Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission File No. 0-28830

Navigant Consulting, Inc.

(Exact name of Registrant as specified in its charter)

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)

Securities registered pursuant to Section 12(b) of the Act:

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), 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.  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  YES  x         NO  ¨

As of March 9, 2004, 45.4 million shares of the Registrant’s common stock, par value $0.001 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 9, 2004, was approximately $915 million. The Registrant’s Proxy Statement for the Annual Meeting of Stockholders, scheduled to be held on April 21, 2004, is incorporated by reference into Part III of this Annual Report on Form 10-K.

Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

FORM 10-K

AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

2

Table of Contents

PART I

Statements included in this report 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. (the “Company” or “NCI”) is a specialized, independent consulting firm providing litigation, financial services, healthcare, energy and operational consulting services to government agencies, legal counsel, and large companies facing the challenges of uncertainty, risk, distress and significant change. The Company focuses on industries undergoing substantial regulatory or structural change and on the issues driving these transformations.

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 common stock is traded on the New York Stock Exchange under the symbol “NCI”.

“Navigant” is a service mark of Navigant International, Inc. NCI is not affiliated, associated, or in any way connected with Navigant International, Inc. and NCI’s use of “Navigant” is made under license from Navigant International, Inc.

(a) General Development of Business

The Company had its initial public offering in 1996 and three subsequent public offerings, one in 1997 and two in 1998. From 1996 to 1999, the Company acquired twenty-four consulting firms. During 1999 and 2000, the Company replaced its management team and the new team, currently in office, subsequently implemented a major realignment of the Company, including three large strategic divestitures and closure or sale of a number of other businesses. This realignment eliminated three former business segments: Economic & Policy Consulting, Strategic Consulting and IT Solutions. During 2001 to 2003, the Company acquired nine consulting firms that were complementary to its current businesses. The most significant acquisition during this period was Hunter & Associates Management Services, Inc. (“Hunter”), which occurred in 2002. The Company is required to furnish pro forma financial information relating to the Hunter acquisition, which has been included in the notes to the Company’s consolidated financial statements.

The Company’s business structure consists of two business segments: Financial & Claims Consulting and Energy Consulting. Each business segment 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 enable it to compete effectively in the business and professional services consulting marketplace.

3

Table of Contents

(b) Financial Information about Business Segments

Segment operating revenues and segment operating profits (together with a reconciliation to operating income) attributable to each segment for each of the last three years are set forth in Note 4 in the notes to the Company’s consolidated financial statements.

The relative percentages of operating revenue attributable to each segment were as follows:

The relative percentages of operating profits attributable to each segment were as follows:

Segment operating profits as a percentage of segment revenue were as follows:

The information presented above does not necessarily reflect the results of segment operations that would have occurred had the segments been stand-alone businesses. Certain operating expenses, which relate to general corporate costs, were allocated to operating segments based on consulting fee revenues. Certain operating expenses, which primarily relate to operating segments, have been excluded for comparative purposes from the segment operating profit amounts, and are included in the costs not allocated to segments.

(c) Narrative Description of Business

Overview

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. New engagements are sought and won by the Company’s senior and mid-level consultants. Future performance will continue to depend on the consultants’ ability to win new engagements.

A significant portion of new business arises from prior client engagements. In addition, the Company seeks to leverage the client relationships in one business segment to cross sell existing services provided by the other segment. Clients frequently expand the scope of engagements during delivery to include follow-on, complementary activities. In addition, 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.

The Company derives substantially all of its revenues from fees for professional services. Over the last three years, a substantial majority of the Company’s revenues has been generated under hourly or daily rates billed on a time and expense basis. Clients are typically invoiced on a monthly basis, with revenue recognized as the services are provided. From time to time, the Company earns incremental revenues, in addition to hourly or fixed fee billing, which are contingent on the attainment of certain contractual objectives. Such incremental revenues may cause variations in quarterly revenues and operating results if all other revenues and expenses during the quarters remain the same.

4

Table of Contents

The Company’s most significant expense is cost of services before reimbursable expenses, which generally relates to costs associated with generating revenues, and includes consultant compensation and benefits, sales and marketing expenses, and the direct costs of training and recruiting the consulting staff. Consultant compensation consists of salaries and incentive compensation. The consultants’ total compensation is competitive with industry standards. Incentive compensation is structured to reward based on business performance.

The Company’s most significant overhead expenses include administrative compensation and benefits, and office related expenses. Administrative compensation includes payroll costs for corporate management and administrative personnel, which are used to indirectly support client projects. Office related expenses include primarily office rent for the Company’s 36 offices.

Service Offerings

The Company provides wide and varied service offerings to its broad client base. The Company considers the following to be the Company’s key service offerings: litigation support and investigative accounting services, claims management and analysis, corporate finance services, discovery services, government contracting services, and operations advisory and management process outsourcing.

Industry Sectors

The Company provides services to and focuses on industries undergoing substantial regulatory or structural change. The Company’s service offerings are relevant to most industries and the public sector. However, the Company has significant industry-specific knowledge and a robust client base in the construction, energy, financial services and healthcare industries. Additionally, the Company has a strong client presence in the public sector, including federal, state and local governmental agencies. The Company has a long history of work for defendants, insurers and reinsurers in the asbestos and other product liability fields. Many of the Company’s engagements involve working in conjunction with the legal counsel of our clients.

Human Capital

As of December 31, 2003, the Company had 1,367 employees, including 959 consultants. Revenues are primarily generated from services performed by the Company’s consultants; therefore, 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, accounting and other consulting organizations, and top rated colleges and universities. The Company seeks to retain its consultants by offering competitive packages of base and incentive compensation, equity ownership and benefits.

Independent contractors at times supplement the Company’s consultants on certain engagements. The Company has found that the practice of retaining independent contractors on a per-engagement basis provides flexibility in adjusting professional personnel levels in response to changes in demand for the Company’s professional services.

