-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T9NOo3O51ubzCiIBTE0etQL5HmhGtsU59ZA9GFX7mqvDkR+QlASUFQS5GmTwX4nm o0dopl4+y+SfM31GT5WIPQ== 0000950131-00-002098.txt : 20000411 0000950131-00-002098.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950131-00-002098 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAVIGANT CONSULTING INC CENTRAL INDEX KEY: 0001019737 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT CONSULTING SERVICES [8742] IRS NUMBER: 364094854 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12173 FILM NUMBER: 581857 BUSINESS ADDRESS: STREET 1: 615 N WABASH CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3125735600 MAIL ADDRESS: STREET 1: 615 N WABASH CITY: CHICAGO STATE: IL ZIP: 60015 FORMER COMPANY: FORMER CONFORMED NAME: METZLER GROUP INC DATE OF NAME CHANGE: 19960826 10-K405 1 FORM 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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
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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- As of March 6, 2000, 41.1 million shares of the Registrants 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 6, 2000, was approximately $401.0 million. The Registrant's Proxy Statement for the Annual Meeting of Stockholders, scheduled to be held May 30, 2000, is incorporated by reference into Part III of this Annual Report on Form 10-K. Statements included in this report which are not historical in nature, 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," and "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. 2 PART I Item 1. Business General Navigant Consulting, Inc., formerly The Metzler Group, Inc., ("We" or the "Company") is a provider of consulting services to electric and gas utilities, insurance companies and pharmaceutical companies, as well as other Fortune 100 companies. As of December 31, 1999, our services included: management consulting, strategic consulting, financial and claims services, and economics and policy consulting. We believe that our experience, reputation, industry focus and broad range of services will enable us to compete effectively in the consulting marketplace. Our growth strategy is to: --Continue to build a complementary spectrum of consulting services; --Leverage existing relationships and expand our client base in both domestic and international markets; --Continue to recruit and retain highly skilled professionals; and --Continue to acquire consulting companies that provide complementary services or geographic presence. Our executive office is located at 615 North Wabash Avenue, Chicago, Illinois 60611. Our telephone number is (312) 573-5600. Marketing and Sales We market our services directly to mid-level and senior executives using a variety of business development and marketing techniques to communicate directly with current and prospective clients, including on-site presentations, industry seminars and industry-specific articles and other publications. A significant portion of new business arises from prior client engagements. In addition, we seek to leverage the client relationships of firms we have acquired by cross-selling existing services. Clients frequently expand the scope of engagements during delivery to include follow-on complementary activities. Also, our on-site presence affords us the opportunity to become aware of, and to help define, additional project opportunities as they are identified by the client. The client relationships arising out of many engagements often facilitate our ability to market additional capabilities to clients in the future. Human Resources As of December 31, 1999, we had approximately 2,200 employees. Our success depends in large part on attracting, retaining and motivating talented, creative and experienced professionals at all levels. In connection with our hiring efforts, we employ internal recruiters, retain executive search firms and utilize personal and business contacts to recruit professionals with significant utility industry or consulting experience. Our consultants are drawn from the industries we serve and from accounting and other consulting organizations. We seek to promote loyalty and continuity of our consultants by offering packages of base and incentive compensation and benefits that we believe are attractive and competitive. We derive our revenues almost exclusively from services performed by our professional consultants. Our future performance will continue to depend in large part upon our ability to attract and retain highly skilled professionals possessing appropriate skills and senior academics with superior professional reputations. Qualified professional consultants are in great demand and are likely to remain a limited resource for the foreseeable future. We may not be able to retain a substantial majority of our existing or future consultants for the long term. In addition, many of our consultants are not subject to non- competition or similar restrictions or are subject to such restrictions for only a limited period of time. The loss of the services of, or the failure to recruit, a significant number of consultants would adversely affect our ability to secure and complete engagements and would have a material adverse effect on our business. 3 In addition to the employees discussed above, we supplement our consultants on certain engagements with independent contractors, some of whom are former employees. We believe that the practice of retaining independent contractors on a per-engagement basis provides us with greater flexibility in adjusting professional personnel levels in response to changes in demand for our services. Competition We compete in the worldwide market for consulting services, although our principal market is North America, which accounted for over 95% of our revenues in 1999 and 1998. The market for consulting services is intensely competitive, highly fragmented and subject to rapid change. The market includes a large number of participants from a variety of market segments, including general management, information technology, and marketing consulting firms, as well as the consulting practices of national accounting firms, and other local, regional, national and international firms. Many of these companies are national and international in scope and have greater personnel, financial, technical and marketing resources than we do. We believe that our experience, reputation, industry focus and broad range of services will enable us to compete effectively in the consulting marketplace. Item 2. Properties Our headquarters are currently located in a 15,000 square foot building in Chicago, Illinois which we own. In addition to our headquarters, we have approximately 100 operating leases for office facilities worldwide. Additional space may be required as our business expands geographically, but we believe we will be able to obtain suitable space as needed. We have principal offices in the following cities: Austin, TX Westminster, CO Menlo Park, CA Baltimore, MD Emeryville, CA New York City, NY Boston, MA Ft. Lauderdale, FL Princeton, NJ Burlington, MA Houston, TX Sacramento, CA Chicago, IL London, England San Francisco, CA Cleveland, OH Los Angeles,CA Washington, DC Dallas, TX
Item 3. Legal Proceedings Numerous purported class action lawsuits have been filed against the Company since November 1999 in the United States District Court for the Northern District of Illinois. These actions name as defendants the Company and certain former directors and former executive officers (one of whom, however, remains an employee of the Company) of the Company and are purported to be on behalf of persons who purchased shares of the Company's common stock during various periods through November 1999. The complaints allege various violations of federal securities law, including violations of Section 10(b) of the Securities Exchange Act of 1934, and that the defendants made materially misleading statements and/or material omissions which artificially inflated prices for the Company's common stock. The plaintiffs seek a judgement awarding damages and other relief. The Company believes it has meritorious defenses and intends to vigorously defend these actions. The outcome of these lawsuits cannot be predicted with certainty and a material adverse judgement against the Company could have a material adverse effect on the Company. Navigant International, Inc., a national travel agency headquartered in Denver, Colorado, sued the Company in July 1999 in the United States District Court for the District of Colorado claiming that the use of "Navigant" in our name infringes on their use of and rights in such name. The complaint seeks declaratory relief and an injunction against our use of "Navigant," attorneys' fees and other related relief. The Company believes it has meritorious defenses and intends to vigorously defend this action. During the fourth quarter of 1999 the Company settled a previously disclosed lawsuit initially brought by the Company against Deborah T. Kearns, Alan G. Carnrite, the Estate of Laurel Dell Manning, and David R. Watkins, who were the former shareholders of Sterling Consulting Group, Inc. Ms. Kearns and Mr. Carnrite 4 filed a counterclaim asserting various causes of action against the Company and two of its officers. The lawsuit was settled by payment by the Company of $1.3 million to Ms. Kearns and $0.1 million to Mr. Carnrite, no payment by Ms. Kearns or Mr. Carnrite and no admission of liability or wrongdoing by any party in connection with any claims or causes of action in the lawsuit. In addition, from time to time, we are 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, we do 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. None. Executive Officers of the Registrant At February 1, 2000, the Registrant had the following executive officers: Mitchell H. Saranow, 54, has served as Chairman of the Board and co-CEO of the Company since November 1999. He has served as one of our directors since 1996. Mr. Saranow has served as Chairman of The Saranow Group L.L.C. and its affiliated companies since October 1984. He founded Fluid Management, L.P. in April 1987 and served as Chairman and Chief Executive Officer until January 1997. Mr. Saranow also serves on the boards of Lawson Products, Mid-Atlantic CATV, ELF Machinery, L.L.C., and HyperLOCK Technologies. John J. Reed, 45, has served as Vice-Chairman and co-CEO of the Company since November 1999. He was appointed a director of the Company on November 21, 1999. Prior to being named Vice-Chairman and co-CEO, Mr. Reed was the Executive Managing Director of the Company's Management Consulting practice. From 1988 until 1999, Mr. Reed was President of Reed Consulting Group, which the Company acquired in August 1997. Carl S. Spetzler, 58, has served as President and co-CEO of the Company since November 1999. He was appointed a director of the Company on November 21, 1999. Prior to being named President and co-CEO, Dr. Spetzler was the Executive Managing Director of the Company's Strategic Consulting practice. From 1986 until 1999, Dr. Spetzler was the President of Strategic Decisions Group, which the Company acquired in February 1999. James F. Hillman, 42, has served as the Chief Financial Officer and Treasurer of the Company since December 1999. From May 1999 through November 1999, he was President of Azimuth Consulting LLC. Mr. Hillman had previously served as the Company's Chief Financial Officer and Treasurer from June 1996 through April 1999. From 1988 until he joined the Company in 1996, he was with the Ameritech Corporation, most recently as the Chief Financial Officer of Ameritech Monitoring Services, Inc. Mr. Hillman is a certified public accountant. Philip P. Steptoe, 48, has served as the Company's Vice President, Secretary and General Counsel since February 2000. Previously, Mr. Steptoe was a partner with the national law firm of Sidley & Austin. During 1994-1995 he served for four months as Acting General Counsel for Orange and Rockland Utilities, Inc., a New York electric and gas utility. Prior to joining Sidley & Austin in 1988, he was an associate and later a partner in the Chicago law firm of Isham, Lincoln & Beale. 5 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Market Information The shares of Common Stock of the Company are traded on the New York Stock Exchange (the "NYSE") under the symbol "NCI." The following table sets forth, for the periods indicated, the high and low sale prices per share. Sales prices for periods beginning July 27, 1999 are as reported on the NYSE Composite Tape. Prior to July 27, 1999 the Company's Common Stock was traded on the Nasdaq National Market under the symbol "METZ" and prices for such periods are as as reported on the Nasdaq National Market.
High Low ------ ------ 1999 Fourth quarter................................................ $48.50 $ 8.69 Third quarter................................................. $54.25 $26.13 Second quarter................................................ $36.13 $22.81 First quarter................................................. $52.00 $28.44 1998 Fourth quarter................................................ $49.00 $28.88 Third quarter................................................. $37.75 $27.25 Second quarter................................................ $36.63 $24.25 First quarter................................................. $33.92 $24.00
Holders As of March 6, 2000, there were approximately 244 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. Sale of Unregistered Securities Within the past three years, we have issued the following unregistered securities:
Type of Number Exemption Date Securities of Shares Purchaser Consideration(1) Claimed ---- ---------- --------- --------- ---------------- --------- January 1, 1997 Common 63,272 Former All Outstanding Section Stock Stockholders Shares of 4(2) of L.E.Burgess L.E.Burgess Consultants, Inc. Consultants, Inc. July 31, 1997 Common 3,205,767 Former All Outstanding Section Stock Stockholders Shares of Resource 4(2) of Resource Management Management International, International, Inc. Inc. August 15, 1997 Common 777,600 Former All Outstanding Section Stock Stockholders Shares of Reed 4(2) of Reed Consulting Consulting Group, Group, Inc. Inc.
6
Type of Number Exemption Date Securities of Shares Purchaser Consideration(1) Claimed ---- ---------- --------- --------- ---------------- --------- December 1, 1997 Common 578,727 Former All Outstanding Section Stock Stockholders Shares of Sterling 4(2) of Sterling Consulting Group, Consulting Inc. Group, Inc. December 1, 1997 Common 45,000 Former Section Stock Stockholders All Outstanding 4(2) of Reed-Stowe & Shares of Reed- Co., Inc. Stowe & Co., Inc. April 3, 1998 Common 137,931 Former All Outstanding Section Stock Stockholders Shares of AUC 4(2) of AUC Management Management Consultants, Inc. Consultants, Inc. April 3, 1998 Common 51,562 Former All Outstanding Section Stock Stockholders Shares of 4(2) of Hydrologic Hydrologic Consultants Inc. Consultants Inc. of California. of California. June 1, 1998 Common 9,200 Former Members of All Membership Section Stock The VisionTrust Interest of The 4(2) Marketing Group, VisionTrust LLC Marketing Group, LLC August 31, 1998 Common 5,596,488 Former Members of All Outstanding Section Stock Peterson Membership 4(2) Consulting Interest of LLC Peterson Consulting LLC August 31, 1998 Common 616,737 Former Section Stock Stockholders All Outstanding 4(2) of Saraswati Shares of Systems Saraswati Systems Corporation Corporation August 31, 1998 Common 103,900 Former All Outstanding Section Stock Stockholders Shares of Applied 4(2) of Applied Health Health Outcomes, Outcomes, Inc. Inc. February 7, 1999 Common 2,437,223 Former All Outstanding Section Stock Stockholders Shares of 4(2) of Strategic Strategic Decisions Group Decisions Group March 31, 1999 Common 952,227 Former Section Stock Stockholders All Outstanding 4(2) of Triad Shares of Triad International, International, Inc. Inc. March 31, 1999 Common 670,592 Former Section Stock Stockholders All Outstanding 4(2) of GeoData Shares of GeoData Solutions, Inc. Solutions, Inc. March 31, 1999 Common 234,109 Former All Outstanding Section Stock Stockholders Shares of Dowling 4(2) of Dowling Associates, Inc. Associates, Inc.
- -------- (1) Does not take into account assumed debt or cash paid to dissenting shareholders or for fractional shares. 7 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.
Years Ended December 31, (1) ----------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Statement of Operations Data: Revenues..................... $397,694 $287,626 $228,731 $181,375 $154,426 Cost of services............. 266,080 174,175 145,144 117,559 99,879 -------- -------- -------- -------- -------- Gross profit................. 131,614 113,451 83,587 63,816 54,547 General and administrative expenses(2)................. 107,274 62,093 55,579 48,031 53,930 Amortization................. 24,300 -- -- -- -- Merger related costs and restructuring charges (benefit)........... (206) 12,778 1,312 -- -- Stock option compensation expense..................... 3,850 -- -- -- -- -------- -------- -------- -------- -------- Operating income (loss)...... (3,604) 38,580 26,696 15,785 617 Other expense (income), net(2)...................... 2,191 (2,638) (1,205) 332 (5,270) -------- -------- -------- -------- -------- Income (loss) before income tax expense................. (5,795) 41,218 27,901 15,453 5,887 Income tax expense(3)........ 8,827 25,637 9,237 97 480 -------- -------- -------- -------- -------- Net income(loss)............. $(14,622) $ 15,581 $ 18,664 $ 15,356 $ 5,407 ======== ======== ======== ======== ======== Net income (loss) per basic share....................... $ (.35) $ 0.43 $ 0.56 $ 0.47 $ 0.17 ======== ======== ======== ======== ======== Net income (loss) per diluted share....................... $ (.35) $ 0.41 $ 0.55 $ 0.47 $ 0.17 ======== ======== ======== ======== ======== As of December 31, (1) ----------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Balance Sheet Data: Cash and cash equivalents.... $ 42,345 $119,704 $ 45,972 $ 33,859 $ 1,999 Working capital.............. 67,598 146,509 58,708 45,551 11,112 Total assets................. 414,676 230,517 125,827 94,542 52,280 Long-term debt, less current portion..................... -- -- 319 1,561 1,202 Total stockholders' equity... $300,669 $164,904 $ 69,215 $ 50,686 $ 12,558
- -------- (1) The amounts above have been restated and reclassified as described in Note 3 of Notes to Consolidated Financial Statements. Certain billable expenses which had previously been presented net of related revenues have been reclassified. As a result, both revenue and cost of sales for the years 1998, 1997, 1996 and 1995 have increased by $13.9 million, $12.9 million, $12.7 million and $13.9 million, respectively. (2) For the year ended December 31, 1995, general and administrative expenses include $4.3 million reported by Peterson Consulting LLC for a restructuring charge related to the settlement of obligations under non-cancelable operating leases and other moving and transition costs. Other income for the year ended December 31, 1995 includes an extraordinary gain of $5.7 million recorded by Peterson in connection with the extinguishment of certain other debt obligations. (3) During the periods presented, certain of our operating subsidiaries were entities 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 Peterson from the modified cash basis to the accrual basis for tax purposes. 8 PART II 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 We are a nationwide provider of consulting services to electric and gas utilities, insurance companies and pharmaceutical companies, as well as other Fortune 100 companies. We derive substantially all of our revenues from fees for professional services. Over the last three years, the substantial majority of our revenues have been generated under standard hourly or daily rates billed on a time-and-expenses basis. Our clients are typically invoiced on a monthly basis with revenue recognized as the services are provided. Our most significant expenses are project personnel costs, which consist of consultant salaries and benefits, and travel-related direct project expenses. We typically employ our project personnel on a full-time basis, although we supplement our project personnel through the use of independent contractors. We retain contractors for specific client engagements on a task-specific, per diem basis during the period their expertise or skills are required. We believe that retaining contractors on a per-engagement basis provides us with greater flexibility in adjusting project personnel levels in response to changes in demand for our services. Acquisitions As part of our growth strategy, we expect to continue to pursue complementary acquisitions to expand our geographic reach, expand the breadth and depth of our service offerings and enhance our consultant base. In furtherance of this growth strategy, we acquired twenty-four consulting firms since our initial public offering in October 1996. During 1997, we acquired five companies: Resource Management International, Inc. (RMI), Reed Consulting Group, Inc. (Reed), Sterling Consulting Group, Inc. (Sterling), Reed-Stowe & Co., Inc. (RSC), and L.E. Burgess Consultants, Inc. (Burgess). These transactions were accounted for as poolings of interests. The Company's consolidated financial statements have been restated as if RMI, Reed, Sterling and RSC had been combined for all periods presented. The stockholders' equity and the operations of Burgess were not significant in relation to those of the Company. As such, the Company recorded the Burgess transaction by restating stockholders' equity as of the date of the acquisition without restating prior period financial statements. RMI. As of July 31, 1997, we acquired substantially all of the common stock of RMI in exchange for 3.2 million shares of our common stock (valued at the time of closing at approximately $75.3 million) and acquired the remaining minority interest in exchange for cash. RMI, based in Sacramento, California, is a provider of consulting services to gas, water, and electric utilities, with operations in the western and eastern United States and international marketplace. RMI's broad range of engineering, technical and economic regulatory services complemented our management consulting and information technology services. Reed. As of August 15, 1997, we acquired substantially all of the common stock of Reed in exchange for 0.8 million shares of our common stock (valued at the time of closing at approximately $17.6 million) and acquired the remaining minority interest in exchange for cash. Reed, based in the Boston, Massachusetts area, provides strategic planning, operations management and economic and regulatory services to electric and natural gas utilities. Reed's operations expanded our services and client base in the northeast United States and internationally. Other 1997 Acquisitions. We acquired all of the common stock of Burgess as of January 1, 1997, and all of the common stock of Sterling and of RSC as of December 31, 1997. In the aggregate for these three transactions, we issued 0.7 million shares of our common stock (valued at the time of closing at approximately $18.5 million). The consulting operations of these three companies were complementary to our existing businesses and have been integrated within the operations of other existing or acquired companies. 9 During 1998, we acquired eight companies: LECG, Inc. (LECG), Peterson Consulting, LLC (Peterson), Saraswati Systems Corporation (SSC), Applied Health Outcomes, Inc. (AHO), AUC Management Consultants, Inc. (AUC), Hydrologic Consultants, Inc. of California (HCI), American Corporate Resources, Inc. (ACR), and The Vision Trust Marketing Group, LLC (VTM). These transactions were accounted for as poolings of interests. The Company's consolidated financial statements have been restated as if LECG, Peterson, SSC, AHO, AUC, and HCI had been combined for all periods presented. The stockholders' equity and the operations of ACR and VTM were not significant in relation to those of the Company. As such, the Company recorded the ACR and VTM transactions by restating stockholders' equity as of the dates of the acquisition without restating prior period financial statements. LECG. As of August 19, 1998, we acquired substantially all of the common stock of LECG in exchange for 7.3 million shares of our common stock (valued at the time of closing at approximately $228.9 million) and acquired the remaining minority interest in exchange for cash. LECG, based in the San Francisco, California area, is a provider of economic consulting and litigation support services. LECG's operations further increased our economic and regulatory expertise and expanded our presence in the telecommunications industry. Peterson. As of August 31, 1998, we acquired substantially all of the common stock of Peterson in exchange for 5.6 million shares of our common stock (valued at the time of closing at approximately $156.7 million) and acquired the remaining minority interest in exchange for cash. Peterson, based in the Chicago area, is a provider of information management services. Peterson's operations expanded our service offerings in claims management, litigation support, and information management. Other 1998 Acquisitions. We acquired all of the common stock of AUC, HCI, ACR as of April 3, 1998 and all of the common stock of VTM as of June 1, 1998. We acquired all of the common stock of SSC and AHO as of September 1, 1998. In the aggregate for these six transactions, we issued 1.2 million shares of our common stock (valued at the time of closing at approximately $35.3 million). The consulting operations of all six companies were complementary to our existing businesses and have been integrated within the operations of other existing or acquired companies. 1999 Acquisitions. During 1999, the Company completed eleven acquisitions (collectively, the "1999 Acquisitions"). The 1999 Acquisitions were accounted for by the purchase method of accounting and, accordingly, the results of operations have been included in the consolidated financial statements from the respective dates of acquisition. On February 7, 1999, the Company issued 2.4 million shares of common stock (valued at the time of closing at approximately $123.7 million) for substantially all of the outstanding common stock of Strategic Decisions Group and acquired the remaining minority interest in exchange for cash. On March 31, 1999, the Company completed the acquisitions of all of the outstanding stock of Triad International, Inc., GeoData Solutions, Inc., and Dowling Associates, Inc. in exchange for 1.8 million shares of the Company's common stock (valued at the time of closing at approximately $57.3 million). On September 30, 1999, the Company completed its acquisition of the business operations and certain assets of Penta Advisory Services LLC (Penta) and the stock of Scope International, Inc. (Scope) for a total cash purchase price of $15.1 million. The purchase agreements for Penta and Scope also provide for additional payments, payable in cash or Company common stock, over the next two to five years contingent on future revenue growth and gross margin targets. The additional payments, if any, will be accounted for as additional goodwill. On October 1, 1999, the Company completed the acquisition of the stock of Brooks International AB, Brooks International Consulting OY, and Brooks International SPRL for an aggregate cash purchase price of $3.3 million. On November 1, 1999, the Company completed the acquisition of the stock of The Barrington Consulting Group, Inc. (Barrington) in exchange for $14.4 million in cash paid at closing and total deferred cash payments of $7.8 million, payable in two equal annual installments. The purchase agreement for Barrington also provides for additional cash payments of up to $7.8 million in the aggregate, which are contingent on continued employment with the Company of certain Barrington shareholders and are payable in cash in two annual installments. On December 1, 1999, the Company completed the acquisition of all of the assets of Glaze Creek Partners, LLC in exchange for $0.8 million in cash. There were no pre-acquisition intercompany transactions between the Company and the 1999 Acquisitions. 10 An inability to effectively integrate the acquisitions or any companies acquired in the future may adversely affect our ability to bid successfully on engagements and to grow our business. Performance problems or dissatisfied clients at one company could have an adverse effect on our reputation as a whole. If our reputation were damaged, for those or other reasons, this could make it more difficult to market our services or to acquire additional companies in the future. In addition, acquired companies may not operate profitably. Acquisitions also involve a number of additional risks, including, among others, the following: --Diversion of management's attention; --Potential loss of key clients or personnel; --Risks associated with unanticipated assumed liabilities and problems; and --Risks of managing businesses or entering markets in which we have limited or no direct expertise. We expect to continue to acquire companies as an element of our growth strategy. Acquisitions involve certain risks that could cause our actual growth to differ from our expectations. For example --We may not be able to continue to identify suitable acquisition candidates or to acquire additional consulting firms on favorable terms. --We compete with other companies to acquire consulting firms. We cannot predict whether this competition will increase. If competition does increase, there may be fewer suitable consulting firms available to be acquired and the price for suitable acquisitions may increase. --We may not be able to integrate the operations (accounting and billing functions, for example) of businesses we acquire to realize the economic, operational and other benefits we anticipate. --We may not be able to successfully integrate acquired businesses in a timely manner or we may incur substantial costs, delays or other operational or financial problems during the integration process. --It may be difficult to integrate a business with personnel who have different business backgrounds and corporate cultures. Results of Operations The following table sets forth, for the periods indicated, selected statement of operations data as a percentage of revenues:
Years Ended December 31, -------------------- 1999 1998 1997 ----- ----- ----- Revenues.................................................. 100.0% 100.0% 100.0% Cost of services........................................ 66.9 60.6 63.5 ----- ----- ----- Gross profit.............................................. 33.1 39.4 36.5 General and administrative expenses..................... 26.9 21.6 24.3 Amortization expense.................................... 6.1 -- -- Merger-related costs.................................... (0.3) 4.4 0.5 Restructuring and other charges......................... 0.3 -- -- Stock option compensation expense....................... 1.0 -- -- ----- ----- ----- Operating income.......................................... (0.9) 13.4 11.7 Other expense (income), net............................. 0.6 (0.9) (0.5) ----- ----- ----- Income before income tax expense.......................... (1.5) 14.3 12.2 Income tax expense...................................... 2.2 8.9 4.0 ----- ----- ----- Net income (loss)......................................... (3.7)% 5.4% 8.2% ===== ===== =====
11 1999 Compared to 1998 Revenues. Revenues increased $110.1 million, or 38%, to $397.7 million in the year ended December 31, 1999 from $287.6 million in 1998. The growth in revenue was primarily due to acquisitions, expansion of services provided to existing clients, engagements with new clients, and increased selling and business development efforts. During 1999, the Company made acquisitions consistent with its strategy of acquiring consulting companies that provide complementary services or broaden the Company's geographic presence. The 1999 Acquisitions had pre-acquisition revenues for 1999 and 1998 of $39.4 million and $115.0 million, respectively, which were not included in the Company's consolidated results of operations. Pro forma revenues, adjusted for the effect of the 1999 acquisitions, increased $34.4 million, or 9%, to $437.1 million in the year ended December 31, 1999 from $402.7 million in 1998. The Company's consolidated 1998 revenues included certain operations which were not reflected in 1999. The 1998 reported and pro forma revenues include revenues of $5.3 million related to certain principals who departed from Peterson in July 1998 and $3.4 million of revenues related to Insurance Data Resources, Inc., a subsidiary of Peterson, which was disposed of on September 1, 1998. Excluding the effects of the departed principals and the disposed operations, the revenue increase in 1999 would have been $43.1 million, or 11%, to $437.1 million from $394.0 million in the prior year. Consulting engagements with new clients and an increase in the average size of client consulting engagements contributed $34.6 million and $8.5 million, respectively, of the $43.1 million of organic revenue growth in 1999. Gross Profit. Gross profit consists of revenues less cost of services, which includes consultant compensation and benefits and direct project-related expenses. Gross profit increased $18.1 million, or 16%, to $131.6 million in 1999 from $113.5 million in 1998. Higher 1999 revenues would have resulted in a $43.4 million increase in gross profit had 1999 gross profit margins as a percentage of revenue been consistent with those in 1998. However, the gross margin in 1999 declined to 33.1% of revenue from 39.4% in 1998. The decline in gross margin in 1999 was primarily due to higher consultant compensation of $23.1 million. General and Administrative Expenses. General and administrative expenses include facilities costs, salaries and benefits of management and support personnel, allowances for uncollectible accounts receivable, depreciation expense, outside professional fees, and all other corporate support costs. General and administrative expenses for 1999 increased $45.2 million to $107.3 million from $62.1 million in 1998. The $45.2 million increase in general and administrative expenses in 1999 is comprised of: $10.6 million in facilities costs, $2.3 million in personnel related expenses, $12.8 million in allowances for uncollectible accounts receivable, $8.8 million in depreciation expense, $7.1 million in professional fees, and $3.6 million in other corporate support costs. In total, general and administrative expenses as a percentage of revenue increased to 27.0% in 1999 from 21.6% in 1998. This higher level of expenses as a percentage of revenue in 1999 represents approximately $21.4 million of growth in expenses in excess of the rate of growth in revenues. The incremental $21.4 million of general and administrative expenses is the result of $0.9 million in higher facilities costs, $11.8 million in higher allowances for uncollectible accounts receivable established in the fourth quarter of 1999, $6.3 million in higher depreciation expense principally from impairments of certain fixed assets, $5.7 million in higher professional fees primarily related to litigation, partially offset by $3.3 million in lower personnel related expenses. Amortization Expense. The excess of cost over the net assets acquired for the 1999 Acquisitions of approximately $226.4 million has been recorded as intangible assets, including goodwill, and is being amortized on a straight- line basis over 7 years, subject to completion of independent appraisals. The $24.3 million non-cash expense recorded in 1999 represents the pro rata amortization from the respective acquisition dates through December 31, 1999. Amortization would have been approximately $32.4 million had the 1999 Acquisitions occurred as of January 1, 1999. Merger Related Cost and Restructuring Charges (Benefit). In the third quarter of 1998, the Company incurred merger-related costs of $12.8 million related to the acquisitions of LECG and Peterson, which were accounted for as poolings of 12 interests. These costs included legal, accounting and other transaction related fees and expenses, as well as accruals to consolidate certain facilities. The Company has reviewed the merger-related accruals and determined that certain amounts previously accrued are no longer necessary given subsequent acquisition activity and changes in the Company's organizational structure. The results of operations for the year ended December 31, 1999 reflect a benefit of $1.4 million for the reversal of the previously accrued amounts. The Company recognized $1.2 million of expense in 1999 for employee separations associated with consolidation of certain accounting and human resources functions. In July 1999, the Company announced a restructuring initiative and offered involuntary severance packages to 73 employees in the administrative, accounting and human resources functions. Stock Option Compensation Expense. The Company recorded $3.5 million for stock option compensation expense in 1999 attributable to 0.3 million option grants to a total of sixteen individuals which were issued at prices below fair market value. The amount charged to expense was calculated using the instrinsic value method for employees and the Black-Scholes option pricing model for non- employees and approximates 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. The Company recorded an additional $0.4 million of stock option compensation expense to amortize the value of certain options retained by a former employee upon separation from the Company. Other Income (Expense), Net. Other income (expense), net includes interest expense, interest income and other non-operating income and expenses. For 1999, the Company incurred a net non-operating expense of $2.2 million, which represented $4.8 million of net incremental expense from the $2.6 million other income realized in 1998. The incremental expense was principally the result of a $5.3 million charge to earnings in 1999 to reflect the likely impairment in the value of certain loans receivable from shareholders. This incremental expense was partially offset by higher interest income in 1999. Income Tax Expense. Income tax expense decreased $16.8 million to $8.8 million for 1999 from $25.6 million in 1998. The Company's results of operations in 1999 included $24.3 million of non-cash, non-deductible amortization expenses resulting from the 1999 acquisitions and $3.9 million of non-cash, non-deductible stock options compensation expense. Excluding the effect of these non-deductible items, the effective tax rate for 1999 would have been 39.5%. The Company's effective income tax rate for 1998 would have been 39.8% excluding the effect of the one-time, non-cash charge to income tax expense of $7.2 million related to the conversion of Peterson from the modified cash basis to the accrual basis of accounting for tax purposes and the effect of certain merger-related costs resulting from the mergers completed during the third quarter of 1998 that are not tax deductible. Net Income (Loss). The Company's 1999 net loss of $14.6 million represents a $30.2 million decline from the 1998 net income of $15.6 million. Higher 1999 revenues resulted in a $18.1 million increase in gross profits over the prior year, which was more than offset by increases of $45.2 million in general and administrative expense, $24.3 million in amortization expenses, $3.9 million in stock option compensation expense and $4.8 million of other non-operating expenses. These expense increases were partially offset by $16.8 million in lower income tax expenses and $13.0 million in lower merger-related costs. 1998 Compared to 1997 Revenues. Revenues increased $58.9 million, or 26%, to $287.6 million in 1998 from $228.7 million in 1997 due to continued strong demand for management consulting services, and increased selling and business development efforts. Selling and business development efforts in support of the Company's strategy to expand the client base and leverage existing client relationships resulted in $57.2 million of the incremental $58.9 million 1998 revenues. Engagements with new clients and an increase in the average size of client engagements contributed $40.4 million and $16.8 million of that total, respectively. 13 Gross Profit. Gross profit increased $29.9 million, or 36%, to $113.5 million in 1998 from $83.6 million in 1997. Higher 1998 revenues contributed $21.5 million of the increase in gross profit. The remaining $8.4 million of the increase in gross profit reflects an increase in gross profit as a percentage of revenues to 39.4% in 1998 from 36.5% in 1997. The increase in the 1998 gross profit margin was the result of increased utilization of the Company's professional consultants coupled with higher average billing rates and a lower proportion of non-margin billable expenses to fee revenues. General and Administrative Expenses. General and administrative expenses for the year ended December 31, 1998 increased $6.5 million, or 12%, to $62.1 million, which represented 21.6% of revenues, compared to $55.6 million, or 24.3% of revenues, in the comparable 1997 period. The increase in general and administrative costs was primarily due to a $3.3 million increase in facilities expenses, a $1.8 million increase in administrative salaries, and a $1.3 million increase in incentive compensation. However, these expenses increased at a slower rate than the Company's revenues and overall volume of business, resulting in a 2.7% decrease in general and administrative expenses as a percent of revenue. This improvement is attributable to increased efficiencies in certain support functions (i.e., human resources, benefits administration and accounting), improved economies of scale and the closing of certain duplicate facilities at the beginning of 1998. Merger-Related Cost and Restructuring Charges. Merger-related costs increased $11.5 million to $12.8 million in 1998 from $1.3 million in 1997. During 1998, the Company incurred merger-related costs of $12.8 million related to the acquisitions of LECG and Peterson, which were accounted for as poolings of interests. These costs include legal, accounting and other merger-related fees and expenses, as well as accruals to consolidate certain facilities. In the prior year period, the Company incurred legal, accounting and other merger- related fees and expenses of $1.3 million related to the acquisitions of RMI and Reed, which were accounted for as poolings of interests. The increased direct merger-related costs in 1998 were the result of the greater size and complexity of the 1998 transactions. Other Income, Net. For the fiscal year ended December 31, 1998, other income, net increased $1.4 million to $2.6 million from $1.2 million for 1997. This increase was largely the result of higher interest income due to larger average cash balances outstanding during the period. The larger average cash balance in 1998 was largely the result of $86.4 million in net proceeds from two offerings of the Company's common stock supplemented by $21.2 million of operating cash flows and $10.6 million of cash inflow primarily from employee stock option exercises. These sources of cash were partially offset by $13.6 million of capital spending, $18.9 million of cash used to acquire certain minority interests in business combinations, $8.2 million of payments to retire pre-existing short-term debt of acquired companies, and $6.1 million in payments of pre-acquisition undistributed earnings of purchased companies. Income Tax Expense. Income tax expense increased $16.4 million to $25.6 million in 1998 from $9.2 million in 1997. The Company's effective income tax rate was 62.2% for the year ended December 31, 1998. The effective rate for this period would have been 39.8%, excluding the effect of the one-time, non- cash charge to income tax expense of $7.2 million related to the conversion of Peterson from the modified cash basis to the accrual basis of accounting for tax purposes and the effect of certain merger-related expenses resulting from the acquisitions of LECG and Peterson that are not tax deductible. The Company's effective income tax rate was 33.1% for the year ended December 31, 1997. The effective rate would have been 38.2%, including federal and certain state income taxes that would have been required had all the Company's subsidiaries been taxable entities during this period. Net Income. Net Income decreased approximately $3.1 million to $15.6 million in 1998 from $18.7 million in 1997. Higher 1998 revenues resulted in a $29.9 million increase in gross profits over the prior year. However, the higher level of 1998 gross profits was offset by a $6.5 million increase in general and administrative expenses, a $11.5 million increase in merger-related costs, and a $16.4 million increase in income tax expense. An increase in other income in 1998 of $1.4 million accounted for the remainder of the change in net income between the periods. 14 Unaudited Quarterly Results The following table sets forth certain unaudited quarterly operating information. These data have been prepared on the same basis as the audited financial statements contained elsewhere in this Form 10-K and include 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 previous fiscal quarter are not necessarily indicative of results for the full year or for any future quarter.
Quarters Ended ------------------------------------------------------------------------------ Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. Dec. 31, 1998 1998 1998 1998 1999 1999 30, 1999 1999 -------- -------- --------- -------- -------- -------- -------- -------- (In thousands, except per share amounts) Revenues................ $66,134 $70,231 $73,967 $77,294 $84,388 $104,732 $107,452 $101,123 Cost of services........ 41,254 42,254 44,302 46,364 50,418 59,118 61,735 94,809 ------- ------- ------- ------- ------- -------- -------- -------- Gross profit............ 24,880 27,977 29,665 30,930 33,970 45,614 45,717 6,314 General and administrative expenses............... 16,355 18,232 13,552 13,955 15,343 20,964 21,077 49,890 Amortization expense.... -- -- -- -- 2,800 6,830 6,830 7,840 Merger-related costs and restructuring charges.. -- -- 12,778 -- -- -- (206) -- Stock option compensation expense... -- -- -- -- 1,698 532 1,063 557 ------- ------- ------- ------- ------- -------- -------- -------- Operating income (loss)................. 8,525 9,745 3,335 16,975 14,129 17,288 16,953 (51,973) Other (income) Expense, net.................... (550) (791) (523) (773) (1,115) (1,037) (1,218) 5,561 ------- ------- ------- ------- ------- -------- -------- -------- Income (loss) before income tax expense..... 9,075 10,536 3,858 17,748 15,244 18,325 18,171 (57,534) Income tax expense (benefit).............. 3,773 4,215 10,680 6,968 8,020 10,186 10,310 (19,689) ------- ------- ------- ------- ------- -------- -------- -------- Net income (loss)....... $ 5,302 $ 6,321 $(6,822) $10,780 $ 7,224 $ 8,139 $ 7,861 $(37,845) ======= ======= ======= ======= ======= ======== ======== ======== Net income (loss), per diluted share.......... $ 0.15 $ 0.17 $ (0.19) $ 0.28 $ 0.17 $ 0.19 $ 0.17 $ (0.91) ======= ======= ======= ======= ======= ======== ======== ======== Diluted shares.......... 36,477 37,752 36,610 39,093 41,786 43,508 45,357 41,798 ======= ======= ======= ======= ======= ======== ======== ========
Revenues and 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 and employee hiring and utilization rates. The timing of revenues varies from quarter to quarter due to factors such as the Company's sales 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 has on occasion experienced a seasonal pattern in its operating results, with a smaller proportion of the Company's revenues and lower operating income occurring in the fourth quarter of the year or a smaller sequential growth rate than in other quarters. During the quarter ended December 31, 1999, the Company incurred certain pre-tax expenses which varied significantly from expense levels recorded in prior interim periods during the year. The aggregate of these expenses amounted to $62.6 million and consisted of the following: $28.5 million of additional costs of sales, $28.2 million of incremental general and administrative expenses, and $5.9 million of other incremental non-operating expenses. The higher fourth quarter cost of sales was principally due to $26.3 million of incremental compensation expense accruals to provide for competitive levels of incentive compensation and promote employee retention. Fourth quarter general and administrative expenses included the following significant incremental expenses: $12.8 million of allowances for uncollectible accounts receivable; $5.5 million of write-downs of certain fixed assets, $5.5 million of professional fees and other costs related to settlement of certain then outstanding litigation; $1.2 million of 15 compensation expense to provide for competitive levels of incentive compensation and promote employee retention; and $0.5 million of stock option compensation expense. The increase in non-operating expenses for the fourth quarter was primarily the result of a loss contingency accrued at December 31, 1999 in the amount of $5.3 million, related to the impairment of notes receivable from certain former company officers. The following table sets forth select unaudited quarterly information as previously reported and as amended. The amended amounts have been restated to retroactively reflect the results of operations for certain business combinations completed in 1998 which were accounted for as poolings of interests. At the respective dates of acquisition, the Company had determined that the stockholders' equity and the results of operations of these businesses were not material, individually or in the aggregate, in relation to those of the Company. As such, the Company had recorded these combinations by restating stockholders' equity as of the effective date of each acquisition without restating prior period financial statements. However, based in part on comments received from the Securities and Exchange Commission, the Company has restated the financial statements for 1998 to reflect the results of operations of AUC, HCI, SSC, and AHO. The amended amounts also incorporate certain reclassifications to conform the presentation of revenue and cost of sales for 1998 and previously issued interim 1999 periods to the 1999 presentation. Certain billable expenses which had previously been presented net of related revenues have been reclassified. The amended amounts for the first three quarters of 1999 also reflect adjustments to correct the application of certain accounting principles related to stock option compensation expense. See also Note 13, "Long-Term Incentive Plan".
