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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, 1999
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
- ------------------- -----------------------------------------
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 20, 2000
was 6,384,601.
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 20, 2000 was $37,852,000*.
* Excludes 616,643 shares deemed to be held by directors, officers and greater
than 10% holders of the Common Stock outstanding at March 20, 2000. 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, 1999
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............................................ 12
Item 3. Legal Proceedings..................................... 12
Item 4. Submission of Matters to a Vote of Security Holders... 12
Part II
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Item 5. Market for the Company's Common Equity and
Related Shareholder Matters.......................... 13
Item 6. Selected Financial Data............................... 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 15
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk.......................................... 21
Item 8. Financial Statements and Supplementary Data........... 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 48
Part III
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Item 10. Directors and Executive Officers of the Company....... 48
Item 11. Executive Compensation................................ 48
Item 12. Security Ownership of Certain Beneficial Owners
and Management....................................... 48
Item 13. Certain Relationships and Related Transactions........ 48
Part IV
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Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K.................................. 49
ITEM 1. BUSINESS
Company 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/scientific investigation. Modern corporations, 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 turning more and more to outside experts and consultants to
address these complex issues. FTI is dedicated to helping corporations, their
advisors, lawyers, lenders and investors meet these challenges by providing a
broad array of "No. 1" practices from a single source.
We derive revenues from our three business divisions: Expert Financial Services,
Litigation Services and Applied Sciences. Our Expert Financial Services
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. Our Litigation
Services Division provides advice and services in connection with all phases of
the litigation process. Our Applied Sciences Division offers engineering and
scientific consulting services, accident reconstruction, fire investigation,
equipment procurement and expert testimony regarding intellectual property
rights.
The markets for our services consist primarily of legal and legal-related
proceedings, bankruptcy and distressed company matters and insurance related
issues. Our clients use us for several reasons, including our expertise and
unique capabilities in certain specialized areas, the sophisticated nature of
our work which precludes the cost-effectiveness of their maintaining our
capabilities "in-house," the need for "outside" expertise or impartiality in
many of the areas in which we operate and the trend in business generally to
outsource non-core activities, especially in those areas which are highly
complex, sophisticated, unique and incident-driven as opposed to generally
recurring.
Over the past three years, we have taken several steps to grow our business and
increase our prominence in the professional services industry. These steps
include:
. Completing six acquisitions that significantly expanded our size, service
offerings and geographic scope;
. Expanding into Expert Financial Services for trials, bankruptcy proceedings
and restructurings;
. Recruiting more recognized litigation support professionals and adding to
our visual communications staff; and
. Developing proprietary trial preparation and presentation software and
software to facilitate engineering and scientific inquiry.
The Company has further expanded its geographic reach with major offices now in
New York, Columbus, Chicago, Houston, Los Angeles, Annapolis and Washington,
D.C., as well as over 25 other U.S. locations.
As described in detail in Note 4 of the "Notes to Consolidated Financial
Statements," the Company
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acquired L.W.G., Inc. ("LWG"), and Bodaken Associates ("Bodaken") in 1997; and
acquired S.E.A., Inc. ("S.E.A."), Klick, Kent & Allen, Inc. ("KK&A"), and Kahn
Consulting, Inc. ("KCI"), in 1998.
On February 4, 2000, the Company acquired Policano & Manzo, L.L.C. ("P&M") as
described in more detail in Note 14 of "Notes to Consolidate Financial
Statements." P&M, based in Saddle Brook, New Jersey, is a leader in providing
bankruptcy and restructuring consulting services to large corporations, money
center banks and secured lenders through the U.S.
Since its founding in March 1990, P&M has participated in more than 300 matters,
including some of the largest bankruptcy proceedings and out-of-court
restructurings in the U.S. In 1999, P&M participated in five of the sixteen
largest Chapter 11 proceedings, with debt over $1 billion and three out-of-court
matters with over $1 billion in debt. Most of P&M's staff of 25 senior
consultants are CPAs, each having significant business and financial advisory
experience. We believe that the combination of P&M's business and KCI's
turnaround and strategic advisory practice will greatly enhance our technical
capabilities and establish our position as the first choice among leading
financial institutions and companies in distressed business situations. The
acquisition of Policano & Manzo L.L.C. significantly strengthens our capability
to provide bankruptcy and restructuring consulting services to large
corporations, money center banks and secured lenders through the U.S.
Expert Financial Services
The bankruptcy and restructuring market is rapidly expanding as more companies
are defaulting on debt. We attribute much of this expansion to the
sector-by-sector restructurings of whole industries, even during periods of
growth in the overall economy and to the increased use of speculative grade debt
in recent years.
According to Standard & Poor's Credit Week, 1999 was one of the worst years ever
in terms of corporate defaults, with the highest ever amount of defaulted debt.
About 40% of last year's defaults related to economic turmoil, but the other 60%
had nothing to do with economic conditions. In fact, most of them occurred in
spite of years of uninterrupted prosperity. Standard & Poor's believes the
current wave of defaults has yet to end and the default numbers will stay high
for several more years.
As a further indication of the increase in the demand for restructuring
services, 1999 saw the highest number of public company Chapter 11 filings since
1991 with twice the amount of pre-petition assets filed in 1998. Our continued
commitment to the bankruptcy market during this period has uniquely positioned
us to take advantage of the increased level of activity emerging in the
bankruptcy market. In addition, the complexity of the global economy and the
intricacies of government regulation on all aspects of business from competition
to the merger and acquisition field has made Expert Financial Services the
fastest growing of the Company's three business lines.
Our forensic accounting specialists work with companies dealing with the
investigation of disclosure and fraud issues, as well as companies which are
undergoing restructuring or bankruptcy reorganizations. In addition, we
generally employ statistical and economic tools to help companies evaluate
issues, such as determining the economic impact of deregulation of certain
industries, the amount of commercial damages suffered by businesses as a result
of a tort or a breach of contract, the existence of discriminatory employment
practices and the value of a business or professional practice for appraisal
purposes. We also
5
work with clients to develop business strategy and tactics on an ongoing basis.
Litigation Services
According to U.S. Bureau of Census statistics, the market for legal services in
the United States exceeds $100 billion. This has been fueled in no small part
by an organized plaintiffs' bar, large jury awards, complexity of cases and a
great deal of publicity.
In response to these factors, corporations and law firms have increasingly
turned to outside litigation support specialists. FTI has an 18-year history in
pioneering creative responses to these challenges. FTI focuses on developing
and providing innovative applications from the fields of accounting, science,
education, communications and technology to meet its clients' needs in the best
fashion.
For example, in the jury consulting arena, the Company has adapted methods
traditionally used in marketing and political polling to analyze how juries
reach decisions. In the visual communications arena, FTI has 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 the technology has made it a cost-effective alternative
for most trials. The dramatic increase in size of trials and volume of
information has made the visualization of concepts and themes through animated
and static "pictures" a necessity.
Perhaps the most dramatic trend affecting the growth of the litigation support
services market, however, has been the increasing sophistication of courtroom
presentation and document management techniques. Computerized document
management in cases involving millions of pages of deposition testimony and
exhibits has become widely used in the federal and state court systems.
Improvements in document management enable litigation support firms to provide a
higher quality of service at a reduced cost. Moreover, effective document
management and exhibit and trial preparation allow companies to better focus on
the issues involved in litigation so that they can better chart cost-effective
strategy with regard to resolution of the issues and control of the expenses.
Applied Sciences
The Applied Sciences Division specializes in analyzing the causes of accidents
resulting from such events as poor product design, fires, chemicals mishaps and
construction accidents. Its market includes insurance companies and
manufacturing companies, and it is being driven not only by a proliferation of
litigation but also by recent trends in:
. A greater emphasis on loss and injury prevention by insurance companies and
manufacturers;
. Insurance companies proactively working with manufacturers to make products
less likely to cause property damage or personal injury;
6
. Manufacturers becoming increasingly aware of the economic importance of
building safe products because of the proliferation of mass tort claims and
product recalls mandated by government agencies;
. Significant improvements in technology and decreases in technology costs,
which allow sophisticated computer-driven analysis on a cost-effective basis;
. The cost-effective use of engineering applications beyond high-exposure
litigation; and
. The cost-effective use of computer simulations and animations for a wider
range of disputes, as well as for product testing and employee training.
