<PAGE>
As filed with the Securities and Exchange Commission on September 6, 2000
Registration No. 333-__________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
FORM S-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
__________________________
FTI CONSULTING, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 52-1261113
(State of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
2021 Research Drive
Annapolis, MD 21401
(410) 224-8770
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Jack B. Dunn, IV
Chief Executive Officer and Chairman
2021 Research Drive
Annapolis, MD 21401
(410) 224-8770
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of all communications, including all communications sent to the agent for
service, should be sent to:
<TABLE>
<S> <C>
Richard C. Tilghman, Jr., Esquire Scott C. Penwell, Esquire
Piper Marbury Rudnick & Wolfe LLP Duane, Morris & Heckscher LLP
6225 Smith Avenue 305 North Front Street
Baltimore, Maryland 21209 5/th/ Floor, P. O. Box 1003
(410) 580-3000 Harrisburg, Pennsylvania 17108-1003
(717) 237-5500
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(A)(1)
of this Form, check the following box: [_]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_] ______________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_] ________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_] _________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==============================================================================================================================
Proposed Maximum Maximum Amount
Amount To Be Offering Price Per of Aggregate Offering
Title of Securities To Be Registered Registered (1) Share (2) Offering Price Registration Fee
==============================================================================================================================
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share 5,117,500 $9.34 $47,797,450 $12,619
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 667,500 shares that the underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for purposes of computing the amount of the registration
fee pursuant to Rule 457 under the Securities Act. Based upon the average
of the low and high prices of our Common Stock as reported on the American
Stock Exchange on September 1, 2000.
___________________________
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Subject to Completion
Preliminary Prospectus dated September 6, 2000
4,450,000 Shares
FTI/Consulting
Common Stock
_______________
We are selling 3,000,000 of the shares of common stock offered under this
Prospectus, and the selling stockholders are selling 1,450,000 shares. Our
common stock is listed on the American Stock Exchange under the symbol "FCN." On
September 6, 2000, the last reported sale price of our common stock on the
American Stock Exchange was $9.19 per share.
____________________________
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
<TABLE>
<CAPTION>
Per Share Total
--------------- -----------------
<S> <C> <C>
Public offering price.................................... $ $
Underwriting discounts and commissions................... $ $
Proceeds to FTI Consulting, Inc.......................... $ $
Proceeds to our selling stockholders..................... $ $
</TABLE>
We and some of the selling stockholders have granted the underwriters the right
to purchase up to 667,500 additional shares of common stock to cover any over-
allotments.
____________________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is a
criminal offense.
____________________________
ING Barings Janney Montgomery Scott LLC
The date of this Prospectus is September __, 2000
<PAGE>
SUMMARY
This summary highlights selected information from this Prospectus. It may
not contain all the information that is important to you. To understand this
offering fully, you should carefully read the entire Prospectus, including the
risk factors and our financial statements and the related notes. In this
Prospectus, "we," "us" and "our" refer to FTI Consulting, Inc. and its
subsidiaries, unless the context requires otherwise. References to "Policano &
Manzo" or "P&M" refer to Policano & Manzo, L.L.C., which we acquired on February
4, 2000.
Our Business
We are a multi-disciplined consulting firm with leading practices in the
areas of financial restructuring, litigation consulting and engineering and
scientific investigation. Modern companies, as well as those who advise and
invest in them, face growing challenges on every front. From a proliferation of
"bet-the-company" litigation to increasingly complicated relationships with
lenders and investors in an ever-changing global economy, U.S. companies are
increasingly turning to outside experts and consultants to deal with these
complex issues. We are dedicated to helping companies and their advisors,
lawyers, lenders and investors meet these challenges by providing a broad array
of the highest quality professional services from a single source.
Our clients are companies, law firms, financial institutions and insurance
companies. They use our services in a wide range of venues, including bankruptcy
and financially distressed company turnaround or workout situations; litigation;
regulatory, rate making and legislative proceedings; mergers, acquisitions and
divestitures; and quality control. In 1999, we and P&M worked for over 1,900
clients, including:
. 1,139 law firms, 60 of which were rated among the top 100 law firms
(based on 1998 U.S. revenues as measured by American Lawyer magazine);
. 198 industrial clients, 75 of which were among the Fortune 500 in
1999;
. 22 of the 25 largest banks located in the U.S. (also listed among the
Fortune 500 in 1999); and
. 447 insurance companies, 61 of which were among the top 100 property
and casualty insurers (as reported by A.M. Best Company in 1999).
We have organized our business into the following three divisions:
. Our Financial Consulting division serves both financially distressed
companies and financial institutions that are regularly involved in
litigation or regulatory, bankruptcy or other proceedings. These
companies and institutions typically require extensive, highly
specialized, long-term advisory services. For companies and
institutions in regulated industries, we provide expert testimony,
cost benefit analysis, damage assessment, market competition analysis
and business valuations. In bankruptcies, restructurings and other
financial distress situations, or alleged irregularities or, in the
case of professional firms, malpractice, we provide companies or their
creditors with business and strategic plan development and forensic
accounting services. This division generated about 39% of our total
pro forma revenues in 1999 and has become our most profitable
division.
. Our Litigation Consulting division advises clients in all phases of
litigation, including discovery, jury selection, trial preparation and
the actual trial. The division also provides visual communications
services, such as animation, image enhancement and computer simulation
to improve trial presentation. This division generated about 27% of
our total pro forma revenues in 1999.
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<PAGE>
. Our Applied Sciences division offers forensic engineering and
scientific investigation services. These services include accident
reconstruction, fire investigation and product failure analysis. The
division also provides quality control services, including assessment
of preventive measures relating to product design and evaluations of
the causes of product failures. This division generated about 34% of
our total pro forma revenues in 1999.
Policano & Manzo Acquisition
On February 4, 2000, we completed the purchase of all of the membership
interests of Policano & Manzo, one of the leading financial consulting firms in
the United States. Policano & Manzo specializes in providing financial
restructuring, advisory and forensic accounting services to the workout and
bankruptcy community. These services are provided on a nationwide basis to
financially distressed companies, creditors, investors and other interested
parties. We acquired the membership interests from Messrs. Policano and Manzo
for total consideration of $54.9 million in cash, shares of our common stock and
acquisition related expenses. Messrs. Policano and Manzo continue to serve as
executive officers of the acquired business.
Industry Overview
The markets we serve consist primarily of legal proceedings, distressed
company and bankruptcy matters and engineering and scientific investigation. As
competition continues to drive companies to concentrate on their core
businesses, they are increasingly turning to outside specialists in these
markets.
This is particularly true in highly complex and sophisticated areas such as
high-stakes legal proceedings where outsourcing work to specialized firms
provides a greater level of expertise and increased cost efficiency. Currently,
the market for legal services in the U.S. exceeds $100 billion, according to
U.S. Bureau of Census statistics. We expect this market to grow as rising
litigation costs and the risks of incurring large monetary judgments continue to
drive most companies to focus on improved management of the litigation process.
Increasingly, companies, financial institutions and law firms are turning to
external litigation consultants to assist their internal legal staffs in their
management of the litigation process.
The turnaround and restructuring market is rapidly growing as debt markets
expand, more speculative debt is issued and defaults increase. We attribute much
of the debt market expansion to the restructurings of entire industries, even
during periods of growth in the overall economy. During the current business
cycle, many companies have greatly increased their use of leverage in order to
finance internal growth and accommodate external acquisitions. In turn, this
rise in leverage has forced less competitively viable companies into debt
default and often bankruptcy.
