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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee required)
For the fiscal year ended December 31, 1997
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required)
For the transition period from to
Commission file number
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION
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(Name of Small Business Issuer in Its Charter)
MARYLAND 52-1261113
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2021 Research Drive, Annapolis, MD 21401
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(Address of Principal Executive Officer) (Zip Code)
(410) 224-8770
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(Issuer Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Common Stock, par value $.01, per share
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(Title of Class)
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(Title of Class)
Check whether the issuer : (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for part 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment of this Form 10-KSB. [X]
State issue's revenue for its most recent fiscal year. $44,175,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was also, or the average
bid and marked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.)
$55,411,845
Note. IF determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
ISSUERS INVOLVED IN A BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. 4,733,601
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
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PART I
ITEM 1. BUSINESS.
FTI is a leading provider of litigation support consulting services
including visual communications, engineering services and trial consulting that
assist attorneys and corporations in developing their trial themes and
strategies, assessing the strength of their cases, and creating state-of-the-art
courtroom presentations. With the acquisition of LWG, Inc., and subsidiary (LWG)
in September 1997, the Company has broadened its offerings to the insurance
market by adding capabilities in claims management consulting and restoration
services. Throughout its 16-year history, the Company has developed innovative
applications for advanced technologies in the courtroom, such as computer
animation and simulation, that greatly enhance presentations and expert
testimony on complex subjects such as airplane crashes, financial disputes,
intellectual property resolutions and physical phenomena. More recently, FTI has
become a leader in utilizing multimedia technology for trial support. The
Company believes that continued increases in the volume, risk, complexity and
cost of litigation have driven the need for litigation support services that
utilize advanced technologies to provide competitive advantages in the courtroom
on a cost-effective basis. The Company was incorporated on June 30, 1982, in the
State of Maryland.
INDUSTRY OVERVIEW
The litigation process involves the efforts and services of many
participants in addition to lawyers. The litigation support services market
includes event investigation and analysis, expert testimony, courtroom
presentation, visual packaging, computer animation and simulation, jury analysis
and selection, economic evaluation consulting and document preparation, storage
and retrieval. Participants in the market include the Big Six accounting firms,
which specialize in document management and financial due diligence, and medium
size firms, such as the Company, which compete to provide multiple services on a
local, regional and national basis. In addition, many small companies that rely
on one or two key individuals provide services in local markets. The Company
believes that the litigation support services market benefits from several
broader market trends including the following:
PREVALENCE OF VISUAL COMMUNICATIONS TECHNIQUES. Over the past several
years, new media, including animation and image enhancement, have become
widespread throughout the general consumer marketplace. At the same time, large
litigation cases have become increasingly complex and often involve
sophisticated and difficult-to-understand issues, such as toxic tort,
intellectual property, evaluation of failures and medical product liability. The
presentation of complicated concepts are dramatically enhanced by visual
presentation and 3D animation using media commonly accepted and understood by
jurors. Consequently, visual technology is becoming increasingly prevalent in
the courtroom.
LITIGATION MARKET. According to available statistics from the U.S. Bureau
of Census, the market for legal services in the United States was estimated to
be $114 billion in 1995. As litigation expenditures have grown to become a
significant expense for FORTUNE 500 companies, courtroom presentation and
document management techniques have become more sophisticated. Computerized
document management in cases involving millions of pages of deposition testimony
and exhibits has become widely accepted in the federal and state court systems.
From the clients' perspective, in virtually every case, cost and quality of
service are the key elements in selecting litigation support providers. In
addition, the Company believes that major users of services view efficient use
of expert services, visual communications, trial consulting and technology as a
way to provide early focus on the issues, chart a cost-effective strategy with
regard to resolution and control, and leverage the cost of fees and expenses.
BUSINESS STRATEGY
The Company's believes it is the leading provider of value-added litigation
support consulting services. The Company's strategy includes the following key
elements:
EXPANSION OF THE RANGE OF SERVICES. The Company focuses on meeting the
changing litigation support needs of corporations and law firms by introducing
new products and services to address client requirements and changes in the
market. The Company's services generally are intended to increase the
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effectiveness of its clients' cases or reduce the cost and complexity of the
litigation process. For example, the Company recognized that computer-based 3D
animation could effectively simplify highly-complex issues in jury trials and
was one of the first companies to introduce that capability. Future acquisitions
may broaden the Company's offerings through additional related services to the
legal market already served by the Company, thus capitalizing on existing
relationships.
The Company believes that the application of advances in communications and
technology is essential to successfully resolving the inefficiencies of cost and
time that burden the legal system today. The Company has developed trial
presentation and case preparation software to facilitate the realization of the
"paperless trial" and increase the legal team's efficiency in the utilization of
large volumes of document and graphic images.
GEOGRAPHIC EXPANSION. The Company seeks new business opportunities by
expanding its operations in strategic geographic markets. The Company believes
that the ability to provide services on a nationwide basis is a competitive
advantage in securing business from large, geographically diverse corporations.
Furthermore, proximity to a client provides a significant cost advantage. The
Company's strategy is to expand both the number of offices it maintains and the
services provided by each office. Due to the fragmented nature of the litigation
support services industry, the Company is presented with a significant number of
opportunities to pursue this strategy through acquisition. See "Management's
Discussion and Analysis -- Overview."
SIZE AND CRITICAL MASS. Large litigation support contracts often require
the service provider to be able to provide services on a number of matters in
varying geographic locations. The Company believes that many market participants
lack sufficient resources, personnel, service offerings and geographic diversity
to effectively compete for such contracts. To enhance its ability to service
such contracts, the Company has pursued a strategy of increasing the number and
range of skills provided by its professionals and invested in software solutions
to facilitate massive data handling.
COST-EFFECTIVE DELIVERY OF SERVICE. The Company is dedicated to providing
cost-effective solutions to its clients. The Company offers a disciplined
project management approach to ensure adherence to the client's budgets and
schedules. The Company also maintains a flexible cost structure by using a mix
of employees and outside contractors. This reduces fixed overhead costs while
offering solutions and expertise tailored to the specific requirements of a
client's case.
PRODUCTS AND SERVICES
VISUAL COMMUNICATIONS CONSULTING. In the mid 1980s, the Company helped
pioneer the concept of visual packaging and 3D computer simulation to enhance
the presentation of scientific findings and other concepts. Visual packaging
incorporates a wide range of exhibits for trial, including static graphics,
photographs, technical illustrations, live video, computer graphics, computer
animations, laser disc and models. The Company assists attorneys in focusing the
issues of their case prior to trial and in presenting those issues in the most
accurate, concise and powerful manner. The Company utilizes production and
communications techniques to tailor the subject matter of a presentation or
exhibit not only to the characteristics of the judge or jury, but also to the
presentation skills of the attorney involved.
Through 3D animation, the Company can illustrate dynamic phenomena that
cannot be portrayed in a static presentation. Such animation can then be used to
provide a dramatic, true-to-physics presentation of a client's case that is
easily understandable by nontechnical audiences such as a jury. The animation
group recreates complicated events such as the motion of an airplane, the spread
of a fire, mechanical and structural movements, and forces or the movement of
vehicles and bodies in an automobile accident.
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The Company's visual communications consulting has been involved in cases
such as the Dupont Plaza Hotel fire in San Juan, Puerto Rico (in which the
Company was the first to apply a computational fluid dynamics computer model to
the analysis of fire spread), the Hunt brothers silver market case (in which the
importance and flexibility of using video depositions in the courtroom was
significantly expanded to allow the admission of assembled portions of selected
deposition materials as opposed to the deposition in its entirety) and the
Northwest Airlines DC-9 crash in Detroit, Michigan (in which the Company helped
develop an animated reenactment of the crash based upon the black box data and
voice recorder, allowing viewers to experience the events leading up to the
crash). Additional cases involving the Company's visual communications services
included Texas Instruments intellectual property licensing agreements, the Pratt
& Whitney antitrust case and the American Eagle accident in Indiana.
The Company believes that its experience in applying visual communications
techniques to litigation cases and in creating visual packages that can be
admitted as evidence has contributed significantly to the development of the
visual packaging marketplace and that its state-of-the-art capabilities allow it
to undertake projects that others may not be able to complete as effectively or
rapidly as the Company.