Quarters Ended -------------------------------------------------------------- Mar. June Sept. Dec. Mar. 31, 30, 30, 31, 31, June 30, Sept. 1998 1998 1998 1998 1999 1999 30, 1999 ------- ------- ------- ------- ------- -------- -------- (In thousands, except per share amounts) Total revenue as previously reported.... $60,809 $64,863 $68,311 $72,894 $82,151 $103,623 $106,185 Retroactive effect of pooling accounting..... 2,854 2,269 1,721 -- -- -- -- Reclassifications....... 2,471 3,099 3,935 4,400 2,237 1,109 1,267 ------- ------- ------- ------- ------- -------- -------- Revenues, as amended.... $66,134 $70,231 $73,967 $77,294 $84,388 $104,732 $107,452 ======= ======= ======= ======= ======= ======== ======== Gross profit, as previously reported.... $24,786 $27,848 $28,991 $30,930 Retroactive effect of pooling accounting..... 94 129 673 -- ------- ------- ------- ------- Gross profit, as amended................ $24,880 $27,977 $29,664 $30,930 ======= ======= ======= ======= Operating income, as previously reported.... $ 8,899 $10,101 $ 2,909 $16,975 $15,827 $ 17,820 $ 18,016 Retroactive effect of pooling accounting..... (374) (356) 426 -- -- -- -- Stock option Compensation expense... -- -- -- -- (1,698) (532) (1,063) ------- ------- ------- ------- ------- -------- -------- Operating income(loss), as amended............. $ 8,525 $ 9,745 $ 3,335 $16,975 $14,129 $ 17,288 $ 16,953 ======= ======= ======= ======= ======= ======== ======== Net income (loss)as previously reported.... $ 5,658 $ 6,658 (6,973) $10,780 $ 8,922 $ 8,671 $ 8,924 Retroactive effect of pooling accounting..... (356) (337) 151 -- -- -- -- Stock option Compensation expense... -- -- -- -- (1,698) (532) (1,063) ------- ------- ------- ------- ------- -------- -------- Net income (loss), as amended................ $ 5,302 $ 6,321 $(6,822) $10,780 $ 7,224 $ 8,139 $ 7,861 ======= ======= ======= ======= ======= ======== ======== Net income (loss) per share as previously reported............... $ 0.16 $ 0.18 $ (0.19) $ 0.28 $ 0.21 $ 0.20 $ 0.20 Retroactive effect of pooling accounting..... (0.01) (0.01) -- -- -- -- -- Stock option Compensation expense... -- -- -- -- (0.04) (0.01) (0.03) ------- ------- ------- ------- ------- -------- -------- Net income (loss) per diluted share, as amended................ $ 0.15 $ 0.17 $ (0.19) $ 0.28 $ 0.17 $ 0.19 $ 0.17 ======= ======= ======= ======= ======= ======== ======== Diluted shares, as previously reported.... 35,566 37,031 36,129 Retroactive effect of pooling accounting..... 911 721 481 ------- ------- ------- Diluted shares, as amended................ 36,477 37,752 36,610 ======= ======= =======
16 Liquidity and Capital Resources Net cash provided by operating activities was $17.4 million for the year ended December 31, 1999. During the year, the primary sources of cash provided by operating activities was net income adjusted for non-cash charges of depreciation, amortization, stockholder notes impairment provision and stock compensation expense. Net income adjusted for these non-cash charges was $32.5 million. Operating cash flow was also positively affected by increases in accrued compensation and project costs of $10.6 million and other current liabilities of $3.4 million. Operating cash flow was negatively affected by the increase in accounts receivable of $19.5 million, the decrease in income taxes payable of $13.0 million and the non-cash charge relating to deferred income taxes of $11.0 million. The Company used $18.6 million for capital spending to support growth in personnel and services. These investments included leasehold improvements, furniture and equipment for new leased facilities, additional computer and related equipment for information management consulting services and the purchase and implementation of enterprise financial and project software system. The Company used $42.1 million in cash during 1999 in conjunction with the 1999 Acquisitions. Net cash used in financing activities was $32.5 million in 1999. During the year, the Company received net cash and related tax benefits of $17.4 million from transactions related to stock option exercises and employee stock purchases. In addition, the Company received proceeds of $10.0 million from borrowings on the line of credit facility. The Company used $40.0 million to purchase treasury shares in 1999. Borrowing by stockholders used approximately $17.0 million of funds during the year. As of December 31, 1999, the Company had no significant commitments for capital expenditures, except for those related to rental expense under operating leases and related leasehold improvements. The total amount of operating lease payments in 2000 is expected to be approximately $15.2 million. The total amount of capital spending in the year 2000 related to leasehold improvements is expected to be approximately $6.9 million. The Company had approximately $42.3 million in cash and cash equivalents at December 31, 1999, resulting principally from cash flows from operations and the various public stock offerings during the previous three years. The company believes that the current cash and cash equivalents, the future cash flows from operations and the $50 million line of credit facility will provide adequate cash to fund anticipated short-term and long-term cash needs from normal operations. In the event the Company were to make significant cash expenditures in the future for major acquisitions or other non-operating activities, the Company would seek additional debt or equity financing, as appropriate. The Company had no plans or intentions for such expenditures as of December 31, 1999. Recently Issued Financial Accounting Standards The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities in June 1998. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities, It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 1999. The Company does not currently have any derivative instruments or complete any hedging activities. The adoption of this standard is not expected to be significant. Item 7A. Quantitative and Qualitative Disclosures About Market Risks The Company's primary exposure to market risks relates to changes in interest rates associated with its investment portfolio and its borrowings under the line of credit. The Company's general investment policy is to limit the risk of principal loss by limiting market and credit risks. As of December 31, 1999, the Company's investments were primarily limited to fully collateralized, Double-A or Triple-A rated securities with maturity dates of 90 days or less. If interest rates average 25 basis points less in fiscal year 2000, than they did in 1999, the Company's interest income would be decreased by $0.1 million. This amount is determined by considering 17 the impact of this hypothetical interest rate on the Company's investment portfolio at December 31, 1999. The Company does not expect any loss with respect to its investment portfolio. The Company's market risk associated with its line of credit relates to changes in interest rates. Borrowings under the line of credit bear interest, at the Company's option, based on either the London Interbank Offered Rate (LIBOR) or the prime rate. If interest rates average 25 basis points higher in 2000, than they did in 1999, the Company's interest expense would increase by less than $.1 million. This amount is determined based on the amount of short-term debt at December 31, 1999. The Company does not currently have any 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 at this time to the Company's consolidated financial statements. Item 8. Consolidated Financial Statements and Supplemental Data The Consolidated Financial Statements of the Company are annexed to the report as pages F-1 through F-22. An index to such materials appears on page F- 1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 18 Part III Item 10. Directors and Executive Officers of the Registrant. Information required in response to this Item is incorporated by reference to the Company's definitive proxy statement for the Company's annual meeting of stockholders scheduled to be held on May 30, 2000, 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 fiscal year ended December 31, 1999. Item 11. Executive Compensation. Information required in response to this Item is incorporated by reference to the Company's definitive proxy statement for the Company's annual meeting of stockholders scheduled to be held on May 30, 2000, 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 fiscal year ended December 31, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information required in response to this Item is incorporated by reference to the Company's definitive proxy statement for the Company's annual meeting of stockholders scheduled to be held on May 30, 2000, 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 fiscal year ended December 31, 1999. Item 13. Certain Relationships and Related Transactions. Information required in response to this Item is incorporated by reference to the Company's definitive proxy statement for the Company's annual meeting of stockholders scheduled to be held on May 30, 2000, 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 fiscal year ended December 31, 1999. 19 Part IV Item 14 Exhibits, Financial Statements 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 Registrant filed the following Current Reports on Form 8-K during the quarter ended December 31, 1999: (1) A Form 8-K dated November 22, 1999 reporting under Item 5 of Form 8- K certain changes to the Board of Directors and management of the Registrant. (2) A Form 8-K dated December 15, 1999 reporting under Item 5 of Form 8- K the adoption of a Stockholder Rights Plan and the addition of two directors to the Board of Directors of the Registrant. (c) The exhibits filed as part of this report are listed below: a. Exhibits:
Exhibit No. Description ----------- ----------- 2.1* Plan and Agreement of Merger, dated as of February 7, 1999, by and among the Metzler Group, Inc., MGI Acquistion III, Inc., Strategic Decisions Group (SDG), and certain SDG Executives 3.1 Amended and Restated Certificate of Incorporation of the Registrant (1) 3.2 Amendment No. 1 to Amended and Restated Certificate of Incorporation of the Registrant (2) 3.3 Amendment No. 2 to Amended and Restated Certificate of Incorporation of the Registrant (3) 3.4 Amended and Restated By-Laws of the Registrant (4) 4.2 Form of Registration Agreement (6) 4.3 Rights Agreement dated as of December 15, 1999 between the Registrant 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)(7) 10.1+ Form of Indemnification Agreement (5) 10.2*+ The Metzler Group, Inc. Long-Term Incentive Plan 10.3+ The Metzler Group, Inc. Employee Stock Purchase Plan (8) 10.4+ Amendment No. 1 to The Metzler Group, Inc. Employee Stock Purchase Plan (6) 10.5+ Amendment No. 2 to The Metzler Group, Inc. Employee Stock Purchase Plan (6) 10.6*+ Amendment No. 3 to The Metzler Group, Inc. Employee Stock Purchase Plan 10.7*+ Amendment No. 4 to The Metzler Group, Inc. Employee Stock Purchase Plan 10.8*+ Employment Agreement dated as of November 12, 1999 between the Registrant and Mitchell H. Saranow 10.9*+ Employment Agreement dated as of November 12, 1999 between the Registrant and John J. Reed 10.10*+ Employment Agreement dated as of November 12, 1999 between the Registrant and Carl S. Spetzler 10.11*+ Letter agreement dated February 1, 2000 between the Registrant and Philip P. Steptoe
20
Exhibit No. Description ----------- ----------- 10.12*+ Consulting Agreement and General Release dated as of November 21, 1999 between the Registrant and Robert P. Maher 10.13*+ Letter agreement dated February 27, 2000 between the Registrant and Barry S. Cain 21.1* Significant Subsidiaries of the Registrant. 23.1* Consent of KPMG LLP 23.2 Consent of Arthur Andersen LLP and Report of Independent Accountants 23.3 Consent of PricewaterhouseCoopers LLP and Report of Independent Accountants 23.4 Consent of Crowe, Chizek and Company LLP and Report of Independent Accountants 27.1* Financial Data Schedule--for the period ended December 31, 1999
- -------- (1) Incorporated by reference from the Registrant'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 Registrant'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 Registrant's Form 8-A12B filed with the SEC on July 20, 1999. (4) Incorporated by reference from the Registrant'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 Registrant's Amendment No. 2 to Registration Statement on Form S-1 (Registration No. 333-9019) filed with the SEC on September 20, 1996. (6) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. (7) Incorporated by reference from the Registrant's Current Report on Form 8-K dated December 15, 1999. (8) Incorporated by reference from the Registrant's Registration Statement on Form S-8 (Registration No. 333-30265) filed with the SEC on June 27, 1997. * Indicates filed herewith. + Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. b. Financial Statement Schedule: Report of Independent Auditors Schedule II: Valuation and Qualifying Accounts 21 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 28, 2000 By: _________________________________ Mitchell H. Saranow Chairman and Co-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 --------- ----- ---- Chairman, and Co-Chief March 28, 2000 ______________________________________ Executive Officer and Mitchell H. Saranow Director (Principal Executive Officer) Vice Chairman and Co-Chief March 28, 2000 ______________________________________ Executive Officer and John J. Reed Director (Principal Executive Officer) Vice Chairman and March 28, 2000 ______________________________________ President and Director Carl S. Spetzler (Principal Executive Officer) Chief Financial Officer March 28, 2000 ______________________________________ (Principal Financial and James F. Hillman Accounting Officer) Director March 28, 2000 ______________________________________ William M. Goodyear Director March 28, 2000 ______________________________________ Peter B. Pond Director March 28, 2000 ______________________________________ Samuel K. Skinner Director March 28, 2000 ______________________________________ James R. Thompson
22 INDEX TO THE FINANCIAL STATEMENTS NAVIGANT CONSULTING, INC. AND SUBSIDIARIES Audited Consolidated Financial Statements as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999 Independent Auditors' 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
F-1 INDEPENDENT AUDITORS' REPORT 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, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. 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 audit. We conducted our audits in accordance with generally accepted auditing standards. 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 financial position of Navigant Consulting, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The 1998 and 1997 consolidated financial statements have been restated as discussed in Notes 3 and 4 to the consolidated financial statements. We previously audited and reported on the consolidated statements of operations, stockholders' equity and cash flows of Navigant Consulting, Inc. and subsidiaries for the year ended December 31, 1997, prior to their restatement for the 1998 poolings of interests, which report was based in part on reliance of other auditors. The contribution of the Company to combined restated revenues represented 37 percent; and to combined restated net income represented 52 percent for the year ended December 31, 1997. Separate financial statements of the other companies included in the 1997 consolidated statements of operations, stockholders' equity and cash flows were audited and reported on separately by other auditors. We also audited the combination of the consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1997, after restatement for the 1998 poolings of interests; in our opinion, such consolidated statements have been properly combined on the basis described in Notes 3 and 4 to the consolidated financial statements. /s/ KPMG LLP Chicago, Illinois March 28, 2000 F-2 NAVIGANT CONSULTING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, ------------------ 1999 1998 -------- -------- ASSETS ------ Current assets: Cash and cash equivalents.............................. $ 42,345 $119,704 Accounts receivable, net............................... 116,100 80,163 Prepaid and other current assets....................... 7,364 6,979 Income tax receivable.................................. 8,211 -- Deferred income taxes.................................. 2,385 -- -------- -------- Total current assets................................. 176,405 206,846 Property and equipment, net.............................. 33,763 22,197 Intangible assets, net................................... 202,096 -- Other assets............................................. 2,412 1,474 -------- -------- Total assets......................................... $414,676 $230,517 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Short-term debt........................................ $ 10,000 $ -- Accounts payable and accrued liabilities............... 20,709 17,955 Accrued compensation and project costs................. 58,425 28,142 Income taxes payable................................... -- 2,942 Deferred income taxes.................................. -- 2,171 Other current liabilities.............................. 19,673 9,127 -------- -------- Total current liabilities............................ 108,807 60,337 Deferred income taxes.................................... 725 5,276 Other non-current liabilities............................ 4,475 -- -------- -------- Total liabilities.................................... 114,007 65,613 -------- -------- Stockholders' equity: Preferred stock, $.001 par value; 3,000 shares authorized; no shares issued or outstanding........... -- -- Common stock, $.001 par value; 75,000 shares authorized; 43,129 and 38,004 shares issued and outstanding in 1999 and 1998, respectively............ 43 38 Additional paid-in capital............................. 340,528 134,624 Treasury stock 2,086 shares at December 31, 1999....... (52,811) -- Notes receivable from stockholders..................... (2,583) -- Accumulated other comprehensive income................. (158) (30) Retained earnings...................................... 15,650 30,272 -------- -------- Total stockholders' equity........................... 300,669 164,904 -------- -------- Total liabilities and stockholders' equity........... $414,676 $230,517 ======== ========
See accompanying Notes to the Consolidated Financial Statements. F-3 NAVIGANT CONSULTING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
For the Years Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- Revenues.......................................... $397,694 $287,626 $228,731 Cost of services.................................. 266,080 174,175 145,144 -------- -------- -------- Gross profit.................................... 131,614 113,451 83,587 General and administrative expenses............... 107,274 62,093 55,579 Amortization...................................... 24,300 -- -- Merger related cost and restructuring charges (benefit)............................... (206) 12,778 1,312 Stock option compensation expense................. 3,850 -- -- -------- -------- -------- Operating income (loss)......................... (3,604) 38,580 26,696 -------- -------- -------- Other expense (income): Interest income................................. (3,857) (3,063) (1,184) Interest expense................................ 376 688 446 Other, net...................................... 5,672 (263) (467) -------- -------- -------- Total other expense (income)................... 2,191 (2,638) (1,205) -------- -------- -------- Income (loss) before income tax expense........... (5,795) 41,218 27,901 Income tax expense.............................. 8,827 25,637 9,237 -------- -------- -------- Net Income (loss)................................. $(14,622) $ 15,581 $ 18,664 ======== ======== ======== Earnings (loss) per share: Basic........................................... $ (0.35) $ 0.43 $ 0.56 Diluted......................................... $ (0.35) $ 0.41 $ 0.55 Weighted average shares outstanding: Basic........................................... 41,601 36,476 33,289 Diluted......................................... 41,601 37,707 33,798
See accompanying Notes to the Consolidated Financial Statements. F-4 NAVIGANT CONSULTING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
Preferred Notes Accumulated Stock Common Stock Additional Receivable Other Treasury Stock Total ------------- -------------- Paid-In From Comprehensive Retained ---------------- Stockholders' Shares Amount Shares Amount Capital Stockholders Income Earnings Shares Amount Equity ------ ------ ------ ------ ---------- ------------ ------------- -------- ------ -------- ------------- Balance at December 31, 1996............ -- -- 33,446 $ 34 $ 41,313 $ (3,045) $ 6 $ 12,378 -- $ -- $ 50,686 Comprehensive income.......... -- -- -- -- -- -- (63) 18,664 -- -- 18,601 Issuance of common stock.... -- -- 2,043 2 25,412 (87) -- 780 -- -- 26,107 Purchase of common stock.... -- -- (535) (1) (10,340) 44 -- (228) -- -- (10,525) Distributions... -- -- -- -- -- (351) -- (16,182) -- -- (16,533) Interest on notes receivable from stockholders.... -- -- -- -- 195 (195) -- -- -- -- -- Collection of notes receivable from stockholders.... -- -- -- -- -- 879 -- -- -- -- 879 --- --- ------ ---- -------- -------- ----- -------- ------ -------- -------- Balance at December 31, 1997............ -- -- 34,954 35 56,580 (2,755) (57) 15,412 -- -- 69,215 Comprehensive income.......... -- -- -- -- -- -- 27 15,581 -- -- 15,608 Issuance of common stock.... -- -- 3,645 4 96,965 -- -- -- -- -- 96,969 Purchase of common stock.... -- -- (595) (1) (18,921) -- -- -- -- -- (18,922) Distributions... -- -- -- -- -- -- -- (721) -- -- (721) Collection of notes receivable from stockholders.... -- -- -- -- -- 2,755 -- -- -- -- 2,755 --- --- ------ ---- -------- -------- ----- -------- ------ -------- -------- Balance at December 31, 1998............ -- -- 38,004 38 134,624 -- (30) 30,272 -- -- 164,904 Comprehensive income (loss)... -- -- -- -- -- -- (128) (14,622) -- -- (14,750) Issuance of common stock.... -- -- 5,387 5 215,160 -- -- -- -- -- 215,165 Purchase of common stock.... -- -- (263) -- (13,335) -- -- -- (2,086) (52,811) (66,146) Stock option compensation expense......... -- -- -- -- 3,850 -- -- -- -- -- 3,850 Issuance of notes receivable from stockholders.... -- -- -- -- -- (20,550) -- -- -- -- (20,550) Interest on notes receivable from stockholders.... -- -- -- -- 229 (229) -- -- -- -- -- Collection of notes receivable from stockholders.... -- -- -- -- -- 12,929 -- -- 12,929 Impairment of notes receivable from stockholders.... -- -- -- -- -- 5,267 -- -- -- -- 5,267 --- --- ------ ---- -------- -------- ----- -------- ------ -------- -------- Balance at December 31, 1999............ -- -- 43,129 $ 43 $340,528 $ (2,583) $(158) $ 15,650 (2,086) $(52,811) $300,669 === === ====== ==== ======== ======== ===== ======== ====== ======== ========
See accompanying Notes to the Consolidated Financial Statements. F-5 NAVIGANT CONSULTING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For The Years Ended December 31, ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- Cash flows from operating activities: Net income (loss)....................... $ (14,622) $ 15,581 $ 18,664 Adjustments to reconcile net income to net cash providedby operating activities: Depreciation............................ 13,460 4,876 3,337 Amortization............................ 24,300 -- -- Impairment of stockholder notes......... 5,267 -- -- Stock option compensation expense....... 3,850 -- -- Provision for bad debts................. 14,900 1,094 172 Deferred income taxes................... (10,970) 1,777 2,499 Other non-cash items, net............... 404 (107) (728) Changes in assets and liabilities, net of acquisitions: Accounts receivable................... (19,543) (20,917) (12,339) Prepaid expenses and other current assets............................... 1,478 (3,467) (1,292) Accounts payable and accrued liabilities.......................... (2,069) 7,291 2,099 Accrued compensation and project costs................................ 10,591 11,029 134 Income taxes payable.................. (13,023) (858) 2,923 Other current liabilities............. 3,426 4,907 1,353 ---------- ---------- ---------- Net cash provided by operating activities......................... 17,449 21,206 16,822 ---------- ---------- ---------- Cash flows from investing activities: Purchase of property and equipment...... (18,641) (13,340) (7,871) Acquisition of businesses, net of cash acquired............................... (42,055) -- -- Other, net.............................. (1,582) (296) 54 ---------- ---------- ---------- Net cash used in investing activities......................... (62,278) (13,636) (7,817) ---------- ---------- ---------- Cash flows from financing activities: Issuance of common stock................ 17,387 96,969 26,107 Purchase of common stock................ (40,011) (18,922) (10,525) Repayment of long-term debt............. (322) (319) (1,550) Proceeds from long-term debt............ -- -- 3,300 Net repayments of short-term debt....... (2,584) (8,242) (3,007) Proceeds from short-term debt........... 10,000 -- -- Issuance of notes receivable from stockholders........................... (17,000) -- -- Payments of pre-acquisition undistributed income to former stockholders........................... -- (6,079) (10,121) Other, net.............................. -- 2,755 (1,096) ---------- ---------- ---------- Net cash (used in )provided by financing activities............................... (32,530) 66,162 3,108 ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents.............................. (77,359) 73,732 12,113 Cash and cash equivalents at beginning of year..................................... 119,704 45,972 33,859 ---------- ---------- ---------- Cash and cash equivalents at end of year.. $ 42,345 $ 119,704 $ 45,972 ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements. F-6 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Navigant Consulting, Inc. (the "Company") is a provider of consulting services to electric and gas utilities, insurance companies, and pharmaceutical companies, as well as other Fortune 100 companies. The Company's services include: management consulting, strategic consulting, financial and claims services, and economics and policy consulting. The Company is headquartered in Chicago, Illinois and has regional offices in various cities within the United States, and several international offices. 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 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. Cash and Cash Equivalents Cash equivalents are comprised of highly liquid instruments with original maturities of 90 days or less. The carrying amount of these financial instruments approximates fair value because of the short maturities. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using the straight-line method based on the estimated useful lives, ranging from three to forty years, of the various classes of property and equipment. Amortization of leasehold improvements is computed over the shorter of the lease term or the estimated useful life of the asset. Intangible Assets Intangible assets consist of identifiable intangibles and goodwill. Identifiable intangibles include customer lists, workforce in place, knowledge capital, and non-compete agreements. Intangible assets are being amortized on the straight-line method over 7 years. 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 and accounts payable, to approximate the fair value of the respective assets and liabilities at December 31, 1999 and 1998. F-7 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Revenue Recognition The Company recognizes revenues as the related services are provided. 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. Provision is made for the entire amount of estimated losses, if any, at the time when they are known. Stock Based Compensation The Company utilizes the intrinsic value-based method of accounting for its stock-based compensation arrangements with employees. The Company utilizes the fair value method of accounting for its stock-based compensation arrangements with non-employee consultants, advisors, and independent contractors. 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. Prior to December 18, 1997, one of the Company's subsidiaries, LECG, Inc. (LECG), had elected to be taxed under Subchapter S of the Internal Revenue Code for income tax purposes. During such period, federal income taxes were the responsibility of LECG's stockholders as were certain state income taxes. Therefore, the financial statements do not include a provision for federal (and some state) income taxes prior to LECG's initial public offering on December 18, 1997. LECG's S-corporation status terminated on December 18, 1997, thereby subjecting LECG's income to federal and certain other state income taxes at the corporate level. Accordingly, LECG applied the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," for the period ended December 31, 1997. In addition, LECG converted from a cash basis to accrual basis for tax purposes in conjunction with its conversion to a C-corporation. Due to temporary differences in recognition of revenue and expenses, income for financial reporting purposes exceeded income for income tax purposes. The conversion to accrual basis along with these temporary differences resulted in the recognition of a net deferred tax liability (and a corresponding one-time charge to expense) of $2.7 million as of December 31, 1997. Prior to August 14, 1998, another of the Company's subsidiaries, Peterson Consulting, L.L.C. d/b/a Peterson Worldwide LLC (Peterson) was a limited liability company, which, for income tax purposes, was treated as a partnership. Accordingly, the income of Peterson was reported on the individual income tax returns of its members and federal income taxes, as well as certain state income taxes, were the responsibility of its members. Subsequent to August 14, 1998, and based on events unrelated to its acquisition by the Company, Peterson elected C-corporation status, thereby subjecting its income to federal and certain state income taxes at the corporate level. As a result of its acquisition of Peterson, the Company has applied the provisions of SFAS No. 109, and has converted Peterson from the modified cash basis to the accrual basis for tax purposes. Due to temporary differences in recognition of revenue and expense, income for financial reporting purposes has exceeded income for tax reporting purposes. The conversion to accrual basis, along with these temporary differences, resulted in the recognition of a one-time, non-cash charge of $7.2 million to be recorded during the period in which the merger occurred. F-8 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Earnings Per Share The following table set forth the components of basic and diluted earnings per share:
Year ended December 31, ------------------------- 1999 1998 1997 -------- ------- ------- (amounts in thousands) Numerator: Net income (loss)............................... $(14,622) $15,581 $18,664 ======== ======= ======= Denominator: Weighted average shares outstanding............. 41,601 36,476 33,289 Effect of dilutive securities: Employee stock options.......................... -- 1,231 509 -------- ------- ------- Denominator for diluted earnings per share........ 41,601 37,707 33,798 ======== ======= =======
For the year ended December 31, 1999, the weighted-average effect of employee stock options was 1.68 million shares. However, the Company incurred a loss for the period and the effect of these options was anti-dilutive. Foreign Currency Translation The balance sheets of the Company's foreign subsidiaries are translated into U.S. dollars using the year-end exchange rate, and sales and expenses are translated using the average exchange rate for the year. The resulting translation gains or losses are recorded as a separate component of stockholders' equity as other comprehensive income. F-9 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. RECONCILIATION TO PREVIOUSLY REPORTED AMOUNTS The following table sets forth select operating information as previously reported and as amended. The amended amounts have been restated to retroactively reflect the results of operations for certain business combinations completed in 1998 and 1997 which were accounted for as poolings of interests. At the respective dates of acquisition, the Company had determined that the stockholders' equity and the results of operations of these businesses were not material, individually or in the aggregate, in relation to those of the Company. As such, the Company had recorded these combinations by restating stockholders' equity as of the effective date of each acquisition without restating prior period financial statements. The Company has restated the financial statements for 1998 and 1997 to reflect the results of operations of Sterling Consulting Group, Inc., Reed-Stowe & Co., Inc., AUC Management Consultants, Inc., Hydrologic Consultants, Inc. of California, Saraswati Systems Corporation and Applied Health Outcomes, Inc. The amended amounts also incorporate certain reclassifications to conform the presentation of revenue and cost of sales for 1998 and 1997 to the 1999 presentation. Certain billable expenses which had previously been presented net of related revenues have been reclassified.
Years ended December 31, ------------------ 1998 1997 -------- -------- (amounts in thousands, except per share amounts) Total revenue, as previously reported.................... $266,877 $196,780 Retroactive effect of pooling accounting................. 6,844 19,079 Reclassifications........................................ 13,905 12,872 -------- -------- Total revenue, as amended................................ $287,626 $228,731 ======== ======== Gross profit, as previously reported..................... $112,555 $ 81,658 Retroactive effect of pooling accounting................. 896 1,929 Reclassifications........................................ -- -- -------- -------- Gross profit, as amended................................. $113,451 $ 83,587 ======== ======== Operating income, as previously reported................. $ 38,884 $ 26,195 Retroactive effect of pooling accounting................. (304) 501 -------- -------- Operating income, as amended............................. $ 38,580 $ 26,696 ======== ======== Net Income, as previously reported....................... $ 16,123 $ 18,419 Retroactive effect of pooling accounting................. (542) 245 -------- -------- Net Income, as amended................................... $ 15,581 $ 18,664 ======== ======== Earnings per diluted share as previously reported........ $ 0.43 $ 0.57 Retroactive effect of pooling accounting................. (0.02) (0.02) -------- -------- Earnings per diluted share, as amended................... $ 0.41 $ 0.55 ======== ======== Dilutive shares as previously reported................... 37,179 32,288 Retroactive effect of pooling accounting................. 528 1,510 -------- -------- Dilutive shares, as amended.............................. 37,707 33,798 ======== ========
F-10 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. BUSINESS COMBINATIONS On July 31, 1997, the Company issued 3.2 million shares of common stock for substantially all the outstanding common stock of Resource Management International, Inc. (RMI). In connection with the acquisition of RMI, the Company acquired assets and assumed liabilities with book values of $13.9 million and $11.1 million, respectively. On August 15, 1997, the Company issued 0.8 million shares of common stock for substantially all of the outstanding common stock of Reed Consulting Group, Inc. (Reed). In connection with the acquisition of Reed, the Company acquired assets and assumed liabilities with book values of $2.5 million and $2.5 million, respectively. Additionally, the Company completed the acquisition of all of the common stock of L.E. Burgess Consultants, Inc. (Burgess) as of January 1, 1997 and Sterling Consulting Group, Inc. (Sterling) and Reed-Stowe & Co., Inc. (RSC), as of December 1, 1997. In the aggregate for the Burgess, Sterling and RSC transactions, the Company issued 0.7 million shares of common stock. In connection with the acquisitions of Burgess, Sterling and RSC, the Company acquired assets and assumed liabilities with book values of $0.6 million and $0.9 million, respectively. All of the 1997 transactions were accounted for as poolings of interests. There were no pre-acquisition intercompany transactions or investments among the Company, RMI, Reed, Burgess, Sterling, and RSC. The Company's consolidated financial statements have been restated as if RMI, Reed, Sterling and RSC had been combined for all periods presented. The Company's consolidated statement of operations for the year ended December 31, 1997 includes revenues and net income from RMI, Reed, Sterling and RSC totaling $35.3 million and $1.5 million, respectively, through the dates of acquisition. The stockholders' equity and the operations of Burgess were not significant in relation to those of the Company. As such, the Company recorded the Burgess transaction by restating stockholders' equity as of the date of the acquisition without restating prior period financial statements. On August 19, 1998, the Company issued 7.3 million shares of common stock for substantially all the outstanding common stock of LECG. In connection with the acquisition of LECG, the Company acquired assets and assumed liabilities with book values of $49.8 million and $17.4 million, respectively. On August 31, 1998, the Company issued 5.6 million shares of common stock for substantially all of the outstanding common stock of Peterson. In connection with the acquisition of Peterson, the Company acquired assets and assumed liabilities with book values of $34.8 million and $24.7 million, respectively. Additionally, the Company completed the acquisitions all of the common stock of American Corporate Resources, Inc. (ACR), AUC Management Consultants, Inc. (AUC), and Hydrologic Consultants, Inc. of California (HCI) as of April 3, 1998; The Vision Trust Marketing Group, LLC (VTM) as of June 1, 1998; and Saraswati Systems Corporation (SSC) and Applied Health Outcomes, Inc. (AHO) as of September 1, 1998. In the aggregate for the ACR, AUC, HCI, VTM, SSC, and AHO transactions, the Company issued 1.2 million shares of common stock. In connection with the acquisitions of ACR, AUC, HCI, VTM, SSC, and AHO, the Company acquired assets and assumed liabilities with book values of $1.9 million and $1.4 million, respectively. All of the 1998 transactions were accounted for as poolings of interests. The Company's consolidated financial statements have been restated as if LECG, Peterson, AUC, HCI, SSC, and AHO had been combined for all periods presented. The Company's consolidated statement of operations for the year ended December 31, 1998 and 1997 includes revenues totaling $104.8 million and $125.7 million, respectively, and net income totaling $5.5 million and $9.0 million, respectively, from LECG, Peterson, AUC, HCI, SSC, and AHO, through the dates of acquisition. The stockholders' equity and the operations of ACR and VTM were not significant in relation to those of the Company. As such, the Company recorded the ACR and VTM transactions by restating stockholders' equity as of the date of the acquisition without restating prior period financial statements. The Company incurred significant costs and expenses in connection with these acquisitions, including legal and accounting, and other various expenses. These costs and expenses were recorded in the consolidated statements of operations during the third quarter in each of the years 1998 and 1997. F-11 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During 1999, the Company completed eleven acquisitions (collectively, the "1999 Acquisitions") in exchange for Company stock and cash having an aggregate value of $235.7 million. On February 7, 1999, the Company issued 2.4 million shares of common stock (valued at the time of closing at approximately $123.7 million) for substantially all of the outstanding common stock of Strategic Decisions Group, Inc. and acquired the remaining minority interest in exchange for $13.3 million in cash. On March 31, 1999, the Company completed the acquisitions of all of the outstanding stock of Triad International, Inc., GeoData Solutions, Inc., and Dowling Associates, Inc. in exchange for 1.8 million shares of the Company's common stock (valued at the time of closing at approximately $57.3 million). On September 30, 1999, the Company completed its acquisition of the business operations and certain assets of Penta Advisory Services LLC (Penta) and the stock of Scope International, Inc. (Scope) for a total cash purchase price of $15.1 million. The purchase agreements for Penta and Scope also provide for additional payments, payable in cash or Company common stock, over the next two to five years contingent on future revenue growth and gross margin targets. The additional payments, if any, will be accounted for as additional goodwill. On October 1, 1999, the Company completed the acquisition of the stock of Brooks International AB, Brooks International Consulting OY, and Brooks International SPRL for an aggregate cash purchase price of $3.3 million. On November 1, 1999, the Company completed the acquisition of the stock of The Barrington Consulting Group, Inc. (Barrington) in exchange for $14.4 million in cash paid at closing and total deferred cash payments of $7.8 million, payable in two equal annual installments. The liability related to the deferred cash payments is reflected in the consolidated balance sheet as of December 31, 1999 as $3.9 million of other current liabilities and $3.9 million of other non-current liabilities. The purchase agreement for Barrington also provides for additional cash payments of up to $7.7 million in the aggregate, which are contingent on continued employment by the Company of certain Barrington shareholders and are payable in cash in two annual installments. The contingent payments will be charged to expense ratably over the period of employment. On December 1, 1999, the Company completed the acquisition of all of the assets of Glaze Creek Partners, LLC in exchange for $0.8 million in cash. There were no pre-acquisition intercompany transactions between the Company and the 1999 Acquisitions. The 1999 Acquisitions have been accounted for by the purchase method of accounting and, accordingly, the results of operations have been included in the accompanying consolidated financial statements from the date of acquisition. Certain assets acquired of $46.2 million and liabilities assumed of $36.9 million have been recorded at their estimated fair values. The excess of cost over the net assets acquired of approximately $226.4 million has been recorded as intangible assets, including goodwill. The allocation of the excess cost over the net assets acquired to identifiable intangible assets and goodwill was based upon independent appraisals, as were the estimated useful lives. The estimated lives range from between one and 20 years, and approximate, on a straight-line basis, an average life of 7 years. The following unaudited pro forma financial information presents the combined results of operations as if the 1999 Acquisitions had occurred as of January 1, 1998, after giving effect to certain adjustments. The adjustments include the amortization of goodwill and other intangibles, a reduction in interest income and related income tax effects, and an increase in the weighted average common shares outstanding. The pro forma information is for informational purposes only. The information presented does not necessarily reflect the results of operations that would have occurred had the acquisitions been completed as of January 1, 1998, nor are they indicative of future results.
1999 1998 -------- -------- Revenue, in thousands................................... $437,095 $402,664 Net loss, in thousands.................................. (23,600) (17,995) Net loss per diluted Share.............................. $ (0.52) $ (0.44)
F-12 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. STOCKHOLDERS' EQUITY Initial Public Offering On December 18, 1997, LECG completed an initial public offering, resulting in net proceeds of approximately $24.4 million, net of issuance costs. Secondary Public Offering On March 2, 1998, the Company completed a secondary offering of its common stock in which an additional 1.5 million shares were sold by the Company, resulting in net proceeds of approximately $36 million. On November 19, 1998, the Company completed a secondary offering of its common stock in which an additional 1.5 million shares were sold by the Company, resulting in net proceeds of approximately $51 million. Employee Stock Purchase Plan During 1996, the Company implemented a plan which permits employees to purchase shares of the Company's common stock each quarter at 85% of the market value. The market value for this purpose is determined to be the lower of the closing market price on the first and last day of each calendar quarter. There are 450,000 shares authorized for issuance under the plan. The Company had issued 159,000 shares under the plan through December 31, 1999. As of December 31, 1999, the Company held $0.8 million of withholdings from employees which were used to purchase approximately 84,000 additional shares under the plan in January 2000. Treasury Stock Repurchases On August 9, 1999, the Company announced that the Board of Directors had authorized the repurchase of up to 3.0 million shares of the Company's common stock in open market or in privately negotiated transactions. In August and September of 1999, the Company repurchased a total of 0.5 million shares for $18.9 million in privately negotiated transactions. In November 1999, the Company repurchased 1.0 million shares for $20.8 million in open market transactions. Also in November 1999, the Company accepted 0.6 million shares with a then market value of $12.9 million as payment for the principal amount of certain notes plus accrued interest related to borrowings by Mr. Maher, the Company's Chairman and Chief Executive Officer at that time. See also Note 17, "Related Party Transactions". Shareholder Notes Receivable At December 31, 1999, the Company held notes receivable from three former Company officers with an aggregate principal balance of $7.9 million. See also Note 17, "Related Party Transactions". The notes receivable arose from transactions whereby these individuals borrowed money from the Company to purchase a total of 200,000 shares of the Company's common stock from third parties and 37,500 shares of common stock from the Company. The notes receivable are shown on the balance sheet as a reduction in stockholders' equity. The notes receivable were accompanied by pledge agreements which pledge the shares as collateral security for repayment of the notes, which shares are currently held by the Company. At the closing market price for the Company's common stock on December 31, 1999 of $10 7/8 per share, the value of the shares held as collateral for the notes receivable was approximately $2.6 million. Although the notes receivable are full recourse, are not due until the year 2002 and there has been no event of default, the Company is not certain that it will be able to collect the full amount due. In March 2000, the borrowers have either challenged the F-13 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) enforceability or declined to confirm their intention to comply with the terms of the notes and each have refused to provide the Company with personal financial information that would support their ability to pay the full amounts due. The Company has accrued a loss contingency at December 31, 1999 in the amount of $5.3 million, representing the difference between the principal amount of the notes receivable and the value of the shares held by the Company as collateral. The $5.3 million was included as a non-operating charge within other expense in the consolidated statement of operations. The Company intends to take all appropriate legal steps to enforce the notes in accordance with their terms. Shareholder Rights Plan On December 15, 1999, the Company's Board of Directors adopted a Stockholders Rights Plan (the "Rights Plan") and declared a dividend distribution of one Right (a "Right") for each outstanding share of common stock, to stockholders of record at the close of business on December 27, 1999. Each Right will entitle its holder, under certain circumstances described in the Rights Agreement, to purchase from the Company one one-thousandth of a share of its Series A Junior Participating Preferred Stock, $.001 par value, (the "Series A Preferred Stock"), at an exercise price of $75 per Right, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and American Stock Transfer & Trust Company, as Rights Agent. Until the Distribution Date under the Rights Agreement, the surrender for transfer of any shares of common stock outstanding will also constitute the transfer of the Rights associated with such shares. The Rights are not exercisable until the Distribution Date and will expire at the close of business on December 15, 2009, unless earlier redeemed or exchanged by the Company. The Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right (subject to adjustment and payable in cash, common stock or other consideration deemed appropriate by the Company's Board of Directors) at any time until ten days following the Stock Acquisition Date under the Rights Agreement. Immediately upon the action of the Company's Board of Directors authorizing any redemption, the Rights will terminate and the only right of the holders of Rights will be to receive the redemption price. Until a Right is exercised, its holder, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. 6. ACCOUNTS RECEIVABLE The components of accounts receivable as of December 31 were as follows:
1999 1998 -------- ------- (in thousands) Billed amounts ........................................... $ 86,849 $60,730 Engagements in process.................................... 45,581 27,559 Allowance for uncollectible accounts...................... (16,330) (8,126) -------- ------- $116,100 $80,163 ======== =======
Engagements in process represent balances accrued by the Company for services that have been performed but have not been billed to the customer. Billings are generally done on a monthly basis for the prior month's services. F-14 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. PROPERTY AND EQUIPMENT Property and equipment, at cost, as of December 31 consisted of:
1999 1998 -------- -------- (in thousands) Land and buildings....................................... $ 3,421 $ 2,878 Furniture, fixtures and equipment........................ 40,444 27,877 Software................................................. 10,241 5,338 Leasehold improvements................................... 5,714 4,736 -------- -------- 59,820 40,829 Less: accumulated depreciation and amortization.......... (26,057) (18,632) -------- -------- $ 33,763 $ 22,197 ======== ========
In December 1999, the Company made a decision to dispose of its corporate headquarters land and building and is actively seeking a buyer. At such time, the Company re-evaluated the carrying amount of the asset and estimated the net realizable value through an independent appraisal. The Company has recorded additional depreciation expense of $1.1 million to reflect the impairment in value. Based upon a comprehensive review of the Company's long-lived assets, the Company recorded a non-cash charge to depreciation expense of $3.8 million in 1999. This charge reflects the write-down of a portion of the recorded asset values of certain computer equipment and software. No additional assets were deemed to be impaired. 8. INTANGIBLE ASSETS The excess of the cost of the 1999 Acquisitions over the net assets acquired of approximately $226.4 million has been recorded as intangible assets, including goodwill, and is being amortized over the estimated useful lives. The allocation of the excess of the cost over the net assets acquired to identifiable intangible assets and goodwill was based upon independent appraisals, as were the related estimated useful lives. Goodwill and other intangible assets consisted of the following as of December 31, 1999:(in thousands) Goodwill........................................................... $ 96,906 Customer lists..................................................... 49,565 Employee workforce................................................. 33,455 Non-compete agreements............................................. 25,570 Other.............................................................. 20,900 -------- 226,396 Less: accumulated amortization..................................... (24,300) -------- Goodwill and intangibles, net...................................... $202,096 ========
The Company periodically examines the carrying value of its goodwill and other intangible assets to determine whether there are any impairment losses. If indicators of impairment were present, and future cash flows were not expected to be sufficient to recover the assets' carrying amount, an impairment loss would be charged to expense in the period identified. No event has been identified that would indicate an impairment of the value of the goodwill and other intangible assets as of December 31, 1999. F-15 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. SHORT-TERM AND LONG-TERM DEBT The Company maintains a line of credit agreement in the amount of $50.0 million which expires May 31, 2001. Under the agreement, the Company may borrow a maximum amount of up to 80% of eligible accounts receivable. The agreement contains certain covenants, the most restrictive of which require the Company to maintain a minimum level of earnings before interest, taxes, depreciation and amortization. The balance outstanding under the line of credit was $10 million at December 31, 1999. At December 31, 1999, the Company had letters of credit of $2.2 million outstanding. The letters of credit expire at various dates through July 2003. At December 31, 1998, The Company had no outstanding short-term debt. The Company had no long-term debt outstanding as of December 31, 1999 or 1998. 10. MERGER-RELATED COSTS AND RESTRUCTURING CHARGES The Company recognized $1.2 million of expense in 1999 for employee separations associated with consolidation of certain accounting and human resources functions. In July 1999, the Company announced a restructuring initiative and offered involuntary severance packages to 73 employees in the administrative, accounting and human resources functions. In 1998, the Company incurred restructuring charges and merger-related costs of $12.8 million related to the acquisitions of LECG and Peterson, which were accounted for as poolings of interests. These costs included legal, accounting and other transaction related fees and expenses, as well as accruals to consolidate certain facilities. At December 31, 1999, the Company reviewed the merger-related accruals and determined that certain amounts previously accrued were no longer necessary given subsequent acquisition activity and changes in the Company's organizational structure. The results of operations for 1999 reflect a benefit of $1.4 million for the reversal of the previously accrued amounts. In 1997, the Company incurred legal, accounting and other transaction related fees and expenses of $1.3 million related to the acquisitions of RMI and Reed, which were accounted for as poolings of interests. During 1999, the Company increased the accrual for restructuring charges and merger-related costs by $3.0 million related to the 1999 Acquisitions, which were accounted for under the purchase method of accounting. These costs were reflected as purchase price adjustments and, as such, increased the amount of goodwill. The restructuring charges and merger-related costs were determined based on formal plans approved by the Company's management using the best information available at the time. The amounts the Company may ultimately incur may change as the balance of the Company's initiative to integrate acquired companies is executed. The activity affecting the accrual for restructuring charges and merger-related costs during 1999, 1998 and 1997 is as follows:
Direct Transaction Facilities Workforce Other Costs Closings Reductions Costs Total ----- -------- ---------- ----- ----- (amounts in thousands) Year ended December 31, 1997 Charges to operations 706 -- 330 276 1,312 Utilized (706) -- (330) (276) (1,312) Year ended December 31, 1998 Charges to operations 7,638 3,600 -- 1,540 12,778 Utilized (4,434) (239) -- (1,655) (6,328) Year ended December 31, 1999 Charges to operations -- -- 1,160 -- 1,160 Purchase price adjustments 2,425 350 255 -- 3,030 Utilized (4,803) (232) (879) -- (5,914) Changes in estimates (826) (655) -- 115 (1,366) -------------------------------------------------------- Balance at December 31, 1999 -- 2,824 536 -- 3,360 ========================================================
11. LEASE COMMITMENTS The Company leases its office facilities and certain equipment under operating lease arrangements which expire at various dates through 2012. The Company leases office facilities under noncancelable operating leases which include fixed or minimum payments plus, in some cases, scheduled base rent increases over the term of the lease and additional rents based on the Consumer Price Index. Certain leases provide for monthly payments of real estate taxes, insurance and other operating expenses applicable to the property. In addition, the Company leases equipment under noncancelable operating leases. Future minimum annual lease payments, for the years subsequent to 1999 and in the aggregate, are as follows:
Year Ending December 31, Amount ------------------------ -------------- (in thousands) 2000........................................................ $ 15,241 2001........................................................ 16,312 2002........................................................ 13,965 2003........................................................ 11,539 2004........................................................ 8,710 Thereafter.................................................. 39,439 -------- $105,206 ========
Rent expense for operating leases entered into by the Company and charged to operations amounted to $15.8 million for 1999, $10.0 million for 1998, and $9.8 million for 1997. F-16 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 12. INCOME TAX EXPENSE Income tax expense consists of the following:
December 31, ------------------------ 1999 1998 1997 ------- ------- ------ (in thousands) Federal: Current........................................ $14,186 $20,180 $5,264 Deferred....................................... (7,391) 1,600 2,648 ------- ------- ------ Total........................................ 6,795 21,780 7,912 ------- ------- ------ State: Current........................................ 3,272 3,461 1,392 Deferred....................................... (1,716) 396 (67) ------- ------- ------ Total........................................ 1,556 3,857 1,325 ------- ------- ------ Foreign.......................................... 476 -- -- ------- ------- ------ Total federal, state and foreign income tax expense..................................... $8,827 $25,637 $9,237 ======= ======= ====== Income tax expense differs from the amounts estimated by applying the statutory income tax rates to income before income tax expense as follows: December 31, ------------------------ 1999 1998 1997 ------- ------- ------ Federal tax at statutory rate.................... 35.0% 35.0% 35.0% State tax at statutory rate, net of federal tax benefits........................................ (17.8) 7.3 4.6 Foreign taxes.................................... (8.2) -- -- Effect of nontaxable interest and dividends...... 12.5 (1.7) (0.9) Effect of nontaxable entity status............... -- -- (5.2) Effect of non-deductible merger-related costs.... (1.0) 4.0 -- Effect of non-deductible amortization............ (139.2) -- -- Effect of non-deductible stock compensation expense......................................... (23.3) -- -- Effect of conversion from cash to accrual method of accounting for acquired company.............. -- 14.7 -- Effect of other non-deductible expenses.......... (10.4) 2.9 (0.4) ------- ------- ------ (152.4)% 62.2% 33.1% ======= ======= ======
The tax benefits associated with nonqualified stock options and disqualifying dispositions of incentive stock options reduced taxes payable by $4.9 million in 1999 and $3.3 million in 1998. Such benefits were recorded as an increase to additional paid-in capital in each year. F-17 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Deferred income taxes result from temporary differences between years in the recognition of certain expense items for income tax and financial reporting purposes. The source and income tax effect of these differences are as follows:
December 31, --------------- 1999 1998 ------ ------- (in thousands) Deferred tax assets: State income taxes.......................................... $ (121) $ 479 Allowance for uncollectible receivables..................... 4,379 194 Merger-related costs........................................ -- 1,427 Stockholders' notes......................................... 2,239 -- Insurance related costs..................................... 865 -- Other....................................................... 202 315 ------ ------- Total deferred tax assets..................................... 7,564 2,415 ------ ------- Deferred tax liabilities: Adjustment resulting from changes in the method of accounting used for tax purposes........................... 6,435 9,136 Other....................................................... (531) 726 ------ ------- Deferred tax liabilities...................................... 5,904 9,862 ------ ------- Net deferred tax assets (liabilities)......................... $1,660 $(7,447) ====== =======
