Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Annual Report -- [x] Reg. S-K Item 405 69 387K
2: EX-10.12 Amendment No. 1 to Alliance Agreement 2± 10K
3: EX-10.15 2001 Long Term Incentive Plan 17 77K
4: EX-10.20 Credit Agreement, 5/21/2001 130 527K
5: EX-10.21 First Amendment to Credit Agreement 10 28K
6: EX-21.1 List of Subsidiaries 3 9K
7: EX-23.1 Consent of Grant Thornton LLP 1 7K
8: EX-99.1 Factor Affecting Future Financial Results 12 55K
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2001
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 000-31351
KPMG CONSULTING, INC.
(Exact name of registrant as specified in its charter)
-----------------
[Download Table]
DELAWARE 22-3680505
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1676 International Drive, McLean, VA 22102
(Address of principal executive office) (Zip Code)
(703) 747-3000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, 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 fliers 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
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of August 31, 2001, the aggregate market value of the voting stock held
by nonaffiliates of the Registrant was $2.33 billion.
The number of shares of common stock of the Registrant outstanding as of
August 31, 2001 was 158,598,563.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Pertinent extracts from Registrant's Proxy Statement for its 2001 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
are incorporated into Part III.
Such information incorporated by reference shall not be deemed to
specifically incorporate by reference the information referred to in Item
402(a)(8) of Regulation S-K.
-----------------
Table of Contents and Cross-Reference Index
[Enlarge/Download Table]
Page
Description Number
----------- ------
Part I.
Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 4
Item 3. Legal Proceedings......................................................... 4
Item 4. Submission of Matters to a Vote of Security Holders....................... 4
Executive Officers of the Company......................................... 5
Part II.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.. 6
Item 6. Selected Financial Data................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 9
Item 7A. Quantitative and Qualitative Disclosures about Market Risks............... 28
Item 8. Financial Statements and Supplementary Data............................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Finance
Disclosure.............................................................. 62
Part III.
Item 10. Directors and Executive Officers of the Registrant........................ 62*
Item 11. Executive Compensation.................................................... 62*
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 62*
Item 13. Certain Relationship and Related Transactions............................. 62*
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 62
Signatures......................................................................... 65
--------
* The information required by this Item is incorporated herein by reference to
the Company's Proxy Statement for its 2001 Annual Meeting of Stockholders.
PART I.
Item 1. Business
Item 1(a). General Development of Business.
KPMG Consulting, Inc. (generally referred to below as "we" or the "Company")
was incorporated as a business corporation under the laws of the State of
Delaware in 1999. Our principal offices are located at the KPMG Consulting
Tower, 1676 International Drive, McLean, Virginia 22102-4828. Our main
telephone number is 703-747-3000. Our Company previously was a part of KPMG
LLP, one of the "Big 5" accounting and consulting firms. In January 2000, KPMG
LLP transferred its consulting business to our Company. In February 2001 we
completed our initial public offering, and on February 8, 2001 we began to
trade on the Nasdaq National Market.
Item 1(b). Financial Information about Industry Segments.
Information required by Item 1(b) is incorporated herein by reference to
Note 20 of the "Notes to Financial Statements" included under Item 8 of this
Annual Report.
Item 1(c). Narrative Description of Business.
Overview
We are one of the world's largest consulting firms with over 10,000
employees. We serve over 2,500 clients, including global 2000 and Fortune 1000
companies, small and medium-sized businesses, government agencies and other
organizations. We provide our clients with a range of service offerings that
combine industry specific business strategy and operational improvements,
technology implementation, business systems and network integration. Our
service offerings are designed to help our clients generate revenues, reduce
costs, and access the information necessary to operate their business in a more
real-time environment. These services include business and technology strategy,
process design and operations improvement, systems integration, network
integration and infrastructure, and outsourcing.
Industry Groups
During fiscal year 2001, we provided consulting services through six
industry groups in which we have significant industry-specific knowledge (with
our Health Care group later being combined into our Public Services and High
Tech groups). These groups are:
. Public Services, which assists public services clients in process
improvement, enterprise resource planning and Internet integration
service offerings. This group is also a leading provider of financial
and economic advisory services to governments, corporations and
financial institutions around the world. Our public services clients
include federal government agencies, state and local governments, and
private and public higher education institutions.
. Financial Services, which focuses on delivering strategic, operational
and technology services, including new, component-based business and
technical architectures that leverage existing application systems and
e-business strategies and development delivered through consumer and
wholesale lines of business. Our clients in the financial services
sector include banking, insurance, securities, real estate, hospitality
and professional services institutions.
. Communications and Content, which provides services that support
broadband access, value-added services, content management, network
management and transaction-based commerce. We work with our clients to
help them formulate and implement e-business and business systems
strategies to reduce
1
operating costs and improve operating efficiencies and service levels
and to create new revenue opportunities in new service markets. Our
clients are companies providing the communications backbone to support
growth in the networked economy, including global and national
telecommunications companies and carriers, wireless service providers,
cable operators and emerging Internet protocol service providers. We
also serve content companies that provide information service providers
and broadcasters.
. High Tech, which delivers e-business integration service offerings to
established market leaders in the global arena and fast growing
e-business companies that increasingly require our infrastructure
development tools. We work with companies that create and develop
software and hardware products, as well as with new Internet companies.
We assist our clients in responding effectively to the realities of the
digital world by deploying teams that span strategy, design, branding,
technology and integration for high tech companies. These teams deliver
complete, end-to-end integration scaled to the size of the enterprise.
. Consumer and Industrial Markets, which advises clients on capturing and
assessing customer needs and buying pattern data to improve one-to-one
marketing and capture additional market share. In addition, we develop
and implement channel integration strategies, electronic storefronts,
sales automation and call center service offerings to help clients
better serve their customers. We focus on improving supply chain
integration through e-procurement, collaborative planning, fulfillment,
product data management and digital marketplace solutions. Finally, we
assist companies in increasing the productivity of their workforce
through Internet-enabled employee self-service and human resource
applications, web-based training and learning, back office/front office
integration, shared services and knowledge management. We work with both
established brick and mortar companies, including their related Internet
companies, and newer Internet companies that produce or distribute
consumer and industrial products and services. We focus on three market
sectors--consumer, industrial and automotive, and chemical and energy.
We work with clients in several vertical markets, including petroleum,
industrial products, food, retail and transportation, to create digital
marketplaces and trading exchanges that connect buyers and sellers
within each market.
. Health Care, which provides e-business and health care business
expertise and experience to enable health care organizations to
capitalize on enterprise resource planning and Internet opportunities.
We provide our health care clients with specialists in the provider,
payor and life sciences segments. We help improve their business
processes by implementing supply chain management, customer management,
finance, human resources and e-business service offerings to create
efficiencies through virtual enterprises of electronically-linked
business partners, such as health care virtual exchanges that link the
supply chain of providers, payors and suppliers. Our health care clients
include providers such as integrated delivery systems, academic medical
centers, physician practice management companies, payors such as
indemnity insurers, managed care insurers, and government payors, and
life sciences companies such as pharmaceutical, biotechnology medical
device companies and distributors. At the beginning of fiscal year 2002,
our Health Care group was combined into our Public Services and High
Tech groups.
Our focus on specific industries provides us with the ability to tailor our
service offerings to reflect an understanding of the marketplaces in which our
clients operate and enables our clients to achieve their objectives more
quickly and efficiently.
Our Joint Marketing Relationships
We have approximately 47 joint marketing relationships with key technology
providers which support and complement our service offerings. We have created
joint marketing relationships to enhance our ability to provide our clients
with high value services. Our joint marketing relationships typically entail
commitments regarding joint marketing, sales collaboration, training and
service offering development.
Our most significant joint marketing and product development relationships
are with Cisco Systems, Inc., Oracle Corporation, PeopleSoft, Inc., Microsoft
Corporation, Qwest Communications International, Inc. and SAP
2
America, Inc., which we believe strengthens our market approach. We work
together to develop comprehensive solutions to common business issues, offer
the expertise required to deliver those solutions, lead in the development of
new products, capitalize on joint marketing opportunities and remain at the
forefront of technology advances. These joint marketing agreements help us to
generate revenues as they provide a source of referrals and the ability to
jointly target specific accounts.
International Operations
We have multi-national operations covering North America, Latin America,
Ireland, Israel and the Asia Pacific region. We utilize this multi-national
network to provide consistent integrated service to clients throughout these
regions. In other regions, we frequently provide our clients with services
directly and, in some instances, we serve our clients through longstanding
working relationships with other consulting providers, primarily the consulting
professionals of KPMG International member firms.
Competition
We operate in a highly competitive and rapidly changing market and compete
with a variety of organizations that offer services similar to those we offer.
The market in which we operate includes a variety of participants, including
specialized e-business consulting firms, systems consulting and implementation
firms, "Big 5" accounting and consulting firms, application software firms
providing implementation and modification services, service groups of computer
equipment companies, outsourcing companies, systems integration companies, and
general management consulting firms.
Some of our competitors have significantly greater financial, technical and
marketing resources, generate greater revenues and have greater name
recognition than we do. Our competitive landscape is experiencing rapid
changes. For instance, one of the "Big 5" accounting and consulting firms has
sold its consulting business, and the former consulting practice of a "Big 5"
accounting firm recently completed its initial public offering, while others
have indicated plans or proposals to divest their consulting businesses or to
seek capital in the public markets. These changes in our marketplace may create
potentially larger and better capitalized competitors with enhanced abilities
to attract and retain professionals. We also compete with our clients' internal
resources.
A majority of our revenue is derived from global market leaders, Fortune
1000 companies, medium-sized companies, governmental organizations and other
large enterprises. There are an increasing number of professional services
firms seeking consulting engagements with these companies. We believe that the
principal competitive factors in the consulting industry in which we operate
include scope of services, service delivery approach, technical and industry
expertise, perceived value added, objectivity of advice given, focus on
achieving results, availability of appropriate resources and global reach.
Our ability to compete also depends in part on several factors beyond our
control, including the ability of our competitors to hire, retain and motivate
skilled professionals, the price at which others offer comparable services and
our competitors' responsiveness. There is a significant risk that this
increased competition will adversely affect our financial results in the
future.
Intellectual Property
Our success has resulted in part from our methodologies and other
proprietary intellectual property rights. We rely upon a combination of
nondisclosure and other contractual arrangements, trade secret, copyright and
trademark laws to protect our proprietary rights and rights of third parties
from whom we license intellectual property. We also enter into confidentiality
and intellectual property agreements with our employees that limit the
distribution of proprietary information. We currently have only a limited
ability to protect our important intellectual property rights.
3
Seasonality
Typically, client service hours, which translate into chargeable hours and
directly affect revenue, are reduced during the first half of our fiscal year
(i.e., July 1--December 31) due to the larger number of holidays and vacation
time taken by our employees and their clients. As a result, the first and
second quarters of the fiscal year historically are the lowest
revenue-generating and income-producing quarters.
Customer Dependence
In fiscal years 1999, 2000 and 2001, our revenues from the United States
federal government were $223.6 million, $302.3 million and $482.1 million,
respectively, representing 11.3%, 12.8% and 16.9% of our total revenues. A loss
of all of our contracts with the United States federal government would have a
material adverse effect on our business. While most of our government agency
clients have the ability to unilaterally terminate their contracts, our
relationships are generally not with political appointees, and we have not
typically experienced a loss of federal government business with a change of
administration.
Compliance with Environmental Laws
Federal, state and local statutes and regulations relating to the protection
of the environment have had no material adverse effect on our operating results
or competitive position, and we anticipate that they will have no material
adverse effect on our future operating results or competitive position in the
industry.
Employees
As of June 30, 2001, we had approximately 10,000 full-time employees,
including approximately 8,550 professional consultants. Our employees are not
represented by any labor union.
Item 2. Properties
Our corporate headquarters is located in McLean, Virginia. This facility has
approximately 229,000 square feet of office space. We also use approximately
1.7 million square feet of office space in approximately 109 locations
throughout the United States. Some of the spaces we occupy are used for
specific client contracts or development activities while administrative
personnel and professional service personnel use other spaces. In addition, we
have approximately 35 locations in Latin America, Canada, Ireland, Israel,
Japan, New Zealand, the Peoples Republic of China and South Korea with
approximately 250,000 additional square feet of office space. We believe that
our facilities are adequate to meet our needs for approximately the next 12
months.
Item 3. Legal Proceedings
We are from time to time the subject of lawsuits and other claims and
regulatory proceedings arising in the ordinary course of our business. We do
not expect that any of these matters, individually or in the aggregate, will
have a material impact on our financial condition or results of operations.
Additional information regarding legal proceedings of the Company is
incorporated by reference herein from Note 12, "Commitments and Contingencies"
of the "Notes to Financial Statements" included under Item 8 of this Report.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders in the fourth
quarter of fiscal 2001.
4
Executive Officers of the Company.
Our executive officers as of June 30, 2001 are:
[Enlarge/Download Table]
Date of
election or
Present office and position appointment to Business or professional experience
Executive Officer Age with the Company present office during the past five years
----------------- --- --------------------------- -------------- -----------------------------------
Randolph C. Blazer. 51 Chairman of the Board, 2/08/00 Chief Executive Officer and
Chief Executive Officer 4/27/00 President of the Company;
and President 4/27/00 Co-President and Co-Chief
Executive Officer of the Company;
member of two-person executive
team that directed all Consulting
services for KPMG LLP
David W. Black..... 39 Executive Vice President, 4/27/00 Executive Vice President, General
General Counsel and Counsel and Secretary for Affiliated
Secretary Computer Services, Inc.
Michael J. Donahue. 42 Group Executive Vice 4/27/00 Managing Partner, Solutions of
President and Chief KPMG LLP
Operating Officer
Robert C. Lamb, Jr. 46 Executive Vice President 6/26/00 Corporate Controller of Fleet
and Chief Financial Officer Boston Financial
Nathan H. Peck, Jr. 47 Executive Vice President, 4/27/00 Acting Chief Financial Officer of
Support Operations the Company; Chief Administrative
Officer, Consulting Practice of
KPMG LLP; Co-Practice Leader,
Financial Services Consulting
Practice of KPMG LLP
Bradley J. Schwartz 44 Group Executive Vice 4/27/00 Group Executive Vice President,
President, Worldwide 4/01/01 Worldwide Client Services,
Client Service and Communications and Content of the
Financial Services Company; Managing Partner,
Information, Communication &
Entertainment Consulting of
KPMG LLP
The term of office of each officer is until election and qualification of a
successor or otherwise at the pleasure of the Board of Directors.
There is no arrangement or understanding between any of the above-listed
officers and any other person pursuant to which any such officer was elected as
an officer.
None of the above-listed officers has any family relationship with any
director or other executive officer.
5
PART II.
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
Market Information
Our Common Stock is listed on the Nasdaq National Market under the symbol
KCIN. For information regarding high and low quarterly sales prices of our
common stock, see the "Quarterly Summarized Financial Information" table
included under Item 7 of this Report, which is incorporated by reference
herein.
Holders
At June 30, 2001, we had 534 stockholders of record.
Dividends
We have not paid cash dividends on our Common Stock, and we do not
anticipate paying any cash dividends on our Common Stock for at least the next
12 months. We intend to retain all of our earnings, if any, to finance the
expansion of our business and for general corporate purposes. Our existing
credit facilities contain financial covenants and restrictions, some of which
directly or indirectly may limit our ability to pay dividends. Our future
dividend policy will also depend on our earnings, capital requirements,
financial condition and other factors considered relevant by our board of
directors.
6
Item 6. Selected Financial Data(1)
The selected financial data were arrived from the combined/consolidated
financial statements of the Company which are included elsewhere in this Annual
Report on Form 10-K. The data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and the related notes thereto included herein.
[Enlarge/Download Table]
Combined
--------------------------------------------- Consolidated Pro Forma(2) Consolidated
Seven Months Five Months Year Year
Year Ended June 30, Ended Ended Ended Ended
-------------------------------- January 31, ------------ ------------ ------------
1997 1998 1999 2000 June 30, June 30, June 30,
-------- ---------- ---------- ------------ 2000 2000 2001
(in thousands) (in thousands, except per share amounts)
Revenues...................... $947,639 $1,428,891 $1,981,536 $1,264,818 $1,105,166 $2,369,984 $2,855,824
Professional compensation..... 366,718 552,570 744,450 436,214 443,781 972,480 1,026,470
Other direct contract expenses 198,646 270,209 374,091 263,106 259,801 522,907 751,951
Amortization of goodwill and
other intangible assets...... 1,903 4,968 6,572 8,957 8,575 17,532 31,474
Impairment charge............. -- -- -- -- 8,000 8,000 7,827
Other costs of service........ 155,668 248,969 276,874 203,821 119,653 321,627 365,381
-------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin.................. 224,704 352,175 579,549 352,720 265,356 527,438 672,721
Selling, general and
administrative expenses...... 159,058 237,093 325,276 220,743 192,920 371,853 451,792
Special payment to managing
directors(3)................. -- -- -- -- 34,520 -- --
-------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income.............. 65,646 115,082 254,273 131,977 37,916 155,585 220,929
Interest expense.............. (13,028) (16,810) (25,157) (27,339) (16,306) (43,645) (17,175)
Interest income............... -- -- -- -- 6,178 6,178 2,386
Gain on sale of assets........ -- -- -- -- -- -- 6,867
Equity in losses of affiliate. -- -- (622) (14,374) (15,812) (30,186) (76,019)
Minority interests............ -- 619 (111) 28 (439) (411) (140)
-------- ---------- ---------- ---------- ---------- ---------- ----------
Income before partner
distributions and
benefits(1).................. $ 52,618 $ 98,891 $ 228,383 $ 90,292
======== ========== ========== ==========
Income before taxes........... 11,537 87,521 136,848
Income tax expense............ 29,339 61,265 101,897
---------- ---------- ----------
Net income (loss)............. (17,802) 26,256 34,951
Dividend on Series A
Preferred Stock.............. (25,992) (25,992) (31,672)
Preferred stock conversion
discount..................... -- -- (131,250)
---------- ---------- ----------
Net income (loss) applicable
to common stockholders....... $ (43,794) $ 264 $ (127,971)
========== ========== ==========
Net income (loss) applicable
to common stockholders per
share--basic and diluted..... $ (0.58) $ -- $ (1.19)
========== ========== ==========
[Enlarge/Download Table]
As of June 30,
----------------------------------------------
Combined Consolidated
-------------------------- -------------------
1997 1998 1999 2000 2001
-------- -------- -------- ---------- --------
(in thousands)
Balance Sheet Data:
Total assets............................................... $205,071 $294,369 $492,191 $ 951,638 $999,635
Long term obligations...................................... -- 10,508 22,860 76,602 13,414
Series A Mandatorily Redeemable Convertible Preferred Stock -- -- -- 1,050,000 --
7
(1)As a partnership, all of KPMG LLP's earnings were allocable to its partners.
Accordingly, distributions and benefits to partners have not been reflected
as an expense in our historical financial statements through January 31,
2000. As a corporation, effective February 1, 2000, payments for services
rendered by our managing directors are included as professional
compensation. Likewise, as a corporation, we are subject to corporate income
taxes effective February 1, 2000.
(2)This pro forma data assumes our Separation from KPMG LLP occurred as of July
1, 1999 and reflects adjustments including:
. compensation and benefit costs for the seven month period ended January
31, 2000 for former consulting partners of KPMG LLP who became employees
of our company on January 31, 2000;
. changes to employee pension and bonus plans for the seven month period
ended January 31, 2000;
. income taxes for the pro forma period at a pro forma effective tax rate
of 70%.
. changes in the amount we pay KPMG LLP for shared infrastructure
services.
(3)For the period from January 31, 2000 through June 30, 2000, the profits of
KPMG LLP and our Company were allocated among the partners of KPMG LLP and
our managing directors as if the entities had been combined through June 30,
2000. Under this arrangement, our managing directors received a special
payment of $34.5 million by our Company for the five month period ended June
30, 2000.
8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with our
combined and consolidated financial statements and the notes to financial
statements included elsewhere in this Form 10-K. This Annual Report on Form
10-K contains forward-looking statements that involve risks and uncertainties.
See the "Disclosure Regarding Forward-Looking Statements." All references to
"years," unless otherwise noted, refer to our fiscal year, which ends on June
30. For example, a reference to "2001" or "fiscal 2001" means the 12-month
period that ended on June 30, 2001.
Historical Overview
We completed the separation ("Separation") of our Company from KPMG LLP on
January 31, 2000. As a partnership, all of KPMG LLP's earnings were allocable
to its partners. Accordingly, distributions and benefits to partners were not
reflected as an expense in our historical financial statements through January
31, 2000. Additionally, as a partnership, KPMG LLP was not subject to income
taxes and, as a result, our historical financial statements through January 31,
2000 do not include a provision for income taxes. Effective February 1, 2000,
following our Separation from KPMG LLP and our commencement of operations in
corporate form, our historical financial statements include payments for
services rendered by our managing directors, who were formerly consulting
partners of KPMG LLP, in professional compensation, and a provision for income
taxes. Consequently, the historical results of operations for the year ended
June 30, 2001, which reflect a corporate basis of presentation, and the
summation of the five months ended June 30, 2000, which reflect a corporate
basis of presentation, and the seven months ended January 31, 2000, which
reflect a partnership basis of presentation, are not directly comparable.
