<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 September 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-28830
Navigant Consulting, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 36-4094854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
615 North Wabash Avenue,
Chicago, Illinois 60611
(Address of principal executive office, including zip code)
(312) 573-5600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
As of November 10, 1999, the Registrant had 41,641,815 outstanding shares of
its $.001 par value Common Stock.
<PAGE>
NAVIGANT CONSULTING, INC.
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 (unaudited) and
December 31, 1998..................................................... 3
Unaudited Consolidated Statements of Operations for the three months
ended September 30, 1999 and 1998..................................... 4
Unaudited Consolidated Statements of Operations for the nine months
ended September 30, 1999 and 1998..................................... 5
Unaudited Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998..................................... 6
Notes to Unaudited Consolidated Financial Statements.................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 13
PART II--OTHER INFORMATION
Item 1. Legal Procedings.................................................. 14
SIGNATURES................................................................... 15
</TABLE>
Explanatory Note
The purpose of this amendment is to amend our Quarterly Report on Form 10-Q
for the period ending September 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 to correct the
application of certain accounting principles related to recognition of revenues
and expenses and related to the third quarter acquisitions 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 and the Original Filing 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)
September 30, December 31,
ASSETS 1999 1998
------ ------------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents.................... $ 83,367 $119,704
Accounts receivable, net..................... 118,218 80,163
Prepaid expenses and other................... 7,668 6,979
-------- --------
Total current assets....................... 209,253 206,846
Property and equipment, net.................... 34,343 22,197
Intangible assets, net......................... 187,083 --
Other non-current assets, net.................. 2,015 1,474
-------- --------
Total assets............................... $432,694 $230,517
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term debt.............................. $ 1,440 $ --
Accounts payable and accrued liabilities..... 13,222 17,955
Accrued compensation and project costs....... 32,497 28,142
Income taxes payable......................... 4,903 2,942
Deferred income taxes........................ 2,130 2,171
Other current liabilities.................... 23,962 9,127
-------- --------
Total current liabilities.................. 78,154 60,337
Deferred income taxes.......................... 1,854 5,276
Other non-current liabilities.................. 359 --
-------- --------
Total liabilities.......................... 80,367 65,613
-------- --------
Stockholders' equity:
Common stock................................. 43 38
Additional paid-in capital................... 335,283 134,624
Treasury stock............................... (18,943) --
Notes receivable from stockholders........... (20,711) --
Retained earnings............................ 56,788 30,272
Accumulated other comprehensive income....... (133) (30)
-------- --------
Total stockholders' equity................. 352,327 164,904
-------- --------
Total liabilities and stockholders' equity. $432,694 $230,517
======== ========
3
<PAGE>
NAVIGANT CONSULTING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months
ended
September 30,
--------------------
1999 1998
---------- --------
<S> <C> <C>
Revenues..................................................... $106,185 $68,311
Cost of services........................................... 60,468 39,320
------- -------
Gross profit................................................. 45,717 28,991
General and administrative expenses........................ 21,077 13,304
Amortization expense....................................... 6,830 --
Merger-related cost (benefit).............................. (1,366) 12,778
Restructuring and other charges............................ 1,160 --
------- -------
Operating income............................................. 18,016 2,909
Other income, net.......................................... (1,218) (538)
------- -------
Income before income tax expense............................. 19,234 3,447
Income tax expense......................................... 10,310 10,420
------- -------
Net income (loss)........................................ $ 8,924 $(6,973)
======= =======
Earnings per common share:
Net income (loss) per basic share.......................... $ 0.21 $ (0.19)
Shares used in computing net income per basic share........ 42,666 36,129
Net income (loss) per dilutive share....................... $ 0.20 $ (0.19)
Shares used in computing net income per dilutive share..... 45,357 36,129
Pro forma income data:
Net income (loss) as reported.............................. $ 8,924 $(6,973)
Pro forma adjustments to income tax expense................ -- 7,200
------- -------
Pro forma net income..................................... $ 8,924 $ 227
======= =======
Pro forma net income per basic share..................... $ 0.21 $ 0.01
