<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, 2000
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 August 14, 2000, 41.3 million shares of the Registrant's common
stock, par value $.001 per share ("Common Stock"), were outstanding.
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<PAGE>
NAVIGANT CONSULTING, INC.
QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.............................................. 3
Notes to Unaudited Consolidated Financial Statements.............. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 17
PART II--OTHER INFORMATION
Item 1. Legal Proceedings................................................ 18
Item 6. Exhibits and Reports on Form 8-K................................. 18
SIGNATURES.................................................................. 19
</TABLE>
2
<PAGE>
NAVIGANT CONSULTING, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited) (Audited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 2,149 $ 42,345
Accounts receivable, net............................ 69,971 116,100
Prepaid expenses and other current assets........... 4,669 7,364
Income tax receivable............................... 6,625 8,211
Deferred income taxes............................... 707 2,385
Net assets of discontinued operations held for
disposition (Note 6)............................... 63,557 --
--------- --------
Total current assets.............................. 147,678 176,405
Property and equipment, net........................... 20,573 33,763
Intangible assets, net................................ 29,088 202,096
Deferred income taxes................................. 3,679 --
Other assets.......................................... 1,514 2,412
--------- --------
Total assets...................................... $ 202,532 $414,676
========= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Short-term debt..................................... $ 5,600 $ 10,000
Accounts payable and accrued liabilities............ 34,379 20,709
Accrued compensation and project costs.............. 14,168 58,425
Other current liabilities........................... 8,789 19,673
--------- --------
Total current liabilities......................... 62,936 108,807
Deferred income taxes................................. -- 725
Other non-current liabilities......................... 5,223 4,475
--------- --------
Total liabilities................................. 68,159 114,007
Stockholders' equity:
Common stock........................................ 43 43
Additional paid-in capital.......................... 342,957 340,528
Treasury stock...................................... (52,811) (52,811)
Notes receivable from stockholders.................. (1,009) (2,583)
Retained earnings (Accumulated Deficit)............. (154,526) 15,650
Accumulated other comprehensive loss................ (281) (158)
--------- --------
Total stockholders' equity........................ 134,373 300,669
--------- --------
Total liabilities and stockholders' equity........ $ 202,532 $414,676
========= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
NAVIGANT CONSULTING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months
ended June 30
------------------
2000 1999
--------- -------
<S> <C> <C>
Revenues................................................... $ 58,465 $54,802
Cost of services......................................... 39,733 28,310
--------- -------
Gross profit............................................... 18,732 26,492
General and administrative expenses (excluding
depreciation)........................................... 16,302 11,972
Depreciation expense..................................... 1,573 1,233
Amortization expense..................................... 1,130 --
Restructuring costs (Note 5)............................. 9,285 --
Litigation settlement provision (Note 7)................. 16,000 --
Stock option compensation expense........................ 137 532
--------- -------
Operating (loss) income from continuing operations......... (25,695) 12,755
Other loss (income), net................................. 1,932 (875)
--------- -------
Income (loss) from continuing operations before income
taxes..................................................... (27,627) 13,630
Income tax (benefit) expense............................. (10,474) 5,609
--------- -------
Net (loss) income from continuing operations........... (17,153) 8,021
--------- -------
Income (loss) from discontinued operations, net of income
tax (Note 6).............................................. (2,926) 118
Loss on disposition of discontinued operations, net of
income tax (Note 6)....................................... (145,917) --
--------- -------
Net (loss) income.................................... $(165,996) $ 8,139
========= =======
Earnings (loss) from continuing operations per common
share:
Net (loss) income per basic share........................ $ (0.42) $ 0.19
Net (loss) income per dilutive share..................... $ (0.42) $ 0.18
Earnings (loss) per common share:
Net (loss) income per basic share........................ $ (4.02) $ 0.19
Net (loss) income per dilutive share..................... $ (4.02) $ 0.19
Shares used in computing net (loss) income per basic share. 41,265 42,540
Shares used in computing net (loss) income per dilutive
share..................................................... 41,265 43,508
Other comprehensive income:
Foreign currency translation adjustments................. $ (50) $ (8)
Comprehensive (loss) income.............................. $(166,046) $ 8,131
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
NAVIGANT CONSULTING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended
June 30
-------------------
2000 1999
--------- --------
<S> <C> <C>
Revenues.................................................. $ 124,307 $106,480
Cost of services........................................ 81,492 58,339
--------- --------
Gross profit.............................................. 42,815 48,141
General and administrative expenses (excluding
depreciation).......................................... 31,321 21,151
Depreciation expense.................................... 3,344 2,481
Amortization expense.................................... 2,260 --
Restructuring costs (Note 5)............................ 9,285 --
Litigation settlement provision (Note 7)................ 16,000 --
Stock option compensation expense....................... 321 2,230
--------- --------
Operating (loss) income from continuing operations........ (19,716) 22,279
Other loss (income), net................................ 1,888 (1,967)
--------- --------
Income (loss) from continuing operations before income
taxes.................................................... (21,604) 24,246
Income tax (benefit) expense............................ (7,539) 10,579
--------- --------
Net (loss) income from continuing operations.......... (14,065) 13,667
--------- --------
Income (loss) from discontinued operations, net of income
tax (Note 6)............................................. (10,193) 1,696
Loss on disposition of discontinued operations, net of
income tax (Note 6)...................................... (145,917) --
========= ========
Net (loss) income................................... $(170,175) $ 15,363
