| Huron Consulting Group Inc |
| ITEM 1A RISK FACTORS Our inability to retain our senior management team and other managing directors would be detrimental to the success of our business |
| We rely heavily on our senior management team, including Gary Holdren, our Chief Executive Officer, Daniel Broadhurst, our Vice President of Operations, Gary Burge, our Chief Financial Officer and Treasurer, and other managing directors, and our ability to retain them is particularly important to our future success |
| Given the highly specialized nature of our services, these people must have a thorough understanding of our service offerings as well as the skills and experience necessary to manage an organization consisting of a diverse group of professionals |
| In addition, we rely on our senior management team and other managing directors to generate and market our business |
| Further, in light of our limited operating history, our senior management’s and other managing directors’ personal reputations and relationships with our clients are a critical element in obtaining and maintaining client engagements |
| Although we enter into non-solicitation agreements with our senior management team and other managing directors, we do not enter into non-competition agreements |
| Accordingly, members of our senior management team and our other managing directors are not contractually prohibited from leaving or joining one of our competitors, and some of our clients could choose to use the services of that competitor instead of our services |
| If one or more members of our senior management team or our other managing directors leave and we cannot replace them with a suitable candidate quickly, we could experience difficulty in securing and successfully completing engagements and managing our business properly, which could harm our business prospects and results of operations |
| Our inability to hire and retain talented people in an industry where there is great competition for talent could have a serious negative effect on our prospects and results of operations |
| Our business involves the delivery of professional services and is highly labor-intensive |
| Our success depends largely on our general ability to attract, develop, motivate and retain highly skilled consultants |
| The loss 11 ______________________________________________________________________ [39]Table of Contents of a significant number of our consultants or the inability to attract, hire, develop, train and retain additional skilled personnel could have a serious negative effect on us, including our ability to manage, staff and successfully complete our existing engagements and obtain new engagements |
| Qualified consultants are in great demand, and we face significant competition for both senior and junior consultants with the requisite credentials and experience |
| Our principal competition for talent comes from other consulting firms, accounting firms and technical and economic advisory firms, as well as from organizations seeking to staff their internal professional positions |
| Many of these competitors may be able to offer significantly greater compensation and benefits or more attractive lifestyle choices, career paths or geographic locations than we do |
| Therefore, we may not be successful in attracting and retaining the skilled consultants we require to conduct and expand our operations successfully |
| Increasing competition for these consultants may also significantly increase our labor costs, which could negatively affect our margins and results of operations |
| We have experienced net losses for the first part of our history, and our limited operating history makes evaluating our business difficult |
| For the period from March 19, 2002 (inception) through December 31, 2002 and for the year ended December 31, 2003, we experienced net losses of dlra4dtta2 million and dlra1dtta1 million, respectively |
| Although we generated net income of dlra10dtta9 million and dlra17dtta8 million for the years ended December 31, 2004 and 2005, respectively, we may not sustain profitability in the future |
| Our net losses, among other things, have had, and should net losses occur in the future, will have, an adverse effect on our stockholders’ equity and working capital |
| To sustain profitability, we must: • attract, integrate, retain and motivate highly qualified consultants; • achieve and maintain adequate utilization and suitable billing rates for our consultants; • expand our existing relationships with our clients and identify new clients in need of our services; • maintain and enhance our brand recognition; and • adapt to meet changes in our markets and competitive developments |
| We may not be successful in accomplishing these objectives |
| Further, our limited operating history makes it difficult to evaluate our business and prospects |
| Our prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in highly competitive industries |
| The historical information in this report may not be indicative of our future financial condition and future performance |
| For example, we expect that our future annual growth rate in revenues will moderate and likely be less than the growth rates experienced in 2003, 2004 and 2005 |
| If we are unable to manage the growth of our business successfully, we may not be able to sustain profitability |
| We have grown significantly since we commenced operations, nearly tripling the number of our consultants from 213 on May 31, 2002 to 632 as of December 31, 2005 |
| As we continue to increase the number of our consultants, we may not be able to successfully manage a significantly larger workforce |
| Additionally, our significant growth has placed demands on our management and our internal systems, procedures and controls and will continue to do so in the future |
