<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 September 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 November 10, 1999, the Registrant had 41,641,815 outstanding shares of
its $.001 par value Common Stock.
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NAVIGANT CONSULTING, INC.
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 (unaudited) and
December 31, 1998..................................................... 3
Unaudited Consolidated Statements of Operations for the three months
ended September 30, 1999 and 1998..................................... 4
Unaudited Consolidated Statements of Operations for the nine months
ended September 30, 1999 and 1998..................................... 5
Unaudited Consolidated Statements of Cash Flows for the nine months
ended September 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................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 12
PART II--OTHER INFORMATION
Item 1. Legal Procedings................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders.............. 14
Item 6. Exhibits and Reports on Form 8-K................................. 14
SIGNATURES................................................................. 15
</TABLE>
2
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PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
NAVIGANT CONSULTING, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------ ------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 83,367 $120,448
Accounts receivable, net........................... 120,225 100,993
Prepaid expenses and other......................... 7,668 8,770
-------- --------
Total current assets............................. 211,260 230,211
Property and equipment, net.......................... 34,343 27,624
Officer loan receivable and related interest......... 10,054 --
Other non-current assets, net........................ 15,013 2,103
-------- --------
Total assets..................................... $270,670 $259,938
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Short-term debt.................................... $ 1,440 $ 3,802
Accounts payable and accrued liabilities........... 13,329 20,092
Accrued compensation and project costs............. 36,182 42,594
Income taxes payable............................... 5,854 3,874
Deferred income taxes.............................. 2,130 6,342
Other current liabilities.......................... 23,552 12,046
-------- --------
Total current liabilities........................ 82,487 88,750
Deferred income taxes................................ 1,854 2,034
Other non-current liabilities........................ 359 209
-------- --------
Total liabilities................................ 84,700 90,993
-------- --------
Stockholders' equity:
Common stock....................................... 43 42
Treasury stock..................................... (22,290) --
Additional paid-in capital......................... 132,516 136,861
Retained earnings.................................. 75,834 32,072
Accumulated other comprehensive income............. (133) (30)
-------- --------
Total stockholders' equity....................... 185,970 168,945
-------- --------
Total liabilities and stockholders' equity....... $270,670 $259,938
======== ========
</TABLE>
3
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NAVIGANT CONSULTING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months
ended
September 30,
-----------------
1999 1998
-------- -------
<S> <C> <C>
Revenues..................................................... $111,020 $90,711
Cost of services........................................... 62,177 51,863
-------- -------
Gross profit................................................. 48,843 38,848
General and administrative expenses........................ 21,047 21,785
Merger-related costs....................................... -- 12,778
-------- -------
Operating income............................................. 27,796 4,285
Other income, net.......................................... (1,184) (606)
-------- -------
Income before income tax expense............................. 28,980 4,891
Income tax expense......................................... 11,476 10,797
-------- -------
Net income............................................... $ 17,504 $(5,906)
======== =======
Earnings per common share:
Net income per basic share................................. $ 0.41 $ (0.15)
Shares used in computing net income per basic share........ 42,666 40,457
Net income per dilutive share.............................. $ 0.39 $ (0.14)
Shares used in computing net income per dilutive share..... 45,357 41,776
Pro forma income data:
Net income as reported..................................... $ 17,504 $(5,906)
Pro forma adjustments to executive compensation expense.... -- --
Pro forma adjustments to income tax expense................ -- 6,913
-------- -------
Pro forma net income..................................... $ 17,504 $ 1,007
======== =======
Pro forma net income per basic share..................... $ 0.41 $ 0.02
Pro forma net income per dilutive share.................. $ 0.39 $ 0.02
Other comprehensive income:
Foreign currency translation adjustments................... $ (27) $ 17
Comprehensive income....................................... $ 17,477 $(5,889)
</TABLE>
4
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NAVIGANT CONSULTING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues.................................................... $310,599 $253,837
Cost of services.......................................... 174,355 145,807
-------- --------
Gross profit................................................ 136,244 108,030
General and administrative expenses....................... 62,406 69,967
Merger-related costs...................................... 3,585 12,778
-------- --------
Operating income............................................ 70,253 25,285
Other income, net......................................... (3,343) (2,080)
-------- --------
Income before income tax expense............................ 73,596 27,365
Income tax expense........................................ 29,832 19,230
