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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 SEPTEMBER 1, 2000
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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
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 ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of October 13, 2000 CRA had outstanding 8,685,661 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 -
September 1, 2000 and November 27, 1999...................3
Consolidated Statements of Income -
Sixteen and forty weeks ended
September 1, 2000 and September 3, 1999...................4
Consolidated Statements of Cash Flows -
Forty weeks ended
September 1, 2000 and September 3, 1999...................5
Notes to Consolidated Financial Statements................6
ITEM 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations....................................10
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk.........19
PART II. OTHER INFORMATION
----------------------------
ITEM 1. Legal Proceedings........................................20
ITEM 6. Exhibits and Reports on Form 8-K.........................20
Signatures.................................................................21
2
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PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements
CHARLES RIVER ASSOCIATES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
NOVEMBER 27, SEPTEMBER 1,
1999 2000
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 20,176 $ 25,819
Available-for-sale securities 8,684 5,059
Accounts receivable, net of allowances of $917 in 1999 and
$1,253 in 2000 for doubtful accounts 12,719 17,767
Unbilled services 13,891 10,157
Prepaid expenses 548 1,727
Deferred income taxes 1,358 1,358
-------- --------
Total current assets 57,376 61,887
Property and equipment, net 4,051 4,947
Goodwill, net of accumulated amortization of $502 in 1999
and $927 in 2000 10,553 10,128
Intangible assets, net of accumulated amortization of $152 in 1999
and $292 in 2000 1,348 1,208
Other assets 182 632
-------- --------
Total assets $ 73,510 $ 78,802
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES:
Accounts payable $ 3,641 $ 3,755
Accrued expenses 15,128 9,848
Deferred revenue and other liabilities 254 371
Current portion of notes payable to former stockholders 406 274
-------- --------
Total current liabilities 19,429 14,248
Notes payable to former stockholders, net of current portion 331 121
Notes payable to minority interest 130 --
Deferred rent 1,305 1,129
Minority interest -- 1,734
Commitments and contingencies
Stockholders' equity:
Preferred Stock, no par value; 1,000,000 shares authorized;
none issued and outstanding -- --
Common Stock, no par value; 25,000,000 shares authorized; 8,683,761
shares in 1999 and 8,685,661 shares in 2000 issued and outstanding 40,189 41,252
Deferred compensation (345) (142)
Retained earnings 12,471 20,460
-------- --------
Total stockholders' equity 52,315 61,570
-------- --------
Total liabilities and stockholders' equity $ 73,510 $ 78,802
======== ========
</TABLE>
See accompanying notes.
3
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CHARLES RIVER ASSOCIATES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Sixteen Weeks Ended Forty Weeks Ended
----------------------------- -------------------------------
SEPTEMBER 3, SEPTEMBER 1, SEPTEMBER 3, SEPTEMBER 1,
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 23,480 $ 23,953 $ 54,633 $ 62,667
Costs of services 13,240 13,056 31,322 34,709
----------- ----------- ----------- -----------
Gross profit 10,240 10,897 23,311 27,958
General and administrative 5,786 6,621 12,970 15,807
----------- ----------- ----------- -----------
Income from operations 4,454 4,276 10,341 12,151
Interest income, net 235 538 698 1,177
----------- ----------- ----------- -----------
Income before provision for income taxes 4,689 4,814 11,039 13,328
and minority interest
Provision for income taxes (1,918) (1,987) (4,485) (5,502)
----------- ----------- ----------- -----------
Income before minority interest 2,771 2,827 6,554 7,826
Minority interest -- 117 33 163
----------- ----------- ----------- -----------
Net income $ 2,771 $ 2,944 $ 6,587 $ 7,989
=========== =========== =========== ===========
Net income per share:
Basic $ 0.33 $ 0.34 $ 0.78 $ 0.92
=========== =========== =========== ===========
Diluted $ 0.32 $ 0.34 $ 0.77 $ 0.91
=========== =========== =========== ===========
Weighted average number of shares outstanding:
Basic 8,468,544 8,685,661 8,444,421 8,685,235
=========== =========== =========== ===========
Diluted 8,549,212 8,685,661 8,530,900 8,743,730
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
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CHARLES RIVER ASSOCIATES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Forty Weeks Ended
---------------------------
SEPTEMBER 3, SEPTEMBER 1,
1999 2000
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,587 $ 7,989
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,548 1,589
