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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended MAY 15, 1998
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or
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 000-24049
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CHARLES RIVER ASSOCIATES INCORPORATED
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2372210
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 CLARENDON STREET, T-33 BOSTON, MA 02116-5092
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(Address of principal executive offices) (Zip Code)
617-425-3000
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Registrant's telephone number, including area code:
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(Former name, former address, former fiscal year,
if changed since last report)
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 ( ) No (X)
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
As of May 15, 1998 the Company had outstanding 8,316,115 shares of common
stock.
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CHARLES RIVER ASSOCIATES INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION:
PAGE
ITEM 1. Financial Statements
Consolidated Balance Sheets -
May 15, 1998 and November 30, 1997.............3
Consolidated Statements of Income -
Twelve and twenty-four weeks ended
May 15, 1998 and May 16, 1997..................4
Consolidated Statements of Cash Flows -
Twelve and twenty-four weeks ended
May 15, 1998 and May 16, 1997..................5
Notes to Consolidated Financial Statements.....6
.
ITEM 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations..........................9
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings.............................17
ITEM 2. Changes in Securities and Use of Proceeds.....17
ITEM 4. Submission of Matters to a Vote of Security
Holders.......................................17
ITEM 6. Exhibits and Reports on Form 8-K..............18
Signatures....................................19
2
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CHARLES RIVER ASSOCIATES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 15,
1997 1998
---- ----
(UNAUDITED)
ASSETS:
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,054 $ 30,029
Accounts receivable, net 10,140 8,554
Unbilled services 4,731 4,785
Prepaid expenses 280 408
-------- --------
Total current assets 17,205 43,776
Property and equipment, net 2,890 2,885
Other assets 340 545
-------- --------
Total assets $ 20,435 $ 47,206
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 902 $ 1,593
Accrued expenses 5,729 9,973
Deferred revenue 225 250
Current portions of notes payable
to former stockholders and capital
lease obligations 325 308
Dividends payable 1,764 0
Deferred income taxes 528 1,424
-------- --------
Total current liabilities 9,473 13,548
Notes payable to former stockholders,
net of current portion 707 501
Capital lease obligations, net of
current portion 74 58
Deferred rent 1,302 1,467
Minority interest 343 210
Stockholders' equity:
Common stock(voting); no par
value; 25,000,000 shares
authorized; 6,519,240 shares
in 1997 and 8,316,115 shares in 1998 issued
and outstanding 1,977 31,435
Retained earnings 7,770 0
Notes receivable from stockholders (1,211) (13)
-------- --------
Total stockholders' equity 8,536 31,422
-------- --------
Total liabilities and stockholders'
equity $ 20,435 $ 47,206
======== ========
</TABLE>
3
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CHARLES RIVER ASSOCIATES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-four Weeks Ended
------------------ -----------------------
May 16, May 15, May 16, May 15,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 9,171 $ 11,557 $ 18,819 $ 22,694
Costs of services 5,912 6,916 12,018 13,402
Supplemental compensation 280 -- 560 --
----------- ----------- ----------- -----------
Gross profit 2,979 4,641 6,241 9,292
General and administrative 2,162 2,585 4,296 5,339
----------- ----------- ----------- -----------
Income from operations 817 2,056 1,945 3,953
Interest income, net 84 180 93 226
----------- ----------- ----------- -----------
Income before provision for
income taxes and minority
interest 901 2,236 2,038 4,179
Provision for income taxes:
Current year operations 60 244 136 364
Change in tax status -- 1,416 -- 1,416
----------- ----------- ----------- -----------
Net income before minority
interest 841 576 1,902 2,399
Minority interest -- 81 -- 133
----------- ----------- ----------- -----------
Net income $ 841 $ 657 $ 1,902 $ 2,532
=========== =========== =========== ===========
Historical basic net income
per share $ 0.14 $ 0.10 $ 0.31 $ 0.38
=========== =========== =========== ===========
Basic weighted average shares 6,212,440 6,860,572 6,212,440 6,689,906
=========== =========== =========== ===========
Historical diluted net income
per share $ 0.14 $ 0.10 $ 0.31 $ 0.38
=========== =========== =========== ===========
Diluted weighted average shares 6,212,440 6,876,329 6,212,440 6,697,785
=========== =========== =========== ===========
Pro forma income data:
Net income as reported $ 841 $ 657 $ 1,902 $ 2,532
Pro forma adjustment (309) 710 (700) 12
----------- ----------- ----------- -----------
Pro forma net income $ 532 $ 1,367 $ 1,202 $ 2,544
=========== =========== =========== ===========
Pro forma basic net income
per share $ 0.08 $ 0.20 $ 0.19 $ 0.37
=========== =========== =========== ===========
Pro forma basic weighted average
shares* 6,342,170 6,990,302 6,342,170 6,819,636
=========== =========== =========== ===========
Pro forma diluted net income
per share $ 0.08 $ 0.20 $ 0.19 $ 0.37
=========== =========== =========== ===========
Pro forma diluted weighted
average shares* 6,342,170 7,006,059 6,342,170 6,827,515
=========== =========== =========== ===========
</TABLE>
*The weighted average number of shares of common stock for the purpose of
computing pro forma net income per share has been increased by the number of
shares required to pay a dividend in the amount of $2.4 million paid from the
proceeds of the initial public offering.