The Company has not recorded a valuation allowance as it believes it is more likely than not that the net deferred tax asset is recoverable. 13. SUPPLEMENTAL CASH FLOW INFORMATION Total interest paid during the years ended December 31, 1999, 1998 and 1997 were $0.4 million, $0.7 million, and $0.3 million, respectively. Total income taxes paid during the years ended December 31, 1999, 1998 and 1997 were $27.6 million, $17.7 million, and $3.5 million, respectively. During the first quarter of 1999, the Company issued 4.2 million shares of common stock (valued at the time at approximately $181.0 million) for substantially all of the outstanding common stock of four companies acquired in transactions accounted for by the purchase method of accounting. In addition to the $42.1 million of cash used to acquire certain businesses during 1999, the Company entered into commitments for deferred cash payments of $7.8 million, payable in two equal annual installments. See also Note 4, "Business Combinations". In April 1999, certain of the Company's then officers borrowed $3.5 million from the Company to exercise certain then-vested options. In November 1999, the Company received 605,684 shares of the Company's common stock, with a then market value of $12.9 million, in lieu of cash as payment for the principal amount of certain loans plus accrued interest. See also Note 17, "Related Party Transactions". 14. LONG-TERM INCENTIVE PLAN On June 30, 1996, the Company adopted a Long-Term Incentive Plan which provides for common stock, common stock-based, and other performance incentives to employees, consultants, directors, advisors, and independent contractors of the Company. The Long-Term Incentive Plan, as amended, was re-approved by a vote of the Company's shareholders in July 1999. As of December 31, 1999, the Company had 8.2 million options outstanding at a weighted average exercise price of $29.15 per share. As of December 31, 1999, 0.7 million options were exercisable. F-18 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In general, options issued under the Long Term Incentive Plan were issued at the fair market value at the dates of grant, have a ten-year term and become vested and thus exercisable in annual installments over a four year period following the date of grant. However, the plan permits the Compensation Committee, or the chief executive officer as its delegate, to vary such terms and conditions, including granting nonqualified options at prices below fair market value at the date of grant. The Company has 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. Accordingly, the Company has recorded an expense in 1999 of $3.5 million for stock option compensation expense attributable to such options. The amount charged to expense represents 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. The amount charged to expense has been amortized over the relevant vesting periods. See also Note 17, "Related Party Transactions." The Company applies APB Opinion 25, Accounting for Stock Issued to employees, and related Interpretations in accounting for its plan. 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. 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," the Company's compensation expense for the years ended December 31, 1999, 1998 and 1997 would have been increased by $18.3 million, $4.6 million, and $1.1 million, respectively, net of related income taxes. As a result, the Company's pro forma net earnings available to common stockholders and earnings per common and common equivalent shares would have been reduced to the pro forma amounts indicated below:
1999 1998 1997 -------------- ------------- ------------- (in thousands, except per share amounts) Earnings, as reported: Net income (loss) ........... $(14,622) $15,581 $18,664 Net income (loss) per basic share....................... $ (0.35) $ 0.43 $ 0.56 Net income (loss) per dilutive share.............. $ (0.35) $ 0.41 $ 0.55 Earnings, fair value method: Net income (loss), with compensation expense from fair value options.......... $(32,941) $10,990 $17,526 Fair value method net income (loss) per basic share...... $ (0.79) $ 0.30 $ 0.53 Fair value method net income (loss) per dilutive share... $ (0.79) $ 0.29 $ 0.52
The weighted average fair value of options granted in 1999, 198O and 1997 was $12.04, $5.68, and $4.46, respectively. For purposes of calculating compensation cost under SFAS No. 123, the fair value of each option 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 1999, 1998 and 1997:
1999 1998 1997 ---- ---- ---- Expected volatility........................................ 75% 45% 45% Risk free interest rate.................................... 5.5% 5.0% 5.7% Dividend yield............................................. 0% 0% 0% Contractual or Expected lives (years)...................... 8.5 2.8 2.5
F-19 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Additional information on the shares subject to options is as follows:
1999 1998 1997 ----------------- ----------------- ----------------- Number Weighted- Number Weighted- Number Weighted- of Average of Average of Average Shares Exercise Shares Exercise Shares Exercise (000's) Price (000's) Price (000's) Price ------ --------- ------- --------- ------ --------- Options outstanding at beginning of year...... 5,510 $24.19 2,623 $16.53 689 $10.37 Granted................. 4,481 32.68 3,849 28.47 2,173 18.35 Exercised............... (696) 17.98 (361) 13.07 (3) 8.00 Forfeited............... (1,082) 25.24 (601) 24.90 (236) 16.35 ------ ------ ----- ------ ----- ------ Options outstanding at end of year............ 8,213 $29.15 5,510 $24.19 2,623 $16.53 ====== ===== ===== Options exercisable at year end............... 676 $19.31 138 $14.41 14 $18.45 ====== ===== =====
The following table summarizes information about stock options outstanding at December 31, 1999 and 1998:
1999 1998 -------------------------- -------------------------- Weighted-Average Weighted-Average -------------------------- -------------------------- Shares Exercise Remaining Shares Exercise Remaining Range of Exercise Price (000's) Price Life (000's) Price Life - ----------------------- ------- -------- --------- ------ -------- --------- $ 0 to $15................ 790 $12.17 4.6 1,025 $12.46 0.7 years $16 to $25................ 737 21.23 6.0 1,277 20.99 2.5 years $26 to $35................ 5,656 29.03 8.8 3,174 29.06 3.6 years $36 to $45................ 307 43.71 9.5 34 39.30 3.8 years $46 to $55................ 723 50.53 9.1 -- -- -- ----- ----- 8,213 $29.15 8.2 5,510 $24.19 2.8 years ===== =====
15. EMPLOYEE BENEFIT PLANS The Company maintained profit sharing and savings plans for several operating subsidiaries through December 31, 1999. Eligible employees may contribute a portion of their compensation to their respective operating subsidiary's plan. The Company matches a percentage of employees' current contributions on some operating subsidiaries' plans and has discretion to match contributions on other plans. The Company may also make an annual profit sharing contribution at its discretion. The Company, as sponsor of the plans, uses independent third parties to provide administrative services to the plans. The Company has the right to terminate the plans at any time. The Company contributions to the various plans which were charged to operations were $1.9 million, $1.0 million, and $1.0 million in the years ended December 31, 1999, 1998, and 1997, respectively. Effective February 2000, the Company amended the profit sharing and savings plans of all operating subsidiaries to provide an employer matching contribution for all participants in an amount equal to 100% of the employees' current contributions, up to a maximum of 3% of the employees' total eligible compensation. 16. SEGMENT INFORMATION The Company has applied the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This statement establishes standards for reporting information regarding operating segments, products and services, geographic areas and major customers. The Company's operations represent a F-20 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) single reportable segment under the provisions of SFAS No. 131. The Company's operations have a high degree of similarity in their economic and operational characteristics, including the nature of the services provided, the type or class of customers for those services, and the methods used for delivering such services. While the Company has retained certain brand identities associated with its principal operating subsidiaries, these distinctions have not been a critical factor for management in making operating decisions or in assessing performance. In addition, the structure of the Company's internal organization has changed from time to time as a result of acquisition activity and in response to customer, project, personnel or geographic requirements and, as such, discrete financial information is not available on a consistent basis at the operating subsidiary level. The Company derives substantially all of its revenues from operations in the United States. In each of the three years ended December 31, 1999, more than 95% of the Company's consolidated revenues and operating income were derived from domestic operations. Substantially all of the Company's identifiable assets are located in the United States. 17. RELATED PARTY TRANSACTIONS In April 1999, Mr. Maher, the Company's Chairman and Chief Executive Officer at that time, borrowed $2.7 million from the Company so that he could exercise his then-vested options. Mr. Maher exercised all 112,500 of his then-vested options at an exercise price of $24.00 per share. In August 1999, Mr. Maher borrowed an additional $10 million from the Company. The applicable interest rate for this loan was 5.75%, payable annually. In November 1999, the Company received from Mr. Maher 605,684 shares of the Company's common stock with a then market value of $12.9 million as payment for the principal amount of the loans plus accrued interest. Five non-employees related by blood or marriage to Mr. Maher received stock option grants. Mr. Maher has informed the Company that each of these persons provided services to the Company from time to time and received no other compensation for those services. In addition, one other individual not employed by the Company, but who was an employee of an unrelated company owned or controlled by Mr. Maher, received stock option grants. Mr. Maher has informed the Company that this individual provided certain services to the Company from time to time. These persons are among sixteen as to whom the Company has determined that their options were issued at prices below fair market value. See also Note 14, "Long Term Incentive Plan". The Company has recorded an expense in 1999 of $3.5 million for stock option compensation expense attributable to such options issued to the sixteen individuals. Of the total stock option compensation expense of $3.5 million, $0.6 million is attributable to the six persons described above. In April 1999, Mr. Cain and Mr. Demirjian, respectively the Company's Chief Administrative Officer and the Company's General Counsel at that time, each borrowed $425,063 from the Company to exercise all 18,750 of their then-vested options at an exercise price of $22.67 per share. The notes which evidence these borrowings are full recourse, are due on or before the third anniversary date and bear interest at a rate equal to 5.75%, payable annually. The notes were accompanied by pledge agreements which pledge the exercised option shares as collateral security for repayment of the notes, which shares are currently held by the Company. In late August, Mr. Cain, Mr. Demirjian and Mr. Kingsbury (the Company's Chief Financial Officer at that time) borrowed $2.625 million, $2.625 million and $1.75 million, respectively, from the Company, related to their purchases of 75,000, 75,000 and 50,000 shares, respectively, of the Company's common stock from third parties at $35 per share. The notes which evidence these borrowings are full recourse, are due on or before the third anniversary date and bear interest at a rate equal to 5.75%, payable annually. These notes were F-21 NAVIGANT CONSULTING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) accompanied by pledge agreements which pledge the shares as collateral security for repayment of the notes, which shares are currently held by the Company. As a result of recent developments, the Company has accrued a loss contingency at December 31, 1999 in the amount of $5.3 million, related to the notes receivable from Mssrs. Cain, Demirjian and Kingsbury. See also Note 5, "Stockholders Equity". The Company has discontinued the accrual of interest on these notes. In November 1999, the Company entered into an agreement with Mr. Maher, pursuant to which, among other things, Mr. Maher agreed to provide certain consulting services to the Company over a two year period, including providing information about past transactions or other matters as to which he may be familiar, and the Company agreed to pay Mr. Maher twenty-four monthly payments of $25,000. 18. LITIGATION Numerous purported class action lawsuits have been filed against the Company since November 1999 in the United States District Court for the Northern District of Illinois. These actions name as defendants the Company and certain former directors and former executive officers (one of whom, however, remains an employee of the Company) of the Company and are purported to be on behalf of persons who purchased shares of the Company's common stock during various periods through November 1999. The complaints allege various violations of federal securities law, including violations of Section 10(b) of the Securities Exchange Act of 1934, and that the defendants made materially misleading statements and/or material omissions which artificially inflated prices for the Company's common stock. The plaintiffs seek a judgement awarding damages and other relief. The Company believes it has meritorious defenses and intends to vigorously defend these actions. The outcome of these lawsuits cannot be predicted with certainty and a material adverse judgment against the Company could have a material adverse effect on the Company. Navigant International, Inc., a national travel agency headquartered in Denver, Colorado, sued the Company in July 1999 in the United States District Court for the District of Colorado claiming that the use of "Navigant" in our name infringes on their use of and rights in such name. The complaint seeks declaratory relief and an injunction against our use of "Navigant," attorneys' fees and other related relief. The Company believes it has meritorious defenses and intends to vigorously defend this action. In addition, from time to time, we are 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, we do not believe that any of those lawsuits or claims will have a material adverse effect on the Company. F-22 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Navigant Consulting, Inc.: Under date of March 28, 2000 we reported on the consolidated balance sheets of Navigant Consulting, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999, which report was based in part on reliance of other auditors, as contained in the annual report on Form 10-K for the year 1999. The 1998 and 1997 financial statements have been restated as discussed in notes 3 and 4 to the consolidated financial statements. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule of valuation and qualifying accounts. The consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statement schedule based on our audits. In our opinion, the consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Chicago, Illinois March 28, 2000 S-1 SCHEDULE II NAVIGANT CONSULTING, INC. VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1999, 1998 and 1997 (amounts in thousands)
Balance at Charged Balance Beginning to at End Description of Year Expenses Deductions(1) of Year - ----------- ---------- -------- ------------- ------- Year Ended December 31, 1999 Allowance for doubtful accounts...... 8,126 14,900 (6,696) 16,330 Year Ended December 31, 1998 Allowance for doubtful accounts...... 7,592 2,058 (1,524) 8,126 Year Ended December 31, 1997 Allowance for doubtful accounts...... 10,569 1,975 (4,952) 7,592
- -------- (1) Represent write-offs of bad debts. S-2
EX-2.1 2 PLAN AND AGREEMENT OF MERGER 02-07-1999 Exhibit 2.1 ----------- PLAN AND AGREEMENT OF MERGER ---------------------------- THIS PLAN AND AGREEMENT OF MERGER (this "Agreement") is made and entered into as of February 7, 1999 by and among The Metzler Group, Inc., a Delaware corporation ("Metzler"), MGI Acquisition III, Inc., a Delaware corporation and wholly-owned, direct subsidiary of Metzler ("Acquisition Sub"), Strategic Decisions Group, a California corporation (the "Company"), and the members of the Company's Executive Officers whose names are set forth on the signature pages attached hereto (individually a "Company Executive" and collectively, the "Company Executives"). Metzler, Acquisition Sub, the Company and the Company Executives are sometimes referred to herein individually as a "Party" and collectively as the "Parties." RECITALS A. The members of the board of directors of Acquisition Sub and the Company Executives have approved the transactions contemplated hereby and have determined that it is advisable and in their respective best interests to consummate the merger described in Article 2 hereof (the "Acquisition"). B. As a result of the Acquisition, Acquisition Sub will be merged with and into the Company, all of the outstanding capital stock of the Company will be converted into common stock of Metzler, and the Company will be the surviving corporation, all on the terms and subject to the conditions set forth in this Agreement. C. For Federal income tax purposes, the Parties intend that the Acquisition shall qualify as a reorganization within the meaning of Section 368(a) of the Code (as defined herein). AGREEMENT NOW, THEREFORE, in consideration of the foregoing Recitals, and the mutual promises herein made, and in consideration of the representations, warranties and covenants herein contained, the Parties hereby agree as follows: 1. DEFINITIONS ----------- 1.1 Definitions. The following terms, when used herein and unless the context clearly requires otherwise, shall have the following meanings: "Adverse Consequences" means all charges, complaints, actions, suits, proceedings, hearings, investigations, claims, demands, costs of defense, judgments, orders, decrees, stipulations, injunctions, damages (including diminution in value), dues, penalties, fines, costs, amounts paid in settlement, Liabilities, Taxes, Liens, losses, expenses, and fees, including all attorneys' fees and court costs, net of any related tax benefits, insurance payments or recoveries from third parties. "Affiliate" means, with respect to any particular Person, any Person controlling, controlled by or under common control with such Person from time to time, whether by ownership or control of voting securities, by contract or otherwise. Affiliates of Metzler include the Surviving Corporation (as defined in Section 2.3(a)) and its Subsidiaries. "Affiliated Group" means any affiliated group within the meaning of Section 1504 of the Code. "Basis" means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction that forms or could reasonably form the basis for any specified consequence. "CGCL" means the California General Corporation Law, as amended. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission or any successor agency. "Company Stock" means the common stock, no par value, of the Company. "Confidential Information" means any and all technical, financial, commercial, and other information concerning the businesses and affairs of a Party other than any such information that (i) is generally available to or known by the public immediately prior to the time of disclosure (except through the actions or inaction of the Person to whom disclosure has been made by or on behalf of such Party) or (ii) has been acquired or developed independent from such Party. "DGCL" means the Delaware General Corporation Law, as amended. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means any corporation or other business entity that is included in a controlled group of corporations within which the Company is also included, as provided in Section 414(b) of the Code; or which is a trade or business under common control with the Company, as provided in Section 414(c) of the Code; or which constitutes a member of an affiliated service group within which the Company is also included, as provided in Section 414(m) of the Code; or which is required to be aggregated with the Company pursuant to regulations issued under Section 414(o) of the Code. "Escrow Agreement" means that certain Escrow Agreement, a form of which is attached hereto as Exhibit C. "Escrow Agent" means the Person acting as the escrow agent under the Escrow Agreement. 2 "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Existing Company Documents" means, collectively, all agreements between the Company and any Shareholder and all options, warrants, and other agreements or documents relating to the issuance or possible issuance of Company Stock, each as in existence as of the date hereof. "GAAP" means generally accepted accounting principles as in effect from time to time, applied on a consistent basis. "HSR Act" means the Hart Scott Rodino Antitrust Improvements Act of 1976, as amended. "Indebtedness" of any Person means all obligations of such Person which in accordance with GAAP should be classified upon a balance sheet of such Person as liabilities of such entity; and in any event, regardless of how classified in accordance with GAAP, shall include (i) all obligations of such Person for borrowed money or obligations of such Person evidenced by notes or similar instruments which have been incurred in consideration for the acquisition of property or assets, (ii) obligations secured by any Security Interest upon property or assets owned by such Person, even though such Person has not assumed or become liable for the payment of such obligations, (iii) obligations created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person, notwithstanding the fact that the rights and remedies of the seller, lender or lessor under such agreement in the event of default are limited to repossession or sale of the property, and (iv) capitalized lease obligations. "Information Statement" means the information statement used by the Company to solicit the approval of its Shareholders by written consent to the Acquisition and the terms of this Agreement. "Intellectual Property" means any and all of the following which is owned by, licensed by, licensed to, used or held for use by the Company and/or any of its Subsidiaries (including all copies and embodiments thereof, in electronic, written or other media): (i) all registered and unregistered trademarks, trade dress, service marks, logos, trade names, internet domain names, corporate names (including the names "Strategic Decisions Group" and all derivations thereof) and all applications to register the same (the "Trademarks"); (ii) all issued U.S. and foreign patents and pending patent applications, patent disclosures and improvements thereto (the "Patents"); (iii) all registered and unregistered copyrights, mask work rights and all applications to register the same (the "Copyrights"); (iv) all computer software and databases owned or used (excluding software and databases licensed to the Company under standard, non-exclusive software licenses granted to end-user customers by third parties in the ordinary course of such third parties' business) by the Company or under development for the Company by third parties (the "Software"); (v) all categories of trade secrets, know-how, inventions (whether or not patentable and whether or not reduced to practice), processes, procedures, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial, marketing, and business data, pricing and cost information, business and marketing plans, client and supplier lists and information and other confidential and proprietary information 3 ("Proprietary Rights"); (vi) all licenses and agreements pursuant to which the Company has acquired rights in or to any of the Trademarks, Patents, Copyrights, Software or Proprietary Rights (excluding software and databases licensed to the Company under standard, non-exclusive software licenses granted to end-user customers by third parties in the ordinary course of such third parties' business) ("Licenses-In"); and (vii) all licenses and agreements pursuant to which the Company has licensed or transferred any rights to any of the Trademarks, Patents, Copyrights, Software or Proprietary Rights ("Licenses- Out"). "Interim Balance Sheet" means the balance sheet of the Company dated January 2, 1999, agreed to by and between Metzler and the Company. "Knowledge" means (i) in the case of any individual, the knowledge of such person after reasonable inquiry and (ii) in the case of a corporation, limited liability company or other entity, the knowledge of the directors and officers or managers of such corporation, limited liability company or other entity, as appropriate, after reasonable inquiry. "Liability" means any liability (whether known or unknown, whether absolute or contingent, whether liquidated or unliquidated, and whether due or to become due), obligation or Indebtedness, including without limitation, any liability for Taxes. "Material Adverse Effect" means a material adverse effect or impact upon the assets, financial condition, results of operations, prospects or business of the Company and its Subsidiaries (taken as a single enterprise), or on the ability of the Parties to consummate the transactions contemplated hereby. "Metzler Common" means the Common Stock, par value $0.001 per share, of Metzler. "Metzler Value" means the per share closing price of Metzler Common for the trading day immediately preceding the Merger Date (as defined in Section 2 below). "Ordinary Course of Business" means the ordinary course of business of the Company and its Subsidiaries consistent with past custom and practice of the Company and its Subsidiaries, respectively, as the context herein may require (including with respect to quantity and frequency). "Person" means any individual, trust, corporation, partnership, limited partnership, limited liability company or other business association or entity, court, governmental body or governmental agency. "Plans" means: (i) all employee benefit plans as defined in Section 3(3) of ERISA; (ii) all other severance pay, deferred compensation, excess or supplemental benefit, vacation, stock, stock option, and incentive plans, or contracts, and schemes, programs, funds, commitments, or arrangements of any kind; and (iii) all other plans, or contracts, and schemes, programs, funds, commitments, or arrangements providing money, services, property, or other benefits, whether written or oral, qualified or nonqualified, funded or unfunded, and including any that have been frozen or terminated, which pertain to any employee, former employee, director, officer, 4 consultant, or independent contractor of the Company or any ERISA Affiliate of the Company and (a) to which the Company or any ERISA Affiliate of the Company is or within the last six years has been a party or by which any of them is or within the last six years has been bound or (b) with respect to which the Company or any ERISA Affiliate of the Company has made any payments or contributions since December 31, 1991 or (c) to which the Company or any ERISA Affiliate of the Company may otherwise currently have any liability (including any such plan or arrangement formerly maintained by the Company or any ERISA Affiliate of the Company). "Pro Rata Percentage" means, with respect to each Shareholder, the percentage set forth opposite such Shareholder's name on Section 3.1(d) of the Disclosure Schedule. "Securities Act" means the Securities Act of 1933, as amended. "Security Interest" means any mortgage, pledge, security interest, lien or other similar encumbrance or right of any third party. "Shareholder(s)" means each shareholder or collectively, the shareholders of the Company whose names are set forth on Schedule 2.6 hereto. "Subsidiary" means any corporation, limited liability company, limited partnership, partnership, trust or other entity with respect to which another Person has the power, directly or indirectly through one or more intermediaries, to vote or direct the voting of sufficient securities or interests to elect a majority of the directors or management committee or similar governing body. "Tax" or "Taxes" means all taxes, however denominated, including any interest, penalties or other additions to tax that may become payable in respect thereof, imposed by any federal, territorial, state, local or foreign government or any agency or political subdivision of any such government, which taxes shall include, but not be limited to, any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code Sec. 59A), customs duties, capital stock, franchise, profits, withholding (employment, backup, foreign, or otherwise), social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, other tax of any kind whatsoever, or other obligations of the same or of a similar nature to any of the foregoing, which are required to be paid, withheld, or collected and whether disputed or not. "Tax Proceeding" means, with respect to Taxes, any proceeding, judicial or administrative, civil or criminal, including, without limitation, any audit or investigation. "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. 5 "Total Merger Consideration" means 2,700,000 shares of Metzler Common; provided, however, that the Total Merger Consideration shall be adjusted as set forth in Section 2.6 herein. 1.2 Principles of Construction. (a) In this Agreement, unless otherwise stated or the context otherwise requires, the following usage apply: (i) unless otherwise provided herein, actions permitted, but not required, under this Agreement may be taken at any time and from time to time in the actor's sole discretion; (ii) in computing periods from a specified date to a later specified date, the words "from" and "commencing on" (and the like) mean "from and including," and the words "to," "until" and "ending on" (and the like) mean "to, but excluding"; (iii) the captions and headings of articles, sections, schedules and exhibits appearing in or attached to this Agreement have been inserted for convenience of reference only and are not a part of, nor shall they affect any construction or interpretation of this Agreement or any of its provisions; (iv) unless otherwise specified, indications of time of day mean Chicago, Illinois time; (v) all references to articles, sections, schedules and exhibits are to articles, sections, schedules and exhibits in or to this Agreement unless otherwise specified; (vi) references to a statute shall refer to the statute as amended from time to time and any successor statute, and to all rules and regulations promulgated under or implementing the statute or successor, as in effect at the relevant time; (vii) references to a governmental or quasi-governmental agency, authority or instrumentality shall also refer to a regulatory body that succeeds to the functions of the agency, authority or instrumentality; (viii) "including" means "including, but not limited to"; (ix) unless the context requires otherwise, all words used in this Agreement in the singular number shall extend to and include the plural, all words in the plural number shall extend to and include the singular and all words in any gender shall extend to and include all genders; and (x) any reference to a document or set of documents in this Agreement, and the rights and obligations of the parties under any such documents, shall mean such document or documents as amended or otherwise modified from time to time, and any and all extensions, renewals, substitutions or replacements thereof. (b) Except as otherwise expressly provided in this Agreement, all accounting not specifically defined herein shall be construed in accordance with United States GAAP applied on a consistent basis. 2. THE MERGER ---------- In connection with the Acquisition, the respective boards of directors and shareholders of Acquisition Sub and the Company have, by resolutions duly adopted, approved the following provisions of this Article 2 as the Plan of Reorganization within the meaning of Code Section 368(a), as a "Merger Agreement" within the meaning of Section 1101 of the CGCL and as an "Agreement of Merger" within the meaning of Section 252 of the DGCL: 2.1 Plan of Merger. Subject to the provisions of this Agreement, an Agreement of Merger as required by Section 1101 of the CGCL, together with an officer's certificate of each of Acquisition Sub and the Company (collectively, the "California Merger Agreement") in the form attached hereto as Exhibit D shall be duly prepared, executed and acknowledged by the Company, Acquisition Sub and such other parties as may be appropriate, and thereafter the 6 California Merger Agreement shall be delivered to the Secretary of State of the State of California (the "California Department") for filing. Simultaneously with filing in the State of California and subject to the provisions of this Agreement, an Agreement of Merger as required by Section 252 of the DGCL, together with an officer's certificate of each of Acquisition Sub, Metzler and the Company (collectively, the "Delaware Certificate of Merger") shall be duly prepared, executed and acknowledged by the Company, Acquisition Sub and such other parties as may be appropriate, and thereafter the Delaware Certificate of Merger shall be delivered to the Department of State of the State of Delaware (the "Delaware Department") for filing. The Acquisition shall become effective for corporate law issues on at 5:00 p.m. Eastern Time on the date such filings occur (the "Merger Time"). The date on which the Merger Time occurs is referred to herein as the "Merger Date". 2.2 Closing. The closing of the transactions contemplated hereby (the "Closing") will take place at the offices of Barack Ferrazzano Kirschbaum Perlman & Nagelberg, 333 West Wacker Drive, Suite 2700, Chicago, Illinois 60606, on February 7, 1999, to the extent that the conditions set forth in Sections 4.5 and 4.6 have been satisfied or waived (where permissible), unless another time or place is agreed to by the Parties. The effective date of this transaction will be the date of Closing (the "Effective Date"). At the Closing, the Parties shall make delivery of those materials set forth, respectively, in Sections 4.5 and 4.6 hereof. 2.3 Effects of the Merger. (a) At the Merger Time, the separate legal existence of Acquisition Sub shall cease and Acquisition Sub shall be merged with and into the Company and the Company, as the surviving corporation in the Acquisition (the "Surviving Corporation"), shall continue its legal existence under the laws of the State of California under the name "Strategic Decisions Group". (b) At and after the Merger Time, the Acquisition will have the effects set forth in Chapter 11 of the CGCL and in Subchapter IX of Title 8 of the DGCL. 2.4 Articles of Incorporation and By-laws. The Articles of Incorporation and By-laws of the Company, each as in effect immediately prior to the Merger Time, as amended, shall respectively become the Articles of Incorporation and By-laws of the Surviving Corporation immediately after the Merger Time and shall thereafter continue to be its Articles of Incorporation and Bylaws until amended as provided therein and under the CGCL. 2.5 Directors and Officers. The directors of Acquisition Sub holding office immediately prior to the Merger Time shall be the directors of the Surviving Corporation immediately after the Merger Time. The officers of Acquisition Sub holding office immediately prior to the Merger Time shall be the officers of the Surviving Corporation immediately after the Merger Time, with additional officers from the Company being appointed by the directors of the Surviving Corporation. 2.6 Conversion of Securities. At the Merger Time, by virtue of the Acquisition and without any action on the part of Acquisition Sub, the Company or the Shareholders, (x) each share of outstanding common stock of Acquisition Sub held by Metzler immediately prior to the 7 Merger Time shall be converted into one share of common stock of the Surviving Corporation, and (y) each share of Company Stock which is issued and outstanding immediately prior to the Merger Time (other than treasury shares) shall be canceled and extinguished and converted into the number of shares of Metzler Common equal to the Total Merger Consideration divided by the number of shares of Company Stock outstanding at the Closing; provided, however, that shares of Company Stock held by a holder who has exercised and perfected appraisal rights shall not be converted into shares of Metzler Common, but the holder of such shares shall only be entitled to such rights as are provided by California Law and the shares of the Metzler Common otherwise allocable to all such holders exercising and perfecting appraisal rights shall not be issued by Metzler; and provided, further, however, that if as the result of the conversion of any Shareholder's Company Stock upon consummation of the Acquisition, a fractional interest in a share of Metzler Common would be deliverable under this Section 2.6, in lieu of a fractional share being delivered therefor, such fractional interest shall automatically be converted into the right to receive an amount in cash (without interest) equal to the product of the Metzler Common Value multiplied by the amount of such fractional interest. No such holder will be entitled to dividends, voting rights or any other rights as a shareholder of Metzler in respect of any fractional share. For all purposes of this Agreement (including all computations pursuant to Schedule 2.6), the Total Merger Consideration shall be adjusted in accordance with the following provisions: (a) Closing Balance Sheet. As soon as practicable but no later than 45 days following the Closing Date, the Company shall deliver to Metzler a balance sheet (the "Closing Balance Sheet") for the Company dated as of the close of business the day prior to the date of Closing (the "Closing Balance Sheet Date"), which Closing Balance Sheet shall be prepared by the Company and reviewed by the Company's certified public accountants (the "Company Accountants") and shall set forth the assets and liabilities of the Company as of the close of business on the Closing Balance Sheet Date. The Closing Balance Sheet shall present fairly the financial position of the Company as of the Closing Balance Sheet Date, in accordance with GAAP and on a basis consistent with the presentation of the Interim Balance Sheet (the "Interim Financial Statement Standards"). (i) If Metzler determines to dispute in good faith that the Closing Balance sheet has not been prepared in accordance with the Interim Financial Statement Standards, Metzler shall notify the Shareholder's Representative in writing thereof (the "Metzler Notice") within 14 days after delivery to the Metzler of the Closing Balance Sheet (the "Notice Period"). The Metzler Notice shall set forth in reasonable detail the alleged non-conformance and the amount(s) being disputed. If Metzler does not deliver the Metzler Notice within the Notice Period, the Closing Balance Sheet shall become final and binding upon all parties. (ii) If the Metzler Notice is delivered within the Notice Period, the Shareholders' Representative and Metzler shall attempt in good faith to resolve all dispute(s). If Metzler and the Shareholders are unable to resolve any disputed item within 14 days after receipt of the Metzler Notice, such disputed item(s), together with each party's calculation of the Company's Working Capital, Total Assets and Net Shareholders' Capital (in each case, as defined below) as of the Closing Balance Sheet Date, shall be submitted to a nationally recognized "Big Five" accounting firm or its successor (other than the Company's or Metzler's 8 regular auditors or their successors) chosen by lot, which accounting firm shall be instructed to arbitrate such disputed item(s) and determine the Company's Working Capital, Total Assets and Net Shareholders' Capital as of the Closing Balance Sheet Date. The resolution of disputes by the accounting firm so selected shall be set forth in writing and shall be conclusive and binding upon all parties and adjustment may be entered thereon by any court having jurisdiction over the parties. The costs of such resolution by such accounting firm multiplied by the percentage (not to exceed 100%) calculated as the amount of the actual adjustment divided by the amount disputed by Metzler shall be borne by the Shareholders, in proportion to their respective Pro Rata Percentages, on the one hand, and the balance, if any, by Metzler, on the other hand. (A) The term "Working Capital" means the excess of the Company's current assets over its current liabilities as of the Closing Balance Sheet Date, calculated in accordance with the Interim Financial Statement Standards, all as finally determined in accordance with this Section 2.6(a); provided, however, that the calculation of the amount of Working Capital shall not include or otherwise account for (i) the expenses and fees of the Company incurred or accrued in connection with the Acquisition pursuant to the provisions of Section 6.11 hereof, which expenses and fees are to remain a post- closing obligation of the Company or (ii) any reclassification of a liability described as a Deferred Compensation Payable from a Long-Term Liability to a Current Liabilty and any related assets from Other Assets to Current Assets (as each such term is set forth on the Interim Balance Sheet). (B) The term "Net Shareholders' Capital" means the excess of the Company's total assets over its total liabilities as of the Closing Balance Sheet Date, calculated in accordance with the Interim Financial Statement Standards, all as finally determined in accordance with this Section 2.6(a); provided, however, that the calculation of Net Shareholders' Capital shall not include or otherwise account for (i) the expenses and fees of the Company incurred or accrued in connection with the Acquisition pursuant to the provisions of Section 6.11 hereof, which expenses and fees are to remain a post- closing obligation of the Company or (ii) any reclassification of a liability described as a Deferred Compensation Payable from a Long-Term Liability to a Current Liabilty and any related assets from Other Assets to Current Assets (as each such term is set forth on the Interim Balance Sheet). (b) Adjustment. The Total Merger Consideration shall be adjusted downward in accordance with this paragraph (b) to account for the negative differential (the "Target Differential"), if any, between Target Working Capital, Target Total Assets, and Target Net Shareholders' Capital (as each such term is hereafter defined) and each of, respectively, Working Capital, Total Assets, and Net Shareholders' Capital. In the event that a Target Differential exists as of the Merger Date, the Total Merger Consideration shall be reduced by the number of shares of Metzler Common equal to the quotient of the Target Differential divided by the Metzler Common Value. For purposes hereof, the Target Differential shall be the greater of the respective differentials between (a) Target Working Capital and Working Capital, (b) Target Total Assets and Total Assets, and (c) Target Net Shareholders' Capital and Net Shareholders' Capital. Target Working Capital shall be $3,190,000, and Target Net Shareholders' Capital shall be $3,350,000. As of the Merger Date, an amount of shares of Metzler Common equal to 10% of the number of shares of Metzler Common issued pursuant to the Acquisition shall be deposited with the Escrow Agent and held in a segregated escrow account (the "Adjustment Escrow") in 9 accordance with the terms of the Escrow Agreement. Within ten days following the determination of the Target Differential, if any, the Escrow Agent shall return to Metzler the number of shares valued at the Metzler Common Value equal to the Target Differential and shall promptly distribute to the Shareholders the remaining shares held in the Adjustment Escrow to the Shareholders, pro rata in respect of their respective Pro Rata Percentages. 2.7 Closing of Company Transfer Books. As of the Closing, no transfer of Company Stock shall thereafter be made or recognized. 2.8 Exchange of Certificates. Each holder of a certificate or certificates representing shares of Company Stock issued and outstanding immediately prior to the Merger Time shall at or as soon as practicable following the Closing, surrender to Metzler (or at Metzler's direction, Metzler's stock transfer agent) for exchange a certificate or certificates representing the number of shares of Company Stock held by such holder, together with a duly executed letter of transmittal. In exchange therefor, Metzler shall issue or pay, as applicable, to such holder of Company Stock and deliver as provided herein a certificate or certificates representing the shares of Metzler Common to be issued to such holder pursuant to Section 2.6 to be delivered to such holder and, in the case of payment for any fractional interest in Metzler Common, a check payable to the holder. Such issuance and payment shall be made promptly upon receipt of Company Stock accompanied by a duly executed letter of transmittal and in any case within five days after receipt by Metzler. Surrendered certificates shall forthwith be canceled. Metzler shall not be obligated to deliver the consideration to which any former holder of Company Stock is entitled as a result of the Acquisition until such holder surrenders such holder's certificate or certificates representing shares of Company Stock for exchange as provided in this Section 2.8; provided, however, that procedures allowing for payment against receipt of customary and appropriate certifications and indemnities shall be provided with respect to lost or destroyed certificates. Until so surrendered and exchanged, each such certificate shall represent solely the right to receive the shares of Metzler Common to be issued pursuant to Section 2.6 in exchange for the shares of Company stock represented by such surrendered certificate and the right to receive the fractional share payment to be paid pursuant to Section 2.6, without interest. 2.9 Rights of the Shareholders. From and after the Merger Time, the Shareholders shall have no rights with respect to their shares of Company Stock other than to surrender the certificate or certificates representing such shares pursuant to Section 2.8. 2.10 Dissenting Company Shares. Company Stock that has not been voted for approval of this Agreement and with respect to which a demand for payment and appraisal shall have been properly made in accordance with Chapter 13 of the CGCL ("Dissenting SDG Shares") shall not be converted into Metzler Common at or after the Merger Time but shall be converted into such consideration as may be determined to be due with respect to such Dissenting SDG Shares pursuant to the CGCL. If a holder of Dissenting SDG Shares ("Dissenting Shareholder") shall withdraw his or her demand for such payment and appraisal or shall become ineligible for such payment and appraisal, then, as of the time of the occurrence of such event of withdrawal or ineligibility, whichever last occurs, such holder's Dissenting SDG Shares shall cease to be Dissenting SDG Shares and shall be converted into the Metzler Common into which such Dissenting SDG Shares would have been converted pursuant to Section 2.6 10 hereof. The Company shall give Metzler prompt notice of any demand received by the Company from a holder of Dissenting SDG Shares for appraisal of Company Stock, and Metzler shall have the right to participate in all negotiations and proceedings with respect to such demand. The Company agrees that, except with the prior written consent of Metzler, or as required under the CGCL, it will not voluntarily make any payment with respect to, or settle or offer to settle, any such demand for appraisal. Each Dissenting Shareholder who, pursuant to the provisions of Chapter 13 of the CGCL, becomes entitled to payment of the value of shares of Company Stock shall receive payment therefor (but only after the value therefor shall have been agreed upon or finally determined pursuant to such provisions). Any Metzler Common which would have been issuable with respect to Dissenting SDG Shares shall be retained by Metzler. 2.11 Taking of Necessary Action; Further Action. Metzler and Acquisition Sub on the one hand, and the Company and the Shareholders, on the other hand, shall use reasonable efforts to take all such action (including action to cause the satisfaction of the conditions precedent to the Acquisition) as may be necessary or appropriate in order to effectuate the Acquisition as promptly as possible. If, at any time after the Merger Time, any further action is necessary or desirable to vest the Surviving Corporation with full possession of all the rights, privileges, immunities and franchises of the Company and Acquisition Sub, the officers of the Surviving Corporation are fully authorized in the name of either the Company or Acquisition Sub or otherwise to take, and shall take, all such action. 3. REPRESENTATIONS AND WARRANTIES ------------------------------ 3.1 Representations and Warranties Concerning the Company. As a material inducement to Metzler and Acquisition Sub to enter into this Agreement and consummate the transactions contemplated hereby, the Company and the Company Executives hereby jointly and severally represent and warrant to Metzler and Acquisition Sub that all of the statements contained in this Section 3.1 are correct and complete as of the date of this Agreement, and hereby covenant that said statements will be correct and complete as of the Merger Date (as though made as of the Merger Date and as though the Merger Date were substituted for the date of this Agreement throughout such statements provided that the representations and warranties made as of a specified date will be true and correct as of such date), except, in each case, as set forth in the schedule delivered concurrently with this Agreement setting forth exceptions to the representations and warranties set forth herein (the "Disclosure Schedule"). The Disclosure Schedule is arranged in sections corresponding to the numbered and lettered sections contained in this Section 3.1, and no matter disclosed with respect to one section shall be deemed to be an exception to another section unless the applicability of such item to such other section is reasonably apparent. Notwithstanding anything herein to the contrary, the disclosure of any contract agreement, arrangement or understanding herein shall not affect or qualify any representation with respect to the effectiveness or enforceability of such contract, agreement, arrangement or understanding or the absence of breaches or defaults thereunder, unless otherwise specifically disclosed. (a) Organization, Qualification and Corporate Power. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Each Subsidiary of the Company, as identified in Section 3.1(a) of the Disclosure 11 Schedule, is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, as identified in Section 3.1(a) of the Disclosure Schedule. Each of the Company and its Subsidiaries has all requisite corporate power and authority to carry on the business in which it is engaged and to own and use the properties owned and used by it. True and correct copies of the Company's Articles of Incorporation and By-laws, in each case as amended to date, have been delivered to Metzler. Each of the Company and its Subsidiaries is qualified to conduct business and is in good standing under the laws of each jurisdiction wherein the nature of its business or its ownership of property requires it to be so qualified, except where the failure to be so qualified, would not individually or in the aggregate, have a Material Adverse Effect. Section 3.1(a) of the Disclosure Schedule lists all jurisdictions in which the Company and each of its Subsidiaries is qualified to do business. (b) Authorization of Transaction. The Company has all requisite corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Without limiting the generality of the prior sentence, the Board of Directors and the Shareholders of the Company have duly authorized the execution, delivery and performance of this Agreement and the consummation of the Acquisition. This Agreement constitutes the valid and legally binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium, or other similar laws now or hereafter in effect relating to the rights and remedies of creditors generally or (ii) rules of law governing specific performance, injunctive relief or other general principles of equity. (c) Noncontravention. Subject to compliance with the HSR Act and except as set forth on Section 3.1(c) of the Disclosure Schedule, neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby will (i) violate any applicable statute, regulation, law, rule or common law doctrine, (ii) violate any judgment, order, decree, stipulation, injunction, or other restriction of any governmental body, governmental agency or court to which the Company is subject, (iii) breach any provision of the Articles of Incorporation or By-laws of the Company, or (iv) conflict with, result in a breach of, constitute a default under (with or without notice or lapse of time, or both), result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice under, or result in the creation of any Security Interest upon any of the Company's (or any of its Subsidiaries') assets pursuant to the terms of, any contract, agreement, lease, sublease, license, sublicense, franchise, permit, indenture, agreement for borrowed money, instrument of indebtedness, Security Interest or other binding arrangement to which the Company (or any of its Subsidiaries) is a party or by which it is bound or to which any of its assets are subject, except, in the case of clauses (i) and (iv) above, for those violations or breaches which would not, individually or in the aggregate, have a Material Adverse Effect. Except pursuant to the HSR Act and as set forth on Section 3.1(c) of the Disclosure Schedule, the Company is not required to give any notice to, make any material filing with, or obtain any authorization, consent, or approval of any government, governmental agency or court, or any other Person in order for the parties to consummate the Acquisition and the transactions contemplated by this Agreement or in order that the Acquisition and such transactions not constitute a breach or violation of, or result in a right of termination or acceleration or any encumbrance on any of the Company's (or any of its Subsidiaries') assets, pursuant to the provisions of any material agreement, arrangement or 12 understanding or any material license, franchise or permit except as would not have a Material Adverse Effect. (d) Capitalization. The authorized capital stock of the Company consists solely of 1,000,000 shares of voting common stock, no par value and 1,000,000 shares of non-voting common stock, no par value per share, of which 20,670 shares and 189 shares, respectively, are issued and outstanding on the date hereof and all of which are owned by the Shareholders. Set forth on Section 3.1(d) of the Disclosure Schedule is a true and correct description of (i) the full legal names and current address of each Shareholder, (ii) the Pro Rata Percentage of each Shareholder, and (iii) all of the current directors and officers of the Company. The Company has never authorized, offered, sold or issued any securities other than Company Stock. All offerings, sales and issuances by the Company of any Company Stock have been conducted in compliance with and in accordance with or in reliance upon exemptions from all applicable Federal and state securities laws and all other applicable state laws. Except as set forth on Section 3.1(d) of the Disclosure Schedule, there are no currently outstanding or authorized options, warrants, rights, contracts, rights of first refusal or first offer, calls, puts, rights to subscribe, conversion rights, or other agreements or commitments to which the Company is a party or which are binding upon the Company or Company upon any of the Shareholders providing for the issuance, disposition, or acquisition of any Company Stock or securities convertible into or exchangeable for Company Stock. There are no voting trusts, proxies, or any other agreements, restrictions or understandings with respect to the voting of any shares of Company Stock, except for those agreements expressly contemplated hereby. (e) No Subsidiaries. Except as set forth in Section 3.1(e) of the Disclosure Schedule, the Company does not own or control any direct or indirect equity interest or equity participation in any corporation, partnership, limited liability company, trust, or other business association or Subsidiary. (f) Financial Statements; Books and Records. (i) The Company has provided Metzler with the following financial statements, correct and complete copies of which are set forth on Section 3.1(f) of the Disclosure Schedule (collectively the "Financial Statements"): (A) consolidated and consolidating balance sheet and related statements of income and changes in shareholders' equity for the Company as of and for the forty (40) week period ended January 3, 1998, the fiscal year ended March 29, 1997 and the fiscal year ended March 31, 1996 (January 3, 1998 being the "Most Recent Fiscal Year End"), each audited by the Company Accountants, and (B) unaudited consolidated and consolidating balance sheet and related statements of income for the Company as of and for the eleven months ended November 7, 1998 and year to date (the "Latest Financials"). The Financial Statements are correct and complete in all material respects and have been prepared in accordance with GAAP, except, in the case of the Latest Financials, for the absence of footnotes and normal year-end adjustments. The Financial Statements fairly present, on such basis, the consolidated financial condition and results of operations of the Company and its Subsidiaries as of the times and for the periods referred to therein. 13 (ii) The Company's and its Subsidiaries' books and records are and have been properly prepared and maintained in form and substance adequate for preparing audited financial statements in accordance with GAAP, and fairly and accurately reflect in accordance with GAAP all of the assets and Liabilities of the Company and its Subsidiaries and all contracts and transactions to which the Company or any of its Subsidiaries is or was a party or by which the Company or any of its Subsidiaries or any of their respective business or assets is or was affected. The minute books and related records of the Company and its Subsidiaries, correct and complete copies of which have been made available to Metzler, correctly reflect all resolutions adopted and all other material corporate actions taken at all meetings or through consents of the directors (including committees thereof) and the shareholders. (g) Recent Events. Except as set forth in Section 3.1(g) of the Disclosure Schedule, since the date of the Interim Balance Sheet, neither the Company nor any of its Subsidiaries has experienced or suffered any Material Adverse Effect. Without limiting the generality of the foregoing, except as set forth on the Latest Financials or Section 3.1(g) of the Disclosure Schedule, since the date of the Interim Balance Sheet, neither the Company nor any of its Subsidiaries: (i) sold, leased, transferred or assigned any of its assets, tangible or intangible, with an aggregate value greater than $75,000, other than in the Ordinary Course of Business; (ii) accelerated, terminated, modified, canceled or committed any breach of any contract, lease, sublease, license, or sublicense (or series of related contracts, leases, subleases, licenses, and sublicenses) either involving more than $50,000 individually or in the aggregate or otherwise outside of the Ordinary Course of Business; (iii) canceled, compromised, waived, or released any right or claim (or series of related rights and claims) either involving more than $50,000 individually or in the aggregate or outside of the Ordinary Course of Business; (iv) experienced any damage, destruction, or loss to its property in excess of $50,000 (whether or not covered by insurance) individually or in the aggregate; (v) created or suffered to exist any Security Interest upon any of its assets, tangible or intangible, outside the Ordinary Course of Business or securing any Liabilities in the aggregate in excess of $75,000; (vi) issued, sold, or otherwise disposed of any Company Stock or other equity securities, or granted any options, warrants, or other rights to purchase or obtain (including upon conversion or exercise) any interest in the Company or any of its equity securities, or any securities convertible or exchangeable into Company Stock or other equity securities; (vii) declared, set aside, or paid any dividend or distribution with respect to the Company Stock or any of its equity securities (whether in cash or in kind) or redeemed, purchased, or otherwise acquired any Company Stock or any of its equity securities; 14 (viii) entered into any transaction, arrangement or contract with, or distributed or transferred any property or other assets to, any officer, director, Shareholder or other insider or Affiliate of the Company or any of its Subsidiaries (other than salaries and employee benefits in the Ordinary Course of Business); (ix) made or committed to make any capital expenditures or entered into any other material transaction outside the Ordinary Course of Business involving an expenditure in excess of $50,000 individually or in the aggregate; (x) amended or modified in any material respect any Plan (beyond any amendments and modifications reflected in true and complete copies of such Plans delivered to Metzler); (xi) entered into any employment agreement for a base salary in excess of $125,000 or collective bargaining agreement or granted any increase in excess of $25,000 in the salary of any officer or management employee of the Company (or increase in excess of $15,000 in the case of any non-management employee) or paid or committed to pay any bonus to any officer or employee; (xii) changed in any material respect the manner in which the business has been conducted, including, without limitation, billing of clients or collection of accounts receivable, purchases of goods and services or payment of accounts payable; (xiii) changed the accounting principles, methods or practices or any change in the depreciation or amortization policies or rates, except in each case as required by GAAP; (xiv) changed the relationships with any client, contractor or supplier which might reasonably be expected to result in a Material Adverse Effect; or (xv) entered into any binding commitment (orally or in writing) to do any of the foregoing. (h) Undisclosed Liabilities. Neither the Company nor any of its Subsidiaries has any Liability (and there is no Basis for any present or future charge, complaint, action, suit, proceeding, hearing, investigation, claim, or demand against the Company or any of its Subsidiaries giving rise to any Liability), except for (i) Liabilities set forth on the face of the Latest Financials, (ii) Liabilities incurred since the date of the Interim Balance Sheet in the Ordinary Course of Business (none of which relates to any breach of contract, breach of warranty, tort, infringement, or violation of law or arose out of any charge, complaint, action, suit, proceeding, hearing, investigation, claim, or demand), (iii) Liabilities in an aggregate amount of less than $50,000, and (iv) Liabilities otherwise expressly disclosed in this Agreement or on the Disclosure Schedule (it being understood that except as set forth in Section 3.1(f) no representation or warranty is being made regarding the revenues or results of operations of the Company). 