<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark
One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-28830
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 office, including zip code)
(312) 573-5600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
As of July 30, 1999, the Registrant had 42,606,370 outstanding shares of its
$.001 par value Common Stock.
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<PAGE>
NAVIGANT CONSULTING, INC.
QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 (unaudited) and
December 31, 1998..................................................... 3
Unaudited Consolidated Statements of Operations for the three months
ended June 30, 1999 and 1998.......................................... 4
Unaudited Consolidated Statements of Operations for the six months
ended June 30, 1999 and 1998.......................................... 5
Unaudited Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998.......................................... 6
Notes to Unaudited Consolidated Financial Statements................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 10
PART II--OTHER INFORMATION
Item 1. Legal Proceedings................................................ 11
Item 6. Exhibits and Reports on Form 8-K................................. 11
SIGNATURES................................................................. 12
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
NAVIGANT CONSULTING, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
------ ----------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 99,646 $120,448
Accounts receivable, net............................. 111,281 100,993
Prepaid expenses and other........................... 7,764 8,770
-------- --------
Total current assets............................... 218,691 230,211
Property and equipment, net............................ 32,151 27,624
Other non-current assets, net.......................... 1,997 2,103
-------- --------
Total assets....................................... $252,839 $259,938
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Short-term debt...................................... $ -- $ 3,802
Accounts payable and accrued liabilities............. 13,930 20,092
Accrued compensation and project costs............... 34,045 42,594
Income taxes payable................................. 6,935 3,874
Deferred income taxes................................ 2,661 6,342
Other current liabilities............................ 6,824 12,046
-------- --------
Total current liabilities.......................... 64,395 88,750
Deferred income taxes.................................. 3,539 2,034
Other non-current liabilities.......................... 269 209
-------- --------
Total liabilities.................................. 68,203 90,993
-------- --------
Stockholders' equity:
Common stock......................................... 43 42
Additional paid-in capital........................... 126,369 136,861
Retained earnings.................................... 58,330 32,072
Accumulated other comprehensive income............... (106) (30)
-------- --------
Total stockholders' equity......................... 184,636 168,945
-------- --------
Total liabilities and stockholders' equity......... $252,839 $259,938
======== ========
</TABLE>
3
<PAGE>
NAVIGANT CONSULTING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months
ended
June 30,
-----------------
1999 1998
-------- -------
<S> <C> <C>
Revenues..................................................... $103,623 $84,468
Cost of services........................................... 58,009 47,901
-------- -------
Gross profit................................................. 45,614 36,567
General and administrative expenses........................ 20,568 25,619
Merger-related costs....................................... -- --
-------- -------
Operating income............................................. 25,046 10,948
Other income, net.......................................... (1,037) (942)
-------- -------
Income before income tax expense............................. 26,083 11,890
Income tax expense......................................... 10,345 4,410
-------- -------
Net income............................................... $ 15,738 $ 7,480
======== =======
Earnings per common share:
Net income per basic share................................. $ 0.37 $ 0.19
Shares used in computing net income per basic share........ 42,540 40,390
Net income per dilutive share.............................. $ 0.36 $ 0.18
Shares used in computing net income per dilutive share..... 43,508 41,561
Pro forma income data (unaudited):
Net income as reported..................................... $ 15,738 $ 7,480
Pro forma adjustments to executive compensation expense.... -- 2,188
Pro forma adjustments to income tax expense................ -- (1,154)
-------- -------
Pro forma net income..................................... $ 15,738 $ 8,514
======== =======
Pro forma net income per basic share..................... $ 0.37 $ 0.21
Pro forma net income per dilutive share.................. $ 0.36 $ 0.20
Other comprehensive income:
Foreign currency translation adjustments................... $ (8) $ 4
Comprehensive income....................................... $ 15,730 $ 7,484
</TABLE>
4
<PAGE>
NAVIGANT CONSULTING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues.................................................... $199,578 $163,126
Cost of services.......................................... 112,178 93,944
-------- --------
Gross profit................................................ 87,400 69,182
General and administrative expenses....................... 41,359 48,182
Merger-related costs...................................... 3,585 --
-------- --------
Operating income............................................ 42,456 21,000
Other income, net......................................... (2,159) (1,474)
-------- --------
Income before income tax expense............................ 44,615 22,474
Income tax expense........................................ 18,356 8,433
-------- --------
Net income.............................................. $ 26,259 $ 14,041
======== ========
Earnings per common share:
Net income per basic share................................ $ 0.62 $ 0.35
