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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, 1998
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.
(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 24, 1999
was 4,829,132.
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 24, 1999 was $12,767,238.*
* Excludes 1,011,178 shares deemed to be held by directors, officers and
greater than 10% holders of the Common Stock outstanding at March 24, 1999.
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
Certain portions of the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission on April 30, 1999 are incorporated
by reference into Part III of this Annual Report on Form 10-K. Certain exhibits
to the Company's (1) Registration Statement on Form SB-1 (File No. 333-2002),
(2) Registration Statement on Form S-8 (File No. 333-30173), (3) Registration
Statement on Form S-8 (File No. 333-30357), (4) Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998 (File No. 001-14875), (5) Current
Reports on Form 8-K filed July 15, 1998, October 2, 1998, October 13, 1998 and
December 8, 1998 (File No. 001-14875) and (6) Form 8-A filed on March 3, 1999
(File No. 001-14875), are incorporated by reference into Part IV of this Annual
Report on Form 10-K.
i
2
FTI CONSULTING, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE REFERENCE TO
FORM 10-K
Part I
- ------
Item 1. Business...............................................4
Item 2. Properties............................................11
Item 3. Legal Proceedings.....................................11
Item 4. Submission of Matters to a Vote of Security Holders...12
Part II
- -------
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..........................................20
Item 8. Financial Statements and Supplementary Data...........21
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure..................46
Part III
- --------
Item 10. Directors and Executive Officers of the Company.......46
Item 11. Executive Compensation................................46
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................46
Item 13. Certain Relationships and Related Transactions........46
Part IV
- -------
Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K..................................47
ii
ITEM 1. BUSINESS
COMPANY OVERVIEW
FTI Consulting, Inc. ("FTI" or the "Company") provides consulting services
to major corporations, law firms, banks and insurance companies in the United
States. FTI has three business divisions: Litigation Services, Applied Sciences
and Expert Financial Services. Through its Litigation Services division, FTI
provides advice and services in connection with all phases of the litigation
process, including discovery, jury selection, trial monitoring and visual
communications services. FTI offers its clients, through the Applied Sciences
division, engineering and scientific consulting services, accident
reconstruction, fire investigation, equipment procurement and expert testimony
regarding intellectual property rights. FTI provides a range of financial
consulting services, such as forensic accounting, fraud investigation, claims
management and expert testimony in connection with quantifying damages, and
bankruptcy and turnaround analysis, through its Expert Financial Services
division. The Company's strategy is to be a one-stop shop for corporations, law
firms, banks and insurance companies that wish to maximize the efficiency and
effectiveness of their litigation support and claims management requirements.
FTI focuses on developing and providing innovative applications from the
fields of science, education, communications and technology to meet its clients
needs in the best fashion. For example, the Company has adapted methods
traditionally used in marketing and political polling to analyze how juries
reach decisions, and has applied computer animation and simulation to enhance
presentations and expert testimony on complex subjects such as airplane crashes,
financial disputes, intellectual property resolutions and physical phenomena.
The Company's staff of statistic, accounting, engineering, scientific,
communication, artistic, computer management and jury professionals are
recognized experts in their fields.
In 1998, FTI completed three major acquisitions which brought the Company
new consulting capabilities, expanded its existing capabilities and furthered
its geographic reach. These were:
o Klick, Kent & Allen, Inc. -- Klick, Kent & Allen, Inc. ("KK&A"),
located in Alexandria, Virginia and serving the Washington, D.C.
metropolitan area, provides strategic and economic consulting. FTI
completed the acquisition of KK&A on June 1, 1998.
o Kahn Consulting, Inc. -- Kahn Consulting, Inc. ("KCI"), located in
New York, New York, provides specialized consulting services in
three primary areas: (1) bankruptcy, trustee and examiner accounting
and financial services; (2) turnaround and strategic advisory
services; and (3) expert accounting testimony and government
contract consulting. The Company completed its acquisition of KCI on
September 17, 1998.
o S.E.A., Inc. -- S.E.A., Inc. ("S.E.A."), located in Columbus, Ohio,
provides specialized consulting services in fire investigation,
product failure analysis, vehicular accident reconstruction, vehicle
dynamics, qualitative and quantitative chemical analysis and
structural distress and failure evaluation. FTI completed the
acquisition of S.E.A. on September 1, 1998.
4
MARKET OVERVIEW
The Litigation Market
According to U.S. Bureau of Census statistics, the market for legal
services in the United States exceeds $100 billion. These costs, in addition to
the risks of incurring large monetary judgments in litigation, have led many
corporations to focus on the management of the litigation process. Rather than
attempting to manage the process internally, corporations and even outside law
firms increasingly have been turning to litigation service consultants to manage
aspects of the litigation process.
Dramatic increases in the costs and complexity of litigation have created a
need for litigation support specialists. Consulting firms have taken advantage
of the emergence of new media, including animation and image enhancement, to
improve the quality of trial preparation and presentation. The complex and
sophisticated nature of recent cases in such areas as toxic torts, intellectual
property infringements and medical products liability have lent themselves to
new media presentation techniques. The presentation of complicated concepts is
dramatically enhanced by visual presentation and 3D animation using media
commonly accepted and understood by jurors. Consequently, visual technology is
becoming increasingly prevalent in the courtroom. 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 it 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 allows companies to better focus on
the issues involved in litigation so that they can better chart a cost effective
strategy with regard to resolution of the issues and control of the expenses.
5
Litigation Services
FTI believes its litigation services division has benefited from the
efforts of major corporations to better manage the litigation process and reduce
their overall legal costs. The Company also believes its TrialMax II software is
among the leading trial preparation and presentation software tools available in
the industry and its use fosters the efficiencies sought by our clients.
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. The Division also 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.
Expert Financial Services
While the litigation support market traditionally has focused on the latter
stages of the trial process, such as jury selection, exhibit preparation and the
trial process itself, today's clients are looking to manage costs effectively
over the entire process, including the pre-litigation phase. For this reason,
FTI has entered the broader field of providing financial consulting services. To
provide financial consulting services, 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. Additionally, we work with
clients to develop business strategy and tactics on an ongoing basis. Forensic
accounting specialists, such as those employed by KCI, work with companies
dealing with the investigation of disclosure and fraud issues, as well as
companies which are undergoing restructuring or bankruptcy reorganizations. We
believe that by providing these services we often have access to companies at an
especially early stage of the litigation process.
BUSINESS STRATEGIES
Traditionally, litigation consulting firms, including the Company, focused
on discrete stages of the litigation process from the inception of a cause of
action to final resolution through a jury trial. Recently, however, FTI has
sought to integrate complementary litigation, applied sciences and financial
services and products. FTI believes that this integration gives it a distinct
advantage over smaller niche players because it can become involved with
potential clients at a much earlier stage of the dispute resolution process or
even on an ongoing, retainer-type basis.
6
FTI's strategy is to become a national company possessing a 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.