In addition to its litigation work, the Division assists companies in assessing
preventative measures relating to product design and the evaluation of the
causes of product failures. As a result, we are engaged by companies at an
early stage of potential litigation or on a quality control basis absent any
litigation at all. We have been called upon to assess the causes and relative
levels of responsibility of an accident, as well as to design preventative
measures. As a result of being engaged so early in the process, the Company
believes that revenues from these services generally are steadier and less
incident-driven than the revenues of other firms involved exclusively in the
latter stages of litigation preparation or other types of consulting services.
In all areas of its business, the Company believes its staff of statistic,
accounting, engineering, scientific, communication, artistic, computer
management and jury professionals are recognized experts in their fields and
provide it with a competitive advantage.
Business Strategy
FTI's strategy is to become a national company possessing critical mass, a broad
range of services and a cost-effective delivery of high-quality services to
clients. The Company's business strategy, combining strong internal growth with
an aggressive acquisition philosophy, is designed to achieve these goals. Most
importantly we believe this strategy clearly aligns us with the goals of our
clients, corporations and their advisers who are seeking consistently highest
quality expertise and the best service on a cost effective basis any time and
anywhere they need it. The Company believes the following elements are key to
the continued success of its business strategy:
. Build on Our Strong Reputation and Quality. The Company believes that
size and reputation are critical elements to the purchasing decisions of
corporations, law firms, banks and insurance companies. By hiring the
most qualified professionals and by acquiring highly respected firms, FTI
has sought to distinguish itself within this industry. The Company has
benefited both from the skills of these professionals, as well as the
client relationships brought by them to FTI. The Company has also sought
to foster its existing client relationships by providing its clients with
the highest quality products and services.
. Increase the Range of Our Services. Our strategy has been to transition
from a vendor-based approach to an early stage and ongoing advisory
approach. We believe that our integrated services approach uniquely
positions us in the market and enables us to better fulfill our clients'
expectations. Since 1982, we have significantly expanded our range of
services to include:
. visual communications;
. jury consulting;
7
. insurance claims management;
. analytic engineering;
. economic consulting;
. forensic accounting; and
. restructuring and bankruptcy consulting.
Our expanded range of services has led to increased demand from our
clients for more broad-based and strategic consulting services. This
has created a unique opportunity for us to successfully cross-market a
broader range of services to our existing clients.
. Expand Our Size and Geographic Reach. Today, large forensic and
litigation matters require a service provider to be capable of supplying
a wide range of services simultaneously. To enhance our ability to
effectively service sophisticated clients in large, complex matters, we
follow a strategy of:
. increasing our staff by attracting highly qualified, well-respected
professionals and outsourcing to quality consultants;
. increasing the range of our core competencies by selectively acquiring
businesses with a strong strategic fit; and
. investing in the technology and equipment necessary to maintain our
competitive edge.
Our growth strategy allows us to expand our client base and range of
services as well as to leverage our operations into key geographic markets.
We believe that we gain a competitive advantage by being able to provide
services to large, geographically diverse corporations on a nationwide
basis. We also believe that our proximity to our clients provides a
significant cost advantage by allowing us to balance resources and
centralize a number of labor intensive activities, such as graphics support
and document management. Our long-term plans include expanding both the
number of offices we maintain and the range of services provided by each
office.
. Provide Cost-Effective Delivery of Service. We are dedicated to providing
cost-effective solutions to our clients. We offer a disciplined project
management approach to ensure that we adhere to clients' budgets and
schedules. We also maintain a flexible cost structure by using a mix of
employees and outside consultants. This reduces our fixed overhead while
allowing us to offer solutions and expertise tailored to the client's
specific requirements.
Clients
In 1999, the Company performed work for 1,977 clients, on 14,315 matters,
including 1,139 law firms, 60 of which were rated in the top 100 law firms in
1999, as measured by the American Lawyer, based on revenues in the United
States; 198 industrial clients, 75 of which were rated in the FORTUNE 500 for
1999; 13 banks and other financial institutions, 3 of which were among the 100
largest U.S. public banks; and 447 insurance companies, 20 of which were rated
in the FORTUNE 500 for 1999. As of December 31, 1999, the Company was actively
working on 3,369 different matters for 1,732 different clients. None of the
Company's clients represented more than 10% of the Company's revenues during
1999.
8
Competition
The legal support services market is highly competitive. The Company faces
various sources of competition, including several national companies, large
public accounting firms and economic consulting organizations and a number of
smaller firms that provide one or more services to local and regional markets.
The source of competition often depends upon the services being provided by the
Company. The expert financial services group competes against accounting and
economic consulting firms. The litigation services division generally competes
against other litigation consulting firms and small sole proprietorships. The
applied sciences division competes against various regional or national
concerns, independent experts and research organizations.
Competitive factors for the Company's services include reputation, geographic
location, performance record, quality of work, range of services provided and
existence of an ongoing client relationship. To a lesser extent, we also
compete on price, however, the nature of our client matters typically reduces
cost or "shopping" to a secondary consideration. On a nationwide basis, the
Company's competitors include Engineering Animation, Inc., which provides
animation services; Exponent, Inc., which provides engineering analysis services
and a limited amount of animation services; Decision Quest, which provides jury
analysis, visual packaging and animation services; and the national accounting
firms. Certain national support service providers are larger than the Company
and, on any given engagement, may have a competitive advantage over the Company
with respect to one or more competitive factors. In addition, smaller local or
regional firms, while not offering the range of services provided by FTI, 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
the legal support services industry may also provide opportunities for large
companies that offer complementary services to enter the market through
acquisition. In the future, these and other competitive pressures could require
the Company to modify its pricing or increase its spending for marketing to
attract business.
Employees
As of December 31, 1999, the Company had 437 employees, and after the
acquisition of Policano & Manzo on February 4, 2000, had 464 employees.
Approximately 98 of the employees are in litigation support services, 245 in
applied sciences and 81 in expert financial services. The remaining employees
are administrative employees. The Company also maintains consulting
arrangements with approximately 1,714 independent consultants, of whom
approximately 432 were utilized on Company engagements during 1999.
None of the Company's employees are covered by collective bargaining agreements.
The Company considers its relationship with its employees to be good.
Business Risks
This Annual Report on Form 10-K, including the documents incorporated by
reference, contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934. When the Company refers to forward-
looking statements or information, sometimes the Company uses words such as
"may," "will," "could," "should," "plans," "intends," "expects," "believes,"
"estimates," "anticipates" and "continues." In particular, the following
summary of "Business Risks" describe forward-looking information. The business
risks that are described are not all inclusive, particularly with respect to
possible
9
future events. Other parts of this Annual Report on Form 10-K may also describe
forward-looking information. Things can happen that can cause actual results to
be very different from those described. The Company also makes no promise to
update any of its forward-looking statements, or to publicly release the results
if we revise any of them. 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:
We are highly leveraged.
Subsequent to the acquisition of Policano & Manzo, we increased our total
indebtedness to $91.0 million, plus a $7.5 million Revolving Credit Line. Our
ability to pay interest and principal on the indebtedness will depend on our
future operating performance which will depend upon prevailing economic
conditions, demand for our professional services and other factors that may be
beyond our control.
The debt obligations include a number of financial and operating covenants,
which restrict our ability to borrow more money, make loans, create liens on or
sell our assets, make investments and merge with other companies.
We have approximately $96 million of goodwill and other intangible assets.
Most of these assets are goodwill related to our acquisitions. If this goodwill
becomes impaired, we are required to write down its carrying value and incur an
additional charge against our income. This could have a materially adverse
affect on our business, operating results and financial condition.
We depend upon our staff of key professionals and management.
Our continued success depends upon our ability to retain and expand our staff of
key professionals. 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
additional qualified professionals in the future. Moreover, the loss of Jack B.
Dunn, IV or Stewart J. Kahn as employees of FTI without a suitable replacement
within 90 days could constitute a default under the Company's new $98.5 million
credit facilities.
We face significant competition for new business opportunities and acquisition
candidates.
We face competition from many other providers of consulting services, ranging
from large organizations, such as the "big five" accounting firms and the large
management consulting companies that offer a full range of consulting services,
to small one or two person firms that provide only one specialized service. We
cannot assure that we will be able to continue to compete successfully for new
business opportunities or retain our existing clients.