Demand for specialized litigation and forensic engineering services is also
being driven by emerging trends, including a greater emphasis on loss and injury
prevention by insurance companies and manufacturers, significant advances in
technology and decreases in technology costs. Decreases in technology costs have
recently provided a cost-effective basis for the use of sophisticated computer-
driven analysis.
Our Strategy
We believe that we are the established leader in consulting to companies
and their creditors facing adverse circumstances. Our goal is to expand our lead
by continuing to anticipate our clients' needs and provide a range of high-
quality consulting services to meet those needs. Success in this marketplace
depends on reputation, service capacity, in some cases geographic location and
to a lesser degree price. The following are the key elements of our business
strategy:
. Leverage Our Reputation for High Quality Consulting Services. We
believe that size and reputation are critical elements in the
purchasing decisions of companies, law firms, financial institutions
and
2
<PAGE>
insurance companies. We believe we can continue to successfully
leverage our reputation, experience and client base to obtain new
engagements from both existing and new clients.
. Retain and Attract Highly Qualified Professionals. Our professionals
are crucial to delivering our services to clients and generating new
business. We are committed to retaining our existing professionals and
continuing to aggressively recruit additional professionals.
. Capitalize on Our Nationwide Network of Offices. We have established a
nationwide network of 33 offices that enables us to leverage our
operations in key geographic markets. We believe that we have a
competitive advantage because we can provide services to large
geographically diverse corporations, bid for engagements on a
nationwide basis and attract highly qualified professionals.
. Expand the Range of Our Services. We will continue to anticipate our
clients' growing needs for expert services and expand our services to
meet their needs. By expanding the range of our capabilities and
integrating them with existing services, we can continue to position
ourselves to provide more broad-based services to our clients.
. Continue to Expand the Use of Technology in Litigation Consulting. We
will continue to develop and apply new technology to improve the cost-
effectiveness of our services and to maintain our competitive edge. We
are also focusing on taking advantage of the efficiencies of the
Internet to improve information exchange and reduce costs throughout
the entire litigation process. Our recently introduced secure extranet
service provides more solutions to the challenges of the increasing
complexity of high stakes, multi-district litigation.
. Selectively Acquire Companies to Obtain New Professionals and
Capabilities. We will continue to build on our record of successfully
identifying, executing and integrating strategic acquisitions. Since
1997, we have made six acquisitions that have enhanced our position as
the leader in consulting to companies facing adverse circumstances. We
will continue to selectively pursue strategic acquisitions that
provide new, highly qualified professionals and capabilities that
complement our existing service offerings.
Our Company
We were incorporated in Maryland in 1982 and completed our initial public
offering of common stock in May 1996. Our executive offices are located at 2021
Research Drive, Annapolis, Maryland 21401. Our telephone number is (410) 224-
8770. Our Web sites are located at www.fticonsulting.com and www.ftiwarroom.net.
Information contained on our Web sites does not constitute part of this
Prospectus.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by us.............................. 3,000,000 shares
Common stock offered by selling
stockholders............................................ 1,450,000 shares
Common stock to be outstanding after
this offering........................................... 10,250,372 shares (1)
Use of proceeds......................................... We intend to use the net proceeds from this offering and
our other financial resources to repay all $30.4 million
of our senior subordinated notes.
American Stock Exchange symbol.......................... FCN
</TABLE>
______________
(1) This number of shares includes 711,025 shares of our common stock we expect
to issue as the result of exercise by some of our selling stockholders of
warrants they currently hold, but the number excludes:
. 3,186,029 shares of our common stock reserved for issuance upon
exercise of outstanding options and 318,283 shares reserved for future
stock option grants under our stock option plans;
. 193,904 shares of our common stock reserved for issuance upon exercise
of other outstanding warrants; and
. up to 667,500 shares of our common stock we will issue if the
underwriters exercise their over-allotment option.
4
<PAGE>
Summary Unaudited Historical and Pro Forma Consolidated Financial and Other Data
The following summary unaudited historical and pro forma consolidated
financial and other data present:
. our audited historical consolidated income statement data for each
of the three years in the period ended December 31, 1999;
. our unaudited historical consolidated income statement data for the
six-month periods ended June 30, 1999 and 2000;
. our unaudited pro forma consolidated income statement data for the
year ended December 31, 1999 and for the six-month period ended June
30, 2000; and
. our unaudited historical and pro forma consolidated balance sheet
data as of June 30, 2000.
Our pro forma consolidated financial data adjust our historical
consolidated financial statements to give effect to the following transactions
as if they occurred on January 1, 1999:
. our acquisition of P&M, including the financing transactions related
to that acquisition;
. the net proceeds from the sale of 3,000,000 shares of our common
stock that we are offering;
. the exercise by some of our selling stockholders in connection with
this offering of 711,025 warrants to purchase common stock at an
average exercise price of $3.97 per share;
. the retirement of $30.4 million of our senior subordinated notes
with the proceeds of the offering and our other financial resources,
including the payment of a $900,000 prepayment penalty and accrued
interest related to these notes; and
. the write-off as an extraordinary loss of $2.5 million of the
unamortized deferred financing costs and $1.2 million of the debt
discount associated with our $30.4 million of senior subordinated
notes that we will retire with the proceeds of the offering and our
other financial resources.
You should also refer to our historical consolidated financial statements,
the historical financial statements of P&M, and our unaudited pro forma
consolidated financial statements, which we have included elsewhere in this
Prospectus.