TRIAL CONSULTING SERVICES. The Company's trial consulting services group
assists attorneys in developing trial strategies and pre-trial negotiation
strategies by identifying key psychological factors through market research and
statistical analysis to assess the impact of courtroom themes and presentations.
The Company entered this market in September 1992, through the acquisition of a
company which had 10 years of experience providing these types of services and
the hiring of several recognized experts in the field who had been involved in
such high-profile cases as the Reginald Denny assault trial and the McMartin
Preschool trial. Assignments range from providing jury consulting for individual
cases to providing jury consulting and negotiation services for a series of
cases, or even substantially all the litigation of a major corporation.
Pre-trial services include attitude surveys of the relevant community to
determine attitudes and characteristics of potential jurors, the use of focus
groups and mock trials to test the effectiveness of various themes to be
presented at trial. Jury selection services include development of juror
profiles and assistance in developing questions to be asked potential jurors
during the jury selection process. Trial services include assistance in
critiquing witnesses to increase the clarity and effectiveness of their
presentations and assistance in developing, presenting and monitoring the impact
of themes used at trial. Negotiation and settlement services include analysis of
jury awards and juror profiles to assess the potential magnitude of jury
verdicts. For example, in the O.J. Simpson trial, the Company conducted a
community attitude survey and focus groups, and provided jury selection and
trial monitoring services.
COURTROOM TECHNOLOGY. The Company has developed a computer-based trial
management system, which is designed to provide storage and retrieval of all
forms of evidentiary materials including a digitized library of video
information during trial. The Company believes this system's ability to store,
search and retrieve information is critical to presenting an effective case by
the legal team. Such information includes depositions, briefs, affidavits and
other evidence. The system also facilitates computer graphics that allow for
rapid and customized display of charts, graphs, photos and other static images.
ENGINEERING AND SCIENTIFIC SERVICES. Since its inception, the Company has
provided services in connection with the engineering and scientific
investigation and analysis of failures and accidents, with Company personnel
often testifying as expert witnesses in connection with the resolution of
associated litigation or arbitration. The Company's engineering and scientific
services include engineering and scientific analyses of complex physical
phenomena and events, including vehicle accidents; electric and gas utility
failures; fires and explosions; and structural defects in buildings, towers and
ships. For example, in an accident reconstruction case, the Company's services
may include the evaluation of highway design, signal device performance, vehicle
dynamics, helmet effectiveness, mechanical failure, evasive maneuvers,
visibility and vehicle operation. In the area of fires and explosions, the
Company provides full-scale fire testing, fire scene laser mapping and computer
fire modeling. Structural analysis assign-
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ments may include the evaluation of the design, construction, operation, and
maintenance of various manmade structures, including buildings, highways,
bridges, towers, tunnels, dams, airports and mechanical structures. The Company
also provides analyses relating to the failure of electrical and mechanical
systems and materials, including metals and composite materials; energy and
utility systems; manufacturing processes and machinery; oil refineries; and
commercial transportation equipment. The Company has access to a wide range of
experts in other disciplines including aviation, biomedical, environmental,
electrical, chemical and utility engineering as well as marine and medical
sciences.
The Company's engineering and scientific services group has been involved
in a number of high profile cases beginning with the MGM Grand Hotel fire in Las
Vegas (in which the Company was hired by the defendant contractor for the new
Tracy Tower addition to analyze the cause of fire and smoke spread related to 85
deaths and hundreds of injuries). One of the most comprehensive investigations
conducted by the Company involved the Hinsdale Telephone Central Office fire in
Chicago, Illinois (in which the Company was selected by the State of Illinois to
lead the investigation of the cause and loss of telecommunications service).
After a full investigation and analysis of the Hinsdale incident, the Company
formulated recommendations which formed the basis for new operating laws under
the Illinois Administrative Code. The Company has continued to apply its
expertise to the solution of complex investigations in other high-profile
incidents such as the Loma Prieta earthquake structural failures and fires,
Amtrak train derailments, as well as several major airline accidents.
Through the acquisition of Teklicon, Inc., on September 30, 1996, the
Company significantly enhanced its capabilities in high technology consulting
and expert witness services to the legal profession and industry clients who
require assessment of intellectual property rights and other industry problems
that have high technology content. Services in support of litigation or
pre-litigation research include patent portfolio research, expert witness
services and intellectual property. Teklicon's registry of experts, many of whom
hold advanced degrees, provides technical expertise in a broad spectrum of
disciplines including semiconductor and microelectronics, telecommunications,
and computer systems architecture and design.
INSURANCE CLAIMS CONSULTING. Through the acquisition of LWG, Inc. ("LWG")
in September 1997, the Company expanded its service offerings to the insurance
claims market. LWG provides expert consulting services to property and casualty
insurance claim adjusters and attorneys primarily on claims associated with
electronic and high technology equipment. Such services include inspecting
damaged property and technical consulting for alternative resolution to a claim
settlement. Additionally, RestorTek, Inc., a wholly-owned subsidiary of LWG,
provides equipment restoration services primarily for high technology equipment
to help minimize the loss to the insurance company, thus containing premiums for
policyholders.
LWG is generally employed in the claims process at the outset of an
incident. It is the Company's belief that inclusion of LWG at this point
presents significant opportunity to develop additional revenues in connection
with the scientific investigation and analysis of the cause of the loss.
Since the insurance claims, engineering and scientific services groups are
often engaged soon after the occurrence of an incident and remain active through
resolution, the Company has effectively used these services for cross-selling
the Company's other services.
CLIENTS
In 1997, the Company performed work for 1301 clients, including 803 law
firms, 70 of which were rated in the top 100 law firms in 1997, as measured by
the American Lawyer, based on revenues in the United States, 116 industrial
clients, 85 of which were rated in the FORTUNE 500 for 1997; and 237 insurance
companies, 18 of which were rated in the FORTUNE 500 for 1997. As of December
31, 1997, the Company was actively working on 827 different matters for 406
different clients. Major clients of the Company include DuPont and AT&T. None of
the Company's clients represented more than 10% of the Company's revenues during
1997.
COMPETITION
The legal support services market is highly competitive. The Company faces
various sources of competition, including several national companies and a large
number of smaller firms that provide one or more services to local and regional
markets. The source of competition often depends upon the
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services being provided by the Company. The scientific and insurance claims
services group competes against various regional or national concerns,
independent experts and research organizations. The litigation support group
generally competes against other litigation consulting firms and small sole
proprietorships.
In addition to pricing, competitive factors for the Company's services
include reputation, geographic locations, performance record, quality of work,
range of services provided and existence of an ongoing client relationship. On a
nationwide basis, the Company's competitors include Engineering Animation, Inc.,
which provides animation services; Exponent, Inc., which provides engineering
analysis services and a limited amount of animation services; Decision Quest,
which provides jury analysis, visual packaging and animation services; S.E.A.,
Inc., which provides engineering and limited animation services; and Relectronic
Service Corporation, which provides electronic equipment restoration. Certain
national support service providers are larger than the Company and, on any given
engagement, may have a competitive advantage over the Company with respect to
one or more competitive factors. In addition, smaller local or regional firms,
while not offering the range of services provided by the Company, often are able
to provide the lowest price on a specific engagement because of their lower
overhead costs and proximity to the engagement. The fragmented nature of the
legal support services industry may also provide opportunities for large
companies that offer complementary services to enter the market through
acquisition. In the future, these and other competitive pressures could require
the Company to reduce its fees or increase its spending for marketing to attract
business.
EMPLOYEES
As of December 31, 1997, the Company had 251 employees in its legal support
services business. Approximately 166 of the legal support services employees are
engaged in activities directly related to revenue generation, and the remaining
85 of such employees are administrative employees. The Company also maintains
contractor arrangements with approximately 1260 independent consultants, of
which approximately 392 were utilized on Company engagements during 1997.
None of the Company's employees are covered by collective bargaining
agreements. The Company considers its relationship with its employees to be
good.
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company leases its principal facility in Annapolis, Maryland, which
totals approximately 39,100 square feet. The Company occupies 25,400 square feet
in adjacent buildings under a lease that expires in December 2003. In the
immediate vicinity, the Company occupies 13,700 additional square feet under a
lease that expires in December 2003.