-------- --------
Net income.............................................. $ 43,764 $ 8,135
======== ========
Earnings per common share:
Net income per basic share................................ $ 1.03 $ 0.20
Shares used in computing net income per basic share....... 42,545 39,913
Net income per dilutive share............................. $ 0.98 $ 0.20
Shares used in computing net income per dilutive share.... 44,559 41,108
Pro forma income data:
Net income as reported.................................... $ 43,764 $ 8,135
Pro forma adjustments to executive compensation expense... 1,191 3,842
Pro forma adjustments to income tax expense............... (482) 4,838
-------- --------
Pro forma net income.................................... $ 44,473 $ 16,815
======== ========
Pro forma net income per basic share.................... $ 1.05 $ 0.42
Pro forma net income per dilutive share................. $ 1.00 $ 0.41
Other comprehensive income:
Foreign currency translation adjustments.................. $ (103) $ 9
Comprehensive income...................................... $ 43,661 $ 8,144
</TABLE>
5
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NAVIGANT CONSULTING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months
ended
September 30,
----------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $43,764 $ 8,135
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 6,720 5,329
Deferred income taxes.................................... (4,409) 2,638
Tax benefit of option exercises.......................... 4,756 1,621
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net............................... (15,805) (17,410)
Prepaid expenses and other............................. 1,209 (2,512)
Accounts payable and other accrued liabilities......... (7,121) 8,239
Accrued compensation and project costs................. (6,649) 15,292
Income taxes payable................................... 1,975 (879)
Other current liabilities.............................. (2,349) 6,155
------- -------
Net cash provided by operating activities............ 22,091 26,608
======= =======
Cash flows from investing activities:
Purchase of property and equipment......................... (12,595) (11,727)
Issuance of officer note receivable........................ (10,000) --
Acquisition of businesses, net of cash acquired............ (14,817) --
Other, net................................................. (633) (853)
------- -------
Net cash used in investing activities................ (38,045) (12,580)
======= =======
Cash flows from financing activities:
Issuance of common stock, net.............................. 4,235 20,773
Payment of short-term debt................................. (3,552) (3,433)
Purchase of certain minority interests in business
combinations.............................................. (13,335) --
Stock repurchases, net of obligations for deferred
settlements............................................... (8,475) --
Payments of pre-acquisition undistributed income to former
shareholders.............................................. -- (7,118)
Other, net................................................. -- 2,121
------- -------
Net cash provided by (used in) financing activities.. (21,127) 12,343
------- -------
Net increase (decrease) in cash and cash equivalents......... (37,081) 26,371
Cash and cash equivalents, beginning of period............... 120,448 47,236
------- -------
Cash and cash equivalents, end of period..................... $83,367 $73,607
======= =======
Supplemental information:
Interest payments.......................................... $ 173 $ 593
Income tax payments........................................ $27,229 $15,850
</TABLE>
See accompanying notes to consolidated financial statements.
6
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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 nine months ended September 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, and also
included on Form 8-K filed by the Company on June 9, 1999.
Note 2. Business Combinations and Acquisition of Intangible Assets
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.
On July 1, 1999, the Company acquired the business operations and certain
assets of Penta Advisory Services, LLC (Penta) and the stock of Scope
International, Inc. (Scope) for a total cash purchase price of $15.1 million.
The purchase agreements also provide for additional payments over the next two
to five years contingent on future revenue growth and gross margin targets. The
additional payments, if any, will be accounted for as additional goodwill.
The acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the results of operations have been included in
the accompanying consolidated financial statements from the date of
acquisition. Certain assets acquired and liabilities assumed have been recorded
at their estimated fair values, and are subject to adjustment when an
independent appraisal concerning tangible and intangible asset valuations is
finalized.
The excess of cost over the net assets acquired of approximately $13.0
million has been recorded as intangible assets, including goodwill and is being
amortized on a straight-line basis of up to 20 years, subject to completion of
the independent appraisal.
7
<PAGE>
NAVIGANT CONSULTING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following pro forma financial information presents the combined
statement of operations as if the acquisitions of Penta and Scope had been
consummated as of January 1, 1998, and includes the effect of certain
acquisition related adjustments. Acquisition adjustments include the
amortization of goodwill and other intangibles, reduced compensation expense,
reduced interest income and the related income tax effects. The pro forma
information is for informational purposes only. Since the financial information
set forth below is based on operating results of Penta and Scope when it was
not under the control of the Company, the information presented is not
indicative of the results which would have occurred, had the acquisitions been
completed as of January 1, 1998, nor are they indicative of future results.
