For The Fiscal Year Ended December 31, 2004
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10–K

 


 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2004

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 000-50976

 


 

HURON CONSULTING GROUP INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware   01-0666114

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

550 West Van Buren Street

Chicago, Illinois 60607

(Address of principal executive offices and zip code)

 

(312) 583-8700

(Registrant’s telephone number, including area code)

 


 

Securities registered pursuant to Section 12(b) of the Act: None

 

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

 

Title of each class


 

Name of each exchange on which registered


Common Stock, par value $0.01 per share

  NASDAQ National Market

 


 

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 the Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

The aggregate market value of the registrant’s common stock held by non-affiliates as of June 30, 2004 (the last business day of the registrant’s most recently completed second fiscal quarter) is not applicable. As of January 31, 2005, 16,365,334 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

 

Documents Incorporated By Reference

 

Portions of the registrant’s definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of its fiscal year are incorporated by reference into Part III of this annual report on Form 10-K.

 



Table of Contents

HURON CONSULTING GROUP INC.

 

ANNUAL REPORT ON FORM 10-K

FOR FISCAL YEAR ENDED DECEMBER 31, 2004

 

TABLE OF CONTENTS

 

               Page

PART I     
     Item 1.    Business    1
     Item 2.    Properties    14
     Item 3.    Legal Proceedings    14
     Item 4.    Submission of Matters to a Vote of Security Holders    14
PART II     
     Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    15
     Item 6.    Selected Financial Data    16-17
     Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    17-28
     Item 7A.    Quantitative and Qualitative Disclosures About Market Risk    29
     Item 8.    Financial Statements and Supplementary Data    29
     Item 9.    Changes in and Disagreements with Accountants on Accounting Financial Disclosure    29
     Item 9A.    Controls and Procedures    29
     Item 9B.    Other Information    29
PART III     
     Item 10.    Directors and Executive Officers of the Registrant    29-30
     Item 11.    Executive Compensation    30
     Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    30
     Item 13.    Certain Relationships and Related Transactions    30
     Item 14.    Principal Accountant Fees and Services    30
PART IV     
     Item 15.    Exhibits and Financial Statement Schedules    31-32
SIGNATURES    33

 

 


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In this annual report on Form 10-K, unless the context otherwise requires, the terms “Huron,” “company,” “we,” “us” and “our” refer to Huron Consulting Group Inc. and its subsidiary, Huron Consulting Services LLC.

 

This annual report on Form 10-K, including the information incorporated by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified by words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” or “continue.” These forward-looking statements reflect our current expectation about our future results, levels of activity, performance or achievements, including without limitation, that our business continues to grow at the current expectations; that we are able to expand our service offerings through our existing consultants and new hires; and that existing market conditions do not change from current expectations. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

 

PART I

 

ITEM 1. BUSINESS.

 

OVERVIEW

 

Huron was formed in March 2002 and commenced operations in May 2002. We were founded by a core group of experienced financial and operational consultants that consisted primarily of former Arthur Andersen LLP partners and professionals, with equity sponsorship from a group of investors led by Lake Capital Management LLC. On October 13, 2004, we completed our initial public offering (“IPO”) and became a publicly traded company listed on the NASDAQ National Market. In the IPO, we sold 3,333,333 shares of common stock and a selling stockholder, HCG Holdings LLC, sold 2,416,667 shares of common stock at an offering price of $15.50 per share.

 

We are an independent provider of financial and operational consulting services. We believe that a financial and operational consulting business that is unaffiliated with a public accounting firm is better suited to serve its clients’ needs. As an independent consulting firm, we are not subject to the legal restrictions placed on public accounting firms that prohibit them from providing certain non-audit services to their audit clients. We also believe that many other consulting firms provide only a limited scope of services and, therefore, a company such as ours with a wide array of services is better positioned to serve the diverse and complex needs of various organizations.

 

We have grown significantly since we commenced operations, more than doubling the number of our consultants from 213 on May 31, 2002 to 483 on December 31, 2004. We have hired experienced professionals from a variety of organizations, including the four largest public accounting firms, referred to as the Big Four, and other consulting firms. Our highly credentialed consultants include certified public accountants, MBAs, accredited valuation specialists and forensic accountants. As of December 31, 2004, we had 56 managing directors who are consultants. These individuals have an average of 20 years of business experience. In addition to our headquarters in Chicago, we have five other core offices located in Boston, Houston, New York City, San Francisco and Washington D.C. and two small offices located in Charlotte and Los Angeles.

 

OUR SERVICES

 

We provide our services through two segments: Financial Consulting and Operational Consulting. For the year ended December 31, 2004, we derived 59.8% of our revenues from Financial Consulting and 40.2% from Operational Consulting. For further financial information on our segment results, see “Management’s discussion and analysis of financial condition and results of operations” and note “15. Segment Information” in the notes to consolidated financial statements included elsewhere in this annual report on Form 10-K.

 

Financial Consulting

 

Our Financial Consulting segment provides highly specialized financial and economic analysis and advice to help clients effectively address complex challenges that arise from litigation, disputes, investigations, regulation, financial distress and other sources of significant conflict or change. Our Financial Consulting segment consisted of 274 consultants as of December 31, 2004. This segment’s practices and the services they offer include:

 

  Disputes and investigations. Our disputes and investigations practice provides financial and economic analysis to support law firms and corporations in connection with business disputes, lawsuits and regulatory or internal investigations. We have extensive experience in the areas of financial investigations and forensic accounting, including matters involving the Securities and Exchange Commission (“SEC”) or other regulatory inquiries or investigations, financial restatements and special accounting projects. We provide specialized accounting services to gather and analyze voluminous financial data and reconstruct complex transactions and events. In addition, we apply economic and econometric analyses in the areas of antitrust and anticompetitive practices, securities fraud, insurance claims and damages, as well as deliver or support independent expert testimony in such cases.

 

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  Corporate advisory services. Our corporate advisory services practice provides consulting assistance to financially distressed companies, creditor constituencies and other stakeholders in connection with bankruptcy proceedings and out-of-court restructurings. For distressed companies, we assess the viability of their business and work closely with management to develop and implement a turnaround plan to improve cash flow and a debt-restructuring plan to improve their balance sheet. In some instances, we serve in interim management roles. When out-of-court solutions are not achievable, we assist clients with preparing for a Chapter 11 bankruptcy filing and with all aspects of the bankruptcy process by gathering, analyzing and presenting financial and business information needed to achieve a successful reorganization. We also provide claims management services to help companies process and analyze complex and voluminous claims filed in bankruptcies. For creditor constituencies, including committees of unsecured creditors, we provide similar financial analyses designed to maximize the recovery of amounts owed to creditors and assess the viability of a debtor’s reorganization plan. Certain consultants in this practice also provide specialized financial advisory services to stakeholders in the energy industry.

 

  Valuation services. Our valuation services practice delivers expert valuation analysis to clients and their advisors. We perform valuations of businesses, financial interests, intellectual property, real property, machinery and equipment and other tangible and intangible assets. Our valuation services practice typically supports client needs in the following contexts:

 

    Transactions: supporting clients’ financial and tax reporting, especially in the context of acquisitions and other corporate transactions;

 

    Litigation or disputes: valuing businesses or assets; and

 

    Bankruptcies: supporting the restructuring process or the sale of business assets.

 

Operational Consulting

 

Our Operational Consulting segment provides services designed to help clients improve the overall efficiency and effectiveness of their operations by enhancing revenue, reducing costs, managing regulatory compliance and maximizing procurement efficiencies. Our Operational Consulting segment consisted of 209 consultants as of December 31, 2004. This segment’s practices and the services they offer include:

 

  Higher education. Our higher education practice provides operational consulting services to colleges, universities and academic medical centers. We provide financial modeling, operational process redesign, strategic planning and assessments and advice on software selection and implementation, especially in connection with helping research universities address the challenges and complexities of administering research programs, including the complex requirements of federally-funded research. Our research administration services include compliance assessments, cost recovery services and operations assistance. We also have extensive experience implementing the PeopleSoft® Grants Suite as a technology solution to sponsored research administration challenges.

 

  Healthcare. Our healthcare practice helps healthcare providers and payors effectively address their strategic, operational and financial challenges. On the provider side, we help hospitals, physicians and other healthcare providers improve operations by performing assessments and implementing solutions designed to reduce costs and increase effectiveness. Our engagements typically focus on revenue cycle and cash acceleration, supply chain improvements, strategic growth and planning, financial planning and physician/ancillary services. Additionally, we provide risk management and regulatory compliance solutions. For healthcare payors, we focus on compliance and government contracting issues related to Federal Healthcare Programs. Our Medicare contract services include Medicare contract transition and termination assistance, implementation of cost accounting standards, secondary payer analyses, strategic assessments, proposal support services and assistance related to implementation of the Medicare Modernization Act. We assist pharmaceutical companies with pricing analyses and related aspects of regulatory disclosures and calculations. We also assist health plans with various operational issues including claims processing over and under-payments, Pharmacy Benefit Manager audits and business performance reporting.

 

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  Strategic sourcing. Our strategic sourcing practice works with clients to drive sustainable non-salary cost reductions. We help clients achieve significant savings by addressing the entire procurement process, including contract negotiations, vendor selection, contract compliance, consumption patterns, total cost of ownership, performance measurement, knowledge transfer and make-versus-buy decisions. We identify opportunities for measurable savings, develop approved action plans and guide the implementation of those plans to final conclusion. We have achieved substantial savings for clients in a wide variety of spend categories, including office-related products, telecommunications, IT hardware, software and services, insurance, printing services, travel and industry-specific categories.

 

  Performance improvement. Our performance improvement practice works with executive officers and other senior managers of large and middle-market organizations that have recently undergone a change in leadership, are integrating acquisitions or are coping with a change in competitive dynamics to address performance challenges and take advantage of opportunities. Our engagements typically increase effectiveness of operations or decrease costs by developing and implementing solutions for clients in areas such as business alignment, operational improvement, cost efficiency, organizational alignment.

 

  Legal business consulting. Our legal business consulting practice helps in-house legal departments enhance the quality of legal services while reducing costs by more efficiently aligning people, processes and technology. We provide strategic advice to help legal departments improve their organizational design, business processes and management of outside counsel. One area of special emphasis is helping clients to choose and implement technology-powered solutions that improve legal department operations. For instance, we have extensive experience in selecting, customizing and successfully rolling out matter management systems that help legal departments track and manage lawsuits and other legal matters. These systems are powerful tools for managing budgets, spending and resources. We also provide similar services for document-management systems, patent-management applications and electronic-billing systems. We also provide services supporting clients’ paper and electronic discovery/document management needs, including computer forensics.

 

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OUR CLIENTS

 

We provide financial and operational consulting services to a wide variety of both financially sound and distressed organizations, including Fortune 500 companies, medium-sized and large businesses, academic institutions, healthcare organizations and the law firms that represent these various organizations. Our clients are in a broad array of industries, including education, professional services, transportation services, healthcare, telecommunications, financial services, electronics, consumer products, energy and utilities, industrial manufacturing and food and beverage. Since commencing operations in May 2002, we have conducted over 1,500 engagements for over 1,000 clients, and we have worked on engagements with 37 of the 40 largest U.S. law firms listed in The American Lawyer 2004 Am Law 100. Our top ten clients represented 27.8% of our revenues in the year ended December 31, 2004. No single client accounted for more than 10% of our revenues in 2004. The following are examples of engagements that we have performed for our clients.

 

Financial Consulting

 

Practice


    

Client need


    

Huron solution


Disputes and investigations and valuation services      Assist legal counsel for an audit committee of a public software company in connection with an SEC investigation and class action litigation     

•      Forensic accounting experts conducted a large-scale, in-depth financial analysis of financial records and analyzed issues such as revenue recognition, acquisition accounting, capitalization of assets, complex transactions and goodwill impairment to identify accounting errors.

 

•      Consultants specializing in GAAP assisted the client with preparation of the restatement of its financial statements and presentations to the SEC.

 

•      Computer forensics experts assisted legal counsel in gathering data by capturing copies of servers, hard drives and emails and searching these sources for use in the restatement and litigation.

 

Corporate advisory services      Assist with Chapter 11 bankruptcy proceedings of a healthcare provider     

•      Analyzed the operations of the company to predict revenue going forward to demonstrate the viability of the company.

 

•      With the involvement of our healthcare practice, assisted in the evaluation of the company’s operating expenses during the bankruptcy proceedings and the negotiation of the terms of the debtor-in-possession financing.

 

•      Served as the interface between creditors’ committees and their advisors by addressing information requests and managing meetings and other committee-related issues.

 

•      Analyzed the feasibility of the company’s projections in the plan of reorganization with the assistance of the healthcare practice and provided written testimony on this analysis at the reorganization plan confirmation hearing.

 

Valuation services      Value assets of acquired company for purchase price allocation by a global media company     

•      Analyzed the fair market value of the assets of the acquired company, including tangible assets, customer relationships, favorable contracts, franchise value and goodwill.

 

•      Determined the remaining life of the assets as well as tested for impairment of the assets in other operating units to support financial reporting requirements.

 

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Operational Consulting

 

Practice


    

Client need


    

Huron solution


Higher education and strategic sourcing      Assess research administration infrastructure of a leading university due to dramatic growth in research volume and increased scrutiny of federal regulators     

•      Evaluated current operations and provided a plan for implementation of improvements to research administration infrastructure, including:

 

•      roles and responsibilities within central university units and departmental units;

 

•      organizational structure of the research enterprise, including its relationship with other university entities;

 

•      business processes;

 

•      information systems;

 

•      personnel;

 

•      training and educational programs; and

 

•      performance measures for central research units.

 

•      Evaluated the exposure of the primary research support units to financial and operational risks relating to research universities.

 

•      Assessed impact of plans to replace university-wide financial systems on research administration support services.

 

•      Our strategic sourcing practice identified areas where the university could reduce its costs of procuring goods and services, such as through library services, scientific supplies or office-related products.

 

Healthcare      Improve operating margins of healthcare provider     

•      Comprehensive assessment of performance levels related to operating costs, supply costs, revenue cycle and organizational structure efficiency.

 

•      Quantified and prioritized areas of potential opportunity for change, growth and/or improvement, including revenue management, use of supplies and efficiency of information systems.

 

•      Developed and implemented plans for sustained improvements in:

 

•      supply chain;

 

•      revenue cycle; and

 

•      organizational effectiveness.

 

       Assist in recovering overpaid claims     

•      Assisted a large health insurance organization perform a detailed analysis of its coordination of benefits programs.

 

•      Identified a significant number of claims that had been paid in error by the client and assisted the client in recovering these overpayments.

 

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Performance improvement      Devised an overarching
strategy for the supply
chain function for a
large consumer
products client
    

•      Synthesized market research, customer feedback and industry benchmarks to provoke discussion about future direction and priorities in the supply chain arena.

 

•      Facilitated a process to build consensus among senior management from across major business units leading to the development of a long-range plan and a series of near-term initiatives.

 

Legal business consulting      Develop cost saving
intitiatives for
pharmaceutical
company’s recently
expanded legal
department
    

•      Analyzed processing of legal matters through various phases and the distribution and management of legal work by internal and outside staff.

 

•      Developed cost saving initiatives to improve organizational design, outside counsel management and business process.

 

•      Assisted with the implementation of an interim matter management system for litigation and the selection of a new department-wide matter management system that will be implemented over a period of time.

 

INDUSTRY BACKGROUND

 

We believe many organizations are facing increasingly large and complex business disputes and lawsuits, a growing number of regulatory and internal investigations and more intense public scrutiny. Concurrently, we believe increased competition and regulation are presenting significant operational and financial challenges for organizations. Distressed companies are responding to these challenges by restructuring and reorganizing their businesses and capital structures, while financially healthy organizations are striving to capitalize on opportunities by improving operations, reducing costs and enhancing revenue. Many organizations have limited dedicated resources to respond effectively to these challenges and opportunities. Consequently, we believe these organizations will increasingly seek to augment their internal resources with experienced independent consultants like us.

 

We believe the demand for our services is driven by the following factors:

 

  SEC and internal investigations. The increased scrutiny of accounting practices, internal controls and disclosure has contributed to the large number of financial restatements by public companies. In response to a number of recent incidences of corporate malfeasance and accounting irregularities, the SEC has conducted an increasing number of public company investigations over the past few years. In 2003, the SEC initiated 679 enforcement actions—81 more than in any other previous year—including nearly 200 actions involving financial fraud or reporting violations. For fiscal year 2005, Congress approved a record $913 million budget, 13% above the prior fiscal year’s appropriation, to hire more staff and continue to enhance SEC oversight and investigation initiatives. For fiscal year 2006, the President has recommended a budget of $888 million. In addition, an increasing number of boards of directors, audit committees and special independent committees of companies that have had to review their historical financials or respond to complaints by whistleblowers have conducted internal forensic investigations to determine the underlying facts. These dynamics have driven demand for independent financial consultants like us who help clients respond to SEC investigations, evaluate restatements of financial statements and support internal investigations by combining investigative accounting and financial reporting skills with business and practical experience.

 

  Litigation and disputes. Litigation and business disputes are prevalent in the United States and, we believe, the volume of this activity does not necessarily correlate with the economic cycle. The breadth and magnitude of these matters is increasing. For example, antitrust investigation and enforcement activities by federal, state and local authorities present heightened complexities and risks for companies in the areas of mergers and acquisitions, pricing policies, distribution relationships and patent and intellectual property matters. In addition, private parties can bring antitrust claims asserting a variety of violations. In complex litigation and disputes, organizations and the law firms that represent them regularly engage experienced consultants to provide or support expert testimony or perform data analyses involving financial, economic and accounting issues.

 

  Sarbanes-Oxley and stockholder activism. The enactment of the Sarbanes-Oxley Act of 2002 has substantially limited the scope of non-audit services that large public accounting firms, such as the Big Four, can provide to their

 

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audit clients. We believe these limitations represent a significant opportunity for independent consulting firms. A study done by the Investor Responsibility Research Center in February 2002 of 1,224 public U.S. companies estimated that 72%, or approximately $4.0 billion, of the fees these companies paid to the accounting firm that conducted their audit in fiscal 2000 were for non-audit services. Although a substantial amount of this spending was for tax services, which we do not provide, we believe there is still a significant opportunity to provide the other non-audit services. Further, certain influential institutional investors, citing concerns over perceived conflicts of interest, have opposed the ratification of auditors and the election of directors of companies that engage their auditors to perform permissible non-audit services. We believe that the restrictions of Sarbanes-Oxley, stockholder opposition to auditors performing consulting services for their audit clients and the relatively small number of large public accounting firms will lead many clients to choose independent consulting firms over the Big Four when seeking providers of various consulting services.

 

  Operational challenges and opportunities. Organizations must constantly reevaluate business processes in order to manage change and risk and minimize or recover costs. For example, in the healthcare industry, the steady flow of changes that affect healthcare funding, treatments, delivery and administration increase the difficulty in managing a complex mix of factors, including rising healthcare costs and insurance premiums and the increasing number of uninsured citizens. In the higher education industry, research universities and academic medical centers must develop and maintain programs to effectively manage research compliance risks and implement systems that support the recovery of research costs. Additionally, the difficulties of managing a large number of legal matters compels in-house legal departments to seek ways to improve their efficiency and effectiveness, which drives demand for consultants specializing in legal department operations. In general, a variety of organizations seek to improve their procurement efficiencies, improve operational processes and reduce costs. We believe that in seeking to meet these challenges and capitalize on these opportunities, organizations will increasingly augment their internal resources with consultants who can provide a combination of industry expertise and strong technical skills.

 

  Improving economic conditions and merger and acquisition activity. Despite depressed levels in recent years, there was a rebound in merger and acquisition, or M&A, activity in the first six months of 2004 amidst an improvement in general economic conditions. According to Dealogic, the aggregate dollar value of announced M&A transactions with a deal value of under $5 billion increased approximately 33% in the first six months of 2004 compared to the first six months of 2003. We believe M&A activity creates demand for financial consulting services, such as purchase price allocations and other similar valuation services and dispute and litigation services, as well as operational consulting services, such as performance improvement and strategic sourcing.

 

  Financial distress. Despite the recent decline in corporate bankruptcy filings, we believe there will continue to be a sufficient number of bankruptcies of the size and complexity that typically require debtors and other constituents to retain the services of financial advisors. Additionally, we believe there is an ongoing need for restructuring and turnaround consulting services to assist financially distressed, under-performing and debt-laden companies and their stakeholders outside of the bankruptcy process.

 

EMPLOYEES

 

Our ability to bring the right expertise together to address client issues requires a willingness to work and think outside the bounds of a single practice or specialty. Our success depends on our ability to attract and retain highly talented professionals by creating a work environment where individuals and teams thrive and individuals are rewarded for their contributions and our successes. To accomplish those goals and recognize performance, we have adopted a comprehensive rewards program incorporating compensation, training and development opportunities, performance management and special recognition programs.

 

As of December 31, 2004, we had 612 employees, consisting of 483 consultants and 129 non-billable professionals. The 483 consultants consisted of 56 managing directors, 70 directors, 101 managers and 256 associates and analysts. Of these consultants, 122 have a master’s degree in business administration, 77 are certified public accountants and various others are accredited valuation specialists and forensic accountants. Our managing directors serve clients as advisors and engagement team leaders, originate revenue through new and existing client relationships, and work to strengthen our intellectual capital, develop our people and enhance our reputation. Our directors and managers manage day-to-day client relationships and oversee the delivery and overall quality of our work product. Our associates and analysts gather and organize data, conduct detailed analyses and prepare presentations that synthesize and distill information to support recommendations we deliver to clients.

 

Our 129 non-billable professionals at December 31, 2004 consisted of 9 managing directors, 20 directors, 16 managers, 48 associates and analysts and 36 assistants. Our non-billable professionals include our senior management team, senior client relationship managers and legal, finance, information technology, marketing and human resource personnel.

 

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We assimilate and support employees in their career progression through training and development programs. We have structured orientation and training programs for new analysts, “milestone” programs to help recently promoted employees quickly become effective in their new roles, and opportunities for self-directed training, including technical and consulting courses. We assign employees internal performance coaches to identify opportunities for development, formal training or certifications.

 

Our compensation plan includes competitive base salary, incentives and benefits. Under our incentive plan, directors, managers, associates and analysts set goals each year with a performance coach. These goals are aligned with our business goals as well as individual interests and development needs. The plan balances our value of teamwork with recognition of individual performance, and incentive compensation is tied to both team and individual performance. Incentives for managing directors are based on their individual performance and their contribution to their practice and to our business as a whole. Funding of the managing director incentive pool is based on our achievement of annual financial goals. In addition, managing directors, directors and managers are eligible for long-term equity incentives.

 

BUSINESS DEVELOPMENT AND MARKETING

 

Business development

 

Our business development activities aim to build relationships and a strong brand reputation with key sources of business and referrals, especially top-tier law firms and the offices of the chief financial officer and general counsel of organizations. We believe that excellent service delivery to clients is critical to building relationships and our brand reputation, and we emphasize the importance of client service to all of our employees.

 

We generate most of our new business opportunities through relationships that our managing directors have with individuals working in corporations, academic institutions, existing or former clients and top-tier law firms. Although some managing directors spend more time on service delivery than new business development, all of our managing directors understand their important role in ongoing relationship and business development, which is reinforced through our compensation and incentive program. We actively seek to identify new business opportunities, and we frequently receive referrals and repeat business from past and current clients and from the law firms with which we have worked.

 

In addition, to complement the business development efforts of our managing directors, we have a group of senior client relationship managers, who are focused exclusively on developing client relationships and generating new business through their extensive network of contacts. We also have formed relationships with prominent academics, which generate new business opportunities.

 

Marketing

 

We have a centralized marketing department with a marketing professional assigned to each of our practices. The centralized department coordinates these professionals’ activities, and also develops and coordinates traditional marketing programs, such as participation in seminars, sponsorship of client events and publication of articles in industry publications to actively promote our name and capabilities. The marketing department also manages public relations activities, develops printed marketing materials and performs research and database management to support sales efforts.

 

COMPETITION

 

The consulting services industry is extremely competitive, highly fragmented and subject to rapid change. The industry includes a large number of participants with a variety of skills and industry expertise, including other business operations and financial consulting firms, general management consulting firms, the consulting practices of major accounting firms, technical and economic advisory firms, regional and specialty consulting firms and the internal professional resources of organizations. We compete with a large number of service providers in both of our segments. Our competitors often vary depending on the particular practice area. In addition, we also expect to continue to face competition from new entrants because the barriers to entry into consulting services are relatively low.

 

We believe the principal competitive factors in our market include firm and consultant reputations, client and law firm relationships and referrals, the ability to attract and retain top consultants, the ability to manage engagements effectively and the ability to be responsive and provide high quality services. There is also competition on price, although to a lesser extent due to the critical nature of many of the issues that the types of services we offer address. Many of our competitors have a greater geographic footprint, including an international presence, and name recognition, as well as have significantly greater personnel, financial, technical and marketing resources than we do. We believe that our independence, experience, reputation, industry focus and broad range of professional services enable us to compete favorably and effectively in the consulting marketplace.

 

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AVAILABLE INFORMATION

 

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge on our website, www.huronconsultinggroup.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

 

RISK FACTORS

 

Our inability to retain our senior management team and other managing directors would be detrimental to the success of our business.

 

We rely heavily on our senior management team, including Gary Holdren, our Chief Executive Officer, and George Massaro, our Chief Operating Officer, and other managing directors, and our ability to retain them is particularly important to our future success. Given the highly specialized nature of our services, these people must have a thorough understanding of our service offerings as well as the skills and experience necessary to manage an organization consisting of a diverse group of professionals. In addition, we rely on our senior management team and other managing directors to generate and market our business. Further, in light of our limited operating history, our senior management’s and other managing directors’ personal reputations and relationships with our clients are a critical element in obtaining and maintaining client engagements. Although we enter into non-solicitation agreements with our senior management team and other managing directors, we do not enter into non-competition agreements. Accordingly, members of our senior management team and our other managing directors are not contractually prohibited from leaving or joining one of our competitors, and some of our clients could choose to use the services of that competitor instead of our services. If one or more members of our senior management team or our other managing directors leave and we cannot replace them with a suitable candidate quickly, we could experience difficulty in securing and successfully completing engagements and managing our business properly, which could harm our business prospects and results of operations.

 

Our inability to hire and retain talented people in an industry where there is great competition for talent could have a serious negative effect on our prospects and results of operations.

 

Our business involves the delivery of professional services and is highly labor-intensive. Our success depends largely on our general ability to attract, develop, motivate and retain highly skilled consultants. The loss of a significant number of our consultants or the inability to attract, hire, develop, train and retain additional skilled personnel could have a serious negative effect on us, including our ability to manage, staff and successfully complete our existing engagements and obtain new engagements. Qualified consultants are in great demand, and we face significant competition for both senior and junior consultants with the requisite credentials and experience. Our principal competition for talent comes from other consulting firms, accounting firms and technical and economic advisory firms, as well as from organizations seeking to staff their internal professional positions. Many of these competitors may be able to offer significantly greater compensation and benefits or more attractive lifestyle choices, career paths or geographic locations than we do. Therefore, we may not be successful in attracting and retaining the skilled consultants we require to conduct and expand our operations successfully. Increasing competition for these consultants may also significantly increase our labor costs, which could negatively affect our margins and results of operations.