Deferred rent (173) (176)
Minority interest (33) (163)
Changes in operating assets and liabilities:
Accounts receivable (4,165) (5,048)
Unbilled services (1,472) 3,734
Prepaid expenses and other assets 93 (1,629)
Accounts payable, accrued expenses, and other liabilities (1,549) (5,049)
-------- --------
Net cash provided by operating activities 836 1,247
INVESTING ACTIVITIES:
Purchase of property and equipment (1,309) (2,044)
Sale (purchase) of available-for-sale securities (7,100) 3,625
Acquisition of businesses (9,339) --
-------- --------
Net cash provided by (used in) investing activities (17,748) 1,581
FINANCING ACTIVITIES:
Payments on notes payable to former stockholders (245) (342)
Proceeds from (payment on) loan from minority interest holder 130 (130)
Issuance of common stock upon exercise of stock options -- 35
Costs related to issuance of common stock in prior fiscal year -- (115)
Net investment by minority interest -- 3,367
-------- --------
Net cash provided by (used in) financing activities (115) 2,815
-------- --------
Net increase (decrease) in cash and cash equivalents (17,027) 5,643
Cash and cash equivalents at beginning of period 32,023 20,176
-------- --------
Cash and cash equivalents at end of period $ 14,996 $ 25,819
======== ========
Supplemental cash flow information:
Cash paid for income taxes $ 4,297 $ 7,345
======== ========
Issuance of common stock for acquired business $ 3,815 --
======== ========
Issuance of common stock for future services $ 108 --
======== ========
</TABLE>
See accompanying notes.
5
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CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Charles River Associates Incorporated ("CRA" or the "Company") is an economic
and business-consulting firm that applies advanced analytic techniques and
in-depth industry knowledge to complex engagements for a broad range of clients.
CRA offers two types of services: legal and regulatory consulting and business
consulting.
2. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AND ESTIMATES
The consolidated balance sheet as of September 1, 2000, the consolidated
statements of income for the sixteen and forty weeks ended September 3, 1999,
and September 1, 2000, and the consolidated statements of cash flows for the
forty-week periods ended September 3, 1999, and September 1, 2000, are
unaudited. In the opinion of management, these statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of CRA'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 dates of the financial statements, and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
3. FISCAL YEAR
CRA's fiscal year ends on the last Saturday in November. Each of CRA's first,
second, and fourth quarters includes twelve weeks, and its third quarter
includes sixteen weeks.
4. REVENUE RECOGNITIOn
Revenues from most engagements are recognized as services are provided based
upon hours worked and contractually agreed-upon hourly rates. The Company's
revenues also include expenses billed to clients, which include travel and other
out-of-pocket expenses, charges for support staff and outside contractors, and
other reimbursable expenses. An allowance is provided for any amounts considered
uncollectible.
Unbilled services represent balances accrued by the Company for services
performed but not yet billed to the client.
5. CASH EQUIVALENTS AND AVAILABLE-FOR-SALE SECURITIES
Cash equivalents consist principally of money market funds, commercial paper,
bankers' acceptances, and certificates of deposit with maturities when purchased
of 90 days or less. Available-for-sale securities consist of commercial paper
and certificates of deposit with maturities when purchased of more than 90 days
but less than one year, whose cost approximates fair market value.
6
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CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. GOODWILL
Goodwill represents the cost in excess of fair market value of net assets of
acquired businesses and is amortized over 20 years.
7. IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically reviews the carrying value of its long-lived assets
(primarily property and equipment and goodwill) to assess the recoverability of
these assets; any impairments would be recognized in operating results if a
permanent diminution in value were to occur. As part of this assessment, the
Company reviews the expected future net operating cash flows from its acquired
businesses.
8. INTANGIBLE ASSETS
Intangible assets consist principally of costs allocated to non-compete
agreements and are amortized over the related terms of the agreements (seven to
ten years).
9. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The Company provides for
depreciation of equipment using the straight-line method over its estimated
useful life, generally three to five years. Amortization of leasehold
improvements is provided using the straight-line method over the shorter of the
lease term or the estimated useful life of the leasehold improvements.
10. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
subsidiaries, and NeuCo, Inc. ("NeuCo"), a corporation founded by the Company
and an affiliate of Commonwealth Energy Systems in June 1997. The Company has a
50.5% interest in NeuCo. The portion of the results of operations of NeuCo,
allocable to its minority owners is shown as "minority interest" in the
Company's consolidated statement of income, and that amount, along with the
capital contributions to NeuCo of its minority interest owners, is shown as
"minority interest" on the Company's consolidated balance sheet. All significant
intercompany accounts have been eliminated.
Prior to May 3, 2000, the Company owned 65.25% of NeuCo. On May 3, 2000, in a
series of transactions that resulted in an infusion of new equity in NeuCo, the
Company's ownership was reduced to 50.5%. The transaction was accounted for as
an increase in minority interest and common stock.
11. Net Income per Share
Basic earnings per share represents net income divided by the weighted average
shares of common stock outstanding during the period. Weighted average shares
used in diluted earnings per share include 86,479 common stock equivalents for
the forty weeks ended September 3, 1999 and 58,495 common
7
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CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
stock equivalents for the forty weeks ended September 1, 2000 arising from stock
options using the treasury stock method.
12. STOCKHOLDERS' EQUITY
In the fourth quarter of fiscal 1999, CRA completed a public offering of 200,000
shares of common stock in exchange for $4.3 million of proceeds, which is net of
offering costs.
Each person who was a stockholder of CRA before the closing of CRA's initial
public offering in April 1998 entered into a Stock Restriction Agreement with
CRA, which prohibits each such person from selling or otherwise transferring
shares of common stock held immediately before the initial public offering
without the consent of the Board of Directors of CRA for two years after the
initial public offering. In addition, the Stock Restriction Agreement allows CRA
to repurchase a portion of such stockholder's shares of common stock at a
percentage of market value should the stockholder leave CRA (other than for
death or retirement for disability).
13. ACCOUNTING PRONOUNCEMENTS
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 requires companies upon
adoption to expense start-up costs, including organization costs, as incurred.
In addition, the SOP requires companies upon adoption to write off as a
cumulative change in accounting principle any previously recorded start-up or
organization costs. The Company adopted the SOP in the first quarter of fiscal
2000 and wrote off approximately $32,000 of unamortized organization costs. This
amount was not deemed material enough to present as a cumulative change in
accounting principle.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires all derivatives to be recorded on the balance sheet at fair market
value and establishes special accounting for certain types of hedges. The
Company does not own any derivative instruments and does not engage in hedging
activities. The Statement is effective for fiscal years beginning after June 15,
2000, however, earlier adoption is allowed.
In March 2000, the FASB issued Interpretation No. 44, "Accounting Transactions
Involving Stock Compensation" (the Interpretation). This Interpretation
clarifies how companies should apply the Accounting Principles Board's Opinion
No. 25, "Accounting for Stock Issued to Employees." The Interpretation will be
applied prospectively to new awards, modifications to outstanding awards, and
changes in employee status on or after July 1, 2000, except as follows: the
definition of an employee applies to awards granted after December 15, 1998; the
Interpretation applies to modifications that reduce the exercise price of an
award after December 15, 1998; and the Interpretation applies to modifications
that add a reload feature to an award made after January 12, 2000. At the
present time, there are no awards granted by the Company which would result in
an adjustment at July 1, 2000 as a result of this Interpretation.
8
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CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. SAB
101 clarifies the SEC staff's views on applying generally accepted accounting
principles to revenue recognition in financial statements. In March 2000, the
SEC issued an amendment, SAB 101A, which deferred the effective date of SAB 101.
In June 2000, the SEC issued an amendment, SAB 101B, which again deferred the
effective date of SAB 101. The Company is required to adopt SAB 101 no later
than the fourth quarter of fiscal 2001 in accordance with the amendment. The
adoption of this SAB is not expected to have a significant impact on the
Company's financial statements.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
FORWARD-LOOKING STATEMENTS
In addition to historical information, this quarterly report contains
forward-looking statements. Certain risks and uncertainties could cause actual
results to differ materially from those reflected in such forward-looking
statements. Factors that might cause 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 - Risk Factors."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date of this
report. CRA 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 CRA files from time to time with the Securities and Exchange
Commission, including CRA's Annual Report on Form 10-K for fiscal 1999.