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Revenue............................. 314,132 260,084
Net Income.......................... 43,632 8,372
Net Income per Diluted Share........ 0.98 0.20
</TABLE>
Note 3. Related Party Transactions
During the third quarter of 1999, the company accepted notes of $7.0 million
from three company officers related to the purchase of 200,000 shares of the
Company's stock. The notes are secured by the stock, are full recourse, and are
due on or before the third anniversary date. The applicable interest rate is
5.75% payable annually. These notes are recorded as a reduction to paid-in
capital on the Balance Sheet.
On August 24, 1999, the Company made a bridge loan of $10 million to its
Chief Executive Officer. This loan was repaid to the company on November 5,
1999 along with interest at a rate of 5.75%.
Note 4. Pro Forma Net Income
Pro forma net income for the nine months ended September 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 nine
months ended September 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. In addition, the pro forma adjustments to income tax expense
for 1998 include a reduction of income tax expense to exclude the effect of the
one-time, non-cash charge which resulted from the conversion of Peterson from
the modified cash basis to the accrual basis of accounting for tax purposes 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.
Note 5. Treasury Share Transactions
During the third quarter the Company purchased 471,000 of its shares in
private transactions with employees. These shares have been recorded at the
fair market value as of the transaction date. Additionally, as of November 4,
1999, the Company purchased 1 million of its shares in the open market.
8
<PAGE>
NAVIGANT CONSULTING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
Note 6. Subsequent Event
On November 5, 1999, the Company acquired The Barrington Consulting Group,
Inc. (Barrington) for $13 million in net cash plus an additional amount of
between $7.75 million and $15.5 million, payable in two installments over two
years, subject to the conditions contained in the definitive agreement. Certain
operations of Barrington in Boston, Pittsburgh, and New York were not included
in the acquisition. Excluding these operations, Barrington's 1999 revenues are
estimated to be approximately $15 million.
9
<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 for the quarter and nine months ended September 30, 1999
increased 22.4%. Third quarter revenues grew $20.3 million to $111.0 million
from $90.7 million in the corresponding quarter of last year. For the nine
months ended September 30, 1999, revenues increased $56.8 million to $310.6
million from $253.8 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 25.7% to $48.8 million in the third quarter of
1999 from $38.8 million in the corresponding period in 1998. For the first nine
months of 1999, gross profit increased 26.1% to $136.2 million from $108.0
million in the comparable 1998 period. Gross profit as a percentage of revenues
was 44.0% in the three month period ended September 30, 1999, compared to 42.8%
for the same quarter of last year. For the nine months ended September 30,
1999, gross profit as a percentage of revenues was 43.9% compared to 42.6% for
the corresponding period of the prior year. The increase as a percentage of
revenue is primarily attributable to increases in productivity 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 third quarter
ended September 30, 1999 were $21.0 million or 19.0% of revenues compared $21.8
million or 24.0% of revenues in the same period of 1998. General and
administrative expenses for the nine months ended September 30, 1999 were $62.4
million or 20.0% of revenues compared to $70.0 million and 27.6% of revenues in
the corresponding prior period. The decrease in general and administrative
expenses as a percentage of revenues was the result of significant efficiencies
realized from improvements in certain support functions, economies of scale,
reduction in headcount and successful efforts to decrease overall expenditures.
The percentage decrease of general and administrative costs is also 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,
10
<PAGE>
management believes that the Company's inability to make pro form adjustments
to give effect to these differences makes period over period comparisons not
meaningful
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.
Other Income, Net. Other income, net includes interest expense, interest
income and other non-operating income and expenses. Other income, net for the
nine months ended September 30, 1999 was $3.3 million versus $2.1 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 40.5% for
the first nine months of 1999. The effective rate for this period would be
39.5% excluding the effect of certain merger-related costs resulting from the
mergers completed during the first quarter of 1999. The Company's effective
income tax rate was 70.3% for the first nine months of 1998. The effective rate
would have been 39.9% excluding the effect of the one-time, non-cash charge to
income tax expense of $7.2 million related to the conversion of Peterson from
the modified cash basis to the accrual basis of accounting for tax purposes,
the effect of certain merger-related costs resulting from the mergers completed
during the third quarter of 1998 that are not tax deductible and federal and
certain state income taxes that would have been required had all of the
Company's subsidiaries been taxable entities during this period.
The foregoing financial statements and related discussion of results of
operations assume that the business combinations consummated in the first
quarter of 1999 will continue to be accounted for as "poolings of interests."
