Form 10-K
Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 

(Mark One)

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

As of and for the year ended December 31, 2002

 

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 0-28830

 


 

Navigant Consulting, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware

  

36-4094854

(State or other jurisdiction of

  

(I.R.S. Employer

incorporation or organization)

  

Identification No.)

 

615 North Wabash Avenue, Chicago, Illinois 60611

(Address of principal executive offices, including zip code)

 

(312) 573-5600

(Registrant’s telephone number, including area code)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class


  

Name of each exchange on which registered


Common Stock, par value $0.001 per share

  

New York Stock Exchange

Preferred Stock Purchase Rights

  

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

 

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), 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 a definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  YES  x    NO  ¨

 

As of March 10, 2003, 42.8 million shares of the Registrant’s common stock, par value $.001 per share (“Common Stock”), were outstanding. The aggregate market value of shares of Common Stock held by non-affiliates, based upon the closing sale price of the stock on the New York Stock Exchange on March 10, 2003, was approximately $235.4 million. The Registrant’s Proxy Statement for the Annual Meeting of Stockholders, scheduled to be held on April 24, 2003, is incorporated by reference into Part III of this Annual Report on Form 10-K.

 


 


Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

FORM 10-K

AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2002

 

TABLE OF CONTENTS

 

         

Page


PART I    

         

Item 1.

  

Business

  

3

Item 2.

  

Properties

  

8

Item 3.

  

Legal Proceedings

  

9

Item 4.

  

Submission of Matters to a Vote of Security Holders

  

9

    

Executive Officers of the Registrant

  

10

PART II

         

Item 5.

  

Market for Registrant’s Common Stock and Related Stockholder Matters

  

11

Item 6.

  

Selected Financial Data

  

13

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of
Operations

  

14

Item 7A.

  

Quantitative and Qualitative Disclosure About Market Risk

  

26

Item 8.

  

Consolidated Financial Statements and Supplemental Data

  

26

Item 9.

  

Changes In and Disagreements with Independent Accountants on Accounting and
Financial Disclosure

  

26

PART III

         

Item 10.

  

Directors and Executive Officers of the Registrant

  

26

Item 11.

  

Executive Compensation

  

26

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

  

27

Item 13.

  

Certain Relationships and Related Transactions

  

27

Item 14

  

Controls and Procedures

  

27

PART IV

         

Item 15.

  

Exhibits, Financial Statements and Reports on Form 8-K

  

27

    

Independent Accountants’ Report

  

F-2

    

Consolidated Balance Sheets

  

F-3

    

Consolidated Statements of Operations

  

F-4

    

Consolidated Statements of Stockholders’ Equity

  

F-5

    

Consolidated Statements of Cash Flows

  

F-6

    

Notes to Consolidated Financial Statements

  

F-7

 

 

2


Table of Contents

PART I

 

Statements included in this report are intended to be, and are hereby identified as, “forward-looking statements” for purposes of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this report, including, without limitation, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” When used in this report, the words “anticipate,” “believe,” “intend,” “estimate,” “expect,” and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. The Company cautions readers that forward-looking statements, including without limitation those relating to the Company’s future business prospects, revenues, working capital, liquidity, and income are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to several important factors herein identified, among others, and other risks and factors identified from time to time in the Company’s reports filed with the SEC. The Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect current or future events or circumstances.

 

Item 1.     Business.

 

General

 

Navigant Consulting, Inc. (the “Company” or “NCI”) is a specialized, independent consulting firm providing litigation, financial, restructuring, strategic and operational consulting services to government agencies, legal counsel, and companies facing the challenges of uncertainty, risk and distress. The Company focuses on industries undergoing substantial regulatory or structural change.

 

The Company is a Delaware corporation headquartered in Chicago, Illinois. The Company’s executive office is located at 615 North Wabash Avenue, Chicago, Illinois 60611. Its telephone number is (312) 573-5600. The Company’s common stock is traded on the New York Stock Exchange under the symbol NCI.

 

“Navigant” is a service mark of Navigant International, Inc. NCI is not affiliated, associated, or in any way connected with Navigant International, Inc. and NCI’s use of “Navigant” is made under license from Navigant International, Inc.

 

(a) General Development of Business

 

The Company had its initial public offering in 1996. The Company had three subsequent public offerings, one in 1997 and two in 1998. From 1996 to 1999, the Company acquired twenty-four consulting firms. During 1999 and 2000, the Company replaced its management team and the new team, currently in office, subsequently implemented a major realignment of the Company. During 2000, the Company completed three large strategic divestitures, which eliminated three former business segments: Economic & Policy Consulting, Strategic Consulting and IT Solutions. In addition, the Company shut down or sold a number of other businesses that had been unprofitable or were not deemed complementary to its current business structure. During 2001 and 2002, the Company acquired two and five consulting firms, respectively, that were deemed complementary to its current businesses. The most significant 2002 acquisition, Hunter & Associates Management Services, Inc. (“Hunter”), requires the Company to furnish pro forma financial information which has been included in the notes to consolidated financial statements.

 

The Company’s current business structure consists of two business segments: Financial & Claims Consulting and Energy & Water Consulting. Each business segment has direct responsibility and accountability for its decisions, costs and profits. The Company’s consultants have the autonomy and authority to seek, engage and complete assignments. This business model and the Company’s experience, reputation and industry focus enable it to compete effectively in the business and professional services consulting marketplace.

 

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Table of Contents

 

(b) Financial Information about industry segments

 

Segment operating revenues and segment operating profits (together with a reconciliation to operating income) attributable to each segment for each of the last three years are set forth in Note 4 in the notes of the Company’s consolidated financial statements.

 

The relative percentages of operating revenue attributable to each segment were as follows:

 

    

2002


    

2001


    

2000


 

Financial & Claims Consulting

  

71.2

%

  

63.1

%

  

61.8

%

Energy & Water Consulting

  

28.8

%

  

36.9

%

  

38.2

%

 

The relative percentages of operating profits attributable to each segment were as follows:

 

    

2002


    

2001


    

2000


 

Financial & Claims Consulting

  

87.5

%

  

58.1

%

  

65.7

%

Energy & Water Consulting

  

12.5

%

  

41.9

%

  

34.3

%

 

Segment operating profits as a percentage of segment revenue were as follows:

 

    

2002


    

2001


    

2000


 

Financial & Claims Consulting

  

14.2

%

  

12.6

%

  

16.4

%

Energy & Water Consulting

  

5.0

%

  

15.5

%

  

13.9

%

Total segment operating profit

  

11.5

%

  

13.6

%

  

15.4

%

 

The information presented above does not necessarily reflect the results of segment operations that would have occurred had the segments been stand-alone businesses. Certain operating expenses, which relate to general corporate costs, were allocated to operating segments on the basis of core revenues. Certain operating expenses, which primarily relate to operating segments, have been excluded from the segment operating profit amounts, and are included in the costs not allocated to segments, for comparative purposes.

 

(c) Narrative description of business

 

Overview

 

The Company markets its services directly to senior and mid-level executives. A variety of business development and marketing channels are used to communicate directly with current and prospective clients, including on-site presentations, industry seminars and industry-specific articles. New engagements are sought and won by the Company’s senior and mid- level consultants. Future performance will continue to depend on the consultants’ ability to win new engagements.

 

A significant portion of new business arises from prior client engagements. In addition, the Company seeks to leverage the client relationships in one business segment to cross sell existing services provided by the other segment. Clients frequently expand the scope of engagements during delivery to include follow-on complementary activities. Also, on-site presence affords the Company’s consultants the opportunity to become aware of, and to help define, additional project opportunities as they are identified.

 

The Company derives substantially all of its revenues from professional services. Over the last three years, a substantial majority of the Company’s revenues have been generated under hourly or daily rates billed on a time and expense basis. Clients are typically invoiced on a monthly basis, with revenue recognized as the services are provided. From time to time, the Company earns incremental revenues, in addition to hourly or fixed fee billing, which are contingent on the attainment of certain contractual objectives, typically related to the closing of a sale of a client’s assets. Such incremental revenues are commonly referred to as “success fees”; they may cause significant variations in quarterly revenues and operating results if all other revenues and expenses during the quarters remain the same.

 

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Table of Contents

 

The Company’s most significant expense is consulting services expense, which generally relates to costs associated with generating revenues, and includes consultant compensation and benefits, and direct project-related expenses. Consultant compensation consists of salaries and performance bonuses. The consultants’ salaries, including bonuses, are competitive with industry standards. The performance bonuses are structured to reward improving business performance. The Company also compensates certain employees through equity based programs. Direct project-related expenses consist of travel-related costs, independent subcontractor fees, and material costs. The direct project-related expenses are typically recoverable under the terms of contracts and are billed to the clients. Project personnel are typically employed on a full-time basis, although independent subcontractors supplement project personnel as needed. Independent subcontractors are typically retained for specific client engagements on a task-specific, per diem basis during the period their expertise or skills are required. Retaining subcontractors on a per-engagement basis provides the Company with greater flexibility in adjusting project personnel levels in response to changes in demand for its services.

 

The Company’s most significant overhead expenses include administrative compensation and benefits, and office related expenses. Administrative compensation includes payroll costs for corporate management and administrative personnel, which are used to indirectly support client projects. Office related expenses include primarily office rent of the Company’s 38 offices.

 

Service Offerings

 

The Company provides wide and varied service offerings to its broad client base. The Company considers the following to be the Company’s key service offerings: litigation support and investigative accounting services, claims management and analysis, corporate restructuring services, discovery services, financial and transaction advisory services, government contracting, and operations advisory and management services.

 

Industry Sectors

 

The Company provides services to and focuses on industries undergoing substantial regulatory or structural change. The Company’s service offerings are relevant to most industries and the public sector. However, the Company has significant industry-specific knowledge and a robust client base in the construction, energy, financial services and healthcare industries. Additionally, the Company has a strong presence in the public sector, including federal, state and local governmental agencies. The Company has a long history of work for defendants, insurers and reinsurers in the asbestos and other product liability fields. Many of the Company’s engagements involve working in conjunction with the legal counsel of our clients.

 

The Company will continue to evaluate the industries that fit the Company’s focus and may add additional industry sectors in the future.

 

Human Capital

 

As of December 31, 2002, the Company had 1,368 employees, including 1,015 billable consultants. Success depends in large part on attracting, retaining and motivating talented, creative and experienced professionals at all levels. In connection with recruiting, the Company employs internal recruiters, retains executive search firms, and utilizes personal and business contacts to recruit professionals with significant industry-specific consulting experience. Consultants are drawn from the industries the Company serves, accounting and other consulting organizations, and top rated colleges and universities. The Company seeks to retain its consultants by offering competitive packages of base and incentive compensation, equity ownership and benefits.

 

Revenues are primarily generated from services performed by the Company’s professional consultants. Future performance will continue to depend, in large part, upon the Company’s ability to attract and retain highly skilled professionals possessing appropriate skills.

 

Independent contractors supplement the Company’s consultants on certain engagements. The Company believes that the practice of retaining independent contractors on a per-engagement basis provides greater

 

5


Table of Contents

flexibility in adjusting professional personnel levels in response to changes in demand for the Company’s professional services.

 

In addition to the employees and independent contractors discussed above, the Company has acquired and seeks to acquire consulting businesses to both add highly skilled professionals and expand the services offered by the Company. Some of the acquired businesses were direct competitors to the Company, while others had been retained as independent contractors to supplement certain engagements. The Company believes that the practice of acquiring consulting businesses to gain certain consultants and consulting capabilities strengthens its marketability, market share and overall operating results.

 

In connection with certain consultants’ employment and compensation agreements from both recruitment and business acquisitions, the Company obtains non-solicitation covenants from senior and mid-level consultants. Most of these covenants have restrictions, preventing solicitation of clients and employees, that extend generally 12 months beyond the employees’ termination date. The Company employs these contractual agreements to reduce the risk of attrition and to safeguard the Company’s existing clients and projects from departing employees.

 

In order to secure new non-solicitation agreements for those consultants hired before 2000 with current agreements that would have expired by year-end 2002, the Company successfully implemented and executed, in the fourth quarter of 2002, a predominantly stock-based retention program, the Management Stock Purchase Program (“MSPP”), for key leaders in both of the Company’s business segments, using the Company’s existing Long-Term Incentive Program authorization. (See Note 10 to the consolidated financial statements for additional information about the MSPP.).

 

The Company continually monitors and adjusts, if needed, the consultants’ total compensation, which includes salaries, annual cash bonus, and other cash and equity incentives from certain Company programs, to ensure both that the consultants’ compensation is competitive within the industry and that the Company has the opportunity to achieve target profitability levels. The Company’s bill rates to clients are tiered in accordance with the experience and levels of the consulting staff. The Company monitors and adjusts, if needed, those bill rates according to the supply and demand of the then-current market conditions within the various industry segments served by the Company.

 

Competition

 

The market for consulting services is intensely competitive, highly fragmented and subject to rapid change. The market includes a large number of participants with a variety of skills and industry expertise, including general management consulting firms, as well as the national accounting firms, and other local, regional, national and international firms. Many of these companies are global in scope and have greater personnel, financial, technical and marketing resources than the Company. The Company believes that its experience, reputation, industry focus and range of services will enable it to compete effectively in the consulting marketplace.

 

(d) Other Matters

 

Concentration of Revenues

 

There were no clients that accounted for more than 10 percent of the Company’s total revenues for the year ended December 31, 2002. One client from the Energy & Water Consulting segment accounted for more than 5 percent of the Company’s total revenues for the years ended December 31, 2002 and 2001. There were no clients that accounted for more than 5 percent of the Company’s total revenues for the year ended December 31, 2000. Revenues earned from the Company’s top 20 clients amounted to 39 percent, 42 percent and 39 percent of total revenues for the years ended December 31, 2002, 2001 and 2000, respectively. The existence and identity of the Company’s largest clients may change from year to year.

 

6


Table of Contents

 

Business Risks

 

In addition to other information contained in this Annual Report on Form 10-K and in the documents incorporated by reference herein, the following risk factors should be considered carefully in evaluating the Company and its business. Such factors could have a significant impact on the Company’s business, operating results and financial condition.

 

The Company relies heavily on its consulting staff and management team. The Company’s inability to retain highly skilled professionals, coupled with departures of a significant number of senior employees, could have a material adverse effect on the Company.

 

The Company’s common stock price may fall and any investment in the Company may be materially affected. Any long-term decline in the common stock would impair the Company’s ability to use equity-based compensation to attract, retain and motivate key employees.

 

The Company uses equity-based compensation as a portion of senior and mid-level consultants’ overall compensation package. Equity-based compensation is being used to help align the interests of its employees and stockholders, but complete alignment is difficult to achieve. Compensation and retention related issues represent a continuing challenge for the Company.