RESULTS OF OPERATIONS-SIXTEEN WEEKS ENDED SEPTEMBER 3, 1999 COMPARED TO SIXTEEN
WEEKS ENDED SEPTEMBER 1, 2000
Revenues. Revenues increased by $473,000, or 2.0%, from $23.5 million for the
third quarter of fiscal 1999 to $24.0 million for the third quarter of fiscal
2000. The increase in revenues was due primarily to an increase in the number of
employee consultants, an increase in consulting services performed for new and
existing clients during the period, and, to a lesser extent, increased billing
rates of CRA's consultants. Utilization was 84% for the third fiscal quarter of
1999 as compared to 74% for the third fiscal quarter of 2000. The total number
of employee consultants increased from 202 for the third quarter of fiscal 1999
to 235 for the third quarter of fiscal 2000. CRA experienced revenue increases
during the third quarter of fiscal 2000 in both its legal and regulatory
consulting services and business consulting services, and in particular,
generated significant revenue increases in its auctions, metals & materials, and
chemicals practice areas.
Costs of Services. Costs of services decreased by $184,000, or 1.4%, from $13.2
million in the third quarter of fiscal 1999 to $13.0 million in the third
quarter of fiscal 2000. As a percentage of revenues, costs of services decreased
from 56.4% for the third quarter of fiscal 1999 to 54.5% in the third quarter of
fiscal 2000. This decrease is primarily the result of reclassifying some of
NeuCo's expenses from Cost of Services to General and Administrative.
General and Administrative. General and administrative expenses increased by
$835,000 or 14.4%, from $5.8 million in the third quarter of fiscal 1999 to $6.6
million in the third quarter of fiscal 2000. As a percentage of revenues,
general and administrative expenses increased from 24.6% in the third quarter of
fiscal 1999 to 27.6% in the third quarter of fiscal 2000. The dollar increase in
general and administrative expenses resulted from payments to outside experts
and increased rents due to internal growth, as well as the reclassification of
NeuCo's expenses.
Interest Income, Net. Net interest income increased from $235,000 in third
quarter of fiscal 1999 to $538,000 in the third quarter of fiscal 2000. This
increase was due primarily to interest earned from the investment of the
proceeds of CRA's public offerings as well as interest earned by NeuCo on funds
received from a minority partner in the second quarter of fiscal 2000.
Provision for Income Taxes. Provision for income taxes increased from $1.9
million in the third quarter
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
of fiscal 1999 to $2.0 million in the third quarter of fiscal 2000. The
Company's effective tax rate increased slightly from 40.9% in the third quarter
of fiscal 1999 to 41.3% in the third quarter of fiscal 2000.
Minority Interest. In June 1997, CRA established and purchased a controlling
interest in NeuCo, which provides applications consulting services and a family
of neural network software solutions and complementary applications for
fossil-fired electric utilities. Minority interest increased from zero in the
third quarter of fiscal 1999 to $117,000 in the third quarter of fiscal 2000,
and represents the portion of NeuCo's net loss after taxes allocable to its
minority owners.
RESULTS OF OPERATIONS-FORTY WEEKS ENDED SEPTEMBER 3, 1999 COMPARED TO FORTY
WEEKS ENDED SEPTEMBER 1, 2000
Revenues. Revenues increased by $8.1 million, or 14.7%, from $54.6 million for
the forty weeks ended September 3, 1999, to $62.7 million for the forty weeks
ended September 1, 2000. The increase in revenues was due primarily to an
increase in the number of employee consultants, an increase in consulting
services performed for new and existing clients during the period and, to a
lesser extent, increased billing rates of CRA's consultants. Utilization was 86%
for the forty weeks ended September 3, 1999 as compared to 75% for the forty
weeks ended September 1, 2000. CRA experienced revenue increases during the
forty weeks ended September 1, 2000, in both its legal and regulatory consulting
services and business consulting services and in particular generated
significant revenue increases in its auctions, trade, metals and materials,
chemicals and transportation practice areas.
Costs of Services. Costs of services increased by $3.4 million, or 10.8%, from
$31.3 million in the forty weeks ended September 3, 1999 to $34.7 million in the
forty weeks ended September 1, 2000. As a percentage of revenues, costs of
services decreased from 57.3% in the forty weeks ended September 3, 1999 to
55.4% in the forty weeks ended September 1, 2000. The decrease as a percentage
of revenues was due primarily to an increase in bonuses paid to outside experts
who source business to CRA. Bonuses paid to outside experts are included in
General and Administrative costs.
