<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-28830
Navigant Consulting, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 36-4094854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
615 North Wabash Avenue,
Chicago, Illinois 60611
(Address of principal executive office, including zip code)
(312) 573-5600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
As of July 30, 1999, the Registrant had 42,606,370 outstanding shares of its
$.001 par value Common Stock.
<PAGE>
NAVIGANT CONSULTING, INC.
QUARTER ENDED JUNE 30, 1999
INDEX
Page
----
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 (unaudited) and
December 31, 1998.................................................... 3
Unaudited Consolidated Statements of Operations for the three months
ended June 30, 1999 and 1998......................................... 4
Unaudited Consolidated Statements of Operations for the six months
ended June 30, 1999 and 1998......................................... 5
Unaudited Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998......................................... 6
Notes to Unaudited Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 12
PART II--OTHER INFORMATION
Item 1. Legal Proceedings................................................ 13
Item 6. Exhibits and Reports on Form 8-K................................. 13
SIGNATURES................................................................. 14
Explanatory Note
The purpose of this amendment is to amend our Quarterly Report on Form 10-Q
for the period ending June 30, 1999 (the "Original Filing") to make certain
changes to the Condensed Consolidated Financial Statements (Item 1),
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Item 2) and the Quantitative and Qualitative Disclosures about
Market Risk (Item 3). We are filing this amended Quarterly Report on Form 10-Q/A
to restate the Condensed Consolidated Financial Statements correct the
application of certain accounting principles related to expense recognition and
to reflect a change in the method of accounting for the four business
combinations consummated in the first quarter of 1999. Although these
transactions were originally accounted for as poolings of interests, the Company
has determined that it should no longer seek to maintain the pooling treatment
in light of subsequent events that occurred during the third quarter of 1999.
This amended Form 10-Q/A also provides additional disclosures in response to
comments received from the Securities and Exchange Commission (the "SEC").
This report continues to speak as of the date of the Original Filing and we
have not updated the disclosures in this report to speak to any later date.
While this report primarily relates to the historical period covered, events may
have taken place since the date of the Original Filing that might have been
reflected in this report if they had taken place prior to the Original Filing.
All information contained in this amendment is subject to updating and
supplementing as provided in the Company's periodic reports filed with the SEC.
2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
NAVIGANT CONSULTING, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
----------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 99,646 $119,704
Accounts receivable, net..................... 111,281 80,163
Prepaid expenses and other................... 7,764 6,979
-------- --------
Total current assets...................... 218,691 206,846
Property and equipment, net.................... 32,151 22,197
Intangible assets, net......................... 181,630 --
Other non-current assets, net.................. 1,997 1,474
-------- --------
Total assets.............................. $434,469 $230,517
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities..... $ 13,604 $ 17,955
Accrued compensation and project costs....... 33,706 28,142
Income taxes payable......................... 6,960 2,942
Deferred income taxes........................ 2,661 2,171
Other current liabilities.................... 7,444 9,127
-------- --------
Total current liabilities................. 64,375 60,337
Deferred income taxes.......................... 3,539 5,276
Other non-current liabilities.................. 269 --
-------- --------
Total liabilities......................... 68,183 65,613
-------- --------
Stockholders' equity:
Common stock................................. 43 38
Additional paid-in capital................... 322,082 134,624
Notes receivable from stockholders........... (3,597) --
Retained earnings............................ 47,864 30,272
Accumulated other comprehensive income....... (106) (30)
-------- --------
Total stockholders' equity................ 366,286 164,904
-------- --------
Total liabilities and stockholders'
equity.................................... $434,469 $230,517
======== ========
</TABLE>
3
<PAGE>
NAVIGANT CONSULTING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months
ended
June 30,
--------------------
1999 1998
--------- --------
<S> <C> <C>
Revenues................................................... $ 103,623 $64,863
Cost of services......................................... 58,009 37,015
--------- -------
Gross profit............................................... 45,614 27,848
General and administrative expenses...................... 20,964 17,747
Amortization expense..................................... 6,830 --
--------- -------
Operating income........................................... 17,820 10,101
Other income, net........................................ (1,037) (790)
--------- -------