 

Specialized systems and processes have been developed by the Company and provide a competitive advantage in servicing current clients and obtaining new clients. This intellectual capital is the property of Navigant Consulting, Inc. and the unauthorized use could have a materially adverse impact on the Company’s business. Additionally, many of the Company’s service offerings rely on technology that is subject to rapid change.

 

The Company’s intellectual capital in certain service offering may be rendered obsolete due to new governmental regulation. A new governmental regulation could allow a competitor a significant advantage before the Company is able to adapt to new updated service demands.

 

The Company must manage growth from both organically expanding services and the acquisitions of complementary consulting firms. This growth and integration of acquisitions may cause strain on our management team and our systems. The strain on management from rapid growth or unsuccessful integration of these businesses could have a material adverse effect on the future profitability of the Company.

 

The Company’s return of capital may not materialize on certain business acquisitions. The Company also may pay a substantial premium on certain business acquisitions to remain competitive. The financing of these acquisitions through cash or common stock could impair liquidity or cause significant stock dilution.

 

The Company’s engagements are usually relatively short-term in comparison to its office-related expenses and other infrastructure commitments. The Company’s inability to continually replace a significant portion of its current engagements would have an adverse effect on the Company’s ability to meet its current and future commitments.

 

The Company maintains a revolving line of credit agreement to help fund short-term and long-term cash requirements from normal operations. This agreement contains certain covenants requiring, among other things, a minimum level of earnings. Poor performance of the Company could cause the Company to be in default of these existing covenants. Additionally, the Company cannot be certain that it will be able to raise capital or obtain debt financing to execute future acquisitions or to meet required working capital needs.

 

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Table of Contents

 

If the financial condition of the Company’s clients were to deteriorate resulting in an impairment of their ability to make payments, additional allowances for uncollectability would likely be required.

 

The professional reputation of the Company and its professionals is critical to the Company’s ability to successfully compete for new client engagements and attract or retain professionals. Any factors that damage our professional reputation could have a material adverse effect on the Company’s business.

 

The Company is subject to the risk of professional liability. The Company’s consultants engage in complex analyses in which the exercise of professional judgment is critical. If services are not performed to the client’s satisfaction, the client may threaten or bring a lawsuit against the Company, claiming the Company performed negligently or breached its obligation to the client. In certain cases there is a potential that persons other than clients may bring claims against the Company. A claim against the Company could exceed the limits of the Company’s insurance coverage and could damage the Company’s reputation.

 

Legislative changes affecting our clients, our competitors, or our staff could have an impact on business. An example of this is the Sarbanes-Oxley Act of 2002, which limits the services that public accounting firms are permitted to provide to their audit clients. The Company is not a public accounting firm and therefore is not subject to such restrictions. Changes to the Sarbanes-Oxley Act or rules promulgated thereunder, as well as other legislation could have an impact on the Company’s business.

 

International Operations

 

The Company has an international presence with offices in the United Kingdom and Canada. In addition, the Company has clients based in the United States of America that have international operations. No country, other than the United States of America, accounted for more than 5 percent of the Company’s total revenues for the three years ended December 31, 2002, 2001 and 2000.

 

Available Information

 

The Company maintains an Internet website at http://www.navigantconsulting.com, that includes a hypertext link to a website maintained by a third-party, where the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge as soon as reasonably practicable following the time that they are filed with or furnished to the SEC.

 

Item 2.     Properties.

 

The Company owns a 16,500 square foot building located in Chicago, Illinois, which is used as the Company’s executive office. In addition to the executive office, the Company has 38 operating leases for office facilities in 34 cities worldwide. Additional space may be required as the business expands geographically, but the Company believes it will be able to obtain suitable space as needed. Principal offices are located in the following cities:

 

Albany, New York

    

Fairfield, Connecticut

    

Pittsburgh, Pennsylvania

Atlanta, Georgia

    

Glendale, California

    

Princeton, New Jersey

Austin, Texas

    

Houston, Texas

    

Richmond, Virginia

Bakersfield, California

    

London, United Kingdom

    

Sacramento, California

Baltimore, Maryland

    

Los Angeles, California

    

San Francisco, California

Boston, Massachusetts

    

Mt. Laurel, New Jersey

    

Tampa, Florida

Burlington, Massachusetts

    

Nashville, Tennessee

    

Toronto, Canada

Chicago, Illinois

    

New York, New York

    

Vienna, Virginia

Dallas, Texas

    

Philadelphia, Pennsylvania

    

Washington, D.C.

Denver, Colorado

    

Phoenix, Arizona

    

Wilmington, Delaware

 

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Table of Contents

 

Item 3.     Legal Proceedings.

 

As previously disclosed, in August 2000, the Company agreed to settle for $23.0 million the consolidated shareholder class actions (the “Consolidated Class Actions”). The Company’s contribution to the settlement was $16.5 million, with the insurance companies contributing $6.5 million. The federal district court approved this settlement in March 2001. The Company subsequently recovered from one of its insurers an additional contribution of $4.0 million, which it agreed to share with the class on a 50/50 basis, net of the Company’s costs. All settlement funds were paid into escrow pending final resolution of appeals and distribution issues. In July 2002 the last pending appeal was resolved. In February 2003, the federal district court entered an order authorizing the distribution of all settlement funds.

 

In February 2003, the Company agreed to settle, without any admission of liability, a previously disclosed lawsuit entitled Klein v. Navigant Consulting, Inc. et al. for a payment of $1.35 million. The plaintiff had opted out of the settlement of the Consolidated Shareholder Class Actions. There are no other opt out lawsuits remaining.

 

As previously disclosed, in October 2002, the Company filed a complaint against two former employees in the United States District Court for the Northern District of Texas entitled, Navigant Consulting Inc. v. Wilkinson et al. In November 2002, the Company amended its complaint to add as a defendant a third former employee, Sharon Taulman. The complaint, as amended, seeks to protect the Company’s intellectual property rights in certain proprietary software and to enforce certain provisions of its former employees’ confidentiality and non-solicitation agreements. The Company is seeking declaratory and injunctive relief, compensatory and punitive damages, and attorneys’ fees on various legal theories, including misappropriation of trade secrets, conversion, breach of contract, and breach of fiduciary duties. The defendants have counter-claimed for defamation and for breach of contract based on the Company’s refusal to permit the defendants to exercise certain employee stock options.

 

As previously disclosed, in November 2001, the Company was informed that the Securities and Exchange Commission (“SEC”) has initiated a formal investigation, through the Chicago office of its Division of Enforcement, as to whether there may have been violations of the securities laws at the Company during 1998 and 1999. The Company is cooperating fully with the SEC.

 

As previously disclosed, in November 2000, the Company was served with a lawsuit filed in the Circuit Court of Cook County, Illinois by two former officers, Steven J. Denari and Charles A. Demirjian. The lawsuit named as defendants the Company, three of its directors, and its auditors, KPMG LLP. The lawsuit seeks compensatory and punitive damages from the defendants based on various legal theories, including defamation. The Company is defending this lawsuit vigorously. In an independent action, the Company is pursuing collection of approximately $3.0 million plus interest from Mr. Demirjian, who borrowed money from the Company to purchase the Company’s common stock and has, to date, declined to repay the money borrowed.

 

From time to time, the Company is party to various other lawsuits and claims in the ordinary course of business. While the outcome of those lawsuits or claims cannot be predicted with certainty, the Company does not believe that any of those lawsuits or claims will have a material adverse effect on the Company.

 

Item 4.     Submission of Matters to a Vote of Security Holders.

 

Not Applicable.

 

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Executive Officers of the Registrant

 

The following are the executive officers of the Company as of March 10, 2003:

 

Name


  

Office


  

Age


William M. Goodyear

  

Chairman of Board and Chief Executive Officer

  

54

Ben W. Perks

  

Executive Vice President and
Chief Financial Officer

  

61

Philip P. Steptoe

  

Vice President, General Counsel and Secretary

  

51

 

William M. Goodyear, 54, has served as Chairman of the Board and Chief Executive Officer of the Company since May 2000. He has served as a director since December 15, 1999. Prior to December 1999, he served as Chairman and Chief Executive Officer of Bank of America, Illinois. From 1972 to 1999, Mr. Goodyear held a variety of assignments with Continental Bank, subsequently Bank of America, including corporate finance, corporate lending, trading and distribution. During this 28-year period, Mr. Goodyear was stationed in London for 5 years (1986 to 1991) to manage Continental Bank’s European and Asian Operations. He was Vice Chairman and a member of the Board of Directors of Continental Bank prior to the 1994 merger between Continental Bank Corporation and BankAmerica Corporation. He was President of the Bank of America’s Global Private Bank until January 1999. Mr. Goodyear received his Masters in Business Administration degree, with Honors, from the Amos Tuck School of Business at Dartmouth College, and his Bachelor’s degree in Business Administration, with Honors, from the University of Notre Dame. He holds the Certified Public Accountant designation.

 

Ben W. Perks, 61, has served as Executive Vice President and Chief Financial Officer since May 2000. Prior to joining the Company, Mr. Perks was a senior Chicago partner in the Financial Advisory Services Group with PricewaterhouseCoopers LLP. With PricewaterhouseCoopers and Price Waterhouse LLP, he had more than 32 years of professional services experience, including 22 years as an audit and consulting partner, providing financial reporting, accounting, auditing, tax, economic and litigation consulting services to clients. Mr. Perks received his Professional Accounting Program degree from Northwestern University’s J.L. Kellogg Graduate School of Management, his Juris Doctor (law) degree and Masters in Business Administration degree from the University of Cincinnati, and his Bachelor’s degree from Denison University. He is a Certified Public Accountant, a Certified Fraud Examiner, and a member of the American Institute of Certified Public Accountants and the American Bar Association.

 

Philip P. Steptoe, 51, has served as Vice President, General Counsel and Secretary since February 2000. Previously, Mr. Steptoe was a partner with the national law firm of Sidley & Austin (now Sidley, Austin, Brown & Wood). Prior to joining Sidley in 1988, he was a partner in the Chicago law firm of Isham, Lincoln & Beale. During 1994 to 1995, he served for four months as Acting General Counsel for Orange and Rockland Utilities, Inc., a New York electric and gas utility. Mr. Steptoe earned his A.B. degree in Physics from Princeton University and his Juris Doctor (law) degree from the University of Virginia.

 

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Table of Contents

 

PART II

 

Item 5.     Market for Registrant’s Common Stock and Related Stockholder Matters.

 

Market Information

 

The shares of common stock of the Company are traded on the New York Stock Exchange under the symbol “NCI.” The following table sets forth, for the periods indicated, the high and low closing sale prices per share.

 

    

High


  

Low


2002

             

Fourth quarter

  

$

6.09

  

$

3.75

Third quarter

  

$

6.80

  

$

5.06

Second quarter

  

$

6.99

  

$

6.15

First quarter

  

$

6.63

  

$

4.68

2001

             

Fourth quarter

  

$

5.50

  

$

3.20

Third quarter

  

$

7.52

  

$

3.24

Second quarter

  

$

8.20

  

$

5.92

First quarter

  

$

7.15

  

$

3.75

 

Holders

 

As of March 10, 2003, there were approximately 450 holders of record of shares of common stock of the Company.

 

Distributions

 

The Company has not paid any cash dividends since its organization and does not anticipate that it will make any such distributions in the foreseeable future.

 

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Table of Contents

 

Sale of Unregistered Securities

 

During the years ended December 31, 2000, 2001 and 2002, the Company has issued the following unregistered securities:

 

Date


  

Type of Securities


  

Number of Shares


  

Purchaser or “Recipient”


  

Consideration(a)


  

Exemption Claimed


October 31, 2001

  

Common Stock

  

136,500

  

Former

stockholder

of Boston Management Resources, Inc.

  

All outstanding shares of Boston Management Resources, Inc.

  

Section 4(2)

May 24, 2002

  

Common

Stock

  

276,448

  

Financial

Analytics Consulting Group, LLC

  

Substantially all of the assets of Financial Analytics Consulting Group, LLC

  

Section 4(2)

June 19, 2002

  

Common Stock

  

410,828

  

Keevan

Consulting

Group, LLC

  

Substantially all of the assets of Keevan Consulting Group, LLC

  

Section 4(2)

July 10, 2002

  

Common Stock

  

716,953

  

Barrington

Energy

Partners, LLC

  

Substantially all of the assets of Barrington Energy Partners, LLC

  

Section 4(2)

July 24, 2002

  

Common Stock

  

91,408

  

GCR, LLC

  

Substantially all of the assets of GCR, LLC

  

Section 4(2)

September 23, 2002

  

Common

Stock

  

1,464,547

  

Hunter & Associates Management Services, Inc.

  

Substantially all of the assets of Hunter & Associates Management Services, Inc.

  

Section 4(2)


(a)   Does not take into account additional cash or other consideration paid or payable as a part of the transactions.

 

12


Table of Contents

 

Item 6.     Selected Financial Data.

 

The following financial and operating data should be read in conjunction with the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements of the Company and related notes thereto appearing elsewhere in this report. The amounts are shown in thousands, except for per share data.

