLC (Peterson), Saraswati Systems
Corporation (SSC), Applied Health Outcomes, Inc. (AHO), AUC Management
Consultants, Inc. (AUC), Hydrologic Consultants, Inc. of California (HCI),
American Corporate Resources, Inc. (ACR), and The Vision Trust Marketing
Group, LLC (VTM). These transactions were accounted for by the poolings of
interests method of accounting for business combinations. The Company's
consolidated financial statements have been restated as if LECG, Peterson,
SSC, AHO, AUC and HCI had been combined for all periods presented. The
stockholders' equity and the operations of ACR and VTM were not significant in
relation to those of the Company. As such, the Company recorded the ACR and
VTM transactions by restating stockholders' equity as of the dates of the
acquisition without restating prior period financial statements.
10
LECG. Based in the San Francisco, California area, LECG is a provider of
economic consulting and litigation support services. As of August 19, 1998,
the Company acquired substantially all of the common stock of LECG in exchange
for 7.3 million shares of the Company's common stock (valued at the time of
closing at approximately $228.9 million) and acquired the remaining minority
interest in exchange for cash.
Peterson. Based in the Chicago area, Peterson is a provider of information
management services. Peterson's operations expanded service offerings in
claims management, outsourcing, litigation support, bankruptcy and information
management. As of August 31, 1998, the Company acquired substantially all of
the common stock of Peterson in exchange for 5.6 million shares of the
Company's common stock (valued at the time of closing at approximately $156.7
million) and acquired the remaining minority interest in exchange for cash.
Other 1998 Acquisitions. The Company acquired all of the common stock of
AUC, HCI, ACR as of April 3, 1998 and all of the common stock of VTM as of
June 1, 1998. The Company acquired all of the common stock of SSC and AHO as
of September 1, 1998. In the aggregate for these six transactions, 1.2 million
shares of the Company's common stock were issued (valued at the time of
closing at approximately $35.3 million).
1999 Acquisitions. During 1999, the Company completed 11 acquisitions
(collectively, the "1999 Acquisitions"). The 1999 Acquisitions were accounted
for by the purchase method of accounting for business combinations and,
accordingly, the results of operations have been included in the consolidated
financial statements from the respective dates of acquisition. On February 7,
1999, the Company issued 2.4 million shares of common stock (valued at the
time of closing at approximately $123.7 million) for substantially all of the
outstanding common stock of Strategic Decisions Group, Inc. and acquired the
remaining minority interest in exchange for cash. On March 31, 1999, the
Company completed the acquisitions of all of the outstanding stock of Triad
International, Inc., GeoData Solutions, Inc., and Dowling Associates, Inc. in
exchange for 1.8 million shares of the Company's common stock (valued at the
time of closing at approximately $57.3 million). On September 30, 1999, the
Company completed its acquisition of the business operations and certain
assets of PENTA Advisory Services LLC (PENTA) and the stock of Scope
International, Inc. (Scope) for a total cash purchase price of $15.1 million.
The purchase agreement for PENTA also provide for additional payments, payable
in cash or Company common stock, over the next four years contingent on future
revenue growth and gross margin targets. The additional payments, if any, will
be accounted for as additional goodwill. On October 1, 1999, the Company
completed the acquisition of the stock of Brooks International AB, Brooks
International SARL and SPRL, and Brooks International Consulting OY for an
aggregate cash purchase price of $3.3 million. On November 1, 1999, the
Company completed the acquisitions of the stock of The Barrington Consulting
Group, Inc. (Barrington) in exchange for $14.4 million in cash paid at closing
and total deferred cash payments of $7.8 million, payable in two equal annual
installments. The purchase agreement for Barrington also provides for
additional cash payments of up to $10.5 million in the aggregate, which are
contingent on continued employment with the Company of certain Barrington
shareholders and are payable in cash in two annual installments, the first of
which was paid in October 2000. This contingent employment provision was
amended, in October 2000, to increase the cash to $10.5 million. On December
1, 1999, the Company completed the acquisition of all of the assets of Glaze
Creek Partners, LLC in exchange for $0.8 million in cash. There were no pre-
acquisition intercompany transactions between the Company and the 1999
Acquisitions.
2000 Divestitures. During 2000, the Company discontinued, shut down or sold
four of the eight companies acquired in 1998 and nine of the eleven companies
acquired in 1999. (See Note 6 to the Consolidated Financial Statements.) On
September 29, 2000, the Company completed the sale of LECG to a team of senior
LECG professionals in a management buy-out for $45.0 million, principally in
cash and notes receivable plus other contingent consideration. The Company
shut down the operations of SSC in the third quarter 2000. In September 2000,
ACR was sold for $1.4 million. In third quarter 2000, VTM was shut down. In
July 2000, the Company sold GeoData Solutions for $9.0 million cash, and
retained all accounts receivable, which had a net realizable value of
approximately $4.1 million at July 1, 2000. The Company shut down the
operations of Dowling Associates during the third quarter of 2000. In October
2000, the Company completed a nontaxable exchange of
11
SDG stock for the Company's common stock, valued at the time of closing at
approximately $6.2 million. In addition, the Company received $16.0 million in
cash related to this transaction. The assets of Glaze Creek Partners were
included in the SDG transaction. The Company has shut down the operations of
Triad International through employee terminations and has sold certain Triad
International assets to the remaining employees, including client engagements
in process. The purchasers also assumed certain liabilities in connection with
this disposition, which was completed in June 2000. The Company is attempting
to sell to either management or various interested third parties the
operations of Brooks International AB, Brooks International SARL and SPRL, and
Brooks International Consulting OY, and expects this process to be completed
during 2001. The Company also shut down the operations of Scope in the fourth
quarter of 2000.
The Company's statement of operations have been restated for the
divestitures of LECG, SSC, Strategic Decisions Group, Inc., Triad
International, Inc., GeoData Solutions, Inc., Dowling Associates, Inc., Brooks
International AB, Brooks International SARL and SPRL, Brooks International
Consulting OY, and Glaze Creek for all applicable periods presented. The
revenues and expenses of these companies are included in "Income (loss) from
discontinued operations, net of income taxes." Scope, VTM and ACR were not
part of discontinued operations and their operating results are included in
continuing operations for all periods since the dates of acquisition.
The Company expects to continue to selectively acquire companies as an
element of its strategy. Acquisitions involve certain risks that could cause
negatively impact the Company's growth. The risks include the following:
--The inability to identify suitable acquisition candidates;
--The inability to acquire consulting firms on favorable terms;
--The loss of potential acquisitions to competitors;
--The inability to integrate certain consulting or administrative
operations of acquired businesses; and
--The inability to integrate acquired businesses in a cost efficient and
timely manner.
An inability to effectively integrate the acquisitions or any companies
acquired in the future may adversely affect the Company's ability to bid
successfully on engagements and to expand the business. Performance problems
or dissatisfied clients at one company could have an adverse effect on the
Company's reputation as a whole. If the Company's reputation were damaged, for
those or other reasons, this could make it difficult to market services or to
acquire additional companies in the future.
Acquisitions also involve a number of additional risks, including, among
others, the following:
--Diversion of management's attention;
--Potential loss of key clients or personnel;
--Risks associated with unanticipated assumed liabilities and problems; and
--Risks of managing businesses or entering markets in which the Company has
limited or no direct expertise.
The Company believes that its ongoing core business units have stable
client bases and will have the resources available to serve those clients. The
Company has become more industry specific with its current core business units
and has certain risks that could affect its ability to operate as a viable
business. These risks, among others, include the loss of major clients or
engagements to competitors and the inability to hire and retain consultants
with expertise in the Company's consulting engagements.
12
Results of Continuing Operations
The following table sets forth, for the periods indicated, selected
statement of operations data as a percentage of revenues:
Years ended
December 31,
---------------------
2000 1999 1998
----- ----- -----
Revenues................................................ 100.0% 100.0% 100.0%
Cost of services (excluding Value Sharing Retention
Program--"VSRP")..................................... 64.9 65.1 60.2
Value sharing retention program cash compensation
expense (VSRP)....................................... 2.4 -- --
----- ----- -----
Gross profit............................................ 32.7 34.9 39.8
General and administrative expenses (excluding VSRP).. 24.5 26.8 21.3
Value sharing retention program cash compensation
expense (VSRP)....................................... 0.2 0.0 0.0
Depreciation expense.................................. 2.7 4.4 1.9
Amortization expense.................................. 1.9 0.4 0.0
Merger-related and restructuring costs (credits)...... 4.2 (0.4) 3.6
Litigation and settlement provisions.................. 6.7 1.1 --
Stock option non-cash compensation expense............ 0.1 1.7 --
----- ----- -----
Operating income (loss) from continuing operations...... (7.6) 0.9 13.0
Other income (loss), net.............................. (0.7) (1.2) 1.0
----- ----- -----
Income from continuing operations before income taxes... (8.3) (0.3) 14.0
Income tax expense (benefit).......................... (2.5) 0.7 9.8
----- ----- -----
Net income (loss) from continuing operations............ (5.8) (1.0) 4.2
----- ----- -----
Income (loss) from discontinued operations, net of
income taxes........................................... (4.2) (5.7) 3.6
(Loss) on dispositions of discontinued operations, net
of income taxes........................................ (63.4) -- --
----- ----- -----
Net income (loss)....................................... (73.4)% (6.7)% 7.8%
===== ===== =====
2000 Compared to 1999
Revenues. Revenues increased $25.1 million, or 11.4%, to $244.6 million in
the year ended December 31, 2000, from $219.5 million in 1999. The increase in
revenues was primarily due to the acquisitions of Barrington and PENTA
("Continuing 1999 Acquisitions"). Pro forma revenues, adjusted for the effect
of the Continuing 1999 Acquisitions as if those companies were acquired
January 1, 1999, were $240.8 million for the year ended December 31, 1999.
When comparing revenues generated in 2000 to pro forma revenues of 1999,
revenues increased $3.8 million, or 1.6%.
Cost of Services (including Value Sharing Retention Expense). Cost of
services includes consultant compensation and benefits, direct project-related
expenses and client development expenses. For the year ended December 31,
2000, cost of services was $164.6 million, which increased $21.6 million, or
15.1%, from $143.0 million for the year ended December 31, 1999. Including
pre-acquisition cost of services of the Continuing 1999 Acquisitions for the
year ended December 31, 1999, pro forma cost of services for the period was
$164.1 million. When comparing cost of services for 2000 to pro forma cost of
services of 1999, cost of services increased $0.5 million.
Gross Profit. Gross profit consists of revenues less cost of services,
which includes consultant compensation and benefits and direct project-related
expenses. Gross profit increased $3.5 million, or 4.6%, to $80.0 million in
2000, from $76.5 million in 1999 and is related to acquisitions of Barrington
and PENTA.
General and Administrative Expenses (including Value Sharing Retention
Expense). General and administrative expenses include facility related costs,
salaries and benefits of management and support personnel, allowances for
uncollectible accounts receivable, professional fees, and all other corporate
support costs. General
13
and administrative expenses for the year ended December 31, 2000 increased
$1.6 million, or 2.7%, to $60.3, million from $58.7 million in 1999. Including
the pre-acquisition general and administrative expenses of the Continuing 1999
Acquisition as if those companies were acquired January 1, 1999, general and
administrative expense for the year 2000 decreased $1.6 million, or 2.6%, from
pro forma expense of $61.9 million. This net decrease of $1.6 million
primarily consists of a decrease in bad debt expense and outside professional
service fees, which has been partially offset by an increase in facility
related costs. Bad debt expense decreased $4.8 million due to management's
increased focus on collection efforts and on more timely billings. Days sales
outstanding for continuing operations decreased from 114 days at December 31,
1999 to 84 days at December 31, 2000. Professional fees decreased $1.6 million
primarily due to lower legal expense incurred in 2000. Various litigation
matters were settled in 2000, which resulted in lower legal expenses when
compared to 1999. Facility related costs and telecommunication expenses
increased $4.9 million due to expansion of offices in major cities throughout
the United States.
Depreciation Expense. Depreciation expense for the year ended December 31,
2000 was $6.8 million, a decrease of $2.8 million, or 29.2%, from the $9.6
million in depreciation expense for the year ended December 31, 1999.
Depreciation expense for the year ended December 31, 1999 included write-downs
of certain computer equipment and software and an impairment of the Company
corporate headquarters. Based on a comprehensive review of the Company's long-
lived assets at December 31, 1999, it was determined that the asset value of
certain computer equipment and software had a shorter depreciable life and,
therefore, a lower carrying value. The Company recorded a non-cash charge to
depreciation expense of $3.0 million in 1999 to reflect the impairment of
these assets. In addition, the Company through an independent appraisal re-
evaluated the carrying amount and net realizable value of its corporate
headquarters and land after a preliminary decision was made to dispose of the
assets. The Company recorded additional depreciation of $1.1 million to
reflect the building impairment. The Company is not, at this time, planning to
sell its corporate headquarters.
Amortization Expense. The excess of cost over the net assets acquired for
the Continuing 1999 Acquisitions of approximately $34.2 million has been
recorded as intangible assets, including goodwill, and is being amortized on a
straight-line basis over 7 years. Amortization expense for the year ended
December 31, 2000 was $4.6 million. The $0.9 million non-cash expense recorded
in 1999 represents the pro rata amortization from the respective acquisition
dates through December 31, 1999. Amortization would have been approximately
$4.5 million had the Continuing 1999 Acquisitions occurred as of January 1,
1999.
