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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended NOVEMBER 27, 1999
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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 incorporation or (I.R.S. Employer
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
No Par Value
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 18, 2000 (based on the closing sale price of
$29.75 as quoted by the Nasdaq National Market as of such date) was
approximately $180,632,599. Shares of common stock held by each executive
officer and director of the registrant and by each person known by the
registrant to own beneficially 5% or more of the outstanding common stock have
been excluded from this computation because these persons may be deemed to be
affiliates. The fact that these persons have been deemed affiliates for purposes
of this computation should not be considered a conclusive determination for any
other purpose.
As of February 18, 2000, CRA had outstanding 8,683,761 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required for Part III of this Annual Report is
incorporated by reference from the registrant's definitive Proxy Statement for
its 2000 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days after the end of the registrant's fiscal
year ended November 27, 1999.
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CHARLES RIVER ASSOCIATES INCORPORATED
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED NOVEMBER 27, 1999
TABLE OF CONTENTS
Page
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PART I
Item 1 - BUSINESS............................................................4
ITEM 2 - PROPERTIES.........................................................14
ITEM 3 - LEGAL PROCEEDINGS..................................................14
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................14
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................15
ITEM 6 - SELECTED FINANCIAL DATA............................................16
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..........................................18
ITEM 7A- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..........31
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................31
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...........................................31
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................32
ITEM 11 - EXECUTIVE COMPENSATION.............................................32
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....32
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................32
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K...........................................................33
SIGNATURES...................................................................34
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PART I
ITEM 1 - BUSINESS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K of
Charles River Associates Incorporated ("CRA") contains forward-looking
statements. Certain risks and uncertainties could cause actual results to differ
materially from those reflected in the 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 - 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 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 Annual Report and in other documents that CRA files from time
to time with the Securities and Exchange Commission, including CRA's Quarterly
Reports on Form 10-Q.
INTRODUCTION
CRA is a leading economic and business consulting firm that applies
advanced analytic techniques and in-depth industry knowledge to complex
engagements for a broad range of clients. Founded in 1965, CRA provides
original, authoritative advice to law firms, corporations, and governments
around the world. CRA is often retained in high-stakes matters such as
multi-billion-dollar mergers and acquisitions, new product introductions, major
capital investment decisions, and complex litigation, the outcomes of which
often have significant implications or consequences for the parties involved.
The firm offers two types of services: legal and regulatory consulting and
business consulting. CRA provides law firms and businesses involved in
litigation and regulatory proceedings with expert advice on highly technical
issues, such as the competitive effects of mergers and acquisitions,
calculations of damages, measurement of market share and market concentration,
liability analysis in securities fraud cases, and the impact of increased
regulation. CRA uses its expertise in economics, finance, and business analysis
to offer corporate clients consulting services for strategic issues, such as
establishing pricing strategies, estimating market demand, valuing intellectual
property and other assets, assessing competitors' actions, and analyzing new
sources of supply. The company's analytical expertise in advanced economic and
financial methods is complemented by its in-depth expertise in specific
industries, including chemicals, electric power and other energies, healthcare,
materials, media and telecommunications, retail and wholesale distribution, and
transportation.
CRA's services are provided by its highly credentialed and experienced
staff of employee consultants. As of November 27, 1999, the firm employed 210
full-time professional, including 75 consultants with Ph.D.s and 43 consultants
with other advanced degrees. CRA's consultants have backgrounds in a wide range
of disciplines, including economics, business, corporate finance, materials
sciences, and engineering. The firm is extremely selective in its hiring of
consultants, recruiting from leading universities, industry, and government.
Many of its employee consultants are nationally recognized as experts in their
respective fields and have
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published scholarly articles, lectured extensively, and been quoted in the
press. To enhance the expertise it provides to its clients, CRA maintains close
working relationships with a select group of renowned academic and industry
experts, or outside experts.
CRA has offices in Boston, Massachusetts, Washington, D.C., Toronto,
Canada, and Palo Alto, Los Angeles, and Oakland, California. During 1999, CRA
acquired The Tilden Group and FinEcon. Both companies add well-known economists
whose specialties strengthen and expand CRA's consulting capabilities as well as
its geographic scope.
CRA has completed more than 3,900 engagements for clients, including major
law firms, domestic and foreign corporations, federal, state, and local
government agencies, governments of foreign countries, public and private
utilities, and national and international trade associations. Its clients come
from a broad range of industries and, in 1999, no single client accounted for
more than 10 percent of CRA's revenues.
INDUSTRY OVERVIEW
Businesses are operating in an increasingly complex environment. Expanding
access to powerful computers and software is providing companies with almost
instantaneous access to a wide range of internal information, such as supply
costs, inventory values, and sales and pricing data, as well as external
information, such as market demand forecasts and customer buying patterns. The
Internet is changing traditional distribution channels, thereby eliminating
barriers to entry in many industries and spurring new competition. At the same
time, markets are becoming increasingly global, offering companies the
opportunity to expand their presence throughout the world and exposing them to
increased competition and the uncertainties of foreign operations. Many
industries are rapidly consolidating as companies pursue mergers and
acquisitions in response to increased competitive pressures and to expand their
market opportunities. In addition, companies are relying to a greater extent on
technological and business innovations to improve efficiency, thus increasing
the importance of strategically analyzing their businesses and developing and
protecting new technology. As a result of this increasingly competitive and
complex business environment, companies must constantly gather, analyze, and use
available information to enhance their business strategies and operational
efficiencies.
The increasing complexity and changing nature of the business environment
is also forcing governments to modify their regulatory strategies. For example,
industries such as healthcare are subject to frequently changing regulations
while other industries such as telecommunications and electric power are
experiencing trends toward deregulation. These constant changes in the
regulatory environment are leading to frequent litigation and interaction with
government agencies as companies attempt to interpret and react to the
implications of this changing environment. Furthermore, as the general business
and regulatory environment becomes more complex, corporate litigation has also
become more complicated, protracted, expensive, and important to the parties
involved.
As a result, companies are increasingly relying on sophisticated economic
and financial analysis to solve complex problems and improve decision-making.
Economic and financial
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models provide the tools necessary to analyze a variety of issues confronting
businesses, such as interpretation of sales data, effects of price changes,
valuation of assets, assessment of competitors' activities, evaluation of new
products, and analysis of supply limitations. Governments are also relying to an
increasing extent on economic and finance theory to measure the effects of
anti-competitive activity, evaluate mergers and acquisitions, change
regulations, implement auctions to allocate resources, and establish transfer
pricing rules. Finally, litigants and law firms are using economic and finance
theory to help determine liability and to calculate damages in complex and
high-stakes litigation. As the need for complex economic and financial analysis
becomes more widespread, CRA believes that companies and governments are
increasingly turning to outside consultants for access to the specialized
expertise, experience, and prestige that are not available to them internally.
COMPETITIVE STRENGTHS
Since 1965, CRA has been committed to providing sophisticated consulting
services to its clients. CRA believes that the following factors have been
critical to its success:
Strong Reputation for High-Quality Consulting. For over 30 years, CRA has
been a leader in providing sophisticated economic analysis and original,
authoritative studies for clients involved in complex litigation and regulatory
proceedings. As a result, CRA believes it has established a strong reputation
among leading law firm and business clients as a preferred source of expertise
in economics, finance, business, and strategy consulting, as evidenced by CRA's
high level of repeat business and significant referrals from existing clients.
In fiscal 1999, approximately 90 percent of CRA's revenues resulted from ongoing
engagements and new engagements for existing clients. In addition, CRA believes
its significant name recognition, which it developed as a result of its work on
many high-profile litigation and regulatory engagements, has enhanced the
development of its business consulting practice.
Highly Educated, Experienced, and Versatile Consulting Staff. CRA believes
its most important asset is its base of full-time employee consultants,
particularly its senior consultants. Of CRA's 210 employee consultants as of
November 27, 1999, 107 were either officers, principals, or senior associates,
nearly all of whom have a Ph.D. or a master's degree. Many of these senior
consultants are nationally recognized as experts in their respective fields. In
addition to their expertise in a particular field, most of CRA's consultants are
able to apply their skills across numerous practice areas. This flexibility in
staffing engagements is critical to CRA's ability to apply its resources as
needed to meet the demands of its clients. As a result, CRA seeks to hire
consultants who not only have strong analytical skills, but who are also
creative, intellectually curious, and driven to develop expertise in new
practice areas and industries.
Strong Corporate Culture. CRA's success has resulted in part from its
strong corporate culture. CRA believes consultants are attracted to the firm
because of its more than 30-year history, its strong reputation, the
credentials, experience, and reputation of its employee consultants, the
opportunity to work on an array of matters and with a broad group of renowned
outside experts, and CRA's collegial atmosphere. Its attractiveness as an
employer is reflected in its relatively low turnover rate among employees. CRA
also believes these factors make the company attractive to potential acquisition
targets.
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Industry Expertise. By maintaining expertise in certain industries, CRA is
able to offer clients creative and pragmatic advice tailored to their specific
markets. This industry expertise, developed by CRA over decades of providing
sophisticated consulting services to a diverse group of clients in industries
such as chemicals, electric power and other energies, healthcare, materials,
media and telecommunications, retail and wholesale distribution, and
transportation, differentiates CRA from many of its competitors. CRA believes it
has developed a strong reputation and substantial name recognition within these
specific industries, which has led to repeat business and new engagements from
clients in those markets.
Broad Range of Services. By offering clients both legal and regulatory
consulting services and business consulting services, CRA is able to satisfy a
broad array of client needs, ranging from expert testimony for complex lawsuits
to designing global business strategies. This broad range of expertise enables
CRA to take an interdisciplinary approach to certain engagements, combining
economists and experts in one area with specialists in other disciplines. CRA
emphasizes its diverse capabilities to clients and regularly cross-markets
across its service areas. For example, a client that CRA assists in a litigation
matter may later retain CRA for a business consulting assignment.
Access to Leading Academic and Industry Experts. To enhance the expertise
it provides to its clients, CRA maintains close working relationships with a
select group of outside experts. Depending on client needs, CRA uses outside
experts for their specialized expertise, assistance in conceptual
problem-solving and expert witness testimony. CRA works regularly with renowned
professors at Georgetown University, Harvard University, the Massachusetts
Institute of Technology, Northwestern University, Stanford University, the
University of California at Berkeley, the University of California at Los
Angeles, the University of Toronto, the University of Virginia, and other
leading universities. Outside experts also generate business for CRA and provide
CRA access to other leading academic and industry experts. By establishing
affiliations with prestigious outside experts, CRA further enhances its
reputation as a leading source of sophisticated economic and financial analysis.