The Company also leases its regional offices throughout the United States
and Canada. The Company believes that these facilities are adequate for its
current needs, and that suitable additional space, should it be needed, will be
available to accommodate expansion of the Company's operations on commercially
reasonable terms.
The Company also owns 5,000 square feet in Germantown, Maryland, from which
the Company conducted the business of its former Annapplix division. The Company
is attempting to lease or sell these premises.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material litigation.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol FTIC since May 8, 1996. The following table sets forth, for the
calendar quarter indicated, the high and low sales prices of the Common Stock,
as reported on the Nasdaq National Market.
1996 HIGH LOW
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Second Quarter (From May 8, 1996) ......... 10 1/2 8 3/4
Third Quarter ............................. 11 1/2 7 5/8
Fourth Quarter ............................ 11 1/4 8 1/2
1997 HIGH LOW
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First Quarter ............................. 9 5/8 5 1/2
Second Quarter ............................ 8 5 5/8
Third Quarter ............................. 9 1/2 6 3/4
Fourth Quarter ............................ 14 3/4 9
As of March 27, 1997, there were an estimated 1,700 holders of record of
the Common Stock.
The Company has never declared or paid any cash dividends on its Common
Stock and does not expect to pay any cash dividends in the foreseeable future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The selected financial data for the three years ended December 31, 1997 are
derived from the Company's consolidated financial statements. The financial
statements for the years ended December 31, 1995, 1996, and 1997 were audited by
Ernst & Young LLP. The data below should be read in conjunction with the
consolidated financial statements and related notes thereto included elsewhere
in this report and "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
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1997 1996 1995(1)(3)
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ......................................................... $ 44,175 $ 30,648 $23,381
Direct cost of revenues .......................................... 23,564 17,020 11,366
Selling, general and administrative expenses ..................... 15,241 10,786 9,887
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Total costs and expenses ......................................... 38,805 27,806 21,253
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Income from operations ........................................... 5,370 2,842 2,128
Other income (expense) ........................................... 173 107 (222)
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Income from continuing operations before income taxes ............ 5,543 2,949 1,906
Income taxes ..................................................... 2,250 1,235 779
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Income from continuing operations ................................ 3,293 1,714 1,127
Loss from operations of discontinued operations, net of tax(1). (65)
Loss on disposal of discontinued operations, net of tax .......... (365)
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Net income ....................................................... 3,293 1,714 697
Preferred stock dividends ........................................ -- 62 125
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Income available to common stockholders .......................... $ 3,293 $ 1,652 $ 572
======== ======== =======
Earnings per common share(2) ..................................... $ 0.73 $ 0.46 $ 0.27
Earnings per common share, assuming dilution(2) .................. $ 0.70 $ 0.42 $ 0.24
Shares used in computation ....................................... 4,698 4,174 3,316
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31
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1997 1996 1995
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .............................................. $10,634 $13,311 $ 2,259
Total assets ................................................. 29,176 20,868 10,756
Long-term debt, capital lease obligations and redeemable stock 1,014 254 3,941
Total stockholders' equity ................................... 21,019 17,629 1,463
</TABLE>
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(1) Effective March 31, 1996, the Company sold Annapplix to a group that
includes Annapplix's former owner and certain officers and stockholders of
the Company. See"Management's Discussion and Analysis of Results of
Operations and Financial Condition," and Note 4 to the Consolidated
Financial Statements.
(2) In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" ("Statement No. 128"). Statement No. 128 replaced the
calculation of primary and fully-diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully-diluted earnings per share. Earnings per share
amounts for all periods have been presented, and where appropriate,
restated, to conform to the Statement No. 128 requirements.
In February 1998, the SEC issued Staff Accounting Bulletin No. 98 ("SAB No.
98"), which redefined "cheap stock" for registrants completing initial
public offerings of their common stock. The 1995 and 1996 earnings per share
amounts have been restated to conform to the requirements of SAB No. 98.
(3) The consolidated financial statements for the year ended December 31, 1995
have been restated to include the financial position, results of operations
and cash flows of Teklicon, Inc., acquired on September 30, 1996 in a
transaction accounted for as a pooling of interests. See Note 4 to "Notes to
Consolidated Financial Statements."
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OVERVIEW
The Company derives revenue primarily from legal cases and matters in which
it is engaged to provide litigation support services. These revenues consist of
(i) fees for professional services; (ii) fees for use of the Company's equipment
and facilities, particularly animation computers; (iii) pass-through expenses
such as the recruiting of subjects and participants for research surveys and
mock trial activities and travel; and (iv) fees associated with work product
production, such as static graph boards, color copies and digital video
production. The Company recognizes revenue as work is performed or as related
expenses are incurred.
The Company's goal is to provide value-added services to its clients either
on a case-by-case basis or through ongoing relationships with major users of
litigation and claims services. Over the past three years, the Company has taken
several steps to grow the business and its industry prominence. Such steps
included establishing new offices in Hayward, CA, Los Angeles, CA, Mountain
View, CA and Stamford, CT, to expand its geographic coverage, expanding its
visual communication staff and hiring recognized professionals in the trial
consulting business.
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 was a provider of general data processing consulting services and
network administration services, and was considered a separate segment of the
Company's operations.
In January 1996, the Company determined that Annapplix was a development
stage operation not strategic to the Company's business of litigation support
services. Effective March 31, 1996, the Company sold Annapplix for $150,000 to a
group that included Annapplix's former owner and certain officers and
stockholders of the Company. The Company recorded the results of operations and
estimated loss on the sale of Annapplix as a discontinued operation in the 1995
financial statements. The estimated loss on the sale of $365,109 includes an
accrual of $285,000 for the operating losses, net of the related income tax
benefit, for the period from January 1, 1996 through March 31, 1996.
In May 1996, the Company completed its initial public offering, raising net
proceeds of $11.1 million and issuing 1,520,000 shares of stock.
In September 1996, the Company acquired Teklicon, Inc., in a transaction
accounted for as a pooling of interests as further described in Note 4 of the
"Notes to Consolidated Financial Statements". This acquisition significantly
enhanced the Company's capabilities in high technology consulting and expert
witness services to the legal profession and industry clients who require
assessment of intellectual property rights and other industry problems that have
high technology content.
Additionally, in September 1997, the Company acquired LWG, Inc., and
subsidiary (LWG) and Bodaken Associates (Bodaken) in transactions accounted for
as purchases as further described in Note 4 of the "Notes to Consolidated
Financial Statements". Bodaken enhanced the Company's jury and trial consulting
capabilities, particularly in the western region of the U.S. LWG broadened the
Company's offerings to the insurance market by adding capabilities in claims
management consulting and restoration services.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
REVENUES. Total revenues in 1997 increased 44.1% or $13.5 million from
1996. Excluding acquisitions during 1997, total revenues increased 29.9%. Of the
revenues generated in 1997, $20.1 million or 45.5% was attributable to visual
communications services, $12.6 million or 28.5% was attributable to engineering
and scientific services, $6.9 million or 15.6% was attributable to trial
consulting, $3.3 million or 7.6% was attributable to insurance claims management
services and $1.3 million or 2.8% was attributable to other revenue. The growth
in total revenues resulted from a 50.8% increase in revenues generated by visual
communications services and a 26.0% increase in revenues generated by
engineering and scientific services. Revenues from visual communications
services increased as a result of increased market penetration, continued
development of key relationships with major law firms and corporations, and a
unique integration of litigation services provided to the Company's clients.
Revenue increases in engineering and scientific services are attributable to
increased marketing efforts and a significant increase in the activity relating
to intellectual property services.
Total revenues in 1996 increased 31.1% or $7.3 million from 1995. Of the
revenues generated in 1996, $20.0 million or 65.1% was attributable to
litigation support services, $10.0 million or 32.7% was attributable to
scientific and insurance claims consulting services and $0.7 million or 2.2% was
attributable to other revenue. Revenues in litigation support services grew
67.8% as a result of increased market penetration by the Chicago, Houston and
Los Angeles offices and continued development of key relationships with major
users of litigation support services. Key additions of visual and trial
professionals also attracted new clients to the Company. The decrease in
scientific and insurance claims consulting services revenues of 10.1% was caused
primarily by the decision to pursue major corporate clients and other large
users of the services and to de-emphasize certain individual plaintiff-oriented
vehicle accident reconstruction work.