Company Overview
We are one of the world's largest consulting firms with over 10,000
employees. We serve over 2,500 clients, including global 2000 companies,
Fortune 1000 companies, small and medium-sized businesses, government agencies
and other organizations. We provide our clients with a range of service
offerings that combine industry specific business strategy and operational
improvements, technology selection and implementation. Our service offerings
are designed to help our clients generate revenues, improve efficiency and
contain costs.
These services include:
. business and technology strategy;
. process design and operations improvement;
. systems integration;
. network integration and infrastructure; and
. outsourcing.
During fiscal 2001 we provided consulting services through six industry
groups in which we have significant industry-specific knowledge. These groups
are public services, financial services, communications and content, high tech,
consumer and industrial markets, and health care. Commencing July 1, 2001, our
health care group will be combined with our public services and high tech
groups. In addition, we have multi-national operations covering North America,
Latin America, Asia Pacific, Ireland and Israel.
9
The following chart provides data regarding our recent acquisitions:
[Enlarge/Download Table]
Amount Paid
Acquired Entity Acquisition Date (in millions)
--------------- ---------------- -------------
Softline Consulting & Integrators, Inc.......................... May 27, 1999 $92.5
Studio Verso and WebVibe Corporation............................ July 1999 $15.5
KPMG Consulting Mexico, S. de R.L. de C.V. (the consulting
business of the Mexican member of KPMG International)......... December 29, 1999 $ 5.5
Consulting business of the Canadian member of KPMG
International................................................. March 1, 2000 $53.0
Consulting business of the Japanese member of KPMG
International................................................. April 1, 2000 $11.0
San Tong Consulting Corporation (the consulting business of the
South Korean member firm of KPMG International)............... May 31, 2000 $ 4.0
Consulting business of the Central American members of KPMG
International................................................. June 20, 2000 $ 2.2
Consulting business of the New Zealand member of KPMG
International and Web Limited................................. June 26, 2000 $16.5
Consulting business of the Venezuelan member of KPMG
International................................................. June 27, 2000 $ 1.9
Consulting business of the Argentine member of KPMG
International................................................. June 30, 2000 $ 5.3
Consulting business of the Colombian member of KPMG
International................................................. July 28, 2000 $ 0.5
Consulting business of the Irish member of KPMG International... September 15, 2000 $35.9
Consulting business of the Peruvian member of KPMG
International................................................. September 22, 2000 $ 1.2
Consulting business of the Brazilian member of KPMG
International................................................. October 3, 2000 $ 8.5
Consulting business of the Netherlands Antilles member of KPMG
International................................................. February 7, 2001 $11.0
Regional consulting businesses in Southeast Asia (including Hong
Kong, Malaysia, Singapore and Taiwan) of the respective
members of KPMG International................................. August 2, 2001 $16.9
Through January 31, 2000, we were part of the overall practice of KPMG LLP.
Our combined financial statements for all periods through January 31, 2000,
which include all majority-owned subsidiaries of KPMG LLP that were deemed part
of our consulting business, have been prepared using KPMG LLP's historical
basis of accounting in conformity with generally accepted accounting principles
in the United States of America ("GAAP") and include the assets, liabilities,
revenues and expenses related to our business. Included in our expenses are
allocations of certain costs incurred by KPMG LLP on behalf of our business.
These allocations are discussed in greater detail in the notes to financial
statements located elsewhere in this Form 10-K.
Since we historically operated as part of the partnership of KPMG LLP, our
consulting partners shared in the annual profits of KPMG LLP rather than
receiving salaries. Therefore, our historical combined financial statements
through January 31, 2000, as presented, do not reflect any compensation or
benefit costs for services rendered by the consulting partners of KPMG LLP. In
connection with the Separation, the consulting partners of KPMG LLP resigned
from KPMG LLP and became our managing directors. Effective February 1, 2000,
these individuals ceased to share in the profits of KPMG LLP and instead began
to receive salary and other benefits as part of their compensation. Our pro
forma financial statements, which appear elsewhere in this Management's
Discussion and Analysis, include adjustments for compensation and benefits we
would have paid to our managing directors under our current compensation
program.
10
Segments
During fiscal 2001 we provided consulting services through six major
industry groups including public services, financial services, communications
and content, high tech, consumer and industrial markets, and health care.
Commencing July 1, 2001, our health care group will be combined with our public
services and high tech groups.
Revenues
We derive substantially all of our revenues from professional service
activities. Revenues include all amounts that are billed or billable to
clients. Revenues for services rendered are recognized on a time and materials
or percentage-of-completion basis, depending upon the contract with the client.
Revenues related to time and material contracts are recognized in the period in
which services are performed. Revenues related to fixed price contracts are
recognized based upon professional costs incurred as a percentage of estimated
total professional costs of the respective contracts. The cumulative impact of
any revisions in estimated total revenues and direct contract costs are
recognized in the period in which they become known. Unbilled revenues
represents revenues for services performed that have not been billed.
Maintenance contract revenues are recognized ratably over the terms of the
agreement. When our consulting engagements have multiple elements, each element
is separately evaluated and revenue is recognized when it is realized or
realizable and earned.
We usually enter into contracts with our clients prior to the time we begin
work on a project. These contracts contain varying terms and conditions. We do
not believe it is appropriate to characterize these contracts as backlog
because these contracts generally provide that they can be terminated without
significant advance notice or penalty. Generally, in the event that a client
terminates a project, the client remains obligated to pay us for services
performed and expenses incurred by us through the date of termination.
Costs of Service
Professional Compensation. Competition for consulting professionals,
particularly information technology professionals with the advanced technology
skills necessary to perform the services we offer, has caused wages to increase
at a rate greater than the general rate of inflation, a trend we expect to
continue for the next few years. As with other professional service firms, we
must adequately anticipate wage increases. Our success is largely dependent on
our ability to keep our consultants highly utilized on revenue-generating
activities, and to hire and retain talented people.
Other Direct Contract Expenses. Other direct contract expenses include costs
directly attributable to client engagements. These costs include items such as
computer hardware and software, travel expenses for professional personnel, and
costs associated with subcontractors.
Amortization of Goodwill and Other Intangible Assets. Amortization of
goodwill and other intangible assets represents the amortization of costs of
acquired companies in excess of the fair value of the tangible net assets
acquired, assembled workforce, purchased software costs and software licensing
rights.
Other Costs of Service. Other costs of service primarily consist of the
costs attributable to the support and maintenance of the professional staff,
bad debt expense relating to accounts receivables, as well as other costs
attributable to the servicing of our client base. These costs include occupancy
costs related to office space utilized by professional staff, the costs of
training and recruiting professional staff and costs associated with
professional support personnel. Some of these costs relate to services
outsourced from KPMG LLP pursuant to the outsourcing agreement as noted below
under "Selling, General and Administrative Expenses."
Gross Margin
Gross margin, which is revenues after deducting costs of professional
compensation, other direct contract expenses, amortization of goodwill and
other intangible assets, and other costs of service, is primarily a function of
hours billed to clients, hourly billing rates and employee compensation.
11
Selling, General and Administrative Expenses
Selling, general and administrative expenses include expenses such as
marketing, costs for information systems, finance and accounting, human
resources, sales commissions and business development expenses related to
managing and growing our business. Prior to the Separation, most of these
activities were provided to us by KPMG LLP. Our historical financial statements
reflect costs determined on a basis consistent with the original outsourcing
agreement entered into at the time of the Separation. The Company and KPMG LLP
entered into a transition services agreement effective February 8, 2001,
whereby we no longer receive and do not incur the cost of services related to
the coordination and management of a multidisciplinary professional services
organization, as such services are not required for us to operate our business
as an independent company. For fiscal 2000, these costs included allocations
for international and U.S. partnership level management structure in the amount
of $36.4 million, international and firmwide partnership meetings in the amount
of $3.2 million and support of the KPMG Foundation, a charitable organization,
in the amount of $2.2 million.
Special Payment to Managing Directors
The terms of our Separation from KPMG LLP provided that, for the period from
January 31, 2000 through June 30, 2000, during which period none of our
outstanding common stock was held by outside investors, the profits of KPMG LLP
and our Company were to be allocated among the partners of KPMG LLP and our
managing directors on a basis as if the entities had been combined through June
30, 2000. Subsequent to June 30, 2000, there has been no further sharing of
profits by KPMG LLP and our Company based on the combined profitability of the
two firms. Under this arrangement, the payments to be made to our managing
directors who were formerly partners in KPMG LLP were paid by our Company. The
amount attributed to the five-month period ended June 30, 2000 was $34.5
million and is reflected as an expense in our consolidated statement of
operations.
Interest Expense
Through June 30, 2000 interest expense was allocated to us by KPMG LLP based
on outstanding accounts receivable and unbilled revenues. Effective July 1,
2000, we no longer are allocated interest by KPMG LLP. Interest expense is also
incurred in connection with debt financing agreements entered into by our
Company.
Equity in Losses of Affiliate and Loss on Redemption of Equity Interest in
Affiliate
Equity in losses of affiliate and loss on redemption of equity interest in
affiliate related to Qwest Cyber.Solutions LLC ("QCS"), which was established
in June 1999 as a joint venture with Qwest Communications International Inc. to
provide comprehensive Internet-based application service provider, application
hosting and application management services. QCS incurred cumulative losses in
excess of $65 million from its inception to December 27, 2000 and periodically
required additional capital to fund its operations and acquire equipment to
support the expansion of its business. We decided not to make any additional
capital contributions to QCS and on December 27, 2000, QCS redeemed our 49%
ownership interest in the joint venture in exchange for a nominal amount.
Accordingly, our investment in QCS of $63.3 million ($58.5 million on an after
tax basis), was written off through a noncash charge to earnings in December
2000.
Provision for Income Taxes
As part of a limited liability partnership, through January 31, 2000, we had
no history of paying corporate income taxes. Thereafter, we are operating in
corporate form and are subject to income taxes. Due to our high level of
non-deductible travel-related and amortization expenses, and unusable foreign
tax losses and credits, our effective tax rate is impacted to a significant
extent by our level of earnings. If our earnings grow and non-deductible
expenses grow at a slower rate or decrease, our effective tax rate will
decrease in the future.
12
Conversion Discount on Series A Preferred Stock
On January 31, 2000, Cisco Systems, Inc ("Cisco") purchased 5 million shares
of our Series A Preferred Stock for $1.05 billion. On September 15, 2000, Cisco
and KPMG LLP agreed that immediately prior to the closing of our initial public
offering, KPMG LLP would purchase 2.5 million shares of Series A Preferred
Stock from Cisco for $525 million. Our agreement with Cisco required us to
repurchase that number of shares of our Series A Preferred Stock that would
result in Cisco owning 9.9% of our common stock following the conversion and
the initial public offering. At the initial public offering price of $18.00
there was a 20%, or $262.5 million conversion discount, such that the Series A
Preferred Stock would convert into our common stock at $14.40 per share for an
equivalent of 72.9 million shares. On November 29, 2000, KPMG LLP agreed to
convert all of the Series A Preferred Stock it agreed to acquire from Cisco at
the initial public offering price without any conversion discount. Thus, the
net amount of the beneficial conversion feature (after deducting the amount of
the conversion discount foregone by KPMG LLP) was $131.25 million. The
intrinsic value (i.e., the "beneficial conversion feature") ascribable to the
Series A Preferred Stock as a result of the discounted conversion price was
reflected as a preferred dividend and a reduction of net income available to
common stockholders as of the date of the initial public offering.
Results of Operations Overview
Prior to our Separation and incorporation, we believe that our income before
partner distributions and benefits was the best measure for assessing our
historical financial performance. Through January 31, 2000, we operated as part
of a partnership, and payments to our consulting partners were accounted for as
distributions of partners' capital rather than as compensation expense. As a
result, through January 31, 2000, our historical professional compensation
expense does not reflect the professional compensation costs we incurred for
partners, including payments for services rendered or benefits paid. These
consulting partners resigned from KPMG LLP as of January 31, 2000 and became
our managing directors. For all periods after the Separation transaction,
payments to our managing directors are included in professional compensation.
In addition, as a partnership, we were not subject to federal or state income
taxes, as such taxes were the responsibility of the individual partners. For
all periods after the Separation transaction, we are subject to, and include a
provision for income taxes in our consolidated statements of operations.
The following table sets forth certain financial information on a historical
basis for the year ended June 30, 2001 and pro forma basis for the year ended
June 30, 2000. The adjustments made to fiscal 2000 historical results and
reflected in the pro forma columns include adjustments to managing directors'
compensation, income taxes, and other items as described in the accompanying
notes to the pro forma consolidated statements of operations, as if the
Separation transaction had occurred on July 1, 1999.
13
Historical Year Ended June 30, 2001 Compared to Pro Forma Year Ended June 30,
2000
(in thousands, except share and per share amounts)
[Enlarge/Download Table]
Fiscal 2000
-----------------------------------------------------------
Historical Historical
Combined Consolidated Pro Forma Historical
Seven Months Five Months Consolidated Consolidated
Ended Ended Pro Forma Year Ended Year Ended
January 31, 2000 June 30, 2000 Adjustments(a) June 30, 2000 June 30, 2001
---------------- ------------- -------------- ------------- -------------
Revenues........................... $1,264,818 $ 1,105,166 $ -- $ 2,369,984 $ 2,855,824
Professional compensation.......... 436,214 443,781 103,992 (1) 972,480 1,026,470
3,874 (2)
(15,381)(3)
Other direct contract expenses..... 263,106 259,801 -- 522,907 751,951
Amortization of goodwill and other
intangible assets................ 8,957 8,575 -- 17,532 31,474
Impairment charge.................. -- 8,000 -- 8,000 7,827
Other costs of service............. 203,821 119,653 (1,847)(3) 321,627 365,381
---------- ----------- -------- ----------- ------------
Gross margin....................... 352,720 265,356 (90,638) 527,438 672,721
Selling, general and administrative
expenses......................... 220,743 192,920 (41,810)(4) 371,853 451,792
Special payment to managing
directors........................ -- 34,520 (34,520)(5) -- --
---------- ----------- -------- ----------- ------------
Operating income (loss)............ 131,977 37,916 (14,308) 155,585 220,929
Interest expense................... (27,339) (16,306) -- (43,645) (17,175)
Interest income.................... -- 6,178 -- 6,178 2,386
Gain on sale of assets............. -- -- -- -- 6,867
Equity in losses of affiliate...... (14,374) (15,812) -- (30,186) (76,019)
Minority interests................. 28 (439) -- (411) (140)
---------- ----------- -------- ----------- ------------
Income before partner distributions
and benefits..................... $ 90,292
==========
Income (loss) before taxes......... 11,537 (14,308) 87,521 136,848
Income tax expense................. 29,339 31,926 (6) 61,265 101,897
----------- -------- ----------- ------------
Net income (loss).................. (17,802) (46,234) 26,256 34,951
Dividend on Series A Preferred
Stock............................ (25,992) -- (25,992) (31,672)
Preferred stock conversion discount -- -- -- (131,250)
----------- -------- ----------- ------------
Net income (loss) applicable to
common stockholders.............. $ (43,794) $(46,234) $ 264 $ (127,971)
=========== ======== =========== ============
Net income (loss) applicable to
common stockholders per share--
basic and diluted................ $ (0.58) $ -- $ (1.19)
=========== =========== ============
Weighted average shares--basic and
diluted.......................... 75,843,000 (7) 75,688,801 107,884,143
=========== =========== ============
--------
(a)For a complete description of the pro forma adjustments refer to page 18.
14
Revenues. Revenues increased $485.8 million, or 20.5%, from $2.4 billion for
the year ended June 30, 2000 to $2.9 billion for the year ended June 30, 2001.
This overall increase is primarily attributable to an 8.9% increase in U.S.
client service hours billed due to growth in several of our operating segments,
including public services (which increased 13%), high tech (which increased
52%) and communications and content (which increased 55%), as well as continued
growth from recently acquired international operations. This growth was
partially due to joint marketing relationships with our alliance partners,
growth in our next generation operations support systems / business support
systems offerings, business-to-business Internet-related services, and growth
from our key accounts. In addition, international revenue grew to $238.6
million due to acquisitions and organic growth within these operations.
Gross Margin. Gross margin as a percentage of revenues was 23.6% for the
year ended June 30, 2001, which reflects a 1.3% increase over a gross margin of
22.3% (on a pro forma basis) for the year ended June 30, 2000. Pro forma
adjustments were made to fiscal 2000 amounts (i) to include partner
compensation and benefit costs that we would have incurred for our managing
directors under the terms of the new compensation plan which we adopted and
implemented effective July 1, 2000, had the new plan been in place during the
historical period, (ii) to include partner vacation costs, and (iii) to
eliminate the cost of the employee pension plan following our Separation from
KPMG LLP on January 31, 2000, since our employees no longer participated in the
KPMG LLP defined benefit pension plan.
The 1.3% increase in gross margin was due to the following factors:
. Changes in our managing director compensation plan, whereby guaranteed
base compensation levels were decreased for most individuals, and the
percentage of total compensation that varies based upon individual and
company performance increased.
. Costs attributable to the support and maintenance of our professional
staff (such as occupancy, training, recruiting and professional support
personnel costs) increased at a slower rate than the overall growth in
the business.
. In fiscal 2000, we recorded one-time noncash charges relating to
compensatory common stock issuances and settlement of pension
obligations to certain managing directors. No such charges were recorded
in fiscal 2001.
. These factors that contributed to the net increase in the gross margin
percentage were partially offset by increases in costs directly
attributable to client engagements (including costs of subcontractors,
travel and lodging, and computer hardware and software). In particular,
due to economic uncertainty during the second half of fiscal 2001, we
increased the use of subcontractors to service client engagements while
limiting our hiring of new employees.
In dollar terms, gross margin increased by $145.3 million, or 27.5%, from
$527.4 million (on a pro forma basis) for the year ended June 30, 2000 to
$672.7 million for the year ended June 30, 2001.
The increase in dollar terms was due to the $485.8 million increase in
revenues described above, partially offset by cost increases due to the
following:
. A net increase in professional compensation of $54.0 million, or 5.6%,
from $972.5 million (on a pro forma basis) to $1,026.5 million,
primarily due to a $40.7 million increase in professional staff
compensation and benefits due to higher wages and benefits for new and
existing staff and an increase of $12.6 million in accruals for
incentive compensation. In addition, in April 2001, the Company recorded
a $20.0 million charge for severance and termination benefits related to
a reduction in workforce. The reduction in workforce affected
approximately 575 employees and was the result of aligning the Company's
workforce with market demand for certain types of services. These
increases were partially offset by a one-time charge of $19.4 million
recorded in fiscal 2000 relating to compensatory common stock issuances
and settlement of pension obligations to certain managing directors.
15
. An increase in other direct contract expenses of $229.0 million, or
43.8%, from $522.9 million to $752.0 million, due to increased use of
subcontractors and higher travel and lodging expenses incurred by our
professional staff to travel to client sites. These costs increased due
to the overall growth in our business and our increased use of
subcontractors to enable us to service our client engagements while
limiting our hiring of new employees during the economic uncertainty of
the second half of fiscal 2001.
. An increase in amortization of goodwill and other intangible assets of
$13.9 million, or 79.5%, from $17.5 million to $31.5 million, primarily
due to recently completed acquisitions.
. An increase in other costs of service of $43.8 million, or 13.6%, from
$321.6 million (on a pro forma basis) to $365.4 million due to overall
growth in the business and a $32.4 million increase in provisions for
doubtful accounts due to losses incurred and increased reserves during
this recent period of economic uncertainty.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $451.8 million for the year ended June 30, 2001.
This reflects an increase of $79.9 million, or 21.5%, from $371.9 million (on a
pro forma basis) for the year ended June 30, 2000. The increase in selling,
general and administrative expenses was primarily due to an increase of $29.7
million related to new business development costs as a result of higher levels
of commissions earned on a higher revenue base and additional sales personnel,
as well as higher marketing costs. In addition, there was an increase of $30.0
million due to the acquisition of several international consulting businesses
and an increase of $20.2 million of allocated and direct costs incurred to
support growth in the business primarily relating to office space, support and
operation services, and increased staffing.
Interest Expense. Interest expense decreased $26.5 million, or 60.6%, from
$43.6 million to $17.2 million for the years ended June 30, 2000 and 2001,
respectively. This decrease was due to decreased outstanding borrowings under
our credit facility for the year ended June 30, 2001 resulting from the use of
proceeds from our initial public offering and improvements made in our
management of client billings and collections, as evidenced by the reduction in
our days sales outstanding, on an operating basis, from 82 at June 30, 2000 to
68 at June 30, 2001. Included in interest expense for the year ended June 30,
2001 is $1.7 million representing a one-time noncash charge for a beneficial
conversion feature (discount) of certain acquisition obligations that converted
to common stock soon after the completion of our initial public offering.
Interest expense for the year ended June 30, 2000 consisted primarily of
interest incurred by KPMG LLP and allocated to the Company.
Interest Income. Interest income decreased $3.8 million, or 61.4%, from $6.2
million to $2.4 million for the year ended June 30, 2000 and 2001,
respectively. Interest income decreased as the proceeds from the issuance of
our Series A Preferred Stock on January 31, 2000 were used to fund working
capital requirements.
Gain on Sale of Assets. During fiscal 2001, the Company sold two small
Canadian practices: Career Consulting and KPMG-Versa Systems Inc., a software
development firm. The Company recognized $6.9 million in pre-tax gains on the
sale of these two businesses. These non-strategic business units generated
approximately $10 million of annual revenue and operated on a breakeven level.