Merger-Related and Restructuring Costs (Credits). Merger-related and
restructuring costs for the year ended December 31, 2000 relate to costs
associated with restructuring the Company's continuing core businesses. The
Company recorded a charge of $10.2 million for employee severance-related
costs and facility closing or space reduction costs in 2000.
Litigation and Settlement Provisions. Litigation and settlement costs
totaled $16.5 million for the year ended December 31, 2000, an increase of
$14.2 million from the $2.3 million expense recorded in the year ended
December 31, 1999. As previously disclosed, the Company has agreed to settle
for $23 million the 21 consolidated securities law class action suits, subject
to court approval. Under the settlement agreement, the Company has contributed
$16.5 million into escrow and, accordingly, recorded a charge for the amount.
The remaining $6.5 million was contributed by one of its insurers, under an
agreement reached with the insurer and the Company, which is also subject to
court approval.
Other Income (Loss), Net. Other income (loss), net, includes interest
expense, interest income and other non-operating income and expenses. Net
other loss for the year ended December 31, 2000 was $1.7 million, compared to
$2.7 million for 1999. The decrease is primarily related to market valuation
of former officers' loan impairment charges being greater in 1999 than 2000.
Income Tax Expense (Benefit). The Company had an income tax benefit of $6.2
million for the year ended December 31, 2000, which decreased by $7.7 million
when compared to the income tax expense of $1.5 million for the year 1999.
This difference is primarily due to higher litigation and settlement
provisions, higher
14
restructuring costs and lower depreciation expense in 2000 than 1999. The
Company's results of operations in 2000 included $4.6 million of non-cash,
non-deductible amortization expenses from the 1999 Acquisitions and $0.5
million of non-cash, non-deductible stock compensation expense. Excluding the
effect of these non-deductible items, the effective tax rate for 2000 would
have been 40.0% based on a taxable loss of $15.5 million. The Company's
results of operations in 1999 included $0.9 million of non-cash, non-
deductible amortization expenses from the 1999 Acquisitions and $3.9 million
of non-cash, non-deductible stock compensation expense. Excluding the effect
of these non-deductible items, the effective tax rate for 1999 would have been
37.1% based on a taxable income of $4.1 million.
Net Income (Loss). The Company's net loss of $179.6 million represents a
$165.0 million decline from the 1999 net loss of $14.6 million. This decline
is primarily attributed to a higher restructuring charge of $11.1 million,
higher litigation settlement provision of $14.2 million and the loss on
disposition of discontinued operations charge of $155.0 million. This loss on
dispositions of discontinued operations primarily relates to impairment of
intangible assets from certain businesses of the 1999 Acquisitions.
1999 Compared to 1998
Revenues. Revenues increased $16.9 million, or 8.3%, to $219.5 million in
1999, from $202.6 million in 1998. The increase in revenue was primarily due
to acquisitions, expansion of professional services provided to new clients,
engagements with new clients, and selling and business development efforts.
During 1999, the Company made acquisitions consistent with its strategy of
acquiring consulting firms that provide complementary services. For 1999, the
increase in revenues due to the Continuing 1999 Acquisitions was $4.9 million,
or 2.5%.
Cost of Services. Cost of Services for 1999 was $142.9 million, compared to
$122.0 million in 1998, an increase of $20.9 million, or 17.2%. The increase
in cost of services for 1999 is primarily due to an increase of $14.0 million
consultant incentive compensation for retention purposes, $1.0 million of
acquisition-related compensation, and $4.9 million in consultant salaries. The
increase in consultant salaries was primarily related to the Continuing 1999
Acquisitions, which accounted for $3.6 million of the increase.
Gross Profit. Gross profit decreased $4.0 million, or 5%, to $76.5 million
in 1999, from $80.5 million in 1998. The decrease in gross profit is primarily
attributed to the increase in consultant incentive compensation for retention
purposes being higher than the increase in revenues.
General and Administrative Expenses. General and administrative expenses
for the year ended December 31, 1999 increased $15.5 million, or 35.9%, to
$58.7 million, which represented 26.7% of revenues, compared to $43.2 million,
or 21.3%, of revenues, in 1998. The increase in general and administrative
expenses was primarily due to a $9.7 million in bad debt expense and $6.6
million in professional fees primarily related to legal expenses, partially
offset by $1.4 million decrease in personnel wage and benefit cost. The
acquisitions of Barrington and PENTA in 1999 had a $0.8 million impact on the
total increase from 1998 to 1999.
Depreciation Expense. For 1999, depreciation expense was $9.6 million, an
increase of $5.7 million from $3.9 million for 1998. Based on a comprehensive
review of the Company's long-lived assets at December 31, 1999, it was
determined that asset value of certain computer equipment and software had a
shorter depreciable life and, therefore lower carrying values. The Company
recorded a non-cash charge to depreciation expense of $3.0 million in 1999 to
reflect the impairment of these assets. In addition, the Company, through an
independent appraisal, re-evaluated the carrying amount and net realizable
value of its corporate headquarters and land after a preliminary decision was
made to dispose of the assets. The Company recorded additional depreciation
expense of $1.1 million to reflect the impairment. Excluding the two
impairment charges totaling $4.1 million, depreciation expense increased $1.6
million for the year ended December 31, 1999 over 1998, and is related to
capital expenditures on equipment and facility expansions.
Amortization Expense. Amortization expense was $0.9 million for the year
ended December 31, 1999. The excess of cost over net assets acquired for the
Continuing 1999 Acquisitions included in continuing operations
15
of approximately $32.2 million was recorded as intangible assets, including
goodwill, in 1999. These intangibles are being amortized on a straight-line
basis over 7 years. There was no amortization expense associated with
continuing operations recorded in the first nine months of 1999. Had the
Continuing 1999 Acquisitions been acquired as of January 1, 1999, amortization
expense would have been $4.5 million.
Merger-Related and Restructuring Costs (Credits). Merger-related costs
decreased $8.3 million, to a credit of $.9 million in 1999, from $7.4 million
in 1998. During 1998, the Company incurred merger-related costs related to the
acquisition of Peterson, which was accounted for as a pooling of interests
business combination. These costs include legal, accounting and other merger-
related fees and expenses, as well as accruals to consolidate certain
facilities. For the year 1999, the Company reviewed the merger-related
accruals and determined certain amounts previously accrued were no longer
necessary given subsequent acquisition activity and changes in the Company's
organizational structure. The results of operations for the year ended
December 31, 1999 reflect a benefit of $0.9 million for the reversal of the
previously accrued amounts.
Litigation and Settlement Provisions. Litigation and settlement provisions
were $2.3 million for the year ended December 31, 1999. During the fourth
quarter 1999, the Company settled a lawsuit initially brought by the Company
against former shareholders of an acquired company which was countered by the
defendants asserting various causes of actions against the Company. The
lawsuit was settled by a cash payment of $1.8 million. In addition, the
Company had other settlement costs of totaling $0.5 million unrelated to any
lawsuits.
Stock Option Compensation Expense. The Company recorded $3.5 million for
stock option compensation expense in 1999 attributable to 0.3 million option
grants to a total of 16 individuals that the Company has determined, based in
part on the absence of contemporaneous documentation, were issued at prices
below fair market value. The amount charged to expense was calculated using
the intrinsic value method for employees and the Black-Scholes option pricing
model for non-employees, and approximates the aggregate dollar amount by which
the grant prices of the options differed from the market prices as of the
dates for which the Company has independent evidence to support the issuance
of the options. The Company recorded an additional $0.4 million of stock
option compensation expense to amortize the value of certain options retained
by a former employee upon separation from the Company.
Other Income (Loss), Net. For the year ended December 31, 1999, other
income (loss), net, decreased $4.7 million to a net other loss of $2.7
million, from a net other income of $2.1 million for 1998. The decrease in
non-operating income was due primarily as a result of a $5.3 million charge to
reflect the probable impairment in the value of certain former officers' loans
receivable. (See Note 3 to the Consolidated Financial Statements.) This charge
was partially offset by higher interest income realized in 1999 as a result of
larger average cash balances outstanding during the year.
Income Tax Expense. Income tax expense decreased $18.4 million to $1.5
million in 1999, from $19.9 million in 1998. The Company's result of
operations in 1999 included $0.9 million of non-cash, non-deductible
amortization expenses from the Continuing 1999 Acquisitions and $3.9 million
of non-cash, non-deductible stock compensation expense. Excluding the effect
of these non-deductible items, the effective tax rate for 1999 would have been
37.1% based on a taxable income of $4.1 million. The Company's effective
income tax rate was 70.7% for the year ended December 31, 1998. The effective
rate for this period would have been 39.8% excluding the effect of the one-
time non-cash charge to income tax expense of $7.2 million and the effect of
certain non-tax deductible merger-related expenses resulting from the
acquisition of Peterson. The $7.2 million charge related to the conversion of
Peterson from the modified cash basis to the accrual basis of accounting for
tax purposes.
Net Income (Loss). Net income decreased approximately $30.2 million from
$15.6 million income in 1998, to $14.6 million loss in 1999. The primary
reason for the decline relates to the results of discontinued operations. Loss
from discontinued operations, net of income taxes for 1999 was $12.5 million
compared to an income of $7.3 million for 1998. In addition, the decline is
attributed to lower gross profits over the prior year combined with higher
general and administrative expenses, higher depreciation expense, higher
litigation settlement provisions and stock option compensation expense offset
by lower merger-related charges.
16
Unaudited Quarterly Results
The following table sets forth-certain unaudited quarterly operating
information. The unaudited quarterly operating data has been prepared on the
same basis as the audited financial statements contained elsewhere in this
Form 10-K. The data includes 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. The amounts have been restated to retroactively exclude
the results of discontinued operations for certain business divestitures
completed in 2000. The revenues and expenses have been appropriately
reclassified into "Income (loss) on discontinued operations, net of income
taxes." Results for any previous quarter are not necessarily indicative of
results for the full year or for any future quarter. The amounts in the
following table are in thousands, except for per share data.
Quarters ended
------------------------------------------------------------------------------
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- --------- -------- -------- --------- --------- --------
Revenues................ $51,678 $54,802 $54,956 $ 58,055 $65,842 $ 58,465 $ 61,260 $59,062
Cost of services
(excluding VSRP)....... 30,029 28,310 29,917 54,709 41,760 39,733 38,760 38,467
Value sharing retention
plan cash compensation
expense (VSRP)......... -- -- -- -- -- -- 1,559 4,331
------- ------- ------- -------- ------- --------- -------- -------
Gross profit............ 21,649 26,492 25,039 3,346 24,082 18,732 20,941 16,264
General and
administrative expenses
(excluding VSRP)....... 9,180 11,972 10,054 27,536 15,019 16,302 14,843 13,682
Value sharing retention
plan cash compensation
expense (VSRP)......... -- -- -- -- -- -- 117 350
Depreciation expense.... 1,247 1,233 1,296 5,774 1,771 1,573 1,653 1,800
Amortization expense.... -- -- -- 900 1,130 1,130 1,222 1,091
Merger-related cost and
restructuring costs
(credits).............. -- -- (881) -- -- 9,285 944 --
Litigation and
settlement provisions.. -- -- -- 2,335 -- 16,000 500 --
Stock option non-cash
compensation expense... 1,698 532 1,064 556 184 137 102 69
------- ------- ------- -------- ------- --------- -------- -------
Operating income (loss)
from continuing
operations............. 9,524 12,755 13,506 (33,755) 5,978 (25,695) 1,560 (728)
Other income (loss),
net.................... 1,092 875 1,054 (5,674) 44 (1,932) (240) 462
------- ------- ------- -------- ------- --------- -------- -------
Income (loss) from
continuing operations
before income taxes.... 10,616 13,630 14,560 (39,429) 6,022 (27,627) 1,320 (266)
Income tax expense
(benefit).............. 4,970 5,609 6,166 (15,211) 2,935 (10,474) 1,087 258
------- ------- ------- -------- ------- --------- -------- -------
Net income (loss) from
continuing operations.. 5,646 8,021 8,394 (24,218) 3,087 (17,153) 233 (524)
Income (loss) from
discontinued
operations, net of
income taxes........... 1,578 118 (533) (13,628) (7,267) (2,926) -- --
(Loss) on dispositions
of discontinued
operations, net of
income taxes........... (145,917) (10,264) 1,178
------- ------- ------- -------- ------- --------- -------- -------
Net income (loss)....... $ 7,224 $ 8,139 $ 7,861 $(37,846) $(4,180) $(165,996) $(10,031) $ 654
======= ======= ======= ======== ======= ========= ======== =======
Net income (loss) from
continuing operations,
per diluted shares (1). $ 0.17 $ 0.19 $ 0.17 $ (0.91) $ (0.10) $ (4.02) $ (0.24) $ 0.02
======= ======= ======= ======== ======= ========= ======== =======
Diluted shares.......... 41,786 43,508 45,357 41,798 41,119 41,265 41,348 39,846
======= ======= ======= ======== ======= ========= ======== =======
- --------
(1) The sum of quarterly earnings per diluted share does not equal to annual
amounts in 1999 and 2000 because of roundings and changes in the weighted
average number of shares.
