SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO _______
COMMISSION FILE NUMBER: 001-14875
FTI CONSULTING, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1261113
------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2021 RESEARCH DRIVE, ANNAPOLIS, MARYLAND 21401
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(Address of Principal Executive Offices) (Zip Code)
(410) 224-8770
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
Common Stock, $.01 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at November 5, 1999
- ----------------------- -------------------------------
Common Stock, par value 4,913,905
$.01 per share
<PAGE>
<TABLE>
<CAPTION>
FTI CONSULTING, INC.
--------------------
INDEX
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - December 31, 1998 and
September 30, 1999 3
Consolidated Statements of Income - Three months ended
September 30, 1998, three months ended September 30, 1999 5
Consolidated Statements of Income - Nine months ended
September 30, 1998, nine months ended September 30, 1999 6
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1998, nine months ended
September 30, 1999 7
Notes to Unaudited Consolidated Financial Statements
- September 30, 1999 8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
2
<PAGE>
Part I. Financial Information
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands of dollars)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
--------------------------------------
(audited) (unaudited)
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 3,223 $ 2,453
Accounts receivable, less allowance of $1,305 in 1998 and $1,556
in 1999 13,139 13,048
Unbilled receivables, less allowance of $1,117 in 1998 and $1,648
in 1999 7,803 9,800
Income taxes recoverable 794 281
Deferred income taxes -- 173
Prepaid expenses and other current assets 1,262 1,721
--------------------------------------
Total current assets 26,221 27,476
Property and equipment:
Buildings 411 309
Furniture and equipment 14,752 16,218
Leasehold improvements 1,891 2,083
--------------------------------------
17,054 18,610
Accumulated depreciation and amortization (8,767) (10,429)
--------------------------------------
8,287 8,181
Goodwill, net of accumulated amortization of $1,077 in 1998 and
$2,786 in 1999 45,164 44,509
Other assets 75 986
--------------------------------------
Total assets $ 79,747 $ 81,152
======================================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands of dollars)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
--------------------------------------
(audited) (unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,924 $ 1,865
Accrued compensation expense 2,765 4,230
Current portion of long-term debt 10,650 1,717
Advances from clients 498 412
Other current liabilities 313 813
--------------------------------------
Total current liabilities 17,150 9,037
Long-term debt, less current portion 35,630 40,918
Other long-term liabilities 269 805
Deferred income taxes 1,104 1,146
Commitments and contingent liabilities - -
Stockholders' equity:
Preferred stock, $.01 par value; 4,000,000 shares authorized, none
outstanding - -
Common stock, $.01 par value; 16,000,000 shares authorized;
4,781,895 and 4,913,905 shares issued and outstanding in 1998
and 1999, respectively 48 49
Additional paid-in capital 16,531 18,197
Retained earnings 9,015 11,000
--------------------------------------
Total stockholders' equity 25,594 29,246
--------------------------------------
Total liabilities and stockholders' equity $ 79,747 $ 81,152
======================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
1998 1999
-----------------------------------------------
(unaudited)
<S> <C> <C>
Revenues $ 13,501 $ 20,855
Direct cost of revenues 7,107 11,012
Selling, general and administrative expenses 5,093 7,114
Amortization of goodwill 274 570
-----------------------------------------------
Total costs and expenses 12,474 18,696
-----------------------------------------------
Income from operations 1,027 2,159
Other income (expense):
Interest and other income 87 110
Interest expense (423) (1,099)
-----------------------------------------------
(336) (989)
-----------------------------------------------
Income before income taxes 691 1,170
Income taxes 309 515
-----------------------------------------------
Net income $ 382 $ 655
===============================================
Earnings per common share, basic $0.08 $0.13
===============================================
Earnings per common share, diluted $0.08 $0.13
===============================================
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1998 1999
-----------------------------------------------
(unaudited)
<S> <C> <C>
Revenues $ 39,470 $ 62,127
Direct cost or revenues 21,419 32,362
Selling, general and administrative expenses 13,676 21,559
Amortization of goodwill 440 1,709
-----------------------------------------------
Total costs and expenses 35,535 55,630
-----------------------------------------------
Income from operations 3,935 6,497
Other income (expense):
Interest and other income 200 253
Interest expense (621) (3,061)
-----------------------------------------------
(421) (2,808)
-----------------------------------------------
Income before income taxes 3,514 3,689
Income taxes 1,458 1,704
-----------------------------------------------
Net income $ 2,056 $ 1,985
===============================================
Earnings per common share, basic $0.44 $0.41
===============================================
Earnings per common share, diluted $0.41 $0.40
===============================================
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands of dollars)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1998 1999
-----------------------------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,056 $ 1,985