Equity in Losses of Affiliate and Loss on Redemption of Equity Interest in
Affiliate. Equity in losses of affiliate and loss on redemption of equity
interest in affiliate, which related to our equity investment in QCS, increased
$45.8 million from $30.2 million to $76.0 million. On December 27, 2000, QCS
redeemed the Company's 49% ownership interest in the joint venture in exchange
for a nominal amount. Accordingly, the Company's investment in QCS of $63.3
million ($58.5 million on an after tax basis), was written off through a
noncash charge to earnings in December 2000. (See Note 5 of the
Combined/Consolidated Financial Statements.)
Income Tax Expense. For the year ended June 30, 2001, the Company earned
income before taxes of $136.8 million and provided for income taxes of $101.9
million, resulting in an effective tax rate of 74.5%. The tax rate was
significantly impacted by nondeductible losses associated with certain
international operations and with redemption of our investment in QCS.
16
Net Income (Loss). Net income increased by $8.7 million, from $26.3 million
(on a pro forma basis) for the year ended June 30, 2000, to $35.0 million for
the year ended June 30, 2001. Improved profitability reflects favorable impacts
from growth in our business coupled with favorable changes in our cost
structure, as discussed previously, partially offset by our higher equity in
losses of an affiliate and our loss on redemption of an equity interest in an
affiliate (which ceased in December 2000).
Preferred Stock Dividends. Series A Preferred Stock dividends totaling $31.7
million were recognized in fiscal 2001 compared to $26.0 million in fiscal
2000. After December 31, 2000, we were no longer required to pay dividends on
our Series A Preferred Stock because it was redeemed and converted into common
stock in connection with our initial public offering.
Preferred Stock Conversion Discount, Net. Our Series A Preferred Stock,
issued to Cisco in January 2000, contained a beneficial conversion feature
whereby the preferred stock could convert into common stock at a rate of
between 75% and 80% of the initial public offering price. Based upon the
initial public offering price of $18 per share, this discount equated to $262.5
million. In September 2000, KPMG LLP agreed to repurchase from Cisco one-half
of the Series A Preferred Stock. In November 2000, KPMG LLP agreed to convert
its Series A Preferred Stock without any conversion discount. Thus, the net
amount of the beneficial conversion feature (after deducting the amount of the
conversion discount foregone by KPMG LLP) was $131.25 million.
Net Loss Applicable to Common Stockholders. After deducting the
aforementioned dividends and conversion discount on our Series A Preferred
Stock, net loss applicable to common stockholders for the year ended June 30,
2001, was $128.0 million or $1.19 per share. As indicated above, the entire net
loss arose from the noncash charge of $131.25 million relating to the
conversion of the Series A Preferred Stock referred to above. For the
comparable period of the prior year, net income applicable to common
stockholders was $264,000, which was considerably less than $.01 per share (on
a pro forma basis). The per share amounts of the losses were further affected
by the increase in the number of common shares outstanding by 82 million (32
million on an average basis) as a result of our initial public offering on
February 8, 2001.
17
NOTES TO PRO FORMA FINANCIAL INFORMATION FOR FISCAL 2000
For purposes of preparing the accompanying fiscal 2000 pro forma financial
information, we have assumed that the Company's Separation from KPMG LLP,
converting the legal form of our business from a partnership to a corporation,
was completed on July 1, 1999, and have made the following adjustments to the
historical combined/consolidated condensed financial statements. The pro forma
financial information for fiscal 2000 does not assume the completion of our
initial public offering, which closed on February 13, 2001. These notes should
be read in conjunction with our combined/consolidated financial statements and
notes thereto, included in this Form 10-K.
(1) Adjustment to reflect partner compensation and benefit costs that we
would have incurred for our managing directors under the terms of our new
compensation plan which we have adopted and implemented effective July 1,
2000, had the new plan been in place during the historical periods.
(2) Adjustment to reflect the increase in partner accrued vacation pay
for the periods preceding our Company's Separation from KPMG LLP.
(3) Adjustment to reflect changes to our employee (professional and
administrative) pension plan. Following the Separation from KPMG LLP on
January 31, 2000, our employees no longer participate in the KPMG LLP
pension plan. The adjustments to eliminate costs under the employee pension
plan were based on the actual amounts allocated to us by KPMG LLP during the
pro forma periods.
(4) KPMG LLP historically allocated costs incurred in the coordination
and management of a multidisciplinary professional services organization to
each of its functional business units. For the period from January 31, 2000
until June 30, 2000, we received these services pursuant to the original
outsourcing agreement. Certain services provided to us pursuant to the
original outsourcing agreement prior to July 1, 2000 were not necessary for
us to operate our business as an independent company since they were
duplicative or were performed by us internally. Consequently, these services
were no longer charged to us effective as of July 1, 2000. These costs
primarily relate to executive management costs that were allocated to us by
KPMG LLP. Because we have historically had a full executive management team
responsible for the consulting business of KPMG LLP, these allocated costs
are no longer incurred. The costs related to our executive management are
reflected in our historical financial statements for non-partner costs and
are included in pro forma adjustment (1) for managing directors.
Additionally, we no longer are a member of KPMG International since the
initial public offering. KPMG International costs previously allocated to us
by KPMG LLP were for executive management costs and headquarter support
costs for KPMG International. KPMG International's management was
duplicative of our executive management costs. We will not incur these costs
incrementally since we will operate in corporate form and our existing
executive management team will oversee our international operations.
The pro forma effect of the elimination of those costs for the year ended
June 30, 2000 pursuant to the transition services agreement is as follows
(in thousands):
[Download Table]
Year Ended
June 30, 2000
-------------
International and U.S. partnership level management structure $36,373
International and firmwide partnership meetings.............. 3,202
Support of the KPMG Foundation............................... 2,235
-------
Total..................................................... $41,810
=======
(5) Reflects an adjustment to eliminate the special payment to managing
directors. The special payment represents a payment to our managing
directors that was determined based on an allocation of the profits of KPMG
LLP and our Company among the partners of KPMG LLP and our managing
directors, as if the entities had been combined through June 30, 2000. The
amounts paid by us to our managing directors in excess of the compensation
they earned as managing directors of our Company represents the amount
classified as a special payment in our statement of operations. Absent this
arrangement with KPMG LLP, our managing directors would not have received
this additional payment.
18
(6) Reflects an adjustment for an estimated income tax provision as if we
had operated as a corporation, including tax benefits of certain losses, at
a pro forma effective tax rate of 70% for the year ended June 30, 2000. Due
to our non-deductible goodwill amortization and our high level of
non-deductible travel related expenses, our effective tax rate is impacted
to a great extent by our level of earnings. If our earnings grow and
non-deductible expenses and goodwill amortization grow at a lesser rate or
decrease, our effective tax rate will decrease in the future.
(7) Pro forma weighted average shares outstanding for the year ended June
30, 2000--basic and diluted, are calculated based on:
[Enlarge/Download Table]
Assumed
Outstanding Shares
Common Stock Issuances From Outstanding
---------------------- ----------- -----------
Separation transaction............................................. 7/1/99 75,563,773
Stock awards, net of forfeitures................................... 1/31/00 13,502
Stock awards, net of forfeitures................................... 2/16/00 297,324
Acquisition of the consulting business of the New Zealand member of
KPMG International............................................... 6/26/00 6,243
Five Months Ended June 30, 1999 Compared to Five Months Ended June 30, 2000
(in thousands, except per share amounts)
[Enlarge/Download Table]
Historical Historical
Combined Consolidated
Five Months Five Months
Ended Ended
June 30, 1999 June 30, 2000
------------- -------------
Revenues............................................................... $882,657 $1,105,166
Professional compensation.............................................. 325,563 443,781
Other direct contract expenses......................................... 181,567 259,801
Amortization of goodwill and other intangible assets................... 3,174 8,575
Impairment charge...................................................... -- 8,000
Other costs of service................................................. 123,671 119,653
-------- ----------
Gross margin........................................................... 248,682 265,356
Selling, general and administrative expenses........................... 161,412 192,920
Special payment to managing directors.................................. -- 34,520
-------- ----------
Operating income....................................................... 87,270 37,916
Interest expense....................................................... (7,879) (16,306)
Interest income........................................................ -- 6,178
Equity in losses of affiliate.......................................... (622) (15,812)
Minority interests..................................................... (46) (439)
-------- ----------
Income before partner distributions and benefits....................... $ 78,723
========
Income before taxes.................................................... 11,537
Income tax expense..................................................... 29,339
----------
Net loss............................................................... (17,802)
Dividend on Series A Preferred Stock................................... (25,992)
Net loss applicable to common stockholders............................. $ (43,794)
==========
Net loss applicable to common stockholders per share--basic and diluted $ (0.58)
==========
19
Revenues. Revenues increased $222.5 million, or 25.2%, from $882.7 million
for the five months ended June 30, 1999 to $1.1 billion for the five months
ended June 30, 2000. The increase is attributable to the addition of
approximately 335 new clients, combined with a 12.4% increase in total client
service hours billed, and $49.3 million of revenue generated by
recently-acquired international consulting businesses. Revenues grew at a
slower rate in fiscal 2000 than in fiscal 1999 due to the conclusion of Year
2000 related systems remediation projects and the subsequent delay by many of
our clients in starting new technology initiatives.
The impact of the decreased demand for Year 2000 related systems integration
projects particularly impacted the financial services and consumer and
industrial markets segments where we experienced declines in revenues. Many of
our clients in these segments postponed purchases of technology consulting
services in order to assess the effectiveness of their Year 2000 related
systems upgrades and evaluate the potential of Internet-based business
approaches. The negative impacts were partially offset by strong growth in the
public services segment due to increased government spending, the high tech
segment due to increased spending on Internet services, and the communications
and content segment due to favorable results of our joint marketing
relationships with Cisco and Oracle, our new operations support
systems/business support systems offerings and increased spending by the
telecommunications sector; and our recently-acquired international consulting
businesses.
Gross Margin. Gross margin as a percentage of revenues decreased from 28.2%
to 24.0% from the five months ended June 30, 1999 to the five months ended June
30, 2000 as a result of the following factors:
. beginning February 1, 2000, we have included payments for services
rendered by our managing directors who were formerly consulting partners
of KPMG LLP in professional compensation;
. our investment in training our professionals in the Internet skills
required;
. our investment in the development of new Internet-related service
offerings;
. costs of approximately $6.2 million associated with a reduction in
workforce involving approximately 350 people that occurred in March
2000. This action was taken to realign our workforce and reduce
non-Internet trained personnel, consistent with our focus on e-business
and Internet related services. The reduction in workforce impacted all
levels of U.S. professional personnel, including managing directors, and
represented less than 5% of our workforce;
. an impairment charge of $8.0 million associated with goodwill relating
to an acquired entity in the business of reselling enterprise resource
planning software and related implementation services, and a software
licensing agreement, that occurred in March 2000; and
. increased amortization of goodwill and other intangible assets due to
recent acquisitions.
In dollar terms, gross margin increased by $16.7 million, or 6.7%, from
$248.7 million for the five months ended June 30, 1999 to $265.4 million for
the five months ended June 30, 2000, primarily due to an increase in revenues
of $222.5 million offset by the following factors:
. an increase in professional compensation of $118.2 million, or 36.3%,
from $325.6 million to $443.8 million attributable to $120.0 million in
managing directors compensation for the five months ended June 30, 2000
(including a one-time noncash charge of $17.2 million related to
compensatory common stock issuances to certain managing directors);
$11.5 million attributable to higher wages paid to staff, and $6.2
million in costs associated with a reduction in workforce. These
increases were partially offset by cost savings from the elimination of
an employees' defined benefit pension plan ($6.1 million) and a
reduction in employee incentive compensation due to creation of an
employee stock option plan ($13.4 million);
. an increase in other direct contract expenses of $78.2 million, or
43.1%, from $181.6 million to $259.8 million attributable to higher
travel and lodging expenses for our client service personnel to travel
to client locations and other disbursements connected with specific
client engagements, including the cost of subcontractors to supplement
our own resources;
20
. an $8.0 million impairment charge associated with goodwill and a
software licensing agreement; and
. a net increase of $1.4 million of expenses resulting from additional
amortization primarily relating to recently completed acquisitions ($5.4
million) offset by a reduction in other costs of service ($4.0 million).
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $31.5 million, or 19.5%, from $161.4
million to $192.9 million, primarily due to:
. an increase of $31.3 million relating to new business development costs,
which includes an increase in our professional sales force from 139
sales professionals at June 30, 1999 to 189 sales professionals at June
30, 2000;
. an increase of $8.2 million relating to allocated costs to support
activities of KPMG International management;
. a decrease of $15.9 million in allocated infrastructure costs relating
to consulting methodologies, marketing and communications as the Company
began developing its own programs; and
. an increase of $7.9 million in expenses resulting from a variety of
factors, none of which individually is significant in relation to total
selling, general and administrative expenses for the periods, including
information systems and other support services.
Interest Income. Interest income was $6.2 million for the five months ended
June 30, 2000. Interest was earned primarily on an investment of a portion of
the proceeds from the issuance of our Series A Preferred Stock on January 31,
2000.
Interest Expense. Interest expense increased $8.4 million, or 107%, from
$7.9 million to $16.3 million, primarily due to interest on outstanding
borrowings on our new credit facility and an increase in interest expense
allocated to us by KPMG LLP due to an increase in our accounts receivable and
unbilled revenues.
Equity in Losses of Affiliate. Equity in losses of affiliate, associated
with our equity investment in QCS, increased $15.2 million from $0.6 million to
$15.8 million as a result of our $11.7 million share of the net losses incurred
by this joint venture as well as $4.1 million of amortization of the excess of
the cost basis of our investment in QCS over our proportionate share of QCS's
net assets.
Income Tax Expense. On February 1, 2000, following the Separation
transaction, our Company began operating in corporate form and became a taxable
entity. For the five months ended June 30, 2000, our Company earned income
before taxes of $11.5 million and recognized a tax provision of $29.3 million
(representing an effective tax rate of 254.3%). The effective tax rate reflects
a high level of non-deductible travel related and goodwill amortization
expense, tax losses incurred by certain subsidiaries that are not currently
available to offset consolidated taxable income and a taxable gain on common
stock awarded to employees of the Barents Group, a subsidiary of our Company,
which has since merged into our operating subsidiary.
Net Income (Loss). The net loss for the five months ended June 30, 2000 of
$17.8 million was significantly impacted by the following four items:
. $17.2 million in noncash charges related to compensatory common stock
issuances;
. $34.5 million special payment to managing directors;
. $8.0 million impairment charge described above; and
. our effective income tax rate of 254.3% for the period.
Preferred Stock Dividend. Our Series A Preferred Stock carried a 6% annual
dividend, payable quarterly. Dividends totalling $26.0 million were recognized
in the five month period since January 31, 2000, the date of issuance.
Net Income (Loss) Attributable to Common Stockholders. After deducting our
preferred stock dividend, the net loss attributable to common stockholders was
$43.8 million or $0.58 per share.
21
Seven Months Ended January 31, 1999 Compared to Seven Months Ended January 31,
2000
[Enlarge/Download Table]
Historical Historical
Combined Combined
Seven Months Seven Months
Ended Ended
January 31, 1999 January 31, 2000
---------------- ----------------
(unaudited)
(in thousands)
Revenues............................................ $1,098,879 $1,264,818
Professional compensation *......................... 418,887 436,214
Other direct contract expenses...................... 192,524 263,106
Amortization of goodwill and other intangible assets 3,398 8,957
Other costs of service *............................ 153,203 203,821
---------- ----------
Gross margin *...................................... 330,867 352,720
Selling, general and administrative expense......... 163,864 220,743
---------- ----------
Operating income *.................................. 167,003 131,977
Interest expense.................................... (17,278) (27,339)
Equity in losses of affiliate....................... -- (14,374)
Minority interests.................................. (65) 28
---------- ----------
Income before partner distributions and benefits *.. $ 149,660 $ 90,292
========== ==========
--------
* Excludes payments for partner distributions and benefits.
Revenues. Revenues increased $166 million, or 15.1%, from $1.1 billion in
the first seven months of 1999 to $1.3 billion in the first seven months of
2000, primarily attributable to an increase of approximately 410 new clients,
combined with a 4.6% increase in total client service hours. Revenues grew at a
slower rate in fiscal 2000 than in fiscal 1999 due to decreased demand for our
services as a result of the conclusion of Year 2000 related systems remediation
projects beginning in June of 1999.
Strong revenue growth was experienced by our public services, high tech and
communications and content segments. In the public services segment, revenue
growth was due to increased federal and state spending. In the high tech
segment, revenue increases reflected increased spending on Internet services.
Communications and content revenue gains were due to opportunities generated by
our joint market relationships and the introduction of our new operations and
business support systems service offerings. In addition, our financial services
segment revenue growth was largely due to the services provided to support
increased mergers and acquisition activities. Offsetting this revenue growth
were declines incurred by the consumer and industrial markets and health care
segments. These revenue declines reflected decreased demand for Year 2000
implementations and reduced spending by health care companies due to decreased
reimbursements from managed care organizations.
Gross Margin. Gross margin as a percentage of revenues decreased from 30.1%
to 27.9% as a result of our investment in training our professionals in the
Internet skills required to meet the changing demands of our clients, and our
investment in the development of new products to meet the demands of the
Internet economy. In dollar terms, gross margin increased $21.9 million, or
6.6%, from $330.9 million in the first seven months of 1999 to $352.7 million
in the first seven months of 2000. The increase in dollar terms was due to the
increase in revenues described above offset by:
. an increase in other direct contract expenses of $70.6 million, or
36.7%, from $192.5 million in the first seven months of 1999 to $263.1
million in the first seven months of fiscal 2000, attributable to higher
22
travel and lodging expenses primarily due to increases in transportation
costs and in the number of our consultants traveling to serve new and
existing clients, and other disbursements connected with specific client
engagements, including the cost of subcontractors to supplement our own
resources;
. an increase in other costs of service due to compensation to existing
and newly-hired support staff of $25.8 million;
. an increase in professional compensation of $17.3 million, or 4.1%, from
$418.9 million in the first seven months of 1999 to $436.2 million in
the first seven months of fiscal 2000, attributable to higher wages paid
to existing staff and the net addition of 300 professionals, offset in
part by lower incentive compensation expense as a result of slower
growth;
. an increase of $5.6 million of amortization of goodwill and other
intangible assets, due to our recent acquisitions;
. an increase of $9.2 million of occupancy expenses resulting from
additional space requirements to support a larger employee base; and
. an increase of $15.5 million in expenses resulting from a variety of
factors, none of which individually is significant in relation to gross
margin for the periods, including increased costs associated with
internal meetings, employee relocation costs, legal costs and bad debt
expense.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $56.8 million, or 34.7%, from $163.9 million
in the first seven months of 1999 to $220.7 million in the first seven months
of 2000 primarily due to:
. an increase of $30.9 million relating to new business development costs,
which included an increase in our professional sales force from 128
sales professionals at January 31, 1999 to 180 sales professionals at
January 31, 2000;
. an increase of $16.2 million in information systems operating costs, due
primarily to increased telecommunications expenses for higher numbers of
personnel remotely accessing our systems; and
. an increase of $9.7 million in expenses resulting from a variety of
factors, none of which individually is significant in relation to total
selling, general and administrative expenses for the periods, including
international support costs, client services delivery, benefits, and
support and operational services.
Interest Expense. The allocation of interest expense increased $10.0
million, or 58.2%, from $17.3 million in the first seven months of 1999 to
$27.3 million in the first seven months of 2000, primarily due to an increase
in our accounts receivable and unbilled revenues.
Equity in Losses of Affiliate. Equity in losses of affiliate, associated
with our equity investment in QCS, reflects our $9.3 million share of the net
losses incurred by this joint venture as well as $5.1 million of amortization
of the excess of the cost basis of our investment in QCS over our proportionate
share of QCS's net assets.
Income before Partner Distributions and Benefits. Income before partner
distributions and benefits decreased $59.4 million, or 39.7%, from $149.7
million in the first seven months of 1999 to $90.3 million in the first seven
months of 2000 as a result of the factors discussed above.
23
Industry Results
We provide consulting services through six industry groups. The tables below
include financial information for each of these groups.
