1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended SEPTEMBER 4, 1998
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or
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 000-24049
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CHARLES RIVER ASSOCIATES INCORPORATED
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2372210
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 CLARENDON STREET, T-33 BOSTON, MA 02116-5092
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(Address of principal executive offices) (Zip Code)
617-425-3000
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Registrant's telephone number, including area code:
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(Former name, former address, former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of September 4, 1998 the Company had outstanding 8,316,115 shares of common
stock.
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CHARLES RIVER ASSOCIATES INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION:
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PAGE
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ITEM 1. Financial Statements
Consolidated Balance Sheets -
September 4, 1998 and November 30, 1997........................3
Consolidated Statements of Income -
Sixteen and forty weeks ended
September 4, 1998 and September 5, 1997........................4
Consolidated Statements of Cash Flows -
Forty weeks ended
September 4, 1998 and September 5, 1997........................5
Notes to Consolidated Financial Statements.....................6
ITEM 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations..........................................9
PART II. OTHER INFORMATION:
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ITEM 1. Legal Proceedings.............................................18
ITEM 2. Changes in Securities and Use of Proceeds.....................18
ITEM 5. Other Information.............................................18
ITEM 6. Exhibits and Reports on Form 8-K..............................19
Signatures....................................................20
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CHARLES RIVER ASSOCIATES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
November 30, September 4,
1997 1998
(unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 2,054 $31,743
Accounts receivable, net of allowance of
$394 in 1997; $570 in 1998 10,140 8,807
Unbilled services 4,731 5,645
Prepaid expenses 280 129
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Total current assets 17,205 46,324
Property and equipment, net 2,890 3,068
Other assets 340 551
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Total assets $20,435 $49,943
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Liabilities and stockholder's equity
Current liabilities:
Accounts payable $ 902 $ 2,207
Accrued expenses 5,729 10,657
Deferred revenue 225 504
Current portions of notes payable
to former stockholders and capital
lease obligations 325 309
Dividends payable 1,764 0
Deferred income taxes 528 1,424
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Total current liabilities 9,473 14,921
Notes payable to former stockholders,
net of current portion 707 498
Capital lease obligations, net of
current portion 74 42
Deferred rent 1,302 1,410
Minority interest 343 101
Stockholders' equity:
Common stock (voting); no par
value; 25,000,000 shares authorized;
6,519,240 shares in 1997 and 8,316,115
shares in 1998 issued and outstanding 1,977 30,998
Retained earnings 7,770 1,986
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9,747 32,984
Notes receivable from stockholders (1,211) (13)
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Total stockholders' equity 8,536 32,971
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Total liabilities and stockholders' equity $20,435 $49,943
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CHARLES RIVER ASSOCIATES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
(unaudited)
Sixteen Weeks Ended Forty Weeks Ended
------------------------------- -------------------------------
September 5, September 4, September 5, September 4,
1997 1998 1997 1998
------------ ------------ ------------ ------------
Revenues $ 14,498 $ 16,465 $ 33,317 $ 39,159
Costs of services 9,135 9,983 21,153 23,385
Supplemental compensation 373 -- 933 --
----------- ----------- ----------- -----------
Gross Profit 4,990 6,482 11,231 15,774
General and administrative 3,361 3,657 7,657 8,996
----------- ----------- ----------- -----------
Income from operations 1,629 2,825 3,574 6,778
Actual interest income, net 41 383 134 609
----------- ----------- ----------- -----------
Income before provision for
income taxes and minority interest 1,670 3,208 3,708 7,387
Provision for income taxes
Current year operations 112 1,331 248 1,695
Change in tax status -- -- -- 1,416
----------- ----------- ----------- -----------
Net income before minority interest 1,558 1,877 3,460 4,276
Minority interest 198 109 198 242
----------- ----------- ----------- -----------
Net income $ 1,756 $ 1,986 $ 3,658 $ 4,518
=========== =========== =========== ===========
Historical basic net income per share $ 0.27 $ 0.24 $ 0.58 $ 0.62
=========== =========== =========== ===========
Basic weighted average shares 6,395,461 8,316,115 6,286,175 7,343,333
=========== =========== =========== ===========
Historical diluted net income per share $ 0.27 $ 0.24 $ 0.58 $ 0.61
=========== =========== =========== ===========
Diluted weighted average shares 6,395,461 8,412,429 6,286,175 7,386,741
=========== =========== =========== ===========
Pro forma income data:
Net income as reported $ 1,756 $ 1,986 $ 3,658 $ 4,518
Pro forma adjustment (654) -- (1,353) 12
----------- ----------- ----------- -----------
Pro forma net income $ 1,102 $ 1,986 $ 2,305 $ 4,530
=========== =========== =========== ===========
Pro forma basic net income per share $ 0.17 $ 0.24 $ 0.36 $ 0.61
=========== =========== =========== ===========
Pro forma basic weighted average shares 6,525,191 8,316,115 6,415,905 7,420,985
=========== =========== =========== ===========
Pro forma diluted net income per share $ 0.17 $ 0.24 $ 0.36 0.61
=========== =========== =========== ===========