5
<PAGE>
Summary Unaudited Historical and Pro Forma Consolidated Financial and Other Data
<TABLE>
<CAPTION>
Statement of Income Data: Six Months Ended June 30,
----------------------------
Historical Historical
------------------------------ Pro Forma ---------------- Pro Forma
1997 1998 1999 1999 1999 2000 2000
------ ------- ------- -------- ------- ------- -------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................................... $44,175 $58,615 $84,607 $106,119 $41,273 $65,599 $68,037
Direct cost of revenues....................... 23,564 31,402 44,149 51,747 21,350 32,811 33,761
Selling, general and administrative expenses.. 15,159 20,532 28,829 29,553 14,445 18,211 18,317
Amortization of goodwill...................... 82 996 2,313 4,917 1,139 2,249 2,466
------- ------- ------- -------- ------- ------- -------
Total costs and expenses...................... 38,805 52,930 75,291 86,217 36,934 53,271 54,544
------- ------- ------- -------- ------- ------- -------
Income from operations........................ 5,370 5,685 9,316 19,902 4,339 12,328 13,493
Interest expense, net......................... (173) 1,163 4,014 6,058 1,820 5,494 3,146
Income taxes.................................. 2,250 1,954 2,311 5,899 1,189 3,007 4,483
------- ------- ------- -------- ------- ------- -------
Income before extraordinary item.............. $ 3,293 $ 2,568 $ 2,991 $ 7,945 $ 1,330 $ 3,827 $ 5,864
======= ======= ======= ======== ======= ======= =======
Net income.................................... $ 3,293 $ 2,568 $ 2,991 $ 1,330 $ 2,958
======= ======= ======= ======= =======
Income before extraordinary item per
common share, diluted.................... $ 0.70 $ 0.51 $ 0.59 $ 0.79 $ 0.27 $ 0.55 $ 0.56
======= ======= ======= ======== ======= ======= =======
Net income per common share, diluted.......... $ 0.70 $ 0.51 $ 0.59 $ 0.27 $ 0.43
======= ======= ======= ======= =======
Weighted average shares outstanding, diluted.. 4,698 5,077 5,028 4,895 6,955
======= ======= ======= ======= =======
EBITDA (1).................................... $ 7,111 $ 8,756 $14,012 $ 27,202 $ 6,637 $15,857 $17,242
======= ======= ======= ======== ======= ======= =======
EBITDA margin(2).............................. 16.1% 14.9% 16.6% 25.6% 16.1% 24.2% 25.3%
======= ======= ======= ======== ======= ======= =======
<CAPTION>
Balance Sheet Data: As of June 30, 2000
-------------------------
FTI Pro Forma
Actual As Adjusted
---------- -----------
<S> <C> <C>
Cash and cash equivalents................................................................................. $ 2,992 $ 1,386
Working capital........................................................................................... 22,669 22,379
Total assets.............................................................................................. 152,655 151,746
Total long-term debt, net of discount.................................................................... 87,027 59,938
Stockholders' equity...................................................................................... 45,572 72,371
</TABLE>
_______________________
(1) EBITDA is presented to provide greater comparability between periods as
well as to indicate our results on an ongoing basis. EBITDA refers to
earnings before taxes plus net interest expense and depreciation and
amortization. Because all companies do not calculate EBITDA or similarly
titled financial measures in the same manner, other companies' disclosures
of EBITDA may not be comparable with EBITDA as used here. EBITDA should not
be considered as an alternative to net income or loss (as an indicator of
operating performance) or as an alternative to cash flow (as a measure of
liquidity or ability to service debt obligations) and is not a measure of
performance or financial condition under generally accepted accounting
principles. EBITDA is intended to provide additional information for
evaluating the ability of an entity to meet its financial obligations. Cash
flows in accordance with generally accepted accounting principles consist
of cash flows from (i) operating, (ii) investing and (iii) financing
activities. Cash flows from operating activities reflect net income or loss
(including charges for interest and income taxes not reflected in EBITDA),
adjusted for (i) all non-cash charges or credits (including, but not
limited to, depreciation and amortization) and (ii) changes in operating
assets and liabilities (not reflected in EBITDA). Further, cash flows from
investing and financing activities are not included in EBITDA.
(2) EBITDA margin equals EBITDA as a percentage of revenues for each period
presented.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risks before you decide to buy
our common stock. Our business, financial condition or operating results may
suffer if any of the following risks actually occur. Additional risks and
uncertainties not currently known to us may also adversely affect our business,
financial condition or operating results. If any of these risks or uncertainties
occurs, the trading price of our common stock could decline, and you may lose
all or part of the money you paid to buy our common stock.
We have made statements in this Prospectus and in documents that are
incorporated by reference into this Prospectus that constitute forward-looking
statements, as that term is defined in the Private Securities Litigation Reform
Act of 1995. These statements are subject to risks and uncertainties. These
forward-looking statements generally are accompanied by words such as "intend,"
"anticipate," "believe," "estimate," "expect," "should" or similar expressions.
You should understand that these forward-looking statements are subject to a
number of assumptions, risks and uncertainties that could cause actual results
to differ materially from those expressed or implied in the forward-looking
statements. Important factors that could cause actual results to differ
materially from estimates or projections contained in forward-looking statements
include those described in "Risk Factors."
We depend upon our professionals and outside consultants.
Our business involves the delivery of professional services. Therefore, our
continued success depends upon our ability to retain and expand our staff of
highly skilled professionals and outside consultants. We face intense
competition for highly skilled professionals in our fields of practice. We
cannot assure you that we will be able to retain our key professionals or that
we will be able to attract, assimilate or retain the necessary number of
qualified professionals in the future. We do not have non-competition agreements
with most of our professional staff. This means that these professionals could
resign with little advance notice to join one of our competitors. If we lose the
services of a number of our key professionals or fail to expand our professional
staff, we are unlikely to be able to expand our business and may be unable to
maintain our business at current levels.
We rely heavily on our management team.
We are highly dependent upon our management team, particularly Messrs.
Dunn, Kahn, Baker, Brady, Monheit, Policano, Manzo and Pincus. If we were to
lose any of these persons and were unable to replace them quickly, we could have
difficulty in properly managing our business. This could have a materially
adverse effect on our business prospects and results of operations.
We face significant competition for new business opportunities.
The market for our consulting services is highly competitive, and we face
competition from many other providers of consulting services. Our competitors
range from large organizations, such as the national accounting firms and the
large management consulting companies that offer a full range of consulting
services, to small firms and independent contractors that provide only one
specialized service. Some of our competitors have significantly more financial
and marketing resources, larger professional staffs or are more widely
recognized. There are few barriers to entry into the consulting business. As the
number of our competitors increases, we cannot assure that we will be able to
continue to compete successfully for new business opportunities or retain our
existing clients.
We are subject to the risk of professional liability.
Many of our engagements involve complex analysis and the exercise of
professional judgment. As a result, we are subject to the risk of professional
liability. Often, our engagements involve matters that, if resolved unfavorably,
may have a severe impact on the client's business, cause the client a
substantial monetary loss or prevent the client from pursuing business
opportunities. Therefore, if we fail to perform to the client's satisfaction,
the client may threaten or bring a lawsuit against us, claiming we performed
negligently or otherwise breached our obligations to the client. Any claim by a
client against us could expose us to liability in excess of our insurance limits
and could severely injure our reputation.
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<PAGE>
We may have trouble finding suitable acquisition candidates and difficulty
financing potential acquisitions.
A number of our competitors also have adopted a strategy of expanding and
diversifying through acquisitions of other consulting firms. We experience
competition, therefore, in our effort to execute our acquisition strategy, and
we expect the level of competition to increase in the future. As a result, we
may be unable to continue to make acquisitions or may be forced to pay more for
companies we are able to acquire. In such an event, we may be unable to grow our
business as quickly as we have in the past, and our profitability may decline.
Our ability to grow our business, particularly through acquisitions, may
depend on our ability to raise capital through the issuance of additional equity
or debt. We cannot be sure, however, that we will be able to raise equity or
obtain debt financing when we need it or on terms acceptable to us. If we
cannot, we may have to curtail our planned growth and not pursue acquisition
opportunities.
Our professional reputation is critical to our business.
We depend upon our reputation and the individual reputations of our
professionals to obtain new client engagements and attract and retain highly
qualified professionals. We obtain a substantial number of new engagements from
existing clients or through referrals from existing clients. Therefore, we may
have difficulty in competing for new engagements if our existing clients become
dissatisfied with our performance. Further, any factor that diminishes our
reputation or the reputations of our personnel may make it more difficult for us
to compete successfully for either new engagements or qualified professionals.
P&M was a substantial acquisition for us.
In February 2000, we completed the P&M acquisition. This acquisition was
substantial when comparing P&M's revenues and profits in 1999 to ours. Although
we believe we have nearly completed the integration of P&M into our business, we
have not yet realized all the benefits we expect to achieve from the
acquisition. We cannot assure you that we will ever realize these benefits. Our
management team's attention may be diverted from seeking new acquisitions or
other business opportunities if they are forced to devote significant time to
enhancing client recognition of P&M's service offerings or integrating future
acquisitions. This could have a materially adverse effect on our business
prospects and results of operations.
We must successfully manage the growth of our business.