Income before income tax expense........................... 18,857 10,891
Income tax expense....................................... 10,186 4,233
--------- -------
Net income............................................. $ 8,671 $ 6,658
========= =======
Earnings per common share:
Net income per basic share............................... $ 0.20 $ 0.18
Shares used in computing net income per basic share...... 42,540 36,067
Net income per dilutive share............................ $ 0.20 $ 0.18
Shares used in computing net income per dilutive share... 43,508 37,031
Pro forma income data (unaudited):
Net income as reported................................... $ 8,671 $ 6,658
Pro forma adjustments to executive compensation expense.. -- 2,188
Pro forma adjustments to income tax expense.............. -- (897)
--------- -------
Pro forma net income................................... $ 8,671 $ 7,949
========= =======
Pro forma net income per basic share................... $ 0.20 $ 0.22
Pro forma net income per dilutive share................ $ 0.20 $ 0.21
Other comprehensive income:
Foreign currency translation adjustments................. $ (8) $ 4
Comprehensive income..................................... $ 8,663 $ 6,662
</TABLE>
4
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NAVIGANT CONSULTING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------
1999 1998
--------- --------
<S> <C> <C>
Revenues.................................................... $185,773 $125,672
Cost of services.......................................... 106,190 73,038
-------- --------
Gross profit................................................ 79,583 52,634
General and administrative expenses....................... 36,306 33,634
Amortization expense...................................... 9,630 --
-------- --------
Operating income............................................ 33,647 19,000
Other income, net......................................... (2,152) (1,340)
-------- --------
Income before income tax expense............................ 35,799 20,340
Income tax expense........................................ 18,206 8,024
-------- --------
Net income.............................................. $ 17,593 $ 12,316
======== ========
Earnings per common share:
Net income per basic share................................ $ 0.43 $ 0.35
Shares used in computing net income per basic share....... 40,971 35,321
Net income per dilutive share............................. $ 0.41 $ 0.34
Shares used in computing net income per dilutive share.... 42,647 36,299
Pro forma income data (unaudited):
Net income as reported.................................... $ 17,593 $ 12,316
Pro forma adjustments to executive compensation expense... -- 3,842
Pro forma adjustments to income tax expense............... -- (1,575)
-------- --------
Pro forma net income.................................... $ 17,593 $ 14,583
======== ========
Pro forma net income per basic share.................... $ 0.43 $ 0.41
Pro forma net income per dilutive share................. $ 0.41 $ 0.40
Other comprehensive income:
Foreign currency translation adjustments.................. $ (76) $ (9)
Comprehensive income...................................... $ 17,517 $ 12,307
</TABLE>
5
<PAGE>
NAVIGANT CONSULTING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 17,593 $ 12,316
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 13,341 2,450
Deferred income taxes.................................. (2,148) (1,830)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net............................. (9,908) (15,053)
Prepaid expenses and other........................... 599 (2,341)
Accounts payable and other accrued liabilities....... (5,823) (900)
Accrued compensation and project costs............... (13,155) 8,901
Income taxes payable................................. 3,819 (1,945)
Other current liabilities............................ (3,054) (349)
-------- --------
Net cash provided by operating activities.......... 1,264 1,249
-------- --------
Cash flows from investing activities:
Purchase of property and equipment....................... (7,944) (7,865)
Acquisition of new businesses, net of cash acquired...... (15,038) --
Other, net............................................... 283 (349)
-------- --------
Net cash used in investing activities.............. (22,699) (8,214)
-------- --------
Cash flows from financing activities:
Issuance of common stock................................. 6,394 38,820
Payment of short term debt............................... (1,466) (170)
Payments of pre-acquisition undistributed income to
former shareholders..................................... -- (5,357)
Issuance of notes receivable from shareholders........... (3,550) --
Other, net............................................... (1) 1,102
-------- --------
Net cash provided by (used in) financing
activities.......................................... 8,377 34,395
-------- --------
Net increase (decrease) in cash and cash equivalents....... (20,058) 27,430
Cash and cash equivalents, beginning of period............. 119,704 45,867
-------- --------
Cash and cash equivalents, end of period................... $ 99,646 $ 73,297
======== ========
Supplemental information:
Interest payments......................................... $ 126 $ 384
Income tax payments....................................... $ 17,051 $ 11,334
</TABLE>
The Company issued 4.2 million shares of common stock (valued at approximately
$181.0 million) in exchange for substantially all of the outstanding stock of
four companies acquired in the first quarter of 1999.