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 anticipate that this competition also will increase in the future. We may be
unable to continue to make acquisitions or may be forced to pay more for the
ones we are able to make. As a result, we may be unable to grow our business as
quickly as we have in the past, and our profitability may decline.
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We must successfully integrate the acquisition of Policano & Manzo.
We have successfully integrated the acquisitions we completed in 1998 and have
begun to integrate Policano & Manzo. If we are unable to effectively integrate
P & M, this could adversely affect our planned growth and lower our
profitability.
Our revenues, operating income and cash flow may fluctuate.
We have experienced fluctuating revenues, operating income and cash flow in some
prior quarterly and annual periods and expect this trend to continue from time
to time in the future.
We must successfully manage the growth of our business.
We plan to continue to rapidly expand our business. If we fail to mange our
growth effectively, our business, results of operations and financial condition
are likely to be adversely affected.
We may face conflicts of interests.
Many of the matters we work on are adversarial and in most matters we obtain
confidential information from our clients. As a result, our engagement by a
particular client may preclude us from accepting engagements from another entity
with an interest adverse to our client.
It is critical that we maintain our professional reputation.
We depend upon our overall reputation and the individual reputations of our
professionals to obtain new client engagements and attract and retain highly
qualified professionals. Therefore, we may have difficulty in competing for new
engagements if our existing clients become dissatisfied with our performance.
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. Any claim by a client against us could expose us to liability in
excess of our insurance limits and could severely injure our reputation.
Risks associated with quantitative and qualitative market risks such as
fluctuations in interest rates as described under Item 7A of this Annual Report
on Form 10-K.
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ITEM 2. PROPERTIES
FTI leases its principal facility in Annapolis, Maryland, which totals
approximately 39,100 square feet, under a lease that expires in December 2003.
The Company also leases offices across the United States, in cities such as New
York, Chicago, Houston, Los Angeles, Atlanta, Columbus and Washington, D.C.
The Company believes that its leased facilities are adequate for its current
needs, and that suitable additional space, should it be needed, will be
available to accommodate expansion of the Company's operations on commercially
reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently 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, 1999.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
(a) During 1999, 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 1999 and the Nasdaq National Market for each quarter during 1998
and 1997.
High Low
---- ---
Fiscal Year Ended December 31, 1997
First fiscal quarter $ 9 5/8 $ 5 1/2
Second fiscal quarter $ 8 $ 5 5/8
Third fiscal quarter $ 9 1/2 $ 6 3/4
Fourth fiscal quarter $14 3/4 $ 9
Fiscal Year Ended December 31, 1998
First fiscal quarter $16 1/4 $10
Second fiscal quarter $20 3/4 $13 1/2
Third fiscal quarter $17 3/16 $ 4
Fourth fiscal quarter $ 8 3/8 $ 2 3/8
Fiscal Year Ended December 31, 1999
First fiscal quarter $ 4 1/4 $ 2 5/8
Second fiscal quarter $ 5 7/8 $ 2 7/8
Third fiscal quarter $ 6 1/8 $ 4 1/2
Fourth fiscal quarter $ 6 3/8 $ 3 3/4
As of March 20, 2000, the number of record holders of the Company's common
stock was 112 and the Company believes the number of beneficial holders was
approximately 2,600.
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.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended December 31, 1999 are
derived from the Company's consolidated financial statements. The financial
statements for the years ended December 31, 1995, 1996, 1997, 1998, and 1999
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,
-------------------------------------------------------
1999 1998 1997 1996 1995/(1)/
---- ---- ---- ---- ---------
(in thousands, except per share data)
Statement of Operations Data:
Revenues $84,607 $58,615 $44,175 $30,648 $ 23,381
Direct cost of revenues 44,149 31,402 23,564 17,020 11,366
Selling, general and administrative expenses 28,829 20,532 15,159 10,786 9,887
Amortization of goodwill 2,313 996 82 - -
------- ------- ------- ------- --------
Total costs and expenses 75,291 52,930 38,805 27,806 21,253
------- ------- ------- ------- --------
Income from operations 9,316 5,685 5,370 2,842 2,128
Other income (expense) (4,014) (1,163) 173 107 (222)
------- ------- ------- ------- --------
Income from continuing operations before
income taxes 5,302 4,522 5,543 2,949 1,906
Income taxes 2,311 1,954 2,250 1,235 779
------- ------- ------- ------- --------
Income from continuing operations 2,991 2,568 3,293 1,714 1,127
Loss from operations of discontinued
operations, net of tax/(1)/ - - - - (65)
Loss on disposal of discontinued operations,
net of tax - - - - (365)
------- ------- ------- ------- --------
Net income 2,991 2,568 3,293 1,714 697
Preferred stock dividends - - - 62 125
------- ------- ------- ------- --------
Income available to common stockholders $ 2,991 $ 2,568 $ 3,293 $ 1,652 $ 572
======= ======= ======= ======= ========
Earnings per common share from continuing
operations $ 0.61 $ 0.54 $ 0.73 $ 0.46 $ 0.27
Earnings per common share, assuming
dilution $ 0.59 $ 0.51 $ 0.70 $ 0.42 $ 0.24
Shares used in computation 5,028 5,077 4,698 4,174 3,316
As of December 31,
--------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital $19,233 $ 9,071 $10,634 $13,311 $ 2,259
Total assets 84,292 79,747 29,176 20,868 10,756
Long-term debt, capital lease obligations
and redeemable stock 41,154 36,016 1,014 254 3,941
Total stockholders' equity 30,252 25,594 21,019 17,629 1,463
/(1)/ Effective March 31, 1996, the Company sold a subsidiary, Annapplix to a
group that includes Annapplix's former owner and certain officers and
stockholders of the Company.
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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/scientific investigation. We derive revenues
from our three business divisions: Expert Financial Services, Litigation
Services and Applied Sciences. Our Expert Financial Services 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. Our Litigation Services Division provides
advice and services in connection with all phases of the litigation process.
Our Applied Sciences Division offers engineering and scientific consulting
services, accident reconstruction, fire investigation, equipment procurement
and expert testimony regarding intellectual property rights.
. fees for our professional services;
. fees for use of our equipment and facilities;
. pass-through expenses, such as our cost of recruiting subjects and
participants for research surveys and mock trial activities and travel; and
. fees associated with production of our work product, such as static graph
boards, color copies and digital video production.
Our goal is to provide value-added services to our clients either on a case-by-
case basis or through on-going relationships with major users of litigation and
claims services. Over the past three years, we have taken several steps to grow
our business and increase our prominence in the professional services industry.
These steps include:
. completing six acquisitions that significantly expanded our size, service
offerings and geographic scope;
. expanding into expert financial services for trials, bankruptcy proceedings
and restructurings; and
. recruiting more recognized litigation support professionals and adding to our
visual communications staff.
The Company has further expanded its geographic reach with major offices now in
New York, Columbus, Chicago, Houston, Los Angeles, Annapolis and Washington,
D.C., as well as over 25 other U.S. locations.
In September 1997, the Company acquired L.W.G., Inc. (LWG) and Bodaken
Associates (Bodaken) in transactions accounted for as purchases. LWG broadened
the Company's offerings to the insurance market by adding capabilities in claims
management consulting and restoration services. Bodaken enhanced the Company's
jury and trial consulting capabilities, particularly in the western region of
the U.S.
In 1998, the Company made three major acquisitions, all of which were accounted
for as purchases as further described in Note 4 of "Notes to Consolidated
Financial Statements." In June, the Company
15
acquired Klick, Kent & Allen (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.
In September 1998, the Company acquired both S.E.A., Inc. (S.E.A.) and Kahn
Consulting, Inc. (KCI). S.E.A., 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 S.E.A. acquisition has allowed the Company 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 KK&A provided the foundation for the expansion of
expert financial services into markets where the Company already has a presence.
On February 4, 2000, the Company acquired the membership interests of Policano &
Manzo L.L.C. ("P&M") as further described in Note 14 of "Notes to Consolidated
Financial Statements." 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
included $47.5 million in cash and the issuance of 815,000 shares of the
Company's common stock. The acquisition was accounted for using the purchase
method of accounting. (See "Liquidity and Capital Resources" below for a
description of the financing of this transaction.)