We have experienced rapid growth in recent years, including six
acquisitions since 1997. We plan to continue to rapidly expand our business,
which may strain our management, human resources and information systems. To
successfully manage our growth, we must add managers and employees and
periodically update our operating, financial and other systems, procedures and
controls. We also must effectively motivate, train and manage a larger
professional staff. If we fail to manage our growth effectively, our business,
results of operations and financial condition are likely to be adversely
affected.
Our revenues, operating income and cash flow are likely to fluctuate.
We have experienced fluctuating revenues, operating income and cash flow in
some prior periods and expect this may occur from time to time in the future. We
may experience future fluctuations because of the timing of our client
assignments and the type of assignments we are working on at different times.
This means our profitability is likely to be lower if we experience an
unexpected variation in the number or timing of client assignments. Also, the
timing of future acquisitions and the cost of integrating them may cause similar
fluctuations in our operating results.
Our business is seasonal.
We experience a reduced level of business during a portion of the third
quarter primarily because courts usually recess during these months. Also, many
members of our professional staff and key contacts at our clients take vacations
during the summer.
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<PAGE>
We operate with a substantial amount of debt.
Our total indebtedness as of July 31, 2000 was about $89.0 million. After
using the proceeds of this offering as described in the section of this
Prospectus entitled "Use of Proceeds" to repay some of our debt, we still will
owe about $59.9 million. Our pro forma EBITDA was $17.2 million for the six-
month period ended June 30, 2000, and our pro forma stockholders' equity, as
adjusted for this offering, was $72.4 million as of June 30, 2000.
Operating with a high amount of leverage could require us to dedicate a
substantial portion of our cash flow from operations to payments on our debt,
thereby reducing funds available for operations, future business opportunities,
capital expenditures, acquisitions or other purposes, and limit our flexibility
in planning for, or reacting to, changes in our business and our industry.
We have $93.7 million of goodwill and other intangible assets and a deficit in
our tangible net worth.
Our intangible assets, net of accumulated amortization, were about $93.7
million as of June 30, 2000, and our stockholders' equity was $45.6 million.
This means that we had a $48.1 million deficit in our tangible net worth. All of
our intangible assets are goodwill related to our acquisitions, including the
$52.2 million of goodwill we recorded from our purchase of P&M.
We are amortizing our intangible assets on a straight-line basis over 15 to
25 years. This amortization in any particular period constitutes a non-cash
expense that reduces our income. Also, we are required to periodically evaluate
the recoverability of this goodwill. If this goodwill becomes impaired, we may
be required to write down its carrying value and incur additional charges
against our income. This could have a materially adverse affect on our business,
operating results and financial condition.
Our Litigation Consulting Division is subject to technological change.
We regularly develop solutions for our clients by using information
technology, electronic document management techniques, the Internet and other
state-of-the art technology. Many of these technologies have only recently
emerged, will rapidly change and may become obsolete as new technologies appear.
Our future success will depend upon the ability of our professionals to remain
current with the rapid changes in the technologies we use in our business and to
learn quickly to use new technologies as they emerge. If our professionals fail
to do this, we could be at a competitive disadvantage. Our competitors may gain
exclusive access to improved technology, which also could put us at a
competitive disadvantage. There may be changes in our clients' or prospective
clients' preferences for technology solutions. If we cannot adapt to these
changes, our business, results of operations and financial condition are likely
to be adversely effected.
Our stock price may be volatile.
Since our initial public offering in May 1996, our common stock has
experienced periods of significant price volatility. We expect that the market
price of our common stock will continue to fluctuate in the future in response
to many factors, including those identified in this section as risk factors.
These fluctuations may be exaggerated if the trading volume of our common stock
is low. Also, the stock market periodically experiences extreme price and volume
fluctuations that affect the price of the stocks of many consulting firms. These
fluctuations often are unrelated to the operating performance of these firms.
Therefore, the market price of our common stock may fluctuate.
Future sales of our common stock in the public market could lower our stock
price.
Sales of substantial amounts of our common stock in the public market
following this offering, or the appearance that a large number of shares is
available for sale, may adversely affect the market price of our common stock.
After the offering, we will have 10,250,372 shares of common stock outstanding,
assuming no exercise of the underwriters' over-allotment option. Of these
shares, 9,095,882 shares will be freely tradable under the Securities Act,
unless acquired by one of our "affiliates," as that term is defined in Rule 144.
The remaining 1,154,490 shares will be tradable, subject to the restrictions of
Rule 144.
We have reserved for issuance an additional 193,904 shares of common stock
issuable upon the exercise of outstanding warrants (at exercise prices ranging
from $3.21 to $4.44 per share). We have not registered the shares issuable upon
exercise of these warrants. Therefore, shares issued upon the exercise of these
warrants will have to be held for one year or registered under the Securities
Act prior to sale of these shares, 78,871 shares are subject to demand
registration rights.
We have reserved for issuance an additional 3,169,029 shares of common
stock issuable upon exercise of outstanding stock options (at exercise prices
ranging from $2.38 to $19.59 per share). All of the shares of common stock
issuable upon the exercise of the stock options will be freely tradable upon
issuance as such shares are registered under a registration statement filed
under the Securities Act.
Our directors, executive officers and selling stockholders will agree with
the underwriters not to sell or otherwise dispose of any of their shares for 90
days after the date of this Prospectus without the prior written consent of ING
Barings.
9
<PAGE>
USE OF PROCEEDS
We estimate that we will receive about $27.7 million of net proceeds from
our sale of the 3,000,000 shares of our common stock we are offering by this
Prospectus, assuming an offering price of $10.00 per share (after deducting
underwriting discounts and commissions and estimated offering expenses). If the
underwriters exercise their over-allotment option in full, we estimate that we
will receive about $3.6 million of net proceeds. We also expect to receive about
$2.8 million from the exercise of warrants by some of our selling stockholders
immediately before the closing of this offering.
Our current outstanding aggregate principal indebtedness owed on our senior
subordinated notes is $30.4 million. We used the proceeds from our senior
subordinated notes, together with the proceeds from another loan, to refinance
our then existing indebtedness and to purchase P&M.
We intend to use all of the net proceeds to us from this offering and the
exercise of warrants and our other financial resources to repay all of our
senior subordinated notes. We will pay the accrued interest on our senior
subordinated notes and the $900,000 prepayment penalty on our senior
subordinated notes from our other financial resources. Our senior subordinated
notes bear interest at 12% per year, payable semi-annually in cash, and 5% per
year, payable semi-annually in additional senior subordinated notes. If not
prepaid, our senior subordinated notes will mature on January 31, 2007.
Pending these uses, we will invest the net proceeds in investment-grade,
interest-bearing instruments.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has been listed on the American Stock Exchange under the
symbol "FCN" since March 9, 1999. Prior to that time, our common stock was
listed on the Nasdaq National Market under the symbol "FTIC." The following
table shows the high and low sales price per share for our common stock for the
periods shown, as reported by the American Stock Exchange since March 9, 1999,
and by the Nasdaq National Market before that date.