See accompanying notes to 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, which are, in the opinion of management, necessary for a
fair presentation of results for these interim periods.
The results of operations for the six months ended June 30, 1999 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 1999.
These financial statements should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the year ended
December 31, 1998 included in the Annual Report on Form 10-K, as filed by the
Company with the Securities and Exchange Commission on March 31, 1999 and as
subsequently amended.
Note 2. Business Combinations
On August 19, 1998, the Company issued 7.3 million shares of common stock
(valued at approximately $228.9 million) for substantially all the outstanding
common stock of LECG, Inc. (LECG). Additionally, on August 31, 1998, the Company
issued 5.6 million shares of common stock (valued at approximately $156.7
million) for substantially all of the outstanding common stock of Peterson
Consulting L.L.C., (Peterson). Each of these transactions was accounted for as a
pooling of interests and, accordingly, the unaudited consolidated financial
statements have been restated as if the companies had been combined for all
periods presented. The Company's unaudited consolidated statements of operations
for the three months ended June 30, 1998 have been restated to reflect revenues
of $37.3 million and net income of $1.9 million for the aggregate of the
operations of LECG and Peterson. The Company's unaudited consolidated statements
of operations for the six months ended June 30, 1998 have been restated to
reflect revenues of $72.6 million and net income of $3.7 million for the
aggregate of the operations of LECG and Peterson.
During 1998, the Company completed six additional transactions (collectively,
the "1998 Acquisitions"), for which the Company issued 1.2 million shares in the
aggregate (valued at approximately $35.3 million). These transactions were
accounted for as poolings of interests. The stockholders' equity and the
operations of these businesses were not significant, individually or in the
aggregate, in relation to those of the Company. As such, the Company recorded
the combinations by restating stockholders' equity as of the date of each
acquisition without restating prior period financial statements. The
consolidated financial statements for 1998 reflect the results of operations of
American Corporate Resources, Inc., AUC Management Consultants, Inc., and
Hydrologic Consultants, Inc. beginning on April 3, 1998; the results of
operations of Vision Trust, Inc. beginning on June 1, 1998; and the results of
operations of Saraswati Systems Corporation, Inc. and Applied Health Outcomes,
Inc. beginning on September 1, 1998. The Company acquired assets of $1.9 million
and assumed liabilities of $1.4 million, in the aggregate, in connection with
the 1998 Acquisitions. There were no pre-acquisition intercompany transactions
between the Company and the 1998 Acquisitions. The 1998 Acquisitions provide
consulting services and their operations were generally consistent with those
previously provided by the Company. Following the acquisition, the new
businesses no longer operated as independent businesses, but instead were
incorporated into the Company's general operations.
During the first quarter of 1999, the Company acquired all of the common stock
of four companies (collectively, the "1999 Acquisitions"): Strategic Decisions
Group, Inc. (SDG), Triad International, Inc. (TII), GeoData Solutions, Inc.
(GDS) and Dowling & Associates, Inc. (DAI). On February 7, 1999, the Company
issued 2.4 million shares of common stock (valued at approximately $123.7
million) for substantially all of the outstanding common stock of SDG and
acquired the remaining minority interest in exchange for $13.3 million in cash.
On March 31, 1999, the Company completed the acquisitions of all of the
outstanding stock of TII, GDS and DAI in exchange for 1.8 million shares of the
Company's common stock (valued at approximately $57.3 million). There were no
pre-acquisition intercompany transactions between the Company and the 1999
Acquisitions. The 1999 Acquisitions provide consulting services and their
operations were generally consistent with the Company's. Following the
acquisition, the new businesses no longer operated as independent businesses,
but instead are incorporated into the Company's general operations.