In addition to the employees and independent contractors discussed above, the Company has acquired and seeks to acquire consulting businesses to both add highly skilled professionals and expand the services offered by the Company. Some of the acquired businesses were direct competitors to the Company, while others had been retained as independent contractors to supplement certain engagements. The Company believes that the strategy of selectively acquiring consulting businesses and consulting capabilities strengthens its platform, market share and overall operating results.

In connection with recruiting activities and business acquisitions, the Company’s policy is to obtain non-solicitation covenants from senior and mid-level consultants. Most of these covenants have restrictions that

5

Table of Contents

extend 12 months beyond the employees’ termination date. The Company employs these contractual agreements to reduce the risk of attrition and to safeguard the Company’s existing clients, staff and projects from departing employees.

To secure new non-solicitation agreements for those consultants hired before 2000 whose non-solicitation agreements would have expired by year-end 2002, the Company successfully executed and implemented, in the fourth quarter of 2002, a predominantly stock-based retention program, the Management Stock Purchase Program (“MSPP”), for key leaders in both of the Company’s business segments, using the Company’s existing Long-Term Incentive Program authorization. (See Note 9 to the consolidated financial statements for additional information about the MSPP.).

The Company continually monitors and adjusts, if needed, the consultants’ total compensation, which includes salaries, annual cash incentive compensation, and other cash and equity incentives from certain Company programs, to ensure both that the consultants’ compensation is competitive within the industry and that the Company has the opportunity to achieve target profitability levels. Material changes to the Company’s compensation structure are done with the requisite approval from the Compensation Committee of the Company’s Board of Directors. The Company’s bill rates to clients are tiered in accordance with the experience and levels of the consulting staff. The Company monitors and adjusts those bill rates according to the supply and demand of the then-current market conditions within the various industry segments served by the Company.

In addition, the Company recently changed its formal compensation program to require certain senior consulting leaders to receive payment of a portion of incentive compensation in restricted stock instead of cash.

Competition

The market for consulting services is intensely competitive, highly fragmented and subject to rapid change. The market includes a large number of participants with a variety of skills and industry expertise, including general management and information technology consulting firms, as well as the 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 independence, experience, reputation, industry focus and broad range of professional services will enable it to compete effectively in the consulting marketplace.

(d) Other Matters

Concentration of Revenues

There were no clients that accounted for more than 5 percent of the Company’s total revenues for the year ended December 31, 2003. One client from the Energy Consulting segment accounted for more than 5 percent of the Company’s total revenues for the years ended December 31, 2002 and 2001. Revenues earned from the Company’s top 20 clients amounted to 36 percent, 39 percent and 42 percent of total revenues for the years ended December 31, 2003, 2002 and 2001, respectively. The mix of the Company’s largest clients may change from year to year.

Business Risks

In addition to other information contained in this Annual Report on Form 10-K and in the documents incorporated by reference herein, the following risk factors should be considered carefully in evaluating the Company and its business. Such factors could have a significant impact on the Company’s business, operating results and financial condition.

The Company relies heavily on its consulting staff and management team. The Company’s inability to retain highly skilled professionals, coupled with departures of a significant number of senior employees, could have a material adverse effect on the Company.

6

Table of Contents

The Company’s common stock price may fall and any investment in the Company may be materially affected. Any long-term decline in the common stock would impair the Company’s ability to use equity-based compensation to attract, retain and motivate key employees.

The Company uses equity-based compensation as a portion of senior and mid-level consultants’ overall compensation packages. Equity-based compensation is used to help align the interests of its employees and stockholders, but complete alignment is difficult to achieve. Compensation and retention related issues represent a continuing challenge for the Company.

Specialized systems and processes have been developed by the Company and provide a competitive advantage in servicing current clients and obtaining new clients. This intellectual capital is the property of the Company and the unauthorized use could have a materially adverse impact on the Company’s business. Additionally, many of our service offerings rely on technology that is subject to rapid change.

The Company’s intellectual capital, in certain service offerings, may be rendered obsolete due to new governmental regulation. A new governmental regulation could allow a competitor a significant advantage before the Company is able to adapt to new updated service demands.

The Company must manage growth from both organically expanding services and the acquisition of complementary consulting firms. This growth and integration of acquisitions may cause strain on our management team and our systems. The strain on management from rapid growth or unsuccessful integration of these businesses could have a material adverse effect on the future profitability of the Company.

The Company’s return of capital may not materialize on certain business acquisitions. The Company also may pay a substantial premium on certain business acquisitions to remain competitive. The financing of these acquisitions through cash, borrowings, or common stock could impair liquidity or cause significant stock dilution.

The Company’s engagements are usually relatively short-term in comparison to its office-related expenses and other infrastructure commitments. The Company’s inability to continually replace a significant portion of current engagements with new engagements would have an adverse effect on the Company’s ability to meet its current and future commitments.

The Company maintains a revolving line of credit agreement to assist in funding short-term and long-term cash requirements from normal operations. This agreement contains certain covenants requiring, among other things, a minimum level of earnings. Poor performance of the Company could cause the Company to be in default of these existing covenants. Additionally, the Company cannot be certain that it will be able to raise capital or obtain debt financing to execute future acquisitions or to meet required working capital needs.

If the financial condition of the Company’s clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances for uncollectability would likely be required.

The professional reputation of the Company and its consultants is critical to the Company’s ability to successfully compete for new client engagements and attract or retain professionals. Any factors that damage our professional reputation could have a material adverse effect on the Company’s business.

The Company is subject to the risk of professional liability. The Company’s consultants engage in complex analyses in which the exercise of professional judgment is critical. If services are not performed to the client’s satisfaction, a client may threaten or bring a lawsuit against the Company, claiming the Company performed negligently or breached its obligation to the client. In certain cases, there is potential that persons other than clients may bring claims against the Company. A claim against the Company could exceed the limits of the Company’s insurance coverage and could damage the Company’s reputation.