<TABLE>
<CAPTION>
High Low
--------- -----------
<S> <C> <C>
1997
First Quarter................................... $ 9.75 $ 5.50
Second Quarter.................................. 8.00 5.63
Third Quarter................................... 9.50 6.75
Fourth Quarter.................................. 14.75 9.00
1998
First Quarter................................... 16.25 10.00
Second Quarter.................................. 20.75 13.50
Third Quarter................................... 17.19 4.00
Fourth Quarter.................................. 8.38 2.38
1999
First Quarter................................... 4.25 2.56
Second Quarter.................................. 5.88 2.88
Third Quarter................................... 6.13 4.50
Fourth Quarter.................................. 6.38 3.75
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C>
2000
First Quarter................................ 7.75 4.75
Second Quarter............................... 11.50 6.63
Third Quarter (through September
6, 2000)..................................... 11.63 9.13
</TABLE>
As of June 30, 2000, there were about 112 holders of record of our common
stock and we believe there were about 2,600 beneficial owners.
We have never paid cash dividends on our common stock, and we do not intend
to pay dividends in the foreseeable future. Our existing senior credit facility
does not allow us to pay cash dividends, and we expect to retain any future
profits to repay existing debt and finance our operations for the foreseeable
future.
11
<PAGE>
Capitalization
The following table shows our capitalization as of June 30, 2000:
. on an actual basis; and
. on a pro forma as adjusted basis to:
. reflect the sale of the 3,000,000 shares of our common
stock we are offering under this Prospectus at an assumed
offering price of $10.00 per share, with net proceeds to us
of about $27.7 million, after estimated underwriting
commissions and expenses;
. reflect the exercise of warrants to purchase 711,025 shares
of our common stock at an average exercise price of $3.97
per share;
. retire $30.4 million of our senior subordinated notes and
pay the prepayment penalty and the accrued interest on
these notes; and
. write-off the $2.5 million of unamortized deferred
financing costs and $1.2 million of debt discount
associated with our $30.4 million of senior subordinated
notes.
You should also refer to our historical consolidated financial statements
and our unaudited pro forma consolidated financial statements, which we have
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
As of June 30, 2000
------------------------------------------
Pro Forma
Actual As Adjusted
------------------- -----------------
(in thousands, except
share amounts)
<S> <C> <C>
Cash and cash equivalents...................................................... $ 2,992 $ 1,386
======== ========
Term loans due through 2006.................................................... $ 59,938 $ 59,938
Senior subordinated notes due 2007, net of discounts........................... 27,089 --
-------- --------
Total debt, net of discounts................................................... 87,027 59,938
Less current portion........................................................ (4,750) (4,750)
-------- --------
Total long-term debt.................................................. 82,277 55,188
-------- --------
Stockholders' equity:
Preferred stock, $0.01 par value, 4,000,000 shares
authorized, no shares issued and outstanding,
actual and pro forma as adjusted......................................... -- --
Common stock, $0.01 par value, 16,000,000 shares
authorized, 6,465,968 shares issued and
outstanding, actual and 10,176,993 shares outstanding, pro forma as
adjusted................................................................. 65 102
Additional paid-in capital.................................................. 30,543 59,959
Retained earnings........................................................... 14,964 12,310
-------- --------
Total stockholders' equity............................................ 45,572 72,371
-------- --------
Total capitalization............................................... $127,849 $127,559
======== ========
</TABLE>
12
<PAGE>
Unaudited Pro Forma Consolidated Financial Statements
Effective on January 31, 2000, we acquired the membership interests of P&M.
The purchase price totaled about $54.9 million, consisting of $48.3 million in
cash, 815,000 shares of our common stock valued at $5.5 million and acquisition
related expenses of $1.1 million. The acquisition was accounted for using the
purchase method of accounting and about $52.2 million of goodwill was recorded
and is being amortized over its estimated useful life of 20 years.
The following unaudited pro forma consolidated financial statements show
for the periods presented:
. the effects of our acquisition of P&M;
. the sale of 3,000,000 shares of our common stock in the offering and the
exercise of warrants to purchase 711,025 shares of our common stock in
connection with the offering; and
. the application of the net proceeds to us from the offering and our
other financial resources to retire all of our senior subordinated
notes.
The pro forma consolidated statements of income for the year ended December
31, 1999 and the six months ended June 30, 2000 assume that the acquisition of
P&M and the retirement of the senior subordinated notes with the proceeds of
this offering both occurred on January 1, 1999. The pro forma consolidated
balance sheet as of June 30, 2000 assumes that the offering and the application
of the proceeds to retire our senior subordinated notes occurred on June 30,
2000. The pro forma adjustments are described in the accompanying notes and are
based upon available information and various assumptions that management
believes are reasonable.
The unaudited pro forma consolidated financial statements do not purport to
represent what our financial position and results of operations would actually
have been had these transactions occurred on the dates indicated. The unaudited
pro forma consolidated financial statements should be read in conjunction with
our historical consolidated financial statements and the historical financial
statements of P&M, included elsewhere in this Prospectus, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
13
<PAGE>
Unaudited Pro Forma Consolidated Statements of Income
<TABLE>
<CAPTION>
Six months ended June 30, 2000
-------------------------------------------------------------------------
Historical Pro Forma Pro Forma
FTI P&M* Total Adjustments As Adjusted
----- ------ ------- ----------- -----------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues.............................................. $65,599 $ 2,438 $ 68,037 $ 68,037
Direct cost of revenues............................... 32,811 892 33,703 $ 58 (1) 33,761
Selling, general and administrative expenses.......... 18,211 106 18,317 18,317
Amortization of goodwill.............................. 2,249 - 2,249 217 (2) 2,466
------- ------- -------- ------- --------
Total costs and expenses.............................. 53,271 998 54,269 275 54,544
------- ------- -------- ------- --------
Income from operations................................ 12,328 1,440 13,768 (275) 13,493
Interest expense, net................................. 5,494 - 5,494 483 (3) 3,146
97 (4)
------- ------- -------- (2,928)(A)
Income before income taxes and extraordinary item..... 6,834 1,440 8,274 ------- --------
2,073 10,347
Income taxes.......................................... 3,007 - 3,007 246 (5)
------- ------- -------- 1,230 (B) 4,483
Income before extraordinary item...................... $ 3,827 $ 1,440 $ 5,267 ------- --------
======= ======= ======== $ 597 $ 5,864
======= ========
Income before extraordinary item per
common share, basic.................................. $ 0.62 $0.58
======= ========
265 (6)
Weighted average shares outstanding, basic............ 6,139 3,711 (C) 10,115
======= ======= ========
Income before extraordinary item per
common share, diluted................................. $ 0.55 $0.56
======= ========
278 (6)
Weighted average shares outstanding, diluted.......... 6,955 3,326 (C) 10,559
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1999
----------------------------------------------------------------------
Historical Pro Forma Pro Forma
FTI P&M Total Adjustments As Adjusted
----- ------- ------- ------------ -----------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues.................................................. $84,607 $21,512 $106,119 $106,119
Direct cost of revenues................................... 44,149 6,898 51,047 $ 700 (1) 51,747
Selling, general and administrative expenses.............. 28,829 724 29,553 29,553
Amortization of goodwill.................................. 2,313 - 2,313 2,604 (2) 4,917
------- ------- -------- ------- -------
Total costs and expenses.................................. 75,291 7,622 82,913 3,304 86,217
------- ------- -------- ------- -------
Income from operations.................................... 9,316 13,890 23,206 (3,304) 19,902
Interest expense, net..................................... 4,014 - 4,014 6,731 (3) 6,058
1,169 (4)
------- ------- -------- (5,856) (A)
Income before income taxes and extraordinary item......... 5,302 13,890 19,192 ------- -------
(5,348) 13,844
Income taxes.............................................. 2,311 - 2,311 1,128 (5)
------- ------- -------- 2,460 (B) 5,899
------- -------
Income before extraordinary item.......................... $ 2,991 $13,890 $ 16,881 $(8,936) 7,945
======= ======= ======== ======= =======
Income before extraordinary item per
common share, basic....................................... $0.61 $ 0.79
======= 1,420 (6) ======
3,711 (C) 10,003
Weighted average shares outstanding, basic................ 4,872 ======= ======
=======
Income before extraordinary item per
common share, diluted.................................... $ 0.59 $ 0.79
======= =======
1,420 (6)
Weighted average shares outstanding, diluted.............. 5,028 3,619 (C) 10,067
======= ======== =======
</TABLE>
___________________________
*Amounts for P&M are for the month ended January 31, 2000.