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CHARLES RIVER ASSOCIATES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty-four weeks Ended
--------------------------
May 16, May 15,
1997 1998
---- ----
Operating activities:
<S> <C> <C>
Net income $ 1,902 $ 2,532
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 258 464
Deferred rent (59) 165
Deferred income taxes 110 896
Minority interest 0 (133)
Changes in operating assets and
liabilities:
Accounts receivable 85 1,586
Unbilled services (848) (54)
Prepaid expenses and other (538) (333)
Accounts payable and accrued
expenses 3,035 4,960
-------- ---------
Net cash provided by operating
activities 3,945 10,083
Investing activities:
Purchase of property and equipment (841) (459)
-------- ---------
Net cash used in investing activities (841) (459)
Financing activities:
Payments on notes payable to
former shareholders and capital
lease obligations (165) (239)
Collection of notes receivable
from stockholders 155 1,198
Dividends paid (1,636) (12,555)
Proceeds from sale of stock 0 29,947
-------- ---------
Net cash provided by(used in) financing
activities (1,646) 18,351
Net increase in cash and cash
equivalents 1,458 27,975
Cash and cash equivalents at
beginning of period 1,434 2,054
-------- ---------
Cash and cash equivalents at
end of period $ 2,892 $ 30,029
======== =========
</TABLE>
5
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CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Charles River Associates Incorporated (the "Company") is an economic and
business consulting firm that applies advanced analytical techniques and
in-depth industry knowledge to complex engagements for a broad range of clients.
The Company offers two types of services: legal and regulatory consulting and
business consulting.
2. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS & ESTIMATES
The consolidated balance sheet as of May 15, 1998 and the consolidated
statements of income and cash flows for the twelve and twenty-four week periods
ended May 15, 1998 and May 16, 1997 are unaudited and in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Company's consolidated
financial position, results of operations and cash flows.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. FISCAL YEAR
The Company's fiscal year ends on the last Saturday in November. The Company's
first, second and fourth quarter each include 12 weeks and the third quarter
includes sixteen weeks.
4. INCOME TAXES
In fiscal 1997, the Company was treated for federal and state income tax
purposes as an S corporation under the Internal Revenue Code of 1986, as amended
(the "Code"). As a result, the Company's stockholders, rather than the Company,
were required to pay federal and certain state income taxes based on the
Company's taxable earnings. The Company filed its returns using the cash method
of accounting. Upon closing of the initial public offering of Common Stock (see
note 7), the Company's status as an S Corporation terminated.
The Company is now subject to corporate taxation as a C Corporation under the
Code. Concurrently with the termination of the Company's status as an S
Corporation, the Company adopted the accrual method of accounting. A pro forma
provision for income taxes has been presented as if the Company had been taxed
as a C corporation for the periods ended May 16, 1997 and May 15, 1998.
At the time of the termination of the Company's status as an S Corporation, the
Company recorded a net deferred income tax liability and a one-time additional
provision for income taxes of $1,416,000.
5. NET INCOME PER SHARE AND PRO FORMA NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
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CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
earnings per share is very similar to the previously reported fully diluted
earnings per share.