========= ========
Earnings (loss) from continuing operations per common
share:
Net (loss) income per basic share....................... $ (0.34) $ 0.33
Net (loss) income per dilutive share.................... $ (0.34) $ 0.32
Earnings (loss) per common share:
Net (loss) income per basic share....................... $ (4.13) $ 0.37
Net (loss) income per dilutive share.................... $ (4.13) $ 0.36
Shares used in computing net (loss) income per basic
share.................................................... 41,192 40,971
Shares used in computing net (loss) income per dilutive
share.................................................... 41,192 42,647
Other comprehensive income:
Foreign currency translation adjustments................ $ (123) $ (76)
Comprehensive (loss) income............................. $(170,298) $ 15,287
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
NAVIGANT CONSULTING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income....................................... $(170,175) $ 15,363
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities, net of
acquisition
Loss from discontinued operations..................... 10,193 --
Loss on disposition of discontinued operations........ 145,917 --
Restructuring costs................................... 9,285 --
Depreciation.......................................... 3,344 3,711
Amortization.......................................... 2,260 9,630
Impairment of stockholders notes...................... 1,573 --
Stock option compensation expense..................... 321 2,230
Deferred income taxes................................. (4,401) (2,148)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net................................ (1,712) (9,908)
Prepaid expenses and other.............................. (697) 599
Accounts payable and other accrued liabilities.......... 5,766 (5,823)
Accrued compensation and project cost................... (15,160) (13,155)
Income taxes payable.................................... 1,467 3,819
Other current liabilities............................... (8,099) (3,054)
--------- --------
Net cash provided by (used in) operating activities of:
Continuing operations................................. (20,118) 1,264
Discontinued operations............................... (8,924) --
--------- --------
Net cash provided by (used in) operating activities..... (29,042) 1,264
--------- --------
Cash flows from investing activities:
Purchase of property and equipment...................... (2,869) (7,944)
Acquisition of new businesses, net of cash acquired..... -- (15,038)
Other, net.............................................. (1,411) 283
--------- --------
Net cash used in investing activities of:
Continuing operations................................. (4,280) (22,699)
Discontinued operations............................... (4,581) --
--------- --------
Net cash used in investing activities................... (8,861) (22,699)
--------- --------
Cash flows from financing activities:
Issuance of common stock................................ 2,107 6,393
Issuance of notes receivable from stockholders.......... -- (3,550)
Payment of short term debt.............................. (4,400) (1,466)
--------- --------
Net cash provided by (used in) financing activities of:
Continuing operations................................. (2,293) 1,377
Discontinued operations............................... -- --
--------- --------
Net cash provided by (used in) financing activities..... (2,293) 1,377
--------- --------
Continuing operations................................. (26,691) (20,058)
Discontinued operations............................... (13,505) --
--------- --------
Net decrease in cash and cash equivalents................. (40,196) (20,058)
Cash and cash equivalents, beginning of period............ 42,345 119,704
--------- --------
Cash and cash equivalents, end of period.................. $ 2,149 $ 99,646
========= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
NAVIGANT CONSULTING, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 except where indicated, which are,
in the opinion of management, necessary for a fair presentation of results of
operations for these interim periods.
The results of operations for the three and six months ended June 30, 2000
are not necessarily indicative of the results to be expected for the entire
year ending December 31, 2000.
These financial statements should be read in conjunction with the Company's
audited consolidated financial statements and footnotes thereto as of and for
the year ended December 31, 1999 included in the Annual Report on Form 10-K,
as filed by the Company with the Securities and Exchange Commission on March
29, 2000, and as subsequently amended.
Note 2. Business Combinations
During 1999, the Company completed eleven acquisitions (collectively, the
"1999 Acquisitions") in exchange for Company stock and cash having an
aggregate value of $235.7 million (valued at the time of acquisition). On
February 7, 1999, the Company issued 2.4 million shares of common stock
(valued at the time of closing at approximately $123.7 million) for
substantially all of the outstanding common stock of Strategic Decisions
Group, Inc. and acquired the remaining minority interest in exchange for $13.3
million in cash. On March 31, 1999, the Company completed the acquisitions of
all of the outstanding stock of Triad International, Inc., GeoData Solutions,
Inc., and Dowling Associates, Inc. in exchange for 1.8 million shares of the
Company's common stock (valued at the time of closing at approximately $57.3
million). On September 30, 1999, the Company completed its acquisition of the
business operations and certain assets of Penta Advisory Services LLC (Penta),
and the stock of Scope International, Inc. (Scope), for a total cash purchase
price of $15.1 million. The purchase agreements for Penta and Scope also
provide for additional payments, payable in cash or Company common stock, 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. On October 1, 1999, the Company completed the acquisition
of the stock of Brooks International AB, Brooks International Consulting OY,
and Brooks International SPRL, for an aggregate cash purchase price of $3.3
million. On November 1, 1999, the Company completed the acquisition of the
stock of The Barrington Consulting Group, Inc. (Barrington) in exchange for
$14.4 million in cash paid at closing and total deferred cash payments of $7.8
million, payable in two equal annual installments. The purchase agreement for
Barrington also provides for additional cash payments of up to $7.7 million in
the aggregate, which are contingent on continued employment by the Company of
certain Barrington stockholders and are payable in cash in two annual
installments. The contingent payments will be charged to expense ratably over
the period of employment. The Company's cost of services for the first and
second quarters of 2000 included $1.6 million of compensation expense in each
quarter related to this employment-related contingency. On December 1, 1999,
the Company completed the acquisition of all of the assets of Glaze Creek
Partners, LLC in exchange for $0.8 million in cash. There were no pre-
acquisition intercompany transactions between the Company and the 1999
Acquisitions.