Operating results fluctuate from quarter to quarter as a result of a number
of factors, including the significance of client engagements commenced and
completed during a quarter, the number of business days in a quarter, and
employee hiring and utilization rates. The timing of revenues varies from
quarter to quarter due to factors such as the Company's revenue cycle, the
ability of clients to terminate engagements without penalty, the size and
scope of assignments, and general economic conditions. Because a significant
percentage of the Company's expenses are relatively fixed, a variation in the
number of client assignments, or the timing of the initiation or the
completion of client assignments, can cause significant variations in
operating results from quarter to quarter. Furthermore, the Company has, on
occasion, experienced a seasonal pattern in its operating
17
results, with a smaller proportion of the Company's revenues and lower
operating income occurring in the fourth quarter of the year, or a smaller
sequential growth rate than in other quarters.
During the quarter ended June 30, 2000, the Company incurred certain pre-
tax expenses that varied significantly from other quarters during the year
ended December 31, 2000. The expenses aggregated $27.3 million and consisted
of the following: $16.0 million litigation and settlement provisions, $9.3
million in merger-related and restructuring costs and $2.0 million for
additional loss contingencies related to the further impairment of notes
receivable from certain former Company officers. (See Note 3 to the
Consolidated Financial Statements.)
During the quarter ended December 31, 1999, the Company incurred certain
pre-tax expenses that varied significantly from expense levels recorded in
prior quarterly periods during the year. The aggregate of these expenses
amounted to $46.8 million and consisted of the following: $20.0 million of
additional costs of services, $14.5 million of incremental general and
administrative expenses, $4.1 million of incremental depreciation, $2.3
million of incremental litigation settlement and $5.9 million of other
incremental non-operating expenses. The higher fourth quarter 1999 pre-tax
expenses were due primarily to incremental compensation expense to provide for
competitive levels of incentive compensation and promote employee retention,
write-downs of certain fixed assets, professional fees and other costs related
to the settlement of certain then outstanding litigation, and allowance for
uncollectible accounts. The increase in non-operating expenses for the fourth
quarter was primarily the result of a loss contingency accrued at December 31,
1999 in the amount of $5.3 million, related to the impairment of notes
receivable from certain former Company officers.
Liquidity and Capital Resources
Summary
The Company had approximately $48.8 million in cash and cash equivalents at
December 31, 2000, principally resulting from sales proceeds of certain
divestitures and the reduction, via collections, of accounts receivable. The
Company's balance sheet remains liquid at December 31, 2000 and does not have
any debt. As of December 31, 2000, cash and cash equivalents represented 77%
of working capital, an increase of 14% from the 63% ratio at December 31,
1999. Working capital, the excess of current assets over current liabilities,
decreased $3.9 million from $67.6 million at December 31, 1999 to $63.7
million at December 31, 2000. The Company's days sales outstanding for
continued operations was 84 days at December 31, 2000 compared to 114 days at
December 31, 1999.
Cash Flow
Net cash used by operating activities of continuing operations was $12.4
million for the year ended December 31, 2000. During the year, the primary
sources of cash provided by operating activities was net income adjusted for
non-cash charges of depreciation, amortization, former officers' notes
impairment provision, stock compensation expense and loss on dispositions of
discontinued operations. The net loss adjusted for these non-cash charges was
$0.9 million. The Company's operating cash from continuing operations was
primarily used for incentive compensation payments, acquisition-related
payments and contingent employment payments pertaining to 1999 Acquisitions,
which totaled $11.7 million. Accounts receivable provided $8.3 million for
continuing operating cash flows as a result of the reduction in days sales
outstanding. Operating cash flow was negatively affected by the net of a
decrease of $11.0 million in other current liabilities, an increase of $7.7
million in income taxes receivable and the non-cash charge of $7.2 million
relating to deferred income taxes.
Net cash provided by investing activities of continuing operations was
$52.8 million. The Company received $62.3 million of sales proceeds in
consideration for several business unit divestitures. (See Note 6 to the
Consolidated Financial Statements.) The Company used $8.7 million for capital
spending to support growth in personnel and services. These investments
included leasehold improvements, furniture and equipment for new leased
facilities, and additional computer and related equipment for information
management consulting services.
Net cash used in financing activities of continuing operations was $11.3
million in 2000. During the year, the Company received net cash and related
tax benefits of $2.3 million from transactions related to stock option
18
exercises and employee stock purchases. The Company used $10.0 million to pay
off borrowings on the line of credit facility and $3.6 million to purchase
treasury shares. In addition, the Company received $6.2 million in connection
with a non-taxable exchange of SDG stock for 1.6 million shares of the
Company's Common Stock.
As of December 31, 2000, the Company had no significant commitments for
capital expenditures, except for those related to rental expense under
operating leases. The total amount of operating lease payments in 2001 is
expected to be approximately $8.9 million. Other lease commitments in 2001 are
expected to be $2.7 million and are part of the restructuring plan.
The Company's cash equivalents were primarily limited to fully pledged
commercial paper or securities (rated A or better) with maturity dates of 90
days or less.
Debt and Capital
The Company maintains a $35.0 million unsecured revolving line of credit
arrangement with LaSalle Bank. The line of credit bears interest at prime or
LIBOR plus 1.0%. Under the agreement, the Company may borrow a maximum amount
of up to 80% of eligible accounts receivable. The agreement contains certain
covenants, the most restrictive of which require the Company to maintain a
minimum level of earnings before interest, taxes, depreciation and
amortization. The Company was in compliance with the terms of the agreement as
of December 31, 2000. The Company did not have a balance outstanding under the
line of credit at December 31, 2000. In February 2001, the Company amended the
line of credit agreement with no substantive changes in the terms and
conditions, except that the amended agreement expires on May 31, 2003.
The Company believes that the current cash and cash equivalents, the future
cash flows from operations and the $35.0 million line of credit facility will
provide adequate cash to fund anticipated short-term and long-term cash needs
from normal operations. In the event the Company were to make significant cash
expenditures in the future for major acquisitions or other non-operating
activities, the Company would seek additional debt or equity financing, as
appropriate. The Company had no plans or intentions for such expenditures as
of December 31, 2000.
Recently Issued Financial Accounting Standards
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities in June 1998. Subsequently, SFAS No. 133
was amended by SFAS No. 138, "Accounting for Certain Derivatives Instruments
and Certain Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It
requires that an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This Statement is effective for fiscal years
beginning 2001. The Company does not currently have any derivative instruments
or conduct any hedging activities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks.
The Company's primary exposure to market risks relates to changes in
interest rates associated with its investment portfolio, classified as cash
equivalents, and its borrowings under the line of credit. The Company's
general investment policy is to limit the risk of principal loss by limiting
market and credit risks. As of December 31, 2000, the Company's investments
were primarily limited to fully collateralized, A rated securities with
maturity dates of 90 days or less. If interest rates average 25 basis points
less in fiscal year 2001 than they did in 2000, the Company's interest income
would be decreased by $0.1 million. This amount is determined by considering
the impact of this hypothetical interest rate on the Company's investment
portfolio at December 31, 2000. The Company does not expect any loss with
respect to its investment portfolio. The Company's market risk associated with
its line of credit relates to changes in interest rates. Borrowings under the
line of credit bear interest, at the Company's option, based on either the
London Interbank Offered Rate (LIBOR) or the prime rate. If interest rates
average 25 basis points higher in 2001 than they did in 2000, the Company's
interest expense would increase by less than $0.1 million. This amount is
determined based on the amount of short-term debt at
19
December 31, 1999. The Company does not currently have any short-term debt,
long-term debt, interest rate derivatives, forward exchange agreements, firmly
committed foreign currency sales transactions, or derivative commodity
instruments.
The Company operates in foreign countries which exposes it to market risk
associated with foreign currency exchange rate fluctuations; however, such
risk is immaterial at this time to the Company's consolidated financial
statements.
Item 8. Consolidated Financial Statements and Supplemental Data.
The Consolidated Financial Statements of the Company are annexed to the
report as pages F-1 through F-27. An index to such materials appears on page
F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information required in response to this Item is incorporated by reference
from the Company's definitive proxy statement for the Company's Annual Meeting
of Stockholders scheduled to be held on April 26, 2001, which proxy statement
will be filed with the Commission pursuant to Regulation 14A not later than
120 days after the end of the Company's year ended December 31, 2000.
Item 11. Executive Compensation.
Information required in response to this Item is incorporated by reference
from the Company's definitive proxy statement for the Company's Annual Meeting
of Stockholders scheduled to be held on April 26, 2001, which proxy statement
will be filed with the Commission pursuant to Regulation 14A not later than
120 days after the end of the Company's year ended December 31, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required in response to this Item is incorporated by reference
from the Company's definitive proxy statement for the Company's Annual Meeting
of Stockholders scheduled to be held on April 26, 2001, which proxy statement
will be filed with the Commission pursuant to Regulation 14A not later than
120 days after the end of the Company's fiscal year ended December 31, 2000.
Item 13. Certain Relationships and Related Transactions.
Information required in response to this Item is incorporated by reference
from the Company's definitive proxy statement for the Company's Annual Meeting
of Stockholders scheduled to be held on April 26, 2001, which proxy statement
will be filed with the Commission pursuant to Regulation 14A not later than
120 days after the end of the Company's fiscal year ended December 31, 2000.
PART IV
Item 14 Exhibits, Financial Statements and Reports on Form 8-K.
(a) The consolidated financial statements filed as part of this report are
listed in the accompanying Index to Consolidated Financial Statements. The
Financial Statement Schedule filed as part of this report is listed below.
(b) The Registrant filed the following Current Reports on Form 8-K during
the quarter ended December 31, 2000:
(1) A Form 8-K dated December 5, 2000 reporting under Item 5 of Form 8-K
the proposed settlement of shareholder class action lawsuit.
20
(c) The exhibits filed as part of this report are listed below:
a. Exhibits:
Exhibit
No. Description
------- -----------
2.1 Asset Purchase Agreement dated as of September 29, 2000 among
Navigant Consulting, Inc., LECG, Inc., LECG Holding Company, LLC and
LECG, Inc. (9)
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(1)
3.2 Amendment No. 1 to Amended and Restated Certificate of Incorporation
of the Registrant (2)
3.3 Amendment No. 2 to Amended and Restated Certificate of Incorporation
of the Registrant (3)
3.4 Amended and Restated By-Laws of the Registrant (4)
4.1 Form of Registration Agreement (6)
4.2 Rights Agreement dated as of December 15, 1999 between the
Registrant and American Stock Transfer & Trust Company, as Rights
Agent, (which includes the form of Certificate of Designations
setting forth the terms of the Series A Junior Participating
Preferred Stock as Exhibit A, the form
of Rights Certificate as Exhibit B and the Summary of Rights to
Purchase Preferred Stock as
Exhibit C)(7)
10.1*+ The Metzler Group, Inc. Long-Term Incentive Plan
10.2+ The Metzler Group, Inc. Employee Stock Purchase Plan (8)
10.3+ Amendment No. 1 to The Metzler Group, Inc. Employee Stock Purchase
Plan (6)
10.4+ Amendment No. 2 to The Metzler Group, Inc. Employee Stock Purchase
Plan (6)
10.5 Amendment No. 3 to The Metzler Group, Inc. Employee Stock Purchase
Plan (5)
10.6+ Amendment No. 4 to The Metzler Group, Inc. Employee Stock Purchase
Plan (5)
10.7*+ Amendment No. 5 to The Metzler Group, Inc. Employee Stock Purchase
Plan
10.8+ Letter agreement dated February 1, 2000 between the Registrant and
Phillip P. Steptoe (5)
10.9*+ Employment Agreement and Amendment number 1 dated May 19, 2000
between the Registrant and William M. Goodyear.
10.10*+ Employment Agreement dated May 19, 2000 between the Registrant and
Ben W. Perks.
21.1* Significant Subsidiaries of the Registrant.
23.1* Consent of KPMG LLP
- --------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (Registration No. 333-9019) filed with the SEC on July 26, 1996
(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-3 (Registration No. 333-40489) filed with the SEC on November 18,
1997.
(3) Incorporated by reference from the Registrant's Form 8-A12B filed with the
SEC on July 20, 1999.
(4) Incorporated by reference from the Registrant's Amendment No. 1 to
Registration Statement on Form S-3 (Registration No. 333-40489) filed with
the SEC on February 12, 1998.
(5) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1999.
(6) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998.
(7) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated December 15, 1999.
(8) Incorporated by reference from the Registrant's Registration Statement on
Form S-8 (Registration No. 333-30265) filed with the SEC on June 27, 1997.
(9) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated September 29, 2000.
* Indicates filed herewith.
+ Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to the Form 10-K.
b. Financial Statement Schedule:
Report of Independent Auditors
Schedule II: Valuation and Qualifying Accounts
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Navigant Consulting, Inc.