The Company believes the following elements are key to the continued
success of its business strategy:
o 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.
o Expand to a Broader Range of Services. By adopting an integrated
services approach to its business, FTI is transitioning itself from
its vendor-based roots to a more full-service advisor. In this
capacity, the Company hopes to better fulfill its clients'
expectations. Whereas FTI started as an expert witness firm in 1982,
it has since expanded to offer its clients services in visual
communications (1987), jury consulting (1992), insurance claims
management (1997), and analytic engineering, economic consulting and
forensic accounting (1998). The increased range of services
available has led to increased expectations from FTI's clients. As
its clients have sought more broad-based and strategic assignments,
FTI has been able to market its other services.
o Size and Critical Mass. Large forensic and litigation matters today
often require the service provider to be able to provide services on
a number of matters. To enhance its ability to service such
contracts, the Company has pursued a strategy of increasing the
number of, and range of skills provided by, its professionals and
investing in support equipment.
o Geographic Expansion. The Company seeks new business opportunities
by expanding its operations in strategic geographic markets. The
Company believes that the ability to provide services on a
nationwide basis is a competitive advantage in securing business
from large, geographically diverse corporations. Furthermore,
proximity to a client provides a significant cost advantage. The
Company's strategy is to expand both the number of offices it
maintains and the services provided by each office.
o Cost Effective Delivery of Service. The Company is dedicated to
providing cost-effective solutions to its clients. The Company
offers a disciplined project management approach to ensure adherence
to the client's budgets and schedules. The Company also maintains a
flexible cost structure by using a mix of employees and outside
consultants. This reduces fixed overhead costs while offering
solutions and expertise tailored to the specific requirements of a
client's case.
7
BUSINESS SERVICES
Consistent with the Company's strategy of being an integrated provider of
litigation support services, it offers a broad range of trial consulting
services to corporations, insurance companies and law firms at every stage of
the trial process. In the pre-trial phase, FTI offers services relating to the
discovery process. Such services include determining the cause of accidents,
assessing damages, developing databases, investigating the possible infringement
of patents and analyzing damaged physical structures. In addition, FTI helps
litigants prepare for the jury selection and venue choice phases of trial by
soliciting community attitudes through focus group studies and venue surveys.
Increasingly, the Company is also called upon to consult on the logistics and
management of the myriad of documents that are part of large cases.
In the trial phase, the Company assists attorneys in the preparation of
their cases by performing mock trials, preparing expert witnesses for testimony
and surveying people with regard to the effectiveness of specific legal
arguments and the general sentiment towards its client. These surveys can
enlighten litigants on the strength of their case and the likelihood of
prevailing, as well as the advisability of seeking settlement. FTI's document
management, visual communication and courtroom technology products are designed
to facilitate the trial process and help litigants present clear and strong
legal arguments to a jury.
The Company also offers services regarding the post-trial phase of the
litigation process. By surveying jurors, FTI can help its clients understand the
basis of a jury's verdict. This information is useful for determining the
likelihood of prevailing on similar litigation in other venues. Moreover, FTI
can help its clients appreciate the full economic consequences of a verdict, and
whether an appeal would even be cost-effective. Such information may also be
relevant with regard to the determination of future courses of action for the
client.
The Company also performs a number of non-trial consulting services such as
quality assurance assessments for industrial, utility and automobile companies
with regard to their products, analysis of computer and equipment problems
related to Year 2000 ("Y2K") issues, forensic accounting and turnaround
consulting services to businesses restructuring either on their own or through
the bankruptcy process and consulting services to clients in regulated
industries such as pipeline, railroad and telecommunications regarding their
general business strategy, their rates and the general industry.
CLIENTS
In 1998, the Company performed work for 1,994 clients, including 1,061 law
firms, 54 of which were rated in the top 100 law firms in 1998, as measured by
the American Lawyer, based on revenues in the United States; 308 industrial
clients, 83 of which were rated in the FORTUNE 500 for 1998; and 477 insurance
companies, 19 of which were rated in the FORTUNE 500 for 1998. As of December
31, 1998, the Company was actively working on 3,753 different matters for 1,348
different clients. None of the Company's clients represented more than 10% of
the Company's revenues during 1998.
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 litigation services group generally competes against other
litigation consulting firms and small sole proprietorships. The applied science
group competes against various regional or national concerns, independent
experts and research organizations. The expert financial services group competes
against accounting and economic consulting firms.
In addition to pricing, competitive factors for the Company's services
include reputation, geographic locations, performance record, quality of work,
range of services provided and existence of an ongoing client relationship. 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, 1998, the Company had 416 employees. Approximately 72 of
the employees are in litigation support services, 161 in applied sciences and 43
in expert financial services. The remaining employees are administrative
employees. The Company also maintains consulting arrangements with approximately
1,472 independent consultants, of whom approximately 379 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.
9
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
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 our 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:
o the loss of a number of key employees could adversely impact its
ability to secure and complete engagements because the Company's
business involves the delivery of professional services and is
labor-intensive. 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 $13 million
Investment and Loan Agreement with Allied Capital Corporation;
o the availability and terms of additional capital or debt financing
to fund future acquisitions and for working capital purposes;
o significant competition for business opportunities and acquisition
candidates, because of the fragmented nature of companies offering
similar services and the strategy of competitors to also grow and
diversify through acquisitions;
o fluctuations of revenue and operating income between quarters
because revenues are primarily derived from services provided in
response to client requests or events that occur without notice, and
engagements, generally billed on a "time and expenses" basis, are
terminable at any time by clients and because of acquisitions; and
o the continued integration of KK&A, KCI and S.E.A., acquired in 1998,
and the integration of future acquisitions, involve inherent
uncertainties, such as the expense of integrating businesses, the
effect on the acquired business and on FTI of FTI's efforts to
integrate and achieve economies of scale and the availability of
management resources to oversee the operations of the acquired
business.
o Risks associated with quantitative and qualitative market risks such
as fluctuations in interest rates as described under Item 7.A. of
this Annual Report on Form10-K.
10
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, Philadelphia, 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.
The Company also owns 5,000 square feet in Germantown, Maryland, from which
the Company conducted the business of its former Annapplix division. The Company
is attempting to lease or sell these premises.
ITEM 3. LEGAL PROCEEDINGS
Titanium
FTI entered into a Stock Purchase Agreement (the "Agreement") with Glenn R.
Baker and Dennis A. Guenther (the "Selling Stockholders") dated September 25,
1998. Pursuant to the Agreement, FTI acquired (the "Acquisition") all of the
issued and outstanding shares of S.E.A. Prior to the Acquisition, in 1993
Titanium Industries filed suit against S.E.A., Inc. in the Court of Common
Pleas, Mahoning County, Ohio, (the "Titanium Claim") claiming negligent
misrepresentation and breach of contract. On June 27, 1994, a judgment of decree
was rendered in favor of Titanium Industries and against S.E.A., Inc. The
judgment was appealed to the Court of Appeals of Ohio - Seventh District. On
April 11, 1997, the Court of Appeals ordered that the judgment of the Common
Pleas Court of Mahoning County, Ohio be reversed and remanded the case to the
trial court. The Agreement provides that the Selling Stockholders will indemnify
FTI for any loss in connection with the Titanium Claim.