Years Ended December 31, 1999, 1998 and 1997
Revenues. Total revenues in 1999 increased 44.4% to $84.6 million from $58.6
million in 1998. Litigation Services revenues increased 9.8% to $29.1 million in
1999 from $26.5 million in 1998 as a result of an improved volume of cases. The
Applied Sciences Division experienced 56.2% growth in 1999 to $35.7 million from
$22.8 million in 1998, nearly all of which came from the acquisition of S.E.A.
in September 1998. The Expert Financial Services division grew by 114.0% to
$19.9 million from $9.3 million, with $8.6 million of that growth coming from
acquisitions in 1998 and $2.0 million from internal growth.
Total revenues in 1998 increased 32.7% over 1997. Excluding acquisitions
completed in 1998, revenues would have increased 6.9%. Litigation Services
revenues decreased 5.2% from 1997 to 1998 as a result of softness in the markets
during the second and third quarter of 1998. The Applied Sciences Division
experienced 90.4% growth in 1998 with more than half of that growth coming from
the acquisition of S.E.A. The Expert Financial Services division grew by 120.2%
with substantially all of that growth coming from acquisitions.
16
Direct Cost of Revenues. Direct cost of revenues consists primarily of billable
employee compensation and related payroll benefits, the cost of contractors
assigned to revenue-generating activities and other related expenses billable to
clients. Direct cost of revenues as a percent of revenues was 52.2% in 1999,
53.6% in 1998 and 53.3% in 1997. The improvement in 1999 resulted from a mix of
price increases and improved productivity.
Selling, General and Administrative Expenses. 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. As a percent of revenues, these expenses were 34.1% in 1999, 34.9% in
1998 and 34.3% in 1997.
Amortization of Goodwill. Annual amortization of goodwill has increased from
$81,000 in 1997 to $2.3 million in 1999 as the Company has completed additional
acquisitions; and is further expected to substantially increase in 2000 as a
result of the acquisition of Policano & Manzo described above and in "Future
Assessment of Recoverability and Impairment of Goodwill" which follows below.
Other Income and Expenses. Interest expense consists primarily of interest
associated with the purchased businesses referred to above. Interest expense is
also expected to increase substantially in 2000 as a result of the acquisition
of Policano & Manzo and the associated refinancing described above.
Income Taxes. In 1999 and 1998, principally as a result of some of the goodwill
amortization not being deductible for income tax purposes, the Company's
effective tax rate increased to 43.7% and 43.2%, respectively, compared to 40.6%
in 1997. See Note 8 of "Notes to Consolidated Financial Statements" for a
reconciliation of the federal statutory rate to the effective tax rates during
each of these years, and a summary of the components of the Company's deferred
tax assets and liabilities.
Future Assessment of Recoverability and Impairment of Goodwill
In connection with its various acquisitions, the Company recorded goodwill,
which is being amortized on a straight-line basis over periods of 15 to 25
years, its estimated periods that the Company will be benefited by such
goodwill. At December 31, 1999, the unamortized goodwill was $43.7 million
(which represented 51.8 % of total assets and 144.3% of stockholders' equity).
Further, in connection with the acquisition of Policano & Manzo described above,
approximately $53.0 million of goodwill was recorded which is being amortized
over its estimated useful life of 20 years. On a pro forma basis at December 31,
1999, the approximately $96.0 million of goodwill will represent nearly 67% of
total assets. 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. The Company has determined the
life for amortizing goodwill based upon several factors, the most significant of
which are the relative size, historical financial viability and growth trends of
the acquired companies and the relative lengths of time such companies have been
in existence.
Management of the Company periodically reviews the Company's carrying value and
recoverability of unamortized goodwill. If the facts and circumstances suggest
that the goodwill may be impaired, the carrying value of such goodwill will be
adjusted which will result in an immediate charge against income during the
period of the adjustment and/or the length of the remaining amortization period
may be shortened, which will result in an increase in the amount of goodwill
amortization during the period of
17
adjustment and each period thereafter until fully amortized. Once adjusted,
there can be no assurance that there will not be further adjustments for
impairment and recoverability in future periods. Of the various factors to be
considered by management of the Company in determining whether goodwill is
impaired, the most significant will be (i) losses from operations, (ii) loss of
customers, and (iii) industry developments, including the Company's inability to
maintain its market share, development of competitive products or services, and
imposition of additional regulatory requirements.
Liquidity and Capital Resources
The Company in 1999 generated $8.4 million of cash flow from operations, an
improvement of $3.0 million as compared to 1998. This increase is attributable
to an increase in 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. The Company expects that cash
flows from operations will increase in 2000, in part as a result of additional
operating cash provided from businesses acquired in late 1998 and the
acquisition of Policano & Manzo described above.
To finance the P&M transaction, the Company 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 margins may decline based on the Company's
leverage ratio: a $7.5 million revolving credit facility (not initially drawn
down) bearing interest at prime plus 1.75% which may also decline based on the
Company's leverage ratio; and a $30.0 million subordinated debt facility with a
group of lenders maturing January 31, 2007, bearing cash interest of 12% and 5%
payable in kind (PIK). The credit facilities are secured by all assets of the
Company. The Company is also required to comply with certain specified financial
covenants related to operating performance and liquidity at the end of each
quarter, and is further required to obtain interest rate protection on a minimum
of 50% of the $61.0 million term loan. The Company believes that it will be in
compliance with all covenants throughout 2000. Proceeds of the facilities,
together with approximately $2.0 million of the Company's existing cash, were
used for the purchase and to refinance the Company's existing debt of
approximately $44.0 million described below. Additionally the Company issued
604,504 shares of its common stock to retire approximately $2.7 million of notes
outstanding to certain members of the senior management team whose businesses
were acquired by the Company in prior transactions.
In connection with the issuance of the subordinated debt, the holders were
issued warrants to purchase approximately 670,000 shares of the Company's common
stock at an exercise price of $4.44 per share. The warrants expire ten years
from the date of closing. In addition, the Company cancelled warrants for
130,835 shares of common stock issued in March 1999 in connection with its
existing subordinated debt of $13.0 million which was repaid as part of this
refinancing.
In 1998 the Company had borrowed $26.0 million under its $27.0 million long-term
credit facility with a bank to provide the $26.4 million of cash needed to
acquire Klick, Kent & Allen, Inc.; Kahn Consulting, Inc.; and S.E.A., Inc. This
credit facility was renegotiated in March 1999, and was repaid on February 4,
2000. The Company in March 1999 issued $13.0 million of subordinated debentures
which were also repaid on February 4, 2000.
18
In connection with the acquisition of certain businesses in 1998 and 1997, the
Company was obligated under certain seller notes totaling $10.8 million at
December 31, 1999. Of the $10.8 million outstanding at December 31, 1999, $8.1
million was repaid during the refinancing on February 4, 2000 and approximately
$2.7 million was exchanged for common stock.
The Company believes that cash generated from operations will allow it to meet
its obligations that mature in 2000 and thereafter under its Credit Facility,
and further provide for the necessary cash resources required in the near term
to fund its expanding operations. The Company will also explore appropriate
opportunities to raise equity capital to repay such obligations in whole or part
prior to maturity.
During 1999 the Company expended $3.1 million for additions to property and
equipment. This amount included expenditures for internal information systems
that allow the Company to better manage its expanding operations. At December
31, 1999, the Company had no material commitments for the acquisition of
property and equipment.
Year 2000 Compliance
During 1999, the Company implemented a four-stage process to assure Year 2000
compliance of all hardware, software, and ancillary equipment that are date
dependent. The Company completed all four phases and believes that the Year 2000
issue did not and will not cause us any significant operational problems. In
addition, we contacted our important suppliers and customers and received
positive statements of compliance from all significant third parties. To date,
the Company is not aware of any Year 2000 non-compliance by its customers or
suppliers that would have a material impact on the Company's business. The
Company is not aware of any other material Year 2000 non-compliance that would
require repair or replacement or that could have a material effect on its
financial position. We cannot assure you, however, that we will not face
unanticipated Year 2000 non-compliance problems. If we do, we may have to spend
material amounts and could face material disruptions to our business. The
Company has developed a strategy to address these potential consequences and
contingency plans to deal with any disruptions.
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 of
Form 10-K 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
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 Form 10-K 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
loss
19
of key officers of the Company, without 90 day replacement, which would
constitute an event of default under the Company's Senior and Subordinated
Credit Facilities; (3) the availability and terms of additional capital or debt
financing to fund future acquisitions and for working capital purposes; (4)
significant competition for business opportunities and acquisition candidates;
(5) fluctuations of revenue and operating income between quarters or termination
of client engagements; (6) the integration of P&M and of future acquisitions;
and (7) risks associated with quantitative and qualitative market risks such as
fluctuations in interest rates.
