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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to _______
Commission file number: 001-14875
FTI CONSULTING, INC.
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(Exact Name of Registrant as Specified in its Charter)
Maryland 52-1261113
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2021 Research Drive, Annapolis, Maryland 21401
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(Address of Principal Executive Offices) (Zip Code)
(410) 224-8770
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.01 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of shares of Registrant's Common Stock outstanding on March 23, 2001
is 10,623,814.
The aggregate market value of voting stock held by non-affiliates of the
Registrant, based upon the average sales price of the Registrant's Common Stock
on March 23, 2001 was $119,885,000*.
* Excludes 633,543 shares deemed to be held by directors, officers and
greater than 10% holders of the Common Stock outstanding at March 16, 2001.
Exclusion of Common Stock held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of the Company,
or that such person is controlled by, or under common control with, the
Company.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement to be filed with
the Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year are incorporated by reference into Part III of this Annual
Report on Form 10-K.
FTI CONSULTING, INC.
Annual Report on Form 10-K
Fiscal Year Ended December 31, 2000
TABLE OF CONTENTS
Page Reference to
Form 10-K
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Part I
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Item 1. Business................................................................... 4
Item 2. Properties................................................................. 15
Item 3. Legal Proceedings.......................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders........................ 15
Part II
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Item 5. Market for the Company's Common Equity and
Related Shareholder Matters.............................................. 16
Item 6. Selected Financial Data.................................................... 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................ 18
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.............................................................. 23
Item 8. Financial Statements and Supplementary Data................................ 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................... 52
Part III
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Item 10. Directors and Executive Officers of the Company............................ 52
Item 11. Executive Compensation..................................................... 52
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................................... 52
Item 13. Certain Relationships and Related Transactions............................. 52
Part IV
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Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K...................................................... 53
ITEM 1. BUSINESS
Company Overview
We are a multi-disciplined consulting firm with leading practices in the areas
of financial restructuring, litigation consulting and engineering and scientific
investigation. Modern companies, as well as those who advise and invest in them,
face growing challenges on every front. From a proliferation of "bet-the-
company" litigation to increasingly complicated relationships with lenders and
investors in an ever-changing global economy, U.S. companies are increasingly
turning to outside experts and consultants to deal with these complex issues. We
are dedicated to helping companies and their advisors, lawyers, lenders and
investors meet these challenges by providing a broad array of the highest
quality professional services from a single source.
Our clients retain us when confronted with adverse situations such as
bankruptcy, litigation, regulatory investigations or proceedings or insurance
claims. We believe that they retain us for several reasons, including:
. our recognized expertise;
. our unique capabilities in several highly specialized areas;
. their need for an impartial expert;
. our disciplined project management approach that allows us to deliver
consistently high-quality advice and services, on schedule and on
budget; and the trend in business generally to outsource non-core
activities, especially in those areas that are complex, unique and
incident-driven.
Over the past four years, we have taken several steps to extend our range of
services, leverage our reputation for quality and client service and grow our
business, including the following:
. completed four acquisitions that significantly expanded our size,
service offerings and geographic scope;
. expanded into financial consulting services for restructurings and
bankruptcy proceedings;
. recruited more recognized litigation support professionals and added
to our visual communications staff; and
. developed proprietary trial preparation and presentation software and
software to facilitate forensic engineering and scientific
investigation.
We have organized our business into the following three divisions:
. Our Financial Consulting division serves both financially distressed
companies and financial institutions that are regularly involved in
litigation or regulatory, bankruptcy or other proceedings. These
companies and institutions typically require extensive, highly
specialized, long-term advisory services. For companies and
institutions in regulated industries, we provide expert testimony,
cost benefit analysis, damage assessment, market competition analysis
and business valuations. In bankruptcies, restructurings and other
financial distress situations, or alleged irregularities or, in the
case of professional firms, malpractice, we provide companies or their
creditors with business and strategic plan development and forensic
accounting services.
. Our Litigation Consulting division advises clients in all phases of
litigation, including discovery, jury selection, trial preparation and
the actual trial. The division also provides
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visual communications services, such as animation, image enhancement
and computer simulation to improve trial presentation.
. Our Applied Sciences division offers forensic engineering and
scientific investigation services. These services include accident
reconstruction, fire investigation and product failure analysis. The
division also provides quality control services, including assessment
of preventive measures relating to product design and evaluations of
the causes of product failures.
Policano & Manzo Acquisition
On February 4, 2000, we completed the purchase of all of the membership
interests of Policano & Manzo, L.L.C. (P&M) one of the leading financial
consulting firms in the United States. P& M specializes in providing financial
restructuring, advisory and forensic accounting services to the workout and
bankruptcy community. These services are provided on a nationwide basis to
financially distressed companies, creditors, investors and other interested
parties. We acquired the membership interests from Messrs. Policano and Manzo
for total consideration of $54.9 million in cash, shares of our common stock and
acquisition related expenses. Messrs. Policano and Manzo continue to serve as
executive officers of the acquired business.
Industry Overview
We serve businesses, lenders, investors, insurers and their legal counsel in
adverse circumstances such as class action lawsuits, financial restructurings
and bankruptcy proceedings and accident investigations. Clients' reputations,
financial condition and very existence are sometimes at stake. Consequently, our
clients require objective and professional advice from independent experts.
Also, many businesses, lenders, investors, insurers and law firms are
increasingly outsourcing functions that have become very specialized or require
unique knowledge or technology.
Financial Consulting: We have greatly expanded our capabilities and size in
financial restructuring and bankruptcy advice since 1998. We believe that the
number of financial restructurings and bankruptcies will continue to grow
because of intense competition and rapidly changing markets in many industries,
the deregulation of various industries and the recent lengthy economic growth
during which many companies expanded aggressively. The bankruptcy market is
rapidly expanding as more companies seek Chapter 11 protection.
According to Moody's Investor Service, 2000 was one of the worst years ever in
terms of corporate defaults, with the highest level of debt ever reported.
Moody's reported the global default rate of high-yield, or junk, bonds rose to
6% in 2000 from a 5.1% rate in 1999; they forecast a 9.1% rate for 2001 when as
many as 450 U.S. and Canadian companies are expected to default. According to
New Generation Research, a research center for information on bankruptcies and
turnarounds, 145 publicly traded companies filed for bankruptcy in 1999,
compared to 122 publicly traded companies in 1998. In 2000, 176 public
companies filed for bankruptcy.
Litigation Consulting and Applied Sciences: Currently, the market for legal
services in the United States exceeds $100 billion annually, according to U.S.
Bureau of Census statistics. We expect this market to continue to grow as rising
litigation costs and the risks of large monetary judgments
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continue to focus businesses on better managing risks and the litigation
process. Increasingly, businesses, financial institutions and law firms are
turning to outside litigation service consultants to complement or assist their
internal legal staffs in more efficiently and effectively managing the
litigation process.
Demand for specialized litigation and forensic engineering services is also
being driven by a greater emphasis on loss and injury prevention by insurance
companies and manufacturers and significant advances and declining costs in
information technology. Manufacturers are increasingly concerned about product
safety and analyzing failures to make products safer as a result of the
proliferation of mass tort claims and the high costs of product recalls mandated
by government agencies. Insurance companies are also partnering with
manufacturers for the same reasons. Continuing advances and the declining costs
of information technology have resulted in a much greater use of computer
simulations and animations for a wider range of disputes, as well as for product
testing and employee training. Further, such advances and declining costs have
resulted in the cost-effective use of engineering applications beyond high
exposure litigation and high value products.
Traditionally, litigation consulting firms focused on discrete stages of the
litigation process from inception of a cause of action, through a jury trial to
final resolution. Today, clients are seeking outside consulting services
throughout the entire process, including the pre-litigation phase.
Business Strategy
We believe that we are the established leader in consulting to companies and
their creditors facing adverse circumstances. Our goal is to expand our lead by
continuing to anticipate our clients' needs and provide a range of high-quality
consulting services to meet those needs. Success in this marketplace depends on
reputation, service capacity, in some cases geographic location and to a lesser
degree price. The following are the key elements of our business strategy:
. Leverage Our Reputation for High Quality Consulting Services. We believe
that size and reputation are critical elements in the purchasing decisions of
businesses, law firms, financial institutions and insurance companies. We
provide services to many Fortune 500 companies and major law firms. We regularly
handle many complex, high-profile restructuring and litigation matters. We
receive a high level of repeat business from our current clients and have been
successful in expanding the range of services we provide to them. We believe we
can continue to successfully leverage our reputation, experience and client base
to obtain new engagements from both existing and new clients.
. Retain and Attract Highly Qualified Professionals. Our professionals are
crucial to delivering our services to clients and generating new business. We
are committed to retaining our existing professionals and continuing to
aggressively recruit additional professionals. We offer our professionals
above-average compensation opportunities, competitive benefits and challenging
engagements. Existing employees are our greatest recruiting asset and the source
of a majority of referrals. We will continue to encourage our employees to refer
highly qualified professionals to us and reward them for these referrals.
. Capitalize on Our Nationwide Network of Offices. We have established a
nationwide network of 33 offices that enables us to leverage our operations in
key geographic markets. We believe that we have a competitive advantage because
we can provide services to large, geographically diverse corporations and bid
for engagements on a nationwide basis. We also believe that our proximity to
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our clients provides a significant cost advantage by allowing us to balance
resources and centralize a number of labor-intensive activities, including
graphics support and document management. We intend to continue to expand the
range of services provided by each of our offices. Also, our network of offices
allows us to attract highly qualified professionals and to acquire highly
respected firms that would like the ability to provide services on a nationwide
basis.
. Expand the Range of Our Services. We will continue to anticipate our
clients' growing needs for expert services and expand our services to meet their
needs. By expanding the range of our capabilities and integrating them with
existing services, we can continue to position ourselves to provide more
broad-based services to our clients. In recent years, we have significantly
expanded our range of services to include such services as visual
communications, forensic engineering, restructuring and bankruptcy consulting
and electronic document management.
. Continue to Expand the Use of Technology in Litigation Consulting. We will
continue to develop and apply new technology to improve the cost-effectiveness
of our services and to maintain our competitive edge. For example, we recently
developed our eWar Room service, a new technology-based trial service that
accelerates lawyers' trial preparation by combining specialized consulting with
powerful new software. We are also focusing on taking advantage of the
efficiencies of the Internet to improve information exchange and reduce costs
throughout the entire litigation process. For example, we have recently
introduced our secure extranet service to provide more solutions to the
challenges of the increasing complexity of high stakes, multi-district
litigation.
. Selectively Acquire Companies to Obtain New Professionals and Capabilities.
We will continue to build on our record of successfully identifying, executing
and integrating strategic acquisitions. Over the past three years, we have made
four acquisitions that have enhanced our position as the leader in consulting to
companies facing adverse circumstances. We will continue to selectively pursue
strategic acquisitions that offer complementary businesses that we can leverage
with our existing client base, offer increased efficiencies by leveraging our
network of 33 locations, add new, highly qualified professional staff, and bring
new clients to which we can cross sell our existing capabilities.
Financial Consulting
Our Financial Consulting division provides expertise in financial restructurings
and workouts, forensic accounting and statistical and economic analysis. As a
result of the recent increase in bankruptcy filings and defaults in
speculative-grade debt, Financial Consulting has become the fastest growing of
our three divisions.
As part of our financial restructuring and workout practice, we provide services
to financially distressed companies or to the secured and unsecured creditors of
these companies. Our financial restructuring professionals advise companies and
creditors in some of the largest, most complex bankruptcy proceedings and
out-of-court restructurings in the United States. When advising a corporate
client, we work with the company's management to assess the client's financial
condition and viability, and then structure and implement a business
rehabilitation plan to manage the client's cash flow to at least a break-even
point. We also identify any non-essential assets that can be sold to generate
cash. Typically, we then assist these corporate clients as they negotiate with
their lenders to restructure their debt. In the event an out-of-court workout
appears unlikely, we assess the impact of a bankruptcy filing on the client's
financial condition and operating performance and seek Debtor-in-Possession
financing on the client's behalf. If the client voluntarily files bankruptcy or
is involuntarily
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forced into bankruptcy, we will assist in managing the entire bankruptcy
process, including structuring, negotiating with creditors and implementing the
plan of reorganization. We also render expert testimony in connection with the
bankruptcy proceeding on such issues as business unit valuation and economic
loss.
When assisting creditors, we seek to maximize amounts owed to them by the debtor
in an out-of-court workout or bankruptcy. In a workout engagement, we evaluate
and monitor the quality and value of the collateral and any other assets
available to the creditor, analyze the debtor's business plan and underlying
cash flow projections and assess the adequacy of the debtor's financial
reporting systems. Based on our analysis, we then assess the debtor's viability
and develop and evaluate restructuring plans. In the event that an out-of-court
workout is not feasible, we assist creditors in deciding whether to provide
Debtor-in-Possession financing, in working through the bankruptcy process and in
structuring and evaluating various reorganization plan alternatives.