Pro forma net income per share is computed using pro forma net income and the
pro forma weighted average number of shares of common stock. The weighted
average number of shares of common stock for the purpose of computing pro forma
net income per share has been increased by the number of shares that were
required to pay a dividend in the amount of $2.4 million that was paid from the
proceeds of the initial public offering.
6. SUPPLEMENTAL COMPENSATION
The Company currently has one bonus program. This program awards discretionary
bonuses based on the Company's revenues and profitability and individual
performance. Amounts paid under this bonus program are included in costs of
services and the Company expects to continue this bonus program. During fiscal
1997, the Company also had another bonus program, which consisted of
discretionary payments to officers and certain outside consultants based
primarily on the Company's cash flows. These bonus payments are shown as
supplemental compensation in the Company's statements of income. Beginning in
fiscal 1998, the Company no longer pays supplemental compensation, and
consequently, did not report supplemental compensation in the twelve or
twenty-four weeks of fiscal 1998.
7. STOCKHOLDERS EQUITY
Subsequent to November 29, 1997, the Company's Board of Directors authorized (i)
the declaration of a 52-for-1 stock split to be effected in the form of a
dividend of 51 shares of Common Stock per share of Common Stock outstanding
before the closing of the Offering and (ii) an increase in the number of shares
of authorized Common Stock to 25,000,000, which the Company's stockholders
approved.
In the second quarter of fiscal 1998, the Company completed an initial public
offering of 1,796,875 shares of Common Stock (the "Offering") in exchange for
$29.8 million of proceeds, which is net of Offering costs.
Each person who was a stockholder of the Company before the closing of the
Offering entered into a Stock Restriction Agreement with the Company, which
prohibits each such person from selling or otherwise transferring shares of
Common Stock held immediately before the Offering without the consent of the
Board of Directors of the Company for two years after the Offering. In addition,
the Stock Restriction Agreement will allow the Company to repurchase a portion
of such stockholder's shares of Common Stock at a percentage of market value
should the stockholder leave the Company (other than for death or retirement for
disability).
8. ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." Both SFAS No. 130 and SFAS No. 131 are effective for fiscal
years beginning after December 15, 1997. The Company believes that the
adoption of these new accounting standards will not have a material impact on
the Company's consolidated financial statements.
In December 1997, The Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued a Statement of Position (SOP),
"Reporting on the Costs of Start-up Activities," which will require
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CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
companies upon adoption to expense start-up costs, including organization costs,
as incurred. In addition, the SOP will require companies upon adoption to write
off as a cumulative change in accounting principle any previously recorded
start-up or organization costs. The SOP is effective for fiscal years beginning
after December 15, 1998. At May 15, 1998, the Company had deferred start-up
costs of $58,000. The Company believes that the adoption of this SOP will not
have a material impact on the Company's consolidated financial statements.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information this Quarterly Report contains
forward-looking statements. The forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors Affecting Future Performance."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date hereof. The
Company undertakes no obligation to revise or publicly release the results of
any revision to these forward-looking statements. Readers should carefully
review the risk factors described in this Quarterly Report and in other
documents that the Company files from time to time with the Securities and
Exchange Commission, including the Company's Registration Statement on Form S-1
(Registration No. 333-46941) and the Quarterly Reports on Form 10-Q filed by the
Company in fiscal 1998.
RESULTS OF OPERATIONS - TWELVE WEEKS ENDED MAY 16, 1997 COMPARED TO TWELVE
WEEKS ENDED MAY 15, 1998
Revenues. Revenues increased by $2.4 million, or 26.0%, from $9.2 million for
the second quarter of fiscal 1997 to $11.6 million for the second quarter of
fiscal 1998. The increase in revenues was due primarily to increased consulting
services performed for new and existing clients during the period and higher
utilization rates. The Company experienced revenue increases during the second
quarter of fiscal 1998 in both its legal and regulatory consulting services and
business consulting services, and in particular generated significant revenue
increases in its antitrust and mergers and acquisitions practices.
Costs of Services. Costs of services increased by $1.0 million, or 17.0%, from
$5.9 million in the second quarter of fiscal 1997 to $6.9 million in the second
quarter of fiscal 1998. As a percentage of revenues, costs of services decreased
from 64.5% in the second quarter of fiscal 1997 to 59.8% in the second quarter
of fiscal 1998. The decrease as a percentage of revenues was due primarily to
research staff not increasing at as fast a rate as the rate of increase in
revenues in the second quarter of fiscal 1998.