14
<PAGE>
Pro forma adjustments related to the acquisition of P&M
(1) Adjustment to record additional compensation expense for P&M employees. In
connection with the acquisition of P&M, we entered into four-year employment
contracts with the former members of P&M. The pro forma adjustment assumes
that the members had received compensation in 1999 as provided for by these
employment contracts. These former members previously received distributions
of profits in lieu of compensation.
(2) Adjustment to reflect the amortization of $52.2 million of goodwill recorded
upon the acquisition of P&M. This goodwill is being amortized over a 20-year
period.
(3) Adjustment to reflect incremental increases in interest expense resulting
from the acquisition of P&M. In February 2000, we borrowed $91.0 million to
acquire P&M and to refinance $41.2 million of other debt. The average
interest rate associated with the $91.0 million of borrowings is
approximately 12%, as compared to approximately 8.8% for the retired debt.
(4) Adjustment to record the amortization of deferred financing costs and debt
discount arising from the issuance of warrants in connection with the
acquisition of P&M. The deferred financing costs and debt discount are being
amortized over the average 6.5-year term of the related debt.
(5) Adjustment to record pro forma income tax expense for (i) the operations of
P&M for which no taxes were provided in the historical financial statements
because P&M was organized as a limited liability company and (ii) the
estimated tax effects of pro forma adjustments, all at the combined federal
and state statutory income tax rate of approximately 42%.
(6) Adjustment to record the additional shares of common stock issued in
connection with the acquisition of P&M and the related February 2000 debt
refinancing. We issued 815,000 shares of common stock in connection with the
acquisition of P&M and 604,504 shares of common stock in exchange for $2.7
million of outstanding notes.
Pro forma adjustments related to the offering and the use of proceeds
(A) Adjustment to record the reduction of interest expense and other financing
costs resulting from the retirement of $30.4 million of senior subordinated
notes.
(B) Adjustment to record the additional income tax expense resulting from
reducing our interest expense upon the retirement of the $30.4 million of
senior subordinated notes. We have estimated the increase in our income tax
expense using the combined federal and state statutory income tax rates of
approximately 42%.
(C) Adjustment to record the effect of the offering and the warrant exercise on
our outstanding shares used in calculating basic and diluted earnings per
common share.
15
<PAGE>
Unaudited Pro Forma Consolidated Balance Sheet
June 30, 2000
<TABLE>
<CAPTION>
Pro Forma Adjustments
------------------------ Pro Forma
Actual Debit Credit As Adjusted
-------- -------- ----------- ---------------
(amounts in thousands)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................................ $ 2,992 $30,525 (1) $32,131 (2) $ 1,386
Accounts receivable, net of allowance for doubtful accounts...... 25,020 25,020
Unbilled receivables, net of allowance for doubtful accounts..... 15,168 15,168
Income tax receivable............................................ 446 1,922 (2) 2,368
Prepaid expenses and other current assets........................ 2,516 1,225 (2) 1,291
------- ------- ------- --------
Total current assets.............................................. 46,142 32,447 33,356 45,233
Property and equipment, net....................................... 8,890 8,890
Goodwill, net of accumulated amortization......................... 93,702 93,702
Other assets...................................................... 3,921 3,921
------- ------- ------- --------
Total assets...................................................... $152,655 $32,447 $33,356 $151,746
======= ======= ======= ========
Liabilities and stockholders' equity
Current liabilities:..............................................
Accounts payable and accrued expenses............................ 10,366 $ 619 (2) $ 9,747
Current portion of long-term debt................................ 4,750 4,750
Advances from clients and other.................................. 6,902 6,902
Other liabilities................................................ 1,455 1,455
------- ------- ------- --------
Total current liabilities......................................... 23,473 619 - 22,854
------- ------- ------- --------
Long-term debt, less current portion and net of discounts......... 82,277 30,611 (2) 3,522 (2)(3) 55,188
Deferred income taxes and other liabilities....................... 1,333 1,333
Stockholders' equity
Preferred stock.................................................. - -
Common stock..................................................... 65 37 (1) 102
Additional paid-in capital....................................... 30,543 1,071 (3) 30,487 (1) 59,959
Retained earnings................................................ 14,964 2,654 (2) 12,310
------- ------- ------- --------
Total stockholders' equity........................................ 45,572 3,725 30,524 72,371
------- ------- ------- --------
Total liabilities and stockholders' equity........................ $152,655 $34,955 $34,046 $151,746
======= ======= ======= ========
</TABLE>
--------------
Pro forma adjustments to the unaudited pro forma consolidated balance sheet at
June 30, 2000 consist of:
(1) Adjustment for the assumed net proceeds from our offering of 3,000,000
shares of our common stock and the exercise of warrants to purchase 711,025
shares of our common stock. We expect to receive $30.5 million of net
proceeds from the offering, consisting of $30.0 million from the sale of
3,000,000 shares of our common stock for $10.00 per share and $2.8 million
from the exercise of warrants, reduced by $2.3 million of estimated offering
expenses.
(2) Adjustment for the application of our net proceeds of the offering. Our
estimated net proceeds of $30.5 million from this offering and the exercise
of warrants by the selling stockholders and existing cash of $1.6 million
will be used to retire our senior subordinated notes. In addition to
retiring the $30.4 million of principal, we will also pay accrued interest
on those notes of $877,000 and pay a prepayment penalty of $900,000. As a
result of retiring our senior subordinated notes prior to maturity, we will
incur an extraordinary loss of $2.7 million, net of the related income tax
benefit of $2.0 million. This loss will result from the write-off of $3.7
million of unamortized deferred financing costs and debt discount, and the
prepayment penalty of $900,000 that we incurred.
(3) Adjustment to write off $1.1 million of debt discount to additional paid-in
capital. This debt discount was associated with warrants to purchase 711,025
shares of our common stock that are being exercised in connection with the
offering.
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data are derived from our consolidated
financial statements. Our financial statements for the years ended December 31,
1995 through 1999 have been audited by Ernst & Young LLP. Our financial
statements for the six months ended June 30, 1999 and 2000 have not been
audited, but we believe they contain all adjustments necessary for a fair
presentation of our financial position and our results of operations for the
periods presented. Operating results for the six months ended June 30, 2000 are
not necessarily indicative of the results that we expect for all of 2000. The
data below should be read with our consolidated financial statements and related
notes thereto and "Management's Discussion and Analysis of Results of Operations
and Financial Condition."