Our forensic accounting specialists work with companies faced with fraud and
financial disclosure issues. Many of these companies are undergoing
restructuring or bankruptcy reorganizations. Our statistical and economic
experts use a range of statistical and economic tools to help companies evaluate
issues, such as the economic impact of deregulation on a particular industry,
the amount of commercial damages suffered by a business as a result of a tort or
a breach of contract, the existence of discriminatory employment practices or
the value of a business or professional practice. We also work with clients to
develop business strategy and tactics on an ongoing basis to address these
issues.
Litigation Consulting
During the past 18 years, we have been a pioneer in developing and delivering
professional services and creative solutions to litigation problems. We focus on
developing and providing innovative applications from the fields of accounting,
science, education, communications and technology to meet our clients' needs.
From the first computer animations used in court to the latest in digital
graphic presentations, we have been a leader in providing high-quality,
cost-effective methods to prepare for and try cases. Our trial technology
professionals have supported clients in the courtroom in some of the largest and
most complex civil trials. Through the use of information technology and the
Internet, we have demonstrated our ability to control litigation costs, speed-up
the trial process and provide litigants superior access to data, a key
competitive advantage.
We have drawn on the skills and techniques used in 3D computer animation and
simulation and pioneered their use to enhance presentations and expert testimony
on complex subjects, such as toxic torts, vehicle accidents, airplane crashes,
financial disputes, intellectual property resolutions and physical phenomena.
The significant decrease in the cost of technology has made it a cost-effective
alternative for most trials. Further, the dramatic increase in the size of
trials and volume of information has made the visualization of concepts and
themes through animated and static "pictures" a necessity for an effective
presentation to a judge or jury.
One of the important trends affecting the growth of litigation consulting is the
increasing sophistication of courtroom presentation and document management
techniques. Computerized document management in cases involving thousands or
even millions of pages of depositions, testimony and exhibits is becoming a
necessity in the federal and state court systems. Our document management and
exhibit and trial preparation solutions enable our clients to better focus on
preparing for and trying cases.
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The following are the type of services we might provide in a complex litigation
matter:
. visual communication consulting services;
. graphic exhibit design and production;
. customized database development and distribution;
. video deposition capture and transcript linking;
. management of designated trial exhibits;
. courtroom survey, design and configuration;
. on-site technical trial support;
. hardware procurement and tracking; and
. secure extranet storage and distribution of data, documents,
transcripts, videos and exhibits.
We have developed a number of technology-based tools to assist our clients in
managing complex litigation:
. TrialMax is our comprehensive trial preparation solution. TrialMax
provides a litigation team with the ability to easily store, annotate
and display documents, computer graphics, video clips and digitized
depositions in the courtroom. One of the innovative features of
TrialMax is its ability to segment digitized video depositions for
presentation in the courtroom.
. eWar Room is our automated tool for handling trial data regardless of
information source or data type. This tool electronically retrieves
and displays documents in court in any order selected by the lawyer
and also enables document highlights to be presented to the judge or
jury. Using our service, trial lawyers can now review an entire
exhibit package on screen, make changes in real time and rehearse in
any media they select, from graphics, video or PowerPoint to paper
documents. With the assistance of our professionals, trial lawyers can
develop key themes and concepts, and we help them get their point
across in the most effective manner.
. Secure Extranet Services is our recently introduced Internet
application for clients who are parties to multi-district litigation.
This service will further our objective of providing better and more
cost- effective service to our clients.
We believe the extranet will become the backbone for the delivery of custom
litigation support software applications and services designed for delivery over
the Internet. To maintain our competitive technological edge, we recently
created a strategic alliance with USinternetworking, one of the leading
application service providers, to host our secure extranet service.
Applied Sciences
Our Applied Sciences division specializes in forensic engineering and scientific
investigation. We analyze the causes of accidents and other claims resulting
from fires, vehicle design, chemical mishaps, poor product design and other
causes. As an extension of our engineering and scientific work, clients also
seek expert testimony from our professionals and network of more than 2,000
on-call technical and scientific consultants.
Our Applied Sciences professionals blend state-of-the-art technology with their
many years of practical experience. For example, we have developed a proprietary
software and full-scale test equipment system for calculating the precise
performance characteristics and center of gravity of virtually any vehicle,
which may be critical in determining liability in accident cases. We also use
this
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equipment to assist vehicle manufacturers, government agencies and auto racing
teams in maximizing safety and vehicle performance.
We believe we are the leader in vehicle accident reconstruction and highway
defect litigation. Visually demonstrating accidents has become an accepted and
even a necessary trial tool. For example, we have recently provided aircraft
accident analysis for several high-profile crashes. We employ our expertise to
create computer simulations for our Litigation Consulting division for courtroom
presentation. We also created a complete aircraft crash simulation video that a
number of airlines have adopted for pilot training.
Our Applied Sciences professionals are well-recognized as experts in the
investigation of fires and explosions. Our staff includes origin and cause
experts, flammability reconstructionists, fire protection engineers, electrical
engineers and mechanical engineers. We have staged actual fires in real
buildings for research and training purposes, using these exercises not only to
educate our own staff but to also train insurance, legal and government
organizations.
We are also engaged by companies at an early stage of potential litigation to
evaluate the cause of product failures and relative responsibility for an
accident, or to assess product safety or preventative safety measures. The
Applied Sciences division also assists companies in assessing preventative
measures relating to product design and evaluating the causes of product
failures. We are regularly called upon to assess the causes and relative levels
of responsibility for an accident, as well as to design preventative measures.
Because we are engaged early in the process, we believe our revenues from these
services are steadier and less incident-driven than those of our competitors who
are focused exclusively on trial preparation and presentation.
Clients
We have cultivated long-term relationships with many of the premier financial
institutions, law firms and businesses in the U.S. In 2000, we performed work
for 2,381 clients on 15,268 matters, including:
. 1,295 law firms, 75 of which were rated among the top 100 law firms
(based on 1999 U.S. revenues as measured by American Lawyer magazine);
. 411 industrial clients, 85 of which were among the Fortune 500 in
2000;
. 22 of the 25 largest banks located in the U.S. (also 10 listed among
the Fortune 500 in 2000); and
. 569 insurance companies, 64 of which were among the top 100 property
and casualty insurers (as reported by A.M. Best Company in 1999).
In 2000, we believe that we derived approximately 75% of our revenues from
existing clients or referrals from existing clients. Our largest client
represented less than 7% of our 2000 revenues. As of December 31, 2000, we were
actively working on 3,069 different matters for 980 different clients.
Marketing and Sales
Historically, we have relied primarily on our reputation to market our services
to new and existing clients since most of our work is repeat work for existing
clients or referrals from existing clients. Our professionals develop close,
personal relationships with clients and often learn about new business
opportunities from their frequent contacts with clients. Consequently, we
encourage our professionals to
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generate new business and reward them with increased compensation and promotions
for generating new business.
Our Litigation Consulting division has about ten full-time sales people and our
Applied Sciences division has about fourteen full-time sales people who are
involved in marketing our services. Our Financial Consulting division primarily
relies upon referrals and does not require sales personnel. In marketing our
services, we emphasize our experience, the quality of our services and our
professionals' particular areas of expertise. While we aggressively seek new
business opportunities, we maintain high professional standards and carefully
evaluate potential new client relationships and engagements.
We plan to develop greater brand awareness of "FTI" as a provider of a broad
range of high-quality consulting services. We are currently focused on improving
the quality and functionality of our Web sites, where we describe our services
and experience and promote our reputation. Although we currently market many of
our services under different names, we are in process of building and promoting
a single brand.
Competition
The markets in which we operate are highly competitive. We face competition from
several national companies, national accounting firms and a number of smaller
firms that provide one or more services in local and regional markets. Financial
Consulting competes primarily against national accounting firms and private
financial consulting firms. Litigation Consulting competes against
Trialgraphics, Decision Quest, Engineering Animation, Exponent and, to a limited
extent, other litigation consulting services and individual consultants. Applied
Sciences competes primarily against several regional or national concerns,
independent experts and research organizations.
Competitive factors for our services include reputation, size, geographic
location, performance record, quality of work, range of services provided and
relationships with clients. To a lesser extent, we also compete on price, but
the critical nature of our services typically reduces price to a secondary
consideration.
Some national support service providers are larger than we are and, on any given
engagement, may have a competitive advantage over us with respect to one or more
competitive factors. In addition, smaller local or regional firms, while not
offering the range of services we provide, often are able to provide the lowest
price on a specific engagement because of their lower overhead costs and
proximity to the engagement. The fragmented nature of our markets may also
provide opportunities for large companies that offer complementary services to
enter one or more of our markets through acquisition. In the future, these and
other competitive pressures could require us to modify our pricing or increase
our spending for marketing to attract business.
Human Resources
As of December 31, 2000, we had 555 employees. Of that total, 144 are in the
Financial Consulting division, 118 are in the Litigation Consulting division,
250 are in the Applied Sciences division and 43 are in corporate management and
administrative positions. We also maintain consulting arrangements with about
1,700 independent consultants, about 380 of whom were utilized on our
engagements during
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2000. About 80% of our professionals have more than ten years of experience in
their field of practice, and many are well recognized for their expertise and
experience.
Our professionals have varied specialties and specialized backgrounds in such
fields as engineering, accounting, mathematics, statistics and psychology. A
number have Ph.D.s or other advanced degrees. Some have legal training and
experience. We strongly believe that our ability to recruit and retain bright,
experienced and ambitious professionals is a key factor to our continued
success.
Business Risks
We depend upon our professionals and outside consultants.
Our business involves the delivery of professional services. Therefore, our
continued success depends upon our ability to retain and expand our staff of
highly skilled professionals and outside consultants. We face intense
competition for highly skilled professionals in our fields of practice. We
cannot assure you that we will be able to retain our key professionals or that
we will be able to attract, assimilate or retain the necessary number of
qualified professionals in the future. We do not have non-competition agreements
with most of our professional staff. This means that these professionals could
resign with little advance notice to join one of our competitors. If we lose the
services of a number of our key professionals or fail to expand our professional
staff, we are unlikely to be able to expand our business and may be unable to
maintain our business at current levels.
We rely heavily on our management team.
We are highly dependent upon our management team, particularly Messrs. Dunn,
Kahn, Baker, Brady, Monheit, Policano, Manzo and Pincus. If we were to lose any
of these persons and were unable to replace them quickly, we could have
difficulty in properly managing our business. This could have a materially
adverse effect on our business prospects and results of operations.
We face significant competition for new business opportunities.
The market for our consulting services is highly competitive, and we face
competition from many other providers of consulting services. Our competitors
range from large organizations, such as the national accounting firms and the
large management consulting companies that offer a full range of consulting
services, to small firms and independent contractors that provide only one
specialized service. Some of our competitors have significantly more financial
and marketing resources, larger professional staffs or are more widely
recognized. There are few barriers to entry into the consulting business. As the
number of our competitors increases, we cannot assure that we will be able to
continue to compete successfully for new business opportunities or retain our
existing clients.
We are subject to the risk of professional liability.
Many of our engagements involve complex analysis and the exercise of
professional judgment. As a result, we are subject to the risk of professional
liability. Often, our engagements involve matters that, if resolved unfavorably,
may have a severe impact on the client's business, cause the client a
substantial monetary loss or prevent the client from pursuing business
opportunities. Therefore, if we fail to perform to the client's satisfaction,
the client may threaten or bring a lawsuit against us, claiming we performed
negligently or otherwise breached our obligations to the client. Any claim by a
client against us could
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expose us to liability in excess of our insurance limits and could severely
injure our reputation.
We may have trouble finding suitable acquisition candidates and difficulty
financing potential acquisitions.
A number of our competitors also have adopted a strategy of expanding and
diversifying through acquisitions of other consulting firms. We experience
competition, therefore, in our effort to execute our acquisition strategy, and
we expect the level of competition to increase in the future. As a result, we
may be unable to continue to make acquisitions or may be forced to pay more for
companies we are able to acquire. In such an event, we may be unable to grow our
business as quickly as we have in the past, and our profitability may decline.
Our ability to grow our business, particularly through acquisitions, may depend
on our ability to raise capital through the issuance of additional equity or
debt. We cannot be sure, however, that we will be able to raise equity or obtain
debt financing when we need it or on terms acceptable to us. If we cannot, we
may have to curtail our planned growth and not pursue acquisition opportunities.
Our professional reputation is critical to our business.
