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Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

x   QUARTERLY REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE
     SECURITIES AND EXCHANGE ACT OF 1934

 

     For the quarterly period ended March 31, 2003

 

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

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

900 Bestgate Road, Suite 100, Annapolis, Maryland

 

21401

(Address of Principal Executive Offices)

 

(Zip Code)

 

(410) 224-8770

(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

 

New York 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes  x  No  ¨

 

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

 

Class


 

Outstanding at May 8, 2003


Common Stock, par value $.01 per share

 

27,461,046

 



Table of Contents

FTI CONSULTING, INC.

 

INDEX

 

    

Page


PART I

  

FINANCIAL INFORMATION

    

Item 1.

  

Consolidated Financial Statements

    
    

Consolidated Balance Sheets—December 31, 2002 and March 31, 2003

  

3

    

Consolidated Statements of Income—Three months ended March 31, 2002 and three months ended March 31, 2003

  

5

    

Consolidated Statements of Cash Flows—Three months ended March 31, 2002 and three months ended March 31, 2003

  

6

    

Notes to Unaudited Consolidated Financial Statements—March 31, 2003

  

7

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

17

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

24

Item 4.

  

Controls and Procedures

  

24

PART II

  

OTHER INFORMATION

    

Item 1.

  

Legal Proceedings

  

24

Item 2.

  

Changes in Securities

  

24

Item 3.

  

Defaults Upon Senior Securities

  

24

Item 4.

  

Submission of Matters to a Vote of Security Holders

  

25

Item 5.

  

Other Information

  

25

Item 6.

  

Exhibits and Reports on Form 8-K

  

25

SIGNATURES

  

26

CERTIFICATIONS

  

27

 

2


Table of Contents

 

Part I. Financial Information

 

FTI Consulting, Inc. and Subsidiaries

 

Consolidated Balance Sheets

(in thousands of dollars, except share amounts)

 

    

December 31,

2002


    

March 31,

2003


 
    

(audited)

    

(unaudited)

 

Assets

                 

Current assets:

                 

Cash and cash equivalents

  

$

9,906

 

  

$

75,497

 

Accounts receivable, less allowance of $6,955 in 2002 and $5,725 in 2003

  

 

29,271

 

  

 

31,925

 

Unbilled receivables, less allowance of $2,061 in 2002 and $2,442 in 2003

  

 

35,576

 

  

 

35,153

 

Deferred income taxes

  

 

2,364

 

  

 

2,364

 

Prepaid expenses and other current assets

  

 

3,165

 

  

 

2,076

 

Current assets of discontinued operations

  

 

11,084

 

  

 

9,443

 

    


  


Total current assets

  

 

91,366

 

  

 

156,458

 

Property and equipment:

                 

Furniture, equipment and software

  

 

22,588

 

  

 

25,823

 

Leasehold improvements

  

 

4,714

 

  

 

5,142

 

    


  


    

 

27,302

 

  

 

30,965

 

Accumulated depreciation and amortization

  

 

(12,364

)

  

 

(14,109

)

    


  


    

 

14,938

 

  

 

16,856

 

Deferred income taxes

  

 

200

 

  

 

200

 

Goodwill

  

 

299,241

 

  

 

299,270

 

Other intangible assets, net of accumulated amortization of $1,033 in 2002 and $1,809 in 2003

  

 

4,067

 

  

 

3,291

 

Other assets

  

 

5,799

 

  

 

5,928

 

Long-term assets of discontinued operations

  

 

14,920

 

  

 

12,508

 

    


  


Total assets

  

$

430,531

 

  

$

494,511

 

    


  


 

See accompanying notes.

 

3


Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

 

Consolidated Balance Sheets

(in thousands of dollars, except share amounts)

 

    

December 31,

2002


    

March 31,

2003


 
    

(audited)

    

(unaudited)

 

Liabilities and stockholders’ equity

                 

Current liabilities:

                 

Accounts payable and accrued expenses

  

$

7,410

 

  

$

8,126

 

Accrued compensation expense

  

 

25,400

 

  

 

19,648

 

Income taxes payable

  

 

3,534

 

  

 

65

 

Deferred income taxes

  

 

193

 

  

 

193

 

Current portion of long-term debt

  

 

20,000

 

  

 

20,000

 

Billings in excess of services provided

  

 

19,921

 

  

 

15,483

 

Other current liabilities

  

 

466

 

  

 

577

 

Current liabilities of discontinued operations

  

 

664

 

  

 

—  

 

    


  


Total current liabilities

  

 

77,588

 

  

 

64,092

 

Long-term debt, less current portion

  

 

77,833

 

  

 

20,879

 

Other long-term liabilities

  

 

1,405

 

  

 

1,185

 

Deferred income taxes

  

 

5,730

 

  

 

7,768

 

Commitments and contingent liabilities

  

 

—  

 

  

 

—  

 

Stockholders’ equity:

                 

Preferred stock, $.01 par value; 5,000,000 shares authorized, none outstanding

  

 

—  

 

  

 

—  

 

Common stock, $.01 par value; 45,000,000 shares; 24,004,292 and 27,451,046 shares issued and outstanding in 2002 and 2003, respectively

  

 

240

 

  

 

274

 

Additional paid-in capital

  

 

200,576

 

  

 

313,485

 

Unearned compensation

  

 

(346

)

  

 

(285

)

Retained earnings

  

 

68,198

 

  

 

87,641

 

Accumulated other comprehensive loss

  

 

(693

)

  

 

(528

)

    


  


Total stockholders’ equity

  

 

267,975

 

  

 

400,587

 

    


  


Total liabilities and stockholders’ equity

  

$

430,531

 

  

$

494,511

 

    


  


 

See accompanying notes.

 

4


Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

 

Consolidated Statements of Income

(in thousands of dollars, except per share data)

 

    

Three Months Ended

March 31,


 
    

2002


    

2003


 
    

(unaudited)

    

(unaudited)

 

Revenues

  

$

37,907

 

  

$

101,351

 

Direct cost of revenues

  

 

18,695

 

  

 

46,536

 

Selling, general and administrative expenses

  

 

9,809

 

  

 

21,167

 

Amortization of other intangible assets

  

 

—  

 

  

 

775

 

    


  


    

 

28,504

 

  

 

68,478

 

    


  


Operating income

  

 

9,403

 

  

 

32,873

 

Other income (expense):

                 

Interest income

  

 

29

 

  

 

128

 

Interest expense

  

 

(759

)

  

 

(1,958

)

    


  


    

 

(730

)

  

 

(1,830

)

    


  


Income from continuing operations before income taxes

  

 

8,673

 

  

 

31,043

 

Income taxes

  

 

3,500

 

  

 

12,575

 

    


  


Income from continuing operations

  

 

5,173

 

  

 

18,468

 

Income from operations of discontinued operations, net of income taxes

  

 

1,431

 

  

 

1,230

 

Loss from sale of discontinued operations, net of income taxes

  

 

—  

 

  

 

(255

)

    


  


Income from discontinued operations

  

 

1,431

 

  

 

975

 

    


  


Net income

  

$

6,604

 

  

$

19,443

 

    


  


Income from continuing operations per common share, basic

  

$

0.26

 

  

$

0.72

 

    


  


Earnings per common share, basic

  

$

0.33

 

  

$

0.75

 

    


  


Income from continuing operations per common share, diluted

  

$

0.24

 

  

$

0.69

 

    


  


Earnings per common share, diluted

  

$

0.31

 

  

$

0.72

 

    


  


 

See accompanying notes.

 

5


Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

 

Consolidated Statements of Cash Flows

(in thousands of dollars)

 

    

Three Months Ended

March 31,


 
    

2002


    

2003


 
    

(unaudited)

 

Operating activities

                 

Net income

  

$

6,604

 

  

$

19,443

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

                 

Depreciation and other amortization

  

 

1,086

 

  

 

1,555

 

Amortization of other intangible assets

  

 

—  

 

  

 

775

 

Income tax benefit from stock option exercises

  

 

1,465

 

  

 

9,129

 

Provision for doubtful accounts

  

 

673

 

  

 

2,335

 

Non-cash stock compensation expense

  

 

48

 

  

 

61

 

Non-cash charge on sale of discontinued operations

  

 

—  

 

  

 

255

 

Non-cash interest expense and other

  

 

164

 

  

 

640

 

Changes in operating assets and liabilities:

                 

Accounts receivable, billed and unbilled

  

 

(8,645

)

  

 

(5,192

)

Prepaid expenses and other current assets

  

 

(1,567

)

  

 

1,016

 

Accounts payable and accrued expenses

  

 

412

 

  

 

672

 

Accrued compensation expense

  

 

(4,336

)

  

 

(5,752

)

Billings in excess of services provided

  

 

200

 

  

 

(4,442

)

Income taxes recoverable/payable

  

 

2,434

 

  

 

(1,431

)

Other current liabilities

  

 

(144

)

  

 

81

 

    


  


Net cash provided by (used in) operating activities

  

 

(1,606

)

  

 

19,145

 

Investing activities

                 

Purchase of property and equipment

  

 

(1,603

)

  

 

(3,545

)

Cash received from sale of discontinued operations

  

 

—  

 

  

 

2,150

 

Contingent payments to former owners of subsidiaries

  

 

(121

)

  

 

(408

)

Acquisition of businesses, including acquisition costs

  

 

(3,241

)

  

 

—  

 

Change in other assets

  

 

—  

 

  

 

1,460

 

    


  


Net cash used in investing activities

  

 

(4,965

)

  

 

(343

)

Financing activities

                 

Issuance of common stock and exercise of options

  

 

2,081

 

  

 

4,596

 

Proceeds from issuance of common stock, net of offering costs

  

 

—  

 

  

 

99,228

 

Payments of long-term debt

  

 

(1,083

)

  

 

(56,954

)

Payment of financing fees

  

 

(50

)

  

 

(81

)

    


  


Net cash provided by financing activities

  

 

948

 

  

 

46,789

 

    


  


Net increase (decrease) in cash and cash equivalents

  

 

(5,623

)

  

 

65,591

 

Cash and cash equivalents at beginning of period

  

 

12,856

 

  

 

9,906

 

    


  


Cash and cash equivalents at end of period

  

$

7,233

 

  

$

75,497

 

    


  


 

See accompanying notes.

 

6


Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2003

(amounts in tables expressed in thousands, except per share data)

 

1. Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules or regulations. The interim financial statements are unaudited, but reflect all adjustments (consisting of normal recurring accruals), which are, in the opinion of management, necessary to present a fair statement of results of the interim periods presented. These financial statements should be read in conjunction with the financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

Operating results for the three-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003.

 

2. Significant Accounting Policies and Recent Accounting Pronouncements

 

Billings in Excess of Services Provided

 

Billings in excess of services provided represents amounts billed to clients, such as retainers, in advance of work being performed. Clients may make advance payments, which are held on deposit until completion of work. Such amounts are either applied to final billings or refunded to clients upon completion of work. Retainers in excess of related accounts receivable and unbilled receivables are recorded as billings in excess of services provided in the consolidated balance sheet.

 

Stock Options and Stock 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, compensation expense is recorded over the vesting period to the extent that the fair value of the underlying stock on the date of grant exceeds the exercise or acquisition price of the stock or stock-based award. 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 fair 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.

 

At March 31, 2003, the Company has two stock-based employee compensation plans, which are described more fully in Note 7 – Stock Option Plans and Employee Stock Purchase Plan. All options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company also periodically issues restricted and unrestricted stock to employees in connection with new hires and performance evaluations. The fair market value on the date of issue of unrestricted stock is immediately charged to compensation expense, and the fair value on the date of issue of restricted stock is charged to compensation expense ratably over the restriction period.

 

7


Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2003 (continued)

(amounts in tables expressed in thousands, except per share data)

 

2. Significant Accounting Policies and Recent Accounting Pronouncements (continued)

 

Stock Options and Stock Granted to Employees (continued)

 

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement 123 to stock-based employee compensation.

 

    

Three Months Ended

March 31,


 
    

2002


    

2003


 

Net income, as reported

  

$

6,604

 

  

$

19,443

 

Add: Stock-based employee compensation cost included in net income, net of taxes

  

 

48

 

  

 

61

 

Deduct: Total stock-based employee compensation expense determined under fair

                     value based method for all awards, net of taxes

  

 

(1,003

)

  

 

(2,154

)

    


  


Pro forma net income

  

$

5,649

 

  

$

17,350

 

    


  


Earnings per share:

                 

Basic-as reported

  

$

0.33

 

  

$

0.75

 

Basic-pro forma

  

$

0.29

 

  

$

0.67

 

Diluted-as reported

  

$

0.31

 

  

$

0.72

 

Diluted-pro forma

  

$

0.27

 

  

$

0.65

 

 

The fair value of the stock-based awards was estimated at the date of grant using the Black-Scholes option-pricing model. 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-based awards. The following assumptions were made in computing the fair value of stock-based awards:

 

    

Three Months Ended

March 31,


    

2002


  

2003


Risk-free interest rate

  

4.50%

  

3.50%

Dividend yield

  

0%

  

0%

Option life

  

3.38 years

  

2.59 years

Stock price volatility

  

75.8% to 78.2%

  

63.4% to 68.5%

Weighted average fair value of granted options

  

$12.38

  

$16.83

 

8


Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2003 (continued)

(amounts in tables expressed in thousands, except per share data)

 

2. Significant Accounting Policies and Recent Accounting Pronouncements (continued)

 

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. The Company estimates its quarterly income tax provisions considering the expected annual effective income tax rate, and adjusts the current and deferred income tax accounts in making these estimates.

 

Goodwill and Other Intangible Assets

 

The Company performs impairment tests on the carrying value of its goodwill on at least an annual basis. No impairment of goodwill was identified as a result of these tests, which were conducted as of December 31, 2002. Other intangible assets with finite lives are amortized over their estimated useful lives. The changes in the carrying amount of goodwill for the three months ended March 31, 2003, are as follows:

 

    

Total


    

Less Discontinued Operations


    

Continuing Operations


 

Balance as of January 1, 2003

  

$

312,455

 

  

$

(13,214

)

  

$

299,241

 

Goodwill acquired during the year:

                          

Contingent payments to former owners of subsidiaries

  

 

408

 

  

 

—  

 

  

 

408

 

Allocation of purchase price of BRS

  

 

(379

)

  

 

—  

 

  

 

(379

)

Goodwill disposed of during the year

                          

Sale of LWG asset disposal group

  

 

(1,884

)

  

 

1,884

 

        
    


  


  


Balance as of March 31, 2003

  

$

310,600

 

  

$

(11,330

)

  

$

299,270

 

    


  


  


 

As discussed in Note 3 – Acquisition of BRS, on August 30, 2002, the Company acquired the domestic Business Recovery Services division of PricewaterhouseCoopers LLP (“BRS”). The Company expects to complete the allocation of the purchase price by June 30, 2003.

 

Goodwill of $11,330 of the SEA Asset Disposal group is included in long-term assets of discontinued operations. As discussed in Note 4 – Pending Sale of Applied Sciences Practice Group, the Company currently expects to recover the carrying value of the assets of the disposal group. However, it is reasonably possible that the ultimate amount realized from the sale may be less than the carrying value.

 

9


Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2003 (continued)

(amounts in tables expressed in thousands, except per share data)

 

2. Significant Accounting Policies and Recent Accounting Pronouncements (continued)

 

Early Extinguishment of Debt

 

On January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (Statement 145). Among other changes, Statement 145 rescinds Statement 4, which required all gains and losses from extinguishment of debt to be aggregated and classified as an extraordinary item, net of the related tax effect. Statement 145 provides that gains and losses from extinguishment of debt should be classified as extraordinary items only if they are unusual or infrequent or they otherwise meet the criteria for classification as an extraordinary item, and observes that debt extinguishment transactions would seldom, if ever, result in extraordinary item classification of the resulting gains and losses.

 

During the three months ended March 31, 2003, the Company extinguished a portion of its long-term debt in connection with the sale of the LWG asset disposal group and the public offering of its common stock, as required by its credit agreement. Accordingly, related deferred bank financing fees of approximately $513,000 were written-off and treated as a component of interest expense.

 

Reclassifications

 

Certain amounts in the 2002 financial statements have been reclassified to conform to the 2003 presentation.

 

3. Acquisition of BRS

 

Domestic Business Recovery Services Division of PwC

 

On August 30, 2002, the Company acquired the domestic Business Recovery Services division of PricewaterhouseCoopers, LLP (“BRS). The Company recorded significant goodwill in the acquisition as a result of the ability to earn a higher rate of return from the acquired business than would be expected if those net assets had to be acquired or developed separately.

 

The Company believes the goodwill recorded as a result of the BRS acquisition will be fully deductible for income tax purposes. The results of operations of BRS are included in the accompanying consolidated financial statements commencing August 31, 2002.

 

The acquisition was accounted for using the purchase method of accounting. The Company allocated the cost of the acquisition of BRS to identifiable assets and liabilities based upon their estimated relative fair values. The Company has not finalized the allocation process and therefore the allocation of the purchase price of BRS is preliminary. Many of BRS’ clients and engagements are subject to the jurisdiction of the various bankruptcy courts and trustees throughout the United States. These authorities have substantial influence and control over the ultimate valuation of the services performed by BRS. Many of the BRS client engagements are very complex and the services are performed for entities in financial distress, often with limited resources to pay professional fees. The valuation of the billed and unbilled receivables at the date of acquisition is very complex and the Company has not yet completed its valuation of these accounts. However, the final purchase price allocation is not expected to vary significantly from the preliminary allocation included in the accompanying consolidated financial statements.

 

10


Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2003 (continued)

(amounts in tables expressed in thousands, except per share data)

 

3. Acquisitions (continued)

 

Domestic Business Recovery Services Division of PwC (continued)

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

 

At August 30, 2002

 

Current assets:

           

Accounts receivable, net of allowances

       

$

16,943

Unbilled receivables, net of allowances

       

 

24,753

         

         

 

41,696

         

Estimated intangible assets subject to amortization (estimated two year weighted-average useful life)

           

Contracts, backlog

  

4,200

      

Intellectual property

  

360

      

Non-compete agreement

  

540

      
    
      
         

 

5,100

Goodwill

       

 

219,316

         

Total assets acquired

       

 

266,112

         

Current liabilities:

           

Accrued compensation

       

 

1,709

Billings in excess of services provided

       

 

20,529

         

Total liabilities assumed

       

 

22,238

         

Net assets acquired

       

$

243,874

         

 

4. Pending Sale of Applied Sciences Practice Group

 

In July 2002, the Company committed to a plan to sell its applied sciences practice group, consisting of two separate business components, LWG, Inc. (“LWG”) and S.E.A. Inc. (“SEA”). In January 2003, the Company sold the LWG disposal group for total consideration of $4.15 million, consisting of cash of $2.15 million and a note in the amount of $2.0 million. An after-tax loss of approximately $891,000 was recorded as of December 31, 2002 to present the LWG asset disposal group at its fair value less cost to sell. In the first quarter of 2003, an after-tax loss of approximately $255,000 was recorded to write-off costs incurred in connection with the disposal of the SEA and LWG asset disposal groups.

 

11


Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2003 (continued)

(amounts in tables expressed in thousands, except per share data)

 

4. Pending Sale of Applied Sciences Practice Group (continued)

 

The remaining SEA asset disposal group is available for immediate sale in its present condition, subject only to the terms that are usual and customary for sales of such asset disposal groups. An active program to locate a buyer, and other actions required to complete the plan to sell, have been initiated, and a sale is expected to be completed during 2003. Actions necessary to complete the plan indicate that it is unlikely significant changes to the plan will be made or that the plan will be withdrawn. The assets comprising the applied sciences asset disposal group are measured at the lower of their carrying amount or estimated fair value less cost to sell. The Company currently expects to recover the $19.9 million carrying value of the net assets of the S.E.A asset disposal group, however, it is reasonably possible that the ultimate amount realized from the sale may be less than the carrying value.

 

Assets of the applied sciences practice group held for sale are as follows:

 

    

Total


  

LWG


  

SEA


    

12/31/2002


    

3/31/2003


  

12/31/2002


    

3/31/2003


  

12/31/2002


  

3/31/2003


Accounts receivable, net

  

$

7,724

 

  

$

7,161

  

$

1,303

 

  

$

—  

  

$

6,421

  

$

7,161

Unbilled receivables, net

  

 

3,179

 

  

 

2,145

  

 

1,080

 

  

 

—  

  

 

2,099

  

 

2,145

Other current assets

  

 

181

 

  

 

137

  

 

150

 

  

 

—  

  

 

31

  

 

137

    


  

  


  

  

  

Current assets of discontinued operations

  

 

11,084

 

  

 

9,443

  

 

2,533

 

  

 

—  

  

 

8,551

  

 

9,443

    


  

  


  

  

  

Property and equipment, net

  

 

1,546

 

  

 

1,178

  

 

237

 

  

 

—  

  

 

1,309

  

 

1,178

Goodwill, net

  

 

13,214

 

  

 

11,330

  

 

1,884

 

  

 

—  

  

 

11,330

  

 

11,330

Other assets

  

 

160

 

  

 

—  

  

 

160

 

  

 

—  

  

 

—  

  

 

—  

    


  

  


  

  

  

Long-term assets of discontinued operations

  

 

14,920

 

  

 

12,508

  

 

2,281

 

  

 

—  

  

 

12,639

  

 

12,508

    


  

  


  

  

  

Current liabilities of the LWG asset disposal group

  

 

(664

)

  

 

—  

  

 

(664

)

  

 

—  

  

 

—  

  

 

—  

    


  

  


  

  

  

Assets of discontinued operations

  

$

25,340

 

  

$

21,951

  

$

4,150

 

  

$

—  

  

$

21,190

  

$

21,951

    


  

  


  

  

  

 

Because the operations and cash flows of the business components comprising the applied sciences practice group will be eliminated from the ongoing operations of the Company as a result of the disposal transaction, and because the Company will not have any significant continuing involvement in the operations after the disposal transactions, the results of the applied sciences practice group’s operations are reported for all periods presented as a separate component of income, net of income taxes. Accordingly, the accompanying statements of income for the three months ended March 31, 2002 and 2003, report the operations of the applied sciences practice group as a discontinued operation.

 

Summarized operating results of the applied sciences practice group are as follows:

 

      

Three Months Ended

March 31,


      

2002


  

2003


      

(SEA and LWG)

  

(SEA only)

Revenue

    

$

12,773

  

$

9,612

Income before income taxes

    

 

2,426

  

 

2,091

Net income

    

 

1,431

  

 

1,230

 

12


Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2003 (continued)

(amounts in tables expressed in thousands, except per share data)

 

5. Stockholders’ Equity

 

    

Common

Stock


    

Additional

Paid-in

Capital


      

Unearned

Compensation


    

Retained

Earnings


    

Accumulated

Other

Comprehensive

Loss


    

Total


 

Balance at January 1, 2003

  

$

240

 

  

$

200,576

 

    

$

(346

)

  

$

68,198

    

$

(693

)

  

$

267,975

 

Issuance of 2,661,595 shares of common stock for cash, net of offering costs of $1,381

  

 

27

 

  

 

99,201

 

                               

 

99,228

 

Exercise of stock options to purchase 785,944 shares of common stock, including tax benefit of $9.1 million

  

 

8

 

  

 

13,717

 

                               

 

13,725

 

Forfeiture of 800 shares of restricted stock

  

 

(1

)

  

 

(9

)

                               

 

(10

)

Amortization of unearned compensation expense

                      

 

61

 

                    

 

61

 

Comprehensive Income:

                                                       

Other comprehensive income – change in fair value of interest rate swaps, net of income taxes of $112

                                        

 

165

 

  

 

165

 

Net income for the three-months ended March 31, 2003

                               

 

19,443

             

 

19,443

 

                                                   


Total comprehensive income

                                                 

 

19,608

 

    


  


    


  

    


  


Balance at March 31, 2003

  

$

274

 

  

$

313,485

 

    

$

(285

)

  

$

87,641

    

$

(528

)

  

$

400,587

 

    


  


    


  

    


  


 

Total comprehensive income for the three-months ended March 31, 2002, was $6,824, representing the change in fair value of interest rate swaps of $220 and net income of $6,604.

 

On March 17, 2003, the Board of Directors approved a three-for-two split of the Company’s common stock payable in the form of a stock dividend. The stock split is subject to stockholder approval of an increase in the Company’s authorized capital from 45 million to 75 million shares at the Company’s annual meeting to be held on May 21, 2003. If the increase in authorized capital is approved, stockholders would receive one additional share for every two shares held on the record date of May 7, 2003, payable on June 4, 2003.

 

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Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2003 (continued)

(amounts in tables expressed in thousands, except per share data)

 

6. Earnings Per Share

 

The following table summarizes the computations of basic and diluted earnings per share:

 

    

Three Months Ended

March 31,


 
    

2002


  

2003


 

Numerator used in basic and diluted earnings per common share:

               

Income from continuing operations

  

$

5,173

  

$

18,468

 

Income from operations of discontinued operations, net of income taxes

  

 

1,431

  

 

1,230

 

Loss on disposal of discontinued operations

  

 

—  

  

 

(255

)

    

  


Net income

  

$

6,604

  

$

19,443

 

    

  


Denominator:

               

Denominator for basic earnings per common share – weighted average shares

  

 

19,783

  

 

25,768

 

Effect of dilutive securities:

               

Stock options

  

 

1,570

  

 

1,124

 

    

  


Denominator for diluted earnings per common share – weighted average shares and effect of dilutive securities

  

 

21,353

  

 

26,892

 

    

  


Income from continuing operations per common share, basic

  

$

0.26

  

$

0.72

 

Income from operations of discontinued operations, net of income taxes, per common share, basic

  

 

0.07

  

 

0.04

 

    

  


Earnings per common share, basic

  

$

0.33

  

$

0.75

 

    

  


Income from continuing operations per common share, diluted

  

$

0.24

  

$

0.69

 

Income from operations of discontinued operations, net of income taxes, per common share, diluted

  

 

0.07

  

 

0.04

 

    

  


Earnings per common share, diluted

  

$

0.31

  

$

0.72

 

    

  


 

14


Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2003 (continued)

(amounts in tables expressed in thousands, except per share data)

 

7. Stock Option Plans and Employee Stock Purchase Plan

 

Prior to 1997, the Company granted 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, provides for the granting to employees and non-employee directors of qualified and non-qualified options to purchase an aggregate of up to 7,725,000 shares of common stock. Options to purchase common stock may be granted at prices not less than 50% of the fair market value of the common stock at the date of grant, for a term of no more than ten years. Vesting provisions for individual awards are at the discretion of the Board of Directors.

 

The following table summarizes the option activity under the plans for the three-month periods ended March 31, 2002 and 2003:

 

    

2002


    

Weighted Avg. Exercise Price


  

2003


    

Weighted Avg. Exercise Price


Option outstanding at January 1

  

3,171,852

 

  

$

8.09

  

3,871,414

 

  

$

22.14

Options granted

  

392,500

 

  

$

26.20

  

60,000

 

  

$

40.46

Options exercised

  

(291,990

)

  

$

4.83

  

(785,944

)

  

$

5.83

Options forfeited

  

(3,750

)

  

$

6.34

  

(1,000

)

  

$

4.46

    

  

  

  

Options outstanding at March 31

  

3,268,612

 

  

$

10.60

  

3,144,470

 

  

$

26.63

    

  

  

  

Options exercisable at March 31

  

1,331,611

 

  

$

7.54

  

863,556

 

  

$

19.77

    

  

  

  

 

All options granted have an exercise price equal to or greater than the quoted market price of the Company’s common stock on the date of grant. Exercise prices for the options outstanding as of March 31, 2003, ranged from $2.84 to $45.76, as follows:

 

Range of Exercise

Prices


  

Options Outstanding


    

Weighted

Average

Exercise Prices

of Options

Outstanding


    

Weighted

Average

Remaining

Contractual

Life of Options

Outstanding


  

Options

Exercisable


  

Weighted

Average

Exercise

Price of

Options

Exercisable


$  2.84 – $  6.88

  

370,234

    

$

4.72

    

6.45

  

165,117

  

$

4.62

$  7.36 – $29.15

  

1,197,603

    

$

19.56

    

8.38

  

623,439

  

$

21.17

$31.99 – $45.76

  

1,576,633

    

$

36.85

    

9.43

  

75,000

  

$

41.40

    
    

    
  
  

    

3,144,470

    

$

26.63

         

863,556

  

$

19.77

    
    

         
  

 

Employee Stock Purchase Plan

 

The Company maintains the FTI Consulting, Inc. Employee Stock Purchase Plan. The plan allows eligible employees to purchase shares of common stock at 85% of the lower of the closing price of the Company’s common stock on the first trading day or the last trading day of each semi-annual offering period. Employees may authorize the Company to withhold up to 15% of their compensation during any offering period, subject to certain limitations.

 

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Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2003 (continued)

(amounts in tables expressed in thousands, except per share data)

 

8. Income Taxes

 

The income tax provisions for interim periods in 2002 and 2003 are based on the estimated effective tax rates applicable for the full years. The Company’s income tax provision for continuing operations of approximately $13.0 million for the three-month period ended March 31, 2003 consists of federal and state income taxes. The effective income tax rate in 2003 is expected to be approximately 40.5%. This rate is higher than the statutory federal income tax rate of 35% due principally to state and local income taxes.

 

9. Debt

 

During 2002, the Company entered into a new credit facility in connection with the acquisition of BRS, The new credit facility originally consisted of a pre-existing term loan of $26.0 million, a new term loan of $74.0 million and a new revolving credit facility of $100.0 million. The debt under this credit facility bears interest at an annual rate equal to LIBOR plus an applicable margin or an alternative base rate defined as the higher of (1) the lender’s announced prime rate or (2) the federal funds rate plus the sum of 50 basis points and an applicable margin. If not prepaid, the $23.8 million Term A loan will mature on December 1, 2005, and the $74.0 million Term B loan and the revolving credit facility will mature on August 30, 2006. Under the credit facility, the lenders have a security interest in substantially all of the Company’s assets.

 

In January 2003, the Company completed the sale of the LWG asset disposal group and received $2.15 million in cash and a long-term note for $2.0 million. In accordance with its credit facility, the Company repaid $2.15 million of its long-term debt and wrote off approximately $14,000 of deferred financing fees to interest expense.

 

In February 2003, the Company completed the public offering of 2,665,585 shares of its common stock for $99.2 million in cash (net of offering costs of $1.4 million). The credit facility requires that at least half of the net proceeds from any public offering of its equity securities be applied to the repayment of the long-term debt. The Company repaid $49.8 million of debt and wrote-off $499,000 of deferred financing fees to interest expense.

 

Aggregate maturities of debt at March 31, 2003 are as follows:

 

April 1 through December 31, 2003

  

$

15,000

 

2004

  

 

17,212

 

2005

  

 

8,667

 

    


    

 

40,879

 

less current portion

  

 

(20,000

)

    


total –

  

$

20,879

 

    


 

16


Table of Contents

 

FTI Consulting, Inc.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We are one of the largest U.S. providers of turnaround, restructuring, bankruptcy and related consulting services. Our highly skilled professionals assist distressed companies in improving their financial position, or their creditors or other stakeholders in maximizing recovery of their claims. We also provide other consulting services such as corporate recovery, forensic accounting, fraud investigation and asset tracing, regulatory, intellectual property, and mergers and acquisitions advisory services. Our trial support practice group advises clients in all phases of litigation, including pre-filing, discovery, jury selection, trial preparation, expert testimony and the actual trial.

 

In July 2002, we committed to a plan to sell our applied sciences practice group, which offers a broad range of forensic engineering and scientific investigation services. In January 2003, we completed the sale of the LWG asset disposal group and expect to sell the remaining portions of the applied sciences practice group during 2003. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations of our applied sciences practice group are treated as discontinued operations. Unless otherwise indicated, all amounts included in Management’s Discussion and Analysis of Financial Condition and Results of Operations are from continuing operations. We have included in Note 4 – Pending Sale of Applied Sciences Practice Group to the Consolidated Financial Statements a more comprehensive discussion about our discontinued operations.

 

Our direct cost of revenues consists primarily of employee compensation and related payroll benefits, the cost of outside consultants assigned to revenue-generating activities and other related expenses billable to clients. In the first quarter of 2003, our direct costs were 45.9% of revenues, an improvement from 49.3% in the first quarter of 2002. This improvement is primarily attributable to changes in the mix of our service offerings and improved staff utilization resulting primarily from the acquisition of BRS.

 

Selling, general and administrative expenses consist primarily of salaries and benefits paid to office and corporate staff, as well as rent, marketing, corporate overhead expenses and depreciation and amortization of property and equipment. In the first quarter of 2003, selling, general and administrative expenses, including depreciation and amortization of property and equipment, represented about 20.9% of our revenues, a substantial reduction from the 25.9% of revenues these expenses represented in the first quarter of 2002. The primary reason for this relative improvement is that the majority of our growth in revenues has been in our financial consulting practice groups, which have lower ratios of selling, general and administrative expenses than our trial support practice groups. Our corporate overhead costs, which are included in selling, general and administrative expenses, represented about 5.1% of revenues in the first quarter of 2003, and 7.9% in the first quarter of 2002. The relative decline in our corporate overhead costs reflects the increased leverage of our overhead and corporate support services in relation to our increased revenue base.

 

We had goodwill related to our continuing operations of about $299.3 million at March 31, 2003, that we recorded principally from business combinations that we completed in the last five years, including $218.9 million related to our acquisition of BRS and $3.7 million related to our acquisition of Technology & Financial Consulting, Inc. (TFC), both during 2002. This goodwill represented about 60.5% of our total assets at March 31, 2003. As of January 1, 2002, we no longer amortize this goodwill, but rather make at least annual assessments of impairment. Our applied sciences practice group had goodwill of approximately $11.3 million at March 31, 2003, which is included in long-term assets of discontinued operations in the consolidated balance sheets.

 

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Table of Contents

 

Recent Developments

 

Acquisition of BRS

 

On August 30, 2002, we acquired BRS for $142.0 million in cash and 3,000,000 shares of our common stock valued at $101.9 million. Results from continuing operations for the first quarter of 2003 include the contribution from BRS, which was not included in 2002 first quarter results.

 

Pending Sale of Our Applied Sciences Practice Group

 

In July 2002, we committed to a plan to sell our applied sciences practice group, consisting of two separate business components or asset disposal groups, L.W.G., Inc. and S.E.A., Inc. Prior to September 1, 2002, these two business components comprised our applied sciences reporting segment. In January 2003, we sold the LWG asset disposal group for total consideration of $4.15 million, consisting of cash of $2.15 million and a seven-year note in the amount of $2.0 million. An after-tax loss of approximately $891,000 was recorded in the accompanying financial statements to present the LWG asset disposal group at its fair value less cost to sell. The remaining SEA asset disposal group is available for immediate sale in its present condition, subject only to the terms that are usual and customary for sales of such asset disposal groups. An active program to locate a buyer, and other actions required to complete the plan to sell, have been initiated.

 

The sale of the SEA asset disposal group is considered probable and is expected to be completed by the end of 2003. Actions necessary to complete the plan indicate that it is unlikely significant changes to the plan will be made or that the plan will be withdrawn. The assets comprising the SEA asset disposal group are measured at the lower of their carrying amount or estimated fair value less cost to sell. Property and equipment held for sale are no longer being amortized. We currently expect to recover the carrying value of the net assets of the SEA disposal group, which was $19.9 million at March 31, 2003. However, it is reasonably possible that the ultimate amount realized from the sale may be less than the carrying value.

 

Because the operations and cash flows of the applied sciences practice group will be eliminated from our future operations as a result of the pending disposal transaction, and because we will not have any significant continuing involvement in the held for sale operations after the disposal transactions, the results of the applied sciences practice group’s operations are reported for all periods presented as a separate component of income, net of income taxes.

 

Critical Accounting Policies

 

General. Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to bad debts, goodwill, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

Revenue Recognition. We derive substantially all of our revenue from providing professional services to our clients. Most of these services are rendered under arrangements that require the client to pay us a fee for the hours that we incur at agreed-upon rates. We also bill our clients for the cost of the production of our work products and other direct expenses that we incur on behalf of the client, such as travel costs and materials that we purchase to produce presentations for courtroom proceedings. We recognize our revenue from professional services as work is performed and expenses are incurred. The basis for our policy is the fact that we normally obtain engagement letters or other agreements from our

 

18


Table of Contents

clients prior to performing any services. In these letters and other agreements, the clients acknowledge that they will pay us based upon our time spent on the matter and at our agreed-upon hourly rates. Revenues recognized but not yet billed to clients have been recorded as unbilled receivables in the accompanying consolidated balance sheets. Billings in excess of services provided represent amounts billed to clients, such as retainers, in advance of work being performed.

 

Some clients pay us retainers before we begin any work for them. We hold retainers on deposit until we have completed the work. We apply these retainers to final billings or refund any excess over the final amount billed to clients, as appropriate, upon our completion of the work. If the client is in bankruptcy, fees for our professional services are subject to approval by the court. In some cases, a portion of the fees to be paid to us by a client is required to be held by a court until completion of our work. We make the initial determination whether to record all or a portion of such a holdback as revenue prior to collection on a case-by-case basis.

 

Bad Debts. We also maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our clients to pay our fees or for disputes that affect our ability to fully collect our billed accounts receivable as well as potential fee reductions imposed by bankruptcy courts. We estimate this allowance by reviewing the status of past-due accounts and recording general reserves based on our experiences in these cases and historical bad debt expense. Our actual experience has not varied significantly from our estimates. However, if the financial condition of our clients were to deteriorate, resulting in their inability to pay our fees, we may need to record additional allowances in future periods. This risk is mitigated by the retainers that we require from some of our clients prior to performing significant services.

 

We believe that the addition of BRS will not have a significant effect on our bad debt expense as a percentage of revenue.

 

Goodwill. We have remaining goodwill from continuing operations of about $299.3 million at March 31, 2003, that we recorded for business combinations that we completed principally in the last five years. We make at least annual assessments of impairment of our goodwill in accordance with our stated accounting policy. In making these impairment assessments, we must make subjective judgments regarding estimated future cash flows and other factors to determine the fair value of the reporting units of our business that are associated with this goodwill. It is possible that these judgments may change over time as market conditions or our strategies change, and these changes may cause us to record impairment charges to adjust our goodwill to its estimated implied fair value. In December 2002, we wrote down $1.2 million of goodwill related to the LWG asset disposal group to reflect the net assets of this disposal group at their fair value less cost to sell. The LWG asset disposal group was sold in January 2003.

 

Effect of Recent Accounting Pronouncements

 

In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 145, Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“Statement 145”). Among other changes, Statement 145 rescinds Statement 4, which required all gains and losses from extinguishment of debt to be aggregated and classified as an extraordinary item, net of the related tax effect. Statement 145 provides that gains and losses from extinguishment of debt should be classified as extraordinary items only if they are unusual or infrequent or they otherwise meet the criteria for classification as an extraordinary item, and observes that debt extinguishment transactions would seldom, if ever, result in extraordinary item classification of the resulting gains and losses. We adopted Statement 145 in January 2003, and reported as a component of interest expense the losses that we incurred upon the early extinguishment of our debt in connection with the sale of the LWG asset disposal group and the public offering of our common stock. Upon the sale of the

 

19


Table of Contents

SEA asset disposal group, our agreement with our bank-lending group requires the cash proceeds to be used to retire portions of our debt. Also, in February 2003, we completed the public offering of approximately 2.7 million shares of our common stock for cash of $99.2 million (less approximately $1.4 million of offering costs). In accordance with our credit agreement, we used half of the proceeds from the stock offering to retire portions of our long-term debt. In February 2003, we wrote-off $499,000 of deferred bank financing fees in connection with the early debt retirement related to the public offering and we estimate that we will write-off up to approximately $400,000 of deferred bank financing fees upon the sale of the SEA asset disposal group, depending upon the sales price and payment terms. In accordance with Statement 145, we recorded these charges as interest expense in the statement of income.

 

20


Table of Contents

 

Results of Continuing Operations

 

Three Months Ended March 31, 2003 and 2002

 

Revenues. Revenues from continuing operations for the three months ended March 31, 2003 increased 167.4% to $101.4 million compared with $37.9 million in the first quarter of 2002. The greatest growth was in our bankruptcy and restructuring practice groups, which includes the acquisition of BRS, in addition to our organic growth. Our forensic consulting practices also experienced significant growth in revenue, principally attributable to our ability to recruit seasoned financial professionals to meet the continued strong demand for our consulting services. Our trial support practice group’s revenue also grew during the first quarter of 2003, although at a more modest rate. The total and billable number of our employees at March 31, 2003 was 778 and 610, respectively, representing increases of 119% and 134%, respectively, primarily resulting from our acquisition of BRS. Our average rate per hour for the first quarter of 2003, was $336, an increase from the $333 average in the fourth quarter of 2002. The new practice areas we added during the prior year have contributed to the revenues and operating income during the quarter.

 

Direct Cost of Revenues. Direct cost of revenues from our continuing operations was 45.9% of our total revenues in the first quarter of 2003, and 49.3% in the same period of 2002. The improvement in 2003 resulted primarily from the relative growth and improvements in staff utilization of our turnaround, restructuring and bankruptcy practice area, which has higher gross margins than our other practice areas.

 

Selling, General and Administrative Expenses. As a percent of our total revenues, these expenses, which include depreciation and amortization of property and equipment, were 20.9% in the first quarter of 2003, and 25.9% in the first quarter of 2002. This improvement in 2003 was primarily the result of the growth in our turnaround, restructuring and bankruptcy services, which have a lower selling and general administrative expense as a percent of revenues than our other practice areas.

 

Amortization of Other Intangible Assets. In connection with the acquisition of BRS, we recorded approximately $5.1 million of other intangible assets, consisting primarily of client backlog, which are being amortized over their useful lives ranging from 18 to 36 months. We began to amortize these other intangible assets in September 2002, and amortization expense in the first quarter of 2003 was $775,000.

 

Interest Income and Expense, Net. Net interest expense consisted primarily of interest on debt we incurred to purchase businesses over the past several years. Interest rates during 2003 have been lower than in 2002, although the additional borrowings in August 2002 to acquire BRS substantially increased the amount of debt on our books at the beginning of 2003 when compared to 2002. At January 1, 2003, we had $97.8 million of debt. During the quarter, we repaid $51.9 million of debt in connection with the sale of the LWG asset disposal group and the public offering of our common stock. In connection with these early debt extinguishments, we wrote off $513,000 of deferred bank financing fees and recorded this as interest expense. We also repaid $5.0 million of debt in accordance with the amortization schedule included in the credit facility. Interest expense in the first quarter of 2003 was $2.0 million compared to $759,000 in the same period of 2002.

 

Income Taxes. Our effective tax rate was approximately 40.5% from continuing operations during the three month periods ended March 31, 2003 and 2002. We expect our effective tax rate from continuing operations to remain the same for the remainder of the current year.

 

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Liquidity and Capital Resources

 

During the three months ended March 31, 2003, net cash provided by our operations was about $19.1 million, as compared to cash used in operations of about $1.6 million for the comparable period in 2002. We continue to finance operations and capital expenditures solely through cash flows from operations. Cash flows from operations have improved year-over-year since 2000 primarily due to increases in net income, although historically, the first calendar quarter generates less cash from operations than the other periods of the year due to the timing of certain compensation and income tax payments. During 2003, the increase in net cash provided by operations occurred primarily because our total revenues from continuing operations increased by 167.4%, while our direct cost of revenues and our selling, general and administrative expenses declined as a percentage of revenues to 66.8% (from 75.2% in the first quarter of 2002). Additionally, we realized a $9.1 million income tax benefit from stock option exercises that further increased our cash flows from operations during the first quarter of 2003. The income tax benefit from stock option exercises was $1.5 million in the first quarter of 2002.

 

Our operating assets and liabilities consist primarily of billed and unbilled accounts receivable, accounts payable and accrued expenses and accrued compensation expense. Changes in these balances are affected by the timing of billings and collections of receivables as well as payments for compensation arrangements. During the first quarter of 2003, changes in operating assets and liabilities decreased cash flows from operations by $15.0 million. This was primarily because our accrued compensation expenses decreased by $5.8 million and billed and unbilled accounts receivables increased by $5.2 million. A substantial portion of total compensation for our professional employees is in the form of incentive compensation, which is normally paid during the first quarter. Our average collection period in the first quarter of 2003 declined when compared to the first quarter of 2002, primarily because of retainers paid by clients prior to the performance of our services. Our customary collection terms range from 30 to 60 days for all of our clients.

 

During the first quarter of 2003, we spent $3.5 million for net additions to property and equipment, primarily related to the integration of BRS. In 2003, we expect to spend approximately $10.0 million for property and equipment additions, including $4.0 million related to the integration of BRS. We had no material outstanding purchase commitments at March 31, 2003.

 

Our financing activities in all periods have consisted principally of borrowings and repayments under long-term debt arrangements as well as issuances of common stock and exercises of stock options. Our long-term debt arrangements have principally been obtained to provide financing for our acquisitions of businesses, particularly BRS in 2002. During the first quarter of 2003, we completed the public offering of 2.7 million shares of our common stock, generating $99.2 million in cash (net of offering costs of $1.4 million). We used approximately half of the net proceeds from the stock offering to repay our long-term debt. We also used all of the net cash proceeds from the sale of the LWG asset disposal group to repay $2.15 million of debt. At March 31, 2003, we had $100.0 million available under our revolving credit facility.

 

During the first quarter of 2003, stock options to purchase 785,944 shares of our common stock were exercised. These exercises generated $13.7 million in cash (including the $9.1 million income tax benefit from the stock option exercises).

 

We intend to complete the sale of our applied sciences practice group by the end of 2003. Depending on the sale price and the tax structure of the transaction, the amount realized after taxes from the sale may be less than the carrying value. Under the credit facility, we are required to apply all of the proceeds from the sale to reduce our outstanding aggregate debt under the facility.

 

We expect that cash generated from our operations and cash available under our credit facility will be sufficient to meet our normal operating requirements for the foreseeable future.

 

 

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Below is a summary of our contractual obligations and commitments at March 31, 2003:

 

 

Contractual Obligations


  

Total


    

2003


    

2004


    

2005


    

2006


    

Thereafter


 

Long-term debt

  

$

40,879

 

  

$

15,000

 

  

$

17,212

 

  

$

8,667

 

  

$

—  

 

  

$

—  

 

Operating leases

  

 

40,895

 

  

 

5,106

 

  

 

6,364

 

  

 

6,846

 

  

 

5,403

 

  

 

17,176

 

    


  


  


  


  


  


Total obligations

  

$

81,774

 

  

$

20,106

 

  

$

23,576

 

  

$

15,513

 

  

$

5,403

 

  

$

17,276

 

Operating leases of discontinued operations

  

 

(4,611

)

  

 

(880

)

  

 

(866

)

  

 

(856

)

  

 

(778

)

  

 

(1,231

)

    


  


  


  


  


  


Total obligations of continuing operations

  

$

77,163

 

  

$

19,226

 

  

$

22,710

 

  

$

14,657

 

  

$

4,625

 

  

$

15,945

 

    


  


  


  


  


  


 

Forward-Looking Statements

 

Some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements expressed or implied by such forward-looking statements not to be fully achieved. These forward-looking statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms or other comparable terminology. These statements are only predictions. We are under no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results and do not intend to do so. Factors, which may cause the actual results of operations in future periods to differ materially from intended or expected results include, but are not limited to, the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2002.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are subject to market risk associated with changes in interest rates on our variable rate debt. We have managed this risk by entering into interest rate swaps. These hedges reduce our exposure to rising interest rates, but also reduce the benefits from lower interest rates. We do not anticipate any material changes to our market risk exposures in 2003.

 

Interest rate swaps with notional principal amounts of $21.1 million at March 31, 2003, were designated as hedges against a portion of our outstanding debt and were used to convert the interest rate on a portion of our variable rate debt to fixed rates for the life of the swap. Our pay rate on the hedged portion of our debt was 8.87% at March 31, 2003, compared to our receive rate of 2.87%. Because of the effectiveness of our hedge of variable interest rates associated with our debt, the change in fair value of our interest rate swaps resulting from changes in market interest rates is reported as a component of other comprehensive income.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings. The Company’s management, including the CEO and CFO, does not expect that our Disclosure Controls or our Internal Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the deterioration of the degree of compliance with the policies and procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company is not presently a party to any material litigation.

 

ITEM 2. CHANGES IN SECURITIES

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 

(a) Exhibits

 

99.1

  

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).

99.2

  

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).

 

(b) Reports on Form 8-K

 

On February 6, 2003, the Company filed a Current Report on Form 8-K (item 5) regarding its fourth quarter and full year financial results for the periods ended December 31, 2002 and then expected commencement of an underwritten public offering of shares of its common stock.

 

On March 3, 2003, the Company filed a Current Report on Form 8-K/A (Amendment No. 2) (item 7) which contained revised pro forma financial information related to the Company’s BRS acquisition.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

FTI CONSULTING, INC.

 

Date: May 14, 2003

 

By:

 

/s/    THEODORE I. PINCUS        


   

THEODORE I. PINCUS

Executive Vice President,

Chief Financial Officer

(principal financial and accounting officer)

and Assistant Secretary

 

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I, Jack B. Dunn, IV, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of FTI Consulting, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

  (a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  (b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

  (c)   presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

  (a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

  (b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: May 14, 2003

 

/s/    JACK B. DUNN, IV        


Jack B. Dunn, IV

Chairman of the Board and Chief Executive Officer

(principal executive officer)

 

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I, Theodore I. Pincus, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of FTI Consulting, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

  (a)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  (b)   evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

  (c)   presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

  (a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

  (b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: May 14, 2003

 

/s/    THEODORE I. PINCUS        


Theodore I. Pincus

Executive Vice President, Chief Financial Officer

and Secretary (principal financial accounting officer)

 

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EXHIBIT INDEX

 

Exhibit


  

Description


99.1

  

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)

99.2

  

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).

 

29