Shares used in computing net income per basic share....... 42,484 39,641
Net income per dilutive share............................. $ 0.59 $ 0.34
Shares used in computing net income per dilutive share.... 44,160 40,774
Pro forma income data (unaudited):
Net income as reported.................................... $ 26,259 $ 14,041
Pro forma adjustments to executive compensation expense... 1,191 3,842
Pro forma adjustments to income tax expense............... (482) (2,075)
-------- --------
Pro forma net income.................................... $ 26,968 $ 15,808
======== ========
Pro forma net income per basic share.................... $ 0.63 $ 0.40
Pro forma net income per dilutive share................. $ 0.61 $ 0.39
Other comprehensive income:
Foreign currency translation adjustments.................. $ (76) $ (9)
Comprehensive income...................................... $ 26,183 $ 14,032
</TABLE>
5
<PAGE>
NAVIGANT CONSULTING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 26,259 $ 14,041
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 4,196 3,445
Deferred income taxes.................................. (2,176) (1,904)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net............................. (10,289) (16,843)
Prepaid expenses and other........................... 1,006 (1,901)
Accounts payable and other accrued liabilities....... (6,161) (380)
Accrued compensation and project costs............... (8,549) 13,055
Income taxes payable................................. 3,061 (1,628)
Other current liabilities............................ (5,222) (2,586)
-------- --------
Net cash provided by operating activities.......... 2,125 5,299
-------- --------
Cash flows from investing activities:
Purchase of property and equipment....................... (8,635) (8,886)
Other, net............................................... 1 (386)
-------- --------
Net cash used in investing activities.............. (8,634) (9,272)
-------- --------
Cash flows from financing activities:
Issuance of common stock................................. 2,843 38,798
Payment of short term debt............................... (3,802) (2,078)
Purchase of certain minority interests in business
combinations............................................ (13,336) --
Payments of pre-acquisition undistributed income to
former shareholders..................................... -- (6,219)
Other, net............................................... 2 1,293
-------- --------
Net cash provided by (used in) financing
activities........................................ (14,293) 31,794
-------- --------
Net increase (decrease) in cash and cash equivalents....... (20,802) 27,821
Cash and cash equivalents, beginning of period............. 120,448 47,236
-------- --------
Cash and cash equivalents, end of period................... $ 99,646 $ 75,057
======== ========
Supplemental information:
Interest payments........................................ $ 126 $ 384
Income tax payments...................................... $ 17,051 $ 11,334
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
NAVIGANT CONSULTING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
Note 1. Basis of Presentation
The accompanying unaudited interim consolidated financial statements of
Navigant Consulting, Inc., formerly The Metzler Group, Inc. (the Company) have
been prepared pursuant to the rules of the Securities and Exchange Commission
for quarterly reports on Form 10-Q and do not include all of the information
and note disclosures required by generally accepted accounting principles. The
information furnished herein includes all adjustments, consisting of normal
recurring adjustments, which are, in the opinion of management, necessary for a
fair presentation of results for these interim periods.
The results of operations for the six months ended June 30, 1999 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 1999.
These financial statements should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the year ended
December 31, 1998, included in the Annual Report on Form 10-K filed by the
Company with the Securities and Exchange Commission on March 31, 1999.
Note 2. 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).
Additionally, on August 31, 1998, the Company issued 5.6 million shares of
common stock for substantially all of the outstanding common stock of Peterson
Consulting L.L.C., (Peterson). Each of these transactions was accounted for as
a pooling of interests and, accordingly, the unaudited and audited consolidated
financial statements have been restated as if the companies had been combined
for all periods presented.
Effective January 1, 1999, the Company issued 1.6 million shares of common
stock for all the outstanding common stock of Triad International, Inc. and
GeoData Solutions, Inc. Additionally, on February 7, 1999, the Company issued
2.4 million shares of common stock for substantially all of the outstanding
common stock of Strategic Decisions Group, Inc. (SDG). All of these
transactions were accounted for as poolings of interests and, accordingly, the
unaudited and audited consolidated financial statements have been restated as
if the companies had been combined for all periods presented. During the first
quarter of 1999, the Company completed one additional transaction which was
accounted for as a pooling of interests. The stockholders' equity and the
operations of this business were not material in relation to those of the
Company. As such, the Company recorded the combination by restating
stockholders' equity as of the effective date of the acquisition without
restating prior period financial statements. The Company incurred certain costs
and expenses in connection with these acquisitions, including legal and
accounting, and other various expenses. These costs and expenses were recorded
in the consolidated statements of operations during the first quarter of 1999.
Note 3. Related Party Transactions
In April 1999, the Company agreed to accept notes for some or all of the
exercise price of vested options for 150,000 shares of stock exercised by three
Company officers. These notes will be delivered upon issuance of the shares,
and the amount of the notes and interest rate will be determined at that time.