7

Table of Contents

Legislative changes affecting our clients, our competitors, or our staff could have an impact on business. An example of this is The Sarbanes-Oxley Act of 2002, which limits the services that public accounting firms are permitted to provide to their audit clients. The Company is not a public accounting firm and therefore is not subject to such restrictions. Changes to The Sarbanes-Oxley Act or rules promulgated thereunder, as well as other legislation could have an impact on the Company’s business.

International Operations

The Company has an international presence with offices in the United Kingdom, Mexico and Canada. In addition, the Company has clients based in the United States of America that have international operations. No country, other than the United States of America, accounted for more than 5 percent of the Company’s total revenues in any of the three years ended December 31, 2003.

Available Information

The Company maintains an Internet website at http://www.navigantconsulting.com, that includes a hypertext link to a website maintained by a third-party, where the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge as soon as reasonably practicable following the time that they are filed with or furnished to the SEC.

Item 2.    Properties.

The Company owns a 16,500 square foot building located in Chicago, Illinois, which is used as the Company’s executive offices. In addition to the executive offices, the Company has 36 operating leases for office facilities in 35 cities, principally in the United States. Additional space may be required as the business expands geographically, but the Company believes it will be able to obtain suitable space as needed. Following are principal offices located in the United States with the indicated cities, alphabetized by state:

Item 3.    Legal Proceedings.

As previously disclosed, in November 2000 the Company was served with a lawsuit filed by two former officers of the Company, Steven J. Denari and Charles A. Demirjian. As amended, the complaint named as defendants the Company, three of its Directors, and its independent accountants, KPMG LLP. The lawsuit seeks compensatory and punitive damages from the defendants based on various legal theories, including defamation. The Company is defending this case vigorously.

As previously disclosed, in October 2001 the Company commenced a civil action to collect the unpaid portion of amounts loaned in 1999 to its former General Counsel, Charles Demirjian. The unpaid amount that the

8

Table of Contents

Company sought to recover, including interest, was approximately $3.5 million. In February 2004, a jury rendered a verdict in Mr. Demirjian’s favor, finding that he is not legally obligated to repay such unpaid amount. The Company is considering whether to move for a new trial or appeal, or both. In 2000, the Company fully reserved the unpaid amount of Mr. Demirjian’s loan and, therefore, the adverse verdict had no impact on the Company’s financial statements.

As previously disclosed, in November 2001 the Company was informed that the SEC had initiated a formal investigation, through the Chicago office of its Division of Enforcement, as to whether there may have been violations of the securities laws at the Company during 1998 and 1999. The Company has cooperated fully with the SEC. The SEC has not informed the Company of the current status of its investigation; however, there have been no developments that the Company is aware of in the last year.

As previously disclosed, in October 2002 the Company filed a complaint against two former employees in the United States District Court for the Northern District of Texas entitled, Navigant Consulting Inc. v. Wilkinson et al. In November 2002 the Company amended its complaint to add as a defendant a third former employee. The complaint, as amended, seeks to protect the Company’s intellectual property rights in certain proprietary software and to enforce certain provisions of its former employees’ confidentiality and non-solicitation agreements. The Company is seeking declaratory and injunctive relief, compensatory and punitive damages and attorneys’ fees on various legal theories, including misappropriation of trade secrets, breach of contract, and breach of fiduciary duties. The defendants have counter-claimed for defamation and for breach of contract based on the Company’s refusal to permit the defendants to exercise certain employee stock options. Both parties have filed motions for summary judgment. The case is currently scheduled for trial in May 2004.

From time to time the Company is party to various other lawsuits and claims in the ordinary course of business. While the outcome of those 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 effect on the Company.

Item 4.    Submission of Matters to a Vote of Security Holders.

Not Applicable.

Executive Officers of the Registrant

The following are the executive officers of the Company as of March 9, 2004:

William M. Goodyear, 55, has served as Chairman of the Board and Chief Executive Officer of the Company since May 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. Mr. Goodyear received his Masters in Business Administration degree, with Honors, from the Amos Tuck School of Business at Dartmouth College, and his Bachelor’s degree in Business Administration, with Honors, from the University of Notre Dame. He holds the Certified Public Accountant designation.

9

Table of Contents

Ben W. Perks, 62, has served as Executive Vice President and Chief Financial Officer since May 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 services experience, including 22 years as an audit and consulting partner, providing financial reporting, accounting, auditing, tax, economic and litigation consulting services to clients. Mr. Perks received his Professional Accounting Program degree from Northwestern University’s J.L. Kellogg Graduate School of Management, his Juris Doctor (law) degree and Masters in Business Administration degree from the University of Cincinnati, and his Bachelor’s degree from Denison University. He is a Certified Public Accountant, licensed in the states of Illinois, California and Arizona, a Certified Fraud Examiner, and a member of the American Institute of Certified Public Accountants and the American Bar Association.

Julie M. Howard, 41, became Vice President and Chief Operating Officer during 2003. Prior to this current role, Ms. Howard was Vice President and Human Capital Officer since July 2000. Since 1986, Ms. Howard has held a variety of consulting and operational positions within the Company and formerly Peterson Consulting, which was acquired by the Company in 1998. Ms. Howard is a graduate of the University of Wisconsin, with a Bachelor of Science degree in Finance. She has also completed several post-graduate courses within the Harvard Business School Executive Education program, focusing in Finance and Management.

Philip P. Steptoe, 52, has served as Vice President, General Counsel and Secretary since February 2000. Previously, Mr. Steptoe was a partner with the national law firm of Sidley & Austin (now Sidley, Austin, Brown & Wood). Prior to joining Sidley in 1988, he was 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. Mr. Steptoe earned his A.B. degree in Physics from Princeton University and his Juris Doctor (law) degree from the University of Virginia.