Pro forma diluted weighted average shares 6,525,191 8,412,429 6,415,905 7,464,393
----------- ----------- ----------- -----------
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CHARLES RIVER ASSOCIATES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
FORTY WEEKS ENDED
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SEPTEMBER 5, SEPTEMBER 4,
1997 1998
Operating activities:
Net income $ 3,658 $ 4,518
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 443 760
Loss on retirement of fixed assets 0 193
Deferred rent (161) 108
Deferred income taxes 233 896
Minority interest (198) (242)
Changes in operating assets and liabilities:
Accounts receivable (2,594) 1,333
Unbilled services 958 (914)
Prepaid expenses and other assets (283) (60)
Accounts payable and accrued expenses 4,000 6,331
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Net cash provided by operating activities 6,056 12,923
Investing activities:
Purchase of property and equipment (1,412) (1,131)
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Net cash used in investing activities (1,412) (1,131)
Financing activities:
Payments on notes payable to
former shareholders and capital
lease obligations (303) (257)
Collection of notes receivable from stockholders 264 1,198
Dividends paid (1,640) (12,555)
Proceeds from minority interest 625 0
Proceeds from sale of stock 261 29,511
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Net cash provided by (used in) financing activities (793) 17,897
Net increase in cash and cash equivalents 3,851 29,689
Cash and cash equivalents at beginning of period 1,434 2,054
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Cash and cash equivalents at end of period $ 5,285 $ 31,743
======= ========
Supplemental cash flow information:
Notes receivable in exchange for common stock $ 502 $ 0
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CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Charles River Associates Incorporated (the "Company") is an economic and
business consulting firm that applies advanced analytical techniques and
in-depth industry knowledge to complex engagements for a broad range of clients.
The Company offers two types of services: legal and regulatory consulting and
business consulting.
2. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS & ESTIMATES
The consolidated balance sheet as of September 4, 1998, the consolidated
statements of income for the sixteen and forty week periods ended September 4,
1998 and September 5, 1997 and the consolidated statements of cash flows for the
forty week periods ended September 4, 1998 and September 5, 1997 are unaudited
and in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the Company's
consolidated financial position, results of operations and cash flows.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. FISCAL YEAR
The Company's fiscal year ends on the last Saturday in November. The Company's
first, third and fourth quarter each include 12 weeks and the third quarter
includes sixteen weeks.
4. LETTER OF INTENT
On October 9, 1998, the Company signed a letter of intent to acquire
substantially all of the assets of The Tilden Group, LLC. The Tilden Group is a
privately-held specialized consulting firm located in Oakland, California that
focuses on economic analysis for litigation, public policy design and strategy
development. Under the terms of the letter of intent, the Company will pay $11.4
million in the form of cash and common stock for substantially all of the assets
of The Tilden Group. The closing of the transaction is subject to negotiation of
definitive agreements, completion of due diligence and obtaining all necessary
approvals.
5. INCOME TAXES
In fiscal 1997, the Company was treated for federal and state income tax
purposes as an S corporation under the Internal Revenue Code of 1986, as amended
(the "Code"). As a result, the Company's stockholders, rather than the Company,
were required to pay federal and certain state income taxes based on the
Company's taxable earnings. The Company filed its returns using the cash method
of accounting. Upon closing of the initial public offering of Common Stock (see
note 8), the Company's status as an S Corporation terminated.
The Company is now subject to corporate taxation as a C Corporation under the
Code. Concurrently with the termination of the Company's status as an S
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CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Corporation, the Company adopted the accrual method of accounting. A pro forma
provision for income taxes has been presented as if the Company had been taxed
as a C corporation for the periods ended September 5, 1997 and September 4,
1998.
At the time of the termination of the Company's status as an S Corporation, the
Company recorded a net deferred income tax liability and a one-time additional
provision for income taxes of $1,416,000.
6. NET INCOME PER SHARE AND PRO FORMA NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share.
Pro forma net income per share is computed using pro forma net income and the
pro forma weighted average number of shares of common stock. The weighted
average number of shares of common stock for the purpose of computing pro forma
net income per share has been increased by the number of shares that were
required to pay a dividend in the amount of $2.4 million that was paid from the
proceeds of the Company's initial public offering.
7. SUPPLEMENTAL COMPENSATION
The Company currently has one bonus program. This program awards discretionary
bonuses based on the Company's revenues and profitability and individual
performance. Amounts paid under this bonus program are included in costs of
services and the Company expects to continue this bonus program. During fiscal
1997, the Company also had another bonus program, which consisted of
discretionary payments to officers and certain outside consultants based
primarily on the Company's cash flows. These bonus payments are shown as
supplemental compensation in the Company's statements of income. Beginning in
fiscal 1998, the Company no longer pays supplemental compensation, and
consequently, did not report supplemental compensation in the sixteen or forty
weeks of fiscal 1998.