| To successfully manage growth, we must add administrative staff and periodically update and strengthen our operating, financial, accounting and other systems, procedures and controls, which will increase our costs and may adversely affect our gross profits and our ability to sustain profitability if we do not generate increased revenues to offset the costs |
| This need to augment our support infrastructure due to growth is compounded by our decision to become a public reporting company and the increased expense that will arise in complying with existing and new regulatory requirements |
| As a public company, our information and control systems must enable us to prepare accurate and timely financial 12 ______________________________________________________________________ [40]Table of Contents information and other required disclosure |
| If we discover deficiencies in our existing information and control systems that impede our ability to satisfy our reporting requirements, we must successfully implement improvements to those systems in an efficient and timely manner |
| Our financial results could suffer if we are unable to achieve or maintain adequate utilization and suitable billing rates for our consultants |
| Our profitability depends to a large extent on the utilization and billing rates of our consultants |
| Utilization of our consultants is affected by a number of factors, including: • the number and size of client engagements; • the timing of the commencement, completion and termination of engagements, which in many cases is unpredictable; • our ability to transition our consultants efficiently from completed engagements to new engagements; • the hiring of additional consultants because there is generally a transition period for new consultants that results in a temporary drop in our utilization rate; • unanticipated changes in the scope of client engagements; • our ability to forecast demand for our services and thereby maintain an appropriate level of consultants; and • conditions affecting the industries in which we practice as well as general economic conditions |
| The billing rates of our consultants that we are able to charge are also affected by a number of factors, including: • our clients’ perception of our ability to add value through our services; • the market demand for the services we provide; • introduction of new services by us or our competitors; • our competition and the pricing policies of our competitors; and • general economic conditions |
| If we are unable to achieve and maintain adequate overall utilization as well as maintain or increase the billing rates for our consultants, our financial results could materially suffer |
| A significant portion of our revenues is derived from a limited number of clients, and our engagement agreements, including those related to our largest clients, can be terminated by our clients with little or no notice and without penalty, which may cause our operating results to be unpredictable |
| As a consulting firm, we have derived, and expect to continue to derive, a significant portion of our revenues from a limited number of clients |
| Our ten largest clients accounted for 38dtta3prca, 27dtta8prca and 32dtta1prca for the years ended December 31, 2005, 2004 and 2003, respectively, and 36dtta3prca of our revenues in the partial year ended December 31, 2002 |
| One of our clients accounted for 11dtta1prca of our revenues in the year ended December 31, 2005 |
| Our clients typically retain us on an engagement-by-engagement basis, rather than under fixed-term contracts; the volume of work performed for any particular client is likely to vary from year to year and a major client in one fiscal period may not require or decide to use our services in any subsequent fiscal period |
| Moreover, a large portion of our new engagements come from existing clients |
| Accordingly, the failure to obtain new large engagements or multiple engagements from existing or new clients could have a material adverse effect on the amount of revenues we generate |
| In addition, almost all of our engagement agreements can be terminated by our clients with little or no notice and without penalty |
| For example, in engagements related to litigation, if the litigation were to be settled, 13 ______________________________________________________________________ [41]Table of Contents our engagement for those services would no longer be necessary and therefore would be terminated |
| In client engagements that involve multiple engagements or stages, there is a risk that a client may choose not to retain us for additional stages of an engagement or that a client will cancel or delay additional planned engagements |
| For clients in bankruptcy, a bankruptcy court could elect not to retain our interim management consultants, terminate our retention, require us to reduce our fees for the duration of an engagement or approve claims against fees earned by us prior to or after the bankruptcy filing |
| For example, shortly after we acquired Speltz & Weis LLC, its largest client, which accounted for approximately 82dtta8prca of its 2004 revenues and which accounted for approximately dlra14dtta5 million, or 7dtta0prca, of our revenues in the year ended December 31, 2005, filed for bankruptcy |
| While the Bankruptcy Court approved our retention, it did so subject to certain fee reductions that we negotiated with the client and certain other interested parties |
| Depending on the outcome of the bankruptcy proceeding, we may not receive the full amount of these negotiated amounts |
| Moreover, several parties to the bankruptcy case have reserved their right to challenge fees earned by us and Speltz & Weis LLC prior to the bankruptcy filing on July 5, 2005 |
| Although no such claim has been brought to date, if a claim is brought in the future, the claim could have a material adverse impact on our financial position, results of operations, earnings per share or cash flows in the period in which such claim were resolved |