7
<PAGE>
The 1999 Acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the results of operations have been included in the
accompanying consolidated financial statements from the date of acquisition. The
$31.1 million of assets acquired and the $28.0 million of 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 $191.3 million has been recorded as intangible assets, including
goodwill, and is being amortized on a straight-line basis over 7 years, subject
to completion of the independent appraisals.
The following unaudited pro forma financial information presents the combined
results of operations as if the 1999 Acquisitions had occurred as of January 1,
1998, after giving effect to certain adjustments. The adjustments include the
amortization of goodwill and other intangibles, a reduction in interest income
and related income tax effects, and an increase in the weighted average common
shares outstanding. The pro forma information is for informational purposes
only. The information presented does not necessarily reflect the results of
operations that would have occurred had the acquisitions been completed as of
January 1, 1998, nor are they indicative of future results.
Three month period Six month period
ended June 30, ended June 30,
------------------ ------------------
1999 1998 1999 1998
--------- ------- -------- --------
Revenue (thousands).................. $103,623 $85,649 $199,578 $165,516
Net Income (loss) (thousands)........ 8,671 307 14,665 (307)
Net Income (loss) per Diluted Share.. $ 0.20 $ 0.01 $ 0.32 $ (0.01)
Note 3. Related Party Transactions
In April 1999, Mr. Maher, the Company's Chairman and Chief Executive Officer at
that time, borrowed $2.7 million from the Company at an interest rate equal to
5.75% so that he could exercise his then-vested options. Mr. Maher exercised all
112,500 of his then-vested options at an exercise price of $24.00 per share.
In April 1999, Mr. Cain and Mr. Demirjian, respectively the Company's Chief
Administrative Officer and the Company's General Counsel at that time, each
borrowed $425,063 from the Company to exercise all 18,750 of their then-vested
options at an exercise price of $22.67 per share. The notes which evidence these
borrowings are full recourse, are due on or before the third anniversary date
and bear interest at a rate equal to 5.75%, payable annually. The notes were
accompanied by pledge agreements which pledge the exercised option shares as
collateral security for repayment of the notes, which shares are currently held
by the Company.
Note 4. Pro Forma Net Income
Pro forma net income for the period ended June 30, 1998 has been adjusted to
reflect the impact of a Peterson executive compensation plan adopted pursuant to
the acquisition in 1998. The pro forma adjustment to executive compensation
expense is shown solely as a result of changes in compensation that exist
following consummation of the merger. These changes would have resulted in
reduced compensation in the pre-merger periods for Peterson executives, although
their duties and responsibilities would have been largely unchanged. The pro
forma adjustment to income tax expense records the tax effect in 1998 associated
with the pro forma compensation expense.
Note 5. Reconciliation to Previously Reported Amounts
The following table sets forth select quarterly operating information as
previously reported and as amended. The amended amounts have been restated to
reflect a change in the method of accounting for certain business combinations
consummated in the first quarter of 1999. Although these transactions were
originally accounted for as poolings of interests, the Company has determined
that it should no longer seek to maintain the pooling of interests accounting
treatment in light of subsequent events that occurred in the third quarter of
1999.
The amended amounts also incorporate other adjustments to correct the
application of certain accounting principles related to expense recognition.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenue, as previously reported $103,623 $ 84,468 $199,579 $163,126
Effect of purchase accounting -- (19,605) (13,806) (37,454)
-------- -------- -------- --------
Total revenue, as amended $103,623 $ 64,863 $185,773 $125,672
======== ======== ======== ========
Gross profit, as previously reported $ 45,614 $ 36,567 $ 87,401 $ 69,181
Effect of purchase accounting -- (8,719) (7,818) (16,547)
-------- -------- -------- --------
Gross profit, as amended $ 45,614 $ 27,848 $ 79,583 $ 52,634
======== ======== ======== ========
Operating income, as previously reported $ 25,046 $ 10,948 $ 42,457 $ 20,999
Effect of purchase accounting (6,830) (847) (8,028) (1,999)
Other adjustments (396) -- (782) 0
-------- -------- -------- --------
Operating income, as amended $ 17,820 $ 10,101 $ 33,647 $ 19,000
======== ======== ======== ========
Net Income,
as previously reported $ 15,738 $ 7,480 $ 26,259 $ 14,040
Effect of purchase accounting (6,830) (822) (8,197) (1,724)
Other adjustments (237) -- (469) 0
-------- -------- -------- --------
Net Income, as amended $ 8,671 $ 6,658 $ 17,593 $ 12,316
======== ======== ======== ========
Earnings per diluted share
as previously reported $ 0.36 $ 0.18 $ 0.59 $ 0.35
Effect of purchase accounting (0.16) -- (0.17) (0.01)
Other adjustments -- -- (0.01) --
-------- -------- -------- --------
Earnings per diluted share, as amended $ 0.20 $ 0.18 $ 0.41 $ 0.34
======== ======== ======== ========
Dilutive shares, as amended 43,508 37,031 42,647 36,299
</TABLE>
8
<PAGE>
Item 2.