CRA has exclusive relationships with 13 of these outside experts.
SERVICES
CRA offers services in two broad areas: legal and regulatory consulting
and business consulting. In its legal and regulatory consulting practice, CRA
usually works closely with law firms on behalf of one or more companies involved
in litigation or regulatory proceedings. Many of the lawsuits and regulatory
proceedings in which CRA is involved are high-stakes matters, such as obtaining
regulatory approval of a pending merger or analyzing possible damages awards in
a securities fraud case. The ability to formulate and effectively communicate
powerful economic and financial arguments to courts and regulatory agencies is
often critical to a successful outcome in litigation and regulatory proceedings.
Through its highly educated and experienced consulting staff, CRA applies
advanced analytic techniques in economics and finance to complex engagements for
a diverse group of clients.
In its business consulting practice, CRA typically provides services
directly to companies seeking assistance with strategic issues that require
expert economic or financial analysis. Many
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of these matters involve "mission-critical" decisions for the client, such as
positioning and pricing a new product or developing a new technological process.
CRA applies a highly analytical, quantitative approach to help companies analyze
and respond to market forces and competitive pressures that affect their
businesses. CRA advises its clients in many of the same areas in which it
provides legal and regulatory consulting, such as finance and mergers and
acquisitions. Applying its in-depth knowledge of specific industries, CRA is
able to provide insightful, value-added advice to its clients. CRA offers
clients practical and creative advice by challenging conventional approaches and
generally avoiding predetermined solutions or methodologies.
Engagements in CRA's two service areas often involve similar areas of
expertise and address related issues, and it is common for CRA's consultants to
work on engagements in both service areas. CRA estimates that it derived
approximately 75 percent of its revenues in fiscal 1999 from legal and
regulatory consulting and approximately 25 percent from business consulting.
CRA offers its clients a wide range of legal, regulatory, and business
consulting services, including the following:
LEGAL AND REGULATORY CONSULTING
AREA OF EXPERTISE DESCRIPTION OF SERVICES
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Antitrust........................ Expert testimony and analysis to support
law firms involved in antitrust
litigation. Areas of expertise include
collusion, price signaling,
monopolization, tying, exclusionary
conduct, resale price maintenance,
predatory pricing, and price
discrimination.
Mergers and Acquisitions......... Economic analysis to assist clients in
obtaining domestic and foreign
regulatory approvals, including in
proceedings before the Federal Trade
Commission and the Department of
Justice. Analysis includes simulating
the effects of mergers on prices,
estimating demand elasticities,
designing and administering customer and
consumer surveys, and studying possible
acquisition-related synergies.
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LEGAL AND REGULATORY CONSULTING (CONTINUED)
Finance.......................... Valuations of businesses, products,
intellectual property, contracts, and
securities. Expert testimony on
valuation theory. Risk assessment for
derivative securities. Computations of
damages and liability analysis in
securities fraud cases.
Intellectual Property............ Consulting and expert testimony in
patent, trademark, copyright, trade
secret, and unfair competition disputes.
Services include valuing property rights
and estimating lost profits, reasonable
royalties, unjust enrichment, and
prejudgment interest.
Transfer Pricing................. Advising clients with foreign operations
regarding the establishment of transfer
prices to improve tax position. Analysis
includes assessment of functions and
risks, valuation of intangible assets,
and analysis of variations in tax laws.
Expert testimony for clients involved in
domestic and foreign lawsuits relating
to transfer pricing.
Environment...................... Expert testimony and consulting for
environmental disputes in litigation
proceedings and before government
agencies. Services include determining
responsibility for cleanups, estimating
damages for spills, disposals and other
environmental injuries, performing
regulatory cost-benefit analysis, and
developing innovative compliance
techniques, such as emissions trading.
International Trade.............. Expert testimony and consulting in
international trade disputes. Expertise
includes antidumping, countervailing
duty examinations and other disputes
involving a wide range of industries and
numerous countries.
Damages.......................... Calculation of damages and critiquing
opposing estimates of damages in complex
commercial litigation. Analysis of
specific economic attributes, such as
price and sales volume, using expertise
in applied microeconomics and
econometrics.
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BUSINESS CONSULTING
AREA OF EXPERTISE DESCRIPTION OF SERVICES
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Business Strategy................ Advising clients on investment
opportunities, cost-reduction programs,
turnaround strategies, risk management,
capital investments, diligence
investigations, valuations, and pricing
strategies. Assessment of the strategic
and financial fit of acquisition
candidates. Analysis includes assessment
of competitive advantages, efficiencies,
and antitrust implications of
acquisitions.
Market Analysis.................. Advising clients on product
introductions, positioning, pricing
strategies, competitive threats and
probable market reactions to proposed
actions. Analysis includes identifying
and understanding market trends,
measuring market size, estimating supply
and demand balances, analyzing
procurement strategies, and evaluating
the impact of government regulations.
Technology Management............ Assisting clients in managing industrial
technologies from assessment through
implementation, including analysis of
the development process for products and
services. Assessing the
commercialization of new technologies by
quantifying the costs and benefits of
obtaining and implementing new
technology. Conducting competitive
analyses through statistical comparisons
of key factors such as raw materials
costs and productivity.
NeuCo. NeuCo, CRA's majority-owned subsidiary, develops and markets a
family of neural network software tools and complementary application consulting
services that are currently focused on electric utilities. NeuCo's products and
services are designed to help utilities maximize the use of their power plants
by improving heat rate, reducing emissions, overcoming operating constraints,
and increasing output capability.
INDUSTRY EXPERTISE
CRA believes its ability to combine expertise in advanced economic and
financial methods with in-depth knowledge of particular industries is one of its
key competitive strengths. By maintaining expertise in certain industries, CRA
provides clients practical advice that is tailored to their specific markets.
This industry expertise, which CRA developed over decades of providing
sophisticated consulting services to a diverse group of clients in many
industries, differentiates CRA from many of its competitors. CRA believes that
it has developed a strong
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reputation and substantial name recognition within specific industries, which
leads to repeat business and new engagements from clients in those markets.
While CRA provides services to clients in a wide variety of industries, it has
particular expertise in the following industries:
- Chemicals
- Electric Power and Other Energies
- Healthcare
- Materials
- Media and Telecommunications
- Retail and Wholesale Distribution
- Transportation
CLIENTS
CRA has completed more than 3,900 engagements for clients including major
law firms, domestic and foreign corporations, federal, state, and local
government agencies, governments of foreign countries, public and private
utilities, and national and international trade associations. While CRA has
particular expertise in a number of industries, it provides services to a
diverse group of clients in a broad range of industries. No single client
accounted for more than 10 percent of the firm's revenues in fiscal 1999. CRA's
policy is to keep the identities of its clients confidential unless its work for
the client is already publicly disclosed.
HUMAN RESOURCES
On November 27, 1999, CRA had 210 full-time employee consultants,
consisting of 37 officers, 70 other senior consultants (either principals or
senior associates) and 103 junior consultants (either associates or analysts),
and had over 75 full-time administrative staff members. Officers and principals
generally work closely with clients, supervise junior consultants, provide
expert testimony on occasion, and seek to generate business for CRA. Senior
associates and associates typically serve as project managers and handle complex
research assignments. Analysts gather and analyze data sets and complete
statistical programming and library research.
CRA derives most of its revenues directly from the services provided by
its full-time employee consultants. The firm's employee consultants generated
engagements that accounted for approximately 78 percent of CRA's revenues in
fiscal 1998 and 66 percent of its revenues in fiscal 1999. CRA's top five
employee consultants in each of fiscal 1998 and fiscal 1999 generated
approximately 33 percent and 24 percent of revenues in those years. The firm's
employee consultants have backgrounds in many disciplines, including economics,
business, corporate finance, materials sciences and engineering. Substantially
all of CRA's senior
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consultants, consisting of officers, principals, and senior associates, have
either a Ph.D. or a master's degree in addition to substantial management,
technical, or industry expertise. Of CRA's total senior employee consulting
staff of 107 as of November 27, 1999, 67 have Ph.D.s in economics, eight have
Ph.D.s in other disciplines, and 26 have other advanced degrees. CRA believes
its financial results, reputation, and growth are directly related to the number
and quality of its employee consultants.
CRA is highly selective in its hiring of consultants, recruiting primarily
from leading universities, industry, and government. CRA believes consultants
choose to work at CRA because of its strong reputation, the credentials,
experience and reputation of its consultants, the opportunity to work on a
diverse array of matters and with renowned outside experts, and CRA's collegial
atmosphere. CRA believes that its attractiveness as an employer is reflected in
its relatively low turnover rate among employees. In 1998, CRA restructured its
recruiting operations to decentralize hiring and implement a team hiring
approach. The firm has designated two or more recruiting teams at each of its
principal offices and given each team responsibility for identifying,
interviewing, and hiring qualified candidates. Teams have specific hiring goals
for fiscal 2000. CRA has also expanded the group of leading universities and
degree programs from which it selects candidates.
CRA's training and career development program for its employee consultants
focuses on three areas: supervision, seminars, and scheduled courses. This
program is designed to complement on-the-job experience and an employee's
pursuit of his or her own career development. New employee consultants
participate in a structured program in which they are partnered with an assigned
mentor. Through CRA's ongoing seminar program, outside speakers make
presentations and conduct discussions with the consultants on various topics. In
addition, employe consultants are expected to present papers, discuss
significant cases, or outline new analytical techniques or marketing
opportunities periodically at in-house seminars. CRA also provides scheduled
courses designed to improve an employee's professional skills, such as
presentation and sales and marketing techniques. CRA also encourages its
employee consultants to pursue their academic interests by writing articles for
economic and other journals.
Each of CRA's officers has signed a non-solicitation agreement, which
generally prohibits the employee from soliciting CRA's clients for a period of
six months following termination of the person's employment with CRA and from
soliciting CRA's employees for a period of two years after termination of the
person's employment. In order to align each officer's interest with the overall
interests and profitability of the firm, CRA has adopted a policy requiring each
of its officers to have an equity interest in CRA. All of CRA's senior
consultants who were stockholders of CRA before its initial public offering are
parties to a stock restriction agreement that prohibits them from selling or
otherwise transferring shares of common stock held immediately before the
initial public offering except under certain circumstances.