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
At December 31, 1999, $33.0 million of the Company's long-term debt bears
interest at variable rates. Accordingly, 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 $660,000 and net
income would decrease by approximately $372,000.
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.
On February 4, 2000, the Company acquired the membership interests of Policano &
Manzo, L.L.C. To finance this transaction, the Company entered into a senior
credit facility of $61.0 million amortizing term loan maturing through January
31, 2006 at variable interest rates, and a $30.0 million subordinated debt
facility bearing interest at fixed rates. See Note 14 to the Consolidated
Financial Statements - Subsequent Events for a more complete description of the
refinance transaction.
Beginning February 4, 2000, $61.0 million of the Company's long-term debt bears
interest at variable rates. Accordingly, the Company's earnings and after tax
cash flow are affected by changes in interest rates. Assuming the current level
of borrowings (at February 4, 2000) and assuming a hypothetical un-hedged 200
basis point increase in interest rates under the Company's long-term senior
credit facility for one year, the Company's interest expense would increase by
approximately $1.2 million and net income would decrease by approximately
$660,000.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FTI Consulting, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
Contents
Report of Independent Auditors.................... 23
Consolidated Financial Statements
Consolidated Balance Sheets....................... 24
Consolidated Statements of Income................. 26
Consolidated Statements of Stockholders' Equity... 27
Consolidated Statements of Cash Flows............. 28
Notes to Consolidated Financial Statements........ 29
22
Report of Independent Auditors
The 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, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, 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 11, 2000
23
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, Pro Forma
1999 1998 December 31, 1999
----------------------------------------------------
(dollars in thousands) (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 5,046 $ 3,223 $ 1,881
Accounts receivable, less allowance of $1,065
in 1999 and $1,305 in 1998 ($1,073 pro forma) 14,458 13,139 19,278
Unbilled receivables, less allowance of $1,160
in 1999 and $1,117 in 1998 ($1,160 pro forma) 9,222 7,803 9,592
Income taxes recoverable 64 794 64
Deferred income taxes 641 - 641
Prepaid expenses and other current assets 1,461 1,262 1,486
-------- -------- --------
Total current assets 30,892 26,221 32,942
Property and equipment:
Buildings - 411 -
Furniture, equipment and software 17,205 14,752 17,508
Leasehold improvements 1,955 1,891 1,955
-------- -------- --------
19,160 17,054 19,463
Accumulated depreciation and amortization (10,781) (8,767) (10,930)
-------- -------- --------
8,379 8,287 8,533
Goodwill, net of accumulated amortization of
$3,473 in 1999 and $1,160 in 1998 ($3,473 pro 43,658 45,164 95,731
forma)
Other assets 1,363 75 4,721
-------- -------- --------
Total assets $ 84,292 $ 79,747 $141,927
======== ======== ========
See accompanying notes.
24
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
(continued)
December 31, Pro Forma
1999 1998 December 31, 1999
-------------------------------------------------
(dollars in thousands) (unaudited)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 3,240 $ 2,924 $ 4,139
Accrued compensation expense 5,373 2,765 5,373
Deferred income taxes 471 - 471
Current portion of long-term debt 1,718 10,650 4,250
Advances from clients 435 498 2,572
Other current liabilities 422 313 422
------- ------- --------
Total current liabilities 11,659 17,150 17,227
Long-term debt, less current portion 41,009 35,630 83,036
Other long-term liabilities 411 269 411
Deferred income taxes 961 1,104 961
Commitments and contingent liabilities - - -
Stockholders' equity:
Preferred stock, $.01 par value; 4,000,000
shares authorized in 1999 and 1998, none - - -
outstanding
Common stock, $.01 par value; 16,000,000 shares
authorized; 4,913,905 and 4,781,895 shares
issued and outstanding in 1999 and 1998, 49 48 63
respectively (6,333,409 pro forma)
Additional paid-in capital 18,197 16,531 30,081
Retained earnings 12,006 9,015 10,148
------- ------- --------
Total stockholders' equity 30,252 25,594 40,292
------- ------- --------
Total liabilities and stockholders' equity $84,292 $79,747 $141,927
======= ======= ========
See accompanying notes.
25
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31,
1999 1998 1997
------------------------------------------------------
(dollars in thousands, except per share data)
Revenues $84,607 $58,615 $44,175
Direct cost of revenues 44,149 31,402 23,564
Selling, general and administrative expenses 28,829 20,532 15,160
Amortization of goodwill 2,313 996 81
------- ------- -------
Total costs and expenses 75,291 52,930 38,805
------- ------- -------
Income from operations 9,316 5,685 5,370
------- ------- -------
Other income (expenses):
Interest and other income 136 319 343
Interest expense (4,150) (1,482) (170)
------- ------- -------
(4,014) (1,163) 173
------- ------- -------
Income from operations before income taxes 5,302 4,522 5,543
Income taxes 2,311 1,954 2,250
------- ------- -------
Net income $ 2,991 $ 2,568 $ 3,293
======= ======= =======
Earnings per common share, basic $ 0.61 $ 0.54 $ 0.73
======= ======= =======
Earnings per common share, diluted $ 0.59 $ 0.51 $ 0.70
======= ======= =======
See accompanying notes.
26
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(dollars in thousands)
Additional
Common Paid-in Retained
Stock Capital Earnings Total
----------------------------------------------
Balance at January 1, 1997 $45 $14,429 $ 3,154 $17,628
Exercise of options to purchase
34,000 shares of common stock 1 97 - 98
Net income for 1997 - - 3,293 3,293
--- ------- ------- -------
Balance at December 31, 1997 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
=== ======= ======= =======
See accompanying notes.
27
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1999 1998 1997
---------------------------------------
(dollars in thousands)
Operating activities
Net income $ 2,991 $ 2,568 $ 3,293
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 2,383 1,789 1,434
Amortization of intangibles 2,313 1,192 307
Amortization of debt discount charged to interest 238 - -
Provision for doubtful accounts (197) 473 526
Deferred income taxes (313) (626) (227)
Loss on disposal of assets 26 - -
Other - 208 -
Changes in operating assets and liabilities:
Accounts receivable (1,079) 1,207 (3,284)
Unbilled receivables (1,462) 51 (788)
Income taxes recoverable/payable 730 (694) 408
Prepaid expenses and other current assets (199) (270) 170
Accounts payable and accrued expenses 316 (83) 826
Accrued compensation expense 2,608 (205) 1,017
Advances from clients (63) (21) (67)
Other current liabilities 109 (296) 33
-----------------------------------------
Net cash provided by operating activities 8,401 5,293 3,648
Investing activities
Purchase of property and equipment (3,093) (3,327) (2,800)
Proceeds from sale of property and equipment 592 130 -
Contingent payments to former shareholders of LWG (398) (440) -
Contingent payments to former shareholders of KK&A (409) - -
Acquisition of KK&A, including acquisition costs - (6,242) -
Acquisition of KCI, including acquisition costs - (10,237) -
Acquisition of SEA, including acquisition costs - (9,961) -
Acquisition of Bodaken, including acquisition costs - - (1,875)
Acquisition of LWG, including acquisition costs - - (1,956)
Change in other assets (1,288) - 480
-----------------------------------------
Net cash used in investing activities (4,596) (30,077) (6,151)
Financing activities
Issuance of common stock and exercise of stock options 376 1,610 98
Borrowings under long-term debt arrangements 33,000 26,000 -
Repayments of long-term debt (35,500) (1,959) (842)
Changes in other long-term liabilities 142 (100) (191)
-----------------------------------------
Net cash provided by (used in) financing activities (1,982) 25,551 (935)
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 1,823 767 (3,438)
Cash and cash equivalents at beginning of year 3,223 2,456 5,894
-----------------------------------------
Cash and cash equivalents at end of year $ 5,046 $ 3,223 $ 2,456
=========================================
See accompanying notes.
28
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
(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. (the "Company" or "FTI") is a multi-disciplined consulting
firm with leading practices in the areas of financial restructuring, litigation
support and engineering/scientific investigation. The Company provides services
to major corporations, law firms, banks, and insurance companies in the United
States. 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. The Company has nearly 500 employees in over 30
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.