Pro forma net income per dilutive share.................. $ 0.20 $ 0.01
Other comprehensive income:
Foreign currency translation adjustments................... $ (27) $ 17
Comprehensive income (loss)................................ $ 8,897 $(6,956)
</TABLE>
4
<PAGE>
NAVIGANT CONSULTING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues.................................................... $291,958 $193,983
Cost of services.......................................... 166,658 112,358
-------- --------
Gross profit................................................ 125,300 81,625
General and administrative expenses........................ 57,384 46,938
Amortization expense....................................... 16,460 --
Merger-related cost (benefit).............................. (1,366) 12,778
Restructuring and other charges............................ 1,160 --
-------- --------
Operating income............................................. 51,662 21,909
Other income, net.......................................... (3,370) (1,878)
-------- --------
Income before income tax expense............................. 55,032 23,787
Income tax expense......................................... 28,516 18,444
-------- --------
Net income.............................................. $ 26,516 $ 5,343
======== ========
Earnings per common share:
Net income per basic share................................. $ 0.64 $ 0.15
Shares used in computing net income per basic share........ 41,536 35,590
Net income per dilutive share.............................. $ 0.61 $ 0.15
Shares used in computing net income per dilutive share..... 43,550 36,540
Pro forma income data:
Net income as reported.................................... $ 26,516 $ 5,343
Pro forma adjustments to executive compensation expense.... -- 2,267
Pro forma adjustments to income tax expense................ -- 7,200
-------- --------
Pro forma net income.................................... $ 26,516 $ 14,810
======== ========
Pro forma net income per basic share..................... $ 0.67 $ 0.42
Pro forma net income per dilutive share.................. $ 0.64 $ 0.41
Other comprehensive income:
Foreign currency translation adjustments................... $ (103) $ 8
Comprehensive income...................................... $ 26,413 $ 5,351
</TABLE>
5
<PAGE>
NAVIGANT CONSULTING, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1999 1998
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................. $26,516 $5,343
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization........................................ 22,651 3,796
Deferred income taxes................................................ (4,380) 2,560
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net........................................... (12,977) (18,042)
Prepaid expenses and other......................................... 786 (2,712)
Accounts payable and other accrued liabilities..................... (6,289) 8,327
Accrued compensation and project costs............................. (14,604) 10,936
Income taxes payable............................................... 1,807 (1,420)
Other current liabilities.......................................... (698) 8,232
------- -------
Net cash provided by operating activities........................ 12,812 17,020
------- -------
Cash flows from investing activities:
Purchase of property and equipment..................................... (12,065) (10,355)
Acquisition of businesses, net of cash acquired........................ (29,810) --
Other, net............................................................. 389 (554)
------- -------
Net cash used in investing activities............................ (41,486) (10,909)
------- -------
Cash flows from financing activities:
Issuance of common stock............................................... 19,481 39,831
Payment of short-term debt............................................. (1,466) (216)
Purchase of certain minority interests in business
combinations.......................................................... -- (18,851)
Stock repurchases, net of obligations for deferred
settlements........................................................... (5,128) --
Payments of pre-acquisition undistributed income to former
shareholders.......................................................... -- (6,079)
Issuance of notes receivable from shareholders......................... (20,550) --
Collection of notes receivable from shareholders....................... -- 2,121
Other, net............................................................. -- 1,412
------- -------
Net cash provided by (used in) financing activities.............. (7,663) 18,218
------- -------
Net increase (decrease) in cash and cash equivalents..................... (36,337) 24,329
Cash and cash equivalents, beginning of period........................... 119,704 45,867
------- -------
Cash and cash equivalents, end of period................................. $83,367 $70,196
======= =======
Supplemental information:
Interest payments...................................................... $ 173 $ 562
Income tax payments.................................................... 27,229 $15,783
</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 nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 1999.
These financial statements should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the year ended
December 31, 1998 included in the Annual Report on Form 10-K, as filed by the
Company with the Securities and Exchange Commission on March 31, 1999 and as
subsequently amended.