 

We have experienced net losses for most of our history, and our limited operating history makes evaluating our business difficult.

 

We have been operating since May 2002. For the period from March 19, 2002 (inception) through December 31, 2002 and for the year ended December 31, 2003, we experienced net losses of $4.2 million and $1.1 million, respectively. Although we generated net income of $10.9 million for the year ended December 31, 2004, we may not sustain profitability in the future. For example, we generated net income of $1.9 million for the six months ended June 30, 2003, but experienced a net loss for the year ended December 31, 2003. Our net losses, among other things, have had, and should net losses occur in the future, will have, an adverse effect on our stockholders’ equity and working capital. To sustain profitability, we must:

 

  attract, integrate, retain and motivate highly qualified consultants;

 

  achieve and maintain adequate utilization and suitable billing rates for our consultants;

 

  expand our existing relationships with our clients and identify new clients in need of our services;

 

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  maintain and enhance our brand recognition; and

 

  adapt to meet changes in our markets and competitive developments.

 

We may not be successful in accomplishing these objectives. Further, our limited operating history makes it difficult to evaluate our business and prospects. Our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in highly competitive industries. The historical information in this report may not be indicative of our future financial condition and future performance. For example, we expect that our future annual growth rate in revenues will moderate and likely be less than the growth rates experienced in 2003 and 2004.

 

If we are unable to manage the growth of our business successfully, we may not be able to sustain profitability.

 

We have grown significantly since we commenced operations, more than doubling the number of our consultants from 213 on May 31, 2002 to 483 as of December 31, 2004. As we continue to increase the number of our consultants, we may not be able to successfully manage a significantly larger workforce. Additionally, our significant growth has placed demands on our management and our internal systems, procedures and controls and will continue to do so in the future. To successfully manage growth, we must add administrative staff and periodically update and strengthen our operating, financial, accounting and other systems, procedures and controls, which will increase our costs and may adversely affect our gross profits and our ability to sustain profitability if we do not generate increased revenues to offset the costs. This need to augment our support infrastructure due to growth is compounded by our decision to become a public reporting company and the increased expense that will arise in complying with existing and new regulatory requirements. As a public company, our information and control systems must enable us to prepare accurate and timely financial information and other required disclosure. If we discover deficiencies in our existing information and control systems that impede our ability to satisfy our reporting requirements, we must successfully implement improvements to those systems in an efficient and timely manner.

 

Our financial results could suffer if we are unable to achieve or maintain adequate utilization and suitable billing rates for our consultants.

 

Our profitability depends to a large extent on the utilization and billing rates of our consultants. Utilization of our consultants is affected by a number of factors, including:

 

  the number and size of client engagements;

 

  the timing of the commencement, completion and termination of engagements, which in many cases is unpredictable;

 

  our ability to transition our consultants efficiently from completed engagements to new engagements;

 

  the hiring of additional consultants because there is generally a transition period for new consultants that results in a temporary drop in our utilization rate;

 

  unanticipated changes in the scope of client engagements;

 

  our ability to forecast demand for our services and thereby maintain an appropriate level of consultants; and

 

  conditions affecting the industries in which we practice as well as general economic conditions.

 

The billing rates of our consultants that we are able to charge are also affected by a number of factors, including:

 

  our clients’ perception of our ability to add value through our services;

 

  the market demand for the services we provide;

 

  introduction of new services by us or our competitors;

 

  our competition and the pricing policies of our competitors; and

 

  general economic conditions.

 

If we are unable to achieve and maintain adequate overall utilization as well as maintain or increase the billing rates for our consultants, our financial results could materially suffer.

 

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A significant portion of our revenues are derived from a limited number of clients, and our engagement agreements, including those related to our largest clients, can be terminated by our clients with little or no notice and without penalty, which may cause our operating results to be unpredictable.

 

As a consulting firm, we have derived, and expect to continue to derive, a significant portion of our revenues from a limited number of clients. Our ten largest clients accounted for 36.3% of our revenues in the partial year ended December 31, 2002, 32.1% of our revenues in the year ended December 31, 2003 and 27.8% of our revenues in the year ended December 31, 2004. Our clients typically retain us on an engagement-by-engagement basis, rather than under fixed-term contracts, and the volume of work performed for any particular client is likely to vary from year to year, and a major client in one fiscal period may not require or decide to use our services in any subsequent fiscal period. Accordingly, the failure to obtain new large engagements or multiple engagements from existing or new clients could have a material adverse effect on the amount of revenues we generate.

 

In addition, almost all of our engagement agreements can be terminated by our clients with little or no notice and without penalty. For example, in engagements related to litigation, if the litigation were to be settled, our engagement for those services would no longer be necessary and therefore would be terminated. In client engagements that involve multiple engagements or stages, there is a risk that a client may choose not to retain us for additional stages of an engagement or that a client will cancel or delay additional planned engagements. For clients in bankruptcy, a bankruptcy court could require us to reduce our fees for the duration of an engagement. These terminations, cancellations, delays or reductions could result from factors unrelated to our services or the progress of the engagement. When engagements are terminated or reduced, we lose the associated future revenues, and we may not be able to recover associated costs or redeploy the affected employees in a timely manner to minimize the negative impact. In addition, our clients’ ability to terminate engagements with little or no notice and without penalty makes it difficult to predict our operating results in any particular fiscal period.

 

Our ability to maintain and attract new business depends upon our reputation, the professional reputation of our consultants and the quality of our services.

 

As a professional services firm, our ability to secure new engagements depends heavily upon our reputation and the individual reputations of our consultants. Any factor that diminishes our reputation or that of our consultants, including not meeting client expectations or misconduct by our consultants, could make it substantially more difficult for us to attract new engagements and clients. Similarly, because we obtain many of our new engagements from former or current clients or from referrals by those clients or by law firms that we have worked with in the past, any client that questions the quality of our work or that of our consultants could impair our ability to secure additional new engagements and clients.

 

The consulting services industry is highly competitive, and we may not be able to compete effectively.

 

The consulting services industry in which we operate includes a large number of participants and is intensely competitive. We face competition from other business operations and financial consulting firms, general management consulting firms, the consulting practices of major accounting firms, technical and economic advisory firms, regional and specialty consulting firms and the internal professional resources of organizations. In addition, because there are relatively low barriers to entry, we expect to continue to face additional competition from new entrants into the business operations and financial consulting industries. We have six core offices and two smaller offices in the United States and do not have any international offices. Many of our competitors have a greater national presence and are also international in scope, as well as have significantly greater personnel, financial, technical and marketing resources. In addition, these competitors may generate greater revenues and have greater name recognition than we do. Our ability to compete also depends in part on the ability of our competitors to hire, retain and motivate skilled consultants, the price at which others offer comparable services and our competitors’ responsiveness to their clients. If we are unable to compete successfully with our existing competitors or with any new competitors, our financial results will be adversely affected.

 

Additional hiring and any acquisitions could disrupt our operations, increase our costs or otherwise harm our business.

 

Our business strategy is dependent in part upon our ability to grow by hiring individuals or groups of consultants and by potentially acquiring complementary businesses. However, we may be unable to identify, hire, acquire or successfully integrate new consultants and complementary businesses without substantial expense, delay or other operational or financial problems. Competition for future hiring and acquisition opportunities in our markets could increase the compensation we offer to potential consultants or the price we pay for businesses we wish to acquire. In addition, we may be unable to achieve the financial, operational and other benefits we anticipate from any hiring or acquisition. Hiring additional consultants or acquiring complementary businesses could also involve a number of additional risks, including:

 

  the diversion of management’s time, attention and resources from managing and marketing our company;

 

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  the failure to retain key acquired personnel;

 

  potential impairment of existing relationships with our clients, such as client satisfaction or performance problems, whether as a result of integration or management difficulties or otherwise;

 

  the creation of conflicts of interest that require us to decline or resign from engagements that we otherwise could have accepted;

 

  the potential need to raise significant amounts of capital to finance a transaction or the potential issuance of equity securities that could be dilutive to our existing stockholders;

 

  increased costs to improve, coordinate or integrate managerial, operational, financial and administrative systems; and

 

  difficulties in integrating diverse backgrounds and experiences of consultants, including if we experience a transition period for newly hired consultants that results in a temporary drop in our utilization rates or margins.

 

If we fail to successfully address these risks, our ability to compete may be impaired.

 

If the number of large bankruptcies continues to decline or other factors cause a decrease in demand for our corporate advisory services, our revenues and profitability could suffer.

 

Our corporate advisory services practice provides various turnaround, restructuring and bankruptcy services to companies in financial distress or their creditors or other stakeholders. This practice accounted for 30.7% and 23.4% of our revenues for the years ended December 31, 2003 and 2004, respectively. We are typically engaged in connection with a bankruptcy case when the bankruptcy is of the size and complexity that generally requires the debtor or other constituents to retain the services of financial advisors. A number of other factors also affect demand for this practice. These factors include:

 

  over-expansion by various businesses;

 

  management’s inability to address critical operational and financial issues;

 

  the level of lending activity and over-leveraging of companies; and

 

  challenging general economic conditions in the United States, which have benefited our corporate advisory services practice since we commenced operations.

 

If the number of large bankruptcies continues to decline or other factors cause a decrease in demand for our corporate advisory services, the revenues from our turnaround, restructuring and bankruptcy services could decline, which could harm our ability to sustain profitability.

 

The profitability of our fixed-fee engagements with clients may not meet our expectations if we underestimate the cost of these engagements.

 

Fixed-fee engagements generated approximately 11.9% and 11.8% of our revenues for the years ended December 31, 2003 and 2004, respectively. When making proposals for fixed-fee engagements, we estimate the costs and timing for completing the engagements. These estimates reflect our best judgment regarding the efficiencies of our methodologies and consultants as we plan to deploy them on engagements. Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed-fee engagements, including delays caused by factors outside our control, could make these contracts less profitable or unprofitable, which would have an adverse effect on our profit margin.

 

Revenues from our performance-based engagements are difficult to predict, and the timing and extent of recovery of our costs is uncertain.

 

From time to time, primarily in our corporate advisory services and strategic sourcing practices, we enter into engagement agreements under which our fees include a significant performance-based component. Performance-based fees are contingent on the achievement of specific measures, such as our clients meeting cost-saving or other contractually defined goals. The achievement of these contractually-defined goals is often impacted by factors outside of our control, such as the actions of our client or third parties. Because performance-based fees are contingent, revenues on such engagements, which are recognized when all revenue recognition criteria are met, are not certain and the timing of receipt is difficult to predict and may not occur evenly throughout the year. While performance-based fees comprised 3.3% and 5.1% of our revenues for the years ended December 31, 2003 and 2004, respectively, we intend to continue to enter into performance-based fee

 

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arrangements and these engagements may impact our revenues to a greater extent in the future. Should performance-based fee arrangements represent a greater percentage of our business in the future, we may experience increased volatility in our working capital requirements and greater variations in our quarter-to-quarter results, which could affect the price of our common stock. In addition, an increase in the proportion of performance-based fee arrangements may offset the positive effect on our operating results from increases in our utilization rate or average billing rate per hour.

 

Conflicts of interest could preclude us from accepting engagements thereby causing decreased utilization and revenues.

 

We provide services in connection with bankruptcy proceedings and litigation proceedings that usually involve sensitive client information and frequently are adversarial. In connection with bankruptcy proceedings, we are required by law to be “disinterested” and in litigation we would generally be prohibited from performing services in the same litigation for the party adverse to our client. In addition, our engagement agreement with a client or other business reasons may preclude us from accepting engagements with our clients’ competitors or adversaries. As we increase the size of our operations, the number of conflict situations can be expected to increase. Moreover, in many industries in which we provide services, there has been a continuing trend toward business consolidations and strategic alliances. These consolidations and alliances reduce the number of companies that may seek our services and increase the chances that we will be unable to accept new engagements as a result of conflicts of interest. If we are unable to accept new engagements for any reason, our consultants may become underutilized, which would adversely affect our revenues and results of operations in future periods.

 

Expanding our service offerings or number of offices may not be profitable.

 

We may choose to develop new service offerings or open new offices because of market opportunities or client demands. Developing new service offerings involves inherent risks, including:

 

  our inability to estimate demand for the new service offerings;

 

  competition from more established market participants;

 

  a lack of market understanding; and

 

  unanticipated expenses to recruit and hire qualified consultants and to market our new service offerings.

 

In addition, expanding into new geographic areas and/or expanding current service offerings is challenging and may require integrating new employees into our culture as well as assessing the demand in the applicable market. For example, in August 2003, we established a small office in Palo Alto, California to service the Silicon Valley marketplace and, in September 2003, we established a small office in Miami, Florida to deepen our corporate finance capabilities. These offices did not meet our expectations and, therefore, we subsequently closed those offices and incurred a restructuring charge of $2.1 million in 2004. Also in 2004, we decided to eliminate a service offering of a practice area in our operational consulting segment that was not meeting our expectations and incurred a restructuring charge of $1.3 million. If we cannot manage the risks associated with new service offerings or new locations effectively, we are unlikely to be successful in these efforts, which could harm our ability to sustain profitability and our business prospects.

 

Our engagements could result in professional liability, which could be very costly and hurt our reputation.

 

Our engagements typically involve complex analyses and the exercise of professional judgment. As a result, we are subject to the risk of professional liability. If a client questions the quality of our work, the client could threaten or bring a lawsuit to recover damages or contest its obligation to pay our fees. Litigation alleging that we performed negligently or breached any other obligations to a client could expose us to significant legal liabilities and, regardless of outcome, is often very costly, could distract our management and could damage our reputation. We are not always able to include provisions in our engagement agreements that are designed to limit our exposure to legal claims relating to our services. Even if these limiting provisions are included in an engagement agreement, they may not protect us or may not be enforceable under some circumstances. In addition, we carry professional liability insurance to cover many of these types of claims, but the policy limits and the breadth of coverage may be inadequate to cover any particular claim or all claims plus the cost of legal defense. For example, we provide services on engagements in which the impact on a client may substantially exceed the limits of our errors and omissions insurance coverage. If we are found to have professional liability with respect to work performed on such an engagement, we may not have sufficient insurance to cover the entire liability.

 

Our intellectual property rights in our “Huron Consulting Group” name are important, and any inability to use that name could negatively impact our ability to build brand identity.

 

We believe that establishing, maintaining and enhancing the “Huron Consulting Group” name is important to our business. We are, however, aware of a number of other companies that use names containing “Huron.” There could be potential trade

 

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name or service mark infringement claims brought against us by the users of these similar names and marks and those users may have trade name or service mark rights that are senior to ours. If another company were to successfully challenge our right to use our name, or if we were unable to prevent a competitor from using a name that is similar to our name, our ability to build brand identity could be negatively impacted.

 

We or some of our consultants could be named in lawsuits because we were founded by former Arthur Andersen LLP partners and professionals and contracted with Arthur Andersen for releases from non-competition agreements.

 

We were founded by a core group of consultants that consisted primarily of former Arthur Andersen LLP partners and professionals, and we entered into a contract with Arthur Andersen to release these partners and professionals from non-competition agreements with Arthur Andersen. These circumstances might lead creditors of Arthur Andersen and other parties to bring claims against us or some of our managing directors or other consultants seeking recoveries for liabilities of Arthur Andersen and we may not be able to successfully avoid liability for such claims. In addition, litigation of this nature or otherwise could divert the time and attention of our managing directors and consultants, and we could incur substantial defense costs.

 

As a holding company, we are totally dependent on distributions from our operating subsidiary to pay dividends or other obligations and there may also be other restrictions on our ability to pay dividends in the future.

 

We are a holding company with no business operations. Our only significant asset is the outstanding equity interest of our wholly-owned operating subsidiary. As a result, we must rely on payments from our subsidiary to meet our obligations. We currently expect that the earnings and cash flow of our subsidiary will primarily be retained and used by it in its operations, including servicing any debt obligations it may have now or in the future. Accordingly, although we do not anticipate paying any dividends in the foreseeable future, our subsidiary may not be able to generate sufficient cash flow to distribute funds to us in order to allow us to pay future dividends on, or make any distribution with respect to, our common stock. Our future credit facilities, other future debt obligations and statutory provisions may also limit our ability to pay dividends or make any distribution in respect of our common stock.

 

ITEM 2. PROPERTIES.

 

Our principal executive offices are located in Chicago, Illinois, consisting of approximately 62,000 square feet of office space, under a lease that expires in September 2014. We have two five-year renewal options under the lease that will allow us to continue to occupy this office space until May 2024. We also have an ongoing expansion option that allows us to lease additional space at such time as the additional space is available for lease, subject to specified notice and election provisions contained in the lease agreement. This facility accommodates our executive team and corporate departments, as well as consultants in each of our practices. We also occupy leased facilities for our five other core offices located in Boston, Houston, New York City, San Francisco and Washington, D.C., as well as smaller offices located in Charlotte and Los Angeles. We do not own any real property. We believe that our leased facilities are adequate to meet our current needs and that additional facilities are available for lease to meet future needs.

 

ITEM 3. LEGAL PROCEEDINGS.

 

From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this annual report on Form 10-K, we are not a party to or threatened with any litigation or other legal proceeding that, in our opinion, could have a material adverse effect on our business, operating results or financial condition.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

No matters were submitted to a vote of security holders during the fourth quarter of 2004.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Market Information

 

Trading in Huron’s common stock commenced on the NASDAQ National Market on October 13, 2004, under the symbol “HURN.” The table below sets forth, on a per share basis and for the period indicated, the high and low sales prices for Huron’s common stock as reported by the NASDAQ National Market.

 

2004


   High

   Low

Fourth Quarter (October 13, 2004 through December 31, 2004)

   $     24.25    $     18.01

 

Holders

 

As of January 31, 2005, there were 84 holders of record of Huron’s common stock.

 

Dividend Policy

 

On May 12, 2004, we declared a special dividend on each outstanding share of our common stock and 8% preferred stock payable to holders of record on May 25, 2004. We paid the special dividend on June 29, 2004. The 8% preferred stock participated on an as converted basis. The aggregate amount of the dividend was $1.25 million, or $0.09 per share of common stock and $22.18 per share of 8% preferred stock. The payment of the special dividend was funded by our available cash balance and by borrowing availability under our credit agreement, which we repaid the following day. Other than the special dividend, we have not declared or paid any dividends on our common stock since our inception and do not intend to pay any dividends on our common stock in the foreseeable future. We currently expect that we will retain our future earnings, if any, for use in the operation and expansion of our business. Future cash dividends, if any, will be at the discretion of our board of directors and will depend upon, among other things, our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors the board of directors may deem relevant.

 

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ITEM 6. SELECTED FINANCIAL DATA.

 

We have derived the following selected consolidated financial data as of the end of and for the period from March 19, 2002 (inception) to December 31, 2002 and as of and for the years ended December 31, 2003 and 2004 from our audited consolidated financial statements. The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with “Management’s discussion and analysis of financial condition and results of operations” and the consolidated financial statements and related notes included elsewhere in this annual report on Form 10-K.

 

Consolidated statements of operations data

(in thousands, except per share and other operating data):


   Year Ended December 31,

    March 19, 2002
(inception) to
December 31, 2002


 
   2004

   2003

   

Revenues and reimbursable expenses:

                       

Revenues

   $ 159,550    $ 101,486     $ 35,101  

Reimbursable expenses

     14,361      8,808       2,921  
    

  


 


Total revenues and reimbursable expenses

     173,911      110,294       38,022  

Direct costs and reimbursable expenses:

                       

Direct costs

     92,270      69,374       26,055  

Stock-based compensation expense

     978      27       —    

Reimbursable expenses

     14,281      8,929       2,921  
    

  


 


Total direct costs and reimbursable expenses

     107,529      78,330       28,976  
    

  


 


Gross profit

     66,382      31,964       9,046  

Operating expenses:

                       

Selling, general and administrative

     40,425      25,171       8,813  

Stock-based compensation expense

     433      14       —    

Depreciation and amortization

     2,365      5,328       3,048  

Restructuring charges

     3,475      —         —    

Management and advisory fees paid to related parties

     —        —         2,750  

Loss on lease abandonment

     —        1,668       —    

Organization costs

     —        —         965  
    

  


 


Total operating expenses

     46,698      32,181       15,576  
    

  


 


Operating income (loss)

     19,684      (217 )     (6,530 )

Other expenses:

                       

Interest expense, net

     692      856       332  

Other

     —        112       1  
    

  


 


Total other expenses

     692      968       333  
    

  


 


Net income (loss) before provision (benefit) for income taxes

     18,992      (1,185 )     (6,863 )

Provision (benefit) for income taxes

     8,128      (122 )     (2,697 )
    

  


 


Net income (loss)

     10,864      (1,063 )     (4,166 )

Accrued dividends on 8% preferred stock

     931      1,066       646  
    

  


 


Net income (loss) attributable to common stockholders

   $ 9,933    $ (2,129 )   $ (4,812 )
    

  


 


Net income (loss) attributable to common stockholders per share (1):

                       

Basic

   $ 0.77    $ (0.18 )   $ (0.41 )

Diluted

   $ 0.72    $ (0.18 )   $ (0.41 )

Weighted average shares used in calculating net income (loss) attributable to common stockholders per share (1):

                       

Basic

     12,820      11,871       11,803  

Diluted

     13,765      11,871       11,803  

Cash dividend per common share (2)

   $ 0.09      —         —    

 

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Other operating data (unaudited):


   Year Ended December 31,

    March 19, 2002
(inception) to
December 31, 2002


 
   2004

    2003

   

Number of consultants (at end of period) (3)

     483       477       262  

Average number of consultants (for the period)

     487       365       247  

Utilization rate (4)

     72.2 %     66.1 %     57.3 %

Average billing rate per hour (5)

   $ 239     $ 217     $ 206  
    

 

As of December 31,


 

Consolidated balance sheet data (in thousands):


   2004

    2003

    2002

 

Cash and cash equivalents

   $ 28,092     $ 4,251     $ 4,449  

Working capital

   $ 42,898     $ 10,159     $ 9,780  

Total assets

   $ 83,219     $ 39,889     $ 26,583  

Long-term debt (consisting of 8% promissory notes)

   $ —       $ 10,076     $ 10,076  

Total 8% preferred stock

   $ —       $ 14,212     $ 13,146  

Total stockholders’ equity (deficit)

   $ 49,233     $ (6,624 )   $ (4,543 )

(1) Adjusted for a 1 for 2.3 reverse stock split effected on October 5, 2004.
(2) On May 12, 2004, we declared a special dividend on each outstanding share of our common stock and 8% preferred stock payable to holders of record on May 25, 2004. We paid the special dividend on June 29, 2004. The 8% preferred stock participated on an as converted basis. The aggregate amount of the dividend was $1.25 million, or $0.09 per share of common stock and $22.18 per share of 8% preferred stock. Other than the special dividend, we have not declared or paid any dividends on our common stock since our inception and do not intend to pay any dividends on our common stock in the foreseeable future.
(3) Consultants consist of our billable professionals.
(4) We calculate the utilization rate for our consultants by dividing the number of hours all of our consultants worked on client assignments during a period by the total available working hours for all of our consultants during the same period, assuming a forty-hour work week, less paid holidays and vacation days.
(5) Average billing rate per hour is calculated by dividing revenues for a period by the number of hours worked on client assignments during the same period.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

OVERVIEW

 

We are an independent provider of financial and operational consulting services. We commenced operations in May 2002 with a core group of experienced financial and operational consultants, composed primarily of former Arthur Andersen LLP partners and professionals. We have grown significantly since we commenced operations, more than doubling the number of our consultants from 213 on May 31, 2002 to 483 as of December 31, 2004. In response to strong demand for our services, we began aggressively hiring consultants in the first quarter of 2003 and added over 200 new consultants during 2003. While this aggressive hiring reduced our 2003 utilization rate (determined by dividing the number of hours all of our consultants worked on client assignments during a period by the total available working hours for all of our consultants during the same period, assuming a forty-hour work week, less paid holidays and vacation days) as we integrated our new hires, we believe the early results of this growth initiative are evident in our financial results. Revenues in 2002 totaled $35.1 million for our first eight months of operations and rose to $101.5 million in 2003, our first full year of operations. Revenues in 2004 totaled $159.6 million, a 57.2% increase from 2003.

 

We provide our services through two segments: Financial Consulting and Operational Consulting. Our Financial Consulting segment provides services that help clients effectively address complex challenges that arise from litigation, disputes, investigations, regulation, financial distress and other sources of significant conflict or change. Our Operational Consulting segment provides services that help clients improve the overall efficiency and effectiveness of their operations, reduce costs, manage regulatory compliance and maximize procurement efficiency.

 

Revenues

 

We derive all of our revenues from providing financial and operational consulting services through three principal types of billing arrangements consisting of time-and-expense, fixed-fee and performance-based. We manage our business on the basis of revenues before reimbursable expenses. We believe this is the most accurate reflection of our consulting services because it eliminates the effect of reimbursable expenses that we bill to our clients at cost.

 

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Since our inception, most of our revenues have been generated from time-and-expense engagements. In time-and-expense engagements, fees are based on the hours incurred at agreed upon billing rates. Time-and-expense engagements represented approximately 83.1% of our revenues in 2004.

 

In fixed-fee engagements, we agree to a pre-established fee in exchange for a pre-determined set of consulting services. We set the fees based on our estimates of the costs and timing for completing the fixed-fee engagements. It is the client’s expectation in these engagements that the pre-established fee will not be exceeded except in mutually agreed upon circumstances. For the year ended December 31, 2004, fixed-fee engagements represented approximately 11.8% of our revenues.

 

Performance-based fee engagements generally tie fees to the attainment of contractually defined objectives. We enter into performance-based engagements in essentially two forms. First, we generally earn fees that are directly related to the savings formally acknowledged by the client as a result of adopting our recommendations for improving cost effectiveness in the procurement area. Second, we have performance-based engagements in which we earn a success fee when and if certain pre-defined outcomes occur. Often this type of success fee supplements time-and-expense or fixed-fee engagements. For example, our revenues for the second quarter of 2004 included a $1.6 million success fee earned on a time-and-expense engagement that included a performance-based component related to the completion of a series of asset sales transactions managed on behalf of a single financial consulting segment client over a two-year period. While performance-based fee revenues represented approximately 5.1% of our revenues in 2004, such revenues in the future may cause significant variations in quarterly revenues and operating results due to the timing of achieving the performance-based criteria.