Pixel
In 1997, FTI and six of its Stamford, Connecticut employees were sued by
Pixel, Inc. ("Pixel"), a California company, which previously had an office in
Stamford, Connecticut (at which the individual defendants worked). The complaint
asserts multiple tort claims and two statutory claims against FTI and the
individuals, all related to the decision of the individual defendants to leave
the employ of Pixel and work for FTI, allegedly in competition with Pixel using
Pixel's confidential and proprietary information. FTI is accused of encouraging
this behavior. The action is pending in Connecticut state court and all
defendants, including FTI, are represented by the Connecticut law firm of
Shipman & Goodwin. Piper & Marbury has also been admitted for purposes of the
case. The case is styled Pixel, Incorporated v. Forensic Technologies
International Corporation, et al., Docket No. CV-97-9349702S and is pending in
the Supreme Court for the Judicial District of Fairfield at Bridgeport.
In addition to injunctive relief against all defendants, including FTI,
Pixel seeks the return of any of its records taken by the individual defendants.
Pixel also seeks unspecified damages (and, to the extend the alleged acts are
violative of Conn. Gen. Stats. ss.52-564 relating to theft of property, treble
damages) plus interest, costs, disbursements and attorneys' fees. In
interrogatory answers, Pixel claims $7,000,000
11
in damages for the destruction of its business and over $1,000,000 a year lost
income (beginning presumably in late 1996).
While the case is pending for almost two years, only recently have
interrogatory answers and documents been exchanged and only part of the
deposition of the president of Pixel has been conducted. Based on the discovery
to date, FTI appears to have good and meritorious defenses to the allegations in
the complaint. As a result, the range of potential loss has not been estimated.
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, 1998.
12
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
(a) The Company did not conduct any sales of Restricted Securities during
Fiscal 1998.
(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 Nasdaq National Market for each
fiscal quarter during the last two fiscal years.
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
On March 29, 1999, the closing sales price for the Company's common stock
on the American Stock Exchange was $2.875.
The number of record holders of the Company's common stock as of March 22,
1999 was 98 and the number of beneficial holders was 1,950.
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. Pursuant to the Investment and Loan Agreement between the
Company, Allied Capital Corporation and Allied Investment Corporation dated
March 29, 1999, the Company has agreed not to declare or pay any dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended December 31, 1998 are
derived from the Company's consolidated financial statements. The financial
statements for the years ended December 31, 1994, 1995, 1996, 1997, and 1998
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 Results of
Operations and Financial Condition."
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------
1998 1997 1996 1995 (1) 1994
----------- ----------- ------------ -------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues $ 58,615 $ 44,175 $ 30,648 $ 23,381 $ 20,254
Direct cost of revenues 31,402 23,564 17,020 11,366 10,499
Selling, general and administrative expenses 21,528 15,241 10,786 9,887 8,320
----------- ----------- ------------ -------------- -----------
Total costs and expenses 52,930 38,805 27,806 21,253 18,819
----------- ----------- ------------ -------------- -----------
Income from operations 5,685 5,370 2,842 2,128 1,435
Other income (expense) (1,163) 173 107 (222) (110)
----------- ----------- ------------ -------------- -----------
Income from continuing operations before
Income taxes 4,522 5,543 2,949 1,906 1,325
Income taxes 1,954 2,250 1,235 779 552
----------- ----------- ------------ -------------- -----------
Income from continuing operations 2,568 3,293 1,714 1,127 773
Loss from operations of discontinued
Operations, net of tax (1)
(65)
Loss on disposal of discontinued operations,
Net of tax
(365)
----------- ----------- ------------ -------------- -----------
Net income 2,568 3,293 1,714 697 773
Preferred stock dividends - - 62 125 125
Income available to common stockholders $ 2,568 $ 3,293 $ 1,652 $ 572 $ 648
---------- ---------- ----------- -------------- -----------
=========== =========== ============ ============== ===========
Earnings per common share from continuing
Operations, assuming dilution $ 0.54 $ 0.73 $ 0.46 $ 0.27 $ 0.28
Earnings per common share, assuming dilu-
tion $ 0.51 $ 0.70 $ 0.42 $ 0.24 $ 0.26
Shares used in computation 5,077 4,698 4,174 3,316 3,354
AS OF DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ------------ -------------- -----------
BALANCE SHEET DATA:
Working capital $ 9,071 $ 10,634 $ 13,311 $ 2,259 $ 3,368
Total assets 79,747 29,176 20,868 10,756 8,071
Long-term debt, capital lease obligations
And redeemable stock 36,016 1,014 254 3,941 3,764
Total stockholders' equity 25,594 21,019 17,629 1,463 1,838
(1) Effective March 31, 1996, the Company sold Annapolis to a group that
includes Annapplix's former owner and certain officers and stockholders of
the Company. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition,".
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company derives revenue primarily from three business divisions: Litigation
Services, Applied Sciences and Expert Financial Services. Through its Litigation
Services division, FTI provides advice and services in connection with all
phases of the litigation process. FTI offers its clients, through the Applied
Sciences division, engineering and scientific consulting services, accident
reconstruction, fire investigation, equipment procurement and expert testimony
regarding intellectual property rights. FTI provides a range of financial
consulting services, such as forensic accounting, fraud investigation, claims
management and expert testimony, and bankruptcy and turnaround analysis, through
its Expert Financial Services division. The revenues generated from the business
divisions consist of: (i) fees for professional services; (ii) fees for use of
the Company's equipment and facilities, particularly animation computers; (iii)
pass-through expenses such as the recruiting of subjects and participants for
research surveys and mock trial activities and travel; and (iv) fees associated
with work product production, such as static graph boards, color copies and
digital video production. The Company recognizes revenue as work is performed or
as related expenses are incurred.
The Company's goal is to provide value-added services to its clients either on a
case-by-case basis or through ongoing relationships with major users of
litigation and claims services. Over the past three years, the Company has taken
several steps to grow the business and its industry prominence. Such steps
include expanding into financial consulting services for trials, turnarounds
and bankruptcies and recruiting additional visual communication staff and
recognized professionals in the trial consulting business. By virtue of its
recent acquisitions, the Company has further expanded its geographic reach with
major offices now in New York, Columbus, Chicago, Houston, Los Angeles and
Washington, DC.
In September 1996, the Company acquired Teklicon, Inc., in a transaction
accounted for as a pooling of interests as further described in Note 4 of the
"Notes to Consolidated Financial Statements." This acquisition significantly
enhanced the Company's capabilities in high technology consulting and expert
witness services to the legal profession and industry clients who require
assessment of intellectual property rights and other industry problems that have
high technology content.
15
In September 1997, the Company acquired LWG, Inc. (LWG) and Bodaken Associates
(Bodaken) in transactions accounted for as purchases as further described in
Note 4 of the "Notes to Consolidated Financial Statements." 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 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 it scientific consulting offerings, in addition to providing geographic
expansion into the southeast and midwest 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 provide the foundation for the expansion of expert
financial services into markets where the Company already has a presence.