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amorization of goodwill 440 1,709
Depreciation and other amortization 1,449 1,773
Provision for doubtful accounts (109) 782
Deferred income taxes - (132)
Loss (gain) on disposal of assets 12 (7)
Non-cash interest expense 140 -
Changes in operating assets and liabilities:
Accounts receivable 3,516 (160)
Unbilled receivables (790) (2,528)
Prepaid expenses and other current assets (968) (459)
Accounts payable and accrued expenses (335) (1,059)
Accrued compensation expense (415) 1,465
Income taxes recoverable (664) 513
Advances from clients (47) (86)
Other current liabilities (241) 947
-----------------------------------------
Net cash provided by operating activities 4,044 4,743
INVESTING ACTIVITIES
Purchase of property and equipment (1,687) (1,574)
Proceeds from sale of property and equipment 73 206
Contingent payments to LWG (544) (235)
Contingent payments to KK&A - (389)
Acquisition of KK&A, net of $90 cash assumed at acquisition (6,035) (56)
Acquisition of KCI (10,206) (11)
Acquisition of SEA, net of $300 cash assumed at acquisition (9,916) -
Change in other assets 2 (19)
-----------------------------------------
Net cash used in investing activities (28,313) (2,078)
FINANCING ACTIVITIES
Exercise of stock options 1,611 136
Employee stock purchases - 241
Borrowings (payments) under long-term credit facility 26,000 (6,042)
Payment of refinancing fees 0 (1,038)
Payment on notes payable for acquired businesses (1,944) (9,621)
Borrowings on subordinated notes payable - 13,000
Payments of other long-term liabilities (48) (111)
-----------------------------------------
Net cash provided by (used in) financing activities 25,619 (3,435)
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 1,350 (770)
Cash and cash equivalents at beginning of period 2,456 3,223
-----------------------------------------
Cash and cash equivalents at end of period $ 3,806 $ 2,453
=========================================
SEE ACCOMPANYING NOTES.
</TABLE>
7
<PAGE>
FTI CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
(in thousands of dollars, except per share data)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1998.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999.
2. EARNINGS PER SHARE
The following table summarizes the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1999 1998 1999
Numerator used in basic and diluted
earnings per common share:
<S> <C> <C> <C> <C>
Net income $382 $655 $2,056 $1,985
==========================================================
Denominator:
Denominator for basic earnings per common share -
weighted average shares 4,774 4,914 4,706 4,858
Effect of dilutive securities:
Warrants - 213 - 95
Employee stock options 104 92 369 33
----------------------------------------------------------
104 305 369 128
Denominator for diluted earnings per common share -
weighted average shares and assumed conversions 4,878 5,219 5,075 4,986
==========================================================
Basic earnings per common share $.08 $.13 $.44 $.41
==========================================================
Diluted earnings per common share $.08 $.13 $.41 $.40
- -------------------------------------------------------==========================================================
</TABLE>
8
<PAGE>
FTI CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999 (CONTINUED)
(in thousands of dollars, except per share data)
3. STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
-------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 $ 48 $16,531 $9,015 $25,594
Exercise of options to purchase 47,000 shares of 136 136
common stock
Issuance of 552,539 warrants to purchase common stock
1,289 1,289
Issuance of 84,773 shares under Employee Stock
Purchase Plan 1 241 242
Net income for nine months ended September 30, 1999 1,985 1,985
-------------------------------------------------
Balance at September 30, 1999 $ 49 $18,197 $11,000 $29,246
=================================================
</TABLE>
4. INCOME TAXES
The income tax provisions for interim periods in 1999 and 1998
are based on the estimated effective tax rates applicable for the full years.
The Company's income tax provision of $1,704 for the nine month period ended
September 30, 1999 consists of federal and state income taxes. The effective
income tax rate in 1999 is expected to be approximately 46%. This rate is higher
than the statutory Federal income tax rate of 34% due principally to state and
local taxes and the effects of nondeductible goodwill recorded in certain
acquisitions.
5. DEBT
In March 1999, the Company renegotiated the terms of its $27,000 long-term
credit facility. Amounts borrowed under the revolving credit facility are
secured by all assets of the Company, bear interest at LIBOR or prime (as
elected by the Company each quarter) plus specified additions, and mature on
September 30, 2001. The Company is required to comply with certain specified
financial covenants related to operating performance and liquidity at the end of
each quarter.
In connection with the renegotiation of the financing, the lender was issued
warrants to purchase 25,000 shares of common stock at an exercise price of $3.00
per share. The warrants expire in March 2006, and contain anti-dilution
provisions and put rights.
Also in March 1999, the Company issued $13,000 of subordinated notes bearing
interest at 9.25% per annum through June 2000, and 12% per annum thereafter
until maturity in March 2004. The subordinated notes are secured by a second
priority interest in all of the assets of the Company, and prohibit the payment
of dividends without the consent of the lender. The proceeds from the issuance
of the notes have been used to fund 1999 maturities of long-term debt and for
working capital.