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. The Company has not experienced
significant variations in the estimate of the allowance for doubtful accounts,
due primarily to credit policies, collection experience, and a lack of
concentrations of accounts receivable. Accounts receivable balances are not
collateralized.
29
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Significant Accounting Policies
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 five to seven years, and leasehold improvements are amortized over
the lesser of the estimated useful life of the asset or the lease term.
On January 1, 1999, the Company adopted AICPA Statement of Position 98-1 ("SOP
98-1"), Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 requires the capitalization of direct costs incurred in
connection with developing or obtaining software for internal-use, including
external direct costs of materials and services and payroll and payroll related
costs for employees who are directly associated with and devote time to an
internal use software development project. During 1999, the Company capitalized
$1.3 million of costs related to the development and implementation of internal-
use software.
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 15 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.
30
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Significant Accounting Policies (continued)
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.
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.
31
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:
Year ended December 31,
1999 1998 1997
-----------------------------------------
Numerator used in basic and diluted
earnings per common share
Net income $2,991 $2,568 $3,293
------ ------ ------
Denominator
Denominator for basic earnings per
common share - weighted average shares 4,872 4,725 4,529
------ ------ ------
Effect of dilutive securities:
Warrants 115 - -
Employee stock options 41 352 169
------ ------ ------
156 352 169
------ ------ ------
Denominator for diluted earnings per common
share - weighted average shares and
assumed conversions 5,028 5,077 4,698
====== ====== ======
Earnings per common share, basic $ 0.61 $ 0.54 $ 0.73
====== ====== ======
Earnings per common share, diluted $ 0.59 $ 0.51 $ 0.70
====== ====== ======
3. Supplemental Disclosure of Cash Flow Information
In 1998, the Company purchased three entities for total consideration of $45.6
million. In connection with these acquisitions, assets with a fair market value
of $50.4 million were acquired and liabilities of approximately $4.8 million
were assumed. In 1997, the Company purchased two entities for total
consideration of $5.3 million. In connection with these acquisitions, assets
with a fair market value of $7.3 million were acquired and liabilities of
approximately $2.0 million were assumed.
The Company paid interest of $4.1 million, $1.0 million and $117,000 and income
taxes of $2.0 million, $2.9 million and $1.5 million during fiscal years 1999,
1998 and 1997, respectively.
32
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Acquisitions
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 statement of
income for the period from September 17, 1998 through December 31, 1998 and all
of 1999.
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 for the period from September 1, 1998 through
December 31, 1998 and all of 1999.
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 purchase price of approximately $10.0 million included an initial
payment of $6.0 million in cash, $4.0 million evidenced by notes payable bearing
interest at 7.5%, plus additional consideration, which for the period from
January 1, 2000 through December 31, 2001, will be equal to 50% of the excess
over $1.0 million of annual pre-tax earnings of KK&A. 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 statement of income for the period
from June 1, 1998 through December 31, 1998 and all of 1999. During 1999,
contingent consideration of $409,000 was recorded as goodwill.
33
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Acquisitions (continued)
Pro Forma Information for 1998 Acquisitions
The following table summarizes the unaudited pro forma consolidated results of
operations for 1998 assuming the KK&A, KCI and SEA acquisitions had occurred on
January 1, 1998, after giving effect to certain adjustments, including
amortization of intangible assets, increased interest expense on the acquisition
debt, decrease in owner compensation, and related income tax effects. In
connection with the acquisitions, the Company entered into employment agreements
with certain stockholders and executive officers of these companies. The future
amount of compensation paid to these officers, who have substantially the same
duties and responsibilities, is less than the amounts paid in periods prior to
the acquisitions.
Year Ended
December 31, 1998
-----------------
Revenues $78,823
Net income 2,900
Net income per common share -
diluted $ 0.57
The 1998 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 1998 or of future operations of the Company.
L.W.G., Inc.
Effective September 1, 1997, the Company acquired all of the outstanding common
stock of L.W.G., Inc. and its subsidiary (collectively, "LWG"). LWG is based in
Northbrook, Illinois and provides claims management consulting and restoration
services to the insurance industry. The acquisition was accounted for using the
purchase method of accounting. The purchase price consisted of an initial cash
payment of $1.8 million, plus additional consideration equal to 50% of the pre-
tax profits of LWG for each quarterly period from October 1, 1997 through
September 30, 2001. Upon the resolution of the amount of any contingent
payments, the Company records any additional consideration payable as additional
goodwill, and amortizes that amount over the remaining amortization period. At
September 1, 1997, goodwill of approximately $1.5 million was recorded and is
being amortized over a period of 25 years. During 1999 and 1998, additional
contingent consideration of $398,000 and $440,000, respectively, was paid and
recorded as goodwill. The results of operations of LWG are included in the
accompanying consolidated statement of income from September 1, 1997 through
December 31, 1997 and for all of 1998 and 1999.
34
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Acquisitions (continued)
Bodaken & Associates
Effective September 1, 1997, the Company acquired substantially all of the
assets of Bodaken & Associates, a trial research and consulting firm serving law
firms and corporations. The acquisition was accounted for using the purchase
method of accounting. The purchase price of $3.5 million included an initial
cash payment of $1.7 million with the remainder of $1.8 million evidenced by a
note payable bearing interest at 7%. Approximately $3.5 million in goodwill was
recorded and is being amortized over 20 years.
5. Long-Term Debt
Debt consists of the following:
December 31
1999 1998
-------------------------
Amounts due under a $27.0 million long-term credit facility (net of
discount of $36,000 in 1999), bearing interest at LIBOR plus
variable percentages (8.96% at December 31, 1999). This facility $19,964 $ 26,000
is secured by substantially all assets of the Company.
Subordinated debentures (net of discount of $848,000 in 1999)
bearing interest at 9.25% per annum through June 2000, and 12% per
annum thereafter until maturity in March 2004. The debentures are
secured by a second priority interest in all of the assets of the 12,152 -
Company.
Notes payable to former shareholders of acquired businesses (net of
discount of $169,000 in 1999), maturing periodically through 2002,
and bearing interest at rates ranging from 6% to 9.25%. 10,611 20,280
------- --------
Total debt 42,727 46,280
Less current portion (1,718) (10,650)
------- --------
Total long-term debt $41,009 $ 35,630
======= ========
35
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
Aggregate maturities of debt at December 31, 1999 are as follows:
2000 $ 1,718
2001 20,399
2002 8,458
2003 -
2004 12,152
-------
Total $42,727
=======
The terms of the subordinated debentures prohibit the payment of dividends
without the consent of the lender.
The fair values of long-term debt are estimated to approximate their carrying
values.
See Note 14 - Subsequent Events for a description of additional debt incurred on
February 4, 2000 in connection with an acquisition and refinancing of the debt
outstanding at December 31, 1999.
6. Warrants
In connection with the issuance of long-term debt in 1999 and prior financing
transactions, the Company issued warrants that allow for the purchase of 572,539
shares of common stock with the following terms:
Year Issued Number of Shares Exercise Price Per Share Expiration Date
- -------------------------------------------------------------------------------------------------------
1996 20,000 $8.50 May 2001
1999 20,000 $3.68 February 2009
1999 25,000 $3.00 March 2006
1999 392,506 $3.21 March 2010
1999 115,033 $3.21 March 2004
-------
572,539
=======
The warrants issued in 1999 were estimated to have an aggregate value of $1.3
million, an estimate determined using the Black-Scholes Option Pricing Model, a
generally accepted warrant valuation methodology. The following valuation
assumptions were used in the calculation of the value of the warrants: risk free
interest rate of 5.5%, dividend yield of 0%, volatility factor of 0.930, and a
weighted average life of the warrants of from 4 to 8.8 years. The range of
values assigned to the warrants was $1.91 to $2.47 per share. The estimated
value of the warrants was recorded as additional paid-in capital, and the
related debt was recorded net of the resulting discount. See Note 14 -
Subsequent Events for a description of the cancellation of 130,835 of these
warrants.
36
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 3,000,000 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, 1999:
1999 1998 1997
Weighted Avg. Weighted Avg. Weighted Avg.