In connection with the September acquisitions, the Company expanded and amended
its line of credit with its bank and utilized $26 million of borrowings to fund
the initial acquisition payments. In March 1999, the Company further amended its
bank financing extending the maturity to September 2001, or possibly later under
certain conditions, and revising certain covenants and other terms. The Company
obtained $13 million of additional debt financing through the sale of
subordinated debentures (with warrants) to an investor, maturing in March 2004.
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
REVENUES. 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; however, there was a
14.4% improvement in our fourth quarter compared with the third quarter of 1998
as our volume of cases improved. 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
Total revenues in 1997 increased 44.1% or $13.5 million from 1996. Excluding
acquisitions during 1997, total revenues increased 29.9%. The growth in total
revenues resulted from a 35.0% increase in revenues generated by Litigation
Services and a 17.0% increase in revenues generated by Applied Sciences,
excluding acquisitions.
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 53.6% in 1998,
53.3% in 1997 and 55.5% in 1996.
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. Selling, general and administrative expenses also include amortization
of goodwill. As a percent of revenues, these expenses were 36.7% in 1998, 34.5%
in 1997 and 35.2% in 1996. Excluding goodwill amortization, selling, general and
administrative expenses as a percentage of sales were 35.0% in 1998 and 34.3% in
1997, both lower than the 35.2% in 1996.
OTHER INCOME AND EXPENSES. Interest expense consists of interest on a line of
credit and Convertible Debentures in 1996 and, in 1997 and 1998, the interest
expense associated with the purchased businesses referred to above. Additional
cash, raised from the initial public offering allowed the Company to pay off the
line of credit in mid-1996, thus reducing interest expense and increasing
interest income during the second half of 1996 and the majority of 1997. In May
1996, the $1.8 million of 8% Subordinated Debentures converted into common
stock, further contributing to the decrease in interest expense in 1996 as
compared to 1995.
INCOME TAXES. In 1998, principally as a result of some of the goodwill
amortization not being deductible for income tax purposes, the effective tax
rate increased to 43.2%. It is expected that the effective tax rates will be
between 45% and 49% in the foreseeable future. The Company's effective tax rate
during the two years ended December 31, 1997, approximated 41%. See Note 7 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, 1998, the unamortized goodwill was $45.2 million
(which represented 57% of total assets and 176% of stockholders' equity).
Goodwill arises when an acquirer pays more for a business than the fair value of
the tangible and separately measurable intangible net assets. For financial
reporting purposes, goodwill and all other intangible assets are amortized over
the estimated period benefited. 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
17
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 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 1998 generated $5.3 million of cash flow from operations, an
improvement of $1.7 million as compared to 1997. This increase is attributable
to an increase in net income excluding non-cash charges (principally
depreciation and amortization) of $271,000, and the favorable net cash effects
of changes in working capital balances. The Company expects that cash flows from
operations will increase in 1999, in part as a result of additional operating
cash provided from businesses acquired in late 1998.
The Company borrowed $26.0 million in 1998 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 SEA, Inc. This
credit facility was renegotiated in March 1999, and the new terms extend the
maturity date of the loan to September 2001. This maturity date may be extended
an additional year if the Company is successful in extending the maturity dates
of certain notes issued to sellers of the acquired 1998 and 1997 businesses.
In connection with the acquisition of certain businesses in 1998 and 1997, and
as described more fully in Note 4 of the 1998 consolidated financial statements,
the Company is obligated under certain seller notes totaling $20.2 million at
December 31, 1998. Of the $20.2 million outstanding at December 31, 1998, $10.65
million will become payable in 1999. The Company in March 1999 issued $13.0
million of subordinated debentures to provide additional cash resources as the
seller notes begin to mature. The subordinated debentures initially bear
interest at 9.25% per annum, and mature in lump sum in March 2004. The
debentures prohibit the payment of dividends without the written consent of the
holder.
18
The Company is required to comply with certain financial covenants related to
operating performance and liquidity, as calculated quarterly, for both the
revised and extended long-term credit facility and the subordinated debentures.
The Company believes that it will be in compliance with all covenants throughout
1999.
During 1998 the Company expended $3.3 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, 1998, the Company had no material commitments for the acquisition of
property and equipment.
The Company believes that cash generated from operations and the financing
arrangements completed in March 1999 will allow it to meet its obligations under
notes maturing in 1999, and further provide for the necessary cash resources
required in the near term to fund its expanding operations.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs written using two digits
(rather than four) to define the applicable year. Absent corrective actions,
programs with date-sensitive logic may recognize "00" as 1900 rather than 2000.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has commenced a process to assure Year 2000 compliance of all
hardware, software, and ancillary equipment that are date dependent. The process
involves four phases:
Phase I - Inventory and Data Collection. This phase involves an identification
of all items that are date dependent. The Company commenced this phase in the
first quarter of 1998 and is now complete.
Phase II - Compliance Requests. This phase involves requests to systems vendors
for verification that the systems identified in Phase I are Year 2000 compliant.
The Company continues to replace critical systems that cannot be updated or
certified compliant. The Company commenced this phase in the first quarter of
1998 and expects to complete this phase before the end of the second quarter of
1999. The Company's principal compliance issue is focused on the existing
business and accounting system developed over the past ten years. A new business
and accounting system has been implemented and is vendor-certified to be Year
2000 compliant. In addition, the Company has determined that substantially all
of its personal computers and PC applications are compliant.
Phase III - Test, Fix and Verify. This phase involves testing all items that are
date dependent and upgrading the critical, non-compliant system as well as
completing the implementation of the new business and accounting system. The
Company has begun this phase and expects completion by the middle of the third
quarter of 1999.
Phase IV - Final Testing, New Item Compliance. This phase involves review of all
systems for compliance and re-testing as necessary. During this phase, all new
systems and equipment will be tested for Year 2000 compliance. The Company
expects to complete this phase by the end of the third quarter of 1999. The
Company presently believes that, with the implementation of the new business and
accounting system, including hardware and software, the Year 2000 issue will not
pose any significant operational problem.
19
This substantial compliance has been achieved without the need to acquire
significant new hardware, software, or systems other than in the ordinary course
of business. The Company is not aware of any other material Year 2000
non-compliance that would require repair or replacement that would have a
material effect on its financial position. As part of the Year 2000 process,
formal communication with the Company's suppliers, customers and other support
services has been initiated during the first quarter of 1999 and efforts will
continue until positive statements of readiness have been received from all
third parties. To date, the Company is not aware of any Year 2000 non-compliance
by its customers or suppliers that would have material impact on the Company's
business. Nevertheless, there can be no assurance that unanticipated Year 2000
non-compliance will not occur, and such Year 2000 non-compliance could require
material costs to repair or could cause material disruptions if not repaired.