Date: March 12, 2001
/s/ William M. Goodyear
By: _________________________________
William M. Goodyear
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ William M. Goodyear Chairman and Chief Executive March 12, 2001
____________________________________ Officer and Director
William M. Goodyear (Principal Executive
Officer)
/s/ Ben W. Perks Executive Vice President and March 12, 2001
____________________________________ Chief Financial Officer
Ben W. Perks (Principal Financial and
Accounting Officer)
/s/ Thomas A. Gildehaus Director March 12, 2001
____________________________________
Thomas A. Gildehaus
/s/ Peter B. Pond Director March 12, 2001
____________________________________
Peter B. Pond
/s/ Samuel K. Skinner Director March 12, 2001
____________________________________
Samuel K. Skinner
/s/ Carl S. Spetzler Director March 12, 2001
____________________________________
Carl S. Spetzler
/s/ Governor James R. Thompson Director March 12, 2001
____________________________________
Governor James R. Thompson
22
INDEX TO THE FINANCIAL STATEMENTS
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
Audited Consolidated Financial Statements as of December 31, 2000 and 1999,
and for each of the three years ended December 31, 2000.
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
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Navigant Consulting, Inc.:
We have audited the accompanying consolidated balance sheets of Navigant
Consulting, Inc. and subsidiaries as of December 31, 2000 and 1999, 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, 2000.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Navigant Consulting, Inc. and subsidiaries as of December 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
years in the three year period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Chicago, Illinois
February 19, 2001
F-2
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31, December 31,
2000 1999
------------ ------------
ASSETS
------
Current assets:
Cash and cash equivalents.......................... $ 48,798 $ 42,345
Accounts receivable, net........................... 55,012 116,100
Prepaid expenses and other current assets.......... 3,776 7,364
Income tax receivable.............................. 476 8,211
Deferred income taxes.............................. 3,351 2,385
--------- --------
Total current assets............................. 111,413 176,405
Property and equipment, net........................ 19,328 33,763
Goodwill and intangible assets, net................ 27,523 202,096
Deferred income taxes.............................. 3,708 --
Other assets....................................... 1,510 2,412
--------- --------
Total assets..................................... $ 163,482 $414,676
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term debt.................................... $ -- $ 10,000
Accounts payable and accrued liabilities........... 17,468 20,709
Accrued compensation and project costs............. 18,933 58,425
Other current liabilities.......................... 11,356 19,673
--------- --------
Total current liabilities........................ 47,757 108,807
Deferred income taxes................................ -- 725
Other non-current liabilities........................ -- 4,475
--------- --------
Total liabilities................................ 47,757 114,007
--------- --------
Stockholders' equity:
Preferred stock, $.001 par value per share; 3,000
shares authorized; no shares issued or
outstanding....................................... -- --
Common stock, $.001 par value per share; 75,000
shares authorized; 38,444 and 41,042 shares issued
at December 31, 2000 and 1999, respectively....... 43 43
Additional paid-in capital......................... 343,340 340,528
Treasury stock..................................... (63,541) (52,811)
Notes receivable from former officers.............. -- (2,583)
Retained earnings (accumulated deficit)............ (163,903) 15,650
Accumulated other comprehensive loss............... (214) (158)
--------- --------
Total stockholders' equity....................... 115,725 300,669
--------- --------
Total liabilities and stockholders' equity....... $ 163,482 $414,676
========= ========
See accompanying notes to the consolidated financial statements.
F-3
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the years ended
December 31,
-----------------------------
2000 1999 1998
--------- -------- --------
Revenues......................................... $ 244,629 $219,491 $202,582
Cost of services (excluding VRSP).............. 158,720 142,965 122,040
Value sharing retention program cash
compensation expense (VSRP)................... 5,890 -- --
--------- -------- --------
Gross profit..................................... 80,019 76,526 80,542
General and administrative expenses (excluding
VRSP)......................................... 59,846 58,742 43,194
Value sharing retention program cash
compensation expense (VSRP)................... 467 -- --
Depreciation expense........................... 6,797 9,550 3,858
Amortization expense........................... 4,573 900 --
Merger-related and restructuring costs
(credits)..................................... 10,229 (881) 7,370
Litigation and settlement provisions........... 16,500 2,335 --
Stock option non-cash compensation expense..... 492 3,850 --
--------- -------- --------
Operating income (loss) from continuing
operations...................................... (18,885) 2,030 26,120
Other income (loss), net....................... (1,666) (2,653) 2,053
--------- -------- --------
Income (loss) from continuing operations before
income taxes.................................... (20,551) (623) 28,173
Income tax expense (benefit)................... (6,194) 1,534 19,920
--------- -------- --------
Net income (loss) from continuing operations... (14,357) (2,157) 8,253
--------- -------- --------
Income (loss) from discontinued operations, net
of income taxes................................. (10,193) (12,465) 7,328
(Loss) on dispositions of discontinued
operations, net of income taxes................. (155,003) -- --
--------- -------- --------
Net income (loss).............................. $(179,553) $(14,622) $ 15,581
========= ======== ========
Basic earnings (loss) per share:
Net income (loss) from continuing operations... $ (0.35) $ (0.05) $ 0.23
Net income (loss) from discontinued operations. $ (0.25) $ (0.30) $ 0.20
(Loss) on dispositions of discontinued
operations.................................... $ (3.79) $ 0.00 $ 0.00
Net income (loss) per common share:............ $ (4.39) $ (0.35) $ 0.43
Shares used in computing net income (loss) per
basic share..................................... 40,895 41,601 36,476
Diluted earnings (loss) per share:
Net income (loss) from continuing operations... $ (0.35) $ (0.05) $ 0.22
Net income (loss) from discontinued operations. $ (0.25) $ (0.30) $ 0.19
(Loss) on dispositions of discontinued
operations.................................... $ (3.79) $ 0.00 $ 0.00
Net income (loss) per common share:............ $ (4.39) $ (0.35) $ 0.41
Shares used in computing net income (loss) per
diluted share................................... 40,895 41,601 37,707
See accompanying notes to the consolidated financial statements.
F- 4
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Notes
Receivable
Common from Accumulated Retained
Preferred Common Treasury Preferred Stock Additional Treasury Stockholders/ Other Earnings
Stock Stock Stock Stock Par Par Paid-In Stock Former Comprehensive (Accumulated
Shares Shares Shares Value Value Capital Cost Officers (Loss) Income Deficit)
--------- ------ -------- --------- ------ ---------- -------- ------------- ------------- ------------
Balance at
December 31,
1997............ -- 34,954 $35 $ 56,580 $ -- $ (2,755) $ (57) $ 15,412
Comprehensive
income.......... 27 15,581
Issuance of
common stock.... 3,645 4 96,965
Purchase of
common stock.... (595) (1) (18,921)
Distributions... (721)
Collection of
notes receivable
from
stockholders.... 2,755
--- ------ ------ --- --- -------- -------- -------- ----- ---------
Balance at
December 31,
1998............ -- 38,004 -- -- 38 134,624 -- -- (30) 30,272
Comprehensive
loss............ (128) (14,622)
Issuance of
common stock.... 5,387 5 215,160
Purchase of
common stock.... (263) (2,086) (13,335) (52,811)
Stock option
compensation
expense......... 3,850
Issuance of
notes receivable
from
former officers. (20,550)
Interest on
notes receivable
from
former officers. 229 (229)
Collection of
notes receivable
from former
officers........ 12,929
Impairment of
notes receivable
from former
officers........ 5,267
--- ------ ------ --- --- -------- -------- -------- ----- ---------
Balance at
December 31,
1999............ -- 43,128 (2,086) -- 43 340,528 (52,811) (2,583) (158) 15,650
Comprehensive
loss............ (56) (179,553)
Issuance of
common stock.... 305 2,320
Purchase of
treasury stock.. (1,310) (4,555) 920
Nontaxable stock
exchange--
disposition of
business........ (1,593) (6,175)
Stock option
compensation
expense......... 492
Impairment of
notes receivable
from former
officers........ 1,663
--- ------ ------ --- --- -------- -------- -------- ----- ---------
Balance at
December 31,
2000............ -- 43,433 (4,989) -- $43 $343,340 $(63,541) $ -- $(214) $(163,903)
=== ====== ====== === === ======== ======== ======== ===== =========
Total
Stockholders'
Equity
-------------
Balance at
December 31,
1997............ $ 69,215
Comprehensive
income.......... 15,608
Issuance of
common stock.... 96,969
Purchase of
common stock.... (18,922)
Distributions... (721)
Collection of
notes receivable
from
stockholders.... 2,755
-------------
Balance at
December 31,
1998............ 164,904
Comprehensive
loss............ (14,750)
Issuance of
common stock.... 215,165
Purchase of
common stock.... (66,146)
Stock option
compensation
expense......... 3,850
Issuance of
notes receivable
from
former officers. (20,550)
Interest on
notes receivable
from
former officers. --
Collection of
notes receivable
from former
officers........ 12,929
Impairment of
notes receivable
from former
officers........ 5,267
-------------
Balance at
December 31,
1999............ 300,669
Comprehensive
loss............ (179,609)
Issuance of
common stock.... 2,320
Purchase of
treasury stock.. (3,635)
Nontaxable stock
exchange--
disposition of
business........ (6,175)
Stock option
compensation
expense......... 492
Impairment of
notes receivable
from former
officers........ 1,663
-------------
Balance at
December 31,
2000............ $ 115,725
=============
See accompanying notes to the consolidated financial statements.
F-5
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31,
-------------------------------
2000 1999 1998
---------- --------- --------
Cash flows from operating activities:
Net income (loss)............................ $ (179,553) $ (14,622) $ 15,581
Adjustments to reconcile net income to net
cash provided by (used in) continuing
activities, net of acquisitions and
dispositions:
Loss from discontinued operations, net of
income taxes.............................. 10,193 -- --
Loss on dispositions of discontinued
operations, net of income taxes........... 155,003 -- --
Depreciation expense....................... 6,797 13,460 4,876
Amortization expense....................... 4,573 24,300 --
Impairment of former officers' notes, net.. 1,663 5,267 --
Stock option non-cash compensation expense. 492 3,850 1,094
Provision for bad debts.................... 4,900 14,900 1,777
Deferred income taxes...................... (7,194) (10,970) (107)
Other, net................................. (399) 404 --
Changes in assets and liabilities:
Accounts receivable...................... 8,256 (19,543) (20,917)
Prepaid expenses and other current
assets.................................. 195 1,478 (3,467)
Accounts payable and accrued liabilities. (2,259) (2,069) 7,291
Accrued compensation and project costs... (11,737) 10,591 11,029
Income taxes receivable.................. 7,735 (13,023) (858)
Other current liabilities................ (11,022) 3,426 4,907
---------- --------- --------
Net cash provided by (used in) operating
activities of:
Continuing operations........................ (12,357) 17,449 21,206
Discontinued operations...................... (23,238) -- --
---------- --------- --------
Net cash provided by (used in)
operating activities.................. (35,595) 17,449 21,206
---------- --------- --------
Cash flows from investing activities:
Purchases of property and equipment.......... (8,693) (18,641) (13,340)
Acquisition of businesses, net of cash
acquired.................................... -- (42,055) --
Divestitures of businesses, net of cash...... 62,287 -- --
Other, net................................... (772) (1,582) (296)
---------- --------- --------
Net cash provided by (used in) investing
activities of:
Continuing operations........................ 52,822 (62,278) (13,636)
Discontinued operations...................... 493 -- --
---------- --------- --------
Net cash provided by (used in)
investing activities.................. 53,315 (62,278) (13,636)
---------- --------- --------
Cash flows from financing activities:
Issuance of common stock..................... 2,320 17,387 96,969
Stock repurchases, net of obligations for
deferred settlements........................ (3,635) (40,011) (18,922)
Repayment of long-term debt.................. -- (322) (319)
Net repayments of short-term debt............ (10,000) (2,584) (8,242)
Proceeds from short-term debt................ -- 10,000 --
Issuance of notes receivable from former
officers.................................... -- (17,000) --
Payments of pre-acquisition undistributed
income to stockholders...................... -- -- (6,079)
Other, net................................... 48 -- 2,755
---------- --------- --------
Net cash provided by (used in)
financing activities of continuing
operations............................ (11,267) (32,530) 66,162
---------- --------- --------
Net increase (decrease) in cash and cash
equivalents................................... 6,453 (77,359) 73,732
Cash and cash equivalents at beginning of the
year.......................................... 42,345 119,704 45,972
---------- --------- --------
Cash and cash equivalents at end of the year... $ 48,798 $ 42,345 $119,704
========== ========= ========
See accompanying notes to the consolidated financial statements.
F-6
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Navigant Consulting, Inc. (the "Company") is a management consulting firm
that provides services to government agencies, law firms, financial
institutions, and related industries, as well as other Fortune 500 companies.
The Company has two business units: Financial & Claims Consulting and Energy &
Water Consulting. The Company is headquartered in Chicago, Illinois and has
regional offices in various cities within the United States, and several
international offices.
During 2000, the Company eliminated three business units: Economic & Policy
Consulting, Strategic Consulting and IT Solutions. (See Note 6, "Discontinued
Operations.")
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.
Use of Estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles in the United States of America, requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and the related notes. Actual results
could differ from those estimates and may impact future results of operations
and cash flows.
Reclassification
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the current year's presentation. During 2000, the
Company discontinued certain business units. The Company has restated the
results of operations for these businesses as discontinued operations.
Accordingly, the revenues and expenses are included in "Income (loss) from
discontinued operations, net of income taxes." (See Note 6, "Discontinued
Operations.")
Cash and Cash Equivalents
Cash equivalents are comprised of highly liquid instruments with original
maturity dates of 90 days or less.
