<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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
----------------------------------------------------------
(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 May 12, 2000
- ----------------------- ---------------------------
Common Stock, par value
$.01 per share 6,387,601
<PAGE>
FTI CONSULTING, INC.
--------------------
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets - December 31, 1999 and
March 31, 2000 3
Consolidated Statements of Income - Three months ended
March 31, 1999, three months ended March 31, 2000 5
Pro Forma Consolidated Statements of Income - Three months
ended March 31, 1999, three months ended March 31, 2000 6
Consolidated Statements of Cash Flows - Three months ended
March 31, 1999, three months ended March 31, 2000 7
Notes to Unaudited Consolidated Financial Statements
- March 31, 2000 8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
<PAGE>
Part I. Financial Information
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands of dollars)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
----------------------------------
(audited) (unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 5,046 $ 2,360
Accounts receivable, less allowance of $1,065 in 1999 and $1,430
in 2000 14,458 22,137
Unbilled receivables, less allowance of $1,160 in 1999 and $1,249
in 2000 9,222 14,854
Income taxes recoverable 64 64
Deferred income taxes 641 641
Prepaid expenses and other current assets 1,461 1,831
----------------------------------
Total current assets 30,892 41,887
Property and equipment:
Furniture, equipment and software 17,205 17,923
Leasehold improvements 1,955 2,120
----------------------------------
19,160 20,043
Accumulated depreciation and amortization (10,781) (11,537)
----------------------------------
8,379 8,506
Goodwill, net of accumulated amortization of $3,473 in 1999 and
$4,490 in 2000 43,658 94,821
Other assets 1,363 3,887
----------------------------------
Total assets $ 84,292 $149,101
==================================
</TABLE>
See accompanying notes.
3
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands of dollars)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
--------------------------------
(audited) (unaudited)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities
Accounts payable and accrued expenses $ 3,240 $ 3,187
Accrued compensation expense 5,373 5,687
Income taxes - 563
Deferred income taxes 471 471
Line of credit - 1,500
Current portion of long-term debt 1,718 4,250
Advances from clients 435 4,626
Other current liabilities 422 1,021
--------------------------------
Total current liabilities 11,659 21,305
Long-term debt, less current portion 41,009 83,342
Other long-term liabilities 411 391
Deferred income taxes 961 961
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;
4,913,905 and 6,384,601 shares issued and outstanding in 1999
and 2000, respectively 49 64
Additional paid-in capital 18,197 30,021
Retained earnings 12,006 13,017
--------------------------------
Total stockholders' equity 30,252 43,102
--------------------------------
Total liabilities and stockholders' equity $84,292 $149,101
================================
</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 March 31,
1999 2000
---------------------------------
(unaudited)
<S> <C> <C>
Revenues $20,000 $31,013
Direct cost of revenues 10,430 15,375
Selling, general and administrative expenses 7,189 8,914
Amortization of goodwill 569 1,016
---------------------------------
Total costs and expenses 18,188 25,305
---------------------------------
Income from operations 1,812 5,708
Other income (expense):
Interest and other income 66 40
Interest expense (861) (2,392)
---------------------------------
(795) (2,352)
---------------------------------
Income before income taxes and extraordinary item 1,017 3,356
Income taxes 458 1,476
---------------------------------
Income before extraordinary item 559 1,880
Extraordinary loss on early extinguishment of debt,
net of income taxes of $660 - 869
---------------------------------
Net income $ 559 $ 1,011
=================================
Income before extraordinary item per common share, basic $0.12 $0.32
=================================
Net income per common share, basic $0.12 $0.17
=================================
Income before extraordinary item per common share, diluted $0.12 $0.29
=================================
Net income per common share, diluted $0.12 $0.16
=================================
</TABLE>
See accompanying notes.