 

    

For the years ended December 31, (1)


    

2002


    

2001


    

2000


    

1999


    

1998


Revenues

                                          

Core revenues

  

$

258,020

 

  

$

224,552

 

  

$

236,654

 

  

$

218,041

 

  

$

202,582

Incremental revenues

  

 

—  

 

  

 

11,028

 

  

 

7,975

 

  

 

1,450

 

  

 

—  

    


  


  


  


  

Total revenues

  

 

258,020

 

  

 

235,580

 

  

 

244,629

 

  

 

219,491

 

  

 

202,582

Operating expenses (credits):

                                          

Consulting services expense

  

 

168,836

 

  

 

152,007

 

  

 

158,720

 

  

 

142,965

 

  

 

122,040

General and administrative expenses

  

 

60,721

 

  

 

55,413

 

  

 

59,846

 

  

 

58,742

 

  

 

43,194

Depreciation expense

  

 

7,651

 

  

 

7,118

 

  

 

6,797

 

  

 

9,550

 

  

 

3,858

Amortization expense

  

 

2,373

 

  

 

5,700

 

  

 

4,573

 

  

 

900

 

  

 

—  

Stock-based compensation expense

  

 

3,401

 

  

 

3,812

 

  

 

492

 

  

 

3,850

 

  

 

—  

Restructuring costs and merger-related costs (credits)

  

 

(500

)

  

 

1,900

 

  

 

10,229

 

  

 

(881

)

  

 

7,370

Litigation and settlement provisions

  

 

750

 

  

 

5,700

 

  

 

16,500

 

  

 

2,335

 

  

 

—  

VSRP cash compensation expense

  

 

—  

 

  

 

12,399

 

  

 

6,357

 

  

 

—  

 

  

 

—  

    


  


  


  


  

Operating income (loss) from continuing operations

  

 

14,788

 

  

 

(8,469

)

  

 

(18,885

)

  

 

2,030

 

  

 

26,120

Other income (loss), net

  

 

(19

)

  

 

874

 

  

 

(1,666

)

  

 

(2,653

)

  

 

2,053

    


  


  


  


  

Income (loss) from continuing operations before income taxes

  

 

14,769

 

  

 

(7,595

)

  

 

(20,551

)

  

 

(623

)

  

 

28,173

Income tax expense (benefit) (2)

  

 

5,908

 

  

 

(2,284

)

  

 

(6,194

)

  

 

1,534

 

  

 

19,920

    


  


  


  


  

Net income (loss) from continuing operations

  

 

8,861

 

  

 

(5,311

)

  

 

(14,357

)

  

 

(2,157

)

  

 

8,253

    


  


  


  


  

Income (loss) from discontinued operations, net of income taxes

  

 

—  

 

  

 

—  

 

  

 

(10,193

)

  

 

(12,465

)

  

 

7,328

Loss on dispositions of discontinued operations, net of income taxes

  

 

—  

 

  

 

—  

 

  

 

(155,003

)

  

 

—  

 

  

 

—  

    


  


  


  


  

Net income (loss)

  

$

8,861

 

  

$

(5,311

)

  

$

(179,553

)

  

$

(14,622

)

  

$

15,581

    


  


  


  


  

Basic income (loss) per share:

                                          

Net income (loss) from continuing operations

  

$

0.22

 

  

$

(0.14

)

  

$

(0.35

)

  

$

(0.05

)

  

$

0.23

Net income (loss) from discontinued operations

  

$

—  

 

  

$

—  

 

  

$

(0.25

)

  

$

(0.30

)

  

$

0.20

Loss on dispositions of discontinued operations

  

$

—  

 

  

$

—  

 

  

$

(3.79

)

  

$

0.00

 

  

$

—  

Net income (loss)

  

$

0.22

 

  

$

(0.14

)

  

$

(4.39

)

  

$

(0.35

)

  

$

0.43

Shares used in computing net income (loss) per basic share

  

 

40,350

 

  

 

38,439

 

  

 

40,895

 

  

 

41,601

 

  

 

36,476

Diluted income (loss) per share:

                                          

Net income (loss) from continuing operations

  

$

0.21

 

  

$

(0.14

)

  

$

(0.35

)

  

$

(0.05

)

  

$

0.22

Net income (loss) from discontinued operations

  

$

—  

 

  

$

—  

 

  

$

(0.25

)

  

$

(0.30

)

  

$

0.19

Loss on dispositions of discontinued operations

  

$

—  

 

  

$

—  

 

  

$

(3.79

)

  

$

—  

 

  

$

—  

Net income (loss)

  

$

0.21

 

  

$

(0.14

)

  

$

(4.39

)

  

$

(0.35

)

  

$

0.41

Shares used in computing net income (loss) per diluted share

  

 

42,670

 

  

 

38,439

 

  

 

40,895

 

  

 

41,601

 

  

 

37,707

                                            
    

As of December 31,


    

2002


    

2001


    

2000


    

1999


    

1998


Balance Sheet Data:

                                          

Cash and cash equivalents

  

$

8,109

 

  

$

35,950

 

  

$

48,798

 

  

$

42,345

 

  

$

119,704

Working capital

  

$

25,910

 

  

$

53,556

 

  

$

63,656

 

  

$

67,598

 

  

$

146,509

Total assets

  

$

201,204

 

  

$

158,826

 

  

$

163,482

 

  

$

414,676

 

  

$

230,517

Long-term debt, less current portion

  

$

4,418

 

  

$

1,500

 

  

$

—  

 

  

$

—  

 

  

$

—  

Total stockholders’ equity

  

$

144,295

 

  

$

112,105

 

  

$

115,725

 

  

$

300,669

 

  

$

164,904

Cash dividends declared per common share

  

 

N/A

 

  

 

N/A

 

  

 

N/A

 

  

 

N/A

 

  

 

N/A


(1)   The amounts above have been restated as described in Note 17 to the Consolidated Financial Statements. Certain business segments that have previously been presented in revenues and expenses were discontinued in 2000 and were reclassified as discontinued operations. As a result, certain revenues and expenses for the years 1999 and 1998 have been reclassified to “Loss from discontinued operations, net of income taxes.”

 

13


Table of Contents
(2)   Certain operating subsidiaries previously were not subject to federal income taxation. The provision for income taxes for the year ended December 31, 1998 reflects a one-time, non-cash charge of $7.2 million resulting from the conversion of a subsidiary of the Company from the modified cash basis to the accrual basis for tax purposes.

 

(3)   In December 1997, the Company acquired two small businesses that were accounted for on a pooling of interests basis. In conjunction with the restructuring of the Company’s operations in the second quarter of 2000, these two entities were shut down. In late 2002, the Company determined that these acquisitions should have been recorded using the purchase accounting method. However, the impact of applying such method of accounting is not material to the Company’s financial statements, and revision of previously issued financial information is not required, in light of the following factors: (a) because the entities were shut down in 2000, changes in financial information primarily would have affected amounts reported for discontinued operations in 1998 through 2000; (b) for all periods subsequent to the second quarter of 2000, there would be no impact on previously reported financial information; (c) there will be no impact on future financial reporting.

 

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

 

Overview

 

The Company is a specialized, independent consulting firm providing litigation, financial, restructuring, strategic and operational consulting services to government agencies, legal counsel, and large companies facing the challenges of uncertainty, risk and distress.

 

The Company derives substantially all of its revenues from professional services. Over the last three years, a substantial majority of the Company’s revenues have been generated under hourly or daily rates billed on a time and expense basis. Clients are typically invoiced on a monthly basis, with revenue recognized as the services are provided. From time to time, the Company earns incremental revenues, in addition to hourly or fixed fee billing, which are contingent on the attainment of certain contractual objectives, typically related to the closing of a sale of a client’s assets. Such incremental revenues are commonly referred to as “success fees”; they may cause significant variations in quarterly revenues and operating results if all other revenues and expenses during the quarters remain the same.

 

The Company’s most significant expense is consulting services expense, which generally relates to costs associated with generating revenues, and includes consultant compensation and benefits, and direct project-related expenses. Consultant compensation consists of salaries and performance bonuses. The consultants’ salaries, including bonuses, are competitive to industry standards. The performance bonuses are structured to reward higher business performance. The Company also compensates certain employees through equity based programs. Direct project-related expenses consist of travel-related costs, independent subcontractor fees, and material costs. The direct project-related expenses are typically recoverable under the terms of contracts and are billed to the clients. Consulting personnel are typically employed on a full-time basis, although independent subcontractors supplement consulting personnel as needed. Independent subcontractors are retained for specific client engagements on a task-specific, per diem basis during the period their expertise or skills are required. Retaining subcontractors on a per-engagement basis provides the Company with greater flexibility in adjusting consulting personnel levels in response to changes in demand for its services.

 

The Company’s most significant overhead expenses include administrative compensation and benefits, and office related expenses. Administrative compensation includes payroll costs for corporate management and administrative personnel, which are used to indirectly support projects. Office related expenses include primarily office rent of the Company’s 38 offices.

 

14


Table of Contents

 

In addition, the Company has several structured compensation and retention programs in which consultants’ compensation graduates at certain levels from cash compensation to stock-based compensation.

 

Critical Accounting Policies

 

The preparation of the financial statements requires management to make estimates and assumptions that affect amounts reported therein. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:

 

Revenue Recognition Policies

 

The Company recognizes revenues as the related professional services are provided. In connection with recording revenues, estimates and assumptions are required in determining the expected conversion of the revenues to cash. From time to time, the Company also earns incremental revenues, commonly referred to as “success fees”, such as based on the successful closing of the sale of a client’s assets. These success fees amounts are generally contingent on a specific event, after which revenues are recognized on the percentage of completion method.

 

Determinations of Accounts Receivable Realization

 

The Company maintains allowances for doubtful accounts for estimated losses based on the Company’s review and assessment of its clients’ ability to make required payments, and the estimated realization, in cash, by the Company of amounts due from its clients. If the financial condition of a client were to deteriorate resulting in an impairment of the client’s ability to make payments, additional allowances might be required.

 

Valuation of Net Deferred Tax Assets

 

The Company has recorded net deferred tax assets as it expects to realize future tax benefits related to the utilization of these assets. Although the Company has experienced net losses in recent years prior to 2002, no valuation allowance has been recorded related to these deferred tax assets because management believes that it is more likely than not that future taxable income will be sufficient to realize the future tax benefits. Should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, it would need to establish an allowance which would be recorded as a charge to income in the period in which such determination is made.

 

Acquisitions and Divestitures

 

2002 Acquisitions:

 

Effective as of April 5, 2002, the Company acquired portions of Arthur D. Little, Inc.’s assets for $6.1 million cash at closing. The acquisition consisted of two consulting units, with approximately 30 consulting and administrative professionals that primarily serve the energy and public sector industries.

 

On May 24, 2002, the Company acquired the assets of Financial Analytics Consulting Group, LLC (“FACG”) for $6.3 million, which consisted of $4.5 million cash at closing and 0.3 million shares of its common stock valued at $1.8 million at closing. In addition to the initial consideration, the purchase agreements for FACG provide for additional payments in cash over the two full calendar years after closing that are contingent on revenues generated and the attainment of certain gross margin thresholds. Any additional payments related to this

 

15


Table of Contents

contingency will be accounted for as goodwill. FACG was formed in conjunction with a management buyout from Arthur Andersen, LLP and consisted of 90 consulting and administrative professionals from five different Arthur Andersen practices. FACG was acquired primarily to augment the Company’s litigation support and investigation services offerings.

 

On June 19, 2002, the Company acquired the assets of Keevan Consulting, LLC (“Keevan”) for $7.2 million, which consisted of $4.0 million cash at closing, 0.4 million shares of its common stock valued at $2.7 million at closing, and $0.5 million cash payable in April 2003. In addition to the initial consideration, the purchase agreement for Keevan provides for additional payments in cash and the Company’s common stock over the two and one-half years from closing that are contingent on revenues generated and the attainment of certain gross margin thresholds. Any additional payments related to this contingency will be accounted for as goodwill. Keevan was formed in conjunction with a management buyout from Arthur Andersen, LLP and consisted of 38 consulting and administrative professionals. Keevan was acquired to enhance the Company’s government contracts services offering.

 

On July 15, 2002, the Company acquired the assets of Barrington Energy Partners, LLC (“Barrington Energy”) for $11.1 million, which consisted of $4.8 million cash at closing, 0.7 million shares of its common stock valued at $4.8 million at closing, and $1.5 million cash payable on the first anniversary of the closing date. In addition to the initial consideration, the purchase agreement for Barrington Energy provides for additional payments in cash and the Company’s common stock over the two and one-half years from closing that are contingent on the attainment of certain performance thresholds. Any additional payments related to this contingency will be accounted for as goodwill. Barrington Energy consisted of eight senior-level professionals and six other staff whom complement the Company’s energy industry sector and primarily provide financial and transaction advisory service offerings. Barrington Energy Partners, LLC is not associated with the Company’s 1999 acquisition of the Barrington Consulting Group, Inc.

 

Effective September 17, 2002, the Company acquired the assets of Hunter & Associates Management Services, Inc. (“Hunter”) for $25.4 million, which consisted of $10.2 million cash at closing, 1.5 million shares of its common stock valued at $8.2 million at closing, $0.5 million cash payable on April 1, 2003, and $6.5 million in its common stock payable in two equal installments on the first and second anniversary of the closing. If either seller or buyer elects, up to 67 percent of the $6.5 million deferred payment would be paid in cash and the remainder would be paid in the Company’s common stock. Accordingly, the Company accounted for this $6.5 million deferred payment obligation as 67 percent liabilities and 33 percent deferred stock issuance. In addition to the initial consideration, the purchase agreement for Hunter provides for additional payments in cash and the Company’s common stock over the three years following closing that are contingent on the attainment of certain performance targets. Any additional payments related to this contingency will be accounted for as goodwill. Hunter consisted of 20 senior-level professionals and 40 additional staff that provide a comprehensive range of performance improvement services to hospitals and healthcare systems, including physician practices and provider owner-managed care organizations. Hunter also provides interim executive-level management services as well as consulting services related to hospital restructurings. Hunter was acquired to significantly expand the Company’s service offerings within the healthcare industry.

 

All of the Company’s 2002 acquisitions have been accounted for by the purchase method of accounting for business combinations and, accordingly, the results of operations have been included in the consolidated financial statements since the dates of acquisition.

 

2001 Acquisitions:

 

On March 1, 2001, the Company acquired the assets of Barba-Arkhon International, Inc. (“Barba-Arkhon”) for $8.3 million, which consisted of $5.3 million cash at closing and $3.0 million notes payable, which bear interest at 6 percent due in two equal annual installments. Barba-Arkhon provides project program management and claims analysis services for construction, governmental and institutional projects. Engagements include delay

 

16


Table of Contents

and disruption claims analysis for dispute resolution, damage valuation, litigation support and technical analysis for projects involving transportation infrastructure, environmental and industrial facilities, power plants and commercial buildings.

 

On July 2, 2001, the Company acquired the common stock of Chambers Associates, Inc. (“Chambers”) for $2.7 million, which consisted of $2.1 million cash at closing and $0.6 million cash due within 18 months of closing. The purchase agreement for Chambers also provides for additional payments through December 31, 2003 contingent on attainment of certain revenue targets. Chambers provides public policy analysis, strategic planning and litigation support services to a wide range of clients. Engagements include economic and financial research to analyze the impact of current or proposed legislation or regulation; advocacy support for certain health, tax, energy and environmental legislative issues; and analysis and estimation of claim values and expert testimony in product liability, medical malpractice, bankruptcy and other litigation cases. Chambers was acquired to augment the services within its asbestos claims and mass tort litigation expertise. In addition, Chambers’ energy and environmental legislative expertise are expected to provide cross-selling opportunities to clients in the energy industry.

 

The 2001 acquisitions have been accounted for by the purchase method of accounting for business combinations and, accordingly, the results of operations have been included in the consolidated financial statements since the dates of acquisition.

 

2000 Acquisitions:

 

There were no acquisitions of businesses during 2000.

 

2000 Divestitures:

 

As part of a major realignment, the Company completed three large strategic divestitures during 2000 (see Note 17 to the Consolidated Financial Statements). In addition, the Company shut down or sold a number of other subsidiaries that had been unprofitable or were not deemed complementary to its current core operations.