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
remaining lease term or the estimated useful life of the asset.
Intangible Assets
Intangible assets consist of identifiable intangibles and goodwill.
Identifiable intangibles include customer lists, workforce in place, knowledge
capital, and non-compete agreements. Intangible assets are being amortized on
the straight-line method over seven years.
F-7
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Fair Value of Financial Instruments
The Company considers the recorded value of its financial assets and
liabilities, which consist primarily of cash and cash equivalents, accounts
receivable and accounts payable, to approximate the fair value of the
respective assets and liabilities at December 31, 2000 and 1999.
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. A provision is made for the entire amount of
estimated losses, if any, at the time when they are known.
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which disclosures are presented in Note 9 "Long-Term Incentive
Plan And The 2000 Value Sharing Retention Plan." Accordingly, the Company
continues to account for stock-based compensation using the intrinsic value-
based method as prescribed under Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees" and related interpretations.
Income Taxes
Income taxes 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 August 14, 1998, one of the Company's subsidiaries, Peterson
Consulting, L.L.C. d/b/a Peterson Worldwide LLC (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 the accrual basis, along with these temporary differences,
resulted in the recognition of a one-time, non-cash charge of $7.2 million,
which was recorded in 1998, the period in which the merger occurred.
Foreign Currency Translation
The balance sheets of the Company's foreign subsidiaries are translated
into U.S. dollars using the period-end exchange rate, and revenue and expenses
are translated using the average exchange rate for each period. The resulting
translation gains or losses are recorded in a separate component of
stockholders' equity as other comprehensive income.
F-8
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and foreign
currency translation adjustments. It is presented in the consolidated
statement of stockholders' equity. The Company's comprehensive loss for the
year includes foreign currency translation loss in 2000 of $0.3 million and
dispositions of accumulated foreign currency adjustments of $0.2 million,
which is related to the divestitures of discontinued operations.
Earnings per Share
Basic earnings (loss) per share (EPS) excludes the dilutive effect of
common shares that could potentially be issued due to the exercise of stock
options, and is computed by dividing net income (loss) by the weighted average
number of common shares outstanding for the period. Diluted EPS is computed by
dividing net income (loss) by the weighted-average number of shares
outstanding, plus all shares that could potentially be issued.
3. STOCKHOLDERS' EQUITY
Secondary Public Offerings
On March 2, 1998, the Company completed a secondary offering of its common
stock. The Company issued 1.5 million shares, 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, resulting in net proceeds of approximately $51 million.
Employee Stock Purchase Plan
During 1996, the Company implemented a plan that permits employees to
purchase shares of the Company's common stock each quarter at 85% of the
market value. The market value of shares purchased for this purpose is
determined to be the lower of the closing market price on the first and last
day of each calendar quarter. On November 30, 2000, the Employee Stock
Purchase Plan was amended to, among other things, increase the total number
shares authorized to be issued under the plan from 450,000 shares to 750,000
shares. The amendment also provided for subsequent annual increases of the
total authorized shares by the lesser of 500,000 shares or 1.2 percent of the
Company's then outstanding shares. The Company has issued 450,000 shares under
the Plan through December 31, 2000.
Treasury Stock Transactions
On August 9, 1999, the Board of Directors authorized the repurchase of up
to 3.0 million shares of the Company's common stock in open market or in
privately negotiated transactions. In August and September of 1999, the
Company repurchased a total of 0.5 million shares for $18.9 million in
privately negotiated transactions. In November 1999, the Company repurchased
1.0 million shares for $20.8 million in open market transactions. Also in
November 1999, the Company accepted 0.6 million shares with a then market
value of $12.9 million as payment for the principal amount of certain notes
plus accrued interest related to borrowings by Mr. Maher, the Company's
Chairman and Chief Executive Officer at the time.
In October 2000, the Board of Directors authorized the repurchase of up to
5.0 million shares of the Company's common stock, approximately 13% of the
Company's then outstanding shares. In October 2000, the Company completed a
nontaxable exchange of SDG stock for 1.6 million of the Company's shares,
valued at approximately $6.2 million, as part of the transaction. In December
2000, the Company repurchased 1.1 million shares for $3.6 million in private
transactions. Also in December 2000, the Company obtained 237,500 shares,
valued at $0.9 million, for partial repayments of former officers' notes
receivable. See also "Former Officers' Notes Receivable."
F-9
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Former Officers' Notes Receivable
As of December 31, 1999, the Company held notes receivable from three
former Company officers with an aggregate principal balance of $7.9 million.
(See also Note 16, "Related Party Transactions.") The notes receivable arose
from transactions whereby these individuals borrowed money from the Company to
purchase a total of 200,000 shares of the Company's common stock from third
parties, and 37,500 shares of common stock from the Company. The notes
receivables were accompanied by pledge agreements, which pledged the shares as
collateral security for repayment of the notes. In March 2000, the borrowers
had either challenged the enforceability or declined to confirm their
intention to comply with the terms of the notes. The Company accrued a loss
contingency at December 31, 1999 in the amount of $5.3 million, representing
the difference between the principal amount of the notes receivable and the
value of the shares held by the Company as collateral. The $5.3 million was
included as a non-operating charge within other expense in the consolidated
statement of operations. During the year ended December 31, 2000, the Company
recorded an additional $1.7 million to reflect further impairment of the
market value of the former officers' notes. In December 2000, the Company
obtained the 237,500 shares, valued at $0.9 million, and retired the shares in
treasury.
Stockholder Rights Plan
On December 15, 1999, the Company's Board of Directors adopted a
Stockholders Rights Plan (the "Rights Plan") and declared a dividend
distribution of one Right (a "Right") for each outstanding share of common
stock, to stockholders of record at the close of business on December 27,
1999. Each Right will entitle its holder, under certain circumstances
described in the Rights Agreement, to purchase from the Company one one-
thousandth of a share of its Series A Junior Participating Preferred Stock,
$.001 par value, (the "Series A Preferred Stock"), at an exercise price of $75
per Right, subject to adjustment. The description and terms of the Rights are
set forth in a Rights Agreement (the "Rights Agreement") between the Company
and American Stock Transfer & Trust Company, as Rights Agent.
Until the Distribution Date under the Rights Agreement, the surrender or
transfer of any shares of common stock outstanding will also constitute the
surrender or transfer of the Rights associated with such shares. The Rights
are not exercisable until the Distribution Date and will expire at the close
of business on December 15, 2009, unless earlier redeemed or exchanged by the
Company. The Company may redeem the Rights in whole, but not in part, at a
price of $.01 per Right (subject to adjustment and payable in cash, common
stock or other consideration deemed appropriate by the Company's Board of
Directors) at any time until ten days following the Stock Acquisition Date
under the Rights Agreement. Immediately upon the action of the Company's Board
of Directors authorizing any redemption, the Rights will terminate and the
only right of the holders of Rights will be to receive the redemption price.
Until a Right is exercised, its holder, as such, will have no rights as a
stockholder of the Company, including, without limitation, the right to vote
or to receive dividends.
Other Issuance of Common Stock
All other issuance of common stock during the year 1998 through 2000 were
related to business combinations and exercised stock options. See also Notes 5
and 9.
F-10
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
4. BASIC AND DILUTED SHARES
The following table provides a reconciliation of the computations of basic
and diluted earnings (loss) per share information for each of the years in the
three year period ended December 31, 2000.
Year ended December 31,
----------------------------
2000 1999 1998
--------- -------- -------
(amounts in thousands)
Numerator:
Net income (loss)................................ $(179,533) $(14,622) $15,581
========= ======== =======
Denominator:
Weighted average shares outstanding.............. 40,895 41,601 36,476
Effect of dilutive securities:
Employee stock options........................... -- -- 1,231
--------- -------- -------
Denominator for diluted earnings(loss) per share... 40,895 41,601 37,707
========= ======== =======
For the year ended December 31, 2000 and 1999, the weighted average effect
of employee stock options was 0.3 million and 1.7 million shares,
respectively. However, the Company incurred a loss in both years and the
effect of these options was anti-dilutive, therefore those options were
excluded from the calculation of the diluted per share amounts. In January
2001, the Company issued 1.9 million restricted shares, which are currently
outstanding and have voting rights but are not vested. These restricted shares
are excluded from basic per share calculations until vested. (See Note 9,
"Long-Term Incentive Plan and The 2000 Value Sharing Retention Plan.")
5. BUSINESS COMBINATIONS
On August 19, 1998, the Company issued 7.3 million shares of common stock
for substantially all the outstanding common stock of LECG, Inc. (LECG). In
connection with the acquisition of LECG, the Company acquired assets and
assumed liabilities with book values of $49.8 million and $17.4 million,
respectively. On August 31, 1998, the Company issued 5.6 million shares of
common stock for substantially all of the outstanding common stock of
Peterson. In connection with the acquisition of Peterson, the Company acquired
assets and assumed liabilities with book values of $34.8 million and $24.7
million, respectively. Additionally, the Company completed the acquisitions of
all of the common stock of American Corporate Resources, Inc. (ACR), AUC
Management Consultants, Inc. (AUC), and Hydrologic Consultants, Inc. of
California (HCI) as of April 3, 1998; The Vision Trust Marketing Group, LLC
(VTM) as of June 1, 1998; and Saraswati Systems Corporation (SSC) and Applied
Health Outcomes, Inc. (AHO) as of September 1, 1998. In the aggregate for the
ACR, AUC, HCI, VTM, SSC and AHO transactions, the Company issued 1.2 million
shares of common stock. In connection with the acquisitions of ACR, AUC, HCI,
VTM, SSC and AHO, the Company acquired assets and assumed liabilities with
book values of $1.9 million and $1.4 million, respectively. All of the 1998
transactions were accounted for as poolings of interests accounting method of
business combination. The Company's consolidated financial statements have
been restated as if LECG, Peterson, AUC, HCI, SSC and AHO had been combined
for all periods presented. Since dates of acquisition, certain companies have
been discontinued. The revenues and expenses of LECG and SSC are included in
"Income (loss) on discontinued operations, net of income taxes" on the
Company's consolidated statements of operations for all years presented. The
Company's statement of operations for the year ended December 31, 1998
includes net income totaling $5.5 million, from LECG, Peterson, AUC, HCI, SSC,
and AHO, through the dates of acquisition. The stockholders' equity and the
operations of ACR and VTM were not significant in relation to those of the
Company. As such, the Company recorded the ACR and VTM transactions by
restating stockholders' equity as of the dates of the acquisition without
restating prior period financial statements.
F-11
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The Company incurred significant costs and expenses in connection with
these acquisitions, including legal, accounting, and other various expenses.
These costs and expenses were recorded in the consolidated statements of
operations during the third quarter of 1998.
During 1999, the Company completed 11 acquisitions (collectively, the "1999
Acquisitions") in exchange for Company stock and cash having an aggregate
value of $235.7 million. On February 7, 1999, the Company issued 2.4 million
shares of common stock (valued at the time of closing at approximately $123.7
million) for substantially all of the outstanding common stock of Strategic
Decisions Group, Inc. (SDG), and acquired the remaining minority interest in
exchange for $13.3 million in cash. On March 31, 1999, the Company completed
the acquisitions of all of the outstanding stock of Triad International, Inc.,
GeoData Solutions, Inc. (GeoData) and Dowling Associates, Inc. (Dowling) in
exchange for 1.8 million shares of the Company's common stock (valued at the
time of closing at approximately $57.3 million). On September 30, 1999, the
Company completed its acquisition of the business operations and certain
assets of PENTA Advisory Services LLC (PENTA) and the stock of Scope
International, Inc. (Scope) for a total cash purchase price of $15.1 million.
The purchase agreement for PENTA also provides for additional earnout
payments, payable in cash or Company common stock, over the next four years
contingent on future revenue growth and gross margin targets. The additional
payments, if any, will be accounted for as additional goodwill. During 2000,
additional goodwill of $2.0 million was recorded for the earnout provision of
the PENTA purchase agreement. On October 1, 1999, the Company completed the
acquisitions of the stock of Brooks International AB, Brooks International
SARL and SPRL, and Brooks International Consulting OY for an aggregate cash
purchase price of $3.3 million. On November 1, 1999, the Company completed the
acquisition of the stock of The Barrington Consulting Group, Inc. (Barrington)
in exchange for $14.4 million in cash paid at closing and total deferred cash
payments of $7.8 million, payable in two equal annual installments. The
remaining liability related to the deferred cash payments is reflected in the
consolidated balance sheet as of December 31, 2000 as $3.9 million of other
current liabilities. The purchase agreement for Barrington, as amended in
October 2000, also provides for additional cash payments of up to $10.5
million in the aggregate. These additional payments are contingent on
continued employment by the Company of certain former Barrington shareholders
and are payable in cash in two annual installments, the first of which was
paid in October 2000. The contingent payments are being charged to expense
ratably over the period of employment. On December 1, 1999, the Company
completed the acquisition of all of the assets of Glaze Creek Partners, LLC in
exchange for $0.8 million in cash. There were no pre-acquisition intercompany
transactions between the Company and the 1999 Acquisitions.