General and Administrative. General and administrative expenses increased by
$2.8 million, or 21.9%, from $13.0 million in the forty weeks ended September 3,
1999, to $15.8 million in the forty weeks ended September 1, 2000. As a
percentage of revenues, general and administrative expenses increased from 23.7%
in the forty weeks ended September 3, 1999, to 25.2% in the forty weeks ended
September 1, 2000. The dollar increase in general and administrative expenses
resulted from payments to outside experts and increased rents due to internal
growth.
Interest Income, Net. Net interest income increased from $698,000 in the forty
weeks ended September 3, 1999 to $1.2 million in the forty weeks ended September
1, 2000. This increase resulted from interest earned on investments of the
proceeds of CRA's public offerings, interest earned on a loan issued to NeuCo
and interest earned by NeuCo on funds received from a minority partner in the
second quarter of fiscal 2000.
Provision for Income Taxes. Provision for income taxes increased from $4.5
million in the forty weeks ended September 3, 1999 to $5.5 million in the forty
weeks ended September 1, 2000. The Company's effective tax rate increased
slightly from 40.6% in the forty weeks ended September 3, 1999, to 41.3% in
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
the forty weeks ended September 1, 2000.
Minority Interest. Minority interest in the loss of NeuCo increased from $33,000
in the forty weeks ended September 3, 1999 to $163,000 in the forty weeks ended
September 1, 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of September 1, 2000, CRA had cash and cash equivalents of $25.8 million,
available-for-sale securities of $5.1 million, and working capital of $47.6
million. Net cash provided by operating activities for the forty weeks ended
September 1, 2000 was $1.3 million, consisting primarily of net income of $8.0
million offset in part by a net increase in accounts receivable and unbilled
services of $1.3 million as well as a decrease in accounts payable and accrued
expenses of $5.0 million, which reflects normal tax payments and bonus payments
to employees.
Cash generated by investing activities amounted to $1.6 million, resulting
primarily from the sale of short-term investments of $3.6 million, which was
offset in part by the purchase of property and equipment during fiscal 2000 of
$2.0 million.
CRA's financing activities generated cash of $2.8 million in the forty weeks
ended September 1, 2000. The generation of cash results primarily from a net
investment in NeuCo by Babcock Borsig Power GmbH of $3.4 million, offset in part
by payments made on notes payable to former shareholders and by costs related to
CRA's sale of stock in a public offering in the prior fiscal year.
CRA presently has available a $2.0 million revolving line of credit with Fleet
National Bank, which is secured by CRA's accounts receivable. This line of
credit automatically renews each year on June 30, unless earlier terminated by
either CRA or Fleet National. No borrowings were outstanding under this line of
credit as of September 1, 2000.
CRA believes that existing cash balances and credit available under its bank
line of credit will be sufficient to meet CRA's working capital and capital
expenditure requirements for at least the next 12 months.
To date, inflation has not had a material impact on CRA's financial results.
There can be no assurance, however, that inflation may not adversely affect
CRA's financial results in the future.
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RISK FACTORS
WE DEPEND UPON ONLY A FEW KEY EMPLOYEES TO GENERATE REVENUE
Our business consists primarily of the delivery of professional services, and
accordingly, our success depends heavily on the efforts, abilities, business
generation capabilities, and project execution of our employee consultants. If
we lose the services of any employee consultant or if our employee consultants
fail to generate business or otherwise fail to perform effectively, that could
have a material adverse effect on our business, financial condition, and results
of operations.
OUR BUSINESS COULD SUFFER IF WE ARE UNABLE TO HIRE ADDITIONAL QUALIFIED
CONSULTANTS AS EMPLOYEES
We must hire increasing numbers of highly qualified, highly educated consultants
as employees. Our failure to recruit and retain a significant number of
qualified employee consultants could have a material adverse effect on our
business, financial condition, and results of operations. Relatively few
potential employees meet our hiring criteria, and we face significant
competition for these employees from our direct competitors, academic
institutions, government agencies, research firms, investment banking firms, and
other enterprises. Many of these competing employers are able to offer potential
employees significantly greater compensation and benefits or more attractive
lifestyle choices, career paths, or geographic locations than we can. Increasing
competition for these employee consultants may also significantly increase our
labor costs, which could have a material adverse effect on our margins and
results of operations.
