U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) September 17, 1998
FTI CONSULTING, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Maryland 0000887936 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>
FTI CONSULTING, INC.
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K dated
September 17, 1998 and on Form 8-K dated September 25, 1998 as set forth below.
ITEM 5. OTHER
This Form 8-K/A provides financial information with respect to the
acquisitions of S.E.A., Inc. and K.C.I., Inc. This Form 8-K/A with the financial
information for these acquisitions is being filed today. As a result of these
acquisitions FTI Consulting, Inc. (the "Company"), no longer satisfies the net
tangible assets requirement for continued listing on the Nasdaq National Market
System and, therefore, is subject to delisting. Accordingly, the Company will
pursue other options in an effort to have its Common Stock remain listed on a
national securities exchange. These options include applying to transfer the
Company's listing to either the Nasdaq SmallCap Market or the American Stock
Exchange. The Company believes it currently meets the applicable listing
requirements on both of these exchanges.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of businesses acquired.
Audited combined financial statements of Kahn Consulting Inc. and
Affiliate, for the years ended December 31, 1997 and 1996 and
unaudited combined financial statements of Kahn Consulting Inc. and
Affiliate, for the six months ended June 30, 1998 and 1997.
Audited financial statements of S.E.A., Inc., for the years ended
December 31, 1997 and 1996 and unaudited financial statements of
S.E.A., Inc., for the six months ended June 30, 1998 and 1997.
(b) Pro Forma Financial Information.
Unaudited pro forma combined statement of income for the nine months
ended September 30, 1998.
Unaudited pro forma combined statement of income for the year ended
December 31, 1997.
Notes to unaudited pro forma combined financial statements.
(c) Exhibits
23.1 Consent of Ernst & Young LLP for Kahn Consulting Inc.
<PAGE>
COMBINED FINANCIAL STATEMENTS
KAHN CONSULTING INC.
AND AFFILIATE
Years ended December 31, 1997 and 1996
with Report of Independent Auditors
<PAGE>
Kahn Consulting Inc.
and Affiliate
Combined Financial Statements
Years ended December 31, 1997 and 1996
CONTENTS
Report of Independent Auditors.................................................1
Audited Combined Financial Statements
Combined Balance Sheets........................................................2
Combined Statements of Income and Retained Earnings............................3
Combined Statements of Cash Flows..............................................4
Notes to Combined Financial Statements.........................................5
<PAGE>
Report of Independent Auditors
The Board of Directors
Kahn Consulting Inc.
We have audited the accompanying combined balance sheets of Kahn Consulting Inc.
and affiliate as of December 31, 1997 and 1996, and the related combined
statements of income and retained earnings and cash flows for the years then
ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Kahn
Consulting Inc. and affiliate at December 31, 1997 and 1996, and the combined
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Baltimore, MD
July 24, 1998
1
<PAGE>
Kahn Consulting Inc.
and Affiliate
Combined Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 247,489 $ 167,611
Restricted cash 347,516 1,346,250
Accounts receivable, less allowance of $392,726
in 1997 and $41,020 in 1996 1,851,545 558,481
Unbilled receivables, less allowance of $480,000
in 1997 and $154,310 in 1996 1,656,836 1,886,498
Other assets 34,908 3,620
---------- ----------
Total current assets 4,138,294 3,962,460
Equipment, net of accumulated depreciation 64,807 84,846
Other assets 55,241 55,241
========== ==========
Total assets $4,258,342 $4,102,547
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 285,861 $ 179,838
Accrued compensation expense 990,000 765,000
Advances from clients 347,516 1,346,250
Deferred income taxes 212,000 136,000
---------- ----------
Total current liabilities 1,835,377 2,427,088
Stockholder's equity:
Common stock, par value $.01 per share; 4,000 shares
authorized, 200 shares issued and outstanding 2 2
Additional paid-in capital 98 98
Retained earnings 2,422,865 1,675,359
---------- ----------
Total stockholder's equity 2,422,965 1,675,459
---------- ----------
Total liabilities and stockholder's equity $4,258,342 $4,102,547
========== ==========
</TABLE>
See accompanying notes.
2
<PAGE>
Kahn Consulting Inc.
and Affiliate
Combined Statements of Income and Retained Earnings
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
-----------------------------------
<S> <C> <C>
Net revenues $ 8,530,104 $ 6,765,686
Direct cost of revenues 6,190,134 5,196,091
General and administrative expenses 1,545,000 1,441,908
----------- -----------
Total costs and expenses 7,735,134 6,637,999
----------- -----------
Income from operations 794,970 127,687
Interest and other income 28,536 55,018
----------- -----------
Income before income taxes 823,506 182,705
Income taxes (76,000) (38,000)
----------- -----------
Net income 747,506 144,705
Retained earnings, beginning of year 1,675,359 1,530,654
=========== ===========
Retained earnings, end of year $ 2,422,865 $ 1,675,359
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
Kahn Consulting Inc.
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996
---------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 747,506 $ 144,705
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 42,949 55,020
Provision for bad debts 254,203 244,817
Deferred income taxes 76,000 38,000
Changes in operating assets and liabilities:
Accounts receivable (1,547,267) (244,785)
Unbilled receivables 229,662 (960,144)
Other current assets (31,288) 8,397
Other assets -- 535
Accounts payable and accrued expenses 106,023 72,822
Accrued compensation expense 225,000 462,459
----------- -----------
Net cash provided by (used in) operating activities 102,788 (178,174)
INVESTING ACTIVITIES
Change in restricted cash -- (50,000)
Purchase of equipment (22,910) (38,966)
----------- -----------
Net cash used in investing activities (22,910) (88,966)
----------- -----------
Net increase (decrease) in cash and cash equivalents 79,878 (267,140)
Cash and cash equivalents at beginning of year 167,611 434,751
=========== ===========
Cash and cash equivalents at end of year $ 247,489 $ 167,611
=========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
Kahn Consulting Inc.
and Affiliate
Notes to Combined Financial Statements
December 31, 1997 and 1996
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of Kahn
Consulting Inc. and KCI Management Corp. (collectively, "the Company"). Kahn
Consulting Inc. provides strategic advisory, turnaround, bankruptcy, and trustee
services, as well as litigation consulting services. These litigation services
include expert testimony in financial proceedings, forensic accounting and fraud
investigation. KCI Management Corp. provides general administrative services to
Kahn Consulting Inc.