9
<PAGE>
FTI CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999 (CONTINUED)
(in thousands of dollars, except per share data)
5. DEBT (CONTINUED)
In connection with the issuance of the subordinated debt, the lender was issued
warrants to purchase 392,506 shares of common stock at an exercise price of
$3.21 per share. The warrants expire six years from the date of final payment on
the subordinated debt and contain put rights.
In March 1999, the Company restructured certain seller promissory notes that it
had issued in June 1998 to sellers of KK&A and in September 1998 to sellers of
S.E.A. and KCI. In connection with this restructuring, holders of such
obligations who deferred the payments due in September 1999 and September 2000
until June 2002 received an amended and restated promissory note that provided:
(i) for every three dollars of face amount deferred until 2002, an increased
interest rate of 9.25% per annum on two dollars of the face amount; (ii) for
every three dollars of face amount deferred until 2002, an interest rate of 6.0%
per annum on one dollar of the face amount plus the right to convert that
portion of the note into common stock at the lower of $5.00 per share or the
average common stock price for June 2000; and (iii) 115,033 five-year warrants,
exerciseable to March 2004 with an exercise price of $3.21.
Warrants to purchase common stock issued in connection with the March 1999
financings were valued at $1,289, an estimate determined using the Black Scholes
Option Pricing Model, a generally accepted warrant valuation methodology. The
estimated value of the warrants was recorded as additional paid-in capital and
the debt has been recorded net of a discount of $1,145 at September 30, 1999.
Debt consists of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-----------------------------
Amounts due under a $27,000 long-term credit facility (net of discount of $42 in
1999) expiring in September 2001, bearing interest at LIBOR plus variable
percentages. The facility is secured by substantially all of the assets of the
Company. $26,000 $19,958
Notes payable to former shareholders of acquired businesses (net of discount of
$186), maturing periodically through 2002, and bearing interest payable as
described above. 20,280 10,594
Subordinated debentures (net of discount of $917) bearing interest at 9.25% per
annum through June 2000, and 12% per annum thereafter until
maturity in March 2004 - 12,083
-----------------------------
Subtotal of debt 46,280 42,635
Less current portion (10,650) (1,717)
-----------------------------
Total long-term debt $35,630 $40,918
=============================
</TABLE>
10
<PAGE>
FTI CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999 (CONTINUED)
(in thousands of dollars, except per share data)
6. SEGMENT REPORTING
The Company provides forensic, strategic consulting and claims management
advisory services through three distinct operating segments. The Expert
Financial Services division provides services in various financial proceedings
such as mathematical and statistical analysis, forensic accounting, fraud
investigation and strategic advisory, turnaround, bankruptcy and trustee
services. The Applied Sciences division provides services in connection with
engineering and scientific investigation and analysis of failures and accidents
alleged in court cases. The Litigation Services division provides consulting
services in the areas of visual communications, trial management and courtroom
technology.
The Company's reportable segments are business units that offer distinct
services. The segments are managed separately by division presidents who are
most familiar with the segment operations.
The following table sets forth information on the Company's reportable segments
for the three months ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------------------------------------------
EXPERT
FINANCIAL APPLIED LITIGATION
SERVICES SCIENCES SERVICES TOTAL
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $2,062 $6,252 $5,187 $13,501
OPERATING EXPENSES 1,617 4,798 4,475 10,890
----- ----- ----- ------
SEGMENT PROFIT $ 445 $1,454 $ 712 $2,611
===== ====== ===== ======
THREE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------------
EXPERT
FINANCIAL APPLIED LITIGATION
SERVICES SCIENCES SERVICES TOTAL
- --------------------------------------------------------------------------------------------------------
REVENUES $4,355 $9,547 $6,953 $20,855
OPERATING EXPENSES 3,508 7,746 5,186 16,440
----- ----- ----- ------
SEGMENT PROFIT $ 847 $1,801 $1,767 $4,415
===== ====== ====== ======
</TABLE>
A reconciliation of segment profit for all segments to income before income
taxes for the three months ended September 30, 1998 and 1999, is as follows:
THREE MONTHS ENDED SEPTEMBER 30, 1998 1999
- --------------------------------------------------------------------------------
OPERATING PROFIT:
TOTAL SEGMENT PROFIT $2,611 $4,415
CORPORATE GENERAL AND ADMINISTRATIVE
EXPENSES (1,100) (1,650)
DEPRECIATION AND AMORTIZATION (484) (606)
INTEREST AND OTHER EXPENSE (336) (989)
----------------------------------
INCOME BEFORE INCOME TAXES $691 $1,170
==================================
11
<PAGE>
FTI CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999 (CONTINUED)
(in thousands of dollars, except per share data)
6. SEGMENT REPORTING (CONTINUED)
The following table sets forth information on the Company's reportable segments