OUR FAILURE TO MANAGE OUR EXPANDING BUSINESS SUCCESSFULLY COULD ADVERSELY AFFECT
OUR REVENUE AND RESULTS OF OPERATIONS
Any failure on our part to manage growth successfully could have a material
adverse effect on our business, financial condition, and results of operations.
We have been experiencing growth in our revenues and employee base as a result
of both internal growth and acquisitions. This growth creates new and increased
management, consulting, and training responsibilities for our employee
consultants. This growth also increases the demands on our internal systems,
procedures, and controls, and on our managerial, administrative, financial,
marketing, and other resources. We depend heavily upon the managerial,
operational, and administrative skills of our officers, particularly James C.
Burrows, our President and Chief Executive Officer, to manage this growth. New
responsibilities and demands may adversely affect the overall quality of our
work. No member of our management team has experience in managing a public
company other than CRA. We have also recently opened offices in new geographic
locations and may open additional offices in the future. Opening new offices may
entail substantial start-up and maintenance costs.
WE DEPEND ON OUR OUTSIDE EXPERTS
We depend on our existing relationships with our exclusive outside experts. Six
of our exclusive outside experts in each of fiscal 1998 and fiscal 1999
generated engagements that accounted for approximately 19 percent and 31 percent
of our revenues in those years. We believe that these outside experts are highly
regarded in their fields and that each offers a combination of knowledge,
experience, and expertise that would be very difficult to replace. We also
believe that we have been able to secure some engagements and attract
consultants in part because we could offer the services of these outside
experts.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Most of these outside experts can limit their relationships with us at any time
for any reason. These reasons could include affiliations with universities whose
policies prohibit accepting specified engagements, the pursuit of other
interests, and retirement.
Thirteen of our approximately 40 outside experts have entered agreements with us
that restrict their right to compete with us. The limitation or termination of
any of their relationships with us or competition from any of them following the
termination of their non-competition agreements with us could have a material
adverse effect on our business, financial condition, and results of operations.
To meet our long-term growth targets, we also need to establish ongoing
relationships with additional outside experts that have reputations as leading
experts in their fields. We may be unable to establish relationships with any
additional outside experts. In addition, any relationship that we do establish
may not help us meet our objectives or generate the revenues or earnings that we
anticipate.
FLUCTUATIONS IN OUR QUARTERLY REVENUES AND RESULTS OF OPERATIONS COULD DEPRESS
THE MARKET PRICE OF OUR COMMON STOCK
We may experience significant fluctuations in our revenues and results of
operations from one quarter to the next. If our revenues or net income in a
quarter fall below the expectations of securities analysts or investors, the
market price of our common stock could fall significantly. Our results of
operations in any quarter can fluctuate for many reasons, including the
following:
- the number of weeks in the quarter
- the number, scope, and timing of ongoing client engagements
- the extent to which we can reassign employee consultants efficiently
from one engagement to the next
- employee hiring
- the extent of discounting or cost overruns
- severe weather conditions and other factors affecting employee
productivity
- collectibility of receivables.
Because we generate almost all of our revenues from consulting services that we
provide on an hourly-fee basis, our revenues in any period are directly related
to the number of our employee consultants, their billing rates, and the number
of billable hours they work in that period. We have a limited ability to
increase any of these factors in the short term. Accordingly, if we underutilize
our consultants during one part of a fiscal period, we may be unable to
compensate by augmenting revenues during another part of that period. In
addition, we may be unable to fully utilize the additional consultants that we
intend to hire, particularly in the quarter in which we hire them. Moreover, a
significant majority of our operating expenses, primarily office rent and
salaries, are fixed in the short term. As a result, if our revenues fail to meet
our projections in any quarter, that could have a disproportionate adverse
effect on our net income. For these reasons, we believe historical results of
operations should not be relied upon as an indication of our future performance.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
ACQUISITIONS MAY DISRUPT OUR OPERATIONS OR ADVERSELY AFFECT OUR RESULTS
We may seek to acquire other businesses, and we may be unable to identify,
acquire, successfully integrate, or profitably manage any business without
substantial expense, delay, or other operational or financial problems. In
addition, we may be unable to achieve the financial, operational, and other
benefits we anticipate from any acquisition. We may be unable to manage any
acquired company profitably or successfully integrate its operations with our
own. Competition for future acquisition opportunities in our markets could
increase the price we pay for businesses we acquire and could reduce the number
of potential acquisition targets. Further, acquisitions may involve a number of
special risks, such as:
- one-time charges related to the acquisition
- diversion of our management's time, attention, and resources
- loss of key acquired personnel
- increased costs to improve or coordinate managerial, operational,
financial, and administrative systems
- dilutive issuances of equity securities
- the assumption of legal liabilities
- amortization of acquired intangible assets
- difficulties in integrating diverse corporate cultures
- additional conflicts of interests.