10

Table of Contents

PART II

Item 5.    Market for Registrant’s Common Stock and Related Stockholder Matters.

Market Information

The shares of common stock of the Company are traded on the New York Stock Exchange under the symbol “NCI.” The following table sets forth, for the periods indicated, the high and low closing sale prices per share.

Holders

As of March 9, 2004, there were approximately 490 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.

11

Table of Contents

Issuance of Unregistered Securities

During the years ended December 31, 2001, 2002 and 2003, the Company has issued the following unregistered securities:

12

Table of Contents

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.

13

Table of Contents

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 specialized, independent consulting firm providing litigation, financial services, healthcare, energy and operational consulting services to government agencies, legal counsel, and large companies facing the challenges of uncertainty, risk, distress, and significant change. The Company focuses on industries undergoing substantial regulatory or structural change and on the issues driving these transformations.

The Company derives substantially all of its revenues from fees for professional services. Over the last three years, a substantial majority of the Company’s revenues has been generated under hourly or daily rates billed on a time and expense basis. Clients are typically invoiced on a monthly basis, with revenue recognized as the services are provided. From time to time, the Company earns incremental revenues, in addition to hourly or fixed fee billings, which are contingent on the attainment of certain contractual objectives. Such incremental revenues may cause variations in quarterly revenues and operating results if all other revenues and expenses during the quarters remain the same.

The Company’s most significant expense is cost of services before reimbursable expenses, which generally relates to costs associated with generating revenues, and includes consultant compensation and benefits, sales and marketing expenses, and the direct costs of training and recruiting the consulting staff. Consultant compensation consists of salaries and incentive compensation. The consultants’ total compensation is competitive with industry standards. Incentive compensation is structured to reward based on business performance.

The Company’s most significant overhead expenses include administrative compensation and benefits, and office related expenses. Administrative compensation includes payroll costs for corporate management and administrative personnel, which are used to indirectly support projects. Office related expenses include primarily office rent for the Company’s 36 offices.

In addition, the Company recently changed its formal compensation program to require certain senior consulting leaders to receive payment of a portion of incentive compensation in restricted stock instead of cash.

Critical Accounting Policies

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect amounts reported therein. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments with respect to the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:

Revenue Recognition Policies

The Company recognizes revenues as the related professional services are provided. In connection with recording revenues, estimates and assumptions are required in determining the expected conversion of the revenues to cash. From time to time, the Company also earns incremental revenues. These incremental revenue amounts are generally contingent on a specific event and the incremental revenues are recognized when the contingencies are resolved.

14

Table of Contents

Determinations of Accounts Receivable Realization

The Company maintains allowances for doubtful accounts for estimated reduction, if any, in amounts to be received, based on the Company’s review and assessment of its clients’ ability to make required payments, and the estimated realization, in cash, by the Company of amounts due from its clients. If the financial condition of a client were to deteriorate resulting in an impairment of the client’s ability to make payments, additional allowances might be required.

Valuation of Net Deferred Tax Assets

The Company has recorded net deferred tax assets as it expects to realize future tax benefits related to the utilization of these assets. Although the Company experienced net losses in recent years prior to 2002, no valuation allowance has been recorded related to these deferred tax assets because management believes that it is more likely than not that future taxable income will be sufficient to realize the future tax benefits. Should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, it would need to establish an allowance which would be recorded as a charge to income in the period in which such determination is made.

Acquisitions and Divestitures

2003 Acquisition:

On December 15, 2003, the Company acquired substantially all of the assets of Front Line Strategic Consulting, Inc. (“Front Line”) for $4.8 million, which included $2.5 million cash at closing and 0.1 million shares of its common stock valued at $1.3 million at closing, and $1.0 million payable in two equal installments on the first and second anniversary of the closing date. The Front Line acquisition consisted of 27 consulting professionals. Front Line was acquired primarily to augment the Company’s healthcare practice. The Front Line acquisition has been 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 since the date of acquisition.

2002 Acquisitions:

On April 5, 2002, the Company acquired portions of Arthur D. Little, Inc.’s assets for $6.1 million cash at closing. The acquisition consisted of two consulting units, with approximately 30 consulting professionals that primarily serve the energy and public sector industries.

On May 24, 2002, the Company acquired substantially all of the assets of Financial Analytics Consulting Group, LLC (“FACG”) for $6.3 million, which consisted of $4.5 million cash at closing and 0.3 million shares of its common stock valued at $1.8 million at closing. In addition to the initial consideration, the purchase agreements for FACG provide for additional payments in cash over the two full calendar years after closing that are contingent on revenues generated and the attainment of certain gross margin thresholds. Any additional payments related to this contingency will be accounted for as goodwill. FACG was formed in conjunction with a management buyout from Arthur Andersen, LLP and consisted of approximately 90 consulting professionals from five different Arthur Andersen practices. FACG was acquired primarily to augment the Company’s litigation support and investigation services offerings.

On June 19, 2002, the Company acquired substantially all of the assets of Keevan Consulting, LLC (“Keevan”) for $7.2 million, which consisted of $4.0 million cash at closing, 0.4 million shares of its common stock valued at $2.7 million at closing, and $0.5 million cash payable in April 2003. In addition to the initial consideration, the purchase agreement for Keevan provides for additional payments in cash and the Company’s common stock over the two and one-half years from closing that are contingent on revenues generated and the attainment of certain gross margin thresholds. Any additional payments related to this contingency will be

15

Table of Contents

accounted for as goodwill. Keevan was formed in conjunction with a management buyout from Arthur Andersen, LLP and consisted of approximately 38 consulting professionals. Keevan was acquired to augment the Company’s government contracts services practice.