 

Our quarterly results are impacted principally by our utilization rate, the number of business days in each quarter and the number of our consultants who are available to work. Our utilization rate can be negatively affected by increased hiring because there is generally a transition period for new consultants that results in a temporary drop in our utilization rate. Our utilization rate can also be affected by seasonal variations in the demand for our services from our clients. For example, during the third and fourth quarters of the year, vacations taken by our clients can result in the deferral of spending on existing and new engagements, which would negatively affect our utilization rate. The number of business work days are also affected by the number of vacation days taken by our consultants and holidays in each quarter. We typically have 10% to 15% fewer business work days available in the third and fourth quarters of the year, which can impact revenues during those periods.

 

Reimbursable expenses

 

Reimbursable expenses that are billed to clients, primarily relating to travel and out-of-pocket expenses incurred in connection with engagements, are included in total revenues and reimbursable expenses, and typically an equivalent amount of these expenses are included in total direct costs and reimbursable expenses. The amount of reimbursable expenses included in total revenues and reimbursable expenses may not always correspond with the amount of these expenses included in total direct costs and reimbursable expenses due to the fact that revenues from reimbursable expenses associated with performance-based engagements may be deferred and recognized at a later date when the revenue on these engagements is recognized. This treatment can result in a timing difference between when revenue from reimbursable expenses is recognized and when such expenses are recognized in the statement of operations. Such timing differences are eliminated when the performance-based engagement is completed, as total cumulative revenues from reimbursable expenses will equal the total cumulative reimbursable expenses incurred on the engagement.

 

Direct costs

 

Our most significant expenses are costs classified as direct costs. These direct costs primarily include salaries, performance bonuses, payroll taxes and benefits for consultants, as well as fees paid to independent subcontractors that we retain to supplement consulting personnel, typically on an as needed basis for specific client engagements. Direct costs also include stock-based compensation, which represents the cost of stock option and restricted stock awards granted to our consultants.

 

Operating expenses

 

Our operating expenses include selling, general and administrative expenses, which consist primarily of salaries, performance bonuses, payroll taxes and benefits for non-billable professionals. Also included in this category are other sales and marketing related expenses, rent and other office related expenses, and professional fees. Other operating expenses include depreciation and amortization expense and stock-based compensation, which represents the cost of stock option and restricted stock awards granted to our non-billable professionals.

 

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Segment results

 

Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrative costs that are incurred directly by the segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. These administrative function costs include corporate office support costs, all office facility costs, costs relating to accounting and finance, human resources, legal, marketing, information technology and company-wide business development functions, as well as costs related to overall corporate management.

 

INITIAL PUBLIC OFFERING

 

On October 13, 2004, we completed our initial public offering (“IPO”). In the IPO, we sold 3,333,333 shares of common stock and a selling stockholder, HCG Holdings LLC, sold 1,666,667 shares of common stock at an offering price of $15.50 per share. On October 22, 2004, the underwriters exercised in full their over-allotment option to purchase an additional 750,000 shares of common stock from the selling stockholder. The IPO generated gross proceeds to us of $51.7 million, or $48.0 million net of underwriting discounts. We did not receive any proceeds from the shares sold by the selling stockholder. On October 18, 2004, we used $15.1 million of the net proceeds to redeem the outstanding 8% preferred stock, including cumulative dividends and a liquidation participation amount totaling $2.6 million. Also on October 18, 2004, the Company used $10.7 million of the net proceeds to repay the notes payable to HCG Holdings LLC, including accrued and unpaid interest of $0.6 million. The costs associated with the IPO, which totaled $3.3 million, were paid from the proceeds. We are using the remaining IPO proceeds for general corporate purposes, including working capital. Additionally, immediately prior to the completion of this offering, each outstanding share of Class B common stock automatically converted into a share of Class A common stock and our Class A common stock was renamed to “common stock.”

 

CRITICAL ACCOUNTING POLICIES

 

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The notes to our consolidated financial statements include disclosure of our significant accounting policies. We review our financial reporting and disclosure practices and accounting policies to ensure that our financial reporting and disclosures provide accurate information relative to the current economic and business environment. The preparation of financial statements in conformity with GAAP requires management to make assessments, estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Critical accounting policies are those policies that we believe present the most complex or subjective measurements and have the most potential to impact our financial position and operating results. While all decisions regarding accounting policies are important, we believe that there are four accounting policies that could be considered critical. These critical policies, which are presented in detail in the notes to our financial statements, relate to revenue recognition, the provision for doubtful accounts and unbilled services, valuation of net deferred tax assets and stock-based compensation.

 

Revenue recognition

 

We recognize revenues in accordance with Staff Accounting Bulletin, or SAB, No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue Recognition.” Revenue is recognized when persuasive evidence of an arrangement exists, the related services are provided, the price is fixed and determinable and collectibility is reasonably assured. Our services are primarily rendered under engagements that require the client to pay on a time-and-expense basis. Fees are based on the hours incurred at agreed-upon rates and recognized as services are provided. Revenues related to fixed-fee engagements are recognized based on estimates of work completed versus the total services to be provided under the engagement. Losses, if any, on fixed-fee engagements are recognized in the period in which the loss first becomes probable and reasonably estimable. To date, such losses have not been significant. Revenues related to performance-based engagements are recognized when all performance-based criteria are met. We also have contracts with clients to deliver multiple services that are covered under both individual and separate engagement letters. These arrangements allow for our services to be valued and accounted for on a separate basis. Reimbursable expenses related to time-and-expense and fixed-fee engagements are recognized as revenue in the period in which the expense is incurred. Reimbursable expenses subject to performance-based criteria are recognized as revenue when all performance criteria are met. Direct costs incurred on all types of engagements, including performance-based engagements, are recognized in the period in which incurred.

 

Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services or deferred revenue. Revenues recognized for services performed but not yet billed to clients are recorded as unbilled services.

 

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Amounts billed to clients but not yet recognized as revenues are recorded as deferred revenue. Client prepayments and retainers that are unearned are also classified as deferred revenue and recognized over future periods as earned in accordance with the applicable engagement agreement.

 

Allowances for doubtful accounts and unbilled services

 

We maintain allowances for doubtful accounts and for services performed but not yet billed for estimated losses based on several factors, including the historical percentages of fee adjustments and write-offs by practice group, an assessment of a client’s ability to make required payments and the estimated cash realization from amounts due from clients. The allowances are assessed by management on a regular basis. If the financial condition of a client deteriorates in the future, impacting the client’s ability to make payments, an increase to our allowances might be required or our allowances may not be sufficient to cover actual write-offs.

 

The provision for doubtful accounts and unbilled services is recorded as a reduction in revenue to the extent the provision relates to fee adjustments and other discretionary pricing adjustments. To the extent the provision relates to a client’s inability to make required payments, the provision is recorded in operating expenses.

 

Valuation of net deferred tax assets

 

We have recorded net deferred tax assets as we expect to realize future tax benefits related to the utilization of these assets. Although we experienced net losses early in our history, no valuation allowance has been recorded relating to these deferred tax assets because we believe that it is more likely than not that future taxable income will be sufficient to allow us to utilize these assets. Should we determine in the future that we will not be able to fully utilize all or part of these deferred tax assets, we would need to establish a valuation allowance, which would be recorded as a charge to income in the period the determination was made. While utilization of these deferred tax assets will provide future cash flow benefits, they will not have an effect on future income tax provisions.

 

Stock-based compensation

 

The accounting for stock-based compensation is complex, and under certain circumstances, GAAP allows for alternative methods. As permitted, we account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (“APB 25), “Accounting for Stock Issued to Employees,” and related interpretations and have elected the disclosure option of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123 requires that companies either recognize compensation expense for grants of stock, stock options and other equity instruments based on fair value, or provide pro forma disclosure of net income and earnings per share in the notes to the financial statements. Accordingly, we have measured compensation expense for stock options that we have granted to employees as the excess, if any, of the estimated fair value of our common stock at the date of grant over the exercise price. The calculated stock-based compensation is included as a component of stockholders’ equity and is amortized on a straight-line basis by charges to earnings over the vesting period of the applicable options.

 

Given the lack of a public market for our common stock prior to our IPO, we established an estimated fair value of the common stock as well as the exercise price for the options to purchase this stock. We estimated the fair value of our common stock by evaluating our results of business activities and projections of our future results of operations.

 

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RESULTS OF OPERATIONS

 

The following table sets forth selected segment and consolidated operating results and other operating data for the periods indicated. Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrative costs that are incurred directly by the segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment.

 

Segment and Consolidated Operating Results

(in thousands):


   Year Ended December 31,

    Mar. 19, 2002
(inception) to
Dec. 31, 2002


 
   2004

    2003

   

Revenues and reimbursable expenses:

                        

Financial Consulting revenues

   $ 95,476     $ 69,941     $ 22,400  

Operational Consulting revenues

     64,074       31,545       12,701  
    


 


 


Total revenues

     159,550       101,486       35,101  

Total reimbursable expenses

     14,361       8,808       2,921  
    


 


 


Total revenues and reimbursable expenses

   $ 173,911     $ 110,294     $ 38,022  
    


 


 


Operating income (loss):

                        

Financial Consulting

   $ 36,258     $ 22,011     $ 3,912  

Operational Consulting

     21,116       5,383       3,527  
    


 


 


Total segment operating income

     57,374       27,394       7,439  

Unallocated corporate costs

     31,417       20,601       7,206  

Depreciation and amortization expense

     2,365       5,328       3,048  

Other operating expenses

     3,908       1,682       3,715  
    


 


 


Total operating expenses

     37,690       27,611       13,969  
    


 


 


Operating income (loss)

   $ 19,684     $ (217 )   $ (6,530 )
    


 


 


Other Operating Data

                        

Number of consultants (at period end) (1):

                        

Financial Consulting

     274       290       172  

Operational Consulting

     209       187       90  
    


 


 


Total

     483       477       262  

Average number of consultants (for the period):

                        

Financial Consulting

     286       227       163  

Operational Consulting

     201       138       84  
    


 


 


Total

     487       365       247  

Utilization rate (2):

                        

Financial Consulting

     72.0 %     66.8 %     55.7 %

Operational Consulting

     72.5 %     65.0 %     60.5 %

Total

     72.2 %     66.1 %     57.3 %

Average billing rate per hour (3):

                        

Financial Consulting

   $ 254     $ 233     $ 212  

Operational Consulting

   $ 220     $ 189     $ 195  

Total

   $ 239     $ 217     $ 206  

(1) Consultants consist of our billable professionals.
(2) We calculate the utilization rate for our consultants by dividing the number of hours all our consultants worked on client assignments during a period by the total available working hours for all of our consultants during the same period, assuming a forty-hour work week, less paid holidays and vacation days.
(3) Average billing rate per hour is calculated by dividing revenues for a period by the number of hours worked on client assignments during the same period.

 

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Year ended December 31, 2004 compared to year ended December 31, 2003

 

Revenues

 

Revenues increased $58.1 million, or 57.2%, to $159.6 million for the year ended December 31, 2004 from $101.5 million for the year ended December 31, 2003. Revenues from time-and-expense engagements increased $46.5 million, or 54.0%, to $132.6 million for the year ended December 31, 2004 from $86.1 million for the year ended December 31, 2003. Revenues from fixed-fee engagements increased $6.7 million, or 55.4%, to $18.8 million for the year ended December 31, 2004 from $12.1 million for the year ended December 31, 2003. Revenues from performance-based engagements increased $4.9 million, or 148.5%, to $8.2 million for the year ended December 31, 2004 from $3.3 million for the year ended December 31, 2003.

 

The overall $58.1 million increase in revenues resulted from a $32.3 million increase in revenues attributable to an increase in billable hours associated with new and existing client engagements and the hiring of additional consultants, a $16.7 million increase in revenues attributable to an increase in the average billing rate per hour and a $9.1 million increase in revenues attributable to an increase in our utilization rate. The average number of consultants increased to 487 for the year ended December 31, 2004 from 365 for the year ended December 31, 2003 as we added a substantial number of consultants during the second half of 2003 to meet growing demand for our services and position us for future growth. The average billing rate per hour increased 10.1% to $239 for the year ended December 31, 2004 from $217 for the year ended December 31, 2003. In addition, our utilization rate increased to 72.2% for the year ended December 31, 2004 from 66.1% in the year ended December 31, 2003.

 

Direct costs

 

Our direct costs increased $22.9 million, or 33.0%, to $92.3 million in the year ended December 31, 2004 from $69.4 million in the year ended December 31, 2003. This increase in cost was primarily attributable to the increase in the average number of consultants described above. We expect direct costs will continue to increase in the near term as we focus primarily on hiring additional managers, associates and analysts to expand support for our existing practices and better leverage the managing directors and directors that we hired in 2003.

 

Stock-based compensation expense increased to $1.0 million primarily due to the issuance of employee stock option awards with a higher intrinsic value during the first quarter of 2004 and the granting of restricted common stock awards. On October 12, 2004, immediately prior to our IPO, we granted stock-based compensation awards to certain employees and each of our independent directors.

 

    We granted a total of 767,700 shares of restricted common stock to certain employees. Compensation expense for the restricted common stock is based on the market value of the shares awarded at the date of grant and is amortized on a straight-line basis over the vesting period of four years. Compensation expense relating to these awards totaled $0.6 million in the year ended December 31, 2004.

 

    We granted to certain employees options exercisable for 75,370 shares of our common stock and to our independent directors options exercisable for 51,612 shares of our common stock. The exercise price of these options is $15.50 per share and equals the market value of our common stock on the date of grant. As such, there is no compensation expense relating to these options.

 

As a result of the grant of restricted common stock awards, annual stock-based compensation expense will increase in the future as vesting occurs. Also, as a result of new accounting rules, we will begin to account for outstanding stock option awards and new stock option awards under the fair value method pursuant to SFAS No. 123 (revised 2004), “Share-Based Payment,” in the third quarter of 2005. See “Recent Accounting Pronouncements” below.

 

Operating expenses

 

Selling, general and administrative expenses increased $15.2 million, or 60.3%, to $40.4 million in the year ended December 31, 2004 from $25.2 million in the year ended December 31, 2003. The increase was due in part to an increase in the average number of non-billable professionals to 113 for the year ended December 31, 2004 from 76 for the year ended December 31, 2003 and their related compensation and benefit costs of $16.5 million in the year ended December 31, 2004 compared to $9.0 million in the year ended December 31, 2003. Selling, general and administrative expenses in the year ended December 31, 2004 also included severance charges totaling $1.8 million as we eliminated the positions of certain managing directors and other senior level consultants. Severance charges included the settling of contractual obligations with certain managing directors. The remaining increase in selling, general and administrative expenses in 2004 compared to 2003 was due to increases in rent and other facility costs, promotion and marketing costs, and other administrative costs associated with the general growth in our business activity, as well as costs incurred to establish an infrastructure to support a public company. We expect operating expenses will continue to increase in the future in response to ongoing growth in our business activity and new costs associated with being a public company.

 

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Depreciation expense increased $0.8 million, or 50.0%, to $2.4 million in the year ended December 31, 2004 from $1.6 million in the year ended December 31, 2003 as computers, furniture and fixtures, and leasehold improvements were added to support our increase in employees. There was no amortization expense in 2004 compared to $3.7 million in the year ended December 31, 2003. The amortization expense in 2003 related to $5.5 million in intangible costs paid in 2002 to obtain the release of certain of our employees from non-competition agreements with Arthur Andersen LLP, their former employer, and the related assumption of $0.8 million in liabilities, both of which were fully amortized by December 31, 2003.

 

Other operating expenses in 2004 consisted of a $2.1 million pre-tax restructuring charge associated with the closing of two small, underperforming offices in Miami, Florida and Palo Alto, California. The charge consisted of approximately $2.0 million for severance payments for the ten employees formerly employed at these locations, which were paid by April 30, 2004, and $0.1 million for office lease payments, which were paid by August 31, 2004. Other operating expenses also included a $1.3 million pre-tax restructuring charge as we decided to eliminate a service offering of a practice area in the operational consulting segment that was not meeting our expectations.

 

Other operating expenses in the year ended December 31, 2003 consisted of a $1.7 million charge for the loss associated with the abandonment of an office lease.

 

Operating income (loss)

 

Operating income in the year ended December 31, 2004 was $19.7 million compared to an operating loss of $0.2 million in the year ended December 31, 2003. The increase in operating income was primarily due to revenue growing at a higher rate as compared to the growth in direct costs and operating expenses. Operating margin, which is defined as operating income expressed as a percentage of revenues, was 12.2% in the year ended December 31, 2004.

 

Segment results

 

Financial Consulting

 

Revenues

 

Financial Consulting segment revenues increased $25.6 million, or 36.6%, to $95.5 million for the year ended December 31, 2004 from $69.9 million for the year ended December 31, 2003. Revenues from time-and-expense engagements increased $23.6 million, or 36.8%, to $87.8 million for the year ended December 31, 2004 from $64.2 million for the year ended December 31, 2003. Revenues from fixed-fee engagements increased $1.1 million, or 22.4%, to $6.0 million for the year ended December 31, 2004 from $4.9 million for the year ended December 31, 2003. Revenues from performance-based engagements increased $0.9 million, or 112.5%, to $1.7 million for the year ended December 31, 2004 from $0.8 million for the year ended December 31, 2003. Performance-based fee revenues for the year ended December 31, 2004 consisted of a $1.6 million success fee recognized in the second quarter relating to the successful completion of a series of asset sales transactions managed on behalf of a single client over a two-year period.

 

The overall $25.6 million increase in revenues resulted from a $12.6 million increase in revenues attributable to an increase in billable hours associated with new and existing client engagements and the hiring of additional consultants, a $7.6 million increase in revenues attributable to an increase in the average billing rate per hour and a $5.4 million increase in revenues attributable to an increase in our utilization rate. The average number of consultants increased to 286 for the year ended December 31, 2004 from 227 for the year ended December 31, 2003 as we added a substantial number of consultants across all of our practices to meet growing demand for our services. The average billing rate per hour increased 9.0% to $254 for the year ended December 31, 2004 from $233 for the year ended December 31, 2003. In addition, our utilization rate increased to 72.0% for the year ended December 31, 2004 from 66.8% for the year ended December 31, 2003.

 

Operating income

 

Financial Consulting segment operating income increased $14.3 million, or 65.0%, to $36.3 million in the year ended December 31, 2004 from $22.0 million in the year ended December 31, 2003. Segment operating margin improved to 38.0% in the year ended December 31, 2004 from 31.5% in the year ended December 31, 2003, primarily as a result of the increase in revenues discussed above, partially offset by an increase in direct costs in 2004.

 

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Operational Consulting

 

Revenues

 

Operational Consulting segment revenues increased $32.6 million, or 103.5%, to $64.1 million for the year ended December 31, 2004 from $31.5 million for the year ended December 31, 2003. Revenues from time-and-expense engagements increased $22.9 million, or 104.6%, to $44.8 million for the year ended December 31, 2004 from $21.9 million for the year ended December 31, 2003. Revenues from fixed-fee engagements increased $5.6 million, or 77.8%, to $12.8 million for the year ended December 31, 2004 from $7.2 million for the year ended December 31, 2003. Revenues from performance-based engagements increased $4.1 million, or 170.8%, to $6.5 million for the year ended December 31, 2004 from $2.4 million for the year ended December 31, 2003.

 

The overall $32.6 million increase in revenues resulted from an $19.9 million increase in revenues attributable to an increase in billable hours associated with new and existing client engagements and the hiring of additional consultants, a $9.1 million increase in revenues attributable to an increase in the average billing rate per hour and a $3.6 million increase in revenues attributable to an increase in our utilization rate. The average number of consultants increased to 201 for the year ended December 31, 2004 from 138 for the year ended December 31, 2003. The average billing rate per hour increased 16.4% to $220 for the year ended December 31, 2004 from $189 for the year ended December 31, 2003. Our utilization rate of 72.5% for the year ended December 31, 2004 was up from 65.0% for the year ended December 31, 2003.

 

Operating income

 

Operational Consulting segment operating income increased $15.7 million, or 290.7%, to $21.1 million in the year ended December 31, 2004 from $5.4 million in the year ended December 31, 2003. Segment operating margin increased to 33.0% in the year ended December 31, 2004 from 17.1% in the year ended December 31, 2003, primarily due to the increase in revenues discussed above, partially offset by an increase in direct costs in 2004, as well as investments made during 2003 to start a new practice and expand our capabilities in an existing practice in this segment.

 

Year ended December 31, 2003 compared to period from March 19, 2002 (inception) through December 31, 2002

 

Revenues

 

Revenues increased $66.4 million, or 189.2%, to $101.5 million for the year ended December 31, 2003 from $35.1 million for the partial year ended December 31, 2002. Revenues from time-and-expense engagements increased $55.6 million, or 182.3%, to $86.1 million for the year ended December 31, 2003 from $30.5 million for the partial year ended December 31, 2002. Revenues from fixed-fee engagements increased $8.0 million, or 195.1%, to $12.1 million for the year ended December 31, 2003 from $4.1 million for the partial year ended December 31, 2002. Revenues from performance-based engagements increased $2.8 million to $3.3 million for the year ended December 31, 2003 from $0.5 million for the partial year ended December 31, 2002.

 

The overall $66.4 million increase in revenues resulted from a $55.9 million increase in revenues attributable to an increase in billable hours associated with the hiring of additional consultants and 2003 having twelve months of operations versus the first eight months of our operations in the 2002 period, a $5.1 million increase in revenues attributable to an increase in the average billing rate per hour and a $5.4 million increase in revenues attributable to an increase in our utilization rate. The average number of consultants increased to 365 for the year ended December 31, 2003 from 247 for the partial year ended December 31, 2002 as we added a substantial number of consultants across all of our practices to meet growing demand for our services. The average billing rate per hour increased to $217 for the year ended December 31, 2003 from $206 for the partial year ended December 31, 2002. In addition, our utilization rate increased to 66.1% for the year ended December 31, 2003 from 57.3% in the partial year ended December 31, 2002. Utilization for the year ended December 31, 2003 was influenced by two large time-sensitive engagements involving a large number of consultants.

 

Direct costs

 

Our direct costs increased $43.3 million, or 165.9%, to $69.4 million in the year ended December 31, 2003 from $26.1 million in the partial year ended December 31, 2002. This increase in cost was primarily attributable to the increase in the average number of consultants described above.

 

Operating expenses

 

Selling, general and administrative expenses increased $16.4 million, or 186.4%, to $25.2 million in the year ended December 31, 2003 from $8.8 million in the partial year ended December 31, 2002. The increase was due in part to an increase in the average number of non-billable professionals to 76 for the year ended December 31, 2003 from 45 for the partial year ended December 31, 2002 and their related compensation and benefit costs of $9.0 million in the year ended

 

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December 31, 2003 compared to $3.2 million in the partial year ended December 31, 2002. Office and equipment rentals increased to $4.5 million in the year ended December 31, 2003 from $1.1 million in the partial year ended December 31, 2002 as a result of increased office space and other facility costs associated with our quickly growing consultant and administrative workforce.

 

Depreciation expense increased $1.2 million to $1.6 million in the year ended December 31, 2003 from $0.4 million in the partial year ended December 31, 2002 as we added computers and leasehold improvements during 2003 to support our increase in employees. Amortization expense increased $1.1 million to $3.7 million in the year ended December 31, 2003 from $2.6 million in the partial year ended December 31, 2002. The increase in amortization expense was due to the amortization of the $5.5 million in intangible costs paid in 2002 to obtain the release of certain of our employees from non-competition agreements with Arthur Andersen LLP, their former employer, and the related assumption of $0.8 million in liabilities, both of which were fully amortized by December 31, 2003.

 

Other operating expenses in the year ended December 31, 2003 consisted of a $1.7 million charge for the loss associated with the abandonment of an office lease while the partial year ended December 31, 2002 consisted of a $2.5 million expense related to management fees paid to an affiliate of Lake Capital Partners LP, which along with Lake Capital Management LLC controls our parent, HCG Holdings LLC, a $0.2 million expense related to advisory fees paid to an affiliate of PPM America, Inc., which is a member of HCG Holdings LLC, and $1.0 million in other organization costs associated with the formation of our company.

 

Operating loss

 

The operating loss for the year ended December 31, 2003 amounted to $0.2 million as compared to an operating loss of $6.5 million for the partial year ended December 31, 2002.

 

Segment results

 

Financial Consulting

 

Revenues

 

Financial Consulting segment revenues increased $47.5 million, or 212.1%, to $69.9 million for the year ended December 31, 2003 from $22.4 million for the partial year ended December 31, 2002. Revenues from time-and-expense engagements increased $44.4 million, or 224.2%, to $64.2 million for the year ended December 31, 2003 from $19.8 million for the partial year ended December 31, 2002. Revenues from fixed-fee engagements increased $2.3 million, or 88.5%, to $4.9 million for the year ended December 31, 2003 from $2.6 million for the partial year ended December 31, 2002. Revenues from performance-based engagements were $0.8 million for the year ended December 31, 2003, and there were no revenues from performance-based engagements in 2002.

 

The overall $47.5 million increase in revenues resulted from a $36.9 million increase in revenues attributable to an increase in billable hours associated with the hiring of additional consultants and 2003 having twelve months of operations versus the first eight months of our operations in the 2002 period, a $6.1 million increase in revenues attributable to an increase in the average billing rate per hour and a $4.5 million increase in revenues attributable to an increase in our utilization rate. The average number of consultants increased to 227 for the year ended December 31, 2003 from 163 for the partial year ended December 31, 2002 as we added a substantial number of consultants across all of our practices to meet growing demand for our services. The average billing rate per hour increased to $233 for the year ended December 31, 2003 from $212 for the partial year ended December 31, 2002. In addition, our utilization rate of 66.8% for the year ended December 31, 2003 was up from 55.7% for the partial year ended December 31, 2002.

 

Operating income

 

Financial Consulting segment operating income increased $18.1 million, or 464.1%, to $22.0 million in the year ended December 31, 2003 from $3.9 million in the partial year ended December 31, 2002. Segment operating margin improved to 31.5% in the year ended December 31, 2003 from 17.5% in the partial year ended December 31, 2002 due to increased revenues and improved utilization rates of 66.8% for the year ended December 31, 2003 from 55.7% for the partial year ended December 31, 2002.

 

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Operational Consulting

 

Revenues

 

Operational Consulting segment revenues increased $18.8 million, or 148.0%, to $31.5 million for the year ended December 31, 2003 from $12.7 million for the partial year ended December 31, 2002.

 

Revenues from time-and-expense engagements increased $11.4 million, or 108.6%, to $21.9 million for the year ended December 31, 2003 from $10.5 million for the partial year ended December 31, 2002. Revenues from fixed-fee engagements increased $5.7 million to $7.2 million for the year ended December 31, 2003 from $1.5 million for the partial year ended December 31, 2002. Revenues from performance-based engagements increased $1.9 million to $2.4 million for the year ended December 31, 2003 from $0.5 million for the partial year ended December 31, 2002.