Supplemental Compensation. Beginning in fiscal 1998, the Company no longer pays
supplemental compensation, and consequently, did not have supplemental
compensation in the second quarter of fiscal 1998. Supplemental compensation was
$280,000 in the second quarter of fiscal 1997.
General and Administrative. General and administrative expenses increased by
$423,000, or 19.6%, from $2.2 million in the second quarter of fiscal 1997 to
$2.6 million in the second quarter of fiscal 1998. The increase was due
primarily to increased rent expense resulting from the Company's expansion of
each of its three offices in Boston, Massachusetts, Washington, D.C. and Palo
Alto, California. However, as a percentage of revenues, general and
administrative expenses decreased from 23.6% in the second quarter of fiscal
1997 to 22.4% in the second quarter of fiscal 1998 due to the increase in the
level of revenues.
Interest Income, Net. Net interest income increased from $84,000 in the second
quarter of fiscal 1997 to $180,000 in the second quarter of fiscal
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1998. This increase was due primarily to interest earned from investments of the
proceeds of the Company's initial public offering.
Minority Interest. In June 1997, the Company established and purchased a
controlling interest in NeuCo LLC ("NeuCo"), which provides applications
consulting services and a family of neural network software solutions and
complementary applications for fossil-fired electric utilities. Minority
interest was $81,000 in the second quarter of fiscal 1998, and represents the
portion of NeuCo's net loss after taxes allocable to its minority owners.
Provision for Income Taxes. The provision for income taxes increased from
$60,000 for the second quarter of fiscal 1997 to $1.7 million for the second
quarter of fiscal 1998. The provision for the second quarter of fiscal 1998
consists of $244,000 for current year operations, reflecting taxation as an S
Corporation for 67 days and taxation as a C Corporation for 17 days, and $1.4
million for the change in tax status to a C Corporation.
RESULTS OF OPERATIONS - TWENTY-FOUR WEEKS ENDED MAY 16, 1997 COMPARED TO
TWENTY-FOUR WEEKS ENDED MAY 15, 1998
Revenues. Revenues increased by $3.9 million, or 20.6%, from $18.8 million for
the twenty-four weeks ended May 16, 1997 to $22.7 million for the twenty-four
weeks ended May 15, 1998. The increase in revenues was due primarily to an
increase in consulting services performed for new and existing clients during
the period and higher utilization rates as well as increases in its antitrust
and mergers and acquisitions practices.
Costs of Services. Costs of services increased by $1.4 million, or 11.5%, from
$12.0 million in the twenty-four weeks ended May 16, 1997 to $13.4 million in
the twenty-four weeks ended May 15, 1998. As a percentage of revenues, costs of
services decreased from 63.9% in the twenty-four weeks ended May 16, 1997 to
59.1% in the twenty-four weeks ended May 15, 1998. The decrease as a percentage
of revenues was due primarily to research staff not increasing at as fast a rate
as the rate of increase in revenues in the twenty-four weeks ended May 15, 1998.
Supplemental Compensation. Beginning in fiscal 1998, the Company no longer pays
supplemental compensation, and consequently, did not have supplemental
compensation, in the twenty-four weeks ended May 15, 1998. Supplemental
compensation was $560,000 through the twenty-four weeks ended May 16, 1997.
General and Administrative. General and administrative expenses increased by
$1.0 million, or 24.3%, from $4.3 million in the twenty-four weeks ended May 16,
1997 to $5.3 million in the twenty-four weeks ended May 15, 1998. As a
percentage of revenues, general and administrative expenses increased from 22.8%
in the twenty-four weeks ended May 16, 1997 to 23.5% in the twenty-four weeks
ended May 15, 1998. The increase as a percentage of revenues was due primarily
to increased rent expense resulting from the Company's expansion of each of its
three offices in Boston, Massachusetts, Washington, D.C. and Palo Alto,
California.
Interest Income, Net. Net interest income increased from $93,000 in the
twenty-four weeks ended May 16, 1997 to $226,000 in the twenty-four weeks ended
May 15, 1998. This increase was due primarily to interest earned from
investments of the proceeds of the Company's initial public offering.