[Download Table]
Year Seven Months Five Months Year
Ended Ended Ended Ended
June 30, January 31, June 30, June 30,
1999 2000 2000(1) 2001(1)
---------- ------------ ----------- ----------
(in thousands) (in thousands)
Revenues:
Financial Services............. $ 520,451 $ 291,976 $ 235,350 $ 458,970
Consumer and Industrial Markets 406,826 200,637 154,404 339,423
Public Services................ 554,714 398,435 314,610 804,759
High Tech...................... 174,393 140,107 125,496 404,332
Communications and Content..... 175,514 157,839 179,768 524,767
Health Care.................... 121,866 55,579 39,656 84,940
Corporate/Other (2)............ 27,772 20,245 55,882 238,633
---------- ---------- ---------- ----------
$1,981,536 $1,264,818 $1,105,166 $2,855,824
========== ========== ========== ==========
Revenues %:
Financial Services............. 26% 23% 21% 16%
Consumer and Industrial Markets 21% 16% 14% 12%
Public Services................ 28% 32% 28% 28%
High Tech...................... 9% 11% 11% 14%
Communications and Content..... 9% 12% 16% 19%
Health Care.................... 6% 4% 4% 3%
Corporate/Other(2)............. 1% 2% 6% 8%
---------- ---------- ---------- ----------
100% 100% 100% 100%
========== ========== ========== ==========
Operating Income (1):
Financial Services............. $ 176,551 $ 84,201 $ 44,824 $ 59,197
Consumer and Industrial Markets 122,788 51,693 26,190 78,214
Public Services................ 123,812 122,857 58,632 231,899
High Tech...................... 53,909 37,979 19,130 112,788
Communications and Content..... 47,693 29,794 29,215 127,405
Health Care.................... 39,340 13,842 2,915 22,002
---------- ---------- ---------- ----------
564,093 340,366 180,906 631,505
Corporate/Other(2)............. (309,820) (208,389) (142,990) (410,576)
---------- ---------- ---------- ----------
$ 254,273 $ 131,977 $ 37,916 $ 220,929
========== ========== ========== ==========
Operating Income %:
Financial Services............. 31% 25% 25% 9%
Consumer and Industrial Markets 22% 15% 14% 12%
Public Services................ 22% 36% 32% 37%
High Tech...................... 10% 11% 11% 18%
Communications and Content..... 8% 9% 16% 20%
Health Care.................... 7% 4% 2% 4%
---------- ---------- ---------- ----------
100% 100% 100% 100%
---------- ---------- ---------- ----------
Corporate/Other(2)............. (55%) (61%) (79%) (65%)
========== ========== ========== ==========
--------
(1)The periods ended June 30, 2000 and June 30, 2001 include managing
directors' compensation and benefit expense. All other periods exclude
payments for partner distributions and benefits.
(2)Corporate/Other revenues are primarily attributable to international
operations for all periods. Corporate/other operating loss is principally
due to infrastructure and shared services costs, as well as operating
results of international operations.
24
Quarterly Summarized Financial Information
The following table presents unaudited quarterly financial information for
each of our last eight quarters on a historical basis. In management's opinion,
the quarterly information contains all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present such information. As a
professional services organization, we anticipate and respond to service
demands from our clients. Accordingly, we have limited control over the timing
and circumstances under which our services are provided. Typically, client
service hours are adversely affected during the first half of our fiscal year
due to the larger number of vacation days and holidays during this period.
Therefore, we can experience variability in our operating results from quarter
to quarter. The operating results for any quarter are not necessarily
indicative of the results for any future period.
[Enlarge/Download Table]
Three Three One Two Three Three Three Three Three
Months Months Month Months Months Months Months Months Months
Ended Ended Ended Ended Ended Ended Ended Ended Ended
Sept. 30, Dec. 31, Jan. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1999 1999 2000 2000 2000 2000 2000 2001 2001
--------- -------- -------- -------- -------- --------- -------- --------- --------
(in thousands) (in thousands, except share and per share amounts)
Revenues.................... $ 525,146 $540,561 $199,111 $432,695 $672,471 $679,436 $702,604 $ 750,913 $722,871
Costs of service:
Professional
compensation*............ 179,952 181,892 74,370 185,457 258,324 269,560 263,208 255,794 237,908
Other direct contract
expenses................. 100,258 119,335 43,513 94,180 165,621 149,972 196,589 200,478 204,912
Amortization of
goodwill and other
intangible assets........ 3,758 3,963 1,236 3,199 5,376 7,088 7,487 7,588 9,311
Impairment charge......... -- -- -- 8,000 -- -- -- -- 7,827
Other costs of service.... 78,157 93,769 31,895 55,012 64,641 82,965 90,533 89,722 102,161
--------- -------- -------- -------- -------- -------- -------- --------- --------
Total costs of service*.. 362,125 398,959 151,014 345,848 493,962 509,585 557,817 553,582 562,119
--------- -------- -------- -------- -------- -------- -------- --------- --------
Gross margin*............... 163,021 141,602 48,097 86,847 178,509 169,851 144,787 197,331 160,752
Selling, general and
administrative
expenses................... 88,372 96,885 35,486 85,739 107,181 108,894 104,071 115,107 123,720
Special payment to
managing directors......... -- -- -- 25,000 9,520 -- -- -- --
--------- -------- -------- -------- -------- -------- -------- --------- --------
Operating income (loss)*.... 74,649 44,717 12,611 (23,892) 61,808 60,957 40,716 82,224 37,032
Interest expense............ (9,435) (12,665) (5,239) (4,199) (12,107) (4,980) (5,981) (4,571) (1,643)
Interest income............. -- -- -- 2,385 3,793 361 421 888 716
Gain on sale of assets...... -- -- -- -- -- -- -- -- 6,867
Equity in losses of
affiliates................. (5,963) (5,563) (2,848) (6,135) (9,677) (12,690) (63,330) (337) 338
Minority interest........... 56 49 (77) (174) (265) 55 20 (372) 157
--------- -------- -------- -------- -------- -------- -------- --------- --------
Income before partner
distributions and
benefits*.................. $ 59,307 $ 26,538 $ 4,447
========= ======== ========
Income (loss) before taxes.. (32,015) 43,552 43,703 (28,154) 77,832 43,467
Income tax expense
(benefit).................. (2,182) 31,521 23,170 9,417 48,296 21,014
-------- -------- -------- -------- --------- --------
Net income (loss)........... (29,833) 12,031 20,533 (37,571) 29,536 22,453
Dividend on Series A
Preferred Stock............ (10,328) (15,664) (15,836) (15,836) -- --
Preferred stock conversion
discount................... -- -- -- -- (131,250) --
-------- -------- -------- -------- --------- --------
Net income (loss)
applicable to
common stockholders........ $(40,161) $ (3,633) $ 4,697 $(53,407) $(101,714) $ 22,453
======== ======== ======== ======== ========= ========
Net income (loss) per basic
and diluted share.......... $ (0.53) $ (0.05) $ 0.06 $ (0.70) $ (0.83) $ 0.14
======== ======== ======== ======== ========= ========
Stock Price
High...................... $ 23.48 $ 19.19
Low....................... $ 12.31 $ 10.91
--------
* All periods subsequent to January 31, 2000 include managing directors'
compensation and benefit expense. All other periods exclude payments for
partner distributions and benefits.
25
Liquidity and Capital Resources
Prior to the Separation we were included in KPMG LLP's centralized treasury
function. Our cash receipts were automatically transferred to KPMG LLP and our
disbursements were automatically funded by KPMG LLP. Upon Separation, we
established our own bank accounts. Our primary financing need is the funding of
our accounts receivable related to client billings and unbilled revenues.
Accounts receivable have increased as our operations have grown.
Interest on borrowings under the revolving credit facility and line of
credit facility are determined, at the Company's option, based on the prime
rate, the lender's indexed rate or the LIBOR rate plus a margin ranging from
0.625% to 1.50%. There are commitment fees ranging from 0.175% to 0.30% for the
revolving credit and from 0.15% to 0.275% for the line of credit. Both
commitment fees vary based on the Company's leverage ratio at quarter-end. The
credit facilities agreement restricts the Company's ability to pay dividends,
incur additional indebtedness and purchase capital equipment. The credit
facilities agreement also requires the Company to maintain certain levels of
fixed charge coverage and net worth, while limiting our leverage ratio to
certain levels.
The Company's cash and cash equivalents increased $18.9 million to $45.9
million at June 30, 2001 when compared with June 30, 2000. The increase in cash
and cash equivalents was due to $82.8 million of cash provided by operating
activities and $42.1 million of cash provided by financing activities, offset
by $105.9 million of cash used in investing activities.
Cash provided by operating activities during the year ended June 30, 2001
was $82.8 million, principally due to cash operating results of $161.6 million
and a net decline in unbilled revenue from clients of $59.2 million, offset by
distributions made to our managing directors relating to fiscal 2000 of $73.2
million, net growth in accounts receivable from clients of $51.9 million and a
net decrease in liabilities of $13.0 million.
Cash used in investing activities during the year ended June 30, 2001 was
$105.9 million, principally due to $44.3 million of property and equipment
purchases, $30.6 million of intangible asset purchases, $17.4 million of equity
investments, and $13.6 million paid for businesses acquired.
Cash provided by financing activities for the year ended June 30, 2001 was
$42.1 million principally, due to the proceeds of $563.5 million from issuance
of common stock, offset by the payment of $378.3 million to repurchase 1.4
million shares of Series A Preferred Stock, a $54.4 million net decrease in
notes payable, $44.8 million in dividend payments and $42.0 million repayment
of acquisition obligations (primarily relating to Softline).
As a result of the redemption of our interest in QCS on December 27, 2000,
we are no longer committed to make capital contributions to fund QCS'
operations and its acquisition of equipment to support the expansion of its
business.
The Company believes that the cash provided from operations, borrowings
available under the various credit facilities, and existing cash and cash
equivalents should be sufficient to meet working capital and capital
expenditure needs.
At such dates that services provided by KPMG LLP under the transition
services agreement terminate, we are obligated to pay to KPMG LLP any
"termination costs" incurred as a result of KPMG LLP having made investments in
systems, personnel and other assets that were used in KPMG LLP's shared
infrastructure and national support capabilities. With respect to technology
infrastructure costs, the transition services agreement expires on the fourth
anniversary of the closing of our initial public offering. For all other
infrastructure costs, the agreement expires on February 13, 2004. It is the
intent of the parties that, during the term of the transition services
agreement, we will work with KPMG LLP to minimize any termination costs arising
at the end of the term of the agreement, and we will wind down our receipt of
services from KPMG LLP by developing our own infrastructure and support
capabilities or by engaging third party providers of such services. The parties
have agreed that the transition of personnel from KPMG LLP to us would occur
prior to the expiration of the agreement so that termination costs relating to
personnel, if any,
26
would not be assessed on or after the expiration of the agreement. We have
further agreed to work together to wind down our receipt of services in a
manner so that the termination costs payable by us upon the expiration of the
agreement will be:
. payments to KPMG LLP in an amount equal to the net book value of assets
that were used by KPMG LLP in providing services to us under the
transition services agreement and which could be used by us in a similar
manner after the term of the transition services agreement; and
. payments required under the existing terms of executory contracts with
third parties for services provided to us by KPMG LLP under the
transition services agreement and which can continue to be obtained by
us after the term of the transition services agreement.
Based on the information currently available, we anticipate paying KPMG LLP
approximately $40 million to $60 million for capital assets that will be
transferred to our Company at the end of the agreement and will continue to be
used in our business. The amount represents unamortized costs of capital assets
(such as software licenses, computer equipment and leasehold improvements)
purchased and used by KPMG LLP in providing services to our Company under the
transition services agreement.
Recently Issued Accounting Pronouncements
In July 2001, Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Intangible Assets" were
issued. SFAS No. 141 requires that all business combinations initiated after
June 30, 2001, be accounted for using the purchase method of accounting, and
prohibits the use of the pooling-of-interests method for such transactions.
SFAS No. 141 also requires identified intangible assets acquired in a business
combination to be recognized as an asset apart from goodwill if they meet
certain criteria.
SFAS No. 142 applies to all goodwill and identified intangible assets
acquired in a business combination. Under the new standard, all goodwill,
including that acquired before initial application of the standard, should not
be amortized but should be tested for impairment at least annually. Identified
intangible assets should be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Within six
months of initial application of the new standard, a transitional impairment
test must be performed on all goodwill. Any impairment loss recognized as a
result of the transitional impairment test should be reported as a change in
accounting principle. In addition to the transitional impairment test, the
required annual impairment test should be performed in the year of adoption of
SFAS No. 142. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001, (although early adoption would be permitted in certain
circumstances) and must be adopted as of the beginning of a fiscal year.
Retroactive application is not permitted. The Company is in the process of
evaluating the impact that early adoption of SFAS No. 142 may have on the
financial statements; however, such impact, if any, is not known or reasonably
estimable at this time. During the first quarter of fiscal 2002, the Company
expects to complete a transitional fair value-based impairment test and if the
fair value is less than the recorded value at July 1, 2001, the Company will
record an impairment loss in the quarter ending September 30, 2001, as a
cumulative effect of a change in accounting principle.
27
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements relating to our operations
that are based on our current expectations, estimates and projections. Words
such as "expects," "intends," "plans," "projects," "believes," "estimates," and
similar expressions are used to identify these forward-looking statements.
These statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that are difficult to predict. Forward-looking
statements are based upon assumptions as to future events that may not prove to
be accurate. Actual outcomes and results may differ materially from what is
expressed or forecast in these forward-looking statements. As a result, these
statements speak only as of the date they were made, and we undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
Our actual results may differ from the forward-looking statements for many
reasons, including:
. the business decisions of our clients regarding the use of our services;
. the timing of projects and their termination;
. the availability of talented professionals to provide our services;
. the pace of technological change;
. the strength of our joint marketing relationships;
. continuing limitations following our Separation from KPMG LLP; and
. the actions of our competitors.
In addition, these statements could be affected by general domestic and
international economic and political conditions, including slowdowns in the
economy, uncertainty as to the future direction of the economy and
vulnerability of the economy to domestic or international incidents. For a
more detailed discussion of certain of these factors, see Exhibit 99.1 to
this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosure About Market Risks
We are exposed to a number of market risks in the ordinary course of
business. These risks, which include interest rate risk and foreign currency
exchange risk, arise in the normal course of business rather than from trading
activities. Our exposure to changes in interest rates arises primarily because
our indebtedness under our bank credit facilities carries variable interest
rates. Foreign currency exchange risk is not significant as foreign currency
transactions have not been significant and are not concentrated in a single
foreign currency.
In connection with our borrowings and as a result of continual monitoring of
interest rates, we may in the future enter into interest rate swap agreements
for purposes of managing our borrowing costs.
28
Item 8. Financial Statements and Supplementary Data
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
The management of KPMG Consulting, Inc. is responsible for the preparation
and fair presentation of the financial statements and other related financial
information published in this Annual Report. The financial statements were
prepared in accordance with accounting principles generally accepted in the
United States of America and were necessarily based in part on reasonable
estimates and judgments given due consideration to materiality.
The management of the Company is also responsible for maintaining an
effective system of internal accounting controls which is designed to provide
reasonable assurance that assets are adequately safeguarded, that financial
records accurately reflect all transactions and can be relied upon in all
material respects in the preparation of financial statements.
Grant Thornton LLP, independent certified public accountants, audits the
financial statements of the Company in accordance with auditing standards
generally accepted in the United States of America. The independent auditors'
report expresses an informed judgment as to the fair presentation of the
Company's reported operating results, financial position and cash flows. Their
judgments are based on the results of auditing procedures and other tests that
they deemed necessary, including their consideration of our internal accounting
controls and the control environment.
The Audit Committee is responsible to the Board of Directors for reviewing
the financial controls, accounting and reporting practices and for recommending
appointment of the independent auditors. The Audit Committee meets periodically
with representatives of the independent auditors with and without the Company's
management being present. Grant Thornton LLP has full and free access to the
Audit Committee.
/s/ Randolph C Blazer
Randolph C. Blazer
Chairman of the Board, Chief Executive Officer and President
/s/ Robert C Lamb Jr
Robert C. Lamb, Jr.
Executive Vice President and Chief Financial Officer
29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of KPMG Consulting, Inc.
We have audited the accompanying consolidated balance sheets of KPMG
Consulting, Inc. (successor to the consulting business of KPMG LLP) as of June
30, 2000 and 2001, and the related combined statements of income before partner
distributions and benefits, changes in equity and cash flows for the year ended
June 30, 1999 and the seven months ended January 31, 2000, and the related
consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for the five months ended June 30, 2000 and the year
ended June 30, 2001. These financial statements are the responsibility of the
management of KPMG Consulting, Inc. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of KPMG
Consulting, Inc. as of June 30, 2000 and 2001, and the combined income before
partner distributions and benefits, changes in equity and cash flows for the
year ended June 30, 1999 and the seven months ended January 31, 2000, and the
consolidated results of operations, changes in stockholders' equity (deficit)
and cash flows for the five months ended June 30, 2000 and the year ended June
30, 2001, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Grant Thornton LLP
New York, New York
August 7, 2001
30
KPMG CONSULTING, INC.
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
June 30, 2000 June 30, 2001
------------- -------------
(in thousands, except share and
per share amounts)
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 26,991 $ 45,914
Accounts receivable, net................................................. 318,182 377,476
Unbilled revenues, net................................................... 238,128 180,355
Other current assets..................................................... 84,299 101,014
---------- ---------
Total current assets................................................. 667,600 704,759
Investment in affiliate..................................................... 66,075 --
Property and equipment, net of depreciation................................. 51,546 66,947
Goodwill, net of amortization............................................... 74,773 118,977
Other intangible assets, net of amortization................................ 56,514 70,406
Other assets................................................................ 35,130 38,546
---------- ---------
Total assets......................................................... $ 951,638 $ 999,635
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable......................................... $ 24,924 $ 11,594
Acquisition obligations.................................................. 82,200 15,000
Accounts payable......................................................... 32,011 65,632
Accrued payroll and related liabilities.................................. 144,288 174,884
Distribution payable to managing directors............................... 73,230 --
Other current liabilities................................................ 135,958 86,999
---------- ---------
Total current liabilities............................................ 492,611 354,109
Notes payable, less current portion......................................... 42,383 1,846
Other liabilities........................................................... 34,219 11,568
---------- ---------
Total liabilities.................................................... 569,213 367,523
Commitments and contingencies
Series A Mandatorily Redeemable Convertible Preferred Stock................. 1,050,000 --
Stockholders' equity (deficit):
Preferred Stock, $.01 par value 10,000,000 shares authorized............. -- --
Common Stock, $.01 par value 1,000,000,000 shares authorized,
76,827,853 shares issued on June 30, 2000 and 158,568,922 shares
issued on June 30, 2001, including 999,006 shares reserved, 75,880,842
shares outstanding on June 30, 2000 and 157,569,916 shares outstanding
on June 30, 2001....................................................... 759 1,576
Additional paid-in capital (deficit)..................................... (643,415) 656,293
Accumulated deficit...................................................... (17,802) (14,523)
Notes receivable from stockholders....................................... (5,845) (7,950)
Accumulated other comprehensive loss..................................... (1,272) (3,284)
---------- ---------
Total stockholders' equity (deficit)................................. (667,575) 632,112
---------- ---------
Total liabilities and stockholders' equity (deficit)................. $ 951,638 $ 999,635
========== =========
The accompanying notes are an integral part of these financial statements.
31
KPMG CONSULTING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
Five Months Year
Ended Ended
June 30, June 30,
2000 2001
----------- ------------
(in thousands, except share and
per share amounts)
Revenues............................................................................ $ 1,105,166 $ 2,855,824
Costs of Service:
Professional compensation........................................................ 443,781 1,026,470
Other direct contract expenses................................................... 259,801 751,951
Amortization of goodwill and other intangible assets............................. 8,575 31,474
Impairment charge................................................................ 8,000 7,827
Other costs of service........................................................... 119,653 365,381
----------- ------------
Total costs of service....................................................... 839,810 2,183,103
----------- ------------
Gross Margin........................................................................ 265,356 672,721
Selling, general and administrative expenses........................................ 192,920 451,792
Special payment to managing directors............................................... 34,520 --
----------- ------------
Operating income.................................................................... 37,916 220,929
Interest expense.................................................................... (16,306) (17,175)
Interest income..................................................................... 6,178 2,386
Gain on sale of assets.............................................................. -- 6,867
Equity in losses of affiliate and loss on redemption of equity interest in affiliate (15,812) (76,019)
Minority interests.................................................................. (439) (140)
----------- ------------
Income before taxes................................................................. 11,537 136,848
Income tax expense.................................................................. 29,339 101,897
----------- ------------
Net income (loss)................................................................... (17,802) 34,951
Dividend on Series A Preferred Stock................................................ (25,992) (31,672)
Preferred stock conversion discount................................................. -- (131,250)
----------- ------------
Net loss applicable to common stockholders.......................................... $ (43,794) $ (127,971)
=========== ============
Loss per share:
Net loss applicable to common stockholders--basic and diluted.................... $ (0.58) $ (1.19)
=========== ============
Weighted average shares--basic and diluted....................................... 75,843,000 107,884,143
=========== ============
The accompanying notes are an integral part of these financial statements.
32
KPMG CONSULTING, INC.
(Successor to the Consulting Business of KPMG LLP)
COMBINED STATEMENTS OF INCOME
BEFORE PARTNER DISTRIBUTIONS AND BENEFITS
[Enlarge/Download Table]
Year Ended June 30, 1999
-----------------------------------
Seven Months Five Months Seven Months
Ended Ended Ended
January 31, June 30, January 31,
1999 1999 Total 2000
------------ ----------- ---------- ------------
(unaudited) (unaudited)
(in thousands)
Revenues......................................... $1,098,879 $882,657 $1,981,536 $1,264,818
Costs of Service:
Professional compensation*.................... 418,887 325,563 744,450 436,214
Other direct contract expenses................ 192,524 181,567 374,091 263,106
Amortization of goodwill and other intangible
assets...................................... 3,398 3,174 6,572 8,957
Other costs of service........................ 153,203 123,671 276,874 203,821
---------- -------- ---------- ----------
Total costs of service*................... 768,012 633,975 1,401,987 912,098
---------- -------- ---------- ----------
Gross Margin*.................................... 330,867 248,682 579,549 352,720
Selling, general and administrative expenses..... 163,864 161,412 325,276 220,743
---------- -------- ---------- ----------
Operating income*................................ 167,003 87,270 254,273 131,977
Interest expense................................. (17,278) (7,879) (25,157) (27,339)
Equity in losses of affiliate.................... -- (622) (622) (14,374)
Minority interests............................... (65) (46) (111) 28
---------- -------- ---------- ----------
Income before partner distributions & benefits*.. $ 149,660 $ 78,723 $ 228,383 $ 90,292
========== ======== ========== ==========
--------
* Excludes payments for partner distributions and benefits.