DIRECT COST OF REVENUES. Direct cost of revenues consists primarily of
billable employee compensation and related payroll benefits, the cost of
contractors assigned to revenue-generating activities and other related expenses
billable to clients. Direct cost of revenues as a percent of revenues decreased
to 53.3% in 1997 from 55.5% in 1996. This decrease resulted in the elimination
of certain billable expenses in connection with a limited number of matters
during 1997. Direct cost of revenues as a percent of revenues increased to 55.5%
in 1996 from 48.6% in 1995, primarily from a redirection of efforts by certain
key personnel from selling, general and administrative activities to revenue
generating activities. In the 1996 period, these individuals were accounted for
as direct costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of salaries and benefits paid to
office and corporate staff, as well as rent, marketing and corporate overhead
expenses. Selling, general and administrative expenses as a percent of revenues,
34.5% in 1997 and 35.2% in 1996, were relatively consistent during these periods
as management focused on containing these costs while growing the business
operations. Selling, general and administrative expenses as a percent of
revenues decreased from 35.2% in 1996 from 42.3% in 1995. This decrease resulted
from the change in allocation of costs to key personnel, as well as the fixed or
semi-variable nature of many of these expenses.
8
<PAGE>
OTHER INCOME AND EXPENSES. Interest expense consists of interest on a line
of credit and Convertible Debentures and, in 1997, the interest in connection
with purchased businesses. Additional cash, raised from the initial public
offering allowed the Company to pay off the line of credit in mid-1996, thus
reducing interest expense and increasing interest income during the second half
of 1996 and the majority of 1997. In May 1996, the $1.8 million of 8%
Subordinated Debentures converted into common stock, further contributing to the
decrease in interest expense in 1996 as compared to 1995.
INCOME TAXES. The Company's effective tax rate during each of the three
years in the period ended December 31, 1997, approximates 41%. See Note 8 of
"Notes to Consolidated Financial Statements" for a reconciliation of the federal
statutory rate to the effective tax rates during each of these years, and a
summary of the components of the Company's deferred tax assets and liabilities.
LIQUIDITY AND CAPITAL RESOURCES
In 1995, the Company's working capital needs were generally funded through
cash flow from operations and borrowings under a bank line of credit. Due
principally to a 31.1% growth in revenues in 1996, and the resultant increase in
accounts receivable and unbilled receivables, the Company used net cash of $0.5
million in 1996 to fund operating activities. This needed cash was provided by
the initial public offering of common stock in May 1996, which generated $11.1
million of net proceeds to the Company. A significant portion of the Company's
billings are made to clients that, in turn, remit such billings to third
parties, such as law firms, insurance companies or product manufacturers, for
payment. The Company's average collection period improved to approximately 91
days in 1997, from approximately 110 days in 1996, while accounts payable and
accrued expenses, a large portion of which consists of contractor remuneration,
are generally paid within 30 to 60 days.
During 1997, operations of the Company and the resultant net increase in
accounts receivable, unbilled receivables, accrued expenses and accounts
payable, provided $3.6 million of cash. This cash, along with the cash on hand
at December 31, 1996, was used to fund acquisitions and the purchase of property
and equipment. The Company believes that expected growth in the business will
require additional investments in working capital, but that the $2.5 million of
cash at December 31, 1997, and a $10.0 million bank line of credit will be
sufficient to fund its working capital needs through at least 1998.
The Company expended $2.8 million, $1.7 million and $1.6 million to
purchase property and equipment for the years ended December 31, 1997, 1996 and
1995, respectively. The Company expects to incur slightly lower levels of
property and equipment additions in 1998 to continue its strategy of expanding
its business. However, no significant commitments currently exist to acquire
such additional property and equipment, except that the Company is in the
process of implementing a new information system, which is estimated to cost
approximately $0.5 million.
Additionally, the Company expended $3.8 million in connection with
acquisitions as further described in Note 4 of the "Notes to Consolidated
Financial Statements". In connection with the acquisition of LWG in September
1997, the Company expended $2.0 million of cash, including acquisition costs of
$0.2 million. Contingent consideration in the amount of 50% of any quarterly
pre-tax profits of LWG for the period from October 1, 1997 through September 30,
2001, is payable quarterly. Also, in September 1997, the Company acquired
Bodaken for an initial cash payment of $1.7 million and a $1.8 million note
payable bearing interest at 7% per annum and due in installments of $1.2 million
on September 30, 1998, and $0.6 million on September 30, 1999.
On October 28, 1996, the bank line of credit was increased to provide for
borrowings by the Company of up to $10.0 million. The line of credit is secured
by the receivables of the Company and expires on May 31, 1998. Outstanding
balances under the line of credit bear interest below the prime rate based on
specified measures of the financial condition of the Company. The line of credit
requires the Company to satisfy certain specified ratios and net worth
requirements (such as "cash flow coverage," "net tangible worth" and "current
ratio"). At December 31, 1996 and 1997, the Company had no borrowings under the
line of credit.
The Company believes that its existing cash resources and available
borrowings under the bank line of credit will be sufficient to meet anticipated
cash requirements for the next 18 months. There can be no
9
<PAGE>
assurance that additional capital beyond the amounts currently forecasted by the
Company will not be required, nor that any such required additional capital will
be available on reasonable terms, if at all, at such time as required by the
Company.
IMPACT OF YEAR 2000
In prior years, certain computer programs were written using two digits
rather than four to define the applicable year. These programs were written
without considering the impact of the upcoming change in the century and may
experience problems handling dates beyond the year 1999. This could cause
computer applications to fail or to create erroneous results unless corrective
measures are taken. Incomplete or untimely resolution of the Year 2000 issue
could have a material adverse impact on the Company's business, operations or
financial condition in the future.
The Company has been assessing the impact that the Year 2000 issue will
have on the computer systems. In response to these assessments, which are
ongoing, the Company has developed a plan to replace its critical system. The
Company presently believes that, with the implementation of a new information
system including hardware and software, the Year 2000 issue will not pose any
significant operational problems. Project plans call for the completion of the
implementation phase and testing of this solution prior to December 1998. The
Company is also taking into consideration any effect critical suppliers and
customers and their status of Year 2000 issues would have on compliance
programs.
Based on work to date and assuming that our project plans, which continue
to evolve, can be implemented as planned we believe future costs relating to the
Year 2000 issue will not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
10
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
CONTENTS
PAGE
-----
Report of Independent Auditors ............................ 12
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets .............................. 13
Consolidated Statements of Income ........................ 14
Consolidated Statements of Stockholders' Equity .......... 15
Consolidated Statements of Cash Flows .................... 16
Notes to Consolidated Financial Statements ............... 17
11
<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 subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. 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 did not audit the financial statements of
Teklicon, Inc., a wholly-owned subsidiary, for fiscal year 1995, which
statements reflect total revenues constituting 13% of 1995 consolidated
revenues. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to 1995 data included
for Teklicon, Inc., is based solely on the report of 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, for 1995, the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Forensic Technologies
International Corporation and subsidiaries at December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
January 31, 1998
12
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 2,456 $ 5,894
Accounts receivable, less allowance of $487 in 1997 and $251 in 1996 10,198 6,296
Unbilled receivables, less allowance of $415 in 1997 and $125 in 1996 4,194 3,007
Income taxes receivable .............................................. -- 111
Deferred income taxes ................................................ 160 186
Prepaid expenses and other current assets ............................ 681 752
-------- --------
Total current assets .................................................. 17,689 16,246
Property and equipment:
Buildings ............................................................ 411 411
Furniture and equipment .............................................. 11,745 8,455
Leasehold improvements ............................................... 1,591 864
-------- --------
13,747 9,730
Accumulated depreciation and amortization ............................ (7,459) (5,624)
-------- --------
6,288 4,106
Goodwill, net of accumulated amortization of $81 in 1997 .............. 5,141 --
Other assets .......................................................... 58 516
-------- --------
Total assets .......................................................... $ 29,176 $ 20,868
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................................ $ 2,825 $ 1,502
Accrued compensation expense ......................................... 1,995 783
Income taxes payable ................................................. 297 --
Current portion of long-term debt .................................... 1,200 --
Advances from clients ................................................ 519 586
Other current liabilities ............................................ 219 64
-------- --------
Total current liabilities ............................................. 7,055 2,935
Long-term debt, less current portion .................................. 730 80
Other long-term liabilities ........................................... 203 121
Deferred income taxes ................................................. 169 104
Commitments and contingent liabilities ................................ -- --
Stockholders' equity:
Preferred stock, $.01 par value; 4,000 shares authorized in 1997, none
outstanding ........................................................ -- --
Common stock, $.01 par value; 16,000 shares authorized; 4,551 and
4,517 shares issued and outstanding in 1997 and 1996, respectively 46 45
Additional paid-in capital ........................................... 14,526 14,429
Retained earnings .................................................... 6,447 3,154
-------- --------
Total stockholders' equity ............................................ 21,019 17,628
-------- --------
Total liabilities and stockholders' equity ............................ $ 29,176 $ 20,868
======== ========
</TABLE>
See accompanying notes.