The 1999 Acquisitions were accounted for by the purchase method of
accounting and, accordingly, the results of operations were included in the
accompanying consolidated financial statements from the dates of acquisition.
Certain assets acquired of $46.2 million and liabilities assumed of $36.9
million were recorded at
7
<PAGE>
their estimated fair values. The excess of cost over the net assets acquired
of approximately $226.4 million was recorded as intangible assets, including
goodwill. The allocation of the excess cost over the net assets acquired to
identifiable intangible assets and goodwill was based upon independent
appraisals, as were the estimated useful lives. The estimated useful lives
range from between one and 20 years, and approximate, on a straight-line
basis, an average life of 7 years.
As discussed further in Note 6, the Company has committed to the
disposition of certain businesses that management has determined should be
discontinued. Discontinued operations include the following 1999 Acquisitions
discussed above: Strategic Decisions Group, Triad International, GeoData
Solutions, Dowling Associates, Brooks International AB, Brooks International
Consulting OY and Brooks International SPRL and GlazeCreek. The remaining 1999
Acquisitions, Barrington, Penta and Scope are included in continuing
operations.
The following unaudited pro forma financial information presents the
combined results of continuing operations as if the acquisitions of
Barrington, Penta and Scope had occurred as of January 1, 1999, after giving
effect to certain adjustments. The adjustments include the amortization of
goodwill and other intangibles and a reduction in interest income and related
income tax effects. The pro forma information is for informational purposes
only. The information presented does not necessarily reflect the results of
continuing operations that would have occurred had the acquisitions been
completed as of January 1, 1999, nor are they indicative of future results.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1999 June 30, 1999
------------------ ----------------
(In thousands, except per share
data)
<S> <C> <C>
Revenues.............................. $61,123 $118,886
Net income............................ $ 6,672 $ 11,465
Net income per diluted share.......... $ .15 $ .27
</TABLE>
Note 3. Accounts Receivable
The components of accounts receivable were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(In thousands)
<S> <C> <C>
Billed amounts..................................... $ 46,102 $ 86,849
Engagements in process............................. 34,395 45,581
Allowance for uncollectible accounts............... (10,526) (16,330)
-------- --------
$ 69,971 $116,100
======== ========
</TABLE>
Engagements in process represent balances accrued by the Company for
services that have been performed but have not been billed to the customer.
Billings are generally done on a monthly basis for the prior month's services.
Note 4. Segment Information
Beginning January 1, 2000, the Company adopted a management reporting
structure with five operating divisions which represent three reportable
segments: Financial and Claims Consulting, Economics and Policy Consulting,
Energy and Water Consulting, Strategic Consulting and IT Solutions. (The
latter three operating divisions were combined as one reportable segment in
the unaudited quarterly financial statement footnotes for March 31, 2000). As
discussed further in Note 6, the Company has committed to disposition of three
of these operating divisions (Economics and Policy-LECG, Strategic Consulting
and IT Solutions) and, accordingly, amounts in the financial statements and
related footnotes have been restated to reflect discontinued operations
accounting for these divisions. Operating results from continuing operations
for the three and six months ended June 30, 1999 have been restated to reflect
the Financial and Claims and Energy and Water reportable segments.
8
<PAGE>
The Financial and Claims segment provides information management, technology
services, damages analysis, business and property valuation, regulatory
compliance, process operations management and litigation support services. The
Energy and Water segment provides management consulting services to clients in
the utility and energy industries.