The 1999 Acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the results of operations have been included in
the accompanying consolidated financial statements from the dates of
acquisition. Certain assets acquired of $46.2 million and liabilities assumed
of $36.9 million have been recorded at their estimated fair values. The excess
of cost over the net assets acquired of approximately $226.4 million has been
recorded as intangible assets, including goodwill. The allocation of the
excess cost over the net assets acquired to identifiable intangible assets and
goodwill was based upon independent appraisals, as were the estimated useful
lives. The estimated lives range from between one and twenty years, and
approximate, on a straight-line basis, an average life of seven years.
As discussed further in Note 6 "Discontinued Operations," the Company
disposed of certain businesses that were unprofitable or not complementary to
its core operations. The discontinued operations include the following 1999
Acquisitions discussed above: Strategic Decisions Group, Inc., Triad
International, Inc., GeoData Solutions, Inc., Dowling Associates, Inc., Brooks
International AB, Brooks International SARL and SPRL, Brooks International
Consulting OY, and Glaze Creek Partner LLC. The revenues and expenses for the
above-mentioned companies have been reclassified to "Income (loss) from
discontinued operations, net of income taxes" for all periods presented since
dates of acquisition. The operating results of Barrington, PENTA and Scope are
included in continuing operations.
F-12
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The following unaudited pro forma financial information presents the
combined results of operations as if the remaining 1999 Acquisitions had
occurred as of January 1, 1999, after giving effect to certain adjustments.
The adjustments include the amortization of goodwill and other intangibles,
compensation expense accrual of contingent payments stipulated in acquisition
agreements, a reduction in interest income, and the related income tax effects
with respect to said adjustments. The pro forma information is for
informational purposes only. The information presented does not necessarily
reflect the results of operations that would have occurred had the
acquisitions been completed as of January 1, 1999, nor are they indicative of
future results.
1999
--------
Revenues....................................................... $240,754
Cost of services............................................... 164,093
--------
Gross profit................................................... 76,661
General and administrative expenses............................ 61,855
Depreciation expense........................................... 9,800
Amortization expense........................................... 4,520
Other charges, net............................................. 5,304
Non-operating charges.......................................... 4,173
--------
Loss from continuing operations before income taxes............ (8,991)
Income tax benefit............................................. (782)
--------
Net loss from continuing operations............................ (9,773)
Loss from discontinued operations.............................. (12,465)
--------
Net loss....................................................... $(22,238)
========
Net loss per diluted share..................................... $ (0.53)
========
6. DISCONTINUED OPERATIONS
In May 2000, the Company developed plans and identified certain operating
units and other entities for disposition, and implemented plans to restructure
the remaining operating units. The Company has made three large strategic
divestitures in 2000: Economics & Policy Consulting, Strategic Consulting and
IT Solutions.
Economics & Policy Consulting
The Company completed the sale of LECG to a team of senior LECG
professionals in a management buy-out for $45.0 million, principally in cash
and notes receivable, on September 29, 2000. The agreement provides for other
contingent consideration, including a $5.0 million deferred sale price
payment. No value was given to contingent deferred payments when calculating
the gain on disposition. This contingent deferred sale price payment is based
on certain employees' retention on, or prior to, the first anniversary of the
closing date.
Strategic Consulting
In October 2000, the Company completed a nontaxable exchange of SDG stock
for the Company's stock with a then current value of approximately $6.2
million. In addition, the Company received $16.0 million in cash related to
this transaction. The assets of Glaze Creek were included in this transaction.
The Company has shut down the operations of Triad International through
employee terminations and has sold certain Triad International assets to the
remaining employees, including client engagements in process. The purchasers
also assumed certain liabilities in connection with this disposition, which
was completed in June 2000. In consideration for the sale, the Company is
entitled to $2.5 million in contingent deferred payments. No value was given
to the contingent deferred payments when calculating the loss on disposition.
The Company is attempting to sell to either management or various
interested third parties the operations of Brooks International AB, Brooks
International SARL and SPRL, and Brooks International Consulting OY and
expects this process to be completed during 2001.
F-13
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
IT Solutions
In July 2000, the Company sold GeoData Solutions for $9 million cash, and
retained all accounts receivable, which had an estimated realizable value of
approximately $4.1 million at July 1, 2000. The Company shut down the
operations of SSC and Dowling Associates during the third quarter of 2000.
The Economics & Policy Consulting, Strategic Consulting and IT Solutions
operating segments are accounted for as discontinued operations. Summarized
results of discontinued businesses are shown separately as discontinued
operations in the accompanying consolidated financial statements.
Certain information with respect to discontinued operations is summarized
as follows (in thousands):
2000 1999 1998
-------- -------- -------
Revenues:
Economics & Policy Consulting............... $ 60,029 $ 76,489 $69,221
Strategic Consulting........................ 35,288 65,836 --
IT Solutions................................ 15,557 35,878 15,823
-------- -------- -------
Total revenues................................ 110,874 178,203 85,044
-------- -------- -------
Income (loss) from discontinued operations.... (13,794) (5,172) 13,045
Income tax expense (benefit).................. (1,877) 7,293 5,717
-------- -------- -------
Net income (loss)........................... $(11,917) $(12,465) $ 7,328
======== ======== =======
Results of discontinued operations for the year ended December 31, 2000
only includes amortization of associated intangible assets through the
measurement date of April 30, 2000. The above results include $1.7 million of
net loss (excludes amortization expenses) for the period May 1, 2000 through
disposition dates.
The loss on dispositions for the year ended December 31, 2000 includes the
following (in thousands):
Book value of net assets in excess of proceeds, including
intangible assets of $162,346................................. $138,181
Net pre-tax loss on discontinued operations for the period
May 1, 2000 through the expected disposition dates.......... 3,597
Expenses associated with asset disposals (including $5,861 in
severance-related expenses)................................. 8,407
--------
Pre-tax loss on dispositions................................. 150,185
Income tax provision......................................... 4,818
--------
Loss on dispositions......................................... $155,003
========
7. MERGER-RELATED AND RESTRUCTURING COSTS (CREDITS)
In May 2000, the Company replaced its Chief Executive Officers and
subsequently implemented a strategic review and restructuring that included
discontinuance and dispositions of several operating units, restructuring of
its remaining core operations and streamlining of its administrative support
staff. Accordingly, the Company recorded restructuring costs of $10.2 million
for the year ended December 31, 2000. The Company offered involuntary
severance packages to approximately 140 consulting, executive and
administrative employees in its continuing operations. The Company recorded
$6.0 million in severance-related costs associated with these reductions in
force. The Company also recorded $4.2 million of expense associated with
facility closings, space reduction and office consolidation.
F-14
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
In 1999, the Company recorded $0.2 million of expense in 1999 for employee
separations associated with consolidation of certain accounting and human
resources functions. At December 31, 1999, the Company reviewed the merger-
related accruals and determined that certain amounts previously accrued were
no longer necessary given subsequent acquisition activity and changes in the
Company's organizational structure. The results of operations for 1999 reflect
a benefit of $1.1 million for the reversal of the previously accrued amounts.
During 1999, the Company increased the accrual for restructuring charges and
merger-related costs by $3.0 million related to the 1999 Acquisitions, which
were accounted for under the purchase method of accounting for business
combinations. These costs were reflected as purchase price adjustments and, as
such, increased the amount of goodwill. In 1998, the Company incurred
restructuring charges and merger-related costs of $7.4 million related to the
acquisition of Peterson, which was accounted for as a pooling of interest
transaction. These costs included legal, accounting and other acquisition-
related fees and expenses, as well as accruals to consolidate certain
facilities.
The restructuring charges and merger-related costs were determined based on
formal plans approved by the Company's management using the best information
available at the time. The amounts the Company may ultimately incur may change
as the balance of the Company's restructuring plan is executed. The activity
affecting the accrual for restructuring charges and merger-related costs
during 2000, 1999 and 1998 is as follows (shown in thousands):
Direct
transaction Facilities Workforce Other
costs closings reductions costs Total
----------- ---------- ---------- ------- -------
Year ended December 31,
1998:
Charges to operations. $ 4,915 $ 1,281 $ -- $ 1,174 $ 7,370
Reclassified to
discontinued
operations........... 2,723 2,319 -- 366 5,408
Utilized.............. (4,434) (239) -- (1,655) (6,328)
------- ------- ------- ------- -------
Balance at December 31,
1998................... 3,204 3,361 -- (115) 6,450
Year ended December 31,
1999:
Charges to operations. -- -- 245 -- 245
Changes in estimates.. (680) (540) -- 94 (1,126)
Purchase price
adjustments.......... 2,425 350 255 -- 3,030
Utilized.............. (4,803) (232) (879) -- (5,914)
Reclassified to
discontinued
operations........... (146) (115) 915 21 675
------- ------- ------- ------- -------
Balance at December 31,
1999................... -- 2,824 536 -- 3,360
Year ended December 31,
2000:
Charges to operations. -- 4,259 5,970 -- 10,229
Utilized.............. (2,275) (5,461) -- (7,736)
Reclassified to
discontinued
operations........... (1,312) -- -- (1,312)
------- ------- ------- ------- -------
Balance at December 31,
2000................... $ -- $ 3,496 $ 1,045 $ -- $ 4,541
======= ======= ======= ======= =======
8. SEGMENT INFORMATION
Beginning January 1, 2000, the Company adopted a managerial reporting
structure with five operating divisions which represent five reportable
segments: Energy & Water Consulting, Financial & Claims Consulting, Economic &
Policy Consulting, Strategic Consulting and IT Solutions. The latter three
operating segments have been discontinued and disposed of as of December 31,
2000. (See Note 6, "Discontinued Operations.") Accordingly, operating results
from continuing operations for the years presented have been restated to
reflect the Financial & Claims Consulting and Energy & Water Consulting
reportable segments.
F-15
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Financial & Claims Consulting provides information management, technology
services, damages analysis, business and property valuation, regulatory
compliance, outsourcing, claims management, and litigation and bankruptcy
support services to a variety of financial and insurance institutions, law
firms and governmental agencies. Energy & Water Consulting provides management
consulting, merger and acquisition consulting, regulatory compliance, and
generation asset divestiture, energy market assessment, strategic resource
allocation, and distribution management services to electric and gas utility
companies.
The Company currently evaluates segment performance and allocates resources
based upon revenues and operating results. The basis of measurement of segment
operating results is consistent between the periods. All intercompany
transactions between segments have been eliminated. Information on the
Company's continuing operations for the years ended December 31, 2000, 1999
and 1998 have been summarized as follows (in thousands):
2000 1999 1998
-------- -------- --------
Revenues:
Financial & Claims Consulting............ $151,282 $124,785 $112,058
Energy & Water Consulting................ 93,347 94,706 90,524
-------- -------- --------
Combined segment revenues.............. $244,629 $219,491 $202,582
======== ======== ========
Operating profit:
Financial & Claims Consulting............ $ 19,524 $ 10,658 $ 12,774
Energy & Water Consulting................ 11,457 10,600 20,716
-------- -------- --------
Combined segment operating profit...... $ 30,981 $ 21,258 $ 33,490
-------- -------- --------
Operating Profit and Statement of
Operations reconciliation:
Unallocated:
Corporate general and administrative
expenses previously allocable to
discontinued operations................. $ 2,537 $ 5,243 $ --
Other non recurring general and
administrative expenses................. 3,289 6,739 --
Acquisition related compensation expense. 5,889 1,042 --
Value sharing retention program cash
compensation expense.................... 6,357 -- --
Amortization expense..................... 4,573 900 --
Merger-related and restructuring costs
(credits)............................... 10,229 (881) 7,370
Litigation and settlement provisions..... 16,500 2,335 --
Stock option compensation expense........ 492 3,850 --
Other expense (income)................... 1,666 2,653 (2,053)
-------- -------- --------
Sub-total.............................. 51,532 21,881 5,317
-------- -------- --------
Income (loss) from continuing operations
before income tax expense................. $(20,551) $ (623) $ 28,173
======== ======== ========
Certain general and administrative expenses, which relate to general
corporate costs, were allocated to operating divisions generally on the basis
of consulting fee revenue. The Company incurred $3.3 million of non-recurring
legal and infrastructure-related computer costs and personnel related costs in
the year ended December 31, 2000, which were not allocated to any operating
divisions.
F-16
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
For the year ended December 31, 1999, the Company incurred $6.7 millin of
non-recurring legal, accounting and depreciation costs. The depreciation
charge was to the write-down of the recorded asset values of certain computer
equipment, software and the Company's corporate headquarters. (See Note 14,
"Property and Equipment.")
The following unaudited pro forma 1999 financial information presents the
combined 1999 revenues and operating profits for each segment as if the 1999
Acquisitions included in continuing operations had occurred as of January 1,
1999. Accordingly, the Financial & Claims Consulting segment includes
Barrington and PENTA. The pro forma 1999 financial information includes
adjustments for the amortization of goodwill and other intangibles,
compensation expense accruals of contingent payments related to acquisition
agreements, a reduction in interest income, and the related income tax
effects.