for the nine months ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------------------------------------------
EXPERT
FINANCIAL APPLIED LITIGATION
SERVICES SCIENCES SERVICES TOTAL
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $4,602 $14,324 $20,544 $39,470
OPERATING EXPENSES 3,319 12,031 15,988 31,338
----- ------ ------ ------
SEGMENT PROFIT $1,283 $2,293 $4,556 $ 8,132
====== ====== ====== ======
NINE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------------
EXPERT
FINANCIAL APPLIED LITIGATION
SERVICES SCIENCES SERVICES TOTAL
- --------------------------------------------------------------------------------------------------------
REVENUES $14,259 $27,316 $20,552 $62,127
OPERATING EXPENSES 10,755 22,644 14,889 48,288
------ ------ ------ ------
SEGMENT PROFIT $3,504 $4,672 $5,663 $13,839
====== ====== ====== =======
</TABLE>
A reconciliation of segment profit for all segments to income before income
taxes for the nine months ended September 30, 1998 and 1999, is as follows:
NINE MONTHS ENDED SEPTEMBER 30,
1998 1999
- -------------------------------------------------------------------------------
OPERATING PROFIT:
TOTAL SEGMENT PROFIT $8,132 $13,839
CORPORATE GENERAL AND ADMINISTRATIVE
EXPENSES (2,308) (3,860)
DEPRECIATION AND AMORTIZATION (1,889) (3,482)
INTEREST AND OTHER EXPENSE (421) (2,808)
----------------------------------
INCOME BEFORE INCOME TAXES $3,514 $3,689
==================================
Substantially all of the revenue and assets of the Company's reportable segments
are attributed to or located in the United States. Additionally, the Company
does not have a single customer which represents ten percent or more of its
consolidated revenues.
12
<PAGE>
FTI CONSULTING, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
FTI Consulting, Inc., (the "Company"), is a leading provider of forensic,
strategic consulting and claims management advisory services to major
corporations, law firms, banks and insurance companies. We derive revenues
primarily from our three business divisions: LITIGATION SERVICES, APPLIED
SCIENCES and EXPERT FINANCIAL services. Our LITIGATION SERVICES division
provides advice and services in connection with all phases of the litigation
process. Our APPLIED SCIENCES division offers engineering and scientific
consulting services, accident reconstruction, fire investigation, equipment
procurement and expert testimony regarding intellectual property rights. Our
EXPERT FINANCIAL SERVICES division offers a range of financial consulting
services, such as, expert testimony, cost benefit analysis, damage assessment,
business valuations, forensic accounting, crisis management and bankruptcy and
turnaround analysis. We recognize revenue as work is performed or as related
expenses are incurred. Revenues generated by our business divisions consist of:
o fees for our professional services;
o fees for use of our equipment and facilities;
o pass-through expenses, such as our cost of recruiting subjects and
participants for research surveys and mock trial activities and travel;
and
o fees associated with production of our work product, such as static
graph boards, color copies and digital video production.
Our goal is to provide value-added services to our clients either on a
case-by-case basis or through on-going relationships with major users of
litigation and claims services. Over the past three years, we have taken several
steps to grow our business and increase our prominence in the professional
services industry. These steps include:
o completing six acquisitions that significantly expanded our size,
service offerings and geographic scope;
o expanding into EXPERT FINANCIAL SERVICES for trials, bankruptcy
proceedings and restructurings, and
o recruiting more recognized litigation support professionals and adding
to our visual communications staff.
By virtue of its recent acquisitions, the Company has further expanded its
geographic reach with major offices now in New York, Columbus, Chicago, Houston,
Los Angeles and Washington, D.C.
In 1998, the Company made three major acquisitions, all of which were accounted
for as purchases. In June, the Company acquired Klick, Kent & Allen (KK&A). KK&A
provides strategic and economic consulting to various regulated businesses,
advising on such matters as industry deregulation, mergers and acquisitions,
rate and cost structures, economic and financial modeling and litigation risk
analysis.
13
<PAGE>
In September 1998, the Company acquired both S.E.A., Inc. (S.E.A.) and Kahn
Consulting, Inc. (KCI). S.E.A., headquartered in Columbus, Ohio, provides
investigation, research, analysis and quality control services in areas such as
distress, product failure, fire and explosion and vehicle and workplace
accidents. The S.E.A. acquisition has allowed the Company to significantly
expand its scientific consulting offerings, in addition to providing geographic
expansion into the southeast and midwest markets. KCI, headquartered in New York
City, provides expert testimony on accounting and financial issues; forensic
accounting and fraud investigation services; strategic advisory, turnaround,
bankruptcy and trustee services, and government contract consulting. The
acquisitions of KCI and KK&A provide the foundation for the expansion of expert
financial services into markets where the Company already has a presence.