The Company currently evaluates segment performance and allocates resources
based upon revenues and operating results. The basis of measurement of segment
operating results is consistent between periods. All intercompany transactions
between segments have been eliminated. Information on the Company's operations
for the three and six months ended June 30, 2000 and 1999 is summarized as
follows:
<TABLE>
<CAPTION>
Three months Six months ended
ended June 30, June 30,
----------------- ------------------
2000 1999 2000 1999
-------- ------- -------- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Revenues:
Financial and Claims Consulting....... $ 34,151 $30,233 $ 76,942 $ 58,374
Energy and Water Consulting........... 24,314 24,569 47,365 48,106
-------- ------- -------- --------
Combined segment revenues........... $ 58,465 $54,802 $124,307 $106,480
======== ======= ======== ========
Operating Profit:
Financial and Claims Consulting....... $ 1,332 $ 7,916 $ 7,766 $ 14,221
Energy and Water Consulting........... 2,706 6,272 4,588 11,774
-------- ------- -------- --------
Combined segment operating profit... $ 4,038 $14,188 $ 12,354 $ 25,995
-------- ------- -------- --------
Operating profit and income statement reconciliation:
Unallocated:
Corporate general and administrative
expenses previously allocable to
discontinued operations.............. $ 1,514 $ 901 $ 2,537 $ 1,486
Other non-recurring corporate
expenses............................. 1,667 0 1,667 0
Amortization expense.................. 1,130 0 2,260 0
Restructuring costs................... 9,285 0 9,285 0
Litigation settlement provision....... 16,000 0 16,000 0
Stock option compensation expense..... 137 532 321 2,230
Other expense (income)................ 1,932 (875) 1,888 (1,967)
-------- ------- -------- --------
Sub-total........................... 31,665 558 33,958 1,749
-------- ------- -------- --------
Income(loss) from continuing operations
before income tax expense.............. $(27,627) $13,630 $(21,604) $ 24,246
======== ======= ======== ========
</TABLE>
During the second quarter 2000, the Company was able to specifically
identify its general and administrative expenses to operating divisions for
both 2000 and 1999. Certain general and administrative expenses, which relate
to general corporate costs, were allocated to operating divisions generally on
the basis of consulting fee revenue. Accounting for the results of
discontinued operations cannot include allocations of general and
administrative costs that are not directly identifiable to discontinued
operations. Accordingly, those costs are unallocated reconciling amounts. In
addition, the Company incurred $1.7 million in non-recurring legal and
infrastructure-related computer costs in the three months ended June 30, 2000
that are not allocated to any operating divisions, and which the Company
expects to significantly reduce and eliminate in subsequent periods.
The following unaudited pro forma financial information presents the
combined revenues and operating profits for each segment as if the 1999
Acquisitions included in continuing operations had occurred as of January 1,
1999. Accordingly, the Financial and Claims Consulting segment includes The
Barrington Consulting Group, Inc., Penta Advisory Services LLC and Scope
International, Inc.
9
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1999 June 30, 1999
------------------ ----------------
(In thousands) (In thousands)
<S> <C> <C>
Revenues:
Financial and Claims Consulting.... $36,554 $ 70,780
Energy and Water Consulting........ 24,569 48,106
------- --------
Combined pro forma revenues...... $61,123 $118,886
======= ========
Operating Profit:
Financial and Claims Consulting.... $ 8,037 $ 15,326
Energy and Water Consulting........ 6,272 11,774
------- --------
Combined segment operating
profit.......................... $14,309 $ 27,100
======= ========
</TABLE>
Note 5. Restructuring Costs
In May 2000, the Company retained outside financial advisors and announced
a management reorganization to complete plans to discontinue and dispose of
certain operations, and to restructure the remaining operating businesses. In
the second quarter, the Company recorded a restructuring charge of $9.3
million. As part of this plan, the Company dissolved the Office of the Chief
Executive. In addition, the Company offered involuntary severance packages to
112 consulting and administrative employees in its continuing operations and
recognized $7.1 million in severance-related costs associated with these
reductions in force. The Company also incurred severance costs associated with
113 employees in its discontinued operations. The Company increased previously
recorded restructuring charges by $2.2 million associated with facility
closings and space reductions in its continuing operations units. The Company
also incurred costs associated with workforce reductions and facility closures
and space reductions in its discontinued operations.
The restructuring charges were determined based on formal plans approved by
the Company's management. The amounts the Company may ultimately incur may
change as the balance of the Company's restructuring plan is executed. The
activity affecting the accrual for restructuring costs, which is included in
accrued liabilities, during the three months and six months ended June 30,
2000 is as follows:
<TABLE>
<CAPTION>
Facilities Workforce
costs reductions Total
---------- ---------- -------
(In thousands)
<S> <C> <C> <C>
Balance at December 31,
1999..................... $ 2,824 $ 536 $ 3,360
Charges to operations... 2,189 7,096 9,285
Utilized................ (255) (1,135) (1,390)
Reclassified to
discontinued
operations............. (1,312) -- (1,312)
------- ------- -------
Balance at June 30, 2000.. $ 3,446 $ 6,497 $ 9,943
======= ======= =======
</TABLE>
Note 6. Discontinued Operations
In May 2000, the Company developed plans and identified business units and
other entities for disposition, and implemented plans to restructure the
remaining operating units. The Company's executive management committed to the
disposition of the following businesses: Economics & Policy (LECG), Strategic
Consulting and IT Solutions.
Economics & Policy
The Company has signed a letter of intent to sell LECG to a team of senior
LECG professionals in a management buy-out for $55 million, principally in
cash. This sale is expected to close in the third quarter of 2000.
10
<PAGE>
Strategic Consulting
The Company is continuing discussions with various interested third parties
relative to the sale of SDG. As part of this process, the Company has signed a
non-exclusive letter of intent to sell SDG to a management team of SDG
partners. Glaze Creek's and Sterling's assets, liabilities and employees would
be included in any SDG sale.
The Company has reduced the operations of Triad International through
employee terminations and has sold certain Triad International assets to the
remaining employees, including client engagements in process. The purchasers
also assumed certain liabilities in connection with this disposition, which
was completed in June 2000.
The Company has decided to wind-down the operations of Brooks International
AB, Brooks International Consulting OY and Brooks International SPRL, and
expects this process to be completed by September 30, 2000.
IT Solutions
In a transaction, the Company sold GeoData Solutions for $9 million cash,
and retained all accounts receivable, which have a net realizable value of
approximately $4.1 million.