Note 2. Business Combinations and Acquisition of Intangible Assets
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 consolidated statements of operations and
comprehensive income for the three months and nine months ended September 30,
1998 have been restated to reflect revenues of $25.3 million and $97.9 million,
respectively and net income of $2.4 million and $6.1 million, respectively, 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 effective 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 $1.4 million
and assumed liabilities of $1.9 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 1999, the Company acquired six companies (collectively, the "1999
Acquisitions"): Strategic Decisions Group, Inc. (SDG), Triad International, Inc.
(TII), GeoData Solutions, Inc. (GDS), Dowling & Associates, Inc. (DAI), Penta
Advisory Services LLC (PAS), and Scope International, Inc. (SII). 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). On
September 30, 1999, the Company completed its acquisition of the business
operations and certain assets of PAS and the stock of SII for a total cash
purchase price of $15.1 million. The purchase agreements 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.
There were no pre-acquisition intercompany transactions between the Company and
the 1999 Acquisitions.
7
<PAGE>
All six of 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.
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.
Certain assets acquired of $36.1 million and liabilities assumed of $30.2
million 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 $203.5 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.
<TABLE>
<CAPTION>
Three month period Nine month period
ended September 30, ended September 30,
------------------- -------------------
1999 1998 1999 1998
---------- ------- --------- --------
<S> <C> <C> <C> <C>
Revenue (thousands).................. $109,014 $93,955 $312,826 $263,449
Net Income (loss) (thousands)........ 8,704 (13,349) 23,331 (14,227)
Net Income (loss) per Diluted Share.. $ 0.19 $ (0.33) $ 0.50 $ (.35)
</TABLE>
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 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 August 1999, Mr. Maher
borrowed an additional $10 million from the Company. The applicable interest
rate for these notes was 5.75%, payable annually. In November 1999, the Company
received from Mr. Maher 605,684 shares of the Company's common stock with a then
market value of $12.9 million as payment for the principal amount of the notes
plus accrued interest.
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 options shares as
collateral security for repayment of the notes, which shares are currently held
by the Company.
In late August, Mr. Cain, Mr. Demirjian and Mr. Kingsbury (the Company's Chief
Financial Officer at that time) borrowed $2.625 million, $2.625 million and
$1.75 million, respectively, from the Company related to their purchases of
75,000, 75,000 and 50,000 shares, respectively, of the Company's common stock
from third parties at $35 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. These notes were
accompanied by pledge agreements which pledge the shares as collateral security
for repayment of the notes, which shares are not currently held by the Company.
Note 4. Pro Forma Net Income
Pro forma net income for the nine month period ended September 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, net of related tax effects, 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 represents a reduction of income tax expense to exclude the
effect of the one-time, non-cash charge which resulted from the conversion of
Peterson from the modified cash basis to the accrual basis of accounting for tax
purposes.
8
<PAGE>
Note 5. Treasury Share Transactions
During the third quarter the Company purchased 471,000 of its shares in
private transactions with employees. These shares have been recorded at the fair
market value as of the transaction date. Additionally, as of November 4, 1999,
the Company purchased 1 million of its shares in the open market.
Note 6. Subsequent Event
On November 5, 1999, the Company acquired The Barrington Consulting Group,
Inc. (Barrington) for $13 million in net cash plus an additional amount of
between $7.75 million and $15.5 million, payable in cash or stock in two
installments over two years, contingent upon future performance. Certain
operations of Barrington in Boston, Pittsburgh, and New York were not included
in the acquisition. Excluding these operations, Barrington's 1999 revenues are
estimated to be approximately $15 million. Barrington provides consulting
services and its operations are generally consistent with the Company's.
Following the acquisition, Barrington will no longer operated as independent
businesses, but instead be incorporated into the Company's general operations.
The excess of cost over the net assets acquired will be recorded as intangible
assets, including goodwill, subject to completion of the independent appraisal.