CRA maintains a discretionary bonus program, pursuant to which CRA grants
performance-based bonuses to its officers and other employees. The Compensation
Committee, in its discretion, determines the bonuses to be granted to CRA's
officers, and CRA's Chief Executive Officer, in his discretion, determines the
bonuses to be granted to CRA's other employees, based on recommendations of the
various committees of officers supervising the employees' work.
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In addition, CRA works closely with a select group of approximately 40
outside experts from leading universities and industry, who supplement the work
of CRA's employee consultants and generate business for CRA. Six of the firm's
exclusive outside experts in each of fiscal 1998 and fiscal 1999 generated
engagements that accounted for approximately 19 percent and 31 percent of
revenues in those years. CRA believes outside experts choose to work with CRA on
engagements because of the interesting and challenging nature of the work
involved, the opportunity to work with CRA's consultants, and the financially
rewarding nature of the work. Thirteen outside experts have entered into
agreements with CRA that restrict their right to compete with CRA.
MARKETING
CRA relies to a significant extent on the efforts of its employee
consultants, particularly its officers and principals, to market the firm's
services. CRA encourages its employee consultants to generate new business from
both existing and new clients, and rewards its employee consultants with
increased compensation and promotions for obtaining new business. In pursuing
new business, CRA's consultants emphasize CRA's institutional reputation and
experience, while also promoting the expertise of the particular employees who
will work on the matter. Many of CRA's consultants have published articles in
industry, business, economic, legal, and scientific journals and have made
speeches and presentations at industry conferences and seminars, which serve as
a means of attracting new business and enhancing their reputations. On occasion,
employee consultants work with one or more outside experts to market CRA's
services.
CRA supplements the personal marketing efforts of its employee consultants
with firm-wide initiatives. CRA relies primarily on its reputation and client
referrals for new business and undertakes traditional marketing activities. The
firm regularly organizes seminars for existing and potential clients featuring
panel members that include CRA consultants, outside experts, and leading
government officials. CRA has an extensive set of brochures organized around its
service areas, which outline the firm's experience and capabilities. CRA
distributes publications to existing and potential clients highlighting emerging
trends and noteworthy CRA engagements. Because existing clients are an important
source of repeat business and referrals, CRA communicates regularly with its
existing clients to keep them informed of developments that affect their markets
and industries.
In its legal and regulatory consulting practice, CRA derives much of its
new business from referrals by existing clients. CRA has worked with leading law
firms across the country and believes it has developed a reputation among law
firms as a preferred source of sophisticated economic advice for litigation and
regulatory work. For its business consulting practice, CRA also relies on
referrals from existing clients, but supplements referrals with a significant
amount of direct marketing to new clients through conferences, publications,
presentations, and direct solicitations.
It is important to CRA that it conduct business ethically and in
accordance with industry standards and CRA's own rigorous professional
standards. CRA carefully considers the pursuit of each specific market, client,
and engagement. Before it accepts a new client or engagement,
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CRA determines whether a conflict of interests exists by circulating a client
development report among its officers and by checking its internal client
database.
COMPETITION
The market for economic and business consulting services is intensely
competitive, highly fragmented, and subject to rapid change. In general, there
are few barriers to entry into CRA's markets, and CRA expects to face additional
competition from new entrants into the economic and business consulting
industries. In the legal and regulatory consulting market, CRA competes
primarily with other economic consulting firms and individual academics. CRA
believes the principal competitive factors in this market are reputation,
analytical ability, industry expertise, and service. In the business consulting
market, CRA competes 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. CRA believes the principal competitive factors
in this market are reputation, industry expertise, analytical ability, service,
and price. Many of CRA's competitors have national and international reputations
as well as significantly greater personnel, financial, managerial, technical,
and marketing resources than CRA. Some of CRA's competitors also have a
significantly broader geographic presence than CRA. CRA may be unable to compete
successfully with its existing competitors or with any new competitors.
ITEM 2 - PROPERTIES
In aggregate, CRA leases approximately 103,000 square feet of office space
in the following offices: Boston, Massachusetts (headquarters); Los Angeles,
California; Oakland, California; Palo Alto, California; Toronto, Canada; and
Washington, D.C. All of CRA's offices are electronically linked and have access
to CRA's core consulting tools. CRA believes its existing facilities are
adequate to meet its current requirements and that suitable space will be
available as needed.
ITEM 3 - LEGAL PROCEEDINGS
CRA is not a party to any legal proceedings the outcome of which, in the
opinion of management of CRA, would have a material adverse effect on CRA's
business, financial condition, or results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of CRA during the
fourth quarter of fiscal 1999.
14
<PAGE> 15
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
CRA's common stock was first offered to the public on April 23, 1998, and
since that time has been traded on the Nasdaq National Market under the symbol
"CRAI". The following table sets forth, for the period indicated, the high and
low sales prices as reported on the Nasdaq National Market.
- -------------------------------------------------------------------------------
FISCAL YEAR ENDED NOVEMBER 28, 1998 HIGH LOW
- -------------------------------------------------------------------------------
November 30, 1997 to February 20, 1998 N/A N/A
- -------------------------------------------------------------------------------
February 21, 1998 to May 15, 1998 $26.000 $23.500
- -------------------------------------------------------------------------------
May 16, 1998 to September 4, 1998 $29.625 $23.750
- -------------------------------------------------------------------------------
September 5, 1998 to November 28, 1998 $25.250 $19.750
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FISCAL YEAR ENDED NOVEMBER 27, 1999 HIGH LOW
- -------------------------------------------------------------------------------
November 29, 1998 to February 19, 1999 $30.750 $18.125
- -------------------------------------------------------------------------------
February 20, 1999 to May 14, 1999 $28.375 $21.250
- -------------------------------------------------------------------------------
May 15, 1999 to September 3, 1999 $29.625 $18.125
- -------------------------------------------------------------------------------
September 4, 1999 to November 27, 1999 $36.875 $23.500
- -------------------------------------------------------------------------------
CRA had approximately 57 holders of record of its common stock as of
February 18, 2000. This number does not include stockholders for whom shares
were held in a "nominee" or "street" name.
Before its initial public offering on April 23, 1998, CRA made periodic
distributions to its stockholders in amounts equal to the stockholders'
aggregate tax liabilities associated with CRA's taxable earnings as an S
corporation attributable to them, as well as other dividend distributions.
CRA currently intends to retain any future earnings to finance operations
and therefore does not anticipate paying any cash dividends in the foreseeable
future. In addition, the terms of CRA's bank line of credit place restrictions
on its ability to pay cash dividends on its common stock.
CRA did not sell any equity securities that were not registered under the
Securities Act during the quarter ended November 27, 1999.
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<PAGE> 16
ITEM 6 - SELECTED FINANCIAL DATA
The following selected consolidated financial data of CRA as of and for
each of the fiscal years in the five-year period ended November 27, 1999, have
been derived from the audited consolidated financial statements of CRA.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
NOVEMBER 25, NOVEMBER 30, NOVEMBER 29, NOVEMBER 28, NOVEMBER 27,
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
(53 WEEKS)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 31,839 $ 37,367 $ 44,805 $ 52,971 $ 73,970
Costs of services 19,760 23,370 28,374 31,695 42,320
Supplemental compensation (1) 1,212 1,200 1,233 -- --
---------- ---------- ---------- ---------- ----------
Gross profit 10,867 12,797 15,198 21,276 31,650
General and administrative 8,397 9,060 10,509 11,934 17,448
---------- ---------- ---------- ---------- ----------
Income from operations 2,470 3,737 4,689 9,342 14,202
Interest income, net 118 124 302 975 977
---------- ---------- ---------- ---------- ----------
Income before provision
for income taxes
and minority interest 2,588 3,861 4,991 10,317 15,179
Provision for income taxes (2) (174) (273) (306) (4,262) (6,182)
---------- ---------- ---------- ---------- ----------
Income before minority
interest 2,414 3,588 4,685 6,055 8,997
Minority interest -- -- 282 310 33
---------- ---------- ---------- ---------- ----------
Net income (2) $ 2,414 $ 3,588 $ 4,967 $ 6,365 $ 9,030
========== ========== ========== ========== ==========
Basic and diluted net income per share:
Basic $ 0.40 $ 0.59 $ 0.78 $ 0.84 $ 1.07
========== ========== ========== ========== ==========
Diluted $ 0.40 $ 0.59 $ 0.78 $ 0.84 $ 1.05
========== ========== ========== ========== ==========
Weighted average number of shares outstanding:
Basic 5,987,384 6,091,384 6,329,007 7,570,493 8,477,204
========== ========== ========== ========== ==========
Diluted 5,987,384 6,091,384 6,329,007 7,619,945 8,571,042
========== ========== ========== ========== ==========
Pro forma income data (unaudited):
Net income as reported $ 4,967 $ 6,365
Pro forma adjustment (1,833) 12
---------- ----------
Pro forma net income $ 3,134 $ 6,377
========== ==========
Pro forma net income per share:
Basic $ 0.48 $ 0.84
========== ==========
Diluted $ 0.48 $ 0.83
========== ==========
Weighted average number of shares outstanding (3):
Basic 6,458,737 7,630,012
========== ==========
Diluted 6,458,737 7,679,464
========== ==========
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
NOVEMBER 25, NOVEMBER 30, NOVEMBER 29, NOVEMBER 28, NOVEMBER 27,
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 4,782 $ 6,554 $ 7,658 $32,890 $37,947
Total assets 12,307 15,468 20,435 53,335 73,510
Total long-term debt 324 550 707 542 461
Total stockholders' equity 4,282 6,202 8,536 34,628 52,315
</TABLE>
- ----------
(1) Represents discretionary payments of bonus compensation to officers and
certain outside experts under a bonus program that was discontinued after
fiscal 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations --Overview" and Note 8 of Notes to
Consolidated Financial Statements.
(2) From fiscal 1988 to April 1998, CRA was taxed under subchapter S of the
Internal Revenue Code. As an S corporation, CRA was not subject to federal
and some state income taxes. CRA's S corporation status terminated on the
closing of its initial public offering on April 28, 1998.
(3) See Note 1 of Notes to Consolidated Financial Statements for a description
of the computation of the number of shares used in the per share
calculation.
17
<PAGE> 18
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
CRA is a leading economic and business consulting firm that applies
advanced analytic techniques and in-depth industry knowledge to complex
engagements for a broad range of clients. Founded in 1965, CRA provides
original, authoritative advice to law firms, corporations, and governments
worldwide. CRA is often retained in high-stakes matters such as
multi-billion-dollar mergers and acquisitions, new product introductions, major
capital investment decisions, and complex litigation. CRA offers two types of
services: legal and regulatory consulting and business consulting. CRA estimates
it derived approximately 75 percent of its revenues in fiscal 1999 from legal
and regulatory consulting and approximately 25 percent from business consulting.