 

In July 2000, the Company sold the assets of GeoData Solutions, Inc. (“GeoData”) for $9.0 million in cash. As part of the disposition agreement, the Company retained all accounts receivable, which had a net realizable value of approximately $4.1 million at July 1, 2000. In September 2000, the Company sold the assets of LECG, Inc. (“LECG”), for $45.0 million, principally in cash and notes receivable plus other contingent payments, to a team of senior LECG professionals in a management buy-out. Also in September 2000, the assets of American Corporate Resources (“ACR”) were sold for $1.4 million in cash. In October 2000, the Company completed a nontaxable exchange of the stock of Strategic Decisions Group (“SDG”) for the Company’s common stock valued at the time of closing at approximately $6.2 million. In addition, the Company received $16.0 million in cash related to this transaction. The assets of Glaze Creek Partners LLC were included in the SDG transaction.

 

In June 2000, the Company shut down the operations of Triad International through employee terminations and sold certain Triad International assets to the remaining employees. The purchaser assumed certain liabilities in connection with this disposition. In consideration for the sale, the Company is eligible to receive up to $4.0 million in contingent deferred payments over four years following the disposition date.

 

During the third and fourth quarters of 2000, the Company shut down the operations of Saraswati Systems Corporation (“SSC”), The Vision Trust Marketing Group, LLC (“VTM”), Dowling and Associates, Inc. (“Dowling”) and Scope International, Inc. (“Scope”). During the fourth quarter of 2000, the Company decided to discontinue the operations of Brooks International AB, Brooks International SARL and SPRL, and Brooks International Consulting OY. These operations were subsequently sold in the first quarter 2001 for nominal cash value and future contingent deferred payments. The Company has received less than $0.1 million through December 31, 2002.

 

17


Table of Contents

 

The Company’s statements of operations have been restated for the divestitures of LECG, SDG, GeoData, SSC, Dowling, Triad International, Inc., Brooks International AB, Brooks International SARL and SPRL, Brooks International Consulting OY, and Glaze Creek Partners for all applicable periods presented. The revenues and expenses of these companies are included in “Income (loss) from discontinued operations, net of income taxes” for all periods presented after the dates of acquisition and through the dates of disposal. The divestitures of Scope, VTM and ACR were not part of discontinued operations and their operating results are included in continuing operations for all periods since the dates of acquisition.

 

Results of Operations

 

The following table sets forth, for the periods indicated, selected statement of operations data as a percentage of total revenues:

 

    

Years ended December 31,


 
    

2002


      

2001


      

2000


 

Revenues:

                        

Core revenues

  

100.0

%

    

95.3

%

    

96.7

%

Incremental revenues

  

—  

 

    

4.7

 

    

3.3

 

    

    

    

Total revenues

  

100.0

%

    

100.0

%

    

100.0

%

Operating expenses (credits):

                        

Consulting services expense

  

65.4

 

    

64.5

 

    

64.9

 

General and administrative expenses

  

23.5

 

    

23.5

 

    

24.5

 

Depreciation expense

  

3.0

 

    

3.0

 

    

2.7

 

Amortization expense

  

1.0

 

    

2.4

 

    

1.9

 

Stock-based compensation expense

  

1.3

 

    

1.6

 

    

0.1

 

Restructuring cost (credits)

  

(0.2

)

    

0.8

 

    

4.2

 

Litigation and settlement provisions

  

0.3

 

    

2.4

 

    

6.7

 

VSRP cash compensation expense

  

—  

 

    

5.3

 

    

2.6

 

    

    

    

Operating income (loss) from continuing operations

  

5.7

 

    

(3.5

)

    

(7.6

)

Other income (loss), net

  

—  

 

    

0.3

 

    

(0.7

)

    

    

    

Income (loss) from continuing operations before income taxes

  

5.7

 

    

(3.2

)

    

(8.3

)

Income tax expense (benefit)

  

2.3

 

    

(0.9

)

    

(2.5

)

    

    

    

Net income (loss) from continuing operations

  

3.4

 

    

(2.3

)

    

(5.8

)

    

    

    

Loss from discontinued operations, net of income taxes

  

—  

 

    

—  

 

    

(4.2

)

Loss on dispositions of discontinued operations, net of income taxes

  

—  

 

    

—  

 

    

(63.4

)

    

    

    

Net income (loss)

  

3.4

%

    

(2.3

)%

    

(73.4

)%

    

    

    

 

18


Table of Contents

 

Results of Operations—2002 compared to 2001

 

Revenues. Total revenues consist of core revenues and incremental revenues. Core revenues are primarily a function of billable hours, consultant headcount and billable project-related expenses, that are primarily billed on a time and expense basis. Billable project-related expenses include travel costs, subcontractor services and materials recoverable under the terms of contracts. Incremental revenues are commonly referred to as success fee revenues, which are earned contingent on the attainment of certain contractual objectives, typically related to the closing of a sale of a client’s assets and are recorded on a percentage of completion basis. The Company typically engages in these types of engagements with certain of its energy clients from time to time.

 

Core revenues generated in 2002 increased $33.4 million, or 14.9 percent, when compared to $224.6 million in 2001. Included in the core revenues increase were $6.4 million of revenues related to increased billable project-related expenses. Excluding billable project related expense in 2002 and 2001, core revenues increased by $27.0 million, or 13.7 percent.

 

The Company has increased its employee base from a combination of new hires and business acquisitions. When comparing the year 2002 to 2001, the average number of consultants employed during the year was 7.6 percent higher, resulting in an increase in billable hours of 7.5 percent. The Company has maintained consistency in its bill rates and utilization rate, which averaged approximately 66 percent in both years compared. These were the significant contributing factors that related to the increase in revenues in 2002.

 

Total revenues increased $22.4 million, or 9.5 percent, to $258.0 million in the year ended December 31, 2002, compared to $235.6 million in 2001. Incremental revenues (success fees) totaled $11.0 million in 2001 and there were no incremental revenues in 2002.

 

Consulting Services Expense. Consulting services expense includes consultant compensation and benefits, direct project-related expenses and client development expenses.

 

Consulting services expense increased $16.8 million, or 11.1 percent, to $168.8 million in the year ended December 31, 2002, compared to $152.0 million in 2001. The most significant reason for the increase in consulting services expense were additional consultant compensation expense related to the higher headcount. The consulting services expense increase included an increase of $6.4 million in direct project-related expenses.

 

General and Administrative Expenses. General and administrative expenses include facility-related costs, salaries and benefits of management and support personnel, allowances for doubtful accounts receivable, professional administrative services, and all other corporate support costs.

 

General and administrative expenses increased $5.3 million, or 9.6 percent, to $60.7 million in the year ended December 31, 2002, compared to $55.4 million in 2001. The most significant increases were related to facility-related costs and administrative wages. Facility-related costs increased to support the headcount growth and to support the geographic reach of the Company. The Company has 38 offices, which are used to support its employee base. Some of the offices currently used were added through acquisitions of businesses. The Company believes it can consolidate certain offices and may choose not to renew certain leases in the future in order to reduce costs. Another reason for the increase in general and administrative expenses relates to professional services, primarily legal fees and compensation-related consulting services. The Company expects these professional service expenses to decline in future years. General and administrative expenses, as a percentage of core revenues, declined over the years. As a percentage of core revenues, general and administrative expenses were 25.3 percent, 24.7 percent and 23.5 percent for the years ended December 31, 2000, 2001, and 2002, respectively. The Company believes through optimal scaling that general and administrative expenses can be reduced to a rate of 20 percent to 21 percent of core revenues.

 

Depreciation Expense. Depreciation expense includes depreciation of the costs of computer equipment, office furniture and equipment, software and leasehold improvements.

 

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Depreciation expense increased $0.6 million to $7.7 million in the year ended December 31, 2002 compared to $7.1 million in 2001. The increase in depreciation expense is primarily attributed to depreciation recorded on new capital purchases consisting of computer equipment and costs related to configuration of certain offices to accommodate newly acquired businesses.

 

Amortization Expense. Amortization expense includes amortization of the costs of goodwill and intangible assets, including customer lists, covenants not-to-compete and trade name. In accordance with SFAS 142, which the Company adopted in 2002, goodwill is no longer subject to amortization beginning in 2002, but is subject to annual impairment testing.

 

Amortization expense decreased $3.3 million, to $2.4 million in the year ended December 31, 2002, compared to $5.7 million in 2001. The decrease in amortization expense from 2002 to 2001 results from not having any goodwill amortization in 2002 because of the adoption of SFAS 142.

 

Stock-based Compensation Expense. Stock-based compensation expense includes non-cash compensation expense related to restricted shares, restricted stock units, stock appreciation rights, exchanged stock options and VSRP stock options awarded to the Company’s employees. Stock-based compensation expense is recorded for the fixed compensation expense of restricted stock grants, in which expense is recorded on a straight-line basis over the vesting term for the market valuation amount at grant date. In addition, stock-based compensation expense is recorded for certain Value Sharing Retention Program (“VSRP”) stock options, exchanged stock options and stock appreciation rights (“variable accounting awards”) that have been awarded to the Company’s employees and are subject to variable accounting treatment. Compensation expense (or credit) for the variable accounting awards is recorded, on a cumulative basis, for the increase (or decrease) in the Company’s stock price above the grant prices.

 

Stock-based compensation expense decreased $0.4 million, or 10.8 percent, to $3.4 million in the year ended December 31, 2002 compared to 2001. The decrease in stock-based compensation expense is in part attributable to the Company’s exchange of certain tendered options subject to variable accounting for fixed compensation restricted shares. The exchange eliminated the variable accounting stock-based compensation expense associated with the tendered stock options and provides for a more predictable future stock-based compensation expense.

 

Restructuring Costs (Credits). Restructuring costs (credits) include provisions for the costs of facility closings, space reduction, office consolidation and staff reduction incurred in the execution of the Company’s restructuring plan.

 

The Company recorded a $0.5 million restructuring credit to its operating results for the year ended December 31, 2002. During the year ended December 31, 2001, the Company recorded a $1.9 million charge for additional costs to be incurred. The Company reevaluated the time and additional costs it expected to incur to secure tenants for the lease obligations based on the then current real estate market conditions.

 

Litigation and settlements provisions. Litigation and settlement provisions include amounts accrued, based on current information, for costs estimated to settle certain litigation matters. The Company recorded an additional $0.8 million in litigation and settlement provisions in the year ended December 31, 2002 for certain previously disclosed litigation matters, accrued for in 2001. The Company recorded the provision to reflect the additional estimated costs in settling the litigation. The 2002 amount is in addition to amounts recorded in previous years and does not relate to any new litigation initiated in 2002. The Company recorded $5.7 million in litigation and settlement provisions in the year ended December 31, 2001.

 

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VSRP Cash Compensation Expense. VSRP cash compensation expense is the cash compensation component of the Value Sharing Retention Program. The cash component of the retention program included four installments totaling $18.8 million and the expense was recorded on a straight-line basis starting on September 1, 2000 through September 1, 2001. As of December 31, 2001, the Company had no further obligation related to the VSRP cash compensation provision.

 

For the ended December 31, 2001, VSRP cash compensation expense was $12.4 million. The Company did not have any VSRP cash compensation expense in 2002.

 

Income Tax Expense (Benefit). Income tax expense (benefit) includes federal, state and foreign income taxes provisions the Company is obligated to pay currently or, though deferred tax provisions (benefit), in the future.

 

The Company had an income tax expense of $5.9 million in the year ended December 31, 2002, which increased by $8.2 million when compared to the income tax benefit of $2.3 million for the year 2001. The increase in income taxes is primarily due to a turnaround of the Company’s operating results from a loss to income. Higher business profitably and lower restructuring, litigation and VSRP cash compensation expenses are the primary factors for the turnaround in the Company’s operating results. The Company’s effective tax rate for the year 2002 was 40.0 percent, compared to a tax benefit rate of 30.1 percent in 2001.

 

Results of Operations—2001 compared to 2000

 

Revenues. Revenues decreased $9.0 million, or 3.7 percent, to $235.6 million in the year ended December 31, 2001, from $244.6 million in 2000. The decrease in revenues was primarily attributed to lower direct project-related expense recoveries included in revenues totaling $8.4 million. Exclusive of direct project-related recoveries, revenues decreased by $0.6 million for the year 2001 compared to 2000.

 

The Company generated $3.1 million more incremental revenues in 2001 than 2000, totaling $11.0 million for the year. Incremental revenues, which are commonly referred to as success fees, are revenues earned, in addition to hourly or fixed fee billing, for the closing of sales related agreements for energy clients. In February 2001, the Company managed a successful auction of a client’s electric generating plants, which yielded incremental revenue to the Company of $9.0 million. In addition, the Company recorded $2.0 million in incremental revenues from other transactions during 2001. Similar transactions occurred in 2000 with different clients, which yielded incremental revenues of $8.0 million.

 

Consulting Services Expense. Consulting services expense decreased $6.7 million, or 4.2 percent, to $152.0 million in 2001 from $158.7 million in 2000. The decrease in consulting services expense is primarily attributed to the cost of direct project-related expenses. Excluding the lower cost of direct project-related expenses in 2001, consulting services expense increased $1.5 million and the increase is primarily attributed to incentive costs associated with higher incremental revenue in 2001 compared to 2000. Included in consulting services expense for 2001 and 2000 was expense relating to the Barrington purchase agreement.

 

General and Administrative Expenses. General and administrative expenses decreased $4.4 million, or 7.4 percent, to $55.4 million in 2001, from $59.8 million in 2000. The decrease of $4.4 million is primarily attributed to a decrease in administrative compensation and corporate professional fees. In May 2000, as a part of the restructuring plan, the Company streamlined its administrative support staff of its core operations, which resulted in a 20 percent administrative headcount reduction. Administrative wages and incentives in total decreased $2.9 million from 2000 to 2001. Corporate professional fees decreased $2.1 million primarily due to the reduction of expenses relating to legal, accounting and human resources costs. The Consolidated Class Actions litigation and other litigation were settled in August 2000 and July 2001, respectively. As these matters have been settled, the Company has significantly reduced legal expenses when comparing 2001 to 2000.

 

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Amortization Expense. For the year 2001, amortization expense increased $1.1 million to $5.7 million from $4.6 million in 2000. The increase was primarily due to the amortization of goodwill of Barba-Arkhon acquired on March 1, 2001. In accordance with SFAS 142, which the Company adopted in 2002, goodwill is no longer subject to amortization beginning in 2002 but subject to annual impairment testing.

 

Stock-based Compensation Expense. Stock-based compensation expense for the year ended December 31, 2001 was $3.8 million. In January 2001, the Company issued 1.9 million restricted shares with a market valuation based on the Company’s stock price of $3.875, which was the closing market price on the grant date. The Company recorded $2.8 million in stock-based compensation related to these grants in 2001. Stock-based compensation of $0.9 million related to options subject to variable accounting. The Company’s stock price was $5.50 at December 31, 2001, compared to $3.81 at December 31, 2000, and was above the grant or exercise prices of the VSRP options then outstanding but below the grant or exercise prices of the exchanged options. Accordingly, compensation expense related to the valuation increase of the outstanding VSRP options was recorded.