15 (i) Tax Matters. (i) The Company, each of the Subsidiaries and their respective predecessors in interest (by merger, liquidation, or otherwise) (each such person referred to as a "Taxpayer" and collectively, as the "Taxpayers") has filed or caused to be filed in a timely manner (within any applicable extension periods) all Tax Returns required to be filed by the Code or by applicable state, local, or foreign tax laws, such Tax Returns have been timely filed on behalf of the Taxpayers, such Tax Returns are true, correct and complete in all respects, and all Taxes due (including all Taxes due in respect of any former Subsidiary of each of the Taxpayers (whether due in respect of a separate company, unitary, or consolidated federal income Tax Return or otherwise), and Taxes due in respect of any person for which any of the Taxpayers had an obligation to withhold and/or otherwise pay over Taxes) have been timely paid in full or will be timely paid in full by the due date thereof (and whether or not shown on a Tax Return). (ii) With respect to any taxable year for which a statute of limitations (or similar provision) has not yet run, none of the Tax Returns of any of the Taxpayers has been audited by a government or taxing authority, nor is any such audit or other Tax Proceeding in process, pending, threatened (either in writing or verbally, formally or informally) or are expected to be asserted with respect to Taxes (or the collection of Taxes) of any of the Taxpayers, and no Taxpayer, officer, director or employee of a Taxpayer has received notice (either in writing or verbally, formally or informally) or expects to receive notice that a Taxpayer has not filed a Tax Return or not paid Taxes required to be filed, withheld, or paid by it. Each of the Taxpayers has disclosed on its federal income tax returns all positions taken therein that could rise to a substantial understatement penalty within the meaning of Code Section 6662. No Taxpayer currently is the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been made by an authority in a jurisdiction where any of the Taxpayers does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. (iii) The Company and each Subsidiary has delivered to Metzler correct and complete copies of all federal income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by any of the Taxpayers since December 31, 1996. (iv) Neither the Company nor any of its Subsidiaries has filed a consent under Section 341(f) of the Code concerning collapsible corporations. Neither the Company nor any of its Subsidiaries has made any material payments, is obligated to make any material payments, or is a party to any agreement that would obligate it to make any material payments that will not be deductible under Section 280G of the Code. Neither the Company nor any of its Subsidiaries has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(A)(ii) of the Code. Neither the Company nor any of its Subsidiaries is a party to any tax allocation or sharing agreement. Neither the Company nor any of its Subsidiaries has been a member of an Affiliated Group which filed federal income tax returns, other than a group of which the Company was the common parent. Neither the Company nor any of its Subsidiaries has any Liability for Taxes owed by any Person (other than the Company), including without limitation, (A) as a transferee, assignee or other successor, (B) pursuant to a Tax sharing agreement or other 16 contract, or (C) pursuant to Treasury Regulation Section 1.1502-6 (or any similar provision of state, local or foreign law). (v) The Company has made available to Metzler information regarding the Taxpayer's basis in its assets, its current and accumulated earnings and profits, its net operating loss and tax credit carryovers, excess loss accounts with respect to Subsidiary stock, tax elections made by any of the Taxpayers affecting any other of the Taxpayers, and deferred intercompany transactions. None of the Taxpayers has net operating losses or other tax attributes presently subject to limitations under Code Sections 382, 383, 384, the federal consolidated return regulations, or other similar provisions under state, local or foreign law. (vi) The Taxpayers have filed all reports and have created and/or retained all records required under Code Section 6038A with respect to their respective ownership by and transactions with related parties. Each related foreign person required to maintain records under Code Section 6038A with respect to transactions between any of the Taxpayers and related foreign person(s) have maintained such records. All documents that are required to be created and/or preserved by the related foreign person(s) with respect to transactions with any of the Taxpayers are either maintained in the United States or the Taxpayer was or is exempt from the record maintenance requirements of Code Section 6038A pursuant to Treasury Regulation Section 1.6038A-1. None of the Taxpayers is a party to any record maintenance agreement with the Internal Revenue Service with respect to Code Section 6038A. Each related foreign person that has engaged in transactions with any of the Taxpayers has authorized such Taxpayer to act as its limited agent solely for purposes of Code Sections 7602, 7603, and 7604 with respect to any request by the Internal Revenue Service to examine records or produce testimony related to any transaction with any of the Taxpayers, and each such authorization remains in full force and effect. (j) Title and Condition of Properties. (i) Neither the Company nor any of its Subsidiaries owns any real property. (ii) The leases described in Section 3.1(j) of the Disclosure Schedule (the "Property Leases") cover all of the real estate leased, used or occupied by the Company or any of its Subsidiaries. Each of the Property Leases is in full force and effect and the Company or one of its Subsidiaries holds a valid and existing leasehold or subleasehold interest under each of such Property Leases. The Company has delivered to Metzler complete and accurate copies of each of the Property Leases and none of such Property Leases has been modified in any respect, except to the extent that such modifications are disclosed by the copies delivered to Metzler. Neither the Company nor any of its Subsidiaries is in default, and to the Knowledge of the Company no circumstances exist which would result in such default (including upon the giving of notice or the passage of time, or both), under any of such Property Leases, and no other party thereto has the right to terminate, accelerate performance under or otherwise modify any of such leases. To the Knowledge of the Company, no lessor under any such lease is in default under any of such leases in its duties to the lessee. Except as set forth in Section 3.1(j) of the Disclosure Schedule, neither the Company nor any of its Subsidiaries has assigned, transferred, conveyed, 17 subjected to a Security Interest, or otherwise encumbered any interest in any of the Property Leases. (iii) The Company or one of its Subsidiaries owns good and marketable title, free and clear of all Security Interests, to all of the personal property and assets reflected on the Latest Financials or acquired after the date of the Interim Balance Sheet, except for (A) assets with an aggregate original purchase price of less than $100,000 which have been disposed of to non-affiliated third parties since the date of the Interim Balance Sheet, in the Ordinary Course of Business, (B) Security Interests securing liabilities reflected on the Latest Financials and (C) Security Interests for current Taxes not yet due and payable. (iv) The Company's computer hardware, equipment and other tangible personal property and assets are in good condition and repair, except for ordinary wear and tear not caused by neglect, and are useable for their respective intended purposes in the Ordinary Course of Business. The personal property and assets shown on the Latest Financials or acquired after the date of the Interim Balance Sheet, the lease rights under the Property Leases and leases of personal property and the Intellectual Property owned or used by the Company or any of its Subsidiaries under valid license, collectively include all assets necessary to the conduct of the Company's and its Subsidiaries business as presently conducted. None of the Shareholders, other employees or independent contractors of the Company or their respective Affiliates owns any rights, other than as would exist upon liquidation or distribution of the Company, in any material assets, real or personal, which are used by the Company or any of its Subsidiaries in its business. (k) Intellectual Property. (i) Section 3.1(k) of the Disclosure Schedule contains a complete list and an accurate functional description by category and indication of status (completed or in process) of all Patents, Trademarks, Copyright registrations, Software, Licenses-In, Licenses-Out and other material items of Intellectual Property which are owned, licensed by, licensed to, used or held for use in and are necessary for the conduct of the business of the Company or any of its Subsidiaries as such business is currently conducted and presently contemplated to be conducted, or as to which the Company or any of its Subsidiaries has a contractual right to an assignment. (ii) No Person has any Security Interest (other than the right to use Software under license) in th e Company's or any of its Subsidiaries' interest in any Intellectual Property owned by the Company or any of its Subsidiaries. The Company and each of its Subsidiaries has all rights to use the Intellectual Property owned or used by it in the manner in which such Intellectual Property is currently being used, except where failure to do so would not have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is under any obligation to pay any royalty or other compensation to any third party or to obtain any approval for use of any of the Intellectual Property. To the Knowledge of the Company, none of the Intellectual Property is subject to any outstanding judgment, order, decree, stipulation, injunction or charge; no charge, complaint, action, suit, proceeding, hearing, investigation, claim, or demand is pending or, threatened, which challenges the legality, validity, enforceability, use or ownership of any of the Intellectual Property. Neither the Company nor any of its Subsidiaries 18 has ever agreed to indemnify any Person for or against interference, infringement, misappropriation, or other conflict with respect to Intellectual Property. (iii) No breach or default (or event which with notice or lapse of time or both would result in a breach or default) by the Company or any of its Subsidiaries exists or has occurred under any License-In or other agreement pursuant to which the Company or any of its Subsidiaries uses any Intellectual Property, and the consummation of the transactions contemplated by this Agreement will not violate or conflict with or constitute a breach or default (or an event which, with notice or lapse of time or both, would constitute a breach or default) or result in a forfeiture under, or constitute a Basis for termination of, any such License-In or such other agreement or impair the Company's or any of its Subsidiaries' ability after consummation of the Acquisition to use the Software in the same manner as such Software is currently used by the Company or such Subsidiary, except where such breaches, defaults, violations, conflicts or other events which would not, individually or in the aggregate, result in a Material Adverse Effect. (iv) Each of the Company and its Subsidiaries owns or has the right to use all the Intellectual Property necessary to provide, produce, sell and license the services and products currently provided, produced, sold and licensed by the Company or any of its Subsidiaries, and to conduct the Company's or any of its Subsidiaries' business as presently conducted, and the consummation of the transactions contemplated hereby will not alter or impair any such rights. The Intellectual Property includes all patents, trademarks, trade names, service marks, copyrights, mask work rights and trade secrets, and the Software includes all software, which are necessary to operate the business of the Company and each of its Subsidiaries as it is presently conducted and to satisfy and perform the contracts, commitments, arrangements and understandings with customers of the Company and each of its Subsidiaries. The Company has no Knowledge of any reason the Company and each of its Subsidiaries will not be able to continue to own, possess or have access to, and to use, license and sub- license as applicable, on reasonable terms, all Intellectual Property and other proprietary rights necessary for the lawful conduct of its business as presently conducted and currently contemplated to be conducted, without any infringement or conflict with the rights of others. (v) No Intellectual Property owned by the Company or any of its Subsidiaries, and no product or service practiced, offered, licensed or sold by the Company or any of its Subsidiaries, to the Knowledge of the Company, infringes or is being infringed by any trademark, trade name, copyright, trade secret, patent, right of publicity, right of privacy or other proprietary right of any Person or would give rise to an obligation to render an accounting to any Person as a result of co-authorship, co-invention or an express or implied contract for any use or transfer. Neither the Company nor any of its Subsidiaries has received notice of any adversely held patent, invention, trademark, copyright, service mark, trade name or trade secret of any other Person alleging or threatening to assert that the Company's or any of its Subsidiaries' use of any of the Intellectual Property infringes upon or is in conflict with any intellectual property or proprietary rights of any third party. The Company, has no Knowledge of any Basis for any claim, threatened claim or any suit or action asserting any such infringement or conflict or asserting that the Company or any of its Subsidiaries does not have the legal right to own, enforce, sell, license, sublicense, lease or otherwise use any such Intellectual Property, process, 19 product or service, except for such instances of defenses such as "fair use" and the Company has no Knowledge of any facts which should give such Person reason to believe that there exists any Basis for such claim, threatened claim or suit or that any such claim, threatened claim or suit may be asserted or instituted in the future. (vi) Neither the Company nor any of its Subsidiaries has sent or otherwise communicated to any other Person any notice, charge, claim or assertion of, and the Company has no Knowledge of any present, impending or threatened infringement by any other Person of any Intellectual Property owned by the Company or any of its Subsidiaries. (vii) Except as disclosed in Section 3.1(k) of the Disclosure Schedule, all the Company's and each of its Subsidiaries' Patents, Trademarks and Copyrights listed in Section 3.1(k) of the Disclosure Schedule as having been issued by, registered with or filed with the United States Patent and Trademark Office or Register of Copyrights or the corresponding offices of other countries identified in Section 3.1(k) of the Schedule have been so duly registered, filed in or issued, as the case may be, and have been properly maintained and renewed in accordance with all applicable provisions of law and administrative regulations in the United States and each such other country. The Company and each of its Subsidiaries has used reasonable efforts to protect its rights in the Intellectual Property. The Company or one of its Subsidiaries owns all right, title and interest in and to the Intellectual Property, other than the Software listed on Exhibit 2 to Section 3.1(k) Disclosure Schedule, as to which the Company has a valid license. No current licenses for the use of the Intellectual Property requires the Company or any of its Subsidiaries to apply for or enforce appropriate legal protection of such licensed Intellectual Property. (viii) Each of the Company's and each of its Subsidiaries' current or former employees and those current or former independent contractors retained by the Company or any of its Subsidiaries who, either alone or in concert with others, created or creates, developed or develops, invented or invents, discovered or discovers, derived or derives, programmed or programs or designed or designs any of the Intellectual Property, has entered into a written agreement with the Company or any of its Subsidiaries, copies of which have heretofore been furnished to Metzler. All copyrightable property is "Work Made For Hire" or has been duly assigned to the Company. No former employees or independent contractors of the Company or any of its Subsidiaries have any claims or rights to any of the Intellectual Property necessary for the conduct of the Company's or any of its Subsidiaries' business as now conducted. To the Knowledge of the Company, no employee of the Company or any of its Subsidiaries is a party to or otherwise bound by any agreement with or obligated to any other Person (including, any former employer) which in any respect conflicts with any obligation, commitment or job responsibility of such employee to the Company or one of its Subsidiaries under any agreement to which currently he or she is a party or otherwise. (ix) Exhibit 3 to Section 3.1(k) of the Disclosure Schedule identifies each Person to whom the Company or any of its Subsidiaries has sold, licensed, leased or otherwise transferred or granted any interest or rights to any Intellectual Property, other than Intellectual Property licensed to end users pursuant to standard, non-exclusive "shrink wrap" license agreements in the Ordinary Course of Business, none of which is a license of any source 20 code ("Shrink Wrap Licenses"). The Company has previously delivered to Metzler complete and accurate copies of all agreements relating to each such sale, license, lease or other transfer or grant. The Company has delivered to Metzler copies of all copyright and trademark registration certificates and all letters patent. (x) To the Knowledge of the Company and the Shareholders, all of the data used in the Software was obtained from public sources and is not subject to any confidentiality obligation imposed on the Company. (xi) To its Knowledge, neither the Company nor any of its Subsidiaries has taken any actions under the law of any applicable foreign jurisdictions where the Company or any of its Subsidiaries has marketed or licensed Software that would restrict or limit the ability of the Company or any of its Subsidiaries to protect, or prevent it from protecting, its ownership interests in, confidentiality rights of, and rights to market, license, modify or enhance the Software. (xii) Neither the Company nor any of its Subsidiaries has granted any third party the right to market the Company's or any of its Subsidiaries' Software. (l) Contracts. Except as set forth on Schedule 3.1(l), with respect to each written agreement that would be material to the Company and its Subsidiaries as a whole (a "Material Contract"): (A) the Material Contract is in full force and effect; (B) the Material Contract will continue to be in full force and effect on identical terms immediately after the Merger Date; (C) neither the Company nor any of its Subsidiaries (nor, to the Knowledge of the Company, any other party) is in material breach or default (including, with respect to any express or implied warranty), and no event has occurred which with notice or lapse of time or both would constitute a material breach or default or permit termination, modification, or acceleration, under any Material Contract, except for any breaches, defaults, terminations, modifications or accelerations which have been cured or waived; and (D) to the Knowledge of the Company, no party has repudiated any material provision of any such Material Contract. To the Knowledge of the Company, neither the Company nor any of its Subsidiaries is a party to any verbal contract, agreement, or other arrangement which, if reduced to written form, would be a Material Contract. Correct and complete copies of the general forms of client engagement and services used by the Company and each of its Subsidiaries have been made available to Metzler. Except for those Material Contracts set forth on Section 3.1(l) of the Disclosure Schedule, neither the Company nor any of its Subsidiaries is a party to any fixed fee or capped price contracts or engagement arrangements (the "Fixed Rate Engagements"), nor does the Company nor any of its Subsidiaries have any outstanding offers, bids or proposals to perform any services on a fixed fee or capped basis in an amount in excess of $500,000 per year. With respect to the Company's Fixed Rate Engagements, the ratio of the amount of revenues recognized to date (in the aggregate) by the Company compared to the amount of revenues payable thereunder is reasonably proportionate to the ratio of the amount of work completed under such Fixed Rate Engagements to the work required to be completed thereunder. (m) Notes and Accounts Receivable. All notes and accounts receivable of the Company and each of its Subsidiaries are reflected properly on its books and records, such 21 receivables are valid receivables subject to no set-offs or counterclaims, are current and collectible in the aggregate amount shown, and will be collected in accordance with their terms at their aggregate recorded amounts, subject only to the reserve for bad debts set forth on the face of the Latest Financials, as adjusted for operations and transactions through the Merger Date in accordance with GAAP and the past custom and practice of the Company and its Subsidiaries. Since the date of the Latest Financials, there has not been an adverse change of more than 10% in the aggregate amount of the accounts receivable of the Company or any of its Subsidiaries or an increase of the average age of such receivables of 15 days. (n) Work in Process. Except as set forth on Section 3.1(n) of the Disclosure Schedule, the amount of unbilled receivables and other work-in- process of the Company and its Subsidiaries has been properly reflected on the books and records of the Company and its Subsidiaries, such that amounts set forth therein, when billed, will represent valid receivables subject to no set- offs or counterclaims and be collectible in the aggregate recorded amounts, subject only to a reserve for bad debts calculated on a basis consistent with the reserve for bad debts set forth on the face of the Latest Financials, as adjusted for operations and transactions through the Merger Date in accordance with GAAP and the past custom and practice of the Company and its Subsidiaries. Since the date of the Latest Financials, there has not been an adverse change of more than 10% in the aggregate amount of the unbilled receivables or other work- in-process of the Company or any of its Subsidiaries or an increase of the average age of such amounts of 15 days. (o) Litigation. Section 3.1(o) of the Disclosure Schedule sets forth each instance in which the Company or any of its Subsidiaries (i) is subject to any unsatisfied judgment, order, decree, stipulation or injunction or (ii) is a party to or, to the Knowledge of the Company, is threatened to be made a party to, any complaint, action, suit, proceeding, hearing, or investigation of or in any court or quasi-judicial or administrative agency of any Federal, state, local, or foreign jurisdiction or before any arbitrator for an amount in controversy in excess of $100,000 individually or $200,000 in the aggregate. None of the complaints, actions, suits, proceedings, hearings, and investigations set forth in Section 3.1(o) of the Disclosure Schedule could reasonably be expected to result in any Material Adverse Effect. To the Knowledge of the Company, there does not exist a Basis on which any such complaint, action, suit, proceeding, hearing, or investigation may be brought or threatened against the Company or any of its Subsidiaries that could have a Material Adverse Effect on the Company. (p) Employees; Employment Matters. (i) Except as set forth in Section 3.1(p) of the Disclosure Schedule, to the Knowledge of the Company, no employee or group of employees of the Company or any of its Subsidiaries who have in the last twelve months generated more than $500,000 in revenues of the Company and its Subsidiaries has notified the Company that they intend to terminate their employment with the Company or any of its Subsidiaries generally or as a result of the transactions contemplated hereby or otherwise. Neither the Company nor any of its Subsidiaries is a party to or bound by any collective bargaining agreement, and neither the Company nor any of its Subsidiaries has experienced any strikes, grievances, other collective bargaining disputes or, to the Knowledge of the Company, claims of unfair labor practices. The Company has no 22 Knowledge of any organizational effort presently being made or threatened by or on behalf of any labor union with respect to employees of the Company or any of its Subsidiaries. (ii) Section 3.1(p) of the Disclosure Schedule contains a true, correct and complete list setting forth the names and current salaries or rates of compensation of all employees of the Company and each of the Subsidiaries with an annual base salary of at least $50,000 and independent contractors who render services to the Company or any of its Subsidiaries on more than a single occasion who are expected to be paid at least $50,000 in 1999. Except as disclosed on Section 3.1(p) of the Disclosure Schedule, neither the Company nor any of its Subsidiaries has any unsatisfied Liability to any previously terminated employee or independent contractor. The Company has made available all written (and summarized all oral) employee handbooks, policies, programs and arrangements to Metzler. (iii) Except as set forth in Section 3.1(p) of the Disclosure Schedule, all Persons employed by the Company and each of its Subsidiaries are employees at will. Except as set forth in Section 3.1(p) of the Disclosure Schedule, none of the employees of the Company or any of its Subsidiaries are subject to noncompete/nonsolicitation covenants in favor of the Company. (iv) The Company and each of its Subsidiaries has materially complied with all applicable laws relating to labor, including, without limitation, any provisions thereof relating to wages, termination pay, vacation pay, fringe benefits, collective bargaining and the payment and/or accrual of the same and all Taxes, insurance and all other costs and expenses applicable thereto, and neither the Company nor any of its Subsidiaries is liable for any material arrearage, or any Taxes, costs or penalties for failure to comply with any of the foregoing. Without limiting the generality of the foregoing, neither the Company nor any of its Subsidiaries has in any material respect violated any of the health care continuation provisions of Part 6 of Subtitle B of Title I of ERISA ("COBRA") or other applicable state insurance continuation law. No material COBRA or other state insurance continuation law violation exists or will exist with respect to any employees of the Company or any of its Subsidiaries prior to the Merger Date. (v) Each Person whom the Company or any of its Subsidiaries currently retains as an independent contractor or previously retained as an independent contractor qualifies, or at all times while performing services for the Company or any of its Subsidiaries qualified, as an independent contractor and not as an employee of the Company or any of its Subsidiaries, under the Code and all applicable state laws. Neither the execution of this Agreement nor the consummation of the Acquisition shall cause the Company or any of its Subsidiaries to be in breach of any agreement with any employee, contractor or consultant or cause the Company or any of its Subsidiaries to be liable to pay any severance or other amount to any of its employees, contractors or consultants. (q) Employee Benefit Plans. (i) All Plans of the Company and each of its Subsidiaries which are "employee benefit plans" within the meaning of Section 3(3) of ERISA are listed in Section 3.1(q) of the Disclosure Schedule. Each Plan is in material compliance with its terms 23 and with ERISA and other applicable laws (including, without limitation, compliance with the health care continuation requirements of COBRA and any proposed regulations promulgated thereunder), and all agreements and instruments applicable to any Plan. Section 3.1(q) of the Disclosure Schedule sets forth each former employee of the Company or any of its Subsidiaries entitled to COBRA benefits and the remaining period of such benefits. The Company has either received a favorable determination letter or notification letter (a "Determination Letter") from the applicable Internal Revenue Service District Director as to the qualification under the Code of each Plan which is a pension plan, as defined in Section 3(2) of ERISA ("Pension Plan") or has remaining a period of time under applicable Treasury regulations or Internal Revenue Service pronouncements in which to apply for such a Determination Letter and make any amendments necessary to obtain a favorable determination as to the qualified status of each Pension Plan, and, to the Company's Knowledge, there have been no amendments or, to the Company's Knowledge, other developments since the date of such Determination Letter which would cause the loss of such qualified status. Each Plan which has not received a favorable Determination Letter but which has remaining a period of time under applicable Treasury Regulations or Internal Revenue Service pronouncements in which to apply for a Determination Letter is reflected on Section 3,1(q) of the Disclosure Schedule. No material violation of ERISA has occurred within the last 6 years in connection with the administration of any of the Plans, and there are no actions, suits, or claims (other than routine, non-contested claims for benefits) pending or, to the Knowledge of the Company threatened against the Plans, or any administrator or fiduciary thereof, which could result in any material Liability. (ii) With respect to all present Plans, the Company has heretofore made available to Metzler true and complete copies of each of the following to the extent such documents exist or are applicable: (A) the Plan documents (and any applicable trust agreement or insurance contract and including descriptions of vacation, severance pay, sickness, and separation policies); (B) the most recent Internal Revenue Service determination or notification letter request relating to each of the Pension Plans; (C) the summary plan description (as currently in effect) and any summary of material modification for each of the Plans; (D) the most recent Annual Report (Form 5500 Series), and accompanying schedules, filed for each of the Plans, and the most recent summary annual report furnished for each of the Plans; (E) the most recent actuarial valuations, and latest financial statements for each of the Plans; and (F) all documents filed with the Internal Revenue Service, Department of Labor or Pension Benefit Guaranty Corporation since January 1, 1992. 24 There is and has been no material violation of ERISA known to the Company with respect to the filing of applicable reports, documents, and notices regarding such past or present Plans with the Secretary of Labor or the Secretary of the Treasury or the furnishing of such documents to the participants or beneficiaries of such Plans. (iii) Except as disclosed in Section 3.1(g) of the Disclosure Schedule, each Plan maintained by the Company is maintained under a plan document which does not provide for other participating employers except for the Company or any ERISA Affiliate of the Company and no Plan provides or has provided credit with respect to service other than with the Company or any ERISA Affiliate of the Company. (iv) Neither the Company nor any ERISA Affiliate of the Company nor any of their employees, shareholders, or directors has engaged in any transaction in connection with which any of them would be subject either to a civil penalty assessed pursuant to Section 502 of ERISA or a tax imposed by Section 4975 of the Code, other than transactions which would not, individually or in the aggregate, have a Material Adverse Effect on the Company. The execution and performance of this Agreement will not involve any prohibited transaction within the meaning of Section 406 of ERISA, other than prohibited transactions which would not, individually or in the aggregate, have a Material Adverse Effect on the Company. (v) None of the assets of any of the Plans is or has been invested in any property constituting employer real property or any employer security within the meaning of Section 407(d) of ERISA. (vi) Intentionally Deleted. (vii) Full payment as of the Merger Date will have been made of all amounts which the Company and any ERISA Affiliate of the Company are required, under the terms of all Plans, to have paid as contributions to such Plans as of the last day of the most recent fiscal year prior to the Merger Date. (viii) The execution and performance of this Agreement will not constitute a stated triggering event under any Plan or employment agreement that will result in any material payment (whether of severance pay or otherwise) becoming due to any employee of the Company or ERISA Affiliate of the Company. (ix) Neither the Company nor any ERISA Affiliate of the Company provides, nor have they at any time provided, coverage under any welfare plan (a Welfare Plan (as defined in Section 3(l) of ERISA) (including, but not limited to, life insurance, disability, medical, dental, prescription drugs, or accidental death or dismemberment) to any of their retirees, other than any continuation or conversion coverage which any such retiree may have purchased at his own expense except as may be required by COBRA or other applicable statute. (x) The financial statements of each Pension Plan as of the end of the most recent plan year for which such statements are available, and the list of the investments of 25 such Pension Plan as of the most recent plan year end for which such statements are available, accurately reflect the financial conditions of the Pension Plans as of the date of such statements, and there have been no material changes in such investments between such date and the Merger Date. (xi) To the Company's Knowledge, there have been no statements, either written or oral, or communications made or materials provided to any employee or former employee of the Company or any ERISA Affiliate of the Company by any officer, director, employee, agent or representative of the Company that provide for or could be construed as a contract or promise by the Company or any ERISA Affiliate of the Company to provide for any pension, welfare, or other insurance-type benefits to such employee or former employee, whether before or after retirement, other than benefits under the Plans. (xii) Neither the Company nor any ERISA Affiliate of the Company currently maintains or contributes, or at any time in the past has maintained or contributed to a defined benefit plan (as defined in Section 3(35) of ERISA), including, but not limited to, each multi-employer plan, as defined in Section 3(37) of ERISA. (r) Licenses, Permits and Approvals. Section 3.1(r) of the Disclosure Schedule lists all material governmental and regulatory licenses, permits and approvals necessary to the conduct of the Company's and each of its Subsidiaries' business. All such licenses, permits and approvals are in full force and effect. There are no violations by the Company or any of its Subsidiaries of, or any claims or proceedings, pending or, to the Knowledge of the Company, threatened, challenging the validity of or seeking to discontinue, any such licenses, permits or approvals, except for such violations, claims or proceedings which would not, individually or in the aggregate, have a Material Adverse Effect. (s) Unlawful Payments. No payments of either cash or other consideration have been made to any Person by the Company, any of its Subsidiaries or the Shareholders or, to the Knowledge of the Company, on behalf of the Company by any agent, employee, officer, director, shareholders or other Person, that were unlawful under the laws of the United States or any state or any other foreign or municipal government authority having appropriate jurisdiction over the Company. (t) Compliance with Laws. The Company and each of its Subsidiaries and each of their respective facilities are in compliance in all material respects with and have not in the past violated any applicable law, rule or regulation of any Federal, state, local or foreign government or agency thereof, including without limitation, environmental laws and laws relating to labor and employment, and no notice, claim, complaint, action, suit, proceeding, investigation or hearing has been received by the Company or any of its Subsidiaries or filed, commenced or, to the Knowledge of the Company threatened against the Company or any of its Subsidiaries alleging any such violation, except in each instance for such failures to comply and such notices, claims, complaints, actions, suits, proceedings, investigations or hearings which would not, individually or in the aggregate, have a Material Adverse Effect. 26 (u) Suppliers and Clients. During the past twelve months, no material licensor, vendor, supplier or licensee, or any client of the Company or any of its Subsidiaries accounting for more than 1% of the Company's or any of its Subsidiaries' revenues during such period, has canceled or otherwise materially adversely modified its relationship with the Company or any of its Subsidiaries and, to the Knowledge of the Company, no such Person has any intention to do so, and, to the Knowledge of the Company, there are no disputes or notices of dissatisfaction with or from any such client of the Company or any of its Subsidiaries, which is reasonably likely to result in a cancellation, termination or materially adverse modification of any such relationship and, to the Knowledge of the Company, the consummation of the transactions contemplated hereby shall not adversely affect any relationships with such clients. (v) Insurance. (i) Except as set forth in Section 3.1(q) of the Disclosure Schedule, attached as Schedule 3.1(v) is a list of each insurance policy (including policies providing property, casualty, Liability, and workers' compensation coverage and bond and surety arrangements) currently carried by the Company or any of its Subsidiaries and the current annual premium for each such policy. (ii) With respect to each such insurance policy: (A) the consummation of the Acquisition will not cause a default or require any consent under any such policy; (B) to the Knowledge of the Company, all such insurance is in full force and effect, and the Company and the Companies' Subsidiaries are in compliance with all requirements and provisions thereof. The Company has not suffered any adverse loss experience which could reasonably be expected to cause its insurance coverage not to be renewed upon the expiration thereof at premiums substantially equivalent to those currently being paid or otherwise at commercially reasonable rates. (w) Warranty. All services previously rendered by the Company and each of its Subsidiaries have been in material conformity with all applicable contractual commitments and all express and implied warranties, and the Company and each of its Subsidiaries has no Liability (and the Company has no Knowledge of any Basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand giving rise to any Liability) for damages in connection therewith, subject only to the reserve for customer claims set forth on the face of the Latest Financials as adjusted for the passage of time through the Merger Date in accordance with the past custom and practice of the Company and its Subsidiaries. No services provided by the Company or any of its Subsidiaries are subject to any contractual guaranty, warranty, or other indemnity beyond the Company's or any of its Subsidiaries' applicable standard terms and conditions of engagement. Neither the Company nor any of its Subsidiaries is obligated to perform services or client work for which it will not be paid in order to correct work previously performed that was incorrect or deficient, complete work in excess of the fixed rate limit with respect to a particular project or otherwise, other than reasonable and customary efforts to maintain client satisfaction consistent with the size and scope of a particular project and consistent with maintaining the reasonable profitability of such project. 27 (x) Transaction-Related Accounting Matters. Neither the Company nor any of its Subsidiaries has taken or agreed to take any action that it knows or has been advised would prevent the transactions contemplated hereby from being accounted for as a pooling of interests in accordance with GAAP. (y) Brokers' Fees. The Company has no Liability or obligation to pay any fees or commissions to any broker or finder with respect to the transactions contemplated by this Agreement for which Metzler could become liable or otherwise obligated. (z) Potential Conflicts of Interest. Except as set forth on Schedule 3.1(z) hereof, no officer, director or shareholder of the Company or any of its Subsidiaries: (i) owns, directly or indirectly, any interest in (excepting not more than 5% stock holdings for investment purposes in securities of publicly held and traded companies) or is a shareholder, officer, director, employee or consultant of any Person which is a competitor, lessor, lessee, customer or supplier of the Company or any of its Subsidiaries; (ii) owns, directly or indirectly, in whole or in part, any interest in Intellectual Property which the Company or any of its Subsidiaries is using or the use of which is necessary for the business of the Company or any of its Subsidiaries; (iii) has any loan outstanding to or, to the Knowledge of the Company, any cause of action or other claim whatsoever against the Company or any of its Subsidiaries, except for claims in the Ordinary Course of Business, such as for accrued salary, bonus, vacation pay and benefits under Benefit Plans and similar matters and agreements existing on the date hereof; (iv) has made, on behalf of the Company or any of its Subsidiaries, any payment or commitment to pay any commission, fee or other amount to, or purchase or obtain or otherwise contract to purchase or obtain any goods or services from, any corporation or other Person of which any officer, manager or director of the Company or any of its Subsidiaries, or, a relative of any of the foregoing, is a partner or shareholder (except stock holdings solely for investment purposes in securities of publicly held and traded companies). No Affiliate of any Shareholder has any claim against the Company, other than for wages for services performed and related business expenses incurred in the Ordinary Course of Business. (aa) Disclosure. None of the representations and warranties of the Company contained in this Agreement or the Disclosure Schedule contains any untrue statement of a material fact or omits a material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they were made, not misleading. There is no material fact which has not been disclosed to Metzler which results in, or could reasonably be anticipated to result in, a Material Adverse Effect on the Company (it being understood that except as set forth in Section 3.1(f) no representation or warranty is being made regarding the revenues or results of operations of the Company). 3.2 Representations and Warranties of Metzler and Acquisition Sub. As a material inducement to the Company to enter into this Agreement and consummate the transactions contemplated hereby, Metzler and Acquisition Sub hereby jointly and severally represent and warrant to the Company and to the Shareholders that all of the statements contained in this Section 3.2 are correct and complete as of the date of this Agreement and Metzler and Acquisition Sub covenant that said statements will be correct and complete as of the Merger Date 28 (as though made as of the Merger Date and as though the Merger Date were substituted for the date of this Agreement throughout this Section 3.2). (a) Organization. Metzler and Acquisition Sub are corporations duly incorporated, validly existing, and in good standing under the laws of the State of Delaware. Metzler is qualified to do business in and is in good standing under the laws of each jurisdiction wherein the nature of its business or its ownership of property requires it to be so qualified, except where the failure to be so qualified would not, in the aggregate, have a material adverse effect or impact upon the assets, business, financial condition or results of operations of Metzler and its Subsidiaries, taken as a whole (a "Metzler Adverse Effect"). (b) Authorization of Transaction. Metzler and Acquisition Sub have all requisite corporate power and authority to execute and deliver this Agreement and to perform their respective obligations hereunder. The Board of Directors of Metzler and Acquisition Sub have duly authorized the execution, delivery and performance of this Agreement by Metzler and Acquisition Sub, subject to the conditions set forth herein. This Agreement constitutes the valid and legally binding obligation of Metzler and Acquisition Sub, enforceable against them in accordance with its terms, except as enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to the rights and remedies of creditors generally or (ii) general principles of equity. (c) Noncontravention. Subject to compliance with the HSR Act, neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby will (i) violate or conflict in any way with any statute, regulation, law, rule or common law doctrine, (ii) violate or conflict in any way with any judgment, order, decree, stipulation, injunction or other restriction of any government, governmental agency or court, to which Metzler or Acquisition Sub is subject (iii) breach any provision of the Certificate of Incorporation or By-Laws of Metzler or the Certificate of Incorporation or By-laws of Acquisition Sub or (iv) conflict with, result in a breach of, constitute a default under (with or without notice or lapse of time, or both), result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice under, or result in the creation of any Security Interest upon any of Metzler's or Acquisition Sub's assets pursuant to the terms of, any contract, agreement, lease, sublease, license, sublicense, franchise, permit, indenture, agreement for borrowed money, instrument of indebtedness, Security Interest or other arrangement to which Metzler or Acquisition Sub is a party or by which it is bound or to which any of its assets are subject, except where such violations, conflicts, breaches, defaults or other events would not, individually or in the aggregate, result in a Metzler Adverse Effect or prevent or materially delay the consummation of the transactions contemplated hereby. Except pursuant to the HSR Act, neither Metzler nor Acquisition Sub is required to give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government, governmental agency or court, or any other Person in order for the parties to consummate the transactions contemplated by this Agreement and in order that the Acquisition and such transactions shall not constitute a breach or violation of, or result in a right of termination or acceleration or any encumbrance on any of Metzler's or Acquisition Sub's assets pursuant to the provisions of, any agreement, arrangement or understanding or any license, franchise or permit. 29 (d) Metzler Common. Metzler has taken all actions necessary to authorize and approve the issuance of the Metzler Common, and as of the Merger Date the Metzler Common will, when issued in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable. There are no statutory or contractual shareholders' preemptive rights or rights of refusal with respect to the issuance of the Metzler Common upon consummation of the Acquisition. (e) Brokers' Fees. Subject to Section 3.1(y) hereof, neither Metzler nor Acquisition Sub has any Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement for which the Shareholder is or could become liable or obligated, except for the fees and expenses payable to Donaldson, Lufkin & Jenrette Securities Corporation. (f) Capital Structure. (i) The authorized capital stock of Metzler consists of 75,000,000 shares of Metzler Common and 3,000,000 shares of preferred stock, par value $0.001 per share ("Metzler Preferred Stock"). As of December 31, 1998, approximately 38,010,000 shares of Metzler Common and no shares of Metzler Preferred Stock were issued and outstanding. All outstanding shares of Metzler's outstanding capital stock are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. (ii) Except for options granted in the normal course pursuant to Metzler's stock option plans and employee stock purchase plan, as described in Metzler SEC Reports (as defined below), and except as contemplated herein, there are no options, warrants, calls, rights, commitments or agreements of any character to which Metzler or any Subsidiary of Metzler is a party or by which any of them is bound obligating Metzler or any Subsidiary of Metzler or any securities or rights convertible into or exchangeable for any such capital stock. (g) Commission Filings. Metzler has timely filed all forms, reports and documents required to be filed by Metzler with the Commission under the Exchange Act and the Securities Act since October 4, 1996 (collectively, the "Metzler SEC Reports"). The Metzler SEC Reports (i) at the time filed, complied in all material respects with the applicable requirements of the Exchange Act, or Securities Act, as applicable, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated in such Metzler SEC Reports or necessary in order to make the statements in such Metzler SEC Reports, in the light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of Metzler included in the Metzler SEC Reports (the "Metzler Financial Statements") complied when filed as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, and were, when filed, in accordance with the books and records of Metzler, complete and accurate in all material respects, and presented fairly the consolidated financial position and the consolidated results of operations, changes in stockholders' equity and cash flows of Metzler and its Subsidiaries as of the dates and for the periods indicated, in accordance with GAAP, consistently applied, subject in the case of interim 30 financial statements to normal year-end adjustments and the absence of certain footnote information. (h) No Material Adverse Changes. Since November 5, 1998, to the Knowledge of Metzler, no event has occurred which has had a Metzler Adverse Effect and no action, suit, claim or proceeding has been filed, or threatened in writing, which if adversely determined, would result in a Metzler Adverse Effect. (i) Transaction-Related Tax Matters. Metzler has not taken or agreed to take any action that would prevent the transactions contemplated hereby from qualifying as a reorganization within the meaning of Section 368(a) of the Code. (j) Disclosure. None of the representations or warranties of Metzler and Acquisition Sub contained herein contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, as of the Merger Date. (k) Information Statement Materials. None of the Metzler SEC Reports contained in Exhibits __ attached to the Information Statement at the time of mailing of the Information Statement to the Shareholders contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 4. CLOSING DELIVERIES ------------------ 4.1 Company Closing Deliveries. The Company shall deliver to Metzler each of the following: (a) a certificate of the Secretary of the Company and a certificate of the Secretary of each of its Subsidiaries dated the Merger Date certifying (i) a copy of the text of the resolutions by which the action on the part of the Company or such Subsidiary, as the case may be, necessary to approve this Agreement and the Acquisition were taken, (ii) incumbency of each officer executing this Agreement or any other agreement, certificate or other instrument executed pursuant hereto, (iii) the Articles of Incorporation and By-laws or other governing document of the Company or such Subsidiary, as the case may be, and (iv) a list of Shareholders or other equity holders, as the case may be, as of the Merger Date; (b) a copy of the Company's Articles of Incorporation, as amended to date, certified as of a recent date prior to the Merger Date by the State Secretary of the State of California; (c) Good standing certificates for the Company issued by the State Secretary of the State of California and each jurisdiction in which the Company is qualified to do business, and for each Subsidiary issued by the applicable secretary of state (or other state agency) of the state of organization of such Subsidiary (or other jurisdiction in which such Subsidiary is qualified to do business), in each case dated as of a recent date prior to the Merger Date; 31 (d) (i) from each of the Shareholders (other than Shareholders who are exercising dissenters' rights with respect to the Acquisition [the "Departing Shareholders"]), executed counterparts to the Registration Agreement substantially in the form of Exhibit A hereto (the "Registration Agreement"), (ii) from the Company, each of the Shareholders and the "Shareholders' Representative" (as such term is defined thereunder), executed counterparts of that certain Consent, Indemnification and Noncompete Agreement between the foregoing parties, Metzler and Acquisition Sub in the form attached hereto as Exhibit B (the "Consent, Indemnification and Noncompete Agreement"), (iii) from the Shareholders' Representative and the Escrow Agent, executed counterparts of the Escrow Agreement, and (iv) from the Dissenters, executed counterparts of that certain Departing Shareholders' Noncompete Agreement in the form attached hereto as Exhibit C (the "Departing Shareholders' Noncompete Agreement"); (e) evidence that no court or other governmental entity having jurisdiction over the Company or Metzler, or any of their respective Subsidiaries, shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is then in effect and has the effect of making the Acquisition or any of the transactions contemplated hereby illegal; (f) evidence that 90% or more of the outstanding shares of Company Stock shall have consented to the Acquisition; and (g) evidence that the Existing Company Documents shall have been terminated. 4.2 Metzler Closing Deliveries. Metzler shall deliver to the Company (or, in the case of subsection (b), the Shareholders) each of the following: (a) Metzler shall deliver to the Company a certificate of the Secretary or any Assistant Secretary of Metzler and the Acquisition Sub dated the Merger Date certifying (i) a copy of the text of the director resolutions by which the corporate action on the part of Metzler and the Acquisition Sub necessary to approve this Agreement and the Acquisition were taken; and (ii) incumbency of each officer executing this Agreement or any other agreement, certificate or other instrument executed pursuant hereto; (b) the Registration Agreement, the Escrow Agreement, the Consent, Indemnification and Noncompete Agreement, and the Dissenters' Noncompete Agreement; (c) evidence that no court or other governmental entity having jurisdiction over the Company or Metzler, or any of their respective Subsidiaries, shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is then in effect and has the effect of making the Acquisition or any of the transactions contemplated hereby illegal; (d) evidence that the applicable waiting period, if any, under the HSR Act shall have expired or been terminated; and 32 (e) evidence that the shares of Metzler Common issuable pursuant to the Acquisition shall have been authorized for listing on the Nasdaq Stock Market, subject to notice of issuance. 5. ADDITIONAL AGREEMENTS --------------------- 5.1 Post-Acquisition Covenants. The Parties agree as follows with respect to the period following the Merger Date: (a) General. In case at any time after the Merger Date any further action is necessary or desirable to carry out the purposes of this Agreement, each of the Parties will take such further action (including the execution and delivery of such further instruments and documents, and in the case of Metzler, using its reasonable efforts to cause the listing of the shares of Metzler Common issuable in the Acquisition on Nasdaq) as any other Party reasonably may request, at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification with respect to such matter under Consent, Indemnification and Noncompete Agreement. (b) Tax Matters. Metzler and the Company Executives shall cooperate fully, as and to the extent reasonably requested by the other Party, in connection with the filing of Tax Returns of the Company and its Subsidiaries and any audit, litigation or other proceeding with respect to any Taxes of the Company or any of its Subsidiaries or any Taxes incurred in connection with any of the transactions contemplated by this Agreement. Neither Metzler, Acquisition Sub nor any direct or indirect Subsidiary of Metzler shall take any action or agree to take any action that prohibits the treatment of the Merger as a reorganization within the meaning of Section 368(a) of the Code. (c) Indemnification of Directors and Officers. The Surviving Corporation shall indemnify, defend, hold harmless and advance expenses to the individuals who are the Company Executives and officers of the Company as of the date of this Agreement to the same extent, if any, that such directors and officers are indemnified under the terms of the Articles of Incorporation or By- laws or otherwise in respect of any claims brought after the date of this Agreement relating to events occurring on or prior to the date of this Agreement. In the event the Surviving Corporation or its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity in such consolidation or merger or (ii) transfers all or substantially all its properties and assets to any Person, then, and in each case, proper provision shall be made so that the successors and assigns of the Surviving Corporation, as the case may be, honor the indemnification obligations set forth in this Section (it being understood that the amount of such indemnification and expenses shall constitute Metzler Indemnifiable Losses as such term is defined under the Consent, Indemnification and Noncompete Agreement to the extent they relate to a breach of a representation or warranty by the Company). (d) Employee Benefits. Employees of the Surviving Corporation immediately following the Effective Date who, immediately prior to the Effective Date, were employees of the Company, any Affiliate, or ERISA Affiliate, shall be given credit for purposes of eligibility, 33 vesting, and determination of level of benefits under each employee benefit plan, program, policy or arrangement of Metzler, or an Affiliate of Metzler, including, but not limited to the Surviving Corporation, in which such employees participate subsequent to the Effective Date for all service with the Company, any Affiliate, or ERISA Affiliate, prior to the Effective Date. (e) Deferred Compensation Pay-out. Within thirty (30) days of the Merger, Metzler shall cause the Company to pay to certain employees of the Company cash or other immediately available funds equal to the difference between (i) amounts actually accrued to such employees pursuant to that certain Deferred Compensation Agreement, dated April 1, 1990, as thereafter amended (the "Deferred Compensation Agreement"), entered into by and among the Company and the employees of the Company who are party thereto, and (ii) the aggregate amount of fees and expenses incurred or accrued by and payable by the Company as a post-closing obligation and specified in Section 6.11 hereof; provided, however, that the aggregate amounts payable pursuant to such Deferred Compensation Agreement shall not exceed the difference between (i) $8,000,000 and (ii) the aggregate amount of fees and expenses incurred or accrued by and payable by the Company as a post-closing obligation and specified in Section 6.11 hereof. 6. MISCELLANEOUS ------------- 6.1 Press Releases and Announcements. No Party shall issue any press release or announcement relating to the subject matter of this Agreement without the prior written approval of the other Party (for purposes hereof, Metzler and the Acquisition Sub shall be deemed one party and the Company and the Shareholders collectively shall be deemed another Party); provided, however, that any Party may make any public disclosure it believes in good faith is required by law or regulation, including, without limitation, any disclosures made necessary by Metzler's status as a public company (in which case the disclosing Party will advise the other Party prior to making the disclosure). 6.2 No Third Party Beneficiaries. Except for Section 5.1(c), this Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns. 6.3 Entire Agreement. This Agreement (including the other documents referred to herein) constitutes the entire agreement between the Parties and supersedes any prior understandings, agreements, or representations by or between the Parties, written or oral, that may have related in any way to the subject matter hereof. 6.4 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign this Agreement or any of such Party's rights, interests, or obligations hereunder without the prior written approval of the other Parties. Notwithstanding the foregoing, Metzler may (i) cause the stock of the Company to be acquired by a wholly owned subsidiary of Metzler and/or (ii) merge the Company with or into a wholly-owned direct or indirect subsidiary of Metzler, in either case without affecting its rights or obligations hereunder. 34 6.5 Survival. All of the representations and warranties of the Company and the Company Executives contained in Section 3.1 hereof (the "Company Representations"), shall survive the consummation of the Acquisition (regardless of any Knowledge or investigation of Metzler, Acquisition Sub or the Surviving Corporation) and shall continue in full force and effect for a period of one year following the Merger Date (the "Survival Period"). All of the representations and warranties of Metzler contained in Section 3.2 (the "Metzler Representations") shall survive the consummation of the Acquisition (regardless of any Knowledge or investigation of the Shareholders or the Company) and shall continue in full force and effect until the expiration of the Survival Period. All covenants (as opposed to representations and warranties) of the Parties in this Agreement shall survive the consummation of the Acquisition and shall continue in full force notwithstanding the expiration of the Survival Period. 6.6 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 6.7 Notices. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given (i) three (3) business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, (ii) one day after receipt is electronically confirmed, if sent by fax (provided that a hard copy shall be promptly sent by first class mail), or (iii) one (1) business day following deposit with a recognized national overnight courier service for next day delivery, charges prepaid, and addressed to the intended recipient as set forth below or in the case of the Shareholder on the signature pages hereto: If to the Company: With a Copy To: ------------------ --------------- Strategic Decisions Group Gray Cary Ware & Freidenrich LLP 2440 Sand Hill Road 400 Hamilton Avenue Menlo Park, CA 94025-6900 Palo Alto, CA 94301-1825 Attn: Carl Spetzler Attn: Peter Astiz, Esq. Fax: (650) 233-6022 Fax: (650) 327 - 3699 If to Metzler or Acquisition Sub: With a copy to: --------------------------------- --------------- The Metzler Group, Inc. Barack Ferrazzano Kirschbaum 615 North Wabash Avenue Perlman & Nagelberg Chicago, Illinois 60015 333 West Wacker Drive, Suite 2700 Attn: General Counsel Chicago, Illinois 60606 Fax: (312) 573-5676 Attn: Michael J. Legamaro, Esq. Fax: (312) 984-3193 Any Party may give any notice, request, demand, claim, or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telecopy, 35 telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is delivered to the individual for whom it is intended. Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth. 6.8 Governing Law. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Illinois, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Illinois, any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Illinois. Each party hereto (a) agrees that any suit, action or other legal proceeding relating hereto may be brought in state court sitting in the County of Clark, Nevada or the United States District Court for the District of Nevada, as applicable; and (b) consents to the jurisdiction of each such court in any such suit, action or proceeding; and (c) waives any objection said party may have to the laying of venue in any such suit, action or proceeding in either such court; and (d) consents to service of process by U.S. mail. 6.9 Amendments and Waivers. No amendment or waiver of any provision of this Agreement shall be valid unless the same shall be in writing and signed by Metzler, the Company, and the Executive Officers; provided, that the Shareholders' Representative may, on behalf of the Company and the Executive Officers (and, indirectly, the Shareholders), consent to any amendment of or waive any provision of this Agreement, the Consent, Indemnification and Noncompete Agreement, the Registration Agreement, or the Escrow Agreement, so long as such amendment or waiver is not more favorable to one Shareholder or group of Shareholders than any other. No waiver by any Party of any default, misrepresentation or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent occurrence of such kind. 6.10 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the invalid or unenforceable term or provision in any other situation or in any other jurisdiction. If a final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the Parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. 6.11 Expenses. Subject to the following two sentences, each of Metzler and the Company will bear its own direct and indirect costs and expenses (including fees and expenses of legal counsel, accountants or other representatives or consultants) incurred in connection with the negotiation, preparation and execution of this Agreement and the consummation of the 36 transactions contemplated hereby, whether or not such transactions are consummated. If the Acquisition is consummated, then expenses paid, incurred, or accrued by the Company to effect the Acquisition shall be paid by the Company; except that the following expenses relating to the Acquisition will be accrued by the Company and become post-closing obligations of the Company, but shall not be considered in determining Working Capital, Total Assets or Net Shareholders Capital for purposes of Section 2.6 hereof: (i) the reasonable accounting fees and expenses of the Company and (ii) the legal fees incurred by the Company in connection with the Acquisition and Merger (up to $75,000). Metzler shall pay any and all investment banking fees due and owing Donaldson, Lufkin & Jenrette Securities Corporation. 6.12 Obligations of Company Executives. The parties hereby agree and acknowledge that notwithstanding the fact that the Company Executives have given representations and warranties under this Agreement and are parties to this Agreement, the Company Executives shall not thereby be liable for indemnification or otherwise beyond the indemnification provided for pursuant to the terms of the Consent, Indemnification and Non-compete Agreement. 6.13 Construction. The Parties have jointly participated in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumptions or burdens of proof shall arise favoring any Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any Federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The Parties intend that each representation, warranty and covenant contained herein shall have independent significance. If any Party has breached any representation, warranty or covenant contained herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the Party has not breached shall not detract from or mitigate the fact that the Party is in breach of the first representation, warranty, or covenant. 6.14 Incorporation of Exhibits and Schedules. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. 6.15 Directly or Indirectly. Where any provision in this Agreement refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether the action in question is taken directly or indirectly by such Person. 37 IN WITNESS WHEREOF, the Parties hereto have executed this Plan and Agreement of Merger as of the date first above written. METZLER: THE COMPANY: - -------- ------------ THE METZLER GROUP, INC., STRATEGIC DECISION GROUP a Delaware corporation a California corporation By: /s/ Robert P. Maher By: /s/ Carl Spetzler Robert P. Maher, President and Carl Spetzler, Chief Executive Chief Executive Officer Officer By: /s/ Charles A. Demirjian By: /s/ Laurie Mandel Charles A. Demirjian, Secretary Laurie Mandel, Secretary ACQUISITION SUB: - ---------------- MGI ACQUISITION III, Inc., a Delaware corporation By: /s/ Robert P. Maher Robert P. Maher, President and Chairman By: /s/ Charles A. Demirjian Charles A. Demirjian, Secretary 38 Company Executives' Signatures ============================== COMPANY EXECUTIVES: /s/ ---------------------------- ---------------------------- ---------------------------- ---------------------------- 39 List of Exhibits and Schedules ------------------------------ Exhibit A - Form of Registration Agreement Exhibit B - Consent, Indemnification and Noncompete Agreement Exhibit C - Departing Shareholder's Noncompete Agreement Exhibit D - California Merger Agreement Schedule 2.5 - Additional Officers of Surviving Corporation Schedule 2.6 - Conversion of Securities 40 EX-10.2 3 THE METZLER GROUP, INC. LONG-TERM INCENTIVE PLAN Exhibit 10.2 THE METZLER GROUP, INC. LONG-TERM INCENTIVE PLAN As Amended Through June 1, 1999 I. Purpose The Metzler Group, Inc. Long-Term Incentive Plan is adopted June 30, 1996. The Plan is designed to attract and retain selected Key Employees and Key Non- Employees of the Company and its Affiliates, and reward them for making major contributions to the success of the Company and its Affiliates. These objectives are accomplished by making long-term incentive awards under the Plan that will offer Participants an opportunity to have a greater proprietary interest in, and closer identity with, the Company and its Affiliates and their financial success. The Awards may consist of: (i) Incentive Options; (ii) Nonstatutory Options; (iii) Formula Options; (iv) Restricted Stock; (v) Rights; (vi) Performance Awards; or (vii) Cash Awards or any combination of the foregoing, as the Committee may determine. The Plan is intended to qualify certain compensation awarded under the Plan for tax deductibility under Section 162(m) of the Code to the extent deemed appropriate by the Committee. The Plan and the grant of Awards hereunder are expressly conditioned upon the Plan's approval by the stockholders of the Company. If such approval is not obtained, then this Plan and all Awards hereunder shall be null and void ab initio. II. Definitions A. Affiliate means any individual, corporation, partnership, association, joint-stock company, trust, unincorporated association or other entity (other than the Company) that, for purposes of Section 422 of the Code, is a parent or subsidiary of the Company, direct or indirect. B. Award means the grant to any Key Employee or Key Non-Employee of any form of Option, Restricted Stock, Right, Performance Award, or Cash Award, whether granted singly, in combination, or in tandem, and pursuant to such terms, conditions, and limitations as the Committee may establish in order to fulfill the objectives of the Plan. C. Award Agreement means an agreement entered into between the Company and a Participant under which an Award is granted and which sets forth the terms, conditions, and limitations applicable to the Award. D. Board means the Board of Directors of the Company. E. Cash Award means an Award of cash, subject to the requirements of Article XII and such other restrictions as the Committee deems appropriate or desirable. F. Code means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. A-1 G. Committee means the committee to which the Board delegates the power to act under or pursuant to the provisions of the Plan, or the Board if no committee is selected. If the Board delegates powers to a committee, and if the Company is or becomes subject to Section 16 of the Exchange Act, then, if necessary for compliance therewith, such committee shall consist initially of not less than two (2) members of the Board, each member of which must be a "non-employee director," within the meaning of the applicable rules promulgated pursuant to the Exchange Act. If the Company is or becomes subject to Section 16 of the Exchange Act, no member of the Committee shall receive any Award pursuant to the Plan or any similar plan of the Company or any Affiliate while serving on the Committee, unless the Board determines that the grant of such an Award satisfies the then current Rule 16b-3 requirements under the Exchange Act. Notwithstanding anything herein to the contrary, and insofar as it is necessary in order for compensation recognized by Participants pursuant to the Plan to be fully deductible to the Company for federal income tax purposes, each member of the Committee also shall be an "outside director" (as defined in regulations or other guidance issued by the Internal Revenue Service under Code Section 162(m)). H. Common Stock means the common stock of the Company. I. Company means, on the date the Plan is adopted, Metzler & Associates, Inc., an Illinois corporation, provided, however, that The Metzler Group, Inc. shall become the Company upon, or as soon as practicable after, the effective date of the reorganization of the Company (pursuant to which reorganization Metzler & Associates, Inc. shall become a one hundred percent (100%) subsidiary of The Metzler Group, Inc.). For all purposes hereunder, Company includes any successor or assignee corporation or corporations into which the Company may be merged, changed, or consolidated; any corporation for whose securities the securities of the Company shall be exchanged; and any assignee of or successor to substantially all of the assets of the Company. J. Disability or Disabled means a permanent and total disability as defined in Section 22(e)(3) of the Code. K. Exchange Act means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute thereto. L. Fair Market Value means, if the Shares are listed on any national securities exchange, the closing sales price, if any, on the largest such exchange on the valuation date, or, if none, on the most recent trade date immediately prior to the valuation date provided such trade date is no more than thirty (30) days prior to the valuation date. If the Shares are not then listed on any such exchange, the fair market value of such Shares shall be the closing sales price if such is reported, or otherwise the mean between the closing "Bid" and the closing "Ask" prices, if any, as reported in the National Association of Securities Dealers Automated Quotation System ("NASDAQ") for the valuation date, or if none, on the most recent trade date immediately prior to the valuation date provided such trade date is no more than thirty (30) days prior to the valuation date. If the Shares are not then either listed on any such exchange or quoted in NASDAQ, or there has been no trade date within such thirty (30) day period, the fair market value shall be the mean between the average of the "Bid" and the average of the "Ask" prices, if any, as reported in the National Daily Quotation System for the valuation date, or, if none, for the most recent trade immediately prior to the valuation date provided such trade date is no more than thirty (30) days prior to the valuation date. If the fair market value cannot be determined under the preceding three sentences, it shall be determined in good faith by the Committee. M. Formula Option means a Nonstatutory Option granted automatically to a Non-Employee Board Member upon his or her initial election, and any subsequent re-election, as a Non-Employee Board Member. N. Incentive Option means an Option that, when granted, is intended to be an "incentive stock option," as defined in Section 422 of the Code. O. Key Employee means an employee of the Company or of an Affiliate who is designated by the Committee as being eligible to be granted one or more Awards under the Plan. A-2 P. Key Non-Employee means a Non-Employee Board Member, consultant, advisor or independent contractor of the Company or of an Affiliate who is designated by the Committee as being eligible to be granted one or more Awards under the Plan. Q. Non-Employee Board Member means a director of the Company who is not an employee of the Company or any of its Affiliates. R. Nonstatutory Option means an Option that, when granted, is not intended to be an "incentive stock option," as defined in Section 422 of the Code. S. Option means a right or option to purchase Common Stock, including Restricted Stock if the Committee so determines. T. Participant means a Key Employee or Key Non-Employee to whom one or more Awards are granted under the Plan. U. Performance Award means an Award subject to the requirements of Article XI, and such performance conditions as the Committee deems appropriate or desirable. V. Plan means The Metzler Group, Inc. Long-Term Incentive Plan, as amended from time to time. W. Restricted Stock means an Award made in Common Stock or denominated in units of Common Stock and delivered under the Plan, subject to the requirements of Article IX, such other restrictions as the Committee deems appropriate or desirable, and as awarded in accordance with the terms of the Plan. X. Right means a stock appreciation right delivered under the Plan, subject to the requirements of Article X and as awarded in accordance with the terms of the Plan. Y. Shares means the following shares of the capital stock of the Company as to which Options or Restricted Stock have been or may be granted under the Plan and upon which Rights or units of Restricted Stock may be based: treasury or authorized but unissued Common Stock, no par value, of the Company (or, following the reorganization of the Company, treasury or authorized but unissued Common Stock, $.01 par value, of the Company), or any shares of capital stock into which the Shares are changed or for which they are exchanged within the provisions of Article XVIII of the Plan. III. Shares Subject to the Plan The aggregate number of Shares as to which Awards may be granted from time to time shall be 25% of the issued and outstanding shares of capital stock of the Company from time to time outstanding; provided that no change in the issued and outstanding capital stock shall cause the number of Shares as to which Awards may be granted to decrease; provided, further, that no more than 5,500,000 Shares (as adjusted for stock splits, stock dividends and other similar events) shall be available for the grant of Incentive Options hereunder. In accordance with Code Section 162(m), if applicable, the aggregate number of Shares as to which Awards may be granted in any one calendar year to any one Key Employee shall not exceed three hundred thousand (300,000) Shares (subject to adjustment for stock splits, stock dividends, and other adjustments described in Article XVIII hereof). From time to time, the Committee and appropriate officers of the Company shall take whatever actions are necessary to file required documents with governmental authorities and stock exchanges so as to make Shares available for issuance pursuant to the Plan. Shares subject to Awards that are exercised, are forfeited, terminated, expired unexercised, canceled by agreement of the Company and the Participant, settled in cash in lieu of Common Stock or in such manner that all or some of the Shares covered by such Awards are not issued A-3 to a Participant, or are exchanged for Awards that do not involve Common Stock, shall immediately become available for Awards. Awards payable in cash shall not reduce the number of Shares available for Awards under the Plan. Except as otherwise set forth herein, the aggregate number of Shares as to which Awards may be granted shall be subject to change only by means of an amendment of the Plan duly adopted by the Company and approved by the stockholders of the Company within one year before or after the date of the adoption of the amendment. IV. Administration of the Plan The Plan shall be administered by the Committee. A majority of the Committee shall constitute a quorum at any meeting thereof (including by telephone conference) and the acts of a majority of the members present, or acts approved in writing by a majority of the entire Committee without a meeting, shall be the acts of the Committee for purposes of this Plan. The Committee may authorize one or more of its members or an officer of the Company to execute and deliver documents on behalf of the Committee. A member of the Committee shall not exercise any discretion respecting himself or herself under the Plan. The Board shall have the authority to remove, replace or fill any vacancy of any member of the Committee upon notice to the Committee and the affected member. Any member of the Committee may resign upon notice to the Board. The Committee may allocate among one or more of its members, or may delegate to one or more of its agents, such duties and responsibilities as it determines. Subject to the provisions of the Plan, the Committee is authorized to: A. Interpret the provisions of the Plan and any Award or Award Agreement, and make all rules and determinations that it deems necessary or advisable to the administration of the Plan; B. Determine which employees of the Company or an Affiliate shall be designated as Key Employees and which of the Key Employees shall be granted Awards; C. Determine the Key Non-Employees to whom Awards, other than Incentive Options and Performance Awards for which Key Non-Employees shall not be eligible, shall be granted; D. Determine whether an Option to be granted shall be an Incentive Option or Nonstatutory Option; E. Determine the number of Shares for which an Option or Restricted Stock shall be granted; F. Determine the number of Rights, the Cash Award or the Performance Award to be granted; G. Provide for the acceleration of the right to exercise any Award, other than an Award for Formula Options, which may not be accelerated; and H. Specify the terms, conditions, and limitations upon which Awards may be granted; provided, however, that with respect to Incentive Options, all such interpretations, rules, determinations, terms, and conditions shall be made and prescribed in the context of preserving the tax status of the Incentive Options as incentive stock options within the meaning of Section 422 of the Code. The Committee may delegate to the chief executive officer and to other senior officers of the Company or its Affiliates its duties under the Plan pursuant to such conditions or limitations as the Committee may establish, except that only the Committee may select, and grant Awards to, Participants who are subject to Section 16 of the Exchange Act. All determinations of the Committee shall be made by a majority of its members. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Award. The Committee shall have the authority at any time to cancel Awards for reasonable cause and to provide for the conditions and circumstances under which Awards shall be forfeited. A-4 Any determination made by the Committee pursuant to the provisions of the Plan shall be made in its sole discretion, and in the case of any determination relating to an Award, may be made at the time of the grant of the Award or, unless in contravention of any express term of the Plan or an Agreement, at any time thereafter. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and the Participants. No determination shall be subject to de novo review if challenged in court. V. Eligibility for Participation Awards may be granted under this Plan only to Key Employees and Key Non- Employees of the Company or its Affiliates. The foregoing notwithstanding, each Participant receiving an Incentive Option must be a Key Employee of the Company or of an Affiliate at the time the Incentive Option is granted. The Committee may at any time and from time to time grant one or more Awards to one or more Key Employees or Key Non-Employees and may designate the number of Shares, if applicable, to be subject to each Award so granted, provided, however that no Incentive Option shall be granted after the expiration of ten (10) years from the earlier of the date of the adoption of the Plan by the Company or the approval of the Plan by the stockholders of the Company, and provided further, that the Fair Market Value of the Shares (determined at the time the Option is granted) as to which Incentive Options are exercisable for the first time by any Key Employee during any single calendar year (under the Plan and under any other incentive stock option plan of the Company or an Affiliate) shall not exceed One Hundred Thousand Dollars ($100,000). To the extent that the Fair Market Value of such Shares exceeds One Hundred Thousand Dollars ($100,000), the Shares subject to Option in excess of One Hundred Thousand Dollars ($100,000) shall, without further action by the Committee, automatically be converted to Nonstatutory Options. Notwithstanding any of the foregoing provisions, the Committee may authorize the grant of an Award to a person not then in the employ of, or engaged by, the Company or of an Affiliate, conditioned upon such person becoming eligible to be granted an Award at or prior to the execution of the Award Agreement evidencing the actual grant of such Award. VI. Awards Under this Plan As the Committee may determine, the following types of Awards may be granted under the Plan on a stand alone, combination, or tandem basis: A. Incentive Option An Award in the form of an Option that shall comply with the requirements of Section 422 of the Code. Subject to adjustments in accordance with the provisions of Article XVIII, the aggregate number of Shares that may be subject to Incentive Options under the Plan shall not exceed one million three hundred thousand (1,300,000). B. Nonstatutory Option An Award in the form of an Option that shall not be intended to comply with the requirements of Section 422 of the Code. C. Formula Option An Award in the form of an Option granted to a Non-Employee Board Member at the time of his or her initial election to the Board, or any subsequent re- election. A-5 D. Restricted Stock An Award made to a Participant in Common Stock or denominated in units of Common Stock, subject to future service and such other restrictions and conditions as may be established by the Committee, and as set forth in the Award Agreement, including but not limited to continuous service with the Company or its Affiliates, achievement of specific business objectives, increases in specified indices, attaining growth rates, and other measurements of Company or Affiliate performance. E. Stock Appreciation Right An Award in the form of a Right to receive the excess of the Fair Market Value of a Share on the date the Right is exercised over the Fair Market Value of a Share on the date the Right was granted. F. Performance Awards An Award made to a Participant that is subject to performance conditions specified by the Committee, including but not limited to continuous service with the Company or its Affiliates, achievement of specific business objectives, increases in specified indices, attaining growth rates, and other measurements of Company or Affiliate performance. G. Cash Awards An Award made to a Participant and denominated in cash, with the eventual payment subject to future service and such other restrictions and conditions as may be established by the Committee, and as set forth in the Award Agreement. Each Award under the Plan shall be evidenced by an Award Agreement. Delivery of an Award Agreement to each Participant shall constitute an agreement between the Company and the Participant as to the terms and conditions of the Award. VII. Terms and Conditions of Incentive Options and Nonstatutory Options Each Option shall be set forth in an Award Agreement, duly executed on behalf of the Company and by the Participant to whom such Option is granted. Except for the setting of the Option price under Paragraph A, no Option shall be granted and no purported grant of any Option shall be effective until such Award Agreement shall have been duly executed on behalf of the Company and by the Participant. Each such Award Agreement shall be subject to at least the following terms and conditions: A. Option Price The purchase price of the Shares covered by each Option granted under the Plan shall be determined by the Committee. The Option price per share of the Shares covered by each Nonstatutory Option shall be at such amount as may be determined by the Committee in its sole discretion on the date of the grant of the Option. In the case of an Incentive Option, if the Participant owns directly or by reason of the applicable attribution rules ten percent (10%) or less of the total combined voting power of all classes of share capital of the Company, the Option price per share of the Shares covered by each Incentive Option shall be not less than the Fair Market Value of the Shares on the date of the grant of the Incentive Option. In all other cases of Incentive Options, the Option price shall be not less than one hundred ten percent (110%) of the Fair Market Value on the date of grant. B. Number of Shares Each Option shall state the number of Shares to which it pertains. A-6 C. Term of Option Each Incentive Option shall terminate not more than ten (10) years from the date of the grant thereof, or at such earlier time as the Award Agreement may provide, and shall be subject to earlier termination as herein provided, except that if the Option price is required under Paragraph A of this Article VII to be at least one hundred ten percent (110%) of Fair Market Value, each such Incentive Option shall terminate not more than five (5) years from the date of the grant thereof, and shall be subject to earlier termination as herein provided. The Committee shall determine the time at which a Nonstatutory Option shall terminate. D. Date of Exercise Upon the authorization of the grant of an Option, or at any time thereafter, the Committee may, subject to the provisions of Paragraph C of this Article VII, prescribe the date or dates on which the Option becomes exercisable, and may provide that the Option become exercisable in installments over a period of years, or upon the attainment of stated goals. E. Medium of Payment The Option price shall be payable upon the exercise of the Option, as set forth in Paragraph I. It shall be payable in such form (permitted by Section 422 of the Code in the case of Incentive Options) as the Committee shall, either by rules promulgated pursuant to the provisions of Article IV of the Plan, or in the particular Award Agreement, provide. F. Termination of Employment 1. A Participant who ceases to be an employee or Key Non-Employee of the Company or of an Affiliate for any reason other than death, Disability, or termination "for cause," as defined in subparagraph (2) below, may exercise any Option granted to such Participant, to the extent that the right to purchase Shares thereunder has become exercisable on the date of such termination, but only within three (3) months after such date, or, if earlier, within the originally prescribed term of the Option. A Participant's employment shall not be deemed terminated by reason of a transfer to another employer that is the Company or an Affiliate. 2. A Participant who ceases to be an employee or Key Non-Employee of the Company or of an Affiliate "for cause" shall, upon such termination, cease to have any right to exercise any Option. For purposes of this Plan, cause shall mean (i) a Participant's theft or embezzlement, or attempted theft or embezzlement, of money or property of the Company, a Participant's perpetration or attempted perpetration of fraud, or a Participant's participation in a fraud or attempted fraud, the Company or a Participant's unauthorized appropriation of, or a Participant's attempt to misappropriate, any tangible or intangible assets or property of the Company; (ii) any act or acts of disloyalty, dishonesty, misconduct, moral turpitude, or any other act or acts by a Participant injurious to the interest, property, operations, business or reputation of the Company; (iii) a Participant's commission of a felony or any other crime the commission of which results in injury to the Company; or (iv) any violation of any restriction on the disclosure or use of confidential information of the Company or on competition with the Company or any of its businesses as then conducted. The determination of the Committee as to the existence of cause shall be conclusive and binding upon the Participant and the Company. 3. A Participant who is absent from work with the Company or an Affiliate because of temporary disability (any disability other than a Disability), or who is on leave of absence for any purpose permitted by any authoritative interpretation (i.e., regulation, ruling, case law, etc.) of Section 422 of the Code, shall not, during the period of any such absence, be deemed, by virtue of such absence alone, to have terminated his or her employment or relationship with the Company or with an Affiliate, except as the Committee may otherwise expressly provide or determine. 4. Paragraph F(1) shall control and fix the rights of a Participant who ceases to be an employee or Key Non-Employee of the Company or of an Affiliate for any reason other than Disability, death, or A-7 termination "for cause," and who subsequently becomes Disabled or dies. Nothing in Paragraphs G and H of this Article VII shall be applicable in any such case except that, in the event of such a subsequent Disability or death within the three (3) month period after the termination of employment or, if earlier, within the originally prescribed term of the Option, the Participant or the Participant's estate or personal representative may exercise the Option permitted by this Paragraph F within twelve (12) months after the date of Disability or death of such Participant, but in no event beyond the originally prescribed term of the Option. G. Total and Permanent Disability A Participant who ceases to be an employee or Key Non-Employee of the Company or of an Affiliate by reason of Disability may exercise any Option granted to such Participant (i) to the extent that the right to purchase Shares thereunder has become exercisable on or before the date such Participant becomes Disabled as determined by the Committee, and (ii) if the Option becomes exercisable periodically, to the extent of any additional rights that would have become exercisable had the Participant not become so Disabled until after the close of business on the next periodic exercise date. A Disabled Participant shall exercise such rights, if at all, only within a period of not more than twelve (12) months after the date that the Participant became Disabled as determined by the Committee (notwithstanding that the Participant might have been able to exercise the Option as to some or all of the Shares on a later date if the Participant had not become Disabled) or, if earlier, within the originally prescribed term of the Option. H. Death In the event that a Participant to whom an Option has been granted ceases to be an employee or Key Non-Employee of the Company or of an Affiliate by reason of such Participant's death, such Option, to the extent that the right is exercisable but not exercised on the date of death, may be exercised by the Participant's estate or personal representative within twelve (12) months after the date of death of such Participant or, if earlier, within the originally prescribed term of the Option, notwithstanding that the decedent might have been able to exercise the Option as to some or all of the Shares on a later date if the Participant were alive and had continued to be an employee or Key Non-Employee of the Company or of an Affiliate. I. Exercise of Option and Issuance of Stock Options shall be exercised by giving written notice to the Company. Such written notice shall: (i) be signed by the person exercising the Option, (ii) state the number of Shares with respect to which the Option is being exercised, (iii) contain the warranty required by paragraph M of this Article VII, if applicable, and (iv) specify a date (other than a Saturday, Sunday or legal holiday) not less than five (5) nor more than ten (10) days after the date of such written notice, as the date on which the Shares will be purchased. Such tender and conveyance shall take place at the principal office of the Company during ordinary business hours, or at such other hour and place agreed upon by the Company and the person or persons exercising the Option. On the date specified in such written notice (which date may be extended by the Company in order to comply with any law or regulation that requires the Company to take any action with respect to the Option Shares prior to the issuance thereof), the Company shall accept payment for the Option Shares in cash, by bank or certified check, by wire transfer, or by such other means as may be approved by the Committee and shall deliver to the person or persons exercising the Option in exchange therefor an appropriate certificate or certificates for fully paid nonassessable Shares or undertake to deliver certificates within a reasonable period of time. In the event of any failure to take up and pay for the number of Shares specified in such written notice on the date set forth therein (or on the extended date as above provided), the right to exercise the Option shall terminate with respect to such number of Shares, but shall continue with respect to the remaining Shares covered by the Option and not yet acquired pursuant thereto. If approved in advance by the Committee, payment in full or in part also may be made (i) by delivering Shares already owned by the Participant having a total Fair Market Value on the date of such delivery equal to A-8 the Option price; (ii) by the execution and delivery of a note or other evidence of indebtedness (and any security agreement thereunder) satisfactory to the Committee; (iii) by authorizing the Company to retain Shares that otherwise would be issuable upon exercise of the Option having a total Fair Market Value on the date of delivery equal to the Option price; (iv) by the delivery of cash or the extension of credit by a broker-dealer to whom the Participant has submitted a notice of exercise or otherwise indicated an intent to exercise an Option (in accordance with part 220, Chapter II, Title 12 of the Code of Federal Regulations, a so-called "cashless" exercise); or (v) by any combination of the foregoing. J. Rights as a Stockholder No Participant to whom an Option has been granted shall have rights as a stockholder with respect to any Shares covered by such Option except as to such Shares as have been registered in the Company's share register in the name of such Participant upon the due exercise of the Option and tender of the full Option price. K. Assignability and Transferability of Option Unless otherwise permitted by the Code and by Rule 16b-3 of the Exchange Act, if applicable, and approved in advance by the Committee, an Option granted to a Participant shall not be transferable by the Participant and shall be exercisable, during the Participant's lifetime, only by such Participant or, in the event of the Participant's incapacity, his guardian or legal representative. Except as otherwise permitted herein, such Option shall not be assigned, pledged, or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment, or similar process and any attempted transfer, assignment, pledge, hypothecation or other disposition of any Option or of any rights granted thereunder contrary to the provisions of this Paragraph K, or the levy of any attachment or similar process upon an Option or such rights, shall be null and void. L. Other Provisions The Award Agreement for an Incentive Option shall contain such limitations and restrictions upon the exercise of the Option as shall be necessary in order that such Option can be an "incentive stock option" within the meaning of Section 422 of the Code. Further, the Award Agreements authorized under the Plan shall be subject to such other terms and conditions including, without limitation, restrictions upon the exercise of the Option, as the Committee shall deem advisable and which, in the case of Incentive Options, are not inconsistent with the requirements of Section 422 of the Code. M. Purchase for Investment If Shares to be issued upon the particular exercise of an Option shall not have been effectively registered under the Securities Act of 1933, as now in force or hereafter amended, the Company shall be under no obligation to issue the Shares covered by such exercise unless and until the following conditions have been fulfilled. The person who exercises such Option shall warrant to the Company that, at the time of such exercise, such person is acquiring his or her Option Shares for investment and not with a view to, or for sale in connection with, the distribution of any such Shares, and shall make such other representations, warranties, acknowledgements, and affirmations, if any, as the Committee may require. In such event, the person acquiring such Shares shall be bound by the provisions of the following legend (or similar legend) which shall be endorsed upon the certificate(s) evidencing his or her Option Shares issued pursuant to such exercise. "The shares represented by this certificate have been acquired for investment and they may not be sold or otherwise transferred by any person, including a pledgee, in the absence of an effective registration statement for the shares under the Securities Act of 1933 or an opinion of counsel satisfactory to the Company that an exemption from registration is then available." "The shares of stock represented by this certificate are subject to all of the terms and conditions of a certain Stockholders' Agreement dated as of , 199 , among the Company and certain of its A-9 stockholders. A copy of the Agreement is on file in the office of the Secretary of the Company. The Agreement provides, among other things, for restrictions upon the holder's right to transfer the shares represented hereby, and for certain prior rights to purchase and certain obligations to sell the shares of common stock evidenced by this certificate at a designated purchase price determined in accordance with certain procedures. Any attempted transfer of these shares other than in compliance with the Agreement shall be void and of no effect. By accepting the shares of stock evidenced by this certificate, any permitted transferee agrees to be bound by all of the terms and conditions of said Agreement." Without limiting the generality of the foregoing, the Company may delay issuance of the Shares until completion of any action or obtaining any consent that the Company deems necessary under any applicable law (including without limitation state securities or "blue sky" laws). VIII. Formula Options A. Each Non-Employee Board Member shall be granted automatically a Formula Option to purchase nine thousand (9,000) Shares upon his or her initial election and qualification for a three (3) year term as a Non-Employee Board Member, and, thereafter, shall be granted automatically a Formula Option to purchase nine thousand (9,000) Shares upon each re-election and qualification as a Non-Employee Board Member. The foregoing notwithstanding, and in lieu thereof, each Non-Employee Board Member whose election is for a term of less than three (3) years shall be granted automatically a Formula Option to purchase three thousand (3,000) Shares for each year of his or her term. B. The purchase price of the Shares subject to the Formula Option shall be equal to one hundred percent (100%) of the Fair Market Value as of the date of grant. C. The Shares subject to the Formula Option granted to a Non-Employee Board Member shall become exercisable cumulatively, in accordance with the following schedule:
Cumulative Number of Shares for Which Formula Option Years Elapsed Since Date of Grant May be Exercised --------------------------------- --------------------------- Less than 1................................... 0 1............................................. 3,000 2............................................. 6,000 3 or more..................................... 9,000
The foregoing schedule notwithstanding, if a Non-Employee Board Member shall cease to be a director of the Company because of death or Disability, all Shares for which a Formula Option has been granted shall become immediately exercisable and shall be exercisable in accordance with Paragraphs G and H of Article VII. If a Non-Employee Board Member ceases to be a director of the Company for any reason other than death or Disability, his or her right to exercise the Formula Option, and the timing of such exercise, shall be governed by the applicable provisions of Paragraph F of Article VII. D. Formula Options shall be evidenced by an Award Agreement which shall conform to the requirements of the Plan, and may contain such other provisions not inconsistent therewith, as the Committee shall deem advisable. The provisions of Article VII governing Nonstatutory Options, and the exercise and issuance thereof, shall apply to Formula Options to the extent such provisions are not inconsistent with this Article VIII. IX. Required Terms and Conditions of Restricted Stock A. The Committee may from time to time grant an Award in Shares of Common Stock or grant an Award denominated in units of Common Stock, for such consideration, if any, as the Committee deems appropriate (which amount may be less than the Fair Market Value of the Common Stock on the date of the Award), and subject to such restrictions and conditions and other terms as the Committee may determine at the time of the A-10 Award (including, but not limited to, continuous service with the Company or its Affiliates, achievement of specific business objectives, increases in specified indices, attaining growth rates, and other measurements of Company or Affiliate performance), and subject further to the general provisions of the Plan, the applicable Award Agreement, and the following specific rules. B. If Shares of Restricted Stock are awarded, such Shares cannot be assigned, sold, transferred, pledged, or hypothecated prior to the lapse of the restrictions applicable thereto, and, in no event, prior to six (6) months from the date of the Award. The Company shall issue, in the name of the Participant, stock certificates representing the total number of Shares of Restricted Stock awarded to the Participant, as soon as may be reasonably practicable after the grant of the Award, which certificates shall be held by the Secretary of the Company as provided in Paragraph G. C. Restricted Stock issued to a Participant under the Plan shall be governed by an Award Agreement that shall specify whether Shares of Common Stock are awarded to the Participant, or whether the Award shall be one not of Shares of Common Stock but one denominated in units of Common Stock, any consideration required thereto, and such other provisions as the Committee shall determine. D. Subject to the provisions of Paragraphs B and E hereof and the restrictions set forth in the related Award Agreement, the Participant receiving an Award of Shares of Restricted Stock shall thereupon be a stockholder with respect to all of the Shares represented by such certificate or certificates and shall have the rights of a stockholder with respect to such Shares, including the right to vote such Shares and to receive dividends and other distributions made with respect to such Shares. All Common Stock received by a Participant as the result of any dividend on the Shares of Restricted Stock, or as the result of any stock split, stock distribution, or combination of the Shares affecting Restricted Stock, shall be subject to the restrictions set forth in the related Award Agreement. E. Restricted Stock awarded to a Participant pursuant to the Plan will be forfeited, and any Shares of Restricted Stock or units of Restricted Stock sold to a Participant pursuant to the Plan may, at the Company's option, be resold to the Company for an amount equal to the price paid therefor, and in either case, such Restricted Stock shall revert to the Company, if the Company so determines in accordance with Article XIV or any other condition set forth in the Award Agreement, or, alternatively, if the Participant's employment with the Company or its Affiliates terminates, other than for reasons set forth in Article XIII, prior to the expiration of the forfeiture or restriction provisions set forth in the Award Agreement. F. The Committee, in its discretion, shall have the power to accelerate the date on which the restrictions contained in the Award Agreement shall lapse with respect to any or all Restricted Stock awarded under the Plan. G. The Secretary of the Company shall hold the certificate or certificates representing Shares of Restricted Stock issued under the Plan, properly endorsed for transfer, on behalf of each Participant who holds such Shares, until such time as the Shares of Restricted Stock are forfeited, resold to the Company, or the restrictions lapse. Any Restricted Stock denominated in units of Common Stock, if not previously forfeited, shall be payable in accordance with Article XV as soon as practicable after the restrictions lapse. H. The Committee may prescribe such other restrictions, conditions, and terms applicable to Restricted Stock issued to a Participant under the Plan that are neither inconsistent with nor prohibited by the Plan or the Award Agreement, including, without limitation, terms providing for a lapse of the restrictions of this Article or any Award Agreement in installments. X. Required Terms and Conditions of Stock Appreciation Rights If deemed by the Committee to be in the best interests of the Company, a Participant may be granted a Right. Each Right shall be granted subject to such restrictions and conditions and other terms as the Committee A-11 may specify in the Award Agreement at the time the Right is granted, subject to the general provisions of the Plan, and the following specific rules. A. Rights may be granted, if at all, either singly, in combination with another Award, or in tandem with another Award. At the time of grant of a Right, the Committee shall specify the base price of Common Stock to be used in connection with the calculation described in Paragraph B below, provided that the base price shall not be less than one hundred percent (100%) of the Fair Market Value of a Share of Common Stock on the date of grant, unless approved by the Board. B. Upon exercise of a Right, which shall be not less than six (6) months from the date of the grant, the Participant shall be entitled to receive in accordance with Article XV, and as soon as practicable, the excess of the Fair Market Value of one Share of Common Stock on the date of exercise over the base price specified in such Right, multiplied by the number of Shares of Common Stock then subject to the Right, or the portion thereof being exercised. C. Notwithstanding anything herein to the contrary, if the Award granted to a Participant allows him or her to elect to cancel all or any portion of an unexercised Option by exercising an additional or tandem Right, then the Option price per Share of Common Stock shall be used as the base price specified in Paragraph A to determine the value of the Right upon such exercise and, in the event of the exercise of such Right, the Company's obligation with respect to such Option or portion thereof shall be discharged by payment of the Right so exercised. In the event of such a cancellation, the number of Shares as to which such Option was canceled shall become available for use under the Plan, less the number of Shares, if any, received by the Participant upon such cancellation in accordance with Article XV. D. A Right may be exercised only by the Participant (or, if applicable under Article XIII, by a legatee or legatees of such Right, or by the Participant's executors, personal representatives, or distributees). XI. Performance Awards A. A Participant may be granted an Award that is subject to performance conditions specified by the Committee. The Committee may use business criteria and other measures of performance it deems appropriate in establishing any performance conditions (including, but not limited to, continuous service with the Company or its Affiliates, achievement of specific business objectives, increases in specified indices, attaining growth rates, and other measurements of Company or Affiliate performance), and may exercise its discretion to reduce or increase the amounts payable under any Award subject to performance conditions, except as otherwise limited under Paragraphs C and D, below, in the case of a Performance Award intended to qualify under Code Section 162(m). B. Any Performance Award will be forfeited if the Company so determines in accordance with Article XIV or any other condition set forth in the Award Agreement, or, alternatively, if the Participant's employment with the Company or its Affiliates terminates, other than for reasons set forth in Article XIII, prior to the expiration of the time period over which the performance conditions are to be measured. C. If the Committee determines that a Performance Award to be granted to a Key Employee should qualify as "performance-based compensation" for purposes of Code Section 162(m), the grant and/or settlement of such Performance Award shall be contingent upon achievement of preestablished performance goals and other terms set forth in this Paragraph C. 1. Performance Goals Generally. The performance goals for such Performance Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to such criteria, as specified by the Committee consistent with this Paragraph C. Performance goals shall be objective and shall otherwise meet the requirements of Code Section 162(m), including the requirement that the level or levels of performance targeted by the Committee result in the performance goals being "substantially uncertain." The Committee may determine that more than one performance goal must be achieved as a A-12 condition to settlement of such Performance Awards. Performance goals may differ for Performance Awards granted to any one Participant or to different Participants. 2. Business Criteria. One or more of the following business criteria for the Company, on a consolidated basis, and/or for specified Affiliates or business units of the Company (except with respect to the total stockholder return and earnings per share criteria), shall be used exclusively by the Committee in establishing performance goals for such Performance Awards: (1) total stockholder return; (2) such total stockholder return as compared to the total return (on a comparable basis) of a publicly available index such as, but not limited to, the Standard & Poor's 500 or the Nasdaq-U.S. Index; (3) net income; (4) pre-tax earnings; (5) EBITDA; (6) pre-tax operating earnings after interest expense and before bonuses, service fees, and extraordinary or special items; (7) operating margin; (8) earnings per share; (9) return on equity; (10) return on capital; (11) return on investment; (12) operating income, excluding the effect of charges for acquired in-process technology and before payment of executive bonuses; (13) earnings per share, excluding the effect of charges for acquired in- process technology and before payment of executive bonuses; (14) working capital; and (15) total revenues. The foregoing business criteria also may be used in establishing performance goals for Cash Awards granted under Article XII hereof. 3. Compensation Limitation. No Key Employee may receive a Performance Award in excess of $2,400,000 for any three (3) year period. D. Achievement of performance goals in respect of such Performance Awards shall be measured over such periods as may be specified by the Committee. Performance goals shall be established on or before the dates that are required or permitted for "performance-based compensation" under Code Section 162(m). E. Settlement of Performance Awards may be in cash or Shares, or other property, in the discretion of the Committee. The Committee may, in its discretion, reduce the amount of a settlement otherwise to be made in connection with such Performance Awards, but may not exercise discretion to increase any such amount payable in respect of a Performance Award subject to Code Section 162(m). XII. Required Terms and Conditions of Cash Awards A. The Committee may from time to time authorize the award of cash payments under the Plan to Participants, subject to such restrictions and conditions and other terms as the Committee may determine at the time of authorization (including, but not limited to, continuous service with the Company or its Affiliates, achievement of specific business objectives, increases in specified indices, attaining growth rates, and other measurements of Company or Affiliate performance), and subject to the general provisions of the Plan, the applicable Award Agreement, and the following specific rules. B. Any Cash Award will be forfeited if Company so determines in accordance with Article XIV or any other condition set forth in the Award Agreement, or, alternatively, if the Participant's employment with the Company or its Affiliates terminates, other than for reasons set forth in Article XIII, prior to the attainment of any goals set forth in the Award Agreement or prior to the expiration of the forfeiture or restriction provisions set forth in the Award Agreement, whichever is applicable. C. The Committee, in its discretion, shall have the power to change the date on which the restrictions contained in the Award Agreement shall lapse, or the date on which goals are to be measured, with respect to any Cash Award. D. Any Cash Award, if not previously forfeited, shall be payable in accordance with Article XV as soon as practicable after the restrictions lapse or the goals are attained. E. The Committee may prescribe such other restrictions, conditions, and terms applicable to the Cash Awards issued to a Participant under the Plan that are neither inconsistent with nor prohibited by the Plan or the Award Agreement, including, without limitation, terms providing for a lapse of the restrictions, or a measurement of the goals, in installments. A-13 XIII. Termination of Employment Except as may otherwise be (i) provided in Article VII for Options, (ii) provided for under the Award Agreement, or (iii) permitted pursuant to Paragraphs A through C of this Article XIII (subject to the limitations under the Code for Incentive Options), if the employment of a Participant terminates, all unexpired, unpaid, unexercised, or deferred Awards shall be canceled immediately. A. Retirement under a Company or Affiliate Retirement Plan. When a Participant's employment terminates as a result of retirement as defined under a Company or Affiliate retirement plan, the Committee may permit Awards to continue in effect beyond the date of retirement in accordance with the applicable Award Agreement, and/or the exercisability and vesting of any Award may be accelerated. B. Resignation in the Best Interests of the Company or an Affiliate. When a Participant resigns from the Company or an Affiliate and, in the judgment of the chief executive officer or other senior officer designated by the Committee, the acceleration and/or continuation of outstanding Awards would be in the best interests of the Company, the Committee may (i) authorize, where appropriate, the acceleration and/or continuation of all or any part of Awards granted prior to such termination and (ii) permit the exercise, vesting, and payment of such Awards for such period as may be set forth in the applicable Award Agreement, subject to earlier cancellation pursuant to Article XIV or at such time as the Committee shall deem the continuation of all or any part of the Participant's Awards are not in the Company's or its Affiliate's best interests. C. Death or Disability of a Participant 1. In the event of a Participant's death, the Participant's estate or beneficiaries shall have a period up to the earlier of (i) the expiration date specified in the Award Agreement, or (ii) the expiration date specified in Paragraph H of Article VII, within which to receive or exercise any outstanding Awards held by the Participant under such terms as may be specified in the applicable Award Agreement. Rights to any such outstanding Awards shall pass by will or the laws of descent and distribution in the following order: (a) to beneficiaries so designated by the Participant; (b) to a legal representative of the Participant; or (c) to the persons entitled thereto as determined by a court of competent jurisdiction. Awards so passing shall be made at such times and in such manner as if the Participant were living. 2. In the event a Participant is determined by the Company to be Disabled, and subject to the limitations of Paragraph G of Article VII, Awards may be paid to, or exercised by, the Participant, if legally competent, or by a legally designated guardian or other representative if the Participant is legally incompetent by virtue of such Disability. 