Inter-company transactions have been eliminated in combination.
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 each individual account. The
Company has experienced significant variations in the estimate of the allowance
for doubtful accounts, due primarily to client concentrations at each respective
year-end. At December 31, 1997, one client comprised 48% of total gross
receivables. At December 31, 1996, that same client comprised 37% of total gross
receivables. These concentrations make the estimates of the allowance for
receivables subject to change in the near term, and the differences could be
material.
5
<PAGE>
Kahn Consulting Inc.
and Affiliate
Notes to Combined Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
RESTRICTED CASH
Restricted cash represents cash held in escrow accounts by the Company on behalf
of clients.
EQUIPMENT
Equipment is stated at cost and depreciated using the straight-line method.
Computer equipment is depreciated over a period of 3 years, furniture and
fixtures 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.
REVENUE RECOGNITION
The Company derives its revenues from professional service activities. Revenues
consist of fees and expenses, and are recorded as work is performed and expenses
are incurred at their estimated net realizable value. Revenues recognized in
excess of amounts billed to clients have been recorded as unbilled receivables.
DIRECT COST OF REVENUES
Direct cost of revenues consists primarily of billable employee compensation and
related payroll benefits, and direct expenses billable to clients. Direct cost
of revenues does not include an allocation of overhead costs.
6
<PAGE>
Kahn Consulting Inc.
and Affiliate
Notes to Combined Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Kahn Consulting Inc. is organized as an S-Corporation for federal income tax
purposes, and its income is included in the tax return of its sole shareholder
for federal income tax purposes. However, income taxes are provided in the
accompanying statement of income related to certain jurisdictions that require
the payment of taxes at the corporate level. KCI Management Corp. is organized
as a C Corporation and its profits are taxable at the corporate level.
Income taxes are recorded using the liability method, whereby deferred income
taxes are recorded to reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities reported for financial reporting
and income tax filing purposes.
2. SIGNIFICANT CUSTOMER
The Company recognized from one customer net revenue representing 17% and 19%,
respectively, of total net revenue in 1997 and 1996. See also, Note 1, Use of
Estimates.
3. EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-----------------------------------
<S> <C> <C>
Furniture and fixtures $ 161,731 $ 161,731
Computer equipment 338,699 315,789
Leasehold improvements 37,651 37,651
--------- ---------
538,081 515,171
Less accumulated depreciation (473,274) (430,325)
========= =========
Equipment, net $ 64,807 $ 84,846
========= =========
</TABLE>
7
<PAGE>
Kahn Consulting Inc.
and Affiliate
Notes to Combined Financial Statements (continued)
4. OPERATING LEASE
The Company leases office space under a noncancelable operating lease with a
minimum lease payment of $370,000 per annum through the period ended January
2001.
Rent expense for all leases was $425,000 and $399,000 for 1997 and 1996,
respectively.
5. INCOME TAXES
The Company's provision for income taxes in 1997 and 1996 consists of local
income taxes related to the operations of Kahn Consulting Inc. Kahn Consulting
Inc. uses the cash method of accounting for income tax purposes, and net
deferred income taxes payable have been recorded principally for net cumulative
temporary differences in accounts receivable, accounts payable and accrued
expenses at the balance sheet date. No income taxes were paid in 1997 or 1996,
and no income taxes are currently due.
Income taxes related to KCI Management Corp. are insignificant.
6. EMPLOYEE BENEFIT PLAN
The Company maintains a qualified defined contribution plan which covers
substantially all employees. Under the plan, participants are entitled to make
pre-tax contributions. The Company matches at its discretion participant
contributions. The Company recorded expense of $93,000 and $0 during 1997 and
1996, respectively, related to this plan.
7. YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has developed a formal plan to remediate its systems for Year 2000
Issues, made necessary changes to certain mission-critical systems, and
successfully tested a portion of those systems for data integrity. Other
necessary remediation and testing will take place in
8
<PAGE>
Kahn Consulting Inc.
and Affiliate
Notes to Combined Financial Statements (continued)
7. YEAR 2000 (UNAUDITED) (CONTINUED)
1998. Management believes that the risk associated with its information systems
is not significant, and, accordingly management does not anticipate that the
Year 2000 will have a significant impact on its information systems or result in
a significant commitment of resources to resolve any potential problems
associated with this event.
9
<PAGE>
COMBINED UNAUDITED FINANCIAL STATEMENTS
KAHN CONSULTING INC.
AND AFFILIATE
Period ended June 30, 1998 and 1997
<PAGE>
Kahn Consulting Inc.
and Affiliate
Combined Unaudited Financial Statements
Period ended June 30, 1998 and 1997
CONTENTS
Unaudited Combined Financial Statements
Combined Balance Sheets........................................................1
Combined Statements of Income and Retained Earnings............................2
Combined Statements of Cash Flows..............................................3
Notes to Combined Financial Statements.........................................4
<PAGE>
Kahn Consulting Inc.
and Affiliate
Unaudited Combined Balance Sheets
<TABLE>
<CAPTION>
JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 765,023 $ 284,259
Restricted cash 30,009 237,107
Accounts receivable, net 706,381 241,023
Unbilled receivables, net 2,925,512 3,475,708
Other assets 9,913 7,414
---------- ----------
Total current assets 4,436,838 4,245,511
Equipment, net of accumulated depreciation 62,115 56,548
Other assets 59,522 59,522
---------- ----------
Total assets $4,558,475 $4,361,581
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities:
Accounts payable and accrued expenses $ 19,360 $ 15,188
Line of credit - 52,500
Accrued compensation expense 1,015,311 1,886,796
Profit sharing payable - 93,693
Income taxes payable 79,000 23,400
Other taxes payable 1,010 10,714
Advances from clients 30,009 237,107
Deferred income taxes 212,000 136,000
---------- ----------
Total current liabilities 1,356,690 2,455,398
Stockholder's equity:
Common stock, par value $.01 per share; 4,000 shares
authorized, 200 shares issued and outstanding 2 2
Additional paid-in capital 98 98
Retained earnings 3,201,685 1,906,083
---------- ----------
Total stockholder's equity 3,201,785 1,906,183
---------- ----------
Total liabilities and stockholder's equity $4,558,475 $4,361,581
========== ==========
</TABLE>
See accompanying notes.
