| LECG CORP ITEM 1A RISK FACTORS Set forth below and elsewhere in this Report and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Report |
| The following risks and uncertainties are not the only ones we face |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations |
| The occurrence of any of the following risks could harm our business, financial condition or results of operations |
| In that case, the market price of our common stock could decline, and stockholders may lose all or part of their investment |
| Our financial results could suffer if we are unable to successfully attract, integrate and retain our experts and professional staff |
| Many of our clients are attracted to us by their desire to engage individual experts, and the ongoing relationship with our clients is often managed primarily by our individual experts |
| If an expert terminates his or her relationship with us, it is probable that most of the clients and projects for which that expert is responsible will continue with the expert, and the clients will terminate their relationship with us |
| We generally do not have non-competition agreements with any of our experts, unless the expert came to us through an acquisition of a business |
| Consequently, experts without non-compete agreements can terminate their relationship with us at any time and immediately begin to compete against us |
| Our top five experts together accounted for 17prca of our revenues during 2005 |
| If any of these individuals or our other experts terminate their relationship with us or compete against us, it could materially harm our business and financial results |
| In addition, if we are unable to retain groups of experts and their staff associated with an acquisition, this could materially harm our business and financial results |
| In addition, if we are unable to attract, develop, motivate and retain highly qualified experts, professional staff and administrative personnel, our ability to adequately manage and staff our existing projects and obtain new projects could be impaired, which would adversely affect our business and our prospects for growth |
| Qualified professionals are in great demand, and we face significant competition for both senior and junior professionals with the requisite credentials and experience |
| Our competition comes from other consulting firms, research firms, governments, universities and other similar enterprises |
| 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 |
| Increasing competition for these professionals may also significantly increase our labor costs, which could negatively affect our margins and results of operations |
| The loss of services from, or the failure to recruit, a significant number of experts, professional staff or administrative personnel could harm our business, including our ability to secure and complete new projects |
| Our financial results could suffer if we are unable to achieve or maintain high utilization and billing rates for our professional staff |
| Our profitability depends to a large extent on the utilization of our professional staff and the billing rates we are able to charge for their services |
| Utilization of our professional staff is affected by a number of factors, including: · the number and size of client engagements; · our experts’ use of professional staff to perform the projects they obtain from clients and the nature of specific client engagements, some of which require greater professional staff involvement than others; 16 ______________________________________________________________________ · the timing of the commencement, completion and termination of projects, which in many cases is unpredictable; · our ability to transition our professional staff efficiently from completed projects to new engagements; · our ability to forecast demand for our services and thereby maintain an appropriate level of professional staff; and · conditions affecting the industries in which we practice as well as general economic conditions |
| The billing rates of our professional staff that we are able to charge are also affected by a number of additional factors, including: · the quality of our expert services; · the market demand for the expert services we provide; · our competition and the pricing policies of our competitors; and · general economic conditions |
| If we are unable to achieve and maintain high utilization as well as maintain or increase the billing rates for our professional staff, our financial results could suffer materially |
| If we are unable to manage the growth of our business successfully, our financial results and business prospects could suffer |
| Over the past several years, we have experienced significant growth in the number of our experts and professional staff |
| We have also expanded our practice areas and have opened offices in new locations |
| We may not be able to successfully manage a significantly larger and more geographically diverse workforce as we increase the number of our experts and professional staff and expand our practice areas |
| Additionally, growth increases the demands on our management, our internal systems, procedures and controls |
| To successfully manage growth and maintain our capability of complying with existing and new regulatory requirements, we must add administrative staff and periodically update and strengthen our operating, financial and other systems, procedures and controls, which will increase our costs and may reduce our profitability |
| As a company subject to public company reporting requirements, we must continue to be able to issue accurate financial reports and disclosures within prescribed timeframes |