5
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Pro Forma Consolidated Statements of Income
(in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Three months ended March 31,
1999 2000
---------------------------------
(unaudited)
<S> <C> <C>
Revenues $25,519 $33,451
Direct cost of revenues 12,087 16,382
Selling, general and administrative expenses 7,567 8,963
Amortization of goodwill 1,229 1,233
---------------------------------
Total costs and expenses 20,883 26,578
---------------------------------
Income from operations 4,636 6,873
Other income (expense):
Interest and other income 66 40
Interest expense (3,070) (2,972)
---------------------------------
(3,004) (2,932)
---------------------------------
Income before income taxes and extraordinary item 1,632 3,941
Income taxes 705 1,734
---------------------------------
Income before extraordinary item 927 2,207
Extraordinary loss on early extinguishment of debt
net of income taxes of $660 - 869
---------------------------------
Net income $ 927 $ 1,338
================================
Income before extraordinary item per common share, basic $0.15 $0.35
================================
Net income per common share, basic $0.15 $0.21
================================
Income before extraordinary item per common share, diluted $0.15 $0.32
================================
Net income per common share, diluted $0.15 $0.19
================================
</TABLE>
See accompanying notes.
6
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands of dollars)
<TABLE>
<CAPTION>
Three months ended March 31,
1999 2000
-------------------------------
(unaudited)
<S> <C> <C>
Operating activities
Net income $ 559 $ 1,011
Adjustments to reconcile net income to net cash:
used in operating activities:
Extraordinary loss on early extinguishment
of debt, before income taxes - 1,529
Amortization of goodwill 569 1,016
Depreciation and other amortization 566 632
Provision for doubtful accounts 145 455
Deferred income taxes (132) -
Loss (gain) on disposal of assets 8 (9)
Non-cash interest expense - 202
Changes in operating assets and liabilities:
Accounts receivable (91) (2,849)
Unbilled receivables (2,437) (5,335)
Prepaid expenses and other current assets 88 (364)
Accounts payable and accrued expenses (934) (438)
Accrued compensation expense 781 (243)
Income taxes recoverable/payable 775 563
Advances from clients 28 1,949
Other current liabilities (21) 605
-------------------------------
Net cash used in operating activities (96) (1,276)
Investing activities
Purchase of property and equipment (845) (642)
Proceeds from sale of property and equipment 82 47
Contingent payments to LWG - (51)
Acquisition of P&M, including acquisition costs - (54,905)
Change in other assets 2 219
-------------------------------
Net cash used in investing activities (761) (55,332)
Financing activities
Issuance of common shares 136 8,402
Payments of long-term debt (12,563) (43,503)
Repurchase of detachable stock warrants - (277)
Payment of financing fees (771) (3,406)
Proceeds from senior credit facility - 61,000
Proceeds from subordinated notes payable and
detachable stock warrants 13,000 30,233
Borrowing on line of credit - 1,500
Payments of other long-term liabilities (32) (27)
-------------------------------
Net cash provided by (used in) financing activities (230) 53,922
-------------------------------
Net decrease in cash and cash equivalents (1,087) (2,686)
Cash and cash equivalents at beginning of period 3,223 5,046
-------------------------------
Cash and cash equivalents at end of period $ 2,136 $ 2,360
===============================
</TABLE>
See accompanying notes.
7
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2000
(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, 1999.
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 three month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000.
The accompanying Pro Forma Consolidated Statements of Income for the three
months ended March 31, 2000 and 1999 are presented to give effect to the January
31, 2000 acquisition of Policano & Manzo, L.L.C. and related financing assuming
the transactions occurred on January 1, 1999 (see Notes 5 and 6). The Pro Forma
Consolidated Statements of Income are not necessarily indicative of the
operating results that would have been achieved had the transactions actually
occurred on January 1, 1999, nor are they necessarily indicative of future
operations.