To finance the KCI and SEA acquisitions, the Company expanded and amended its
line of credit with its bank and utilized $26 million of borrowings against a
$27 million credit line to fund the initial acquisition payments. In March 1999,
the Company further amended its bank financing by extending the maturity to
September 2001, or possibly later under certain conditions, and revising certain
covenants and other terms, including elimination of the requirement to add $10
million of equity by May 1999. The Company also issued $13 million of
subordinated debt financing through the sale of subordinated debentures (with
warrants) to an investor, maturing in March 2004. Further, the seller notes were
restructured in consideration for the acceleration of certain payments due in
1999 to March 31, 1999, the extension of certain other payments through June 30,
2002, adjustments to interest rates, the issuance of warrants to purchase an
aggregate of 115,033 shares of the Company's common stock at $3.21 per share,
and the right to convert $2,875,800 of debt into common stock at the lower of $5
per share or the average closing price of the Company's common stock on the AMEX
for the month of June 2000.
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
REVENUES. Total revenues for the three months ended September 30, 1999 increased
54.8% to $20.9 million compared to $13.5 million for the three months ended
September 30, 1998. Excluding acquisitions completed in 1998, revenues would
have increased 16.7%. Litigation services revenues increased 34.6% from $5.2
million in 1998 to $7.0 million in 1999, continuing its recovery from the
softness in the markets which began in the second quarter of 1998. The Applied
Sciences Division experienced 50.8% growth to $9.5 million in the three months
ended September 30, 1999 compared with $6.3 million in the third quarter of 1998
as a result of the acquisition of S.E.A. The Expert Financial Services division
grew by 109.5%, from $2.1 million 1998 to $4.4 million in 1999, with all of that
growth coming from the acquisition of KCI.
14
<PAGE>
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 were 52.8% of revenue for the three months
ended September 30, 1999, compared to 52.6% of revenue for the three months
ended September 30, 1998.
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 percentage of sales
were 34.1% in 1999 and 37.7% in 1998. This improvement came primarily from
better management of the Litigation Services Division's traditional third
quarter seasonal slowdown.
AMORTIZATION OF GOODWILL. Amortization of goodwill increased in 1999 to
$570,000 from $274,000 in 1998 as a result of the acquisitions of KCI and SEA
completed at the end of the third quarter of 1998.
OTHER INCOME AND EXPENSES. Other income and expenses consists primarily of net
interest expense on our bank line of credit, subordinated note and the interest
expense, as restructured, associated with the purchased businesses referred to
above. Net interest expense increased to $1.0 million for the three months ended
September 30, 1999, from $336,000 for the three months ended September 30, 1998.
INCOME TAXES. In the third quarter of 1999, principally as a result of the
reduced effect of certain goodwill amortization not being deductible for income
tax purposes, the effective tax rate decreased to 44.0% from 44.7% in the third
quarter of 1998. It is anticipated that the effective income tax rate will be
between 44% and 48% for the foreseeable future.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
REVENUES. Total revenues for the nine months ended September 30, 1999 increased
57.2% to $62.1 million compared to $39.5 million for the nine months ended
September 30, 1998. Excluding acquisitions completed in 1998, revenues for each
nine month period would have been relatively the same primarily because nine
months' revenues through September 30, 1998 were affected by unusually strong
revenues in the first quarter of that year in the Litigation Services Division,
followed by a softness in its markets. Litigation Services revenues for the nine
months ended September 30, 1999 have grown to $20.5 million, the same as 1998,
reflecting its continued recovery. The Applied Sciences Division experienced
90.9% growth to $27.3 million in the nine months ended September 30, 1999
compared to $14.3 million in the comparable period of 1998, $12.6 million of
that growth coming from the acquisition of S.E.A. The Expert Financial Services
division grew by 210.9%, from $4.6 million in 1998 to $14.3 million in 1999,
with all of that growth coming from the acquisitions of KCI and KK&A.
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 improved to 52.1% of revenue for the nine
months ended September 30, 1999,
15
<PAGE>
compared to 54.3% of revenue for the nine months ended September 30, 1998, the
improvement coming primarily from the Litigation Services Division.
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 percentage of sales
were 34.7% in 1999 and 34.6% in 1998.
AMORTIZATION OF GOODWILL. Amortization of goodwill increased in 1999 to
$1,709,000 from $440,000 in 1998 as a result of the acquisitions of KCI, SEA
and KK&A during 1998.