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CHARLES RIVER ASSOCIATES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. STOCKHOLDERS EQUITY
Subsequent to November 29, 1997, the Company's Board of Directors authorized (i)
the declaration of a 52-for-1 stock split to be effected in the form of a
dividend of 51 shares of Common Stock per share of Common Stock outstanding
before the closing of the Offering and (ii) an increase in the number of shares
of authorized Common Stock to 25,000,000, which the Company's stockholders
approved.
In the second quarter of fiscal 1998, the Company completed an initial public
offering of 1,796,875 shares of Common Stock (the "Offering") in exchange for
$29.5 million of proceeds, which is net of offering costs.
Each person who was a stockholder of the Company before the closing of the
Offering entered into a Stock Restriction Agreement with the Company, which
prohibits each such person from selling or otherwise transferring shares of
Common Stock held immediately before the Offering without the consent of the
Board of Directors of the Company for two years after the Offering. In addition,
the Stock Restriction Agreement will allow the Company to repurchase a portion
of such stockholder's shares of Common Stock at a percentage of market value
should the stockholder leave the Company (other than for death or retirement for
disability).
9. ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." Both SFAS No. 130 and SFAS No. 131 are effective for fiscal years
beginning after December 15, 1997. The Company believes that the adoption of
these new accounting standards will not have a material impact on the Company's
consolidated financial statements.
In December 1997, The Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued a Statement of Position (SOP),
"Reporting on the Costs of Start-up Activities," which will require companies
upon adoption to expense start-up costs, including organization costs, as
incurred. In addition, the SOP will require companies upon adoption to write off
as a cumulative change in accounting principle any previously recorded start-up
or organization costs. The SOP is effective for fiscal years beginning after
December 15, 1998. At September 4, 1998, the Company had deferred start-up costs
of $54,000. The Company believes that the adoption of this SOP will not have a
material impact on the Company's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires all derivatives to be
recorded on the balance sheet at fair market value and establishes special
accounting for certain types of hedges. The Company does not engage in any
derivative instruments and hedging activities. The statement is effective for
fiscal years beginning after June 15, 1999, however early adoption is allowed.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information this Quarterly Report contains
forward-looking statements. The forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors Affecting Future Performance."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's opinions only as of the date hereof. The
Company undertakes no obligation to revise or publicly release the results of
any revision to these forward-looking statements. Readers should carefully
review the risk factors described in this Quarterly Report and in other
documents that the Company files from time to time with the Securities and
Exchange Commission, including the Company's Registration Statement on Form S-1
(Registration No. 333-46941) and the Quarterly Reports on Form 10-Q filed by the
Company in fiscal 1998.
RESULTS OF OPERATIONS - SIXTEEN WEEKS ENDED SEPTEMBER 5, 1997 COMPARED TO
SIXTEEN WEEKS ENDED SEPTEMBER 4, 1998
Revenues. Revenues increased by $2.0 million, or 13.6%, from $14.5 million for
the third quarter of fiscal 1997 to $16.5 million for the third quarter of
fiscal 1998. The increase in revenues was due primarily to an increase in
consulting services performed for new and existing clients during the period and
an increase in the number of consultants. The Company experienced revenue
increases during the third quarter of fiscal 1998 in both its legal and
regulatory consulting services and business consulting services, and in
particular generated significant revenue increases in its antitrust and mergers
and acquisitions practices.
Costs of Services. Costs of services increased by $848,000, or 9.3%, from $9.1
million in the third quarter of fiscal 1997 to $10.0 million in the third
quarter of fiscal 1998. As a percentage of revenues, costs of services decreased
from 63.0% in the third quarter of fiscal 1997 to 60.6% in the third quarter of
fiscal 1998. The decrease as a percentage of revenues was due primarily to the
Company's consulting staff not increasing at as fast a rate as the rate of
increase of revenues. In addition, the Company hired more junior consultants,
who typically generate higher margins than senior consultants.
Supplemental Compensation. Beginning in fiscal 1998, the Company no longer pays
supplemental compensation, and consequently, did not have supplemental
compensation in the third quarter of fiscal 1998. Supplemental compensation was
$373,000 in the third quarter of fiscal 1997.
General and Administrative. General and administrative expenses increased by
$296,000, or 8.8%, from $3.4 million in the third quarter of fiscal 1997 to $3.7
million in the third quarter of fiscal 1998. The increase was due primarily to
increased rent expense resulting from the Company's expansion of each of its
three offices in Boston, Massachusetts, Washington, D.C. and Palo Alto,
California. As a percentage of revenues, general and administrative expenses
decreased from 23.2% in the third quarter of fiscal 1997 to 22.2% in the third
quarter of fiscal 1998. This was due to the Company increasing its
administrative and support staff at a lower rate than the rate of increase of
its consultants.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest Income, Net. Net interest income increased from $41,000 in the third
quarter of fiscal 1997 to $383,000 in the third quarter of fiscal 1998. This
increase was due primarily to interest earned from investments of the proceeds
of the Company's initial public offering.
Minority Interest. In June 1997, the Company established and purchased a
controlling interest in NeuCo LLC ("NeuCo"), which provides applications
consulting services and a family of neural network software solutions and
complementary applications for fossil-fired electric utilities. Minority
interest decreased from $198,000 in the third quarter of fiscal 1997 to $109,000
in the third quarter of fiscal 1998, and represents the portion of NeuCo's net
loss after taxes allocable to its minority owners.