In June 2000, the Company began to execute plans to wind-down the
operations of SSC and Dowling Associates, and expects to complete this process
by September 30, 2000.
The Economics & Policy, Strategic Consulting and IT Solutions operating
segments are accounted for as discontinued operations and, accordingly,
amounts in the financial statements and related footnotes have been restated
to reflect discontinued operations accounting. Summarized results of
discontinued businesses are shown separately as discontinued operations in the
accompanying consolidated financial statements. The investment in discontinued
operations consists primarily of expected net proceeds from actual and pending
sales as of June 30, 2000, as well as receivables and fixed assets of other
dispositions, net of liabilities, including provisions for severance,
facilities and other shutdown expenses.
Certain information with respect to discontinued operations is summarized
as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- -----------------
2000 1999 2000 1999
--------- --------- -------- -------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Revenues:
LECG.................................. $ 23,370 $ 20,157 $ 42,403 $39,761
SDG................................... 11,507 22,374 26,134 30,721
Other................................. 7,626 7,399 15,564 12,157
--------- --------- -------- -------
Total revenues.......................... 42,503 49,930 84,101 82,639
Income (loss) from discontinued
operations (2,787)..................... (2,787) 4,695 (10,259) 9,323
Income tax expense (benefit)............ 190 4,577 (15) 7,627
--------- --------- -------- -------
Net income (loss)................... $ (2,977) $ 118 $(10,244) $ 1,696
========= ========= ======== =======
</TABLE>
Results of discontinued operations for the three and six months ended June
30, 2000 only includes amortization of associated intangible assets through
the measurement date of April 30, 2000. The above results include $.1 million
of net loss (excludes amortization expenses) for the period May 1, 2000
through June 30, 2000. These results are included in the calculation of the
loss on disposition of discontinued operations.
11
<PAGE>
The loss on disposition in the quarter ended June 30, 2000 includes the
following (in thousands):
<TABLE>
<S> <C>
Book value of net assets in excess of anticipated proceeds,
including intangible assets of $162,292........................ $123,610
Net pre-tax loss on discontinued operations for the period May
1, 2000 through expected disposition dates..................... 885
Expenses associated with asset disposals (including $6,371 in
severance-related expenses).................................... 7,827
--------
Pre-tax loss on disposition..................................... 132,322
Estimated income taxes payable.................................. 13,595
--------
Loss on disposition............................................. $145,917
========
</TABLE>
Note 7. Litigation Settlement Provision
In August 2000, the Company announced it has executed a Memorandum of
Understanding containing the essential terms of a settlement for the
consolidated securities-related class actions lawsuits that were originally
filed against the Company and certain former directors and officers in
November 1999. See further discussion under Item 1, Legal Proceedings.
Accordingly, the Company has included a provision of $16 million for its share
of the settlement amount in its consolidated statement of operations.
Note 8. Stock Option Exchange
In July 2000, the Company completed an employee stock option exchange that
had been offered to all current employees, other than executive management,
for employee retention purposes. Employees tendered 6.4 million options, with
an average exercise price of approximately $28 per share. These employees were
granted 2.7 million options in exchange for the tendered options. The number
of exchanged options granted each employee was based on, among other factors,
a formula that considered the exercise prices of the tendered options. The new
options have an exercise price of $5.9375, which is $1.00 above the market
price as of the tender offer date in June 2000. The new options will vest 10%
each quarter beginning March 31, 2001. As of June 30, 2000, the Company had
5.4 million options outstanding with an average exercise price of $12.26 per
share.
Note 9. The components of basic and diluted shares were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -----------------
2000 1999 2000 1999
--------- --------- -------- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Weighted average shares outstanding....... 41,265 42,540 41,192 40,971
Employee stock options.................... 0 968 0 1,676
--------- --------- -------- --------
Dilutive shares........................... 41,265 43,508 41,192 42,647
========= ========= ======== ========
</TABLE>
For the three and six months ended June 30, 2000, the weighted average
effect of employee stock options was less than .1 million. However, the
Company incurred a loss for these periods and inclusion of these common stock
equivalents in the dilutive shares would be anti-dilutive.
Note 10. Supplemental Cash Flow Information
Total interest paid during the six months ended June 30, 2000 and 1999 were
$.5 million and $.1 million, respectively. Total income taxes paid during the
six months ended June 30, 2000 and 1999 were $3.4 million and $17.1 million,
respectively.
During the first quarter of 1999, the Company issued 4.2 million shares of
common stock (valued at the time at approximately $181.0 million) for
substantially all of the outstanding common stock of four companies acquired
in transactions accounted for by the purchase method of accounting. See also
Note 2, "Business Combinations".
12
<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 Continuing Operations
Three months ended June 30, 2000 compared to three months ended June 30, 1999
Revenues. Revenues increased $3.7 million, or 7%, to $58.5 million in the
three months ended June 30, 2000, from $54.8 million for the same period in
1999. The growth in revenue is due to acquisitions. During 1999, the Company
made acquisitions consistent with its strategy of acquiring consulting
companies that provide complementary services or broaden the Company's
geographic presence. Had the 1999 acquisitions been included in the results of
continuing operations of the Company as of January 1, 1999, the Company's pro
forma revenues would have been $61.1 million for the quarter ended June 30,
1999. On a pro forma basis, revenues decreased $2.6 million, or 4.4%, in the
three months ended June 30, 2000 from $61.1 million for the same period in
1999.