 

The overall $18.8 million increase in revenues resulted from an $18.8 million increase in revenues attributable to an increase in billable hours associated with the hiring of additional consultants and 2003 having twelve months of operations versus the first eight months of our operations in the 2002 period and a $1.0 million increase in revenues attributable to an increase in our utilization rate, which were partially offset by a $1.0 million decrease in revenues attributable to a decrease in the average billing rate per hour. The average number of consultants increased to 138 for the year ended December 31, 2003 from 84 for the partial year ended December 31, 2002. Our utilization rate of 65.0% for the year ended December 31, 2003 was up from 60.5% for the partial year ended December 31, 2002. The average billing rate per hour decreased to $189 for the year ended December 31, 2003 from $195 for the partial year ended December 31, 2002.

 

Operating income

 

Operational Consulting segment operating income increased $1.9 million, or 54.3%, to $5.4 million in the year ended December 31, 2003 from $3.5 million in the partial year ended December 31, 2002. Segment operating margin decreased to 17.1% in the year ended December 31, 2003 from 27.8% in the partial year ended December 31, 2002 primarily due to investments made during 2003 to start a new practice and expand our capabilities in an existing practice in this segment. A total of 38 consultants were hired for the new and expanded practices during the course of 2003 and revenue generation lagged our investments in payroll and sales and marketing costs.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary sources of liquidity are cash flows from operations, proceeds generated by our IPO, debt capacity available under our credit facility and available cash reserves. Cash and cash equivalents, consisting of demand deposits and short-term commercial paper, increased $23.8 million, from $4.3 million at December 31, 2003, to $28.1 million at December 31, 2004 primarily due to cash generated by our IPO and growth in our business.

 

Operating activities

 

Cash flows generated by operating activities totaled $12.5 million for the year ended December 31, 2004 and $4.0 million for the year ended December 31, 2003. The increase in cash provided by operations for the year ended December 31, 2004 was primarily attributable to higher revenues and improved financial results due to the general growth in our business. Our operating assets and liabilities consist primarily of receivables from billed and unbilled services, accounts payable and accrued expenses, and accrued payroll and related benefits. The volume of billings and the timing of collections and payments affect these account balances. Receivables from clients and unbilled services increased $11.4 million during the year ended December 31, 2004 primarily due to increased revenues generated and billed. This increase in client balances was substantially offset by a $11.3 million increase in accounts payable and accrued expenses and accrued payroll and related benefits. Accrued payroll and related benefits at December 31, 2004 included $16.3 million of accrued bonuses, which we will pay out in the first quarter of 2005.

 

Cash flow generated by operating activities totaled $4.0 million for the year ended December 31, 2003 compared to cash used in operating activities of $9.8 million for the partial year ended December 31, 2002. The increase in cash provided by operations for the year ended December 31, 2003 was primarily attributable to revenue growth in excess of the growth in operating expenses when compared to the partial year ended December 31, 2002, which had eight months of operations, and various start-up costs associated with the commencement of operations.

 

Investing activities

 

Cash used by investing activities was $6.9 million for the year ended December 31, 2004 and $4.2 million for the year ended December 31, 2003. Use of cash in both periods pertained to the purchase of computer hardware and software, furniture and fixtures and leasehold improvements needed to meet the ongoing needs relating to the hiring of additional

 

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employees and the expansion of office space. We estimate that our capital expenditures in 2005 will be approximately $8.0 million for the purchase of additional computers, furniture and fixtures and leasehold improvements as our business continues to expand.

 

Cash used by investing activities was $4.2 million for the year ended December 31, 2003 and $8.6 million for the partial year ended December 31, 2002. In the partial year ended December 31, 2002, we paid $5.5 million to obtain the release of certain employees from non-competition agreements with Arthur Andersen LLP, their former employer, and $0.8 million of certain related liabilities. In addition, we paid $2.3 million in the partial year ended December 31, 2002 for the purchase of computer hardware and software, furniture and fixtures and leasehold improvements relating to the hiring of employees and establishment of new offices. Capital expenditures for the purchase of property and equipment, including computer hardware and software, furniture and fixtures and leasehold improvements, were the primary use of cash in the year ended December 31, 2003, as business expansion and the hiring of new employees continued during the course of the year.

 

Financing activities

 

Cash provided by financing activities was $18.3 million for the year ended December 31, 2004 primarily due to cash proceeds generated by our IPO, which we used a portion of to redeem the outstanding 8% preferred stock and repay the 8% promissory notes as discussed below. On June 29, 2004, we paid a special dividend to our stockholders. The special dividend was declared on May 12, 2004 for each outstanding share of common stock and 8% preferred stock payable to holders of record on May 25, 2004. The 8% preferred stock participated on an as converted basis. The aggregate amount of the dividend was $1.3 million, or $0.09 per share of common stock and $22.18 per share of 8% preferred stock. The payment of the special dividend was funded by our available cash balance and by borrowing availability under our credit agreement described below, which we repaid the following day.

 

Between April and June 2002, in connection with our initial capitalization, we issued to our parent, HCG Holdings LLC, an aggregate of 12,500 shares of our 8% preferred stock for an aggregate consideration of $12.5 million and an aggregate of approximately 11,281,243 shares of our common stock at a purchase price of $0.02 per share for an aggregate consideration of approximately $0.3 million. Proceeds of approximately $10.1 million were also received from the issuance of 8% promissory notes to HCG Holdings LLC. We had no other borrowings outstanding as of December 31, 2002.

 

Upon the consummation of our IPO on October 18, 2004, we used $15.1 million of our net proceeds from the IPO to redeem the outstanding 8% preferred stock, plus cumulative dividends and a liquidation participation amount totaling $2.6 million. Also on October 18, 2004, we used $10.7 million of our net proceeds from the IPO to repay the 8% promissory notes, including accrued and unpaid interest of $0.6 million.

 

Huron Consulting Services LLC had a bank credit agreement that expired on February 10, 2005 that allowed it to borrow up to the lesser of $15.0 million or the sum of (a) 75% of eligible accounts receivable and (b) the lesser of 30% of unbilled services and $3.0 million. Borrowings under the agreement were limited by any outstanding letters of credit. Borrowings under the credit agreement bore interest at either the prime rate or LIBOR, rounded up to the nearest whole percentage, plus 2.75%, and were secured by substantially all of Huron Consulting Services LLC’s assets. The bank credit agreement included covenants for minimum equity and maximum annual capital expenditures as well as covenants restricting our ability to incur additional indebtedness or engage in certain types of transactions outside of the ordinary course of business. As of December 31, 2004, we were in compliance with the bank credit agreement debt covenants and had no borrowings outstanding. The balance available under the agreement was $13.3 million after the calculation of eligible accounts receivable and unbilled services balances and a reduction of approximately $1.7 million for letters of credit outstanding.

 

Prior to the expiration of the bank credit agreement described above, we established a new facility. The new bank credit agreement, expiring on February 10, 2006, allows us to borrow up to the lesser of $25.0 million or the sum of (a) 85% of eligible accounts receivable and (b) the lesser of 40% of unbilled services and $5.0 million. Borrowings under the agreement will be limited by any outstanding letters of credit, will bear interest at LIBOR plus 1.75%, and will be secured by substantially all of our assets. The bank credit agreement includes covenants for minimum equity and maximum annual capital expenditures, as well as covenants restricting our ability to incur additional indebtedness or engage in certain types of transactions outside of the ordinary course of business.

 

Future needs

 

Our primary financing need has been to fund our growth. Our growth strategy includes hiring additional consultants and expanding our service offerings through existing consultants, new hires or acquisitions. We intend to fund such growth over the next twelve months with funds generated from operations, proceeds from our IPO and borrowing availability under our credit agreement. Because we expect that our future annual growth rate in revenues and related percentage increases in working capital balances will moderate, we believe cash generated from operations and the IPO, supplemented as necessary by borrowings under our credit facility, will be adequate to fund this growth.

 

 

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CONTRACTUAL OBLIGATIONS

 

The following tables represent our obligations and commitments to make future payments under contracts, such as lease agreements, and under contingent commitments as of December 31, 2004 (in thousands).

 

     Less than
1 year


   1-3
years


   4-5
years


   After 5
years


   Total

Operating leases

   $ 4,461    $ 9,149    $ 8,668    $ 14,601    $ 36,879

Purchase obligations

     1,303      49      20      —        1,372
    

  

  

  

  

Total contractual obligations

   $ 5,764    $ 9,198    $ 8,688    $ 14,601    $ 38,251
    

  

  

  

  

 

We lease our facilities and certain equipment under operating lease arrangements expiring on various dates through 2014, with various renewal options. We lease office facilities under noncancelable operating leases that include fixed or minimum payments plus, in some cases, scheduled base rent increases over the term of the lease. Certain leases provide for monthly payments of real estate taxes, insurance and other operating expense applicable to the property. Some of the leases contain provisions whereby the future rental payments may be adjusted for increases in operating expense above the specified amount.

 

Purchase obligations include information technology and telecommunication obligations, as well as other commitments to purchase services where we cannot cancel or would be required to pay a termination fee in the event of cancellation.

 

OFF BALANCE SHEET ARRANGEMENTS

 

We have not entered into any off-balance sheet arrangements.

 

RECENT ACCOUNTING PRONOUNCEMENT

 

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”). This statement requires that the costs of employee share-based payments be measured at fair value on the awards’ grant date using an option-pricing model and recognized in the financial statements over the requisite service period. This statement does not change the accounting for stock ownership plans, which are subject to American Institute of Certified Public Accountants Statement of Position 93-6, “Employer’s Accounting for Employee Stock Ownership Plans.” SFAS No. 123R supersedes APB 25 and its related interpretations, and eliminates the alternative to use APB 25’s intrinsic value method of accounting, which we are currently using. Additionally, SFAS No. 123R amends SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid.

 

SFAS No. 123R allows for two alternative transition methods. The first method is the modified prospective application whereby compensation cost for the portion of awards for which the requisite service has not yet been rendered that are outstanding as of the adoption date will be recognized over the remaining service period. The compensation cost for that portion of awards will be based on the grant-date fair value of those awards as calculated for pro forma disclosures under SFAS No. 123, as originally issued. All new awards and awards that are modified, repurchased, or cancelled after the adoption date will be accounted for under the provisions of SFAS No. 123R. The second method is the modified retrospective application, which requires that we restate prior period financial statements. The modified retrospective application may be applied either to all prior periods or only to prior interim periods in the year of adoption of this statement. We are currently determining which transition method we will adopt and are evaluating the impact SFAS No. 123R will have on our financial position, results of operations, EPS, and cash flows when the statement is adopted.

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are exposed to market risks related to interest rates and changes in the market value of our investments. We do not enter into interest rate caps or collars or other hedging instruments. Our exposure to changes in interest rates is limited to borrowings under the bank credit agreement, which has a variable interest rates tied to the LIBOR or prime rate. We had no borrowings outstanding under our bank credit agreement as of December 31, 2003 and 2004, and, as a result, any change in interest rates would not have a material effect on our financial position or operating results. From time to time, we invest excess cash in marketable securities. These investments principally consist of overnight sweep accounts and short-term commercial paper. Due to the short maturity of our investments and debt obligations, we have concluded that we do not have material market risk exposure.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

The Company’s consolidated financial statements and supplementary data are included in pages F-1 through F-20 of this annual report on Form 10-K.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

Our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2004. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2004, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports we file or submit under the Exchange Act.

 

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the “Exchange Act”) that occurred during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION.

 

None.

 

PART III

 

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

Executive Officers and Directors

 

The information required by this item is incorporated by reference from portions of our definitive proxy statement for our annual meeting of stockholders to be filed with the SEC pursuant to Regulation 14A by April 30, 2005 (the “Proxy Statement”) under “Nominees to Board of Directors,” “Directors Not Standing For Election,” “Executive Officers” and “Board Meetings and Committees.”

 

Compliance with Section 16(a) of the Exchange Act

 

The information required by this item is incorporated by reference from a portion of the Proxy Statement under “Section 16(a) Beneficial Ownership Reporting Compliance.”

 

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Code of Business Conduct and Ethics

 

We have adopted a Code of Business Conduct and Ethics (the “Code”) that is applicable to all our employees, officers and directors. The Code is available on our website at www.huronconsultinggroup.com. If we make any amendments to or grant any waivers from the Code which are required to be disclosed pursuant to the Securities Exchange Act of 1934, we will make such disclosures on our website.

 

ITEM 11. EXECUTIVE COMPENSATION

 

The information required by this item is incorporated by reference from a portion of the Proxy Statement under “Executive Compensation.”

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table summarizes information as of December 31, 2004 with respect to equity compensation plans approved by shareholders. We do not have equity compensation plans that have not been approved by shareholders.

 

Plan Category


   Number of Shares to
be Issued Upon
Exercise of
Outstanding Options


   Weighted-Average
Exercise Price of
Outstanding Options


   Number of Shares
Remaining Available
for Future Issuance
(excluding shares in
1st column)


 

Equity compensation plans approved by shareholders (1):

                  

2002 Equity Incentive Plan

   445,220    $ 0.02    —   (2)

2002 Equity Incentive Plan (California)

   88,597    $ 0.79    —   (2)

2003 Equity Incentive Plan

   1,005,686    $ 1.07    —   (2)

2004 Omnibus Stock Plan

   125,562    $ 15.50    1,194,088  

Equity compensation plans not approved by shareholders:

   N/A      N/A    N/A  
    
  

  

Total

   1,665,065    $ 1.86    1,194,088  
    
  

  


(1) Our equity compensation plans were approved by the existing shareholders prior to our IPO.
(2) Prior to the completion of our IPO, we established the 2004 Omnibus Stock Plan. We terminated the 2002 Equity Incentive Plan, 2002 Equity Incentive Plan (California) and 2003 Equity Incentive Plan and no further awards will be granted under these plans.

 

The other information required by this item is incorporated by reference from a portion of the Proxy Statement under “Stock Ownership of Certain Beneficial Owners and Management.”

 

ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.

 

The information required by this item is incorporated by reference from a portion of the Proxy Statement under “Certain Relationships and Related Transactions.”

 

ITEM 14. PRINCIPAL INDEPENDENT ACCOUNTANT FEES AND SERVICES.

 

The information required by this item is incorporated by reference from a portion of the Proxy Statement under “Audit and Non-Audit Fees.”

 

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PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

 

(a) Documents filed as part of this annual report on Form 10-K.

 

1. Financial Statements – Our independent auditors’ report and consolidated financial statements are listed below and begin on page F-1 of this annual report on Form 10-K.

 

Independent Auditors’ Report

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Stockholders’ Equity (Deficit)

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

 

2. Financial Statement Schedules – The financial statement schedules required by this item are included in the consolidated financial statements and accompanying notes.

 

3. Exhibit Index

 

Exhibit
Number


   

Exhibit Description


3.1     Third Amended and Restated Certificate of Incorporation of Huron Consulting Group Inc. (filed herewith).
3.2 *   Bylaws of Huron Consulting Group Inc.
4.1 *   Specimen Stock Certificate.
10.1 *   Office Lease, dated December 2003, between Union Tower, LLC and Huron Consulting Services LLC (formerly known as HuronConsulting Group LLC).
10.2 *   Senior Management Agreement, effective as of May 13, 2002, between Huron Consulting Services LLC (formerly known as HuronConsulting Group LLC) and Gary E. Holdren.
10.3 *   First Amendment to Senior Management Agreement between Huron Consulting Services LLC (formerly known as Huron Consulting Group LLC) and Gary E. Holdren.
10.4 *   Second Amendment to Senior Management Agreement between Huron Consulting Services LLC (formerly known as Huron Consulting Group LLC) and Gary E. Holdren.
10.5 *   Restricted Shares Award Agreement, dated December 10, 2002, between Huron Consulting Group Inc., Huron Consulting Services LLC (formerly known as Huron Consulting Group LLC), HCG Holdings LLC and Gary E. Holdren.
10.6 *   Restricted Shares Award Agreement, dated December 31, 2002, between Huron Consulting Group Inc. and Gary E. Holdren.
10.7 *   Senior Management Agreement, effective as of August 12, 2002, between Huron Consulting Services LLC (formerly known as Huron Consulting Group LLC) and George E. Massaro.
10.8 *   First Amendment to Senior Management Agreement between Huron Consulting Services LLC (formerly known as Huron Consulting Group LLC) and George E. Massaro.
10.9 *   Senior Management Agreement, effective as of May 15, 2002, between Huron Consulting Services LLC (formerly known as Huron Consulting Group LLC) and Daniel Broadhurst.
10.10 *   First Amendment to Senior Management Agreement between Huron Consulting Services LLC (formerly known as Huron Consulting Group LLC) and Daniel Broadhurst.
10.11 *   Senior Management Agreement, effective as of May 1, 2002, between Huron Consulting Services LLC (formerly known as Huron Consulting Group LLC) and Mary Sawall.
10.12 *   First Amendment to Senior Management Agreement between Huron Consulting Services LLC (formerly known as Huron Consulting Group LLC) and Mary Sawall.
10.13 *   Huron Consulting Group Inc. 2002 Equity Incentive Plan and form of option agreement thereunder.

 

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Table of Contents
10.14 *    Amendment No. 1 to Huron Consulting Group Inc. 2002 Equity Incentive Plan.
10.15 *    Amended and Restated Huron Consulting Group Inc. 2002 Equity Incentive Plan (California) and form of option agreement thereunder.
10.16 *    Huron Consulting Group Inc. 2003 Equity Incentive Plan and form of option agreement thereunder.
10.17 *    Huron Consulting Group Inc. 2004 Omnibus Stock Plan and form of option and restricted stock agreement thereunder.
10.18 *    Second Amended and Restated Secured Revolving Line of Credit Note, dated February 11, 2004, between Huron Consulting Services LLC (formerly known as Huron Consulting Group LLC) and LaSalle Bank, N.A.
10.19 *    Loan and Security Agreement, dated January 31, 2003, between Huron Consulting Services LLC (formerly known as Huron Consulting Group LLC) and LaSalle Bank, N.A., including amendments thereto, dated as of January 28, 2004, February 11, 2004 and May 7, 2004.
10.20      Registration Rights Agreement, dated October 12, 2004, between Huron Consulting Group Inc. and HCG Holdings LLC (filed herewith).
10.21      Management rights letter agreement, dated October 12, 2004, between Huron Consulting Group Inc. and Lake Capital Partners LP (filed herewith).
10.22      Senior Management Agreement, effective as of November 25, 2002, between Huron Consulting Services LLC (formerly known as Huron Consulting Group LLC) and Gary L. Burge (filed herewith).
10.23      First Amendment to Senior Management Agreement between Huron Consulting Services LLC (formerly known as Huron Consulting Group LLC) and Gary L. Burge (filed herewith).
10.24      Executive Officers’ Compensation for 2004 and 2005 Summary Sheet (filed herewith).
10.25      Directors’ Compensation for 2005 Summary Sheet (filed herewith).
10.26      Third Amended and Restated Secured Revolving Line of Credit Note, dated February 10, 2005, between Huron Consulting Group Inc., Huron Consulting Services LLC and LaSalle Bank, N.A. (filed herewith).
10.27      Amended and Restated Loan and Security Agreement between Huron Consulting Group Inc., Huron Consulting Services LLC and LaSalle Bank, N.A., dated as of February 10, 2005 (filed herewith).
21.1 *    List of Subsidiaries of Huron Consulting Group Inc.
23.1      Consent of PricewaterhouseCoopers LLP.
31.1      Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2      Certification of the Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1      Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2      Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Incorporated by reference to the same number exhibit filed with the Registrant’s Registration Statement on Form S-1 (File No. 333-115434).

 

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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, on February 16, 2005.

 

Signature


  

Title


  

Date


/s/ Gary E. Holdren


Gary E. Holdren

  

Chairman, Chief Executive Officer and President

   February 16, 2005

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on February 16, 2005.

 

Signature


  

Title


  

Date


/s/ Gary E. Holdren


Gary E. Holdren

  

Chairman, Chief Executive Officer and President

(Principal Executive Officer)

   February 16, 2005

/s/ George E. Massaro


George E. Massaro

   Chief Operating Officer and Director    February 16, 2005

/s/ Gary L. Burge


Gary L. Burge

  

Vice President, Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer)

   February 16, 2005

/s/ DuBose Ausley


DuBose Ausley

   Director    February 16, 2005

/s/ Deborah A. Bricker


Deborah A. Bricker

   Director    February 16, 2005

/s/ James D. Edwards


James D. Edwards

   Director    February 16, 2005

/s/ John McCartney


John McCartney

   Director    February 16, 2005

/s/ Paul G. Yovovich


Paul G. Yovovich

   Director    February 16, 2005

 

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Table of Contents

HURON CONSULTING GROUP INC.

 

CONSOLIDATED FINANCIAL STATEMENTS

 

INDEX

 

     Page

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets at December 31, 2004 and 2003

   F-3

Consolidated Statements of Operations for the years ended December 31, 2004 and 2003 and the period from March 19, 2002 (inception) to December 31, 2002

   F-4

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2004 and 2003 and the period from March 19, 2002 (inception) to December 31, 2002

   F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003 and the period from March 19, 2002 (inception) to December 31, 2002

   F-6

Notes to Consolidated Financial Statements

   F-7

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

Huron Consulting Group Inc.:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows present fairly, in all material respects, the financial position of Huron Consulting Group Inc. and its subsidiary at December 31, 2004 and 2003, and the results of their operations and their cash flows for the years ended December 31, 2004 and 2003 and the period from March 19, 2002 (inception) to December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

February 14, 2005

 

F-2


Table of Contents

HURON CONSULTING GROUP INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

    

December 31,

2004


   

December 31,

2003


 

Assets

                

Current assets:

                

Cash and cash equivalents

   $ 28,092     $ 4,251  

Receivables from clients, net

     21,750       15,118  

Unbilled services, net

     10,830       7,946  

Income tax receivable

     494       2,286  

Deferred income taxes

     7,919       1,946  

Other current assets

     3,053       837  
    


 


Total current assets

     72,138       32,384  

Property and equipment, net

     8,975       4,498  

Other assets:

                

Deferred income taxes

     1,450       2,333  

Deposits

     656       674  
    


 


Total other assets

     2,106       3,007  
    


 


Total assets

   $ 83,219     $ 39,889  
    


 


Liabilities and stockholders’ equity (deficit)

                

Current liabilities:

                

Accounts payable

   $ 2,809     $ 1,396  

Accrued expenses

     3,334       3,822  

Accrued payroll and related benefits

     20,494       13,914  

Deferred revenue

     2,603       2,273  

Interest payable to HCG Holdings LLC

     —         820  
    


 


Total current liabilities

     29,240       22,225  

Non-current liabilities:

                

Accrued expenses

     598       —    

Deferred lease incentives

     4,148       —    
    


 


Total non-current liabilities

     4,746       —    

Commitments and contingencies

                

Notes payable to HCG Holdings LLC

     —         10,076  

8% preferred stock, $1,000 per share stated value plus accrued 8% annual cumulative dividends; 106,840 shares authorized; 0 and 12,500 shares issued and outstanding at December 31, 2004 and 2003, respectively

     —         14,212  

Stockholders’ equity (deficit)

                

Common stock (previously named Class A common stock)*; $0.01 par value; 500,000,000 shares authorized; 16,364,574 and 11,281,243 shares issued and outstanding at December 31, 2004 and 2003, respectively

     164       259  

Class B common stock (retired in 2004)*; $0.01 par value; 6,486,715 shares authorized; 682,348 shares issued and outstanding at December 31, 2003

     —         16  

Additional paid-in capital

     59,608       42  

Deferred stock-based compensation

     (12,281 )     —    

Retained earnings (deficit)

     1,742       (6,941 )
    


 


Total stockholders’ equity (deficit)

     49,233       (6,624 )
    


 


Total liabilities and stockholders equity (deficit)

   $ 83,219     $ 39,889  
    


 



* Adjusted to reflect a 1 for 2.3 reverse stock split effected on October 5, 2004.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

HURON CONSULTING GROUP INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

    

Year ended

December 31,


   

Mar. 19, 2002

(inception) to

Dec. 31, 2002


 
     2004

   2003

   

Revenues and reimbursable expenses:

                       

Revenues

   $ 159,550    $ 101,486     $ 35,101  

Reimbursable expenses

     14,361      8,808       2,921  
    

  


 


Total revenues and reimbursable expenses

     173,911      110,294       38,022  

Direct costs and reimbursable expenses:

                       

Direct costs

     92,270      69,374       26,055  

Stock-based compensation expense

     978      27       —    

Reimbursable expenses

     14,281      8,929       2,921  
    

  


 


Total direct costs and reimbursable expenses

     107,529      78,330       28,976  
    

  


 


Gross profit

     66,382      31,964       9,046  

Operating expenses:

                       

Selling, general and administrative

     40,425      25,171       8,813  

Stock-based compensation expense

     433      14       —    

Depreciation and amortization

     2,365      5,328       3,048  

Restructuring charges

     3,475      —         —    

Loss on lease abandonment

     —        1,668       —    

Management and advisory fees paid to related parties

     —        —         2,750  

Organizational costs

     —        —         965  
    

  


 


Total operating expenses

     46,698      32,181       15,576  
    

  


 


Operating income (loss)

     19,684      (217 )     (6,530 )

Other expenses:

                       

Interest expense, net

     692      856       332  

Other

     —        112       1  
    

  


 


Total other expenses

     692      968       333  
    

  


 


Net income (loss) before provision (benefit) for income taxes

     18,992      (1,185 )     (6,863 )

Provision (benefit) for income taxes

     8,128      (122 )     (2,697 )
    

  


 


Net income (loss)

     10,864      (1,063 )     (4,166 )

Accrued dividends on 8% preferred stock

     931      1,066       646  
    

  


 


Net income (loss) attributable to common stockholders

   $ 9,933    $ (2,129 )   $ (4,812 )
    

  


 


Net income (loss) attributable to common stockholders per share*:

                       

Basic

   $ 0.77    $ (0.18 )   $ (0.41 )

Diluted

   $ 0.72    $ (0.18 )   $ (0.41 )

Weighted average shares used in calculating net income (loss) attributable to common stockholders per share*:

                       

Basic

     12,820      11,871       11,803  

Diluted

     13,765      11,871       11,803  

* Adjusted to reflect a 1 for 2.3 reverse stock split effected on October 5, 2004.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

HURON CONSULTING GROUP INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

 

   

Common Stock

(previously named

Class A Common

Stock)


   

Class B

Common Stock

(retired in 2004)


    Stock
Subscription
Receivable


    Additional
Paid-In
Capital


  Deferred
Stock-based
Compen-
sation


    Retained
Earnings
(Deficit)


    Stockholders’
Equity
(Deficit)


 
    Shares*

  Amount

    Shares*

    Amount

           

Balance at March 19, 2002 (inception)

  —     $ —       —       $ —       $ —       $ —     $ —       $ —       $ —    

Net loss

                                                    (4,166 )     (4,166 )

Issuance of Class A common stock

  11,281,243     259                                                   259  

Issuance of Class B common stock

              521,740       12                                     12  

Stock subscription receivable

                              (2 )                           (2 )

Accrued dividends on 8% preferred stock

                                                    (646 )     (646 )
   
 


 

 


 


 

 


 


 


Balance at December 31, 2002

  11,281,243     259     521,740       12       (2 )     —       —         (4,812 )     (4,543 )

Net loss

                                                    (1,063 )     (1,063 )

Exercise of stock options

              160,608       4                                     4  

Stock option compensation

                                      42                     42  

Stock subscription receivable

                              2                             2  

Accrued dividends on 8% preferred stock

                                                    (1,066 )     (1,066 )
   
 


 

 


 


 

 


 


 


Balance at December 31, 2003

  11,281,243     259     682,348       16       —         42     —         (6,941 )     (6,624 )

Net income

                                                    10,864       10,864  

Dividends paid

                                                    (1,250 )     (1,250 )

Issuance of common stock in connection with:

                                                               

Initial public offering, net of offering costs

  3,333,333     33                             44,696                     44,729  

Restricted stock awards, net of cancellations

  821,350     8                             12,976     (12,984 )             —    

Exercise of stock options

  29,846           216,454       2               51                     53  

Stock-based compensation

                                      709     703               1,412  

Income tax benefit on stock-based compensation

                                      980                     980  

1 for 2.3 reverse stock split

        (145 )           (9 )             154                     —    

Conversion of Class B common stock to common stock

  898,802     9     (898,802 )     (9 )                                   —    

Accrued dividends on 8% preferred stock

                                                    (931 )     (931 )
   
 


 

 


 


 

 


 


 


Balance at December 31, 2004

  16,364,574   $ 164     —       $ —       $ —       $ 59,608   $ (12,281 )   $ 1,742     $ 49,233  
   
 


 

 


 


 

 


 


 



* Adjusted for a 1 for 2.3 reverse stock split effected on October 5, 2004.