Provision for Income Taxes. The provision for income taxes increased from
$112,000 for the third quarter of fiscal 1997 to $1.3 million for the third
quarter of fiscal 1998. The provision for the third quarter of fiscal 1998
reflects taxation as a C Corporation for the entire quarter.
RESULTS OF OPERATIONS - FORTY WEEKS ENDED SEPTEMBER 5, 1997 COMPARED TO FORTY
WEEKS ENDED SEPTEMBER 4, 1998
Revenues. Revenues increased by $5.9 million, or 17.5%, from $33.3 million for
the forty weeks ended September 5, 1997 to $39.2 million for the forty weeks
ended September 4, 1998. The increase in revenues was due primarily to an
increase in consulting services performed for new and existing clients during
the period and an increase in the number of consultants.
Costs of Services. Costs of services increased by $2.2 million, or 10.6%, from
$21.2 million in the forty weeks ended September 5, 1997 to $23.4 million in the
forty weeks ended September 4, 1998. As a percentage of revenues, costs of
services decreased from 63.5% in the forty weeks ended September 5, 1997 to
59.7% in the forty weeks ended September 4, 1998. The decrease as a percentage
of revenues was due primarily to consultants not increasing at as fast a rate as
the rate of increase in revenues in the forty weeks ended September 4, 1998,
higher utilization rates and increases in junior consultants who typically
generate higher margins than senior consultants.
Supplemental Compensation. Beginning in fiscal 1998, the Company no longer pays
supplemental compensation, and consequently, did not have supplemental
compensation in the forty weeks ended September 4, 1998. Supplemental
compensation was $933,000 through the forty weeks ended September 5, 1997.
General and Administrative. General and administrative expenses increased by
$1.3 million, or 17.5%, from $7.7 million in the forty weeks ended September 5,
1997 to $9.0 million in the forty weeks ended September 4, 1998. As a percentage
of revenues, general and administrative expenses remained flat at 23.0% for the
forty weeks ended September 5, 1997 as well as the forty weeks ended September
4, 1998.
Interest Income, Net. Net interest income increased from $134,000 in the forty
weeks ended September 5, 1997 to $609,000 in the forty weeks ended September 4,
1998. This increase was due primarily to interest earned from investments of the
proceeds of the Company's initial public offering.
Minority Interest. Minority interest increased from $198,000 in the forty weeks
ended September 5, 1997 to $242,000 in the forty weeks ended September 4,1998,
and represents the portion of NeuCo's net loss after taxes allocable to its
minority owners. NeuCo was started in June 1997, so that the 1998 loss includes
an additional four-week period of loss.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provision for Income Taxes. The provision for income taxes increased from
$248,000 for the forty weeks ended September 5, 1997 to $3.1 million for the
forty weeks ended September 4, 1998. The provision for the forty weeks ended
September 4, 1998 consists of $1.7 million for current year operations,
reflecting taxation as an S Corporation for 149 days and taxation as a C
Corporation for 129 days, and $1.4 million for the change in tax status to a C
Corporation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of September 4, 1998, the Company had cash and cash equivalents of $31.7
million and working capital of $31.4 million. Net cash provided by operating
activities for the forty weeks ended September 4, 1998 was $12.9 million. Cash
generated from operating activities resulted primarily from net income of $4.5
million, a decrease in accounts receivable of $1.3 million and an increase in
accounts payable and accrued expenses of $6.3 million which reflects normal
bonus accruals for the forty weeks ended September 4, 1998.
Net cash used in investing activities for the purchase of furniture, fixtures
and computer equipment during the forty weeks ended September 4, 1998 was $1.1
million. The Company's financing activities provided cash of $17.9 million in
the forty weeks ended September 4, 1998. This increase consists primarily of the
net proceeds of $29.5 million from the sale of stock in the Company's initial
public offering (the "Offering"), and the collection of notes receivable from
shareholders of $1.2 million, offset by the previously accrued 1997 tax
distribution of $1.7 million, a $2.4 million supplemental dividend paid from the
proceeds of the Offering, and a final $8.0 million S Corporation distribution
paid to the stockholders.
The Company presently has available a $2.0 million revolving line of credit with
BankBoston Corporation ("BankBoston"), which is secured by the Company's
accounts receivable. This line of credit automatically renews each year on June
30 unless earlier terminated by either the Company or BankBoston. No borrowings
were outstanding under this line of credit as of September 4, 1998.
On October 9, 1998, the Company signed a letter of intent to acquire
substantially all of the assets of The Tilden Group, LLC. The Tilden Group is a
privately-held specialized consulting firm located in Oakland, California that
focuses on economic analysis for litigation, public policy design and strategy
development. Under the terms of the letter of intent, the Company will pay $11.4
million in the form of cash and common stock for substantially all of the assets
of The Tilden Group. The closing of the transaction is subject to negotiation of
definitive agreements, completion of due diligence and obtaining all necessary
approvals.