| Terminations of engagements, cancellations of portions of the project plan, delays in the work schedule or reductions in fees could result from factors unrelated to our services |
| When engagements are terminated or reduced, we lose the associated future revenues, and we may not be able to recover associated costs or redeploy the affected employees in a timely manner to minimize the negative impact |
| In addition, our clients’ ability to terminate engagements with little or no notice and without penalty makes it difficult to predict our operating results in any particular fiscal period |
| Our ability to maintain and attract new business depends upon our reputation, the professional reputation of our consultants and the quality of our services |
| As a professional services firm, our ability to secure new engagements depends heavily upon our reputation and the individual reputations of our consultants |
| Any factor that diminishes our reputation or that of our consultants, including not meeting client expectations or misconduct by our consultants, could make it substantially more difficult for us to attract new engagements and clients |
| Similarly, because we obtain many of our new engagements from former or current clients or from referrals by those clients or by law firms that we have worked with in the past, any client that questions the quality of our work or that of our consultants could impair our ability to secure additional new engagements and clients |
| The consulting services industry is highly competitive, and we may not be able to compete effectively |
| The consulting services industry in which we operate includes a large number of participants and is intensely competitive |
| We face competition from other business operations and financial consulting firms, general management consulting firms, the consulting practices of major accounting firms, technical and economic advisory firms, regional and specialty consulting firms and the internal professional resources of organizations |
| In addition, because there are relatively low barriers to entry, we expect to continue to face additional competition from new entrants into the business operations and financial consulting industries |
| We have six core offices and two smaller offices in the United States and do not have any international offices |
| Many of our competitors have a greater national presence and are also international in scope, as well as have significantly greater personnel, financial, technical and marketing resources |
| In addition, these competitors may generate greater revenues and have greater name recognition than we do |
| Our ability to compete also depends in part on the ability of our competitors to hire, retain and motivate skilled consultants, the price at which others offer comparable services and our competitors’ responsiveness to their clients |
| If we are unable to compete successfully with our existing competitors or with any new competitors, our financial results will be adversely affected |
| Additional hiring and acquisitions could disrupt our operations, increase our costs or otherwise harm our business |
| Our business strategy is dependent in part upon our ability to grow by hiring individuals or groups of consultants and by potentially acquiring additional complementary businesses |
| However, we may be unable to 14 ______________________________________________________________________ [42]Table of Contents identify, hire, acquire or successfully integrate new consultants and complementary businesses without substantial expense, delay or other operational or financial problems |
| Competition for future hiring and acquisition opportunities in our markets could increase the compensation we offer to potential consultants or the price we pay for businesses we wish to acquire |
| In addition, we may be unable to achieve the financial, operational and other benefits we anticipate from any hiring or acquisition, including with respect to Speltz & Weis LLC Hiring additional consultants or acquiring complementary businesses could also involve a number of additional risks, including: • the diversion of management’s time, attention and resources from managing and marketing our company; • the failure to retain key acquired personnel; • the adverse short-term effects on reported operating results from the amortization or write-off of acquired goodwill and other intangible assets, such as described in “Management’s Discussion and Analysis—Client Bankruptcy Case”; • potential impairment of existing relationships with our clients, such as client satisfaction or performance problems, whether as a result of integration or management difficulties or otherwise; • the creation of conflicts of interest that require us to decline or resign from engagements that we otherwise could have accepted; • the potential need to raise significant amounts of capital to finance a transaction or the potential issuance of equity securities that could be dilutive to our existing stockholders; • increased costs to improve, coordinate or integrate managerial, operational, financial and administrative systems; and • difficulties in integrating diverse backgrounds and experiences of consultants, including if we experience a transition period for newly hired consultants that results in a temporary drop in our utilization rates or margins |
| If we fail to successfully address these risks, our ability to compete may be impaired |
| If the number of large bankruptcies declines or other factors cause a decrease in demand for our corporate advisory services, our revenues and profitability could suffer |
| Our corporate advisory services practice provides various turnaround, restructuring and bankruptcy services to companies in financial distress or their creditors or other stakeholders |
| This practice accounted for 12dtta5prca and 23dtta4prca of our revenues for the years ended December 31, 2005 and 2004, respectively |