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
------------------------------------------------------------ ---------------------
1995 1996 1997 (4) 1998 (5) 1999 1999 2000 (6)
---------- ------- -------- -------- ------- ------- ---------
(in thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues.................................... $ 23,381 $30,648 $ 44,175 $ 58,615 $84,607 $41,273 $ 65,599
Direct cost of revenues..................... 11,366 17,020 23,564 31,402 44,149 21,350 32,811
Selling, general and administrative
expenses................................. 9,887 10,786 15,241 21,528 31,142 15,584 20,460
-------- ------- -------- -------- ------- ------- --------
Total costs and expenses.................... 21,253 27,806 38,805 52,930 75,291 36,934 53,271
-------- ------- -------- -------- ------- ------- --------
Income from operations...................... 2,128 2,842 5,370 5,685 9,316 4,339 12,328
Other income (expense)...................... (222) 107 173 (1,163) (4,014) (1,820) (5,494)
-------- ------- -------- -------- ------- ------- --------
Income from continuing operations
before income taxes...................... 1,906 2,949 5,543 4,522 5,302 2,519 6,834
Income taxes................................ 779 1,235 2,250 1,954 2,311 1,189 3,007
-------- ------- -------- -------- ------- ------- --------
Income from continuing operations........... 1,127 1,714 3,293 2,568 2,991 1,330 3,827
Loss from operations of discontinued
operations, net of tax (1)................. (65) - - - - - -
Loss on disposal of discontinued
operations, net of tax(1)................. (365) - - - - - -
-------- ------- -------- -------- ------- ------- ---------
Income before extraordinary item............ 697 1,714 3,293 2,568 2,991 1,330 3,827
Extraordinary loss on early extinguishment
of debt, net of income taxes................ - - - - - - 869
-------- ------- -------- -------- ------- ------- ---------
Net income.................................. 697 1,714 3,293 2,568 2,991 1,330 2,958
Preferred stock dividends................... 125 62 - - - - -
-------- ------- -------- -------- ------- ------- --------
Income available to common
stockholders.............................. $ 572 $ 1,652 $ 3,293 $ 2,568 $ 2,991 $ 1,330 $ 2,958
======== ======= ======== ======== ======= ======= ========
Earnings per common share:
Basic..................................... $ 0.27 $ 0.46 $ 0.73 $ 0.54 0.61 $ 0.28 $ 0.48
Diluted................................... $ 0.24 $ 0.42 $ 0.70 $ 0.51 0.59 $ 0.27 $ 0.43
Weighted average shares outstanding,
basic..................................... 2,158 3,591 4,529 4,725 4,872 4,829 6,139
Weighted average shares outstanding,
diluted................................... 3,316 4,174 4,698 5,077 5,028 4,895 6,955
Other Data:
Capital expenditures...................... $ 1,609 $ 1,672 $ 2,800 $ 3,327 $ 3,093 $ 1,316 $ 1,699
Depreciation and amortization............. 659 862 1,741 2,981 4,696 2,441 3,529
EBITDA (2)................................ 2,787 3,705 7,111 8,756 14,012 6,637 15,857
EBITDA margin (3)......................... 11.9% 12.1% 16.1% 14.9% 16.6% 16.1% 24.2%
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of June 30,
---------------------------------------------------- ---------------------
1995 1996 1997(4) 1998(5) 1999 1999 2000(6)
------- -------- -------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................. $ 10 $ 5,894 $ 2,456 $ 3,223 $ 5,046 $ 3,635 $ 2,992
Working capital............................ 2,259 13,311 10,634 9,071 19,233 18,199 22,669
Total assets............................... 10,756 20,868 29,176 79,747 84,292 82,295 152,655
Total long-term debt, net of discounts..... 1,880 80 1,930 46,280 42,727 44,843 87,027
Total stockholders' equity................. 1,463 17,628 21,019 25,594 30,252 28,349 45,572
</TABLE>
______________________
(1) Effective March 31, 1996, we sold our Annapplix business to a group that
included Annapplix's former owners.
(2) EBITDA is presented to provide greater comparability between periods as
well as to indicate our results on an ongoing basis. EBITDA refers to
earnings before taxes plus net interest expense and depreciation and
amortization. Because all companies do not calculate EBITDA or similarly
titled financial measures in the same manner, other companies'
disclosures of EBITDA may not be comparable with EBITDA as used here.
EBITDA should not be considered as an alternative to net income or loss
(as an indicator of operating performance) or as an alternative to cash
flow (as a measure of liquidity or ability to service debt obligations)
and is not a measure of performance or financial condition under
generally accepted accounting principles. EBITDA is intended to provide
additional information for evaluating the ability of an entity to meet
its financial obligations. Cash flows in accordance with generally
accepted accounting principles consist of cash flows from (i) operating,
(ii) investing and (iii) financing activities. Cash flows from operating
activities reflect net income or loss (including charges for interest
and income taxes not reflected in EBITDA), adjusted for (i) all non-cash
charges or credits (including, but not limited to, depreciation and
amortization) and (ii) changes in operating assets and liabilities (not
reflected in EBITDA). Further, cash flows from investing and financing
activities are not included in EBITDA.
(3) EBITDA margin equals EBITDA as a percentage of revenues for each
period presented.
(4) In September 1997, we acquired L.W.G., Inc. and subsidiary, and Bodaken
& Associates in business combinations accounted for as purchases. See
Note 4 to our historical consolidated financial statements for
additional information.
(5) In June 1998, we acquired Klick, Kent & Allen, Inc. In September 1998,
we acquired S.E.A., Inc., Kahn Consulting, Inc., and KCI Management
Corp. These business combinations were accounted for as purchases. See
Note 4 to our historical consolidated financial statements for
additional information.
(6) Effective January 31, 2000, we acquired Policano & Manzo, L.L.C. in a
business combination accounted for as a purchase. See Note 4 to our
historical consolidated financial statements for additional information.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
FTI is a multi-disciplined consulting firm with leading practices in the
areas of financial restructuring, litigation support and engineering and
scientific investigation. Our Financial Consulting division, which accounted for
39% of our 1999 pro forma revenues and was our most profitable division, offers
a broad 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 Consulting division,
which accounted for 27% of our 1999 pro forma revenues, provides advice and
services in connection with all phases of the litigation process. Our Applied
Sciences division, which accounted for 34% of our 1999 pro forma revenues,
offers forensic engineering and scientific investigation services, accident
reconstruction, fire investigation and expert testimony regarding intellectual
property rights. From 1997 to 1999, our revenues grew at an average annual rate
of about 38%.
Revenues generated by our business divisions consist primarily of fees for
our professional services. We charge our professionals' time at hourly rates,
which vary from professional to professional, based on the professional's
position, experience and expertise. We also directly bill our clients for
services provided by our independent consultants. We recognize revenues for the
production of our work product, including static graph boards, color copies and
digital video production and fees for use of our equipment and facilities. We
also pass through our out-of-pocket expenses, such as our cost of recruiting
subjects and participants for research surveys and mock trial activities and our
travel. We recognize revenues in the period when the service is provided.
Our direct cost of revenues consists primarily of employee compensation and
related payroll benefits, the cost of outside consultants assigned to revenue-
generating activities and other related expenses billable to clients.
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. In 1999, selling, general and administrative
expenses accounted for about 28% of our pro forma revenues. Our corporate
overhead costs other than depreciation and amortization, which are included in
selling, general and administrative expenses, represented about 5% of pro forma
revenues in 1999.