The Company believes that existing cash balances and credit available under its
bank line of credit will be sufficient to meet the Company's working capital and
capital expenditure requirements for at least the next 12 months.
To date, inflation has not had a material impact on the Company's financial
results. There can be no assurance, however, that inflation may not adversely
affect the Company's financial results in the future.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
the 20th century dates. The use of software and computer systems that are not
Year 2000 compliant could result in system failures or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. As a result, many companies' software and computer systems may need
to be upgraded or replaced in order to comply with Year 2000 requirements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has received verbal confirmations from software vendors that the
software the Company has purchased and is installing is Year 2000 compliant, and
it is in the process of obtaining written certifications from such vendors to
the same effect. Based on the foregoing, the Company currently has no reason to
believe that its internal software systems are not Year 2000 compliant. To date,
the Company has not incurred significant incremental costs in order to comply
with Year 2000 requirements and does not believe it will incur significant
incremental costs in the foreseeable future. However, there can be no assurance
that Year 2000 errors or defects will not be discovered in the Company's
internal software systems and, if such errors or defects are discovered, there
can be no assurance that the costs of making such systems Year 2000 compliant
will not have a material adverse effect on the Company's business, operating
results and financial conditions.
The Company relies on third party vendors that may not be Year 2000 compliant
for certain equipment and services. To date, the Company has not conducted a
Year 2000 review of all of its vendors. Failure of systems maintained by the
Company's vendors to operate properly with regard to the Year 2000 and
thereafter could require the Company to incur significant unanticipated expenses
to remedy any problems or replace affected vendors and could have a material
adverse effect on the Company's business, operating results and financial
condition.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FACTORS AFFECTING FUTURE PERFORMANCE
Certain of the statements contained in this section and elsewhere in this
quarterly report that are not purely historical, such as statements regarding
the Company's expectations, beliefs, intentions, plans and strategies regarding
the future, are forward-looking statements that involve risks, uncertainties and
assumptions that could cause the Company's actual results to differ materially
from those expressed in the forward-looking statements. All forward-looking
statements are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any forward-looking statement.
The cautionary statements made in this quarterly report should be read as being
applicable to all related forward-looking statements wherever they appear in
this quarterly report.
DEPENDENCE UPON KEY EMPLOYEES
The Company's business consists primarily of the delivery of professional
services and, accordingly, its future success is highly dependent upon the
efforts, abilities, and business generation capabilities and project execution
of its consultants. The Company has no employment or non-competition agreement
with any consultant and, accordingly, each consultant may terminate his or her
relationship with the Company at will and without notice and immediately begin
to compete with the Company. The loss of the services of any consultant or the
failure of the Company's consultants to generate business or otherwise perform
at or above historical levels could have a material adverse effect on the
Company's business, financial condition and results of operations.
NEED TO ATTRACT QUALIFIED CONSULTANTS
In order to meet its growth objectives, the Company needs to hire increasing
numbers of highly qualified, highly educated consultants. The number of
potential employees that meet the Company's hiring criteria is relatively small.
Moreover, increasing competition for these consultants may also result in
significant increases in the Company's labor costs, which could have a material
adverse effect on the Company's margins and results of operations. The failure
to recruit and retain a significant number of qualified consultants could have a
material adverse effect on the Company's business, financial condition and
results of operations.
MAINTENANCE OF PROFESSIONAL REPUTATION
The Company's ability to secure new engagements and hire qualified consultants
is highly dependent upon the Company's overall reputation. Any factor that
diminishes the reputation of the Company or any of its personnel or outside
consultants ("Outside Experts") could make it substantially more difficult for
the Company to compete successfully for both new engagements and qualified
consultants and could therefore have a material adverse effect on the Company's
business, financial condition and results of operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company has experienced, and may continue to experience, significant
period-to-period fluctuations in revenues and results of operations. The
Company's results of operations in any quarter can fluctuate depending upon,
among other things, the number of weeks in the quarter, the number, scope and
timing of ongoing client engagements, the extent of discounting or cost
overruns, employee hiring, and other factors affecting employee productivity.
Because the Company generates substantially all of its revenues from consulting
services provided on an hourly-fee basis, the Company's revenues in any period
are directly related to the number of its consultants, their billing rates and
the number of billable hours worked during that period. The Company's ability to
increase any of these factors in the short term is limited and, accordingly, the
Company may be unable to compensate for periods of underutilization during one
part of a fiscal period by augmenting revenues during another part of that
period. In addition, the Company intends to hire additional consultants who may
not be fully utilized immediately, particularly in the quarter in which the
consultants are hired. Moreover, a significant majority of the Company's
operating expenses, primarily rent and the base salaries of the Company's
consultants, are fixed in the short term, and as a result the failure of
revenues to meet the Company's projections in any quarter could have a
disproportionate adverse effect on the Company's net income. For these reasons,
the Company believes that its historical results of operations should not be
relied upon as an indication of future performance.