2. Stockholders' Equity
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 2000 $49 $18,197 $12,006 $30,252
Issuance of 670,404 warrants to purchase common
stock 3,714 3,714
Repurchase of 130,835 warrants to purchase common
stock in connection with early retirement of debt (277) (277)
Issuance of 604,504 shares of common stock in
exchange for debt to sellers of acquired businesses 6 2,677 2,683
Issuance of 815,000 shares of common stock
for the acquisition of Policano & Manzo, L.L.C. 8 5,493 5,501
Issuance of 51,192 shares of common stock under
Employee Stock Purchase Plan 1 217 218
Net income for three months ended March 31, 2000 1,011 1,011
------------------------------------------------
Balance at March 31, 2000 $64 $30,021 $13,017 $43,102
================================================
</TABLE>
8
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2000 (continued)
(in thousands of dollars, except per share data)
3. Earnings Per Share
The following table summarizes the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Actual Pro Forma
Three months ended Three months ended
March 31, March 31,
1999 2000 1999 2000
---------------------------------------------------
<S> <C> <C> <C> <C>
Numerator used in basic and diluted
earnings per common share:
Income before extraordinary item $ 559 $1,880 $ 927 $2,207
Extraordinary item, net of taxes - 869 - 869
---------------------------------------------------
Net income $ 559 $1,011 $ 927 $1,338
===================================================
Denominator:
Denominator for basic earnings per common
share - weighted average shares 4,829 5,854 6,249 6,385
Effect of dilutive securities:
Warrants - 357 - 357
Employee stock options 12 189 12 189
---------------------------------------------------
12 546 12 546
Denominator for diluted earnings per
common share - weighted average shares
and effect of dilutive securities 4,841 6,400 6,261 6,931
===================================================
Income before extraordinary item per
common share, basic $ 0.12 $ 0.32 $ 0.15 $ 0.35
Extraordinary loss per common share, basic - (0.15) - (0.14)
---------------------------------------------------
Net income per common share, basic $ 0.12 $ 0.17 $ 0.15 $ 0.21
===================================================
Income before extraordinary item per
common share, diluted $ 0.12 $ 0.29 $ 0.15 $ 0.32
Extraordinary loss per common share, diluted - (0.13) - (0.13)
---------------------------------------------------
Net income per common share, diluted $ 0.12 $ 0.16 $ 0.15 $ 0.19
===================================================
</TABLE>
9
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2000 (continued)
(in thousands of dollars, except per share data)
4. Income Taxes
The income tax provisions for interim periods in 2000 and 1999 are based on the
estimated effective tax rates applicable for the full years. The Company's
income tax provision of $1,476 for the three month period ended March 31, 2000
consists of federal and state income taxes. The effective income tax rate in
2000 is expected to be approximately 44%. 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. Acquisition of Policano & Manzo, L.L.C.
Effective on January 31, 2000, the Company acquired the membership interests of
Policano & Manzo, L.L.C. ("P&M"). P&M, based in Saddle Brook, New Jersey, is a
leader in providing bankruptcy and turnaround consulting services to large
corporations, money center banks and secured lenders throughout the U.S. The
purchase price totaled approximately $54.0 million, consisting of $47.5 million
in cash and 815,000 shares of common stock valued at $5.5 million. The Company
also incurred acquisition related expenses of $728,000. The acquisition was
accounted for using the purchase method of accounting and approximately $52.2
million of goodwill was recorded and is being amortized over its estimated
useful life of twenty years.
The accompanying unaudited Pro Forma Consolidated Statements of Income give
effect to the acquisition of P&M and the related refinancing discussed in
Note 6, assuming that these transactions occurred as of January 1, 1999.
10
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2000 (continued)
(in thousands of dollars, except per share data)
6. Debt
In connection with the acquisition of P&M, the Company entered into a $68.5
million senior credit facility to provide the cash needed to consummate the
acquisition, partially refinance existing long-term debt arrangements, and to
provide working capital for expansion. The senior credit facility consists of
(i) a $61.0 million amortizing term loan maturing through January 31, 2006, that
intially bears interest at LIBOR plus specified margins ranging from 3.25% to
3.75% and (ii) a $7.5 million revolving credit facility, initially bearing
interest at prime plus 1.75%. The interest rates on these borrowings will
decline if the Company's leverage ratios improve.