| The decrease is a result of the wind-up of several large bankruptcy engagements |
| We are typically engaged in connection with a bankruptcy case when the bankruptcy is of the size and complexity that generally requires the debtor or other constituents to retain the services of financial advisors |
| A number of other factors also affect demand for this practice |
| These factors include: • over-expansion by various businesses; • management’s inability to address critical operational and financial issues; • the level of lending activity and over-leveraging of companies; and • challenging general economic conditions in the United States, which have benefited our corporate advisory services practice since we commenced operations |
| If the number of large bankruptcies declines or other factors cause a decrease in demand for our corporate advisory services, the revenues from our turnaround, restructuring and bankruptcy services could decline, which could harm our ability to sustain profitability |
| 15 ______________________________________________________________________ [43]Table of Contents The profitability of our fixed-fee engagements with clients may not meet our expectations if we underestimate the cost of these engagements |
| Fixed-fee engagements generated approximately 11dtta5prca and 11dtta8prca of our revenues for the years ended December 31, 2005 and 2004, respectively |
| When making proposals for fixed-fee engagements, we estimate the costs and timing for completing the engagements |
| These estimates reflect our best judgment regarding the efficiencies of our methodologies and consultants as we plan to deploy them on engagements |
| Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed-fee engagements, including delays caused by factors outside our control, could make these contracts less profitable or unprofitable, which would have an adverse effect on our profit margin |
| Revenues from our performance-based engagements are difficult to predict, and the timing and extent of recovery of our costs is uncertain |
| From time to time, primarily in our corporate advisory services and strategic sourcing practices, we enter into engagement agreements under which our fees include a significant performance-based component |
| Performance-based fees are contingent on the achievement of specific measures, such as our clients meeting cost-saving or other contractually defined goals |
| The achievement of these contractually-defined goals is often impacted by factors outside of our control, such as the actions of our client or third parties |
| Because performance-based fees are contingent, revenues on such engagements, which are recognized when all revenue recognition criteria are met, are not certain and the timing of receipt is difficult to predict and may not occur evenly throughout the year |
| While performance-based fees comprised 3dtta7prca and 5dtta1prca of our revenues for the years ended December 31, 2005 and 2004, respectively, we intend to continue to enter into performance-based fee arrangements and these engagements may impact our revenues to a greater extent in the future |
| Should performance-based fee arrangements represent a greater percentage of our business in the future, we may experience increased volatility in our working capital requirements and greater variations in our quarter-to-quarter results, which could affect the price of our common stock |
| In addition, an increase in the proportion of performance-based fee arrangements may offset the positive effect on our operating results from increases in our utilization rate or average billing rate per hour |
| For example, net deferrals of dlra1dtta4 million of performance-based fees for services rendered had the effect of reducing our average billing rate per hour for the third quarter of 2005 by dlra6, while net recognition of dlra1dtta1 million of performance-based fees had the effect of increasing our average billing rate per hour for the fourth quarter of 2005 by dlra5 |
| Conflicts of interest could preclude us from accepting engagements thereby causing decreased utilization and revenues |
| We provide services in connection with bankruptcy proceedings and litigation proceedings that usually involve sensitive client information and frequently are adversarial |
| In connection with bankruptcy proceedings, we are required by law to be “disinterested” and may not be able to provide multiple services to a particular client |
| In litigation we would generally be prohibited from performing services in the same litigation for the party adverse to our client |
| In addition, our engagement agreement with a client or other business reasons may preclude us from accepting engagements with our clients’ competitors or adversaries |
| As we increase the size of our operations, the number of conflict situations can be expected to increase |
| Moreover, in many industries in which we provide services, there has been a continuing trend toward business consolidations and strategic alliances |
| These consolidations and alliances reduce the number of companies that may seek our services and increase the chances that we will be unable to accept new engagements as a result of conflicts of interest |
| If we are unable to accept new engagements for any reason, our consultants may become underutilized, which would adversely affect our revenues and results of operations in future periods |
| Expanding our service offerings or number of offices may not be profitable |
| We may choose to develop new service offerings or open new offices because of market opportunities or client demands |
| Developing new service offerings involves inherent risks, including: • our inability to estimate demand for the new service offerings; 16 ______________________________________________________________________ [44]Table of Contents • competition from more established market participants; • a lack of market understanding; and • unanticipated expenses to recruit and hire qualified consultants and to market our new service offerings |