The accompanying notes are an integral part of these financial statements.
33
KPMG CONSULTING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
[Enlarge/Download Table]
Common Stock Additional Notes Accumulated
------------------- Paid-in Receivable Other
Number of Capital Accumulated from Comprehensive
Shares Amount (Deficit) Deficit Stockholders Loss Total
----------- ------ ---------- ----------- ------------ ------------- ---------
(in thousands, except share amounts)
Balance at January 31, 2000....... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of stock to KPMG LLP
and the partners of KPMG LLP..... 75,563,773 756 (756) -- -- -- --
Issuance of note to KPMG LLP...... -- -- (630,000) -- -- -- (630,000)
Employee stock awards............. 310,826 3 17,247 -- -- -- 17,250
Notes receivable from stockholders
for income taxes on stock award.. -- -- -- -- (5,845) -- (5,845)
Issuance of stock for acquisition. 6,243 -- 347 -- -- -- 347
Cash dividend on Series A
Preferred Stock.................. -- -- (25,992) -- -- -- (25,992)
Earnings of valuation services
practice retained by
KPMG LLP......................... -- -- (4,261) -- -- -- (4,261)
Comprehensive loss:
Net loss........................ -- -- -- (17,802) -- -- (17,802)
Foreign currency translation
adjustment, net of tax......... -- -- -- -- -- (1,272) (1,272)
---------
Total comprehensive loss.......... (19,074)
----------- ------ --------- -------- ------- ------- ---------
Balance at June 30, 2000.......... 75,880,842 759 (643,415) (17,802) (5,845) (1,272) (667,575)
----------- ------ --------- -------- ------- ------- ---------
Cash dividend on Series A
Preferred Stock.................. -- -- -- (31,672) -- -- (31,672)
Issuance of stock in exchange for
KPMG LLP's 0.5% interest in
our operating subsidiary......... 433,487 4 (4) -- -- -- --
Initial public offering proceeds,
net of transaction costs........ 34,243,615 342 563,150 -- -- -- 563,492
Conversion of preferred stock to
common stock.................... 44,606,701 446 802,475 -- -- -- 802,921
Preferred stock conversion
discount......................... -- -- (131,250) -- -- -- (131,250)
Conversion of acquisition
obligations...................... 2,455,224 25 65,337 -- -- -- 65,362
Shares retired.................... (49,953) -- -- -- -- -- --
Notes receivable from
stockholders including $517 in
interest......................... -- -- -- -- (2,105) -- (2,105)
Comprehensive income:
Net income...................... -- -- -- 34,951 -- -- 34,951
Foreign currency translation
adjustment, net of tax......... -- -- -- -- -- (2,012) (2,012)
---------
Total comprehensive income........ 32,939
----------- ------ --------- -------- ------- ------- ---------
Balance at June 30, 2001.......... 157,569,916 $1,576 $ 656,293 $(14,523) $(7,950) $(3,284) $ 632,112
=========== ====== ========= ======== ======= ======= =========
The accompanying notes are an integral part of these financial statements.
34
KPMG CONSULTING, INC.
(Successor to the Consulting Business of KPMG LLP)
COMBINED STATEMENTS OF CHANGES IN EQUITY
[Download Table]
Investment by
KPMG LLP in
KPMG Consulting, Inc.
---------------------
(in thousands)
Balance at June 30, 1998............................... $ 135,861
Income before partner distributions and benefits.... 228,383
Additions (withdrawals) of capital, net............. (180,025)
---------
Balance at June 30, 1999............................... 184,219
Income before partner distributions and benefits.... 90,292
Additions (withdrawals) of capital, net............. 107,854
Transfer of net assets for common stock by KPMG LLP. (382,365)
---------
Balance at January 31, 2000............................ $ --
=========
The accompanying notes are an integral part of these financial statements.
35
KPMG CONSULTING, INC.
(Successor to the Consulting Business of KPMG LLP)
COMBINED/CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
Combined Consolidated
---------------------- ---------------------
Seven Months Five Months Year
Year Ended Ended Ended Ended
June 30, January 31, June 30, June 30,
1999 2000 2000 2001
---------- ------------ ----------- ---------
(in thousands)
Cash flows from operating activities:
Income before partner distributions and benefits....... $ 228,383 $ 90,292
Net income (loss)...................................... $ (17,802) $ 34,951
Adjustments to reconcile to net cash provided by
(used in) operating activities:
Deferred income taxes.............................. (151) (1,074) 12,930 (13,213)
Equity in losses of affiliate and loss on
redemption of equity interest in affiliate....... 622 14,374 15,812 76,019
Gain on sale of assets............................. -- -- -- (6,867)
Debt conversion discount........................... -- -- -- 1,698
Stock awards....................................... -- -- 17,250 --
Depreciation....................................... 19,567 13,447 12,074 29,548
Amortization....................................... 6,572 8,957 8,575 31,474
Impairment charge.................................. -- -- 8,000 7,827
Minority interests................................. 111 (28) 439 140
Changes in assets and liabilities:
Accounts receivable................................ (96,269) (132,878) (214,122) (51,864)
Unbilled revenues.................................. 30,691 (57,598) (204,365) 59,180
Other current assets............................... (270) (19,409) (14,636) (1,190)
Other assets....................................... (6,710) (3,842) (15,480) 1,321
Accrued payroll and related liabilities............ 37,714 (39,264) 40,862 27,519
Accounts payable and other current liabilities..... 22,102 56,917 8,001 (40,533)
Distribution payable to managing directors......... -- -- 73,230 (73,230)
Other liabilities.................................. 4,180 (1,368) (1,162) --
--------- --------- --------- ---------
Net cash provided by (used in) operating
activities:................................... 246,542 (71,474) (270,394) 82,780
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment.................... (23,901) (16,367) (18,220) (44,309)
Businesses acquired, net of cash acquired.............. (35,683) (21,120) (43,168) (13,599)
Purchases of other intangible assets................... (13,657) (3,031) (29,379) (30,579)
Notes receivable....................................... -- -- (7,020) --
Investment in affiliate................................ -- -- -- (9,945)
Purchases of equity investments........................ -- -- (6,821) (7,500)
--------- --------- --------- ---------
Net cash used in investing activities........... (73,241) (40,518) (104,608) (105,932)
--------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements.
36
KPMG CONSULTING, INC.
(Successor to the Consulting Business of KPMG LLP)
COMBINED/CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued
[Enlarge/Download Table]
Combined Consolidated
---------------------- ---------------------
Year Seven Months Five Months Year
Ended Ended Ended Ended
June 30, January 31, June 30, June 30,
1999 2000 2000 2001
--------- ------------ ----------- ---------
(in thousands)
Cash flows from financing activities:
Additions (withdrawals) of capital by KPMG LLP, net... (180,025) 107,854 -- --
Proceeds from issuance of common stock................ -- -- -- 563,492
Proceeds from issuance of Series A Preferred Stock.... -- -- 1,050,000 --
Repayment of notes payable to KPMG LLP................ -- -- (680,809) --
Proceeds from notes payable........................... 17,013 18,573 124,590 283
Repayment of notes payable............................ (5,730) (3,200) (94,335) (54,670)
Repayment of acquisition obligations.................. -- -- -- (42,033)
Repayment of Series A Preferred Stock................. -- -- -- (378,329)
Repurchase of minority interest in subsidiary......... -- -- -- (1,914)
Notes receivable from stockholders.................... -- -- (5,845) --
Dividends paid on Series A Preferred Stock............ -- -- (12,910) (44,754)
Business transfer from KPMG LLP....................... -- -- (4,261) --
--------- -------- ---------- ---------
Net cash provided by (used in) financing
activities...................................... (168,742) 123,227 376,430 42,075
--------- -------- ---------- ---------
Net increase in cash and cash equivalents................ 4,559 11,235 1,428 18,923
Cash and cash equivalents--beginning of period........... 9,769 14,328 25,563 26,991
--------- -------- ---------- ---------
Cash and cash equivalents--end of period................. $ 14,328 $ 25,563 $ 26,991 $ 45,914
========= ======== ========== =========
Supplementary cash flow information:
Interest paid......................................... $ 23,404 $ 25,077 $ 14,936 $ 20,900
========= ======== ========== =========
Taxes paid............................................ $ -- $ 149,585
========== =========
Supplemental non-cash investing and financing activities:
Conversion of acquisition obligations to common
stock............................................... $ 65,362
Conversion of Series A Preferred Stock to common
stock............................................... $ 802,921
Series A Preferred Stock conversion discount.......... $(131,250)
Acquisition obligations from business acquisitions.... $ 17,200 $ 42,880
Deferred taxes on assembled workforce resulting from
business acquisitions............................... $ 7,250
Contribution of net assets from KPMG LLP.............. $ (382,365)
Accounts receivable retained by KPMG LLP.............. $ 298,231
Unbilled revenues retained by KPMG LLP................ $ 97,170
Note payable to KPMG LLP for separation transaction... $ 41,357
Note payable to KPMG LLP for business acquisition..... $ 27,795
Deferred income taxes................................. $ (45,772)
Dividends payable on Series A Preferred Stock......... $ 13,082
The accompanying notes are an integral part of these financial statements.
37
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
1. Description of the Business and Basis of Presentation
KPMG Consulting, Inc. is one of the world's largest consulting firms with
over 10,000 employees and 2,500 clients. We provide our clients with a range of
service offerings that combine industry specific business strategy and
operational improvements, and technology selection and implementation. We
deliver consulting services through six industry groups (segments) including
Public Services, Financial Services, Communications and Content, High Tech,
Consumer and Industrial Markets, and Health Care. In addition, we have
multinational operations covering North America, Latin America, Asia Pacific,
Ireland and Israel.
Historically, KPMG LLP has been a provider of assurance, tax and consulting
services. As of January 31, 2000, KPMG LLP separated its management and
information technology consulting business ("Consulting Business") from its
remaining businesses, and transferred this business, including substantially
all of the operating assets (other than accounts receivable and unbilled
revenues of $298,231 and $97,170, respectively, which were retained by KPMG
LLP) and the liabilities relating to such business, into a newly-formed
corporate entity. We refer to this as the "Separation". For periods prior to
January 31, 2000, "Company" refers to KPMG LLP's Consulting Business which was
operated in partnership form as a part of KPMG LLP; for periods commencing
January 31, 2000, "Company" refers to KPMG Consulting, Inc.
The Company was incorporated on August 17, 1999, however it did not formally
commence significant operations until January 31, 2000. KPMG LLP and the
Company entered into certain agreements relating to the Separation of KPMG
LLP's Consulting Business, the transfer of that business to the Company and the
distribution of the Company's common stock. In connection with these
transactions 51,044,000 shares of the Company's common stock were issued to
KPMG LLP and 24,520,000 shares were issued to partners of KPMG LLP, including
partners associated with KPMG LLP's Consulting Business. The Company also
issued demand notes to KPMG LLP in the principal amounts of $630,000 and
$41,357 in connection with the Separation. The $630,000 demand note was paid
immediately after issuance with a portion of the proceeds from the sale of the
Series A Mandatorily Redeemable Convertible Preferred Stock ("Series A
Preferred Stock") (see Note 13). The $41,357 demand note was repaid on June 30,
2000.
On June 30, 2000, KPMG LLP transferred its valuation services practice to
our Company. Our financial statements for all periods presented include the
assets, liabilities and operating results of this practice. A charge against
paid-in capital of $4,261 was recognized to reflect the retention by KPMG LLP
of accounts receivable equal to the net assets of this practice as of June 30,
2000.
Our managing directors resigned from the KPMG LLP partnership as of January
31, 2000. The terms of our Separation from KPMG LLP provide that, for the
period from January 31, 2000 through June 30, 2000, during which period none of
our outstanding common stock was held by outside investors, the profits of KPMG
LLP and our Company were to be allocated among the partners of KPMG LLP and the
managing directors of our Company as if the entities had been combined through
June 30, 2000. Under this arrangement, the Company's managing directors were
paid by our Company. The amount attributed to this arrangement for the five
month period ended June 30, 2000 was $34,520. Subsequent to June 30, 2000, no
further payments were made to or received from KPMG LLP based on the combined
profitability of the two firms.
On January 17, 2001, the Company's board of directors and stockholders
approved a reverse stock split of approximately one for 5.045 effective
immediately prior to its initial public offering. All share and per share
amounts reflect this reverse stock split.
During February 2001, the Company sold 34.2 million shares of common stock
in an initial public offering, and a selling stockholder (KPMG LLP) sold an
additional 95.1 million shares of common stock (including
38
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
29.2 million shares of common stock that were issued in connection with the
conversion of the Series A Preferred Stock that was purchased by KPMG LLP), for
a total offering of 129.3 million shares. In connection with the initial public
offering, the Company also repurchased 1.4 million shares of the Series A
Preferred Stock for $378.3 million in cash, and the remaining shares of Series
A Preferred Stock were converted into 15.4 million shares of common stock. The
Company's proceeds from the initial public offering, net of underwriting
discount of $24.7 million and our pro rata portion of other expenses of the
offering of $28.2 million, were $563.5 million. Of the net proceeds, $378.3
million was used to repurchase 1.4 million shares of Series A Preferred Stock,
$112.0 million was used to repay all the Company's outstanding indebtedness to
KPMG LLP, and $70.0 million was used to repay bank loans.
The financial statements of the Company have been prepared in conformity
with accounting principles generally accepted in the United States of America,
on the basis of KPMG LLP's historical cost of the assets and liabilities
associated with its Consulting Business. KPMG LLP operates as a partnership,
and certain services relating to KPMG LLP's assurance, tax, and consulting
business have been provided by KPMG LLP on a centralized basis. Prior to the
Separation, the costs of these services have been allocated among these
businesses on a basis management believes to be reasonable. However, management
does not believe it is practicable to determine what the costs of these
services would have been had we operated as an independent entity during the
historical periods and either performed such services internally or obtained
them from an unaffiliated entity. See Note 16 for additional discussion of
services provided to the Company by KPMG LLP. Additionally, as a partnership,
all of KPMG LLP's earnings were allocable to its partners and principals
("Partners"). As a result, it is difficult to differentiate the ownership or
"entrepreneurial" components of distributions to partners from the compensation
component of such distributions. Accordingly, compensation and benefits for
services rendered by consulting partners have not been reflected as an expense
in the combined financial statements. As a result, the combined financial
statements do not reflect the results of operations that would have been
reported had the Company operated as a stand-alone entity for the periods
indicated in the combined financial statements. Commencing January 31, 2000,
the former partners of KPMG LLP who were associated with KPMG LLP's Consulting
Business became managing directors of the Company and, from that date forward,
all compensation and benefits incurred by the Company on behalf of such
managing directors has been reflected in the Company's consolidated financial
statements.
2. Summary of Significant Accounting Policies
Principles of Combination/Consolidation
The financial statements reflect the operations of the Company and its
majority-owned subsidiaries after elimination of intercompany balances and
transactions. Certain prior period amounts have been reclassified to conform
with the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. These estimates and assumptions relate to estimates of
collectibility of accounts receivable and unbilled revenues, the realizability
of goodwill and other intangible assets, costs to complete engagements,
accruals, income taxes and other factors. Management has exercised
reasonableness in deriving these estimates. However, actual results could
differ from these estimates.
39
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
Revenue Recognition
We earn revenues from a range of consulting services, including business and
technology strategy, process design and operations improvement, systems
integration, network integration and infrastructure, and outsourcing. Revenue
includes all amounts that are billed or billable to clients. Revenues for
services rendered are recognized on a time and materials or
percentage-of-completion basis, depending upon the contract with the client.
Revenues related to time and material contracts are recognized in the period in
which the services are performed. Revenues related to fixed price contracts are
recognized based upon professional costs incurred as a percentage of estimated
total professional costs of the respective contracts. The cumulative impact of
any revisions in estimated total revenues and direct contract costs are
recognized in the period in which they become known. Unbilled revenues
represent revenues for services performed that have not been billed.
Maintenance contract revenues are recognized ratably over the term of each
agreement. When our consulting engagements have multiple elements, each element
is separately evaluated and revenue is recognized when it is realized or
realizable and earned, in accordance with SEC Staff Accounting Bulletin No.
101, "Revenue Recognition".
Costs of Service
Professional compensation consists of payroll costs and related benefits
associated with professional staff (including costs associated with reductions
in workforce). Other direct contract expenses include travel, subcontracting
and direct contract expenses. Other costs of service include expenses
attributable to support and professional staff, bad debt expense relating to
accounts receivables, and impairment charges associated with long-lived assets.
Amortization includes the amortization of goodwill and other intangible assets
used in the delivery of professional services. Substantially all of our
research and development activities have been incurred pursuant to specific
client contracts and, accordingly, have been expensed as costs of service as
incurred.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include expenses such as
marketing, costs for information systems, finance and accounting, human
resources, sales commissions and business development expenses related to
managing and growing our business. Advertising costs are expensed when
advertisements are first placed or run. Advertising expense totaled $11,074 for
the year ended June 30, 1999, $5,703 for the seven months ended January 31,
2000, $6,287 for the five months ended June 30, 2000, and $8,979 for the year
ended June 30, 2001.
Cash Equivalents
Cash equivalents consist of demand deposits and highly liquid investments
with original maturities of three months or less.
Investments
Investments in nonmarketable equity securities of $6,821 and $13,370 at June
30, 2000 and June 30, 2001, respectively, are included in other assets. The
Company's nonmarketable equity securities are carried at the lower of the
Company's cost or estimated fair value.
Property and Equipment
Equipment, furniture and leasehold improvements are recorded at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Equipment and furniture are depreciated over three
to seven years. Leasehold improvements are amortized over the remaining term of
the respective lease.
40
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
Goodwill and Other Intangible Assets
Goodwill represents the cost of acquired companies in excess of the fair
value of the net assets acquired. Goodwill is amortized by the straight-line
method over the expected periods of benefit, ranging from five to fifteen
years.
Other intangible assets includes the portion of the cost of acquired
companies assigned to the assembled workforce, purchased or developed software,
software licensing rights, and other intangible assets obtained through
acquisitions. Other intangible assets are amortized principally by the
straight-line method over their expected period of benefit. Assembled workforce
is amortized over their estimated useful lives up to five years. The cost of
software purchased for internal use is capitalized and amortized to expense by
the straight-line method, over an estimated useful life ranging to six years.
The cost of software purchased for resale, including software acquired through
acquisitions of businesses, is capitalized and amortized over the estimated
economic lives, unless the purchased software has an alternative future use in
which case it is accounted for in accordance with its use. No internal costs
relating to web-site development or software developed for resale have been
capitalized as such costs have been insignificant.
The Company reviews the carrying value of its long-lived assets, including
investments, property and equipment, goodwill and other intangible assets, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be fully recoverable. Recoverability of
long-lived assets is assessed by a comparison of the carrying amount of the
asset to the estimated future net cash flows expected to be generated by the
asset. If estimated future net cash flows are less than the carrying amount of
the asset, the asset is considered impaired and an expense is recorded in an
amount required to reduce the carrying amount of the asset to its estimated
future net cash flows.
Foreign Currency Translation
Assets and liabilities of the operations of the Company denominated in
foreign currencies are translated into United States dollars using current
exchange rates. Revenues and expenses are translated at an average exchange
rate during the periods. Foreign exchange gains and losses have not been
significant. The cumulative translation adjustment is reported as a component
of "accumulated other comprehensive loss" in stockholders' equity on the
consolidated balance sheet.
Fair Value of Financial Instruments
The financial statements include the following financial instruments that
require disclosures of fair values: cash and cash equivalents, investments,
acquisition obligations and notes payable. No comparison of fair values to the
carrying values of these financial instruments is presented, as their fair
values are not significantly different than their carrying values.
Concentrations of Credit Risk
Financial instruments that subject the Company to credit risk consist
primarily of accounts receivable and unbilled revenues. Concentrations of
credit risk are limited due to the Company's large number of clients and their
dispersion across many different industries.
41
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
Income Taxes
Commencing with the Separation from KPMG LLP on January 31, 2000, the
Company began operations in corporate form and became subject to federal and
state income taxes. The Company accounts for corporate income taxes under the
asset and liability method. Deferred income 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 basis, and to operating loss and tax credit carryforwards.
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred income tax assets will not be realized. Prior to
January 31, 2000, the Company generally operated within the partnership of KPMG
LLP and, therefore, as a partnership was not subject to federal and state
income taxes. Such taxes were the responsibility of the individual partners.
While operating in the partnership form, the Company applied the asset and
liability method of accounting for corporate income taxes of a wholly-owned
corporation acquired in May 1999.
Stock Based Compensation
The Company discloses information relating to stock-based compensation
awards in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation", and has elected to apply
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" to such compensation awards. The Company grants
employee stock options at an exercise price equal to the fair market value at
the date of grant. No compensation expense is recorded with respect to such
stock option grants. Compensation expense with respect to fiscal 2000 stock
awards granted to employees was measured based on the fair value of such awards
as of the date of grant, and was charged to expense immediately as these awards
vested on the date of the grant.