| We have designed our internal disclosure controls and procedures and our internal control over financial reporting to provide reasonable assurance that these controls and procedures will meet their objectives; however, even well designed and operated controls and procedures are susceptible to inherent limitations |
| These inherent limitations potentially include faulty assumptions in the design of the controls and procedures, fraud by individuals and errors or mistakes by those overseeing the controls procedures |
| As a result, we may be unable to successfully implement improvements to our information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls |
| Moreover, as we acquire new businesses, we will need to integrate their financial reporting systems into ours, including our disclosure controls and procedures |
| We may experience difficulties in integrating new businesses, which could impair the overall quality and timeliness of the information produced by our financial reporting systems |
| Further related to the issue of providing accurate and timely financial information, there are certain key personnel that have developed over time a deep institutional knowledge of, and have helped shape and implement the unique characteristics of our expert compensation model, including developing the financial and operational support systems and contractual agreements necessary to administer the complexities of the model |
| This 17 ______________________________________________________________________ institutional knowledge has been an essential element in our ability to scale our model to meet the demands imposed by our growth over the past five years |
| Any failure to successfully manage growth, retain key administrative personnel, maintain adequate internal disclosure controls and procedures or controls over financial reporting, could result in material weaknesses in our controls and could harm our financial results and business prospects |
| We depend on the complex damages and competition policy/antitrust practices, which could be adversely affected by changes in the legal, regulatory and economic environment |
| Our business is heavily concentrated in the practice areas of complex damages and competition policy/antitrust, including mergers and acquisitions |
| Projects in our competition policy/antitrust practice area, including mergers and acquisitions, accounted for 25prca and 24prca of our billings in 2004 and 2005, respectively |
| Changes in the federal antitrust laws or the federal regulatory environment, or changes in judicial interpretations of these laws could substantially reduce the need for expert consulting services in these areas |
| In addition, adverse changes in general economic conditions, particularly conditions influencing the merger and acquisition activity of larger companies, could also negatively impact the number and scope of our projects in proceedings before the Department of Justice and the Federal Trade Commission |
| 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 experts and by acquiring other expert services firms |
| However, we may be unable to identify, hire, acquire or successfully integrate new experts and consulting practices without substantial expense, delay or other operational or financial problems |
| And, we may be unable to achieve the financial, operational and other benefits we anticipate from any hiring or acquisition |
| Hiring additional experts or acquiring other expert services firms could also involve a number of additional risks, including: · the diversion of management’s and key senior experts’ time, attention and resources, especially since Dr |
| Teece, our Chairman and key senior experts involved in the recruiting and acquisition process also provide consulting services that account for a significant amount of our revenues; · loss of key acquisition related personnel; · the incurrence of signing bonuses, which could adversely impact our profitability and cash flow; · additional expenses associated with the amortization, impairment or write-off of acquired intangible assets, which could adversely impact our profitability and cash flow; · potential assumption of debt to acquire businesses; · potential impairment of existing relationships with our experts, professionals and clients; · the creation of conflicts of interest that require us to decline engagements that we otherwise could have accepted; · increased costs to improve, coordinate or integrate managerial, operational, financial and administrative systems; · increased costs associated with the opening and build-out of new offices, redundant offices in the same city where consolidation is not immediately possible or office closures where consolidation is possible, which would result in the immediate recognition of expense associated with the abandoned lease; 18 ______________________________________________________________________ · dilution of our stock as a result of issuing equity securities in connection with hiring new experts or acquiring other expert services firms; and · difficulties in integrating diverse corporate cultures |
| We have encountered these risks after hiring individuals and groups of experts and acquiring expert practices, and we anticipate that we will encounter these risks in connection with future hiring and acquisitions |
| Competition for future hiring and acquisition opportunities in our markets could increase the compensation we offer to potential experts or the price we have to pay for businesses we wish to acquire |
| In addition, this increased competition could make it more difficult to retain our experts |
| The occurrence of any of these events could harm our business, financial condition and results of operations |
| Projects may be terminated suddenly, which may negatively impact our financial results |