We depend upon our reputation and the individual reputations of our
professionals to obtain new client engagements and attract and retain highly
qualified professionals. We obtain a substantial number of new engagements from
existing clients or through referrals from existing clients. Therefore, we may
have difficulty in competing for new engagements if our existing clients become
dissatisfied with our performance. Further, any factor that diminishes our
reputation or the reputations of our personnel may make it more difficult for us
to compete successfully for either new engagements or qualified professionals.
Policano &Manzo, L.L.C. was a substantial acquisition for us.
In February 2000, we completed the Policano& Manzo, L.L.C. ("P&M") acquisition.
This acquisition was substantial when comparing P&M's revenues and profits in
1999 to ours. Although we believe we have nearly completed the integration of
P&M into our business, we have not yet realized all the benefits we expect to
achieve from the acquisition. We cannot assure you that we will ever realize
these benefits. Our management team's attention may be diverted from seeking new
acquisitions or other business opportunities if they are forced to devote
significant time to enhancing client recognition of P&M's service offerings or
integrating future acquisitions. This could have a materially adverse effect on
our business prospects and results of operations.
We must successfully manage the growth of our business.
We have experienced rapid growth in recent years, including four acquisitions
in the past three years. We plan to continue to rapidly expand our business,
which may strain our management, human resources and information systems. To
successfully manage our growth, we must add managers and employees and
periodically update our operating, financial and other systems, procedures and
controls. We also must effectively motivate, train and manage a larger
professional staff. If we fail to manage our growth effectively, our business,
results of operations and financial condition are likely to be adversely
affected.
Our revenues, operating income and cash flow are likely to fluctuate.
13
We have experienced fluctuating revenues, operating income and cash flow in some
prior periods and expect this may occur from time to time in the future. We may
experience future fluctuations because of the timing of our client assignments
and the type of assignments we are working on at different times. This means our
profitability is likely to be lower if we experience an unexpected variation in
the number or timing of client assignments. Also, the timing of future
acquisitions and the cost of integrating them may cause similar fluctuations in
our operating results.
Our business is seasonal.
We experience a reduced level of business during a portion of the third quarter
primarily because courts usually recess during these months. Also, many members
of our professional staff and key contacts at our clients take vacations during
the summer.
We operate with a substantial amount of debt.
Our total indebtedness as of December 31, 2000 was $60.5 million. Operating with
a high amount of leverage could require us to dedicate a substantial portion of
our cash flow from operations to payments on our debt, thereby reducing funds
available for operations, future business opportunities, capital expenditures,
acquisitions or other purposes, and limit our flexibility in planning for, or
reacting to, changes in our business and our industry.
We have $92.0 million of goodwill and other intangible assets and a deficit in
our tangible net worth.
Our intangible assets, net of accumulated amortization, were about $92.0 million
as of December 31, 2000, and our stockholders' equity was $68.6 million. This
means that we had a $23.4 million deficit in our tangible net worth. All of our
intangible assets are goodwill related to our acquisitions, including the $52.2
million of goodwill we recorded from our purchase of P&M.
We are amortizing our intangible assets on a straight-line basis over 20 to 25
years. This amortization in any particular period constitutes a non-cash expense
that reduces our income. Also, we are required to periodically evaluate the
recoverability of this goodwill. If this goodwill becomes impaired, we may be
required to write down its carrying value and incur additional charges against
our income. This could have a materially adverse affect on our business,
operating results and financial condition.
Our Litigation Consulting division is subject to technological change.
We regularly develop solutions for our clients by using information technology,
electronic document management techniques, the Internet and other
state-of-the-art technology. Many of these technologies have only recently
emerged, will rapidly change and may become obsolete as new technologies appear.
Our future success will depend upon the ability of our professionals to remain
current with the rapid changes in the technologies we use in our business and to
learn quickly to use new technologies as they emerge. If our professionals fail
to do this, we could be at a competitive disadvantage. Our competitors may gain
exclusive access to improved technology, which also could put us at a
competitive disadvantage. There may be changes in our clients' or prospective
clients' preferences for technology solutions. If we cannot adapt to these
changes, our business, results of operations and financial condition are likely
to be adversely effected.
14
Risks associated with quantitative and qualitative market risks such as
fluctuations in interest rates are described under Item 7A. of this Annual
Report.
ITEM 2. PROPERTIES
We lease our principal facility in Annapolis, Maryland, which totals
approximately 39,100 square feet, under a lease that expires in December 2003.
We also lease 32 other offices across the United States, including offices in
cities such as New York, Chicago, Houston, Dallas, Los Angeles, Columbus and
Washington, D.C. We believe that our leased facilities are adequate for our
current needs and that suitable additional space, should it be needed, will be
available to accommodate expansion of our operations on commercially reasonable
terms.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's stockholders for consideration during
the quarter ended December 31, 2000.
15
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
(a) During 2000, the Company did not conduct any sales of its equity
securities that were not registered under the Securities Act of 1933, as
amended, other than the sales previously disclosed in the Company's quarterly
reports on Form 10-Q.
(b) On March 9, 1999, FTI's common stock began trading on the American
Stock Exchange under the symbol "FCN." Prior to that time, the common stock was
listed on the Nasdaq National Market and traded under the symbol "FTIC." The
following table sets forth for the periods indicated the high and low sales
prices for the common stock, as reported on the American Stock Exchange for each
quarter during 2000 and1999 and the Nasdaq National Market for each quarter
during 1998.
High Low
---- ---
Fiscal Year Ended December 31, 1998
First fiscal quarter $ 16.25 $ 10.00
Second fiscal quarter $ 20.75 $ 13.50
Third fiscal quarter $17.1875 $ 4.00
Fourth fiscal quarter $ 8.375 $ 2.375
Fiscal Year Ended December 31, 1999
First fiscal quarter $ 4.25 $ 2.625
Second fiscal quarter $ 5.875 $ 2.875
Third fiscal quarter $ 6.125 $ 4.50
Fourth fiscal quarter $ 6.375 $ 3.75
Fiscal Year Ended December 31, 2000
First fiscal quarter $ 7.75 $ 4.75
Second fiscal quarter $ 11.50 $ 6.625
Third fiscal quarter $ 11.625 $7.3125
Fourth fiscal quarter $ 10.875 $ 5.625
As of March 23, 2001, the number of record holders of the Company's common stock
was 108 and the Company believes the number of beneficial holders approximates
1,914.
The Company has not declared or paid any cash dividends on the Company's common
stock to date and does not anticipate paying any cash dividends on its shares of
common stock in the foreseeable future because it intends to retain its
earnings, if any, to finance the expansion of its business and for general
corporate purposes. Further, the Company's credit facilities restrict the
Company's ability to pay dividends.
16
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended December 31, 2000, are
derived from the Company's consolidated financial statements. The financial
statements for the years ended December 31, 1996, 1997, 1998, 1999 and 2000 were
audited by Ernst & Young LLP. The data below should be read in conjunction with
the consolidated financial statements and related notes thereto included
elsewhere in this report and "Management's Discussion and Analysis of Financial
Conditions and Results of Operations."
Year ended December 31,
----------------------------------------------------------------------------
2000
Pro Forma 2000 1999 1998 1997 1996
----------------------------------------------------------------------------
(unaudited) (in thousands, except per share data)
----------- -------------------------------------
(See Note 15)
Statement of Operations Data:
Revenues $137,203 $134,764 $84,607 $58,615 $44,175 $30,648
Direct cost of revenues 69,617 68,667 44,149 31,402 23,564 17,020
Selling, general and administrative expenses 36,839 36,732 28,829 20,532 15,159 10,786
Amortization of goodwill 4,940 4,723 2,313 996 82 -
---------------------------------------------------------------------------
Total costs and expenses 111,396 110,122 75,291 52,930 38,805 27,806
----------------------------------------------------------------------------
Income from operations 25,807 24,642 9,316 5,685 5,370 2,842
Interest income (expense) (11,352) (10,771) (4,014) (1,163) 173 107
----------------------------------------------------------------------------
Income before income taxes and
extraordinary item 14,455 13,871 5,302 4,522 5,543 2,949
Income taxes 6,175 5,917 2,311 1,954 2,250 1,235
----------------------------------------------------------------------------
Income before extraordinary item 8,280 7,954 2,991 2,568 3,293 1,714
Extraordinary loss on early extinguishment of
debt, net of income taxes (5,393) (5,393) - - - -
----------------------------------------------------------------------------
Net income 2,887 2,561 2,991 2,568 3,293 1,714
Preferred stock dividends - - - - - 62
----------------------------------------------------------------------------
Income available to common stockholders $ 2,887 $ 2,561 $ 2,991 $ 2,568 $ 3,293 $ 1,652
============================================================================
Earnings per common share before
extraordinary item, basic $ 1.15 $ 1.12 $ 0.61 $ 0.54 $ 0.73 $ 0.46
Earnings per common share, basic $ 0.40 $ 0.36 $ 0.61 $ 0.54 $ 0.73 $ 0.46
Earnings per common share before
extraordinary item, diluted $ 1.03 $ 1.00 $ 0.59 $ 0.51 $ 0.70 $ 0.42
Earnings per common share, diluted $ 0.36 $ 0.32 $ 0.59 $ 0.51 $ 0.70 $ 0.42
Shares used in computation 8,073 7,992 5,028 5,077 4,698 4,174
December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------
Balance Sheet Data:
Working capital $ 20,163 $19,233 $9,071 $10,634 $13,311
Total assets $146,131 83,857 79,747 28,657 20,282
Long-term debt, capital lease obligations
(and redeemable preferred stock in 1996) 56,690 41,154 36,016 1,014 254
Total stockholders' equity 68,624 30,252 25,594 21,019 17,629
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
FTI Consulting, Inc. (the "Company" or "FTI") is a multi-disciplined consulting
firm with leading practices in the areas of financial restructuring, litigation
support and engineering and scientific investigation. Our Financial Consulting
division, which accounted for 48.6% of our 2000 pro forma revenues and was our
most profitable division, offers a broad range of financial consulting services,
such as forensic accounting, bankruptcy and restructuring analysis, expert
testimony, damage assessment, cost benefit analysis and business valuations. Our
Litigation Consulting division, which accounted for 22.9% of our 2000 pro forma
revenues, provides advice and services in connection with all phases of the
litigation process. Our Applied Sciences division, which accounted for 28.5% of
our 2000 pro forma revenues, offers forensic engineering and scientific
investigation services, accident reconstruction, fire investigation and expert
testimony regarding intellectual property rights.
Revenues generated by our business divisions consist primarily of fees for our
professional services. We charge our professionals' time at hourly rates, which
vary from professional to professional, based on the professional's position,
experience and expertise. We also directly bill our clients for services
provided by our independent consultants. We recognize revenues for the
production of our work product, including static graph boards, color copies and
digital video production and fees for use of our equipment and facilities. We
also pass through our out-of-pocket expenses, such as our cost of recruiting
subjects and participants for research surveys and mock trial activities and our
travel. We recognize revenues in the period when the service is provided.
Our direct cost of revenues consists primarily of employee compensation and
related payroll benefits, the cost of outside consultants assigned to
revenue-generating activities and other related expenses billable to clients.
Selling, general and administrative expenses consist primarily of salaries and
benefits paid to office and corporate staff, as well as rent, marketing and
corporate overhead expenses. In 2000, selling, general and administrative
expenses accounted for about 26.8% of our pro forma revenues. Our corporate
overhead costs other than depreciation and amortization, which are included in
selling, general and administrative expenses, represented about 5.8% of pro
forma revenues in 2000.
We are organized into three distinct operating segments that contribute to the
overall performance of our company. As such, we evaluate segment performance and
allocate resources based on the operating income before depreciation and
amortization, corporate general and administrative expenses and income taxes for
each division. In 2000, our Financial Consulting division accounted for 65.9% of
our pro forma operating income, while our Litigation Consulting division
accounted for 16.6% and our Applied Sciences division accounted for 17.5%.
On December 31, 2000, we had about $92.0 million of unamortized goodwill, which
we are amortizing over 20 to 25-year periods. Annual goodwill amortization,
including goodwill associated with the acquisition of P&M, is approximately $5.0
million. Approximately $14.6 million of our unamortized goodwill is not
deductible for tax purposes. Consequently, our effective tax rate for 2000 will
be 40.7% before amortization of goodwill and 42.7% after amortization of
goodwill.
We used the net proceeds from an equity offering and our other financial
resources to repay $30.4 million of our outstanding senior subordinated notes.
We expect annual interest savings from
18
repayment of our senior subordinated notes to be about $5.2 million.
Recent Acquisitions
Since January 1, 1998 we have made four major acquisitions, all of which were
accounted for as purchases, as further described in Note 4 of "Notes to
Consolidated Financial Statements."