1
<PAGE>
Kahn Consulting Inc.
and Affiliate
Unaudited Combined Statements of Income and Retained Earnings
<TABLE>
<CAPTION>
PERIOD ENDED JUNE 30,
1998 1997
----------- -----------
<S> <C> <C>
Net revenues $ 4,883,027 $ 4,175,464
Direct cost of revenues 3,304,187 3,206,362
General and administrative expenses 723,430 725,662
----------- -----------
Total costs and expenses 4,027,617 3,932,024
----------- -----------
Income from operations 855,410 243,440
Interest and other income 2,410 10,684
----------- -----------
Income before income taxes 857,820 254,124
Income taxes (79,000) (23,400)
----------- -----------
Net income 778,820 230,724
Retained earnings, beginning of year 2,422,865 1,675,359
----------- -----------
Retained earnings, end of year $ 3,201,685 $ 1,906,083
=========== ===========
</TABLE>
See accompanying notes.
2
<PAGE>
Kahn Consulting Inc.
Unaudited Combined Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD ENDED JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 778,820 $ 230,724
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 27,600 27,600
Changes in operating assets and liabilities:
Accounts receivable 1,145,164 317,458
Unbilled receivables (1,268,676) (1,589,210)
Other current assets 24,995 (3,794)
Other assets (4,281) (4,281)
Accounts payable and accrued expenses (266,501) (164,650)
Accrued compensation expense 25,311 1,121,796
Profit sharing payable -- 93,693
Other tax payable 1,010 10,714
Income tax payable 79,000 23,400
Advances from clients (347,516) (1,346,250)
---------- ----------
Net cash provided by (used in) operating activities 194,926 (1,282,800)
INVESTING ACTIVITIES
Change in restricted cash 347,516 1,346,250
Purchase of equipment (24,908) 698
---------- ----------
Net cash used in investing activities 322,608 1,346,948
FINANCING ACTIVITIES
Advance on line of credit -- 52,500
---------- ----------
Net cash provided by financing activities -- 52,500
Net increase in cash 517,534 116,648
Cash and cash equivalents at beginning of period 247,489 167,611
----------- -----------
Cash and cash equivalents at end of period 765,023 284,259
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
Kahn Consulting Inc.
and Affiliate
Notes to Unaudited Combined Financial Statements
June 30, 1998 and 1997
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying combined financial statements include the accounts of Kahn
Consulting Inc. and KCI Management Corp. (collectively, "the Company"). Kahn
Consulting Inc. provides strategic advisory, turnaround, bankruptcy, and trustee
services, as well as litigation consulting services. These litigation services
include expert testimony in financial proceedings, forensic accounting and fraud
investigation. KCI Management Corp. provides general administrative services to
Kahn Consulting Inc.
The accompanying unaudited combined financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 8-K and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting princples for complete financial
statements. In the opinion of management all adjustments considered necessary
for a fair presentation have been included.
Inter-company transactions have been eliminated in combination.
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 each individual account. The
Company has experienced significant variations in the estimate of the allowance
for doubtful accounts, due primarily to client concentrations at each respective
year-end. These concentrations make the estimates of the allowance for
receivables subject to change in the near term, and the differences could be
material.
4
<PAGE>
Kahn Consulting Inc.
and Affiliate
Notes to Unaudited Combined Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
RESTRICTED CASH
Restricted cash represents cash held in escrow accounts by the Company on behalf
of clients.
EQUIPMENT
Equipment is stated at cost and depreciated using the straight-line method.
Computer equipment is depreciated over a period of 3 years, furniture and
fixtures 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.
REVENUE RECOGNITION
The Company derives its revenues from professional service activities. Revenues
consist of fees and expenses, and are recorded as work is performed and expenses
are incurred at their estimated net realizable value. Revenues recognized in
excess of amounts billed to clients have been recorded as unbilled receivables.
DIRECT COST OF REVENUES
Direct cost of revenues consists primarily of billable employee compensation and
related payroll benefits, and direct expenses billable to clients. Direct cost
of revenues does not include an allocation of overhead costs.
5
<PAGE>
Kahn Consulting Inc.
and Affiliate
Notes to Unaudited Combined Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Kahn Consulting Inc. is organized as an S-Corporation for federal income tax
purposes, and its income is included in the tax return of its sole shareholder
for federal income tax purposes. However, income taxes are provided in the
accompanying statement of income related to certain jurisdictions that require
the payment of taxes at the corporate level. KCI Management Corp. is organized
as a C Corporation and its profits are taxable at the corporate level.
Income taxes are recorded using the liability method, whereby deferred income
taxes are recorded to reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities reported for financial reporting
and income tax filing purposes.
6
<PAGE>
Audited Financial Statements
S.E.A., Inc.
Years ended December 31, 1997 and 1996
<PAGE>
S.E.A., Inc.
Audited Financial Statements
Years ended December 31, 1997 and 1996
CONTENTS
Report of Independent Auditors................................................1
Balance Sheets................................................................2
Statements of Operations......................................................4
Statements of Stockholders' Equity............................................5
Statements of Cash Flows......................................................6
Notes to Financial Statements.................................................7
<PAGE>
Report of Independent Auditors
The Board of Directors
S.E.A., Inc.