1999 Exercise Price 1998 Exercise Price 1997 Exercise Price
-----------------------------------------------------------------------------------------
Options outstanding at January 1 1,820,829 $7.86 1,495,229 $7.96 576,179 $5.88
Options granted 397,500 4.25 565,000 7.73 995,850 9.02
Options exercised - - (217,900) 6.83 (34,000) 2.85
Options forfeited (200,300) 8.25 (21,500) 8.92 (42,800) 8.48
--------- ----- --------- ----- --------- -----
Options outstanding at December 31 2,018,029 $7.11 1,820,829 $7.86 1,495,229 $7.96
========= ===== ========= ===== ========= =====
Options exercisable at December 31 1,197,591 $7.87 674,580 $7.69 448,325 $6.47
========= ===== ========= ===== ========= =====
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, 1999 ranged from $2.38 to $19.59 as
follows:
Weighted Average
Weighted Average Remaining Contractual Weighted Average
Range of Exercise Options Exercise Prices of Life of Options Options Exercise Prices of
Prices Outstanding Options Outstanding Outstanding Exercisable Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
$2.38 - $7.98 1,094,447 $ 4.99 8.01 years 488,750 $ 5.43
$8.50 - $9.90 843,582 $ 8.97 7.64 years 657,174 $ 8.97
$12.38 - $19.59 80,000 $16.63 8.28 years 51,667 $16.89
Pro Forma Disclosures Required by Statement 123
For the years ended December 31, 1999, 1998 and 1997, 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:
37
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Option Plans (continued)
Year ended December 31,
1999 1998 1997
-----------------------------------------------------
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 .518-1.394 .628-1.606 .420-.901
Weighted average fair value of granted
options $3.22 $4.58 $2.98
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.
The following table summarizes pro forma income and earnings per share:
Year ended December 31,
1999 1998 1997
----------------------------------------
Net income, as reported $2,991 $2,568 $3,293
Pro forma net income $1,233 $1,022 $2,355
Earnings per share, basic, as reported $ 0.61 $ 0.54 $ 0.73
Pro forma earnings per common share, basic $ 0.25 $ 0.22 $ 0.52
Earnings per common share, diluted, as reported $ 0.59 $ 0.51 $ 0.70
Pro forma earnings per common share, diluted $ 0.24 $ 0.20 $ 0.50
8. Income Taxes
Significant components of the Company's deferred tax assets and liabilities at
December 31 are as follows:
38
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
1999 1998
-------- --------
Deferred tax assets:
Allowance for doubtful accounts $ 428 $ 404
Accrued vacation 213 82
------ -------
Total deferred tax assets 641 486
Deferred tax liabilities:
Use of cash basis for income tax purposes by subsidiary 699 1,268
Goodwill 344 133
Capitalized software 175 134
Prepaid expenses 36 50
Other 178 5
------ -------
Total deferred tax liabilities 1,432 1,590
------ -------
Net deferred tax liability $ (791) $(1,104)
====== =======
Income tax expense (benefit) consisted of the following:
Year ended December 31
1999 1998 1997
--------------------------------------------
Current:
Federal $1,937 $2,038 $1,983
State 687 542 494
------ ------ ------
2,624 2,580 2,477
Deferred (benefit):
Federal (190) (525) (253)
State (123) (101) 26
------ ------ ------
(313) (626) (227)
------ ------ ------
$2,311 $1,954 $2,250
====== ====== ======
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,
---------------------------------------------------
1999 1998 1997
---------------------------------------------------
Expected federal income tax provision at 34% $1,803 $1,537 $1,885
Expenses not deductible for tax purposes 302 181 70
State income taxes, net of federal benefit 286 239 293
Other (80) (3) 2
------ ------ ------
$2,311 $1,954 $2,250
====== ====== ======
9. Operating Leases
The Company leases office space under noncancelable operating leases that expire
in various years through 2008. The leases for certain office space contain
provisions whereby the future rental payments may be
39
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Operating Leases (continued)
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, 1999:
2000 $ 2,743
2001 2,354
2002 2,110
2003 1,581
2004 638
Thereafter 1,643
-------
Total minimum lease payments $11,069
=======
Rental expense consists of the following:
Year ended December 31,
1999 1998 1997
-----------------------------------
Furniture and equipment $ 392 $ 326 $ 211
Office and storage 2,859 1,975 1,131
------ ------ ------
$3,251 $2,301 $1,342
====== ====== ======
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 $344,000, $233,000 and $153,000 during 1999, 1998 and 1997,
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,
and 132,010 shares have been issued as of December 31, 1999.
40
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Segment Reporting
The Company provides litigation and claims management consulting services
through three distinct operating segments. The Expert Financial Services
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
Services division provides advice and services in connection with all phases of
the litigation process. The Applied Services 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 allocated 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
information on the Company's reportable segments:
Year ended December 31, 1999
-----------------------------------------------------------------
Expert
Financial Applied Litigation
Services Sciences Services 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
-----------------------------------------------------------------
Expert
Financial Applied Litigation
Services Sciences Services 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
====== ======= ======= =======
41
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Segment Reporting (continued)
Year ended December 31, 1997
---------------------------------------------------------------------------
Expert
Financial Applied Litigation
Services Sciences Services Total
- ---------------------------------------------------------------------------------------------------
Revenues $4,207 $12,000 $27,968 $44,175
Operating expenses 3,445 9,238 17,671 30,354
------ ------- ------- -------
Segment profit $ 762 $ 2,762 $10,297 $13,821
====== ======= ======= =======
A reconciliation of segment profit for all segments to income before income
taxes is as follows:
Year Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------------------------
Operating Profit:
Total segment profit $19,263 $14,017 $13,821
Corporate general and
administrative expenses (5,251) (5,351) (6,710)
Depreciation and amortization (4,696) (2,981) (1,741)
Interest (expense) income (4,014) (1,163) 173
------- ------- -------
Income before income taxes $ 5,302 $ 4,522 $ 5,543
======= ======= =======
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 which represents ten percent or more of its
consolidated revenues.
42
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Quarterly Financial Data (unaudited)
Quarter ended
-----------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 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
======= ======= ======= =======
13. 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.
43
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Subsequent Events
On February 4, 2000, the Company acquired the membership interests of Policano &
Manzo, L.L.C. ("P&M"). In connection with this acquisition, the Company entered
into certain financing transactions to provide the cash necessary to complete
the transaction and to refinance its existing long-term debt. These
transactions and the pro forma effects of the transactions on the 1999 financial
statements are described below.
Description of Business and Acquisition Cost
P&M is based in Saddle Brook, New Jersey and 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
$53.0 million, consisting of $47.5 million in cash and 815,000 shares of common
stock valued at $5.5 million. The Company also incurred acquisition-related
expenses of $728,000. The acquisition was accounted for using the purchase
method of accounting, and at the acquisition date, approximately $52.1 million
of goodwill was recorded that is being amortized over its estimated useful life
of 20 years.
Financing of the Transaction and Debt Refinancing
In connection with the acquisition, the Company entered into a $68.5 million
senior credit facility to provide the cash needed to consummate the acquisition,
partially refinance existing long-term debt arrangements, and to provide working
capital for expansion. The senior credit facility consists of (i) a $61.0
million amortizing term loan maturing through January 31, 2006 that initially
bears interest at LIBOR plus specified margins ranging from 3.25% to 3.75%, and
(ii) a $7.5 million revolving credit facility (under which no amounts were drawn
at closing) initially bearing interest at prime plus 1.75%. The
interest rates on these borrowings will decline if the Company's leverage ratios
improve.
The Company also issued $30.0 million of subordinated notes to lenders that
mature on January 31, 2007, and bear interest at 17% per annum, payable semi-
annually. The interest rate of 17% per annum consists of a cash component equal
to 12% per annum of principal and a component payable in additional notes equal
to 5% per annum of principal. These lenders also received warrants to purchase
670,404 shares of the Company's common stock at an exercise price of $4.44 per
share that expire on January 31, 2010.
The proceeds from these borrowings of $91.0 million, in tandem with $2.0 million
of cash, were used to finance the $47.5 million cash purchase price of P&M,
refinance $41.2 million of the $44.0 million of existing long-term debt, and
fund acquisition and finance related expenses of $4.3 million. The remaining
$2.7 million of long-term debt was exchanged for 604,504 shares of common stock.
44
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Subsequent Events (continued)
In connection with the early extinguishment of the $44.0 million of debt,
warrants to purchase 130,835 shares of common stock for $3.21 per share were
cancelled. In addition, an extraordinary loss of $862,000 net of income taxes
was incurred related to unamortized debt discount and deferred financing costs
attributable to the retired debt.