NAVIGANT CONSULTING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended by Public Law 104-67. Forward-looking statements may be
identified by words including "anticipate," "believe," "intends," "estimates,"
"expect" and similar expressions. The Company cautions readers that forward-
looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity, and
income, are subject to risks and uncertainties that could cause actual results
to differ materially from those indicated in the forward looking statements, due
to important risks and factors herein identified or identified from time to time
in the Company's reports filed with the SEC.
Results of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenues. Revenues increased $38.7 million, or 60%, to $103.6 million in the
three months ended June 30, 1999 from $64.9 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.
During the first three quarters of 1999 and during 1998, the Company made
acquisitions consistent with its strategy of acquiring consulting companies that
provide complementary services or broaden the Company's geographic presence. The
1999 Acquisitions had pre-acquisition revenues of $20.8 million for the three
months ended June 30, 1998 which were not included in the Company's consolidated
results of operations. The 1998 Acquisitions had pre-acquisition revenues of
$2.3 million in the three months ended June 30, 1998 which were not included in
the Company's consolidated results of operations.
Reported year over year revenue growth was reduced by the effect of activities
of acquired companies which are no longer reflected as ongoing operations and
the departures of certain principals of acquired companies during the period
prior to acquisition. The results of operations for the three months ended June
30, 1998 included revenues of $2.0 million related to the intellectual property
group (IPG) of Peterson and $1.2 million related to Insurance Data Resources,
Inc. (IDR), a subsidiary of Peterson. On July 17, 1998, prior to its acquisition
by the Company, four principals and 34 employees of the IPG departed from the
firm. On September 1, 1998, subsequent to its acquisition by the Company, IDR
was sold for approximately $1.3 million to one of Peterson's then officers at
its independently appraised fair market value, which approximated net book
value. Management believes that the exclusion of these effects from the pro
forma information provided in Note 3 to the Unaudited Consolidated Financial
Statements makes period over period comparisons of the pro forma data not
meaningful.
Excluding the effects of acquisitions, the departures of certain principals
and the disposal of certain operations of an acquired company, the revenue
increase would have been $18.8 million, or 22%, to $103.6 million for the three
months ended June 30, 1999 from $84.8 million in the prior year period. The
increase of $18.8 million was due to selling and business development efforts in
support of the Company's strategy to expand the client base and leverage
existing client relationships to take advantage of continued strong demand for
management consulting services. Consulting engagements with new clients and an
increase in the average size of client consulting engagements contributed $11.0
million and $7.8 million, respectively, of the $18.8 million of organic revenue
growth in 1999.
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 $17.8 million, or 64%, to $45.6 million in the
second quarter of 1999 from $27.8 million in the corresponding period in 1998.