Note 7. 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 revenue and expense
recognition and related to the third quarter acquisitions.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenue, as previously reported $111,020 $ 90,711 $310,599 $253,837
Effect of purchase accounting -- (22,400) (13,806) (59,854)
Other adjustments (4,835) -- (4,835) --
-------- -------- -------- --------
Total revenue, as amended $106,185 $ 68,311 $291,958 $193,983
======== ======== ======== ========
Gross profit, as previously reported $ 48,843 $ 38,848 $136,244 $108,030
Effect of purchase accounting -- (9,857) (7,818) (26,405)
Other adjustments (3,126) -- (3,126) 0
-------- -------- -------- --------
Gross profit, as amended $ 45,717 $ 28,991 $125,300 $ 81,625
======== ======== ======== ========
Operating income, as previously reported $ 27,796 $ 4,285 $ 70,253 $ 25,285
Effect of purchase accounting (6,830) (1,376) (14,859) (3,376)
Other adjustments (2,950) -- (3,732) --
-------- -------- -------- --------
Operating income, as amended $ 18,016 $ 2,909 $ 51,662 $ 21,909
======== ======== ======== ========
Net Income (loss),
as previously reported $ 17,504 $ (5,906) $ 43,764 $ 8,135
Effect of purchase accounting (6,830) (1,067) (15,029) (2,792)
Other adjustments (1,750) -- (2,219) --
-------- -------- -------- --------
Net Income (loss), as amended $ 8,924 $ (6,973) $ 26,516 $ 5,343
======== ======== ======== ========
Earnings per diluted share
as previously reported $ 0.39 $ (0.14) $ 0.98 $ 0.20
Effect of purchase accounting (0.15) (0.05) (0.33) (0.05)
Other adjustments (0.04) -- (0.04) --
-------- -------- -------- --------
Earnings per diluted share, as amended $ 0.20 $ (0.19) $ 0.61 $ 0.15
======== ======== ======== ========
Dilutive shares, as amended 45,357 36,129 43,550 36,540
</TABLE>
9
<PAGE>
Item 2.
NAVIGANT CONSULTING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended by Public Law 104-67. Forward-looking statements may be
identified by words including "anticipate," "believe," "intends," "estimates,"
"expect" and similar expressions. The Company cautions readers that forward-
looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity, and
income, are subject to risks and uncertainties that could cause actual results
to differ materially from those indicated in the forward looking statements, due
to important risks and factors herein identified or identified from time to time
in the Company's reports filed with the SEC.
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Revenues. Revenues increased $37.9 million, or 55%, to $106.2 million in the
three months ended September 30, 1999 from $68.3 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 1999 and 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 for the three months ended September 30, 1999 and 1998 of
$2.8 million and $25.7 million, respectively, which were not included in the
Company's consolidated results of operations. The 1998 Acquisitions had pre-
acquisition revenues of $1.7 million in the three months ended September 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
September 30, 1998 included revenues of $0.6 million related to the intellectual
property group (IPG) of Peterson and $1.0 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 $14.9 million, or 16%, to $109.0 million for the three
months ended September 30, 1999 from $94.1 million in the prior year period. The
increase of $14.9 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 $14.2
million and $0.7 million, respectively, of the $14.9 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 $16.7 million, or 58%, to $45.7 million in the
third quarter of 1999 from $29.0 million in the corresponding period in 1998.
Higher 1999 revenues contributed $16.1 million, or 96%, of the increase in gross
profit for the quarter. The remaining $0.6 million of the increase in gross
profit for the quarter reflects an increase in gross profit as a percentage of
revenues to 43.1% in the three month period ended September 30, 1999, from 42.4%
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
September 30, 1999 increased $7.8 million to $21.1 million, or 19.9% of
revenues, from $13.3 million, or 19.5% of revenues, in the prior corresponding
period. The higher level of 1999 revenue and business volume would account for
$7.4 million, or 95%, of the increase in general and administrative expenses for
the period. The remaining increase reflects additional costs associated with the
consolidation of certain accounting and human resources functions during the
three months ended September 30, 1999.
10
<PAGE>
Amortization Expense. The excess of cost over the net assets acquired for the
1999 acquisition of approximately $203.5 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 $6.8 million
non-cash expense recorded in the third quarter would have been approximately
$0.4 million higher had all of the 1999 acquisitions occurred as of July 1,
1999.