OTHER INCOME AND EXPENSES. Other income and expenses consists primarily of net
interest expense on our bank line of credit, subordinated note and the interest
expense, as restructured, associated with the purchased businesses referred to
above. Net interest expense increased to $2.8 million for the nine months ended
September 30, 1999, from $421,000 for the nine months ended September 30, 1998.
INCOME TAXES. In the nine months ended September 30, 1999, the effective tax
rate increased to 46.2% from 41.5%; in 1998, principally as a result of certain
goodwill amortization not being deductible for income tax purposes. It is
anticipated that the effective income tax rate will be between 44% and 48% for
the foreseeable future.
FUTURE ASSESSMENT OF RECOVERABILITY AND IMPAIRMENT OF GOODWILL. We have recorded
goodwill in each of our four acquisitions that we accounted for as purchases. We
record goodwill when we pay more for a business as a going concern than the fair
market value of its identifiable assets. For financial reporting purposes, we
amortize goodwill on a straight-line basis over the period that we believe we
will benefit from the goodwill. We determine the period for amortizing goodwill
based upon the relative size, historical financial viability and growth trends
of the acquired business and other factors. We also consider the length of time
the business has existed. We are amortizing the goodwill we have recorded from
our acquisitions over 15 to 25 years. At September 30, 1999, the unamortized
goodwill was $44.5 million, which represented 54.8% of total assets and 152.4%
of stockholders' equity.
We periodically review the carrying value and recoverability of our unamortized
goodwill. If we believe goodwill may be impaired, we will adjust its carrying
value. If we make an adjustment, we may take an immediate charge against our
income during the period of the adjustment. As an alternative, we may shorten
the length of the remaining amortization period. This will result in an increase
in the amount of goodwill amortization. We cannot assure you that we will not
have to make adjustments for goodwill impairment and recoverability in future
periods. The key factors we review to determine whether goodwill is impaired
are:
o losses from operation of the acquired business;
o loss of customers;
o industry developments;
o whether we believe we can maintain market share;
16
<PAGE>
o whether new competitive products or services have been introduced; and
o whether there are new regulatory requirements.
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of 1999, the Company generated $4.7 million of
cash from operations, an improvement of $700,000 compared to cash generated by
operations in the first nine months of 1998. This improvement is attributable
primarily to an increase of $1.5 million in net income excluding non-cash
charges (principally depreciation and amortization) less the net cash effects of
changes in working capital balances. The Company expects that cash flows from
operations will continue to increase in 1999, in part as a result of additional
operating cash provided from businesses acquired in 1998.
During the nine months ended September 30, 1999 the Company expended
$1.6 million for additions to property and equipment. This amount included
expenditures for internal information systems that allow the Company to better
manage its expanding operations. At September 30, 1999 the Company had no
material commitments for the acquisition of property and equipment.
The Company borrowed $26.0 million in 1998 under its $27.0 million
long-term credit facility with a bank to provide the $26.4 million of cash
needed to acquire Klick, Kent & Allen, Inc., Kahn Consulting, Inc., and SEA,
Inc. This credit facility was renegotiated in March 1999, and the new terms
extend the maturity date of the loan to September 2001. This maturity date may
be extended an additional year if the Company is successful in extending the
maturity dates of certain notes issued to sellers of the acquired 1998 and 1997
businesses.
In connection with the acquisition of certain businesses in 1998 and
1997, the Company is obligated under certain seller notes totaling $10.8 million
at September 30, 1999. Of the $10.8 million outstanding at September 30, 1999,
$1.7 million is payable within the next twelve months. As described above, the
Company in March 1999 issued $13.0 million of subordinated debentures to provide
additional cash resources as the seller notes begin to mature. The subordinated
debentures initially bear interest at 9.25% per annum, and mature in lump sum in
March 2004. The debentures prohibit the payment of dividends without the written
consent of the holder.
The Company is required to comply with certain financial covenants
related to operating performance and liquidity, as calculated quarterly, for
both the revised and extended long-term credit facility and the subordinated
debentures. The Company believes that it will be in compliance with all
covenants throughout 1999.
The Company believes that its existing cash, its expected cash flow
from operations and the financing arrangements completed in March 1999 will be
sufficient for its projected working capital needs and to meet its future
obligations under existing seller notes.
17
<PAGE>
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs written using two
digits (rather than four) to define the applicable year. Absent corrective
actions, programs with date-sensitive logic may recognize "00" as 1900 rather
than 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company has implemented a process to assure Year 2000 compliance of
all hardware, software, and ancillary equipment that are date dependent. The
process involved four phases:
PHASE I - INVENTORY AND DATA COLLECTION. This phase involved an
identification of all items that are date dependent.