Earnings (Loss) Per Share
Basic and diluted loss per share have been determined based on net income
(loss) after deducting preferred stock dividends and a one-time preferred stock
conversion discount, divided by the weighted average number of common shares
outstanding for all periods presented since the Separation from KPMG LLP.
Options to purchase 8,048,183 and 27,351,257 shares of common stock were
outstanding at June 30, 2000 and 2001, respectively, but were not included in
the computation of diluted loss per share because the effect of their inclusion
would be antidilutive.
Recently Issued Accounting Standards
In July 2001, SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Intangible Assets" were issued. SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted for using the
purchase method of accounting, and prohibits the use of the
pooling-of-interests method for such transactions. SFAS No. 141 also requires
identified intangible assets acquired in a business combination to be
recognized as an asset apart from goodwill if they meet certain criteria.
SFAS No. 142 applies to all goodwill and identified intangible assets
acquired in a business combination. Under the new standard, all goodwill,
including that acquired before initial application of the standard, should not
be amortized but should be tested for impairment at least annually. Identified
intangible assets should be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Within six
months of initial application of the new standard, a transitional impairment
test must be performed on all goodwill. Any
42
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
impairment loss recognized as a result of the transitional impairment test
should be reported as a change in accounting principle. In addition to the
transitional impairment test, the required annual impairment test should be
performed in the year of adoption of SFAS No. 142. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001 (although early adoption
would be permitted in certain circumstances), and must be adopted as of the
beginning of a fiscal year. Retroactive application is not permitted. The
Company is in the process of evaluating the impact that early adoption of SFAS
No. 142 may have on the financial statements; however, such impact, if any, is
not known or reasonably estimable at this time. During the first quarter of
fiscal 2002, the Company expects to complete a transitional fair value-based
impairment test and if the fair value is less than the recorded value at July
1, 2001, the Company will record an impairment loss in the quarter ending
September 30, 2001, as a cumulative effect of a change in accounting principle.
3. Accounts Receivable
[Download Table]
June 30,
------------------
2000 2001
-------- --------
Accounts receivable............ $325,182 $404,943
Allowance for doubtful accounts (7,000) (27,467)
-------- --------
$318,182 $377,476
======== ========
In May 2000, the Company entered into a receivables purchase agreement. In
connection with this agreement, the Company has granted a security interest in
certain accounts receivable (see Note 8).
4. Other Current Assets
The following table sets forth the detail of other current assets at June
30, 2000 and 2001:
[Download Table]
June 30,
-----------------
2000 2001
-------- --------
Deferred income taxes $ 36,752 $ 30,411
Prepaid income taxes. -- 20,437
Prepaid expenses..... 12,412 19,202
Other................ 35,135 30,964
-------- --------
Total............. $ 84,299 $101,014
======== ========
5. Investment in Affiliate
On June 3, 1999, the Company and Qwest Communications International Inc.
("Qwest") formed Qwest Cyber.Solutions, LLC ("QCS"), a company involved in
applications outsourcing. QCS's fiscal year-end is December 31. The company
held a 49% interest in QCS, with the remaining 51% interest being held by
Qwest. The Company acquired its interest by contributing net assets, primarily
related to Softline Consulting & Integrators, Inc. ("Softline"), which was
acquired on May 27, 1999 (see Note 17), to QCS. The Company's cost basis of its
investment in QCS exceeded its proportionate share of QCS's net assets by
$39,244.
QCS periodically required additional capital to fund its operations and
acquire equipment to support the expansion of its business and the Company
decided not to make any additional capital contributions to QCS. On December
27, 2000, QCS redeemed the Company's 49% ownership interest in the joint
venture in exchange for a
43
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
nominal amount. Accordingly, the Company's investment in QCS of $63,330
($58,482 on an after tax basis) was written off through a noncash charge to
earnings in December 2000. Concurrent with the disposition of the Company's
equity investment in QCS, the Company entered into an agreement pursuant to
which the Company continues to have a significant marketing relationship with
QCS. Under this arrangement, the Company will continue to work with QCS to
develop sales and marketing plans for the distribution of QCS' products and
services through the Company, and to market QCS' products and services. The
Company's marketing relationship with QCS allows the Company to continue to
offer its clients application service provider services, which is a component
of the Company's e-outsourcing service offerings. The Company's marketing
relationship with QCS extends through June 2, 2009 or through the date of an
initial public offering by QCS, if earlier.
Summarized financial information of QCS is as follows:
[Download Table]
Inception Year Ended
to June 30, June 30,
1999 2000
----------- -------------
Operating Information:
Revenues..................... $ 8,376 $ 69,816
Gross Margin................. 1,655 6,016
Net Loss..................... (302) (42,832)
June 30, 2000
-------------
Balance Sheet Information:
Current assets............... $ 42,865
Noncurrent assets............ 56,682
--------
Total assets................. $ 99,547
========
Current liabilities.......... $ 25,021
Equity....................... 74,526
--------
Total liabilities and equity. $ 99,547
========
The following is a summary of equity in losses of affiliate and loss on
redemption of equity interest in affiliate:
[Enlarge/Download Table]
Year Seven Months Five Months Year
Ended Ended Ended Ended
June 30, January 31, June 30, June 30,
1999 2000 2000 2001
-------- ------------ ----------- --------
Interest in QCS's losses (49%).............. $(148) $ (9,277) $(11,711) $(10,728)
Amortization of excess investment in QCS.... (474) (5,097) (4,101) (1,961)
Loss on redemption of equity interest in QCS
($58.5 million on an after-tax basis)..... -- -- -- (63,330)
----- -------- -------- --------
Total.................................... $(622) $(14,374) $(15,812) $(76,019)
===== ======== ======== ========
44
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
6. Property and Equipment
[Download Table]
Accumulated
Depreciation
and
Cost Amortization Net
--------- ------------ --------
June 30, 2000
Equipment............. $ 112,962 $ (71,575) $ 41,387
Furniture............. 7,872 (2,377) 5,495
Leasehold improvements 6,413 (1,749) 4,664
--------- --------- --------
Total.............. $ 127,247 $ (75,701) $ 51,546
========= ========= ========
Accumulated
Depreciation
and
Cost Amortization Net
--------- ------------ --------
June 30, 2001
Equipment............. $ 142,509 $(102,543) $ 39,966
Furniture............. 6,978 (1,709) 5,269
Leasehold improvements 23,873 (2,161) 21,712
--------- --------- --------
Total.............. $ 173,360 $(106,413) $ 66,947
========= ========= ========
7. Goodwill and Other Intangible Assets
[Download Table]
June 30,
-------------------
2000 2001
-------- ---------
Goodwill........................ $ 91,514 $ 147,950
Accumulated amortization........ (16,741) (28,973)
-------- ---------
Goodwill, net................ $ 74,773 $ 118,977
======== =========
Other intangible assets:
Software licensing agreement. $ 6,000 $ 6,000
Internal use software........ 36,191 66,170
Assembled workforce.......... 22,062 24,576
Other........................ 2,786 2,765
-------- ---------
67,039 99,511
Accumulated amortization........ (10,525) (29,105)
-------- ---------
Other intangible assets, net. $ 56,514 $ 70,406
======== =========
In fiscal 2001, the Company recorded an impairment charge of $7,827 related
to software licenses due to lower than anticipated sales. In fiscal 2000, the
Company recorded an impairment charge of $8,000 for a writedown of $4,000
related to a software licensing agreement due to lower than anticipated sales
and a writedown of goodwill of $4,000 due to the termination of a reseller
agreement with a vendor.
45
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
8. Notes Payable
KPMG LLP:
On February 1, 2000, the Company issued a $27,795 demand note to KPMG LLP in
connection with the Company's acquisition of the Canadian consulting business
of a KPMG International member firm. This note had a balance of $18,343 as of
June 30, 2000 and was paid in its entirety on February 13, 2001. The demand
note bore interest at a rate of 8.5%.
Notes Payable:
[Download Table]
June 30,
------------------
2000 2001
-------- --------
Revolving credit facility................................ $ 32,000 $ --
Accounts receivable financing............................ 10,000 --
Trade notes payable...................................... 19,828 8,069
Other.................................................... 5,479 5,371
-------- --------
67,307 13,440
Less: current portion.................................... (24,924) (11,594)
-------- --------
Noncurrent portion....................................... $ 42,383 $ 1,846
======== ========
The aggregate maturities of notes payable are as follows:
2002.................................................. $ 11,594
2003.................................................. 1,846
--------
Total............................................. $ 13,440
========
On May 21, 2001, the Company amended and restated its credit agreement,
originally dated May 24, 2000, with a commercial lender which provides the
Company with a revolving credit facility ($32,000 outstanding at June 30, 2000
and no outstanding balance at June 30, 2001) in an aggregate principal balance
not to exceed $100,000 and a revolving line of credit facility (there was no
outstanding balance at June 30, 2000 and June 30, 2001) in an aggregate amount
not to exceed $100,000. The funds available under the credit agreement may be
used for general corporate purposes, for working capital, and for acquisitions
subject to certain restrictions. The revolving credit facility expires on May
24, 2004 and the revolving line of credit expires on May 20, 2002. Annually,
the revolving line of credit facility can be extended at the request of the
Company and the consent of the lenders. In addition, under the revolving credit
facility the Company granted liens with respect to our equity interests in
certain foreign subsidiaries. The credit agreement provides for the issuance of
letters of credit, in the aggregate amount not to exceed $30,000, with a
maximum maturity of twelve months from the date of issuance. At June 30, 2001,
the Company had $108 of letters of credit outstanding under the credit
agreement.
The credit agreement restricts the Company's ability to pay dividends, incur
additional indebtedness and purchase capital equipment. The credit agreement
also requires the Company to maintain certain levels of fixed charge coverage
and net worth, while limiting our leverage ratio to certain levels.
Interest on borrowings under the credit agreement are determined, at the
Company's option, based on the prime rate, the lender's indexed rate or the
LIBOR rate plus a margin ranging from 0.625% to 1.50%. There are commitment
fees ranging from 0.175% to 0.300% for the revolving credit and from 0.15% to
0.275% for the line of credit. Both commitment fees vary based on the Company's
leverage ratio at quarter-end.
46
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
On May 22, 2000, the Company entered into a receivables purchase agreement
with an issuer of receivables-backed commercial paper up to $200,000. The
Company has the option to sell, on an ongoing basis and without recourse, an
undivided percentage interest in designated pools of accounts receivable. In
connection with the receivables purchase agreement, the Company has granted a
security interest in certain accounts receivable. To maintain the balance in
the designated pools of accounts receivable sold, the Company is obligated to
sell undivided interests in new receivables as existing receivables are
collected. The agreement permits the sale of up to $200,000 of an undivided
interest in accounts receivable through May 21, 2003, subject to an annual
renewal. There was $10,000 outstanding on the accounts receivable financing at
June 30, 2000 and no outstanding balance at June 30, 2001. Interest on
borrowings under the receivables purchase agreement is based on a variable
commercial paper rate plus 0.4%. The effective interest rate at June 30, 2000
was 7.16%. There is a commitment fee of 0.225% on the unused balance.
Trade notes are payable in quarterly installments through 2003. The trade
notes bear interest at rates between 7.0% and 9.4%. Other debt primarily
consists of short-term yen-denominated borrowings which bear interest from 1.4%
to 1.8% as of June 30, 2000 and at 1.7% as of June 30, 2001.
9. Acquisition Obligations
Acquisition obligations are as follows (see Note 17):
[Download Table]
June 30,
-----------------
2000 2001
-------- --------
Softline....... $ 65,000 $ 15,000
Japan.......... 10,000 --
South Korea.... 3,600 --
Argentina...... 3,600 --
-------- --------
$ 82,200 $ 15,000
======== ========
On May 27, 1999, KPMG LLP acquired all of the voting common stock of
Softline, and entered into an agreement to acquire all of the Softline
nonvoting common stock for not less than $65,000. The $65,000 acquisition
obligation for the nonvoting common stock accrues interest at 6% per annum, and
was due by its terms at the earlier of a demand by a majority vote of the
nonvoting shareholders, or May 8, 2000. In the event the Company had provided
notice of an IPO on or before May 8, 2000, the nonvoting shareholders would
have had the right to convert the acquisition obligation of $65,000, plus
accrued interest, into the Company's common shares at a conversion price equal
to the IPO price less the underwriter's per share discount. This obligation was
not retired at its maturity. The Company and the counterparties to this
agreement entered into an agreement in August, 2000, pursuant to which $33,980
of this obligation was repaid in cash, $7,020 was retired through the
cancellation of short-term notes due from the counterparties and $9,000 was
settled in November, 2000 ($3,000 in cash and 326,024 shares of the Company's
common stock). The remaining obligation of $15,000 plus interest at 6% per
annum, is payable upon the ultimate resolution of specific contingencies
relating to the Softline acquisition and will be paid through the issuance of
shares of the Company's common stock, valued for such settlement purposes at
the IPO price less the underwriting discount or, at the election of the
counterparties, through the issuance of cash equal to the current market price
of the Company's common stock for up to 30% of the shares otherwise issuable,
with the remainder payable in shares valued at the IPO price.
47
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
In connection with the acquisitions of the consulting businesses of member
firms of KPMG International in Japan, South Korea, Argentina, Ireland and
Brazil, the Company incurred acquisition obligations with the following terms:
Japan: $10,000 incurred on April 1, 2000 plus interest at the rate the
Company pays for advances under its revolving credit agreement. This
obligation was converted on March 24, 2001 into 592,384 shares of the
Company's common stock, at a value equal to the IPO price less the
underwriting discount.
South Korea: $3,600 incurred on May 31, 2000 plus interest at the prime
rate was paid in cash on June 29, 2001.
Argentina: $3,600, incurred on June 30, 2000 payable in nine equal annual
installments commencing July 3, 2000, plus interest at the rate the Company
paid for advances under its revolving credit agreement. The holder of this
obligation elected on March 1, 2001 to convert the remaining outstanding
obligation into 194,241 shares of the Company's common stock at a value
equal to the IPO price less the underwriting discount.
Ireland: $57,000 non-interest bearing convertible notes ($35,880 on a
fair value basis) incurred on September 15, 2000, with an effective interest
rate of 12.67%. This obligation was converted into 917,672 shares of the
Company's common stock at the date of the IPO.
Brazil: $7,000 incurred on October 3, 2000, plus interest at the rate the
Company pays for advances under its revolving credit agreement. This
obligation was converted on March 1, 2001 into 424,903 shares of the
Company's common stock at a value equal to the IPO price less the
underwriting discount.
In March 2001, after completion of our IPO, $26,569 in acquisition
obligations (principal plus interest) in the aggregate were converted into
1,537,552 shares of common stock. The amount of the beneficial conversion
feature was $1,698 and reflected as a noncash charge to interest expense in
the fiscal 2001 Consolidated Statement of Operations.
10. Other Current Liabilities
The following table sets forth the detail of other current liabilities at
June 30, 2000 and 2001:
[Download Table]
June 30,
------------------
2000 2001
--------- --------
Deferred revenue.................. $ 26,408 $ 31,677
Due to KPMG LLP (see Note 16)..... 18,343 9,959
Income taxes payable (see Note 15) 15,529 --
Dividend payable (see Note 13).... 13,082 --
Travel expenses payable........... 10,836 8,798
Other............................. 51,760 36,565
--------- --------
Total.......................... $ 135,958 $ 86,999
========= ========
11. Other Liabilities
In August 1997, the Company entered into a collaboration agreement with
Microsoft Corporation. Under this agreement, the Company developed a broad
portfolio of services and solutions to enable the rapid deployment of Microsoft
products. Microsoft paid the Company $15,000. The agreement requires the
Company
48
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
to train a specified number of consultants to be proficient in Microsoft
products, and to participate in joint marketing efforts with Microsoft. Revenue
was not recognized for $10,000 due to a minimum royalty liability of $10,000
associated with the agreement as set forth in the following paragraph. The
remaining $5,000 was recognized as revenue as training and other costs
associated with the agreement were incurred.
The agreement also requires the Company to pay Microsoft royalties on
certain net revenues for business relating to Microsoft products. The royalty
period commenced in August 2000 and ends on the earlier of the date on which
the Company makes the maximum aggregate royalty payment of $10,000 or June 30,
2006. If aggregate payments on June 30, 2006 are less than $10,000, the Company
is obligated to make a final payment for the difference. The royalty for the
period ended June 30, 2001 is $623.
12. Commitments and Contingencies
The Company is involved in legal proceedings, claims and litigation arising
in the ordinary course of business. Additionally, under its contracts with the
U.S. Government, the Company is subject to audit by the Defense Contract Audit
Agency, which could result in adjustments of amounts previously billed. Based
on its current assessment, management believes that the Company's financial
statements include adequate provision for estimated costs and losses that may
ultimately be incurred with regard to such matters. In connection with the
Separation, the Company has indemnified KPMG LLP and its partners for any
liabilities or losses relating to the Company or otherwise assigned to the
Company.
On September 27, 2000, the Company and a client reached a final settlement
of a contract dispute and the Company was paid $6,510 which was recorded as
revenue.
Softline Acquisition Contingencies: A number of issues have arisen with
respect to Softline, which was acquired on May 27, 1999 (see Note 17). The
acquisition agreements entered into with the Softline selling shareholders in
connection with the acquisition included an acquisition obligation to the
Softline selling shareholders in the amount of $65,000. This obligation matured
on May 8, 2000, and was subsequently paid, except for $15,000 which has been
withheld and is payable upon resolution of the specified contingencies. The
Company does not believe that the ultimate resolution of these matters will
have a material impact on the Company's financial position or results of
operations.
Transition Services Provided By KPMG LLP: As described in Note 16, if the
Company terminates any services under the transition services agreement prior
to the end of the term for such service, the Company is potentially liable for
the payment of any termination costs incurred by KPMG LLP in connection with
the winding down and termination of such services. It is the intent of the
parties that, during the term of the transition services agreement, the Company
will work with KPMG LLP to minimize any termination costs arising at the end of
the term of the agreement, and the Company will wind down its receipt of
services from KPMG LLP and will develop its own internal infrastructure and
support capabilities or seek third party providers of such services. The
parties have agreed that the transition of personnel from KPMG LLP to the
Company would occur prior to the expiration of the agreement so that
termination costs relating to personnel, if any, would not be assessed on or
after the expiration of the agreement. The parties have further agreed to work
together to wind down the Company's receipt of services in a manner so that the
termination costs payable by the Company upon the expiration of the agreement
will be: (1) payments to KPMG LLP in an amount equal to the net book value of
assets that were used by KPMG LLP in providing services to the Company under
the transition services agreement and which could be used by the Company in a
similar manner after the term of the transition services agreement and (2)
payments required under the existing terms of executory contracts with third
parties for services that were provided to the Company by KPMG LLP under the
transition services agreement and which can continue to be obtained by the
Company after the term of the
49
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
transition services agreement. Based on the information currently available,
the Company anticipates paying KPMG LLP approximately $40,000 to $60,000 for
capital assets that will be transferred to our Company at the end of the
agreement and will continue to be used in our business. The amount represents
the unamortized costs of capitalizable assets (such as software licenses,
computer equipment and leasehold improvements) purchased and used by KPMG LLP
in providing services to the Company under the transition services agreement.
Occupancy: The Company has entered into subleases with KPMG LLP for office
space for periods that coincide with the periods of the KPMG LLP lease periods
which run through 2014. The rental cost is based on square feet utilized by the
Company. Future aggregate minimum lease payments under these agreements for the
years ending June 30 are as follows: 2002-$43.9 million, 2003-$42.0 million,
2004-$40.9 million, 2005-$39.5 million, 2006-$37.0 million, thereafter-$183.5
million. Total rent expense related to the operating leases for the year ended
June 30, 2001 was approximately $41.3 million. Prior to fiscal 2001, rent
expense was allocated to the Company by KPMG LLP (see Note 16).
Employee Benefit Plan: The Company committed to a specified minimum
contribution to its 401(k) defined contribution plan of $20,000 to be paid by
March 15, 2002. This amount is expected to be fully funded by eligible employee
contributions to the Plan for the period from July 1, 2001 to March 15, 2002.
In the unlikely event that eligible employee contributions are not sufficient
to fund this commitment, the Company contributions would fund any shortfall.
13. Series A Mandatorily Redeemable Convertible Preferred Stock
On January 31, 2000, Cisco Systems, Inc. ("Cisco") purchased 5,000,000
shares of the Company's Series A Mandatorily Redeemable Convertible Preferred
Stock ("Series A Preferred Stock") for $1,050,000. The Series A Preferred Stock
had no voting rights except for the election of two directors and in connection
with certain fundamental events such as mergers, sale of substantially all
assets and charter amendments; carried a 6% annual dividend, payable quarterly;
and was convertible at the holder's option, upon the consummation of the
initial public offering, into the Company's common stock at a beneficial
conversion rate of 80% of the IPO price.
The Company has agreed not to enter into an agreement relating to a merger,
consolidation or other business combination involving any of four specified
companies during the five year period following the issuance of the Series A
Preferred Stock to Cisco. If the Company were to enter into any such
transaction, the Company could be obligated to repurchase any outstanding
securities of the Company held by Cisco and to make an additional cash payment
to Cisco equal to the Company's consolidated revenues for the twelve months
preceding the transaction.