The Company and its auditors are currently reviewing certain of those
combinations to determine whether pooling treatment remains appropriate in
light of certain transactions in the Company's stock which occurred during the
third quarter. If any of the combinations were to be recharacterized as
purchases rather than poolings of interests, the impact on the Company's
reported net income in prior quarters would depend upon the significance of the
affected transactions. However, such recharacterization would not in and of
itself have any material impact on the Company's reported cash flows or "cash
earnings" during or after fiscal 1999. If necessary, the Company will file an
amendment to this Report on Form 10-Q promptly after the conclusion of its
review.
Liquidity and Capital Resources
As of September 30, 1999, the Company had $83.4 million in cash and cash
equivalents and working capital of $128.8 million. The Company's primary source
of liquidity has been cash provided by cash flows from operations and the
various public stock offerings during the previous three years.
Net cash provided by operating activities was $22.1 million during the nine
months ended September 30, 1999. For the period, the primary sources of cash
provided by operating activities were net income of $43.8 million adjusted for
non-cash depreciation of $6.7 million. Other sources of cash from operations
included tax benefits relating to option exercises of $4.8 million and a
decrease in prepaid expenses and other of $1.2 million. The higher volume of
business in 1999 resulted in increases in accounts receivable for the year
which negatively affected operating cash flow by $15.8 million. Operating cash
flow was also negatively affected by decreases in accounts payable and accrued
liabilities of $7.1 million, accrued compensation and project costs of $6.6
million, current and deferred tax payables of $2.4 million and other current
liabilities of $2.3 million.
Year to date investing activities used net cash flows of $38.0 million,
primarily for acquisitions and to support growth in personnel and services. The
investments to support growth in personnel and services 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 enterprise financial and project
software system. Cash flows used in investing activities included a $10.0
million loan to one of the Company's officers which was repaid in November of
1999 and $14.8 million for the acquisitions during the quarter.
11
<PAGE>
Net cash used in financing activities was $21.1 million in the nine months
ended September 30, 1999. During the year, the Company received net cash of
$4.2 million from transactions related to stock option exercises and employee
stock purchases. Cash flows used by financing activities included $3.6 million
of short-term debt payments, $13.3 million for the purchase of certain minority
interests in business combinations and $8.5 million for the repurchase of
stock, net of obligations for deferred settlements.
During the quarter ended September 30, 1999, the Company increased the
unsecured revolving line of credit with LaSalle Bank to $50 million, which
bears interest at prime or LIBOR plus 1.0%. The amount available under the line
of credit at September 30, 1999 was $50.0 million less amounts for outstanding
letters of credit. The Company intends to utilize this line of credit to
finance short-term working capital needs or to finance short-term cash
acquisition needs. The Company believes that current projected levels of cash
flows and the availability of financing, including borrowings under the
Company's credit facility, will be adequate to fund its anticipated cash needs
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.
12
<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
On March 8, 1999, we brought an action against Deborah T. Kearns, Alan G.
Carnrite, the Estate of Laurel Dell Manning, and David R. Watkins, who were the
former shareholders of Sterling Consulting Group, Inc. ("Sterling"), in the
United States District Court for the Northern District of Illinois, Eastern
Division. In general, the complaint alleges, among other things, that the
defendants made various misrepresentations of fact and failed to disclose
certain material facts in connection with our purchase of Sterling. Among the
misrepresentations the defendants are alleged to have made are
misrepresentations concerning the activities and nature of another company they
owned and operated. Specifically, the complaint alleges that, in connection
with our purchase of Sterling, the defendants falsely stated that their other
company was not in a business competitive with or similar to Sterling, when in
fact the other company's business was competitive with and related to
Sterling's business. The complaint alleges that, during 1998, the defendants
continued to operate this company in a manner competitive with Sterling, in
violation of Ms. Kearns' and Mr. Carnrite's fiduciary duties to Sterling and in
violation of the non-compete provisions of the Acquisition Agreement pursuant
to which we acquired Sterling. The complaint also alleges that, during 1998,
Ms. Kearns and Mr. Carnrite committed various other violations of their
fiduciary duties to Sterling, including self-dealing regarding their other
company and failing to act in Sterling's best interest in a number of respects.
Ms. Kearns and Mr. Carnrite filed a counterclaim asserting various causes of
action against us and two of our officers. Generally, Ms. Kearns' counterclaims
allege that we violated various contractual and other duties to her by refusing
to remove the legend on the restrictive shares of stock she received from us in
connection with our purchase of Sterling. We have defended the counterclaims on
various legal and factual grounds, including defenses based on various
provisions of the securities laws, various contractual arguments, and various
defects in Ms. Kearns' requests and documentation regarding the removal of the
restrictive legend. Following certain objections and defects raised by us
regarding this request, Ms. Kearns submitted certain revised paperwork,
including filing a Form 144 (which had not previously been filed). In September
1999, the district court held that the restrictive legend may be removed from
Ms. Kearns' shares of stock, provided that Ms. Kearns sell the stock through
her broker on the New York stock exchange. Following such ruling and in
connection with Ms. Kearns' sales, the legend on her shares was removed. We
have appealed certain aspects of the district court's ruling. Ms. Kearns has
filed a motion requesting that she be awarded approximately $1.7 million in
damages.