Revenues:
Financial & Claims Consulting................................. $146,048
Energy & Water Consulting..................................... 94,706
--------
Combined pro forma revenues................................... $240,754
========
Operating Profit:
Financial & Claims Consulting................................. $ 11,888
Energy & Water Consulting..................................... 10,600
--------
Combined pro forma segment operating profit................... $ 22,488
========
Pro forma 1999 Operating Profit and Statement of Operations reconciliation:
Unallocated:
Corporate general and administrative expenses previously
allocable to discontinued operations......................... $ 5,243
Other non recurring general and administrative expenses....... 6,739
Acquisition related compensation expense...................... 5,500
Amortization expense.......................................... 4,520
Restructuring credit.......................................... (881)
Litigation and settlement provisions.......................... 2,335
Stock option compensation expense............................. 3,850
Other expense................................................. 4,173
-------
Sub-total................................................... 31,479
-------
Pro forma loss from continuing operations before income tax
expense........................................................ $(8,991)
=======
9. LONG-TERM INCENTIVE PLAN AND THE 2000 VALUE SHARING RETENTION PLAN
On June 30, 1996, the Company adopted a Long-Term Incentive Plan that
provides for common stock, common stock-based, and other performance
incentives to employees, consultants, directors, advisors, and independent
contractors of the Company. The Long-Term Incentive Plan was approved by a
vote of the Company's stockholders in July 1999.
In general, options issued under the Long Term Incentive Plan were issued
at the fair market value at the dates of grant, have a ten-year term and
become vested and thus exercisable in annual installments over a four year
period following the date of grant. However, the plan permits the Compensation
Committee, or the chief executive officer as its delegate, to vary such terms
and conditions, including granting nonqualified options at
F-17
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
prices below fair market value at the date of grant. The Company has
determined, based in part on the absence of contemporaneous documentation,
that 0.3 million nonqualified options issued to a total of sixteen individuals
were issued at prices below fair market value. Accordingly, the Company has
recorded an expense of $3.5 million and $0.5 million in 1999 and 2000,
respectively, for stock option compensation expense attributable to such
options. The amount charged to expense represents the aggregate dollar amount
by which the grant prices of the options differ from the market prices as of
the dates for which the Company has independent evidence to support the
issuance of the options. The amount charged to expense has been amortized over
the relevant vesting periods.
In July 2000, the Company completed an employee stock option exchange that
was been offered to all current employees, other than executive management,
for employee retention purposes. Employees tendered 6.4 million options, with
an average exercise price of approximately $28 per share. These employees were
granted 2.7 million options in exchange for the tendered options. The number
of exchanged options granted each employee was based on, among other factors,
a formula that considered the exercise prices of the tendered options. The new
options have an exercise price of $5.9375, which was $1.00 above the market
price as of the tender date. The new options will vest 10% each quarter,
beginning March 01, 2001.
In August 2000, the Company adopted a comprehensive monetary and equity
incentive program (the Value Sharing Retention Program -- "Retention Program")
to retain certain senior level employees. This feature covers approximately
30% of the employee population. The Company obtained new non-compete covenants
and extensions of current non-compete covenants for the majority of the
participants under this incentive value sharing retention program. The program
includes approximately $20.0 million in cash, 1.9 million restricted shares,
and 4.8 million options at an exercise price of $3.9375, which was equal to
the market price as of September 1, 2000. The cash and equity incentives are
designed to vest in stages over a 4 year period. The cash incentives vest over
a 12-month period commencing on September 1, 2000. The retention program has
scheduled cash payments of four equal installments beginning December 1, 2000
and, continuing every three months to September 1, 2001. The Company paid the
first installment totaling $4.8 million on December 1, 2000. The restricted
shares vest 33% per year beginning September 2001, and the option grants vest
10% on the date of grant and 5% per quarter thereafter through March 2004. The
Company issued 1.9 million restricted shares to retention program participants
during the first quarter 2001.
As of December 31, 2000, the Company had 7.7 million options outstanding at
a weighted average exercise price of $6.39 per share. As of December 31, 2000,
1.7 million options were exercisable at a weighted average exercise price of
$8.63 per share. As of December 31, 2000, 2.1 million options are subject to
variable accounting.
The following table summarizes stock option activity for the years ended
December 31, 2000, 1999 and 1998:
2000 1999 1998
----------------- ---------------- ----------------
Number Weighted Number Weighted Number Weighted
of average of average of average
shares exercise shares exercise shares exercise
(000's) price (000's) price (000's) price
------- -------- ------ -------- ------ --------
Options outstanding at
beginning of year...... 8,213 $29.15 5,510 $24.19 2,623 $16.53
Granted................. 10,141 6.59 4,481 32.68 3,849 28.47
Exercised............... (18) 3.01 (696) 17.98 (361) 13.07
Forfeited............... (10,674) 23.92 (1,082) 25.24 (601) 24.90
------- ------ ------ ------ ----- ------
Options outstanding at
end of year............ 7,662 $ 6.39 8,213 $29.15 5,510 $24.19
======= ====== =====
Options exercisable at
year end............... 1,702 $ 8.63 676 $19.31 138 $14.41
======= ====== =====
F-18
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The following table summarizes information regarding stock options
outstanding at December 31, 2000 and 1999:
2000 1999
---------------------------- ----------------------------
Weighted Remaining Weighted Remaining
Number of average exercise Number of average exercise
shares exercise period shares exercise period
Range of exercise price (000's) price (years) (000's) price (years)
----------------------- --------- -------- --------- --------- -------- ---------
$ 0.00 to $ 4.99........ 4,966 $ 3.92 9.6
$ 5.00 to $ 9.99........ 1,816 6.06 8.2
$10.00 to $15.99........ 340 12.36 2.1
----- ------ --- ----- ------ ---
$ 0.00 to $15.99
subtotal............... 7,122 $ 4.87 8.9 790 $12.17 4.6
----- ------ --- ----- ------ ---
$16.00 to $25.99........ 176 21.77 2.7 737 21.23 6.0
$26.00 to $35.99........ 354 28.49 6.6 5,656 29.03 8.8
$36.00 to $45.99........ 9 42.96 8.4 307 43.71 9.5
$46.00 to $55.99........ 1 46.38 8.7 723 50.53 9.1
----- ------ --- ----- ------ ---
$0.00 to $55.99 Total... 7,662 $ 6.39 8.7 8,213 $29.15 8.2
===== ====== === ===== ====== ===
The following table summarizes information regarding stock options
exercisable at December 31, 2000:
Weighted
Number of average
shares exercise
Range of exercise price (000's) price
----------------------- --------- --------
$ 0.00 to $ 4.99...................................... 732 $ 3.92
$ 5.00 to $ 9.99...................................... 438 5.72
$10.00 to $15.99...................................... 318 12.43
$16.00 to $25.99...................................... 98 20.09
$26.00 to $35.99...................................... 116 29.35
----- ------
$0.00 to $35.99 Total................................. 1,702 $ 8.63
===== ======
F-19
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related to interpretations in accounting for its plan.
Accordingly, no compensation cost has been recognized for those option grants
where the exercise price is equal to the fair market value at the date of
grant. The Company would have incurred compensation expense 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." Under this methodology, the
Company's compensation expense would have been increased by $12.1 million,
$18.3 million and $4.6 million, net of related income taxes, for the years
ended December 31, 2000, 1999 and 1998, respectively. As a result, the
Company's pro forma net income (loss) available to common stockholders and net
income (loss) per basic and diluted shares would have been reduced to the pro
forma amounts indicated below (shown in thousands, except per share amounts):
2000 1999 1998
--------- -------- -------
Earnings, as reported:
Net income (loss)......................... $(179,553) $(14,622) $15,581
Net income (loss) per basic share......... $ (4.39) $ (0.35) $ 0.43
Net income (loss) per diluted share....... $ (4.39) $ (0.35) $ 0.41
Earnings, fair value method:
Net income (loss), with compensation
expense from fair value options.......... $(191,642) $(32,941) $10,990
Fair value method net income (loss) per
basic share.............................. $ (4.69) $ (0.79) $ 0.30
Fair value method net income (loss) per
diluted share............................ $ (4.69) $ (0.79) $ 0.29
The weighted average fair value of options granted in 2000, 1999 and 1998
was $2.77, $12.04, and $5.68, 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 2000, 1999 and 1998:
2000 1999 1998
---- ---- ----
Expected volatility..................................... 92% 75% 45%
Risk free interest rate................................. 5.2% 5.5% 5.0%
Dividend yield.......................................... 0% 0% 0%
Contractual or expected lives (years)................... 6.8 8.5 2.8
10. EMPLOYEE BENEFIT PLANS
The Company maintained profit sharing and savings plans for several
operating subsidiaries through December 31, 2000. Eligible employees may
contribute a portion of their compensation to their respective operating
subsidiary's plan. Effective February 2000, the Company amended the profit
sharing and savings plans of all operating subsidiaries to provide employer
matching contributions for all participants. The Company matches in an amount
equal to 100% of the employees' current contributions, up to a maximum of 3%
of the employees' total eligible compensation and limited to $5,100 per
participant. 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 were $2.3 million, $1.9 million and $1.0 million in the years
ended December 31, 2000, 1999 and 1998, respectively.
F-20
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
11. SHORT-TERM AND LONG-TERM DEBT
The Company maintains a line of credit agreement, unsecured, in the amount
of $35.0 million. Under the agreement, the Company may borrow a maximum amount
of up to 80% of eligible accounts receivable. The agreement contains certain
covenants, the most restrictive of which require the Company to maintain a
minimum level of earnings before interest, taxes, depreciation and
amortization. The Company did not have a balance outstanding under the
agreement at December 31, 2000. At December 31, 1999, the Company had $10.0
million outstanding thereunder. The Company had no long-term debt outstanding
as of December 31, 2000. In February 2001, the Company amended the line of
credit agreement with no substantive changes in the terms and conditions,
except that the amended agreement expires on May 31, 2003.
At December 31, 2000, the Company had letters of credit of $2.0 million
outstanding. The letters of credit expire at various dates through July 2010.
12. LEASE COMMITMENTS
The Company leases its office facilities and certain equipment under
operating lease arrangements that expire at various dates through 2012. The
Company leases office facilities under noncancelable operating leases that
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. In addition, the Company leases equipment under noncancelable
operating leases.
Future minimum annual lease payments of continuing operations, for the
years subsequent to 2000 and in the aggregate are as follows (shown in
thousands):
Year ending December 31, Amount
------------------------ -------
2001............................................................ $ 8,932
2002............................................................ 8,452
2003............................................................ 6,316
2004............................................................ 5,194
2005............................................................ 5,173
Thereafter...................................................... 22,840
-------
$56,907
=======
In addition, the Company has other lease commitments for the years
subsequent to 2000 and in the aggregate totaling $15.3 million. As part of the
restructuring plan, the Company decided to terminate such leases and has
reserved for the associated costs within the facilities closings reserve. (See
Note 7, "Merger-related and Restructuring Costs (Credits).")
Rent expense for operating leases entered into by the Company and charged
to continuing operations amounted to $11.3 million for 2000, $8.5 million for
1999 and $8.3 million for 1998.
F-21
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
13. INCOME TAX EXPENSE (BENEFIT)
Income tax expense (benefit) consists of the following (shown in
thousands):
For the year ended
December 31,
-------------------------
2000 1999 1998
------- ------- -------
Federal:
Current...................................... $(1,901) $ 5,373 $13,556
Deferred..................................... (4,075) (5,681) 2,546
------- ------- -------
Total...................................... (5,976) (308) 16,102
------- ------- -------
State:
Current...................................... 82 2,872 3,228
Deferred..................................... (944) (1,316) 590
------- ------- -------
Total...................................... (862) 1,556 3,818
------- ------- -------
Foreign........................................ 644 286 --
------- ------- -------
Total federal, state and foreign income tax
expense (benefit)......................... $(6,194) $ 1,534 $19,920
======= ======= =======
Income tax expense (benefit) differs from the amounts estimated by applying
the statutory income tax rates to income (loss) from continuing operations
before income taxes as follows:
For the year ended
December 31,
-----------------------
2000 1999 1998
------ ------- ------
Federal income tax expense at statutory rate..... 35.0% 35.0% 35.0%
State income tax at statutory rate, net of
federal tax benefits............................ 4.2 (17.9) 8.0
Foreign income taxes............................. 0.2 0.2 --
Effect of nontaxable interest income and
dividends....................................... 0.4 90.1 (1.7)
Effect of non-deductible merger-related costs.... -- (34.7) 4.2
Effect of non-deductible amortization expense.... (4.7) (29.8) --
Effect of non-deductible stock compensation
expense......................................... (0.8) (216.5) --
Effect of conversion from cash to accrual method
of accounting for acquired company.............. -- -- 22.4
Effect of non-deductible meals and entertainment
expenses........................................ (2.1) (72.0) 0.1
Effect of other non-deductible expenses.......... (2.1) (0.9) 2.7
----- ------- -----
30.1% (246.5)% 70.7%
===== ======= =====
The tax benefits associated with nonqualified stock options and
disqualifying dispositions of incentive stock options reduced taxes payable by
$0.02 million, $4.9 million and $3.3 million in 2000, 1999, and 1998,
respectively. Such benefits were recorded as an increase to additional paid-in
capital in each year.