The Company is in the process of developing a strategy to address these
potential consequences that may result from unresolved Year 2000 issues, which
will include the development of one or more contingency plans by mid 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
At December 31, 1998, $26.0 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 $520,000 and net
income would decrease by approximately $296,000.
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.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FTI Consulting, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1998 and 1997
CONTENTS
Report of Independent Auditors .............................................22
Consolidated Financial Statements
Consolidated Balance Sheets.................................................23
Consolidated Statements of Income...........................................25
Consolidated Statements of Stockholders'Equity..............................26
Consolidated Statements of Cash Flows.......................................27
Notes to Consolidated Financial Statements..................................28
21
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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FTI Consulting,
Inc. and subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. 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
March 30, 1999
22
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
DECEMBER 31
1998 1997
------------------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 3,223 $ 2,456
Accounts receivable, less allowance of $1,305
in 1998 and $487 in 1997 13,139 10,198
Unbilled receivables, less allowance of $1,117
in 1998 and $415 in 1997 7,803 4,194
Income taxes recoverable 794 -
Deferred income taxes - 160
Prepaid expenses and other current assets 1,262 681
-------------------------
Total current assets 26,221 17,689
Property and equipment:
Buildings 411 411
Furniture and equipment 14,752 11,745
Leasehold improvements 1,891 1,591
-------------------------
17,054 13,747
Accumulated depreciation and amortization (8,767) (7,459)
-------------------------
8,287 6,288
Goodwill, net of accumulated amortization of $1,077
in 1998 and $81 in 1997 45,164 5,141
Other assets 75 58
-------------------------
Total assets $ 79,747 $ 29,176
=========================
23
DECEMBER 31
1998 1997
--------------------------------------
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,924 $2,825
Accrued compensation expense 2,765 1,995
Income taxes payable - 297
Current portion of long-term debt 10,650 1,200
Advances from clients 498 519
Other current liabilities 313 219
--------------------------------------
Total current liabilities 17,150 7,055
Long-term debt, less current portion 35,630 730
Other long-term liabilities 269 203
Deferred income taxes 1,104 169
Commitments and contingent liabilities - -
Stockholders' equity:
Preferred stock, $.01 par value; 4,000,000 shares authorized
in 1998 and 1997, none outstanding - -
Common stock, $.01 par value; 16,000,000 shares
authorized; 4,781,895 and 4,550,912 shares issued and
outstanding in 1998 and 1997, respectively 48 46
Additional paid-in capital 16,531 14,526
Retained earnings 9,015 6,447
--------------------------------------
Total stockholders' equity 25,594 21,019
--------------------------------------
Total liabilities and stockholders' equity $ 79,747 $ 29,176
======================================
See accompanying notes.
24
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Income
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $58,615 $44,175 $30,648
Direct cost of revenues 31,402 23,564 17,020
Selling, general and administrative expenses 21,528 15,241 10,786
-----------------------------------------------------
Total costs and expenses 52,930 38,805 27,806
-----------------------------------------------------
Income from operations 5,685 5,370 2,842
Other income (expenses):
Interest and other income 319 343 286
Interest expense (1,482) (170) (179)
-----------------------------------------------------
(1,163) 173 107
-----------------------------------------------------
Income from operations before income taxes 4,522 5,543 2,949
Income taxes 1,954 2,250 1,235
-----------------------------------------------------
Net income $ 2,568 $ 3,293 $ 1,714
Preferred stock dividends - - 62
-----------------------------------------------------
Income available to common stockholders $ 2,568 $ 3,293 $ 1,652
=====================================================
Earnings per common share, basic $ 0.54 $ 0.73 $ 0.46
=====================================================
Earnings per common share, diluted $ 0.51 $0.70 $ 0.42
=====================================================
See accompanying notes.
25
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
CLASS A CLASS B ADDITIONAL
COMMON COMMON PAID-IN RETAINED UNEARNED
STOCK STOCK CAPITAL EARNINGS COMPENSATION TOTAL
----------------------------------------------------------------------------
Balance at January 1, 1996 $20 $15 $1 $1,455 $(29) $1,462
Repurchase of 55 shares of Class A common stock and 8
shares of Class B common stock (105) (25) (130)
Issuance of 1,520 shares of common stock, net of
expenses of $1,671 in initial public offering of 15 11,101 11,116
stock
Conversion of Class B common stock into 15 shares of
common stock (15) 15 -
Conversion of Series A Preferred Stock into 655
shares of common stock 6 1,553 1,559
Conversion of Convertible Subordinated Debt in 378
shares of common stock 4 1,796 1,800
Value of common stock options issued to directors 29 29
Exercise of options to purchase 14 shares of Class A
common stock 39 39
Amortization of unearned compensation 29 29
Dividends paid on Series A Preferred Stock (62) (62)
Accounting adjustment due to pooling-of-interests 72 72
Net income for 1996 1,714 1,714
----------------------------------------------------------------------------
Balance at December 31, 1996 45 - 14,429 3,154 - 17,628
Exercise of options to purchase 34 shares of Class A 97 98
common stock 1
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 218 shares of Class A 2,005 2,007
common stock 2
Net income for 1998 2,568 2,568
----------------------------------------------------------------------------
Balance at December 31, 1998 $48 $ - $16,531 $9,015 $ - $25,594
============================================================================
See accompanying notes.
26
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 2,568 $ 3,293 $ 1,714
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 1,789 1,434 757
Amortization 1,192 307 105
Provision for doubtful accounts 473 526 (1)
Deferred income taxes (626) (227) 341
Loss on disposal of discontinued Annapplix division - - (479)
Other 208 - 134
Changes in operating assets and liabilities:
Accounts receivable 1,207 (3,284) (1,701)
Unbilled receivables 51 (788) (723)
Income taxes recoverable/payable (694) 408 (320)
Prepaid expenses and other current assets (270) 170 (599)
Accounts payable and accrued expenses (83) 826 331
Accrued compensation expense (205) 1,017 (221)
Advances from clients (21) (67) 309
Other current liabilities (296) 33 (162)
------------------------------------------------------
Net cash provided by (used in) operating activities 5,293 3,648 (515)
INVESTING ACTIVITIES
Purchase of property and equipment (3,327) (2,800) (1,672)
Proceeds from sale of property and equipment 130 - -
Contingent payments to former shareholders of LWG (440) - -
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 Anamet Laboratories - - (400)
Acquisition of Bodaken, including acquisition costs - (1,875) -
Acquisition of LWG, including acquisition costs - (1,956) -
Change in other assets - 480 (238)
------------------------------------------------------
Net cash used in investing activities (30,077) (6,151) (2,310)
FINANCING ACTIVITIES
Issuance of common stock - - 11,116
Repurchase of Class A common stock - - (130)
Repurchase of Class A common stock subject to repurchase and Class B - - (310)
common stock
Exercise of stock options 1,610 98 39
Repayments under line of credit - - (2,110)
Borrowings under long-term debt arrangements 26,000 - -
Payments of other long-term debt (100) (191) (69)
Repayments of long-term liabilities (1,959) (842) -
Dividends paid - - (62)
------------------------------------------------------
Net cash provided by (used in) financing activities 25,551 (935) 8,474
------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 767 (3,438) 5,649
Cash and cash equivalents at beginning of year 2,456 5,894 245
------------------------------------------------------
Cash and cash equivalents at end of year $ 3,223 $ 2,456 $ 5,894
======================================================
See accompanying notes.