Mr. Carnrite has claimed that we owe him compensation of approximately
$100,000 for various services performed under a purported consulting agreement
he executed with Ms. Kearns (allegedly in her capacity as an officer of
Sterling) during 1998. We have defended this claim on various factual and legal
grounds, including that there was no authorization for such an agreement.
We are seeking money damages (including disgorgement of profits and certain
other compensation paid to Mr. Carnrite and Ms. Kearns), indemnification,
punitive damages, attorneys' fees, and any other relief which the court deems
just and proper. The defendants are seeking money damages (including
indemnification and compensatory damages), punitive damages, attorneys' fees,
and equitable relief (including a declaratory judgment that certain provisions
of the acquisition agreement are not enforceable). We are represented by
Winston & Strawn in connection with this litigation. One of our directors, Gov.
James R. Thompson, is a partner of Winston & Strawn.
In July 1999, Navigant International, Inc., a national travel agency
headquartered in Denver, Colorado, sued us in the United States District Court
for the District of Colorado claiming that the use of "Navigant" in our name
infringes on their use of and rights in such name. The complaint seeks
declaratory relief and an injunction against our use of "Navigant," attorneys
fees and other related relief. Navigant International did not seek to stop or
delay our shareholder approval of our use of such term. Our name was developed
by outside, independent name consultants, and our Board of Directors approved
the use of the name based on the
13
<PAGE>
independent opinions of counsel (including Winston & Strawn). We are
represented by our primary outside counsel, Sachnoff & Weaver, Ltd., in
connection with this litigation.
Although we are not able at this time to fully evaluate the damages involved
in the above actions, we do not currently expect that they will have a material
adverse effect on our business or consolidated financial position.
We are subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, we do not
believe that the outcome of any of these legal matters will have a material
adverse effect on our business or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
On July 15, 1999, Navigant Consulting, Inc. held its 1999 Annual Meeting to
Stockholders, and four items were voted upon by the Company's stockholders.
First, the stockholders elected Robert P. Maher to serve as director of the
Board of Directors for a term of three years. The voting results were as
follows:
<TABLE>
<CAPTION>
For Against
--- -------
<S> <C>
31,583,662 525,246
</TABLE>
Secondly, the stockholders approved an amendment to Navigant Consulting,
Inc.'s certificate of incorporation to increase the total authorized common
stock to 250,000,000 shares. The voting results were as follows:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C>
21,203,828 10,900,438 4,642
</TABLE>
Thirdly, the stockholders approved an amendment to the Company's certificate
of incorporation to change the name of the Company from The Metzler Group, Inc.
to Navigant Consulting, Inc. The voting results were as follows:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C>
30,535,546 1,366,805 206,557
</TABLE>
Lastly, the stockholders approved the re-approval of Navigant Consulting,
Inc.'s Long-Term Incentive Plan. The voting results were as follows:
<TABLE>
<CAPTION>
For Against Withheld
--- ------- --------
<S> <C> <C>
22,523,026 9,576,112 9,770
</TABLE>
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
No reports on Form 8-K were filed during the reporting period ended
September 30, 1999.
14
<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: November 15, 1999
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 83,367 120,448
<SECURITIES> 0 0
<RECEIVABLES> 120,225 100,993
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 211,260 230,211
<PP&E> 62,949 51,024
<DEPRECIATION> (28,606) (23,400)
<TOTAL-ASSETS> 270,670 259,938
<CURRENT-LIABILITIES> 82,487 88,750
<BONDS> 0 0
0 0
0 0
<COMMON> 43 42
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 270,670 259,938
<SALES> 310,599 253,837
<TOTAL-REVENUES> 310,599 253,837
<CGS> 174,355 145,807
<TOTAL-COSTS> 240,346 228,552
<OTHER-EXPENSES> (3,343) (2,080)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 73,596 27,365
<INCOME-TAX> 29,832 19,230
<INCOME-CONTINUING> 43,764 8,135
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 43,764 8,135
<EPS-BASIC> 1.03 0.20
<EPS-DILUTED> 0.98 0.20
</TABLE>