F-22
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
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 (shown in thousands):
December 31,
--------------
2000 1999
------ ------
Deferred tax assets attributable to:
State income taxes..................................... $ (480) $ (121)
Allowance for uncollectible accounts receivables....... 2,022 4,379
Restructuring costs ................................... 1,707 --
Former officers' notes................................. 1,393 2,239
Insurance related costs................................ 440 865
Depreciation expense .................................. 3,718 248
Compensation expense .................................. 691 443
Other.................................................. 42 (489)
------ ------
Total deferred tax assets................................ 9,533 7,564
------ ------
Deferred tax liabilities attributable to:
Adjustment resulting from changes in the method of
accounting used for tax purposes...................... 2,176 6,435
Other.................................................. 298 (531)
------ ------
Deferred tax liabilities................................. 2,474 5,904
------ ------
Net deferred tax assets ................................. $7,059 $1,660
====== ======
The Company has not recorded a valuation allowance as it believes it is
more likely than not that the net deferred tax asset is recoverable.
14. SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION
Accounts Receivable
The components of accounts receivable as of December 31 were as follows
(shown in thousands):
2000 1999
-------- --------
Billed amounts ....................................... $ 44,037 $ 86,849
Engagements in process................................ 20,496 45,581
Allowance for uncollectible accounts.................. (9,521) (16,330)
-------- --------
$ 55,012 $116,100
======== ========
As of December 31, 1999, net accounts receivable for continuing operations
was $68.3 million.
Engagements in process represent balances accrued by the Company for
services that have been performed and earned but have not been billed to the
customer. Billings are generally done on a monthly basis for the prior month's
services.
F-23
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Property and Equipment
Property and equipment as of December 31 consisted of (shown in thousands):
2000 1999
-------- --------
Land and buildings.................................... $ 3,421 $ 3,421
Furniture, fixtures and equipment..................... 28,321 40,444
Software.............................................. 4,361 10,241
Leasehold improvements................................ 7,575 5,714
-------- --------
Property and equipment, at cost....................... 43,678 59,820
Less: accumulated depreciation and amortization....... (24,350) (26,057)
-------- --------
Property and equipment, net......................... $ 19,328 $ 33,763
======== ========
In December 1999, the Company made a decision to dispose of its corporate
headquarters land and building. At such time, the Company re-evaluated the
carrying amount of the asset and estimated the net realizable value through an
independent appraisal. The Company has recorded additional depreciation
expense of $1.1 million to reflect the impairment in value.
Based upon a comprehensive review of the Company's long-lived assets, the
Company recorded a non-cash charge to depreciation expense of $3.0 million in
1999. This charge reflects the write-down of a portion of the recorded asset
values of certain computer equipment and software. No additional assets were
deemed to be impaired.
Goodwill and Intangible Assets
The excess of the cost of the 1999 Acquisitions over the net assets
acquired, including goodwill of approximately $226.4 million, was recorded as
intangible assets in 1999. The allocation of the excess of the cost over the
net assets acquired to identifiable intangible assets and goodwill was based
upon independent appraisals, as were the related estimated useful lives.
Related to the disposition of certain business units, see Note 6 "Discontinued
Operations," the Company charged $162.3 million to discontinued operations in
the second quarter ended June 30, 2000. As of December 31, 2000, the Company
recorded goodwill and contingent earnout liabilities of $2.0 million under the
provisions of the PENTA purchase agreement. As of December 31, goodwill and
other intangible assets (shown in thousands) consisted of :
2000 1999
------- --------
Goodwill............................................... $22,831 $ 96,906
Less--accumulated amortization......................... (4,767) (10,401)
------- --------
Goodwill, net........................................ 18,064 86,505
Intangible assets:
Customer lists......................................... 4,470 49,565
Employee workforce..................................... 2,355 33,455
Non-compete agreements................................. 4,575 25,570
Other.................................................. -- 20,900
------- --------
Total intangible assets................................ 11,400 129,490
Less: accumulated amortization......................... (1,941) (13,899)
------- --------
Intangible assets, net .............................. 9,459 115,591
------- --------
Goodwill and intangible assets, net.................. $27,523 $202,096
======= ========
The Company periodically examines the carrying value of its goodwill and
other intangible assets to determine whether there is any impairment. If
indicators of impairment were present, and future cash flows were
F-24
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
not expected to be sufficient to recover the assets' carrying amounts, an
impairment loss would be charged to expense in the period identified. As of
December 31, 2000, no event has been identified that would indicate an
impairment in the carrying value of the goodwill and other intangible assets.
Accounts Payable and Accrued Liabilities
The components of accounts payable and accrued liabilities (shown in
thousands) as of December 31 were as follows:
2000 1999
------- -------
Accounts payable ........................................ $ 6,223 $ 7,052
Accrued liabilities ..................................... 3,831 10,297
Accrued restructuring costs ............................. 4,541 3,360
Accrued disposition costs ............................... 2,873 --
------- -------
$17,468 $20,709
======= =======
Accrued Compensation and Project Costs
The components of accrued compensation and project costs (shown in
thousands) as of December 31 were as follows:
2000 1999
------- -------
Accrued payroll-related costs............................ $ 5,645 $ 7,966
Accrued benefit-related costs............................ 1,368 2,585
Accrued incentive-related costs.......................... 10,293 32,201
Deferred acquisition compensation........................ 1,627 705
Accrued contractor fees and related costs................ -- 14,968
------- -------
$18,933 $58,425
======= =======
Other Current Liabilities
The components of other current liabilities (shown in thousands) as of
December 31 were as follows:
2000 1999
------- -------
Non-contingent acquisition liabilities................... $ 3,875 $ 3,875
Contingent earnout liabilities........................... 1,980 --
Deferred rent............................................ 1,064 591
Capital lease obligations................................ 633 1,052
Deferred revenue......................................... 859 11,611
Other liabilities........................................ 2,945 2,544
------- -------
$11,356 $19,673
======= =======
15. SUPPLEMENTAL CASH FLOW INFORMATION
Total interest paid during the years ended December 31, 2000, 1999 and 1998
was $0.7 million, $0.4 million and $0.7 million, respectively. Total income
taxes paid during the years ended December 31, 2000, 1999 and 1998 were $6.2
million, $27.6 million and $17.7 million, respectively.
In October 2000, the Company exchanged SDG stock for 1.6 million shares of
the Company's stock, valued at $6.2 million, in conjunction with the sale of
SDG. (See Note 6, "Discontinued Operations.")
F-25
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
As of December 31, 2000, the Company recorded goodwill and contingent
earnout liabilities of $2.0 million for certain revenue and gross margin
targets met under the provisions of the PENTA purchase agreement.
During the first quarter of 1999, the Company issued 4.2 million shares of
common stock (valued at the time at approximately $181.0 million) for
substantially all of the outstanding common stock of four companies acquired
in transactions accounted for by the purchase method of accounting for
business combinations. In addition to the $42.1 million of cash used to
acquire certain businesses during 1999, the Company entered into commitments
for deferred cash payments of $7.8 million, payable in two equal annual
installments. (See also Note 5, "Business Combinations.")
In April 1999, certain of the Company's then officers borrowed $3.5 million
from the Company to exercise certain then vested options. In November 1999,
the Company received 605,684 shares of the Company's common stock, with a then
market value of $12.9 million, in lieu of cash as payment for the principal
amount of certain loans, plus accrued interest. (See also Note 16, "Related
Party Transactions.")
16. RELATED PARTY TRANSACTIONS
In 1999 five non-employees related by blood or marriage to Mr. Maher
received stock option grants from Mr. Maher. Mr. Maher informed the Company
that each of these persons provided services to the Company from time to time
and received no other compensation for those services. In addition, one other
individual not employed by the Company, but who was an employee of an
unrelated company owned or controlled by Mr. Maher, received stock option
grants. Mr. Maher has informed the Company that this individual provided
certain services to the Company from time to time. These persons are among
sixteen as to whom the Company has determined that their options were issued
at prices below fair market value. (See also Note 9.)
In April 1999, Mr. Maher, the Company's then Chairman and Chief Executive
Officer, borrowed $2.7 million from the Company so that he could exercise his
then vested options. Mr. Maher exercised all 112,500 of his then vested
options at an exercise price of $24.00 per share. In August 1999, Mr. Maher
borrowed an additional $10 million from the Company. The applicable interest
rate for this loan was 5.75%, payable annually. In November 1999, the Company
received from Mr. Maher 605,684 shares of the Company's common stock, with a
then market value of $12.9 million, as payment for the principal amount of the
loans plus accrued interest.
In November 1999, the Company entered into an agreement with Mr. Maher,
pursuant to which, among other things, Mr Maher agreed to provide certain
consulting services to the Company over a two year period, including providing
information about past transactions or other matters as to which he may be
familiar, and the Company agreed to pay Mr. Maher twenty-four monthly payments
of $25,000. The Company ceased making said payments after paying one
installment in December 1999.
As previously disclosed, in April 1999 Mr. Cain and Mr. Demirjian,
respectively the Company's Chief Administrative Officer and the Company's
General Counsel at that time, each borrowed $425,063 from the Company to
exercise 18,750 options at an exercise price of $22.67 per share. The notes
which evidence these borrowings were full recourse, were due on or before the
third anniversary date and bore interest at a rate equal to 5.75%, payable
annually. The notes were accompanied by pledge agreements which pledged the
exercised option shares as collateral security for repayment of the notes. In
late August 1999, Mr. Cain, Mr. Demirjian, and Mr. Kingsbury, the Company's
Chief Financial Officer at that time, borrowed $2.625 million, $2.625 million
and $1.75 million, respectively, from the Company, related to their purchases
of 75,000, 75,000 and 50,000 shares, respectively, of the Company's common
stock from third parties at $35 per share. The notes which evidenced these
borrowings were full recourse, were due on or before the third anniversary
date, and bore interest at a rate of 5.75%, payable annually. These notes were
accompanied by pledge agreements which pledged the
F-26
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
shares as collateral security for repayment of the notes. In early 2000,
Messrs. Cain, Demirjian and Kingsbury each challenged the enforceability or
declined to confirm their intention to comply with the terms of the notes, and
subsequently each defaulted on interest payments when due. In December 2000
the Company declared Messrs. Cain, Demirjian and Kingsbury to be in default
with respect to each of their notes and subsequently pursuant to the pledge
agreements the Company took back into treasury the total 237,500 shares
pledged as collateral at the then-current market value. The Company has
cancelled all of Mr. Kingsbury's remaining indebtedness, pursuant to a
settlement agreement. The Company has also cancelled $2.0 million of Mr.
Cain's indebtedness.
Gov. Thompson, one of the Company's directors, is Chairman of the law firm
of Winston & Strawn. Winston & Strawn has provided in the past and may provide
us in the future with legal representation. Total payments related to services
rendered were $1.1 million and $0.6 million in 2000 and 1999, respectively.
17. LITIGATION
As previously disclosed, in August 2000 the Company agreed with the
appointed lead plaintiff, the Policemen and Firemen Retirement System of the
City of Detroit, to settle for $23.0 million the consolidated securities law
class actions then pending in the Northern District of Illinois (the
"Consolidated Class Actions"), subject to court approval and certain other
conditions. The settlement calls for the dismissal, with prejudice, of the
Consolidated Class Actions and a release of the Company and the Company's
former and current officers and directors, among others. Under the final
settlement agreement, the Company has contributed $16.5 million into escrow,
pending such approval, and one of its insurers has contributed $6.5 million
under an agreement reached with the Company which is also subject to certain
conditions. The Company is seeking to recover from said insurer an additional
$0.5 million as reimbursement for certain attorneys' fees.
In November 2000, the Court granted its preliminary approval for the
proposed settlement. Pursuant to this order, notice was provided to the Class
and the court established certain deadlines in February 2001 for Class members
to opt-out of or to object to the proposed settlement. These deadlines have
now passed. Nine persons have timely opted out of the proposed settlement.
Four objections have been filed. The Court has scheduled a hearing on March
22, 2001 with respect to the fairness and final approval of the proposed
settlement. The Company will vigorously support the terms of the proposed
settlement of the Consolidated Class Actions and will vigorously oppose the
objections.
In addition, from time to time, the Company is party to various other
lawsuits and claims in the ordinary course of business. While the outcome of
these lawsuits or claims cannot be predicted with certainty, management does
not believe that any of those lawsuits or claims will have a material adverse
affect on the Company.
F-27
REPORT OF INDEPENDENT AUDITORS'
The Board of Directors and Stockholders
Navigant Consulting, Inc.:
Under date of February 19, 2001, we reported on the consolidated balance
sheets of Navigant Consulting, Inc. and subsidiaries as of December 31, 2000
and 1999, 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, 2000 as contained in the annual report on Form 10-K for the year
2000. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule of valuation and qualifying accounts. The consolidated
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statement schedule based on our audits.
In our opinion, the consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Chicago, Illinois
February 19, 2001
S-1
SCHEDULE II
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2000, 1999 and 1998
(amounts in thousands)
Balance at Charged Balance
beginning to at end
Description of year expenses Deductions(1) of year
- ----------- ---------- -------- ------------- -------
Year ended December 31, 2000
Allowance for doubtful accounts..... $16,330 $ 4,900 $(11,709) $ 9,521
Year ended December 31, 1999
Allowance for doubtful accounts..... $ 8,126 $14,900 $ (6,696) $16,330
Year ended December 31, 1998
Allowance for doubtful accounts..... $ 7,592 $ 2,058 $ (1,524) $ 8,126
- --------
(1) Represent write-offs of bad debts and disposal of allowance related to
divestitures. In 2000, $5.1 million relates to divestitures.
S-2