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

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Table of Contents

HURON CONSULTING GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

    

Year ended

December 31,


    Mar. 19, 2002
(inception) to
Dec. 31, 2002


 
     2004

    2003

   

Cash flows from operating activities:

                        

Net income (loss)

   $ 10,864     $ (1,063 )   $ (4,166 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

                        

Depreciation and amortization

     2,365       5,328       3,048  

Loss on long-term deposits

     —         111       —    

Deferred income taxes

     (5,090 )     (1,568 )     (2,710 )

Stock-based compensation expense

     1,412       42       —    

Tax benefit from stock options exercised

     980       —         —    

Allowances for doubtful accounts and unbilled services

     1,873       1,410       382  

Changes in operating assets and liabilities:

                        

Increase in receivables from clients

     (7,943 )     (9,711 )     (6,441 )

Increase in unbilled services

     (3,446 )     (2,198 )     (6,506 )

Decrease (increase) in income tax receivable, net

     2,741       (2,286 )     —    

Increase in other current assets and other

     (2,114 )     (449 )     (388 )

Decrease (increase) in deposits

     18       98       (883 )

Increase in accounts payable and accrued expenses

     4,721       3,661       1,557  

Increase in accrued payroll and related benefits

     6,580       9,289       4,625  

(Decrease) increase in interest payable to HCG Holdings LLC

     (820 )     477       343  

Increase in deferred revenue

     330       893       1,380  
    


 


 


Net cash provided by (used in) operating activities

     12,471       4,034       (9,759 )
    


 


 


Cash flows from investing activities:

                        

Purchase of property and equipment, net

     (6,943 )     (4,179 )     (2,312 )

Acquisition of intangibles

     —         (60 )     (6,324 )
    


 


 


Net cash used in investing activities

     (6,943 )     (4,239 )     (8,636 )
    


 


 


Cash flows from financing activities:

                        

Proceeds from issuance of common stock (previously named Class A common stock), net of offering costs

     44,729       —         259  

Proceeds from issuance of Class B common stock

     —         3       9  

Proceeds from (redemption) issuance of 8% preferred stock

     (12,500 )     —         12,500  

Payment of accrued dividends on 8% preferred stock

     (2,643 )     —         —    

Proceeds from exercise of stock options

     53       4       —    

Proceeds from borrowings under line of credit

     37,200       19,175       —    

Repayments on line of credit

     (37,200 )     (19,175 )     —    

(Redemption of) proceeds from notes issued to HCG Holdings LLC

     (10,076 )     —         10,076  

Dividends paid on common stock

     (1,250 )     —         —    
    


 


 


Net cash provided by financing activities

     18,313       7       22,844  
    


 


 


Net increase (decrease) in cash and cash equivalents

     23,841       (198 )     4,449  

Cash and cash equivalents:

                        

Beginning of the period

     4,251       4,449       —    
    


 


 


End of the period

   $ 28,092     $ 4,251     $ 4,449  
    


 


 


Noncash transaction:

                        

Accrued dividends on 8% preferred stock

   $ 931     $ 1,066     $ 646  

Supplemental disclosure of cash flow information:

                        

Cash paid for interest

   $ 1,647     $ 417     $ —    

Cash paid for taxes

   $ 9,497     $ 3,736     $ —    

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

HURON CONSULTING GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in thousands, except per share amounts)

 

1. Description of Business

 

Huron Consulting Group Inc. was formed on March 19, 2002. Huron Consulting Group Inc., together with its wholly owned subsidiary, Huron Consulting Services LLC, (collectively the “Company”), is an independent provider of financial and operational consulting services, whose clients include Fortune 500 companies, medium-sized and large businesses, leading academic institutions, healthcare organizations and the law firms that represent these various organizations. The Company is a majority owned subsidiary of HCG Holdings LLC. On October 13, 2004, the Company completed its initial public offering (“IPO”) of shares of its common stock (see Note 10).

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements reflect the results of operations and cash flows for the years ended December 31, 2004 and 2003 and the period from March 19, 2002 (inception) to December 31, 2002.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Huron Consulting Group Inc. and its wholly owned subsidiary, Huron Consulting Services LLC. All material intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts that are reported in the consolidated financial statements and accompanying disclosures. Actual results may differ from these estimates.

 

Reclassifications

 

Certain amounts reported in previous years have been reclassified to conform to the 2004 presentation.

 

Revenue Recognition

 

The Company recognizes revenues in accordance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue Recognition” when persuasive evidence of an arrangement exists, the related services are provided, the price is fixed and determinable and collectibility is reasonably assured. These services are primarily rendered under arrangements that require the client to pay on a time-and-expense basis. Fees are based on the hours incurred at agreed-upon rates and recognized as services are provided. Revenues related to fixed-fee engagements are recognized based on estimates of work completed versus the total services to be provided under the engagement. Losses, if any, on fixed-fee engagements are recognized in the period in which the loss first becomes probable and reasonably estimable. The Company also earns revenues on a performance-based fee basis and recognizes such revenues when all performance criteria are met. The Company also has contracts with clients to deliver multiple services that are covered under both individual and separate engagement letters. These arrangements allow for the Company’s services to be valued and accounted for on a separate basis. Direct costs incurred on engagements, including performance-based fee engagements, are expensed in the period incurred.

 

Provisions are recorded for the estimated realization adjustments on all engagements, including engagements for which fees are subject to review by the bankruptcy courts. Expense reimbursements that are billable to clients are included in total revenues and reimbursable expenses, and typically an equivalent amount of reimbursable expenses are included in total direct costs and reimbursable expenses. Reimbursable expenses related to time-and-expense and fixed-fee engagements are recognized as revenue in the period in which the expense is incurred. Reimbursable expenses subject to performance-based criteria are recognized as revenue when all performance criteria are met.

 

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Table of Contents

Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services or deferred revenue in the accompanying consolidated balance sheets. Revenues recognized for services performed but not yet billed to clients have been recorded as unbilled services. Client prepayments and retainers are classified as deferred (i.e., unearned) revenue and recognized over future periods as earned in accordance with the applicable engagement agreement.

 

Allowances for Doubtful Accounts and Unbilled Services

 

The Company maintains allowances for doubtful accounts and for services performed but not yet billed for estimated losses based on several factors, including the historical percentages of fee adjustments and write-offs by practice group, an assessment of a client’s ability to make required payments and the estimated cash realization from amounts due from clients. The allowances are assessed by management on a regular basis.

 

The provision for doubtful accounts and unbilled services is recorded as a reduction in revenue to the extent the provision relates to fee adjustments and other discretionary pricing adjustments. To the extent the provision relates to a client’s inability to make required payments, the provision is recorded in operating expenses.

 

Direct Costs and Reimbursable Expenses

 

Direct costs and reimbursable expenses consists primarily of billable employee compensation and their related benefit costs, the cost of outside consultants or subcontractors assigned to revenue generating activities and direct expenses to be reimbursed by clients.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments, including overnight investments and commercial paper, with original maturities of three months or less to be cash equivalents.

 

Concentrations of Credit Risk

 

To the extent receivables from clients become delinquent, collection activities commence. No single client balance is considered large enough to pose a significant credit risk. The allowances for doubtful accounts and unbilled services are based upon the expected ability to collect accounts receivable and bill and collect unbilled services. Management does not anticipate incurring losses on accounts receivable in excess of established allowances.

 

Fair Value of Financial Instruments

 

Cash and cash equivalents are stated at cost, which approximates fair market value. The carrying values for receivables from clients, unbilled services, accounts payable, deferred revenue and other accrued liabilities reasonably approximate fair market value due to the nature of the financial instrument and the short term maturity of these items.

 

Property and Equipment

 

Property and equipment is stated at cost, less accumulated depreciation. Depreciation of property and equipment is computed on a straight-line basis over the estimated useful life of the asset. Software, computers and related equipment are depreciated over an estimated useful life of 2 to 3 years. Furniture and fixtures are depreciated over 5 years. Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the initial term of the lease.

 

Long-Lived Assets

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment of Long-Lived Assets.” No impairment charges were recorded in 2004, 2003 and 2002.

 

Intangible Assets

 

The Company accounts for intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” This standard requires that certain identifiable intangible assets be amortized over their expected useful lives.

 

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Table of Contents

Non-Current Liabilities

 

The Company records certain liabilities that are expected to be settled over a period that exceeds one year as non-current liabilities. The Company has recorded in accrued expenses the loss on abandonment of one of its leases as a non-current liability for the payments that are expected to exceed a one-year term. The Company has also recorded as non-current the portion of the deferred lease incentive liability that the Company expects to recognize over a period greater than one year. The deferred lease incentive liability at December 31, 2004 totaled $4.1 million and consists of $3.8 million of tenant improvement allowance. The remaining balance primarily represents rent abatement. Deferred lease incentives are amortized on a straight-line basis over the life of the lease. The payments that will be paid within twelve months of the balance sheet date related to the lease abandonment and the deferred lease incentive are classified as current liabilities. The Company monitors the classification of such liabilities based on the expectation of their utilization periods.

 

Income Taxes

 

Current tax liabilities and assets are recognized for the estimated taxes payable or refundable on the tax returns for the current year. 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.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” and related interpretations and elects the disclosure option of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS No. 123 requires that companies either recognize compensation expense for grants of stock, stock options and other equity instruments based on fair value, or provide pro forma disclosure of net income and earnings per share in the notes to the financial statements. Accordingly, the Company has measured compensation expense for stock options as the excess, if any, of the estimated fair market value of the Company’s stock at the date of grant over the exercise price.

 

The following table details the effect on net income (loss) attributable to common stockholders and net income (loss) attributable to common stockholders per share if compensation expense for the stock plans had been recorded based on the fair value method under SFAS No. 123.

 

     Year Ended
December 31,


    Mar. 19, 2002
(inception) to
Dec. 31, 2002


 
     2004

    2003

   

Net income (loss) attributable to common stockholders

   $ 9,933     $ (2,129 )   $ (4,812 )

Add: Total stock-based employee compensation expense included in reported net income (loss), net of related tax effects

     844       25       —    

Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects

     (943 )     (28 )     —    
    


 


 


Pro forma net income (loss) attributable to common stockholders

   $ 9,834     $ (2,132 )   $ (4,812 )
    


 


 


Earnings (loss) per share:

                        

Basic – as reported

   $ 0.77     $ (0.18 )   $ (0.41 )

Basic – pro forma

   $ 0.77     $ (0.18 )   $ (0.41 )

Diluted – as reported

   $ 0.72     $ (0.18 )   $ (0.41 )

Diluted – pro forma

   $ 0.71     $ (0.18 )   $ (0.41 )

 

Segment Reporting

 

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes annual and interim reporting standards for an enterprise’s business segments and related disclosures about its products, services,

 

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Table of Contents

geographic areas and major customers. The Company provides services through two segments: Financial Consulting and Operational Consulting. The Financial Consulting segment provides services that help clients effectively address complex challenges that arise from litigation, disputes, investigations, regulation, financial distress and other sources of significant conflict or change. The Operational Consulting segment provides services that help clients improve the overall efficiency and effectiveness of their operations by enhancing revenue, reducing costs managing regulatory compliance and maximizing procurement efficiency.

 

New Accounting Pronouncement

 

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”). This statement requires that the costs of employee share-based payments be measured at fair value on the awards’ grant date using an option-pricing model and recognized in the financial statements over the requisite service period. This statement does not change the accounting for stock ownership plans, which are subject to American Institute of Certified Public Accountants Statement of Position 93-6, “Employer’s Accounting for Employee Stock Ownership Plans.” SFAS No. 123R supersedes APB 25 and its related interpretations, and eliminates the alternative to use APB 25’s intrinsic value method of accounting, which the Company is currently using. Additionally, SFAS No. 123R amends SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid.

 

SFAS No. 123R allows for two alternative transition methods. The first method is the modified prospective application whereby compensation cost for the portion of awards for which the requisite service has not yet been rendered that are outstanding as of the adoption date will be recognized over the remaining service period. The compensation cost for that portion of awards will be based on the grant-date fair value of those awards as calculated for pro forma disclosures under SFAS No. 123, as originally issued. All new awards and awards that are modified, repurchased, or cancelled after the adoption date will be accounted for under the provisions of SFAS No. 123R. The second method is the modified retrospective application, which requires that the Company restates prior period financial statements. The modified retrospective application may be applied either to all prior periods or only to prior interim periods in the year of adoption of this statement. The Company is currently determining which transition method it will adopt and is evaluating the impact SFAS No. 123R will have on its financial position, results of operations, EPS and cash flows when the statement is adopted.

 

3. Earnings Per Share

 

Basic earnings per share (EPS) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential reduction in EPS that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. EPS under the basic and diluted computation are as follows:

 

     Year ended
December 31,


    Mar. 19, 2002
(inception) to
Dec. 31, 2002


 
     2004

    2003

   

Net income (loss)

   $ 10,864     $ (1,063 )   $ (4,166 )

Dividends accrued on 8% preferred stock

     (931 )     (1,066 )     (646 )
    


 


 


Net income (loss) attributable to common stockholders

   $ 9,933     $ (2,129 )   $ (4,812 )
    


 


 


Weighted average common shares outstanding – basic

     12,820       11,871       11,803  

Weighted average common stock equivalents

     945       —         —    
    


 


 


Weighted average common shares outstanding – diluted

     13,765       11,871       11,803  
    


 


 


Basic net income (loss) attributable to common stockholders per share

   $ 0.77     $ (0.18 )   $ (0.41 )
    


 


 


Diluted net income (loss) attributable to common stockholders per share

   $ 0.72     $ (0.18 )   $ (0.41 )
    


 


 


 

F-10


Table of Contents

Prior to the redemption of the 8% preferred stock in 2004, the 8% preferred stockholders participated in any dividends paid to common stockholders on an as converted basis using the current period estimated fair market value of a share of common stock. Net loss is not allocated to preferred stockholders.

 

The computation of diluted EPS for the period from March 19, 2002 (inception) to December 31, 2002 excluded outstanding stock options of 842,826 because the strike prices for those securities were equal to the estimated average market price of the common shares. The computation of diluted EPS for the year ended December 31, 2003 excluded 1,599,185 outstanding stock options because the effect of these securities would have been anti-dilutive as the Company incurred a net loss for the year.

 

4. Restructuring Charges

 

In March 2004, the Company incurred a $2.1 million pre-tax restructuring charge associated with the closing of two offices. The charge included approximately $2.0 million for severance payments, which were paid by April 30, 2004, and $0.1 million for office lease payments, which were paid by August 31, 2004.

 

In September 2004, the Company decided to eliminate a service offering of a practice area in the operational consulting segment that was not meeting its expectations and recorded a pre-tax restructuring charge of $1.3 million in the third quarter of 2004. As of December 31, 2004, the Company has substantially utilized the restructuring reserve through cash payments for severance.

 

5. Property and Equipment

 

Property and equipment at December 31, 2004 and 2003, are detailed below:

 

     December 31,

 
     2004

    2003

 

Computers, related equipment and software

   $ 5,746     $ 3,944  

Furniture and fixtures

     2,925       1,021  

Leasehold improvements

     4,520       1,525  
    


 


Property and equipment

     13,191       6,490  

Accumulated depreciation and amortization

     (4,216 )     (1,992 )
    


 


Property and equipment, net

   $ 8,975     $ 4,498  
    


 


 

6. Intangible Assets

 

During 2002, the Company obtained a release of certain employees from non-competition agreements with Arthur Andersen LLP, their former employer, in exchange for a payment of $5.5 million and the assumption of certain related liabilities in the amount of $0.8 million. The Company estimates that the value received as a result of the employees’ release from these agreements has a useful life of eighteen months, the length of the restrictive covenants in the agreements with Arthur Andersen LLP.

 

Aggregate amortization expense for the year ended December 31, 2003 and the period from March 19, 2002 (inception) to December 31, 2002 was $3.7 million and $2.6 million, respectively. The remaining net book value of the intangible asset was fully amortized during the year ended December 31, 2003.

 

7. Employee Benefit Plan

 

The Company sponsors a qualified defined contribution 401(k) plan covering substantially all of its employees. Under the plan, employees are entitled to make pre-tax contributions. The Company matches an amount equal to the employees’ contributions up to 6% of the employees’ salaries. The Company’s matching contributions for the years ended December 31, 2004, 2003 and the period from March 19, 2002 (inception) to December 31, 2002 were $3.3 million, $2.3 million and $0.9 million, respectively.

 

F-11


Table of Contents

8. Notes Payable to HCG Holdings LLC

 

At various times during 2002, the Company entered into promissory note agreements with HCG Holdings LLC. The total principal amount borrowed under the promissory note agreements as of December 31, 2003 was $10.1 million. Interest accrued daily on the promissory notes at a rate of 8% per year and aggregated $0.8 million at December 31, 2003.

 

Upon the consummation of the IPO on October 18, 2004, the Company used $10.7 million of the net proceeds from the IPO to repay its notes payable to HCG Holdings LLC, including accrued and unpaid interest of $0.6 million.

 

9. Line of Credit and Guarantee

 

Huron Consulting Services LLC had a bank credit agreement that expired on February 10, 2005 that allowed it to borrow up to the lesser of $15.0 million or the sum of (a) 75% of eligible accounts receivable and (b) the lesser of 30% of unbilled services and $3.0 million. Borrowings under the agreement were limited by any outstanding letters of credit. Borrowings bore interest at either the prime rate or LIBOR, rounded up to the nearest whole percentage, plus 2.75%, and were secured by substantially all of Huron Consulting Services LLC’s assets. The borrowing facility was unused as of December 31, 2004 and 2003. At both December 31, 2004 and 2003, Huron Consulting Services LLC was in compliance with or obtained waivers for its debt covenants.

 

Prior to the expiration of the bank credit agreement described above, the Company established a new facility. The new bank credit agreement, expiring on February 10, 2006, allows the Company to borrow up to the lesser of $25.0 million or the sum of (a) 85% of eligible accounts receivable and (b) the lesser of 40% of unbilled services and $5.0 million. Borrowings under the agreement will be limited by any outstanding letters of credit, will bear interest at LIBOR plus 1.75%, and will be secured by substantially all of the Company’s assets. The bank credit agreement includes covenants for minimum equity and maximum annual capital expenditures, as well as covenants restricting the Company’s ability to incur additional indebtedness or engage in certain types of transactions outside of the ordinary course of business.

 

Guarantees in the form of letters of credit of $1.7 million and $1.0 million were outstanding at December 31, 2004 and 2003, respectively, to support certain office lease obligations.

 

10. Capital Structure and Initial Public Offering

 

Prior to its IPO, the Company’s capital structure consisted of 8% preferred stock, preferred stock and Class A and Class B common stock.

 

8% Preferred Stock

 

The 8% preferred stock had a stated value of $1,000 per share and accrued dividends on a daily basis, compounded annually, at the rate of 8% per annum on the stated value. Between April and June 2002, in connection with the Company’s initial capitalization, the Company issued to HCG Holdings LLC an aggregate of 12,500 shares of the Company’s 8% preferred stock for an aggregate consideration of $12.5 million. Upon the consummation of the Company’s IPO on October 18, 2004, the Company used $15.1 million of the IPO proceeds to redeem all outstanding 8% preferred stock, plus cumulative dividends and a liquidation participation amount totaling $2.6 million.

 

Preferred Stock

 

The Company is expressly authorized to issue up to 50,000,000 shares of preferred stock. The Company’s certificate of incorporation authorizes the Company’s board of directors, without any further stockholder action or approval, to issue these shares in one or more classes or series, to establish from time to time the number of shares to be included in each class or series, and to fix the rights, preferences and privileges of the shares of each wholly unissued class or series and any of its qualifications, limitations or restrictions. As of December 31, 2004 and 2003, no such preferred stock have been approved or issued.

 

Common Stock

 

Prior to the IPO, the Company had issued and outstanding Class A voting and Class B nonvoting common stock. Pursuant to the terms of the Company’s certificate of incorporation, each share of the Company’s Class B common stock was automatically converted into one share of Class A common stock immediately prior to the consummation of the IPO and the Company’s Class A common stock was renamed to “common stock.”

 

F-12


Table of Contents

The holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders. Subject to the rights and preferences of the holders of any series of preferred stock that may at the time be outstanding, holders of common stock are entitled to such dividends as the Company’s board of directors may declare. In the event of any liquidation, dissolution or winding-up of the Company’s affairs, after payment of all of the Company’s debts and liabilities and subject to the rights and preferences of the holders of any series of preferred stock that may at the time be outstanding, holders of common stock will be entitled to receive the distribution of any of the Company’s remaining assets.

 

Dividends

 

On May 12, 2004, the Company declared a special dividend for each outstanding share of common stock and 8% preferred stock payable to holders of record on May 25, 2004. The 8% preferred stock participated on an as converted basis. The aggregate amount of the dividend was $1.3 million, or $0.09 per share of common stock and $22.18 per share of 8% preferred stock, and was paid on June 29, 2004.

 

Initial Public Offering

 

On October 13, 2004, the Company completed its IPO. In the IPO, the Company sold 3,333,333 shares of common stock and a selling stockholder, HCG Holdings LLC, sold 1,666,667 shares of common stock at an offering price of $15.50 per share. On October 22, 2004, the underwriters exercised in full their over-allotment option to purchase an additional 750,000 shares of common stock from the selling stockholder. The IPO generated gross proceeds to the Company of $51.7 million, or $48.0 million net of underwriting discounts. The Company did not receive any proceeds from the shares sold by the selling stockholder.

 

11. Equity Incentive Plans

 

In 2002, the Huron Consulting Group Inc. 2002 Equity Incentive Plan and the Huron Consulting Group Inc. 2002 Equity Incentive Plan (California) were established pursuant to which up to 1,316,740 Class B non-voting and 108,696 Class A voting shares, respectively, may be granted. In 2003, the Huron Consulting Group Inc. 2003 Equity Incentive Plan was established pursuant to which up to 1,377,392 Class B nonvoting shares may be granted.

 

Prior to the completion of the IPO, the Huron Consulting Group Inc. 2004 Omnibus Stock Plan (the “Omnibus Plan”) was established. The plans described in the paragraph above were terminated and no further awards will be granted under these plans. The Omnibus Plan provides for the issuance of stock options and other equity-based awards valued in whole or in part by reference to, or otherwise based on, the Company’s common stock. A total of 2,141,000 shares of common stock are reserved for issuance under the Omnibus Plan, of which 1,194,088 remain available for future issuance at December 31, 2004. Subject to acceleration under certain conditions, stock options generally vest annually, pro-rata over 4 years. All options expire ten years after the grant date.

 

F-13


Table of Contents

The stock option activity under the Company’s various equity incentive plans is as follows (number of options in thousands):

 

     2004

   2003

   2002

     Number
of
Options


    Weighted
Average
Exercise
Price


   Number
of
Options


    Weighted
Average
Exercise
Price


   Number
of
Options


    Weighted
Average
Exercise
Price


Outstanding, beginning of year

     1,599     $ 0.36      843     $ 0.02      —       $ —  

Granted:

                                            

Exercise price = fair market value

     127       15.50      935       0.60      856       0.02

Exercise price < fair market value

     422       1.96      —         —        —         —  

Exercised

     (246 )     0.22      (161 )     0.02      —         —  

Canceled

     (237 )     0.85      (18 )     0.18      (13 )     0.02
    


 

  


 

  


 

Outstanding, end of year

     1,665     $ 1.86      1,599     $ 0.36      843     $ 0.02
    


 

  


 

  


 

Exercisable, end of year

     614     $ 0.58      47     $ 0.02      —       $ —  
    


 

  


 

  


 

Weighted average fair value of options granted during the year:

                                            

Exercise price = fair market value

   $ 7.34            $ 0.69            $ —          

Exercise price < fair market value

   $ 6.50              —                —          

 

The fair value of each stock option is estimated (on the date of grant) based on the Black-Scholes option-pricing model with the following weighted average assumptions:

 

     December 31,

 
     2004

    2003

    2002

 

Expected dividend yield

   0 %   0 %   0 %

Expected volatility

   12 %   1 %   1 %

Risk-free interest rate

   2.6 %   2.3 %   3.3 %

Expected option life (in years)

   4     4     5  

 

Options outstanding and exercisable at December 31, 2004 are as follows (number of options in thousands):

 

     Options Outstanding

   Options Exercisable

     Number of
Options


   Weighted
Average
Remaining
Contractual
Life (in years)


   Weighted
Average
Exercise
Price


   Number
of Options


   Weighted
Average
Exercise
Price


Range of Exercise Prices                             

$0.00 to $0.02

   571    7.8    $ 0.02    492    $ 0.02

$0.03 to $0.85

   593    8.5    $ 0.69    105    $ 0.74

$0.86 to $1.96

   375    9.1    $ 1.96    —        —  

$1.97 to $15.50

   126    9.7    $ 15.50    17    $ 15.50
    
              
      

Total

   1,665    8.5    $ 1.86    614    $ 0.58
    
              
      

 

The Company’s Omnibus Plan also provides for granting restricted stock awards to certain employees and officers. Restricted stock awards are restricted from sale and generally vest over a three-year or four-year period. On October 12, 2004, immediately prior to the IPO, the Company granted a total of 767,700 shares of restricted common stock to certain employees and officers. On November 2, 2004, the Company granted an additional 68,850 shares of restricted common stock. Total compensation expense relating to these restricted common stock awards of $13.2 million, which is based on the market value of the shares awarded at the date of grant, will be amortized on a straight-line basis over the vesting period. For the year ended December 31, 2004, amortization expense relating to these restricted common stock awards totaled $0.7 million.