CRA derives revenues principally from professional services rendered by
its employee consultants. In most instances, CRA charges clients on a
time-and-materials basis and recognizes revenues in the period when it provides
its services. CRA charges consultants' time at hourly rates, which vary from
consultant to consultant depending on a consultant's position, experience, and
expertise, and other factors. Outside experts may or may not bill clients
directly for their services. As a result, CRA generates substantially all of its
professional services fees from the work of its own full-time employee
consultants. Factors that affect CRA's professional services fees include the
number and scope of client engagements, the number of consultants employed by
CRA, the consultants' billing rates, and the number of hours worked by the
consultants. In addition to professional services fees, a portion of CRA's
revenues represents expenses billed to clients, such as travel and other
out-of-pocket expenses, charges for support staff and outside contractors, and
other reimbursable expenses.
CRA's costs of services include the salaries, bonuses, and benefits of
CRA's employee consultants. CRA currently has one bonus program. This program
awards discretionary bonuses based on CRA's revenues and profitability and
individual performance. During fiscal 1995, fiscal 1996, and fiscal 1997, CRA
also had another bonus program, which consisted of discretionary payments to
officers and selected outside experts based primarily on CRA's cash flows. These
bonus payments are shown as "supplemental compensation" in CRA's statements of
income. CRA discontinued this bonus program after fiscal 1997. Costs of services
also include out-of-pocket and other expenses that are billed to clients, and
the salaries, bonuses, and benefits of support staff whose time is billed
directly to clients, such as librarians, editors, and computer programmers.
CRA's gross profit, which equals revenues less costs of services and
supplemental compensation, is affected by changes in the mix of revenues. CRA
experiences significantly higher gross margins on revenues from professional
services fees than on revenues from expenses billed to clients. General and
administrative expenses include salaries, bonuses, and benefits of CRA's
administrative and support staff, bonuses to outside experts for generating new
business, office rent, and marketing and other costs.
In June 1997, CRA invested approximately $650,000 for a majority interest
in NeuCo, Inc. NeuCo was established by CRA and an affiliate of Commonwealth
Energy Systems as a start-up
18
<PAGE> 19
entity to develop and market a family of neural network software tools and
complementary application consulting services for electric utilities. CRA's
financial statements are consolidated with the financial statements of NeuCo.
NeuCo sustained net losses after taxes of approximately $564,000 in the period
from inception (June 19, 1997) to November 29, 1997, $619,000 in fiscal 1998,
and $233,000 in fiscal 1999. NeuCo may never become profitable. The portion of
this loss allocable to NeuCo's minority owners is shown as "minority interest"
in CRA's statements of income, and that amount, together with the capital
contributions to NeuCo of its minority owners, is shown as "minority interest"
in CRA's balance sheets. In addition, in December 1998, CRA loaned NeuCo
$370,000 and the affiliate of Commonwealth Energy Systems loaned NeuCo $130,000.
The amount owed to the affiliate of Commonwealth Energy Systems is shown as
"note payable to minority interest holder" in CRA's balance sheets.
On December 15, 1998, CRA acquired assets and assumed specified
liabilities of The Tilden Group for an aggregate of $9.6 million in cash and
common stock. CRA acquired accounts receivable, work in process, fixed assets,
and the goodwill of The Tilden Group, and maintains The Tilden Group's Oakland,
California, office staffed by 10 former consultants of The Tilden Group. CRA has
accounted for this acquisition as a purchase transaction and is amortizing the
goodwill acquired in the transaction over a period of 20 years.
On February 25, 1999, CRA acquired assets and assumed specified
liabilities of Financial Economic Consulting, or FinEcon, for an aggregate of
$3.2 million in cash and common stock. CRA acquired accounts receivable, work in
process, fixed assets, and the goodwill of FinEcon, and maintains FinEcon's Los
Angeles, California, office staffed by 10 former FinEcon consultants. CRA has
accounted for this acquisition as a purchase transaction and is amortizing the
goodwill acquired in the transaction over a period of 20 years.
From fiscal 1988 until April 1998, CRA was taxed as an S corporation and
did not pay federal and some state income taxes.
CRA's fiscal year ends on the last Saturday in November and, accordingly,
its fiscal year will periodically contain 53 weeks rather than 52 weeks. For
example, fiscal 1996 contained 53 weeks. This additional week of operations in
the fiscal year will affect the comparability of results of operations of these
53-week fiscal years with other fiscal years. Historically, CRA has managed its
business based on a four-week billing cycle to clients and, consequently, has
established quarters that are divisible by four-week periods. As a result, the
first, second, and fourth quarters of each fiscal year are 12-week periods and
the third quarter of each fiscal year is a 16-week period. However, the fourth
quarter in 53-week fiscal years is 13 weeks long. Accordingly,
quarter-to-quarter comparisons of CRA's results of operations are not
necessarily meaningful if the quarters being compared have different lengths.
The terms "fiscal 1994," "fiscal 1995," "fiscal 1997," "fiscal 1998" and
"fiscal 1999" refer to the 52-week periods ended November 26, 1994, November 25,
1995, November 29, 1997, November 28, 1998, and November 27, 1999, respectively,
and the term "fiscal 1996" refers to the 53-week period ended November 30, 1996.
19
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth certain operating information as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------
NOVEMBER 29, NOVEMBER 28, NOVEMBER 27,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Costs of services 63.3 59.8 57.2
Supplemental compensation 2.8 -- --
----- ----- -----
Gross profit 33.9 40.2 42.8
General and administrative 23.5 22.5 23.6
----- ----- -----
Income from operations 10.4 17.7 19.2
Interest income, net 0.7 1.8 1.3
----- ----- -----
Income before provision for income taxes
and minority interest 11.1 19.5 20.5
Provision for income taxes 0.7 8.1 8.3
----- ----- -----
Income before minority interest 10.4 11.4 12.2
Minority interest 0.6 0.6 0.0
----- ----- -----
Net income 11.0% 12.0% 12.2%
===== ===== =====
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues. Revenues increased $21.0 million, or 39.6 percent, from $53.0
million for fiscal 1998 to $74.0 million for fiscal 1999. 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. The acquisition of The Tilden Group and FinEcon also contributed to
CRA's increase in revenue during fiscal 1999. Both acquisitions have been fully
integrated. The total number of employee consultants increased from 145 in
fiscal 1998 to 210 in fiscal 1999. CRA experienced revenue increases during
fiscal 1999 in its legal and regulatory consulting services, and in particular
generated significant revenue increases in its newly formed practice in
international trade, as well as in its finance and environment practice areas.
Costs of Services. Costs of services increased by $10.6 million, or 33.5
percent, from $31.7 million in fiscal 1998 to $42.3 million in fiscal 1999. As a
percentage of revenues, costs of services decreased from 59.8 percent in fiscal
1998 to 57.2 percent in fiscal 1999. The decrease as a percentage of revenues
was due primarily to a relative decrease in bonuses paid to employee consultants
who source business to CRA.
General and Administrative. General and administrative expenses increased
by $5.5 million, or 46.2 percent, from $11.9 million in fiscal 1998 to $17.4
million in fiscal 1999. As a percentage of revenues, general and administrative
expenses increased from 22.5 percent in fiscal 1998 to 23.6 percent in fiscal
1999. The increase in general and administrative expenses
20
<PAGE> 21
resulted from bonus payments to outside experts, increased rents due to internal
growth, and amortization costs related to acquired businesses. The number of
outside experts has increased as a result of acquisitions.
Interest Income, Net. Net interest income was essentially the same,
amounting to $975,000 in fiscal 1998 and $977,000 in fiscal 1999.
Provision for Income Taxes. Provision for income taxes increased from $4.3
million in fiscal 1998 to $6.2 million in fiscal 1999. The provision for fiscal
1998 consists of $2.9 million for current year operations, reflecting taxation
as an S corporation for 150 days and taxation as a C corporation for 214 days,
and $1.4 million for deferred tax resulting from the change in tax status to a C
corporation, while the provision for fiscal 1999 reflects taxation as a C
corporation for the entire period.
Minority Interest. In June 1997, CRA established and purchased a
controlling interest in NeuCo. Minority interest in the loss of NeuCo decreased
from $310,000 in fiscal 1998 to $33,000 in fiscal 1999 due to CRA's inability to
allocate continued losses of NeuCo to the minority interest holders as their
minority interest accounts have been reduced to zero.
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues. Revenues increased $8.2 million, or 18.2 percent, from $44.8
million for fiscal 1997 to $53.0 million for fiscal 1998. The increase in
revenues was due primarily to an increase in consulting services performed for
new and existing clients during the period and an increase in the number of
consultants and increased billing rates of CRA's consultants. The number of
employee consultants increased from 121 in fiscal 1997 to 145 in fiscal 1998.
CRA experienced revenue increases during 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 $3.3 million, or 11.7
percent, from $28.4 million in fiscal 1997 to $31.7 million in fiscal 1998. As a
percentage of revenues, costs of services decreased from 63.3 percent in fiscal
1997 to 59.8 percent in fiscal 1998. The decrease as a percentage of revenues
were due primarily to the fact that CRA's consulting staff costs did not
increase as quickly as the rate of increase of revenues. In fiscal 1998 as
compared to fiscal 1997, utilization rates for CRA's consultants were higher,
which positively affected revenues but had no impact on cost of services. In
addition, CRA hired more junior consultants, who typically generate higher
margins than senior consultants.
Supplemental Compensation. Beginning in fiscal 1998, CRA no longer paid
supplemental compensation, and, consequently, did not have supplemental
compensation in fiscal 1998. Supplemental compensation was $1.2 million in
fiscal 1997.
General and Administrative. General and administrative expenses increased
by $1.4 million, or 13.6 percent, from $10.5 million in fiscal 1997 to $11.9
million in fiscal 1998. As a percentage of revenues, general and administrative
expenses decreased from 23.5 percent in fiscal 1997 to 22.5 percent in fiscal
1998, primarily because CRA increased its administrative
21
<PAGE> 22
and labor costs at a slower rate than the rate of increase of its employee
consultants. In addition, the dollar increase in general and administrative
expenses was offset in part by CRA better utilizing existing space and systems.