Minority Interest. Minority interest was $133,000 in the twenty-four weeks ended
May 15, 1998, and represents the portion of NeuCo's net loss after taxes
allocable to its minority owners.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provision for Income Taxes. The provision for income taxes increased from
$136,000 for the twenty-four weeks ended May 16, 1997 to $1.8 million for the
twenty-four weeks ended May 15, 1998. The provision for the twenty-four weeks
ended May 15, 1998 consists of $364,000 for current year operations, reflecting
taxation as an S Corporation for 150 days and taxation as a C Corporation for 17
days, and $1.4 million for the change in tax status to a C Corporation.
11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of May 15, 1998, the Company had cash and cash equivalents of $30.0 million
and working capital of $30.2 million. Net cash provided by operating activities
for the twenty-four weeks ended May 15, 1998 was $10.0 million. Cash generated
from operating activities resulted primarily from net income of $2.5 million, a
decrease in accounts receivable of $1.6 million and an increase in accounts
payable and accrued expenses of $4.7 million which reflects unpaid bonuses
related to fiscal year 1997 along with normal bonus provisions for the
twenty-four weeks ended May 15, 1998.
Net cash used in investing activities for the purchase of property and equipment
during the twenty-four weeks ended May 15, 1998 was $459,000. The Company's
financing activities provided cash of $18.4 million in the twenty-four weeks
ended May 15, 1998. This increase consists primarily of the proceeds from the
sale of stock of $29.9 million from the Company's initial public offering (the
"Offering"), and the collection of notes receivable from shareholders of $1.2
million, offset by the previously accrued 1997 tax distribution of $1.7 million,
a $2.4 million supplemental dividend paid from the proceeds of the Offering, and
a final $8.0 million S Corporation distribution paid to the stockholders.
The Company presently has available a $2.0 million revolving line of credit with
BankBoston Corporation ("BankBoston"), which is secured by the Company's
accounts receivable. This line of credit automatically renews each year on June
30 unless earlier terminated by either the Company or BankBoston. No borrowings
were outstanding under this line of credit as of May 15, 1998.
The Company believes that the net proceeds of the Offering, together with funds
generated by operating activities, existing cash balances and credit available
under its bank line of credit, will be sufficient to meet the Company's working
capital and capital expenditure requirements for at least the next 12 months.
The Company is currently assessing the potential impact of the Year 2000 on the
processing of date-sensitive information by the Company's computerized
information systems and on products sold by the Company. While there can be no
assurance that all issues arising from the Year 2000 will be identified and
resolved satisfactorily, the Company presently believes that Year 2000 issues
will not pose significant operational problems for the Company or have a
material adverse effect on the Company's business, financial condition or
results of operations.
To date, inflation has not had a material impact on the Company's financial
results. There can be no assurance, however, that inflation may not adversely
affect the Company's financial results in the future.
12
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FACTORS AFFECTING FUTURE PERFORMANCE
Certain of the statements contained in this section and elsewhere in this
quarterly report that are not purely historical, such as statements regarding
the Company's expectations, beliefs, intentions, plans and strategies regarding
the future, are forward-looking statements that involve risks, uncertainties and
assumptions that could cause the Company's actual results to differ materially
from those expressed in the forward-looking statements. All forward-looking
statements are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any forward-looking statement.
The cautionary statements made in this quarterly report should be read as being
applicable to all related forward-looking statements wherever they appear in
this quarterly report.
DEPENDENCE UPON KEY EMPLOYEES
The Company's business consists primarily of the delivery of professional
services and, accordingly, its future success is highly dependent upon the
efforts, abilities, and business generation capabilities and project execution
of its consultants. The Company has no employment or non-competition agreement
with any consultant and, accordingly, each consultant may terminate his or her
relationship with the Company at will and without notice and immediately begin
to compete with the Company. The loss of the services of any consultant or the
failure of the Company's consultants to generate business or otherwise perform
at or above historical levels could have a material adverse effect on the
Company's business, financial condition and results of operations.
NEED TO ATTRACT QUALIFIED CONSULTANTS
In order to meet its growth objectives, the Company needs to hire increasing
numbers of highly qualified, highly educated consultants. The number of
potential employees that meet the Company's hiring criteria is relatively small.