 

F-14


Table of Contents

12. Income Taxes

 

The income tax expense (benefit) for the years ended December 31, 2004 and 2003 and for the period from March 19, 2002 (inception) to December 31, 2002 consists of the following:

 

     Year ended
December 31,


    Mar. 19, 2002
(inception) to
Dec. 31, 2002


 
     2004

    2003

   

Current:

                        

Federal

   $ 9,592     $ 1,139     $ —    

State

     2,647       307       13  
    


 


 


Total current

     12,239       1,446       13  
    


 


 


Deferred:

                        

Federal

     (3,162 )     (1,256 )     (2,171 )

State

     (949 )     (312 )     (539 )
    


 


 


Total deferred

     (4,111 )     (1,568 )     (2,710 )
    


 


 


Income tax expense (benefit)

   $ 8,128     $ (122 )   $ (2,697 )
    


 


 


 

A reconciliation of the U.S. statutory income tax rate to the Company’s effective tax rate is as follows. The 2003 tax rate effects of meals and entertainment and other non-deductible items are due to the ratio of non-deductible expense relative to the pretax loss for the year. Other non-deductible items include taxes not deductible for federal income tax purposes.

 

     Year ended
December 31,


    Mar. 19, 2002
(inception) to
Dec. 31, 2002


 
     2004

    2003

   

Percent of pretax income:

                  

At U.S. statutory tax rate – expense (benefit)

   35.0 %   (35.0 )%   (35.0 )%

State income taxes

   5.2     (5.2 )   (5.1 )

Meals and entertainment

   2.5     17.9     0.8  

Other non-deductible items

   0.1     12.0     —    
    

 

 

Effective income tax expense (benefit) rate

   42.8 %   (10.3 )%   (39.3 )%
    

 

 

 

Deferred tax assets at December 31, 2004 and 2003 consist of the following:

 

     Year ended
December 31,


 
     2004

    2003

 

Deferred tax assets:

                

Accrued payroll and other liabilities

   $ 4,757     $ 1,144  

Amortization of intangibles

     2,064       2,283  

Revenue recognition

     1,787       720  

Deferred lease incentives

     1,374       69  

Stock-based compensation

     537       —    

Net operating loss carryforward

     194       408  

Other

     61       87  
    


 


Total deferred assets

     10,774       4,711  
    


 


Deferred tax liabilities:

                

Property and equipment

     (967 )     (300 )

Prepaid expenses

     (438 )     (132 )
    


 


Total deferred liabilities

     (1,405 )     (432 )
    


 


Net deferred tax asset

   $ 9,369     $ 4,279  
    


 


 

F-15


Table of Contents

At December 31, 2004, the Company had a net operating loss carryforward for U.S. federal income tax purposes of approximately $0.5 million that begins to expire in 2023. The income tax loss carryforward may be subject to certain limitations based upon changes in ownership that could impair the ability to utilize the benefits of this loss in the future. Although realization of the net deferred tax asset is not assured, management believes, based upon current estimates, that it is more likely than not that all of the net deferred tax assets will be realized. Accordingly, the Company determined that no valuation allowance against deferred tax assets at December 31, 2004 and 2003 was necessary.

 

13. Related Party Transactions

 

On April 23, 2002, HCG Holdings LLC, on behalf of the Company, entered into an agreement with Lake Capital Management LLC, a related party, under which Lake Capital Management LLC agreed to provide certain management services to the Company in exchange for a $1.5 million payment. The Company paid an additional $1.0 million fee upon termination of the agreement in July 2002. Lake Capital Management LLC is an interest holder of HCG Holdings LLC.

 

In connection with an Advisory Services Agreement, dated April 23, 2002, between HCG Holdings LLC, on behalf of the Company, and PPM America Private Equity Fund, L.P., or PPM LP, a member of HCG Holdings LLC, the Company paid PPM LP $0.3 million for certain advisory services. The advisory services agreement was terminated in July 2002.

 

14. Commitments and Contingencies

 

Litigation

 

From time to time, the Company is involved in various legal matters arising out of the ordinary course of business. Although the outcome of these matters cannot presently be determined, in the opinion of management, disposition of these matters will not have a material adverse effect on the financial position or results of operations of the Company.

 

Lease Commitments

 

The Company leases office space and certain equipment under noncancelable operating lease arrangements expiring on various dates through 2014, with various renewal options. The Company’s principal executive offices located in Chicago, Illinois are under a lease that expires in September 2014, with two five-year renewal options, and accounts for approximately 70% of the Company’s future minimum rental commitments. Office facilities under operating leases include fixed or minimum payments plus, in some cases, scheduled base rent increases over the term of the lease. Certain leases provide for monthly payments of real estate taxes, insurance and other operating expense applicable to the property. Some of the leases contain provisions whereby the future rental payments may be adjusted for increases in operating expense above the specified amount. Rental expense, including operating costs and taxes, for the period from March 19, 2002 (inception) to December 31, 2002 and the years ended December 31, 2003 and 2004 was $1.2 million, $3.0 million and $4.1 million, respectively. Future minimum rental commitments under non-cancelable operating leases and sublease income as of December 31, 2004, are as follows:

 

     Minimum
Rental
Commitment


   Sublease
Income


2005

   $ 4,461    $ 268

2006

     4,419      299

2007

     4,730      182

2008

     4,380       

2009

     4,288       

Thereafter

     14,601       
    

  

Total

   $ 36,879    $ 749
    

  

 

F-16


Table of Contents

15. Segment Information

 

Segments are defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” as components of a company in which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance.

 

The Company provides services through two segments: Financial Consulting and Operational Consulting. The Financial Consulting segment provides services that help clients effectively address complex challenges that arise from litigation, disputes, investigations, regulation, financial distress and other sources of significant conflict or change. The Operational Consulting segment provides services that help clients improve the overall efficiency and effectiveness of their operations by enhancing revenue, reducing costs, managing regulatory compliance and maximizing procurement efficiency.

 

Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrative costs that are incurred directly by the segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. These administrative function costs include costs for corporate office support, all office facility costs, costs relating to accounting and finance, human resources, legal, marketing, information technology and company-wide business development functions, as well as costs related to overall corporate management.

 

F-17


Table of Contents

The following table presents information about reported segments along with the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements:

 

    

Year ended

December 31,


    Mar. 19, 2002
(inception) to
Dec. 31, 2002


 
     2004

    2003

   
Financial Consulting:                         

Revenues

   $ 95,476     $ 69,941     $ 22,400  

Segment operating income

   $ 36,258     $ 22,011     $ 3,912  

Segment operating income as a percent of segment revenues

     38.0 %     31.5 %     17.5 %
Operational Consulting:                         

Revenues

   $ 64,074     $ 31,545     $ 12,701  

Segment operating income

   $ 21,116     $ 5,383     $ 3,527  

Segment operating income as a percent of segment revenues

     33.0 %     17.1 %     27.8 %
Total Company:                         

Revenues

   $ 159,550     $ 101,486     $ 35,101  

Reimbursable expenses

     14,361       8,808       2,921  
    


 


 


Total revenues and reimbursable expenses

   $ 173,911     $ 110,294     $ 38,022  
    


 


 


Statement of operations reconciliation:                         

Segment operating income

   $ 57,374     $ 27,394     $ 7,439  

Charges not allocated at the segment level:

                        

Other selling, general and administrative expenses

     31,417       20,601       7,206  

Stock-based compensation expense

     433       14       —    

Depreciation and amortization expense

     2,365       5,328       3,048  

Restructuring charges

     3,475       —         —    

Loss on lease abandonment

     —         1,668       —    

Management and advisory fees paid to related parties and organization costs

     —         —         3,715  

Interest expense, net

     692       856       332  

Other

     —         112       1  
    


 


 


Net income (loss) before provision (benefit) for income taxes

   $ 18,992     $ (1,185 )   $ (6,863 )
    


 


 


Segment assets:                         

Financial Consulting

   $ 18,921     $ 15,961     $ 8,727  

Operational Consulting

     13,659       7,103       3,837  

Unallocated assets

     50,639       16,825       14,019  
    


 


 


Total assets

   $ 83,219     $ 39,889     $ 26,583  
    


 


 


 

All long-lived assets are in the United States. During 2004, 2003 and 2002, no client in either segment accounted for 10% or more of total revenues of the Company.

 

F-18


Table of Contents

16. Valuation and Qualifying Accounts

 

The following summarizes the activity of the allowances for doubtful accounts and unbilled services:

 

     Beginning
balance


   Additions

   Deductions*

   Ending
balance


Period from March 19, 2002 (inception) to December 31, 2002:                        

Allowances for doubtful accounts and unbilled services

   $ —      841    459    $ 382
Year ended December 31, 2003:                        

Allowances for doubtful accounts and unbilled services

   $ 382    5,335    3,925    $ 1,792
Year ended December 31, 2004:                        

Allowances for doubtful accounts and unbilled services

   $ 1,792    9,051    7,178    $ 3,665

* Deductions include write-offs of accounts receivable, fee adjustments related to estimated overruns on fixed and capped fee engagements and other discretionary pricing adjustments.

 

17. Selected Quarterly Financial Data (unaudited)

 

     Quarter Ended

2004


   Mar. 31,

   Jun. 30,

   Sep. 30

   Dec. 31

Revenues

   $ 40,101    $ 41,503    $ 37,109    $ 40,837

Reimbursable expenses

     3,443      3,647      3,225      4,046

Total revenues and reimbursable expenses

     43,544      45,150      40,334      44,883

Gross profit

     15,153      18,885      14,762      17,582

Operating income

     4,253      8,731      2,135      4,565

Net income attributable to common stockholders

     2,074      4,600      811      2,448

Net income attributable to common stockholders per share*:

                           

Basic

   $ 0.16    $ 0.35    $ 0.06    $ 0.16

Diluted

   $ 0.15    $ 0.32    $ 0.06    $ 0.15

Weighted average shares used in calculating net income attributable to common stockholders per share*:

                           

Basic

     11,974      12,050      12,180      15,061

Diluted

     12,747      13,044      13,149      16,101

 

F-19


Table of Contents
     Quarter Ended

 

2003


   Mar. 31,

   Jun. 30,

    Sep. 30

    Dec. 31

 

Revenues

   $ 23,212    $ 23,711     $ 25,549     $ 29,014  

Reimbursable expenses

     2,069      1,837       2,105       2,797  

Total revenues and reimbursable expenses

     25,281      25,548       27,654       31,811  

Gross profit

     9,631      7,961       6,461       7,911  

Operating income (loss)

     3,515      326       (3,315 )     (743 )

Net income (loss) attributable to common stockholders

     1,688      (344 )     (2,440 )     (1,033 )

Net income (loss) attributable to common stockholders per share*:

                               

Basic

   $ —      $ (0.03 )   $ (0.20 )   $ (0.09 )

Diluted

   $ —      $ (0.03 )   $ (0.20 )   $ (0.09 )

Weighted average shares used in calculating net income (loss) attributable to common stockholders per share*:

                               

Basic

     11,803      11,809       11,927       11,946  

Diluted

     11,803      11,809       11,927       11,946  

 

F-20

Third Amended and Restated Certificate

Exhibit 3.1

 

THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

OF

HURON CONSULTING GROUP INC.

 

Pursuant to Sections 228, 242 and 245 of the

Delaware General Corporation Law

 

Huron Consulting Group Inc. (the “Corporation”), a corporation organized and existing under the General Corporation Law of the State of Delaware (the “GCL”), does hereby certify as follows:

 

(1) The name of the Corporation is Huron Consulting Group Inc. The original certificate of incorporation of the Corporation was filed with the office of the Secretary of State of the State of Delaware on March 19, 2002 under the name SSCG, Inc.

 

(2) This Third Amended and Restated Certificate of Incorporation was duly adopted by the Board of Directors of the Corporation and by the stockholders of the Corporation in accordance with Sections 228, 242 and 245 of the GCL.

 

(3) This Third Amended and Restated Certificate of Incorporation restates and integrates and further amends the Amended and Restated Certificate of Incorporation of the Corporation, as heretofore amended, supplemented or corrected.

 

(4) The text of the Amended and Restated Certificate of Incorporation is amended and restated in its entirety as follows:


ARTICLE I

Name

 

The name of the Corporation is Huron Consulting Group Inc. (the “Corporation”).

 

ARTICLE II

Registered Office and Registered Agent

 

The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, Wilmington, County of New Castle. The name of its registered agent is The Corporation Trust Company.

 

ARTICLE III

Purpose

 

The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the GCL as set forth in Title 8 of the General Corporation Law of the State of Delaware (the “GCL”).

 

ARTICLE IV

Stock Issuance

 

Part A. Authorized Shares

 

The amount of the total authorized capital stock of the Corporation is 556,499,215 shares, consisting of:

 

(a) 50,000,000 shares of preferred stock, par value $0.01 per share (the “Preferred Stock”);

 

(b) 500,000,000 shares of Class A Voting Common Stock, par value $.01 per share (the “Class A Common Stock”);

 

(c) 6,486,715 shares of Class B Non-Voting Common Stock, par value $.01 per share (the “Class B Common Stock” and together with the Class A Common Stock, the “Common Stock”); and

 

(d) 12,500 shares of 8% Preferred Stock, par value $0.01 per share (the “8% Preferred Stock”).

 

The preferences, qualifications, limitations, restrictions and special or relative rights of shares of each class of authorized capital stock are set forth below.

 

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Part B. Preferred Stock

 

The Board of Directors of the Corporation (the “Board”) is hereby expressly authorized to provide for the issuance of all or any shares of the Preferred Stock in one or more classes or series, and to fix for each such class or series such voting powers, full or limited, or no voting powers, and such distinctive designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board providing for the issuance of such class or series and as may be permitted by the GCL, including, without limitation, the authority to provide that any such class or series may be (i) subject to redemption at such time or times and at such price or prices; (ii) entitled to receive dividends (which may be cumulative or non-cumulative) at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or any other series; (iii) entitled to such rights upon the dissolution of, or upon any distribution of the assets of, the Corporation; or (iv) convertible into, or exchangeable for, shares of any other class or classes of stock, or of any other series of the same or any other class or classes of stock, of the Corporation at such price or prices or at such rates of exchange and with such adjustments; all as may be stated in such resolution or resolutions.

 

Part C. Common Stock

 

Except as otherwise provided in this Third Amended and Restated Certificate of Incorporation or as otherwise required by applicable law, all shares of Class A Common Stock and Class B Common Stock shall be identical in all respects and shall entitle holders thereof to the same rights and privileges, subject to the same qualifications, limitations and restrictions.

 

Section 1. Voting. Except as otherwise required by statute or specifically provided in this Third Amended and Restated Certificate of Incorporation, the holders of any outstanding shares of Class A Common Stock shall have the sole right and power to vote on all matters on which a vote of stockholders is to be taken. The Corporation, by action of the Board and the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote irrespective of the provisions of Section 242(b)(2) of the GCL, may increase or decrease the number of authorized shares of Class B Common Stock (but not below the number of shares of Class B Common Stock then outstanding). Except as otherwise required by statute or specifically provided in this Third Amended and Restated Certificate of Incorporation, at every meeting of the stockholders:

 

(a) each holder of shares of Class A Common Stock shall be entitled to cast one (1) vote, in person or by proxy, for each share of Class A Common Stock standing in his, her or its name on the transfer books of the Corporation; and

 

(b) holders of shares of Class B Common Stock shall have no right to vote on any matter submitted to the stockholders of the Corporation for vote, consent or approval, and shares of Class B Common Stock shall not be included in determining the number of shares voting or entitled to vote on any such matter.

 

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Section 2. No Cumulative Voting. The holders of shares of Common Stock shall not have cumulative voting rights.

 

Section 3. No Preemptive or Subscription Rights. The holders of shares of Common Stock shall not have preemptive or subscription rights.

 

Section 4. Dividends; Conversion; Issuance

 

4.1 General Obligation. Subject to the rights of the holders of the 8% Preferred Stock and any series of Preferred Stock set forth in Parts B and E of Article IV and any other provisions herein, holders of Class A Common Stock and Class B Common Stock shall be entitled to receive, equally on a per share basis, such dividends and other distributions in cash, stock, or property of the Corporation as may be declared thereon by the Board from time to time out of assets or funds of the Corporation legally available therefore. Dividends shall be declared and paid to holders of shares of any of the Class A Common Stock and Class B Common Stock only if such dividends are declared and paid to all holders of shares of such classes in the same amount per share.

 

4.2 Distributions of Stock. If at any time a dividend or distribution of shares of Class A Common Stock or Class B Common Stock, or any other securities of the Corporation, is to be made to holders of shares of Class A Common Stock or Class B Common Stock (hereinafter referred to as a “share distribution”), such share distribution may be declared and paid only as follows:

 

(a) a share distribution consisting of shares of Class A Common Stock to holders of shares of Class A Common Stock; provided, there shall be a simultaneous share distribution consisting of shares of Class B Common Stock to holders of shares of Class B Common Stock in the same amount per share;

 

(b) a share distribution consisting of shares of Class B Common Stock to holders of shares of Class B Common Stock; provided, there shall be a simultaneous share distribution consisting of shares of Class A Common Stock to holders of shares of Class A Common Stock in the same amount per share; or

 

(c) a share distribution consisting of any other class of securities of the Corporation to holders of shares of Class A Common Stock and Class B Common Stock in the same amount per share.

 

Notwithstanding anything to the contrary herein, the issuance of shares of any class of Common Stock upon the conversion of shares of 8% Preferred Stock or Preferred Stock pursuant to Part B or Part E of Article IV hereof or of any class of Common Stock pursuant to this Part C of Article IV hereof shall not constitute a “share distribution” of purposes of this Section 4.

 

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4.3 Liquidation; Dissolution. Subject to the rights of the holders of the 8% Preferred Stock and any series of Preferred Stock set forth in Parts B and E of Article IV and any other provisions herein, upon any liquidation, dissolution or winding up of the Corporation, the holders of shares of Class A Common Stock and the holders of shares of Class B Common Stock shall be entitled to receive, equally on a per share basis, the assets of the Corporation available for distribution after payments to creditors and to the holders of any 8% Preferred Stock or any series of Preferred Stock that may at the time be outstanding, in proportion to the number of shares held by them, respectively, without regard to class.

 

4.4 Issuance of Common Stock; Automatic Conversion. Upon a Fundamental Change, a Change of Control or immediately prior to the closing of a Qualified Public Offering, each share of Class B Common Stock then issued and outstanding shall automatically convert, on a share for share basis, to a share of Class A Common Stock and the Class B Common Stock shall cease to exist as a separate class of Common Stock.

 

Section 5. Reclassification, Etc. Neither the Class A Common Stock nor Class B Common Stock may be subdivided, consolidated, reclassified or otherwise changed unless contemporaneously therewith the other class of Common Stock is subdivided, consolidated, reclassified or otherwise changed in the same proportion and in the same manner.

 

Part D. Power to Sell and Purchase Shares

 

Subject to the requirements of applicable law, the Corporation shall have the power to issue and sell all or any part of any shares of any class of stock herein or hereafter authorized to such persons, and for such consideration, as the Board shall from time to time, in its discretion, determine, whether or not greater consideration could be received upon the issue or sale of the same number of shares of another class, and as otherwise permitted by law. Subject to the requirements of applicable law, the Corporation shall have the power to purchase any shares of any class of stock herein or hereafter authorized from such persons, and for such consideration, as the Board shall from time to time, in its discretion, determine, whether or not less consideration could be paid upon the purchase of the same number of shares of another class, and as otherwise permitted by law.

 

Part E. 8% Preferred Stock

 

Section 1. Dividends.

 

1.1 General Obligations. Each share of 8% Preferred Stock shall have a stated value (the “Stated Value”) of $1,000. Each share of 8% Preferred Stock will accrue dividends on a daily basis at the rate of eight percent (8%) per annum compounded annually (calculated on the basis of a 360 day year of 30 day months), on the Stated Value thereof (the “8% Dividend”) from and including the earlier of (a) the date of the contribution of cash or other property with respect to which such share of 8% Preferred Stock is issued and (b) the date of issuance of such share of 8% Preferred Stock, to and

 

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including the earlier of (x) the date of any liquidation, dissolution or winding up of the Corporation, (y) the date on which such share of 8% Preferred Stock is redeemed in accordance with Section 5 of this Part E or (z) the date on which such share of 8% Preferred Stock is converted in accordance with Section 6 or Section 7 of this Part E (the “Accrual Period”), and will also receive any dividends paid on the Common Stock during the Accrual Period on an as converted basis using the then current Market Price of a share of Common Stock and the then current Stated Value of a share of 8% Preferred Stock. The 8% Dividend will accrue whether or not they have been declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends; provided that such dividends will be paid only when, as and if declared by the Board, out of funds legally available for the payment of dividends. The date on which the Corporation initially issues any share of 8% Preferred Stock will be deemed to be its “date of issuance” regardless of the number of times transfer of such share of 8% Preferred Stock is made on the stock records maintained by or for the Corporation and regardless of the number of certificates that may be issued to evidence such share of 8% Preferred Stock.

 

1.2 Priority of Dividends. All accrued and unpaid 8% Dividends on the 8% Preferred Stock shall be fully paid, or declared with funds irrevocably set apart for payment, before any dividend, distribution or payment may be made with respect to any 8% Junior Securities.

 

1.3 Payments of Dividends. Subject to Section 1.1 of this Part E, dividends on the 8% Preferred Stock may be declared by the Board and paid on any date fixed by the Board, to the holders of record of the 8% Preferred Stock as they appear on the stock register of the Corporation on the record date fixed by the Board. Any dividend payments shall first be credited against 8% Dividends accumulated with respect to the earliest period for which dividends have not been paid, pro rata to the holders of 8% Preferred Stock.

 

Section 2. Liquidation.

 

2.1 Liquidation; Dissolution. Upon any liquidation, dissolution or winding up of the Corporation, each holder of 8% Preferred Stock shall be entitled to be paid, before any distribution or payment is made upon any 8% Junior Securities, an amount in cash equal to the Stated Value of the shares of 8% Preferred Stock held by each such holder plus all accrued and unpaid 8% Dividends thereon pursuant to Section 1.1 of this Part E (the “8% Liquidation Preference”) before any payment shall be made or any assets distributed to the holders of any 8% Junior Securities. After any such payment in full, the remaining assets of the Corporation available for distribution shall be distributed first to the holders of 8% Junior Securities that rank senior to the Common Stock on liquidation and then ratably to the holders of Common Stock and the holders of 8% Preferred Stock and any other holders of participating capital stock of the Corporation on a share for share basis provided, however, that if at any time after the date of issuance of a share of 8% Preferred Stock or of any other participating capital stock (such share of 8% Preferred Stock or other participating capital stock being referred to herein as a “Participating Share”) there is a stock split of the Common Stock, then such Participating Share shall

 

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participate in such distribution as if there was a stock split of such Participating Share equal to the stock split of the Common Stock (meaning that each share of Common Stock, 8% Preferred Stock and any other participating capital stock shall receive the same distribution per share after equitably adjusting the 8% Preferred Stock and all other participating classes of capital stock to give effect to any stock split of the Common Stock). The 8% Liquidation Preference, together with any distribution to which a holder of 8% Preferred Stock is entitled pursuant to the immediately preceding sentence, is referred to herein as the “8% Liquidation Amount.” If upon any such liquidation, dissolution or winding up of the Corporation, the Corporation’s assets available for distribution to its stockholders are insufficient to permit payment of the 8% Liquidation Amount to the holders of 8% Preferred Stock in full, then the entire assets available for distribution to holders of 8% Preferred Stock shall be distributed ratably among holders of 8% Preferred Stock based upon the 8% Liquidation Amount of the 8% Preferred Stock held by such holders.

 

2.2 Deemed Liquidations. A Fundamental Change or Change of Control shall not be a deemed liquidation, dissolution or winding up of the Corporation within the meaning of Section 2.1 of this Part E.

 

2.3 Noncash Distributions. If any of the assets of the Corporation are to be distributed other than in cash pursuant to this Section 2, the value of such assets shall be determined by agreement of the Board and the Required Holders, provided that if they cannot so agree, then the Board shall promptly engage, at the Corporation’s expense, an independent appraiser, which appraiser shall be reasonably acceptable to the Required Holders, to determine the value of the assets to be distributed to the holders of 8% Preferred Stock; except that the value of any security that is listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market shall be deemed to be its Market Price. The Corporation shall, upon receipt of the appraiser’s valuation, if any, give prompt written notice to each holder of shares of 8% Preferred Stock of the appraiser’s valuation.

 

2.4 Cancellation of Shares. Upon payment or distribution of all amounts to be paid to the holders of the 8% Preferred Stock under this Section 2, the shares of 8% Preferred Stock shall be deemed to be automatically canceled and the rights and preferences contained herein shall be null and void.

 

Section 3. Voting Rights. Except as otherwise required by applicable law or as set forth herein, the 8% Preferred Stock shall not have voting rights with respect to the affairs of the Corporation.

 

Section 4. Priority of 8% Preferred Stock; Subordination of 8% Junior Securities. So long as any 8% Preferred Stock remains outstanding, neither the Corporation nor any Subsidiary shall redeem, purchase or otherwise acquire directly or indirectly any 8% Junior Securities, if at the time of or immediately after any such redemption, purchase or acquisition, any share of 8% Preferred Stock shall be outstanding; provided that, notwithstanding the foregoing, the Corporation may purchase shares of Common Stock pursuant to the terms of any equity incentive plan (or similar agreement) of the

 

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Corporation and its Subsidiaries or any employment (or employee related) agreement with the senior managers of the Corporation and its Subsidiaries (an “Exempt Repurchase”). So long as any shares of the 8% Preferred Stock are outstanding and except for Exempt Repurchases, the Board shall not declare, and the Corporation shall not pay or set apart for payment any dividend on any 8% Junior Securities or make any distribution in respect of the 8% Junior Securities, either directly or indirectly, and whether in cash, obligations or shares of the Corporation or other property unless prior to or concurrently with such declaration, payment or distribution, as the case may be, all accumulated and unpaid 8% Dividends on the shares of the 8% Preferred Stock not paid as provided in Section 1 of this Part E shall have been paid. All payments or distributions upon or with respect to any 8% Junior Securities that are received by the holder thereof contrary to the provisions of this Section 4 shall be (1) received in trust for the benefit of the holders of the 8% Preferred Stock, (2) segregated from other funds and property held by such holder of 8% Junior Securities, and (3) paid over to the holders of the 8% Preferred Stock in the same form as so received (with any necessary endorsement).