Merger-Related Cost (Benefit). In the third quarter of 1998, the Company
incurred merger-related costs of $12.8 million related to the acquisitions of
LECG and Peterson, which were accounted for as poolings of interests. These
costs included legal, accounting and other transaction related fees and
expenses, as well as accruals to consolidate certain facilities. The Company has
reviewed the merger-related accruals and determined that certain amounts
previously accrued are no longer necessary given subsequent acquisition activity
and changes in the Company's organizational structure. The results of operations
for the three months ended September 30, 1999 reflect a benefit of $1.4 million
for the reversal of the previously accrued amounts.
Restructuring and Other Charges. The Company recognized $1.2 million of
expense in the third quarter of 1999 for employee separations associated with
consolidation of certain accounting and human resources functions. In July 1999,
the Company announced a restructuring initiative and offered involuntary
severance packages to 73 employees in the administrative, accounting and human
resources functions.
Other Income, Net. Other income, net includes interest expense, interest
income and other non-operating income and expenses. Other income, net for the
third quarter of 1999 increased $0.7 million to $1.2 million from $0.5 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.
Income Tax Expense. Income tax expense decreased $0.1 million to $10.3 million
for the three months ended September 30, 1999 from $10.4 million in the
corresponding period in 1998. The Company's effective income tax rate was 53.6%
for the third quarter of 1999. The effective rate for this period would be 39.6%
excluding the effect of the non-cash, non-deductible amortization expenses
resulting from the 1999 acquisitions. The Company's effective income tax rate
for the three months ended September 30, 1998 would have been 38.4% excluding
the effect of the one-time, non-cash charge to income tax expense of $7.2
million related to the conversion of Peterson from the modified cash basis to
the accrual basis of accounting for tax purposes and the effect of certain
merger-related costs resulting from the mergers completed during the third
quarter of 1998 that are not tax deductible.
Net Income. Net Income increased $15.9 million to $8.9 million in the three
months ended September 30, 1999 from a loss of $7.0 million in the year earlier
period. Much of the increase is due to the lower level of merger-related costs
in 1999. Higher 1999 revenues resulted in a $16.7 million increase in gross
profits over the prior year, largely offset by increases of $7.8 million in
general and administrative expense and $6.8 million in amortization expenses.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues. Revenues increased $98.0 million, or 51%, to $292.0 million in the
nine months ended September 30, 1999 from $194.0 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
managment 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 $20.8 million and $66.0
million for the nine months ended September 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 $7.1 million in the nine
months ended September 30, 1998 which were not included in the Company's
consolidated results of operations. The results of operations for the nine
months ended September 30, 1998 included revenues of $5.3 million related to the
departures of certain principals and revenues of $3.4 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 $54.4 million, or 21%, to
$312.8 million for the nine months ended September 30, 1999 from $258.4 million
in the prior year period. Consulting engagements with new clients and an
increase in the average size of client consulting engagements contributed $36.4
million and 18.0 million, respectively, of the $54.4 million of organic revenue
growth in 1999.
Gross Profit. Gross profit increased $43.7 million, or 54%, to $125.3 million
in the nine months ended September 30, 1999 from $81.6 million in the
corresponding period in 1998. Higher 1999 revenues contributed $41.2 million, or
94%, of the increase in gross profit. The remaining $2.5 million of the
increase in gross profit reflects an increase in gross profit as a percentage of
revenues to 42.9% in the nine month period ended September 30, 1999, from 42.1%
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.
11
<PAGE>
General and Administrative Expenses. General and administrative expenses for
the nine months ended September 30, 1999 increased $10.5 million to $57.4
million, or 19.7% of revenues, from $46.9 million, or 24.2% of revenues, in the
prior corresponding period. General and administrative expenses for the nine
months ended September 30, 1998 would have been $43.1 million, or 22% 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 $14.3 million in the first nine months of
1999. However, these expenses increased at a slower rate than the Company's
revenues and overall volume of business, resulting in a 2.5% 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 acquisition of approximately $203.5 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 $16.5 million
non-cash expense recorded in 1999 represents the pro rata amortization from the
respective acquisition dates through September 30, 1999. Amortization would
have been approximately $21.8 million had the 1999 acquisitions occurred as of
January 1, 1999.