On September 15, 2000, Cisco and KPMG LLP agreed that, immediately prior to
the closing of an IPO, KPMG LLP would purchase 2,500,000 shares of Series A
Preferred Stock (half of such shares then outstanding and held by Cisco) from
Cisco for $525,000. Under this agreement, the Company agreed to repurchase that
number of shares of our Series A Preferred Stock resulting in Cisco owning 9.9%
of our common stock as of the date of our initial public offering. On November
29, 2000, KPMG LLP agreed to convert all of the preferred stock it acquired at
the initial public offering price without any conversion discount.
In February 2001, in connection with our IPO, approximately 1.4 million
shares of Series A Preferred Stock were repurchased by the Company from Cisco
for $378.3 million in cash; the remaining 3.6 million shares were converted
into 44.6 million shares of Common Stock by Cisco and KPMG LLP. The net amount
of the beneficial conversion feature, after deducting the $131.25 million
conversion discount foregone by KPMG LLP, was $131.25 million and reflected as
a noncash charge against net income available to common stockholders in the
fiscal 2001 Consolidated Statement of Operations.
50
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
14. Common Stock Options and Awards
On January 31, 2000, the Company adopted the 2000 Long-Term Incentive Plan
(the "Plan"), pursuant to which the Company is authorized to grant stock
options and other awards to its employees and directors. The number of shares
of common stock that are authorized for grants or awards under the Plan (the
"Authorized Shares") is equal to the greater of (i) 35,084,158 shares of common
stock and (ii) 25% of the sum of (x) the number of issued and outstanding
shares of common stock of the Company and (y) the Authorized Shares. Stock
options are granted with an exercise price equal to the common stock's fair
market value at the date of grant. Stock options granted have 10 year terms and
generally vest over four years from the date of grant.
In connection with our initial public offering, the Company granted 16.1
million stock options with an exercise price of $18 per share to employees.
These options vest over three and one-half years with 25% vesting on August 8,
2001 and an additional 25% vesting on August 8 in each of the years 2002
through 2004.
Stock option activity during the periods indicated was as follows:
[Enlarge/Download Table]
Options Weighted Average
Available Number Exercise Price Exercise
for Grant of Options Range Price Per Share
----------- ---------- -------------- ----------------
Authorized at January 31, 2000 35,084,158 -- $ -- $ --
Granted.................... (9,165,014) 9,165,014 55.50 55.50
Exercised.................. -- -- -- --
Forfeited.................. 1,116,831 (1,116,831) 55.50 55.50
Expired.................... -- -- -- --
----------- ----------
Balance at June 30, 2000...... 27,035,975 8,048,183 55.50 55.50
Granted.................... (22,842,745) 22,842,745 11.90-55.50 18.07
Exercised.................. -- -- -- --
Forfeited.................. 3,539,671 (3,539,671) 11.90-55.50 36.62
Expired.................... -- -- -- --
----------- ----------
Balance at June 30, 2001...... 7,732,901 27,351,257 11.90-55.50 27.31
=========== ==========
[Download Table]
Options Range of Weighted Average
Outstanding Exercise Remaining Weighted Average
June 30, 2001 Prices Contractual Life Exercise Price
------------- -------------- ---------------- ----------------
401,931 $11.90-$16.65 9.8 $ 13.57
19,984,534 $16.65-$22.20 9.5 18.00
143,536 $22.20-$27.75 9.6 22.69
6,821,256 $55.50 8.5 55.50
----------
27,351,257 $ 11.90-$55.50 9.3 27.31
==========
As of June 30, 2001, there were 1,766,582 options exercisable (with a
weighted average exercise price of $53.78).
51
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
The weighted average fair value of stock options granted during the five
months ended June 30, 2000 and the year ended June 30, 2001 were $35.26 and
$12.45 per option, respectively. The fair value of options granted was
determined by using the Black-Scholes option pricing model with the following
assumptions:
[Download Table]
Stock Price Risk-Free Expected
Expected Interest Expected Dividend
Volatility Rate Life Yield
----------- --------- -------- --------
2000 70.00% 6.49% 5 --
2001 81.25% 5.31% 5 --
In accordance with APB No. 25, compensation expense has not been recognized
with respect to the stock option grants, since the stock options had no
intrinsic value on the date of grant. The table below reflects the pro forma
effect on net loss applicable to common stockholders, and loss per share if the
Company were to recognize compensation expense based on the fair values of the
amounts as described above.
[Download Table]
Five Months Ended Year Ended
June 30, 2000 June 30, 2001
--------------------------------- ---------------------------------
Net Loss Net Loss
Applicable to Applicable to
Common Stockholders Loss Per Share Common Stockholders Loss Per Share
------------------- -------------- ------------------- --------------
As reported $(43,794) $ (.58) $(127,971) $(1.19)
Pro forma.. $(79,190) $(1.04) $(212,288) $(1.97)
On February 16, 2000, the Company issued stock awards of 297,324 shares to
certain employees as part of the combination of a consulting practice. In
connection with these awards, the Company also provided loans of $5,845 to the
grantees for the income tax attributed to the awards. The loans are secured
only by the shares of common stock issued to the employees, and bear interest
at 6.2% per annum. Principal and accrued interest on the loans are due no later
than February 16, 2005. These awards were fully vested at the date of grant
and, accordingly, the fair value of the awards of $16,500 was recorded as
compensation expense at the award date. Moreover, the Company provided
additional loans of $1,588 at an interest rate of 4.63% in April, 2001.
15. Income Taxes
The Company had income before taxes of $11,537 and $136,848, net of foreign
losses of approximately $4,500 and $14,600, for the five months ended June 30,
2000 and for the year ended June 30, 2001, respectively.
The components of income tax expense are as follows:
[Download Table]
For the Five Months Ended
June 30, 2000
-------------------------
Current Deferred Total
------- -------- -------
Federal........ $10,869 $10,662 $21,531
State and local 3,071 3,148 6,219
Foreign........ 1,589 -- 1,589
------- ------- -------
Total....... $15,529 $13,810 $29,339
======= ======= =======
52
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
[Download Table]
For the Year Ended June 30, 2001
--------------------------------
Current Deferred Total
-------- -------- --------
Federal........ $ 86,487 $ (8,635) $ 77,852
State and local 24,446 (2,440) 22,006
Foreign........ 2,780 (741) 2,039
-------- -------- --------
Total....... $113,713 $(11,816) $101,897
======== ======== ========
The following table presents the principal reasons for the difference
between the effective income tax rate and the United States federal statutory
income tax rate:
[Enlarge/Download Table]
Five Months Year
Ended Ended
June 30, June 30,
2000 2001
----------- --------
U.S. federal statutory income tax rate...................................... 35.0% 35.0%
Nondeductible equity in losses of affiliate and loss on redemption of equity
interest in affiliate..................................................... 35.5% 15.3%
State taxes, net of federal benefit......................................... 35.0% 10.5%
Nondeductible meals and entertainment expense............................... 31.4% 5.4%
Change in valuation allowance............................................... 34.0% 4.6%
Other, net.................................................................. -- 2.0%
Foreign taxes............................................................... 13.8% 1.1%
Nondeductible goodwill amortization......................................... 19.6% .6%
Nonrecurring taxable gain on employee stock award........................... 50.0% --
----- ----
Effective income tax rate................................................... 254.3% 74.5%
===== ====
53
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
The temporary differences which give rise to a significant portion of
deferred income tax assets and liabilities are as follows:
[Download Table]
June 30,
------------------
2000 2001
---- ----
Deferred income tax assets:
Net operating loss carryforwards....... $ 19,500 $ 26,000
Accrued compensation................... 25,400 23,600
Depreciation and amortization.......... 5,400 13,900
Allowance for doubtful accounts........ 13,900 11,400
Goodwill............................... 4,800 5,900
Foreign currency translation........... 900 2,300
Reserve for claims..................... 3,400 1,600
Accrued liabilities.................... 6,700 --
-------- --------
Total gross deferred income tax assets. 80,000 84,700
Less valuation allowance.................. (22,900) (29,100)
-------- --------
Total net deferred income tax assets...... 57,100 55,600
-------- --------
Deferred income tax liabilities:
Intangible assets...................... 25,506 13,005
Unbilled revenues...................... 13,000 --
401(k) plan............................ -- 8,200
Accrued liabilities.................... -- 100
-------- --------
Total deferred income tax liabilities.. 38,506 21,305
-------- --------
Net deferred income tax asset............. $ 18,594 $ 34,295
======== ========
The Company has U.S. net operating loss carryforwards at June 30, 2001 of
approximately $47,000 which expire at various dates through 2020. The Company
also has foreign net operating loss carryforwards at June 30, 2001 of
approximately $18,800 which expire at various dates prescribed in foreign law.
A valuation allowance has been recorded due to the uncertainty of the
recognition of certain deferred income tax assets, primarily the net operating
losses of certain U.S. and foreign subsidiaries. The net changes in the
valuation allowance for the five months ended June 30, 2000 and the year ended
June 30, 2001 were increases of $9,200 and $6,200, respectively.
16. Transactions with Related Parties
Cisco
We entered into an alliance agreement with Cisco Systems, Inc. on December
29, 1999. At the same time we executed this alliance agreement, we also entered
into an agreement with Cisco pursuant to which Cisco purchased 5,000,000 shares
of our Series A Mandatorily Redeemable Convertible Preferred Stock (see Note
13). The term of the alliance agreement is five years, and may be extended as
mutually agreed by the Company and Cisco.
KPMG LLP
Infrastructure Services. Historically, certain infrastructure services
relating to KPMG LLP's assurance, tax and consulting businesses have been
provided by KPMG LLP on a centralized basis. These services include
54
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
the following: human resources, employee benefits, benefits administration,
finance and accounting, risk management, training, facilities management,
legal, marketing, technology, data processing, and other administrative and
executive functions. The financial statements for all historical periods
include allocations of these centralized costs based on the actual cost of such
services, on substantially the same basis as provided for in the original
outsourcing agreement, as discussed below.
The Company and KPMG LLP entered into an outsourcing agreement effective
January 31, 2000, whereby the Company received and was charged for services
performed by KPMG LLP. Certain services provided to us pursuant to this
original outsourcing agreement were not necessary for us to operate our
business as an independent company since they were duplicative or were
performed by us internally. In recognition of this fact and in anticipation of
consummation of our IPO, the Company and KPMG LLP entered into an amended and
restated outsourcing agreement effective July 1, 2000, eliminating the services
and related costs that we did not require. Thereafter, on February 13, 2001,
the Company and KPMG LLP entered into a transition services agreement whereby
we receive and are charged for infrastructure services on substantially the
same basis as the amended and restated outsourcing agreement. The allocation of
costs to the Company for such services is based on actual costs incurred by
KPMG LLP and are allocated among KPMG LLP's assurance and tax businesses and
the Company primarily on the basis of full-time equivalent personnel and actual
usage (specific identification).
The transition services agreement expires on the fourth anniversary of the
February 8, 2001 IPO with regard to the technology infrastructure costs, and on
the third anniversary of the IPO with regard to all other costs except for
those relating to facilities costs. With regard to facilities costs, the
company and KPMG LLP have entered into arrangements pursuant to which our
Company subleases from KPMG LLP office space that was formally allocated to the
Company under the outsourcing agreement. The terms of the arrangements are
substantially equivalent to those under the original outsourcing agreement, and
will extend over the remaining period covered by the lease agreement between
KPMG LLP and the lessor. If the Company terminates any services under the
transition services agreement prior to the end of the term for such services,
the Company is obligated to pay to KPMG LLP any "termination costs" incurred as
a result of KPMG LLP having made investments in systems, personnel and other
assets that were used in KPMG LLP's shared infrastructure and national support
capabilities. It is the intent of the parties that, during the term of the
transition services agreement, the Company will work with KPMG LLP to minimize
any termination costs arising at the end of the term of the agreement, and the
Company will wind down its receipt of services from KPMG LLP by developing its
own infrastructure and support capabilities or by engaging third party
providers of such services. The parties have agreed that the transition of
personnel from KPMG LLP to the Company would occur prior to the expiration of
the agreement so that termination costs relating to personnel, if any, would
not be assessed on or after the expiration of the agreement. The parties have
further agreed to work together to wind down the Company's receipt of services
in a manner so that the termination costs payable by the Company upon the
expiration of the agreement are minimized (see Note 12).
In July 2001, the Company and KPMG LLP agreed that the Company would
terminate certain services relating to human resources, training, purchasing,
facilities management and knowledge management. Termination costs associated
with these services to be paid by the Company to KPMG LLP in fiscal 2002 are
not expected to exceed $1,000.
In September 2000, the Company purchased $16,100 of internal use software
from KPMG LLP at its net book value. This purchase was made in connection with
the Separation.
Retirement and Benefit Plans. Historically, all of KPMG LLP's employees,
including those involved in KPMG LLP's Consulting Business, participated in
various KPMG LLP sponsored benefit and retirement plans.
55
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
KPMG LLP's costs with respect to these plans have been allocated among KPMG
LLP's assurance, tax and consulting businesses. KPMG LLP has retained the
assets and liabilities under these plans, other than those relating to KPMG
LLP's 401(k) plan, with respect to all current and former employees of the
Company. The assets related to the Company's employees who participated in KPMG
LLP's 401(k) plan were transferred into a new Company sponsored 401(k) plan
(see Note 18). From January 31, 2000, the date of Separation, no further
benefits will accrue to the Company's employees under KPMG LLP's retirement and
benefit plans.
Interest Expense. Historically, cash management functions for KPMG LLP's
assurance, tax and consulting businesses have been performed on a centralized
basis by KPMG LLP. Further, a substantial portion of KPMG LLP's total cash
requirements have been obtained through utilization of partners' available
capital account balances. In return, the KPMG LLP partners were paid interest
on their total capital account balances at floating interest rates based on the
prime rate plus 1%. Total interest expense, net of interest earned, incurred by
KPMG LLP for all historical periods, including interest paid to partners, has
been allocated between KPMG LLP's assurance, tax and consulting businesses
based on relative average balances of accounts receivable and unbilled
revenues. Effective July 1, 2000, the Company was no longer allocated interest
by KPMG LLP.
Total expenses allocated to the Company with regard to infrastructure
services, retirement and benefit plans, occupancy and interest are as follows:
[Enlarge/Download Table]
Year Seven Months Five Months Year
Ended Ended Ended Ended
June 30, January 31, June 30, June 30,
1999 2000 2000 2001
-------- ------------ ----------- --------
Occupancy costs................................. $ 48,780 $ 32,570 $ 24,144 $ 55,502
Retirement and benefit plans.................... 38,949 32,848 11,293 --
Interest expense................................ 23,352 23,504 13,680 --
Other infrastructure service costs.............. 201,270 123,341 89,723 179,393
-------- -------- -------- --------
Total........................................... $312,351 $212,263 $138,840 $234,895
======== ======== ======== ========
Amounts included in:
Other costs of service....................... $ 65,523 $ 46,302 $ 27,400 $ 64,944
Selling, general and administrative expenses. 223,476 142,457 97,760 169,951
Interest expense............................. 23,352 23,504 13,680 --
-------- -------- -------- --------
$312,351 $212,263 $138,840 $234,895
======== ======== ======== ========
IPO Transaction Costs. In October 2000, KPMG LLP and the Company agreed to
pool all IPO transaction costs (such as legal, accounting and printing costs)
and apportion them to the companies based on the relative number of shares sold
in the initial public offering. Accordingly, the Company incurred transaction
costs of approximately $28 million, which were accounted for as a reduction in
proceeds from the transaction.
56
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
Related Party Revenues and Costs of Service. The Company has periodically
provided consulting services directly to KPMG LLP and other affiliates.
Additionally, KPMG LLP's assurance and tax businesses sometimes utilized the
Company's consultants in servicing their assurance and tax clients.
Correspondingly, the Company sometimes utilized KPMG LLP assurance and tax
professionals in servicing their consulting clients. Management believes that
the revenues earned and fees paid between KPMG LLP's assurance and tax
businesses, other affiliates and the Company were determined on a basis
substantially equivalent to what would have been earned and paid in similar
transactions with unrelated parties. The revenues earned from, and costs paid
to, KPMG LLP as a result of these services are summarized as follows:
[Download Table]
Year Seven Months Five Months Year
Ended Ended Ended Ended
June 30, January 31, June 30, June 30,
1999 2000 2000 2001
-------- ------------ ----------- --------
Total revenue......... $128,612 $55,378 $44,356 $53,554
======== ======= ======= =======
Total costs of service $ 27,119 $10,078 $ 5,651 $35,581
======== ======= ======= =======
Other Related Parties
Revenues earned from other related parties were as follows:
[Download Table]
Year Seven Months Five Months Year
Ended Ended Ended Ended
June 30, January 31, June 30, June 30,
1999 2000 2000 2001
-------- ------------ ----------- --------
Qwest (see Note 5). $2,675 $22,260 $12,980 $52,169
Cisco (see Note 13) 4,024 3,800 9,609 18,087
------ ------- ------- -------
$6,699 $26,060 $22,589 $70,256
====== ======= ======= =======
Accounts receivable and unbilled revenues from other related parties were as
follows:
[Download Table]
June 30,
---------------
2000 2001
------- -------
Qwest $11,729 $16,650
Cisco 5,849 1,542
------- -------
$17,578 $18,192
======= =======
17. Acquisitions
All acquisitions have been accounted for as purchases and, accordingly, the
purchase price of each acquisition was assigned to the assets acquired and
liabilities assumed based on their fair values at the respective dates of
acquisition. To date, most acquisitions have been made to increase our
multinational service delivery capabilities in the following regions (amounts
represent aggregate purchase prices in the region): North America ($52.8
million), Latin America ($36.0 million), Asia Pacific ($31.5 million), Europe
($35.9 million), and other ($117.0 million, including $92.5 million for
Softline).
OAD Group, Inc.: On August 26, 1998, the Company acquired all of the
outstanding stock of OAD Group, Inc. for $9,000 of which $8,100 was allocated
to goodwill.
57
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
Softline Consulting & Integrators, Inc.: On May 27, 1999, the Company
acquired all of the voting common stock of Softline, a systems integration
company, for $27,540 in cash, and entered into an agreement to acquire all of
the Softline nonvoting common stock for not less than $65,000 (see Note 9). The
acquisition resulted in the recognition of goodwill of $79,148 and intangible
assets (primarily assembled workforce) of $22,319. A substantial portion of the
acquired Softline business was transferred to a newly-formed entity, QCS,
shortly after the acquisition (see Note 5).
Studio Verso and WebVibe Corporation: In July 1999, the Company acquired
these two entities for an aggregate purchase price of $15,500. The allocation
of the purchase price to the acquired assets resulted in the allocation of
substantially all of the purchase price to goodwill.
KPMG Consulting Mexico, S. de R.L. de C.V.: On December 29, 1999, the
Company acquired the Mexican consulting business of a KPMG International member
firm for $5,547. The allocation of the purchase price to the acquired assets
and liabilities assumed resulted in the allocation of $3,600 to assembled
workforce and $2,452 to goodwill.
Consulting businesses of Canadian member of KPMG International: Effective
February 1, 2000, the Company acquired the Canadian consulting business of a
KPMG International member firm for $52,765, of which the company paid $24,970
to the KPMG member firm and received a loan of $27,795 from KPMG LLP. The
allocation of the purchase price to the acquired assets resulted in the
allocation of $9,900 to assembled workforce and $22,094 to goodwill.
Japan: On April 1, 2000, the Company acquired the Japanese consulting
business of a KPMG International member firm for $11,000. The allocation of the
purchase price to the acquired assets and liabilities assumed resulted in the
allocation of $1,400 to assembled workforce and $9,103 to goodwill (see Note
9).
San Tong Consulting Corporation: On May 31, 2000, the Company acquired the
South Korean consulting business of a KPMG International member firm for
$4,000. The allocation of the purchase price to the acquired assets and
liabilities assumed resulted in the allocation of $500 to assembled workforce
and $3,350 to goodwill (see Note 9).
Central America: On June 20, 2000, the Company acquired the Central America
consulting business of a KPMG International member firm for $2,238. The
allocation of the purchase price to the acquired assets and liabilities assumed
resulted in $2,402 of goodwill.
New Zealand: On June 26, 2000, the Company acquired the New Zealand
consulting business of a KPMG International member and Web Limited firm for
$16,500. The allocation of the purchase price to the acquired assets and
liabilities assumed resulted in the allocation of $4,400 to assembled workforce
and $9,031 to goodwill.
Venezuela: On June 27, 2000, the Company acquired the Venezuelan consulting
business of a KPMG International member firm for $1,854. The allocation of the
purchase price to the acquired assets and liabilities assumed resulted in the
allocation of $100 to assembled workforce and $3,047 to goodwill.
Argentina: On June 30, 2000, the Company acquired the Argentine consulting
business of a KPMG International member firm for $5,340. The allocation of the
purchase price to the acquired assets and liabilities assumed resulted in the
allocation of $400 to assembled workforce and $6,321 to goodwill (see Note 9).
58
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
Colombia: On July 28, 2000, the Company acquired the Colombian consulting
business of a KPMG International member firm for $490. The allocation of the
purchase price to the acquired assets and liabilities assumed resulted in
$1,021 of goodwill.
Ireland: On September 15, 2000, the Company acquired the Irish consulting
business of a KPMG International member firm for $35,880. The allocation of the
purchase price to the acquired assets and liabilities assumed resulted in the
allocation of $1,450 to assembled workforce and $31,861 to goodwill (see Note
9).