On a pro forma basis, revenues in the Company's Financial and Claims
Consulting segment decreased $2.4 million, or 7%, from $36.6 million to $34.2
million in the second quarter of 2000 due to lower utilization levels.
Revenues in the Energy and Water Consulting segment decreased $.3 million, or
1%, from $24.6 million to $24.3 million.
Gross Profit. Gross profit consists of revenues less cost of services,
which includes consultant salaries, benefits and travel-related direct project
expenses. Gross profit decreased $7.8 million, or 29%, to $18.7 million in the
second quarter of 2000 from $26.5 million in the corresponding period in 1999.
Higher revenues for the quarter ended June 30, 2000 would have resulted in an
$9.5 million increase in gross profit had the gross profit margin as a
percentage of revenues been consistent with that in the prior year period. The
change in the gross profit as a percentage of revenue was a decrease to 32% in
2000, from 48% in 1999. The decline in gross margin was due to $11.4 million
of increased costs of services, partially offset by $3.7 million of higher
revenues. The higher second quarter 2000 costs of services were $7.9 million
of consultant salaries and benefits, which reflects lower utilization levels
for the period, $2.0 million of outside contractor and other billable
expenses, and $1.5 million of selling, recruiting and other non-billable
expenses.
General and Administrative Expenses. General and administrative expenses
include salaries and benefits of management and support personnel, facilities
costs, training, outside professional fees and all other corporate costs.
General and administrative expenses for the three months ended June 30, 2000
increased $4.3 million to $16.3 million, or 28% of revenues, from $12.0
million, or 22% of revenues, in the prior corresponding period. The increase
in general and administrative expenses as a percentage of revenue was
primarily due to $1.3 million of higher facilities and infrastructure costs
and $2.1 million of higher salary and benefit costs.
13
<PAGE>
For the quarter ended June 30, 2000, operating profit margins as a
percentage of revenues declined for both of the Company's reportable segments.
The operating profit margin in the Financial and Claims Consulting segment
declined to 4% of revenues, or $1.3 million, from 26% of revenues in the prior
year period, due to increased cost and lower utilization levels in the current
period. The operating profit margin in the Energy and Water Consulting segment
declined to 11% of revenues, or $2.7 million, from 26% of revenues in the
prior year, due to increased costs.
Amortization Expense. The excess of cost over the net assets acquired for
the 1999 acquisitions included in continuing operations of approximately $32.2
million has been recorded as intangible assets, including goodwill, and is
being amortized on a straight-line basis over 7 years. There was no
amortization expense associated with continuing operations recorded in the
second quarter of 1999. Amortization would have been approximately $1.1
million for the second quarter of 1999 had the 1999 acquisitions occurred as
of January 1, 1999.
Stock Option Compensation Expense. The Company recorded $.1 million for
stock option compensation expense in 2000 versus $.5 million in 1999. These
amounts are attributable to 0.3 million option grants in 1999 to a total of 16
individuals, which were issued at prices below fair market value, and includes
amortization of the value of certain options retained by a former employee
upon separation from the Company. The amount charged to expense was calculated
using the intrinsic value method for employees and the Black-Scholes option
pricing model for non-employees, and approximates the aggregate dollar amount
by which the grant prices of the options differ from the market prices as of
the dates for which the Company has independent evidence to support the
issuance of the options.
Other (Income) Loss, Net. Other (income) loss, net, includes interest
expense, interest income and other non-operating income and expenses. Other
income, net, for the second quarter of 2000 decreased $2.8 million to a $1.9
million loss from $.9 million income in the comparable quarter last year. The
decrease is the result of decreased interest income, increased interest
expense and a $1.6 million charge to reflect the impairment of shareholder
notes receivable.
Income Tax (Benefit) Expense. Income tax expense decreased $16.1 million to
a benefit of $10.5 million for the three months ended June 30, 2000, from a
tax expense of $5.6 million in the prior year quarter. The decrease in income
taxes in 2000 primarily resulted from the $16 million litigation settlement
provision and the $9.3 million in restructuring costs as well as lower income
in 2000.
Net (Loss) Income from Continuing Operations. Net loss from continuing
operations decreased $25.2 million, to a net loss of $17.2 million in the
three months ended June 30, 2000 from a net income of $8.0 million in the same
period the previous year. The increase in revenues of $3.7 million was offset
by a $11.4 million increase in cost of services resulting in a net decrease in
gross profit of $7.8 million. The decrease in gross profit was further
exacerbated by $4.3 million of higher general and administrative expenses, $.3
million of higher depreciation expense, $ 1.1 million in amortization
expenses, $9.3 million in restructuring charges, $16.0 million litigation
settlement provision and $2.8 million lower other income. The net loss for the
second quarter of 2000 was reduced by $.4 million of lower stock option
compensation expense and $16.1 million of lower income tax expenses.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
Revenues. Revenues increased $17.8 million, or 17%, to $124.3 million in
the six months ended June 30, 2000, from $106.5 million for the same period in
1999. The growth in revenue is primarily due to acquisitions, expansion of
services provided to existing clients, engagements with new clients, and
increased selling and business development efforts. During 1999, the Company
made acquisitions consistent with its strategy of acquiring consulting
companies that provide complementary services or broaden the Company's
geographic presence. Had the 1999 acquisitions been included in the results of
continuing operations of the Company as of January 1, 1999, the Company's pro
forma revenues would have been $118.9 million for the six months ended June
30, 1999. On a pro forma basis, revenues increased $5.4 million, or 5%, in the
six months ended June 30, 2000, from $118.9 million for the same period in
1999.