Merger-Related Cost (Benefit). In the third quarter of 1998, the Company
incurred merger-related costs of $12.8 million related to the acquisitions of
LECG and Peterson, which were accounted for as poolings of interests. These
costs included legal, accounting and other transaction related fees and
expenses, as well as accruals to consolidate certain facilities. The Company has
reviewed the merger-related accruals and determined that certain amounts
previously accrued are no longer necessary given subsequent acquisition activity
and changes in the Company's organizational structure. The results of operations
for the three months ended September 30, 1999 reflect a benefit of $1.4 million
for the reversal of the previously accrued amounts.
Restructuring and Other Charges. The Company recognized $1.2 million of
expense in the third quarter of 1999 for employee separations associated with
consolidation of certain accounting and human resources functions. In July 1999,
the Company announced a restructuring initiative and offered involuntary
severance packages to 73 employees in the administrative, accounting and human
resources functions.
Other Income, Net. Other income, net for the nine months ended September 30,
1999 increased $1.5 million to $3.4 million from $1.9 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 $10.1 million to $28.5
million for the nine months ended September 30, 1999 from $18.4 million in the
corresponding period in 1998. The Company's effective income tax rate was 51.8%
for the nine months ended September 30, 1999. The effective rate for this period
would be 39.9% excluding the effect of the non-cash, non-deductible amortization
expenses resulting from the 1999 acquisitions. The Company's effective income
tax rate for the nine months ended September 30, 1998 would have been 38.6%
excluding the effect of the one-time, non-cash charge to income tax expense of
$7.2 million related to the conversion of Peterson from the modified cash basis
to the accrual basis of accounting for tax purposes and the effect of certain
merger-related costs resulting from the mergers completed during the third
quarter of 1998 that are not tax deductible.
Net Income. Net Income increased $21.2 million, or 400%, to $26.5 million in
the nine months ended September 30, 1999 from $5.3 million in the year earlier
period. Much of the increase is due to the lower level of merger-related costs
in 1999. Higher 1999 revenues resulted in a $43.7 million increase in gross
profits over the prior year. This was largely offset by increases of $10.5
million in general and administrative expense, $16.5 million in amortization
expenses and $10.1 million in income tax expense.
Liquidity and Capital Resources
As of September 30, 1999, the Company had $83.4 million in cash and cash
equivalents and working capital of $131.1 million. The Company's primary source
of liquidity has been cash provided by cash flows from operations and the
various public stock offerings during the previous three years.
Net cash provided by operating activities was $12.8 million during the nine
months ended September 30, 1999. For the period, the primary sources of cash
provided by operating activities were net income of $26.5 million adjusted for
non-cash depreciation and amortization of $22.7 million. The higher volume of
business in 1999 resulted in increases in accounts receivable for the year which
negatively affected operating cash flow by $13.0 million. Operating cash flow
was also negatively affected by decreases in accounts payable and accrued
liabilities of $6.3 million, accrued compensation and project costs of $14.6
million, and current and deferred tax payables of $4.4 million.
Year to date the Company has used $12.0 million for capital spending to
support growth in personnel and services. The investments to support growth in
personnel and services included leasehold improvements, furniture and equipment
for new leased facilities, additional computer and related equipment for
information management consulting services and the purchase and implementation
of enterprise financial and project software system. The Company used $29.8
million in cash during 1999 in conjunction with the 1999 acquisitions.
Net cash used by financing activities was $7.7 million in the nine months
ended September 30, 1999. During the year, the Company received net cash and
related tax benefits of $19.5 million from transactions related to stock option
exercises and employee stock purchases. Borrowings by shareholders used
approximately $20.6 million of funds during the year.
12
<PAGE>
and $5.1 million for the repurchase of stock, net of obligations for deferred
settlements.
During the quarter ended September 30, 1999, the Company increased the
unsecured revolving line of credit with LaSalle Bank to $50 million, which bears
interest at prime or LIBOR plus 1.0%. The line of credit expires in May 2000.
There were no borrowings outstanding under the line of credit at September 30,
1999. 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 and possible contingent payments resulting from the
purchases of Penta and Scope. 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 September 30, 1999.
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
September 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.
13
<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
On March 8, 1999, we brought an action against Deborah T. Kearns, Alan G.