 

Section 5. Redemption of 8% Preferred Stock. The rights of redemption with respect to the 8% Preferred Stock are as follows:

 

5.1 Optional Redemption – Holder. At any time after April 23, 2008, a holder of 8% Preferred Stock may, by sending written notice (each, a “Redemption Notice”) to the Corporation, require the Corporation to redeem all or any portion of the outstanding 8% Preferred Stock held by such holder for a price equal to the 8% Liquidation Amount of such 8% Preferred Stock, calculated as if the Corporation was to be liquidated as of the date of such redemption. Within ten (10) days of its receipt of any Redemption Notice, the Corporation shall give written notice to holders of the 8% Preferred Stock of such redemption. Upon receipt of any Redemption Notice, the Corporation shall be obligated to redeem for cash the aggregate number of shares of 8% Preferred Stock specified in the Redemption Notice and any Redemption Notice received by the Corporation within twenty (20) days of the first Redemption Notice (“Total Redemption Shares”) within ninety (90) days after the Corporation’s receipt of the applicable Redemption Notice; provided, however, that if the Corporation does not, in the reasonable discretion of the Board, have sufficient cash to redeem the Total Redemption Shares, the 8% Preferred Stock shall be redeemed pro rata based on the Total Redemption Shares; provided further, that prior to April 23, 2009, the Corporation shall not be required to redeem more than fifty percent (50%) of the 8% Preferred Stock from the initial holder thereof and any Person’s transferees, in the aggregate.

 

5.2 Optional Redemption – Corporation. The Corporation, acting through the Board, may at any time redeem all or any portion of the 8% Preferred Stock then outstanding. On any such redemption, the Corporation shall pay a price per share of 8% Preferred Stock equal to the 8% Liquidation Amount, calculated as if the Corporation was to be liquidated as of the date of such redemption. Any redemptions made hereunder shall be made to each holder of 8% Preferred Stock pro rata based on the aggregate 8% Liquidation Amount of the 8% Preferred Stock held by each holder.

 

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5.3 Cancellation of Redeemed Shares. All of the shares of 8% Preferred Stock redeemed as provided in this Section 5 of this Part E shall be retired and canceled and shall not be reissued and the number of authorized shares of 8% Preferred Stock shall automatically be reduced by such number of redeemed shares.

 

5.4 Payment of Redemption Price. If the funds of the Corporation legally available therefor shall be insufficient to discharge any redemption required pursuant to this Section 5 of this Part E, the maximum number of full shares of 8% Preferred Stock that can be redeemed with such funds shall be redeemed ratably among the holders of the 8% Preferred Stock in proportion to the aggregate redemption price to be paid to each holder and the extent such obligation is not met in full, such obligation shall continue to be discharged as promptly as funds legally available therefor become available until the obligation is discharged in full.

 

5.5 Notices. The Corporation will (a) give written notice if required by applicable law to all holders of 8% Preferred Stock prior to the date on which the Corporation closes its books or takes a record (i) with respect to any distribution upon Common Stock, or (ii) with respect to any pro rata subscription offer to holders of Common Stock and (b) give written notice if required by applicable law to the holders of 8% Preferred Stock prior to the date on which any Fundamental Change or Change of Control will take place.

 

Section 6. Reorganization, Reclassification, Consolidation, Merger or Sale. Any capital reorganization, reclassification, consolidation, merger or sale of all or substantially all of the Corporation’s assets to another person or entity that is affected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an “Organic Change”. Prior to the consummation of any Organic Change, the Corporation will make appropriate provisions (in form and substance satisfactory to the Required Holders) to insure that each of the holders of 8% Preferred Stock will thereafter have the right to acquire and receive such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted each share of his 8% Preferred Stock immediately prior to such Organic Change into the number of shares of Class A Common Stock determined by dividing the 8% Liquidation Amount for such share of 8% Preferred Stock as of such date, calculated as if the Corporation was to be liquidated as of such date, by the Market Price of a share of Class A Common Stock as of such date. In any such case, the Corporation will make appropriate provisions (in form and substance satisfactory to the Required Holders) to insure that the provisions of this Section 6 will thereafter be applicable to the 8% Preferred Stock. The Corporation will not effect any such Organic Change unless prior to the consummation thereof, the successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing such assets assumes by written instrument (in form satisfactory to the Required Holders) the obligation to deliver to each holder of 8% Preferred Stock such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire and receive.

 

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Section 7. Rights Upon a Qualified Public Offering.

 

7.1 Election by Required Holders. The Corporation shall provide written notice (a “QPO Notice”) to the holders of 8% Preferred Stock at least twenty (20) days prior to the first filing of a registration statement in connection with a Qualified Public Offering. The Required Holders, on behalf of all holders of 8% Preferred Stock, shall have ten (10) days following receipt of the QPO Notice to notify the Corporation in writing that the holders of the 8% Preferred Stock shall either: (i) elect to convert all of the 8% Preferred Stock and have the Corporation redeem the accrued but unpaid 8% Dividends thereon pursuant to Section 7.2 of this Part E; (ii) elect to convert all of the 8% Preferred Stock, including all accrued but unpaid 8% Dividends thereon, pursuant to Section 7.3 of this Part E or (iii) elect to continue to hold all of the 8% Preferred Stock. If the Qualified Public Offering is not consummated within six (6) months of delivery of the QPO Notice, then any election hereunder shall be void and the Corporation shall be obligated to comply with this Section 7.1 with respect to any subsequent Qualified Public Offering.

 

7.2 Conversion and Redemption. If this Section 7.2 is elected by the Required Holders, immediately prior to the closing of a Qualified Public Offering each share of 8% Preferred Stock then issued and outstanding shall automatically be converted into the number of shares of Class A Common Stock determined by dividing the difference between the 8% Liquidation Amount on such share of 8% Preferred Stock, calculated as if the Corporation was to be liquidated as of the date of such conversion, and the accrued but unpaid 8% Dividends on such share, by the mid-range offering price of a share of common stock to be sold to the public in such Qualified Public Offering as estimated by the underwriters in good faith and approved by the Board at the time of filing of the registration statement in connection with such Qualified Public Offering. If elected, immediately prior to the closing of the Qualified Public Offering, the outstanding shares of 8% Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Class A Common Stock issuable upon such conversion unless certificates evidencing such shares of 8% Preferred Stock being converted are either delivered to the Corporation or any transfer agent or the holder notifies the Corporation or any transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement reasonably satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. Upon the conversion of the 8% Preferred Stock and the surrender by the holder of the 8% Preferred Stock of the certificates representing such shares duly endorsed (or the indemnity agreement referenced above) at the office of the Corporation or of any transfer agent for the Common Stock, there shall be issued and delivered to such holder, as soon as practicable thereafter at such office and in his name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Class A Common Stock into which the shares of the 8% Preferred Stock surrendered were convertible on the date on which such automatic conversion occurred. Within twenty (20) business days following the consummation of the Qualified Public Offering, the Corporation shall pay to the former holder of each share of 8% Preferred Stock, in cash, any and all accrued but unpaid 8% Dividends on such share of 8% Preferred Stock as of the date of such conversion.

 

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7.3 Conversion Only. If this Section 7.3 is elected by the Required Holders, immediately prior to the closing of a Qualified Public Offering, each share of 8% Preferred Stock then issued and outstanding shall automatically be converted into the number of shares of Class A Common Stock determined by dividing the 8% Liquidation Amount for such share of 8% Preferred Stock as of such date, calculated as if the Corporation was to be liquidated as of such date, by the mid-range offering price of a share of common stock sold to the public in such Qualified Public Offering as estimated by the underwriters in good faith and approved by the Board at the time of filing of the registration statement in connection with the Qualified Public Offering. If elected, immediately prior to the closing of the Qualified Public Offering, the outstanding shares of 8% Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Class A Common Stock issuable upon such conversion unless certificates evidencing such shares of 8% Preferred Stock being converted are either delivered to the Corporation or any transfer agent or the holder notifies the Corporation or any transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement reasonably satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. Upon the conversion of the 8% Preferred Stock and the surrender by the holder of the 8% Preferred Stock of the certificates representing such shares duly endorsed (or the indemnity agreement referenced above) at the office of the Corporation or of any transfer agent for the Class A Common Stock, there shall be issued and delivered to such holder, as soon as practicable thereafter at such office and in his name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Class A Common Stock into which the shares of the 8% Preferred Stock surrendered were convertible as of the date of such conversion.

 

7.4 Fractional Interests. If any fractional interest in a share of Class A Common Stock would, except for the provisions of this Section 7.4, be deliverable upon any conversion pursuant to Section 7.2 or 7.3 of this Part E, the Corporation, in lieu of delivering the fractional share therefore, will pay an amount to the holder thereof equal to the Market Price of such fractional interest as of the date of conversion.

 

7.5 Rounding. All calculations under this Section 7 shall be made to the nearest cent or to the nearest one-tenth of a share, as the case may be.

 

7.6 Cancellation of Converted Shares. All of the shares of 8% Preferred Stock converted as provided herein shall be retired and canceled and shall not be reissued and the number of authorized shares of 8% Preferred Stock shall automatically be reduced by such number of converted shares.

 

7.7 Protection of Conversion Rights. The Corporation shall not amend this Third Amended and Restated Certificate of Incorporation or participate in any

 

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reorganization, transfer of assets, consolidation, merger, dissolution, issuance or sale of securities or any other voluntary action, for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed under this Third Amended and Restated Certificate of Incorporation by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Third Amended and Restated Certificate of Incorporation and will take all actions that may be necessary or appropriate in order to protect the rights of the holders of shares of 8% Preferred Stock to convert such shares against impairment.

 

Section 8. Cancellation of Class. At such time as all of the shares of 8% Preferred Stock have been redeemed as provided in Section 5 of this Part E or converted as provided in Section 7 of this Part E, the 8% Preferred Stock shall cease to exist as a separate class of capital stock.

 

Section 9. Amendment and Waiver. Notwithstanding anything to the contrary contained in this Third Amended and Restated Certificate of Incorporation, so long as any 8% Preferred Stock remains outstanding, no amendment, alteration, change, repeal or waiver of any provision of this Third Amended and Restated Certificate of Incorporation shall be effective without the prior approval of the Required Holders.

 

Section 10. Rank. The Corporation shall not, without first obtaining the prior written consent of the Required Holders, issue any new class of equity securities (or any securities convertible into or exchangeable for equity securities) that rank senior to or in parity with the 8% Preferred Stock with respect to liquidations or the payment of distributions.

 

Part F. Certain Definitions

 

In addition to the terms defined elsewhere, the following terms shall have the respective meanings set forth below:

 

Change of Control” shall mean any sale, Transfer, issuance or redemption or series of sales, Transfers, issuances or redemptions (or any combination thereof) of shares of the Corporation’s capital stock by the holders thereof or the Corporation that results in any person or entity or group of affiliated persons or entities (other than the owners of the Corporation’s capital stock (on a fully diluted basis) as of immediately prior to any such transaction or series of transactions) owning more than 50% of the outstanding Common Stock in the Corporation.

 

Fundamental Change” shall mean a reorganization, consolidation or merger in which the Corporation is a party (except any reorganization, consolidation or merger where, after giving effect thereto, the holders of the Corporation’s outstanding capital stock (on a fully diluted basis) immediately prior to such reorganization, consolidation or merger will own immediately following such reorganization, consolidation or merger a majority of the outstanding voting equity securities of the Corporation (on a fully diluted basis), or a sale or other Transfer of all or substantially all of the assets of the Corporation and its Subsidiaries on a consolidated basis in any transaction or series of related transactions (other than sales in the ordinary course of business or Transfers of assets among the Corporation and its Subsidiaries).

 

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Market Price” of any security means the average of the closing prices of such security’s sales on all securities exchanges on which such security may at the time be listed, or, if there has been no sale on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the closing prices quoted in the NASDAQ System as of 4:00 P.M., New York time, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 business days consisting of the day as of which “Market Price” is being determined and the 20 consecutive business days prior to such day. If at any time such security is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the “Market Price” will be the fair value thereof reasonably determined in good faith by the Board.

 

Person” means a natural person, trust, estate, corporation (both non-profit and other corporation), partnership (both limited and general), joint venture, limited liability company, unincorporated association, sole proprietorship or other entity.

 

Qualified Public Offering” shall mean the closing of a public offering pursuant to a registration statement declared effective under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock that is designated as a Qualified Public Offering by the Board with the approval of the Required Holders.

 

Required Holders” means the holders at least 60% of the issued and outstanding shares of 8% Preferred Stock.

 

Subsidiary” shall mean any person or entity of which securities or other ownership interests representing more than 50% of the ordinary voting power or equity interests of such person or entity are at the time owned or controlled, directly or indirectly, by the Corporation.

 

Transfer” shall mean, as a noun, any voluntary or involuntary transfer, sale, assignment, pledge, encumbrance or other disposition, and as a verb, voluntarily or involuntarily to sell, assign, transfer, grant, give away, hypothecate, pledge, encumber or otherwise dispose of, and shall include any transfer by will, gift or intestate succession.

 

8% Junior Securities” means each other class of capital stock, including the Common Stock, or series of Preferred Stock, that does not expressly provide that it ranks senior to or in parity with the 8% Preferred Stock.

 

Part G. Effect of Cancellation of Classes

 

Section 1. Cancellation of Class B Common Stock. Effective immediately following the automatic conversion and cancellation of the Class B Common Stock pursuant to

 

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Section 4.4 of Part C of this Article IV, and without any further action on the part of the Corporation or any of its stockholders:

 

(a) Clause (c) of Part A of this Article IV shall be deleted in its entirety and the total authorized capital stock of the Corporation set forth in the first sentence of Part A of this Article IV shall be reduced by 6,486,715 shares to reflect the cancellation of the Class B Common Stock;

 

(b) the introductory sentence and Sections 4 and 5 of Part C of this Article IV shall be deleted in their entirety and Section 1 of Part C of this Article IV shall be deleted in its entirety and restated to read as follows:

 

“Section 1. Voting. On all matters on which holders of Common Stock are entitled to vote, each holder of shares of Common Stock shall be entitled to cast one (1) vote, in person or by proxy, for each share of Common Stock standing in his, her or its name on the transfer books of the Corporation.”; and

 

(c) the Class A Voting Common Stock, or Class A Common Stock, shall be renamed “Common Stock” and all references in this Third Amended and Restated Certificate of Incorporation to “Class A Voting Common Stock” or “Class A Common Stock” shall be deemed to be references to “Common Stock.”

 

Section 2. Cancellation of 8% Preferred Stock. Effective immediately following the cancellation of the 8% Preferred Stock pursuant to Section 8 of Part E of this Article IV, and without any further action on the part of the Corporation or any of its stockholders:

 

(a) Clause (d) of Part A of this Article IV shall be deleted in its entirety and the total authorized capital stock of the Corporation set forth in the first sentence of Part A of this Article IV shall be reduced by 12,500 shares to reflect the cancellation of the 8% Preferred Stock; and

 

(b) Part E and Part F of this Article IV shall be deleted in their entirety.

 

Section 3. Restated Certificate. If the Board determines, the Corporation may file a restated certificate of incorporation pursuant to Section 245 of the GCL, without a vote of stockholders, which restates and integrates but does not further amend this Third Amended and Restated Certificate of Incorporation to reflect the effects of Section 1 and Section 2 of this Part G of this Article IV and to remove this Part G of this Article IV.

 

ARTICLE V

Board of Directors

 

The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders:

 

(a) The business and affairs of the Corporation shall be managed by or under the direction of the Board.

 

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(b) The Board shall consist of not less than five nor more than fifteen members, the exact number of which shall be fixed from time to time by the Board.

 

(c) The Board shall be divided into three classes, designated Class I, Class II and Class III. The initial division of the Board into classes shall be made by the decision of the affirmative vote of a majority of the entire Board. The term of the initial Class I directors shall terminate on the date of the 2005 annual meeting; the term of the initial Class II directors shall terminate on the date of the 2006 annual meeting; and the term of the initial Class III directors shall terminate on the date of the 2007 annual meeting or, in each case, upon such director’s earlier death, resignation, retirement, disqualification or removal from office. At each succeeding annual meeting of stockholders beginning in 2005, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term and until their successors are duly elected and qualified, subject, however, to prior death, resignation, retirement, disqualification or removal from office. If the number of directors is changed, any increase or decrease shall be apportioned among the classes, and any additional director of any class elected to fill a vacancy resulting from an increase in such class or from the removal from office, death, disability, resignation or disqualification of a director or other cause shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors have the effect of removing or shortening the term of any incumbent director.

 

(d) Subject to the terms of any one or more classes or series of Preferred Stock, any vacancy on the Board that results from an increase in the number of directors may be filled by a majority of the Board then in office, provided that a quorum is present, and any other vacancy occurring on the Board may be filled by a majority of the Board then in office, even if less than a quorum, or by a sole remaining director. Any director of any class elected to fill a vacancy resulting from an increase in the number of directors of such class shall hold office for a term that shall coincide with the remaining term of that class. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his or her predecessor. Subject to the rights, if any, of the holders of shares of Preferred Stock then outstanding, any director or the entire Board may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least two-thirds of the voting power of the issued and outstanding shares of capital stock of the Corporation entitled to vote in connection with the election of directors. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Third Amended and Restated Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article V unless expressly provided by such terms.

 

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(e) In addition to the powers and authority hereinabove or by statute expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the GCL, this Third Amended and Restated Certificate of Incorporation, and any by-laws adopted by the stockholders; provided, however, that no by-laws hereafter adopted by the stockholders shall invalidate any prior act of the directors that would have been valid if such by-laws had not been adopted.

 

ARTICLE VI

Liability of Directors

 

A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except as to liability to the extent such exemption from liability or limitation thereof is not permitted under the paragraph (7) of subsection (b) of Section 102 of the GCL, as the same exists or may hereafter be amended. If the GCL hereafter is amended to further eliminate or limit the liability of a director, then a director of the Corporation, in addition to the circumstances in which a director is not personally liable as set forth in the preceding sentence, shall not be liable to the fullest extent permitted by the amended GCL. Any repeal or modification of this Article VI by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.

 

ARTICLE VII

Creditor Arrangements

 

Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under Section 291 of Title 8 of the GCL or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under Section 279 of Title 8 of the GCL order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on this Corporation.

 

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ARTICLE VIII

Indemnification

 

The Corporation shall indemnify its directors and officers to the fullest extent authorized or permitted by applicable law, as now or hereafter in effect, and such right to indemnification shall continue as to a person who has ceased to be a director or officer of the Corporation and shall inure to the benefit of his or her heirs, executors and personal and legal representatives; provided, however, that, except for proceedings to enforce rights to indemnification, the Corporation shall not be obligated to indemnify any director or officer (or his or her heirs, executors or personal or legal representatives) or advance expenses in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board. The right to indemnification conferred by this Article VIII shall include the right to be paid by the Corporation the expenses incurred in defending or otherwise participating in any proceeding in advance of its final disposition upon receipt by the Corporation of an undertaking by or on behalf of the director or officer receiving advancement to repay the amount advanced if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation under this Article VIII.

 

The Corporation may, to the extent authorized from time to time by the Board, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article VIII to directors and officers of the Corporation.

 

The rights to indemnification and to the advancement of expenses conferred in this Article VIII shall not be exclusive of any other right which any person may have or hereafter acquire under this Third Amended and Restated Certificate of Incorporation, the by-laws of the Corporation, any statute, agreement, vote of stockholders or disinterested directors or otherwise.

 

Any repeal or modification of this Article VIII by the stockholders of the Corporation shall not adversely affect any rights to indemnification and to the advancement of expenses of a director, officer, employee or agent of the Corporation existing at the time of such repeal or modification with respect to any acts or omissions occurring prior to such repeal or modification.

 

ARTICLE IX

No Action By Written Consent

 

Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation, and the ability of the stockholders to consent in writing to the taking of any action is hereby specifically denied.

 

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ARTICLE X

Location of Meetings of Stockholders and Books and Records

 

Meetings of stockholders may be held within or without the State of Delaware, as the by-laws of the Corporation may provide. The books of the Corporation may be kept (subject to any provision contained in the GCL) outside the State of Delaware at such place or places as may be designated from time to time by the Board or in the by-laws of the Corporation.

 

ARTICLE XI

Calling of Special Meetings of Stockholders

 

Unless otherwise required by law, special meetings of the stockholders, for any purpose or purposes, may be called by either (i) the Chairman of the Board, if there be one (ii) the President or (iii) the Board. The ability of the stockholders to call a special meeting of the stockholders is hereby specifically denied.

 

ARTICLE XII

Amendments of By-laws

 

In furtherance and not in limitation of the powers conferred upon it by the laws of the State of Delaware, the Board shall have the power to adopt, amend, alter or repeal the by-laws of the Corporation. The affirmative vote of at least a majority of the entire Board shall be required to adopt, amend, alter or repeal the by-laws of the Corporation. The by-laws of the Corporation also may be adopted, amended, altered or repealed by the affirmative vote of the holders of at least two-thirds of the voting power of the issued and outstanding shares of capital stock of the Corporation entitled to vote in connection with the election of directors.

 

ARTICLE XIII

Amendments

 

The Corporation reserves the right to amend, alter, change, repeal or waive any provision contained in this Third Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation; provided, however, that notwithstanding anything contained in this Third Amended and Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least two-thirds of the voting power of the issued and outstanding shares of capital stock of the Corporation entitled to vote in connection with the election of directors shall be required to amend, alter, change or repeal, or adopt any provision inconsistent with, Articles V, VI, VIII, IX, XI and XII of this Third Amended and Restated Certificate of Incorporation or this Article XIII.

 

Any repeal or modification of Articles VI or VIII of this Third Amended and Restated Certificate of Incorporation shall not adversely affect any rights under Articles VI or VIII of any individual referred to in Articles VI or VIII existing at the time of such repeal or modification with respect to acts or omissions of such individual occurring prior to such repeal or modification.

 

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ARTICLE XIV

Business Combinations

 

The Corporation shall not be governed by the provisions of Section 203 of the General Corporation Law.

 

 

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IN WITNESS WHEREOF, the Corporation has cause this Third Amended and Restated Certificate of Incorporation to be executed on its behalf this 12th day of October, 2004.

 

HURON CONSULTING GROUP INC.
   

/s/ Natalia Delgado


Name:   Natalia Delgado
Title:   General Counsel and Corporate Secretary

 

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Registration Rights Agreement

Exhibit 10.20

 

HURON CONSULTING GROUP INC.

 

REGISTRATION RIGHTS AGREEMENT

 

by and between

 

HCG Holdings LLC

 

and Huron Consulting Group Inc.

 

Dated as of October 12, 2004

 

 


HURON CONSULTING GROUP INC.

REGISTRATION RIGHTS AGREEMENT

 

REGISTRATION RIGHTS AGREEMENT (as amended from time to time, this “Agreement”), dated as of October 12, 2004, by and between Huron Consulting Group Inc., a Delaware corporation (the “Company”) and HCG Holdings LLC, a Delaware limited liability company (the “Stockholder”).

 

W I T N E S S E T H:

 

WHEREAS, the parties hereto wish to enter into this Registration Rights Agreement to memorialize their agreement regarding registration rights with respect to the Company.

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

 

ARTICLE I

 

DEFINITIONS

 

1.1 Definitions. The following terms when used in this Agreement shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof):

 

Agreement” shall have the meaning provided in the Introduction.

 

Commission” shall mean the Securities and Exchange Commission.

 

Common Stock” shall mean the common stock, par value $.01 per share of the Company.

 

Company” shall have the meaning provided in the Introduction.

 

Demand Registration” shall have the meaning provided in Section 2.1.

 

Effectiveness Period” shall have the meaning provided in Section 3.2(a).

 

Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

 

Form S-3” shall have the meaning provided in Section 3.1.

 

IPO” shall mean the initial public offering of Common Stock by the Company.

 

Lock Up Period” shall have the meaning provided in Section 5.1.

 

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Person” shall mean any natural person, corporation, firm, limited liability company, partnership, association, government, governmental agency or other entity, whether acting in an individual, fiduciary or other capacity.

 

Piggyback Registration” shall have the meaning provided in Section 4.1.

 

Prospectus” shall mean the prospectus included in any registration statement, as amended or supplemented by any prospectus supplement with respect of the terms of the offering of any security of the Company covered by such registration statement and all other amendments or supplements to the prospectus, including post effective amendments, and all material incorporated, or deemed to be incorporated, by reference in such prospectus.

 

Registrable Securities” shall mean (i) any shares of Common Stock of the Company owned by the Stockholder upon the IPO; and (ii) any equity securities of the Company issued or issuable with respect to the Common Stock referred to in clause (i) by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, reclassification, merger, consolidation or other reorganization. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when they have been distributed to the public pursuant to an offering registered under the Securities Act or sold to the public through a broker, dealer or market maker in compliance with Rule 144 (or any similar rule then in force). For purposes of this Agreement, a Person shall be deemed to be a holder of Registrable Securities whenever the Person has the right to acquire, directly or indirectly, the Registrable Securities (upon conversion or exercise in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right), whether or not the acquisition has actually been effected.

 

Registration” shall have the meaning provided in Section 2.1.

 

Registration Expenses” shall have the meaning provided in Section 7.1.

 

Resale Registration” shall have the meaning provided in Section 3.1.

 

Rule 144” shall mean Rule 144 promulgated under the Securities Act.

 

Securities Act” shall mean the Securities Act of 1933, as amended.

 

Restricted Shares Agreement” shall mean that certain Restricted Shares Award Agreement, dated as of December 10, 2002, among the Company, Huron Consulting Group LLC, a Delaware limited liability company, the Stockholder and Gary E. Holdren.

 

Suspension Period” shall have the meaning provided in Section 3.3.

 

Underwriting Agreement” shall mean that certain Underwriting Agreement, dated October 12, 2004, by and among the Company, the Stockholder and UBS Securities LLC, Deutsche Bank Securities Inc. and William Blair & Company, L.L.C., as representatives of the several underwriters named therein.

 

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ARTICLE II

 

DEMAND REGISTRATIONS

 

2.1 Requests for Registration. Subject to the terms and conditions hereof, at any time after the expiration of the lock-up period set forth in Section 6(e) of the Underwriting Agreement (or earlier if waived) and until the Stockholder ceases to own 10% of the Company’s issued and outstanding common stock, if the Stockholder requests in writing registration under the Securities Act of any of its Registrable Securities (a “Registration”), which request specifies the approximate number of Registrable Securities requested to be registered, then within ten days after receipt of any such request, the Company shall give written notice of such requested Registration to all other holders of Registrable Securities and shall include in the Registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the date of mailing of the Company’s notice. The Registration requested pursuant to this Section 2.1 is referred to herein as a “Demand Registration”.