14
<PAGE>
On a pro forma basis, revenues in the Company's Financial and Claims
Consulting segment increased $6.1 million, or 9%, to $76.9 million in the
first six months of 2000 due to expansion of services provided to existing
clients, engagements with new clients, and increased selling and business
development efforts. Revenues in the Energy and Water Consulting segment
decreased $.7 million, or 1%, to $47.4 million.
Gross Profit. Gross profit consists of revenues less cost of services,
which includes consultant salaries, benefits and travel-related direct project
expenses. Gross profit decreased $5.3 million, or 11%, to $42.8 million for
the six months ended June 30, 2000 from $48.1 million in the corresponding
period in 1999. Higher revenues for the six months ended June 30, 2000 would
have resulted in an $13.4 million increase in gross profit had the gross
profit margin as a percentage of revenues been consistent with that in the
prior year period. However, gross profit as a percentage of revenue decreased
to 34% in 2000, from 45% in 1999. The decline in gross margin was due to $23.2
million of increased costs of services, partially offset by $17.8 million of
higher revenues. The higher six months ended June 30, 2000 costs of services
were $18.2 million of consultant salaries and benefits, which reflects lower
utilization levels for the period, $3.4 million of outside contractor and
other billable expenses, and $1.6 million of selling, recruiting and other
non-billable expenses.
General and Administrative Expenses. General and administrative expenses
include salaries and benefits of management and support personnel, facilities
costs, training, outside professional fees and all other corporate costs.
General and administrative expenses for the six months ended June 30, 2000
increased $10.1 million to $31.3 million, or 25% of revenues, from $21.2
million, or 20% of revenues, in the prior corresponding period. The increase
in general and administrative expenses as a percentage of revenue was
primarily due to $1.5 million of higher facilities and infrastructure costs,
$3.2 million of higher salary and benefit costs and $1.9 million of higher
allowances for uncollectable amounts and other miscellaneous indirect costs.
For the six months ended June 30, 2000, operating profit margins as a
percentage of revenues declined for both of the Company's reportable segments.
The operating profit margin in the Financial and Claims Consulting segment
declined to 10% of revenues, or $7.8 million, from 24% of revenues in the
prior year period, due to increased costs of services in the current period.
The operating profit margin in the Energy and Water Consulting segment
declined to 10% of revenues, or $4.6 million, from 24% of revenues in the
prior year, due to increased costs of services.
Amortization Expense. The excess of cost over the net assets acquired for
the 1999 acquisitions included in continuing operations of approximately $32.2
million has been recorded as intangible assets, including goodwill, and is
being amortized on a straight-line basis over 7 years. There was no
amortization expense associated with continuing operations recorded in the
first six months of 1999. Amortization would have been approximately $2.3
million for the six months ended June 30, 1999 had the 1999 acquisitions
occurred as of January 1, 1999.
Stock Option Compensation Expense. The Company recorded $.3 million for
stock option compensation expense in 2000 versus $2.2 million in 1999. These
amounts are attributable to 0.3 million option grants in 1999 to a total of 16
individuals, which were issued at prices below fair market value, and includes
amortization of the value of certain options retained by a former employee
upon separation from the Company. The amount charged to expense was calculated
using the intrinsic value method for employees and the Black-Scholes option
pricing model for non-employees, and approximates the aggregate dollar amount
by which the grant prices of the options differ from the market prices as of
the dates for which the Company has independent evidence to support the
issuance of the options.
Other Loss (Income), Net. Other loss (income), net, includes interest
expense, interest income and other non-operating income and expenses. Other
income (loss), net, for the six months ended June 30, 2000 decreased $3.9
million to a loss of $ 1.9 million, from $2.0 million income in the comparable
quarter last year. The decrease is the result of decreased interest income,
increased interest expense, and a $1.6 million charge to reflect the
impairment of shareholder notes receivable.
15
<PAGE>
Income Tax (Benefit) Expense. Income tax expense decreased $18.1 million to
a tax benefit of $7.5 million for the six months ended June 30, 2000, from a
tax expense of $10.6 million in the prior year. The tax benefit in 2000
primarily resulted from the $16 million litigation settlement provision and
the $9.3 million restructuring costs as well as lower income in 2000.
Net (Loss) Income from Continuing Operations. Net income (loss) from
continuing operations decreased $27.8 million to a net loss of $14.1 million
in the six months ended June 30, 2000, from a net income of $13.7 million in
the same period the previous year. The increase in revenues of $17.8 million
was offset by a $23.2 million increase in cost of services resulting in a net
decrease in gross profit of $5.3 million. The decrease in gross profit was
further exacerbated by $10.1 million of higher general and administrative
expenses, $0.9 million of higher depreciation expenses, $2.3 million of higher
amortization expense, $9.3 million in restructuring charges, $16.0 million
litigation settlement provision and $3.9 million lower other income. The net
loss for the second quarter of 2000 was reduced by $1.9 million of lower stock
option compensation expense and $18.1 million of lower income tax expenses.