7
<PAGE>
NAVIGANT CONSULTING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
Note 4. Pro Forma Net Income
Pro forma net income for the three and six months ended June 30, 1998 has
been adjusted to reflect the impact of a Peterson executive compensation plan
adopted pursuant to the acquisition in 1998. Pro forma net income for the six
months ended June 30, 1999 has been adjusted to reflect the impact of an SDG
executive compensation plan adopted pursuant to the acquisition in 1999. The
pro forma adjustments to executive compensation expense are shown solely as a
result of changes in compensation that exist following consummation of the
mergers. These changes would have resulted in reduced compensation in the pre-
merger periods for Peterson and SDG executives, although their duties and
responsibilities would have been largely unchanged. The pro forma adjustments
to income tax expense represent adjustments to record the tax effect in 1998
and 1999 associated with the pro forma compensation expense adjustment
described above and an adjustment to reflect a provision for income taxes that
would have been recorded had all of the Company's subsidiaries been taxable
entities in 1998.
8
<PAGE>
Item 2.
NAVIGANT CONSULTING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended by Public Law 104-67. Forward-looking statements may be
identified by words including "anticipate," "believe," "intends," "estimates,"
"expect" and similar expressions. 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 risks and uncertainties that could cause actual results
to differ materially from those indicated in the forward looking statements,
due to important risks and factors herein identified or identified from time to
time in the Company's reports filed with the SEC.
Results of Operations
Revenues. Revenues increased by 23% to $103.6 million in the second quarter
of 1999 from $84.5 million in the corresponding period of the prior year. For
the six months ended June 30, 1999, revenues increased by 22% to $199.6 million
from $163.1 million for the same period in 1998. The growth in revenue was
primarily due to expansion of services provided to existing clients,
engagements with new clients, continued strong demand for management consulting
services in energy based and other network and regulated industries, increased
selling and business development efforts and acquisitions. Reported year over
year revenue growth percentage was reduced by the effect of activities of
acquired companies which are no longer reflected as ongoing operations and the
departures of certain equity holders of acquired companies during the period
prior to acquisition. As a result, management believes that the Company's
inability to make pro forma adjustments to give effect to these differences
makes period over period comparisons not meaningful.
Gross Profit. Gross profit consists of revenues less cost of services, which
includes consultant salaries, benefits and travel-related direct project
expenses. Gross profit increased 25% to $45.6 million in the second quarter of
1999 from $36.6 million in the corresponding period in 1998. For the first six
months of 1999, gross profit increased 26% to $87.4 million from $ 69.2 million
in the comparable 1998 period. Gross profit as a percentage of revenues was 44%
in the three and six month periods ended June 30, 1999, compared to 43% and 42%
for the three and six month periods ended June 30, 1998. For the first six
months of 1999, gross margin as a percentage of revenue was higher than the
prior year due to increased utilization of the Company's professional
consultants coupled with higher average billing rates.
General and Administrative Expenses. General and administrative expenses
include salaries and benefits of management and support personnel, facilities
costs, training, direct selling, outside professional fees and all other
corporate costs. General and administrative expenses for the six months ended
June 30, 1999 were $41.4 million or 21% of revenues compared to $48.2 million
and 30% of revenues in the corresponding prior period. The percentage decrease
of general and administrative costs is principally due to the difference in
structure between a privately held enterprise designed to generate minimum
taxable income as compared to the Company's structure as a public company. As a
result, management believes that the Company's inability to make pro forma
adjustments to give effect to these differences makes period over period
comparisons not meaningful. In the current period the Company also realized
some improvement in general and administrative expenses attributable to
economies of scale, increased efficiencies in certain support functions, and
reduction of administrative headcount.
Merger-Related Costs. In the first quarter of 1999, the Company incurred
merger-related costs of $3.6 million related to acquisitions which were
accounted for as poolings of interests. These costs include legal, accounting
and other transaction related fees and expenses, as well as accruals to
consolidate certain facilities.
9
<PAGE>
Other Income, Net. Other income, net includes interest expense, interest
income and other non-operating income and expenses. Other income, net for the
six months ended June 30, 1999 was $2.1 million versus $1.5 million in the
comparable period last year. The increase is the result of higher interest
income due to larger average cash balances outstanding during the period and a
reduction in interest expense.
Income Tax Expense. The Company's effective income tax rate was 41.3% for
the first six months of 1999. The effective rate for this period would be 39.4%
excluding the effect of certain merger-related expenses resulting from the
mergers completed during the first quarter of 1999. The Company's effective
income tax rate was 37.5% for the first six months of 1998. The effective rate
would have been 39.7% including federal and certain state income taxes that
would have been required had all of the Company's subsidiaries been taxable
entities during this period.