13
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues ...................................................... $44,175 $30,648 $23,381
Direct cost of revenues ....................................... 23,564 17,020 11,366
Selling, general and administrative expenses .................. 15,241 10,786 9,887
------- ------- -------
Total costs and expenses ...................................... 38,805 27,806 21,253
------- ------- -------
Income from operations ........................................ 5,370 2,842 2,128
Other income (expense):
Interest and other income .................................... 343 286 42
Interest expense ............................................. (170) (179) (264)
------- ------- -------
173 107 (222)
------- ------- -------
Income from continuing operations before income taxes ......... 5,543 2,949 1,906
Income taxes .................................................. 2,250 1,235 779
------- ------- -------
Income from continuing operations ............................. 3,293 1,714 1,127
Discontinued operations:
Loss from discontinued operations (net of income tax
benefit of $44) ............................................ -- -- (65)
Loss on disposal of discontinued operations (net of in-
come tax benefit of $249) .................................. -- -- (365)
------- ------- -------
Net income .................................................... 3,293 1,714 697
Preferred stock dividends ..................................... -- 62 125
------- ------- -------
Income available to common stockholders ....................... $ 3,293 $ 1,652 $ 572
======= ======= =======
Earnings Per Common Share:
Income from continuing operations ............................ $ 0.73 $ 0.46 $ 0.47
Loss from discontinued operations ............................ -- -- (0.20)
------- ------- -------
Net income per common share .................................. $ 0.73 $ 0.46 $ 0.27
======= ======= =======
Earnings Per Common Share -- Assuming Dilution:
Income from continuing operations ............................ $ 0.70 $ 0.42 $ 0.37
Loss from discontinued operations ............................ -- -- (0.13)
------- ------- -------
Net income per common share -- assuming dilution ............. $ 0.70 $ 0.42 $ 0.24
======= ======= =======
</TABLE>
See accompanying notes.
14
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL
COMMON COMMON PAID-IN RETAINED UNEARNED
STOCK STOCK CAPITAL EARNINGS COMPENSATION TOTAL
--------- --------- ------------ ---------- -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 .............................. $22 $ 17 $ 988 $ 883 $ (72) $1,838
Repurchase of 164 shares of Class B Common Stock ........ (2) (4) (6)
Repurchase of 185 shares of Class A Common Stock . ...... (2) (723) (725)
Amortization of unearned compensation ................... 43 43
Dividends paid on Series A Redeemable Convertible
Preferred Stock ($.19 per share) ....................... (125) (125)
Reclassification of Class A Common Stock subject to
repurchase ............................................. (310) (310)
Other ................................................... 50 50
Net income for 1995 ..................................... 697 697
---- ----- ------ ------ ----- --------
Balance at December 31, 1995 ............................ 20 15 1 1,455 (29) 1,462
Repurchase of 55 shares of Class A Common Stock
and 8 shares of Class B Common Stock ................... (105) (25) (130)
Issuance of 1,520 shares of Common Stock, net of ex-
penses of $1,671 in initial public offering of stock ... 15 11,101 11,116
Conversion of Class B Common Stock into 15 shares
of Common Stock ........................................ (15) 15 --
Conversion of Series A Preferred Stock into 655 shares
of Common Stock ........................................ 6 1,553 1,559
Conversion of Convertible Subordinated Debt into 378
shares of Common Stock ................................. 4 1,796 1,800
Value of common stock options issued to directors ....... 29 29
Exercise of options to purchase 14 shares of Common
Stock .................................................. 39 39
Amortization of unearned compensation ................... 29 29
Dividends paid on Series A Preferred Stock .............. (62) (62)
Accounting adjustment due to pooling-of-interests ....... 72 72
Net income for 1996 ..................................... 1,714 1,714
---- ----- ------ ------ ----- --------
Balance at December 31, 1996 ............................ 45 -- 14,429 3,154 -- 17,628
Exercise of options to purchase 34 shares of Common
Stock .................................................. 1 97 98
Net income for 1997 ..................................... 3,293 3,293
---- ----- ------ ------ ----- --------
Balance at December 31, 1997 ............................ $46 $ -- $14,526 $6,447 $ -- $21,019
===== ====== ======== ====== ===== ========
</TABLE>
See accompanying notes.
15
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1997 1996 1995
----------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ............................................................... $ 3,293 $ 1,714 $ 697
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ............................................................ 1,434 757 638
Amortization ............................................................ 307 105 21
Provision for doubtful accounts ......................................... 526 (1) 169
Deferred income taxes ................................................... (227) 341 (218)
Loss on disposal of discontinued Annapplix division ..................... -- (479) 613
Other ................................................................... -- 134 93
Changes in operating assets and liabilities:
Accounts receivable ................................................... (3,284) (1,701) (972)
Unbilled receivables .................................................. (788) (723) (424)
Income taxes receivable/payable ....................................... 408 (320) 97
Prepaid expenses and other current assets ............................. 170 (599) (9)
Accounts payable and accrued expenses ................................. 826 331 561
Accrued compensation expense .......................................... 1,017 (221) 527
Advances from clients ................................................. (67) 309 (333)
Other current liabilities ............................................. 33 (162) 65
-------- --------- ---------
Net cash provided by (used in) operating activities ...................... 3,648 (515) 1,525
INVESTING ACTIVITIES
Purchase of property and equipment ....................................... (2,800) (1,672) (1,609)
Acquisition of Applix Software Computer Service .......................... -- -- (200)
Acquisition of Anamet Laboratories, Inc. ................................. -- (400) --
Acquisition of Bodaken Associates, including acquisition costs ........... (1,875) -- --
Acquisition of LWG, Inc., including acquisition costs .................... (1,956) -- --
Sale/(purchase) of other assets .......................................... 480 (238) (41)
-------- --------- ---------
Net cash used in investing activities .................................... (6,151) (2,310) (1,850)
FINANCING ACTIVITIES
Issuance of Common Stock ................................................. -- 11,116 --
Repurchase of Class A Common Stock ....................................... -- (130) (725)
Repurchase of Class A Common Stock subject to repurchase and Class
B Common Stock .......................................................... -- (310) (6)
Exercise of stock options ................................................ 98 39 --
Net borrowing (repayments) under line of credit .......................... -- (2,110) 1,538
Payments of other long-term liabilities .................................. (191) (69) (358)
Repayments of long-term debt ............................................. (842) -- --
Dividends paid ........................................................... -- (62) (125)
-------- --------- ---------
Net cash provided by (used in) financing activities ...................... (935) 8,474 324
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents ..................... (3,438) 5,649 (1)
Cash and cash equivalents at beginning of year ........................... 5,894 245 246
-------- --------- ---------
Cash and cash equivalents at end of year ................................. $ 2,456 $ 5,894 $ 245
======== ========= =========
</TABLE>
See accompanying notes.
16
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
Description of Business
Forensic Technologies International Corporation and subsidiaries (the Company)
provides litigation and claims management consulting services to major
corporations, law firms and insurance companies in the United States. These
services include visual communications and trial consulting, engineering and
scientific services, assessment and expert testimony regarding intellectual
property rights, and claims management outsourcing services. The Company has 27
offices throughout the United States and Canada.