Higher 1999 revenues contributed $16.6 million, or 93%, of the increase in gross
profit for the quarter. The remaining $1.2 million of the increase in gross
profit for the quarter reflects an increase in gross profit as a percentage of
revenues to 44.0% in the three month period ended September 30, 1999, from 42.9%
for the same period in 1998. The 1999 gross margin as a percentage of revenue
was higher than the prior year due to increased utilization rates and higher
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 three months ended
June 30, 1999 increased $3.3 million to $21.0 million, or 20% of revenues, from
$17.7 million, or 27% of revenues, in the prior corresponding period. General
and administrative expenses for the three months ended June 30, 1998 would have
been $15.5 million, or 24% of revenues, had the reported expenses been reduced
by $2.2 million to reflect the impact of a Peterson executive compensation plan
adopted pursuant to the acquisition in 1998. After giving retroactive effect to
the pro forma reduction of compensation expense in the year earlier period, the
Company's general and administrative expenses increased by $5.5 million in the
second quarter of 1999. However, these expenses increased at a
9
<PAGE>
slower rate than the Company's revenues and overall volume of business,
resulting in a 4% improvement in general and administrative expenses as a
percent of revenue. This improvement is attributable to economies of scale,
increased efficiencies in certain support functions (i.e., human resources,
benefits administration and accounting), and reduction of administrative
headcount.
Amortization Expense. The excess of cost over the net assets acquired for the
1999 acquisitions of approximately $191.8 million has been recorded as
intangible assets, including goodwill, and is being amortized on a straight-line
basis over 7 years, subject to completion of independent appraisals.
Other Income, Net. Other income, net includes interest expense, interest
income and other non-operating income and expenses. Other income, net for the
second quarter of 1999 increased $0.2 million to $1.0 million from $0.8 million
in the comparable quarter 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. The larger average cash balance in
1999 was largely the result of $51.0 million in net proceeds from a secondary
offering of the Company's common stock completed in November of 1998, partially
offset by $13.3 million of cash used to purchase certain minority interests in a
business combination. Interest expense for the second quarter of 1999 were
reduced because of the lower average balance of short-term debt outstanding.
Short-term debt balances of acquired companies were retired following the
acquisition.
Income Tax Expense. Income tax expense increased $6.0 million to $10.2 million
for the three months ended June 30, 1999 from $4.2 million in the corresponding
period in 1998. The Company's effective income tax rate was 54.0% for the second
quarter of 1999. The effective rate for this period would be 39.7% excluding the
effect of the non-cash, non-deductible amortization expenses resulting from the
1999 acquisitions. The Company's effective income tax rate was 38.9% for the
three months ended June 30, 1998. The lower effective tax rate in 1998 reflects
the non-taxable nature of much of the interest income earned on the Company's
investments in short-term securities.
Net Income. Net Income increased $2.0 million, or 30%, to $8.7 million in the
three months ended June 30, 1999 from $6.7 million in the year earlier period.
Higher 1999 revenues resulted in a $17.8 million increase in gross profits over
the prior year. This was largely offset by increases of $3.3 million in general
and administrative expenses, $6.8 million in amortization expenses and $6.0
million in income tax expenses.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues. Revenues increased $60.1 million, or 48%, to $185.8 million in the
six months ended June 30, 1999 from $125.7 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.
The 1999 Acquisitions had pre-acquisition revenues of $13.8 million and $39.9
million for the six months ended June 30, 1999 and 1998, respectively, which
were not included in the Company's consolidated results of operations. The 1998
Acquisitions had pre-acquisition revenues of $5.4 million in the six months
ended June 30, 1998 which were not included in the Company's consolidated
results of operations. The results of operations for the six months ended June
30, 1998 included revenues of $4.6 million related to the departures of certain
principals and the revenues of $2.5 million related to certain disposed
operations of Peterson. Excluding the effects of acquisitions, the departures of
certain principals and the disposal of certain operations of an acquired
company, the revenue increase would have been $35.7 million, or 22%, to $199.6
million for the six months ended June 30, 1999 from $163.9 million in the prior
year period. Consulting engagements with new clients and an increase in the
average size of client consulting engagements contributed $19.7 million and
$16.0 million, respectively, of the $35.7 million of organic revenue growth in
1999.
Gross Profit. Gross profit increased $27.0 million, or 51%, to $79.6 million
in the six months ended June 30, 1999 from $52.6 million in the corresponding
period in 1998. Higher 1999 revenues contributed $25.2 million, or 93%, of the
increase in gross profit. The remaining $1.8 million of the increase in gross
profit reflects an increase in gross profit as a percentage of revenues to 42.8%
in the six month period ended June 30, 1999, from 41.9% for the same period in
1998. The 1999 gross margin as a percentage of revenue was higher than the prior
year due to increased utilization rates and higher billing rates.