 

In 1999, the Company determined, based in part on the absence of contemporaneous documentation, that 0.3 million nonqualified options issued to a total of sixteen individuals were issued at prices below fair market value. The aggregate dollar amount by which the grant prices of the options differ from the market prices as of the dates for which the Company has independent evidence to support the issuance of the options was $4.1 million. The amount charged to expense has been amortized over the relevant vesting periods. Accordingly, the Company recorded stock-based compensation expense, attributable to such options, of $0.1 million, and $0.5 million in 2001 and 2000, respectively. As of December 31, 2001, the Company fully amortized the $4.1 million to stock-based compensation expense.

 

Restructuring Costs. In May 2000, the Company implemented a plan to restructure its operations. The restructuring of the Company’s operations included streamlining its administrative staff, facility closings and space reduction. Accordingly, the Company recorded restructuring costs of $10.2 million for the year ended December 31, 2000. During the year ended December 31, 2001, the Company recorded additional charges of $1.9 million related to updated estimates on executing of the remainder of its restructuring plan.

 

Litigation and settlements. Litigation and Settlements costs totaled $5.7 million for the year ended December 31, 2001; a decrease of $10.8 million from the $16.5 million expense recorded in the year ended December 31, 2000. The Company was a defendant in the Consolidated Class Actions shareholder litigation, previously discussed, and other litigation during 2001 and 2000.

 

VSRP Cash Compensation Expense. For the year 2001, VSRP cash compensation expense was $12.4 million, compared to $6.4 million in 2000. The increase in VSRP expense is related to the number of months to which the cash compensation expense was allocated during each year. The cash component of the retention program started on September 1, 2000 and ended on the September 1, 2001. The Company paid the last three of four installments totaling $13.9 million in 2001 and the Company has no further obligation related to the VSRP cash compensation provision.

 

Other Income (Loss), Net. Other income improved $2.6 million to an income of $0.9 million income for the year ended December 31, 2001, from $1.7 million loss for the year ended December 31, 2000. A $1.7 million charge to reflect the impairment of former officers’ notes receivable was recorded in 2000. The Company had a higher average cash balance, net of line of credit borrowings, for year ended December 31, 2001 compared to the same period in 2000, which resulted in higher interest income and lower interest expense when comparing the years.

 

Income Tax Expense (Benefit). The Company had an income tax benefit of $2.3 million for the year ended December 31, 2001, which decreased by $3.9 million when compared to the income tax benefit of $6.2 million for the year 2000. This difference is primarily due to a lower operating loss in 2001 compared to 2000, as a result of 2001 having lower litigation and settlement provisions and lower restructuring costs. The decrease in these expenses was partially offset by higher VSRP cash compensation and non-cash stock-based compensation expense.

 

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Unaudited Quarterly Results

 

The following table sets forth certain unaudited quarterly operating information. The unaudited quarterly operating data has been prepared on the same basis as the audited consolidated financial statements contained elsewhere in this Form 10-K. The data includes all normal recurring adjustments necessary for the fair presentation of the information for the periods presented, when read in conjunction with the Company’s Consolidated Financial Statements and related Notes thereto. Results for any quarter are not necessarily indicative of results for the full year or for any future quarter. The amounts in the following table are in thousands, except for per share data.

 

    

Quarters ended


 
    

Mar. 31, 2001


    

Jun. 30, 2001


    

Sept. 30, 2001


    

Dec. 31, 2001


  

Mar. 31, 2002


    

Jun. 30, 2002


  

Sept. 30, 2002


    

Dec. 31, 2002


 

Revenues:

                                                                   

Core revenues

  

$

53,902

 

  

$

57,093

 

  

$

56,828

 

  

$

56,729

  

$

60,570

 

  

$

61,015

  

$

66,601

 

  

$

69,834

 

Incremental revenues

  

 

8,975

 

  

 

285

 

  

 

300

 

  

 

1,468

  

 

—  

 

  

 

—  

  

 

—  

 

  

 

—  

 

    


  


  


  

  


  

  


  


Total revenues

  

 

62,877

 

  

 

57,378

 

  

 

57,128

 

  

 

58,197

  

 

60,570

 

  

 

61,015

  

 

66,601

 

  

 

69,834

 

Operating expenses (credits):

                                                                   

Consulting services expense

  

 

39,533

 

  

 

36,970

 

  

 

37,903

 

  

 

37,601

  

 

39,075

 

  

 

40,514

  

 

43,395

 

  

 

45,852

 

General and administrative expenses

  

 

14,001

 

  

 

14,446

 

  

 

13,925

 

  

 

13,041

  

 

14,374

 

  

 

14,659

  

 

15,794

 

  

 

15,894

 

Depreciation expense

  

 

1,577

 

  

 

1,781

 

  

 

1,871

 

  

 

1,889

  

 

1,791

 

  

 

2,047

  

 

1,916

 

  

 

1,897

 

Amortization expense

  

 

1,270

 

  

 

1,472

 

  

 

1,476

 

  

 

1,482

  

 

338

 

  

 

449

  

 

449

 

  

 

1,137

 

Stock-based compensation expense (credit)

  

 

2,418

 

  

 

2,961

 

  

 

(2,951

)

  

 

1,384

  

 

1,942

 

  

 

1,254

  

 

(1,527

)

  

 

1,732

 

Restructuring costs (credits)

  

 

—  

 

  

 

1,900

 

  

 

—  

 

  

 

—  

  

 

—  

 

  

 

—  

  

 

—  

 

  

 

(500

)

Litigation and settlement provisions

  

 

—  

 

  

 

5,700

 

  

 

—  

 

  

 

—  

  

 

—  

 

  

 

—  

  

 

—  

 

  

 

750

 

VSRP cash compensation expense

  

 

4,752

 

  

 

4,540

 

  

 

3,107

 

  

 

—  

  

 

—  

 

  

 

—  

  

 

—  

 

  

 

—  

 

    


  


  


  

  


  

  


  


Operating income (loss)

  

 

(674

)

  

 

(12,392

)

  

 

1,797

 

  

 

2,800

  

 

3,050

 

  

 

2,092

  

 

6,574

 

  

 

3,072

 

Other income (loss), net

  

 

463

 

  

 

160

 

  

 

171

 

  

 

80

  

 

(28

)

  

 

135

  

 

(43

)

  

 

(83

)

    


  


  


  

  


  

  


  


Income (loss) before income taxes

  

 

(211

)

  

 

(12,232

)

  

 

1,968

 

  

 

2,880

  

 

3,022

 

  

 

2,227

  

 

6,531

 

  

 

2,989

 

Income tax expense (benefit)

  

 

437

 

  

 

(4,982

)

  

 

1,019

 

  

 

1,242

  

 

1,194

 

  

 

934

  

 

2,592

 

  

 

1,188

 

    


  


  


  

  


  

  


  


Net income (loss)

  

$

(648

)

  

$

(7,250

)

  

$

949

 

  

$

1,638

  

$

1,828

 

  

$

1,293

  

$

3,939

 

  

$

1,801

 

    


  


  


  

  


  

  


  


Net income (loss), per diluted share(1)

  

$

(0.02

)

  

$

(0.19

)

  

$

0.02

 

  

$

0.04

  

$

0.04

 

  

$

0.03

  

$

0.09

 

  

$

0.04

 

    


  


  


  

  


  

  


  


Diluted shares

  

 

38,441

 

  

 

38,218

 

  

 

40,952

 

  

 

40,017

  

 

40,905

 

  

 

41,583

  

 

42,583

 

  

 

45,608

 

    


  


  


  

  


  

  


  



(1)   The sum of quarterly earnings per diluted share does not equal annual amounts in 2001 and 2002 because of roundings and changes in the weighted average number of shares.

 

Operating results fluctuate from quarter to quarter as a result of a number of factors, including the significance of client engagements commenced and completed during a quarter, the number of business days in a quarter, employee hiring and utilization rates. The timing of revenues varies from quarter to quarter due to factors such as the Company’s revenue cycle, the ability of clients to terminate engagements without penalty, the size and scope of assignments, and general economic conditions. Because a significant percentage of the Company’s expenses are relatively fixed, a variation in the number of client assignments, or the timing of the initiation or the completion of client assignments, can cause significant variations in operating results from quarter to quarter. Furthermore, the Company’s stock price volatility may cause significant fluctuations in expenses and operating results as the Company measures the valuation of non-cash stock-based compensation for options subject to variable accounting treatment from quarter to quarter.

 

Human Capital Resources

 

The Company had 1,015 consultants as of December 31, 2002, a net increase of 23 consultants since the beginning of year. The increase includes approximately 230 consultants from business acquisitions, which was offset by higher than normal attrition principally related to the termination of personnel in underperforming practices.

 

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In the normal course of business, the Company needs to retain highly skilled professionals, particularly those not bound by non-compete or non-solicitation agreements. Senior and mid-level consultants hired in 2000 and thereafter are subject to non-solicitation covenants that are consistent with standard industry practices, which provide for non-solicitation arrangements that extend beyond the employee’s separation date.

 

In order to secure non-solicitation agreements for those consultants hired prior to 2000, the Company successfully implemented and executed a predominantly stock-based retention program, the Management Stock Purchase Program (“MSPP”), for key leaders in both of the Company’s business segments, using the Company’s existing Long-Term Incentive Program authorization. The program provides for individual purchases over five years of up to 2.3 million restricted stock units, including an accompanying match or grant of restricted stock units, as well as additional cash compensation of up to $4.5 million over three years, in return for the adoption of industry standard non-solicitation agreements. See Note 10 to the Consolidated Financial Statements.

 

The Company continually monitors and adjusts, if needed, the consultants’ total compensation, which includes salaries, annual cash bonus, and other cash and equity incentives from certain Company programs, to ensure both that the consultants’ compensation are competitive within the industry and that the Company maintains profitability levels. The Company’s bill rates are tiered in accordance with the experience and levels of the consulting staff. The Company monitors and adjusts, if needed, those bill rates according to the supply and demand of the then-current market conditions.

 

Within the Energy & Water business segment during the first quarter of 2003, the Company is reducing headcount in order to eliminate excess consulting capacity. These actions are designed to improve the profitability of this business segment. The Company will continue to review personnel requirements in order to balance staffing with future revenue expectations and may also eliminate unprofitable service offerings.

 

Liquidity and Capital Resources

 

Summary

 

The Company had $8.1 million in cash and cash equivalents at December 31, 2002, compared to $36.0 million at December 31, 2001. The Company’s cash equivalents were primarily limited to commercial paper or securities (rated A or better), with maturity dates of 90 days or less.

 

Working capital, the excess of current assets over current liabilities, was $25.9 million at December 31, 2002 compared to $53.6 million at December 31, 2001. The decrease in working capital is primarily related to the use of cash to finance business acquisitions during the year ended December 31, 2002, and to pay for other acquisition-related obligations.

 

The Company calculates accounts receivable days sales outstanding (“DSO”) on a gross basis by dividing the accounts receivable balance, net of deferred revenue credits, at the end of the quarter by daily net revenues. Daily net revenues are calculated by taking net quarter revenues divided by 90 days, approximately equal to the number of days in a quarter. Calculated as such, DSO was 77 days at December 31, 2002 compared to 80 days at December 31, 2001. The Company has a certain number of practices, some recently acquired, that bill and collect in advance of services. The collection of these billings, and management’s continued focus on collection efforts and on more timely billings, reduced the DSO at the 2002 year-end.

 

Cash Flow

 

For the year ended December 31, 2002, net cash provided by operating activities was $8.5 million.

 

Net cash used by investing activities for the year ended December 31, 2002 was $41.8 million, primarily due to acquisition-related transactions. The Company paid $30.7 million in cash for businesses acquired during the year ended December 31, 2002. The Company paid $5.6 million related to businesses acquired in prior years. In addition, the Company used $5.2 million for capital spending to support personnel and services and to configure certain offices to accommodate newly acquired businesses and other new hires.

 

Net cash provided by financing activities was $5.5 million in 2002. During the year ended December 31, 2002, the Company received cash, and related tax benefits, of $4.2 million from transactions related to stock

 

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option exercises and employee stock purchases. The Company borrowed $6.5 million, net, from its line of credit facility and used $5.2 million to purchase its common stock in 2002.

 

Debt, Commitments and Capital

 

The Company maintains an unsecured revolving line of credit agreement for $50.0 million, with the ability to increase the amount up to $75.0 million over the term of the agreement. A consortium between the LaSalle Bank, N.A., the Company’s primary banker, and US Bank agreed to extend and increase the revolving line of credit agreement. The revolving line of credit agreement expires on October 31, 2005 and the Company has the option to extend the agreement for an additional two years from the expiration date. Borrowings under the revolving line of credit agreement bear interest based, at the Company’s option, on either (1) the higher of the prime rate or the federal fund rate plus 0.5 percent, or (2) London Interbank Offered Rate (LIBOR) plus 1.25 percent. The line of credit agreement was amended in November 2002 and contains similar covenants as the original agreement, which requires the Company to maintain a minimum level of earnings before interest, taxes, depreciation and amortization. There were no other substantive changes in the terms and conditions in the amendment.

 

The Company was in compliance with the terms of the line of credit agreements then in place as of December 31, 2002 and 2001. As of December 31, 2002, the Company had a $6.5 million balance outstanding under the line of credit agreement. The Company did not have a balance outstanding under the agreement at December 31, 2001.

 

The Company had $3.0 million in notes payable under the Barba-Arkhon purchase agreement due in two equal annual installments on March 1, 2002 and 2003. The Company paid the first annual installment of $1.5 million on March 1, 2002. The second installment was due on March 1, 2003 and bore interest at a 6 percent annual percentage rate payable on a quarterly basis. The Company paid the second installment in the first quarter 2003 and does not have any remaining purchase price obligations related to Barba-Arkhon.

 

As of December 31, 2002, the Company had a total of $13.5 million in deferred purchase price and contingent earnout obligations payable in cash and its common stock. The Company also had a $3.1 million cash obligation related to the MSPP agreements. As of December 31, 2002, the Company had no significant commitments for capital expenditures, except for those related to rental expense under operating leases.

 

The Company believes that the current cash and cash equivalents, the future cash flows from operations and the line of credit facility provide adequate cash to fund anticipated short-term and long-term cash needs from normal operations. In the event the Company was to make significant cash expenditures in the future for major acquisitions or other non-operating activities, the Company might need additional debt or equity financing, as appropriate.

 

Contingencies

 

During the next three years, the Company is subject to pay additional purchase price amounts that are part of the consideration for certain purchase agreements. The payments, if any, are contingent on the achievement of certain revenue and gross margin targets reached by the consultants of the acquired businesses. The Company believes that it will have sufficient funds to satisfy obligations related to the contingent consideration. The Company expects to fund these contingent payments, if any, from the cash generated from the operations of these acquired businesses.

 

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Table of Contents

 

Item 7A.     Quantitative and Qualitative Disclosures About Market Risk.