Principles of Consolidation
The consolidated financial statements include the accounts of wholly-owned
subsidiaries. All significant intercompany transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company uses estimates to determine the amount of the allowance for doubtful
accounts necessary to reduce accounts receivable and unbilled receivables to
their expected net realizable value. The Company estimates the amount of the
required allowance by reviewing the status of significant past-due receivables
and analyzing historical bad debt trends. The Company has not experienced
significant variations in the estimate of the allowance for doubtful accounts,
due primarily to credit policies, collection experience and a lack of
concentrations of accounts receivable. Accounts receivable balances are not
collateralized.
SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-line
method. Buildings are depreciated over a period of 40 years, furniture and
equipment is depreciated over estimated useful lives ranging from 5 to 7 years
and leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the lease term.
Intangible Assets
Goodwill consists of the cost in excess of fair value of the net assets of
entities acquired in purchase transactions, and is amortized over the expected
periods of benefit, which range from 15 to 25 years. On a periodic basis, the
Company evaluates goodwill for impairment. In completing this evaluation, the
Company compares its best estimate of undiscounted future cash flows with the
carrying value of goodwill.
17
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - (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 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 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.
Reclassifications
Certain amounts in the 1996 financial statements have been reclassified to
conform with the current year presentation.
Stock Options Granted to Employees
The Company records compensation expense for all stock-based compensation plans
using the intrinsic value method prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees ("APB No. 25"). Under APB No. 25, if the exercise
price of the Company's employee stock options equals the estimated fair value of
the underlying stock on the date of grant, no compensation expense is generally
recognized. Financial Accounting Standards Board Statement No. 123, Accounting
for Stock-Based Compensation ("Statement 123") encourages companies to recognize
expense for stock-based awards based on their estimated fair value on the date
of grant. Statement 123 requires the disclosure of pro forma income and earnings
per share data in the notes to the financial statements if the new fair value
method is not adopted. The Company has supplementally disclosed in Note 7 the
required pro forma information as if the fair-value method had been adopted.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Comprehensive Income
In December 1997, the Financial Accounting Standards Boards issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement 130"), that establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Statement 130 only impacts display as opposed to actual
amounts recorded. Other comprehensive income includes all non-owner changes in
equity that are excluded from net income. This Statement does not apply to an
enterprise that has no items of other comprehensive income in any period
presented. During all years presented, the Company has no items of other
comprehensive income.
18
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share ("Statement 128"). Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Earnings per share amounts for all periods have been
presented, and where appropriate, restated, to conform to the Statement 128
requirements.
The following table summarizes the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
<S> <C> <C> <C>
1997 1996 1995
---- ---- ----
NUMERATOR:
Net income .................................................... $ 3,293 $1,714 $ 697
Preferred stock dividends ..................................... -- (62) (125)
------- ------ ------
Numerator for basic earnings per share -- income available to
common stockholders .......................................... 3,293 1,652 572
Effect of dilutive securities:
Preferred stock dividends .................................... -- 62 125
Interest on convertible debentures ........................... -- 31 86
------- ------ ------
-- 93 211
------- ------ ------
Numerator for diluted earnings per share -- income available to
common stockholders after assumed conversions ................ 3,293 1,745 783
DENOMINATOR:
Denominator for basic earnings per common share -- weighted
average shares ............................................... 4,529 3,591 2,158
Effect of dilutive securities:
Convertible preferred stock .................................. -- 240 655
8% convertible subordinated debentures ....................... -- 139 378
Warrants ..................................................... -- 1 --
Employee stock options ....................................... 169 203 125
------- ------ ------
169 583 1,158
Denominator for diluted earnings per common share --
weighted average shares and assumed conversions ............ 4,698 4,174 3,316
======= ====== ======
Basic earnings per common share .............................. $ .73 $ .46 $ .27
======= ====== ======
Diluted earnings per common share ............................ $ .70 $ .42 $ .24
======= ====== ======
</TABLE>
In 1997, the Company adopted the provisions of Staff Accounting Bulletin No. 98,
("SAB 98"), issued by the SEC staff in February 1998. SAB 98 requires that
registrants in initial public offerings consider all potentially dilutive
securities issued for nominal consideration outstanding for all periods. Under
the previous SEC regulations in SAB 83, the Company considered all potentially
dilutive securities issued within a twelve month period prior to the initial
public offering date at a price below the initial public offering price as
outstanding for all periods. The 1996 and 1995 basic and diluted earnings per
common share amounts have been restated to conform to the provisions of SAB 98.
The adoption of SAB 98 had no effect on basic and diluted earnings per common
share in 1997, 1996 and 1995.
19
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company paid interest of $117, $242 and $491 and income taxes of $1,452,
$1,213 and $629 during fiscal years 1997, 1996 and 1995, respectively.
4. ACQUISITIONS AND DISCONTINUED OPERATIONS
LWG, Inc.
Effective September 1, 1997, the Company acquired all of the outstanding common
stock of LWG, Inc. and its subsidiary (collectively "LWG"). LWG is based in
Northbrook, Illinois and provides claims management consulting and restoration
services to the insurance industry. The acquisition was accounted for using the
purchase method of accounting. The purchase price consists of an initial cash
payment of $1,800, plus additional consideration equal to fifty-percent of the
pre-tax profits of LWG for each quarterly period from October 1, 1997 through
September 30, 2001. Upon the resolution of the amount of any contingent payment,
the Company records any additional consideration payable as additional goodwill,
and amortizes that amount over the remaining amortization period. At September
1, 1997, goodwill of approximately $1.5 million was recorded and is being
amortized over a period of 25 years.
The results of operations of LWG are included in the accompanying 1997
consolidated statement of income from September 1, 1997.
Bodaken Associates
Effective September 1, 1997, the Company acquired substantially all of the
assets of Bodaken Associates, a trial research and consulting firm serving law
firms and corporations. The acquisition was accounted for using the purchase
method of accounting. The purchase price of $3,550 includes an initial payment
of $1,700 with the remainder of $1,850 evidenced by a note payable bearing
interest at 7%. Approximately $3,500 in goodwill was recorded and is being
amortized over 20 years.
Teklicon, Inc.
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.
Applix Software Computer Service
On February 1, 1995, the Company acquired for $200 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 was a
provider of general data processing consulting services and network
administration services, and was considered a separate segment of the Company's
operations.
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 income 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 $136 was recorded as
goodwill.
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 and certain other officers and stockholders of the Company. The Company
20
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. ACQUISITIONS AND DISCONTINUED OPERATIONS - (CONTINUED)
Applix Software Computer Service (continued)
sold the furniture, equipment and intangible assets of the division in exchange
for cash of $150, 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 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 included an accrual of $285
for the operating losses, net of the related income tax benefit, for the period
from January 1, 1996 through March 31, 1996, the date of disposal.
5. BORROWINGS UNDER LINE OF CREDIT
The Company has a demand line of credit with a bank expiring on May 31, 1998,
under which the Company may borrow up to $10,000, subject to restrictions based
on the available collateral. Borrowings under this line of credit bear interest
at prime less variable percentages and are secured by accounts receivable and
unbilled receivables. In connection with this credit line, the Company is
required to maintain a minimum tangible net worth and comply with certain
financial ratios and covenants. No amounts were outstanding under the line of
credit at December 31, 1997 and 1996.
6. LONG-TERM DEBT
Long-term debt consists of a $80 mortgage note payable to a bank bearing
interest at the prime rate plus 1.5% (10.0% at December 31, 1997) and secured by
the related building. The note requires monthly interest payments and a lump-sum
payment of the entire principal on January 1, 1999.
The Company issued a note payable in the amount of $1,850 in connection with the
acquisition of Bodaken Associates. The note bears interest at 7% per annum,
payable quarterly, and is due in installments of $1,200 on September 30, 1998,
and $650 on September 30, 1999. The fair value of the note approximates its
carrying value at December 31, 1997, based on the Company's current incremental
borrowing rate.
7. STOCK OPTION PLANS
Prior to 1997, the Company granted certain options to key employees under the
1992 Stock Option Plan. This plan was terminated in 1997 upon the adoption of
the 1997 Stock Option Plan ("the 1997 Plan"). The 1997 Plan provides for the
granting to employees and non-employee directors of non-qualified options to
purchase an aggregate of up to 1,000,000 shares of common stock. Options to
purchase common stock may be granted at prices not less than 50% of the fair
market value of the common stock at the date of grant, for a term of no more
than ten years. Vesting provisions for individual awards are at the discretion
of the Board of Directors.