Interest Income, Net. Net interest income increased from $302,000 in
fiscal 1997 to $975,000 in fiscal 1998. This increase was due primarily to
interest earned from the investment of the proceeds of CRA's initial public
offering.
Provision for Income Taxes. The provision for income taxes increased from
$306,000 in fiscal 1997 to $4.3 million in fiscal 1998. The provision for fiscal
1998 consists of $2.9 million for current year operations, reflecting taxation
as an S corporation for 150 days and taxation as a C corporation for 214 days,
and $1.4 million for deferred tax resulting from the change in tax status to a C
corporation.
Minority Interest. Minority interest increased from $282,000 in fiscal
1997 to $310,000 in fiscal 1998, and represents the portion of NeuCo's net loss
after taxes allocable to its minority owners.
LIQUIDITY AND CAPITAL RESOURCES
As of November 27, 1999, CRA had cash and cash equivalents of $20.2
million, marketable securities of $8.7 million, and working capital of $37.8
million. Net cash provided by operating activities for fiscal year 1999 was $3.1
million. Cash generated from operating activities resulted primarily from net
income of $9.0 million and an increase of $2.7 million in accounts payable,
accrued expenses, and other liabilities, which were offset in part by an
increase in unbilled services of $7.3 million and an increase in accounts
receivable of $2.4 million.
Cash used in investing activities for the purchase of furniture, fixtures,
and computer equipment during fiscal year 1999 was $1.6 million. CRA used cash
of $9.3 million in fiscal year 1999 in the acquisition of The Tilden Group on
December 15, 1998 and FinEcon on February 25, 1999.
CRA's financing activities provided cash of $4.6 million in fiscal year
1999. This increase consists primarily of the net proceeds of $4.8 million from
CRA's sale of stock in a public offering.
CRA currently has available a $2.0 million revolving line of credit with
BankBoston N.A., 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 BankBoston. No borrowings were outstanding under this line of
credit as of November 27, 1999.
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.
22
<PAGE> 23
YEAR 2000 COMPLIANCE
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act.
Many computer systems and software products were not originally designed
to recognize dates after December 31, 1999. This "Year 2000" problem could
result in system failures or miscalculations causing disruptions of operations
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. The inability of
the products, services, and systems on which CRA relies to process dates after
December 31, 1999 could seriously harm its business.
To date, CRA is not aware that Year 2000 issues have affected its
business. Before the end of 1999, CRA conducted tests and sought confirmation
from software vendors to determine whether the software it uses is Year 2000
compliant. Based on the results of its investigation, CRA believes that all of
its internal software systems are Year 2000 compliant. Nonetheless, CRA may
discover Year 2000 errors or defects in its internal software systems and, if it
does, the costs of making these systems Year 2000 compliant could be
significant.
CRA also relies on third-party vendors for some equipment and services,
and CRA did not conduct a Year 2000 review of all of its vendors. In many cases,
these vendors had no obligation to provide CRA with information regarding their
Year 2000 compliance. If these vendors or their systems or equipment experience
Year 2000 problems, CRA could incur significant expenses to remedy any problems
or replace affected vendors.
CRA estimates that the aggregate incremental costs that it incurred in
order to comply with Year 2000 requirements will not exceed $275,000. CRA did
not develop a contingency plan to address situations that may arise if CRA or
any of its vendors is not Year 2000 compliant.
FACTORS AFFECTING FUTURE PERFORMANCE
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 employee consultants
generated engagements that accounted for approximately 78 percent of our
revenues in fiscal 1998 and 66 percent of our revenues in fiscal 1999. Our top
five employee consultants in each of fiscal 1998 and fiscal 1999 generated
approximately 33 percent and 24 percent of our revenues in those years. We do
not have any employment or non-competition agreements with our employee
consultants. Each employee consultant can terminate his or her relationship with
us at will and without notice and can begin to compete with us at any time.
23
<PAGE> 24
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 significant 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. 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
24
<PAGE> 25
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.
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.
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
25
<PAGE> 26
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 approximately 35 percent of our revenues in fiscal 1997, 47
percent in fiscal 1998, and 41 percent in fiscal 1999 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
26
<PAGE> 27
results of operations. 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 changes 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. Our 10 largest engagements accounted for approximately
23 percent of our revenues in fiscal 1997, 29 percent in fiscal 1998, and 20
percent in fiscal 1999. Our 10 largest clients accounted for approximately 29
percent, 38 percent, and 39 percent of our revenues in those years. 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.
27
<PAGE> 28
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 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 has not been and 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.
28
<PAGE> 29
"Year 2000" problems may disrupt our operations
Many computer systems and software products were not originally designed
to recognize dates after December 31, 1999. This "Year 2000" problem could
result in system failures or miscalculations causing disruptions of operations.
The inability of the products, services, and systems on which we rely to process
dates after December 31, 1999, could seriously harm our business. To date, we
are not aware that Year 2000 issues have affected our business. Nonetheless, we
may discover Year 2000 errors or defects in our internal software systems and,
if we do, the costs of making these systems Year 2000 compliant could be
significant. We also rely on third-party vendors for some of our equipment and
services, and we did not conduct a Year 2000 review of all of our vendors. If
these vendors or their systems or equipment experience Year 2000 problems, we
could incur significant expenses to remedy any problems or replace affected
vendors.
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
- 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.
29
<PAGE> 30
Our charter and by-laws and Massachusetts law may deter takeovers
Our articles of organization and by-laws and Massachusetts law contain
provisions that could have anti-takeover effects and that could discourage,
delay, or prevent a change in control of CRA or an acquisition of CRA at a price
that many stockholders may find attractive. These provisions may also discourage
proxy contests and make it more difficult for stockholders of CRA to take some
corporate actions, including the election of directors. The existence of these
provisions could limit the price that investors might be willing to pay in the
future for shares of our common stock.
30
<PAGE> 31
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of November 27, 1999, 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 upon CRA's financial position.
ITEM 8 -FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of CRA are included in this annual
report as pages FS-1 through FS-19. An index to the consolidated financial
statements is set forth on Page FS-1.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
31
<PAGE> 32
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors and executive officers and
compliance with Section 16(a) of the Securities Exchange Act of 1934 may be
found in the sections captioned "Directors and Executive Officers" and "Section
16(a) Beneficial Ownership Reporting Compliance" appearing in CRA's definitive
proxy statement to be delivered to stockholders in connection with CRA's 2000
annual meeting of stockholders. Such information is incorporated herein by
reference.
ITEM 11 - EXECUTIVE COMPENSATION
Information with respect to this item may be found in the section
captioned "Compensation of Directors and Executive Officers" appearing in CRA's
definitive proxy statement to be delivered to stockholders in connection with
CRA's 2000 annual meeting of stockholders. Such information is incorporated
herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item may be found in the section
captioned "Security Ownership of Certain Beneficial Owners and Management"
appearing in CRA's definitive proxy statement to be delivered to stockholders in
connection with CRA's 2000 annual meeting of stockholders. Such information is
incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item may be found in the section
captioned "Certain Transactions" appearing in CRA's definitive proxy statement
to be delivered to stockholders in connection with CRA's 2000 annual meeting of
stockholders. Such information is incorporated herein by reference.
32
<PAGE> 33
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules, and Exhibits. The consolidated
financial statements filed as part of this annual report are listed
in the index to consolidated financial Statements on page FS-1. The
exhibits filed as part of this report are listed in the accompanying
exhibit index, which follows the signature page to this annual
report.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by CRA during
the fourth quarter of fiscal 1999.
(c) Exhibits. The exhibits filed as part of this report are listed in the
accompanying exhibit index, which follows the signature page to this
annual report.
(d) Financial Statement Schedules. Financial statement schedules are
omitted as not applicable, not required or the information is
included in the consolidated financial statements or notes thereto.
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ James C. Burrows
-----------------------------------------------
James C. Burrows
President, Chief Executive Officer and Director
Date: February 25, 2000
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS that each individual whose signature appears
below hereby constitutes and appoints James C. Burrows, Laurel E. Morrison and
Firoze E. Katrak, and each of them, his or her true and lawful attorneys-in-fact
and agents with full power of substitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
to this annual report on Form 10-K, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Security and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
which they, or any of them, may deem necessary or advisable to be done in
connection with this annual report on Form 10-K, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or any
substitute or substitutes for any or all of them, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Franklin M. Fisher Chairman of the Board February 25, 2000
- -------------------------------
Franklin M. Fisher
/s/ James C. Burrows President, Chief Executive Officer February 25, 2000
- ------------------------------- and Director (principal executive officer)
James C. Burrows
/s/ Laurel E. Morrison Chief Financial Officer, Vice President, February 25, 2000
- ------------------------------- Finance and Administration, and Treasurer
Laurel E. Morrison (principal financial and accounting officer)
/s/ William B. Burnett Vice President and Director February 25, 2000
- -------------------------------
William B. Burnett
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Firoze E. Katrak Vice President and Director February 25, 2000
- -------------------------------
Firoze E. Katrak
/s/ Carl Kaysen Director February 25, 2000
- -------------------------------
Carl Kaysen
/s/ Rowland T. Moriarty Director February 25, 2000
- -------------------------------
Rowland T. Moriarty
/s/ Garth Saloner Director February 25, 2000
- -------------------------------
Garth Saloner
/s/ Steven C. Salop Director February 25, 2000
- -------------------------------
Steven C. Salop
</TABLE>
35
<PAGE> 36
EXHIBIT INDEX
- --------------------------------------------------------------------------------
EXHIBIT
NO. DESCRIPTION
- --------------------------------------------------------------------------------
3.1 Amended and Restated Articles of Organization of CRA (filed as Exhibit
3.2 to CRA's Registration Statement on Form S-1, File No. 333-46941,
and incorporated herein by reference).
- --------------------------------------------------------------------------------
3.2 Amended and Restated By-Laws of CRA (filed as Exhibit 3.4 to CRA's
Registration Statement on Form S-1, File No. 333-46941, and
incorporated herein by reference).
- --------------------------------------------------------------------------------
4.1 Specimen certificate for the Common Stock of CRA (filed as Exhibit 4.1
to CRA's Registration Statement on Form S-1, File No. 333-46941, and
incorporated herein by reference).
- --------------------------------------------------------------------------------
*10.1 1998 Incentive and Nonqualified Stock Option Plan, as amended (filed
with CRA's Definitive Proxy Statement filed with the Securities and
Exchange Commission on May 4, 1999, and incorporated herein by
reference).