Moreover, increasing competition for these consultants may also result in
significant increases in the Company's labor costs, which could have a material
adverse effect on the Company's margins and results of operations. The failure
to recruit and retain a significant number of qualified consultants could have a
material adverse effect on the Company's business, financial condition and
results of operations.
MAINTENANCE OF PROFESSIONAL REPUTATION
The Company's ability to secure new engagements and hire qualified consultants
is highly dependent upon the Company's overall reputation. Any factor that
diminishes the reputation of the Company or any of its personnel or outside
consultants ("Outside Experts") could make it substantially more difficult for
the Company to compete successfully for both new engagements and qualified
consultants and could therefore have a material adverse effect on the Company's
business, financial condition and results of operations.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company has experienced, and may continue to experience, significant
period-to-period fluctuations in revenues and results of operations. The
Company's results of operations in any quarter can fluctuate depending upon,
among other things, the number of weeks in the quarter, the number, scope and
timing of ongoing client engagements, the extent of discounting or cost
overruns, employee hiring, and other factors affecting employee productivity.
Because the Company generates substantially all of its revenues from consulting
services provided on an hourly-fee basis, the Company's revenues in any period
are directly related to the number of its consultants, their billing rates and
the number of billable hours worked during that period. The Company's ability to
increase any of these factors in the short term is limited and, accordingly, the
Company may be unable to compensate for periods of underutilization during one
part of a fiscal period by augmenting revenues during another part of that
period. In addition, the Company intends to hire additional consultants who may
not be fully utilized immediately, particularly in the quarter in which the
consultants are hired. Moreover, a significant majority of the Company's
operating expenses, primarily rent and the base salaries of the Company's
consultants, are fixed in the short term, and as a result the failure of
revenues to meet the Company's projections in any quarter could have a
disproportionate adverse effect on the Company's net income. For these reasons,
the Company believes that its historical results of operations should not be
relied upon as an indication of future performance.
DEPENDENCE UPON OUTSIDE EXPERTS
The Company's future success depends upon the continuation of the Company's
existing relationships with four principal Outside Experts. The Company's
ability to compete successfully for certain engagements in the past has derived
in substantial part from its ability to offer the services of these Outside
Experts to potential clients. Each of these Outside Experts is a party to an
agreement with the Company that restricts his right to compete with the Company,
however these Outside Experts may limit their relationships with the Company at
any time for any reason. The limitation or termination of any of their
relationships with the Company could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
in order to meet the Company's growth objectives, the Company believes that it
will be necessary to establish ongoing relationships with additional Outside
Experts. There can be no assurance that the Company will be successful in
establishing such.
MANAGEMENT OF GROWTH
The Company has recently experienced and may continue to experience significant
growth in its revenues and employee base. This growth has resulted, and any
future growth would continue to result, in new and increased management,
consulting and training responsibilities for the Company's consultants as well
as increased demands on the Company's internal systems, procedures and controls,
and its managerial, administrative, financial, marketing and other resources. No
member of the Company's management team has experience in managing a public
company. Moreover, the Company may open offices in new geographic locations,
which would entail certain start-up and maintenance costs that could be
substantial. The failure of the Company to manage growth successfully could have
a material adverse effect on the Company's business, financial condition and
results of operations.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONCENTRATION OF REVENUES; DEPENDENCE ON LIMITED NUMBER OF LARGE ENGAGEMENTS
The Company has derived, and expects to continue to derive, a significant
portion of its revenues from a limited number of large engagements. The volume
of work performed for any particular client is likely to vary from year to year.
Engagements can also terminate suddenly and without prior notice to the Company.
The unexpected termination of an engagement could result in the underutilization
of the consultants working on the engagement until they are assigned to other
projects. Accordingly, the failure to obtain anticipated numbers of new large
engagements, or the termination or significant reduction in the scope of a
single large engagement, could have a material adverse effect on the Company's
business, financial condition and results of operations.