The Company also issued $30.0 million of subordinated notes to lenders that
mature on January 31, 2007, and bear interest at 17% per annum, payable semi-
annually. The interest rate of 17% consists of a cash component equal to 12%
per annum of principal and a component payable in additional notes equal to 5%
per annum of principal. These lenders also received warrants to purchase
670,404 shares of the Company's common stock at the exercise price of $4.44 per
share that expire on January 31, 2010.
The fair value of these warrants was estimated at the date of grant using the
Black-Scholes pricing model with the following assumptions: risk-free interest
rate of 5.5%; expected dividend yield of 0%; expected warrant life of 10-years;
expected stock price volatility of 0.647. Using these assumptions, the fair
value of the warrants was computed to be $5.44 per share, and the total value
assigned was $3.7 million. This amount was recorded as additional paid-in
capital and a corresponding debt discount was recorded that is recognized as
additional interest expense over the term of the debt instruments.
The proceeds from these borrowings of $91.0 million, in tandem with $2.0 million
of cash, were used to finance the $47.5 million cash purchase price of P&M,
refinance $41.2 million of the $44.0 million of existing long-term debt and fund
acquisition and finance related expenses of $4.3 million. The remaining $2.7
million of long-term debt was exchanged for 604,504 shares of common stock.
In connection with the early extinguishment of the $44.0 million of debt,
warrants to purchase 130,835 shares of common stock for $3.21 per share were
repurchased. In addition, an extraordinary loss of $869,000, net of income taxes
was incurred related to unamortized debt discount and deferred financing costs
attributable to the retired debt.
11
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2000 (continued)
(in thousands of dollars, except per share data)
6. Debt (continued)
In summary, debt consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------------------------
<S> <C> <C>
Amounts due under the $61.0 million amortizing term loans. $ - $61,000
Amounts due under the $7.5 million line of credit. - 1,500
Amounts due under $30.0 million subordinated notes (net of discount
of $3.6 million). - 26,592
Amounts due under a $27.0 million long-term credit facility (net of
discount of $36,000 in 1999), bearing interest at LIBOR plus
variable percentages. 19,964 -
Notes payable to former shareholders of acquired businesses (net of
discount of $169,000). 10,611 -
Subordinated debentures (net of discount of $848,000) bearing
interest at 9.25%. 12,152 -
------------------------------
Total of debt 42,727 89,092
Less current portion (1,718) (5,750)
------------------------------
Total long-term debt $41,009 $83,342
==============================
</TABLE>
The aggregate maturities of long-term debt outstanding at March 31, 2000, prior
to amortization of debt discount are as follows:
December 31, 2000 $ 3,188
December 31, 2001 5,750
December 31, 2002 7,750
December 31, 2003 11,250
December 31, 2004 14,500
December 31, 2005 and thereafter 48,562
-------
$91,000
=======
12
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2000 (continued)
(in thousands of dollars, except per share data)
6. Debt (continued)
In March 2000, the Company entered into interest rate swap and cap transactions
on $41.0 million of the outstanding amortizing term loans, in accordance with
provisions of the credit facility. The $20.5 million swap transactions resulted
in exchanging floating LIBOR rates for fixed rates. The $20.5 million cap
transactions limited the Company's exposure to substantial increases in the
LIBOR rate by establishing the maximum rate over the life of the cap to be
7.75%. These interest rate hedge transactions expire in three-years. The
premium associated with the cap transactions have been incorporated into the
swap transactions and resulted in the fixed rates of 7.41% on $10.0 million and
7.43% on $10.5 million. The mark-to-market valuation of these hedges at March
31, 2000 was approximately $50,000.