 

2.2 Registration. The Stockholder, together with any transferee of the Stockholder, shall be entitled to not more than six Demand Registrations, in the aggregate. Subject to the limitations set forth in this Section 2.2 and in Section 2.4, no more than one Demand Registration may be requested in any six-month period. The Company shall pay all Registration Expenses in connection with each Demand Registration. No request for a Demand Registration shall be permitted unless the Registrable Securities sought to be included in such Demand Registration have an expected market value of at least $20 million. A Registration shall not count as a Demand Registration until it has become effective, and any Registration shall not count as a Demand Registration unless the initiating holder or holders of Registrable Securities are able to register and sell at least 70% of the Registrable Securities requested to be included in such Registration.

 

2.3 Priority on Demand Registrations. The Company shall not include in any Demand Registration any securities which are not Registrable Securities without the prior written consent of the Stockholder. If a Demand Registration is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities and, if permitted hereunder, other securities requested to be included in such offering, exceeds the number of Registrable Securities and other securities, if any, which can be sold in an orderly manner in such offering within a price range acceptable to the Stockholder, the Company shall include in the Registration, prior to the inclusion of any securities which are not Registrable Securities, the number of Registrable Securities requested to be included which, in the opinion of the underwriters, can be sold in an orderly manner within the price range of the offering, pro rata (or as may have been agreed among the holders of Registrable Securities) among the respective holders thereof on the basis of the amount of Registrable Securities requested

 

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to be registered by each such holder; provided that if the number of Registrable Securities to be included in the registration is less than 85% of the number requested to be so included, the holders of Registrable Securities covered by such Demand Registration shall be entitled to withdraw such request, upon the affirmative vote of holders holding 66% of such Registrable Securities, and, if such request is withdrawn, the Demand Registration shall not count as a permitted Demand Registration hereunder, and the Company shall pay all Registration Expenses in connection with the withdrawn Registration. Any Persons (other than holders of Registrable Securities) who participate in Demand Registrations which are not at the Company’s expense must pay their share of the Registration Expenses as provided in Article VII.

 

2.4 Restrictions on Registrations. The Company shall not be obligated to effect any Demand Registration within six months after the effective date of a Registration demanded by the holders of registration rights under a Registration in which the holders of Registrable Securities were given piggyback rights pursuant to Article IV and in which there was no reduction in the number of Registrable Securities requested to be included. Notwithstanding anything in this Article II to the contrary, if any request for a Demand Registration is delivered at a time when the Company has determined or is currently planning (and has discussed with its Board of Directors its plan) to file a registration statement with respect to an underwritten primary Registration of the Company’s common stock on behalf of the Company (so long as a registration statement is filed with respect thereto within one month of such request for the Demand Registration), the Company may require the holders of the Registrable Securities requesting such Demand Registration to postpone such request until the expiration of the 90-day period following the effective date of such Registration. The Company may, not more than twice in any 12-month period, postpone for up to 90 days the filing or the effectiveness of a registration statement for a Demand Registration if the Board of Directors of the Company determines in good faith that it is reasonably foreseeable that the Demand Registration or disclosure of information required by or related to the Demand Registration could materially and adversely impact the Company; provided, that in such event, the holders of Registrable Securities covered by the Demand Registration shall be entitled, upon the affirmative vote of holders holding 66% of such Registrable Securities, to withdraw such request and, if such request is withdrawn, the Demand Registration shall not count as a permitted Demand Registration hereunder, and the Company shall pay all Registration Expenses in connection with the withdrawn Registration; provided further, that upon the election of the Company and upon notice to the Stockholder, one such postponement or suspension may be extended to not more than 120 days at the sole discretion of the Company.

 

2.5 Selection of Underwriters. In connection with a Demand Registration, the Stockholder shall have the right to select the investment banker(s) and manager(s) to administer the offering; provided, however, that such selection shall be subject to the consent of the Company, which consent shall not be unreasonably withheld or delayed.

 

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ARTICLE III

 

RESALE REGISTRATIONS

 

3.1 Requests for Registration. Subject to Section 3.3, and further subject to the availability of a registration statement on Form S-3 (“Form S-3”) to the Company, the Company shall, upon the written request from the Stockholder, agree to register some or all of the Stockholder’s Registrable Securities, file with the Commission a registration statement on Form S-3 providing for an offering to be made on a continuous basis pursuant to Rule 415 under the Securities Act relating to the offer and sale of the Registrable Securities by the Stockholder and, thereafter, shall use its reasonable best efforts to cause such registration statement to be declared effective under the Securities Act as soon as reasonably practicable after the filing thereof. Within ten days after receipt of any such request, the Company shall give written notice of such requested Registration to all other holders of Registrable Securities and shall include in such Registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the receipt of the Company’s notice; provided, however, that no holder of Registrable Securities shall be entitled to have the Registrable Securities held by it covered by such registration statement unless such holder has made a written request, which request specifies the approximate number of Registrable Securities requested to be registered. The Registration requested pursuant to this Section 3.1 is referred to herein as a “Resale Registration”. Each holder of Registrable Securities shall be entitled to an unlimited number of Resale Registrations so long as it is an affiliate (as such term is used in the Securities Act) of the Company; provided, that the Company shall not be required to effect more than two Resale Registrations within any twelve-month period; provided, further, that the Company agrees to deregister any Registrable Securities included in a Resale Registration if so requested by any holder of such Registrable Securities.

 

3.2 Period of Effectiveness. Subject to Section 3.3, the Company shall use its reasonable best efforts:

 

(a) to keep a registration statement for the Resale Registration continuously effective in order to permit the Prospectus forming part thereof to be usable by the holders of Registrable Securities covered thereby for a period of two years after the Resale Registration is declared effective or such shorter period that will terminate when there are no Registrable Securities outstanding (in either case, such period being referred to herein as the “Effectiveness Period”); and

 

(b) after the registration statement for the Resale Registration has become effective, promptly upon the request of the Stockholder or a transferee of the Stockholder, if all of such holder’s Registrable Securities are not covered thereby, to take any action reasonably necessary to enable such holder to use the Prospectus forming a part thereof for offers and resales of Registrable Securities, including, without limitation, any action reasonably necessary to identify such holder as a selling securityholder in the Resale Registration.

 

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3.3 Temporary Suspensions of a Resale Registration. Notwithstanding anything to the contrary contained in this Agreement, the Company shall be entitled, from time to time by providing written notice to the holders, to require the holders to suspend the use of the Prospectus for sales of Registrable Securities under the Resale Registration for a reasonable period of time not to exceed 90 days and not more than twice in any twelve-month period (a “Suspension Period”) if the Board of Directors of the Company determines in good faith that it is reasonably foreseeable that the disclosure of information required by or related to the Resale Registration could materially and adversely impact the Company; provided that upon the election of the Company and upon notice to the Stockholder, one such postponement or suspension may be extended to not more than 120 days at the sole discretion of the Company. Immediately upon receipt of such notice, the holders of Registrable Securities covered by the Resale Registration shall suspend the use of the Prospectus until requisite changes to the Prospectus have been made as required below. Any Suspension Period shall terminate at such time as the public disclosure of such information. After the expiration of any Suspension Period and without any further request from the holders of Registrable Securities, the Company shall as promptly as reasonably practicable prepare a post-effective amendment or supplement to the registration statement for the Resale Registration or the Prospectus, or any document incorporated therein by reference, or file any other required document so that, as thereafter delivered to purchasers of the Registrable Securities included therein, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

 

3.4 Resale Registration Expenses. The Company shall pay all Registration Expenses of the holders of Registrable Securities in connection with all Resale Registrations.

 

ARTICLE IV

 

PIGGYBACK REGISTRATIONS

 

4.1 Right to Piggyback. Subject to the terms and conditions hereof, whenever the Company proposes to register (including for this purpose a Registration effected by the Company for shareholders other than holders of Registrable Securities) any of its securities under the Securities Act (other than (i) a Registration under Articles II and III hereof, (ii) a Registration of securities solely relating to an offering and sale pursuant to any employee stock plan or other employee benefit plan arrangement, including any registration on Form S-8 (or any successor form thereto) or (iii) a Registration of securities issued solely in an acquisition or business combination including any Registration on Form S-4 (or any successor form thereto)) (a “Piggyback Registration”), the Company shall give at least 20 days’ written notice to all holders of Registrable Securities of the Company’s intention to effect such a Registration and shall include in the Registration, subject to any agreement among the holders of Registrable Securities, all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the receipt of the Company’s notice.

 

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4.2 Piggyback Expenses. The Registration Expenses of the holders of Registrable Securities shall be paid by the Company in all Piggyback Registrations.

 

4.3 Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary Registration on behalf of the Company and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such Registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the Company, the Company shall include in such Registration (i) first, the securities the Company proposes to sell, (ii) second, the Registrable Securities requested to be included in the Registration and any securities requested to be included in the Registration pursuant to the registration rights previously granted pursuant to the Restricted Shares Agreement, pro rata among the holders of such Registrable Securities and the holder under the Restricted Share Agreement on the basis of the number of shares proposed to be registered by each, (iii) third, securities requested to be included in the Registration pursuant to registration rights granted by the Company after the date hereof, pro rata among the holders of such other securities on the basis of the number of shares requested to be registered by each such holder, and (iii) fourth, such other securities requested to be included in the Registration.

 

4.4 Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary Registration on behalf of holders of the Company’s securities and the managing underwriters advise the Company in writing that, in their opinion, the number of securities requested to be included in the Registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the holders initially requesting the Registration, the Company shall include in such Registration (i) first, the Registrable Securities requested to be included in the Registration, (ii) second, the securities requested to be included therein by the holders requesting such Registration, (iii) third, any securities requested to be included in the Registration pursuant to the registration rights previously granted pursuant to the Restricted Shares Agreement and any securities requested to be included in the Registration pursuant to registration rights granted by the Company after the date hereof, pro rata among the holder under the Restricted Share Agreement and the holders of such other securities on the basis of the number of shares requested to be registered by each such holder, and (iv) fourth, other securities requested to be included in such Registration.

 

4.5 Selection of Underwriters. If any Piggyback Registration is an underwritten offering, the Company shall select the investment banker(s) and manager(s) to administer the offering.

 

4.6 Other Registrations. Unless otherwise agreed to by Stockholder, if the Company has previously filed a registration statement with respect to Registrable Securities pursuant to Article II or pursuant to this Article IV, and if such previous Registration has not been withdrawn or abandoned, the Company shall not file or cause to be effected any other Registration of any of its equity securities or securities convertible or exchangeable into or exercisable for its equity securities (except on Form S-4 or Form S-8 or any successor or similar forms or any registration statement covering

 

8


only securities proposed to be issued in exchange for securities or assets of another corporation), whether on its own behalf or at the request of any holder or holders of such securities, until a period of at least six months has elapsed from the effective date of the previous Registration.

 

ARTICLE V

 

LOCK UP AGREEMENTS

 

5.1 In General. Each holder of Registrable Securities agrees not to effect any public sale or distribution (including sales pursuant to Rule 144) of equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during a period of up to 90 days (as may be requested by the Company and the managing underwriters) following any underwritten, registered public offering of Company common stock (such period being the “Lockup Period”), beginning on the effective date of such underwritten, registered offering (except for sales of such securities as part of such underwritten, registered offering), unless the managing underwriters otherwise agree. The foregoing provisions of this Section 5.1 shall not apply unless all directors and executive officers of the Company enter into substantially similar arrangements.

 

5.2 Effect on Company. The Company agrees (i) not to effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the period of up to 90 days, as required by the managing underwriters, beginning on the effective date of any underwritten Registration (except as part of such underwritten Registration or pursuant to Registrations on Form S-4 or Form S-8 or any successor or similar forms or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another corporation), unless the managing underwriters otherwise agree, and (ii) if requested by the managing underwriters, to use reasonable efforts to cause each director and executive officer to agree not to effect any public sale or distribution (including sales pursuant to Rule 144) of any such securities during such period (except as part of such underwritten registration, if otherwise permitted), unless the managing underwriters otherwise agree.

 

ARTICLE VI

 

REGISTRATION PROCEDURES

 

6.1 Registration Procedures. Whenever the holders of Registrable Securities have requested that any Registrable Securities be registered pursuant to this Agreement, the Company shall use its best efforts to effect the Registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto the Company shall as expeditiously as possible:

 

(a) Prepare and, in the case of a Demand Registration or Resale Registration, no later than 45 days after a request for a Demand Registration or Resale

 

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Registration, file with the Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause the registration statement to become effective and remain effective until the earlier of (i) the date when all Registrable Securities covered by the registration statement have been sold, or (ii) other than in the case of a Resale Registration, 180 days from the effective date of the registration statement; provided, that before filing a registration statement or Prospectus or any amendments or supplements thereto, the Company shall furnish to the counsel selected by the Stockholder copies of all such documents proposed to be filed, to the extent specifically requested by such counsel, including documents that are to be incorporated by reference into the registration statement, amendment or supplement, which documents shall be subject to the review of such counsel, and which proposed registration statement or amendment or supplement thereto shall not be filed by the Company if the Stockholder reasonably objects to such filing; and provided further, that the period for the preparation and filing of a Demand Registration or Resale Registration shall be 90 days if a request for a Demand Registration or Resale Registration is made in the first 45 days of any year, and the Company cannot file such Demand Registration or Resale Registration without audited financial statements for the prior calendar year under the rules of the Commission;

 

(b) Prepare and file with the Commission such amendments and supplements to the registration statement and the Prospectus used in connection therewith as may be necessary to keep the registration statement effective for the period referred to in Section 6.1(a) or Section 3.2, as applicable, and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by the registration statement during such period in accordance with the intended methods of disposition by the sellers thereof as set forth in the registration statement;

 

(c) Furnish to each seller of Registrable Securities such number of copies of the registration statement, each amendment and supplement thereto, the Prospectus included in the registration statement (including each preliminary prospectus) and such other documents as such holder may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such holder;

 

(d) Use commercially reasonable efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any holder thereof reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such holder to consummate the disposition in such jurisdictions of the Registrable Securities owned by such holder; provided, however, that the Company shall not be required to qualify to do business or file a general consent to service of process in any such jurisdiction;

 

(e) Notify each holder of such Registrable Securities, at any time when a Prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the Prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such holder, the Company shall prepare a supplement or amendment to the Prospectus so that,

 

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as thereafter delivered to the purchasers of such Registrable Securities, such Prospectus shall not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading;

 

(f) Promptly notify the holders of such Registrable Securities and the underwriters, if any, of the following events and (if requested by any such Persons) confirm such notification in writing: (i) the filing of the Prospectus or any prospectus supplement and the registration statement and any amendment or post-effective amendment thereto and, with respect to the registration statement or any post-effective amendment thereto, the declaration of the effectiveness of such document; (ii) any written comments by the Commission or any requests by the Commission for amendments or supplements to the registration statement or the Prospectus or for additional information; (iii) the issuance or threat of issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose; and (iv) the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threat of initiation of any proceeding for such purpose;

 

(g) Cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed and, if not so listed, to be listed on the NASD automated quotation system and, if listed on the NASD automated quotation system, use its best efforts to secure designation of all such Registrable Securities covered by the registration statement as a NASDAQ “national market system security” within the meaning of Rule 11Aa2-1 of the Commission or, failing that, to secure NASDAQ authorization for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least two market makers to register as such with respect to such Registrable Securities with the NASD;

 

(h) Provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement;

 

(i) Enter into such customary agreements (including, without limitation, underwriting agreements in customary form) and take all such other actions as the Stockholder or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities;

 

(j) Make available for inspection by the Stockholder, any underwriter participating in any disposition pursuant to the registration statement and any attorney, accountant or other agent retained by the Stockholder or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company’s officers, directors, employees and independent accountants to supply all information reasonably requested by the Stockholder, underwriter, attorney, accountant or agent in connection with the registration statement;

 

(k) Otherwise comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months

 

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beginning with the first day of the Company’s first full calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 1l(a) of the Securities Act and Rule 158 thereunder;

 

(l) Make every reasonable effort to prevent the entry of any order suspending the effectiveness of the registration statement and, in the event of the issuance of any such stop order, or of any order suspending or preventing the use of any related Prospectus or suspending the qualification of any security included in such registration statement for sale in any jurisdiction, the Company shall use its best efforts promptly to obtain the withdrawal of such order;

 

(m) Use its best efforts to cause such Registrable Securities covered by the registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the holders thereof to consummate the disposition of such Registrable Securities;

 

(n) Cooperate with the selling holders of Registrable Securities and the underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends, and enable such Registrable Securities to be in such lots and registered in such names as the underwriters may request at least two business days prior to any delivery of Registrable Securities to the underwriters;

 

(o) Make available, on a reasonable basis, senior management personnel of the Company to participate in, and cause them to cooperate with the selling holders of Registrable Securities or the managing underwriter in any underwritten offering in connection with “road show” and other customary marketing activities, including “one on one” meetings with prospective purchasers of the Registrable Securities to be sold in the underwritten offering and otherwise to facilitate, cooperate with, and participate in each proposed offering contemplated herein and customary selling efforts related thereto, in each case to the same extent as if the Company were engaged in a primary registered offering of its capital stock;

 

(p) Provide a CUSIP number for all Registrable Securities not later than the effective date of the registration statement; and

 

(q) In connection with an underwritten offering, (i) make such representations and warranties to the selling holders of such Registrable Securities and the underwriters with respect to the Registrable Securities and the registration statement as are customarily made by issuers to underwriters in primary underwritten offerings, (ii) obtain opinions of counsel to the Company and updates thereof (which counsel and which opinions shall be reasonably satisfactory to the underwriters and to the Stockholders) addressed to each selling holder and the underwriters covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by the Stockholders and underwriters or their counsel, (iii) obtain “cold comfort” letters and updates thereof from the Company’s independent certified public accountants addressed to the selling holders of Registrable

 

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Securities and the underwriters, such letters to be in customary form and cover matters of the type customarily covered in “cold comfort” letters by underwriters in connection with primary underwritten offerings, and (iv) deliver such documents and certificates as may be reasonably requested by the Stockholder and by the underwriters to evidence compliance with clause (i) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company.

 

ARTICLE VII

 

REGISTRATION EXPENSES

 

7.1 In General. All expenses incident to the Company’s performance of or compliance with this Agreement, including without limitation, all Registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, and fees and disbursements of counsel for the Company and all independent certified public accountants, underwriters (excluding discounts and commissions and transfer taxes, if any, attributable to the sale of Registrable Securities) and other Persons retained by the Company (all such expenses being herein called “Registration Expenses”), shall be borne by the Company, and the Company shall pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed or on the NASD automated quotation system.

 

7.2 Reimbursement by the Company. In connection with each Registration, the Company shall reimburse the holders of Registrable Securities covered by such Registration for the reasonable fees and disbursements of one counsel chosen by the holders of a majority of the Registrable Securities covered by such Registration.

 

7.3 Obligations of the Holders of Securities. To the extent Registration Expenses are not required to be paid by the Company, each holder of securities included in any Registration hereunder shall pay those Registration Expenses allocable to the registration of such holder’s securities so included, and any Registration Expenses not so allocable shall be borne by all sellers of securities included in the Registration in proportion to the aggregate selling price of the securities to be so registered.

 

ARTICLE VIII

 

INDEMNIFICATION

 

8.1 In General. In connection with any registration pursuant hereto, the Company agrees to indemnify, to the fullest extent permitted by law, each holder of Registrable Securities, its affiliates and their respective officers, directors, employees and agents, as the case may be, and each Person who controls the holder (within the meaning

 

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of the Securities Act), against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of material fact contained in any registration statement, Prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein as provided in Section 8.2 below. In connection with an underwritten offering, the Company shall indemnify the underwriters, their officers, directors and partners, as the case may be, and each Person who controls the underwriters (within the meaning of the Securities Act), to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities.

 

8.2 Information from the Holders. In connection with any registration statement in which a holder of Registrable Securities is participating pursuant to this Agreement, each holder shall furnish to the Company in writing information regarding such holder, the Registrable Securities and the intended distribution thereof for use in connection with any such registration statement or Prospectus and as shall be reasonably required in connection with any Registration, qualification or compliance required in connection with this Agreement and, to the fullest extent permitted by law, shall indemnify the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of material fact contained in the registration statement, Prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit furnished in writing by the holder specifically stating that it has been provided for inclusion in the registration statement and not corrected in a subsequent writing prior to the sale of the Registrable Securities; provided, that the obligation to indemnify shall be individual to each holder and shall be limited to the net amount of proceeds received by the holder from the sale of Registrable Securities pursuant to the registration statement.

 

8.3 Notice of Claim. Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) unless in the indemnified party’s reasonable judgment a conflict of interest between the indemnified and the indemnifying parties may exist with respect to such claim, permit the indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by the indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party, a conflict of interest may exist between the indemnified party and any other of such indemnified parties with respect to such claim.

 

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8.4 Survival of Indemnification. The indemnification provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and shall survive the transfer of securities.

 

8.5 Contribution. The Stockholder and the Company agree that if, for any reason, the indemnification provisions contemplated by Section 8.1 are unavailable to or are insufficient to hold harmless any indemnified party in respect of all expenses, claims, losses, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of all such expenses, claims, losses, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of, and benefits derived by, the indemnifying party and the indemnified party, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such indemnifying party or by such indemnified party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 8.5 were determined (i) by pro rata allocation (even if the Stockholder or any agents for, or underwriters of, the Registrable Securities, or all of them, were treated as one entity for such purpose); or (ii) by any other method of allocation which does not take account of the equitable considerations referred to in this Section 8.5. The amount paid or payable by an indemnified party as a result of the expenses, claims, losses, damages or liabilities (or actions in respect thereof) referred to above shall be deemed to include (subject to any limitations set forth thereon) any legal or other fees or expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action, proceeding or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding the foregoing, the obligation for contribution hereunder shall be individual to each holder and shall be limited to the net amount of proceeds received by the holder from such sale of Registrable Securities pursuant to the registration statement.

 

ARTICLE IX

 

PARTICIPATION IN UNDERWRITTEN REGISTRATIONS

 

9.1 Participation in Underwritten Registrations. No Person may participate in any Registration hereunder which is underwritten unless the Person (a) agrees to accept the terms of the underwriting agreement as agreed upon by the Company and the underwriters selected in accordance with this Agreement, and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements; provided, however, that this Article IX will not require any holder of Registrable

 

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Securities to agree to any lock up agreement or market standoff agreement other than those permitted by Section 5.1 hereof and that no holder of Registrable Securities included in any underwritten registration shall be required to (i) make any representations or warranties to the Company or the underwriters other than representations and warranties regarding the holder and the holder’s intended method of distribution or (ii) provide any indemnification other than as provided in Section 8.2.

 

ARTICLE X

 

REPORTS UNDER THE SECURITIES LAWS

 

10.1 Reports Under the Securities Laws. With a view to making available to the holders of Registrable Securities the benefits of Rule 144 and any other rule or regulation of the Commission that may at any time permit the holder to sell securities of the Company to the public without Registration, the Company agrees to:

 

(a) Make and keep public information available, as those terms are understood and defined in Rule 144, at all times subsequent to 90 days after the effective date of any registration statement covering an underwritten public offering filed under the Securities Act by the Company;

 

(b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it is subject to such reporting requirements; and

 

(c) Furnish to any holder so long as the holder owns any of the Registrable Securities forthwith upon request a written statement by the Company that it has complied with the reporting requirements of Rule 144 (at any time after 90 days after the effective date of the registration statement filed by the Company), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as may be reasonably requested by any holder in availing itself of any rule or regulation of the Commission permitting the selling of any the securities without Registration.

 

ARTICLE XI

 

CERTAIN LIMITATIONS IN CONNECTION WITH FUTURE GRANTS

OF REGISTRATION RIGHTS

 

11.1 Certain Limitations in Connection with Future Grants of Registration Rights. From and after the date of this Agreement and until the six Demand Registrations provided for in Article II have been completed, together with any transferee of the Stockholder, has exercised, the Company shall not enter into any agreement with any holder or prospective holder of any securities of the Company providing for the granting to the holder of registration rights which:

 

(a) grants any registration rights to any Person that are superior in any respect to those granted thereunder;

 

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(b) is otherwise inconsistent with the rights granted to the holders of Registrable Securities in this Agreement; and

 

(c) does not provide that the Stockholder has priority over such new holders of securities of the Company in any subsequent registration statement.

 

ARTICLE XII

 

TRANSFER OF REGISTRATION RIGHTS

 

12.1 Transfer of Registration Rights. Provided that the Company is given prompt written notice by the holder of Registrable Securities of any transfer of Registrable Securities by such holder stating the name and address of the transferee of such Registrable Securities and identifying the securities with respect to which the rights under this Agreement are being assigned and such transferee agrees in writing to be bound by the terms and conditions of this Agreement, the rights of the holder of Registrable Securities under this Agreement may be transferred in whole or in part at any time to any such transferee, so long as such transfer of securities is in accordance with all applicable state and federal securities laws and regulations. The Company shall be responsible for the Registration Expenses of any transferee or assignee pursuant to this Section 12.1 to the same extent as the original transferor.

 

ARTICLE XIII

 

INFORMATION BY HOLDERS OF REGISTRABLE SECURITIES

 

13.1 Reporting of Sales. Each holder of Registrable Securities shall report to the Company sales made pursuant to any Registration of such Registrable Securities.

 

ARTICLE XIV

 

MISCELLANEOUS

 

14.1 Notices. Any notice, demand, offer, or other instrument required or permitted to be given pursuant to this Agreement shall be in writing signed by the party giving such notice and shall, to the extent reasonably practicable, be sent by telecopy (with confirmation of receipt), and if not reasonably practicable to send by telecopy, then by hand delivery, overnight courier, telegram or certified mail (return receipt requested), to the other parties at the addresses set forth below or, if that address is not listed below, at the address contained in the member records of the Company:

 

If to the Company:

 

Huron Consulting Group Inc.

550 West Van Buren Street

Chicago, Illinois 60607

Attention: General Counsel

Facsimile: (312) 880-3250

 

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If to the Stockholder:

 

HCG Holdings LLC

c/o Lake Capital Management LLC

676 North Michigan Avenue

Suite 3900

Chicago, Illinois 60611

Attention: Paul Yovovich

Facsimile: (312) 640 7065

 

with a copy to:

 

Skadden, Arps, Slate, Meagher & Flom LLP

333 West Wacker Drive

Chicago, Illinois 60006

Attention: Kimberly A. deBeers

Facsimile: (312) 407-0411

 

Each party may change the place to which notice shall be sent or delivered or specify one additional address to which copies of notices may be sent, in either case by similar notice sent or delivered in like manner to the other parties. Without limiting any other means by which a party may be able to prove that a notice has been received by the other party, a notice shall be deemed to be duly received: (a) if sent by hand, overnight courier or telegram, the date when duly delivered at the address of the recipient; (b) if sent by certified mail, the date of the return receipt; or (c) if sent by telecopy, upon receipt by the sender of an acknowledgment or transmission report generated by the machine from which the telecopy was sent indicating that the telecopy was sent in its entirety to the recipient’s telecopy number.