PHASE II - COMPLIANCE REQUESTS. This phase involved requests to systems
vendors for verification that the systems identified in Phase I are Year 2000
compliant. The Company replaced critical systems that could not be updated or
certified compliant. The Company's principal compliance issue focused on the
existing business and accounting system developed over the past ten years. A new
business and accounting system has been implemented and is vendor-certified to
be Year 2000 compliant. In addition, the Company has determined that
substantially all of its personal computers and PC applications are compliant.
PHASE III - TEST, FIX AND VERIFY. This phase involved testing all items
that are date dependent and upgrading the critical, non-compliant system as well
as completing the implementation of the new business and accounting system.
PHASE IV - FINAL TESTING, NEW ITEM COMPLIANCE. This phase involved review
of all systems for compliance and re-testing as necessary. During this phase,
all new systems and equipment were tested for Year 2000 compliance.
The Company has completed all four phases and presently believes that the Year
2000 issue will not cause us any significant operational problems. In addition,
we contacted our important suppliers and customers to receive positive
statements of compliance from all significant third parties. To date, the
Company is not aware of any Year 2000 non-compliance by its customers or
suppliers that would have material impact on the Company's business. This
substantial compliance has been achieved without the need to acquire significant
new hardware, software, or systems other than in the ordinary course of
business. The Company is not aware of any other material Year 2000
non-compliance that would require repair or replacement or that could have a
material effect on its financial position. We cannot assure you, however, that
we will not face unanticipated Year 2000 non-compliance problems. If we do, we
may have to spend material amounts and could face material disruptions to our
business. The Company has developed a strategy to address these potential
consequences and contingency plans to deal with any disruptions.
18
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Quarterly
Report of Form 10-Q contain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These statements involve
known and unknown risks, uncertainties and other factors that may cause our or
our industry's actual results, levels of activity, performance or achievements
expressed or implied by such forward-looking statements. These forward-looking
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "intends," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of such terms
or other comparable terminology. These statements are only predictions.
Moreover, neither we nor any other person assumes responsibility for the
accuracy and completeness of such statements. We are under no duty to update any
of the forward-looking statements after the date of this prospectus to conform
such statements to actual results and do not intend to do so. Factors which may
cause the actual results of operations in future periods to differ materially
from intended or expected results include, but are not limited to: (1) the loss
of any key employees because the Company's business involves the delivery of
professional services and is labor-intensive; (2) the loss of key officers of
the Company, without 90 day replacement, which would constitute an event of
default under the Company's $13 million Investment and Loan Agreement with
Allied Capital Corporation and Allied Investment Corporation; (3) the
availability and terms of additional capital or debt financing to fund future
acquisitions and for working capital purposes; (4) significant competition for
business opportunities and acquisition candidates; (5) fluctuations of revenue
and operating income between quarters or termination of client engagements; (6)
the continued integration of KK&A, KCI and S.E.A., acquired in 1998, and the
integration of future acquisitions; and (7) risks associated with quantitative
and qualitative market risks such as fluctuations in interest rates.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
1. TITANIUM. On May 12, 1999, FTI, through its subsidiary S.E.A., Inc. paid
$350,000 in settlement of the Titanium Industries matter. In accordance with the
Stock Purchase Agreement, FTI was reimbursed this amount by the selling
stockholders.
2. PIXEL On July 14, 1999, the Superior Court at Stamford, Connecticut granted
the motion to dismiss this action. Pixel has provided FTI legal counsel with a
release dropping all claims and counterclaims.
The Company is not presently a party to any material litigation.
ITEM 2. CHANGES IN SECURITIES
1. On February 24, 1999, the Company issued to Grotech Capital
Corporation, et al, warrants exercisable for an aggregate of 20,000 shares of
common stock. The exercise price per share for each of these warrants is $3.25.
These warrants expire on February 23, 2004. The Grotech Warrants were issued by
the Company in reliance on the private placement exemption under Section 4(2) of
the Securities Act. As of May 7, 1999, the Grotech Entities beneficially owned
shares of common stock and securities convertible into shares of common stock as
follows: Grotech III Pennsylvania Fund LP (27,240 shares of common stock and
warrants currently exercisable for 600 shares of common stock), Grotech III
Companion Fund, LP (45,438 shares of common stock and warrants currently
exercisable for 1,001 shares of common stock), Grotech Partners III, LP (381,322
shares of common stock and warrants currently exercisable for 8,399 shares of
common stock).