7. Segment Reporting
The Company provides litigation and claims management consulting services
through three distinct operating segments. The Expert Financial Services
division offers a range of financial consulting services, such as forensic
accounting, bankruptcy and restructuring analysis, expert testimony, damage
assessment, cost benefit analysis and business valuations. The Litigation
Services division provides advice and services in connection with all phases of
the litigation process. The Applied Sciences division offers engineering and
scientific consulting services, accident reconstruction, fire investigation,
equipment procurement and expert testimony regarding intellectual property
rights.
The Company evaluates performance and allocated resources based on operating
income before depreciation and amortization, corporate general and
administrative expenses and income taxes. The Company does not allocate assets
to its reportable segments as assets generally are not specifically attributable
to any particular segment. Accordingly, asset information by reportable segment
is not presented. The accounting policies used by the reportable segments are
the same as those used by the Company. There are no significant intercompany
sales or transfers.
13
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2000 (continued)
(in thousands of dollars, except per share data)
7. Segment Reporting (continued)
The following table sets forth information on the Company's reportable segments:
<TABLE>
<CAPTION>
Three months ended March 31, 1999
----------------------------------------------------------------------------
Expert
Financial Applied Litigation
Services Sciences Services Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 5,077 $8,307 $6,616 $20,000
Operating expenses 3,620 7,198 4,711 15,529
------- ------ ------ -------
Segment profit $ 1,457 $1,109 $1,905 $ 4,471
======= ====== ====== =======
<CAPTION>
Three months ended March 31, 2000
----------------------------------------------------------------------------
Expert
Financial Applied Litigation
Services Sciences Services Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $12,519 $9,984 $8,510 $31,013
Operating expenses 7,180 8,026 6,355 21,561
------- ------ ------ -------
Segment profit $ 5,339 $1,958 $2,155 $ 9,452
======= ====== ====== =======
</TABLE>
A reconciliation of segment profit for all segments to income before income
taxes and extraordinary item is as follows:
<TABLE>
<CAPTION>
Three Months ended March 31,
1999 2000
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Operating Profit:
Total segment profit $ 4,471 $ 9,452
Corporate general and administrative
expenses (1,524) (2,096)
Depreciation and amortization (1,135) (1,648)
Interest and other expense (795) (2,352)
------- -------
Income before income taxes and
extraordinary item $ 1,017 $ 3,356
======= =======
</TABLE>
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.
14
<PAGE>
FTI Consulting, Inc.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
FTI Consulting, Inc. (the "Company" or "FTI") is a multi-disciplined consulting
firm with leading practices in the areas of financial restructuring, litigation
support and engineering/scientific investigation. We derive revenues from our
three business divisions: Expert Financial Services, Litigation Services and
Applied Sciences. Our Expert Financial Services division offers a range of
financial consulting services, such as forensic accounting, bankruptcy and
restructuring analysis, expert testimony, damage assessment, cost benefit
analysis and business valuations. 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. Revenues generated by
our business divisions consist of:
. fees for our professional services;
. fees for use of our equipment and facilities;
. pass-through expenses, such as our cost of recruiting subjects and
participants for research surveys and mock trial activities and travel; and
. 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:
. completing six acquisitions that significantly expanded our size, service
offerings and geographic scope;
. expanding into expert financial services for trials, bankruptcy proceedings
and restructurings; and
. recruiting more recognized litigation support professionals and adding to our
visual communications staff.
The Company has further expanded its geographic reach with major offices now in
New York, Columbus, Chicago, Houston, Los Angeles, Annapolis and Washington,
D.C., as well as over 25 other U.S. locations.
On February 4, 2000, the Company acquired the membership interests of Policano &
Manzo L.L.C. ("P&M"). P&M, based in Saddle Brook, New Jersey, is a leader in
providing bankruptcy and turnaround consulting services to large corporations,
money center banks and secured lenders throughout the U.S. The purchase price
included $47.5 million in cash and the issuance of 815,000 shares of the
Company's common stock. The
15
<PAGE>
acquisition was accounted for using the purchase method of accounting. See
"Liquidity and Capital Resources" below for a description of the financing of
this transaction.