We have audited the accompanying balance sheets of S.E.A., Inc. as of December
31, 1997 and 1996, and the related 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
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of S.E.A., Inc. at December 31,
1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Columbus, OH
July 31, 1998
/s/ Ernst & Young
1
<PAGE>
S.E.A., Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 34,663 $ 33,481
Receivables:
Trade (net of allowance for doubtful accounts
of $15,000 in 1997 and 1996) 2,588,122 2,598,264
Unbilled 1,087,570 977,411
Notes receivable 7,500 6,300
----------- -----------
Total receivables 3,683,192 3,581,975
Other current assets 117,809 87,046
----------- -----------
Total current assets 3,835,664 3,702,502
Property and equipment:
Building under capital lease 1,575,000 1,575,000
Vehicles 151,721 143,398
Office equipment 1,098,139 1,034,762
Laboratory equipment 220,764 222,775
Test machines 200,000 200,000
Office furniture 222,272 227,413
Leasehold improvements 123,934 123,934
Software and other assets 57,170 64,830
----------- -----------
Total property and equipment 3,649,000 3,592,112
Accumulated depreciation (2,714,951) (2,536,265)
----------- -----------
934,049 1,055,847
Other assets:
Cash surrender value of life insurance -- 169,685
Notes receivable 209,690 217,652
Deposits 15,194 12,693
Deferred tax asset 105,350 153,215
----------- -----------
Total other assets 330,234 553,245
----------- -----------
Total assets $ 5,099,947 $ 5,311,594
=========== ===========
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 25,000 $ 500,000
Current portion of long-term debt 135,000 128,950
Current portion of capital lease obligations 227,612 258,696
Notes payable - officers -- 200,000
Accounts payable 44,058 150,953
Accrued payroll 601,817 541,710
Profit-sharing payable 235,188 209,585
Income taxes payable 240,100 22,075
Other taxes payable 71,248 71,771
Deferred tax liability 1,236,047 1,183,801
---------- ----------
Total current liabilities 2,816,070 3,267,541
Long-term debt, net of current portion 270,662 405,844
Capital lease obligations, net of current portion 532,912 758,279
---------- ----------
Total liabilities 3,619,644 4,431,664
Stockholders' equity:
Common stock (no par value, 500 shares
authorized, 60 shares issued and outstanding) 336 336
Additional paid-in capital 10,218 10,218
Retained earnings 1,469,749 869,376
---------- ----------
1,480,303 879,930
---------- ----------
Total liabilities and shareholders' equity $5,099,947 $5,311,594
========== ==========
</TABLE>
See accompanying notes.
3
<PAGE>
S.E.A., Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996
----------------------------------------
<S> <C> <C>
Revenues $ 16,070,069 $ 15,283,927
Direct cost of revenues 9,455,754 8,697,057
Selling, general and administrative expenses 5,471,420 5,067,173
------------ ------------
Total costs and expenses 14,927,174 13,764,230
------------ ------------
Income from operations 1,142,895 1,519,697
Other income and (expense):
Interest income 30,779 3,914
Interest expense (169,301) (243,984)
Gain from sale of assets 4,050 8,649
Other 24,950 17,771
------------ ------------
Total other expense (109,522) (213,650)
------------ ------------
Income before taxes 1,033,373 1,306,047
Provision for income taxes 433,000 543,000
------------ ------------
Net income $ 600,373 $ 763,047
============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
S.E.A., Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ 336 $ 10,218 $ 106,329 $ 116,883
1996 net income -- -- 763,047 763,047
---------- ---------- ---------- ----------
Balance at December 31, 1996 336 10,218 869,376 879,930
1997 net income -- -- 600,373 600,373
---------- ---------- ---------- ----------
Balance at December 31, 1997 $ 336 $ 10,218 $1,469,749 $1,480,303
========== ========== ========== ==========
</TABLE>
See accompanying notes.
5
<PAGE>
S.E.A., Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
-------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 600,373 $ 763,047
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 307,338 282,667
Gain from sale of fixed assets (4,050) (8,649)
Cash surrender value of life insurance 169,685 (11,832)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable - trade 10,142 (490,177)
Increase in accounts receivable - unbilled (110,159) (200,250)
Decrease in notes receivable 6,762 427
Increase in prepaids and other current assets (30,763) (78,940)
Increase in deposits (2,501) (1,886)
Decrease (increase) in deferred tax asset - long term 47,865 (1,087)
Decrease in accounts payable (106,895) (191,265)
Increase (decrease) in accrued liabilities 60,107 (46,379)
Increase in profit sharing payable 25,603 103,796
Increase in deferred tax liabilities 52,246 414,824
Increase (decrease) in other liabilities 259,372 (27,047)
----------- -----------
Net cash provided by operating activities 1,285,125 507,249
INVESTING ACTIVITIES
Proceeds from sale of fixed assets and real estate 4,050 48,892
Purchases of property and equipment, net (185,540) (276,023)
----------- -----------
Net cash used in investing activities (181,490) (227,131)
FINANCING ACTIVITIES
Net (decrease) increase in line of credit (475,000) 400,000
(Repayment) proceeds from officers' notes payable (200,000) 200,000
Payment of long-term debt (129,132) (706,562)
Payment of capital lease obligations (298,321) (165,746)
----------- -----------
Net cash used in financing activities (1,102,453) (272,308)
----------- -----------
Net increase in cash 1,182 7,810
Cash at beginning of year 33,481 25,671
----------- -----------
Cash at end of year $ 34,663 $ 33,481
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 129,676 $ 217,167
=========== ===========
Income taxes paid $ 116,476 $ 114,488
=========== ===========
</TABLE>
See accompanying notes.
6
<PAGE>
S.E.A., Inc.
Notes to Financial Statements
December 31, 1997
1. DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
S.E.A., Inc. (the Company) provides data and evaluation related to fire
investigation, product failure analysis, vehicle or accident reconstruction, and
other services related to the investigation of catastrophic events. The Company
provides services from seven locations in Ohio, Georgia, Missouri, Florida,
Texas, North Carolina and South Carolina.
SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method. Expenditures for maintenance and repairs are expensed as
incurred. Renewals and betterments that materially extend the life of the assets
are capitalized. Furniture and equipment is depreciated over estimated lives
ranging from 5 to 7 years, leasehold improvements are amortized over the lesser
of the estimated useful life of the asset or the lease term. The building under
capital lease is depreciated over the 15 year lease term.
Revenue Recognition
The Company derives its revenues from professional service activities. The
majority of these activities are provided under "time and materials" billing
arrangements, and revenues, consisting of billed fees and expenses, are recorded
as work is performed and expenses are incurred. Revenues recognized in excess of
amounts billed to clients have been recorded as unbilled receivables in the
accompanying balance sheets.
7
<PAGE>
S.E.A., Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
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 are expected to be in effect
when the differences are expected to reverse.
2. BORROWINGS UNDER LINE OF CREDIT
The Company has a $500,000 revolving line of credit with a bank expiring on
April 1, 1999. Borrowings under this line of credit bear interest at prime minus
1/8%, and are secured by accounts receivable, inventory and equipment. At
December 31, 1997, $475,000 of this line of credit was available.
In connection with this line of credit, the Company is required to maintain
covenants regarding certain financial statement amounts, ratios and activities
of the Company.