On February 4, 2000, we acquired Policano & Manzo, L.L.C. ("P&M") as further
described in Note 4 of "Notes to Consolidated Financial Statements." P&M, based
in Saddle Brook, New Jersey, specializes in providing financial restructuring,
advisory and forensic accounting services to the workout and bankruptcy
community. These services are provided on a nationwide basis to financially
distressed businesses, creditors, investors and other interested parties. The
purchase price totaled $54.9 million, consisting of $48.3 million in cash,
815,000 shares of our common stock valued at $5.5 million and
acquisition-related expenses of $1.1 million.
In September 1998, we acquired both S.E.A., Inc. and Kahn Consulting, Inc.
("KCI"). SEA, headquartered in Columbus, Ohio, provides investigation, research,
analysis and quality control services in areas such as distress, product
failure, fire and explosion, and vehicle and workplace accidents. The SEA
acquisition has allowed us to significantly expand its scientific consulting
offerings, in addition to providing geographic expansion into the southeast and
mid-west markets. KCI, headquartered in New York City, provides expert testimony
on accounting and financial issues; forensic accounting and fraud investigation
services; strategic advisory, turnaround, bankruptcy and trustee services; and
government contract consulting. The acquisitions of KCI and Klick, Kent & Allen,
provided the foundation for expansion of our financial consulting services into
cities in which we provide litigation or forensic engineering services.
In June 1998, we acquired KK&A. KK&A provides strategic and economic consulting
to various regulated businesses, advising on such matters as industry
deregulation, mergers and acquisitions, rate and cost structures, economic and
financial modeling and litigation risk analysis.
Results of Operations
Years Ended December 31, 2000, 1999 and 1998
Revenues. Total revenues in 2000 increased 59.3% to $134.8 million from $84.6
million in 1999. Our Financial Consulting division's revenues grew by 222.6% to
$64.2 million from $19.9 million, or 61.0% on a pro forma basis to $66.6 million
from $41.4 million including the P&M acquisition. Litigation Consulting division
revenues increased 7.9% to $31.4 million in 2000 from $29.1 million in 1999
primarily through increased rates. Litigation Consulting division revenues and
productivity in the third and fourth quarters of 2000 were less than the
comparable periods in 1999 due to seasonal variations in trial activity and an
unusual number of trials that were deferred or cancelled due to settlement or
settlement discussions. Our Applied Sciences division experienced 9.8% in
revenue growth in 2000 to $39.2 million from $35.7 million in 1999.
Total revenues in 1999 increased 44.4% over 1998. Litigation Consulting revenues
increased 9.8% from 1998 to 1999 as a result of an improved volume of cases. Our
Applied Sciences division experienced 56.2% growth in 1999, with nearly all of
that growth coming from the acquisition of SEA. The Financial Consulting
division's revenues grew by 114.0%, with substantially all of that growth coming
from the KCI acquisition.
19
Direct Cost of Revenues. Direct cost of revenues was 50.9% of our total revenues
in 2000, 52.2% in 1999 and 53.6% in 1998. The improvement in 2000 resulted
primarily from the acquisition of P&M and productivity improvements in the
Financial Consulting and Applied Sciences Divisions, and was net of decreased
productivity in Litigation Consulting as noted above.
Selling, General and Administrative Expenses. As a percent of our total
revenues, these expenses were 27.3% in 2000, 34.1% in 1999 and 34.9% in 1998.
The decrease in 2000 was primarily attributed to the acquisition of P&M and the
growth of the Financial Consulting division which has a lower ratio of selling,
general and administrative expenses to revenues than the Litigation Consulting
and Applied Sciences divisions.
Amortization of Goodwill. Annual amortization of goodwill increased from $2.3
million in 1999 to $4.7 million in 2000, as a result of our acquisitions. We
discuss goodwill amortization further in "Future Assessment of Recoverability
and Impairment of Goodwill" below.
Other Income and Expenses. Interest expense consisted primarily of interest on
debt we incurred to purchase the businesses referred to above. Interest expense
increased substantially in 2000 as a result of the P&M acquisition, and was then
reduced by our subsequent equity offering and refinancing of existing debt in
late 2000.
Income Taxes. Our effective tax rate decreased to 42.7% in 2000 from 43.7% in
1999, and 43.2% in 1998, principally as a reduced effect of some of the goodwill
amortization not being deductible for income tax purposes.
See Note 8 of "Notes to Consolidated Financial Statements" for a reconciliation
of the federal statutory rate to our effective tax rates during each of these
years, and a summary of the components of our deferred tax assets and
liabilities.
Extraordinary Item, net of Taxes. As a result of the write-off of unamortized
debt discount and deferred financing costs associated with the debt that we
refinanced on February 4, 2000 and repaid and refinanced in the fourth quarter
of 2000, we had a $5.4 million loss on early extinguishment of debt, net of
taxes.
Future Assessment of Recoverability and Impairment of Goodwill
In connection with our various acquisitions, including P&M, we recorded
goodwill, which we are amortizing on a straight-line basis over periods of 20 to
25 years. These are the periods during which we estimate we will benefit from
this goodwill. At December 31, 2000, unamortized goodwill was $92.0 million, or
62.9% of our total assets and 134.0% of our stockholders' equity. Goodwill
arises when an acquirer pays more for a business than the fair value of the
tangible and separately measurable intangible net assets. For financial
reporting purposes, goodwill and all other intangible assets are amortized over
the estimated period benefited. We have determined the period for amortizing
goodwill based upon several factors, the most significant of which are the
relative size, historical financial viability, growth trends of the acquired
companies and the relative lengths of time these companies have been in
existence.
Our management periodically reviews the carrying value and recoverability of our
unamortized goodwill. If the facts and circumstances suggest that the goodwill
may be impaired, we would adjust the carrying value of the goodwill. This would
result in an immediate charge against income during
20
the period of the adjustment and/or a shortening of the length of the remaining
amortization period, which would result in an increase in the amount of goodwill
amortization during the period of adjustment and each period thereafter until
fully amortized. If we adjust goodwill, we cannot assure you that we will not
have to make further adjustments for impairment and recoverability in future
periods. The most significant of the factors we will consider in determining
whether goodwill is impaired will be losses from operations; loss of customers;
and industry developments such as our inability to maintain market share, the
development of competitive products or services or imposition of additional
regulatory requirements.
Liquidity and Capital Resources
In 2000, we generated $15.6 million of cash flow in our operations, compared to
$8.4 million in 1999. We attribute this dramatic increase in cash flow primarily
to the significant increase in net income prior to the extraordinary item of
$8.5 million before taxes, plus non-cash charges for depreciation, amortization
and a portion of our interest expense. Cash flow from operations is also net of
a $2.9 million increase in our net working capital balances.
In 1999, we generated $8.4 million of cash flow from operations, an improvement
of $3.1 million from 1998. We attribute this increase to our higher net income
excluding non-cash charges (principally depreciation and amortization) of $2.2
million and the favorable net cash effects of changes in working capital
balances.
During the year ended December 31, 2000, we spent $6.6 million for additions to
property and equipment. This amount included expenditures for internal
information systems that allow us to better manage our expanding operations. At
December 31, 2000, we had no material commitments for the acquisition of
property and equipment. During 1999, we spent $3.1 million for additions to
property and equipment.
To finance the P&M acquisition in February 2000, we entered into:
. a senior credit facility, consisting of a $61.0 million amortizing term
loan maturing through January 31, 2006, initially bearing interest at
LIBOR plus specified margins ranging from 3.25% to 3.75%, which would
decline based on our leverage ratio;
. a $7.5 million revolving credit facility (not initially drawn down),
bearing interest at prime plus 1.75%, which also would decline based on
our leverage ratio; and
. $30.0 million of senior subordinated notes maturing January 31, 2007,
bearing 12% annual cash interest and 5% annual interest payable in kind
(PIK).
We used the proceeds of these facilities, together with approximately $2.0
million of our existing cash, to purchase P&M and to refinance our then existing
debt of approximately $47.1 million as follows:
. In 1998, we had borrowed $26.0 million under our prior $27.0 million
long-term credit facility with a bank to provide the $26.4 million of
cash needed to acquire KK&A, KCI and SEA. We negotiated this credit
facility in March 1999 and repaid it on February 4, 2000.
. In March 1999, we issued $13.0 million of subordinated debentures, that
we also repaid on February 4, 2000.
. When we acquired several businesses owned by several members of our
current management team, we issued seller notes to them that totaled
$10.8 million on February 4, 2000. On February 4, 2000, we issued
604,504 shares of our common stock to retire $2.7 million of the
notes and repaid the remaining $8.1 million in cash.
21
In connection with the $30.0 senior subordinated notes issued in connection with
the P&M acquisition, we issued the holders warrants to purchase approximately
670,000 shares of our common stock at an exercise price of $4.44 per share. The
warrants expire ten years from the date of closing. We also retired warrants for
130,835 shares of our common stock issued in March 1999 in connection with the
subordinated debt of $13.0 million noted above that was repaid.
In the fourth quarter of 2000, we completed a public offering of 4.025 million
shares of common stock. We used the net proceeds and our other financial
resources to repay the $30.0 million senior subordinated notes that we issued on
February 4, 2000. When we repaid the senior subordinated notes, we retired
warrants for 197,166 shares of our common stock issued in February 2000 in
connection with the $30.0 million senior subordinated notes that were repaid.
In December 2000, we refinanced our $61.0 million term loan and the $7.5 million
revolving credit facility. Our new credit facility consists of an amortizing
term loan of $32.5 million and a $47.5 million revolving credit line, of which
$28.0 million was drawn at December 31, 2000. The new credit facility bears
interest at LIBOR plus 2.25%, which would decline based on our leverage ratio.
The new credit facility is secured by all of our assets. Under the new credit
facility, we are required to comply with various specified financial covenants
related to our operating performance at the end of each quarter, and the payment
of dividends is restricted. Further, we have obtained interest rate protection,
through interest rate swap, on the $32.5 million term loan. We believe we will
be in compliance with all loan covenants throughout 2001.
Effect of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended, which
the Company is required to adopt effective January 2001. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will not have a significant effect on the
financial position or results of operations of the Company.
Forward-Looking Statements
Some of the statements under "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and elsewhere in this Annual Report
contain forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934. These statements involve known and unknown
risks, uncertainties and other factors that may cause our or our industry's
actual results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements not to be fully achieved. These
forward-looking statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or other comparable terminology. These
22
statements are only predictions. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this Annual Report to conform such statements to actual results and do not
intend to do so. Factors which may cause the actual results of operations in
future periods to differ materially from intended or expected results include,
but are not limited to (1) the loss of any key employees because the Company's
business involves the delivery of professional services and is labor-intensive;
(2) the availability and terms of additional capital or debt financing to fund
future acquisitions and for working capital purposes; (3) significant
competition for business opportunities and acquisition candidates; (4)
technological changes affecting our Litigation Consulting division; (5) the
risks of professional liability; (6) any factor that diminishes our professional
reputation; (7) fluctuations of revenue and operating income between quarters or
termination of client engagements; (8) the successful management of the growth
of our business; (9) the integration of P&M and of future acquisitions; and (10)
risks associated with quantitative and qualitative market risks such as
fluctuations in interest rates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
At December 31, 2000, the Company had $60.5 million in long-term debt. As
discussed in Note 5 to the Consolidated Financial Statements, $32.5 million of
long-term debt was hedged with interest rate swaps effectively fixing the
interest rate at 6.64%, plus variable percentages, currently 2.25%, as
determined by the credit agreement.
Therefore, at December 31, 2000, the remaining $28.0 million of the Company's
long-term debt bears interest at variable rates. The Company's earnings and
after-tax cash flow are affected by changes in interest rates. Assuming the
current level of borrowings and assuming a hypothetical 200 basis point increase
in interest rates under the Company's long-term bank credit facility for one
year, the Company's interest expense would increase by approximately $560,000
and net income would decrease by approximately $300,000.
In the event of an adverse change in interest rates, management would likely
take actions to further mitigate its exposure. However, due to the uncertainty
of the actions that would be taken and their possible effects, the analysis
assumes no such actions. Further, the analysis does not consider the effects of
the change in the level of overall economic activity that could exist in such an
environment.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FTI Consulting, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2000, 1999 and 1998
Contents
Report of Independent Auditors ............................................ 25
Consolidated Financial Statements
Consolidated Balance Sheets................................................ 26
Consolidated Statements of Income.......................................... 26
Unaudited Pro Forma Consolidated Statements of Income...................... 27
Consolidated Statements of Stockholders' Equity............................ 30
Consolidated Statements of Cash Flows...................................... 31
Notes to Consolidated Financial Statements................................. 32
24
Report of Independent Auditors
Board of Directors and Stockholders
FTI Consulting, Inc.