| Our projects generally center on decisions, disputes, proceedings or transactions in which clients are seeking expert advice and opinions |
| Our projects can terminate suddenly and without advance notice to us |
| Our clients may decide at any time to settle their disputes or proceedings, to abandon their transactions or to take other actions that result in the early termination of a project |
| Our clients are under no contractual obligation to continue using our services |
| If an engagement is terminated unexpectedly, or even upon the completion of a project, our professionals working on the engagement may be underutilized until we assign them to other projects |
| The termination or significant reduction in the scope of a single large engagement could negatively impact our results of operations |
| Conflicts of interest could preclude us from accepting projects |
| We provide our services primarily in connection with significant or complex decisions, disputes and regulatory proceedings that are usually adversarial or involve sensitive client information |
| Our engagement by a client may preclude us from accepting projects with our clients’ competitors or adversaries because of conflicts of interest or other business reasons |
| 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, for example the petroleum industry, 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 projects as a result of conflicts of interest |
| If we are unable to accept new assignments for any reason, our professional staff may become underutilized, which would adversely affect our revenues and results of operations in future periods |
| Our ability to maintain and attract new business depends upon our reputation, the professional reputation of our experts and the quality of our services on client projects |
| Our ability to secure new projects depends heavily upon our reputation and the individual reputations of our experts |
| Any factor that diminishes our reputation or that of our experts could make it substantially more difficult for us to attract new projects and clients |
| Similarly, because we obtain many of our new projects from clients that we have worked with in the past or from referrals by those clients, any client that questions the quality of our work or that of our experts could seriously impair our ability to secure additional new projects and clients |
| 19 ______________________________________________________________________ In litigation, we believe that there has been an increase in the frequency of challenges made by opposing parties to the qualifications of experts |
| In the event a court or other decision-maker determines that an expert is not qualified to serve as an expert witness in a particular matter, then this determination could harm the expert’s reputation and ability to act as an expert in other engagements which could in turn harm our business reputation and our ability to obtain new engagements |
| Our engagements could result in professional liability, which could be very costly and hurt our reputation |
| Our projects typically involve complex analysis and the exercise of professional judgment |
| As a result, we are subject to the risk of professional liability |
| Many of our projects involve matters that could have a severe impact on a client’s business, cause a client to gain or lose significant amounts of money or assist or prevent a client from pursuing desirable business opportunities |
| 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 liabilities and damage our reputation |
| We carry professional liability insurance to cover most 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 amounts in controversy or 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 |
| Litigation, regardless of the outcome, is often very costly, could result in distractions to our management and experts and could harm our business and our reputation |
| Intense competition from economic, business and financial consulting firms could hurt our business |
| The market for expert consulting services is intensely competitive, highly fragmented and subject to rapid change |
| Many of our competitors are national and international in scope and 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 |
| We may be unable to compete successfully with our existing competitors or with any new competitors |
| There are relatively low barriers to entry, and we have faced and expect to continue to face additional competition from new entrants into the economic, business and financial consulting industries |
| In the litigation and regulatory expert services markets, we compete primarily with economic, business and financial consulting firms and individual academics |
| Expert services are also available from a variety of participants in the business consulting market, including general management consulting firms, the consulting practices of major accounting firms, technical and economic advisory firms, regional and specialty consulting firms, small “niche” consulting companies and the internal professional resources of companies |
| We currently have operations in Argentina, Belgium, Canada, France, Italy, New Zealand, South Korea, Spain and the United Kingdom |
| Revenues attributable to activities outside of the United States, were 13prca and 14prca in 2004 and 2005, respectively |
| We may continue to expand internationally and our international revenues may account for an increasing portion of our revenues in the future |
| Our international operations carry special financial and business risks, including: · greater difficulties in managing and staffing foreign operations; · less stable political and economic environments; · cultural differences that adversely affect utilization; · currency fluctuations that adversely affect our financial position and operating results; · unexpected changes in regulatory requirements, tariffs and other barriers; 20 ______________________________________________________________________ · civil disturbances or other catastrophic events that reduce business activity; and · greater difficulties in collecting accounts receivable |