General and Administrative Expenses. General and administrative expenses for
the six months ended June 30, 1999 increased $2.7 million to $36.3 million, or
19.5% of revenues, from $33.6 million, or 27% of revenues, in the prior
corresponding period. General and administrative expenses for the six months
ended June 30, 1998 would have been $29.8 million, or 24% of revenues, had the
reported expenses been reduced by $3.8 million to reflect the impact of a
Peterson executive compensation plan adopted pursuant to the acquisition in
1998. After giving retroactive effect to the pro forma reduction of
compensation expense in the year earlier period, the Company's general and
administrative expenses increased by $5.7 million in the first half of 1999.
However, these expenses increased at a slower rate than the Company's revenues
and overall volume of business, resulting in a 5% improvement in general and
administrative expenses as a percent of revenue. This improvement is
attributable
10
<PAGE>
to economies of scale, increased efficiencies in certain support functions
(i.e., human resources, benefits administration and accounting), and reduction
of administrative headcount.
Amortization Expense. The excess of cost over the net assets acquired for the
1999 acquisitions of approximately $191.3 million has been recorded as
intangible assets, including goodwill, and is being amortized on a straight-line
basis over 7 years, subject to completion of independent appraisals. The $9.6
million non-cash expense recorded in the first six months of 1999 represents the
pro rata amortization from the respective acquisition dates through June 30,
1999. Amortization would have been approximately $13.6 million had the 1999
acquisitions occurred as of January 1, 1999.
Other Income, Net. Other income, net for the six months ended September 30,
1999 increased $0.9 million to $2.2 million from $1.3 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. Income tax expense increased $10.2 million to $18.2
million for the six months ended June 30, 1999 from $8.0 million in the
corresponding period in 1998. The Company's effective income tax rate was 50.9%
for the six months ended June 30, 1999. The effective rate for this period would
be 40.1% excluding the effect of the non-cash, non-deductible amortization
expenses resulting from the 1999 acquisitions. The Company's effective income
tax rate was 39.4% for the six months ended June 30, 1998.
Net Income. Net Income increased $5.3 million, or 43%, to $17.6 million in
the six months ended June 30, 1999 from $12.3 million in the year earlier
period. Higher 1999 revenues resulted in a $27.0 million increase in gross
profits over the prior year. This was largely offset by increases of $2.7
million in general and administrative expenses, $9.6 million in amortization
expenses and $10.2 million in income tax expense.
Liquidity and Capital Resources
Operating activities provided net cash of $1.3 million during the six months
ended June 30, 1999. For the period, the primary sources of cash provided by
operating activities were net income of $17.6 million, non-cash depreciation and
amortization of $13.3 million and an increase income taxes payable of $3.8
million. The higher volume of business in 1999 resulted in increases in accounts
receivable for the quarter which negatively affected operating cash flow by
$9.9 million. Operating cash flow was also negatively affected by decreases in
accounts payable and accrued liabilities of $5.8 million, accrued compensation
and project costs of $13.2 million, and other current liabilities of $3.1
million.
Year to date capital spending used net cash flows of $7.9 million, principally
to support growth in personnel and services. These investments included
leasehold improvements, furniture and equipment for new leased facilities,
additional computer and related equipment for information management consulting
services, and the purchase and implementation of an enterprise financial and
project software system. Acquisitions of new businesses used approximately $15.0
million in the first six months of 1999, net of cash acquired.
Net cash provided by financing activities was $1.4 million in the first six
months of 1999. During the quarter, the Company received $6.4 million from
transactions related to stock option exercises and the employee stock purchase
plan. Cash flows used by financing activities included $1.5 million of net
payments of short term debt and $3.6 million of notes receivable from
shareholders. At June 30, 1999, the Company had no short-term debt outstanding.
At June 30, 1999, the Company maintained line of credit agreements in the
aggregate amount of $21.0 million expiring at various dates through July 1999.