Three Months Ended March 31, 2000 and March 31, 1999
Revenues. Total revenues for the three months ended March 31, 2000 increased
55.0% to $31.0 million compared to $20.0 million for the three months ended
March 31, 1999. Litigation Services division revenues increased 28.6% from $6.6
million in 1999 to $8.5 million in 2000. The Applied Sciences division
experienced 20.2% growth to $10.0 million in the three months ended March 31,
2000 compared to $8.3 million in the first quarter of 1999. For the three month
period ended March 31, 2000, revenues for Expert Financial Services division
grew by $7.4 million, or 146.6%, to $12.5 million as compared to 1999. The
acquisition of P&M as of January 31, 2000 accounted for $5.4 million of this
growth and $2.0 million was generated by internal growth.
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 49.6% of revenue for the three
months ended March 31, 2000, compared to 52.2% of revenue for the three months
ended March 31, 1999. This improvement was attributable primarily to the
acquisition of P&M and productivity increases in the Applied Sciences and Expert
Financial Divisions. Direct cost of revenue from the acquired P&M business
during the quarter were 42.2%.
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. These expenses were 28.7% of revenues for the three months ended March
31, 2000 compared to 35.9% for the three months ended March 31, 1999. The
improvement resulted primarily from the lower percent of SG&A of revenues of P&M
and the significant revenue increases that exceeded the rate of increase of SG&A
at all three divisions.
Amortization of Goodwill. Amortization of goodwill increased from $.6 million in
the first quarter of 1999 to $1.0 million in the first quarter of 2000 as a
result of the acquisition of P&M.
Interest Expense, net. Net interest expense increased to $2.4 million for the
three months ended March 31, 2000, from $.8 million for the three months ended
March 31, 1999. Interest expense consists primarily of net interest expense
associated with the purchased businesses referred to above, including P&M, and
the refinancing of the Company's debt obligations on February 4, 2000. See
"Liquidity and Capital Resources" below.
Income Taxes. In the first quarter of 2000, the effective income tax rate
decreased to 44.0% from 45.0% in the first quarter of 1999 primarily as a result
of the proportionately lower non-deductible goodwill amortization resulting from
acquisitions in 1997 and 1998.
Extraordinary Item, net of taxes. The $.9 million loss on early extinguishment
of debt, net of taxes, resulted from the write-off
16
<PAGE>
of unamortized debt discount and deferred financing costs associated with the
Company's debt that was refinanced on February 4, 2000.
Future Assessment of Recoverability and Impairment of Goodwill
In connection with its various acquisitions, including the acquisition of P&M,
the Company recorded goodwill, which is being amortized on a straight-line basis
over periods of 15 to 25 years, its estimated periods that the Company will be
benefited by such goodwill. At March 31, 2000, the unamortized goodwill was
$94.8 million (which, represented 63.6 % of total assets and 220.0% of
stockholders' equity. Goodwill arises when an acquirer pays more for a business
than the fair value of the tangible and separately measurable intangible net
assets. For financial reporting purposes, goodwill and all other intangible
assets are amortized over the estimated period benefited. The Company has
determined the life for amortizing goodwill based upon several factors, the most
significant of which are the relative size, historical financial viability and
growth trends of the acquired companies and the relative lengths of time such
companies have been in existence.
Management of the Company periodically reviews the Company's carrying value and
recoverability of unamortized goodwill. If the facts and circumstances suggest
that the goodwill may be impaired, the carrying value of such goodwill will be
adjusted, which will result in an immediate charge against income during the
period of the adjustment, and/or the length of the remaining amortization period
may be shortened, which will result in an increase in the amount of goodwill
amortization during the period of adjustment and each period thereafter until
fully amortized. Once adjusted, there can be no assurance that there will not
be further adjustments for impairment and recoverability in future periods. Of
the various factors to be considered by management of the Company in determining
whether goodwill is impaired, the most significant will be (i) losses from
operations, (ii) loss of customers, and (iii) industry developments, including
the Company's inability to maintain its market share, development of competitive
products or services, and imposition of additional regulatory requirements.