POTENTIAL CONFLICTS OF INTERESTS
The Company's engagement by a client frequently precludes the Company from
accepting engagements with the client's competitors or adversaries because of
direct or indirect conflicts between their interests or positions on disputed
issues. Accordingly, the number of both potential clients and potential
engagements is limited. Moreover, in many of the industries in which the Company
provides consulting services, and in the telecommunications industry in
particular, there has been a continuing trend toward business consolidations and
strategic alliances. These consolidations and alliances reduce the number of
potential clients for the Company's services and increase the likelihood that
the Company will be unable to continue certain ongoing engagements or accept
certain new engagements as a result of conflicts of interests. Any such result
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE UPON ANTITRUST AND MERGERS AND ACQUISITIONS CONSULTING BUSINESS
The Company derives substantial revenues from engagements in the Company's
antitrust and mergers and acquisitions practice areas. Substantially all of
these revenues are derived from engagements relating to enforcement of United
States antitrust laws. Changes in the federal antitrust laws or changes in
judicial interpretations of these laws for any reason could substantially reduce
the number, duration or size of engagements available to the Company in this
area. Any substantial reduction in the number of the Company's antitrust and
mergers and acquisitions consulting engagements could have a material adverse
effect on its business, financial condition and results of operations.
INTENSE COMPETITION
The market for economic and business consulting services is intensely
competitive, highly fragmented and subject to rapid change. In general, the
barriers to entry into the Company's markets are few and the Company expects to
face additional competition from new entrants into the economic and business
consulting industries. There can be no assurance that the Company will compete
successfully with its existing competitors or with any new competitors.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISKS RELATED TO POSSIBLE ACQUISITIONS
An element of the Company's strategy is to expand its operations through the
acquisition of complementary businesses or consulting practices. The Company has
never acquired another business, and there can be no assurance that the Company
will be able to identify, acquire, successfully integrate into the Company or
profitably manage any businesses without substantial expense, delay or other
operational or financial problems. Moreover, there is competition for
acquisition opportunities in the economic and business consulting industries,
which could result in an increase in the price of acquisition targets and a
decrease in the number of attractive companies available for acquisition.
RISKS RELATED TO ENTRY INTO NEW LINES OF BUSINESS
An element of the Company's growth strategy is to continue to develop new
practice areas and complementary lines of business. For example, in June 1997,
the Company established and purchased a controlling interest in NeuCo LLC
("NeuCo"), which provides applications consulting services and a family of
neural network software solutions and complementary applications for
fossil-fired electric utilities. To date, NeuCo has not been profitable, and
there can be no assurance that it will become profitable. The development by the
Company of new practice areas or lines of business outside its core economic and
business consulting services carries inherent risks, including risks associated
with inexperience and competition from mature participants in those markets.
There can be no assurance that the Company's attempts to develop NeuCo or any
other new practice area or line of business will be successful.
PROFESSIONAL LIABILITY
Litigation against the Company alleging that the Company performed negligently
or otherwise breached its obligations to the client could expose the Company to
significant liabilities and tarnish its reputation, either of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
16
<PAGE> 17
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
As of the date of this filing, the Company is not a party to any
legal proceedings the outcome of which, in the opinion of management
of the Company, would have material adverse effect on the Company's
business, financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds
d) Use of Proceeds
The Company sold 1,796,875 shares of its Common Stock, without par
value ("Common Stock"), on April 29, 1998 and May 7, 1998, pursuant
to a Registration Statement on Form S-1 (Registration No.
333-46941), which was declared effective by the Securities and
Exchange Commission on April 23, 1998 (the "Effective Date").
Certain stockholders of the Company sold an aggregate of 719,325
shares of Common Stock pursuant to such registration statement. The
managing underwriters of the offering were NationsBanc Montgomery
Securities LLC and William Blair & Company. The aggregate gross
proceeds to the Company and the selling stockholders from the
offering were $33.2 million and $13.3 million, respectively. The
Company's total expenses in connection with the offering were
approximately $3.4 million, of which $2.3 million was for
underwriting discounts and commissions and, based on the Company's
reasonable estimate, approximately $1.0 million was for other
expenses, of which $900,000 was paid to persons other than directors
or officers of the Company, persons owning more than 10 percent of
any class of equity securities of the Company, or affiliates of the
Company (collectively, "Affiliates") and of which approximately
$100,000 was paid to a company wholly owned by a director, for
services in connection with the offering. The Company's net proceeds
from the offering were approximately $29.9 million. From the
Effective Date through May 15, 1998, the Company used $2.4 million
of such net proceeds to pay a dividend to stockholders of record on
April 28, 1998 (the "Dividend"). A portion of the Dividend was paid
to Affiliates of the Company. As of May 15, 1998 the Company had
approximately $27.5 million of proceeds remaining from the Offering,
and pending use of the proceeds, the Company intends to invest such
proceeds primarily in investment-grade, short-term, interest-bearing
instruments. The terms of the Company's bank line of credit place
certain restrictions on the Company's ability to pay cash dividends
on its Common Stock.