 

The Company’s primary exposure to market risks relates to changes in interest rates associated with its borrowings under the line of credit, and its investment portfolio, classified as cash equivalents. The Company’s general investment policy is to limit the risk of principal loss by limiting market and credit risks.

 

As of December 31, 2002, the Company’s investments were primarily limited to 'A' rated securities with maturity dates of 90 days or less. These financial instruments are subject to interest rate risk and will decline in value if interest rates rise. Because of the short periods to maturity of these instruments, an increase in interest rates would not have a material effect on the Company financial position or operating results.

 

The Company’s market risk associated with its line of credit relates to changes in interest rates. Borrowings under the new line of credit agreement bear interest based, at the Company’s option, on either (1) the higher of the prime rate or the federal fund rate plus 0.5 percent, or (2) London Interbank Offered Rate (LIBOR) plus 1.25 percent. Based on the line of credit balance as of December 31, 2002, a substantial rise in interest rates would have an immaterial effect on the Company’s financial position and operating results. The Company does not anticipate any material changes in interest rates in the short-term future.

 

Other than the second installment of the Barba-Arkhon notes payable (which was paid in full in the first quarter of 2003), the line of credit obligation, certain deferred purchase price obligations, and contingent earnout obligations discussed above, the Company does not have any short-term debt, long-term debt, interest rate derivatives, forward exchange agreements, firmly committed foreign currency sales transactions, or derivative commodity instruments.

 

The Company operates in foreign countries which exposes it to market risk associated with foreign currency exchange rate fluctuations; however, such risk is immaterial in relation to the Company’s consolidated financial statements.

 

Item 8.     Consolidated Financial Statements and Supplementary Data.

 

The Consolidated Financial Statements of the Company are this report as pages F-1 through F-33. An index to such information appears on page F- 1.

 

Item 9.     Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure.

 

None.

 

PART III

 

Item 10.     Directors and Executive Officers of the Registrant.

 

Information required in response to this Item is incorporated by reference from the Company’s definitive proxy statement for the Company’s Annual Meeting of Stockholders scheduled to be held on April 24, 2003, which proxy statement will be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the Company’s year ended December 31, 2002.

 

Item 11.     Executive Compensation.

 

Information required in response to this Item is incorporated by reference from the Company’s definitive proxy statement for the Company’s Annual Meeting of Stockholders scheduled to be held on April 24, 2003, which proxy statement will be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the Company’s year ended December 31, 2002.

 

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Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Information required in response to this Item is incorporated by reference from the Company’s definitive proxy statement for the Company’s Annual Meeting of Stockholders scheduled to be held on April 24, 2003, which proxy statement will be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the Company’s year ended December 31, 2002.

 

Information required with respect to the securities authorized for issuance under the Company’s equity compensation plans, including plans that have previously been approved by the Company’s stockholders and plans that have not previously been approved by the Company’s stockholders, will be set forth in the Proxy Statement, and such information is incorporated by reference.

 

Item 13.     Certain Relationships and Related Transactions.

 

Information required in response to this Item is incorporated by reference from the Company’s definitive proxy statement for the Company’s Annual Meeting of Stockholders scheduled to be held on April 24, 2003, which proxy statement will be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the Company’s year ended December 31, 2002.

 

Item 14.     Controls and Procedures.

 

(a) Evaluation of disclosure controls and procedures. Within 90 days prior to the date of this annual report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 12a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company’s required information to be included in its periodic SEC filings.

 

(b) Change in internal controls. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.

 

PART IV

 

Item 15.     Exhibits, Financial Statements, Schedules and Reports on Form 8-K.

 

(a) The consolidated financial statements filed as part of this report are listed in the accompanying Index to Consolidated Financial Statements. The Financial Statement Schedule filed as part of this report is listed below.

 

(b) The Company filed the following Current Reports on Form 8-K during the quarter ended December 31, 2002:

 

(1) A Form 8-K dated September 23, 2002 and filed on October 7, 2002 reporting under Item 2 of Form 8-K the acquisition of substantially all of the assets of Hunter & Associates Management Services, Inc.

 

(2) A Form 8-K/A filed on December 9, 2002 amending the Form 8-K dated September 23, 2002 to add thereto the following financial statements: Statement of Operations for the years ended December 31, 2001, 2000 and 1999, Balance Sheet as of December 31, 2001 and 2000, and Statement of Cash Flows for the years ended December 31, 2001, 2000 and 1999.

 

27


Table of Contents

 

(c) The exhibits filed as part of this report are listed below:

 

a.    Exhibits:

 

Exhibit

No.


  

Description


2.1

  

Asset Purchase Agreement dated as of September 1, 2002 among the Company, Hunter & Associates Management Services, Inc. and THG Investors, Inc. (12)

3.1

  

Amended and Restated Certificate of Incorporation of the Company (1)

3.2

  

Amendment No. 1 to Amended and Restated Certificate of Incorporation of the Company (2)

3.3

  

Amendment No. 2 to Amended and Restated Certificate of Incorporation of the Company (3)

3.4

  

Amended and Restated By-Laws of the Company (4)

4.2

  

Rights Agreement dated as of December 15, 1999 between the Company and American Stock Transfer & Trust Company, as Rights Agent, (which includes the form of Certificate of Designations setting forth the terms of the Series A Junior Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C) (5)

10.1+

  

Long-Term Incentive Plan of the Company (6)

10.2+

  

2001 Supplemental Equity Incentive Plan of the Company (7)

10.3+

  

Employee Stock Purchase Plan of the Company (8)

10.4+

  

Amendment No. 1 Employee Stock Purchase Plan of the Company (9)

10.5+

  

Amendment No. 2 Employee Stock Purchase Plan of the Company (9)

10.6+

  

Amendment No. 3 Employee Stock Purchase Plan of the Company (10)

10.7+

  

Amendment No. 4 Employee Stock Purchase Plan of the Company (10)

10.8+

  

Amendment No. 5 Employee Stock Purchase Plan of the Company (6)

10.9+

  

Letter Agreement dated February 1, 2000 between the Company and Phillip P. Steptoe (10)

10.10+*

  

Employment Agreement dated January 1, 2003 between the Company and William M. Goodyear (11)

10.11+

  

Employment Agreement and Amendment number 1 dated May 19, 2000 between the Company and Ben W. Perks (6)

21.1*

  

Significant Subsidiaries of the Company

23.1*

  

Consent of KPMG LLP

99.1*

  

Certification of the Chief Executive Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2*

  

Certification of the Chief Financial Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(1)   Incorporated by reference from the Company’s Registration Statement on Form S-1 (Registration No. 333-9019) filed with the SEC on July 26, 1996.

 

(2)   Incorporated by reference from the Company’s Registration Statement on Form S-3 (Registration No. 333-40489) filed with the SEC on November 18, 1997.

 

(3)   Incorporated by reference from the Company’s Form 8-A12B filed with the SEC on July 20, 1999.

 

(4)   Incorporated by reference from the Company’s Amendment No. 1 to Registration Statement on Form S-3 (Registration No. 333-40489) filed with the SEC on February 12, 1998.

 

(5)   Incorporated by reference from the Company’s Current Report on Form 8-K dated December 15, 1999.

 

(6)   Incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.

 

(7)   Incorporated by reference from the Company’s Registration Statement on Form S-8 (Registration No. 333-81680) filed with the SEC on January 30, 2002.

 

(8)   Incorporated by reference from the Company’s Registration Statement on Form S-8 (Registration No. 333-53506) filed with the SEC on January 10, 2001.

 

28


Table of Contents

 

(9)   Incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended December 31, 1998.

 

(10)   Incorporated by reference from the Company’s Annual Report on Form 10-K or the year ended December 31, 1999.

 

(11)   Incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

 

(12)   Incorporated by reference from the Company’s Current Report on Form 8-K dated September 23, 2002.

 

*   Indicates filed herewith.

 

+   Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.

 

d.    Financial Statement Schedule:

 

Independent Accountants’ Report

Schedule II: Valuation and Qualifying Accounts

 

 

29


Table of Contents

 

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.

 

       

Navigant Consulting, Inc.

Date: March 13, 2003

       
           

By:

 

/s/    WILLIAM M. GOODYEAR        


               

William M. Goodyear

Chairman and Chief Executive Officer

 

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 in the capacities and on the dates indicated.

 

Signature


  

Title


 

Date


/s/    WILLIAM M. GOODYEAR        


William M. Goodyear

  

Chairman and Chief Executive Officer and Director (Principal Executive Officer)

 

March 13, 2003

/s/    BEN W. PERKS       


Ben W. Perks

  

Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

 

March 13, 2003

/s/    THOMAS A. GILDEHAUS      


Thomas A. Gildehaus

  

Director

 

March 13, 2003

/s/    VALERIE B. JARRETT      


Valerie B. Jarrett

  

Director

 

March 13, 2003

/s/    PETER B. POND      


Peter B. Pond

  

Director

 

March 13, 2003

/s/    SAMUEL K. SKINNER     


Samuel K. Skinner

  

Director

 

March 13, 2003

/s/    JAMES R. THOMPSON        


James R. Thompson

  

Director

 

March 13, 2003

 

 

30


Table of Contents

 

CERTIFICATIONS

 

I, William M. Goodyear, Chairman and Chief Executive Officer of Navigant Consulting, Inc. (the “Company”), certify that:

 

1.   I have reviewed this annual report on Form 10-K of the Company;

 

2.   Based on my knowledge, the annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report;

 

4.   The Company’s other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:

 

    a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

    b) evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

    c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.   The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s independent accountants and the Audit Committee of the Company’s Board of Directors:

 

    a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s independent accountants any material weaknesses in internal controls; and

 

    b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

 

6.   The Company’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:  March 13, 2003

/s/    WILLIAM M. GOODYEAR


 

William M. Goodyear

Chairman and Chief Executive Officer

 

 

 

31


Table of Contents

 

I, Ben W. Perks, Executive Vice President and Chief Financial Officer of Navigant Consulting, Inc. (the “Company”), certify that:

 

1.   I have reviewed this annual report on Form 10-K of the Company;

 

2.   Based on my knowledge, the annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of and for the periods presented in this annual report;

 

4.   The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:

 

    a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

    b) evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

    c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.   The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s independent accountants and the Audit Committee of the Company’s Board of Directors:

 

    a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s independent accountants any material weaknesses in internal controls; and

 

    b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

 

6.   The Company’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:   March 13, 2003

/s/    BEN W. PERKS


 

Ben W. Perks

Executive Vice President and Chief Financial Officer

 

 

 

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Table of Contents

 

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

 

Audited Consolidated Financial Statements as of December 31, 2002 and 2001, and for each of the three years ended December 31, 2002. (page numbers to be updated)

 

    

Page


Report of Independent Accountants

  

F-2

Consolidated Balance Sheets

  

F-3

Consolidated Statements of Operations

  

F-4

Consolidated Statements of Stockholders’ Equity

  

F-5

Consolidated Statements of Cash Flows

  

F-6

Notes to Consolidated Financial Statements

  

F-7

   1.    Description of Business

  

F-7

   2.    Summary of Significant Accounting Policies

  

F-7

   3.    Acquisitions

  

F-9

   4.    Segment Information

  

F-11

   5.    Goodwill and Intangible Assets

  

F-13

   6.    Recent Accounting Pronouncements

  

F-15

   7.    Earnings per Share

  

F-15

   8.    Stockholders’ Equity

  

F-16

   9.    Stock-based Compensation Expense

  

F-19

10.    Long-Term Incentive Plan and Supplemental Equity Incentive Plan

  

F-20

11.    Supplemental Consolidated Balance Sheet Information

  

F-24

12.    Supplemental Consolidated Cash Flow Information

  

F-26

13.    Lease Commitments

  

F-27

14.    Bank Borrowings

  

F-27

15.    Income Tax Expense (Benefit)

  

F-28

16.    Restructuring Costs (Credits)

  

F-29

17.    Discontinued Operations

  

F-30

18.    Employee Benefits and Supplemental Equity Incentive Plan

  

F-32

19.    Related Party Transactions

  

F-32

20.    Litigation and Settlement Provisions

  

F-32

 

F-1


Table of Contents

 

REPORT OF INDEPENDENT ACCOUNTANTS

 

The Board of Directors and Stockholders

Navigant Consulting, Inc.

 

We have audited the accompanying consolidated balance sheets of Navigant Consulting, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Navigant Consulting, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in note 2 of the notes to the consolidated financial statements, in the year ended December 31, 2002, the Company changed its method of accounting for goodwill.

 

/s/    KPMG LLP

 

Chicago, Illinois

February 7, 2003

 

 

F-2


Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

    

December 31, 2002


    

December 31, 2001


 

ASSETS


                 

Current assets:

                 

Cash and cash equivalents

  

$

8,109

 

  

$

35,950

 

Accounts receivable, net

  

 

61,693

 

  

 

52,412

 

Prepaid expenses and other current assets

  

 

3,998

 

  

 

4,804

 

Deferred income taxes

  

 

4,601

 

  

 

5,611

 

    


  


Total current assets

  

 

78,401

 

  

 

98,777

 

Property and equipment, net

  

 

18,124

 

  

 

20,648

 

Goodwill and intangible assets, net

  

 

97,372

 

  

 

35,455

 

Deferred income taxes

  

 

3,645

 

  

 

2,445

 

Other assets

  

 

3,662

 

  

 

1,501

 

    


  


Total assets

  

$

201,204

 

  

$

158,826

 

    


  


LIABILITIES AND STOCKHOLDERS’ EQUITY


                 

Current liabilities:

                 

Bank borrowings

  

$

6,500

 

  

$

—  

 

Accounts payable and accrued liabilities

  

 

10,621

 

  

 

13,779

 

Accrued compensation

  

 

11,995

 

  

 

14,798

 

Income tax payable

  

 

6,705

 

  

 

8,191

 

Other current liabilities

  

 

16,670

 

  

 

8,453

 

    


  


Total current liabilities

  

 

52,491

 

  

 

45,221

 

Other non-current liabilities

  

 

4,418

 

  

 

1,500

 

    


  


Total liabilities

  

 

56,909

 

  

 

46,721

 

Stockholders' equity:

                 

Preferred stock, $.001 par value per share; 3,000 shares authorized; no shares issued or outstanding

  

 

—  

 

  

 

—  

 

Common stock, $.001 par value per share; 75,000 shares authorized; 42,084 and

                 

38,700 shares issued and outstanding at December 31, 2002 and 2001, respectively

  

 

47

 

  

 

44

 

Additional paid-in capital

  

 

372,012

 

  

 

353,234

 

Deferred stock issuance

  

 

3,209

 

  

 

—  

 

Restricted stock units outstanding

  

 

4,439

 

  

 

—  

 

Deferred compensation—restricted stock

  

 

(9,152

)

  

 

(4,504

)

Treasury stock

  

 

(65,803

)

  

 

(67,394

)

Accumulated deficit

  

 

(160,353

)

  

 

(169,214

)

Accumulated other comprehensive loss

  

 

(104

)

  

 

(61

)

    


  


Total stockholders' equity

  

 

144,295

 

  

 

112,105

 

    


  


Total liabilities and stockholders' equity

  

$

201,204

 

  

$

158,826

 

    


  


 

See accompanying notes to the consolidated financial statements.