27
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
(Dollars in thousands, except per share data)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
Description of Business
FTI Consulting, Inc. and subsidiaries (the Company) provides forensic and
strategic consulting 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, assessment and expert testimony regarding intellectual
property rights and claims management outsourcing services, from assessment to
restoration. The Company has 35 offices throughout the United States and in
Canada.
Principles of Consolidation
The consolidated financial statements include the accounts of 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 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.
28
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. Buildings are depreciated over a period of 40 years, furniture and
equipment is depreciated over estimated useful lives ranging from 5 to 7 years,
and leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the lease term.
Intangible Assets
Goodwill consists of the cost in excess of fair value of the net assets of
entities acquired in purchase transactions, and is amortized over the expected
periods of benefit, which range from 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 majority of these activities are provided under "time and materials" billing
arrangements, and revenues, consisting of billed fees and 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.
29
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 options equals 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 6 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.
30
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,
1998 1997 1996
--------------- -------------- -----------------
NUMERATOR
Net income $2,568 $3,293 $1,714
Preferred stock dividends - - (62)
--------------- -------------- -----------------
Numerator for basic earnings per share - income available
to common stockholders 2,568 3,293 1,652
Effect of dilutive securities:
Preferred stock dividends - - 62
Interest on convertible debentures - - 31
--------------- -------------- -----------------
- - 93
Numerator for diluted earnings per share - income
available to common stockholders after assumed
conversions 2,568 3,293 1,745
DENOMINATOR
Denominator for basic earnings per common share - weighted
average shares 4,725 4,529 3,591
Effect of dilutive securities:
Convertible preferred stock - - 240
8% convertible subordinated debentures - - 139
Warrants - - 1
Employee stock options 352 169 203
--------------- -------------- -----------------
352 169 583
--------------- -------------- -----------------
Denominator for diluted earnings per common
share - weighted average shares and
assumed conversions 5,077 4,698 4,174
=============== ============== =================
Earnings per common share, basic $0.54 $0.73 $0.46
=============== ============== =================
Earnings per common share, diluted $0.51 $0.70 $0.42
=============== ============== =================
31
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
In 1998, the Company purchased three entities for total consideration of
$45,630. In connection with these acquisitions, assets with a fair market value
of $50,426 were acquired and liabilities of approximately $4,796 were assumed.
In 1997, the Company purchased two entities for total consideration of $5,350.
In connection with these acquisitions, assets with a fair market value of $7,300
were acquired and liabilities of approximately $1,950 were assumed.
The Company paid interest of $1,048, $117 and $242 and income taxes of $2,953,
$1,452 and $1,213 during fiscal years 1998, 1997 and 1996, respectively.
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 $20,000 included an initial payment of $10,000 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 $17,400 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 1998 consolidated statement of income
for the period from September 17, 1998 through December 31, 1998.
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 $15,630 included an initial payment of $10,000
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 $13,600 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 1998 consolidated statement
of income for the period from September 1, 1998 through December 31, 1998.
32
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. ACQUISITIONS (CONTINUED)
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 $10,000 included an initial payment of $6,000 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 $9,700 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 1998 consolidated statement of income
for the period from June 1, 1998 through December 31, 1998.
Pro Forma Information for 1998 Acquisitions
The following summarizes the unaudited pro forma consolidated results of
operations for 1997 and 1998 assuming the KK&A, KCI and SEA acquisitions had
occurred on January 1, 1997, 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 1997
----------------- ----------------
Revenues $78,823 $74,265
Net income 2,900 3,476
Net income per common share -
diluted $0.57 $0.74
The pro forma consolidated results of operations are not necessarily indicative
of the results that would have occurred had these transactions been consummated
as of the beginning of the year presented or of future operations of the
Company.
33
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. ACQUISITIONS (CONTINUED)
LWG, Inc.
Effective September 1, 1997, the Company acquired all of the outstanding common
stock of LWG, 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 consists of an initial cash
payment of $1,800, 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 $1,500 was recorded and is being amortized over
a period of 25 years. During 1998, additional contingent consideration of $440
was paid and recorded as goodwill. The results of operations of LWG are included
in the accompanying consolidated statements of income from September 1, 1997
through December 31, 1997.
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 $3,550 included an initial cash
payment of $1,700 with the remainder of $1,850 evidenced by a note payable
bearing interest at 7%. Approximately $3,500 in goodwill was recorded and is
being amortized over 20 years.
34
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31
1998 1997
-------- --------
Amounts due under a $27,000 long-term credit facility
expiring in May 2000, bearing interest at LIBOR plus
variable percentages (7.06% at December 31, 1998). The
facility is secured by substantially all of the assets
of the Company. $26,000 $ -
Notes payable to former shareholders of acquired
businesses, maturing in 1999 and 2000, and bearing
interest payable quarterly at 7% or 7.5% per annum. 20,280 1,850
Mortgage note payable for a building, bearing interest
at the prime rate plus 1.5% (9.25% at December 31, 1998).
The note matured in 1998. - 80
-------- -------
Total long-term debt $46,280 $1,930
======== =======
Future maturities of long-term debt are as follows: 1999--$10,650;
2000--$35,630. The $27,000 credit facility was renegotiated in March 1999 (see
Note 12). The fair value of the notes approximates their carrying value at
December 31, 1998 and 1997.
6. 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 2,000,000 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.
35
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTION PLANS (CONTINUED)
The following table summarizes the option activity under the Plan for the
three-year period ended December 31, 1998:
1998 1996
WEIGHTED WEIGHTED
AVG. 1997 AVG.