Item 4. Submission of Matters to a Vote of Security Holders
On April 9, 1998 the Company held a Special Meeting of Stockholders
in Lieu of Annual Meeting of Stockholders. Matters voted on and the
results of those votes are set forth below:
1. The votes cast to adopt Amended and Restated Articles of
Organization of the Company were:
For: 6,207,240 Against: 0 Abstain: 0 Broker non-vote: 0
17
<PAGE> 18
2. The votes cast to adopt Amended and Restated By-Laws of
the Company were:
For: 6,207,240 Against: 0 Abstain: 0 Broker non-vote: 0
3. The votes cast to approve the Company's 1998 Incentive and
Non-Qualified Stock Option Plan:
For: 6,207,240 Against: 0 Abstain: 0 Broker non-vote: 0
4. The votes cast to approve the Company's 1998 Employee
Stock Option Plan:
For: 6,207,240 Against: 0 Abstain: 0 Broker non-vote: 0
5. The votes cast to fix the number of directors constituting
the Board of Directors of the Company at six (6) were:
For: 6,207,240 Against: 0 Abstain: 0 Broker non-vote: 0
6. The votes cast to elect directors of the Company were:
<TABLE>
<CAPTION>
Name For Against Abstain Broker non-vote
---- --- ------- ------- ---------------
<S> <C> <C> <C> <C>
William B. Burnett 6,207,240 0 0 0
James C. Burrows 6,207,240 0 0 0
Franklin M. Fisher 6,207,240 0 0 0
Firoze E. Katrak 6,207,240 0 0 0
Carl Kaysen 6,207,240 0 0 0
Rowland T. Moriarty 6,207,240 0 0 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
Charles River Associates Incorporated did not file any Reports on
Form 8-K during the quarter ended May 15, 1998.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Charles River Associates Incorporated
-------------------------------------
(Registrant)
Date: June 26, 1998 By: /s/ James C. Burrows
------------------- --------------------
James C. Burrows
President and Chief Executive
Officer
Date: June 26, 1998 By: /s/ Laurel E. Morrison
------------------- ----------------------
Laurel E. Morrison
Vice President & Treasurer
(Principal Financial and Accounting
Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-28-1998
<PERIOD-START> FEB-21-1998
<PERIOD-END> MAY-15-1998
<EXCHANGE-RATE> 1
<CASH> 30,029
<SECURITIES> 0
<RECEIVABLES> 13,339<F1>
<ALLOWANCES> (256)
<INVENTORY> 0
<CURRENT-ASSETS> 43,776
<PP&E> 2,885<F2>
<DEPRECIATION> (3,218)
<TOTAL-ASSETS> 47,206
<CURRENT-LIABILITIES> 13,548
<BONDS> 58<F3>
0
0
<COMMON> 31,435
<OTHER-SE> (13)<F4>
<TOTAL-LIABILITY-AND-EQUITY> 47,206
<SALES> 0
<TOTAL-REVENUES> 11,557
<CGS> 0
<TOTAL-COSTS> 6,916
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,236
<INCOME-TAX> 1,660<F5>
<INCOME-CONTINUING> 657
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 657<F6>
<EPS-PRIMARY> .10<F7>
<EPS-DILUTED> .10<F7>
<FN>
<F1>NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS $256
<F2>NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION $3,218
<F3>EXCLUDES RELATED PARTY DEBT
<F4>NOTES RECEIVABLE FROM STOCKHOLDERS
<F5>INCLUDES CHANGE OF TAX STATUS ADJUSTMENT OF $1,416
<F6>NET INCOME BEFORE MINORITY INTEREST IS $576 AND MINORITY INTEREST OF $81
<F7>HISTORICAL EPS ONLY; PROFORMA EPS .20
</FN>
</TABLE>