As of June 30, 1999, the Company had $99.6 million in cash and cash
equivalents, resulting principally from cash flows from operations and the
various public stock offerings during the previous three years. The Company
believes that current cash and cash equivalents and future cash flows from
operations will provide adequate cash to fund anticipated short-term and long-
term cash needs for normal operations, including commitments related to rental
expenses under operating leases. As of June 30, 1999, the Company had no long-
term debt and no commitments for material capital expenditures, nor would the
Company anticipate that existing operations would require such financing or
commitments in the normal course of business. 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, 1999.
11
<PAGE>
Year 2000 Compliance
In 1998 the Company began assessing the impact that the turn of the century
will have on its internal computer systems. The company has developed an overall
plan to evaluate and correct all date-related computer system issues by the
second half of 1999. This evaluation and correction process has already been
completed on a number of the company's most critical systems. The company is
also in the process of communication with significant suppliers to ascertain the
status of their year 2000 compliance programs.
The total cost of any modifications and upgrades to date has not been material
and the total costs to become year 2000 compliant are expected to be less than
$.1 million. These costs are expensed as incurred and do not include the cost of
scheduled replacement of software and hardware.
Although the Company believes it is unlikely, it is possible the Company could
experience an adverse impact that could be material to the results of operations
or the financial position of the company as a result of potential failure by
major customers or suppliers, or a delay in the Company's efforts to address
year 2000 issues. In addition, if suppliers of necessary telecommunications,
energy and transportation needs fail to provide their services, such failure
could have an adverse impact on the results of operations or financial position
of the company.
The Company expects to establish contingency plans, in the event all systems
and critical suppliers have not been made year 2000 compliant, during 1999.
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's general investment policy is to
limit the risk of principal loss by limiting market and credit risks. As of June
30, 1999, the Company's investments were primarily limited to fully
collateralized, double-A or Triple-A rated securities with maturity dates of 90
days or less. The Company does not expect any loss with respect to its
investment portfolio. If interest rates were to average 50 basis points less
during the year ending December 31, 1999 than 1998 rates, the Company's interest
income would decrease by $0.6 million. This amount was determined by
considering the impact of this hypothetical interest rate reduction on the
Company's investment portfolio at December 31, 1998. 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.
12
<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Peterson, which was acquired by the Company in September 1998, was a defendant
in a lawsuit filed by the National Council on Compensation Insurance, Inc.
("NCCI") against Peterson, its former subsidiary Insurance Data Resources, Inc.
("IDR") and certain of their officers and former directors. The lawsuit alleged,
among other things, that IDR violated certain copyrights and other intellectual
property of NCCI and sought to hold Peterson liable as IDR's sole shareholder.
Peterson no longer owns IDR, but the company continued to have indemnification
rights against the former members of Peterson and the purchaser of IDR.
Effective April 21, 1999, the parties settled the dispute, without any payment
by or further obligation of Peterson or the Company, and the Company, Peterson
and its officers and directors were released from all claims under the
litigation.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K.
On June 9, 1999, Navigant Consulting, Inc. (the "Company"), formerly the
Metzler Group, filed an interim Report on Form 8-K which included restated
selected financial data, unaudited quarterly financial information, and
consolidated financial statements for three acquisitions that were consummated
in the first quarter of 1999 following the pooling of interests method of
accounting. Subsequent to the filing of that interim report, the Company
determined that it should no longer seek to maintain the pooling of interests
treatment in light of subsequent events that occurred in the third quarter of
1999. Although, these 1999 transactions were originally accounted for properly
as poolings-of-interests, the disclosures, financial data and financial
statements referring to these acquisitions as poolings have been superseded and
all of the acquisitions consummated in the first quarter of 1999 will be
accounted for under the purchase method of accounting.
As a result, the information regarding the Company's financial condition as of
December 31, 1998 and 1997, and results of operations for each of the three
years in the period ended December 31, 1998, can be found in the Company's
Annual Report on Form 10-K, as filed on March 31, 1999 and as subsequently
amended.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
Navigant Consulting, Inc.
/s/ James F. Hillman
By: _______________________
James F. Hillman
Chief Financial Officer
Date: January 21, 2000
14
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