RISKS RELATED TO POSSIBLE ACQUISITIONS
An element of the Company's strategy is to expand its operations through the
acquisition of complementary businesses or consulting practices. On October 9,
1998 the Company signed a letter of intent to acquire substantially all of the
assets of The Tilden Group, LLC. The Company has never acquired another
business, and there can be no assurance that the Company will be able to
identify, acquire, and successfully integrate into the Company or profitably
manage any businesses without substantial expense, delay or other operational or
financial problems. Moreover, there is competition for acquisition opportunities
in the economic and business consulting industries, which could result in an
increase in the price of acquisition targets and a decrease in the number of
attractive companies available for acquisition.
DEPENDENCE UPON OUTSIDE EXPERTS
The Company's future success depends upon the continuation of the Company's
existing relationships with four principal Outside Experts. The Company's
ability to compete successfully for certain engagements in the past has derived
in substantial part from its ability to offer the services of these Outside
Experts to potential clients. Each of these Outside Experts is a party to an
agreement with the Company that restricts his right to compete with the Company,
however these Outside Experts may limit their relationships with the Company at
any time for any reason. The limitation or termination of any of their
relationships with the Company could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
in order to meet the Company's growth objectives, the Company believes that it
will be necessary to establish ongoing relationships with additional Outside
Experts. There can be no assurance that the Company will be successful in
establishing such relationships.
15
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT OF GROWTH
The Company has recently experienced and may continue to experience significant
growth in its revenues and employee base. This growth has resulted, and any
future growth would continue to result, in new and increased management,
consulting and training responsibilities for the Company's consultants as well
as increased demands on the Company's internal systems, procedures and controls,
and its managerial, administrative, financial, marketing and other resources. No
member of the Company's management team has significant experience in managing a
public company. Moreover, the Company has recently opened offices in new
geographic locations and may open new offices in the future. Opening new offices
may entail certain start-up and maintenance costs that could be substantial. The
failure of the Company to manage growth successfully could have a material
adverse effect on the Company's business, financial condition and results of
operations.
CONCENTRATION OF REVENUES; DEPENDENCE ON LIMITED NUMBER OF LARGE ENGAGEMENTS
The Company has derived, and expects to continue to derive, a significant
portion of its revenues from a limited number of large engagements. The volume
of work performed for any particular client is likely to vary from year to year.
Engagements can also terminate suddenly and without prior notice to the Company.
The unexpected termination of an engagement could result in the underutilization
of the consultants working on the engagement until they are assigned to other
projects. Accordingly, the failure to obtain anticipated numbers of new large
engagements, or the termination or significant reduction in the scope of a
single large engagement, could have a material adverse effect on the Company's
business, financial condition and results of operations.
POTENTIAL CONFLICTS OF INTERESTS
The Company's engagement by a client frequently precludes the Company from
accepting engagements with the client's competitors or adversaries because of
direct or indirect conflicts between their interests or positions on disputed
issues. Accordingly, the number of both potential clients and potential
engagements is limited. Moreover, in many of the industries in which the Company
provides consulting services, and in the telecommunications industry in
particular, there has been a continuing trend toward business consolidations and
strategic alliances. These consolidations and alliances reduce the number of
potential clients for the Company's services and increase the likelihood that
the Company will be unable to continue certain ongoing engagements or accept
certain new engagements as a result of conflicts of interests. Any such result
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE UPON ANTITRUST AND MERGERS AND ACQUISITIONS CONSULTING BUSINESS
The Company derives substantial revenues from engagements in the Company's
antitrust and mergers and acquisitions practice areas. Substantially all of
these revenues are derived from engagements relating to enforcement of United
States antitrust laws. Changes in the federal antitrust laws or changes in
judicial interpretations of these laws for any reason could substantially reduce
the number, duration or size of engagements available to the Company in this
area. Any substantial reduction in the number of the Company's antitrust and
mergers and acquisitions consulting engagements could have a material adverse
effect on its business, financial condition and results of operations.
16
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTENSE COPMETITION
The market for economic and business consulting services is intensely
competitive, highly fragmented and subject to rapid change. In general, the
barriers to entry into the Company's markets are few and the Company expects to
face additional competition from new entrants into the economic and business
consulting industries. There can be no assurance that the Company will compete
successfully with its existing competitors or with any new competitors.
RISKS RELATED TO ENTRY INTO NEW LINES OF BUSINESS
An element of the Company's growth strategy is to continue to develop new
practice areas and complementary lines of business. For example, in June 1997,
the Company established and purchased a controlling interest in NeuCo LLC
("NeuCo"), which provides applications consulting services and a family of
neural network software solutions and complementary applications for
fossil-fired electric utilities. To date, NeuCo has not been profitable, and
there can be no assurance that it will become profitable. The development by the
Company of new practice areas or lines of business outside its core economic and
business consulting services carries inherent risks, including risks associated
with inexperience and competition from mature participants in those markets.
There can be no assurance that the Company's attempts to develop NeuCo or any
other new practice area or line of business will be successful.