3. After the death or Disability of a Participant, the Committee may in its sole discretion at any time (i) terminate restrictions in Award Agreements; (ii) accelerate any or all installments and rights; and/or (iii) instruct the Company to pay the total of any accelerated payments in a lump sum to the Participant, the Participant's estate, beneficiaries or representative, notwithstanding that, in the absence of such termination of restrictions or acceleration of payments, any or all of the payments due under the Awards ultimately might have become payable to other beneficiaries. XIV. Cancellation and Rescission of Awards Unless the Award Agreement specifies otherwise, the Committee may cancel any unexpired, unpaid, unexercised, or deferred Awards at any time if the Participant is not in compliance with the applicable provisions of the Award Agreement, the Plan, or with the following conditions: A. A Participant shall not breach any protective agreement entered into between him or her and the Company or any Affiliates, or render services for any organization or engage directly or indirectly in any business which, in the judgment of the chief executive officer of the Company or other senior officer designated by the Committee, is or becomes competitive with the Company, or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company. For a Participant whose employment has terminated, the judgment of the chief A-14 executive officer shall be based on terms of the protective agreement, if applicable, or on the Participant's position and responsibilities while employed by the Company or its Affiliates, the Participant's post-employment responsibilities and position with the other organization or business, the extent of past, current, and potential competition or conflict between the Company and other organization or business, the effect of the Participant's assuming the post-employment position on the Company's or its Affiliate's customers, suppliers, investors, and competitors, and such other considerations as are deemed relevant given the applicable facts and circumstances. A Participant may, however, purchase as an investment or otherwise, stock or other securities of any organization or business so long as they are listed upon a recognized securities exchange or traded over-the-counter, and such investment does not represent a substantial investment to the Participant or a greater than one percent (1%) equity interest in the organization or business. B. A Participant shall not, without prior written authorization from the Company, disclose to anyone outside the Company or its Affiliates, or use in other than the Company's or Affiliate's business, any confidential information or materials relating to the business of the Company or its Affiliates, acquired by the Participant either during or after employment with the Company or its Affiliates. C. A Participant shall disclose promptly and assign to the Company all right, title, and interest in any invention or idea, patentable or not, made or conceived by the Participant during employment with the Company or an Affiliate, relating in any manner to the actual or anticipated business, research, or development work of the Company or its Affiliates, and shall do anything reasonably necessary to enable the Company or its Affiliates to secure a patent, trademark, copyright, or other protectable interest where appropriate in the United States and in foreign countries. Upon exercise, payment, or delivery pursuant to an Award, the Participant shall certify on a form acceptable to the Committee that he or she is in compliance with the terms and conditions of the Plan, including the provisions of Paragraphs A, B or C of this Article XIV. Failure to comply with the provisions of Paragraphs A, B or C of this Article XIV prior to, or during the one (1) year period after, any exercise, payment, or delivery pursuant to an Award shall cause such exercise, payment, or delivery to be rescinded. The Company shall notify the Participant in writing of any such rescission within two (2) years after such exercise, payment, or delivery. Within ten (10) days after receiving such a notice from the Company, the Participant shall pay to the Company the amount of any gain realized or payment received as a result of the rescinded exercise, payment, or delivery pursuant to the Award. Such payment shall be made either in cash or by returning to the Company the number of Shares of Common Stock that the Participant received in connection with the rescinded exercise, payment, or delivery. XV. Payment of Restricted Stock, Rights, Performance Awards and Cash Awards Payment of Restricted Stock, Rights, Performance Awards and Cash Awards may be made, as the Committee shall specify, in the form of cash, Shares of Common Stock, or combinations thereof; provided, however, that a fractional Share of Common Stock shall be paid in cash equal to the Fair Market Value of the fractional Share of Common Stock at the time of payment. XVI. Withholding Except as otherwise provided by the Committee, A. The Company shall have the power and right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes required by law to be withheld with respect to any grant, exercise, or payment made under or as a result of this Plan; and B. In the case of payments of Awards, or upon any other taxable event hereunder, a Participant may elect, subject to the approval in advance by the Committee, to satisfy the withholding requirement, if any, in whole or in part, by having the Company withhold Shares of Common Stock that would otherwise be transferred to the A-15 Participant having a Fair Market Value, on the date the tax is to be determined, equal to the minimum marginal tax that could be imposed on the transaction. All elections shall be made in writing and signed by the Participant. XVII. Savings Clause This Plan is intended to comply in all respects with applicable law and regulations, including, (i) with respect to those Participants who are officers or directors for purposes of Section 16 of the Exchange Act, Rule 16b-3 of the Securities and Exchange Commission, if applicable, and (ii) with respect to executive officers, Code Section 162(m). In case any one or more provisions of this Plan shall be held invalid, illegal, or unenforceable in any respect under applicable law and regulation (including Rule 16b-3 and Code Section 162(m)), the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal, or unenforceable provision shall be deemed null and void; however, to the extent permitted by law, any provision that could be deemed null and void shall first be construed, interpreted, or revised retroactively to permit this Plan to be construed in compliance with all applicable law (including Rule 16b-3 and Code Section 162(m)) so as to foster the intent of this Plan. Notwithstanding anything herein to the contrary, with respect to Participants who are officers and directors for purposes of Section 16 of the Exchange Act, if applicable, and if required to comply with rules promulgated thereunder, no grant of, or Option to purchase, Shares shall permit unrestricted ownership of Shares by the Participant for at least six (6) months from the date of grant or Option, unless the Board determines that the grant of, or Option to purchase, Shares otherwise satisfies the then current Rule 16b-3 requirements. XVIII. Adjustments upon Changes in Capitalization; Corporate Transactions In the event that the outstanding Shares of the Company are changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of any reorganization, merger, consolidation, recapitalization, reclassification, change in par value, stock split-up, combination of shares or dividends payable in capital stock, or the like, appropriate adjustments to prevent dilution or enlargement of the Awards granted to, or available for, Participants shall be made in the manner and kind of Shares for the purchase of which Awards may be granted under the Plan, and, in addition, appropriate adjustment shall be made in the number and kind of Shares and in the Option price per share subject to outstanding Options. The foregoing notwithstanding, no such adjustment shall be made in an Incentive Option which shall, within the meaning of Section 424 of the Code, constitute such a modification, extension, or renewal of an Option as to cause it to be considered as the grant of a new Option. Notwithstanding anything herein to the contrary, the Company may, in its sole discretion, accelerate the timing of the exercise provisions of any Award in the event of a tender offer for the Company's Shares, the adoption of a plan of merger or consolidation under which a majority of the Shares of the Company would be eliminated, or a sale of all or any portion of the Company's assets or capital stock. Alternatively, the Company may, in its sole discretion, cancel any or all Awards upon any of the foregoing events and provide for the payment to Participants in cash of an amount equal to the value or appreciated value, whichever is applicable, of the Award, as determined in good faith by the Committee, at the close of business on the date of such event. The preceding two sentences of this Article XVIII notwithstanding, the Company shall be required to accelerate the timing of the exercise provisions of any Award if (i) any such business combination is to be accounted for as a pooling-of- interests under APB Opinion 16 and (ii) the timing of such acceleration does not prevent such pooling-of-interests treatment. Upon a business combination by the Company or any of its Affiliates with any corporation or other entity through the adoption of a plan of merger or consolidation or a share exchange or through the purchase of all or substantially all of the capital stock or assets of such other corporation or entity, the Board or the Committee may, in its sole discretion, grant Options pursuant hereto to all or any persons who, on the effective date of such transaction, hold outstanding options to purchase securities of such other corporation or entity and who, on and after the effective date of such transaction, will become employees or directors of, or consultants or A-16 advisors to, the Company or its Affiliates. The number of Shares subject to such substitute Options shall be determined in accordance with the terms of the transaction by which the business combination is effected. Notwithstanding the other provisions of this Plan, the other terms of such substitute Options shall be substantially the same as or economically equivalent to the terms of the options for which such Options are substituted, all as determined by the Board or by the Committee, as the case may be. Upon the grant of substitute Options pursuant hereto, the options to purchase securities of such other corporation or entity for which such Options are substituted shall be cancelled immediately. XIX. Dissolution or Liquidation of the Company Upon the dissolution or liquidation of the Company other than in connection with a transaction to which Article XVIII is applicable, all Awards granted hereunder shall terminate and become null and void; provided, however, that if the rights of a Participant under the applicable Award have not otherwise terminated and expired, the Participant may, if the Committee, in its sole discretion, so permits, have the right immediately prior to such dissolution or liquidation to exercise any Award granted hereunder to the extent that the right thereunder has become exercisable as of the date immediately prior to such dissolution or liquidation. XX. Termination of the Plan The Plan shall terminate (10) years from the earlier of the date of its adoption by the Board or the date of its approval by the stockholders. The Plan may be terminated at an earlier date by vote of the stockholders or the Board; provided, however, that any such earlier termination shall not affect any Award Agreements executed prior to the effective date of such termination. Notwithstanding anything in this Plan to the contrary, any Options granted prior to the effective date of the Plan's termination may be exercised until the earlier of (i) the date set forth in the Award Agreement, or (ii) in the case of an Incentive Option, ten (10) years from the date the Option is granted; and the provisions of the Plan with respect to the full and final authority of the Committee under the Plan shall continue to control. XXI. Amendment of the Plan The Plan may be amended by the Board and such amendment shall become effective upon adoption by the Board; provided, however, that any amendment that (i) increases the numbers of Shares that may be granted under this Plan, other than as provided by Article XVIII, (ii) materially modifies the requirements as to eligibility to participate in the Plan, (iii) materially increases the benefits to Participants, (iv) extends the period during which Incentive Options may be granted or exercised, or (v) changes the designation of the class of employees eligible to receive Incentive Options, or otherwise causes the Incentive Options to no longer qualify as "incentive stock options" as defined in Section 422 of the Code, also shall be subject to the approval of the stockholders of the Company within one (1) year either before or after such adoption by the Board, subject to the requirements of Article XVII of the Plan. XXII. Employment Relationship Nothing herein contained shall be deemed to prevent the Company or an Affiliate from terminating the employment of a Participant, nor to prevent a Participant from terminating the Participant's employment with the Company or an Affiliate. XXIII. Indemnification of Committee In addition to such other rights of indemnification as they may have as directors or as members of the Committee, the members of the Committee shall be indemnified by the Company against all reasonable expenses, including attorneys' fees, actually and reasonably incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken by them as directors or members of the Committee and against all amounts A-17 paid by them in settlement thereof (provided such settlement is approved by the Board) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that the director or Committee member is liable for gross negligence or willful misconduct in the performance of his or her duties. To receive such indemnification, a director or Committee member must first offer in writing to the Company the opportunity, at its own expense, to defend any such action, suit or proceeding. XXIV. Unfunded Plan Insofar as it provides for payments in cash in accordance with Article XV, or otherwise, the Plan shall be unfunded. Although bookkeeping accounts may be established with respect to Participants who are entitled to cash, Common Stock, or rights thereto under the Plan, any such accounts shall be used merely as a bookkeeping convenience. The Company shall not be required to segregate any assets that may at any time be represented by cash, Common Stock, or rights thereto, nor shall the Plan be construed as providing for such segregation, nor shall the Company, the Board, or the Committee be deemed to be a trustee of any cash, Common Stock, or rights thereto to be granted under the Plan. Any liability of the Company to any Participant with respect to a grant of cash, Common Stock, or rights thereto under the Plan shall be based solely upon any contractual obligations that may be created by the Plan and any Award Agreement; no such obligation of the Company shall be deemed to be secured by any pledge or other encumbrance on any property of the Company. Neither the Company nor the Board nor the Committee shall be required to give any security or bond for the performance of any obligation that may be created by the Plan. XXV. Mitigation of Excise Tax If any payment or right accruing to a Participant under this Plan (without the application of this Article XXV), either alone or together with other payments or rights accruing to the Participant from the Company or an Affiliate, would constitute a "parachute payment" (as defined in Section 280G of the Code and regulations thereunder), such payment or right shall be reduced to the largest amount or greatest right that will result in no portion of the amount payable or right accruing under the Plan being subject to an excise tax under Section 4999 of the Code or being disallowed as a deduction under Section 280G of the Code. The determination of whether any reduction in the rights or payments under this Plan is to apply shall be made by the Company. The Participant shall cooperate in good faith with the Company in making such determination and providing any necessary information for this purpose. XXVI. Effective Date This Plan shall become effective upon adoption by the Board, provided that the Plan is approved by the stockholders of the Company before or at the Company's next annual meeting, but in no event shall stockholder approval be sought more than one (1) year after such adoption by the Board. XXVII. Governing Law This Plan shall be governed by the laws of the State of Illinois and construed in accordance therewith. Adopted this 30th day of June, 1996. A-18
EX-10.6 4 AMENDMENT NO. 3 EMPLOYEE STOCK PLAN EX-10.6 AMENDMENT #3 TO THE EMPLOYEE STOCK PURCHASE PLAN EX-10.6 THIRD AMENDMENT TO THE METZLER GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN The Metzler Group, Inc. Employee Stock Purchase Plan ("Plan") is hereby amended, effective September 15, 1998, as follows: 1. Section 3 ("Eligibility") shall be amended to read as follows: "All Employees, except those individuals listed on Exhibit A, Section 16 Individuals, of the Insider Trader and Tipping Policy of The Metzler Group, Inc., shall be eligible to participate in the Plan on the Effective Date. Subject to the enrollment limitations of Section 6, each other Employee of the Company and/or an Affiliate shall be eligible to participate on the Offering Date coincident with or next following the Employee's first date of employment." 2. Section 6(a) ("Participation") shall be amended to read as follows: "Each Employee may become a Participant in the Plan by authorizing a payroll deduction on a form provided by the Committee. Such authorization shall become effective on the next Offering Date following the delivery of the authorization form to the Committee; provided (i) that the Employee is eligible under Section 3 to participate in the Plan on such day and (ii) that if the authorization form is delivered to the Committee less than fifteen (15) days prior to the Offering Date, it shall become effective on the next Offering Date that is fifteen (15) or more days following delivery of the authorization form to the Committee. The Committee may, in its discretion, waive such fifteen (15) day delivery period for Employees of newly-acquired Affiliates." 3. Section 7(b) ("Purchase of Shares") shall be amended to read as follows: "The purchase price for the shares of Common Stock to be purchased with payroll deductions from the Participant shall be equal to eighty-five percent (85%) of the lesser of (i) the "fair market value" of a share of Common Stock on the Offering Date (or, if later, on the date the Participant's authorization form becomes effective, as set forth in Section 6), or (ii) the "fair market value" of a share on the Purchase Date. Fair market value shall be defined as the closing sales price of the Common Stock on the largest national securities exchange on which such Common Stock is listed at the time the Common Stock is to be valued. If the Common Stock is not then listed on any such exchange, the fair market value shall be the closing sales price if such is reported or otherwise the mean between the closing "Bid" and the closing "Ask" prices, if any, as reported in the National Association of Securities Dealers Automated Quotation System ("NASDAQ") for the date of valuation, or if none, on the most recent trade date thirty (30) days or less prior to the date of valuation for which such quotations are reported. If the Common Stock is not then listed on any such exchange or quoted in NASDAQ, the fair market value shall be the mean between the average of the "Bid" and the average of the "Ask" prices, if any, as reported in the National Daily Quotation Service for the date of valuation, or, if none, for the most recent trade date thirty (30) days or less prior to the date of valuation for which such quotations are reported. If the fair market value cannot be determined under the proceeding three sentences, it shall be determined in good faith by the Committee." 4. Section 9 ("Cessation of Participation") shall be amended to read as follows: "A Participant may cease participation in the Plan at any time by notifying the Committee in writing of his intent to cease his participation. If such notice is received by the Committee, the Company shall distribute to the Participant all of his accumulated payroll deductions, without interest. If any Participant ceases participation in the Plan, no further Compensation deductions shall be made on his behalf after the effective date of his cessation, except in accordance with a new authorization form filed with the Committee as provided in Section 6. Notwithstanding anything herein contained to the contrary, if a Participant ceases participation in the Plan, as required under Section 8 hereof, he shall not be eligible to again participate in the Plan until the next Offering Date that is coincident with or next follows the expiration of two (2) full Offering Periods following the date such participation ceased." IN WITNESS WHEREOF, The Metzler Group, Inc. has caused this Amendment to be executed by its officer hereto duly authorized this 10th day of September, 1998. The Metzler Group, Inc., a Delaware Corporation By: Barry Cain Its: Vice President EX-10.7 5 AMENDMENT NO. 4 TO EMPLOYEE STOCK PURCHASE PLAN EX-10.7 Amendment No. 4 to The Navigant Consulting, Inc. Stock Purchase Plan Exhibit 10.7 FOURTH AMENDMENT TO THE NAVIGANT CONSULTING, INC. EMPLOYEE STOCK PURCHASE PLAN The Navigant Consulting, Inc. Employee Stock Purchase Plan ("Plan") is hereby amended, effective February 15, 2000, as follows: 1. Section 6(a) ("Participation") shall be amended to read as follows: "Each Employee may become a Participant in the Plan by authorizing a payroll deduction on a form provided by the Committee. Such authorization shall become effective on the next Offering Date following the delivery of the authorization form to the Committee; provided (i) that the Employee is eligible under Section 3 to participate in the Plan on such day and (ii) that if the authorization form is delivered to the Committee less than fifteen (15) days prior to the Offering Date, it shall become effective on the next Offering Date that is fifteen (15) or more days following delivery of the authorization form to the Committee. Notwithstanding the foregoing, the Committee may allow an Employee's authorization of such payroll deduction pursuant to this Section 6(a) to become effective at a selected time or times during an Offering Period, provided such allowance is applied uniformly to all Employees." 2. Section 6(b) ("Participation") shall be amended to read as follows: "At the time an Employee files his authorization for a payroll deduction, he shall elect to have deductions made from each paycheck that he receives, such deductions to continue until the Participant withdraws from the Plan or otherwise becomes ineligible to participate in the Plan. Authorized payroll deductions shall be for a minimum of one percent (1%) and a maximum of fifteen percent (15%) of the Participant's Compensation. The deduction rate so authorized shall continue in effect through the Offering Period and each succeeding Offering Period, except to the extent such rate is changed in accordance with the following guidelines: (i) The Participant may, at any time during any Offering Period, reduce his rate of payroll deduction by filing an authorization form with the Company; and (ii) The Participant may, at any time during any Offering Period, increase the rate of his payroll deduction by filing an authorization form with the Committee. New deduction rates shall become effective as soon as practicable after the authorization form is filed with the Committee." IN WITNESS WHEREOF, Navigant Consulting, Inc. has caused this Amendment to be executed by its officer hereto duly authorized this 22nd day of February, 2000. Navigant Consulting, Inc. By: Mitchell S. Saranow ------------------- Its: co-Chief Executive Officer -------------------------- EX-10.8 6 EMPLOYMENT AGREEMENT WITH MITCHELL H. SARANOW EX-10.8 Employment Agreement dated as of November 12, 1999 between the Registrant and John J. Reed Exhibit 10.8 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement"), signed on ________, ____, and effective as of November 12, 1999 (the "Effective Date"), is between Navigant Consulting, Inc., a Delaware corporation (the "Company"), and John Reed (the "Executive"). RECITALS A. The Executive possesses knowledge, skill and experience advantageous to the Company. B. The Company desires to employ the Executive as its Co-Chief Executive Officer, and the Executive desires to accept such employment, on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing premises and mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Employment. Subject to the terms and conditions of this Agreement, the Company agrees to employ the Executive, and the Executive agrees to be employed by the Company, for the period stated in Paragraph 2 hereof. 2. Employment Term. The term of the Executive's employment by the Company under this Agreement will begin as of November 12, 1999, and will continue, subject to earlier termination as provided in Section 7 hereof, for a three-year period ending November 12, 2002, or it will continue to a later date pursuant to an extension or modification of this Agreement by mutual agreement of the parties hereto from time to time (the "Employment Term"). 3. Position and Responsibilities. During the period of his employment hereunder, the Executive agrees to serve the Company, and the Company shall employ the Executive, as one of its three Co-Chief Executive Officers. During the Employment Term, the Executive shall possess such broad powers and perform such duties and functions as are normally incident to the position of Co-Chief Executive Officer with an entity of an equivalent size and nature as the Company, and the Executive will share the powers and duties of Co-Chief Executive Officer with the other two Co-Chief Executive Officers appointed by the Company's Board of Directors (the "Board") in a manner which is mutually agreed upon from time to time between the Executive, the other Co-Chief Executive Officers and the Board. 4. Performance of Duties; Commitment of Time. During the Employment Term the Executive shall discharge the following obligations: (a) During the period of his employment hereunder and except for illness, reasonable vacation periods, and reasonable leaves of absence, the Executive shall devote his best efforts and full-time attention and skill to the business and affairs of the Company and its subsidiaries, affiliates and divisions, as such business and affairs now exist and as they may be hereafter changed or added to. (b) The Executive shall report directly and exclusively to the Board, and he shall perform all of his duties in accordance with such reasonable directions, requests, rules and regulations as are specified by the Board in connection with his employment. (c) Nothing herein shall preclude the Executive from devoting such reasonable time as required to serve, or to continue to serve, on the boards of directors of, or to hold any other offices or positions in or with respect to, other companies, organizations or entities, provided that (i) the Executive gives prior notice to the Company of such other activities, (ii) such other activities do not violate Paragraph 6 hereof, and (iii) such other activities have no material effect on the time the Executive is required to spend in connection with the services required of him hereunder. 5. Compensation and Benefits. (a) Base Salary. During the Employment Term, the Executive will receive an annual salary, payable in monthly or more frequent installments, of $500,000 subject to authorized withholding and other deductions. The annual salary will be reviewed annually and, if appropriate, increased by the Company in the sole discretion of the Compensation Committee of its Board. Such annual salary, as so increased, is hereinafter referred to as the "Base Salary." In no event shall the Executive's Base Salary be reduced below $500,000. A retroactive payment of Base Salary may be due to the Executive for his services to the Company beginning on November 12, 1999, and extending through the business day preceding the date this Agreement is signed, to the extent that actual salary paid by the Company to the Executive for this time period was insufficient. The retroactive payment, if necessary, shall be made in one lump sum within 15 days of the date this Agreement is signed. (b) Annual Bonus. During the Employment Term, the Executive will be eligible to receive an annual cash bonus based upon the Executive's and/or the Company's achievement of performance goals or objectives. The bonus goals and objectives shall be established by mutual agreement of the Compensation Committee of the Board and the Executive. The Executive shall have a maximum bonus opportunity of 100% of Base Salary and a target payment of 65% of Base Salary. The Compensation Committee shall have the sole discretion to determine whether the bonus goals and objectives have been met. Notwithstanding the foregoing, the Executive shall be entitled to receive a bonus for the 1999 calendar year in accordance with the terms and conditions previously established by the Company, for his services rendered prior to November 12, 1999. In addition thereto, the Executive shall be entitled to receive a prorated bonus payment of $35,000 for the period ending December 31, 1999, which shall be paid to the Executive by the Company within 15 days of the date this Agreement is signed. (c) Long-Term Incentive Compensation. (i) The Company has granted the Executive an option (the "Option") to purchase 300,000 shares of the Company's common stock, par value $0.001 per share (the "Common Stock"). The purchase price per share is the closing price of the Common Stock on the date of grant (the "Exercise Price"). The Option has been granted in accordance with the Company's Long-Term Incentive Plan and is subject to the terms and conditions contained in the Stock Award Agreement to be entered into between the Company and the Executive, which terms shall include: (i) the Option shall have a term equal to the lesser of ten years measured from the date of grant or the longest period permitted by the Company's Long-Term Incentive Plan after the date of the termination of the Executive's employment with the Company; (ii) the greatest portion of the Option shares allowable under the Company's Long-Term Incentive Plan shall be issued as incentive stock options; (iii) the Option shares shall vest and become exercisable 50% as of the date of grant, an additional 25% on the date 6 months after the date of grant, and an additional 25% on the date 18 months after the date of grant; and (iv) in the event of a Change of Control prior to the Executive's termination of employment, or the termination of Executive's employment by the Company without Cause (as hereinafter defined) or by the Executive for Good Reason (as hereinafter defined) the Executive shall immediately become fully vested in his entire Option. (d) Employee Benefits. During the Employment Term, the Executive will be entitled to receive all benefits of employment generally available to other members of the Company's senior executive management, upon his satisfaction of the eligibility or participation criteria therefor. (e) Entitlement to Perquisites. For each fiscal year of the Company, or portion thereof, occurring during the Employment Term, the Executive shall be entitled to receive those perquisites from the Company which are generally available to other members of the Company's senior executive management and they shall specifically 2 include, without limitation, reasonable hotel expenses while in Chicago, an automobile allowance of $850 per month and downtown parking fees, and reimbursement of dues and expenses associated with one downtown luncheon club. (f) Reimbursement of Travel and Entertainment Expenses. The Company shall pay or reimburse the Executive, in accordance with its normal policies and practices, for all reasonable hotel, travel and other expenses incurred by the Executive in connection with the performance of his obligations hereunder. The Company further agrees to furnish the Executive with such accommodations as shall be suitable to the character of the Executive's position with the Company and adequate for the performance of his duties hereunder (including those reasonable hotel and entertainment costs he incurs while staying in Chicago on Company business). (g) Legal Fees. The Company shall pay, or reimburse the Executive for, the legal fees and expenses of counsel to the Executive in connection with the preparation, negotiation, execution and delivery of this Agreement. (h) Withholding Taxes. There shall be deducted and withheld from the Base Salary and all other compensation payable to the Executive during or for the Employment Term any and all amounts required to be deducted or withheld under the provisions of any statute, regulation, ordinance or order. 6. Obligations of the Executive During and After Employment. (a) The Executive acknowledges and agrees that solely by virtue of his employment by, and relationship with, the Company, he will acquire "Confidential Information," as defined in subparagraph (vii) below, as well as special knowledge of the Company's relationships with its clients, and that, but for his association with the Company, the Executive will not have had access to said Confidential Information or knowledge of said relationships. The Executive further acknowledges and agrees (1) that the Company has long term relationships with its clients, and that those relationships were developed at great expense and difficulty to the Company over several years of close and continuing involvement; (2) that the Company's relationships with its clients are and will continue to be valuable, special and unique assets of the Company and (3) that the Company has the following protectable interests that are critical to its competitive advantage in the industry and would be of demonstrable value in the hands of a competitor: software designs and application; plans, modeling products and tools (including, but not limited to, COMPPASS 2000); processes, distribution networks, and protocols; research bases, systems, and industry benchmarks; and concepts, ideas, marketing strategies, and other matters not generally known to the public. In return for the consideration described in this Agreement, and as a condition precedent both to the grant of the Option under the Stock Award Agreement and the Company employing the Executive, and as an inducement to the Company to do so, the Executive hereby represents, warrants and covenants as follows: (i) The Executive has executed and delivered this Agreement as his free and voluntary act, after having determined that the provisions contained herein are of a material benefit to him, and that the duties and obligations imposed on him hereunder are fair and reasonable and will not prevent him from earning a comparable livelihood following the termination of his employment with the Company; (ii) The Executive has read and fully understands the terms and conditions set forth herein, has had time to reflect on and consider the benefits and consequences of entering into this Agreement, and has had the opportunity to review the terms hereof with an attorney or other representative if he so chooses; (iii) The execution and delivery of this Agreement by the Executive does not conflict with, or result in a breach of or constitute a default under, any agreement or contract, whether oral or written, to which the Executive is a party or by which the Executive may be bound; (iv) The Executive agrees that, during the time of his employment with the Company and for a period of one year after termination of the Executive's employment hereunder for any reason whatsoever or for no reason, whether voluntary or involuntary, the Executive will not, except on behalf of the Company, anywhere in North America or in any other place or venue where the Company or any affiliate, subsidiary or division thereof now conducts or operates, or may conduct or operate, its business prior to the date of the Executive's termination of employment; 3 (A) directly or indirectly, contact, solicit or direct any person, firm, corporation, association, or other entity to contact or solicit, any of the Employer's clients or prospective clients (as they are hereinafter defined) for the purpose of selling or distributing or attempting to sell or distribute, any products and/or services in competition with the Company to its clients during the term hereof. In addition, the Executive will not disclose the identity of any such clients or prospective clients, or any part thereof, to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, except to the extent (1) required by any law, regulation or order of any court or regulatory commission, department or agency, provided that the Executive gives prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order, or (2) such disclosure is necessary to perform properly the Executive's duties under this Agreement; (B) solicit on his own behalf or on behalf of any other person, the services of any person who is an employee of the Company, nor solicit any of the Company's employees to terminate employment with the Company; (C) become directly or indirectly, an investor, owner or stockholder (excluding investments representing less than 2% of the common stock of a public company), lender, director, consultant, employee, agent or salesperson, whether part-time or full-time, of any business which competes with the Company in the marketing of products or services developed, marketed or provided by the Company; and (D) act as a consultant, advisor, officer, manager, agent, director, partner, independent contractor, owner, or employee for or on behalf of any of the Company's clients or prospective clients (as hereinafter defined), with respect to any other business activities in which the Company engages during the term hereof; (v) The scope described above is necessary and reasonable in order to protect the Company in the conduct of its business and that, if the Executive becomes employed by another employer, he shall be required to disclose the existence of this paragraph 6 to such employer and the Executive hereby consents to and the Company is hereby given permission to disclose the existence of this paragraph 6 to such employer. (vi) For purposes of this Paragraph 6, "client" shall be defined as any person, firm, corporation, association, or entity that purchased any type of product and/or service from the Company or is or was doing business with the Company within the 12-month period immediately preceding termination of the Executive's employment. For purposes of this Paragraph 6, "prospective client" shall be defined as any person, firm, corporation, association, or entity contacted or solicited in writing by the Company or who contacted the Company within the 12-month period immediately preceding the termination of the Executive's employment for the purpose of having such persons, firms, corporations, associations, or entities become a client of the Company; (vii) Both during his employment and thereafter he will not, for any reason whatsoever, use for himself or disclose to any person not employed by the Company any "Confidential Information" of the Company acquired by the Executive during his relationship with the Company, except to the extent that such Confidential Information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical, or in other media, available to the general public, other than as a result of any act or omission of the Executive, (b) is required to be disclosed by law, regulation or order of any court or regulatory commission, department or agency, provided that the Executive gives prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order, or (c) is required to be disclosed in order to perform properly the Executive's duties under this Agreement. The Executive further agrees to use Confidential Information solely for the purpose of performing duties with the Company and further agrees not to use Confidential Information for his own private use or commercial purposes. The Executive agrees that "Confidential Information" includes but is not limited to: (1) any financial, engineering, business, planning, operations, services, potential services, products, potential products, technical information and/or know-how, organization charts, formulas, business plans, production, purchasing, marketing, pricing, sales, profit, personnel, customer, broker, supplier, or other lists or information of the Company; (2) any papers, data, records, processes, methods, techniques, systems, models, samples, devices, equipment, compilations, invoices, client lists, or documents of the Company; (3) any confidential information or trade secrets of any third party provided to the Company in confidence or subject to other use or disclosure restrictions or limitations; and (4) any other information, written, oral, or electronic, whether existing now or at some time in the 4 future, and whether pertaining to current or future developments, which pertains to the Company's affairs or interests or with whom or how the Company does business. The Company acknowledges and agrees that Confidential Information does not include information properly in the public domain; (viii) During and after the term of employment hereunder, the Executive will not remove from the Company's premises any documents, records, files, notebooks, correspondence, reports, video or audio recordings, computer printouts, computer programs, computer software, price lists, microfilm, drawings, or other similar documents containing Confidential Information, including copies thereof, whether prepared by him or others, except as his duties under this Agreement shall require, and in such cases, will promptly return such items to the Company. Upon termination of his employment with the Company, all such items including summaries or copies thereof, then in the Executive's possession, shall be returned to the Company immediately; (ix) All ideas, inventions, designs, processes, discoveries, enhancements, plans, writings, and other developments or improvements (the "Inventions") conceived by the Executive, alone or with others, during the term of his employment, whether or not during working hours, that are within the scope of the Executive's business operations or that relate to any of the Company's work or projects (including any and all inventions based wholly or in part upon ideas conceived during the Executive's employment with the Company), are the sole and exclusive property of the Company. The Executive further agrees that (1) he will promptly disclose all Inventions to the Company and hereby assigns to the Company all present and future rights he has or may have in those Inventions, including without limitation those relating to patent, copyright, trademark or trade secrets; and (2) all of the Inventions eligible under the copyright laws are "work made for hire." At the request of and without charge to the Company, the Executive will do all things deemed by the Company to be reasonably necessary to perfect title to the Inventions in the Company and to assist in obtaining for the Company such patents, copyrights or other protection as may be provided under law and desired by the Company, including but not limited to executing and signing any and all relevant applications, assignments or other instruments. Notwithstanding the foregoing, pursuant to the Employee Patent Act, Illinois Public Act 83-493, the Company hereby notifies the Executive that the provisions of this subparagraph (ix) shall not apply to any Inventions for which no equipment, supplies, facility or trade secret information of the Company was used and which were developed entirely on the Executive's own time, unless (1) the Invention relates (i) to the business of the Company, or (ii) to actual or demonstrably anticipated research or development of the Company, or (2) the Invention results from any work performed by the Executive for the Company; (x) All client lists, supplier lists, and client and supplier information are and shall remain the exclusive property of the Company, regardless of whether such information was developed, purchased, acquired, or otherwise obtained by the Company or the Executive. The Executive also agrees to furnish to the Company on demand at any time during his employment, and upon the termination of his employment, any records, notes, computer printouts, computer programs, computer software, price lists, microfilm, or any other documents related to the Company's business, including originals and copies thereof; and (xi) The Executive may become aware of "material" nonpublic information relating to clients whose stock is publicly traded. The Executive acknowledges that he is prohibited by law as well as by Company policy from trading in the shares of such clients while in possession of such information or directly or indirectly disclosing such information to any other persons so that they may trade in these shares. For purposes of this subparagraph (xi), "material" information may include any information, positive or negative, which might be of significance to an investor in determining whether to purchase, sell or hold the stock of publicly traded clients. Information may be significant for this purpose even if it would not alone determine the investor's decision. Examples include a potential business acquisition, internal financial information that departs in any way from what the market would expect, the acquisition or loss of a major contract, or an important financing transaction. (b) Remedy for Breach. The Executive agrees that in the event of a material breach or threatened material breach of any of the covenants contained in this Paragraph 6, the Company will have the right and remedy to have such covenants specifically enforced by any court having jurisdiction, it being acknowledged and agreed that any material breach of any of the covenants will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. 5 (c) Blue-Penciling. The Executive acknowledges and agrees that the noncompetition and nonsolicitation provisions contained herein are reasonable and valid in geographic, temporal and subject matter scope and in all other respects, and do not impose limitations greater than are necessary to protect the goodwill, Confidential Information and other business interests of the Company. Nevertheless, if any court determines that any of said noncompetition and other restrictive covenants and agreements, or any part thereof, is unenforceable because of the duration or geographic scope of such provision, such court will have the power to reduce the duration or scope of such provision, as the case may be, and, in its reduced form, such provision will then be enforceable to the maximum extent permitted by applicable law. 7. Termination of Employment. (a) Termination as a Result of Death or Disability. The Executive's employment with the Company shall terminate automatically upon the Executive's death during the Employment Term. If the Disability of the Executive has occurred during the Employment Term (pursuant to the definition of "Disability" set forth below), the Company may give to the Executive written notice of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Company (the "Disability Effective Date"), provided that, within the 30 days after receipt of notice, the Executive shall not have returned to substantial performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company for 120 consecutive days, or a total of 180 days in any 12-month period, as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician jointly selected by the Company and the Executive or the Executive's legal representative, or if the parties cannot agree on the selection of such physician then each shall choose a physician and the two physicians shall jointly select a physician to make such binding determination. (b) Termination by the Company for Cause. The Company may terminate the Executive's employment during the Employment Term for Cause at any time upon written notice from the Board specifying such Cause and the expiration of the cure period specified below, and thereafter, the Company's obligations hereunder (other than the obligation to pay any accrued salary or benefit) shall cease and terminate; provided, however, that such written notice shall not be delivered until after the Board shall have given the Executive written notice specifying the conduct alleged to have constituted such Cause. The Executive shall have 30 days to cure the matters specified in the notice delivered by the Board (to the extent that such matters are curable). For purposes of this Agreement, "Cause" shall mean the Executive's willful misconduct, dishonesty or other willful actions (or willful failures to act) which are materially and demonstrably injurious to the Company, or a material breach by the Executive of one or more terms of this Agreement, which shall include the Executive's habitual neglect of the material duties required of him under this Agreement. For purposes of this Section, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the Board by the vote of a majority of the entire Board at a meeting of the Board duly called and held for such purpose, at which the Executive shall have an opportunity to be present and to be heard, finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described above, and specifying the particulars thereof in detail. (c) Termination by the Executive for Good Reason. The Executive's employment with the Company may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean any of the following actions, if taken without the express written consent of the Executive: (1) any material change by the Company in the Executive's title, functions, duties, or responsibilities, which changes would cause the Executive's position with the Company to become of significantly less responsibility, importance or scope as compared to the position and attributes that applied to the Executive as of the Effective Date; (2) any material failure by the Company to comply with any of the provisions of the Agreement; or (3) the requirement made by the Company that the Executive change his manner of performing his responsibilities so as to require a change in his residence. 6 (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" means a written notice which (1) indicates the specific termination provision in this Agreement relied upon, (2) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (3) if the Date of Termination (as defined in Section (e) hereof) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (1) if the Executive's employment is terminated by the Company for Cause, the expiration of the cure period specified in Paragraph 7(b) hereof, (2) if the Executive's employment is terminated by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (3) if the Executive's employment is terminated by reason of death or Disability, the date of death of the Executive or the Disability Effective Date, as the case may be, and (4) if the Executive's employment is terminated by the Company other than for Cause or Disability, or by the Executive without Good Reason, 30 days after the date of receipt by the non-terminating party of a written notice of termination or such shorter time as the Board thereafter specifies in a written notice to the Executive. (f) Change of Control of the Company. For the purpose of this Agreement, a "Change of Control" shall have been deemed to have occurred if at any time during the Employment Term: (i) the Company sells or otherwise disposes in an arms length transaction assets of the Company having a fair market value of at least 60% of the total assets of the Company and its subsidiaries on a consolidated basis, or the Company sells or otherwise disposes of a majority of the equity ownership or voting control of any member of any corporation or other entity holding substantially all of the assets of the Company, in a single transaction or series of related transactions, or (ii) acquisition by (A) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") or (B) two or more Persons of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of either (1) the shares of Common Stock outstanding immediately after such acquisition (the "Company Common Stock") or (2) the combined voting power of the voting securities of the Company entitled to vote generally in the election of directors outstanding immediately after such acquisition (the "Company Voting Securities"); provided, however, that for purposes of this subsection (i) the following acquisitions of securities shall not constitute or be included when determining whether there has been a Change of Control: (1) any acquisition by the Company, or (2) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (iii) consummation of a reorganization, merger or consolidation or the sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of the assets of another corporation by the Company (in each case, a "Business Combination"), unless, following any such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Company Common Stock and Company Voting Securities outstanding immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Company Common Stock and Company Voting Securities outstanding, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan or related trust of the Company or 7 any corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 50% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination. 8. Obligations of the Company upon Termination of Employment. (a) Termination by the Company Other Than for Cause, Death or Disability or by the Executive for Good Reason or for any Reason Following a Change of Control. If during the Employment Term (i) the Company terminates the Executive's employment other than for Cause, death or Disability, (ii) the Executive terminates his employment for Good Reason, or (iii) following a Change of Control, the Executive terminates his employment for any reason, then in any such case the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination (or, in the event any amounts due cannot be determined within this period, as soon thereafter as is practicable) an amount equal to (A) two times the Executive's then current Base Salary plus (B) two times the annual bonus most recently paid to the Executive. The Company shall have no further obligation to the Executive other than the obligation to pay to him any compensation and benefits due to the Executive in accordance with this Agreement, in each case to the extent theretofore unpaid. The provisions of this Subparagraph 8(a) shall not affect any rights of the Executive under the Company's benefit plans or programs. (b) Termination as a Result of the Executive's Disability or Death. If during the Employment Term the Executive's employment is terminated by reason of the Executive's Disability or death, then the Company shall pay to the Executive or the Executive's legal representatives in a lump sum in cash within 30 days after the Date of Termination (or, in the event any amounts due cannot be determined within this period, as soon thereafter as is practicable) an amount equal to one times (A) the Executive's then current Base Salary plus (B) the annual bonus most recently paid to the Executive. The Company shall have no further obligation to the Executive other than the obligation to pay to him any compensation and benefits due to the Executive in accordance with this Agreement, in each case to the extent theretofore unpaid. The provisions of this Subparagraph 8(b) shall not affect any rights of the Executive's heirs, administrators, executors, legatees, beneficiaries or assigns under the Company's benefit plans or programs. (c) Termination by the Company for Cause or by the Executive other than for Good Reason. If during the Employment Term either (i) the Executive's employment is terminated by the Company for Cause or (ii) the Executive voluntarily terminates his employment prior to a Change of Control, excluding termination by him for Good Reason, then the Company shall have no further obligation to the Executive other than the obligation to pay to the Executive (A) his Base Salary through the Date of Termination and (B) any other compensation and benefits due to the Executive in accordance with this Agreement, in each case to the extent theretofore unpaid. 9. Golden Parachute Provision. In the event that in the opinion of tax counsel selected by the Executive and compensated by the Company ("Executive's Tax Counsel"), a payment or benefit received or to be received by the Executive (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company or any of its subsidiaries, affiliates or divisions) (collectively, with the payments provided for in the foregoing provisions of Section 8, the "Post Termination Payments") would be subject to excise tax (in whole or in part) as a result of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and as a result of such excise tax, the net amount of Post Termination Payments retained by the Executive (taking into account federal and state income taxes and such excise tax) would be less than the net amount of Post Termination Payments retained by the Executive (taking into account federal and state income taxes) if the Post Termination Payments were reduced or eliminated as described in this Section 9, then the Post Termination Payments shall be reduced or eliminated until no portion of the Post Termination Payments is subject to excise tax, or the Post Termination Payments are reduced to zero. For purposes of this limitation (i) no portion of the Post Termination Payments the receipt or enjoyment of 8 which the Executive shall have waived in writing prior to the date of payment following termination of the Post Termination Payments shall be taken into account, (ii) no portion of the Post Termination Payments shall be taken into account which in the opinion of Executive's Tax Counsel does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, (iii) the Post Termination Payments shall be reduced only to the extent necessary so that the Post Termination Payments (other than those referred to in clauses (i) and (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code or are otherwise not subject to excise tax, in the opinion of Executive's Tax Counsel, and (iv) the value of any non-cash benefit and all deferred payments and benefits included in the Post Termination Payments shall be determined by the mutual agreement of the Company and the Executive in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. 10. Governing Law; Arbitration; Jurisdiction; Attorneys' Fees. This Agreement is made and entered into and will be governed by and interpreted in accordance with the laws of the State of Illinois. The Company and the Executive agree that any dispute regarding this Agreement, that cannot be resolved amicably by the parties, will be submitted to arbitration within 60 days of the date the dispute arose and will be resolved in accordance with the rules of the American Arbitration Association for expedited cases then in effect. The arbitrator will be mutually selected by the parties or in the event the parties cannot mutually agree, then appointed by the American Arbitration Association. Any arbitration will be held in Chicago, Illinois and the arbitrator will apply Illinois law. Judgment upon any award rendered by the arbitrator will be final and binding and may be entered in any court of competent jurisdiction. The arbitrator will not be empowered to award damages in excess of compensatory damages and each party hereby irrevocably waives any damages in excess of compensatory damages. Notwithstanding the foregoing, the Company will have the absolute right to seek equitable remedies in any state court of competent jurisdiction in the State of Illinois, County of Cook, or in a United States District Court in the State of Illinois pursuant to Paragraph 6(b) hereof. By Executive's execution and delivery of this Agreement, the Executive irrevocably submits to and accepts the exclusive jurisdiction of each of such courts and waives any objection (including any objection to venue or any objection based upon the grounds of forum non conveniens) which might be asserted against the bringing of any such action, suit or other legal proceeding in such courts. The parties shall be responsible for their own costs and expenses under this Section 10. 11. Miscellaneous. (a) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes any and all previous agreements, written or oral, including restrictive covenants, regarding the subject matter hereof between the parties hereto. This Agreement shall not be modified or amended, except by a written agreement signed by the parties hereto. (b) Notices. All notices, requests, demands and other communications required or permitted to be given or made under this Agreement shall be in writing and shall be deemed to have been given if delivered by hand, sent by generally recognized overnight courier service, telex or telecopy with confirmation of receipt, or mail: (i) to the Company: Navigant Consulting, Inc. Attn: General Counsel 615 N. Wabash Chicago, Illinois 60611 with a copy to: Winston & Strawn Attention: Gov. James R. Thompson 35 West Wacker Drive Chicago, IL 60601 9 (ii) to the Executive: John Reed --------------------- --------------------- or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications will be effective when actually received by the addressee. (c) Successors. This Agreement is personal to the Executive and without the prior written consent of the Company it shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement will inure to the benefit of and be enforceable against the Executive's legal representatives. This Agreement will inure to the benefit of and be binding upon the Company and its successors and assigns. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, share exchange or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. For purposes of this Agreement, the term "Company" means the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (d) Severability. If any provision of this Agreement is held invalid or unenforceable, either in its entirety or by virtue of its scope or application to given circumstances, such provision will thereupon be deemed modified only to the extent necessary to render such provision valid, or not applicable to given circumstances, or excised from this Agreement, as the situation may require, and this Agreement will be construed and enforced as if such provision had been included herein as so modified in scope or application, or had not been included herein, as the case may be. Should this Agreement, or any one or more of the provisions hereof, be held to be invalid, illegal or unenforceable within any governmental jurisdiction or subdivision thereof, the Agreement or any such provision or provisions will not as a consequence thereof be deemed to be invalid, illegal or unenforceable in any other governmental jurisdiction or subdivision thereof. (e) Waiver. The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, will not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) Counterparts. This Agreement may be executed in two counterparts, each of which will be deemed an original and both of which taken together will constitute a single instrument. (signature page follows) 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ------------------------------------ John Reed Navigant Consulting, Inc. By __________________________________ Its _________________________________ 11 EX-10.9 7 EMPLOYMENT AGREEMENT WITH JOHN R. REED EX-10.9 Employment Agreement dated as of November 12, 1999 between the Registrant and Mitchell H. Saranow Exhibit 10.9 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement"), signed on ________, ____, and effective as of November 12, 1999 (the "Effective Date"), is between Navigant Consulting, Inc., a Delaware corporation (the "Company"), and Mitchell H. Saranow (the "Executive"). RECITALS A. The Executive has served as an independent director of the Company for three years and possesses knowledge, skill and experience advantageous to the Company. B. The Company desires to employ the Executive as its Chairman of the Board of Directors and Co-Chief Executive Officer, and the Executive desires to accept such employment, on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing premises and mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Employment. Subject to the terms and conditions of this Agreement, the Company agrees to employ the Executive, and the Executive agrees to be employed by the Company, for the period stated in Paragraph 2 hereof. 2. Employment Term. The term of the Executive's employment by the Company under this Agreement will begin as of November 12, 1999, and will continue, subject to earlier termination as provided in Section 7 hereof, for a three-year period ending November 12, 2002, or it will continue to a later date pursuant to an extension or modification of this Agreement by mutual agreement of the parties hereto from time to time (the "Employment Term"). 3. Position and Responsibilities. During the period of his employment hereunder, the Executive agrees to serve the Company, and the Company shall employ the Executive, as one of its three Co-Chief Executive Officers. The Executive also shall serve as Chairman of the Company's Board of Directors (the "Board") until the annual meeting of stockholders of the Company to be held in 2000. The Company agrees that the Executive shall be nominated to serve as a director of the Company at the annual meeting of stockholders of the Company to be held in 2000 and, following the election of the Executive as a director at such annual meeting, the Executive shall be elected to the office of Chairman of the Board. During the Employment Term, the Executive shall possess such broad powers and perform such duties and functions as are normally incident to the position of Chairman of the Board and Co-Chief Executive Officer with an entity of an equivalent size and nature as the Company, and the Executive will share the powers and duties of Co-Chief Executive Officer with the other two Co-Chief Executive Officers appointed by the Board in a manner which is mutually agreed upon from time to time between the Executive, the other Co-Chief Executive Officers and the Board. 