We have audited the accompanying consolidated balance sheets of FTI Consulting,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FTI
Consulting, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Baltimore, Maryland
February 13, 2001
25
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
2000 1999
---------------------------------------
(dollars in thousands)
Assets
Current assets:
Cash and cash equivalents $ 3,235 $ 5,046
Accounts receivable, less allowance of $1,321 in 2000 and
$1,065 in 1999 20,380 14,023
Unbilled receivables, less allowance of $797 in 2000 and
$1,160 in 1999 11,952 9,222
Income taxes recoverable 1,317 64
Deferred income taxes 1,029 641
Prepaid expenses and other current assets 1,924 1,461
---------- ----------
Total current assets 39,837 30,457
Property and equipment:
Furniture, equipment and software 20,977 17,205
Leasehold improvements 4,560 1,955
---------- ----------
25,537 19,160
Accumulated depreciation and amortization (12,382) (10,781)
---------- ----------
13,155 8,379
Goodwill, net of accumulated amortization of $8,196 in 2000 and
$3,473 in 1999 91,971 43,658
Other assets 1,168 1,363
----------- ----------
Total assets $ 146,131 $ 83,857
=========== ==========
26
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
December 31,
2000 1999
--------------------------------------
(dollars in thousands)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 4,325 $ 3,240
Accrued compensation expense 10,339 5,373
Deferred income taxes 500 471
Current portion of long-term debt 4,333 1,718
Other current liabilities 177 422
---------------- -------------
Total current liabilities 19,674 11,224
Long-term debt, less current portion 56,167 41,009
Other long-term liabilities 600 411
Deferred income taxes 1,066 961
Commitments and contingent liabilities - -
Stockholders' equity:
Preferred stock, $.01 par value; 4,000,000 shares
authorized, none outstanding - -
Common stock, $.01 par value; 16,000,000 shares
authorized; 10,567,447 and 4,913,905 shares issued and
outstanding in 2000 and 1999, respectively 106 49
Additional paid-in capital 53,951 18,197
Retained earnings 14,567 12,006
---------------- -------------
Total stockholders' equity 68,624 30,252
---------------- -------------
Total liabilities and stockholders' equity $ 146,131 $ 83,857
================ =============
See accompanying notes.
27
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31,
2000 1999 1998
---------------------------------------------
(dollars in thousands, except per share data)
Revenues $ 134,764 $ 84,607 $ 58,615
Direct cost of revenues 68,667 44,149 31,402
Selling, general and administrative expenses 36,732 28,829 20,532
Amortization of goodwill 4,723 2,313 996
--------- --------- ---------
Total costs and expenses 110,122 75,291 52,930
--------- --------- ---------
Income from operations 24,642 9,316 5,685
--------- --------- ---------
Other income (expenses):
Interest income 253 136 319
Interest expense (11,024) (4,150) (1,482)
--------- --------- ---------
(10,771) (4,014) (1,163)
--------- --------- ---------
Income before income taxes and extraordinary item 13,871 5,302 4,522
Income taxes 5,917 2,311 1,954
--------- --------- ---------
Income before extraordinary item 7,954 2,991 2,568
Extraordinary loss on early extinguishment of debt, net
of income taxes of $3,078 5,393 -- --
--------- --------- ---------
Net income $ 2,561 $ 2,991 $ 2,568
========= ========= ==========
Income before extraordinary item
per common share, basic $ 1.12 $ 0.61 $ 0.54
========= ========= ==========
Earnings per common share, basic $ 0.36 $ 0.61 $ 0.54
========= ========= ==========
Income before extraordinary item
per common share, diluted $ 1.00 $ 0.59 $ 0.51
========= ========= ==========
Earnings per common share, diluted $ 0.32 $ 0.59 $ 0.51
========= ========= ==========
See accompanying notes.
28
FTI Consulting, Inc. and Subsidiaries
Unaudited Pro Forma /(1)/ Consolidated Statements of Income
Year ended December 31,
2000 1999
------------------------
(dollars in thousands
except per share data)
Revenues $ 137,203 $ 106,119
Direct cost of revenues 69,617 51,749
Selling, general and administrative expenses 36,839 29,553
Amortization of goodwill 4,940 4,915
--------- ---------
Total costs and expenses 111,396 86,217
--------- ---------
Income from operations 25,807 19,902
--------- ---------
Other income (expenses):
Interest income 253 136
Interest expense (11,605) (12,280)
--------- ---------
(11,352) (12,144)
--------- ---------
Income before income taxes and
extraordinary item 14,455 7,758
Income taxes 6,175 3,258
--------- ---------
Income before extraordinary item 8,280 4,500
Extraordinary loss on early extinguishment of
debt, net of income taxes of $3,078 5,393 -
--------- ---------
Net income $ 2,887 $ 4,500
========= =========
Income before extraordinary item
per common share, basic $ 1.15 $ 0.72
========= =========
Earnings per common share, basic $ 0.40 $ 0.72
========= =========
Income before extraordinary item
per common share, diluted $ 1.03 $ 0.70
========= =========
Earnings per common share, diluted $ 0.36 $ 0.70
========= =========
/(1)/ Pro Forma assumes the acquisition of P&M occurred January 1, 1999, see
Note 15.
29
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Additional
Common Paid-in Retained
Stock Capital Earnings Total
----------------------------------------------
(dollars in thousands)
Balance at January 1, 1998 $ 46 $ 14,526 $ 6,447 $ 21,019
Exercise of options to purchase 217,900 shares of
common stock 2 2,005 -- 2,007
Net income for 1998 -- -- 2,568 2,568
-------- -------- -------- --------
Balance at December 31, 1998 48 16,531 9,015 25,594
Issuance of 552,539 warrants to purchase
common stock -- 1,291 -- 1,291
Issuance of 132,010 shares of common stock
under Employee Stock Purchase Plan 1 375 -- 376
Net income for 1999 -- -- 2,991 2,991
-------- -------- -------- --------
Balance at December 31, 1999 49 18,197 12,006 30,252
Issuance of warrants to purchase 670,404 shares of
common stock in connection with debt refinancing -- 3,714 -- 3,714
Issuance of 815,000 shares of common stock for the
acquisition of Policano & Manzo, L.L.C 8 5,493 -- 5,501
Issuance of 604,504 shares of common stock in
exchange for debt to sellers of acquired businesses 6 2,677 -- 2,683
Retirement of 328,001 warrants to purchase common
stock in connection with debt refinancing -- (1,272) -- (1,272)
Issuance of 114,571 shares of common stock under
Employee Stock Purchase Plan 1 486 -- 487
Exercise of options and warrants to purchase 74,467
shares of common stock 1 472 -- 473
Issuance of 4,025,000 shares of common stock for
cash, net of offering costs 41 24,025 -- 24,066
Issuance of 20,000 shares of restricted common stock -- 159 -- 159
Net income for 2000 -- -- 2,561 2,561
-------- -------- -------- --------
Balance at December 31, 2000 $ 106 $ 53,951 $ 14,567 $ 68,624
======== ======== ======== ========
See accompanying notes.
30
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31,
2000 1999 1998
-----------------------------------------------------
(dollars in thousands)
Operating activities
Net income $ 2,561 $ 2,991 $ 2,568
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Extraordinary loss on early extinguishment
of debt, before income taxes 8,471 - -
Depreciation and other amortization 2,769 2,621 1,789
Amortization of goodwill 4,723 2,313 1,192
Provisions for doubtful accounts (116) (197) 473
Deferred income taxes (254) (313) (626)
Other (111) 26 208
Changes in operating assets and liabilities:
Accounts receivable, billed and unbilled (5,632) (2,604) 1,237
Income taxes recoverable/payable (1,253) 730 (694)
Prepaid expenses and other current assets (458) (199) (270)
Accounts payable and accrued expenses 700 316 (83)
Accrued compensation expenses 4,409 2,608 (205)
Other current liabilities (247) 109 (296)
-----------------------------------------------------
Net cash provided by operating activities 15,562 8,401 5,293
Investing activities
Purchase of property and equipment (6,640) (3,093) (3,327)
Proceeds from sale of property and equipment 47 592 130
Contingent payments to former owners of subsidiaries (907) (807) (440)
Acquisition of subsidiaries (49,404) - (26,440)
Change in other assets 246 (1,288) -
-----------------------------------------------------
Net cash used in investing activities (56,658) (4,596) (30,077)
Financing activities
Issuance of common stock and exercise of stock options 25,185 376 1,610
Borrowings under long-term debt arrangements 151,500 33,000 26,000
Retirement of detachable stock warrants (1,272) - -
Repayments of long-term debt arrangements (130,825) (35,500) (1,959)
Payment of financing fees (4,894) - -
Changes in other long-term liabilities (409) 142 (100)
-----------------------------------------------------
Net cash provided by (used in) financing activities 39,285 (1,982) 25,551
-----------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,811) 1,823 767
Cash and cash equivalents at beginning of year 5,046 3,223 2,456
-----------------------------------------------------
Cash and cash equivalents at end of year $ 3,235 $ 5,046 $ 3,223
=====================================================
See accompanying notes.
31
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000
(dollars in tables expressed in thousands, except per share data)
1. Description of Business and Significant Accounting Policies
Basis of Presentation of Financial Statements
Description of Business
FTI Consulting, Inc. and subsidiaries (the "Company" or "FTI") is a
multi-disciplined consulting firm with leading practices in the areas of
financial restructuring, litigation support and engineering and scientific
investigation. The Company provides services to major corporations, law firms,
banks and insurance companies. These services include visual communications and
trial consulting, engineering and scientific services, expert financial services
including turnaround and bankruptcy consulting, assessment and expert testimony
regarding intellectual property rights and claims management outsourcing
services, from assessment to restoration. At December 31, 2000, the Company had
555 employees in 33 locations throughout the United States.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions have
been eliminated.
Significant Accounting Policies
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 amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
The Company uses estimates to determine the amount of the allowance for doubtful
accounts necessary to reduce accounts receivable and unbilled receivables to
their expected net realizable value. The Company estimates the amount of the
required allowance by reviewing the status of significant past-due receivables
and analyzing historical bad debt trends. Actual collection experience has not
varied significantly from estimates, due primarily to credit policies,
collection experience, and a lack of concentrations of accounts receivable.
Accounts receivable balances are not collateralized.
32
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-line
method. Furniture and equipment is depreciated over estimated useful lives
ranging from three to seven years, and leasehold improvements are amortized over
the lesser of the estimated useful life of the asset or the lease term.
Intangible Assets
Goodwill consists of the cost in excess of fair value of the net assets of
entities acquired in purchase transactions and is amortized over the expected
periods of benefit, which range from 20 to 25 years. On a periodic basis, the
Company evaluates goodwill for impairment. In completing this evaluation, the
Company compares its best estimates of undiscounted future cash flows with the
carrying value of goodwill.
Revenue Recognition
The Company derives most of its revenues from professional service activities.
The vast majority of these activities are provided under "time-and-materials"
billing arrangements, and revenues, consisting of billed fees and pass-through
expenses, are recorded as work is performed and expenses are incurred. Revenues
recognized but not yet billed to clients have been recorded as unbilled
receivables in the accompanying consolidated balance sheets. The Company obtains
retainers from many of its clients in advance of providing professional service.
At December 31, 2000 and 1999, retainers of $7.3 million and $435,000
respectively, were excluded from revenues and offset against accounts
receivable.
Direct Cost of Revenues
Direct cost of revenues consists primarily of billable employee compensation and
related payroll benefits, the cost of consultants assigned to revenue-generating
activities and direct expenses billable to clients. Direct cost of revenues does
not include an allocation of overhead costs.
33
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Stock Options Granted to Employees
The Company records compensation expense for all stock-based compensation plans
using the intrinsic value method prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees ("APB No. 25"). Under APB No. 25, if the exercise
price of the Company's employee stock-based awards equals or exceeds the
estimated fair value of the underlying stock on the date of grant, no
compensation expense is generally recognized. Financial Accounting Standards
Board Statement No. 123, Accounting for Stock-Based Compensation ("Statement
123") encourages companies to recognize expense for stock-based awards based on
their estimated value on the date of grant. Statement 123 requires the
disclosure of pro forma income and earnings per share data in the notes to the
financial statements if the fair value method is not adopted. The Company has
supplementally disclosed in Note 7 the required pro forma information as if the
fair value method had been adopted.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Impact of Adoption of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which requires
that an entity record all derivatives in the statement of financial position at
their fair value. It also requires changes in the fair value of derivatives to
be recorded each period in current earnings or other comprehensive income
depending on the type of hedge transaction. The Company will adopt this new
accounting standard beginning in January 2001. Management does not anticipate
that the adoption of the new Statement will have a significant effect on the
financial position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements ("SAB 101").
SAB 101 provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. The Company adopted the provisions of SAB 101
in 2000. The adoption of this pronouncement did not have any impact on the
Company's financial position or results of operations.