Carnrite, the Estate of Laurel Dell Manning, and David R. Watkins, who were the
former shareholders of Sterling Consulting Group, Inc. ("Sterling"), in the
United States District Court for the Northern District of Illinois, Eastern
Division. In general, the complaint alleges, among other things, that the
defendants made various misrepresentations of fact and failed to disclose
certain material facts in connection with our purchase of Sterling. Among the
misrepresentations the defendants are alleged to have made are
misrepresentations concerning the activities and nature of another company they
owned and operated. Specifically, the complaint alleges that, in connection with
our purchase of Sterling, the defendants falsely stated that their other company
was not in a business competitive with or similar to Sterling, when in fact the
other company's business was competitive with and related to Sterling's
business. The complaint alleges that, during 1998, the defendants continued to
operate this company in a manner competitive with Sterling, in violation of Ms.
Kearns' and Mr. Carnrite's fiduciary duties to Sterling and in violation of the
non-compete provisions of the Acquisition Agreement pursuant to which we
acquired Sterling. The complaint also alleges that, during 1998, Ms. Kearns and
Mr. Carnrite committed various other violations of their fiduciary duties to
Sterling, including self-dealing regarding their other company and failing to
act in Sterling's best interest in a number of respects.
Ms. Kearns and Mr. Carnrite filed a counterclaim asserting various causes of
action against us and two of our officers. Generally, Ms. Kearns' counterclaims
allege that we violated various contractual and other duties to her by refusing
to remove the legend on the restrictive shares of stock she received from us in
connection with our purchase of Sterling. We have defended the counterclaims on
various legal and factual grounds, including defenses based on various
provisions of the securities laws, various contractual arguments, and various
defects in Ms. Kearns' requests and documentation regarding the removal of the
restrictive legend. Following certain objections and defects raised by us
regarding this request, Ms. Kearns submitted certain revised paperwork,
including filing a Form 144 (which had not previously been filed). In September
1999, the district court held that the restrictive legend may be removed from
Ms. Kearns' shares of stock, provided that Ms. Kearns sell the stock through her
broker on the New York stock exchange. Following such ruling and in connection
with Ms. Kearns' sales, the legend on her shares was removed. We have appealed
certain aspects of the district court's ruling. Ms. Kearns has filed a motion
requesting that she be awarded approximately $1.7 million in damages.
Mr. Carnrite has claimed that we owe him compensation of approximately
$100,000 for various services performed under a purported consulting agreement
he executed with Ms. Kearns (allegedly in her capacity as an officer of
Sterling) during 1998. We have defended this claim on various factual and legal
grounds, including that there was no authorization for such an agreement.
We are seeking money damages (including disgorgement of profits and certain
other compensation paid to Mr. Carnrite and Ms. Kearns), indemnification,
punitive damages, attorneys' fees, and any other relief which the court deems
just and proper. The defendants are seeking money damages (including
indemnification and compensatory damages), punitive damages, attorneys' fees,
and equitable relief (including a declaratory judgment that certain provisions
of the acquisition agreement are not enforceable). We are represented by Winston
& Strawn in connection with this litigation. One of our directors, Gov. James R.
Thompson, is a partner of Winston & Strawn.
In July 1999, Navigant International, Inc., a national travel agency
headquartered in Denver, Colorado, sued us in the United States District Court
for the District of Colorado claiming that the use of "Navigant" in our name
infringes on their use of and rights in such name. The complaint seeks
declaratory relief and an injunction against our use of "Navigant," attorneys
fees and other related relief. Navigant International did not seek to stop or
delay our shareholder approval of our use of such term. Our name was developed
by outside, independent name consultants, and our Board of Directors approved
the use of the name based on the independent opinions of counsel (including
Winston & Strawn). We are represented by our primary outside counsel, Sachnoff &
Weaver, Ltd., in connection with this litigation.
Although we are not able at this time to fully evaluate the damages involved
in the above actions, we do not currently expect that they will have a material
adverse effect on our business or consolidated financial position.
We are subject to various other legal proceedings and claims, either asserted
or unasserted, which arise in the ordinary course of business. While the outcome
of these claims cannot be predicted with certainty, we do not believe that the
outcome of any of these legal matters will have a material adverse effect on our
business or financial position.
14
<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
15
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