 

F-3


Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

    

For the years ended December 31,


 
    

2002


    

2001


    

2000


 

Revenues:

                          

Core revenues

  

$

258,020

 

  

$

224,552

 

  

$

236,654

 

Incremental revenues

  

 

—  

 

  

 

11,028

 

  

 

7,975

 

    


  


  


Total revenues

  

 

258,020

 

  

 

235,580

 

  

 

244,629

 

Operating expenses (credits):

                          

Consulting services expense

  

 

168,836

 

  

 

152,007

 

  

 

158,720

 

General and administrative expenses

  

 

60,721

 

  

 

55,413

 

  

 

59,846

 

Depreciation expense

  

 

7,651

 

  

 

7,118

 

  

 

6,797

 

Amortization expense

  

 

2,373

 

  

 

5,700

 

  

 

4,573

 

Stock-based compensation expense

  

 

3,401

 

  

 

3,812

 

  

 

492

 

Restructuring costs (credits)

  

 

(500

)

  

 

1,900

 

  

 

10,229

 

Litigation and settlement provisions

  

 

750

 

  

 

5,700

 

  

 

16,500

 

VSRP cash compensation expense

  

 

—  

 

  

 

12,399

 

  

 

6,357

 

    


  


  


Operating income (loss) from continuing operations

  

 

14,788

 

  

 

(8,469

)

  

 

(18,885

)

Other income (loss), net

  

 

(19

)

  

 

874

 

  

 

(1,666

)

    


  


  


Income (loss) from continuing operations before income taxes

  

 

14,769

 

  

 

(7,595

)

  

 

(20,551

)

Income tax expense (benefit)

  

 

5,908

 

  

 

(2,284

)

  

 

(6,194

)

    


  


  


Net income (loss) from continuing operations

  

 

8,861

 

  

 

(5,311

)

  

 

(14,357

)

    


  


  


Loss from discontinued operations, net of income taxes

  

 

—  

 

  

 

—  

 

  

 

(10,193

)

Loss on dispositions of discontinued operations, net of income taxes

  

 

—  

 

  

 

—  

 

  

 

(155,003

)

    


  


  


Net income (loss)

  

$

8,861

 

  

$

(5,311

)

  

$

(179,553

)

    


  


  


Basic income (loss) per share:

                          

Net income (loss) from continuing operations

  

$

0.22

 

  

$

(0.14

)

  

$

(0.35

)

Loss from discontinued operations, net of income taxes

  

$

—  

 

  

$

—  

 

  

$

(0.25

)

Loss on dispositions of discontinued operations, net of income taxes

  

$

—  

 

  

$

—  

 

  

$

(3.79

)

Net income (loss) per basic share

  

$

0.22

 

  

$

(0.14

)

  

$

(4.39

)

Shares used in computing net income (loss) per basic share

  

 

40,350

 

  

 

38,439

 

  

 

40,895

 

Diluted income (loss) per share:

                          

Net income (loss) from continuing operations

  

$

0.21

 

  

$

(0.14

)

  

$

(0.35

)

Loss from discontinued operations, net of income taxes

  

$

—  

 

  

$

—  

 

  

$

(0.25

)

Loss on dispositions of discontinued operations, net of income taxes

  

$

—  

 

  

$

—  

 

  

$

(3.79

)

Net income (loss) per basic share

  

$

0.21

 

  

$

(0.14

)

  

$

(4.39

)

Shares used in computing net income (loss) per diluted share

  

 

42,670

 

  

 

38,439

 

  

 

40,895

 

 

See accompanying notes to the consolidated financial statements.

 

F-4


Table of Contents

 

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)

 

    

Preferred Stock Shares


 

Common Stock Shares


 

Treasury Stock Shares


    

Preferred Stock Par Value


 

Common Stock Par Value


 

Additional Paid-In Capital


 

Deferred Stock Issuance


  

Restricted Stock Units Outstanding


 

Deferred Compen-
sation
Restricted
Stock


   

Treasury Stock Cost


   

Notes Receivable from Former Officers


   

Accumu-
lated Other Compre-
hensive Income


   

Retained Earnings (Accumu-
lated Deficit)


   

Total Stock-
holders' Equity


 

Balance at December 31, 1999

  

—  

 

43,128

 

(2,086

)

  

—  

 

$

43

 

$

340,528

 

$

  

$

 

$

 

 

$

(52,811

)

 

$

(2,583

)

 

$

(158

)

 

$

15,650

 

 

$

300,669

 

Comprehensive income (loss)

                                                                      

 

(56

)

 

 

(179,553

)

 

 

(179,609

)

Issuance of common stock

  

—  

 

305

        

—  

 

 

—  

 

 

2,320

 

 

—  

  

 

—  

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

2,320

 

Purchase of treasury stock

  

—  

 

—  

 

(1,310

)

  

—  

 

 

—  

 

 

—  

 

 

—  

  

 

—  

 

 

—  

 

 

 

(4,555

)

 

 

920

 

 

 

—  

 

 

 

—  

 

 

 

(3,635

)

Nontaxable stock exchange—disposition of business

  

—  

 

—  

 

(1,593

)

  

—  

 

 

—  

 

 

—  

 

 

—  

  

 

—  

 

 

—  

 

 

 

(6,175

)

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

(6,175

)

Stock-based compensation expense—stock options

  

—  

 

—  

 

—  

 

  

—  

 

 

—  

 

 

492

 

 

—  

  

 

—  

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

492

 

Impairment of notes receivable from former officers

  

—  

 

—  

 

—  

 

  

—  

 

 

—  

 

 

—  

 

 

—  

  

 

—  

 

 

—  

 

 

 

—  

 

 

 

1,663

 

 

 

—  

 

 

 

—  

 

 

 

1,663

 

    
 
 

  
 

 

 

  

 


 


 


 


 


 


Balance at December 31, 2000

  

—  

 

43,433

 

(4,989

)

  

—  

 

 

43

 

 

343,340

 

 

—  

  

 

—  

 

 

—  

 

 

 

(63,541

)

 

 

—  

 

 

 

(214

)

 

 

(163,903

)

 

 

115,725

 

Comprehensive income (loss)

  

—  

 

—  

 

—  

 

  

—  

 

 

—  

 

 

—  

 

 

—  

  

 

—  

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

153

 

 

 

(5,311

)

 

 

(5,158

)

Issuance of common stock

  

—  

 

401

 

—  

 

  

—  

 

 

1

 

 

1,677

 

 

—  

  

 

—  

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

1,678

 

Issuance of restricted stock, net of forfeitures

  

—  

 

624

 

—  

 

  

—  

 

 

—  

 

 

7,277

 

 

—  

  

 

—  

 

 

(7,277

)

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

Purchase of treasury stock

  

—  

 

—  

 

(769

)

  

—  

 

 

—  

 

 

—  

 

 

—  

  

 

—  

 

 

—  

 

 

 

(3,853

)

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

(3,853

)

Stock-based compensation expense—stock options

  

—  

 

—  

 

—  

 

  

—  

 

 

—  

 

 

940

 

 

—  

  

 

—  

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

940

 

Stock-based compensation expense—restricted stock and units

  

—  

 

—  

 

—  

 

  

—  

 

 

—  

 

 

—  

 

 

—  

  

 

—  

 

 

2,773

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

2,773

 

    
 
 

  
 

 

 

  

 


 


 


 


 


 


Balance at December 31, 2001

  

—  

 

44,458

 

(5,758

)

  

—  

 

 

44

 

 

353,234

 

 

—  

  

 

—  

 

 

(4,504

)

 

 

(67,394

)

 

 

—  

 

 

 

(61

)

 

 

(169,214

)

 

 

112,105

 

Comprehensive income (loss)

      

—  

 

—  

 

  

—  

 

 

—  

 

 

—  

 

 

—  

  

 

—  

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

(43

)

 

 

8,861

 

 

 

8,818

 

Issuance of common stock related to business combinations

  

—  

 

1,556

 

1,404

 

  

—  

 

 

2

 

 

11,467

 

 

3,077

  

 

—  

 

 

—  

 

 

 

6,630

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

21,176

 

Other issuances of common stock

  

—  

 

827

 

39

 

  

—  

 

 

1

 

 

4,064

 

 

—  

  

 

—  

 

 

—  

 

 

 

140

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

4,205

 

Issuance of restricted stock, net of forfeitures

  

—  

 

479

 

—  

 

  

—  

 

 

—  

 

 

2,745

 

 

—  

  

 

—  

 

 

(4,077

)

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

(1,332

)

Grant of restricted stock units

  

—  

     

—  

 

  

—  

 

 

—  

       

 

—  

  

 

4,439

 

 

(4,439

)

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

Purchase of treasury stock

  

—  

     

(922

)

  

—  

 

 

—  

       

 

—  

  

 

—  

 

 

—  

 

 

 

(5,179

)

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

(5,179

)

Stock-based compensation expense—stock options

  

—  

            

—  

 

 

—  

 

 

502

 

 

—  

  

 

—  

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

502

 

Stock-based compensation expense—restricted stock and units

  

—  

            

—  

 

 

—  

       

 

132

        

 

3,868

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

4,000

 

    
 
 

  
 

 

 

  

 


 


 


 


 


 


Balance at December 31, 2002

  

—  

 

47,320

 

(5,237

)

  

—  

 

$

47

 

$

372,012

 

$

3,209

  

$

4,439

 

$

(9,152

)

 

$

(65,803

)

 

$

 

 

$

(104

)

 

$

(160,353

)

 

$

144,295

 

    
 
 

  
 

 

 

  

 


 


 


 


 


 


 

See accompanying notes to the consolidated financial statements.

 

F-5


Table of Contents

NAVIGANT CONSULTING, INC AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

    

Years ended December 31,


 
    

2002


    

2001


    

2000


 

Cash flows from operating activities:

                          

Net income (loss)

  

$

8,861

 

  

($

5,311

)

  

($

179,553

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing activities, net of acquisitions and dispositions:

                          

Loss from discontinued operations, net of income taxes

  

 

—  

 

  

 

—  

 

  

 

10,193

 

Loss on dispositions of discontinued operations, net of income taxes

  

 

—  

 

  

 

—  

 

  

 

155,003

 

Depreciation expense

  

 

7,651

 

  

 

7,118

 

  

 

6,797

 

Amortization expense

  

 

2,373

 

  

 

5,700

 

  

 

4,573

 

Stock-based compensation expense

  

 

3,250

 

  

 

3,812

 

  

 

492

 

Payments to Consultants’ on non-solicitation agreements

  

 

(1,363

)

  

 

—  

 

  

 

—  

 

Amortization of consultants’ non-solicitation agreements

  

 

279

 

  

 

—  

 

  

 

—  

 

Impairment of former officers’ notes, net

  

 

—  

 

  

 

—  

 

  

 

1,663

 

Provision for bad debts

  

 

4,643

 

  

 

5,604

 

  

 

4,900

 

Deferred income taxes

  

 

(191

)

  

 

(1,013

)

  

 

(7,194

)

Other, net

  

 

212

 

  

 

—  

 

  

 

(399

)

Changes in assets and liabilities:

                          

Accounts receivable

  

 

(10,484

)

  

 

(2,310

)

  

 

8,256

 

Prepaid expenses and other current assets

  

 

2,266

 

  

 

(650

)

  

 

195

 

Accounts payable and accrued liabilities

  

 

(2,854

)

  

 

(3,881

)

  

 

(2,259

)

Accrued compensation-related costs

  

 

(2,982

)

  

 

(4,251

)

  

 

(11,737

)

Income taxes payable

  

 

(1,485

)

  

 

8,437

 

  

 

7,735

 

Other current liabilities

  

 

(1,716

)

  

 

(1,811

)

  

 

(11,022

)

    


  


  


Net cash provided by (used in) operating activities of:

                          

Continuing operations

  

 

8,460

 

  

 

11,444

 

  

 

(12,357

)

Discontinued operations

  

 

—  

 

  

 

—  

 

  

 

(23,238

)

    


  


  


Net cash provided by (used in) operating activities

  

 

8,460

 

  

 

11,444

 

  

 

(35,595

)

    


  


  


Cash flows from investing activities:

                          

Purchases of property and equipment

  

 

(5,242

)

  

 

(7,659

)

  

 

(8,693

)

Acquisitions of businesses, net of cash acquired

  

 

(32,740

)

  

 

(7,593

)

  

 

—  

 

Payment of contingent acquisition liabilities

  

 

(2,146

)

  

 

(1,980

)

  

 

—  

 

Payment of notes payable related to acquisition

  

 

(1,500

)

  

 

—  

 

  

 

—  

 

Payment of acquisition liabilities

  

 

—  

 

  

 

(3,875

)

  

 

—  

 

Divestitures of businesses, net of cash

  

 

—  

 

  

 

—  

 

  

 

62,287

 

Other, net

  

 

(201

)

  

 

(517

)

  

 

(772

)

    


  


  


Net cash provided by (used in) investing activities of:

                          

Continuing operations

  

 

(41,829

)

  

 

(21,624

)

  

 

52,822

 

Discontinued operations

  

 

—  

 

  

 

—  

 

  

 

493

 

    


  


  


Net cash provided by (used in) investing activities

  

 

(41,829

)

  

 

(21,624

)

  

 

53,315

 

    


  


  


Cash flows from financing activities:

                          

Issuance of common stock

  

 

4,207

 

  

 

1,185

 

  

 

2,320

 

Stock repurchases

  

 

(5,179

)

  

 

(3,853

)

  

 

(3,635

)

Borrowings from (repayments to) bank

  

 

6,500

 

  

 

—  

 

  

 

(10,000

)

Other, net

  

 

—  

 

  

 

—  

 

  

 

48

 

    


  


  


Net cash provided by (used in) financing activities

  

 

5,528

 

  

 

(2,668

)

  

 

(11,267

)

    


  


  


Net increase (decrease) in cash and cash equivalents

  

 

(27,841

)

  

 

(12,848

)

  

 

6,453

 

Cash and cash equivalents at beginning of the year

  

 

35,950

 

  

 

48,798

 

  

 

42,345

 

    


  


  


Cash and cash equivalents at end of the year

  

$

8,109

 

  

$

35,950

 

  

$

48,798

 

    


  


  


 

See accompanying notes to the consolidated financial statements.