Reclassification
Amounts in the 1999 and 1998 consolidated statements have been reclassified to
conform to the 2000 presentation.
34
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Earnings Per Share
The following table summarizes the computations of basic and diluted earnings
per share:
(unaudited)
Year ended December 31, Pro Forma
2000 1999 1998 2000 1999
--------- -------- -------- -------- --------
(see Note 15)
Numerator used in basic and diluted earnings per common
share
Income before extraordinary item $ 7,954 $ 2,991 $ 2,568 $ 8,280 $ 4,500
Extraordinary item, net of taxes (5,393) -- -- (5,393) --
------- ------- ------- ------- -------
Net income $ 2,561 $ 2,991 $ 2,568 $ 2,887 $ 4,500
------- ------- ------- ------- -------
Denominator
Denominator for basic earnings per common share -
weighted average shares 7,075 4,872 4,725 7,217 6,291
Effect of dilutive securities:
Warrants 526 115 -- 465 115
Employee stock options 391 41 352 391 41
------- ------- ------- ------- -------
917 156 352 856 156
------- ------- ------- ------- -------
Denominator for diluted earnings per common share -
weighted average shares and assumed conversions 7,992 5,028 5,077 8,073 6,447
======= ======= ======= ======= =======
Income before extraordinary item per common share, basic $ 1.12 $ 0.61 $ 0.54 $ 1.15 $ 0.72
Extraordinary loss per common share, basic (0.76) -- -- (0.75) --
------- ------- ------- ------- -------
Earnings per common share, basic $ 0.36 $ 0.61 $ 0.54 $ 0.40 $ 0.72
======= ======= ======= ======= =======
Income before extraordinary item per common share, diluted $ 1.00 $ 0.59 $ 0.51 $ 1.03 $ 0.70
Extraordinary loss per common share, diluted (0.68) -- -- (0.67) --
------- ------- ------- ------- -------
Earnings per common share, diluted $ 0.32 $ 0.59 $ 0.51 $ 0.36 $ 0.70
======= ======= ======= ======= =======
35
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Supplemental Disclosure of Cash Flow Information
In 2000, the Company purchased the membership interests of Policano & Manzo,
L.L.C. for total consideration of $54.9 million. In connection with this
acquisition, assets with fair market value of $58.1 million were acquired and
liabilities of approximately $3.2 million were assumed. In 1998, the Company
purchased three entities for total consideration of $45.6 million. In connection
with these 1998 acquisitions, assets with a fair market value of $50.4 million
were acquired and liabilities of approximately $4.8 million were assumed.
The Company paid interest of $10.8 million, $4.1 million and $1.0 million, and
income taxes of $4.3 million, $2.0 million and $2.9 million during fiscal years
2000, 1999 and 1998, respectively.
4. Acquisitions
Policano & Manzo, L.L.C.
Effective January 31, 2000, the Company acquired the membership interests of
Policano & Manzo, L.L.C. ("P&M"). P&M, based in Saddle Brook, New Jersey, is a
leader in providing bankruptcy and turnaround consulting services to large
corporations, money center banks and secured lenders throughout the U.S. The
purchase price totaled approximately $54.9 million, consisting of $48.3 million
in cash, 815,000 shares of common stock valued at $5.5 million and acquisition
related expenses of $1.1 million. The acquisition was accounted for using the
purchase method of accounting and approximately $52.2 million of goodwill was
recorded and is being amortized over its estimated useful life of 20 years. The
results of operations of P&M are included in the accompanying consolidated
statements of income commencing January 31, 2000 and in the accompanying
unaudited pro forma consolidated statements of income as if the acquisition was
made on January 1, 1999 (See Note 15). The pro forma consolidated results of
operations are not necessarily indicative of the results that would have
occurred had these transactions been consummated as of the beginning of 1999 or
of future operations of the Company.
Kahn Consulting, Inc.
On September 17, 1998, the Company acquired all of the outstanding common stock
of Kahn Consulting, Inc., and KCI Management Corp. (collectively, "KCI"). KCI,
based in New York, New York, provides strategic advisory, turnaround, bankruptcy
and trustee services, as well as litigation consulting services. The purchase
price of $20.0 million included an initial payment of $10.0 million in cash,
with the remainder evidenced by notes payable bearing interest at 7.5%. The
acquisition was accounted for using the purchase method of accounting. At the
acquisition date, approximately $17.4 million of goodwill was recorded which is
being amortized over its estimated useful life of 20 years. The results of
operations of KCI are included in the accompanying consolidated statements of
income commencing September 17, 1998.
36
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Acquisitions (continued)
S.E.A., Inc.
Effective September 1, 1998, the Company acquired all of the outstanding common
stock of S.E.A., Inc. ("SEA"). SEA, based in Columbus, Ohio, provides
investigation, research, analysis and quality control services in areas such as
distress, product failure, fire and explosion, and vehicle and workplace
accidents. The purchase price of $15.6 million included an initial payment of
$10.0 million in cash, with the remainder evidenced by notes payable bearing
interest at 7.5%. The acquisition was accounted for using the purchase method of
accounting. At the acquisition date, approximately $13.6 million of goodwill was
recorded which is being amortized over its estimated useful life of 20 years.
The results of operations of SEA are included in the accompanying consolidated
statement of income commencing September 1, 1998.
Klick, Kent & Allen, Inc.
On June 1, 1998, the Company acquired all of the outstanding common stock of
Klick, Kent & Allen, Inc. ("KK&A"). KK&A, based in Alexandria, Virginia,
provides strategic and economic consulting to various regulated businesses,
advising on such matters as industry deregulation, mergers and acquisitions,
rate and cost structures, economic and financial modeling and litigation risk
analysis. The initial purchase price of approximately $10.0 million included
$6.0 million in cash and $4.0 million evidenced by notes payable bearing
interest at 7.5%. Contingent consideration equal to 50% of the excess over $1.0
million of pre-tax earnings of KK&A for 2000 and 2001 will be payable. The
acquisition was accounted for using the purchase method of accounting. At the
acquisition date, approximately $9.7 million of goodwill was recorded which is
being amortized over its estimated useful life of 20 years. The results of
operations of KK&A are included in the accompanying consolidated statements of
income commencing June 1, 1998. During 2000 and 1999, contingent consideration
of $493,000 and $409,000, respectively, was earned and recorded as additional
goodwill.
LWG, Inc.
The Company acquired all the outstanding common stock of L.W.G., Inc. effective
September 1, 1997, in a transaction that was accounted for using the purchase
method of accounting. During the year ended December 31, 2000, additional
contingent consideration of $624,000 was paid and recorded as goodwill. In 1999
and 1998, $398,000 and $440,000, respectively, was paid and recorded as
goodwill. At December 31, 2000, approximately $3.0 million of goodwill related
to the LWG acquisition is being amortized over a 25-year period.
37
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt
Debt consists of the following:
December 31
2000 1999
----------------------------------
Amounts due under a $80.0 million long-term credit
facility, consisting of an amortizing term loan of
$32.5 million and a $47.5 million revolving credit line,
(of which $28.0 million was drawn at December 31, 2000),
bearing interest at LIBOR plus variable percentages
(8.69% at December 31, 2000). This facility is secured
by substantially all the assets of the Company, and
the unpaid principal matures in varying amounts
through December 31, 2005 $ 60,500 $ --
Amounts due under a $27.0 million long-term credit
facility (net of discount of $36,000), bearing interest at
LIBOR plus variable -- 19,964
Subordinated debentures (net of discount of $848,000)
bearing interest at 9.25% per annum -- 12,152
Notes payable to former shareholders of acquired
businesses (net of discount of $169,000) -- 10,611
-------- --------
Total debt 60,500 42,727
Less current portion (4,333) (1,718)
-------- --------
Total long-term debt $ 56,167 $ 41,009
======== ========
The Company has entered into interest rate swap transactions on the $32.5
million of outstanding amortizing term loans. The swap transactions resulted in
exchanging floating LIBOR rates for the fixed rate of 6.64% and expire in three
years. The cost is included as a component of interest expense in the
accompanying statements of income. The fair value of the swap agreements and
changes in the fair value as a result of changes in market interest rates are
not recognized in the consolidated financial statements.
38
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
Aggregate maturities of debt at December 31, 2000, are as follows:
2001 $ 4,333
2002 4,333
2003 6,500
2004 8,667
2005 36,667
---------
Total $ 60,500
=========
The terms of the credit facility prohibit the payment of dividends without the
consent of the lender.
The fair value of long-term debt at December 31, 2000 approximates its carrying
value.
6. Warrants
At December 31, 2000, the Company has outstanding warrants to purchase common
stock, summarized as follows:
Year Issued Number of Shares Exercise Price Per Share Expiration Date
- -----------------------------------------------------------------------------
1996 10,000 $3.22 May 2001
1999 20,000 $3.25 February 2009
1999 25,000 $3.00 March 2006
1999 261,670 $3.21 March 2010
1999 115,033 $3.21 March 2004
2000 473,238 $4.44 January 2010
-------
904,941
=======
During 2000 and 1999, the Company issued warrants to purchase 670,404 and
552,539 shares of common stock, respectively.
39
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Warrants (continued)
The fair value of the warrants issued in each period was estimated using the
Black-Sholes option pricing model, a generally accepted warrant valuation
methodology. The following valuation assumptions were used in the calculation of
the value of the warrants:
Warrants Issued Warrants Issued
Assumptions in 2000 in 1999
- ----------- ----------------- -----------------
Risk free interest rate 5.5% 5.5%
Expected dividend yield 0% 0%
Expected stock price volatility 0.647 0.930
Expected life 5 years 4 to 8.8 years
Aggregate fair value $ 3,714 $ 1,291
The estimated value of the warrants was recorded as additional paid-in capital,
and the related debt was recorded net of the resulting discount.
7. Stock Option Plans
Prior to 1997, the Company granted certain options to key employees under the
1992 Stock Option Plan. This plan was terminated in 1997 upon the adoption of
the 1997 Stock Option Plan ("the 1997 Plan"). The 1997 Plan, provides for the
granting to employees and non-employee directors of non-qualified options to
purchase an aggregate of up to 3,150,000 shares of common stock. Options to
purchase common stock may be granted at prices not less than 50% of the fair
market value of the common stock at the date of grant, for a term of no more
than ten years. Vesting provisions for individual awards are at the discretion
of the Board of Directors.
The following table summarizes the option activity under the Plan for the
three-year period ended December 31, 2000:
2000 1999 1998
Weighted Avg. Weighted Avg. Weighted Avg.
2000 Exercise Price 1999 Exercise Price 1998 Price Exercise
--------- -------------- ---------- -------------- ---------- -----------------
Options outstanding at January 1 2,018,029 $ 7.11 $1,820,829 $ 7.86 1,495,229 $ 7.96
Options granted 1,342,200 6.97 397,500 4.25 565,000 7.73
Options exercised (64,467) 5.57 -- -- (217,900) 6.83
Options forfeited (31,633) 7.03 (200,300) 8.25 (21,500) 8.92
--------- ------ ---------- ------ --------- --------
Options outstanding at December 31 3,264,129 $ 7.11 2,018,029 $ 7.11 1,820,829 $ 7.86
========= ====== ========== ====== ========= ========
Options exercisable at December 31 1,770,133 $ 7.48 $1,197,591 $ 7.87 674,580 $ 7.69
========= ====== ========== ====== ========= ========
40
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Option Plans (continued)
All options granted have an exercise price equal to or greater than the fair
value of the Company's common stock on the date of grant. Exercise prices for
options outstanding as of December 31, 2000 ranged from $2.38 to $19.59 as
follows:
Weighted Average
Remaining
Weighted Average Contractual Life Weighted Average
Range of Options Exercise Price of of Options Options Exercise Price of
Exercise Prices Outstanding Options Outstanding Outstanding Exercisable Options Exercisable
----------------- ----------------- -------------------- ------------------- -------------- --------------------
$2.38 - $6.00 855,747 $ 4.65 7.25 years 532,418 $4.72
$6.12 - $8.50 1,607,966 $ 6.84 8.38 years 573,799 $7.28
$8.80 - $19.59 800,416 $10.18 6.77 years 663,916 $9.86
Pro Forma Disclosures Required by Statement 123
For the years ended December 31, 2000, 1999 and 1998, pro forma net income and
earnings per share information required by Statement 123 has been determined as
if the Company had accounted for its stock options using the fair value method.