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Capitalized building lease, payable in monthly installments of $24,756
plus interest at 13.6% through December 1, 2001. $ 728,894 $ 968,781
Capitalized computer equipment lease, payable in monthly lease installments of
$1,381, including interest at 11%, through November, 1999 31,630 48,194
</TABLE>
8
<PAGE>
S.E.A., Inc.
Notes to Financial Statements (continued)
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Notes payable-bank for $700,000, payable in monthly installments of $14,127
including interest at 8.35%, due September, 2000, secured by inventory,
accounts receivable, and equipment 405,662 477,093
Note payable - other - 57,701
---------------- ---------------
1,166,186 1,551,769
Less: current portion 362,612 387,646
---------------- ---------------
Long-term debt $ 803,574 $1,164,123
================ ===============
</TABLE>
Principal maturities of long-term debt and capital lease obligations are as
follows:
YEAR ENDING
DECEMBER 31,
------------
1998 $ 362,612
1999 408,430
2000 395,144
----------
Total $1,166,186
==========
4. OPERATING LEASES
The Company is committed under noncancelable leases for various equipment,
warehouse and office facilities, expiring at various dates through 2012. These
leases require the Company to pay for insurance, real estate taxes, maintenance,
sales tax, and escalations in operating expenses over the taxable base year.
Total rental payments under the leases were $227,487 in 1997 and $205,216 in
1996 to outside lessors, and $42,000 in 1997 to a related party.
9
<PAGE>
S.E.A., Inc.
Notes to Financial Statements (continued)
4. OPERATING LEASES (CONTINUED)
Future minimum rental payments under noncancelable operating leases are as
follows:
1998 $ 267,561
1999 237,684
2000 213,543
2001 212,275
2002 177,551
Thereafter 231,683
----------
Total $1,340,297
==========
5. RELATED PARTY TRANSACTIONS
The Company leases its office locations in Columbus, Ohio from S.E.A.,
Properties, an Ohio partnership, and GBDG, Ltd., an Ohio limited liability
company, which are related to the Company through common ownership. (See Note
4).
In December, 1996, the Company sold certain real estate totaling $250,000 to
GBDG, Ltd. A note receivable was established for $200,000. The terms of the note
provide for monthly payments of principal and interest of $1,969. The note
carries interest at 8.5% and is due January, 2012. The note receivable balance
from GBDG, Ltd. as of December 31, 1997 and 1996 was $193,700 and $200,000,
respectively.
6. PROFIT SHARING AND 401K PLANS
The Company has a Defined Contribution Profit Sharing Plan and a 401(k) plan
that covers all eligible employees. Company contributions to the plans totaled
$235,188 and $209,585 in 1997 and 1996, respectively. Profit sharing
contributions are approved by the Board of Directors. The Company matches 25% of
each employee 401(k) contribution up to 1% of total salary.
10
<PAGE>
S.E.A., Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities at
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax asset - non current:
Building under capital lease $ 165,361 $ 197,430
Tax depreciation in excess of book
depreciation (60,011) (44,215)
----------- -----------
Net deferred tax asset $ 105,350 $ 153,215
=========== ===========
Deferred tax liability - current:
Use of cash basis for income tax purposes $ 1,236,047 $ 1,183,801
=========== ===========
</TABLE>
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current:
Federal $ 261,500 $ 86,500
State 73,389 12,763
----------- -----------
334,889 99,263
Deferred:
Federal 116,753 388,519
State (18,642) 55,218
----------- -----------
98,111 443,737
----------- -----------
Total $ 433,000 $ 543,000
=========== ===========
</TABLE>
11
<PAGE>
S.E.A., Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
The Company's provision for income taxes resulted in effective tax rates that
varied from statutory federal income tax rates as follows:
<TABLE>
<CAPTION>
1997 % 1996 %
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Expected federal income tax provision at 35% $361,681 35.0% $457,117 35.0%
Expenses not deductible for tax purposes 16,572 1.6 17,903 1.4
State income taxes, net of federal benefit 54,747 5.3 67,980 5.2
-------- ---- -------- ----
$433,000 41.9% $543,000 41.6%
======== ==== ======== ====
</TABLE>
8. SUBSEQUENT EVENT
On July 6, 1998, the Company's stockholders signed a letter of intent to sell
all of the outstanding stock of S.E.A. Inc.
9. YEAR 2000 ISSUE (UNAUDITED)
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and is in the process of converting all of its critical
data processing systems. The Company expects this project to be complete by
mid-1999 and does not expect this project to have a significant effect on
operations.
<PAGE>
Unaudited Financial Statements
S.E.A., Inc.
Period ended June 30, 1998 and 1997
<PAGE>
S.E.A., Inc.
Unaudited Financial Statements
Periods ended June 30, 1998 and 1997
CONTENTS
Balance Sheets.................................................................2
Statements of Operations.......................................................4
Statements of Stockholders' Equity.............................................5
Statements of Cash Flows.......................................................6
Notes to Financial Statements..................................................7
<PAGE>
<TABLE>
<CAPTION>
S.E.A., Inc.
Unaudited Balance Sheets
JUNE 30
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 231,382 $ 203,941
Receivables:
Trade (net of allowance for doubtful accounts
of $15,000 in 1997 and 1996) 2,925,077 2,731,871
Unbilled 1,383,030 1,437,438
----------- -----------
Total receivables 4,308,107 4,169,309
Other current assets 229,337 247,377
----------- -----------
Total current assets 4,768,826 4,620,627
Property and equipment:
Building under capital lease 1,575,000 1,575,000
Office equipment 1,146,195 1,095,434
Furniture and Equipment 372,486 384,173
Test machines 200,000 200,000
Office furniture 226,390 240,849
Leasehold improvements 123,934 123,934
Software and other assets 57,670 64,830
----------- -----------
Total property and equipment 3,701,675 3,684,220
Accumulated depreciation (2,850,255) (2,689,159)
----------- -----------
851,420 995,061
Other Assets 70,119 219,845
Deferred tax asset 105,350 105,350
----------- -----------
Total other assets 175,469 325,195
----------- -----------
Total assets $ 5,795,715 $ 5,940,883
=========== ===========
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
JUNE 30
1998 1997
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 77,737 $ 179,923
Current portion of capital lease obligations 643,573 840,867
Accounts payable 163,324 279,473
Accrued payroll 1,021,787 837,841
Income taxes payable 286,985 397,496
Deferred tax liability 1,316,484 1,236,047
---------- ----------
Total current liabilities 3,509,890 3,771,647
Capital lease obligations, net of current portion 277,421 429,176
---------- ----------
Total liabilities 3,787,311 4,200,823
Stockholders' equity:
Common stock (no par value, 500 shares
authorized, 60 shares issued and outstanding) 336 336
Additional paid-in capital 10,218 10,218
Retained earnings 1,997,850 1,729,506
---------- ----------
Total Stockholders' equity 2,008,404 1,740,060
---------- ----------
Total liabilities and shareholders' equity $5,795,715 $5,940,883
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
S.E.A., Inc.