The occurrence of any of these events could have a material adverse effect on
our business, financial condition, and results of operations.
MAINTAINING OUR PROFESSIONAL REPUTATION IS CRUCIAL TO OUR FUTURE SUCCESS
Our ability to secure new engagements and hire qualified consultants as
employees depends heavily on our overall reputation as well as the individual
reputations of our consultants and principal outside experts. Because we obtain
a majority of our new engagements from existing clients or from referrals by
those clients, any client that is dissatisfied with our performance on a single
matter could seriously impair our ability to secure new engagements. Any factor
that diminishes our reputation or the reputations of any of our personnel or
outside experts could make it substantially more difficult for us to compete
successfully for both new engagements and qualified consultants. That could have
a material adverse effect on our business, financial condition, and results of
operations.
WE DEPEND ON OUR ANTITRUST AND MERGERS AND ACQUISITIONS CONSULTING BUSINESS
We derived a substantial portion of our revenues from engagements in our
antitrust and mergers and acquisitions practice areas. Any substantial reduction
in the number of our engagements in these practice areas could have a material
adverse effect on our business, financial condition, and results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
We derived almost all of these revenues from engagements relating to enforcement
of United States antitrust laws. Changes in federal antitrust laws, changes in
judicial interpretations of these laws, or less vigorous enforcement of these
laws as a result of changes in political appointments or priorities, or for
other reasons, could substantially reduce our revenues from engagements in this
area. In addition, adverse change in general economic conditions, particularly
conditions influencing the merger and acquisition activity of larger companies,
could also adversely affect engagements in which we assist clients in
proceedings before the Department of Justice and the Federal Trade Commission.
OUR REVENUES COME FROM A LIMITED NUMBER OF LARGE ENGAGEMENTS
We have been deriving a significant portion of our revenues from a limited
number of large engagements. If we do not obtain a significant number of new
large engagements each year, our business, financial condition, and results of
operations could suffer. In general, the volume of work we perform for any
particular client varies from year to year, and a major client in one year may
not hire us again.
CLIENTS CAN TERMINATE ENGAGEMENTS WITH US AT ANY TIME
Our engagements generally depend upon disputes, proceedings, or transactions
that involve our clients. Our clients may decide at any time to seek to resolve
the dispute or proceeding or abandon the transaction. Our engagements can
therefore terminate suddenly and without advance notice to us. If an engagement
is terminated unexpectedly, the employee consultants working on the engagement
could be underutilized until we assign them to other projects. Accordingly, the
termination or significant reduction in the scope of a single large engagement
could have a material adverse effect on our business, financial condition, and
results of operations.
POTENTIAL CONFLICTS OF INTERESTS MAY PRECLUDE US FROM ACCEPTING SOME ENGAGEMENTS
We provide our services primarily in connection with significant or complex
transactions, disputes, or other matters that are usually adversarial or that
involve sensitive client information. Our engagement by a client frequently
precludes us from accepting engagements with the client's competitors or
adversaries because of conflicts between their interests or positions on
disputed issues or other reasons. Accordingly, the number of both potential
clients and potential engagements is limited. Moreover, in many industries in
which we provide consulting services, particularly in the telecommunications
industry, there has been a continuing trend toward business consolidations and
strategic alliances. These consolidations and alliances reduce the number of
potential clients for our services and increase the chances that we will be
unable to continue some of our ongoing engagements or accept new engagements as
a result of conflicts of interests. Any such result could have a material
adverse effect on our business, financial condition, and results of operations.
INTENSE COMPETITION FROM OTHER ECONOMIC AND BUSINESS CONSULTING FIRMS COULD HURT
OUR BUSINESS
The market for economic and business consulting services is intensely
competitive, highly fragmented, and subject to rapid change. We may be unable to
compete successfully with our existing competitors or with any new competitors.