Liquidity and Capital Resources
In the first quarter of 2000, the Company used $1.3 million of cash flow in its
operations, as compared to a use of $0.1 million in the first quarter of 1999.
This increased use was attributable to (a) the net cash effects of the increase
in net working capital balances excluding working capital acquired from P&M, and
(b) reduced by an increase in net income excluding non-cash charges for
depreciation and amortization and bad debts expense of $1.6 million and the
extraordinary item of $1.5 million, before taxes. The Company anticipates that
cash flow from operations for the rest of 2000 will increase, in part as a
result of the acquisition of P&M described above and in part by a decrease in
net working capital balances.
To finance the P&M transaction, the Company entered into a senior credit
facility, consisting of a $61.0 million amortizing term loan maturing through
January 31, 2006, initially bearing interest at LIBOR plus specified margins,
ranging from 3.25% to 3.75%, which margins may decline based on the Company's
leverage ratio; a $7.5 million revolving credit facility bearing interest at
prime plus 1.75% which may also decline based on the Company's leverage ratio;
and a $30.0 million subordinated debt facility
17
<PAGE>
with a group of lenders maturing January 31, 2007, bearing cash interest of 12%
and 5% interest payable in kind (PIK). The credit facilities are secured by all
assets of the Company. The Company is also required to comply with certain
specified financial covenants related to operating performance and liquidity at
the end of each quarter, and is further required to obtain interest rate
protection on a minimum of 50% of the $61.0 million term loan. The Company
believes that it will be in compliance with all covenants throughout 2000.
Proceeds of the facilities, together with approximately $3.0 million of the
Company's existing cash, were used for the purchase and to refinance the
Company's existing debt of approximately $44.0 million described below.
Additionally, the Company issued 604,504 shares of its common stock in exchange
for approximately $2.7 million of notes outstanding to certain members of the
senior management team whose businesses were acquired by the Company in prior
transactions.
In connection with the issuance of the subordinated debt, the holders were
issued warrants to purchase approximately 670,000 shares of the Company's common
stock at an exercise price of $4.44 per share. The warrants expire ten years
from the date of closing. In addition, the Company retired warrants for 130,835
shares of common stock issued in March 1999 in connection with its existing
subordinated debt of $13.0 million, which was repaid as part of this
refinancing.
In 1998, the Company had borrowed $26.0 million 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 S.E.A., Inc. This
credit facility was renegotiated in March 1999, and was repaid on February 4,
2000. The Company, in March 1999, issued $13.0 million of subordinated
debentures that were also repaid on February 4, 2000.
In connection with the acquisition of certain businesses in 1998 and 1997, the
Company was obligated under certain seller notes totaling $10.8 million at
December 31, 1999. Of the $10.8 million outstanding at December 31, 1999, $8.1
million was repaid during the refinancing on February 4, 2000, and approximately
$2.7 million was exchanged for common stock as noted above.
During the quarter ended March 31, 2000, the Company expended $.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 March 31, 2000 the Company had no material commitments
for the acquisition of property and equipment, but in March 2000, the Company
entered into a lease agreement for new facilities in New York City which it
intends to occupy before the end of 2000. The Company presently estimates that
it will expend approximately $.8 million for leasehold improvements, furniture
and fixtures for this facility.
The Company believes that cash generated from operations will allow it to meet
its obligations that mature in 2000 and thereafter under its Credit Facility,
and further provide for the necessary cash resources required in the near term
to fund its expanding operations. The Company will also explore appropriate
opportunities to raise equity capital to repay such obligations in whole or part
prior to maturity.