| In addition, expanding into new geographic areas and/or expanding current service offerings is challenging and may require integrating new employees into our culture as well as assessing the demand in the applicable market |
| For example, in August 2003, we established a small office in Palo Alto, California to service the Silicon Valley marketplace and, in September 2003, we established a small office in Miami, Florida to deepen our corporate finance capabilities |
| These offices did not meet our expectations and, therefore, we subsequently closed those offices and incurred a restructuring charge of dlra2dtta1 million in 2004 |
| Also in 2004, we decided to eliminate a service offering of a practice area in our operational consulting segment that was not meeting our expectations and incurred a restructuring charge of dlra1dtta3 million |
| If we cannot manage the risks associated with new service offerings or new locations effectively, we are unlikely to be successful in these efforts, which could harm our ability to sustain profitability and our business prospects |
| Our engagements could result in professional liability, which could be very costly and hurt our reputation |
| Our engagements typically involve complex analyses and the exercise of professional judgment |
| As a result, we are subject to the risk of professional liability |
| If a client questions the quality of our work, the client could threaten or bring a lawsuit to recover damages or contest its obligation to pay our fees |
| Litigation alleging that we performed negligently or breached any other obligations to a client could expose us to significant legal liabilities and, regardless of outcome, is often very costly, could distract our management and could damage our reputation |
| We are not always able to include provisions in our engagement agreements that are designed to limit our exposure to legal claims relating to our services |
| Even if these limiting provisions are included in an engagement agreement, they may not protect us or may not be enforceable under some circumstances |
| In addition, we carry professional liability insurance to cover many of these types of claims, but the policy limits and the breadth of coverage may be inadequate to cover any particular claim or all claims plus the cost of legal defense |
| For example, we provide services on engagements in which the impact on a client may substantially exceed the limits of our errors and omissions insurance coverage |
| If we are found to have professional liability with respect to work performed on such an engagement, we may not have sufficient insurance to cover the entire liability |
| Our intellectual property rights in our “Huron Consulting Group” name are important, and any inability to use that name could negatively impact our ability to build brand identity |
| We believe that establishing, maintaining and enhancing the “Huron Consulting Group” name is important to our business |
| We are, however, aware of a number of other companies that use names containing “Huron |
| ” There could be potential trade name or service mark infringement claims brought against us by the users of these similar names and marks and those users may have trade name or service mark rights that are senior to ours |
| If another company were to successfully challenge our right to use our name, or if we were unable to prevent a competitor from using a name that is similar to our name, our ability to build brand identity could be negatively impacted |
| We or some of our consultants could be named in lawsuits because we were founded by former Arthur Andersen LLP partners and professionals and contracted with Arthur Andersen for releases from non-competition agreements |
| We were founded by a core group of consultants that consisted primarily of former Arthur Andersen LLP partners and professionals, and we entered into a contract with Arthur Andersen to release these partners and professionals from non-competition agreements with Arthur Andersen |
| These circumstances might lead creditors of Arthur Andersen and other parties to bring claims against us or some of our managing directors or other consultants seeking recoveries for liabilities of Arthur Andersen and we may not be able to successfully avoid liability for such claims |
| In addition, litigation of this nature or otherwise could divert the time and attention of our managing directors and consultants, and we could incur substantial defense costs |
| 17 ______________________________________________________________________ [45]Table of Contents As a holding company, we are totally dependent on distributions from our operating subsidiaries to pay dividends or other obligations and there may also be other restrictions on our ability to pay dividends in the future |
| We are a holding company with no business operations |
| Our only significant asset is the outstanding equity interests of our wholly-owned operating subsidiaries |
| As a result, we must rely on payments from our subsidiaries to meet our obligations |
| We currently expect that the earnings and cash flow of our subsidiaries will primarily be retained and used by them in their operations, including servicing any debt obligations they may have now or in the future |
| Accordingly, although we do not anticipate paying any dividends in the foreseeable future, our subsidiaries may not be able to generate sufficient cash flow to distribute funds to us in order to allow us to pay future dividends on, or make any distribution with respect to, our common stock |
| Our future credit facilities, other future debt obligations and statutory provisions may also limit our ability to pay dividends or make any distribution in respect of our common stock |