In general, there are few barriers to entry into our markets, and we expect to
face additional competition from new entrants into the economic and business
consulting industries. In the legal and regulatory consulting market, we compete
primarily with other economic consulting firms
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
and individual academics. In the business consulting market, we compete
primarily with other business and management consulting firms, specialized or
industry-specific consulting firms, the consulting practices of large accounting
firms, and the internal professional resources of existing and potential
clients. Many of our competitors have national and international reputations as
well as significantly greater personnel, financial, managerial, technical, and
marketing resources than we do. Some of our competitors also have a
significantly broader geographic presence than we do.
OUR ENTRY INTO NEW LINES OF BUSINESS COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS
If we attempt to develop new practice areas or lines of business outside our
core economic and business consulting services, those efforts could have a
material adverse effect on our results of operations. For example, in June 1997,
we established and purchased a controlling interest in NeuCo, Inc., which
provides applications consulting services and a family of neural network
software solutions and complementary applications for fossil-fired electric
utilities. NeuCo may never be profitable. Our efforts in new practice areas or
new lines of business involve inherent risks, including risks associated with
inexperience and competition from mature participants in the markets we enter.
Our inexperience may result in costly decisions that could have a material
adverse effect on our business, financial condition, and results of operations.
OUR ENGAGEMENTS MAY RESULT IN PROFESSIONAL LIABILITY
Our services typically involve difficult analytical assignments and carry risks
of professional and other liability. Many of our engagements involve matters
that could have a severe impact on the client's business, cause the client to
lose significant amounts of money, or prevent the client from pursuing desirable
business opportunities. Accordingly, if a client is dissatisfied with our
performance, the client could threaten or bring litigation in order to recover
damages or to contest its obligation to pay our fees. Litigation alleging that
we performed negligently or otherwise breached our obligations to the client
could expose us to significant liabilities and tarnish our reputation. These
outcomes could have a material adverse effect on our business, financial
condition, and results of operations.
THE PRICE OF OUR COMMON STOCK MAY BE VOLATILE
Many factors may cause the market price of our common stock to fluctuate
significantly, including the following:
- variations in our quarterly results of operations
- the hiring or departure of key personnel or outside experts
- changes in our professional reputation
- the introduction of new services by us or our competitors
- acquisitions or strategic alliances involving us or our competitors
- changes in accounting principles
- changes in the legal and regulatory environment affecting clients
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- changes in estimates of our performance or recommendations by
securities analysts
- future sales of shares of common stock in the public market
- market conditions in the industry and the economy as a whole.
In addition, the stock market has recently experienced extreme price and volume
fluctuations. These fluctuations are often unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of our common stock. When the market price of
a company's stock drops significantly, stockholders often institute securities
class action litigation. Any such litigation against us could cause us to incur
substantial costs and could divert the time and attention of our management and
other resources. Any of these events could have a material adverse effect on our
business, financial condition, and results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of September 1, 2000, CRA was exposed to market risks, which primarily
include changes in U.S. interest rates.
CRA maintains a portion of its cash and cash equivalents in financial
instruments with purchased maturities of one year or less and a portion of its
short-term investments in financial instruments with purchased maturities of two
years or less. These financial instruments are subject to interest rate risk and
will decline in value if interest rates increase. Because these financial
instruments are readily marketable, an immediate increase in interest rates
would not have a material effect on CRA's financial position.
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PART II. OTHER INFORMATION:
----------------------------
Item 1. Legal Proceedings
As of the date of this filing, CRA is not a party to any legal proceedings the
outcome of which, in the opinion of CRA's management, would have a material
adverse effect on CRA's business, financial condition, or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
On July 5, 2000, CRA filed a current report on Form 8-K, which reported
the elections of William F. Concannon, J. Robert Prichard, and Carl Shapiro to
the board of directors on June 1, 2000.
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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
Date: October 16, 2000 By: /s/ James C. Burrows
----------------------------------------
James C. Burrows
President and Chief Executive Officer
Date: October 16, 2000 By: /s/ Laurel E. Morrison
----------------------------------------
Laurel E. Morrison
Chief Financial Officer
Vice President & Treasurer
(Principal Financial and Accounting Officer)
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