- --------------------------------------------------------------------------------
*10.2 1998 Employee Stock Purchase Plan (filed as Exhibit 10.2 to CRA's
Registration Statement on Form S-1, File No. 333-46941, and
incorporated herein by reference).
- --------------------------------------------------------------------------------
10.3 Amended and Restated Loan Agreement dated as of November 18, 1994,
between CRA and The First National Bank of Boston, as amended (filed
as Exhibit 10.3 to CRA's Registration Statement on Form S-1, File No.
333-46941, and incorporated herein by reference).
- --------------------------------------------------------------------------------
10.4 Amended and Restated Security Agreement dated as of November 18, 1994,
between CRA and The First National Bank of Boston (filed as Exhibit
10.4 to CRA's Registration Statement on Form S-1, File No. 333-46941,
and incorporated herein by reference).
- --------------------------------------------------------------------------------
10.5 Revolving Credit Note of CRA dated as of November 18, 1994, in the
principal amount of $2,000,000 payable to The First National Bank of
Boston (filed as Exhibit 10.5 to CRA's Registration Statement on Form
S-1, File No. 333-46941, and incorporated herein by reference).
- --------------------------------------------------------------------------------
10.6 Office Lease Agreement between CRA and John Hancock Mutual Life
Insurance Company dated March 1, 1978, as amended (filed as Exhibit
10.6 to CRA's Registration Statement on Form S-1, File No. 333-46941,
and incorporated herein by reference).
- --------------------------------------------------------------------------------
10.7 Office Lease Agreement between CRA and Deutsche Immobilien Fonds
Aktiengesellschaft dated March 6, 1997 (filed as Exhibit 10.7 to CRA's
Registration Statement on Form S-1, File No. 333-46941, and
incorporated herein by reference).
- --------------------------------------------------------------------------------
10.8 Form of Consulting Agreement with Outside Experts (filed as Exhibit
10.8 to CRA's Registration Statement on Form S-1, File No. 333-46941,
and incorporated herein by reference).
- --------------------------------------------------------------------------------
10.9 Stock Restriction Agreement between CRA and its pre-offering
stockholders (filed as Exhibit 10.9 to CRA's Registration Statement on
Form S-1, File No. 333-46941, and incorporated herein by reference).
- --------------------------------------------------------------------------------
10.10 Asset Purchase Agreement dated as of December 15, 1998, among CRA, The
Tilden Group LLC, Michael L. Katz and Carl Shapiro (filed as Exhibit
2.1 to CRA's Current Report on Form 8-K filed on December 30, 1998,
and incorporated herein by reference).
- --------------------------------------------------------------------------------
21.1 Subsidiaries of CRA.
- --------------------------------------------------------------------------------
23.1 Consent of Ernst & Young LLP, Independent Auditors.
- --------------------------------------------------------------------------------
24.1 Power of Attorney (included on the signature page to this annual
report).
- --------------------------------------------------------------------------------
27.1 Financial Data Schedule.
- --------------------------------------------------------------------------------
* Management contract or compensatory plan.
36
<PAGE> 37
CHARLES RIVER ASSOCIATES INCORPORATED
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors........................................ FS-2
Consolidated Balance Sheets........................................... FS-3
Consolidated Statements of Income..................................... FS-4
Consolidated Statements of Stockholders' Equity....................... FS-5
Consolidated Statements of Cash Flows................................. FS-6
Notes to Consolidated Financial Statements............................ FS-7
FS-1
<PAGE> 38
REPORT OF INDEPENDENT AUDITORS
Board of Directors
CHARLES RIVER ASSOCIATES INCORPORATED
We have audited the accompanying consolidated balance sheets of Charles
River Associates Incorporated (the "Company") as of November 28, 1998 and
November 27, 1999, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended November 27, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Charles River
Associates Incorporated as of November 28, 1998, and November 27, 1999, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended November 27, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
January 7, 2000
FS-2
<PAGE> 39
CHARLES RIVER ASSOCIATES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 28, NOVEMBER 27,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $32,023 $20,176
Available-for-sale securities -- 8,684
Accounts receivable, net of allowances of $727
in 1998 and $952 in 1999 for doubtful accounts 9,867 12,719
Unbilled services 6,614 13,891
Prepaid expenses 496 548
Deferred income taxes 573 1,358
------- -------
Total current assets 49,573 57,376
Property and equipment, net 3,532 4,051
Goodwill, net of accumulated amortization of $502 in 1999 -- 10,553
Intangible assets, net of accumulated amortization of $152 in 1999 -- 1,348
Other assets 230 182
------- -------
Total assets $53,335 $73,510
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,529 $ 3,641
Accrued expenses 13,408 15,128
Deferred revenue and other liabilities 407 254
Current portion of notes payable to former stockholders 339 406
------- -------
Total current liabilities 16,683 19,429
Notes payable to former stockholders, net of current portion 542 331
Notes payable to minority interest -- 130
Deferred rent 1,449 1,305
Minority interest 33 --
Commitments and contingencies
Stockholders' equity:
Preferred Stock, no par value; 1,000,000 shares authorized; none
issued or outstanding -- --
Common Stock, no par value; 25,000,000
shares authorized; 8,316,115 shares in 1998 and
8,683,761 shares in 1999 issued and outstanding 30,992 40,189
Deferred compensation -- (345)
Retained earnings 3,636 12,471
------- -------
Total stockholders' equity 34,628 52,315
------- -------
Total liabilities and stockholders' equity $53,335 $73,510
======= =======
</TABLE>
See accompanying notes.
FS-3
<PAGE> 40
CHARLES RIVER ASSOCIATES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Year ended
------------------------------------------------------
NOVEMBER 29, NOVEMBER 28, NOVEMBER 27,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 44,805 $ 52,971 $ 73,970
Costs of services 28,374 31,695 42,320
Supplemental compensation 1,233 -- --
---------- ---------- ----------
Gross profit 15,198 21,276 31,650
General and administrative 10,509 11,934 17,448
---------- ---------- ----------
Income from operations 4,689 9,342 14,202
Interest income, net 302 975 977
---------- ---------- ----------
Income before provision for income taxes
and minority interest 4,991 10,317 15,179
Provision for income taxes:
Current year operations (306) (2,846) (6,182)
Change in tax status -- (1,416) --
---------- ---------- ----------
Income before minority interest 4,685 6,055 8,997
Minority interest 282 310 33
---------- ---------- ----------
Net income $ 4,967 $ 6,365 $ 9,030
========== ========== ==========
Net income per share:
Basic $ .78 $ .84 $ 1.07
========== ========== ==========
Diluted $ .78 $ .84 $ 1.05
========== ========== ==========
Weighted average number of shares outstanding:
Basic 6,329,007 7,570,493 8,477,204
========== ========== ==========
Diluted 6,329,007 7,619,945 8,571,042
========== ========== ==========
Pro forma income data (unaudited):
Net income as reported $ 4,967 $ 6,365
Pro forma adjustment (1,833) 12
---------- ----------
Pro forma net income $ 3,134 $ 6,377
========== ==========
Pro forma net income per share:
Basic $ 0.48 $ 0.84
========== ==========
Diluted $ 0.48 $ 0.83
========== ==========
Weighted average number of shares outstanding:
Basic 6,458,737 7,630,012
========== ==========
Diluted 6,458,737 7,679,464
========== ==========
</TABLE>
See accompanying notes.
FS-4
<PAGE> 41
CHARLES RIVER ASSOCIATES INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------- TREASURY STOCK
SHARES RETAINED ------------------ NOTES DEFERRED STOCKHOLDERS'
ISSUED AMOUNT EARNINGS SHARES AMOUNT RECEIVABLE COMPENSATION EQUITY
--------- ------- -------- -------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT NOVEMBER 30, 1996 6,228,040 $ 902 $ 5,989 (15,600) $ (29) $ (660) $ 6,202
Net income 4,967 4,967
Issuance of common stock 400,400 1,085 (715) 370
Distributions to stockholders (2,600) (2,600)
Collection on notes receivable
from stockholders 264 264
Purchase of treasury stock (119,600) (444) (444)
Adjustment to purchase price of
treasury stock (220) (220)
Sale of treasury stock 26,000 97 (58) 39
Retirement of treasury stock (109,200) (10) (366) 109,200 376 --
Accrued interest on notes
receivable from stockholders (42) (42)
--------------------------------------------------------------------------------------------
BALANCE AT NOVEMBER 29, 1997 6,519,240 1,977 7,770 -- -- (1,211) -- 8,536
Net income 6,365 6,365
Issuance of common stock, net
of offering costs 1,796,875 29,506 29,506
Dividends declared (491) (10,303) (10,794)
Adjustment to purchase price of
treasury stock (196) (196)
Collection of notes receivable
from stockholders 1,211 1,211
--------------------------------------------------------------------------------------------
BALANCE AT NOVEMBER 28, 1998 8,316,115 30,992 3,636 -- -- -- -- 34,628
Net income 9,030 9,030
Issuance of common stock, net
of offering costs 200,000 4,453 4,453
Issuance of common stock
principally for acquisition
of businesses 152,429 3,924 $(106) 3,818
Issuance of common stock under
Employee Stock Purchase Plan 15,217 377 377
Grant of stock options to
consultants 443 (443) --
Amortization of deferred
compensation 204 204
Adjustment to purchase price
of treasury stock (195) (195)
--------------------------------------------------------------------------------------------
BALANCE AT NOVEMBER 27, 1999 8,683,761 $40,189 $ 12,471 -- $ -- $ -- $(345) $ 52,315
============================================================================================
</TABLE>
See accompanying notes.