EXERCISE WEIGHTED AVG. EXERCISE
1998 PRICE 1997 EXERCISE PRICE 1996 PRICE
-------------- -------------- ----------- --------------- ------------- --------------
Options outstanding at January 1 1,495,229 $ 7.96 576,179 $ 5.88 242,659 $ 3.14
Options granted 565,000 7.73 995,850 9.02 353,600 7.59
Options exercised (217,900) 6.83 (34,000) 2.85 (14,200) 2.73
Options forfeited (21,500) 8.92 (42,800) 8.48 (5,880) 3.57
---------- ------ ---------- ------ ---------- ------
Options outstanding at December 31 1,820,829 $ 7.86 1,495,299 $ 7.96 576,179 $ 5.88
========== ====== ========== ====== ========== ======
Options exercisable at December 31 674,580 $ 7.69 448,325 $ 6.47 206,899 $ 3.58
========== ====== ========== ====== ========== ======
Weighted avg. fair value of
options granted during the year $ 4.58 $ 2.98 $ 1.56
========== ====== ========== ====== ========== ======
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, 1998 ranged from $2.38 to $19.59 as
follows:
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE
RANGE OF WEIGHTED AVERAGE CONTRACTUAL LIFE EXERCISE PRICES
EXERCISE PRICES OPTIONS EXERCISE PRICES OF OF OPTIONS OPTIONS OF OPTIONS
OUTSTANDING OPTIONS OUTSTANDING OUTSTANDING EXERCISABLE EXERCISABLE
---------------- ------------------ -------------------- ------------------ --------------- -------------------
$2.38 - $7.98 752,081 $ 5.45 8.21 290,654 $5.35
$8.50 - $9.90 983,748 $8.97 8.39 358,926 $8.94
$12.38 - $19.59 85,000 $16.45 9.29 25,000 $17.00
36
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTION PLANS (CONTINUED)
Pro Forma Disclosures Required by Statement 123
For the years ended December 31, 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: risk-free
interest rate of 5.50%, dividend yields of 0%, volatility factors ranging from
1.224 to .397, and an expected life of the granted options which varied from one
to three years depending upon the vesting period. 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 Company's pro
forma net income is $1,022 and $2,355 for the years ended December 31, 1998 and
1997, respectively. Pro forma earnings per common share, basic is $0.22 and
$0.52 for the year ended December 31, 1998 and 1997, respectively. Pro forma
earnings per share, diluted is $0.20 and $0.50 for the year ended December 31,
1998 and 1997, respectively.
37
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities at
December 31 are as follows:
1998 1997
-----------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 404 $ 361
Accrued vacation 82 52
-----------------------------------
Total deferred tax assets 486 413
Deferred tax liabilities:
Use of cash basis for income tax purposes by subsidiary 1,268 192
Capitalized software 134 156
Prepaid expenses 50 62
Other 138 12
-----------------------------------
Total deferred tax liabilities 1,590 422
-----------------------------------
Net deferred tax liability $(1,104) $ (9)
===================================
Income tax expense (benefit) consisted of the following:
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------
Current:
Federal $ 2,038 $ 1,983 $ 726
State 542 494 168
------------------------------------------------
2,580 2,477 894
Deferred (benefit):
Federal (525) (253) 269
State (101) 26 72
------------------------------------------------
(626) (227) 341
------------------------------------------------
$ 1,954 $ 2,250 $ 1,235
================================================
38
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
The Company's provision for income taxes resulted in effective tax rates that
varied from the statutory federal income tax rate as follows:
1998 1997 1996
----------------------------------------------------
Expected federal income tax provision at 34% $ 1,537 $ 1,885 $ 1,003
Expenses not deductible for tax purposes 181 70 48
State income taxes, net of federal benefit 239 293 159
Other (3) 2 25
====================================================
$ 1,954 $ 2,250 $ 1,235
====================================================
8. 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 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, 1998:
1999 $2,123
2000 2,040
2001 1,688
2002 1,529
2003 1,209
Thereafter 323
============
Total minimum lease payments $8,912
============
39
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. OPERATING LEASES (CONTINUED)
Rental expense consists of the following:
YEAR ENDED DECEMBER 31,
1998 1997 1996
---------------------------------------------------
Furniture and equipment $ 326 $ 211 $ 97
Office and storage 1,975 1,131 839
===================================================
$ 2,301 $ 1,342 $ 936
===================================================
9. EMPLOYEE BENEFIT PLAN
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 are at the discretion of the Board of Directors. The Company made
contributions of $233, $153 and $146 during 1998, 1997 and 1996, respectively,
related to these plans.
10. CONTINGENCIES
The Company is subject to various legal proceedings generally incidental to its
business. The Company and six employees have been sued by Pixel, Inc. ("Pixel")
in a complaint that alleges that the Company and the individual employees
committed various torts related to the employees' decision to leave the employ
of Pixel and work for the Company. The Company and the employees believe the
grounds of the lawsuit are without merit and intends to defend the lawsuit
vigorously. Management is unable to predict the ultimate outcome of the lawsuit,
but believes that the ultimate resolution of the matter will not have a material
effect on consolidated financial position or results of operations.
The Company is subject to other 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.
40
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosure about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 supercedes
Financial Accounting Standards Board Statement No. 14, Financial Reporting for
Segments of a Business Enterprise, and establishes new standards for the way
that public business enterprises report selected information about operating
segments in annual and interim financial statements. It also established
standards for the related disclosures about products and services, geographical
areas, and major customers. Statement 131 is effective for financial statements
for fiscal years beginning after December 15, 1997. The Company adopted
Statement 131 in 1998, and accordingly, the disclosures for all periods have
been presented to conform to the Statement 131 requirements.
The Company provides litigation and claims management consulting services
through three distinct operating segments. The Expert Financial Services
division provides services in various financial proceedings such as mathematical
and statistical analysis, forensic accounting, fraud investigation and strategic
advisory, turnaround, bankruptcy and trustee services. The Applied Sciences
division provides services in connection with engineering and scientific
investigation and analysis of failures and accidents alleged in court cases. The
Litigation Services division provides consulting services in the areas of visual
communications, trial management and courtroom technology.
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 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.
41
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. SEGMENT REPORTING (CONTINUED)
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, 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
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
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------
EXPERT FINANCIAL APPLIED LITIGATION
SERVICES SCIENCES SERVICES TOTAL
- ------------------------------ ------------------ ---------------- ------------------- -----------------
REVENUES $2,779 $7,150 $20,719 $30,648
OPERATING EXPENSES 2,878 5,633 14,382 22,893
SEGMENT (LOSS) PROFIT (99) 1,517 6,337 7,755
42
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. SEGMENT REPORTING (CONTINUED)
A reconciliation of segment profit for all segments to income before income
taxes is as follows:
1998 1997 1996
- ------------------------------------------- ------------------ ------------------ ------------------
OPERATING PROFIT:
TOTAL SEGMENT PROFIT $14,017 $13,821 $7,755
CORPORATE GENERAL AND ADMINISTRATIVE
EXPENSES (5,351) (6,710) (4,051)
DEPRECIATION AND AMORTIZATION (2,981) (1,741) (862)
OTHER INTEREST (EXPENSE) INCOME (1,163) 173 107
------------------ ------------------ ------------------
INCOME BEFORE INCOME TAXES $4,522 $5,543 $2,949
------------------ ------------------ ------------------
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 of more of its
consolidated revenues.
43
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter ended
-----------------------------------------------------------------------------------
March 31, 1998 June 30, 1998 September 30,1998 December 31, 1998
- ------------------------------------ -------------------- -------------------- -------------------- --------------------
Operating revenues $ 14,109 $ 11,860 $ 13,501 $ 19,145
Operating expenses 12,241 10,818 12,474 17,397
-------- -------- -------- --------
Operating income 1,868 1,042 1,027 1,748
Non-operating items, net (3) (82) (336) (742)
-------- -------- -------- --------
Income before income taxes 1,865 960 691 1,006
Income taxes 759 390 309 496
-------- -------- -------- --------
Net income $ 1,106 $ 570 $ 382 $ 510
-------- -------- -------- --------
Net income per common share
Basic $ .24 $ .12 $ .08 $ .11
-------- -------- -------- --------
Diluted $ .22 $ .11 $ .08 $ .11
-------- -------- -------- --------
Weighted average shares outstanding
Basic 4,598 4,744 4,774 4,782
-------- -------- -------- --------
Diluted 5,072 5,267 4,878 4,800
-------- -------- -------- --------
13. SUBSEQUENT EVENTS
In March 1999, the Company renegotiated the terms of its $27,000 long-term
credit facility. Amounts borrowed under the revolving credit facility are
secured by all assets of the Company, bear interest at LIBOR or prime plus
specified margins (as elected by the Company each quarter), and mature on
September 30, 2001. The maturity date may be extended to September 30, 2002 if
certain specified events occur. The Company is also required to comply with
certain specified financial covenants related to operating performance and
liquidity at the end of each quarter.
In connection with the renegotiation of the financing, the lender was issued
warrants to purchase 25,000 shares of common stock at an exercise price of $3.00
per share. The warrants expire in March 2006 and contain anti-dilution
provisions.
44
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. SUBSEQUENT EVENTS (CONTINUED)
The Company in March 1999 also issued $13,000 of subordinated notes bearing
interest at 9.25% per annum through June 2000, and 12% per annum thereafter
until maturity in March 2004. The subordinated notes are secured by a second
priority interest in all of the assets of the Company, and prohibits the payment
of dividends without the consent of the lender. The proceeds from the issuance
of the notes will be used to fund 1999 maturities of long-term debt.
In connection with the issuance of the subordinated debt, the lender was issued
warrants to purchase 392,506 shares of common stock at an exercise price of
$3.21 per share. The warrants expire six years from the date of final payment on
the subordinated debt.
45
ITEM 9. CHANGE 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 Annual Meeting of Stockholders for fiscal 1999 to be filed within 120
days after the end of the Company's fiscal year ended December 31, 1998 (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.
46
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.)
Consolidated Balance Sheet as of December 31, 1998 and December 31,
1997
Consolidated Statement of Income for the fiscal years ended December
31, 1998, December 31, 1997 and December 31, 1996
Consolidated Statement of Stockholders' Equity for the fiscal years
ended December 31, 1998, December 31, 1997 and December 31, 1996
Consolidated Statement of Cash Flows for the fiscal years ended
December 31, 1998, December 31, 1997 and December 31, 1996
Notes to Consolidated Financial Statements
47
2. FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts and Reserves
All schedules, other than those outlined above, are omitted as the
information is not required or is otherwise furnished.
- ------------------------------------------------------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------------------------------------------------------
FTI Consulting, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------------------
Additions
- ------------------------------------------------------------------------------------------------------------------------------
Description Balance at Charged to Charged to Other Deductions Balance at End
Beginning of Costs and Accounts of Period
Period Expenses
- ------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996:
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Reserves and allowances deducted from asset accounts:
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts 377 115 116 (1) 376
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
(1) Uncollectible accounts written off, net of recoveries.
- ------------------------------------------------------------------------------------------------------------------------------
(2) Allowance recorded during acquisitions.
- ------------------------------------------------------------------------------------------------------------------------------
48
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 Financing and Security Agreement dated September 15, 1998,
between the Company and NationsBank, N.A., regarding a
revolving credit facility in the maximum amount of $35
million
* 10.2 1992 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.
**** 10.6 1997 Stock Option Plan
***** 10.7 Employee Stock Purchase Plan
****** 10.8 Stock Purchase Agreement dated as of June 30, 1998 by and
among FTI Consulting, Inc., Klick, Kent & Allen, Inc. and
the Stockholders Named Therein
******* 10.9 Stock Purchase Agreement dated as of September 25, 1998 by
and among FTI Consulting, Inc., Glen R. Baker and Dennis A.
Guenther
******** 10.10 Stock Purchase Agreement dated as of September 17, 1998, by
and between FTI Consulting, Inc., Kahn Consulting, Inc.,
KCI Management Corp. and the Stockholders Named Therein
** 10.11 $13,000,000 Investment and Loan Agreement dated March 29,
1999, among FTI Consulting, Inc., its subsidiaries and
Allied Capital Corporation and Allied Investment
Corporation
** 10.12 Amended and Restated Financing and Security Agreement dated
March 30, 1999, among FTI Consulting, Inc., its
subsidiaries and NationsBank N.A.
** 11. Computation of Per Share Earnings (included in Note 2 to
the Consolidated Financial Statements included in Item 7,
herein)
** 21.0 Schedule of Subsidiaries
** 23.0 Consent of Ernst & Young LLP
24.0 Power of Attorney (included on signature page)
** 27.0 Financial Data Schedule
49
- ----------
* Filed as an exhibit to the Company's Registration Statement on Form
SB-1, as amended (Filed 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 this Form 10-K.
*** Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 (File No. 001-14875) and
incorporated herein by reference.
**** Filed as an exhibit to the Company's Registration Statement on Form
S-8 (File No. 333-30173) 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 (File No. 333-02002).
******* Filed as an exhibit to the Company's Current Report on Form 8-K filed
October 13, 1998 (File No. 333-02002).
******** Filed as an exhibit to the Company's Current Report on Form 8-K filed
October 2, 1998 (File No. 333-02002).
50
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 30
day of March, 1999.
FTI CONSULTING, INC.
By: /s/ Jack B. Dunn, IV
-------------------------------------------
Name: Jack B. Dunn, IV
Title: Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below on the dates indicated by the
following persons in the capacities indicated. Each person whose signature
appears below hereby constitutes and appoints each of Jack B. Dunn, IV as his
attorney-in-fact and agent, with full power of substitution and resubstitution
for him in any and all capacities, to sign any or all amendments to this Report
and to file same, with exhibits thereto and other documents in connection
therewith, granting unto such attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
in connection with such matters and hereby ratifying and confirming all that
such attorney-in-fact and agent or his substitutes may do or cause to be done by
virtue hereof.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- --------- ------------------------ ----
/s/ JACK B. DUNN IV Chairman of the Board and Chief March 30, 1999
- ------------------------------------ Executive Officer (principal
Jack B. Dunn, IV executive officer)
/s/ STEWART J. KAHN President and Acting Chief Financial March 30, 1999
- ------------------------------------ Officer (principal financial and
Stewart J. Kahn accounting officer)
/s/ JOSEPH R. REYNOLDS, JR. Vice Chairman of the Board March 30, 1999
- --------------------------------
Joseph R. Reynolds, Jr.
Director March 30, 1999
- ------------------------------------
James A. Flick, Jr.
/s/ PETER F. O'MALLEY Director March 30, 1999
- ------------------------------------
Peter F. O'Malley
/s/ DENNIS J. SHAUGHNESSY Director March 30, 1999
- ------------------------------------
Dennis J. Shaughnessy
/s/ GEORGE P. STAMAS Director March 30, 1999
- ------------------------------------
George P. Stamas
51