On July 15, 2002, the Company acquired substantially all of the assets of Barrington Energy Partners, LLC (“Barrington Energy”) for $11.1 million, which consisted of $4.8 million cash at closing, 0.7 million shares of its common stock valued at $4.8 million at closing, and $1.5 million cash payable on the first anniversary of the closing date. In addition to the initial consideration, the purchase agreement for Barrington Energy provides for additional payments in cash and the Company’s common stock over the two and one-half years from closing that are contingent on the attainment of certain performance thresholds. Any additional payments related to this contingency will be accounted for as goodwill. Barrington Energy consisted of eight senior-level professionals and six other staff who complement the Company’s energy industry sector and primarily provide financial and transaction advisory service offerings. Barrington Energy Partners, LLC is not associated with the Company’s 1999 acquisition of the Barrington Consulting Group, Inc.

Effective September 17, 2002, the Company acquired substantially all of the assets of Hunter & Associates Management Services, Inc. (“Hunter”) for $25.4 million, which consisted of $10.2 million cash at closing, 1.5 million shares of the Company’s common stock valued at $8.2 million at closing, $0.5 million cash payable on April 1, 2003, and $6.5 million in the Company’s common stock payable in two equal installments on the first and second anniversary of the closing. If either seller or buyer elects, up to 67 percent of the $6.5 million deferred payment would be paid in cash and the remainder would be paid in the Company’s common stock. Accordingly, the Company accounted for this $6.5 million deferred payment obligation as 67 percent liabilities and 33 percent deferred stock issuance. In addition to the initial consideration, the purchase agreement for Hunter provides for additional payments in cash and the Company’s common stock over the three years following closing that are contingent on the attainment of certain performance targets. Any additional payments related to this contingency will be accounted for as goodwill. Hunter consisted of 20 senior-level professionals and 40 additional staff that provide a comprehensive range of performance improvement services to hospitals and healthcare systems, including physician practices and provider owner-managed care organizations. Hunter also provides interim executive-level management services as well as consulting services related to hospital restructurings. Hunter was acquired to significantly expand the Company’s service offerings within the healthcare industry.

All of the Company’s 2002 acquisitions have been 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 since the dates of acquisition.

2001 Acquisitions:

On March 1, 2001, the Company acquired substantially all of the assets of Barba-Arkhon International, Inc. (“Barba-Arkhon”) for $8.3 million, which consisted of $5.3 million cash at closing and $3.0 million notes payable, which bore interest at 6 percent, and was paid when due in two equal annual installments. Barba-Arkhon provides project program management and claims analysis services for construction, governmental and institutional projects.

On July 2, 2001, the Company acquired substantially all of the common stock of Chambers Associates, Inc. (“Chambers”) for $2.7 million, which consisted of $2.1 million cash at closing and $0.6 million cash due within 18 months of closing. The purchase agreement for Chambers also provides for additional payments through December 31, 2003 contingent on attainment of certain revenue targets. Chambers was acquired to augment the services with its asbestos claims and mass tort litigation expertise. In addition, Chambers’ energy and environmental legislative expertise are expected to provide cross-selling opportunities to clients in the energy industry.

16

Table of Contents

The 2001 acquisitions have been 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 since the dates of acquisition.

2003 Divestiture:

In September 2003, the Company sold for a nominal sales price its water consulting practice, Bookman–Edmonston, Inc., which was previously part of the Energy Consulting business segment. Bookman–Edmonston accounted for 3 percent or less of the Company’s total revenues for the years ended December 31, 2003, 2002 and 2001. For the years ended December 31, 2003 and 2002, the water consulting practice operated at a loss and the operating results had deteriorating financial performance trends.

Results of Operations

The following table sets forth, for the periods indicated, selected statement of operations data as a percentage of revenues before reimbursements:

Results of Operations—Annual Comparisons for the Years ended December 31, 2003, 2002 and 2001

Revenues before Reimbursements. Most revenues before reimbursements are earned from consultants’ fee revenues that are primarily a function of billable hours, bill rates and consultant headcount. Revenues before reimbursements were $276.1 million and $225.3 million for the years ended December 31, 2003 and 2002, respectively, which represent increases in revenues before reimbursements of 23 percent and 7 percent, respectively, when compared to the preceding years.

Revenues before reimbursements in 2003 increased through an improvement in consultant utilization and pricing mix. Consultant utilization rates were 72 percent for 2003, compared to 66 percent for both 2002 and 2001. The improvement in utilization, in 2003, was a function of an increase in client engagement activities and a reduction of excess consulting capacity. The Company’s improved pricing mix also accounted for a significant

17

Table of Contents

portion of the revenues increase in 2003 compared to 2002 and had limited impact from 2001 to 2002. The Company continued to increase the number of senior level consultants. Given that the Company’s bill rates are tiered in accordance with experience and levels, the higher amount of senior level consultants was a contributing factor in the revenue increase. The increase in revenues from 2001 to 2002 was primarily a function of increased consultant headcount.

In September 2003, the Company sold its water practice, which had declining revenues and other deteriorating financial performance trends. The divestiture partially offset the increase in revenues from the Company’s remaining business for the year ended December 31, 2003.

Cost of Services before Reimbursable Expenses. Cost of services before reimbursable expenses increased $24.0 million, or 18 percent, to $160.1 million for the year ended December 31, 2003, and increased $9.1 million, or 7 percent, to $136.1 million for the year ended December 31, 2002, when compared to the preceding years.

Cost of services before reimbursable expenses increased primarily because of consultant compensation and benefits. The Company’s business model rewards employees with incentive compensation, which is generally derived as a percentage of profitability. The increase in the Company’s profits and the associated incentive compensation to employees is the primary reason for the increase in cost of services before reimbursable expense for 2003 and 2002 when compared to the preceding years. Another factor in the increase in cost of services is the change in the consultant personnel mix. The Company has increased the number of senior level consultants through a combination of recruiting and business acquisitions and, as a result, has incurred higher salary costs per consultant. Increasing amounts of recruiting expenses were an additional factor in the expense increases.