FS-5
<PAGE> 42
CHARLES RIVER ASSOCIATES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year ended
-----------------------------------------------------
NOVEMBER 29, NOVEMBER 28, NOVEMBER 27,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,967 $ 6,365 $ 9,030
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 727 949 2,122
Deferred rent (93) 147 (144)
Deferred income taxes 95 (1,101) (785)
Minority interest (282) (310) (33)
Changes in operating assets and liabilities:
Accounts receivable (2,779) 273 (2,449)
Unbilled services 125 (1,883) (7,277)
Prepaid expenses and other (172) (106) (3)
Accounts payable, accrued expenses and
other liabilities 1,030 9,369 2,680
------- -------- --------
Net cash provided by operating activities 3,618 13,703 3,141
INVESTING ACTIVITIES:
Purchase of property and equipment (2,290) (1,591) (1,586)
Purchase of short-term investments -- -- (8,684)
Acquisition of businesses -- -- (9,339)
------- -------- --------
Net cash used in investing activities (2,290) (1,591) (19,609)
FINANCING ACTIVITIES:
Payments on notes payable to former shareholders (370) (302) (339)
Loan from minority interest -- -- 130
Issuance of common stock 370 29,506 4,830
Sale of treasury stock 39 -- --
Collection of notes receivable from stockholders 264 381 --
Dividends paid (1,636) (11,728) --
Proceeds from minority interest 625 -- --
------- -------- --------
Net cash provided by (used in) financing activities (708) 17,857 4,621
------- -------- --------
Net increase (decrease) in cash and cash equivalents 620 29,969 (11,847)
Cash and cash equivalents at beginning of year 1,434 2,054 32,023
------- -------- --------
Cash and cash equivalents at end of year $ 2,054 $ 32,023 $ 20,176
======= ======== ========
Supplemental cash flow information:
Cash paid for income taxes $ 275 $ 3,872 $ 7,621
======= ======== ========
Issuance of common stock for acquired businesses -- -- $ 3,818
======= ======== ========
Issuance of common stock for future services -- -- $ 106
======= ======== ========
Notes receivable in exchange for common stock $ 773 -- --
======= ======== ========
Notes payable in exchange for treasury stock $ 444 -- --
======= ======== ========
Dividends applied to reduce notes receivable -- $ 830 --
======= ======== ========
</TABLE>
See accompanying notes.
FS-6
<PAGE> 43
CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Charles River Associates Incorporated (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. The
Company offers two types of services: legal and regulatory consulting and
business consulting.
ESTIMATES
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.
FISCAL YEAR
The Company's fiscal year ends on the last Saturday in November.
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.
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.
GOODWILL
Goodwill represents the cost in excess of fair market value of net assets
of acquired businesses and is amortized over 20 years.
FS-7
<PAGE> 44
CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
INTANGIBLE ASSETS
Intangible assets consist principally of costs allocated to non-compete
agreements and are amortized over the related terms of the agreements (7 - 10
years).
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its subsidiaries and NeuCo, Inc., a corporation founded by the Company and an
affiliate of Commonwealth Energy Systems in June 1997. The Company has a 65.25
percent interest in NeuCo, Inc. The portion of the results of operations of
NeuCo, Inc. allocable to its minority owners is shown as "minority interest" in
the Company's statement of income, and that amount, along with the capital
contributions to NeuCo, Inc. of its minority interest owners, is shown as
"minority interest" on the Company's balance sheet. All significant intercompany
accounts have been eliminated.
CONCENTRATION OF CREDIT RISK
The Company's accounts receivable base consists of a broad range of
clients in a variety of industries located throughout the United States and in
certain other countries. The Company performs a credit evaluation of each of its
clients to minimize its collectibility risk. Historically, the Company has not
experienced significant write-offs.
FS-8
<PAGE> 45
CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company provides an allowance for doubtful accounts for potentially
uncollectible amounts. Activity in the accounts is as follows:
FISCAL YEAR
-------------------------------
1997 1998 1999
----- ---- ----
(IN THOUSANDS)
Balance at beginning of period $ 578 $394 $727
Charge to cost and expenses -- 361 225
Amounts written off (184) (28) --
----- ---- ----
Balance at end of period $ 394 $727 $952
===== ==== ====
DEFERRED REVENUE
Deferred revenue represents amounts paid to the Company in advance of
services rendered.
INCOME TAXES
Until April 28, 1998, the Company had been 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 the closing of the initial public offering of the
Company's common stock, the Company's status as an S corporation terminated. Pro
forma provisions for income taxes have been presented as if the Company had been
taxed as a C corporation for the fiscal years ended November 29, 1997, and
November 28, 1998.
At the time of the termination of the Company's status as an S
corporation, the Company recorded a one-time additional provision for income
taxes of $1,416,000.
NET INCOME PER SHARE AND PRO FORMA NET INCOME PER SHARE
Basic earnings per share represents net income divided by the weighted
average shares of common stock outstanding during the period. Diluted earnings
per share represents net income divided by the weighted average shares of common
stock and common stock equivalents, which consists of stock options, outstanding
during the period.
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 would have
been required to pay a dividend in the amount of $2,400,000 that was paid upon
the completion of the initial public offering.
FS-9
<PAGE> 46
CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," in accounting for its
stock-based compensation plans rather than the alternative fair value accounting
method provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," as this alternative requires the use of option valuation models
that were not developed for use in valuing stock options.
DEFERRED COMPENSATION
Deferred compensation represents the cost associated with shares of common
stock granted to certain employees and the cost associated with the grant of
stock options to consultants. The options granted to consultants are accounted
for under variable accounting in accordance with SFAS No. 123. These costs are
being amortized over the related vesting period.
FOREIGN CURRENCY TRANSLATION
In accordance with SFAS No. 52, "Foreign Currency Translation," balance
sheet accounts of the Company's foreign subsidiary are translated into United
States dollars at year-end exchange rates. Operating accounts are translated at
average exchange rates for each year. Net translation gains or losses for the
fiscal years 1998 and 1999 were not significant.
ACCOUNTING PRONOUNCEMENTS
In fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which did 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 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 the
Company in the first quarter of fiscal 2000. At November 27, 1999, the Company
had deferred start-up costs of $37,000. The Company believes that the adoption
of this SOP will not have a material impact on the Company's consolidated
financial statements.
In June 1998, the 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 engage in any
derivative instruments and hedging activities. The Statement is effective for
fiscal years beginning after June 15, 2001; however, earlier adoption is
allowed.
FS-10
<PAGE> 47
CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS ACQUISITIONS
On December 15, 1998, the Company acquired assets and assumed certain
liabilities of The Tilden Group, a consulting company, for $9.6 million in cash
and common stock. On February 29, 1999, the Company acquired assets and assumed
certain liabilities of FinEcon, a consulting company, for $3.2 million in cash
and common stock. The acquisitions have been accounted for under purchase
accounting and the results of operations have been included in the accompanying
statements of operations from the related dates of acquisition. The pro forma
results of operations had the acquisitions occurred at the beginning of fiscal
years 1998 and 1999 are not materially different from the results in the
accompanying statements of operations.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
NOVEMBER 28, NOVEMBER 27,
1998 1999
------------ ------------
(IN THOUSANDS)
Furniture and equipment $5,362 $6,985
Leasehold improvements 1,697 1,857
------ ------
7,059 8,842
Accumulated depreciation and amortization 3,527 4,791
------ ------
$3,532 $4,051
====== ======
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
NOVEMBER 28, NOVEMBER 27,
1998 1999
------------ ------------
(IN THOUSANDS)
Compensation and related expenses $11,260 $13,072
Other 2,148 2,234
------- -------
$13,408 $15,306
======= =======
5. NOTES PAYABLE TO FORMER STOCKHOLDERS
Notes payable to former stockholders represent amounts owed by the Company
to former stockholders in connection with the Company's repurchase of shares of
common stock from such stockholders upon their separation from the Company
pursuant to an Exit Agreement.
FS-11
<PAGE> 48
CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NOTES PAYABLE TO FORMER STOCKHOLDERS (CONTINUED)
In 1998, the Company's Board of Directors authorized the Company to amend and
restate the Exit Agreeement, and no further repurchases may be made under the
Exit Agreement
Under the Exit Agreement, the Company repurchased shares of common stock
from certain stockholders at a purchase price based upon a formula that used the
book value of the Company at the date the stockholder separated from the Company
(the "Fixed Amount") and an amount (the "Contingent Pay-Out Amount") equal to
the stockholder's pro rata portion of 25 percent of the Company's earnings
before bonuses, supplemental compensation, and amortization of goodwill, if any,
for each of the five fiscal years commencing with the fiscal year in which the
repurchase was made. The Fixed Amount is payable in three equal installments,
and the Contingent Pay-Out Amount is payable in five equal annual installments.
The Fixed Amount bears interest at an average prime rate (8.5 percent at
November 27, 1999) determined in accordance with the terms of the Exit
Agreement.
For financial reporting purposes, the Company initially estimates the
Contingent Pay-Out Amount owed to each former stockholder for the full five-year
payment period based on the actual amount of the contingent payment for the
first year. In subsequent years, the Company adjusts the estimate annually based
on actual amounts of the contingent payment for all preceding years. The related
adjustments are made to treasury stock and additional paid-in capital and, to
the extent additional paid-in capital is not available, retained earnings.
Annual principal payments to former stockholders are estimated as of November
27, 1999 to be: $406,000 in fiscal 2000; $210,000 in fiscal 2001, and $121,000
in fiscal 2002. The Company believes the recorded value of the notes payable to
former stockholders approximates fair market value.
6. FINANCING ARRANGEMENTS
The Company has a line of credit that permits borrowings of up to $2.0 million
with interest at the bank's base rate (8.5 percent at November 27, 1999) and is
secured by the Company's accounts receivable. This line of credit automatically
renews each year on June 30 unless earlier terminated by either CRA or the bank.
The terms of the line of credit include certain operating and financial
covenants. No borrowings were outstanding as of November 28, 1998, and November
27, 1999.
7. EMPLOYEE BENEFIT PLANS
The Company maintains a profit-sharing retirement plan that covers
substantially all full-time employees. Contributions are made at the discretion
of the Company and its subsidiaries and cannot exceed the maximum amount
deductible under applicable provisions of the Code. Contributions were
approximately $1.2 million in fiscal 1997, $1.0 million in fiscal 1998, and $1.5
million in fiscal 1999.
FS-12
<PAGE> 49
CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SUPPLEMENTAL COMPENSATION
The Company currently has a bonus program which awards discretionary
bonuses based on the Company's revenues, profitability, and individual
performance. Amounts paid under this bonus program are included in costs of
services. Prior to the beginning of fiscal 1998, the Company also had another
bonus program, which consisted of discretionary payments to officers and certain
outside experts based primarily on the Company's cash flows. These bonus
payments are shown as supplemental compensation in the Company's statements of
income. This plan was discontinued at the end of fiscal 1997.
9. LEASES
At November 27, 1999, the minimum rental commitments under all
noncancellable operating leases with initial or recurring terms of more than one
year were as follows (in thousands):
FISCAL YEAR
-----------
2000 $ 3,301
2001 2,845
2002 2,640
2003 2,433
2004 2,186
Thereafter 5,515
-------
$18,920
=======
Rent expense amounted to approximately $1.8 million in fiscal 1997, $2.3
million in fiscal 1998, and $3.1 million in fiscal 1999.