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions:
Year ended December 31,
2000 1999 1998
----------------- ----------------- ------------------
Risk free interest rate 5.5% 5.5% 5.5%
Expected dividend yield 0% 0% 0%
Expected option life 4 years 4 years 4 years
Expected stock price volatility 0.779 - 0.790 0.788 - 0.808 0.667 - 0.767
Weighted average fair value of granted options $3.13 $2.65 $4.45
The Black-Scholes option pricing model and other models were developed for use
in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
41
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Option Plans (continued)
The following table summarizes pro forma income (loss) and earnings (loss) per
share:
Year ended December 31,
2000 1999 1998
-----------------------------------------
Income before extraordinary item, as reported $7,954 $2,991 $2,568
Pro forma income before extraordinary item $5,196 $1,820 $1,550
Net income, as reported $2,561 $2,991 $2,568
Pro forma net income (loss) $ (197) $1,820 $1,550
Income before extraordinary item per common share,
basic, as reported $ 1.12 $ 0.61 $ 0.54
Pro forma income before extraordinary item per
common share, basic $ 0.73 $ 0.37 $ 0.33
Income before extraordinary item per common share,
diluted, as reported $ 1.00 $ 0.59 $ 0.51
Pro forma income before extraordinary item per
common share, diluted $ 0.68 $ 0.36 $ 0.27
Earnings per share common share, basic, as reported $ 0.36 $ 0.61 $ 0.54
Pro forma earnings (loss) per share common share, basic $(0.03) $ 0.37 $ 0.33
Earnings per share common share, diluted, as reported $ 0.32 $ 0.59 $ 0.51
Pro forma earnings (loss) per share common share, diluted $(0.03) $ 0.36 $ 0.27
8. Income Taxes
Significant components of the Company's deferred tax assets and liabilities at
December 31 are as follows:
2000 1999
-----------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 529 $ 428
Accrued vacation and bonus 500 213
-----------------------------------
Total deferred tax assets 1,029 641
Deferred tax liabilities:
Use of cash basis for income tax purposes by subsidiary 350 699
Goodwill 610 344
Capitalized software 447 175
Other 159 214
-----------------------------------
Total deferred tax liabilities 1,566 1,432
-----------------------------------
Net deferred tax liability $ (537) $ (791)
===================================
42
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
Income tax expense (benefit), before extraordinary item consisted of the
following:
Year ended December 31
2000 1999 1998
---------------------------------------------
Current:
Federal $ 4,766 $ 1,937 $ 2,038
State 1,405 687 542
---------------------------------------------
6,171 2,624 2,580
Deferred (benefit):
Federal (145) (190) (525)
State (109) (123) (101)
---------------------------------------------
(254) (313) (626)
---------------------------------------------
$ 5,917 $ 2,311 $ 1,954
=============================================
The Company's provision for income taxes resulted in effective tax rates that
varied from the statutory federal income tax rate as follows:
Year Ended December 31,
----------------------------------------------------
2000 1999 1998
----------------------------------------------------
Expected federal income tax provision at 34% $ 4,716 $ 1,803 $ 1,537
Expenses not deductible for tax purposes 557 302 181
State income taxes, net of federal benefit 732 286 239
Other (88) (80) (3)
----------------------------------------------------
$ 5,917 $ 2,311 $ 1,954
====================================================
9. Operating Leases
The Company leases office space under noncancelable operating leases that expire
in various years through 2010. The leases for certain office space contain
provisions whereby the future rental payments may be adjusted for increases in
maintenance and insurance above specified amounts. The Company also leases
certain furniture and equipment in its operations under operating leases having
initial terms of less than one year.
Future minimum payments under noncancelable operating leases with initial terms
of one year or more consist of the following at December 31, 2000:
2001 $ 3,369
2002 3,808
2003 3,478
2004 2,605
2005 2,393
Thereafter 8,754
----------
Total minimum lease payments $ 24,407
==========
43
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Operating Leases (continued)
Rental expense consists of the following:
Year ended December 31,
2000 1999 1998
--------------------------------------------
Furniture and equipment $ 324 $ 392 $ 326
Office and storage 3,556 2,859 1,975
----------- ---------- ----------
$ 3,880 $ 3,251 $ 2,301
=========== ========== ==========
10. Employee Benefit Plans
The Company maintains qualified defined contribution plans and 401(k) plans
which cover substantially all employees. Under the plans, participants are
entitled to make both pre-tax and after-tax contributions. The Company matches a
certain percentage of participant contributions pursuant to the terms of each
plan which are limited to a percent of the participant's eligible compensation.
Typically, the percentage match is based on each participant's respective years
of service and is at the discretion of the Board of Directors. The Company made
contributions of $685,000, $344,000 and $233,000 during 2000, 1999 and 1998,
respectively, related to these plans.
The Company also maintains an Employee Stock Purchase Plan which covers
substantially all employees. Under the Plan, participants are eligible to
purchase shares of the Company's common stock at a price that is equal to 85% of
the lesser of the fair market value of the stock on the first trading day of the
offering period or the last trading day of the offering period. Offering periods
commence the first day of each January and July in any particular year. There
are 400,000 shares of the Company's common stock issuable under the Plan, of
which 246,581 shares have been issued as of December 31, 2000.
11. Extraordinary Loss
In connection with the acquisition of P&M, the Company refinanced its debt
during the first quarter of 2000 and retired all long-term debt outstanding at
February 4, 2000. In connection with this early extinguishment of debt, the
Company wrote off unamortized debt discount and financing fees, incurring an
extraordinary loss of $869,000 (net of a $660,000 income tax benefit).
During the fourth quarter of 2000, the Company successfully completed a
secondary offering of 4.025 million shares of common stock. The $24.0 million
proceeds, net of offering costs, together with internal cash resources, were
used to pay-off $30.0 million of subordinated notes issued in connection with
the acquisition of P&M. Concurrent with the repayment of the subordinated notes,
the Company refinanced its long-term debt to obtain more attractive terms and to
reduce interest expense. In connection with the fourth quarter early
extinguishment of debt, the Company wrote-off unamortized original issue
discount and financing fees and pre-payment penalties cost, resulting in an
extraordinary loss of $4.5 million (net of a $2.4 million income tax benefit).
44
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Segment Reporting
The Company is a multi-disciplined consulting firm with leading practices in the
areas of financial restructuring, litigation consulting and engineering and
scientific investigation, through three distinct operating segments. The
Financial Consulting division offers a range of financial consulting services,
such as forensic accounting, bankruptcy and restructuring analysis, expert
testimony, damage assessment, cost benefit analysis and business valuations. The
Litigation Consulting division provides advice and services in connection with
all phases of the litigation process. The Applied Sciences division offers
engineering and scientific consulting services, accident reconstruction, fire
investigation, equipment procurement and expert testimony regarding intellectual
property rights.
The Company evaluates performance and allocates resources based on operating
income before depreciation and amortization, corporate general and
administrative expenses and income taxes. The Company does not allocate assets
to its reportable segments as assets generally are not specifically attributable
to any particular segment. Accordingly, asset information by reportable segment
is not presented. The accounting policies used by the reportable segments are
the same as those used by the Company and described in Note 1 to the
consolidated financial statements. There are no significant intercompany sales
or transfers.
The Company's reportable segments are business units that offer distinct
services. The segments are managed separately by division presidents who are
most familiar with the segment operations.
The following table sets forth unaudited pro forma information on the Company's
reportable segments (see Note 15):
Pro Forma Year ended December 31, 2000
-------------------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- -------------------------------------------------------------------------------------------------------
Revenues $ 66,614 $ 39,232 $ 31,357 $137,203
Operating expenses 39,340 31,963 24,489 95,792
--------- -------- -------- --------
Segment profit $ 27,274 $ 7,269 $ 6,868 $ 41,411
========= ======== ======== ========
Pro Forma Year ended December 31, 1999
-------------------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- -------------------------------------------------------------------------------------------------------
Revenues $ 41,363 $ 35,693 $ 29,063 $106,119
Operating expenses 22,804 30,276 20,579 73,659
--------- -------- -------- --------
Segment profit $ 18,559 $ 5,417 $ 8,484 $ 32,460
========= ======== ======== ========
45
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Segment Reporting (continued)
Pro Forma Year ended December 31,
- -------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------
Operating Profit:
Total segment profit $ 41,411 $ 32,460
Corporate general and administrative
expenses (7,892) (5,251)
Depreciation and amortization (7,712) (7,307)
Interest expense, net (11,352) (12,144)
-------- --------
Income before income taxes and
extraordinary item $ 14,455 $ 7,758
======== ========
The following tables set forth historical information on the Company's
reportable segments:
Year ended December 31, 2000
------------------------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- -------------------------------------------------------------------------------------------------------
Revenues $ 64,175 $ 39,232 $ 31,357 $134,764
Operating expenses 38,286 31,963 24,489 94,738
--------- -------- -------- --------
Segment profit $ 25,889 $ 7,269 $ 6,868 $ 40,026
========= ======== ======== ========
Year ended December 31, 1999
------------------------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- -------------------------------------------------------------------------------------------------------
Revenues $ 19,851 $ 35,693 $ 29,063 $ 84,607
Operating expenses 14,489 30,276 20,579 65,344
-------- -------- -------- --------
Segment profit $ 5,362 $ 5,417 $ 8,484 $ 19,263
======== ======== ======== ========
Year ended December 31, 1998
------------------------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- -------------------------------------------------------------------------------------------------------
Revenues $ 9,264 $ 22,844 $ 26,507 $ 58,615
Operating expenses 6,696 18,931 18,971 44,598
-------- -------- -------- --------
Segment profit $ 2,568 $ 3,913 $ 7,536 $ 14,017
======== ======== ======== ========
46
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Segment Reporting (continued)
A reconciliation of segment profit for all segments to income before income
taxes is as follows:
Year ended December 31,
2000 1999 1998
- ----------------------------------------------------------------------------------------------
Operating Profit:
Total segment profit $ 40,026 $19,263 $14,017
Corporate general and administrative
expenses (7,892) (5,251) (5,351)
Depreciation and amortization (7,492) (4,696) (2,981)
Interest expense, net (10,771) (4,014) (1,163)
----------------------------------------------
Income before income taxes and
extraordinary item $ 13,871 $ 5,302 $ 4,522
==============================================
Substantially all of the revenue and assets of the Company's reportable segments
are attributed to or located in the United States. Additionally, the Company
does not have a single customer that represents ten percent or more of its
consolidated revenues.
13. Quarterly Financial Data (unaudited)
Quarter ended
--------------------------------------------------------------------------------
March 31, March June 30, September December
2000 31, 2000 2000 30, 2000 31, 2000
Pro Forma
- ---------------------------------------------------------------------------------------------------------------
Operating revenues $33,452 $31,013 $34,585 $33,395 $35,771
Operating expenses 26,579 25,305 27,965 27,630 29,222
--------------------------------------------------------------------------------
Operating income 6,873 5,708 6,620 5,765 6,549
Non-operating items, net (2,933) (2,352) (3,142) (3,143) (2,134)
--------------------------------------------------------------------------------
Income before income taxes
and extraordinary item 3,940 3,356 3,478 2,622 4,415
Income taxes 1,734 1,476 1,530 1,154 1,757
--------------------------------------------------------------------------------
Income before
extraordinary item 2,206 1,880 1,948 1,468 2,658
Extraordinary loss on early
extinguishment of debt,
net of taxes 869 869 - - 4,524
--------------------------------------------------------------------------------
Net income (loss) $ 1,337 $ 1,011 $ 1,948 $ 1,468 $(1,866)
================================================================================
Income before
extraordinary item per
common share, basic $ 0.20 $ 0.32 $ 0.30 $ 0.22 $ 0.28
================================================================================
Net income (loss) per
common share, basis $ 0.21 $ 0.17 $ 0.30 $ 0.22 $ (0.20)
================================================================================
Income before
extraordinary item per
common share, diluted $ 0.32 $ 0.29 $ 0.26 $ 0.19 $ 0.26
================================================================================
Net income (loss) per
common share, diluted $ 0.19 $ 0.16 $ 0.26 $ 0.19 $ (0.18)
================================================================================
Weighted average shares
outstanding:
Basic 6,385 5,854 6,423 6,536 9,492
================================================================================
Diluted 6,931 6,400 7,513 7,736 10,274
================================================================================
47
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Quarterly Financial Data (unaudited) - continued
Quarter ended
-----------------------------------------------------------------------------------
March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 20,000 $ 21,273 $ 20,855 $ 22,479
Operating expenses 18,188 18,746 18,696 19,661
---------- ---------- ---------- ---------
Operating income 1,812 2,527 2,159 2,818
Non-operating items, net (795) (1,025) (989) (1,205)
---------- ---------- ---------- ---------
Income before income taxes 1,017 1,502 1,170 1,613
Income taxes 458 731 515 607
---------- ---------- ---------- ---------
Net income $ 559 $ 771 $ 655 $ 1,006
========== ========== ========== =========
Net income per common share:
Basic $ .12 $ .16 $ .13 $ .20
========== ========== ========== =========
Diluted $ .12 $ .15 $ .13 $ .19
========== ========== ========== =========
Weighted average shares outstanding:
Basic 4,829 4,829 4,914 4,914
========== ========== ========== =========
Diluted 4,841 5,010 5,219 5,172
========== ========== ========== =========
14. Contingencies
The Company is subject to legal actions arising in the ordinary course of its
business. In management's opinion, the Company has adequate legal defenses
and/or insurance coverage with respect to the eventuality of such actions and
does not believe any settlement would materially affect the Company's financial
position.