Stock-based Compensation Expense. Stock-based compensation expense includes non-cash compensation expense related to restricted shares, restricted stock units, stock appreciation rights, exchanged stock options and Value Sharing Retention Program (“VSRP”) stock options awarded to the Company’s employees. Stock-based compensation expense is recorded for restricted stock awards on a straight-line basis over their term based on the valuation amount at grant date. In addition, stock-based compensation expense was recorded for certain VSRP stock options, exchanged stock options and stock appreciation rights (“variable accounting awards”) that have been awarded to the Company’s employees and are subject to variable accounting treatment. Compensation expense (or credit) for the variable accounting awards is recorded, on a periodic basis, quarterly, for the increase (or decrease) in the market price of the Company’s common stock above the grant prices.

Stock-based compensation expense was $11.1 million and $3.4 million for the years ended December 31, 2003 and 2002, respectively, which represented an increase of $7.7 million and a decrease of $0.4 million, respectively, when compared to the preceding years. The Company’s closing common stock price was $18.86, $5.90 and $5.50 per share at December 31, 2003, 2002, and 2001, respectively. Accordingly, the Company recorded stock based-compensation expense to reflect changes in the market valuation of stock option awards and stock appreciation rights subject to variable accounting treatment. The expense related to variable accounting awards accounted for $4.1 million of the increase in 2003. The expense related to restricted stock awards granted under the Management Stock Purchase Program (“MSPP”), which was implemented in October 2002, accounted for $2.1 million of the increase in 2003. Also implemented in October 2002 was an exchange of restricted stock awards for stock options subject to variable accounting treatment. The expense related to these restricted stock awards accounted for $1.5 million of the increase in 2003.

In future periods, the Company expects to record approximately $0.3 million of stock-based compensation expense for variable accounting awards for every one dollar change in its common stock price, until the variable accounting awards outstanding at December 31, 2003 have been exercised or cancelled. The number of awards, as of December 31, 2003, subject to variable accounting was 0.3 million and approximately two-thirds of these awards are stock appreciation rights that expire in the second quarter of 2005; the remaining variable awards

18

Table of Contents

were issued before December 31, 1999 and expire 10 years from the original date of issue. The agreements for certain restricted stock awards outstanding at December 31, 2003 contain provisions that call for an acceleration of vesting, if the Company achieves certain levels of financial performance. Accordingly, the Company may be required to accelerate the unamortized compensation expense related to those awards and, therefore, the Company may experience variations in stock-based compensation expense from period to period.

General and Administrative Expenses. General and administrative expenses include facility-related costs, salaries and benefits of management and support personnel, allowances for doubtful accounts receivable, professional administrative services, and all other corporate support costs.

General and administrative expenses increased $2.6 million, or 4 percent, to $63.3 million in the year ended December 31, 2003 and increased $5.3 million, or 10 percent, to $60.7 million in 2002. General and administrative expenses as a percentage of revenues before reimbursements were 23 percent, 27 percent, and 26 percent for the years ended December 31, 2003, 2002 and 2001, respectively. The Company’s objective is to increase revenues in the future while maintaining or reducing general and administrative expenses as a percentage of revenues. The $2.6 million increase in general and administrative expenses for 2003 compared to 2002 was primarily related to the increase in administrative compensation costs. Incentive compensation for the Company’s management and support personnel is based on the Company’s profitability and increased in 2003 compared to 2002. The $5.3 million increase in general and administrative expense for 2002 compared to 2001 was primarily related to facility-related costs and administrative wages. Facility-related costs increased to support headcount increases. Some of the facility-related costs and headcount increases were added through acquisitions of businesses. The Company is reviewing opportunities to consolidate certain offices and may choose not to renew certain leases in the future in order to reduce costs. Another reason for the increase in general and administrative expenses in 2002 compared to 2001 related to other professional service expenses, primarily legal fees and compensation-related consulting services.

Amortization Expense. Amortization expense includes amortization of goodwill and intangible assets, including customer lists, covenants not-to-compete and trade names. In accordance with Statement of Financial Accounting Standards No. 142, which the Company adopted in 2002, goodwill is no longer subject to amortization beginning in 2002, but is subject to annual impairment testing.

Amortization expense decreased $0.5 million, to $1.9 million in the year ended December 31, 2003, from $2.4 million in 2002. Amortization expense decreased $3.3 million from $5.7 million in 2001.

Litigation and Settlements Provisions. Litigation and settlement provisions included amounts accrued, based on then current information, for costs estimated to resolve certain litigation matters. The Company recorded $5.7 million in litigation and settlement provisions in the year ended December 31, 2001. The Company recorded an additional $0.8 million in 2002 and $0.4 million in 2003 to settle the litigation for which the Company had established an accrual in 2001. The provisions in 2002 and 2003 reflect the additional estimated costs in settling the aforementioned matters and does not relate to any new litigation matters. The matters for which the Company had established the provisions, have been resolved and payments were made prior to the year ended December 31, 2003.

VSRP Cash Compensation Expense. VSRP cash compensation expense is the cash compensation component of the Value Sharing Retention Program (“VSRP”). The cash component of the retention program included four installments totaling $18.8 million. The expense was recorded on a straight-line basis starting on September 1, 2000 through September 1, 2001. For the year ended December 31, 2001, VSRP cash compensation expense was $12.4 million. As of December 31, 2001, the Company had no further obligations related to the VSRP cash compensation program.

19

Table of Contents

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 consolidated 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. Results for any 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:

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 various factors, such as 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’s stock price volatility may cause fluctuations in expenses and operating results as the Company measures the valuation of stock-based compensation for options subject to variable accounting treatment from quarter to quarter.

Human Capital Resources

The Company had 959 consultants as of December 31, 2003, a net decrease of 56 consultants during the year. The decrease included approximately 75 employee terminations in the Energy Consulting segment,

20

Table of Contents

principally related to the Company reducing excess consulting capacity in the first quarter of 2003 and the disposition of the water consulting practice in September 2003.

In October 2003, the Company adopted certain ownership guidelines for corporate officers and senior consulting leaders. These guidelines include an employee stock ownership program set as a multiple of base salary. This program sets stock ownership guidelines of four times annual base salary for the Chief Executive Officer, three times annual base salary for other corporate officers, and other amounts for senior consulting leaders. Additionally, the program includes certain initial adoption and ongoing compliance standards to be monitored by the Company. At the same time, the Company instituted a program in which corporate officers and senior consulting leaders will receive a specified portion of their annual incentive compensation in restricted stock in lieu of cash. In such cases, the Company will grant an additional premium amount in restricted stock equal to a percentage of the value of the incentive compensation paid in restricted stock in lieu of cash. This program has a mandatory and voluntary component for incentive compensation earned beginning in 2004 and is voluntary in 2003.

In connection with certain recruiting activities and business acquisitions, the Company’s policy is to obtain non-solicitation covenants from senior and mid-level consultants. Most of these covenants have restrictions that extend twelve months beyond the employees’ termination date. The Company employs these contractual agreements to reduce the risk of attrition and to safeguard the Company’s existing clients, staff and projects from departing employees.

In order to secure new non-solicitation agreements for those consultants hired before 2000 whose non-solicitation agreements would have expired by year-end 2002, the Company successfully executed and implemented, in the fourth quarter of 2002, a predominantly stock-based retention program, the Management Stock Purchase Program (“MSPP”), for key leaders in both of the Company’s business segments, using the Company’s existing Long-Term Incentive Program authorization. (See Note 9 to the consolidated financial statements for additional information about the MSPP.)

The Company continually monitors and adjusts, if needed, the consultants’ total compensation, which includes salaries, annual cash incentive compensation, and other cash and equity incentives from certain Company programs, to ensure both that the consultants’ compensation is competitive within the industry and that the Company has the opportunity to achieve target profitability levels. Material changes to the Company’s compensation structure are done with the requisite approval from the Compensation Committee of the Company’s Board of Directors. The Company’s bill rates to clients are tiered in accordance with the experience and levels of the consulting staff. The Company monitors and adjusts those bill rates according to the supply and demand of the then-current market conditions within the various industry segments served by the Company.

Liquidity and Capital Resources

Summary

The Company had $38.4 million in cash and cash equivalents at December 31, 2003, compared to $8.1 million at December 31, 2002. The Company’s cash equivalents were primarily limited to commercial paper or securities (rated A or better), with maturity dates of 90 days or less.

Working capital, the excess of current assets over current liabilities, was $51.9 million at December 31, 2003 compared to $25.9 million at December 31, 2002.

The Company calculates accounts receivable days sales outstanding (“DSO”) by dividing the accounts receivable balance, net of deferred revenue credits, at the end of the quarter by daily net revenues. Daily net revenues are calculated by taking quarterly net revenues divided by 90 days, approximately equal to the number of days in a quarter. Calculated as such, DSO was 72 days at December 31, 2003 compared to 77 days at

21

Table of Contents

December 31, 2002. Revenues for the fourth quarter 2003 increased by 16 percent compared with 2002 fourth quarter revenues, while accounts receivable, net of deferred revenue credits, increased 8 percent to $64.5 million at December 31, 2003, from $59.8 million at December 31, 2002.

The Company has a limited number of engagements that are billed and collected in advance of services. The collection of these billings, and management’s continued focus on collection efforts and on more timely billings, was a factor in reducing the DSO at the 2003 year-end.

Cash Flow

For the year ended December 31, 2003, net cash provided by operating activities was $57.0 million, compared to $8.9 million and $11.5 million for the years ended December 31, 2002 and 2001, respectively. For the year ended December 31, 2003, the Company’s net income was $18.7 million, which included $9.4 million of depreciation and amortization expense, and $11.1 million of non-cash stock-based compensation expense. Several factors significantly affected the Company’s net operating cash flows during the year ended December 31, 2003. First, during 2003, the Company recorded accruals for employee incentive compensation, which are based on profitability for the period and was paid in the first quarter 2004 with a combination of cash and shares of the Company’s common stock. The timing of incentive compensation payments was the primary factor which caused the Company’s accrued compensation-related costs liability to increase by $21.0 million in 2003. Second, the Company realized tax benefits of $10.3 million related to the restricted stock and non-qualified stock options exercised for the difference between the Company’s then-current market price and the strike price of the equity awards when those equity awards were exercised. Third, the Company’s cash inflow was offset by a $12.1 million increase in accounts receivable resulting from increased revenue generation.

Net cash used by investing activities for the year ended December 31, 2003 was $22.0 million. The Company paid $2.8 million in cash for businesses acquired during the year ended December 31, 2003 and paid $10.3 million related to businesses acquired prior to 2003. In addition, the Company used $9.3 million for capital spending related to facilities furnishing and leasehold improvements to certain offices. The leases of several offices expired during 2003 and, in some cases, the Company relocated the personnel to new offices. Capital expenditures were incurred at these offices and at existing offices in anticipation of future growth.

Net cash used in financing activities was $4.8 million in 2003. During 2003, the Company received $7.8 million in cash related to employee purchases of vested stock options and shares of its common stock. The Company experienced an increase in stock option exercise transactions in 2003 when the Company’s stock price rose substantially above the exercise prices of stock options in the latter part of the second quarter. The market price of the Company’s common stock was $18.86 at December 31, 2003, compared to $5.90 at December 31, 2002. The average exercise price of the stock options exercised in 2003 was $4.44 per share. During 2003, the Company used $6.1 million to purchase 1.0 million shares of its common stock, most of which was purchased during the first quarter of 2003. During 2003, the Company used $6.5 million to repay its bank borrowings under its line of credit and did not have a balance outstanding at December 31, 2003.