21
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. STOCK OPTION PLANS - (CONTINUED)
The following table summarizes the option activity for the three-year period
ended December 31, 1997:
<TABLE>
<CAPTION>
1997 1996
WEIGHTED WEIGHTED
AVG EXERCISE AVG EXERCISE
1997 PRICE 1996 PRICE 1995
------------ -------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Options outstanding at January 1 ............. 576,179 $ 5.88 242,659 $ 3.14 209,059
Options granted .............................. 995,850 9.02 353,600 7.59 35,700
Options exercised ............................ (34,000) 2.85 (14,200) 2.73 --
Options forfeited ............................ (42,800) 8.48 (5,880) 3.57 (2,100)
------- ------- ------- ------- -------
Options outstanding at December 31 ........... 1,495,229 7.96 576,179 5.88 242,659
========= ======= ======= ======= =======
Options exercisable at December 31 ........... 448,325 6.47 206,899 3.58 103,849
========= ======= ======= ======= =======
Weighted average exercise price per share for
options granted during the year .............. $ 9.02 $ 7.59 $ 4.76
========== ========= ========
Weighted average exercise price per share of
outstanding options at end of year ........... $ 7.96 $ 5.88 $ 3.13
========== ========= ========
Weighted average fair value of options granted
during the year .............................. $ 2.98 $ 1.56 $ 0.25
========== ========= ========
</TABLE>
All options granted have an exercise price equal to or greater than the fair
value of the Company's common stock on the date of grant. Exercise prices for
options outstanding as of December 31, 1997, ranged from $2.38 to $12.38. The
weighted average remaining contractual life of those options is 8.2 years.
Pro Forma Disclosures Required by Statement 123
To determine the pro forma data required by Statement 123 for 1997 and 1996, the
Company used option pricing models to measure the fair value of options at the
date of grant. For all option grants prior to May 1996 (the initial public
offering date), the Company used the minimum value method to calculate pro forma
compensation expense. For all grants after May 1996, the Company used the
Black-Scholes option pricing model.
The minimum value method calculates the fair value of options as the excess of
the estimated fair value of the underlying stock at the date of grant over the
present value of both the exercise price and the expected dividend payments,
each discounted at the risk-free rate, over the expected life of the option. In
determining the estimated fair value of the granted stock options under the
minimum value method, the risk-free rate was assumed to be 5.5%, the dividend
yield was estimated to be 0% and the expected life of the granted options varied
from one to three years depending upon the vesting period.
Options valued using the Black-Scholes option pricing model assumed the
following: risk-free interest rate of 5.5%, dividend yields of 0%, a volatility
factor of .462 and an expected life of the granted options which varied from one
to three years depending upon the vesting period.
The Black-Scholes option pricing model and other models were developed for use
in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net income is $2,842 and $1,585 for the years ended December 31, 1997 and
1996, respectively. Pro forma earnings per common share is $0.63 and $0.44 for
the years ended December 31, 1997 and 1996, respectively. Pro forma earnings per
share,
22
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. STOCK OPTION PLANS - (CONTINUED)
assuming dilution, is $0.62 and $0.42 for the years ended December 31, 1997 and
1996, respectively. The effect of compensation expense from stock options on
1996 pro forma net income reflects only the vesting of 1996 awards, which,
depending on the individual grant, vest over one year, two years, or three
years. Pro forma net income in 1997 reflects additional vesting of 1996 awards
and the first year of vesting of 1997 awards. Because most of the options
granted vest over a three-year period, not until 1998 is the full effect of
recognizing compensation expense for stock options representative of the
possible effects on pro forma net income for future years.
8. 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 assets:
Allowance for doubtful accounts ................................. $361 $155
Accrued vacation ................................................ 52 80
Accrued bonus ................................................... -- 7
---- ----
Total deferred tax assets ........................................ 413 242
Deferred tax liabilities:
Use of cash basis for income tax purposes by subsidiary ......... 192 21
Capitalized software ............................................ 156 104
Prepaid expenses ................................................ 62 35
Other ........................................................... 12 --
---- ----
Total deferred tax liabilities ................................... 422 160
---- ----
Net deferred tax asset (liability) ............................... $ (9) $ 82
==== ====
</TABLE>
Income tax expense attributable to continuing operations consisted of the
following:
1997 1996 1995
--------- --------- -------
Current:
Federal .......... $1,983 $ 726 $575
State ............ 494 168 152
------ ------ ----
2,477 894 727
Deferred (benefit):
Federal .......... (253) 269 38
State ............ 26 72 14
------ ------ ----
(227) 341 52
------ ------ ----
$2,250 $1,235 $779
====== ====== ====
23
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. INCOME TAXES - (CONTINUED)
The Company's provision for income taxes from continuing operations resulted in
effective tax rates that varied from the statutory federal income tax rate as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Expected federal income tax provision at 34% .......... $1,885 $1,003 $648
Expenses not deductible for tax purposes .............. 70 48 31
State income taxes, net of federal benefit ............ 293 159 107
Other ................................................. 2 25 (7)
------ ------ ------
$2,250 $1,235 $779
====== ====== =====
</TABLE>
9. 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, 1997:
1998 ................................. $1,308
1999 ................................. 1,126
2000 ................................. 1,012
2001 ................................. 1,036
2002 ................................. 889
Thereafter ........................... 586
------
Total minimum lease payments ......... $5,957
======
Rental expense consists of the following:
1997 1996 1995
-------- -------- -------
Furniture and equipment .......... $ 211 $ 97 $ 99
Office and storage ............... 1,131 839 819
------ ----- ----
$1,342 $ 936 $918
------ ----- ----
10. 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 $153, $146 and $116 during
1997, 1996 and 1995, respectively, related to this plan.
11. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosure about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 supersedes
Financial Accounting Standards Board Statement No. 14, Financial
24
<PAGE>
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. SEGMENT REPORTING - (CONTINUED)
Reporting for Segments of a Business Enterprise ("Statement 14") and establishes
new standards for the way that public business enterprises report selected
information about operating segments in annual and interim financial statements.
It also established standards for the related disclosures about products and
services, geographical areas and major customers. Statement 131 is effective for
financial statements for fiscal years beginning after December 15, 1997.
The Company will adopt the provisions of the new standard in 1998. Under
Statement 14, which is effective until the Company adopts Statement 131, the
Company is considered to operate predominately in one segment.
25
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
26
<PAGE>
PART III
The information called for by Items 9 to 12 is incorporated by reference
from the Forensic Technologies International Corporation Notice of 1998 Annual
Meeting and Proxy Statement, to be filed pursuant to Regulation 14A not later
than April 30, 1998.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS.
ITEM 10. EXECUTIVE COMPENSATION.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 13. EXHIBITS
*3.i Amended and Restated Articles of Incorporation of Forensic
Technologies International Corporation.
*3.ii Bylaws of Forensic Technologies International Corporation.
***10.1 Financing and Security Agreement dated October 28, 1996, between the
Company and NationsBank, N. A., regarding a revolving credit facility
in the maximum amount of $10 million.
*10.2 1992 Stock Option Plan, as amended.
*10.3 Employment Agreement dated as of January 1, 1996, between Forensic
Technologies International Corporation and Jack B Dunn, IV.
*10.4 Employment Agreement dated as of January 1, 1996, between Forensic
Technologies International Corporation and Joseph R. Reynolds, Jr.
*10.5 Employment Agreement dated as of January 1, 1996, between Forensic
Technologies International Corporation and Daniel W. Luczak.
****10.6 1997 Stock Option Plan
*****10.7 Employee Stock Purchase Plan
11. Computation of Per Share Earnings ( included in Note 2 to the
Consolidated Financial Statements included in Item 7, herein).
21. Subsidiaries
The Company has two subsidiaries Teklicon, Inc., incorporated in
California and LWG, Inc., incorporated in Illinois
**23.0 Consent of Ernst & Young LLP.
**23.1 Consent of Young, Craig & Company, LLP.
**27.1 Financial Data Schedule for 6 months ended June 30, 1996 (Restated).
**27.2 Financial Data Schedule for 9 months ended September 30, 1996
(Restated).