Unaudited Statements of Operations
<TABLE>
<CAPTION>
PERIODS ENDED JUNE 30
1998 1997
----------- -----------
<S> <C> <C>
Revenues $ 8,533,221 $ 8,139,202
Direct cost of revenues 4,111,580 4,450,259
Selling, general and administrative expenses 3,526,555 2,231,095
----------- -----------
Total costs and expenses 7,638,135 6,681,354
----------- -----------
Income from operations 895,086 1,457,848
Other income and (expense):
Other - -
----------- -----------
Total other expense - -
----------- -----------
Income before taxes 895,086 1,457,848
Provision for income taxes 366,985 597,718
----------- -----------
Net income $ 528,101 $ 860,130
=========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
S.E.A., Inc.
Unaudited Statements of Stockholders' Equity
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 336 $ 10,218 $ 869,376 $ 879,930
Net Income - - 860,130 860,130
----------------------------------------------------------
Balance at June 30, 1997 336 10,218 1,729,506 1,740,060
==========================================================
Balance at January 1, 1998 $ 336 $ 10,218 $ 1,469,749 $ 1,480,303
Net Income - - 528,101 528,101
----------------------------------------------------------
Balance at June 30, 1998 336 10,218 1,997,850 2,008,404
==========================================================
See accompanying notes.
</TABLE>
5
<PAGE>
S.E.A., INC.
Unaudited Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD ENDED JUNE 30
1998 1997
------------------------
<S> <C> <C>
Operating activities
Net income $ 528,101 $ 860,130
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 78,753 106,644
Changes in assets and liabilities:
Decrease in accounts receivable - trade (336,955) (133,607)
Decrease in accounts receivable - unbilled (295,460) (460,027)
Increase in notes receivable 7,500 6,300
Increase in prepaids and other current assets 43,237 67,719
Increase in accounts payable 119,266 128,519
Increase in accrued liabilities 419,970 296,131
Decrease in profit sharing payable (235,188) (209,585)
Increase in deferred tax liabilities 80,437 52,246
Increase (decrease) in income tax payable (24,363) 303,650
--------- ---------
Net cash provided by operating activities 385,298 1,018,120
INVESTING ACTIVITIES
Proceeds from sale of fixed assets and real estate 3,876 -
Purchases of property and equipment, net - (45,858)
--------- --------
Net cash used in investing activities 3,876 (45,858)
FINANCING ACTIVITIES
Net Decrease in line of credit (25,000) (500,000)
Repayment officers' notes payable and long term debt (327,925) (554,871)
Payment of capital lease obligations 160,469 253,069
--------- ---------
Net cash used in financing activities (192,456) (801,802)
--------- --------
Net increase in cash 196,718 170,460
Cash at beginning of period 34,664 33,481
--------- ---------
Cash at end of period $ 231,382 $ 203,941
========= =========
</TABLE>
See accompanying notes.
6
<PAGE>
S.E.A., INC.
Unaudited Notes to Financial Statements
June 30, 1998
1. DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
S.E.A., Inc. (the Company) provides data and evaluation related to fire
investigation, product failure analysis, vehicle or accident reconstruction, and
other services related to the investigation of catastrophic events. The Company
provides services from seven locations in Ohio, Georgia, Missouri, Florida,
Texas, North Carolina and South Carolina.
The accompanying unaudited combined financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 8-K and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting princples for complete financial
statements. In the opinion of management all adjustments considered necessary
for a fair presentation have been included
SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method. Expenditures for maintenance and repairs are expensed as
incurred. Renewals and betterments that materially extend the life of the assets
are capitalized. Furniture and equipment is depreciated over estimated lives
ranging from 5 to 7 years, leasehold improvements are amortized over the lesser
of the estimated useful life of the asset or the lease term. The building under
capital lease is depreciated over the 15 year lease term.
Revenue Recognition
The Company derives its revenues from professional service activities. The
majority of these activities are provided under "time and materials" billing
arrangements, and revenues, consisting of billed fees and expenses, are recorded
as work is performed and expenses are incurred. Revenues recognized in excess of
amounts billed to clients have been recorded as unbilled receivables in the
accompanying balance sheets.
7
<PAGE>
S.E.A., Inc.
Unaudited Notes to Financial Statements (continued)
1. DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
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 are expected to be in effect
when the differences are expected to reverse.
2. RELATED PARTY TRANSACTIONS
The Company leases its office locations in Columbus, Ohio from S.E.A.,
Properties, an Ohio partnership, and GBDG, Ltd., an Ohio limited liability
company, which are related to the Company through common ownership.
8
<PAGE>
FTI CONSULTING, INC.
PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
(8) PRO FORMA PRO FORMA
FTI KK&A KAHN SEA ADJUSTMENTS COMBINED
------------- ------------------------------------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $44,175,343 $5,489,863 $8,530,104 $16,070,069 74,265,379
Direct cost of revenues 23,564,284 2,719,803 6,190,134 9,455,754 (1,837,715)(3) 40,092,260
Selling,general and administrative
Expenses 15,240,802 2,092,663 1,545,000 5,471,420 (552,715)(3) 25,383,340
1,586,170 (2)
------------- ------------------------------------------ ------------ -------------
Total costs and expenses 38,805,086 4,812,466 7,735,134 14,927,174 (804,260) 65,475,600
------------- ------------------------------------------ ------------ -------------
Income from operations 5,370,257 677,397 794,970 1,142,895 804,260 8,789,779
Other income (expense):
Interest and other income 343,000 60,413 28,536 59,779 491,728
Interest expense (170,000) (19,800) (169,301) (2,572,250)(1) (2,931,351
------------- ------------------------------------------ ------------ ------------
173,000 40,613 28,536 (109,522) (2,572,250) (2,439,623
------------- ------------------------------------------ ------------ ------------
Income from continuing operations before
income taxes 5,543,257 718,010 823,506 1,033,373 (1,767,990) 6,350,156
Income taxes 2,249,982 287,204 76,000 433,000 (171,598)(5) 2,874,588
------------- ------------------------------------------ ------------
------------
Net income 3,293,275 430,806 747,506 600,373 (1,596,392) 3,475,568
------------- ------------------------------------------ ------------
Income available to common stock holders $3,293,275 $430,806 $747,506 $600,373 ($1,596,392) 3,475,568
============= ========================================== ============ ============
Earnings Per Common Share:
Net income per common share $0.73 0.77
============= ============
Earnings Per Common Share - Assuming
Dilution:
Net income per common share- assuming
dilution $0.70 0.74
============= ============
Weighted average shares used in the
calculation of basic and diluted
earnings per commons share:
Basic 4,528,627 4,528,627(4)
============= ============
Diluted 4,697,517 4,697,517(4)
============= ============
</TABLE>
<PAGE>
FTI CONSULTING, INC.
UNAUDITED PRO FORMA BALANCE SHEETS
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FTI KAHN SEA ADJUSTMENTS COMBINED
--------------- ---------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,442,103 ($27,264) $390,791 $3,805,630
Accounts receivable, net 7,613,666 739,222 2,934,929 11,287,817
Unbilled receivables, net 4,624,526 2,626,399 1,670,712 8,921,637
Income taxes receivable 0 -
Deferred income taxes 180,905 180,905
Prepaid expenses 1,942,937 59,522 (42,936) 1,959,523
--------------- ---------------- -------------- ----------------- -----------------
TOTAL CURRENT ASSETS 17,804,137 3,397,879 4,953,496 - 26,155,512
PROPERTY AND EQUIPMENT:
Buildings 411,241 - - 411,241
Furniture and equipment 12,918,957 68,467 595,771 13,583,195
Leasehold improvements 1,609,462 - - 1,609,462
--------------- ---------------- -------------- ----------------- -----------------
14,939,660 68,467 595,771 - 15,603,898
Accumulated depreciation and
amortization (8,303,878) 0 (19,450) (8,323,328)
--------------- ---------------- -------------- ----------------- -----------------
6,635,782 68,467 576,321 - 7,280,570
Deferred Income taxes (12,728) - 105,350 92,622
Goodwill 15,431,244 31,295,896 (1) 47,154,640
427,500 (2)
Accumulated amortization (432,660) (34,000) (54,185) (520,845)
--------------- ---------------- -------------- ----------------- -----------------
14,998,584 (34,000) (54,185) 31,723,396 46,633,795
Other assets 57,502 52,220 109,722
Investment in subsidiaries 35,630,000 (35,630,000) -
-
--------------- ---------------- -------------- -----------------
TOTAL ASSETS $75,113,277 $3,432,346 $5,633,202 -$3,906,604 $80,272,221
=============== ================ ============== ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,537,045 $44,160 $46,790 $427,500 (2) $2,055,495
Due to Previous owner $467,434 $80,526 $547,960
Line of Credit $26,000,000 $26,000,000
Current note payable 10,650,000 - - 10,650,000
Current Portion on Capital
lease 102,374 16,574 118,948
Accrued compensation
expense 1,531,120 264,232 997,623 2,792,975
Incomes tax payable (617,343) 15,144 179,167 (423,032)
Advances from clients 472,609 (761) 471,848
Current deferred taxes 102,711 324,678 346,511 773,900
Other current liabilities 26,253 - 175,000 201,253
--------------- ---------------- -------------- ----------------- -----------------
TOTAL CURRENT LIABILITIES 40,272,203 727,979 1,761,665 427,500 43,189,347
Long-term debt, less current
portion 9,700,000 - 9,700,000
Other long-term liabilities 224,593 2,614 227,207
Deferred income taxes 401,463 974,033 1,039,535 2,415,031
Commitment and contingent
liabilities -
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value 47,819 100 336 (436) (1) 47,819
Additional paid-in capital 16,190,087 - 10,218 (10,218) (1) 16,190,087
Retained earnings 8,277,112 1,730,234 2,818,834 (4,323,450) (1) 8,502,730
--------------- ---------------- -------------- ----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 24,515,018 1,730,334 2,829,388 (4,334,104) 24,740,636
--------------- ---------------- -------------- ----------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $75,113,277 $3,432,346 $5,633,202 ($3,906,604) $80,272,221
=============== ================ ============== ================= =================
- - - - -
</TABLE>
<PAGE>
FTI CONSULTING, INC.
PRO FORMA STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
(6) PRO FORMA PRO FORMA
FTI KK&A KAHN SEA ADJUSTMENTS COMBINED
------------- --------------------------------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $39,470,337 $2,085,508 $6,255,631 $11,579,920 $59,391,396
Direct cost of revenues 21,419,389 1,340,490 2,981,965 5,753,456 (1,500,717)(3) 29,994,583
Selling,general and administrative
Expenses 14,115,595 498,126 3,008,515 4,702,519 (133,333)(3) 23,490,539
1,299,118 (2)
------------- --------------------------------------- --------------- ------------
Total costs and expenses 35,534,984 1,838,616 5,990,480 10,455,975 (334,932) 53,485,123
------------- --------------------------------------- --------------- ------------
Income from operations 3,935,353 246,892 265,151 1,123,945 334,932 5,906,273
Other income (expense):
Interest and other income 199,686 33,642 233,328
Interest expense (620,602) (2,075,250)(1) (2,695,852)
------------- --------------------------------------- --------------- ------------
(420,916) - 33,642 - (2,075,250) (2,462,524)
------------- --------------------------------------- --------------- ------------
Income from continuing operations
before income taxes 3,514,437 246,892 298,793 1,123,945 (1,740,318) 3,443,749
Income taxes 1,458,873 81,000 27,500 355,156 (329,909)(5) 1,592,620
------------- --------------------------------------- --------------- ------------
Net income 2,055,564 165,892 271,293 768,789 (1,410,408) 1,851,130
------------- --------------------------------------- ---------------
Income available to common stock
holders $2,055,564 $165,892 $271,293 $768,789 ($1,410,408) $1,851,130
============= ======================================= =============== ============
Earnings Per Common Share:
Net income per common share $0.44 $0.39
============= ============
Earnings Per Common Share -
Assuming Dilution:
Net income per common share-
assuming dilution $0.41 $0.36
============= ============
Weighted average shares used in the
calculation of basic and diluted
earnings per commons share:
Basic 4,705,927 4,705,927(4)
============= ============
Diluted 5,075,076 5,075,076(4)
============= ============
</TABLE>
<PAGE>
FTI CONSULTING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma financial statements give retroactive effect to the
acquisition of Kahn Consulting Inc. and Affliate ("KCI") by the Company
effective September 17, 1998 (the date that control of KCI was transferred to
the Company) and the acquisition of S.E.A., Inc. ("SEA") by the Company
effective September 1, 1998 (the date that control of SEA was transferred to the
Company). Both acquisitions were accounted for by the Company as a purchase.