Debt, Commitments and Capital

As of December 31, 2003, the Company maintained an unsecured revolving line of credit agreement for $150.0 million. In December 2003, the Company amended its revolving line of credit agreement to increase the line from $75.0 million to $150.0 million. In addition, Harris Trust and Savings Bank and Fifth Third Bank – Chicago joined the existing bank group of LaSalle Bank, N.A., a subsidiary of ABN AMRO Bank N.V., and U.S. Bank. There were no other substantive changes in the terms and conditions in the amendment. The line of credit amendment was made to give the Company more financial flexibility to pursue selective acquisitions and support growth.

22

Table of Contents

The revolving line of credit agreement expires on October 31, 2005 and the Company has the option to extend the agreement for an additional two years from the expiration date. Borrowings under the revolving line of credit agreement bear interest based, at the Company’s option, on either (1) the higher of the prime rate or the Federal fund rates plus 0.5 percent, or (2) London Interbank Offered Rate (LIBOR) plus 1.25 percent. The line of credit agreement requires the Company to maintain a minimum level of earnings before interest, taxes, depreciation and amortization, among other things.

The Company was in compliance with the terms of its credit agreements as of December 31, 2003 and 2002. As of December 31, 2003, the Company did not have a balance outstanding under the line of credit agreement, compared to a balance outstanding of $6.5 million as of December 31, 2002.

As of December 31, 2003, the Company had a total of $16.5 million in deferred purchase price and contingent earnout obligations, approximately 25 percent of which are payable in the Company’s common stock. The Company also had a $2.2 million cash obligation related to the MSPP agreements. As of December 31, 2003, the Company had no significant commitments for capital expenditures.

The following table shows the components of significant commitments as of December 31, 2003 and the scheduled years of payments (shown in thousands):

The Company believes that the current cash and cash equivalents, the future cash flows from operations and the line of credit facility provide adequate cash to fund anticipated short-term and long-term cash needs from normal operations. In the event the Company was to make significant investments in the future for major acquisitions or other non-operating activities, the Company might need additional debt or equity financing, as appropriate.

Other Event

On January 30, 2004, the Company acquired substantially all of the assets of Tucker Alan, Inc. (“Tucker”) for $89.5 million, which included $45.6 million cash at closing and 0.3 million shares of its common stock valued at $6.0 million at closing, and $37.9 million payable in two installments of cash and the Company’s common stock within the first two years, following the closing date of the transaction. The Tucker acquisition included 230 consulting professionals active primarily in the litigation, construction and healthcare practices. The Company acquired Tucker to strengthen its national platform. Tucker has a significant presence in the western region of the United States that would complement the Company’s other geographic regions. Tucker’s service offerings and industry expertise are also complementary to those of the Company’s.

Contingencies

The Company is subject to pay additional purchase price amounts that are part of the consideration for certain business acquisition agreements. The payments, if any, are contingent on the achievement of certain revenue and gross margin targets by the acquired businesses. The Company believes that it will have sufficient funds to satisfy obligations related to the contingent consideration. The Company expects to fund these contingent payments, if any, from the cash generated from the operations of these acquired businesses.

23

Table of Contents

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

The Company’s primary exposure to market risks relates to changes in interest rates associated with its borrowings under the line of credit, and its investment portfolio, classified as cash equivalents. The Company’s general investment policy is to limit the risk of principal loss by limiting market and credit risks.

As of December 31, 2003, the Company’s investments were primarily limited to ‘A’ rated securities with maturity dates of 90 days or less. These financial instruments are subject to interest rate risk and will decline in value if interest rates rise. Because of the short periods to maturity of these instruments, an increase in interest rates would not have a material effect on the Company’s financial position or operating results.

The Company’s market risk associated with its line of credit relates to changes in interest rates. Borrowings under the amended line of credit agreement bear interest based, at the Company’s option, on either (1) the higher of the prime rate or the Federal fund rates plus 0.5 percent, or (2) London Interbank Offered Rate (LIBOR) plus 1.25 percent. Because at December 31, 2003, no amounts were outstanding under the line of credit, a change in interest rates would not affect the Company’s financial position or operating results. The Company does not anticipate any material changes in interest rates in the short-term future.

At December 31, 2003, the Company does not 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 in relation to the Company’s consolidated financial statements.

Item 8.    Consolidated Financial Statements and Supplementary Data.

The Consolidated Financial Statements of the Company are in this report as pages F-1 through F-28. An index to such information appears on page F-1.

Item 9.    Changes In and Disagreements with the Company’s Independent Accountants on Accounting and Financial Disclosure.

None.

Item 9A.    Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. Within 90 days prior to the date of this annual report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rules 12a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company’s required information to be included in its periodic SEC filings.

(b) Change in internal controls. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses noted and, therefore, there were no corrective actions taken.

24

Table of Contents

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 21, 2004, 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, 2003.

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 21, 2004, 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, 2003.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

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 21, 2004, 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, 2003.

Information required with respect to the securities authorized for issuance under the Company’s equity compensation plans, including plans that have previously been approved by the Company’s stockholders and plans that have not previously been approved by the Company’s stockholders, will be set forth in the Proxy Statement, and such information is incorporated by reference.

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 21, 2004, 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, 2003.

Item 14.    Principal Independent Accountant Fees and Services.

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 21, 2004, 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, 2003.

25

Table of Contents

PART IV

Item 15.    Exhibits, Financial Statements, Schedules 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 Company filed the following Current Reports on Form 8-K during the quarter ended December 31, 2003:

(1) A Form 8-K dated October 21, 2003 reported under Items 7 and 9 of Form 8-K of the Company’s press release dated October 21, 2003 announcing the Company’s third quarter 2003 results of operations.

(c) The exhibits filed as part of this report are listed below:

a.    Exhibits:

26

Table of Contents

d.    Financial Statement Schedule:

Report of Independent Accountants

Schedule II: Valuation and Qualifying Accounts

27

Table of Contents

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.

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.