PROFESSIONAL LIABILITY
Litigation against the Company alleging that the Company performed negligently
or otherwise breached its obligations to the client could expose the Company to
significant liabilities and tarnish its reputation, either of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
17
18
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
As of the date of this filing, the Company is not a party to any legal
proceedings the outcome of which, in the opinion of management of the
Company, would have material adverse effect on the Company's business,
financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds
d) USE OF PROCEEDS
The Company sold 1,796,875 shares of its Common Stock, without par
value ("Common Stock"), on April 29, 1998 and May 7, 1998, pursuant to
a Registration Statement on Form S-1 (Registration No. 333-46941),
which was declared effective by the Securities and Exchange Commission
on April 23, 1998 (the "Effective Date"). Certain stockholders of the
Company sold an aggregate of 719,325 shares of Common Stock pursuant
to such registration statement. The managing underwriters of the
offering were NationsBanc Montgomery Securities LLC and William Blair
& Company. The aggregate gross proceeds to the Company and the selling
stockholders from the offering were $33.2 million and $13.3 million,
respectively. The Company's total expenses in connection with the
offering were approximately $3.7 million, of which $2.3 million was
for underwriting discounts and commissions and, based on the Company's
reasonable estimate, approximately $1.4 million was for other
expenses, of which $1.3 million was paid to persons other than
directors or officers of the Company, persons owning more than 10
percent of any class of equity securities of the Company, or
affiliates of the Company (collectively, "Affiliates") and of which
approximately $100,000 was paid to a company wholly owned by a
director, for services in connection with the offering. The Company's
net proceeds from the offering were approximately $29.5 million. From
the Effective Date through September 4, 1998, the Company used $2.4
million of such net proceeds to pay a dividend to stockholders of
record on April 28, 1998 (the "Dividend"). A portion of the Dividend
was paid to Affiliates of the Company. As of September 4, 1998 the
Company had approximately $27.1 million of proceeds remaining from the
Offering, and pending use of the proceeds, the Company intends to
invest such proceeds primarily in investment-grade, short-term,
interest-bearing instruments. The terms of the Company's bank line of
credit place certain restrictions on the Company's ability to pay cash
dividends on its Common Stock.
Item 5. Other Information
On September 14, 1998, the Company's Board of Directors appointed
Steven C. Salop a director of the Company. The Company's Board of
Directors is divided into three classes, one class of which is elected
each year at the annual meeting of stockholders to hold office for a
term of three years. Rowland T. Moriarty, William B. Burnett and Dr.
Salop currently serve as Class I Directors; their terms of office
expire in 1999. Firoze E. Katrak and Carl Kaysen currently serve as
Class II Directors; their terms of office expire in 2000. Franklin M.
Fisher and James C. Burrows currently
18
19
serve as Class III Directors; their terms of office expire in 2001.
Item 6. Exhibits and Reports on Form 8-K
a) EXHIBITS
99.1 Press Release of the Company dated October 13, 1998
announcing the Company's signing of a letter of intent to
acquire substantially all of the assets of The Tilden Group,
LLC.
b) REPORTS ON FORM 8-K
Charles River Associates Incorporated did not file any Reports on
Form 8-K during the quarter ended September 4, 1998.
19
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Charles River Associates Incorporated
-------------------------------------
(Registrant)
Date: October 16, 1998 By: /s/ James C. Burrows
- ---------------------- -----------------------------------
James C. Burrows
President and Chief Executive
Officer
Date: October 16, 1998 By: /s/ Laurel E. Morrison
- ---------------------- -----------------------------------
Laurel E. Morrison
Vice President & Treasurer
(Principal Financial and Accounting
Officer)
20
5
1
U.S. DOLLARS
OTHER
NOV-28-1998
MAY-16-1998
SEP-04-1998
1
31,743
0
8,807
(570)
0
46,324
6,493
(3,425)
49,943
14,921
42
0
0
30,998
(13)
49,943
0
16,465
0
9,983
3,657
0
0
3,208
1,331
1,986
0
0
0
1,986
0.24
0.24
NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS $570
NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION $3,425
EXCLUDES NOTES PAYABLE TO FORMER STOCKHOLDERS $498
NOTES RECEIVABLE FROM STOCKHOLDERS
NET INCOME BEFORE MINORITY INTEREST IS $1,877 AND MINORITY INTEREST OF $109
1
EXHIBIT 99.1
FOR IMMEDIATE RELEASE
Contact:
Laurel Morrison James R. Buckley
Vice President, Chief Financial Officer Vice President
Charles River Associates Incorporated Sharon Merrill Associates, Inc.
617-425-3000, Ext. 4476 617-542-5300
CHARLES RIVER ASSOCIATES SIGNS LETTER OF INTENT TO ACQUIRE
THE TILDEN GROUP, LLC FOR $11.4 MILLION
ACQUISITION STRENGTHENS CRA'S POSITION IN THE EXPANDING CONSULTING MARKET
WITH THE ADDITION OF TWO WORLD-CLASS INDUSTRY EXPERTS
BOSTON, October 13, 1998 - Charles River Associates Incorporated (NASDAQ:CRAI),
a leading provider of high-level economic, financial and business strategy
consulting, today announced that it has signed a letter of intent to acquire the
assets of the California-based, The Tilden Group, LLC. The Tilden Group is a
privately held specialized consulting firm focusing on economic analysis for
litigation, public policy design and business strategy development. The
transaction will strengthen CRA's litigation support and business consulting
practices and expand its presence in California with the addition of Dr. Michael
Katz, an inter-nationally recognized authority on telecommunications, antitrust,
intellectual property and business strategy issues, and Dr. Carl Shapiro, a
prominent economic expert in the areas of antitrust , intellectual property and
business strategy.