4. Performance of Duties; Commitment of Time. During the Employment Term the Executive shall discharge the following obligations: (a) During the period of his employment hereunder and except for illness, reasonable vacation periods, and reasonable leaves of absence, the Executive shall, subject to Paragraph 4(c) hereof, devote his best efforts and a reasonable amount of his business time (which shall be less than full-time), attention, skill and efforts to the business and affairs of the Company and its subsidiaries, affiliates and divisions, as such business and affairs now exist and as they may be hereafter changed or added to. (b) The Executive shall report directly and exclusively to the Board, and he shall perform all of his duties in accordance with such reasonable directions, requests, rules and regulations as are specified by the Board in connection with his employment. (c) Nothing herein shall preclude the Executive from devoting such reasonable time as required to serve, or to continue to serve, on the boards of directors of, or to hold any other offices or positions in or with respect to, other companies, organizations or entities, provided that (i) the Executive gives prior notice to the Company of such other activities, (ii) that such other activities do not violate Paragraph 6 hereof, and (iii) such other activities have no material effect on the time the Executive is required to spend in connection with the services required of him hereunder. The Company acknowledges that the Executive is currently involved with several businesses. The Executive represents and warrants that such involvement will not affect the performance of the Executive's duties as specified in this Paragraph 4. 5. Compensation and Benefits. (a) Base Salary. During the Employment Term, the Executive will receive an annual salary, payable in monthly or more frequent installments, of $500,000 subject to authorized withholding and other deductions. The annual salary will be reviewed annually and, if appropriate, increased by the Company in the sole discretion of the Compensation Committee of its Board. Such annual salary, as so increased, is hereinafter referred to as the "Base Salary." In no event shall the Executive's Base Salary be reduced below $500,000. Payments of Base Salary have been made to The Saranow Group for the Executive's services to the Company beginning on November 12, 1999, and extending through December 31, 1999. (b) Annual Bonus. During the Employment Term, the Executive will be eligible to receive an annual cash bonus based upon the Executive's and/or the Company's achievement of performance goals or objectives. The bonus goals and objectives shall be established by mutual agreement of the Compensation Committee of the Board and the Executive. The Executive shall have a maximum bonus opportunity of 100% of Base Salary and a target payment of 65% of Base Salary. The Compensation Committee shall have the sole discretion to determine whether the bonus goals and objectives have been met. A prorated bonus payment of $35,000 for the period ending December 31, 1999, shall be paid to the Executive by the Company within 15 days of the date this Agreement is signed. (c) Long-Term Incentive Compensation. (i) The Company has granted the Executive an option (the "Option") to purchase 300,000 shares of the Company's common stock, par value $0.001 per share (the "Common Stock"). The purchase price per share is the closing price of the Common Stock on the date of grant (the "Exercise Price"). The Option has been granted in accordance with the Company's Long-Term Incentive Plan and is subject to the terms and conditions contained in the Stock Award Agreement to be entered into between the Company and the Executive, which terms shall include: (i) the Option shall have a term equal to the lesser of ten years measured from the date of grant or the longest period permitted by the Company's Long-Term Incentive Plan after the date of the termination of the Executive's employment with the Company; (ii) the greatest portion of the Option shares allowable under the Company's Long-Term Incentive Plan shall be issued as incentive stock options; (iii) the Option shares shall vest and become exercisable 50% as of the date of grant, an additional 25% on the date 6 months after the date of grant, and an additional 25% on the date 18 months after the date of grant; and (iv) in the event of a Change of Control prior to the Executive's termination of employment, or the termination of Executive's employment by the Company without Cause (as hereinafter defined) or by the Executive for Good Reason (as hereinafter defined) the Executive shall immediately become fully vested in his entire Option. (d) Employee Benefits. During the Employment Term, the Executive will be entitled to receive all benefits of employment generally available to other members of the Company's senior executive management, upon his satisfaction of the eligibility or participation criteria therefor. 2 (e) Entitlement to Perquisites. For each fiscal year of the Company, or portion thereof, occurring during the Employment Term, the Executive shall be entitled to receive those perquisites from the Company which are generally available to other members of the Company's senior executive management and they shall specifically include, without limitation, reasonable hotel expenses while in Chicago, an automobile allowance of $850 per month and downtown parking fees, and reimbursement of dues and expenses associated with one downtown luncheon club. (f) Reimbursement of Travel and Entertainment Expenses. The Company shall pay or reimburse the Executive, in accordance with its normal policies and practices, for all reasonable hotel, travel and other expenses incurred by the Executive in connection with the performance of his obligations hereunder. The Company further agrees to furnish the Executive with such accommodations as shall be suitable to the character of the Executive's position with the Company and adequate for the performance of his duties hereunder (including those reasonable hotel and entertainment costs he incurs while staying in Chicago on Company business). (g) Legal Fees. The Company shall pay, or reimburse the Executive for, the legal fees and expenses of counsel to the Executive in connection with the preparation, negotiation, execution and delivery of this Agreement. (h) Withholding Taxes. There shall be deducted and withheld from the Base Salary and all other compensation payable to the Executive during or for the Employment Term any and all amounts required to be deducted or withheld under the provisions of any statute, regulation, ordinance or order. 6. Obligations of the Executive During and After Employment. (a) The Executive acknowledges and agrees that solely by virtue of his employment by, and relationship with, the Company, he will acquire "Confidential Information," as defined in subparagraph (vii) below, as well as special knowledge of the Company's relationships with its clients, and that, but for his association with the Company, the Executive will not have had access to said Confidential Information or knowledge of said relationships. The Executive further acknowledges and agrees (1) that the Company has long term relationships with its clients, and that those relationships were developed at great expense and difficulty to the Company over several years of close and continuing involvement; (2) that the Company's relationships with its clients are and will continue to be valuable, special and unique assets of the Company and (3) that the Company has the following protectable interests that are critical to its competitive advantage in the industry and would be of demonstrable value in the hands of a competitor: software designs and application; plans, modeling products and tools (including, but not limited to, COMPPASS 2000); processes, distribution networks, and protocols; research bases, systems, and industry benchmarks; and concepts, ideas, marketing strategies, and other matters not generally known to the public. In return for the consideration described in this Agreement, and as a condition precedent both to the grant of the Option under the Stock Award Agreement and the Company employing the Executive, and as an inducement to the Company to do so, the Executive hereby represents, warrants and covenants as follows: (i) The Executive has executed and delivered this Agreement as his free and voluntary act, after having determined that the provisions contained herein are of a material benefit to him, and that the duties and obligations imposed on him hereunder are fair and reasonable and will not prevent him from earning a comparable livelihood following the termination of his employment with the Company; (ii) The Executive has read and fully understands the terms and conditions set forth herein, has had time to reflect on and consider the benefits and consequences of entering into this Agreement, and has had the opportunity to review the terms hereof with an attorney or other representative if he so chooses; (iii) The execution and delivery of this Agreement by the Executive does not conflict with, or result in a breach of or constitute a default under, any agreement or contract, whether oral or written, to which the Executive is a party or by which the Executive may be bound; (iv) The Executive agrees that, during the time of his employment with the Company and for a period of one year after termination of the Executive's employment hereunder for any reason whatsoever or for no reason, whether voluntary or involuntary, the Executive will not, except on behalf of the Company, anywhere in 3 North America or in any other place or venue where the Company or any affiliate, subsidiary or division thereof now conducts or operates, or may conduct or operate, its business prior to the date of the Executive's termination of employment; (A) directly or indirectly, contact, solicit or direct any person, firm, corporation, association, or other entity to contact or solicit, any of the Employer's clients or prospective clients (as they are hereinafter defined) for the purpose of selling or distributing or attempting to sell or distribute, any products and/or services in competition with the Company to its clients during the term hereof. In addition, the Executive will not disclose the identity of any such clients or prospective clients, or any part thereof, to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, except to the extent (1) required by any law, regulation or order of any court or regulatory commission, department or agency, provided that the Executive gives prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order, or (2) such disclosure is necessary to perform properly the Executive's duties under this Agreement; (B) solicit on his own behalf or on behalf of any other person, the services of any person who is an employee of the Company, nor solicit any of the Company's employees to terminate employment with the Company; (C) become directly or indirectly, an investor, owner or stockholder (excluding investments representing less than 2% of the common stock of a public company), lender, director, consultant, employee, agent or salesperson, whether part-time or full-time, of any business which competes with the Company in the marketing of products or services developed, marketed or provided by the Company; and (D) act as a consultant, advisor, officer, manager, agent, director, partner, independent contractor, owner, or employee for or on behalf of any of the Company's clients or prospective clients (as hereinafter defined), with respect to any other business activities in which the Company engages during the term hereof; (v) The scope described above is necessary and reasonable in order to protect the Company in the conduct of its business and that, if the Executive becomes employed by another employer, he shall be required to disclose the existence of this paragraph 6 to such employer and the Executive hereby consents to and the Company is hereby given permission to disclose the existence of this paragraph 6 to such employer. (vi) For purposes of this Paragraph 6, "client" shall be defined as any person, firm, corporation, association, or entity that purchased any type of product and/or service from the Company or is or was doing business with the Company within the 12-month period immediately preceding termination of the Executive's employment. For purposes of this Paragraph 6, "prospective client" shall be defined as any person, firm, corporation, association, or entity contacted or solicited in writing by the Company or who contacted the Company within the 12-month period immediately preceding the termination of the Executive's employment for the purpose of having such persons, firms, corporations, associations, or entities become a client of the Company; (vii) Both during his employment and thereafter he will not, for any reason whatsoever, use for himself or disclose to any person not employed by the Company any "Confidential Information" of the Company acquired by the Executive during his relationship with the Company, except to the extent that such Confidential Information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical, or in other media, available to the general public, other than as a result of any act or omission of the Executive, (b) is required to be disclosed by law, regulation or order of any court or regulatory commission, department or agency, provided that the Executive gives prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order, or (c) is required to be disclosed in order to perform properly the Executive's duties under this Agreement. The Executive further agrees to use Confidential Information solely for the purpose of performing duties with the Company and further agrees not to use Confidential Information for his own private use or commercial purposes. The Executive agrees that "Confidential Information" includes but is not limited to: (1) any financial, engineering, business, planning, operations, services, potential services, products, potential products, technical information and/or know-how, organization charts, formulas, business plans, production, purchasing, marketing, pricing, sales, profit, personnel, customer, broker, supplier, or other lists or information of the Company; (2) any papers, data, records, processes, methods, techniques, systems, models, samples, devices, equipment, 4 compilations, invoices, client lists, or documents of the Company; (3) any confidential information or trade secrets of any third party provided to the Company in confidence or subject to other use or disclosure restrictions or limitations; and (4) any other information, written, oral, or electronic, whether existing now or at some time in the future, and whether pertaining to current or future developments, which pertains to the Company's affairs or interests or with whom or how the Company does business. The Company acknowledges and agrees that Confidential Information does not include information properly in the public domain; (viii) During and after the term of employment hereunder, the Executive will not remove from the Company's premises any documents, records, files, notebooks, correspondence, reports, video or audio recordings, computer printouts, computer programs, computer software, price lists, microfilm, drawings, or other similar documents containing Confidential Information, including copies thereof, whether prepared by him or others, except as his duties under this Agreement shall require, and in such cases, will promptly return such items to the Company. Upon termination of his employment with the Company, all such items including summaries or copies thereof, then in the Executive's possession, shall be returned to the Company immediately; (ix) All ideas, inventions, designs, processes, discoveries, enhancements, plans, writings, and other developments or improvements (the "Inventions") conceived by the Executive, alone or with others, during the term of his employment, whether or not during working hours, that are within the scope of the Executive's business operations or that relate to any of the Company's work or projects (including any and all inventions based wholly or in part upon ideas conceived during the Executive's employment with the Company), are the sole and exclusive property of the Company. The Executive further agrees that (1) he will promptly disclose all Inventions to the Company and hereby assigns to the Company all present and future rights he has or may have in those Inventions, including without limitation those relating to patent, copyright, trademark or trade secrets; and (2) all of the Inventions eligible under the copyright laws are "work made for hire." At the request of and without charge to the Company, the Executive will do all things deemed by the Company to be reasonably necessary to perfect title to the Inventions in the Company and to assist in obtaining for the Company such patents, copyrights or other protection as may be provided under law and desired by the Company, including but not limited to executing and signing any and all relevant applications, assignments or other instruments. Notwithstanding the foregoing, pursuant to the Employee Patent Act, Illinois Public Act 83-493, the Company hereby notifies the Executive that the provisions of this subparagraph (ix) shall not apply to any Inventions for which no equipment, supplies, facility or trade secret information of the Company was used and which were developed entirely on the Executive's own time, unless (1) the Invention relates (i) to the business of the Company, or (ii) to actual or demonstrably anticipated research or development of the Company, or (2) the Invention results from any work performed by the Executive for the Company; (x) All client lists, supplier lists, and client and supplier information are and shall remain the exclusive property of the Company, regardless of whether such information was developed, purchased, acquired, or otherwise obtained by the Company or the Executive. The Executive also agrees to furnish to the Company on demand at any time during his employment, and upon the termination of his employment, any records, notes, computer printouts, computer programs, computer software, price lists, microfilm, or any other documents related to the Company's business, including originals and copies thereof; and (xi) The Executive may become aware of "material" nonpublic information relating to clients whose stock is publicly traded. The Executive acknowledges that he is prohibited by law as well as by Company policy from trading in the shares of such clients while in possession of such information or directly or indirectly disclosing such information to any other persons so that they may trade in these shares. For purposes of this subparagraph (xi), "material" information may include any information, positive or negative, which might be of significance to an investor in determining whether to purchase, sell or hold the stock of publicly traded clients. Information may be significant for this purpose even if it would not alone determine the investor's decision. Examples include a potential business acquisition, internal financial information that departs in any way from what the market would expect, the acquisition or loss of a major contract, or an important financing transaction. (b) Remedy for Breach. The Executive agrees that in the event of a material breach or threatened material breach of any of the covenants contained in this Paragraph 6, the Company will have the right and remedy to have such covenants specifically enforced by any court having jurisdiction, it being acknowledged and agreed that 5 any material breach of any of the covenants will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. (c) Blue-Penciling. The Executive acknowledges and agrees that the noncompetition and nonsolicitation provisions contained herein are reasonable and valid in geographic, temporal and subject matter scope and in all other respects, and do not impose limitations greater than are necessary to protect the goodwill, Confidential Information and other business interests of the Company. Nevertheless, if any court determines that any of said noncompetition and other restrictive covenants and agreements, or any part thereof, is unenforceable because of the duration or geographic scope of such provision, such court will have the power to reduce the duration or scope of such provision, as the case may be, and, in its reduced form, such provision will then be enforceable to the maximum extent permitted by applicable law. 7. Termination of Employment. (a) Termination as a Result of Death or Disability. The Executive's employment with the Company shall terminate automatically upon the Executive's death during the Employment Term. If the Disability of the Executive has occurred during the Employment Term (pursuant to the definition of "Disability" set forth below), the Company may give to the Executive written notice of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Company (the "Disability Effective Date"), provided that, within the 30 days after receipt of notice, the Executive shall not have returned to substantial performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company for 120 consecutive days, or a total of 180 days in any 12-month period, as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician jointly selected by the Company and the Executive or the Executive's legal representative, or, if the parties cannot agree on the selection of such physician then each shall choose a physician and the two physicians shall jointly select a physician to make such binding determination. (b) Termination by the Company for Cause. The Company may terminate the Executive's employment during the Employment Term for Cause at any time upon written notice from the Board specifying such Cause and the expiration of the cure period specified below, and thereafter, the Company's obligations hereunder (other than the obligation to pay any accrued salary or benefit) shall cease and terminate; provided, however, that such written notice shall not be delivered until after the Board shall have given the Executive written notice specifying the conduct alleged to have constituted such Cause. The Executive shall have 30 days to cure the matters specified in the notice delivered by the Board (to the extent that such matters are curable). For purposes of this Agreement, "Cause" shall mean the Executive's willful misconduct, dishonesty or other willful actions (or willful failures to act) which are materially and demonstrably injurious to the Company, or a material breach by the Executive of one or more terms of this Agreement, which shall include the Executive's habitual neglect of the material duties required of him under this Agreement. For purposes of this Section, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the Board by the vote of a majority of the entire Board at a meeting of the Board duly called and held for such purpose, at which the Executive shall have an opportunity to be present and to be heard, finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described above, and specifying the particulars thereof in detail. (c) Termination by the Executive for Good Reason. The Executive's employment with the Company may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean any of the following actions, if taken without the express written consent of the Executive: (1) any material change by the Company in the Executive's title, functions, duties, or responsibilities, which changes would cause the Executive's position with the Company to become of significantly less responsibility, importance or scope as compared to the position and attributes that applied to the Executive as of the Effective Date; (2) any material failure 6 by the Company to comply with any of the provisions of the Agreement; or (3) the requirement made by the Company that the Executive change his manner of performing his responsibilities so as to require a change in his residence. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" means a written notice which (1) indicates the specific termination provision in this Agreement relied upon, (2) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (3) if the Date of Termination (as defined in Section (e) hereof) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (1) if the Executive's employment is terminated by the Company for Cause, the expiration of the cure period specified in Paragraph 7(b) hereof, (2) if the Executive's employment is terminated by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (3) if the Executive's employment is terminated by reason of death or Disability, the date of death of the Executive or the Disability Effective Date, as the case may be, and (4) if the Executive's employment is terminated by the Company other than for Cause or Disability, or by the Executive without Good Reason, 30 days after the date of receipt by the non-terminating party of a written notice of termination or such shorter time as the Board thereafter specifies in a written notice to the Executive. (f) Change of Control of the Company. For the purpose of this Agreement, a "Change of Control" shall have been deemed to have occurred if at any time during the Employment Term: (i) the Company sells or otherwise disposes in an arms length transaction assets of the Company having a fair market value of at least 60% of the total assets of the Company and its subsidiaries on a consolidated basis, or the Company sells or otherwise disposes of a majority of the equity ownership or voting control of any member of any corporation or other entity holding substantially all of the assets of the Company, in a single transaction or series of related transactions, or (ii) acquisition by (A) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") or (B) two or more Persons of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of either (1) the shares of Common Stock outstanding immediately after such acquisition (the "Company Common Stock") or (2) the combined voting power of the voting securities of the Company entitled to vote generally in the election of directors outstanding immediately after such acquisition (the "Company Voting Securities"); provided, however, that for purposes of this subsection (i) the following acquisitions of securities shall not constitute or be included when determining whether there has been a Change of Control: (1) any acquisition by the Company, or (2) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (iii) consummation of a reorganization, merger or consolidation or the sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of the assets of another corporation by the Company (in each case, a "Business Combination"), unless, following any such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Company Common Stock and Company Voting Securities outstanding immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their 7 ownership, immediately prior to such Business Combination, of the Company Common Stock and Company Voting Securities outstanding, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan or related trust of the Company or any corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 50% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination. 8. Obligations of the Company upon Termination of Employment. (a) Termination by the Company Other Than for Cause, Death or Disability or by the Executive for Good Reason or for any Reason Following a Change of Control. If during the Employment Term (i) the Company terminates the Executive's employment other than for Cause, death or Disability, (ii) the Executive terminates his employment for Good Reason, or (iii) following a Change of Control, the Executive terminates his employment for any reason, then in any such case the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination (or, in the event any amounts due cannot be determined within this period, as soon thereafter as is practicable) an amount equal to (A) two times the Executive's then current Base Salary plus (B) two times the annual bonus most recently paid to the Executive. The provisions of this Subparagraph 8(a) shall not affect any rights of the Executive under the Company's benefit plans or programs. (b) Termination as a Result of the Executive's Disability or Death. If during the Employment Term the Executive's employment is terminated by reason of the Executive's Disability or death, then the Company shall pay to the Executive or the Executive's legal representatives in a lump sum in cash within 30 days after the Date of Termination (or, in the event any amounts due cannot be determined within this period, as soon thereafter as is practicable) an amount equal to one times (A) the Executive's then current Base Salary plus (B) the annual bonus most recently paid to the Executive. The provisions of this Subparagraph 8(b) shall not affect any rights of the Executive's heirs, administrators, executors, legatees, beneficiaries or assigns under the Company's benefit plans or programs. (c) Termination by the Company for Cause or by the Executive other than for Good Reason. If during the Employment Term either (i) the Executive's employment is terminated by the Company for Cause or (ii) the Executive voluntarily terminates his employment prior to a Change of Control, excluding termination by him for Good Reason, then the Company shall have no further obligation to the Executive other than the obligation to pay to the Executive (A) his Base Salary through the Date of Termination and (B) any other compensation and benefits due to the Executive in accordance with this Agreement, in each case to the extent theretofore unpaid. 9. Golden Parachute Provision. In the event that in the opinion of tax counsel selected by the Executive and compensated by the Company ("Executive's Tax Counsel"), a payment or benefit received or to be received by the Executive following his termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company or any of its subsidiaries, affiliates or divisions) (collectively, with the payments provided for in the foregoing provisions of Section 8, the "Post Termination Payments") would be subject to excise tax (in whole or in part) as a result of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and as a result of such excise tax, the net amount of Post Termination Payments retained by the Executive (taking into account federal and state income taxes and such excise tax) would be less than the net amount of Post Termination Payments retained by the Executive (taking into account federal and state income taxes) if the Post Termination Payments were reduced or eliminated as described in this Section 9, then the Post Termination Payments shall be reduced or eliminated until no portion of the Post Termination Payments is subject to excise tax, or the Post Termination Payments are reduced to zero. For purposes of this limitation (i) no portion of the Post Termination Payments the receipt or enjoyment of which the Executive shall have waived in writing prior to the date 8 of payment following termination of the Post Termination Payments shall be taken into account, (ii) no portion of the Post Termination Payments shall be taken into account which in the opinion of Executive's Tax Counsel does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, (iii) the Post Termination Payments shall be reduced only to the extent necessary so that the Post Termination Payments (other than those referred to in clauses (i) and (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code or are otherwise not subject to excise tax, in the opinion of Executive's Tax Counsel, and (iv) the value of any non-cash benefit and all deferred payments and benefits included in the Post Termination Payments shall be determined by the mutual agreement of the Company and the Executive in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. 10. Governing Law; Arbitration; Jurisdiction; Attorneys' Fees. This Agreement is made and entered into and will be governed by and interpreted in accordance with the laws of the State of Illinois. The Company and the Executive agree that any dispute regarding this Agreement, that cannot be resolved amicably by the parties, will be submitted to arbitration within 60 days of the date the dispute arose and will be resolved in accordance with the rules of the American Arbitration Association for expedited cases then in effect. The arbitrator will be mutually selected by the parties or in the event the parties cannot mutually agree, then appointed by the American Arbitration Association. Any arbitration will be held in Chicago, Illinois and the arbitrator will apply Illinois law. Judgment upon any award rendered by the arbitrator will be final and binding and may be entered in any court of competent jurisdiction. The arbitrator will not be empowered to award damages in excess of compensatory damages and each party hereby irrevocably waives any damages in excess of compensatory damages. Notwithstanding the foregoing, the Company will have the absolute right to seek equitable remedies in any state court of competent jurisdiction in the State of Illinois, County of Cook, or in a United States District Court in the State of Illinois pursuant to Paragraph 6(b) hereof. By Executive's execution and delivery of this Agreement, the Executive irrevocably submits to and accepts the exclusive jurisdiction of each of such courts and waives any objection (including any objection to venue or any objection based upon the grounds of forum non conveniens) which might be asserted against the bringing of any such action, suit or other legal proceeding in such courts. The parties shall be responsible for their own costs and expenses under this Section 10. 11. Miscellaneous. (a) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes any and all previous agreements, written or oral, regarding the subject matter hereof between the parties hereto. This Agreement shall not be modified or amended, except by a written agreement signed by the parties hereto. (b) Notices. All notices, requests, demands and other communications required or permitted to be given or made under this Agreement shall be in writing and shall be deemed to have been given if delivered by hand, sent by generally recognized overnight courier service, telex or telecopy with confirmation of receipt, or mail: (i) to the Company: Navigant Consulting, Inc. Attn: General Counsel 615 N. Wabash Chicago, Illinois 60611 with a copy to: Winston & Strawn Attention: Gov. James R. Thompson 35 West Wacker Drive Chicago, IL 60601 (ii) to the Executive: 9 Mitchell H. Saranow 860 Auburn Road Winnetka, IL 60093 with a copy to: Sidley & Austin Attention: Steven Sutherland Bank One Plaza 10 South Dearborn Chicago, IL 60603 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications will be effective when actually received by the addressee. (c) Successors. This Agreement is personal to the Executive and without the prior written consent of the Company it shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement will inure to the benefit of and be enforceable against the Executive's legal representatives. This Agreement will inure to the benefit of and be binding upon the Company and its successors and assigns. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, share exchange or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. For purposes of this Agreement, the term "Company" means the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (d) Severability. If any provision of this Agreement is held invalid or unenforceable, either in its entirety or by virtue of its scope or application to given circumstances, such provision will thereupon be deemed modified only to the extent necessary to render such provision valid, or not applicable to given circumstances, or excised from this Agreement, as the situation may require, and this Agreement will be construed and enforced as if such provision had been included herein as so modified in scope or application, or had not been included herein, as the case may be. Should this Agreement, or any one or more of the provisions hereof, be held to be invalid, illegal or unenforceable within any governmental jurisdiction or subdivision thereof, the Agreement or any such provision or provisions will not as a consequence thereof be deemed to be invalid, illegal or unenforceable in any other governmental jurisdiction or subdivision thereof. (e) Waiver. The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, will not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) Counterparts. This Agreement may be executed in two counterparts, each of which will be deemed an original and both of which taken together will constitute a single instrument. (signature page follows) 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ------------------------------------ Mitchell H. Saranow Navigant Consulting, Inc. By __________________________________ Its _________________________________ 11 EX-10.10 8 EMPLOYMENT AGREEMENT WITH CARL S. SPETZLER EX-10.10 Employment Agreement dated as of November 12, 1999 between the Registrant and Carl S. Spetzler Exhibit 10.10 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement"), signed on ________, ____, and effective as of November 12, 1999 (the "Effective Date"), is between Navigant Consulting, Inc., a Delaware corporation (the "Company"), and Carl Spetzler (the "Executive"). RECITALS A. The Executive possesses knowledge, skill and experience advantageous to the Company. B. The Company desires to employ the Executive as its Co-Chief Executive Officer, and the Executive desires to accept such employment, on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing premises and mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Employment. Subject to the terms and conditions of this Agreement, the Company agrees to employ the Executive, and the Executive agrees to be employed by the Company, for the period stated in Paragraph 2 hereof. 2. Employment Term. The term of the Executive's employment by the Company under this Agreement will begin as of November 12, 1999, and will continue, subject to earlier termination as provided in Section 7 hereof, for a three-year period ending November 12, 2002, or it will continue to a later date pursuant to an extension or modification of this Agreement by mutual agreement of the parties hereto from time to time (the "Employment Term"). 3. Position and Responsibilities. During the period of his employment hereunder, the Executive agrees to serve the Company, and the Company shall employ the Executive, as one of its three Co-Chief Executive Officers. During the Employment Term, the Executive shall possess such broad powers and perform such duties and functions as are normally incident to the position of Co-Chief Executive Officer with an entity of an equivalent size and nature as the Company, and the Executive will share the powers and duties of Co-Chief Executive Officer with the other two Co-Chief Executive Officers appointed by the Company's Board of Directors (the "Board") in a manner which is mutually agreed upon from time to time between the Executive, the other Co-Chief Executive Officers and the Board. 4. Performance of Duties; Commitment of Time. During the Employment Term the Executive shall discharge the following obligations: (a) During the period of his employment hereunder and except for illness, reasonable vacation periods, and reasonable leaves of absence, the Executive shall devote his best efforts and full-time attention and skill to the business and affairs of the Company and its subsidiaries, affiliates and divisions, as such business and affairs now exist and as they may be hereafter changed or added to. (b) The Executive shall report directly and exclusively to the Board, and he shall perform all of his duties in accordance with such reasonable directions, requests, rules and regulations as are specified by the Board in connection with his employment. (c) Nothing herein shall preclude the Executive from devoting such reasonable time as required to serve, or to continue to serve, on the boards of directors of, or to hold any other offices or positions in or with respect to, other companies, organizations or entities, provided that (i) the Executive gives prior notice to the Company of such other activities, (ii) such other activities do not violate Paragraph 6 hereof, and (iii) such other activities have no material effect on the time the Executive is required to spend in connection with the services required of him hereunder. 5. Compensation and Benefits. (a) Base Salary. During the Employment Term, the Executive will receive an annual salary, payable in monthly or more frequent installments, of $500,000 subject to authorized withholding and other deductions. The annual salary will be reviewed annually and, if appropriate, increased by the Company in the sole discretion of the Compensation Committee of its Board. Such annual salary, as so increased, is hereinafter referred to as the "Base Salary." In no event shall the Executive's Base Salary be reduced below $500,000. A retroactive payment of Base Salary may be due to the Executive for his services to the Company beginning on November 12, 1999, and extending through the business day preceding the date this Agreement is signed, to the extent that actual salary paid by the Company to the Executive for this time period was insufficient. The retroactive payment, if necessary, shall be made in one lump sum within 15 days of the date this Agreement is signed. (b) Annual Bonus. During the Employment Term, the Executive will be eligible to receive an annual cash bonus based upon the Executive's and/or the Company's achievement of performance goals or objectives. The bonus goals and objectives shall be established by mutual agreement of the Compensation Committee of the Board and the Executive. The Executive shall have a maximum bonus opportunity of 100% of Base Salary and a target payment of 65% of Base Salary. The Compensation Committee shall have the sole discretion to determine whether the bonus goals and objectives have been met. Notwithstanding the foregoing, the Executive shall be entitled to receive a bonus for the 1999 calendar year in accordance with the terms and conditions previously established by the Company, for his services rendered prior to November 12, 1999. In addition thereto, the Executive shall be entitled to receive a prorated bonus payment of $35,000 for the period ending December 31, 1999, which shall be paid to the Executive by the Company within 15 days of the date this Agreement is signed. (c) Long-Term Incentive Compensation. (i) The Company has granted the Executive an option (the "Option") to purchase 300,000 shares of the Company's common stock, par value $0.001 per share (the "Common Stock"). The purchase price per share is the closing price of the Common Stock on the date of grant (the "Exercise Price"). The Option has been granted in accordance with the Company's Long-Term Incentive Plan and is subject to the terms and conditions contained in the Stock Award Agreement to be entered into between the Company and the Executive, which terms shall include: (i) the Option shall have a term equal to the lesser of ten years measured from the date of grant or the longest period permitted by the Company's Long-Term Incentive Plan after the date of the termination of the Executive's employment with the Company; (ii) the greatest portion of the Option shares allowable under the Company's Long-Term Incentive Plan shall be issued as incentive stock options; (iii) the Option shares shall vest and become exercisable 50% as of the date of grant, an additional 25% on the date 6 months after the date of grant, and an additional 25% on the date 18 months after the date of grant; and (iv) in the event of a Change of Control prior to the Executive's termination of employment, or the termination of Executive's employment by the Company without Cause (as hereinafter defined) or by the Executive for Good Reason (as hereinafter defined) the Executive shall immediately become fully vested in his entire Option. (d) Employee Benefits. During the Employment Term, the Executive will be entitled to receive all benefits of employment generally available to other members of the Company's senior executive management, upon his satisfaction of the eligibility or participation criteria therefor. (e) Entitlement to Perquisites. For each fiscal year of the Company, or portion thereof, occurring during the Employment Term, the Executive shall be entitled to receive those perquisites from the Company which are generally available to other members of the Company's senior executive management and they shall specifically include, without limitation, reasonable hotel expenses while in Chicago, an automobile allowance of $850 per month and downtown parking fees, and reimbursement of dues and expenses associated with one downtown luncheon club. 2 (f) Reimbursement of Travel and Entertainment Expenses. The Company shall pay or reimburse the Executive, in accordance with its normal policies and practices, for all reasonable hotel, travel and other expenses incurred by the Executive in connection with the performance of his obligations hereunder. The Company further agrees to furnish the Executive with such accommodations as shall be suitable to the character of the Executive's position with the Company and adequate for the performance of his duties hereunder (including those reasonable hotel and entertainment costs he incurs while staying in Chicago on Company business). (g) Legal Fees. The Company shall pay, or reimburse the Executive for, the legal fees and expenses of counsel to the Executive in connection with the preparation, negotiation, execution and delivery of this Agreement. (h) Withholding Taxes. There shall be deducted and withheld from the Base Salary and all other compensation payable to the Executive during or for the Employment Term any and all amounts required to be deducted or withheld under the provisions of any statute, regulation, ordinance or order. 6. Obligations of the Executive During and After Employment. (a) The Executive acknowledges and agrees that solely by virtue of his employment by, and relationship with, the Company, he will acquire "Confidential Information," as defined in subparagraph (vii) below, as well as special knowledge of the Company's relationships with its clients, and that, but for his association with the Company, the Executive will not have had access to said Confidential Information or knowledge of said relationships. The Executive further acknowledges and agrees (1) that the Company has long term relationships with its clients, and that those relationships were developed at great expense and difficulty to the Company over several years of close and continuing involvement; (2) that the Company's relationships with its clients are and will continue to be valuable, special and unique assets of the Company and (3) that the Company has the following protectable interests that are critical to its competitive advantage in the industry and would be of demonstrable value in the hands of a competitor: software designs and application; plans, modeling products and tools (including, but not limited to, COMPPASS 2000); processes, distribution networks, and protocols; research bases, systems, and industry benchmarks; and concepts, ideas, marketing strategies, and other matters not generally known to the public. In return for the consideration described in this Agreement, and as a condition precedent both to the grant of the Option under the Stock Award Agreement and the Company employing the Executive, and as an inducement to the Company to do so, the Executive hereby represents, warrants and covenants as follows: (i) The Executive has executed and delivered this Agreement as his free and voluntary act, after having determined that the provisions contained herein are of a material benefit to him, and that the duties and obligations imposed on him hereunder are fair and reasonable and will not prevent him from earning a comparable livelihood following the termination of his employment with the Company; (ii) The Executive has read and fully understands the terms and conditions set forth herein, has had time to reflect on and consider the benefits and consequences of entering into this Agreement, and has had the opportunity to review the terms hereof with an attorney or other representative if he so chooses; (iii) The execution and delivery of this Agreement by the Executive does not conflict with, or result in a breach of or constitute a default under, any agreement or contract, whether oral or written, to which the Executive is a party or by which the Executive may be bound; (iv) The Executive agrees that, during the time of his employment with the Company and for a period of one year after termination of the Executive's employment hereunder for any reason whatsoever or for no reason, whether voluntary or involuntary, the Executive will not, except on behalf of the Company, anywhere in North America or in any other place or venue where the Company or any affiliate, subsidiary or division thereof now conducts or operates, or may conduct or operate, its business prior to the date of the Executive's termination of employment; (A) directly or indirectly, contact, solicit or direct any person, firm, corporation, association, or other entity to contact or solicit, any of the Employer's clients or prospective clients (as they are 3 hereinafter defined) for the purpose of selling or distributing or attempting to sell or distribute, any products and/or services in competition with the Company to its clients during the term hereof. In addition, the Executive will not disclose the identity of any such clients or prospective clients, or any part thereof, to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, except to the extent (1) required by any law, regulation or order of any court or regulatory commission, department or agency, provided that the Executive gives prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order, or (2) such disclosure is necessary to perform properly the Executive's duties under this Agreement; (B) solicit on his own behalf or on behalf of any other person, the services of any person who is an employee of the Company, nor solicit any of the Company's employees to terminate employment with the Company; (C) become directly or indirectly, an investor, owner or stockholder (excluding investments representing less than 2% of the common stock of a public company), lender, director, consultant, employee, agent or salesperson, whether part-time or full-time, of any business which competes with the Company in the marketing of products or services developed, marketed or provided by the Company; and (D) act as a consultant, advisor, officer, manager, agent, director, partner, independent contractor, owner, or employee for or on behalf of any of the Company's clients or prospective clients (as hereinafter defined), with respect to any other business activities in which the Company engages during the term hereof; (v) The scope described above is necessary and reasonable in order to protect the Company in the conduct of its business and that, if the Executive becomes employed by another employer, he shall be required to disclose the existence of this paragraph 6 to such employer and the Executive hereby consents to and the Company is hereby given permission to disclose the existence of this paragraph 6 to such employer. (vi) For purposes of this Paragraph 6, "client" shall be defined as any person, firm, corporation, association, or entity that purchased any type of product and/or service from the Company or is or was doing business with the Company within the 12-month period immediately preceding termination of the Executive's employment. For purposes of this Paragraph 6, "prospective client" shall be defined as any person, firm, corporation, association, or entity contacted or solicited in writing by the Company or who contacted the Company within the 12-month period immediately preceding the termination of the Executive's employment for the purpose of having such persons, firms, corporations, associations, or entities become a client of the Company; (vii) Both during his employment and thereafter he will not, for any reason whatsoever, use for himself or disclose to any person not employed by the Company any "Confidential Information" of the Company acquired by the Executive during his relationship with the Company, except to the extent that such Confidential Information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical, or in other media, available to the general public, other than as a result of any act or omission of the Executive, (b) is required to be disclosed by law, regulation or order of any court or regulatory commission, department or agency, provided that the Executive gives prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order, or (c) is required to be disclosed in order to perform properly the Executive's duties under this Agreement. The Executive further agrees to use Confidential Information solely for the purpose of performing duties with the Company and further agrees not to use Confidential Information for his own private use or commercial purposes. The Executive agrees that "Confidential Information" includes but is not limited to: (1) any financial, engineering, business, planning, operations, services, potential services, products, potential products, technical information and/or know-how, organization charts, formulas, business plans, production, purchasing, marketing, pricing, sales, profit, personnel, customer, broker, supplier, or other lists or information of the Company; (2) any papers, data, records, processes, methods, techniques, systems, models, samples, devices, equipment, compilations, invoices, client lists, or documents of the Company; (3) any confidential information or trade secrets of any third party provided to the Company in confidence or subject to other use or disclosure restrictions or limitations; and (4) any other information, written, oral, or electronic, whether existing now or at some time in the future, and whether pertaining to current or future developments, which pertains to the Company's affairs or interests or with whom or how the Company does business. The Company acknowledges and agrees that Confidential Information does not include information properly in the public domain; 4 (viii) During and after the term of employment hereunder, the Executive will not remove from the Company's premises any documents, records, files, notebooks, correspondence, reports, video or audio recordings, computer printouts, computer programs, computer software, price lists, microfilm, drawings, or other similar documents containing Confidential Information, including copies thereof, whether prepared by him or others, except as his duties under this Agreement shall require, and in such cases, will promptly return such items to the Company. Upon termination of his employment with the Company, all such items including summaries or copies thereof, then in the Executive's possession, shall be returned to the Company immediately; (ix) All ideas, inventions, designs, processes, discoveries, enhancements, plans, writings, and other developments or improvements (the "Inventions") conceived by the Executive, alone or with others, during the term of his employment, whether or not during working hours, that are within the scope of the Executive's business operations or that relate to any of the Company's work or projects (including any and all inventions based wholly or in part upon ideas conceived during the Executive's employment with the Company), are the sole and exclusive property of the Company. The Executive further agrees that (1) he will promptly disclose all Inventions to the Company and hereby assigns to the Company all present and future rights he has or may have in those Inventions, including without limitation those relating to patent, copyright, trademark or trade secrets; and (2) all of the Inventions eligible under the copyright laws are "work made for hire." At the request of and without charge to the Company, the Executive will do all things deemed by the Company to be reasonably necessary to perfect title to the Inventions in the Company and to assist in obtaining for the Company such patents, copyrights or other protection as may be provided under law and desired by the Company, including but not limited to executing and signing any and all relevant applications, assignments or other instruments. Notwithstanding the foregoing, pursuant to the Employee Patent Act, Illinois Public Act 83-493, the Company hereby notifies the Executive that the provisions of this subparagraph (ix) shall not apply to any Inventions for which no equipment, supplies, facility or trade secret information of the Company was used and which were developed entirely on the Executive's own time, unless (1) the Invention relates (i) to the business of the Company, or (ii) to actual or demonstrably anticipated research or development of the Company, or (2) the Invention results from any work performed by the Executive for the Company; (x) All client lists, supplier lists, and client and supplier information are and shall remain the exclusive property of the Company, regardless of whether such information was developed, purchased, acquired, or otherwise obtained by the Company or the Executive. The Executive also agrees to furnish to the Company on demand at any time during his employment, and upon the termination of his employment, any records, notes, computer printouts, computer programs, computer software, price lists, microfilm, or any other documents related to the Company's business, including originals and copies thereof; and (xi) The Executive may become aware of "material" nonpublic information relating to clients whose stock is publicly traded. The Executive acknowledges that he is prohibited by law as well as by Company policy from trading in the shares of such clients while in possession of such information or directly or indirectly disclosing such information to any other persons so that they may trade in these shares. For purposes of this subparagraph (xi), "material" information may include any information, positive or negative, which might be of significance to an investor in determining whether to purchase, sell or hold the stock of publicly traded clients. Information may be significant for this purpose even if it would not alone determine the investor's decision. Examples include a potential business acquisition, internal financial information that departs in any way from what the market would expect, the acquisition or loss of a major contract, or an important financing transaction. (b) Remedy for Breach. The Executive agrees that in the event of a material breach or threatened material breach of any of the covenants contained in this Paragraph 6, the Company will have the right and remedy to have such covenants specifically enforced by any court having jurisdiction, it being acknowledged and agreed that any material breach of any of the covenants will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company. (c) Blue-Penciling. The Executive acknowledges and agrees that the noncompetition and nonsolicitation provisions contained herein are reasonable and valid in geographic, temporal and subject matter scope and in all other respects, and do not impose limitations greater than are necessary to protect the goodwill, Confidential Information and other business interests of the Company. Nevertheless, if any court determines that 5 any of said noncompetition and other restrictive covenants and agreements, or any part thereof, is unenforceable because of the duration or geographic scope of such provision, such court will have the power to reduce the duration or scope of such provision, as the case may be, and, in its reduced form, such provision will then be enforceable to the maximum extent permitted by applicable law. 7. Termination of Employment. (a) Termination as a Result of Death or Disability. The Executive's employment with the Company shall terminate automatically upon the Executive's death during the Employment Term. If the Disability of the Executive has occurred during the Employment Term (pursuant to the definition of "Disability" set forth below), the Company may give to the Executive written notice of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Company (the "Disability Effective Date"), provided that, within the 30 days after receipt of notice, the Executive shall not have returned to substantial performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company for 120 consecutive days, or a total of 180 days in any 12-month period, as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician jointly selected by the Company and the Executive or the Executive's legal representative, or if the parties cannot agree on the selection of such physician then each shall choose a physician and the two physicians shall jointly select a physician to make such binding determination. (b) Termination by the Company for Cause. The Company may terminate the Executive's employment during the Employment Term for Cause at any time upon written notice from the Board specifying such Cause and the expiration of the cure period specified below, and thereafter, the Company's obligations hereunder (other than the obligation to pay any accrued salary or benefit) shall cease and terminate; provided, however, that such written notice shall not be delivered until after the Board shall have given the Executive written notice specifying the conduct alleged to have constituted such Cause. The Executive shall have 30 days to cure the matters specified in the notice delivered by the Board (to the extent that such matters are curable). For purposes of this Agreement, "Cause" shall mean the Executive's willful misconduct, dishonesty or other willful actions (or willful failures to act) which are materially and demonstrably injurious to the Company, or a material breach by the Executive of one or more terms of this Agreement, which shall include the Executive's habitual neglect of the material duties required of him under this Agreement. For purposes of this Section, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the Board by the vote of a majority of the entire Board at a meeting of the Board duly called and held for such purpose, at which the Executive shall have an opportunity to be present and to be heard, finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described above, and specifying the particulars thereof in detail. (c) Termination by the Executive for Good Reason. The Executive's employment with the Company may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean any of the following actions, if taken without the express written consent of the Executive: (1) any material change by the Company in the Executive's title, functions, duties, or responsibilities, which changes would cause the Executive's position with the Company to become of significantly less responsibility, importance or scope as compared to the position and attributes that applied to the Executive as of the Effective Date; (2) any material failure by the Company to comply with any of the provisions of the Agreement; or (3) the requirement made by the Company that the Executive change his manner of performing his responsibilities so as to require a change in his residence. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" means a written notice which (1) indicates the specific termination provision in this 6 Agreement relied upon, (2) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (3) if the Date of Termination (as defined in Section (e) hereof) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (1) if the Executive's employment is terminated by the Company for Cause, the expiration of the cure period specified in Paragraph 7(b) hereof, (2) if the Executive's employment is terminated by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (3) if the Executive's employment is terminated by reason of death or Disability, the date of death of the Executive or the Disability Effective Date, as the case may be, and (4) if the Executive's employment is terminated by the Company other than for Cause or Disability, or by the Executive without Good Reason, 30 days after the date of receipt by the non-terminating party of a written notice of termination or such shorter time as the Board thereafter specifies in a written notice to the Executive. (f) Change of Control of the Company. For the purpose of this Agreement, a "Change of Control" shall have been deemed to have occurred if at any time during the Employment Term: (i) the Company sells or otherwise disposes in an arms length transaction assets of the Company having a fair market value of at least 60% of the total assets of the Company and its subsidiaries on a consolidated basis, or the Company sells or otherwise disposes of a majority of the equity ownership or voting control of any member of any corporation or other entity holding substantially all of the assets of the Company, in a single transaction or series of related transactions, or (ii) acquisition by (A) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") or (B) two or more Persons of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of either (1) the shares of Common Stock outstanding immediately after such acquisition (the "Company Common Stock") or (2) the combined voting power of the voting securities of the Company entitled to vote generally in the election of directors outstanding immediately after such acquisition (the "Company Voting Securities"); provided, however, that for purposes of this subsection (i) the following acquisitions of securities shall not constitute or be included when determining whether there has been a Change of Control: (1) any acquisition by the Company, or (2) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (iii) consummation of a reorganization, merger or consolidation or the sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of the assets of another corporation by the Company (in each case, a "Business Combination"), unless, following any such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Company Common Stock and Company Voting Securities outstanding immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Company Common Stock and Company Voting Securities outstanding, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan or related trust of the Company or any corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 50% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at 7 least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination. 8. Obligations of the Company upon Termination of Employment. (a) Termination by the Company Other Than for Cause, Death or Disability or by the Executive for Good Reason or for any Reason Following a Change of Control. If during the Employment Term (i) the Company terminates the Executive's employment other than for Cause, death or Disability, (ii) the Executive terminates his employment for Good Reason, or (iii) following a Change of Control, the Executive terminates his employment for any reason, then in any such case the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination (or, in the event any amounts due cannot be determined within this period, as soon thereafter as is practicable) an amount equal to (A) two times the Executive's then current Base Salary plus (B) two times the annual bonus most recently paid to the Executive. The Company shall have no further obligation to the Executive other than the obligation to pay to him any other compensation and benefits due to the Executive in accordance with this Agreement, in each case to the extent theretofore unpaid. The provisions of this Subparagraph 8(a) shall not affect any rights of the Executive under the Company's benefit plans or programs. (b) Termination as a result of the Executive's Disability or Death. If during the Employment Term the Executive's employment is terminated by reason of the Executive's Disability or death, then the Company shall pay to the Executive or the Executive's legal representatives in a lump sum in cash within 30 days after the Date of Termination (or, in the event any amounts due cannot be determined within this period, as soon thereafter as is practicable) an amount equal to one times (A) the Executive's then current Base Salary plus (B) the annual bonus most recently paid to the Executive. The Company shall have no further obligation to the Executive other than the obligation to pay to him any other compensation and benefits due to the Executive in accordance with this Agreement, in each case to the extent theretofore unpaid. The provisions of this Subparagraph 8(b) shall not affect any rights of the Executive's heirs, administrators, executors, legatees, beneficiaries or assigns under the Company's benefit plans or programs. (c) Termination by the Company for Cause or by the Executive other than for Good Reason. If during the Employment Term either (i) the Executive's employment is terminated by the Company for Cause or (ii) the Executive voluntarily terminates his employment prior to a Change of Control, excluding termination by him for Good Reason, then the Company shall have no further obligation to the Executive other than the obligation to pay to the Executive (A) his Base Salary through the Date of Termination and (B) any other compensation and benefits due to the Executive in accordance with this Agreement, in each case to the extent theretofore unpaid. 9. Golden Parachute Provision. In the event that in the opinion of tax counsel selected by the Executive and compensated by the Company ("Executive's Tax Counsel"), a payment or benefit received or to be received by the Executive (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company or any of its subsidiaries, affiliates or divisions) (collectively, with the payments provided for in the foregoing provisions of Section 8, the "Post Termination Payments") would be subject to excise tax (in whole or in part) as a result of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and as a result of such excise tax, the net amount of Post Termination Payments retained by the Executive (taking into account federal and state income taxes and such excise tax) would be less than the net amount of Post Termination Payments retained by the Executive (taking into account federal and state income taxes) if the Post Termination Payments were reduced or eliminated as described in this Section 9, then the Post Termination Payments shall be reduced or eliminated until no portion of the Post Termination Payments is subject to excise tax, or the Post Termination Payments are reduced to zero. For purposes of this limitation (i) no portion of the Post Termination Payments the receipt or enjoyment of which the Executive shall have waived in writing prior to the date of payment following termination of the Post Termination Payments shall be taken into account, (ii) no portion of the Post Termination Payments shall be taken into account which in the opinion of Executive's Tax Counsel does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, (iii) the Post Termination Payments shall be reduced only to the extent 8 necessary so that the Post Termination Payments (other than those referred to in clauses (i) and (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code or are otherwise not subject to excise tax, in the opinion of Executive's Tax Counsel, and (iv) the value of any non-cash benefit and all deferred payments and benefits included in the Post Termination Payments shall be determined by the mutual agreement of the Company and the Executive in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. 10. Governing Law; Arbitration; Jurisdiction; Attorneys' Fees. This Agreement is made and entered into and will be governed by and interpreted in accordance with the laws of the State of Illinois. The Company and the Executive agree that any dispute regarding this Agreement, that cannot be resolved amicably by the parties, will be submitted to arbitration within 60 days of the date the dispute arose and will be resolved in accordance with the rules of the American Arbitration Association for expedited cases then in effect. The arbitrator will be mutually selected by the parties or in the event the parties cannot mutually agree, then appointed by the American Arbitration Association. Any arbitration will be held in Chicago, Illinois and the arbitrator will apply Illinois law. Judgment upon any award rendered by the arbitrator will be final and binding and may be entered in any court of competent jurisdiction. The arbitrator will not be empowered to award damages in excess of compensatory damages and each party hereby irrevocably waives any damages in excess of compensatory damages. Notwithstanding the foregoing, the Company will have the absolute right to seek equitable remedies in any state court of competent jurisdiction in the State of Illinois, County of Cook, or in a United States District Court in the State of Illinois pursuant to Paragraph 6(b) hereof. By Executive's execution and delivery of this Agreement, the Executive irrevocably submits to and accepts the exclusive jurisdiction of each of such courts and waives any objection (including any objection to venue or any objection based upon the grounds of forum non conveniens) which might be asserted against the bringing of any such action, suit or other legal proceeding in such courts. The parties shall be responsible for their own costs and expenses under this Section 10. 11. Miscellaneous. (a) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes any and all previous agreements, whether written or oral, including restrictive covenants, regarding the subject matter hereof between the parties hereto. This Agreement shall not be modified or amended, except by a written agreement signed by the parties hereto. (b) Notices. All notices, requests, demands and other communications required or permitted to be given or made under this Agreement shall be in writing and shall be deemed to have been given if delivered by hand, sent by generally recognized overnight courier service, telex or telecopy with confirmation of receipt, or mail: (i) to the Company: Navigant Consulting, Inc. Attn: General Counsel 615 N. Wabash Chicago, Illinois 60611 with a copy to: Winston & Strawn Attention: Gov. James R. Thompson 35 West Wacker Drive Chicago, IL 60601 (ii) to the Executive: Carl Spetzler 9 --------------- --------------- or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications will be effective when actually received by the addressee. (c) Successors. This Agreement is personal to the Executive and without the prior written consent of the Company it shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement will inure to the benefit of and be enforceable against the Executive's legal representatives. This Agreement will inure to the benefit of and be binding upon the Company and its successors and assigns. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, share exchange or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. For purposes of this Agreement, the term "Company" means the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (d) Severability. If any provision of this Agreement is held invalid or unenforceable, either in its entirety or by virtue of its scope or application to given circumstances, such provision will thereupon be deemed modified only to the extent necessary to render such provision valid, or not applicable to given circumstances, or excised from this Agreement, as the situation may require, and this Agreement will be construed and enforced as if such provision had been included herein as so modified in scope or application, or had not been included herein, as the case may be. Should this Agreement, or any one or more of the provisions hereof, be held to be invalid, illegal or unenforceable within any governmental jurisdiction or subdivision thereof, the Agreement or any such provision or provisions will not as a consequence thereof be deemed to be invalid, illegal or unenforceable in any other governmental jurisdiction or subdivision thereof. (e) Waiver. The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, will not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) Counterparts. This Agreement may be executed in two counterparts, each of which will be deemed an original and both of which taken together will constitute a single instrument. (signature page follows) 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ------------------------------------ Carl Spetzler Navigant Consulting, Inc. By __________________________________ Its _________________________________ 11 EX-10.11 9 LETTER AGREEMENT WITH PHILLIP P. STEPTOE EX-10.11 Letter Agreement dated February 1, 2000 between the Registrant and Philip P. Steptoe Exhibit 10.11 February 1, 2000 Mr. Philip P. Steptoe 1024 Central Avenue Wilmette, IL 60091 Dear Phil: I am very pleased you have decided to join our Senior Management Team. The purpose of this letter is to confirm our several conversations as well as the terms of your employment with us. Key points are as follows: Position and Duties: You will be elected Vice President, General Counsel and Secretary of Navigant Consulting. Inc. (the "Company") effective February 1, 2000. You will have the duties customarily associated with the position of a Vice President, General Counsel and Secretary which duties will include, but not be limited to, the oversight of the legal affairs of the Company. You will report to me, in my capacity as Chairman of the Board of Directors. Salary: Your annual salary will be $250,000, payable in accordance with the Company's payroll policy from time to time in effect. Options: You will receive a non-qualified option to purchase 100,000 shares of the common stock of the Company, with the purchase price being the fair market value of the Company's common stock on the day of grant. The option will vest over two years, with a first installment of 25,000 of the shares becoming vested after six months from the day of grant and 25,000 becoming vested every six months thereafter. All shares will be vested in event of a "change in control" as defined below: The Option shall have a term equal to the lesser of ten years measured from the date of grant or the longest period permitted by the Company's Long-Term Incentive Plan after the date of the termination of the Executive's employment with the Company, the greatest portion of the Option shares allowable under the Company's Long-Term Incentive Plan shall be issued as incentive stock options. The terms of your option grants will be governed by the Navigant, Inc. Long-Term Incentive Plan which requires, as a condition of the grant, that you enter into a Stock Option Agreement. Bonus: If both the Company and you achieve certain goals (both the levels and the goals to be agreed upon), you will be eligible for a bonus of up to 50% of your annual salary, provided you are actively employed by the Company on the date the bonus is to be paid. Benefits: You will be entitled to whatever benefits are available from time to time to senior executives of the Company, including but not limited to, life insurance, medical insurance, vacation and participation in a Section 401(k) plan. Start Date: Your first day of employment with the Company will be February 1, 2000. Severance Pay: If the Company terminates your employment at any time, without "cause," the Company agrees to continue your base salary for a period of six months, in accordance with the Company's payroll policy then in effect. For purposes of this letter agreement, you will be considered terminated for "cause" if your employment terminates after (i) you have committed any felony or a crime involving fraud, theft, misappropriation, dishonesty or embezzlement; (ii) you have committed acts with the intent to materially impair the goodwill or business of the Company or cause material damage to its property, goodwill or business; or (iii) you refuse to, or willfully fail to, perform the material duties of your position, provided that you will been given written notice of such refusal or willful failure and given a cure period of 30 days. Protective Covenant: As a condition of your employment, you agree that, during the period of your employment with the Company and for a period of one year thereafter, you will not (a) solicit any of the clients or prospective clients of the Company or its subsidiaries and affiliates, (b) engage in any activities of employment with any business involved in providing the type of consulting services then provided by the Company or its subsidiaries and affiliates, and (c) solicit or hire any employee of the Company (or any individual who was an employee of the Company or its subsidiaries and affiliates during the year preceding such solicitation or hire). In addition, you agree at all times, both during the term of your employment and at any time thereafter, not to disclose to any person not employed by the Company or its subsidiaries and affiliates any confidential or proprietary business information, except as may be required by your duties as Vice President, General Counsel and Secretary. Moreover, if requested by the Company, you agree to sign its standard Protective Covenant encompassing the foregoing agreements. Employment Relationship: It is understood that you and the Company are free to terminate your employment relationship at any time. A. Termination as a Result of Death or Disability. Your employment with the Company shall terminate automatically upon the your death during the Employment Term. If your Disability has occurred during the Employment Term (pursuant to the definition of "Disability" set forth below), the Company may give to you written notice of its intention to terminate the your employment. In such event, your employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Company (the "Disability Effective Date"), provided that, within the 30 days after receipt of notice, you shall not have returned to substantial performance of your duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company for 120 consecutive days, or a total of 180 days in any 12-month period, as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician jointly selected by the Company and you or your legal representative, or, if the parties cannot agree on the selection of such physician and the two physicians shall jointly select a physician to make such binding termination. B. Termination by the Company for Cause. The Company may terminate your employment during the Employment Term for "Cause" (as defined above) at any time, subject to the expiration of applicable cure period specified above, and thereafter, the Company's obligations hereunder (other than the obligation to pay any accrued salary or benefit) shall cease and terminate. C. Change of Control of the Company. For the purpose of this Agreement, a "Change of Control" shall have been deemed to have occurred if at any time during the Employment Term: 1. the Company sells or otherwise disposes in an arms length transaction assets of the Company having a fair market value of at least 60% of the total assets of the Company and its subsidiaries on a consolidated basis, or the Company sells or otherwise disposes of a majority of the equity ownership or voting control of any member of any corporation or other entity holding substantially all of the assets of the Company, in a single transaction or series of related transactions, or 2. acquisition by (A) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person") or (B) two or more Persons of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) or more than 50% of either (1) the shares of Common Stock outstanding immediately after such acquisition (the "Company Common Stock") or (2) the combined voting power of the voting securities of the Company entitled to vote generally in the election of directors outstanding immediately after such acquisition (the "Company Voting Securities"); provided, however, that for purposes of this subsection (1) the following acquisitions of securities shall not constitute or be included when determining whether there has been a Change of Control: (1) any acquisition by the Company, or (2) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or 3. consummation of a reorganization, merger or consolidation or the sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of the assets of another corporation by the Company (in each case, a "Business Combination"), unless, following any such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Company Common Stock and Company Voting Securities outstanding immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares or common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all of substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combinations, of the Company Common Stock and Company Voting Securities outstanding, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan or related trust of the Company or an corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 50% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities or such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Board at the time of the execution of the initial agreement, or of the action of the Board providing for such Business Combination. Assignment: While you may not assign any of your rights or delegate any of your duties or obligations, the rights and obligations of the Company will inure to the benefit of and will be binding upon its successors and assigns. Indemnification: You shall be entitled to indemnification as may be provided for under the Company's Certificate of Incorporation which provides indemnification to the fullest extent permitted by Delaware law. The Company further agrees that nothing in this Agreement shall be deemed to impair any rights to indemnification that you may have relating to, or arising of, your employment with the Company and its subsidiaries or affiliates. Governing Law: This offer letter will be governed by, and construed in accordance with, the laws of the State of Illinois. Any and all disputes arising under this letter, other than a dispute arising under the Protective Covenant, initially will be referred by the parties to non-binding mediation for resolution (through mediation administered by the American Arbitration Association under the National Rules for Resolution of Employment Disputes, Employment Mediation Rules). If mediation is unsuccessful in resolving the dispute (or in the context of a dispute under the Protective Covenant), any court action to enforce this Agreement will have as its sole and exclusive venue Cook County, Illinois. No Other Understandings: This letter sets forth our entire agreement and understanding and supersedes any and all other agreements, either oral or in writing, between the Company and you. No change to this letter will be valid unless in writing and signed by the Company and you. ----------------------------------- Mitchell H. Saranow Chairman, Navigant Consulting, Inc. Accepted this ______ day of ______________, 2000. - ----------------------- Philip P. Steptoe EX-10.12 10 CONSULTING AGREEMENT WITH ROBERT P. MAHER EX-10.12 Consulting Agreement and General Release dated as of November 21, 1999 between the Registrant and Robert P. Maher Exhibit 10.12 CONSULTING AGREEMENT AND GENERAL RELEASE THIS CONSULTING AGREEMENT AND GENERAL RELEASE (the "Agreement") is made and entered into as of the 21st day of November, 1999, by and between Navigant Consulting, Inc., a Delaware corporation (the "Company"), and Robert P. Maher ("Maher"). RECITALS A. Maher has been employed by the Company as President and Chief Executive Officer and Chairman of the Board of Directors (the "Board"). B. Maher desires voluntarily to resign his employment with the Company and resign all positions he holds. C. The Company and Maher agree that he will be engaged as a consultant to the Company, subject to the terms and limitations of this Agreement. NOW, THEREFORE, in consideration of the above premises and the following mutual covenants and conditions, the parties agree as follows: 1. Resignation of Employment. The Company and Maher agree that immediately upon the signing of this Agreement by both parties (the "Effective Time"), Maher resigns his employment with the Company and its subsidiaries and affiliates and the Company accepts such resignation. At the Effective Time, the Company and Maher also agree that he resigns as Chairman of, and as a member of, the Board, and as a Member of the Board of Directors and as an officer of any subsidiaries or affiliates of the Company and the Company accepts such resignations. Additionally, Maher agrees to return to the Company all Company property in his possession on or prior to November 22, 1999. Maher's termination of each of his positions shall be deemed to have occurred by virtue of his voluntary resignation. Maher agrees and acknowledges that he will make no announcement about his resignation or about the affairs of the Company to employees of the Company or its subsidiaries or affiliates, which is in any manner inconsistent with the terms of this Agreement, and further agrees and acknowledges that any press or other written or oral public releases or statements concerning his resignation or about the affairs of the Company or its subsidiaries or affiliates shall be issued by the Company only. In addition to the foregoing, Maher agrees and covenants that he will not make or authorize the making of any statements, whether oral or written, to any third party disparaging the Company or its subsidiaries or affiliates, its or their business, employees, officers or directors. Further, Maher will refrain from making any disparaging or misleading statements to financial analysts or others in the financial services industry about the Company, its subsidiaries or affiliates or their business (or about or relating to any officer, director, employee or other person acting on the Company's or its subsidiaries' or affiliates' behalf). At all times, Maher shall be free to respond to false or disparaging statements directed at his conduct with factually accurate statements. 2. Consulting Agreement. Subject to the terms of this Agreement, from November 21, 1999 through November 20, 2001 (the "Consulting Period"), Maher shall be engaged as a consultant to the Company. Maher agrees that (i) he will not hereinafter seek re-employment with the Company, (ii) the Company may terminate the Consulting Period at any time and for any reason, provided the Company provides Maher with two (2) days prior written notice of such termination, and (iii) the Company may terminate the Consulting Period at any time, and without notice, for Cause, as defined below. For purposes of this Agreement, the Company may terminate this Agreement for Cause if Maher shall have breached in any material respect the terms of this Agreement ("Cause"). The Company shall provide notice of any termination for cause as provided in Paragraph 18. The termination of the Consulting Period shall not constitute a termination of this Agreement. 3. Duties. Through November 20, 2001 (or such earlier time as may be provided for under Paragraph 2), Maher shall be available to perform projects to be assigned to him by the Chief Executive Officer of the Company, such projects to be performed at the direction of such Chief Executive Officer or his designee. Maher shall diligently, competently, and faithfully perform all such assigned projects. Maher shall perform the duties provided for in this Agreement as an independent contractor without the power to bind, represent, or speak for the Company for any purpose whatsoever without the prior written approval of the Board. Maher acknowledges his separate responsibility for all federal and state taxes applicable on payments received pursuant to Paragraph 4. Except with respect to services expressly and directly requested by the Company's Chief Executive Officer, Maher shall not become involved in the operations or management of the Company or its subsidiaries or affiliates, or directly or indirectly attempt to influence the management, policies or affairs of the Company and its subsidiaries or affiliates, except with respect to any rights he may have as a shareholder of the Company. 4. Compensation and Release Payments. A. As compensation for his consulting services, and as consideration for this Agreement, the Company shall pay Maher the sum of $25,000 per month, payable at the end of each month during the Consulting Period, subject to any deductions as may be required to be made pursuant to law, government order, or by agreement with, or consent of, Maher. B. If, prior to November 20, 2001, the Company terminates the Consulting Period, other than for Cause, the Company shall pay Maher at the time of such termination an amount equal to the difference between $600,000 and the sum total of the monthly consulting fees theretofore paid to Maher under this Agreement and the Company shall thereby be relieved of any other payment obligations under Paragraph 4A of this Agreement. 2 C. Notwithstanding anything else in this Agreement, if, prior to November 20, 2001, the Company terminates the Consulting Period for Cause, Maher shall be entitled to no further payments under this Agreement. D. The Company and Maher acknowledge that, as of the Effective Time, Maher has a loan outstanding to the Company made in or about April 1999 in the amount of $2,700,000. The Company hereby agrees to release any claims the Company may have against him concerning such loan, including the repayment of any principal or interest thereon, in consideration of Maher's agreement to sell back to the Company, within two (2) business days of the Effective Time, 112,500 shares of Company stock at $24.00 per share. In addition to the foregoing, the Company and Maher acknowledge that Maher has tendered to the Company approximately 493,000 shares of Company stock at $20.50 per share, as accord and satisfaction for a $10,000,000 loan, and accrued interest thereon that had been made to him on or about August 24, 1999 by the Company. The Company agrees to release any claims that it may have had against Maher concerning this additional $10,000,000 loan. E. Maher is a party to stock option agreements with the Company entered into as of May 21, 1997, January 16, 1998, October 8, 1998 and July 1, 1999, respectively (the "Option Agreements"). In consideration of the payments under this Agreement, Maher hereby surrenders and relinquishes all rights under the option agreement dated October 8, 1998 and, under the option agreement dated July 1, 1999, Maher surrenders and relinquishes all rights to all but the option to purchase 37,500 shares thereunder. Maher shall retain the right and option to exercise all 150,000 shares under the option agreement dated May 21, 1997 and all 112,500 shares under the option agreement dated January 16, 1998, subject to the following revised terms for the option agreements dated May 21, 1997, January 16, 1998 and July 1, 1999. The options to purchase the 300,000 shares remaining under said option agreements shall be exercisable as follows: Exercise Period ------------------------------------ Number of Shares Exercise Price Commencement Date Expiration Date ---------------- -------------- ----------------- ----------------- 75,000 $13.33 November 21, 1999 February 20, 2002 75,000 $13.33 November 21, 2000 February 20, 2002 37,500 $24.00 November 21, 2000 February 20, 2002 75,000 $24.00 November 21, 2001 February 20, 2002 37,500 $26.5625 November 21, 2001 February 20, 2002 Except as set forth in this Paragraph 4E, the terms of the Option Agreements shall be null and void and the exercise provisions shall hereinafter be governed solely by the terms of this Agreement and the Navigant Consulting, Inc. Long-Term Incentive Plan. For these purposes, the Company and the Plan Committee shall be deemed to have approved the use of any of the methods of exercise permitted under the Plan. The foregoing provisions of 3 this Paragraph 4E notwithstanding, (i) if the Company terminates the Consulting Period, other than for Cause or upon Maher's death, the options set forth in the table above shall become immediately exercisable and remain exercisable through the Expiration Date set forth in the table above, and (ii) if the Company terminates the Consulting Period for Cause, any options provided for hereunder shall expire immediately and shall, in accordance with the terms of the Long-Term Incentive Plan, cease to be exercisable. F. The payments made by the Company hereunder shall be in consideration of the duties described above in Paragraph 3, the release of all other claims described below in Paragraph 5, and the Protective Agreement described in Paragraph 7. G. Maher agrees that he has heretofore been paid for all earned but unused vacation pay and shall be paid for all salary accrued through November 20, 1999 in accordance with the Company's payroll policy. Except as set forth in this Agreement, no other sums (contingent or otherwise) shall be paid to Maher in respect of his employment, or consulting relationship, with the Company, and any such sums (whether or not owed) are hereby expressly waived by Maher, provided, however, that Maher (i) may elect to continue his health insurance coverage, as mandated by COBRA, which may continue to the extent required by applicable law (and for which the Company shall pay all premiums during the term of the COBRA continuation period); (ii) shall be entitled to receive his account balance, if any, under the Company's 401(k) Plan in accordance with the terms of such Plan; (iii) may submit on or before December 31, 1999 any claims for reasonable expense reimbursements incurred on or before November 20, 1999, which claims, if any, shall be reimbursed in accordance with the Company's expense reimbursement policy; and (iv) may submit for reimbursement reasonable expenses for consulting services under this Agreement and approved in advance by the Company. 5. General Release. As a material inducement to the Company to enter into this Agreement and in consideration of the payments to be made by the Company to Maher in Paragraph 4 above, Maher, with full understanding of the contents and legal effect of this Agreement, and having the right and opportunity to consult with his counsel, releases and discharges the Company, its parent, divisions, subsidiaries and affiliates, and its and their respective predecessors, successors, stockholders, officers, directors, supervisors, managers, employees, agents, and representatives and each of their respective heirs, executors, administrators and assigns (collectively, the "COMPANY RELEASED PARTIES") from any and all claims, actions, causes of action, grievances, suits, charges, or complaints of any kind or nature whatsoever relating to his employment with, or the business of, the Company that he ever had or now has, whether fixed or contingent, liquidated or unliquidated, known or unknown, suspected or unsuspected, and whether arising in tort, contract, statute, or equity, before any federal, state, local, or private court, agency, arbitrator, mediator, or other entity, regardless of the relief or remedy. Without limiting the generality of the foregoing, it being the intention of the parties to make this Agreement as broad and as general as the law permits, this Agreement specifically includes any and all claims arising from any alleged violation by the Company Released Parties under the Age Discrimination in Employment Act of 1967, as amended; Title VII of the Civil Rights Act of 1964, as amended; the Civil Rights Act of 1866, as amended by the Civil Rights Act of 1991 (42 U.S.C. (S) 1981); the 4 Rehabilitation Act of 1973, as amended; the Employee Retirement Income Security Act of 1974, as amended; the Illinois Wage Payment and Collection Act; the Illinois Human Rights Act, the Chicago Human Rights Ordinance, the Cook County Human Rights Ordinance, and other similar state or local laws; the Americans with Disabilities Act; the Family and Medical Leave Act; the Equal Pay Act; Executive Order 11246; Executive Order 11141; and any other statutory claim, employment or other contract claim or implied contract claim (including, but not limited to, any claims under the Option Agreements), or common law claim for wrongful discharge, defamation, or invasion of privacy arising out of or involving his employment or engagement with the Company, the termination of his employment or engagement with the Company, or involving any continuing effects of his employment or engagement with the Company or termination of his employment or engagement with the Company. Maher further acknowledges that he is aware that statutes exist that render null and void releases and discharges of any claims, rights, demands, liabilities, action and causes of action which are unknown to the releasing or discharging party at the time of execution of the release and discharge. Maher hereby expressly waives, surrenders and agrees to forego any protection to which he otherwise would be entitled by virtue of the existence of any such statute in any jurisdiction including, but not limited to, the State of Illinois. The foregoing notwithstanding, this Paragraph 5 does not release the Company Released Parties from any claims Maher may have with respect to the enforcement of the terms of this Agreement nor does it release the Company Released Parties from any claims that may arise for events which first occur following the execution of this Agreement by Maher. 6. Covenant Not to Sue. Maher, for himself, his heirs, executors, administrators, successors and assigns covenants and agrees not to bring, file, charge, claim, sue or cause, assist, or permit to be brought, filed, charged or claimed any action, cause of action, or proceeding based upon any of the claims released under Paragraph 5 hereof, and further covenants and agrees that this Agreement is, will constitute and may be pleaded as, a bar to any such claim, action, cause of action or proceeding. If any government agency or court assumes jurisdiction of any charge, complaint, or cause of action released by this Agreement, Maher will not seek and will not accept any personal equitable or monetary relief in connection with such investigation, civil action, suit or legal proceeding. 7. Protective Agreement. Maher acknowledges and agrees that solely by virtue of his employment by, and relationship with, the Company, he has acquired "Confidential Information", as defined below, as well as special knowledge of the Company's relationships with its clients, and that, but for his association with the Company, Maher will not have had access to said Confidential Information or knowledge of said relationships. In return for the consideration described in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Maher hereby represents, warrants, and covenants as follows: A. Maher has executed and delivered this Agreement as his free and voluntary act, after having determined that the provisions contained herein are of a material benefit to him, and that the duties and obligations imposed on him hereunder are fair and reasonable. B. Maher has read and fully understands the terms and conditions set forth herein, and has had time to reflect on and consider the benefits and consequences of 5 entering into this Agreement. Maher further understands that for purposes of this Paragraph 7, Company refers to Navigant Consulting, Inc. and its subsidiaries, affiliates, and divisions. C. Maher agrees that he will not, through November 20, 2001, except on behalf of the Company, anywhere in the United States or in any other place or venue where the Company or any affiliate, subsidiary or division thereof now conducts or operates, or may conduct or operate its business, directly or indirectly, whether as an investor (excluding investments representing less than one percent (1%) of the common stock of a public company), lender, owner, stockholder, officer, director, consultant, employee, agent, salesperson or in any other capacity, whether part-time or full-time, become associated with or engaged by a client or prospective client (as hereinafter defined) of the Company and Maher shall take reasonable efforts to ascertain with the Company who falls within such categories. D. Maher agrees that, through November 20, 2001, he will not, except on behalf of the Company, anywhere in the United States or in any other place or venue where the Company or any affiliate, subsidiary or division thereof now conducts or operates, or may conduct or operate its business: (1) directly or indirectly, contact, solicit or direct any person, firm, corporation, association, or other entity to contact or solicit, any of the Company's clients or prospective clients (as hereinafter defined) for the purpose of providing any consulting services that are the same as or similar to the consulting services provided by the Company to its clients during the term hereof. In addition, Maher will not disclose the identity of any such clients or prospective clients, or any part thereof, to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever; or (2) solicit or accept if offered to him, with or without solicitation, on his own behalf or on behalf of any other person, the services of any person who is a current employee of the Company (or was an employee of the Company during the year preceding such solicitation), nor solicit any of the Company's current employees (or any individual who was an employee of the Company during the year preceding such solicitation) to terminate employment with the Company, nor agree to hire any current employee of the Company into employment with himself or any company, individual or other entity; or (3) act as a consultant, advisor, officer, manager, agent, director, partner, independent contractor, owner, or employee for or on behalf of any of the Company's clients or prospective clients (as hereinafter defined), with respect to or in any way with regard to any aspect of the Company's business and/or any other business activities in which the Company engages during the term hereof. E. Maher acknowledges and agrees that the scope described above is necessary and reasonable in order to protect the Company in the conduct of its business and that, if Maher becomes employed by, or engaged by, another entity, he shall be required to disclose 6 the existence of this Paragraph 7 to such entity and Maher hereby consents to and the Company is hereby given permission to disclose the existence of this Paragraph 7 to such entity. F. For purposes of this Paragraph 7, "client" shall be defined as any person, firm, corporation, association, or entity that engaged the Company or is or was doing business with the Company or Maher within the twelve (12) month period immediately preceding termination of Maher's employment with the Company, or during the Consulting Period. For purposes of this Paragraph 7, "prospective client" shall be defined as any person, firm, corporation, association, or entity for which the Company or Maher (whether directly or indirectly) presented a written proposal for consulting services within the twelve (12) month period immediately preceding termination of Maher's employment with the Company, or during the Consulting Period, for the purpose of having such persons, firms, corporations, associations, or entities become a client of the Company. G. Maher agrees that during his engagement and thereafter Maher will not, for any reason whatsoever, use for himself or disclose to any person not employed by the Company any "Confidential Information" of the Company acquired by Maher during his relationship with the Company. Maher further agrees to use Confidential Information solely for the purpose of performing duties with the Company and further agrees not to use Confidential Information for his own private use or commercial purposes or in any way detrimental to the Company. Maher agrees that "Confidential Information" includes but is not limited to: (i) any non-public financial, engineering, business, planning, operations, services, potential services, products, potential products, technical information and/or know-how, organization charts, formulas, business plans, production, purchasing, marketing, pricing, sales, profit, personnel, client, broker, supplier, or other lists or information of the Company; (ii) any non-public papers, data, records, processes, methods, techniques, systems, models, samples, devices, equipment, compilations, invoices, client lists, or documents of the Company; (iii) any confidential information or trade secrets of any third party provided to the Company in confidence or subject to other use or disclosure restrictions or limitations; and (iv) any other non-public information, written, oral, or electronic, whether existing now or at some time in the future, and whether pertaining to current or future developments, which pertains to the Company's affairs or interests or with whom or how the Company does business. The Company acknowledges and agrees that Confidential Information does not include (a) information properly in the public domain, or (b) information in Maher's possession prior to the date of his original employment with the Company. H. Maher acknowledges and agrees that all client lists, supplier lists, and client and supplier information, including, without limitation, addresses and telephone numbers, are and shall remain the exclusive property of the Company, regardless of whether such information was developed, purchased, acquired, or otherwise obtained by the Company or Maher. Maher agrees to furnish to the Company on demand his complete list of the correct names and places of business and telephone numbers of all of its clients served by him, 7 including all copies thereof wherever located. Maher also agrees to return immediately to the Company all records, notes, computer printouts, computer programs, computer software, price lists, microfilm, or any other documents related to the Company's business, including originals and copies thereof. I. It is agreed that any breach or anticipated or threatened breach of any of Maher's covenants contained in this Paragraph 7 will result in irreparable harm and continuing damages to the Company and its business and that the Company's remedy at law for any such breach or anticipated or threatened breach will be inadequate and, accordingly, in addition to any and all other remedies that may be available to the Company at law or in equity in such event, any court of competent jurisdiction may issue a decree of specific performance or issue a temporary and permanent injunction, without the necessity of the Company posting bond or furnishing other security and without proving special damages or irreparable injury, enjoining and restricting the breach, or threatened breach, of any such covenant, including, but not limited to, any injunction restraining Maher from disclosing, in whole or part, any Confidential Information. Maher acknowledges the truthfulness of all factual statements in this Agreement and agrees that he is estopped from and will not make any factual statement in any proceeding that is contrary to this Agreement or any part thereof. 8. Severability. If any provision of this Agreement shall be found by a court to be invalid or unenforceable, in whole or in part, then such provision shall be construed and/or modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Agreement, as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law, as if such provision had been originally incorporated herein as so modified or restricted, or as if such provision had not been originally incorporated herein, as the case may be. The parties further agree to seek a lawful substitute for any provision found to be unlawful; provided, that, if the parties are unable to agree upon a lawful substitute, the parties desire and request that a court or other authority called upon to decide the enforceability of this Agreement modify the Agreement so that, once modified, the Agreement will be enforceable to the maximum extent permitted by the law in existence at the time of the requested enforcement. 9. Waiver. A waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver or estoppel of any subsequent breach. No waiver shall be valid unless in writing and signed by an authorized officer of the Company (if a Company waiver) or by Maher (if a Maher waiver). 10. Miscellaneous Provisions and Representations. A. Both parties agree they will keep the terms, contents, and amounts set forth in this Agreement completely confidential and, other than as required by statute, regulation, a court of competent jurisdiction, or the rules of any governmental agency, will not disclose any information concerning this Agreement's terms and amounts to any person other than 8 each party's attorney, accountants, tax advisors, or (if disclosed by Maher) Maher's immediate family. B. Maher represents and certifies that he has carefully read and fully understands all of the provisions and effects of this Agreement, has knowingly and voluntarily entered into this Agreement freely and without coercion, and acknowledges that on November 19, 1999, the Company advised him to consult with an attorney prior to executing this Agreement. Maher is voluntarily entering into this Agreement and neither the Company nor its agents, representatives, or attorneys made any representations concerning the terms or effects of this Agreement other than those contained in the Agreement itself. C. Nothing in this Agreement impacts Maher's right, if any, to indemnification as may be provided for under the Company's By-Laws. The Company further agrees that nothing in this Agreement shall be deemed to impair any rights to indemnification that Maher may have relating to, or arising out of, his employment with the Company and its subsidiaries or affiliates, or his service as a director of the Company and its subsidiaries or affiliates, or any of its or their predecessors. 11. Complete Agreement. This Agreement sets forth the entire agreement between the parties, and fully supersedes any and all prior agreements or understandings between the parties pertaining to the subject matter of this Agreement. 12. Amendment. This Agreement may not be altered, amended, or modified except in writing signed by both Maher and the Company. 13. Future Cooperation. During the Consulting Period, in connection with any and all claims, disputes, negotiations, investigations, lawsuits, administrative proceedings or other requests by the Company for information about past transactions or other matters as to which Maher may be familiar, Maher agrees to make himself available, upon reasonable notice from the Company, to provide information or documents, provide declarations or statements to the Company, meet with attorneys or other representatives of the Company, prepare for and give depositions or testimony, and/or otherwise cooperate in the investigation, defense or prosecution of any or all such matters. In addition, unless required to do so under applicable law, Maher shall not provide information or otherwise assist any person or entity in asserting or threatening to assert any claim against any of the Company Released Parties. 14. Joint Participation. The parties hereto participated jointly in the negotiation and preparation of this Agreement, and each party has had the opportunity to obtain the advice of legal counsel and to review and comment upon the Agreement. Accordingly, it is agreed that no rule of construction shall apply against any party or in favor of any party. This Agreement shall be construed as if the parties jointly prepared this Agreement, and any uncertainty or ambiguity shall not be interpreted against one party and in favor of the other. 9 15. Headings. The headings in this Agreement are inserted for convenience only and are not to be considered a construction of the provisions hereof. 16. Execution of Agreement. This Agreement may be executed in several counterparts, each of which shall be considered an original, but which when taken together, shall constitute one Agreement. 17. Board Approval. This Agreement shall be subject to the approval of the Board within five (5) days of its execution. 18. Notices. Any notice to be given hereunder shall be in writing and shall be deemed given when mailed by certified mail, return receipt requested, addressed as follows to: Maher: Robert P. Maher 33 East Bellevue Chicago, Illinois 60611 with a copy to: Robert T. Markowski Jenner & Block One IBM Plaza, Suite 4400 Chicago, Illinois 60611 Company: Navigant Consulting, Inc. 615 N. Wabash Chicago, Illinois 60611 Attn: Board of Directors with a copy to: Jeffrey L. London Sachnoff & Weaver, Ltd. 30 South Wacker Drive, Suite 2900 Chicago, Illinois 60606 19. Arbitration. Any controversy or claim arising out of or relating to the termination of the Consulting Period shall be resolved by arbitration in accordance with the National Rules for the Resolution of Employment Disputes ("Rules") of the American Arbitration Association through a single arbitrator selected in accordance with the Rules. The decision of the arbitrator shall be rendered within thirty (30) days of the close of the arbitration hearing and shall include written findings of fact and conclusions of law reflecting the appropriate substantive law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof in the State of Illinois. In reaching his or her decision, the arbitrator shall have no authority (a) to authorize or require the parties to engage in discovery (provided, however, that the arbitrator may schedule the time by which the parties must exchange copies of the exhibits that, and the names of the witnesses whom, the parties intend to present at the hearing), (b) to interpret or enforce Paragraph 7 of the Agreement (for which Paragraph 21 shall provide the exclusive venue), (c) to change or modify any provision of this Agreement, (d) to 10 base any part of his or her decision on the common law principle of constructive termination, or (e) to award punitive damages or any other damages not measured by the prevailing party's actual damages and may not make any ruling, finding or award that does not conform to this Agreement. Each party shall bear one-half (1/2) of the costs of the arbitrator. 20. Recitals. The recitals to this Agreement are an integral part hereof and shall be considered as substantive and not precatory language. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Illinois, and, subject to Paragraph 19, any court action commenced to enforce this Release shall have as its sole and exclusive venue the County of Cook, Illinois. PLEASE READ THIS AGREEMENT AND CAREFULLY CONSIDER ALL OF ITS PROVISIONS BEFORE SIGNING IT. THIS AGREEMENT CONTAINS A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS AND OTHER FEDERAL, STATE AND LOCAL LAWS PROHIBITING DISCRIMINATION IN EMPLOYMENT. IN WITNESS WHEREOF, the parties have set their signatures on the date first written above. NAVIGANT CONSULTING, INC. ROBERT P. MAHER By:__________________________________ ____________________________________ Its:_________________________________ 11 EX-10.13 11 LETTER AGREEMENT WITH BARRY S. CAIN EX-10.13 Letter Agreement dated February 27, 2000 between the Registrant and Barry S. Cain Exhibit 10.13 February 27, 2000 Mr. Barry S. Cain 755 Smoke Tree Road Deerfield, IL 60015 Dear Barry: This letter will confirm our recent conversation regarding the terms of your resignation from Navigant Consulting. . We agreed that your last day of work was February 18, 2000, that you have resigned effective August 18, 2000 (the interim period being the "Notice Period") and that during such Notice Period your sole responsibility will be to endeavor to secure employment outside the Company. . During the Notice Period, the Company has agreed to continue to pay you your regular salary, payable per our normal executive payroll cycle; provided, however, that the last three months' take-home salary (i.e., net of withholding for taxes, benefits etc.) will not be paid directly to you but instead will be applied as a credit to reduce the interest on your loans from the Company. No severance pay shall be due you at the end of the Notice Period. . During the Notice Period, all regular executive employee benefits in which you are eligible to participate (e.g., life, disability, medical and dental insurance; 401(k)) will continue, but there shall be no further vacation accrual. Eligibility for COBRA benefits will commence at the end of the Notice Period. The above terms are contingent upon your agreement to full and complete cooperation with the Company's outside counsel in relation to outstanding litigation matters. To avoid any possible misunderstanding, "full and complete cooperation" means that no later than March 3, 2000, you will submit yourself to an interview by the Company's outside counsel, you will be candid and forthcoming, you provide to them all requested documents in your possession, and you will thereafter make yourself available during the Notice Period to the Company or its representatives, upon reasonable notice, and cooperatively provide requested information or documents. Regardless of whether such interviews take place before or after your last day of work, the Company will treat the contents of the interview as a privileged Company communication between an employee and counsel representing the Company for purposes of defending the pending class actions. You shall be entitled at all times to advice and counsel from your own attorney. We have also agreed on the following . As soon as reasonably possible, the Company shall - - pay you for your 7 weeks' of accrued unpaid vacation pay, and - provide you with a mutually agreeable letter of recommendation. . During the Notice Period, office voice mail will continue to be available at the same extension to the extent possible, together with telephone answering as necessary. . You may retain your computer, but you must allow us to create a backup copy of all business-related files on your computer as soon as mutually convenient. As an interim matter, I asked Phil Steptoe to assume your various responsibilities following February 18, 2000. Please cooperate with him to the extent he reasonably requires your knowledge of past matters. If you agree that this letter accurately reflects the agreement between you and the Company, please countersign this letter and return it to me. Best regards, M.H. Saranow Chairman Agreed and Accepted: -------------------- Barry S. Cain Dated: -------------------- EX-21 12 SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT EX-21.1 SIGNIFICANT SUBSIDIARIS OF THE REGISTRANT EXHIBIT 21.1 SIGNIFICANT SUBSIDIARIES OF NAVIGANT CONSULTING, INC. Name State of Incorporation Doing Business As - ---- ---------------------- ----------------- LECG, Inc. California Peterson Worldwide LLC Peterson Consulting LLC Illinois Navigant Consulting LLC Strategic Decisions Group California Navigant Consulting, Inc. EX-23.1 13 CONSENT OF KPMG LLP Ex-23.1 Consent of KPMG LLP Exhibit 23.1 Consent of KPMG LLP The Board of Directors Navigant Consulting, Inc. We consent to incorporation by reference in the registration statement (No. 333-30267) on Form S-8 of Navigant Consulting, Inc. of our reports dated March 20, 2000, relating to the consolidated balance sheets of Navigant Consulting, Inc. and subsidiaries as of December 31, 1999 and 1998, 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, 1999, and the related schedule, which reports appear in the December 31, 1999 annual report on Form 10-K of Navigant Consulting, Inc. /s/ KPMG LLP Chicago, Illinois March 28, 2000 EX-23.2 14 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.2 ARTHUR ANDERSEN CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into the Company's previously filed Form S-8 Registration Statement No. 333-30267. /s/ Arthur Andersen LLP San Francisco, California March 23, 2000 Exhibit 23.2 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of LECG, Inc. We have audited the statements of income, shareholders' equity and cash flows of LECG, Inc. (a California corporation) and subsidiaries for the year ended December 31, 1997, which were audited prior to the restatement (and, therefore, are not presented herein) for the pooling-of-interest as described in Note 3 to the restated financial statements included on pages F-1 - F-14. We have audited the statements of income, shareholders'equity and cash flows of LECG, Inc. (a California corporation) and subsidiaries as of December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of their operations and their cash flows for the year ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Arthur Andersen & Co. San Francisco, California January 30, 1998 EX-23.3 15 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-30267) of Navigant Consulting, Inc. of our report dated February 11, 1998, relating to the consolidated financial statements of Resource Management International, Inc. and Subsidiaries as of December 31, 1997, which appears in this December 31, 1999 Form 10-K. /s/ Pricewaterhouse Coopers LLP Sacramento, California March 28, 2000 Exhibit 23.3 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Resources Management International, Inc. Rancho Cordova, California We have audited the accompanying consolidated balance sheet of Resource Management International, Inc. and Subsidiaries as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Resource Management International, Inc. and Subsidiaries at December 31, 1997, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Sacramento, California February 11, 1998 EX-23.4 16 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to incorporation by reference in the registration statement No. 333-30267 on Form S-8 of Navigant Consulting, Inc. of our report dated March 17, 1998 relating to the consolidated statements of operations, members' equity, and cash flows for the year ended December 31, 1997 of Peterson Consulting L.L.C. which report appears in the December 31, 1999 annual report on Form 10-K of Navigant Consulting, Inc. /s/ Crowe, Chizek and Company LLP Oak Brook, Illinois March 27, 2000 Exhibit 23.4 REPORT OF INDEPENDENT AUDITORS To the Members Peterson Consulting L.L.C. We have audited the consolidated statements of operations, members' equity, and cash flows for the year ended December 31, 1997 (not included herein) of Peterson Consulting L.L.C. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flow for the year ended December 31, 1997 of Peterson Consulting L.L.C. in conformity with generally accepted accounting principles. Crowe, Chizek and Company LLP Oak Brook, Illinois March 17, 1998 EX-27.1 17 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR YEAR DEC-31-1999 DEC-31-1998 DEC-31-1997 JAN-01-1999 JAN-01-1998 JAN-01-1997 DEC-31-1999 DEC-31-1998 DEC-31-1997 42,345 119,704 45,972 0 0 0 116,100 80,163 6,341 0 0 0 0 0 0 176,405 206,846 3,511 59,820 40,829 33,506 26,057 18,632 19,576 414,676 230,517 125,827 108,807 60,337 51,116 0 0 0 0 0 0 0 0 0 43 38 34 300,626 164,866 69,180 414,676 230,517 125,827 397,694 287,626 228,731 397,694 287,626 228,731 266,080 174,175 145,144 401,298 249,046 202,035 2,191 (2,638) (1,205) 0 0 0 376 688 446 (5,795) 41,218 27,901 8,827 25,637 9,237 (14,622) 15,581 18,664 0 0 0 0 0 0 0 0 0 (14,622) 15,581 18,664 (0.35) 0.43 0.56 (0.35) 0.41 0.55
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