Pro forma adjustments to the unaudited pro forma combined statements of income
assume that the transaction was consummated on January 1, 1997, and are based on
the allocated purchase price as reported in the unaudited combined balance sheet
as filed in the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 1998. These adjustments are described below.
The purchase price for the acquisition of KCI of $20,000,000, plus estimated
expenses of $206,250, includes an initial payment of $10,000,000 with the
remainder evidenced by a note payable bearing interest at 7.5%. The purchase
price was allocated as follows:
<TABLE>
<CAPTION>
Assets acquired: (in thousands)
--------------
<S> <C>
Cash $ 1
Accounts receivable 3,172
Prepaid expenses 62
Property and equipment 68
Goodwill 18,498
----------
Total assets $ 21,801
==========
Liabilities assumed:
Accounts payable and accrued expenses $ 296
Current deferred tax 325
Long-term deferred tax liability 974
1,595
----------
Total purchase price $ 20,206
==========
</TABLE>
<PAGE>
FTI CONSULTING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (Continued)
The purchase price for the acquisition of SEA of $15,630,000, plus estimated
expenses of $216,250, includes an initial payment of $10,000,000 with the
remainder evidenced by a note payable bearing interest at 7.5%. The purchase
price was allocated as follows:
<TABLE>
<CAPTION>
Assets acquired: (in thousands)
--------------
<S> <C>
Cash $ 300
Accounts receivable 4,367
Prepaid expenses 229
Property and equipment 584
Goodwill 13,221
----------
Total assets $ 18,701
==========
Liabilities assumed:
Accounts payable and accrued expenses $ 1,300
Current portion of long-term debt and capital
lease obligations 275
Current deferred tax 347
Long-term deferred tax liability 933
----------
2,855
----------
Total purchase price $ 15,846
==========
</TABLE>
The value of goodwill will be amortized over a twenty-year period, and will be
reviewed if the facts and circumstances suggest that the value of the goodwill
is impaired, based on an analysis of future cash flows from the KCI and SEA
businesses. If this review indicates that the goodwill will not be recoverable,
the Company's carrying value of the goodwill will be reduced accordingly.
These unaudited pro forma combined financial statements may not be indicative of
the results that may be obtained in the future. The unaudited pro forma combined
financial statements, including the notes thereto, should be read in conjunction
with the historical financial statements of the Company, KCI and SEA.
<PAGE>
FTI CONSULTING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (Concluded)
(1) Adjustment to reflect interest expense on the $45.63 million promissory
notes, which bear interest at rates from 7.0% to 7.5%, issued in connection
with the acquisitions.
(2) Adjustment to reflect the additional amortization of goodwill which is
amortized over an estimated useful life of 20-year period.
(3) In connection with the acquisitions, the Company entered into employment
agreements with the stockholders and executive officers of KCI and SEA. The
future amount of compensation to be paid to these officers, who will have
substantially the same duties and responsibilities, will be less than the
amounts paid in periods prior to the acquisitions. The pro forma adjustment
assumes that the officers had received the reduced amount of compensation
for the year ended December 31, 1997 and for the nine months ended
September 30, 1998.
(4) Weighted average shares used in calculating basic and diluted earnings per
share are the same as reported in the Company's historical consolidated
financial statements.
(5) Adjustment to reflect (i) taxation of KCI as a C-corporation. KCI was
organized as an S-Corporation and taxes principally at the shareholder
level and (ii) the income tax effects of other proforma adjustments. The
assumed effective income tax rate is 45%.
(6) Klick, Kent & Allen (KK&A) was acquired June 1, 1998. The pro forma
statement of income for the year ended December 31, 1997 includes unaudited
pro forma financial data of KK&A for the year ended December 31, 1997 as
presented in the Form 8K filed with the Securities and Exchange Commission
on July 17, 1998. The unaudited statement of income for the six months
ended June 30, 1998 includes five months of activity for the period prior
to acquisition of January 1, 1998 to May 31, 1998. The pro forma
adjustments assume that the transactions were consummated on June 30, 1998.
<PAGE>
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.
FTI CONSULTING, INC.
(Registrant)
By: /s/ Gary Sindler
---------------------------------------
Gary Sindler
Executive Vice President and Chief
Financial Officer, Secretary and Treasurer
DATED: November 30, 1998
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO. EXHIBIT
- ------- -------
23.1 Consent of Ernst & Young LLP.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of FTI Consulting, Inc. our reports (a) dated July 24, 1998 with
respect to the combined financial statements of Kahn Consulting, Inc. as of and
for the years ended December 31, 1996 and 1997, and (b) dated July 31, 1998 with
respect to the financial statements of S.E.A. Inc. as of and for the years ended
December 31, 1996 and 1997, each included in the Current Report (Form 8-K/A)
filed with the Securities and Exchange Commission.
REGISTRATION STATEMENT ON FORM S-8
<TABLE>
<CAPTION>
REGISTRATION
NAME NUMBER DATE FILED
- --------------------------------------------- ------------- ----------------
<S> <C> <C>
1992 Stock Option Plan (As Amended) ......... 33-19251 January 3, 1997
1997 Stock Option Plan ...................... 33-30357 June 30, 1997
Employee Stock Purchase Plan ................ 33-30173 June 27, 1997
</TABLE>
Baltimore, Maryland
December 1, 1998