2. The Company issued $13,000,000 of subordinated debentures bearing
interest at 9.25% per annum through June 2000, and 12% per annum thereafter
until maturity in March 2004, of which $5,700,000 was sold to Allied Capital
Corporation and $7,300,000 was sold to Allied Investment Corporation. In
connection with the issuance of the subordinated debt, as of March 29, 1999, the
Company issued warrants to purchase an aggregate of 392,505.73 shares of common
stock at an exercise price of $3.205 per share to the lenders, of which a
warrant exercisable for 172,098.67 shares of common stock was issued to Allied
Capital Corporation and a warrant exercisable for 220,407.06 shares of common
stock was issued to Allied Investment Corporation (collectively, the "Allied
Warrants"). If the debentures are paid in full before the close of business on
June 30, 2000, the number of shares of common stock that are issuable on
exercise of the warrant issued to Allied Capital Corporation will be reduced to
111,713.17 and the number of shares of common stock that are issuable on
exercise of the warrant issued to Allied Investment Corporation will be reduced
to 143,071.25. The right to exercise the Allied Warrants will expire six years
after the date the debentures are paid in full. The Allied Warrants were issued
by the Company in reliance on the private placement exemption under Section 4(2)
of the Securities Act.
20
<PAGE>
3. As of March 31, 1999, the Company restructured certain seller
promissory notes that it had issued in June 1998 to sellers of K.K.&A. and in
September 1998 to sellers of S.E.A. and KCI. In connection with this
restructuring, holders of such obligations who deferred the payments due in
September 1999 and September 2000 until June 2002 received an amended and
restated promissory that provided: (i) for every three dollars of face amount
deferred until 2002, an increased rate of 9.25% per annum on two dollars of the
face amount; (ii) for every three dollars of face amount deferred until 2002, a
lower interest rate of 6.00% per annum on one dollar of the face amount plus the
right to convert that portion of the note into common stock at the lower of
$5.00 per share or the average common stock price for June 2000 (collectively,
the "Convertible Note"); and (iii) five-year warrants (exercisable to March 31,
2004) with an exercise price of $3.205 equal in number to 2% of the portion of
the obligation bearing the 9.25% interest rate (collectively, the "Restructuring
Warrants"). To the extent that the restructuring of the notes is deemed to be
the issuance of restricted securities, as well as the issuances of the
Convertible Notes and the Restructuring Warrants, the following individuals were
issued the following: (a) Stewart A. Kahn: $1,500,000 Convertible Note
(convertible into 300,000 shares of common stock of the Company based on an
assumed conversion price of $5.00 per share) and a Restructuring Warrant for
60,000 shares of Company common stock; (b) Michael R. Baranowski: $166,700
Convertible Note (convertible into 33,340 shares of common stock of the Company
based on an assumed conversion price of $5.00 per share) and a Restructuring
Warrant to purchase 6,667 shares of Company common stock; (c) Barry M. Monheit:
$433,300 Convertible Note (convertible into 86,660 shares of common stock of the
Company based on an assumed conversion price of $5.00 per share) and a
Restructuring Warrant to purchase 17,333 shares of Company common stock; (d)
Laureen M. Ryan: $42,500 Convertible Note (convertible into 8,500 shares of
common stock of the Company based on an assumed conversion price of $5.00 per
share) and a Restructuring Warrant to purchase 1,700 shares of Company common
stock; (e) Dennis A. Guenther: $333,300 Convertible Note (convertible into
66,660 shares of common stock of the Company based on an assumed conversion
price of $5.00 per share) and a Restructuring Warrant to purchase 13,333 shares
of Company common stock; (f) Christopher D. Kent: $200,000 Convertible Note
(convertible into 40,000 shares of common stock of the Company based on an
assumed conversion price of $5.00 per share) and a Restructuring Warrant to
purchase 8,000 shares of Company common stock; and (g) John C. Klick: $200,000
Convertible Note (convertible into 40,000 shares of common stock of the Company
based on an assumed conversion price of $5.00 per share) and a Restructuring
Warrant to purchase 8,000 shares of Company common stock. All of the Convertible
Notes and Restructuring Warrants were issued by the Company in reliance on the
private placement exemption under Section 4(2) of the Securities Act.
4. In March 1999, the Company renegotiated the terms of its $27,000
long-term credit facility. Amounts borrowed under the revolving credit facility
are secured by all assets of the Company, bear interest at LIBOR or prime (as
elected by the Company each quarter) plus specified additions, and mature on
September 30, 2001. The maturity date may be extended to September 30, 2002 if
certain specified events occur. The Company is also required to comply with
certain specified financial covenants related to operating performance and
liquidity at the end of each quarter. In connection with the renegotiation of
the financing, the lender was issued warrants to purchase 25,000 shares of
common stock at an exercise price of $3.00 per share. The warrants expire in
March 2006, contain anti-dilution provisions and contain put rights.
21
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27. Financial Data Schedule for nine months ended September 30, 1999
(B) REPORTS ON FORM 8-K
Current Report on Form 8-K filed on January 8, 1999.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FTI CONSULTING, INC.
Date: November 5, 1999 By /s/Theodore I. Pincus
---------------- ---------------------
Executive Vice President and Chief
Financial Officer (principal financial
and accounting officer)
23
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