Under the terms of the letter of intent, CRA will pay $11.4 million with a
mixture of cash and stock, for the assets of The Tilden Group. The acquisition
is expected to close in the fourth quarter of calendar 1998. It is anticipated
that in connection with the transaction, Drs. Katz and Shapiro will sign
exclusive consulting agreements with CRA. The closing of the transaction will be
subject to negotiation of definitive agreements, completion of due diligence and
obtaining all necessary approvals.
In addition to Drs. Katz and Shapiro, The Tilden Group currently employs 10
consulting and administrative staff all of whom are expected to join CRA upon
completion of the acquisition. The consulting operations will continue to be
conducted out of the Oakland, California office.
2
CHARLES RIVER ASSOCIATES/2
"This acquisition marks an important step forward in the execution of our
growth strategy," stated James C. Burrows, CRA President and Chief Executive
Officer. "We view this acquisition as a major milestone for CRA and are
enthusiastic about the growth opportunities that this combination provides.
Acquiring The Tilden Group not only strengthens our position as a leading
provider of sophisticated, economically-based legal and business consulting
advice, but also adds two key consultants with distinguished, world-class
reputations in industrial organization, business strategy and telecommunications
economics."
Burrows concluded, "Michael Katz and Carl Shapiro have the extensive
knowledge, broad project exposure and high-profile testimony experience to
enhance CRA's preeminent reputation in the areas of antitrust, intellectual
property, litigation and telecommunications. These two well-known and highly
respected experts are welcome additions to CRA's roster of elite consultants. By
expanding CRA's already strong presence in the California market, we expect that
Carl Shapiro and Michael Katz will be significant contributors to the growth of
CRA."
"The strategic combination of CRA's broad foundation of expertise with The
Tilden Group's antitrust, telecommunications and business strategy capabilities
creates an even more attractive consulting resource for our client base,"
Shapiro stated.
Katz added "the experience and capabilities of CRA's management and
consulting staff will strengthen our ability to offer clients comprehensive
business and legal consulting solutions."
Dr. Michael L. Katz is a respected expert in the areas of
telecommunications policy, antitrust economics and business strategy. Prior to
co-founding The Tilden Group, he was the Chief Economist at the Federal
Communications Commission (FCC) where he formulated and implemented regulatory
policies for all industries under the FCC's jurisdiction from 1994 to 1996. He
has published in such areas as telecommunications, industrial organization,
intellectual property and the economics of network effects. He earned his
doctorate in economics from Oxford University in 1982 and graduated summa cum
laude with an A.B. in economics from Harvard University. Dr. Katz is currently
the Edward J. and Mollie Arnold Professor of Business Administration at the Haas
School of Business at the University of California at Berkeley.
3
CHARLES RIVER ASSOCIATES/3
Dr. Carl Shapiro is a world-renowned expert in the areas of antitrust and
intellectual property. Prior to co-founding The Tilden Group, he served as the
Deputy Assistant Attorney General for Economics in the Antitrust Division of the
U.S. Department of Justice from 1995 to 1996. Dr. Shapiro's depth of knowledge
extends across a variety of disciplines, including antitrust, regulation,
intellectual property, and competitive strategy. He has published extensively in
the areas of industrial organization, competition policy, the economics of
innovation and competitive strategy. He earned his Ph.D. in economics from the
Massachusetts Institute of Technology (M.I.T.) in 1981, an M.A. in economics at
the University of California at Berkeley and a B.S. in economics and math from
M.I.T. Dr. Shapiro is currently the Transamerica Professor of Business Strategy
at the Haas School of Business at the University of California at Berkeley.
Charles River Associates is a worldwide leader in the market for
sophisticated economic consulting services. Founded in 1965, CRA is known for
its expertise in the fields of legal and regulatory economics, business strategy
development, energy policy analysis, finance, intellectual property, materials
and manufacturing, policy impact evaluation, technology assessment,
telecommunications and transportation planning.
Statements in this press release concerning the future business, operating
results and financial condition of the Company are "forward-looking" statements
as defined in the Private Securities Litigation Reform Act of 1995. Such
statements are based upon management's current expectations and are subject to a
number of factors and uncertainties. Information contained in these
forward-looking statements is inherently uncertain and actual performance and
results may differ materially due to many important factors. Such factors that
could cause actual results to differ materially from any forward-looking
statements made by the Company include, among others, dependence on key
personnel, attracting and retaining qualified consultants, dependence on outside
experts, intense competition and professional liability. Further information on
these and other potential factors that could affect the Company's financial
results are included in the Company's initial public offering prospectus dated
April 23, 1998.
###