At February 4, 2000, the aggregate maturities of long-term debt are as follows:
2000 $ 3,188
2001 5,750
2002 7,750
2003 11,250
2004 14,500
2005 and thereafter 48,562
-------
$91,000
=======
Unaudited Consolidated Pro Forma Financial Information
The unaudited consolidated pro forma balance sheet accompanying the historical
balance sheets and presented in more detail below gives effect to the
acquisition of P&M and the changes in capitalization that occurred in connection
with the acquisition and the related refinancing. The unaudited consolidated
pro forma balance sheet at December 31, 1999 has been prepared assuming that
these transactions occurred on December 31, 1999, and should be read in
conjunction with the historical financial statements and related notes.
45
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Subsequent Events (continued)
Unaudited Pro Forma Consolidated Balance Sheet
As of December 31, 1999
Pro Forma
Balance Sheet Historical Adjustments Pro Forma
FTI P&M Total Dr. Cr. Consolidated
-----------------------------------------------------------------------------------------
Assets:
Current assets:
Cash and equivalents $ 5,046 $1,101 $ 6,147 $ 91,000 (2) $ 49,329 (1) $ 1,881
128 (5)
3,944 (3)
41,097 (4)
768 (1)
Accounts receivable, net of allowance
for doubtful accounts 14,458 4,820 19,278 19,278
Unbilled receivables, net of allowance
for doubtful accounts 9,222 370 9,592 9,592
Prepaid expenses and other current assets 2,166 25 2,191 2,191
------------------------------------------------- -------- --------
Total current assets 30,892 6,316 37,208 91,000 95,266 32,942
Property and equipment, net 8,379 154 8,533 8,533
Goodwill, net of accumulated amortization 43,658 43,658 52,073 (1) 95,731
Other assets 1,363 219 1,582 3,944 (3) 805 (7) 4,721
------------------------------------------------- -------- --------
Total assets $84,292 $6,689 $90,981 $147,017 $ 96,071 $141,927
================================================= ======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 8,613 $1,027 $ 9,640 $ 128 (5) $ 9,512
Income taxes payable 471 471 471
Current portion of long-term debt 1,718 1,718 1,718 (4) 4,250 (2) 4,250
Advances from clients and other 857 2,137 2,994 2,994
------------------------------------------------- -------- --------
Total current liabilities 11,659 3,164 14,823 1,846 4,250 17,227
Long-term debt, less current portion and 39,379 (4) 91,000 (2)
net of discounts 41,009 41,009 2,683 (6) 1,053 (7) 83,036
4,250 (2)
3,714 (2)
Deferred income taxes and other liabilities 1,372 1,372 1,372
Stockholders' equity:
Preferred stock
Common stock 49 49 8 (1) 63
6 (6)
Additional paid-in capital 18,197 18,197 5,493 (1) 30,081
3,714 (2)
2,677 (6)
Members' equity 3,525 3,525 3,525 (1) -
Retained earnings 12,006 12,006 1,858 (7) 10,148
------------------------------------------------- -------- --------
Total stockholders' equity 30,252 3,525 33,777 5,383 11,898 40,292
------------------------------------------------- -------- --------
Total liabilities and stockholders' equity $84,292 $6,689 $90,981 $ 57,255 $108,201 $141,927
================================================= ======== ========
Notes:
(1) Adjustment to reflect the acquisition of P&M for cash of $47.5 million, the
issuance of 815,000 shares of common stock, valued at $5.5 million, costs of
$0.7 million, and a working capital adjustment in accordance with the
Purchase Agreement.
(2) Adjustment to reflect the issuance of $91 million of Senior and Subordinated
debt and 670,404 warrants valued at $5.54 each.
(3) Adjustment to reflect costs and expenses related to the financing.
(4) Adjustment to reflect the payment in full of prior senior, subordinated and
seller debt outstanding, including accrued interest.
(5) Adjustments reflect payment of accrued interest on Seller Notes.
(6) Adjustment to reflect the issuance of 604,504 shares of common stock in
exchange for $2.7 million of seller notes outstanding.
(7) Adjustment to eliminate prior debt discount, net of taxes, as an
extraordinary item in connection with the early extinguishment of such debt.
46
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Subsequent Events (continued)
The following unaudited summarized consolidated pro forma statement of income
for the year ended December 31, 1999 is also presented to give effect to the
subsequent events described above, and has been prepared assuming that they
occurred on January 1, 1999. The summarized pro forma results for 1999 may not
be indicative of the results of operations had the transactions actually
occurred on that date, and should be read in conjunction with the historical
financial statements and related notes.
Unaudited Pro Forma Income Statement
As of December 31, 1999
Historical
FTI P&M Total Adjustments Pro Forma
--------------------------------------------------------------------------------------------------
Revenues $84,607 $21,512 $106,119 $ - $106,119
Expenses 75,291 7,622 82,913 700 (1) 86,217
- 2,604 (2)
--------------------------------------------------------------------------------------------------
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 avg. shares o/s 5,028 - 5,028 1,420 (6) 6,448
--------------------------------------------------------------------------------------------------
Earnings per share diluted $0.59 $0.70
==================================================================================================
EBITDA $14,012 $13,897 $ 27,909 $ (700) $ 27,209
==================================================================================================
Notes:
(1) In connection with the acquisition, the Company entered into four year
employment contracts with two principals of P&M. The pro forma adjustment
assumes that the principals had received compensation for 1999 as provided
in such employment contracts. Because P&M was organized as an L.L.C., its
owners, who will have substantially the same duties and responsibilities,
were taxed on the profits of the firm and received only a small amount of
actual compensation in 1999.
(2) Adjustment to reflect the additional amortization of acquired goodwill which
will be amortized over a 20 year period.
(3) Adjustment to reflect the interest expense in connection with the financing,
including the amortization of related costs and expenses over the life of
the debt on a debt outstanding basis.
(4) Amortization of refinancing fees and warrants over the life of the debt
facilities.
(5) Adjustment to reflect income tax expense at 42% effective rate.
(6) Issuance of 815,000 shares in connection with the acquisition and 604,504 in
exchange for seller notes.
47
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 2000 Annual Meeting of Stockholders to be filed within 120 days after
the end of the Company's fiscal year ended December 31, 1999 (the "Proxy
Statement") pursuant to Regulation 14A with the Securities and Exchange
Commission.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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.
48
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, 1999 and December 31,
1998
Consolidated Statements of Income for the fiscal years ended December
31, 1999, December 31, 1998 and December 31, 1997
Consolidated Statements of Stockholders' Equity for the fiscal years
ended December 31, 1999, December 31, 1998 and December 31, 1997
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1999, December 31, 1998 and December 31, 1997
Notes to Consolidated Financial Statements
49
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 Deductions Balance at End
Beginning of Costs and to Other of Period
Period Expenses Accounts
- ----------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997:
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Reserves and allowances deducted from asset accounts:
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts 376 439 110 (2) 23 (1) 902
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
(1) Uncollectible accounts written off, net of recoveries.
- -------------------------------------------------------------------------------
(2) Allowance recorded during acquisitions.
- -------------------------------------------------------------------------------
50
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
**3.4 Amendment No. 1 to By-laws
***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)
++++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)
51
++++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)
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
27.0 Financial Data Schedule
* 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 From 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.
+++ 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.
52
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 29th
day of March, 2000.
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 29, 2000
- ------------------------- Executive Officer (principal
Jack B. Dunn, IV executive officer)
/s/ Stewart J. Kahn President and Chief Operating March 29, 2000
- ------------------------- Officer and Director
Stewart J. Kahn
/s/ Theodore I. Pincus Executive Vice President and Chief March 29, 2000
- ------------------------- Financial Officer (principal financial
Theodore I. Pincus accounting officer)
/s/ Scott S. Binder Director March 29, 2000
- -------------------------
Scott S. Binder
/s/ James A. Flick, Jr. Director March 29, 2000
- -------------------------
James A. Flick, Jr.
/s/ Peter F. O'Malley Director March 29, 2000
- -------------------------
Peter F. O'Malley
/s/ Dennis J. Shaughnessy Director March 29, 2000
- -------------------------
Dennis J. Shaughnessy
/s/ George P. Stamas Director March 29, 2000
- -------------------------
George P. Stamas
53