10. NOTES RECEIVABLE FROM STOCKHOLDERS
The Company has a policy requiring that each of its officers have an
equity interest in the Company. Until December 1997, the Company sold shares of
common stock to new or existing members of the management team at the fair
market value of the common stock on the date of purchase as determined by the
Company's Board of Directors. A portion of the purchase price was payable at the
time of purchase, and the remainder is payable in installments over a period of
five years.
FS-13
<PAGE> 50
CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. NET INCOME PER SHARE AND PRO FORMA NET INCOME PER SHARE
A reconciliation of the shares used in calculating basic, diluted, and pro forma
net income is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------
NOVEMBER 29, 1997 NOVEMBER 28, 1998 NOVEMBER 27, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Basic 6,329,007 7,570,493 8,477,204
Dilutive employee stock options -- 49,452 93,838
---------------------------------------------------
Diluted 6,329,007 7,619,945 8,571,042
=========
Shares required to pay $2.4 million in
dividends at completion of the initial
public offering 129,730 59,519
------------------------------
Pro forma - Diluted 6,458,737 7,679,464
==============================
</TABLE>
12. COMMON STOCK
On March 31, 1998, 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 Company's initial public offering (the "Offering") and (ii) an
increase in the number of shares of authorized common stock to 25,000,000. The
accompanying consolidated financial statements have been adjusted retroactively
to give effect to these actions for all periods presented.
The Company has 1,000,000 shares of preferred stock, no par value,
authorized at November 27, 1999, none of which are issued or outstanding.
In April 1998, the Company completed the Offering, issuing 1,796,875
shares for proceeds of $29,506,000, net of offering costs. In October 1999, the
Company completed a second public offering, issuing 200,000 shares for proceeds
of $4,463,000, net of offering costs.
In 1998, the Company's Board of Directors authorized the Company to amend
and restate the Exit Agreement (as so amended and restated, the "Stock
Restriction Agreement"). The Stock Restriction Agreement prohibits each person
who is a stockholder of the Company before the closing of the Offering 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).
FS-14
<PAGE> 51
CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK-BASED COMPENSATION
The Company has the 1998 Incentive and Nonqualified Stock Option Plan,
which provides for the granting of options to purchase up to 970,000 shares of
common stock. Options are to be granted at an exercise price equal to the fair
market value of the shares of common stock at the date of the grant, and vesting
terms are determined at the discretion of the Board of Directors. All options
terminate 10 years after the date of grant. A summary of option activity is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding at November 29, 1997 -- --
Granted 352,500 $18.90
Canceled (16,500) 18.50
-------
Outstanding at November 28, 1998 336,000 $18.90
Granted 213,500 $23.88
Canceled (1,000) 29.63
-------
Outstanding at November 27, 1999 548,500 $23.86
=======
Options available for grant 421,500
=======
Options exercisable:
At November 27, 1999 79,227 $20.83
======= ======
At November 28, 1998 3,500 $23.75
======= ======
Weighted average remaining contractual life at
November 27, 1999 8 1/2 years
</TABLE>
Options granted during fiscal 1999 range from immediate vesting to vesting
at various rates over five years. The weighted average fair market value of the
options granted in fiscal 1998 and fiscal 1999 was $9.19 and $9.63,
respectively.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair market value of the stock options at the date of grant was estimated
using the Black-Scholes option pricing model with the following weighted average
assumptions as follows: risk-free interest rate of approximately 5.6 percent in
fiscal 1998 and 5.5 percent in fiscal 1999, the volatility factor of the
expected market price of the Company's Common Stock was 62 percent in fiscal
1998 and 57 percent in fiscal 1999 and the weighted average expected life was
4.54 years in fiscal 1998 and 3.56 years in fiscal 1999. The Company does not
expect to pay dividends in the foreseeable future.
FS-15
<PAGE> 52
CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK-BASED COMPENSATION (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except for earnings per share
information):
FISCAL YEAR
1998 1999
------ ------
Net income - as reported $6,365 $9,030
====== ======
Net income - pro forma $6,116 $8,400
====== ======
Basic earnings per share - as reported $ 0.84 $ 1.07
====== ======
Basic earnings per share - pro forma $ 0.81 $ 0.99
====== ======
Diluted earnings per share - as reported $ 0.84 $ 1.05
====== ======
Diluted earnings per share - pro forma $ 0.80 $ 0.98
====== ======
The effect on pro forma net income and earnings per share of expensing the
fair value of stock options is not necessarily representative of the effects on
reported results for future years.
The Company has adopted the 1998 Employee Stock Purchase Plan (the "Stock
Purchase Plan"). The Stock Purchase Plan authorizes the issuance of up to an
aggregate of 243,000 shares of common stock to participating employees at an
amount equal to 85 percent of fair market value on either the first or the last
day of the one year offering period under the Stock Purchase Plan. During fiscal
1999, 15,217 shares were issued under the Stock Purchase Plan.
Options granted to non-employee consultants, amounting to options for
26,500 shares of common stock at November 27, 1999, are accounted for at fair
value in accordance with SFAS No. 123. During 1999, $204,000 was charged to
compensation expense in connection with these options.
FS-16
<PAGE> 53
CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. INCOME TAXES
Components of the Company's deferred taxes are as follows:
NOVEMBER 28, NOVEMBER 27,
1998 1999
------------ ------------
(IN THOUSANDS)
Deferred tax assets:
Accrued expenses $1,620 $1,814
Allowance for doubtful accounts 156 374
Excess tax over book depreciation and
amortization 18 100
------ ------
1,794 2,288
Deferred tax liabilities:
Cash to accrual adjustment 1,004 671
Other 217 259
------ ------
1,221 930
------ ------
Net deferred tax assets $ 573 $1,358
====== ======
The provision (credit) for income taxes for current year operations consists of
the following:
FISCAL YEAR
1998 1999
------- ------
(IN THOUSANDS)
Currently payable:
Federal $ 3,475 $5,921
State 472 1,046
------- ------
3,947 6,967
Deferred:
Federal (1,056) (670)
State (45) (115)
------- ------
(1,101) (785)
------- ------
$ 2,846 $6,182
======= ======
The provision for income taxes in fiscal 1997 represents state taxes required in
those jurisdictions that did not recognize the Company's S corporation status.
FS-17
<PAGE> 54
CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. INCOME TAXES (CONTINUED)
A reconciliation of the Company's tax rates with the federal statutory rate is
as follows:
FISCAL YEAR
1998 1999
----- ----
Federal statutory rate 34.0% 34.0%
State income taxes, net of federal income tax benefit 6.1 6.3
S corporation earnings not subject to federal taxes (13.7) --
Adjustment to deferred taxes for change in tax status 13.7 --
Other 1.2 .4
----- ----
41.3% 40.7%
===== ====
For purposes of computing pro forma net income, the Company assumed
effective tax rates for the fiscal years ended November 29, 1997 and November
28, 1998 of 43.0 percent and 41.3 percent, respectively.
15. RELATED PARTY TRANSACTIONS
The Company made payments to stockholders of the Company who performed
consulting services for the Company in the amounts of $1.8 million in fiscal
1997, $2.6 million in fiscal 1998, and $5.3 million in fiscal 1999.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
FEBRUARY 20, MAY 15, SEPTEMBER 4, NOVEMBER 28,
1998 1998 1998 1998
-----------------------------------------------------------------
(16 WEEKS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues $11,137 $11,557 $16,465 $13,812
Gross profit 4,651 4,641 6,482 5,502
Income from operations 1,897 2,056 2,825 2,564
Income before provision for income
taxes and minority interest 1,943 2,236 3,208 2,930
Minority interest 52 81 109 68
Net income 1,875 657 1,986 1,847
Basic and diluted net income per share 0.29 0.10 0.24 0.22
</TABLE>
FS-18
<PAGE> 55
CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
FEBRUARY 19, MAY 14, SEPTEMBER 3, NOVEMBER 27,
1999 1999 1999 1999
-----------------------------------------------------------------
(16 WEEKS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues $14,413 $16,740 $23,480 $19,337
Gross profit 5,730 7,341 10,240 8,339
Income from operations 2,644 3,243 4,454 3,861
Income before provision for income
taxes and minority interest 2,904 3,446 4,689 4,140
Minority interest 33 -- -- --
Net income 1,755 2,061 2,771 2,443
Basic net income per share 0.21 0.25 0.33 0.28
Diluted net income per share 0.21 0.24 0.32 0.28
</TABLE>
FS-19
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF CHARLES RIVER ASSOCIATES INCORPORATED
Name of Organization Jurisdiction
- -------------------- ------------
CRA Security Corporation Massachusetts
Charles River Associates Canada Ltd. Ontario
NeuCo, Inc. Delaware
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-63451) pertaining to the 1998 Incentive and Nonqualified Stock
Option Plan and (Form S-8 No. 33-63453) pertaining to the 1998 Employee Stock
Purchase Plan of Charles River Associates Incorporated of our report dated
January 7, 2000, with respect to the consolidated financial statements of
Charles River Associates Incorporated included in the Annual Report (Form 10-K)
for the year ended November 27, 1999.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 22, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-27-1999
<PERIOD-START> NOV-29-1998
<PERIOD-END> NOV-27-1999
<EXCHANGE-RATE> 1
<CASH> 28,860<F1>
<SECURITIES> 0
<RECEIVABLES> 13,671<F2>
<ALLOWANCES> (952)
<INVENTORY> 0
<CURRENT-ASSETS> 57,376
<PP&E> 8,842
<DEPRECIATION> (4,791)
<TOTAL-ASSETS> 73,510
<CURRENT-LIABILITIES> 19,429
<BONDS> 0
0
0
<COMMON> 40,189
<OTHER-SE> (345)
<TOTAL-LIABILITY-AND-EQUITY> 73,510
<SALES> 0
<TOTAL-REVENUES> 73,970<F3>
<CGS> 0
<TOTAL-COSTS> 42,320
<OTHER-EXPENSES> 17,448
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,179
<INCOME-TAX> 6,182
<INCOME-CONTINUING> 9,030
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,030<F4>
<EPS-BASIC> 1.07
<EPS-DILUTED> 1.05
<FN>
<F1>INCLUDES SHORT-TERM INVESTMENT OF $8,684
<F2>EXCLUDES ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $952
<F3>EXCLUDES INTEREST INCOME OF $977
<F4>NET INCOME BEFORE MINORITY INTEREST IS $8,997 AND MINORITY INTEREST IS $33
</FN>
</TABLE>