**27.3 Financial Data Schedule for 12 months ended December 31, 1996
(Restated).
**27.4 Financial Data Schedule for 3 months ended March 30, 1997 (Restated).
**27.5 Financial Data Schedule for 6 months ended June 30, 1997 (Restated).
**27.6 Financial Data Schedule for 9 months ended September 30, 1997
(Restated).
**27.7 Financial Data Schedule for 12 months ended December 31, 1997
- ----------
* Filed as an exhibit to the Company's Registration Statement on Form SB-1,
as amended (File No. 333-2002) and incorporated herein by reference.
** Filed as an exhibit to this Form 10-KSB.
*** Filed as an exhibit to Form 10-KSB for year ended December 31, 1996.
**** Filed as an exhibit to the Company's Registration Statement on Form S-8
(File No. 333-30173) and incorporated herein by reference.
***** Filed as an exhibit to the Company's Registration Statement on Form S-8
(File No. 333-30357) and incorporated herein by reference.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION
Date: March 30, 1998 By /s/ Jack B. Dunn, IV
--------------------------------- ----------------------------------
Jack B. Dunn, IV
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ------------------------------------------------- ---------------
<S> <C> <C>
/s/ JACK B. DUNN IV Director, Chief Executive Officer and President March 30, 1998
- ------------------------- (principal executive officer)
Jack B. Dunn, IV
/s/ GARY SINDLER Executive Vice President and Chief Financial March 30, 1998
- -------------------------- Officer, Secretary and Treasurer (principal
Gary Sindler financial and accounting officer)
/s/ DANIEL W. LUCZAK Chairman of the Board March 30, 1998
- -------------------------
Daniel W. Luczak
/s/ JOSEPH R. REYNOLDS, JR. Vice Chairman of the Board March 30, 1998
- -------------------------
Joseph R. Reynolds, Jr.
/s/ JAMES A. FLICK, JR. Director March 30, 1998
- --------------------------
James A. Flick, Jr.
/s/ PETER F. O'MALLEY Director March 30, 1998
- -------------------------
Peter F. O'Malley
/s/ DENNIS J. SHAUGHNESSY Director March 30, 1998
- -------------------------
Dennis J. Shaughnessy
/s/ GEORGE P. STAMAS Director March 30, 1998
- -------------------------
George P. Stamas
</TABLE>
EXHIBIT 23.0
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-19251) pertaining to the 1992 Stock Option Plan (As Amended),
in the Registration Statement (Form S-8 No. 333-30357) pertaining to the 1997
Stock Option Plan, and in the Registation Statement (Form S-8 No. 333-30173)
pertaining to the Employee Stock Purchase Plan, all of Forensic Technologies
International Corporation, of our report dated January 31, 1998, with respect to
the consolidated financial statements of Forensic Technologies International
Corporation included in the Annual Report (Form 10-KSB) for the year ended
December 31, 1997.
/s/ Ernst & Young LLP
Baltimore, Maryland
March 27, 1998
EXHIBIT 23.1
CONSENT OF YOUNG, CRAIG & CO. LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33- ) pertaining to the 1992 Stock Option Plan (As Amended), in
the Registration Statement (Form S-8 No. 33- ) pertaining to the 1997 Stock
Option Plan, and in the Registation Statement (Form S-8 No. 33- ) pertaining to
the Employee Stock Purchase Plan, all of Forensic Technologies International
Corporation, of our report dated July 25, 1996, on the financial statements of
Teklicon, Inc. for the year ended March 31, 1995 included in the Annual Report
(Form 10-K) of Forensic Technologies International Corporation for the year
ended December 31, 1997.
/s/ Young Craig & Co., LLP.
Los Altos, California
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U S DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 8,202,042
<SECURITIES> 0
<RECEIVABLES> 7,888,487
<ALLOWANCES> 422,686
<INVENTORY> 0
<CURRENT-ASSETS> 16,414,525
<PP&E> 8,204,606
<DEPRECIATION> 4,961,974
<TOTAL-ASSETS> 19,754,038
<CURRENT-LIABILITIES> 3,127,331
<BONDS> 0
0
0
<COMMON> 40,878
<OTHER-SE> 16,407,850
<TOTAL-LIABILITY-AND-EQUITY> 19,754,038
<SALES> 14,973,858
<TOTAL-REVENUES> 14,973,858
<CGS> 8,165,772
<TOTAL-COSTS> 13,259,964
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141,386
<INCOME-PRETAX> 1,655,344
<INCOME-TAX> 700,011
<INCOME-CONTINUING> 955,333
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 955,333
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.29
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 6,936,957
<SECURITIES> 0
<RECEIVABLES> 10,157,756
<ALLOWANCES> 422,686
<INVENTORY> 0
<CURRENT-ASSETS> 17,840,529
<PP&E> 8,970,536
<DEPRECIATION> 5,368,220
<TOTAL-ASSETS> 21,671,209
<CURRENT-LIABILITIES> 4,175,137
<BONDS> 0
0
0
<COMMON> 45,070
<OTHER-SE> 17,268,071
<TOTAL-LIABILITY-AND-EQUITY> 17,313,141
<SALES> 22,547,184
<TOTAL-REVENUES> 22,547,184
<CGS> 12,337,641
<TOTAL-COSTS> 20,095,744
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155,982
<INCOME-PRETAX> 2,488,429
<INCOME-TAX> 1,046,136
<INCOME-CONTINUING> 1,442,293
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,442,293
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.37
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 5,893,897
<SECURITIES> 0
<RECEIVABLES> 9,679,868
<ALLOWANCES> 376,316
<INVENTORY> 332,828
<CURRENT-ASSETS> 16,246,328
<PP&E> 9,730,435
<DEPRECIATION> 5,624,060
<TOTAL-ASSETS> 20,868,425
<CURRENT-LIABILITIES> 2,934,613
<BONDS> 0
0
0
<COMMON> 45,169
<OTHER-SE> 17,583,409
<TOTAL-LIABILITY-AND-EQUITY> 20,868,425
<SALES> 30,647,985
<TOTAL-REVENUES> 30,647,985
<CGS> 17,020,021
<TOTAL-COSTS> 27,806,442
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 179,523
<INCOME-PRETAX> 2,948,721
<INCOME-TAX> 1,235,194
<INCOME-CONTINUING> 1,713,527
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,713,527
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.42
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 5,713,454
<SECURITIES> 0
<RECEIVABLES> 10,577,077
<ALLOWANCES> 406,316
<INVENTORY> 332,828
<CURRENT-ASSETS> 16,890,570
<PP&E> 10,689,464
<DEPRECIATION> 5,926,078
<TOTAL-ASSETS> 22,176,425
<CURRENT-LIABILITIES> 3,521,388
<BONDS> 0
0
0
<COMMON> 45,269
<OTHER-SE> 18,246,693
<TOTAL-LIABILITY-AND-EQUITY> 22,176,425
<SALES> 9,539,549
<TOTAL-REVENUES> 9,539,549
<CGS> 5,161,672
<TOTAL-COSTS> 8,511,216
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,971
<INCOME-PRETAX> 1,084,042
<INCOME-TAX> 444,457
<INCOME-CONTINUING> 639,585
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 639,585
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 5,324,053
<SECURITIES> 0
<RECEIVABLES> 10,958,084
<ALLOWANCES> 412,439
<INVENTORY> 332,828
<CURRENT-ASSETS> 17,061,520
<PP&E> 11,142,120
<DEPRECIATION> 6,307,404
<TOTAL-ASSETS> 22,477,499
<CURRENT-LIABILITIES> 3,120,598
<BONDS> 0
0
0
<COMMON> 45,269
<OTHER-SE> 18,956,730
<TOTAL-LIABILITY-AND-EQUITY> 22,477,499
<SALES> 19,010,958
<TOTAL-REVENUES> 19,010,958
<CGS> 10,393,458
<TOTAL-COSTS> 16,853,631
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,095
<INCOME-PRETAX> 2,287,495
<INCOME-TAX> 937,873
<INCOME-CONTINUING> 1,349,622
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,349,622
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.29
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
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0
0
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<TABLE> <S> <C>
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<LEGEND>
(Replace this text with the legend)
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<S> <C>
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0
0
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