18
<PAGE>
Year 2000 Compliance
During 1999, the Company implemented a four-stage process to assure Year 2000
compliance of all hardware, software and ancillary equipment that are date
dependent. The Company completed all four phases and believes that the Year 2000
issue did not and will not cause us any significant operational problems. In
addition, we contacted our important suppliers and customers and received
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 a material impact on the Company's 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.
Forward-Looking Statements
Some of the statements under "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and elsewhere in this Quarterly Report
contain forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934. These statements involve known and unknown
risks, uncertainties and other factors that may cause our or our industry's
actual results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements not to be fully achieved. These
forward-looking statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or other comparable terminology. These statements
are only predictions. 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 Quarterly Report to conform such statements to actual results and do not
intend to do so. Factors which may cause the actual results of operations in
future periods to differ materially from intended or expected results include,
but are not limited to (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 Senior and Subordinated
Credit Facilities; (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 integration of P&M and of future acquisitions;
and (7) risks associated with quantitative and qualitative market risks such as
fluctuations in interest rates.
19
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss to future earnings, to fair values or to future
cash flows that may result from the changes in the price of financial
instruments. The Company is exposed to market risk from changes in interest
rates which could affect its future results of operations and financial
condition. The Company manages its exposures to these risks through its regular
operating and financing activities, including the use of derivative financial
instruments.
At March 31, 2000, $61.0 million of the Company's long-term debt bears interest
at variable rates. Accordingly, the Company's earnings and after-tax cash flow
are affected by changes in interest rates. To mitigate its exposure, management
has utilized three-year interest rate swap and cap agreements covering $41.0
million of its long-term debt. In the event of adverse changes in interest
rates, management may take actions to further mitigate its exposure.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not presently a party to any material litigation.
Item 2. Changes in Securities
1. On February 4, 2000, the Company purchased the membership interests
of Policano & Manzo, L.L.C. The purchase price totalled approximately $54.0
million, consisting of $47.5 million in cash and 815,000 shares of common stock
valued at $6.75 per share. The issuance of the shares was exempt from
registration under Section 4(2)d of the Securities Act of 1933 (the "1933 Act").
2. Also on February 4, 2000, in connection with the acquisition of
Policano & Manzo, L.L.C., the Company entered into a $68.5 million senior credit
facility and issued $30.0 million of subordinated debentures, to provide the
cash needed to consummate the acquisition, partially refinance existing long-
term debt arrangements, and to provide working capital for expansion. The
lenders owning the subordinated debentures received warrants to purchase 670,404
shares of common stock. The exercise price of these warrants is $4.44 per share
and they expire on January 31, 2010. The issuance of the warrants was exempt
from registration under Section 4(2) of the 1933 Act.
3. On February 4, 2000, the Company repaid the entire $13.0 million of
subordinated debentures that were to mature in March 2004, of which $5.7 million
was sold to Allied Capital Corporation and $7.3 million 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
392,506 shares of common stock at an exercise price of $3.205 per share. In
accordance with the terms the warrants, 130,835 of these warrants were
repurchased when the subordinated debentures were repaid prior to June 30, 2000.
4. In connection with the Company's acquisition of several businesses in
1998 and 1997, the Company had a total obligation of $10.8 million under notes
issued to the former owners. Of the $10.8 million, $8.1 million was repaid as
part of the February 4, 2000 refinancing above described and $2.7 million was
exchanged for 604,504 shares of FTI common stock, valued at $4.44 per share. The
issuance of the shares was exempt from registration under Section 4(2) of the
1933 Act.
20
<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 three months ended March 31, 2000
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on February 15, 2000, regarding
the Company's acquisition of P&M and refinancing of its indebtedness. On April
6, 2000, the Company amended the foregoing Report to add financial statements of
P&M and pro forma financial information.
21
<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: May 12, 2000 By /s/ Theodore I. Pincus
----------------------
THEODORE I. PINCUS
Executive Vice President, Chief Financial Officer
(principal financial and accounting officer) and
Secretary
22
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