 

F-6


Table of Contents

 

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.    DESCRIPTION OF BUSINESS

 

Navigant Consulting, Inc. (the “Company”) is a specialized, independent consulting firm providing litigation, financial, restructuring, strategic and operational consulting services to government agencies, legal counsel and large companies facing the challenges of uncertainty, risk and distress. The Company focuses on industries undergoing substantial regulatory or structural change.

 

The Company is headquartered in Chicago, Illinois and has offices in various cities primarily within the United States, Canada and the United Kingdom.

 

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. Actual results could differ from those estimates and may impact future results of operations and cash flows.

 

Reclassifications

 

Certain amounts in prior years’ consolidated financial statements have been reclassified to conform to the current year’s presentation.

 

Cash and Cash Equivalents

 

Cash equivalents are comprised of highly liquid instruments with original maturity dates of 90 days or less.

 

Fair Value of Financial Instruments

 

The Company considers the recorded value of its financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, bank borrowings, and accounts payable, to approximate the fair value of the respective assets and liabilities at December 31, 2002 and 2001.

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of three to seven years for furniture, fixtures and equipment, three years for software, and forty years for buildings. Amortization of leasehold improvements is computed over the shorter of the remaining lease term or the estimated useful life of the asset.

 

Goodwill and Intangible Assets

 

Intangible assets consist of identifiable intangibles and goodwill. Identifiable intangible assets other than goodwill include customer lists, non-compete agreements and trade names. Intangible assets are being amortized on the straight-line method based on the estimated useful lives, ranging from three months to seven years.

 

F-7


Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

Prior to the adoption of SFAS 142 in 2002, goodwill was amortized on the straight-line method over seven years for businesses acquired prior to July 1, 2001. The Company did not record goodwill amortization in 2002. In 2001, goodwill was not amortized for an acquisition subsequent to June 30, 2001, in accordance with SFAS 142.

 

Revenue Recognition

 

The Company recognizes revenues as the related professional services are provided, generally on a time and expense basis. Certain contracts are accounted for on the percentage of completion method, whereby revenues are recognized based upon costs incurred in relation to total estimated costs at completion. A provision is made for the entire amount of estimated losses, if any, at the time when they are known.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation using the intrinsic value-based method as prescribed under Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” and related interpretations.

 

The Company applies APB Opinion 25, “Accounting for Stock Issued to Employees”, and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for those option grants where the exercise price is equal to the fair market value at the date of grant. The Company would have incurred compensation expense had compensation cost for the plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS No. 123, “Accounting for Stock-Based Compensation.” Under this methodology, the Company would have recorded additional compensation expense, net of related income taxes, of $0.5 million, $1.0 million, and $12.1 million for the years ended December 31, 2002, 2001, and 2000, respectively. The following shows a reconciliation of the pro forma net operating results of continuing operations had the Company accounting for its stock option using SFAS 123.

 

    

2002


    

2001


    

2000


 

Net income (loss) from continuing operations

  

$

8,861

 

  

$

(5,311

)

  

$

(14,357

)

Adjustment for compensation expense of stock options accounted for under SFAS 123

  

 

(460

)

  

 

(1,034

)

  

 

(12,089

)

    


  


  


Adjusted net income (loss) from continuing operations

  

$

8,401

 

  

$

(6,345

)

  

$

(26,446

)

    


  


  


Basic earnings per share:

                          

Net income (loss) from continuing operations

  

$

0.22

 

  

$

(0.14

)

  

$

(0.35

)

Adjustment for compensation expense of stock options accounted for under SFAS 123

  

 

(0.01

)

  

 

(0.03

)

  

 

(0.30

)

    


  


  


Adjusted basic net income (loss) from continuing operations per share

  

$

0.21

 

  

$

(0.17

)

  

$

(0.65

)

    


  


  


Diluted earnings per share:

                          

Net income (loss) from continuing operations

  

$

0.21

 

  

$

(0.14

)

  

$

(0.35

)

Adjustment for compensation expense of stock options accounted for under SFAS 123

  

 

(0.01

)

  

 

(0.03

)

  

 

(0.30

)

    


  


  


Adjusted basic net income (loss) from continuing operations per share

  

$

0.20

 

  

$

(0.17

)

  

$

(0.65

)

    


  


  


 

The weighted average fair value of options granted in 2002, 2001 and 2000 was $2.95, $2.91, and $2.77, respectively. For purposes of calculating compensation cost under SFAS No. 123, the fair value of each option

 

F-8


Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

grant is estimated as of the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used in the model for grants made in 2002, 2001 and 2000:

 

    

2002


  

2001


  

2000


Expected volatility

  

62%

  

80%

  

92%

Risk free interest rate

  

4.5%

  

5.0%

  

5.2%

Dividend yield

  

0%

  

0%

  

0%

Contractual or expected lives (years)

  

7.2

  

9.6

  

6.8

 

Income Taxes

 

Income taxes are accounted for in accordance with the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

Foreign Currency Translation

 

The balance sheets of the Company’s foreign subsidiaries are translated into U.S. dollars using the period-end exchange rate, and revenue and expenses are translated using the average exchange rate for each period. The resulting translation gains or losses are recorded in stockholders’ equity as a component of other comprehensive income.

 

Comprehensive Income (Loss)

 

Comprehensive income consists of net income (loss), unrealized gains on marketable securities, net of income taxes, and foreign currency translation adjustments. It is presented in the consolidated statements of stockholders’ equity.

 

The Company’s comprehensive income for the year ended December 31, 2002 includes $0.1 million of foreign currency translation losses.

 

3.    ACQUISITIONS

 

2002 Acquisitions:

 

Effective as of April 5, 2002, the Company acquired portions of Arthur D. Little, Inc.’s assets for $6.1 million cash at closing. The acquisition consisted of two consulting units, with approximately 30 consulting and administrative professionals that serve the energy industry.

 

On May 24, 2002, the Company acquired the assets of Financial Analytics Consulting Group, LLC (“FACG”) for $6.3 million, which included $4.5 million cash at closing and 0.3 million shares of its common stock valued at $1.8 million at closing. In addition to the initial consideration value, the purchase agreements for FACG provide for additional payments in cash over the next two calendar years that are contingent on revenues generated and the attainment of certain gross margin targets. Any additional payments related to this contingency will be accounted for as goodwill. FACG was formed in conjunction with a management buyout from Arthur Andersen, LLP and consisted of 90 consulting and administrative professionals from five different Arthur

 

F-9


Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

Andersen practices. FACG has been acquired primarily to augment the Company’s litigation support and investigation services offerings.

 

On June 19, 2002, the Company acquired the assets of Keevan Consulting, LLC (“Keevan”) for $7.2 million, which included $4.0 million cash at closing, 0.4 million shares of its common stock valued at $2.7 million at closing, and $0.5 million cash payable in April 2003. In addition to the initial consideration value, the purchase agreement for Keevan provides for additional payments in cash and the Company’s common stock over the next two and one half years from closing that are contingent on revenues generated and the attainment of certain gross margin targets. Any additional payments related to this contingency will be accounted for as goodwill. Keevan was formed in conjunction with a management buyout from Arthur Andersen, LLP and consisted of 38 consulting and administrative professionals. Keevan was acquired to enhance the government contracts service offering.

 

On July 15, 2002, the Company acquired the assets of Barrington Energy Partners, LLC (“Barrington Energy”) for $11.1 million, which included $4.8 million cash at closing, 0.7 million shares of its common stock valued at $4.8 million at closing, and $1.5 million cash payable on the first anniversary of the closing date. In addition to the initial consideration value, the purchase agreement for Barrington Energy provides for additional payments in cash and the Company’s common stock over the next two and one half years from closing that are contingent on the attainment of certain performance targets. Any additional payments related to this contingency will be accounted for as goodwill. Barrington Energy consisted of eight senior-level professionals and six other staff who complement the Company’s energy industry sector and primarily provide financial and transaction advising service offerings. Barrington Energy Partners, LLC is not associated with the Company’s 1999 acquisition of the Barrington Consulting Group, Inc.

 

Effective September 17, 2002, the Company acquired the assets of Hunter & Associates Management Services, Inc. (“Hunter”) for $25.4 million, which included $10.2 million cash at closing, 1.5 million shares of its common stock valued at $8.2 million at closing, $0.5 million cash payable on April 1, 2003, and $6.5 million in its common stock payable in two equal installments on the first and second anniversary of the closing. If either seller or buyer elects, up to 67 percent of the $6.5 million deferred payment commitment is payable in cash and the remainder is payable in the Company’s common stock. Accordingly, the Company accounted for this $6.5 million deferred payment obligation as 67 percent liabilities and 33 percent deferred stock issuance. In addition to the initial consideration value, the purchase agreement for Hunter provides for additional payments in cash and the Company’s common stock over the three years following closing that are contingent on the attainment of certain performance targets. Any additional payments related to this contingency will be accounted for as goodwill. Hunter consisted of 20 senior-level professionals and 40 additional staff that provide a comprehensive range of performance improvement services to hospitals and health care systems, including physician practices, faculty practice plans, and provider owner-managed care organizations. Hunter also provides interim executive-level management services as well as consulting services related to hospital restructuring. Hunter was acquired to significantly expand the Company’s service offerings within the healthcare industry and is reflected in the Financial & Claims Consulting segment.

 

All of the 2002 acquisitions have been accounted for by the purchase method of accounting for business combinations and, accordingly, the results of operations have been included in the consolidated financial statements since the dates of acquisition.

 

Pro Forma Information

 

The following unaudited pro forma financial information presents the combined financial information as if the acquisition of Hunter had been effective as of January 1, 2001. The pro forma financial information (shown

 

F-10


Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

in thousands) includes adjustments to record amortization of goodwill in 2001 (but not in 2002 due to the cessation of goodwill amortization in accordance with SFAS 142), to record the amortization of other intangibles and to record income tax effects as if Hunter had been included in the Company’s income tax returns:

 

    

Years ended December 31,


 
    

2002


  

2001


 

Revenues:

               

Core revenues:

               

Financial & Claims Consulting

  

$

203,171

  

$

176,556

 

Energy & Water Consulting

  

 

74,373

  

 

75,989

 

    

  


Total core revenues

  

 

277,544

  

 

252,545

 

Incremental revenues—Energy & Water Consulting

  

 

—  

  

 

11,028

 

    

  


Total combined segment revenues

  

$

277,544

  

$

263,573

 

    

  


Net Income (loss)

  

$

11,446

  

$

(1,618

)

    

  


Basic income (loss) per share

  

$

0.28

  

$

(0.04

)

Diluted income (loss) per share

  

$

0.27

  

$

(0.04

)

 

2001 Acquisitions:

 

On March 1, 2001, the Company acquired the assets of Barba-Arkhon International, Inc. (“Barba-Arkhon”) for $8.3 million, which consisted of $5.3 million cash at closing and $3.0 million notes payable, which bear interest at 6 percent due in two equal annual installments. Barba-Arkhon provides project program management and claims analysis services for construction, governmental and institutional projects. Engagements include delay and disruption claims analysis for dispute resolution, damage valuation, litigation support and technical analysis for projects involving transportation infrastructure, environmental and industrial facilities, power plants and commercial buildings.

 

On July 2, 2001, the Company acquired the common stock of Chambers Associates, Inc. (“Chambers”) for $2.7 million, which consisted of $2.1 million cash at closing and $0.6 million cash due within 18 months of closing. The purchase agreement for Chambers also provides for additional payments through December 31, 2003 contingent on attainment of certain revenue targets. Chambers provides public policy analysis, strategic planning and litigation support services to a wide range of clients. Engagements include economic and financial research to analyze the impact of current or proposed legislation or regulation; advocacy support for certain health, tax, energy and environmental legislative issues; and analysis and estimation of claim values and expert testimony in product liability, medical malpractice, bankruptcy and other litigation cases. Chambers was acquired to augment the services with its asbestos claims and mass tort litigation expertise. In addition, Chambers’ energy and environmental legislative expertise are expected to provide cross-selling opportunities to clients in the energy industry.

 

Both of the 2001 acquisitions have been accounted for by the purchase method of accounting for business combinations and, accordingly, the results of operations have been included in the consolidated financial statements since the dates of acquisition.

 

2000 Acquisitions:

 

There were no acquisitions of businesses during 2000.

 

4.    SEGMENT INFORMATION

 

The Company is comprised of two business segments: Financial & Claims Consulting and Energy & Water Consulting.

 

F-11


Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)

 

 

The Financial & Claims Consulting business segment provides consulting and advisory services to clients facing the challenges of dispute, litigation, bankruptcy, regulation and change. Its services include analyzing complex accounting, finance, economic, operations and information management issues.

 

The Energy & Water business segment provides a wide range of management consulting services to companies facing the challenges of the deregulating energy and water industries. Its services include strategy development, financial transaction support, operations support, regulatory advisement and technical analysis.

 

The Company evaluates segment performance and allocates resources based upon revenues and operating results. The basis of measurement of segment operating results is consistent among the periods. Transactions between segments have been eliminated. Information on the segment operations for the years ended December 31, 2002, 2001 and 2000 have been summarized as follows (shown in thousands):

 

    

2002


    

2001


    

2000


 

Revenues:

                          

Core revenues:

                          

Financial & Claims Consulting

  

$

183,647

 

  

$

148,563

 

  

$

151,282

 

Energy & Water Consulting

  

 

74,373

 

  

 

75,989

 

  

 

85,372

 

    


  


  


Total core revenues

  

 

258,020

 

  

 

224,552

 

  

 

236,654

 

Incremental revenues—Energy & Water Consulting

  

 

—  

 

  

 

11,028

 

  

 

7,975

 

    


  


  


Total combined segment revenues

  

$

258,020

 

  

$

235,580

 

  

$

244,629

 

    


  


  


Operating profit:

                          

Financial & Claims Consulting

  

$

26,068

 

  

$

18,682

 

  

$

24,828

 

Energy & Water Consulting

  

 

3,712

 

  

 

13,467

 

  

 

12,950

 

    


  


  


Total combined segment operating profit

  

$

29,780

 

  

$

32,149

 

  

$

37,778

 

    


  


  


 

Operating Profit and Statement of Operations reconciliation:

                          

Unallocated:

                          

Depreciation expense

  

$

7,651

 

  

$

7,118

 

  

$

6,797

 

Amortization expense

  

 

2,373

 

  

 

5,700

 

  

 

4,573

 

Stock-based compensation expense

  

 

3,401

 

  

 

3,812

 

  

 

492

 

Restructuring costs (credits)

  

 

(500

)

  

 

1,900

 

  

 

10,229

 

Litigation and settlement provisions

  

 

750

 

  

 

5,700

 

  

 

16,500

 

Acquisition/integration costs

  

 

1,317

 

  

 

—  

 

  

 

—  

 

VSRP cash compensation expense

  

 

—  

 

  

 

12,399

 

  

 

6,357

 

Acquisition-related compensation expense

  

 

—  

 

  

 

3,609