Peru: On September 22, 2000, the Company acquired the Peruvian consulting
business of a KPMG International member firm for $1,181. The allocation of the
purchase price to the acquired assets and liabilities assumed resulted in $708
of goodwill.
Brazil: On October 3, 2000, the Company acquired the Brazilian consulting
business of a KPMG International member firm for $8,516. The allocation of the
purchase price to the acquired assets and liabilities assumed resulted in the
allocation of $500 to assembled workforce and $12,024 to goodwill (see Note 9).
Netherlands Antilles: On February 7, 2001, the Company acquired the
Netherlands Antilles consulting business of a KPMG International member firm
for $10,904. The allocation of the purchase price to the acquired assets and
liabilities assumed resulted in the allocation of $650 to assembled workforce
and $14,786 to goodwill.
The pro forma effects on operations of acquisitions were not material.
18. Employee Benefits
The Company sponsors a qualified 401(k) defined contribution plan (the
"Plan") covering substantially all of its employees. Participants are permitted
(subject to a maximum permissible contribution under the Internal Revenue Code
for calendar year 2001 of ten thousand, five hundred dollars) to contribute up
to 20% of their earnings to the Plan. Matching contributions by the Company are
discretionary and range between 0%-50% of the first 6% of employees' earnings
contributions. Company contributions for the five months ended June 30, 2000
and the year ended June 30, 2001 were $1,966 and $13,640, respectively (see
Note 12).
The Company offers to substantially all our full-time employees an employee
stock purchase plan. These employees are eligible to use up to 15% of their
regular compensation (subject to a twenty-five thousand dollar calendar year
limit under the Internal Revenue Code) to purchase shares of our common stock
at a price equal to 85% of the lesser of the fair market value of our common
stock at the beginning of an offering period and the fair market value of our
common stock at the end of each six month purchase period within this offering
period. The first offering period began on February 8, 2001 and will end on
January 31, 2003. Succeeding 24 month offering periods will follow at six-month
intervals. The maximum number of shares of our common stock that may be
purchased under our employee stock purchase plan is 3,776,096 shares, plus an
annual increase on the first day of each of the Company's fiscal years
beginning July 1, 2001 and ending June 30, 2026.
19. Reduction in Workforce
In April, 2001, the Company recorded a $19,968 charge for severance and
termination benefits related to a reduction in workforce. The reduction in
workforce affected approximately 575 employees and was the result of aligning
the Company's workforce with market demand for certain types of services. All
of the affected employees have been terminated and are no longer employed by
the Company. At June 30, 2001, approximately $4,200 of the accrual remains and
will be paid in cash by February 2003.
59
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
20. Segment Information
The Company's segment information has been prepared in accordance with SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information".
Segments were determined based on the six groups in which the Company has
industry-specific knowledge. The Company's chief operating decision maker, the
Chairman and Chief Executive Officer, evaluates performance and allocates
resources based upon the industry groups. Accounting policies of the segments
are the same as those described in the summary of significant accounting
policies (Note 2). Performance of the segments is evaluated on operating income
excluding the costs of infrastructure functions (such as information systems,
finance and accounting, human resources, legal and marketing). Inter-segment
sales were made at prices approximating current market value.
[Enlarge/Download Table]
Depreciation
& Interest Operating Capital
Revenues Amortization Expense (2) Income Assets (3) Expenditures
---------- ------------ ----------- --------- ---------- ------------
Year Ended June 30, 1999
Financial Services................. $ 520,451 $ 4,179 $ 6,125 $ 176,551 $ 51,936 $ 5,410
Consumer and Industrial Markets.... 406,826 6,317 5,988 122,788 50,664 4,337
Public Services.................... 554,714 6,266 13,995 123,812 151,134 8,644
High Tech.......................... 174,393 3,741 2,573 53,909 25,250 1,837
Communications and Content......... 175,514 2,273 3,084 47,693 28,473 2,463
Health Care........................ 121,866 1,941 2,133 39,340 13,835 1,020
Corporate/Other (1)................ 27,772 1,422 (8,741) (309,820) 170,899 190
---------- ------- ------- --------- -------- -------
Total........................... $1,981,536 $26,139 $25,157 $ 254,273 $492,191 $23,901
========== ======= ======= ========= ======== =======
Seven Months Ended January 31, 2000
Financial Services................. $ 291,976 $ 3,287 $ 3,906 $ 84,201 $ 80,420 $ 2,756
Consumer and Industrial Markets.... 200,637 3,625 3,056 51,693 59,263 1,450
Public Services.................... 398,435 3,487 11,669 122,857 208,287 3,373
High Tech.......................... 140,107 4,744 1,937 37,979 17,425 1,779
Communications and Content......... 157,839 1,176 2,552 29,794 97,796 2,296
Health Care........................ 55,579 571 1,042 13,842 20,965 402
Corporate/Other (1)................ 20,245 5,514 3,177 (208,389) 236,935 4,311
---------- ------- ------- --------- -------- -------
Total........................... $1,264,818 $22,404 $27,339 $ 131,977 $721,091 $16,367
========== ======= ======= ========= ======== =======
Five Months Ended June 30, 2000
Financial Services................. $ 235,350 $ 2,195 $ 3,797 $ 44,824 $ 81,427 $ 2,962
Consumer and Industrial Markets.... 154,404 1,797 2,346 26,190 48,154 654
Public Services.................... 314,610 3,554 9,196 58,632 199,637 2,331
High Tech.......................... 125,496 4,217 2,194 19,130 42,163 4,276
Communications and Content......... 179,768 2,843 3,413 29,215 123,950 7,896
Health Care........................ 39,656 421 825 2,915 16,293 101
Corporate/Other (1)................ 55,882 5,622 (5,465) (142,990) 440,014 --
---------- ------- ------- --------- -------- -------
Total........................... $1,105,166 $20,649 $16,306 $ 37,916 $951,638 $18,220
========== ======= ======= ========= ======== =======
60
KPMG CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share amounts)
[Enlarge/Download Table]
Depreciation
& Interest Operating Capital
Revenues Amortization Expense (2) Income Assets (3) Expenditures
---------- ------------ ----------- --------- ---------- ------------
Year Ended June 30, 2001
Financial Services............. $ 458,970 $ 3,727 $ 9,120 $ 59,197 $ 57,367 $ 1,639
Consumer and Industrial Markets 339,423 3,930 4,948 78,214 45,565 1,118
Public Services................ 804,759 7,106 16,893 231,899 177,305 3,739
High Tech...................... 404,332 7,475 6,421 112,788 103,943 1,287
Communications and Content..... 524,767 7,302 12,639 127,405 128,977 9,384
Health Care.................... 84,940 552 1,001 22,002 3,283 142
Corporate/Other (1)............ 238,633 30,930 (33,847) (410,576) 483,195 27,000
---------- ------- -------- --------- -------- -------
Total....................... $2,855,824 $61,022 $ 17,175 $ 220,929 $999,635 $44,309
========== ======= ======== ========= ======== =======
--------
(1)Corporate/Other includes our investment in our affiliated company (QCS),
which is not specific to any individual segment, and our international
operations. It also includes infrastructure costs.
(2)Interest expense is allocated to the industry segments based on accounts
receivable and unbilled revenues.
(3)Industry segment assets include only accounts receivable, unbilled revenues
and certain property and equipment directly attributed to the industry
segment. All other assets are not allocated to industry segments and are
deemed to be corporate assets.
Corporate/Other revenues are primarily attributed to international
operations for all periods. Long-lived assets in international locations were
not significant at June 30, 1999, $8,981 at June 30, 2000, and $9,019 at June
30, 2001.
The Company's public services industry segment has a significant percentage
of their engagements performed on a fixed-price or fixed-time basis and derives
revenues from departments and agencies of the United States government. While
most of our government agency clients have the ability to unilaterally
terminate their contracts, the Company's relationships are generally not with
political appointees; and the Company has not typically experienced a loss of
federal government business with a change of administration. U.S. Federal
government revenues accounted for 11.3%, and 12.8%, and 16.9% of the Company's
revenues for fiscal 1999, 2000, and 2001, respectively.
21. Subsequent Events
On August 2, 2001, the Company acquired a regional consulting practice in
Southeast Asia, consisting of consultancies in Hong Kong, Malaysia, Singapore
and Taiwan, from certain KPMG International member firms for approximately
$16,900. The Company is currently in the process of determining the allocation
of the purchase price to the acquired assets and liabilities. Preliminary data
indicated that the excess of purchase price over net liabilities assumed was
approximately $18,200.
On August 7, 2001, the Company announced a stock repurchase program of up to
$100 million of the Company's outstanding common stock.
61
Item 9. Changes in and Disagreements with Accountants on Accounting and Finance
Disclosure
There were no changes in or disagreements with accountants on accounting and
financial disclosure as defined by Item 304 of Regulation S-K.
PART III.
The information required by Items 10, 11, 12 and 13 (except for certain
information regarding executive officers that is called for by Item 10, which
information is contained in Part I) is incorporated herein by reference from
the definitive proxy statement that the Company intends to file pursuant to
Regulation 14A on or before October 1, 2001.
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
[Enlarge/Download Table]
(a)(1). The financial statements of the Company required in response to this Item are incorporated by reference
from Item 8 of this Report.
(a)(2). Not applicable.
(a)(3). See the exhibits listed below under Item 14 (c) and Financial Statement Schedule under Item 14(d).
(b). Not applicable.
(c). Exhibit Index
[Enlarge/Download Table]
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation of Registrant, dated as of February 7, 2001,
which is incorporated herein by reference to Exhibit 3.1 from the Company's Form 10-Q for the
quarter ending March 31, 2001 filed on May 15, 2001.
3.2 Amended and Restated Bylaws of the Registrant, which is incorporated herein by reference to
Exhibit 3.2 from the Company's Registration Statement on Form S-1 (Registration No. 333-
36328, which is contained in Commission File No. 000-31351) (referred to below as "the
Company's Form S-1").
10.1 Amended and Restated Separation Agreement, dated as of February 13, 2001, among KPMG LLP,
KPMG Consulting, LLC and the Registrant, which is incorporated herein by reference to Exhibit
10.1 to the Company's Form 10-Q for the quarter ending March 31, 2001 filed on May 15, 2001.
10.2 Limited License Agreement between the Registrant and KPMG International, which is
incorporated herein by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter
ending March 31, 2001 filed on May 15, 2001.
10.3 Transition Services Agreement, dated as of February 13, 2001, among KPMG LLP, KPMG
Consulting, LLC and the Registrant, which is incorporated herein by reference to Exhibit 10.3 to
the Company's Form 10-Q for the quarter ending March 31, 2001 filed on May 15, 2001.
10.4 Non-Competition Agreement, dated as of February 13, 2001, among KPMG LLP, KPMG
Consulting, LLC and the Registrant, which is incorporated herein by reference to Exhibit 10.4 to
the Company's Form 10-Q for the quarter ending March 31, 2001 filed on May 15, 2001.
10.5 Form of Member Distribution Agreement for KPMG Consulting Qualified Employees, which is
incorporated herein by reference to Exhibit 10.6 from the Company's Form S-1.
62
[Enlarge/Download Table]
Exhibit No. Description
---------- -----------
10.6 Form of Member Distribution Agreement for KPMG Consulting Non-Qualified Employees, which is
incorporated herein by reference to Exhibit 10.7 from the Company's Form S-1.
10.7 Form of Member Agreement for KPMG Consulting Non-Eligible Employees, which is incorporated
herein by reference to Exhibit 10.8 from the Company's Form S-1.
10.8 Form of Managing Director Agreement, which is incorporated herein by reference to Exhibit 10.9
from the Company's Form S-1.
10.9 Stock Purchase Agreement dated as of December 29, 1999 between Cisco Systems, Inc. and the
Registrant, which is incorporated herein by reference to Exhibit 10.11 from the Company's Form S-1.
10.10 Investor Rights Agreement dated as of January 31, 2000 among KPMG LLP, Cisco Systems, Inc. and
the Registrant, which is incorporated herein by reference to Exhibit 10.12 from the Company's
Form S-1.
10.11 Alliance Agreement, dated as of December 29, 1999, between Cisco Systems, Inc. and KPMG LLP
and related amendment, which is incorporated herein by reference to Exhibit 10.13 from the
Company's Form S-1.
10.12 Amendment No. 1 to Alliance Agreement, dated as of December 1, 2000, between Cisco Systems, Inc.
and the Registrant.
10.13 Business Alliance Agreement, dated as of November 22, 1995, between KPMG LLP and Oracle
Corporation, which is incorporated herein by reference to Exhibit 10.16 from the Company's
Form S-1.
10.14 National Partner Agreement, dated as of September 20, 1993, between KPMG LLP and SAP America,
Inc., which is incorporated herein by reference to Exhibit 10.17 from the Company's Form S-1.
10.15 Registrant's 2000 Long-Term Incentive Plan, amended as of March 30, 2001.
10.16 Registrant's Employee Stock Purchase Plan, which is incorporated herein by reference to Exhibit 4.3
from the Company's Registration Statement on Form S-8 (Registration No. 333-55354, which is
contained in Commission File No. 000-31351).
10.17 Registrant's 401(k) Plan, which is incorporated herein by reference to Exhibit 10.20 from the
Company's Form S-1.
10.18 Amendment #1 to Registrant's 401(k) Plan, which is incorporated herein by reference to Exhibit 4.4
from the Company's Registration Statement on Form S-8 (Registration No. 333-55380, which is
contained in Commission File No. 000-31351).
10.19 Strategic Alliance Agreement dated as of December 27, 2000 among Qwest Communications
International Inc., KPMG Consulting, LLC, Softline Consulting & Integrators, Inc. and Qwest
Cyber.Solutions LLC, which is incorporated herein by reference to Exhibit 10.26 from the Company's
Form S-1.
10.20 Credit Agreement, amended and restated as of May 21, 2001.
10.21 First Amendment, dated as of August 2, 2001, to Credit Agreement, amended and restated as of
May 21, 2001.
21.1 List of subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP
99.1 Factors Affecting Future Financial Results
(d). Financial Statement Schedule
63
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS ON SCHEDULE
Board of Directors and Stockholders
KPMG Consulting, Inc.
In connection with our audit of the financial statements of KPMG Consulting,
Inc. (successor to the consulting business of KPMG LLP) referred to in our
report dated August 7, 2001, which is included in this annual report on Form
10-K for the year ended June 30, 2001, we have also audited Schedule II for the
year ended June 30, 1999, for the seven months ended January 31, 2000 and the
five months ended June 30, 2000 and the year ended June 30, 2001. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ Grant Thornton LLP
New York, New York
August 7, 2001
Schedule II
Valuation and Qualifying Accounts
[Download Table]
Balance at Charge to Balance at
Beginning Costs and Deductions- End
Allowance for Doubtful Accounts of Period Expenses (a) Write Offs of Period
------------------------------- ---------- ------------ ----------- ----------
(in thousands)
Year ended June 30, 1999........... $ 2,100 $ 7,816 $ (6,416) $ 3,500
Seven months ended January 31, 2000 3,500 6,635 (5,235) 4,900
Five months ended June 30, 2000.... 4,900 12,881 (10,781) 7,000
Year ended June 30, 2001........... 7,000 63,157 (42,690) 27,467
--------
(a)Expense reflected in other costs of service in the Combined/Consolidated
Financial Statements
64
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.
KPMG CONSULTING, INC.
/s/ RANDOLPH C. BLAZER
By: _________________________________
Randolph C. Blazer,
Chairman of the Board, Chief
Executive Officer and President
Date: September 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
[Enlarge/Download Table]
Signature Title Date
--------- ----- ----
Principal Executive Officer and Director: Chairman of the Board, Chief September 28, 2001
Executive Officer and President
By: /s/ RANDOLPH C. BLAZER
-------------------------------------------
Randolph C. Blazer
Principal Financial and Accounting Officer: Executive Vice President and Chief September 28, 2001
Financial Officer
By: /s/ ROBERT C. LAMB, JR.
-------------------------------------------
Robert C. Lamb, Jr.
Board of Directors: Director September 28, 2001
By: /s/ DOUGLAS C. ALLRED
-------------------------------------------
Douglas C. Allred
By: /s/ WOLFGANG KEMNA Director September 28, 2001
-------------------------------------------
Wolfgang Kemna
By: /s/ RODERICK C. MCGEARY Director September 28, 2001
-------------------------------------------
Roderick C. McGeary
By: /s/ AFSHIN MOHEBBI Director September 28, 2001
-------------------------------------------
Afshin Mohebbi
By: /s/ JAY H. NUSSBAUM Director September 28, 2001
-------------------------------------------
Jay H. Nussbaum
65
[Enlarge/Download Table]
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation of Registrant, dated as of February 7, 2001,
which is incorporated herein by reference to Exhibit 3.1 from the Company's Form 10-Q for the
quarter ending March 31, 2001 filed on May 15, 2001.
3.2 Amended and Restated Bylaws of the Registrant, which is incorporated herein by reference to
Exhibit 3.2 from the Company's Registration Statement on Form S-1 (Registration No. 333-
36328, which is contained in Commission File No. 000-31351) (referred to below as "the
Company's Form S-1").
10.1 Amended and Restated Separation Agreement, dated as of February 13, 2001, among KPMG LLP,
KPMG Consulting, LLC and the Registrant, which is incorporated herein by reference to Exhibit
10.1 to the Company's Form 10-Q for the quarter ending March 31, 2001 filed on May 15, 2001.
10.2 Limited License Agreement between the Registrant and KPMG International, which is
incorporated herein by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter
ending March 31, 2001 filed on May 15, 2001.
10.3 Transition Services Agreement, dated as of February 13, 2001, among KPMG LLP, KPMG
Consulting, LLC and the Registrant, which is incorporated herein by reference to Exhibit 10.3 to
the Company's Form 10-Q for the quarter ending March 31, 2001 filed on May 15, 2001.
10.4 Non-Competition Agreement, dated as of February 13, 2001, among KPMG LLP, KPMG
Consulting, LLC and the Registrant, which is incorporated herein by reference to Exhibit 10.4 to
the Company's Form 10-Q for the quarter ending March 31, 2001 filed on May 15, 2001.
10.5 Form of Member Distribution Agreement for KPMG Consulting Qualified Employees, which is
incorporated herein by reference to Exhibit 10.6 from the Company's Form S-1.
10.6 Form of Member Distribution Agreement for KPMG Consulting Non-Qualified Employees, which
is incorporated herein by reference to Exhibit 10.7 from the Company's Form S-1.
10.7 Form of Member Agreement for KPMG Consulting Non-Eligible Employees, which is
incorporated herein by reference to Exhibit 10.8 from the Company's Form S-1.
10.8 Form of Managing Director Agreement, which is incorporated herein by reference to Exhibit 10.9
from the Company's Form S-1.
10.9 Stock Purchase Agreement dated as of December 29, 1999 between Cisco Systems, Inc. and the
Registrant, which is incorporated herein by reference to Exhibit 10.11 from the Company's Form
S-1.
10.10 Investor Rights Agreement dated as of January 31, 2000 among KPMG LLP, Cisco Systems, Inc.
and the Registrant, which is incorporated herein by reference to Exhibit 10.12 from the
Company's Form S-1.
10.11 Alliance Agreement, dated as of December 29, 1999, between Cisco Systems, Inc. and KPMG
LLP and related amendment, which is incorporated herein by reference to Exhibit 10.13 from the
Company's Form S-1.
10.12 Amendment No. 1 to Alliance Agreement, dated as of December 1, 2000, between Cisco Systems,
Inc. and the Registrant.
10.13 Business Alliance Agreement, dated as of November 22, 1995, between KPMG LLP and Oracle
Corporation, which is incorporated herein by reference to Exhibit 10.16 from the Company's
Form S-1.
10.14 National Partner Agreement, dated as of September 20, 1993, between KPMG LLP and SAP
America, Inc., which is incorporated herein by reference to Exhibit 10.17 from the Company's
Form S-1.
10.15 Registrant's 2000 Long-Term Incentive Plan, amended as of March 30, 2001.
[Enlarge/Download Table]
Exhibit No. Description
----------- -----------
10.16 Registrant's Employee Stock Purchase Plan, which is incorporated herein by reference to Exhibit
4.3 from the Company's Registration Statement on Form S-8 (Registration No. 333-55354, which
is contained in Commission File No. 000-31351).
10.17 Registrant's 401(k) Plan, which is incorporated herein by reference to Exhibit 10.20 from the
Company's Form S-1.
10.18 Amendment #1 to Registrant's 401(k) Plan, which is incorporated herein by reference to
Exhibit 4.4 from the Company's Registration Statement on Form S-8 (Registration No. 333-
55380, which is contained in Commission File No. 000-31351).
10.19 Strategic Alliance Agreement dated as of December 27, 2000 among Qwest Communications
International Inc., KPMG Consulting, LLC, Softline Consulting & Integrators, Inc. and Qwest
Cyber.Solutions LLC, which is incorporated herein by reference to Exhibit 10.26 from the
Company's Form S-1.
10.20 Credit Agreement, amended and restated as of May 21, 2001.
10.21 First Amendment, dated as of August 2, 2001, to Credit Agreement, amended and restated as of
May 21, 2001.
21.1 List of subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP
99.1 Factors Affecting Future Financial Results
Dates Referenced Herein and Documents Incorporated by Reference
↑Top
Filing Submission 0001021408-01-507517 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Mon., Apr. 29, 8:59:24.2am ET 