Liquidity and Capital Resources
As of June 30, 2000, the Company had $2.1 million in cash and cash
equivalents and working capital of $84.7 million, including net assets of
discontinued operations. The Company's primary source of liquidity has been
cash provided by cash flows from operations, and equity and debt financing.
Net cash used in operating activities was $29.0 million during the six
months ended June 30, 2000. For the period, the primary uses of the cash
provided by operating activities were for net compensation-related payments of
$15.2 million, a reduction of other current liabilities of $8.1 million, and
discontinued operations-related expenditures of $8.9 million.
The Company has used $8.9 million for capital spending to support increases
in personnel and services for the six months ended June 30, 2000. The
investments to support increases in personnel and services included leasehold
improvements, furniture and equipment for new leased facilities, additional
computers and related equipment for information management consulting
services.
Net cash used in financing activities was $2.3 million in the six months
ended June 30, 2000. Net repayments from the unsecured revolving line of
credit were $4.4 million. During the six months ended June 30, 2000, the
Company received $2.1 million primarily from the Company's employee stock
purchase plan.
The Company maintains an unsecured revolving line of credit with LaSalle
Bank that supports up to $50.0 million of borrowings and bears interest at
prime or LIBOR plus 1.0%. The line of credit expires in May 2001. 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 short-term and long-term
cash needs for normal operations, including commitments related to rental
expenses under operating leases, possible contingent payments resulting from
the purchases of Barrington, Penta and Scope, restructuring-related and other
severance costs, and settlement of the securities litigation. In the event
that the Company were to make significant cash expenditures in the future for
major acquisitions or other non-operating activities, the Company would seek
additional debt or equity financing, as appropriate. The Company had no plans
or intentions for such expenditures as of June 30, 2000.
16
<PAGE>
Item 3. 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. The
Company's market risk associated with its line of credit relates to changes in
interest rates. Borrowings under the line of credit bear interest, at the
Company's option, based on either the London Interbank Offered Rate (LIBOR) or
the prime rate. If interest rates average 25 basis points higher in 2000 than
they did in 1999, the Company's interest expense would increase by less than
$0.1 million. This amount is determined based on the amount of short-term debt
at June 30, 2000. The Company does not currently have any long-term debt,
interest rate derivatives, forward exchange agreements, firmly committed
foreign currency sales transactions, or derivative commodity instruments.
The Company operates in foreign countries which exposes it to market risk
associated with foreign currency exchange rate fluctuations; however, such
risk is immaterial at this time to the Company's consolidated financial
statements.
17
<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Numerous purported class action lawsuits have been filed against the
Company since November 1999 in the United States District Court for the
Northern District of Illinois. These actions name as defendants the Company
and certain former directors and former executive officers (one of whom,
however, remains an employee of the Company) of the Company and are purported
to be on behalf of persons who purchased shares of the Company's common stock
during various periods through November 1999. The complaints allege various
violations of federal securities law, including violations of Section 10(b) of
the Securities Exchange Act of 1934, and that the defendants made materially
misleading statements and/or material omissions which artificially inflated
prices for the Company's common stock. The plaintiffs seek a judgement
awarding damages and other relief. These complaints were consolidated in
February 2000. In August 2000, the Company executed a Memorandum of
Understanding with the appointed lead plaintiff in this consolidated
proceeding, the Policemen and Firemen Retirement System of the City of
Detroit, containing the essential terms of a settlement of all the pending
securities law class actions. The settlement calls for the dismissal with
prejudice of the lawsuits and the provision of releases to the Company. In
exchange, the Company will pay $23 million to class members, $7 million of
which is anticipated to be received from one of the Company's insurers. The
Company has also initiated litigation against another of its insurers seeking
to recover at least $10 million under the relevant policy, and has agreed to
share any proceeds from such litigation on a 50/50 basis with the class. The
settlement is subject to various conditions, including the execution of a
definitive written settlement agreement, various court approvals, and the
resolution of certain issues with the insurer from whom the Company
anticipates receiving a $7 million contribution. In the Memorandum of
Understanding, the Company denies any wrongdoing and states that it is
"entering into this Settlement to eliminate continued uncertainty which is
damaging to the Company and its shareholders."
Navigant International, Inc., a national travel agency headquartered in
Denver, Colorado, sued the Company in July 1999 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. The parties engaged in voluntary non-binding
mediation in May 2000, but were unsuccessful in resolving the litigation. The
current schedule calls for a trial date in January 2001. The Company believes
it has meritorious defenses and intends to vigorously defend this action.
In addition, from time to time, we are 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, we do not believe that any of
those lawsuits or claims will have a material adverse effect on the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(27) Financial Data Schedule
(b) Reports on Form 8-K.
On May 23, 2000, the Company filed a Current Report on Form 8-K in which
the Company filed as an exhibit the Company's press release announcing a new
top management team and that the Company is considering strategic alternatives
and retained Lehman Brothers as an exclusive financial advisor.
18
<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/ William M. Goodyear
By: _________________________________
William M. Goodyear
Chairman and Chief Executive
Officer
/s/ Ben W. Perks
By: _________________________________
Ben W. Perks
Executive Vice President andChief
Financial Officer
Date: August 14, 2000
19