| The occurrence of any one of these factors could have an adverse effect on our operating results |
| Our disputes with Navigant Consulting, Inc |
| could harm our business and financial results |
| We have a dispute with Navigant Consulting, Inc |
| arising out of our management led buyout of certain assets and liabilities of LECG, Inc |
| from Navigant Consulting and LECG, Inc |
| In the management led buyout, we acquired substantially all of the assets and assumed certain liabilities of LECG, Inc |
| pursuant to an asset purchase agreement with Navigant Consulting and LECG, Inc |
| dated September 29, 2000 |
| Under the asset purchase agreement, up to dlra5dtta0 million of the purchase price was deferred contingent upon whether specific individuals listed on a schedule to the asset purchase agreement had an employment, consulting, contracting or other relationship with us on September 29, 2001 |
| Navigant Consulting contends that it is entitled to a payment of approximately dlra4dtta9 million plus interest with respect to the contingent purchase price amount |
| On several occasions before and after September 29, 2001, we notified Navigant Consulting that several of the individuals listed on the schedule to the asset purchase agreement did not have an employment, consulting, contracting or other relationship with us on September 29, 2001 |
| If Navigant Consulting initiates legal proceedings against us, a decision against us could harm our financial results and financial position |
| In June 2004, National Economic Research Associates, Inc, or NERA, and its parent company, Marsh & McLennan Companies, Inc, filed a complaint against us and one of our experts |
| This action arises out of our hiring of a professional in March 2004 who was formerly employed by NERA The complaint alleges that during and after his employment with NERA, this expert violated contractual commitments and fiduciary duties to NERA The complaint further alleges that we interfered with NERA’s contractual relations and advantageous business relationship, misappropriated confidential business information and goodwill, and engaged in unfair and deceptive trade practices |
| The complaint asks for unspecified damages and disgorgement of wrongful gain, invalidation of an indemnification agreement provided to this expert by us and contains a demand for a jury trial |
| In August 2004, the Company served a motion to dismiss the breach of contract, tortious interference with contractual relations and the unfair and deceptive trade practices counts, which motion has been denied |
| The Company has filed an answer to the complaint denying the substantive allegations of the complaint |
| The parties have served initial discovery requests, including interrogatories and document requests and discovery is ongoing |
| However, the Company is not able to determine the outcome or resolution of the complaint, or to estimate the amount or potential range of loss with respect to this complaint |
| Our stock price has been and may continue to be volatile |
| The price of our common stock has fluctuated widely and may continue to do so, depending upon many factors, including but not limited to the risk factors listed above and the following: · the limited trading volume of our common stock on the NASDAQ National Market; · variations in our quarterly results of operations; · failure to retain key management personnel; · the hiring or departure of key personnel, including experts; · our ability to maintain high utilization of our professional staff; 21 ______________________________________________________________________ · announcements by us or our competitors; · the loss of significant clients; · changes in our reputation or the reputations of our experts; · acquisitions or strategic alliances involving us or our competitors; · changes in the legal and regulatory environment affecting businesses to which we provide services; · changes in estimates of our performance or recommendations by securities analysts; · inability to meet quarterly or yearly estimates or targets of our performance; and · market conditions in the industry and the economy as a whole |
| The issuance of preferred stock could discourage or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders |
| Our board of directors has the authority to issue preferred stock and to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders |
| The preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock |
| The potential issuance of preferred stock may make it more difficult for a person to acquire a majority of our outstanding voting stock, and thereby delay or prevent a change in control of us, discourage bids for our common stock over the market price and adversely affect the market price and the relative voting and other rights of the holders of our common stock |
| Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock |
| Our amended and restated certificate of incorporation and our bylaws contain provisions that could delay or prevent a change in control of our company |
| In addition, the provisions of Section 203 of Delaware General Corporate Law govern us |
| These provisions may prohibit large stockholders, in particular those owning 15prca or more of our outstanding voting stock, from merging or combining with us |
| These and other provisions in our amended and restated certificate of incorporation, our bylaws and under Delaware law could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions |