U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 31, 1996
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Maryland 0- 52-1261113
(State of other jurisdiction of (Commission File Number) (IRS Employer Identification No.)
incorporation)
</TABLE>
2021 Research Drive, Annapolis, Maryland 21401
(Address of principal executive offices, including Zip Code)
(410) 224-8770
(Registrant's telephone number, including area code)
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION
ITEM 5. OTHER EVENTS
A Form 8K was previously filed on October 15, 1996 reporting the
acquisition of Teklicon, Inc. The required financial statements of this
acquisition were filed on Form 8K dated November 27, 1996.
In as much as, the above acquisition was accounted for as a pooling of
interest, the Company's financial statements have been restated. In order to
have current combined financial statements of the Company on file with the
Securities and Exchange Commission, this Form 8K includes financial statements
restated to include Teklicon, Inc.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements. Audited financial statements of Forensic
Technologies International, Corp., Inc., for the years ended December 31, 1995
and 1994.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, hereunto duly authorized.
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION
(Registrant)
By: /s/ Gary Sindler
------------------------
Gary Sindler
Executive Vice President and Chief
Financial Officer
DATED: December 31, 1996
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Forensic Technologies International Corporation
We have audited the accompanying consolidated balance sheets of Forensic
Technologies International Corporation and subsidiary as of December 31, 1994
and 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
and opinion on these financial statements based on our audits. We did not audit
the fiscal year 1995 financial statements of Teklicon, Inc., a wholly owned
subsidiary, which statements reflect $941,988 of total assets at March 31, 1996
and $3,053,564 of total revenues for the year then ended. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Teklicon, Inc., is based
solely on the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Forensic Technologies
International Corporation and subsidiary at December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
Ernst & Young LLP
Baltimore, Maryland
December 23, 1996
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
Teklicon, Inc.
Mountain View, California
We have audited the accompanying balance sheet of Teklicon (a corporation) as of
March 31, 1996 and the related statements of operations, retained earnings, and
cash flows for the year then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above represent fairly, in
all material respects, the financial position of Teklicon, Inc. as of March 31,
1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles
/s/ Young, Craig & Co.
July 25, 1996
<PAGE>
Forensic Technologies International Corporation and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1994 1995
------------------ ---------------------
<S> <C> <C>
ASSETS (Restated) (Restated)
Current assets:
Cash and cash equivalents.............................. $ 245,918 $ 244,925
Accounts receivable, less allowance of $129,260 in 1994
and $212,262 in 1995................................ 3,579,920 4,633,850
Unbilled receivables, less allowance of $79,223 in 1994
and $164,935 in 1995................................... 1,907,526 2,230,674
Deferred income taxes.................................. 149,923 419,310
Prepaid expenses....................................... 136,577 145,805
------------------ ---------------------
Total current assets.................................... 6,019,864 7,674,564
Property and equipment:
Buildings.............................................. -- 411,241
Furniture and equipment................................ 5,569,460 6,576,259
Leasehold improvements................................. 469,666 677,348
------- -------
6,039,126 7,664,848
Accumulated depreciation and amortization.............. (4,212,054) (4,784,174)
---------- ----------
1,827,072 2,880,674
Deferred income taxes................................... 55,556 4,090
Other assets............................................ 168,235 196,662
------- -------
Total assets............................................ $ 8,070,727 $ 10,755,990
=================== ======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Forensic Technologies International Corporation and Subsidiary
Consolidated Balance Sheets (Continued)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1994 1995
----------------- -------------------
Liabilities and stockholders' equity (Restated) (Restated)
<S> <C> <C>
Current liabilities:
Accounts payable $ 610,492 $ 1,171,201
Borrowings under line of credit 572,239 2,110,391
Accrued compensation expense 406,386 933,841
Income taxes payable 161,563 208,296
Current portion of deferred revenue 333,333 138,889
Current portion of capital lease obligations 322,251 63,463
Accrued loss on disposal of discontinued operations -- 478,828
Other current liabilities 245,752 310,554
----------------- -------------------
Total current liabilities 2,652,016 5,415,463
Deferred revenue, less current portion 138,889 --
Long-term debt and capital lease obligations, less current portion 81,671 206,747
8% Convertible Subordinated Debentures, due to stockholders 1,800,000 1,800,000
Series A Redeemable Convertible Preferred Stock, $.01 par value, stated
at redemption value 1,560,000 1,560,000
Common Stock subject to repurchase -- 310,930
Commitments and contingent liabilities -- --
Stockholders' equity:
Common stock, $.01 par value:
Class A:
Authorized shares -- 9,800,000; Shares issued and outstanding and
not subject to repurchase - 2,231,613 in 1994 and 1,989,059 in 1995 22,316 19,891
Class B:
Authorized shares -- 6,300,000; Issued and outstanding shares --
1,688,400 in 1994 and 1,524,600 in 1995 16,884 15,246
Additional paid-in capital 987,922 850
Retained earnings 883,313 1,455,773
Less: Unearned compensation recorded upon issuance of common stock (72,284) (28,910)
----------------- -------------------
Total stockholders' equity 1,838,151 1,462,850
----------------- -------------------
Total liabilities and stockholders' equity $8,070,727 $10,755,990
================= ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Forensic Technologies International Corporation and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1994 1995
------------------ ----------------
(Restated) (Restated)
<S> <C> <C>
Revenues $20,253,897 $23,381,303
Direct cost of revenues 10,499,161 11,366,249
Selling, general and administrative expenses 8,319,848 9,886,791
------------------ ----------------
Total costs and expenses 18,819,009 21,253,040
------------------ ----------------
1,434,888 2,128,263
Other income (expenses):
Interest and other income 172,527 41,669
Interest expense (281,850) (263,824)
------------------ ----------------
(109,323) (222,155)
------------------ ----------------
Income from continuing operations before
income taxes 1,325,565 1,906,108
Income taxes 552,278 778,665
------------------ ----------------
Income from continuing operations 773,287 1,127,443
Discontinued operations:
Loss from discontinued operations (net of income tax
benefit of $44,460) -- (65,074)
Loss on disposal of discontinued operations (net of income
tax benefit of $248,520) -- (365,109)
----------------- ----------------
Net income $ 773,287 $ 697,260
================= ================
Earnings Per Share Data:
Per common and common equivalent share:
Income from continuing operations $ 0.33 $ 0.49
================= ================
Net income $ 0.33 $ 0.31
================= ================
Per common share, assuming full dilution:
Income from continuing operations $ 0.25 $ 0.37
================= ================
Net income $ 0.25 $ 0.23
================= ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Forensic Technologies International Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity (as restated)
<TABLE>
<CAPTION>
Class A Class B Additional
Common Common Paid-in Retained
Stock Stock Capital Earnings
---------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 $22,610 $19,152 $1,118,754 $339,532
Award of 323,400 shares of Class B Common
Stock under the 1992 Employee Stock Bonus
Award Program 3,234 8,316
Repurchase of 550,200 shares of Class B
Common Stock (5,502) (14,148)
Repurchase of 29,400 shares of Class A Common
Stock (294) (104,706)
Purchase of options to purchase 105,000
shares of Class A Common Stock (125,000)
Amortization of unearned compensation
Dividends paid on Series A Redeemable
Convertible Preferred Stock ($.19 per share) (124,800)
Net income for 1994. 773,287
---------------- ---------------- ------------------ -----------------
Balance at December 31, 1994 22,316 16,884 987,922 883,313
Repurchase of 163,800 shares of Class B
Common Stock (1,638) (4,212)
Repurchase of 184,514 shares of Class A
Common Stock (1,845) (722,510)
Amortization of unearned compensation
Dividends paid on Series A Redeemable
Convertible Preferred Stock ($.19 per share) (124,800)
Reclassification of Class A Common Stock
subject to repurchase (580) (310,350)
Other 50,000
Net income for 1995 697,260
---------------- ---------------- ------------------ -----------------
Balance at December 31, 1995 $19,891 $15,246 $ 850 $1,455,773
================ ================= ================== =================
</TABLE>
<TABLE>
<CAPTION>
Unearned Total
Compensation
----------------- ----------------
<S> <C> <C>
Balance at January 1, 1994. $(139,073) $ 1,360,975
Award of 323,400 shares of Class B Common
Stock under the 1992 Employee Stock Bonus
Award Program 11,550
Repurchase of 550,200 shares of Class B
Common Stock (19,650)
Repurchase of 29,400 shares of Class A Common
Stock (105,000)
Purchase of options to purchase 105,000
shares of Class A Common Stock (125,000)
Amortization of unearned compensation 66,789 66,789
Dividends paid on Series A Redeemable
Convertible Preferred Stock ($.19 per share) (124,800)
Net income for 1994 773,287
------------ ------------
Balance at December 31, 1994 (72,284) 1,838,151
Repurchase of 163,800 shares of Class B
Common Stock (5,850)
Repurchase of 184,514 shares of Class A
Common Stock (724,355)
Amortization of unearned compensation 43,374 43,374
Dividends paid on Series A Redeemable
Convertible Preferred Stock ($.19 per share) (124,800)
Reclassification of Class A Common Stock
subject to repurchase (310,930)
Other 50,000
Net income for 1995 697,260
------------- ------------
Balance at December 31, 1995 $ (28,910) $ 1,462,850
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Forensic Technologies International Corporation and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1994 1995
------------ -----------
(Restated) (Restated)
<S> <C> <C>
Cash flow from operating activities
Net income $ 773,287 $ 697,260
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 864,596 637,837
Amortization 17,152 20,835
Non-cash compensation. 66,789 43,374
Provision for doubtful accounts 41,370 168,714
Deferred income taxes (139,424) (217,921)
Loss on disposal of assets -- 26,281
Loss on disposal of discontinued Annapplix division -- 613,629
Gain on sale of technology (121,989) --
Changes in operating assets and liabilities:
Unbilled receivables (307,329) (423,885)
Accounts receivable 28,624 (971,907)
Income taxes refundable 121,867 --
Prepaid expenses 45,367 (9,228)
Accounts payable (317,408) 560,709
Accrued compensation expense 59,885 527,455
Income taxes payable 166,297 96,732
Deferred revenue. (333,333) (333,333)
Other current liabilities (214,624) 64,802
------------ -----------
Net cash provided by operating activities 751,127 1,501,354
Cash flow from investing activities
Proceeds from sale of marketable securities 202,370 --
Purchase of property and equipment (625,454) (1,608,939)
Proceeds from sale of property and equipment -- 22,608
Acquisition of Applix Software Computer Service. -- (200,000)
Purchase of other assets (96,934) (40,975)
------------ -----------
Net cash used in investing activities (520,018) (1,827,306)
Cash flow from financing activities
Proceeds from issuance of Class B Common Stock. 11,550 --
Repurchase of Class B Common Stock (19,650) (5,850)
Repurchase of Class A Common Stock and purchase of
options to purchase Class A Common Stock (65,000) (724,355)
Net borrowings (repayments) under line of credit (242,761) 1,538,152
Payments of capital lease obligations (434,970) (358,188)
Dividends paid (124,800) (124,800)
------------ -----------
Net cash provided by (used in) financing
activities (875,631) 324,959
------------ -----------
Net decrease in cash and cash
equivalents (644,522) (993)
Cash and cash equivalents at beginning of year 890,440 245,918
------------ -----------
Cash and cash equivalents at end of year $ 245,918 $ 244,925
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation of Financial Statements
Description of Business
Forensic Technologies International Corporation and Subsidiary (the
Company) provides communication, engineering, and other trial support services
to the litigation industry. These services include event investigation and
analysis, expert testimony, courtroom visual presentation, computer animation
and simulation, jury analysis and selection, exposure assessment and
computerized document storage and retrieval. The Company has seven offices
serving all regions of the United States.
On September 30, 1996 the Company acquired all of the outstanding common stock
of Teklicon, Inc. ("Teklicon") in exchange for 415,000 shares of common stock.
The acquisition was accounted for as a pooling of interests and, accordingly,
the Company's financial statements have been restated for all periods prior to
the merger to include the financial position, results of operations, and cash
flows of Teklicon. The accompanying consolidated balance sheets at December 31,
1994 and 1995 include the financial position of Teklicon at March 31, 1995 and
March 31, 1996, respectively, the fiscal year-end of Teklicon. The accompanying
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1994 and 1995 include the results of operations and
cash flows of Teklicon for its fiscal years ended March 31, 1995 and 1996,
respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of a wholly-owned
subsidiary. All significant intercompany transactions have been eliminated.
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 - (Continued)
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
concentration of accounts receivable.
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.
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 - (Continued)
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 fees and expenses,
are recorded as work is performed and expenses are incurred. Revenues recognized
in excess of amounts billed to clients have been recorded as unbilled
receivables in the accompanying consolidated balance sheets.
The Company also enters into fixed price contracts for its litigation
support services that are accounted for using the percentage-of-completion
method. Income for these contracts is recognized based on the percentage of
contract completion determined by the total expenses incurred to date as a
percentage of total estimated expenses at the completion of the contract.
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.
Accounting for Impairment of Long-lived Assets and for Long-lived Assets to Be
Disposed of
In 1995 the Company adopted the provisions of Financial Accounting
Standards Board Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, issued in March 1995. The
Statement prescribes the accounting for the impairment of long-lived assets,
such as property, plant and equipment and intangible assets, as well as the
accounting for long-lived assets that are held for disposal. The adoption of
this Statement in 1995 did not have a material impact on the reported results of
operations of the Company.
Under Statement No. 121, the Company is not required to actively search
for impairments of assets that are employed in the business or to perform an
asset-by-asset analysis to determine whether an impairment exists. Instead, a
review is necessary only when events or circumstances indicate that an
impairment might exist. When one or more indicators are present, assets are
grouped at the lowest level for which there are identifiable cash flows. Then
the expected future undiscounted cash flows from the use and eventual disposal
of each group of assets are estimated and compared with the carrying amount of
that group of assets. If the sum of the estimated undiscounted cash flows is
less than the carrying amount of the assets, an impairment loss will be
recorded. The impairment loss is measured by comparing the fair value
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 - (Continued)
of the assets with their carrying amount. Assets held for disposal are reported
at the lower of the assets' carrying amount or fair value less costs related to
the assets' disposition.
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. In October 1995 the Financial
Accounting Standards Board issued FASB Statement No. 123, Accounting for
Stock-Based Compensation, which encourages companies to recognize expense for
stock-based awards based on their estimated value on the date of grant.
Statement No. 123, effective for 1996, does not require companies to change
their existing accounting for stock-based awards, but if the new fair value
method is not adopted, pro forma income and earnings per share data should be
provided in the footnotes to the financial statements. The Company intends to
continue to account for stock-based compensation plans using the intrinsic value
method, and will supplementally disclose in its 1996 consolidated financial
statements 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.
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 - (Continued)
2. EARNINGS PER SHARE
The following table summarizes the computations of share amounts used in the
computation of earnings per share presented in the accompanying consolidated
statements of operations.
<TABLE>
<CAPTION>
December 31,
1994 1995
-------------- -------------
(Restated) (Restated)
<S> <C> <C>
COMMON AND COMMON EQUIVALENT SHARES:
Weighted average number of shares of common
stock outstanding during the period 2,279,063 2,157,606
Options to purchase common stock issued within one
year of registration statement. 41,700 41,700
Dilutive effect of other options and warrants. 41,686 83,530
-------------- -------------
Total common and common equivalent shares of
stock considered outstanding during the year. 2,362,449 2,282,836
============== =============
COMMON SHARES, ASSUMING FULL DILUTION:
Weighted average number of shares of common stock
outstanding during the period 2,279,063 2,157,606
Options to purchase common stock issued
within one year of registration statement. 41,700 41,700
Dilutive effect of other options and warrants 41,686 125,373
Assumed conversion of Series A Redeemable
Convertible Preferred Stock. 655,200 655,200
Assumed conversion of 8% Convertible
Subordinated Debentures 378,000 378,000
------- -------
Total fully diluted securities considered
outstanding during the year 3,395,649 3,357,879
============== =============
</TABLE>
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 - (Continued)
Earnings per common and common equivalent share is based upon the
average number of shares of common stock outstanding during each year, adjusted
for the dilutive effect of common stock equivalents determined using the
treasury stock method. The computations also assume that the dilutive effect
(determined using the treasury stock method) of certain options and warrants
issued within one year of the Company's initial filing to register common stock
for sale to the public in March 1996 are outstanding for all periods, as
required by the SEC.
Earnings per common share, assuming full dilution, is calculated on
the same basis as the previously described primary computation, except that the
calculation in 1994 and 1995 assumes that the Series A Redeemable Convertible
Preferred Stock and the 8% Convertible Subordinated Debentures were converted on
the first day of the fiscal year, and that the fair value of the Company's
common stock on the last day of the fiscal year (rather than the average fair
value during the year) is used to determine the dilutive effect of stock
options.
3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company paid interest of $276,839 and $491,375 and income taxes of
$408,272 and $628,984 during fiscal years 1994 and 1995, respectively.
The Company entered into the following non-cash investing and
financing activities:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------
1994 1995
------------------- ----------------------
<S> <C> <C>
Acquisition of equipment under capital leases $ 47,305 $ 175,368
Redemption of Class A Common Stock and purchase of option to purchase $165,000 $ --
Class A Common Stock in exchange for software
</TABLE>
4. ACQUISITIONS AND DISCONTINUED OPERATIONS
On September 30, 1996, the Company issued 415,000 shares of its common
stock for all of the outstanding common stock of Teklicon. Teklicon is based in
Mountain View, California and provides expert witness testimony to attorneys and
businesses. The merger has been accounted for as a pooling-of-interests and,
accordingly, the Company's financial statements have been restated for all
periods prior to the acquisition to include the financial position, results of
operations and cash flows of Teklicon. Revenues and net income for the
individual entities are as follows:
Forensic
Technologies
International
Corporation Teklicon Combined
----------- -------- --------
Year Ended
December 31, 1994:
Revenues $ 17,547,055 $ 2,706,842 $ 20,253,897
Net income $ 638,830 $ 134,457 $ 773,287
Year Ended
December 31, 1995:
Revenues $ 20,327,739 $ 3,053,564 $ 23,381,303
Net income (loss) $ 705,893 $ (8,633) $ 697,260
On February 1, 1995, the Company acquired for $200,000 in cash certain
assets of a sole proprietorship doing business as "Applix Software Computer
Service", and formed the Annapplix division of the Company. The Annapplix
division is a provider of general data processing consulting services and
network administration services, and is considered a separate segment of the
Company's operations.
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 - (Continued)
The acquisition was accounted for using the purchase method of
accounting and the results of operations of the acquired business are included
in the accompanying 1995 consolidated statement of operations from February 1,
1995, the date of acquisition, through December 31, 1995. The excess of the cost
of the acquisition over the fair value of the assets acquired of $135,604 was
recorded as goodwill and is amortized using the straight-line method over 15
years.
In January 1996, the Board of Directors and management of the Company
committed to a formal plan to sell the Annapplix division based on an assessment
that the division was not complementary to its core litigation support services.
In March 1996, the Company agreed to sell the division to a group including the
former owner, who currently manages the division as an officer of the Company,
and certain other officers and stockholders of the Company. The Company sold the
furniture, equipment, and intangible assets of the division in exchange for cash
of $150,000, and retained ownership of billed and unbilled accounts receivable,
buildings and accounts payable. The effective date of the sale was April 1,
1996.
The Company has recorded the results of operations and estimated loss
on the sale of Annapplix as a discontinued operation in the 1995 consolidated
financial statements. The estimated loss on the sale of $365,109 includes an
accrual of $285,000 for the estimated operating losses, net of the related
income tax benefit, for the period from January 1, 1996 through March 31, 1996,
the date of disposal.
During 1995, Annapplix reported revenues of $3.2 million and loss
before an income tax benefit of $109,534. Expenses attributable to the segment
include interest expense related to debt incurred to purchase assets used by the
division and an allocation of $80,000 of other consolidated interest that is not
directly attributable to or related to other operations. The allocated interest,
consisting of interest expense on the line of credit, is allocated based on the
ratio of the net assets to be sold to total consolidated net assets excluding
the balance of the line of credit.
5. BORROWINGS UNDER LINE OF CREDIT
The Company has a demand line of credit with a bank due on May 31,
1996 under which the Company may borrow up to $3.1 million, subject to
restrictions based on the available collateral. Borrowings under this line of
credit bear interest at the London Interbank Offered Rate plus 2.5%, and are
secured by all of the Company's assets not otherwise pledged as collateral. The
estimated average borrowing rate during 1994 and 1995 was 8.1% and 8.3%,
respectively. In connection with this credit line, the Company is required to
maintain a minimum tangible net worth and comply with certain other financial
ratios and covenants.
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 - (Continued)
6. DEFERRED REVENUE
On June 22, 1993, the Company entered into an agreement with an
unrelated entity whereby the Company agreed to market the entity's litigation
consulting related services and granted to the entity the exclusive worldwide
right to market the Company's litigation consulting related products and
services through May 31, 1996. In consideration for this agreement, the Company
was paid $1,000,000, which is being recognized as revenue over the term of the
agreement. For the years ended December 31, 1994 and 1995, the Company has
recognized $333,333, and $333,333, respectively, as revenue. At December 31,
1995, the remaining $138,889 is recorded as deferred revenue in the balance
sheet.
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term Debt
Long-term debt consists of a $79,920 mortgage note payable to a bank
bearing interest at the prime rate plus 1.5% and secured by the related
building. The note requires monthly payments of $444 through December 1, 1998
and a lump-sum payment of the entire principal on January 1, 1999.
Capital Leases
The Company leases furniture and equipment under capital leases.
Property and equipment includes the following amounts for leases that have been
capitalized:
1994 1995
----------------- ----------------
Furniture and equipment $ 2,395,701 $ 2,476,290
Less accumulated amortization 1,996,887 2,148,630
----------------- ----------------
$ 398,814 $ 327,660
================= ================
Amortization of leased assets is included in depreciation and amortization
expense.
Future minimum payments under capital lease obligations consist of the
following at December 31, 1995:
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 - (Continued)
1996 $ 74,590
1997 49,455
1998 33,022
1999 31,857
2000 28,898
-------------------
Total minimum lease payments 217,822
Amounts representing interest 27,532
-------------------
Present value of net minimum lease payments
(including current portion of $63,463) $190,290
===================
8. CONVERTIBLE SUBORDINATED DEBENTURES
On July 21, 1994 the Company issued $1,800,000 of 8% Convertible
Subordinated Debentures to its stockholders, due no later than July 15, 2000.
The Debentures bear interest at a rate of 8% per annum, payable semi-annually on
January 15 and July 15, beginning on January 15, 1994. The Company may, at its
option, pay any accrued interest due by issuing additional debentures. During
1994 and 1995, the Company expensed and paid $144,000 of interest to the holders
of the Debentures.
In May 1996 the Company completed its initial public offering and the
Debentures converted into 378,151 shares of Class A Common Stock.
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 - (Continued)
9. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK AND CLASS A COMMON STOCK
The Company had authorized the issuance of 655,200 shares of Series A
Redeemable Convertible Preferred Stock ("Preferred Stock"). At December 31, 1994
and 1995, 655,200 shares were outstanding. Each share of Preferred Stock
converted into 655,200 shares of Class A Common Stock immediately prior to the
closing of the Company's initial public offering in May 1996. The holders of the
Company's Preferred Stock had certain rights, including redemption rights, as
described below.
Rights of Holders of Series A Redeemable Convertible Preferred Stock
The holders of the Preferred Stock were entitled to receive, when
declared by the Board of Directors, cumulative semi-annual dividends at the
annual rate of $.19 per share.
Each share of Preferred Stock had a preference on liquidation of $2.38
per share plus accrued and unpaid dividends, and was convertible at the option
of the holder at any time into an equivalent number of shares of Class A Common
Stock, subject to adjustment in certain circumstances.
Each share of Preferred Stock was subject to redemption at any time
after May 8, 1996 for $2.38 per share at the option of the holder.
The holders of Preferred Stock had substantially the same voting
rights as the holders of Class A Common Stock.
Shares Reserved for Future Issuance
The Company has reserved 1,291,105 shares of Class A Common Stock for
future issuance upon the conversion of 8% Convertible Subordinated Debentures,
Series A Redeemable Convertible Preferred Stock, Class B Common Stock and
outstanding stock options.
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 - (Continued)
10. EMPLOYEE STOCK BONUS AWARD PROGRAM AND CLASS B COMMON STOCK
The Company has adopted the 1992 Employee Stock Bonus Award Program
(the Program) which authorized the issuance of 1,500,000 shares of Class B
Common Stock. Each employee under the level of senior management is eligible to
receive shares under the Program. The Company issued 323,400 shares during 1994,
under the Program. Compensation charged to selling, general and administrative
expense during 1994 related to these awards was $11,550.
The Company determines the amount of compensation expense to record
based on an estimate of the value of the Class B Common Stock at the date of
grant, as approved by the Board of Directors. The estimated value of 100 shares
of Class B Common Stock is equal to the estimated value of one share of Class A
Common Stock (the conversion rate of Class B Common Stock into Class A Common
Stock). The estimated value of Class B Common Stock granted to employees was
$.0357 per share in 1994.
The holders of the Class B Common Stock are not entitled to vote on
any matter submitted to a vote of stockholders, nor do they have any preemptive
rights. Subject to the preference of the Preferred Stock, dividends will be
declared and paid on the Class B Common Stock whenever dividends are declared
and paid on the Class A Common Stock. The amount of dividend payable to each
holder of Class B Common Stock is the dividend that would be received if the
Class B Common Stock were converted into shares of Class A Common Stock.
The Class B Common Stock automatically converted into 15,246 shares of
Class A Common Stock upon the closing of the Company's initial public offering
in May 1996.
11. RESTRICTED STOCK GRANTS
During 1991, the Company approved a stock issuance whereby key
employees were granted and issued 201,839 restricted shares of the Company's
Class A Common Stock subject to certain vesting provisions expiring in equal
annual amounts over a four-year period. As of December 31, 1994, all of these
shares were fully vested.
During 1992, the Company awarded an additional 72,853 shares of
restricted Class A Common Stock to a key employee, subject to certain vesting
provisions expiring in equal annual amounts over a four-year period. As of
December 31, 1995, 12,142 of these shares remain subject to vesting provisions.
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 - (Continued)
The market value of the shares awarded was recorded as unearned
compensation at the date of issuance and reported as a separate component of
stockholders' equity. The unearned compensation is being charged to expense as
earned over the four-year vesting period. Compensation charged to selling,
general and administrative expense was $66,789 and $43,365 in 1994, and 1995,
respectively.
12. STOCK OPTION PLAN
The 1992 Stock Option Plan was approved by the stockholders of the
Company in May 1992. The plan provides for the granting to key employees and
directors of incentive and non-qualified stock options to purchase up to
1,212,548 shares of Class A Common Stock. Incentive stock options granted under
the plan allow for the purchase of Class A Common Stock at prices not less than
the fair market value of the Class A Common Stock at the date of grant for a
term of no more than ten years. Non-qualified stock options granted under the
plan allow for the purchase of Class A Common Stock at prices not less than 50%
of the fair market value of the Class A Common Stock at the date of grant, for a
term of no more than ten years. Vesting provisions for individual awards are at
the discretion of the Board of Directors.
The following table summarizes the option activity under the Plan for
the two-year period ended December 31, 1995:
<TABLE>
<CAPTION>
1994 1995
------------- ----------------
<S> <C> <C>
Options outstanding at January 1 125,059 209,059
Options granted.............................. 84,000 35,700
Options exercised............................ -- --
Options forfeited............................ -- (2,100)
------------- ----------------
Options outstanding at December 31.......... 209,059 242,659
============= ================
Options exerciseable at December 31.......... -- 103,849
============= ================
Average exercise price per share for options granted during the
year $ 3.57 $ 4.76
============= ================
Weighted-average exercise price per share of outstanding options
at end of year.......... $ 2.86 $ 3.13
============= ================
</TABLE>
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 - (Continued)
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, consisting
primarily of cash and cash equivalents, accounts receivable, unbilled
receivables, accounts payable, and borrowings under the line of credit
approximate fair value. The 8% Convertible Subordinated Debentures and
Convertible Redeemable Preferred Stock automatically converted into Class A
Common Stock upon the closing of the Company's initial public offering in May
1996. Because of the conversion, the securities are not considered financial
instruments.
14. INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
------------- ----------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 83,393 $150,879
Loss on disposal of discontinued Annapplix division -- 246,097
Accrued vacation 34,643 64,030
Deferred revenue 188,889 55,556
Other 6,666 10,756
------------- ----------------
Total deferred tax assets 313,591 527,318
Valuation allowance for deferred tax assets -- --
------------- ----------------
Deferred tax assets after valuation allowance 313,591 527,318
Deferred tax liability:
Use of cash basis for income tax purposes by Teklicon, Inc. 82,895 79,831
Prepaid expenses 25,217 24,087
------------- ----------------
Net deferred tax asset $205,479 $423,400
============= ================
</TABLE>
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 - (Continued)
Income tax expense attributable to continuing operations consisted of
the following:
1994 1995
------------- ----------------
Current:
Federal............ $ 538,378 $575,119
State.............. 152,147 152,085
------------- ----------------
690,526 727,204
Deferred (benefit):
Federal............ (108,247) 37,714
State.............. (30,001) 13,747
------------- ----------------
(138,248) 51,461
------------- ----------------
$ 552,278 $778,665
============= ================
The Company's provision for income taxes resulted in effective tax
rates that varied from the statutory federal income tax rate as follows:
1994 1995
------------ ----------------
Expected federal income tax provision at 34% $450,692 $648,077
Expenses not deductible for tax purposes 20,886 31,383
State income taxes, net of federal benefit 74,375 107,295
Other 6,325 (8,090)
------------ ----------------
$ 552,278 $ 778,665
============ ================
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 - (Continued)
15. OPERATING LEASES
The Company leases office space under noncancelable operating leases
that expire in various years through 2003. 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, 1995:
1996 $ 746,512
1997 757,588
1998 732,741
1999 590,481
2000 345,155
Thereafter 1,148,484
---------
Total minimum lease
payments $4,320,961
===========
Rental expense consists of the following for the year ended December 31,:
1994 1995
---------------- --------------
Furniture and equipment $ 79,450 $ 99,146
Office and storage 863,280 818,962
---------------- --------------
$942,730 $918,108
================ ==============
16. EMPLOYEE BENEFIT PLAN
The Company maintains a qualified defined contribution plan which
covers substantially all employees. Under the plan, participants are entitled to
make both pre-tax and after-tax contributions. The Company matches a percentage
of participant contributions, limited to 6% of the participant's eligible
compensation. The percentage match is based on each participant's respective
years of service. The Company recorded expense of $102,175, and $116,201, during
1994 and 1995, respectively, related to this plan.
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 - (Continued)
17. COMMITMENTS
The Company has entered into an agreement with a former employee to
repurchase or cause another to purchase 29,018 shares of Class A Common Stock at
$4.76187 per share in January 1996 and 29,022 shares of Class A Common Stock at
$5.95238 per share in January 1997. The former employee retains all ownership
rights in the Class A Common Stock until repurchase. This commitment of $310,930
is classified as Common Stock subject to repurchase in the accompanying balance
sheet at December 31, 1995. In January 1996 the Company paid the former employee
the installment due of $138,180 and retired the Common Stock repurchased.
18. SUBSEQUENT EVENTS
On January 12, 1996, the Board of Directors approved the issuance of
options to purchase 184,800 shares of Class A Common Stock to key employees. The
exercise price of the granted shares is $6.38 per share, or the estimated fair
market value of a share of Class A Common Stock at the date of grant, and the
options vest ratably over a three-year period. These options are included in the
earnings per share computation, as discussed in Note 2, Earnings Per Share.
On January 26, 1996, the Board of Directors approved a 4.2-for-1 stock
split of the Company's Class A Common Stock. The application of anti-dilution
provisions effectively resulted in a 4.2-for-1 split of the Class B Common Stock
and Series A Redeemable Preferred Stock. The stated par values of the common and
preferred stocks were not changed. All share and per share amounts have been
restated to retroactively reflect the split of the Class A Common Stock and
effective split of the Class B Common Stock and Series A Redeemable Preferred
Stock.
The Board of Directors on January 26, 1996 advised, and at the March
20, 1996 annual meeting of stockholders, the stockholders approved, amended and
restated articles of incorporation that, among other things changed the
authorized number of shares of preferred stock of all classes to 4,000,000
shares upon the closing of the initial public offering in May 1996. Upon the
closing of the initial public offering, no shares of preferred stock were
outstanding.