15. Unaudited Pro Forma Consolidated Statements of Income
As discussed in Note 4, effective January 31, 2000, FTI acquired the membership
interests of Policano & Manzo, L.L.C. ("P&M"). The following Unaudited Pro Forma
Consolidated Statements of Income are based on historical consolidated financial
statements and the historical financial statements of P&M for the periods
presented, adjusted to give effect to the acquisition as if had occurred as of
January 1, 1999. The pro forma adjustments are described in the accompanying
notes and are based upon available information and certain assumptions that
management believes are reasonable. The Unaudited Pro Forma Consolidated
Statements of Income do not purport to represent what the results of operations
would actually have been had the acquisition in fact occurred on such date or to
project the results of operations for any future date or period.
48
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Unaudited Pro Forma Consolidated Statements of Income (continued)
For the year ended December 31, 2000:
-----------------------------------------------------
Historical Pro
-----------------------------------------------------
FTI P&M Total Adjustments Forma
---------------------------------------------------------------------
(in thousands, except per share data)
Revenues $ 134,764 $ 2,439 $ 137,203 $ 137,203
Direct of cost of revenues 68,667 892 69,559 58 (1) 69,617
Selling, general and administrative
expenses 36,732 107 36,839 36,839
Amortization of goodwill 4,723 - 4,723 217 (2) 4,940
--------------------------------------------------- ---------
Total costs and expenses 110,122 999 111,121 275 111,396
--------------------------------------------------- ---------
Income from operations 24,642 1,440 26,082 (275) 25,807
Interest expense, net 10,771 - 10,771 484 (3) 11,352
97 (4)
Income before income taxes and
extraordinary item 13,871 1,440 15,311 (856) 14,455
Income taxes 5,917 - 5,917 258 (5) 6,175
--------------------------------------------------- ---------
Income before extraordinary item $ 7,954 $ 1,440 $ 9,394 $ (1,114) $ 8,280
=================================================== =========
Weighted average shares outstanding 7,992 7,992 81 (6) 8,073
========== ======================== =========
Earnings before extraordinary item
per common share, diluted $ 1.00 $ 1.03
========== =========
For the year ended December 31, 1999:
-----------------------------------------------------
Historical Pro
-----------------------------------------------------
FTI P&M Total Adjustments Forma
---------------------------------------------------------------------
(in thousands, except per share data)
Revenues $ 84,607 $ 21,512 $ 106,119 $ 106,119
Direct of cost of revenues 44,149 6,898 51,047 702 (1) 51,749
Selling, general and administrative
expenses 28,829 724 29,553 29,553
Amortization of goodwill 2,313 - 2,313 2,602 (2) 4,915
--------------------------------------------------- ---------
Total costs and expenses 75,291 7,622 82,913 3,304 86,217
--------------------------------------------------- ---------
Income from operations 9,316 13,890 23,206 (3,304) 19,902
Interest expense, net 4,014 - 4,014 6,961 (3) 12,144
1,169 (4)
Income before income taxes 5,302 13,890 19,192 (11,434) 7,758
Income taxes 2,311 2,311 947 (5) 3,258
--------------------------------------------------- ---------
Net income $ 2,991 $ 13,890 $ 16,881 $ (12,381) $ 4,500
=================================================== =========
Weighted average shares outstanding 5,028 5,028 1,419 (6) 6,447
========== ======================== =========
Earnings per common share, diluted $ 0.59 $ 0.70
========== =========
49
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Unaudited Pro Forma Consolidated Statements of Income (continued)
Notes to Unaudited Consolidated Pro Forma Statements of Income:
(1) Adjustment to record additional compensation expense for P&M employees.
In connection with the acquisition of P&M, the Company entered into four-year
employment contracts with the former members of P&M. The pro forma adjustment
assumes that the members had received compensation in 1999 as provided for by
these employment contracts. These former members previously received
distributions of profits in lieu of compensation.
(2) Adjustment to reflect the amortization of $52.2 million of goodwill
recorded upon the acquisition of P&M. This goodwill is being amortized over a
20-year period.
(3) Adjustment to reflect incremental increases in interest expense
resulting from the acquisition of P&M. In February 2000, the Company borrowed
$91.0 million to acquire P&M and to refinance $41.2 million of other debt. The
average interest rate associated with the $91.0 million of borrowings is
approximately 12%, as compared to approximately 8.8% associated with the retired
debt.
(4) Adjustment to record the amortization of deferred financing costs and
debt discount arising from the issuance of warrants in connection with the
acquisition of P&M. The deferred financing costs and debt discount are being
amortized over the average 6.5-year term of the related debt.
(5) Adjustment to record the pro forma income tax expense for (i) the
operations of P&M for which no taxes were provided in the historical financial
statements because P&M was organized as an limited liability company, and (ii)
the estimated tax effects of pro forma adjustments, all at the combined federal
and state statutory income tax rate of approximately 42%.
(6) Adjustment to record the additional shares of common stock issued in
connection with the acquisition of P&M and the related February 2000 debt
refinancing. The Company issued 815,000 shares of common stock in connection
with the acquisition of P&M and 604,504 shares of common stock in exchange for
$2.7 million of outstanding notes.
50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Certain information required in Part III is omitted from this Report but is
incorporated herein by reference from the Company's Definitive Proxy Statement
for the 2001 Annual Meeting of Stockholders to be filed within 120 days after
the end of the Company's fiscal year ended December 31, 2000 (the "Proxy
Statement"), pursuant to Regulation 14A with the Securities and Exchange
Commission.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information contained in the Proxy Statement under the caption "The Board of
Directors" and "Executive Officers and Compensation" is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption "Executive
Officers and Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information contained in the Proxy Statement under the caption "Stock
Ownership" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption "Executive
Officers and Compensation -- Certain Relationships and Related Transactions" is
incorporated herein by reference.
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, EXHIBITS AND SCHEDULES
1. FINANCIAL STATEMENTS (See Item 8 hereof.)
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2000 and December 31,
1999
Consolidated Statements of Income for the fiscal years ended December
31, 2000, December 31, 1999 and December 31, 1998
Consolidated Statements of Stockholders' Equity for the fiscal years
ended December 31, 2000, December 31, 1999 and December 31, 1998
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 2000, December 31, 1999 and December 31, 1998
Notes to Consolidated Financial Statements
52
2. FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
All schedules, other than those outlined below, are
omitted as the information is not required or is otherwise
furnished.
- ----------------------------------------------------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ----------------------------------------------------------------------------------------------------------------------------
FTI Consulting, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------------------------------------
Additions
- ----------------------------------------------------------------------------------------------------------------------------
Description Balance at Charged to Charged to Deductions Balance at End
Beginning of Costs and Other of Period
Period Expenses Accounts
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000:
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Reserves and allowances deducted from asset accounts:
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts 2,225 1,740 9 (2) 1,856 (1) 2,118
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999:
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Reserves and allowances deducted from asset accounts:
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts 2,422 599 796 (1) 2,225
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998:
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Reserves and allowances deducted from asset accounts:
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts 902 527 1,048 (2) 55 (1) 2,422
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
(1) Uncollectible accounts written off, net of recoveries.
- ----------------------------------------------------------------------------------------------------------------------------
(2) Allowance recorded for acquisitions.
- ----------------------------------------------------------------------------------------------------------------------------
53
3. EXHIBITS
NUMBER DESCRIPTION
------ --------------------------------------------------------------
*3.1 Amended and Restated Articles of Incorporation of FTI
Consulting, Inc.
*3.2 Bylaws of FTI Consulting, Inc.
**3.3 Amendment to Articles of Incorporation
***4.2 Specimen Common Stock Certificate
*10.1 1992 Stock Option Plan, as amended
****10.2 1997 Stock Option Plan, as amended
*10.3 Employment Agreement dated as of January 1, 1996, between
Forensic Technologies International Corporation and Jack B.
Dunn, IV
*10.4 Employment Agreement dated as of January 1, 1996, between
Forensic Technologies International Corporation and Joseph R.
Reynolds, Jr.
*****10.5 Employee Stock Purchase Plan
+10.6 Stock Purchase Agreement dated as of June 30, 1998, by and
among FTI Consulting, Inc., Klick, Kent & Allen, Inc., and the
stockholders named therein
++10.7 Stock Purchase Agreement dated as of September 25, 1998, by and
among FTI Consulting, Inc., Glenn R. Baker and Dennis A.
Guenther
+++10.8 Stock Purchase Agreement dated as of September 17, 1998, by and
among FTI Consulting, Inc., Kahn Consulting, Inc., KCI
Management Corp., and the stockholders named therein
++++10.9 LLC Membership Interests Purchase Agreement dated as of January
31, 2000, by and among FTI Consulting, Inc., and Michael
Policano and Robert Manzo (schedules and exhibits omitted)
54
++++10.10 Credit Agreement dated as of February 4, 2000, by and among FTI
Consulting, Inc., and its subsidiaries named therein, Newcourt
Commercial Finance Corporation, an affiliate of The CIT Group,
Inc., and the other agents and lenders named therein (schedules
and exhibits omitted)
++++10.11 Investment and Loan Agreement dated as of February 4, 2000, by
and among FTI Consulting, Inc., and its subsidiaries named
therein, Jack B. Dunn, IV, Stewart J. Kahn, Allied Capital
Corporation, and the other lenders named therein (schedules and
exhibits omitted)
++++10.12 Form of Series A Stock Purchase Warrant dated as of February 4,
2000, by and between FTI Consulting, Inc., and each of the
lenders named in the above-referenced Investment and Loan
Agreement (schedules and exhibits omitted)
10.13 Credit Agreement dated as of December 22, 2000, among FTI
Consulting, Inc. and the lenders and agents named therein
(schedules omitted)
11.0 Computation of Earnings Per Share (included in Note 2 to the
Consolidated Financial Statements included in Item 8 herein)
21.0 Schedule of Subsidiaries
23.0 Consent of Ernst & Young, LLP
* Filed as an exhibit to the Company's Registration Statement on Form SB-1,
as amended (File No. 333-2002) and incorporated herein by reference.
** Filed as an exhibit to the Company's Registration Statement on Form 8-A
(File No. 001-14875) and incorporated herein by reference.
*** Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, and incorporated herein by reference.
**** Filed as an exhibit to the Company's Registration Statement on Form S-8
(File No. 333-32160) and incorporated herein by reference.
***** Filed as an exhibit to the Company's Registration Statement on Form S-8
(File No. 333-30357) and incorporated herein by reference.
+ Filed as an exhibit to the Company's Current Report on Form 8-K filed July
15, 1998, and incorporated herein by reference.
++ Filed as an exhibit to the Company's Current Report on Form 8-K filed
October 13, 1998, and incorporated herein by reference.
55
+++ Filed as an exhibit to the Company's Current Report on Form 8-K filed
October 2, 1998, and incorporated herein by reference.
++++ Filed as an exhibit to the Company's Current Report on Form 8-K filed
February 15, 2000, and incorporated herein by reference.
(b) None.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized this
28/th/ day of March, 2001.
FTI CONSULTING, INC.
By: /s/ Jack B. Dunn, IV
--------------------------------------
Name: Jack B. Dunn, IV
Title: Chief Executive Officer and
Chairman of the Board
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- --------- ------------------------ ----
/s/ Jack B. Dunn, IV Chairman of the Board and Chief March 28, 2001
- ------------------------------------
Jack B. Dunn, IV Executive Officer (principal
executive officer)
/s/ Stewart J. Kahn President, Chief Operating March 28, 2001
- ------------------------------------
Stewart J. Kahn Officer and Director
/s/ Theodore I. Pincus Executive Vice President, Chief March 29, 2000
- -----------------------------
Theodore I. Pincus Financial Officer and Secretary
(principal financial accounting officer)
/s/ Denis J. Callaghan Director March 28, 2001
- ------------------------------------
Denis J. Callaghan
/s/ James A. Flick, Jr. Director March 28, 2001
- ------------------------------------
James A. Flick, Jr.
/s/ Peter F. O'Malley Director March 28, 2001
- ------------------------------------
Peter F. O'Malley
/s/ Dennis J. Shaughnessy Director March 28, 2001
- ------------------------------------
Dennis J. Shaughnessy
/s/ George P. Stamas Director March 28, 2001
- ------------------------------------
George P. Stamas
57