Liquidity and Capital Resources
Operating activities provided net cash of $2.1 million during the six months
ended June 30, 1999. For the period, the primary sources of cash provided by
operating activities were net income of $26.3 million, non-cash depreciation of
$4.2 million and increases in prepaid expenses and other of $1.0 million and
income taxes payable of $3.1 million. The higher volume of business in 1999
resulted in increases in accounts receivable for the quarter which negatively
affected operating cash flow by $10.3 million. Operating cash flow was also
negatively affected by decreases in accounts payable and accrued liabilities of
$6.2 million, accrued compensation and project costs of $8.5 million, and other
current liabilities of $5.2 million.
Year to date investing activities used net cash flows of $8.6 million,
principally to support growth in personnel and services. These investments
included leasehold improvements, furniture and equipment for new leased
facilities, additional computer and related equipment for information
management consulting services, and the purchase and implementation of an
enterprise financial and project software system.
Net cash used in financing activities was $14.3 million in the first six
months of 1999. During the quarter, the Company received $2.8 million from
transactions related to stock option exercises and the employee stock purchase
plan. Cash flows used by financing activities included $3.8 million of net
payments of short term debt, and $13.3 million for the purchase of certain
minority interests in business combinations.
As of June 30, 1999, the Company had $99.6 million in cash and cash
equivalents, resulting principally from cash flows from operations and the
various public stock offerings during the previous three years. The Company
believes that current cash and cash equivalents will provide adequate cash to
fund its anticipated cash need over at least the next twelve months.
In general, the Company's internal information technology ("IT") and Non-IT
systems are Year 2000 compliant. The Company does not expect to incur any
additional costs for the purpose of Year 2000 compliance, nor does the Company
believe that there is a significant risk of a material potential liability to
third parties arising from Year 2000 issues.
Item 3. 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 included in cash
equivalents on the consolidated balance sheet. The Company does not currently
use derivative securities. The Company's general policy is to limit the risk of
principal loss by limiting market and credit risks. The Company does not expect
any material loss with respect to its investment portfolio.
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.
10
<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Peterson, which was acquired by the Company in September 1998, was a
defendant in a lawsuit filed by the National Council on Compensation Insurance,
Inc. ("NCCI") against Peterson, its former subsidiary Insurance Data Resources,
Inc. ("IDR") and certain of their officers and former directors. The lawsuit
alleged, among other things, that IDR violated certain copyrights and other
intellectual property of NCCI and sought to hold Peterson liable as IDR's sole
shareholder. Peterson no longer owns IDR, but the company continued to have
indemnification rights against the former members of Peterson and the purchaser
of IDR. Effective
April 21, 1999, the parties settled the dispute, without any payment by or
further obligation of Peterson or the Company, and the Company, Peterson and
its officers and directors were released from all claims under the litigation.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<C> <S>
(27) Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
On June 9, 1999, the Company filed with the Securities and Exchange
Commission, an interim report on Form 8-K showing the following:
(1) Audited Consolidated Financial Statements as of December 31, 1998
and 1997, for each of the three years in the period ended December
31, 1998, as restated.
(2) Selected Financial Data as of and for each of the five years in the
period ended December 31, 1998, as restated.
(3) Unaudited Quarterly Operating Information, as restated.
11
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
/s/ Robert P. Maher
By: _________________________________
Robert P. Maher
Chairman of the Board, President
and
Chief Executive Officer
/s/ Timothy D. Kingsbury
By: _________________________________
Timothy D. Kingsbury
Chief Financial Officer
Date: August 16, 1999
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 99,646 120,448
<SECURITIES> 0 0
<RECEIVABLES> 111,281 100,993
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 218,691 230,211
<PP&E> 58,333 51,024
<DEPRECIATION> (26,182) (23,400)
<TOTAL-ASSETS> 252,839 259,938
<CURRENT-LIABILITIES> 64,395 88,750
<BONDS> 0 0
0 0
0 0
<COMMON> 43 42
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 252,839 259,938
<SALES> 199,578 163,126
<TOTAL-REVENUES> 199,578 163,126
<CGS> 112,178 93,944
<TOTAL-COSTS> 157,122 142,126
<OTHER-EXPENSES> (2,159) (1,474)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 44,615 22,474
<INCOME-TAX> 18,356 8,433
<INCOME-CONTINUING> 26,259 14,041
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 26,259 14,041
<EPS-BASIC> .62 .35
<EPS-DILUTED> .59 .34
</TABLE>