We are organized into three distinct operating segments that contribute to
the overall performance of our company. As such, we evaluate segment performance
and allocate resources based on the operating income before depreciation and
amortization, corporate general and administrative expenses and income taxes for
each division. In 1999, our Financial Consulting division accounted for 57.2% of
our pro forma operating income, while our Litigation Consulting division
accounted for 26.1% and our Applied Sciences division accounted for 16.7%.
On June 30, 2000, we had about $93.7 million of unamortized goodwill, which
we are amortizing over 15 to 25 year periods. Annual goodwill amortization,
including goodwill associated with the acquisition of P&M, is approximately $5.1
million. Approximately $14.6 million of our unamortized goodwill is not
deductible for tax purposes. Consequently, we estimate that our effective tax
rate for 2000 will be about 42% before amortization of goodwill and 44% after
amortization of goodwill.
We intend to use our net proceeds from this offering and our other
financial resources to repay all $30.4 million of our outstanding senior
subordinated notes. The senior subordinated notes bear annual interest at 12%
payable in cash, and 5% payable in additional subordinated notes. Upon
repayment of the notes, our remaining debt outstanding will be about $59.9
million. The average annual interest rate on this remaining debt will be about
10.5%. We expect annual interest savings from repayment of our senior
subordinated notes to be about $5.1 million.
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Recent Acquisitions
Since September 1997, we have made six major acquisitions, all of which
were accounted for as purchases, as further described in Note 4 of "Notes to
Consolidated Financial Statements," which we have included later in this
Prospectus.
On February 4, 2000, we acquired Policano & Manzo as further described in
Note 4 of "Notes to Consolidated Financial Statements." P&M, based in Saddle
Brook, New Jersey, specializes in providing financial restructuring, advisory
and forensic accounting services to the workout and bankruptcy community. These
services are provided on a nationwide basis to financially distressed
businesses, creditors, investors and other interested parties. The purchase
price totaled $54.9 million, consisting of $48.3 million in cash, 815,000 shares
of our common stock valued at $5.5 million and acquisition related expenses of
$1.1 million.
In September 1998, we acquired both S.E.A., Inc. and Kahn Consulting, Inc.
("KCI"). SEA, 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 SEA
acquisition has allowed us to significantly expand its scientific consulting
offerings, in addition to providing geographic expansion into the southeast and
mid-west 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 provided the
foundation for expansion of our financial consulting services into cities in
which we provide litigation or forensic engineering services.
In June 1998, we 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.
In September 1997, we acquired L.W.G., Inc. and Bodaken Associates. LWG
broadened our offerings to the insurance market by adding capabilities in claims
management consulting and restoration services. Bodaken enhanced our jury and
trial consulting capabilities, particularly in the western region of the U.S.
Results of Operations
Six Months Ended June 30, 2000 and June 30, 1999
Revenues. Total revenues for the six months ended June 30, 2000 increased
58.8% to $65.6 million compared to $41.3 million for the six months ended June
30, 1999. For the six months ended June 30, 2000, revenues in our Financial
Consulting division grew by $19.0 million, or 191.3%, to $28.9 million, compared
to the first half of 1999. Our acquisition of P&M as of January 31, 2000
accounted for $13.3 million of this growth, with $5.7 million generated by
internal growth. Litigation Consulting division revenues increased 25.6% from
$13.6 million in 1999 to $17.1 million in 2000. The Applied Sciences division
experienced revenue growth of 10.7% to $19.7 million in revenues in the six
months ended June 30, 2000, compared to $17.8 million in the first half of 1999.
Direct Cost of Revenues. Direct cost of revenues consists primarily of
billable employee compensation and related payroll benefits, the cost of outside
consultants assigned to revenue-generating activities and other related expenses
billable to clients. Direct cost of revenues improved to 50.0% of total revenues
for the six months ended June 30, 2000, compared to 51.7% of total revenues for
the six months ended June 30, 1999. We attribute this improvement primarily to
the acquisition of P&M and productivity increases in the Applied Sciences and
Financial Consulting divisions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of salaries and benefits paid to our
office and corporate staff, as well as rent, marketing and corporate overhead
expenses. These expenses were 27.8% of total revenues for the six months ended
June 30, 2000, compared
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to 35.0% for the six months ended June 30, 1999. This improvement was primarily
because P&M's selling, general and administrative expenses were a lower
percentage of its revenues and because our total revenues increased
substantially more than our selling, general and administrative expenses.
Amortization of Goodwill. Amortization of goodwill increased from $1.1
million in the first half of 1999 to $2.2 million in the first half of 2000 as a
result of our acquisition of P&M as of January 31, 2000.
Interest Expense, net. Net interest expense increased to $5.5 million for
the six months ended June 30, 2000, from $1.8 million for the six months ended
June 30, 1999. Interest expense consisted primarily of net interest expense
associated with the purchased businesses referred to above, including P&M, and
the refinancing of our debt on February 4, 2000. We discuss this refinancing
below in "Liquidity and Capital Resources."
Income Taxes. In the first half of 2000, our effective income tax rate
decreased to 44.0% from 47.2% in the first half of 1999. This decrease was
primarily the result of the proportionately lower non-deductible goodwill
amortization resulting from some of our acquisitions in 1997 and 1998.
Extraordinary Item, net of taxes. As a result of the write-off of
unamortized debt discount and deferred financing costs associated with the debt
that we refinanced on February 4, 2000, we had an $869,000 loss on early
extinguishment of debt, net of taxes in the first half of 2000.
Years Ended December 31, 1999, 1998 and 1997
Revenues. Total revenues in 1999 increased 44.4% to $84.6 million from
$58.6 million in 1998. Our Financial Consulting division's revenues grew by
114.0% to $19.9 million from $9.3 million, with $8.6 million of that growth
coming from the KCI acquisition in 1998 and $2.0 million from internal growth.
Litigation Consulting division revenues increased 9.8% to $29.1 million in 1999
from $26.5 million in 1998 as a result of an improved volume of cases. Our
Applied Sciences division experienced 56.2% in revenue growth in 1999 to $35.7
million from $22.8 million in 1998, nearly all of which came from the
acquisition of SEA in September 1998.
Total revenues in 1998 increased 32.7% over 1997. Excluding acquisitions
completed in 1998, revenues would have increased 6.9%. Litigation Consulting
revenues decreased 5.3% from 1997 to 1998 as a result of softness in the markets
during the second and third quarters of 1998. Our Applied Sciences division
experienced 90.4% growth in 1998, with more than half of that growth coming from
the acquisition of SEA. The Financial Consulting division's revenues grew by
120.2%, with substantially all of that growth coming from the KCI acquisition.
Direct Cost of Revenues. Direct cost of revenues was 52.2% of our total
revenues in 1999, 53.6% in 1998 and 53.3% in 1997. The improvement in 1999
resulted from a mix of price increases and improved productivity.
Selling, General and Administrative Expenses. As a percent of our total
revenues, these expenses were 34.1% in 1999, 35.0% in 1998 and 34.3% in 1997.
Amortization of Goodwill. Annual amortization of goodwill increased from
$82,000 in 1997 to $2.3 million in 1999, as a result of our acquisitions.
Amortization will increase substantially in 2000 as a result of the P&M
acquisition. We discuss goodwill amortization further in "Future Assessment of
Recoverability and Impairment of Goodwill" below.
Other Income and Expenses. Interest expense consisted primarily of interest
on debt we incurred to purchase the businesses referred to above. Interest
expense will also increase substantially in 2000 as a result of the P&M
acquisition and the associated refinancing of our existing debt in February
2000.
Income Taxes. Our effective tax rate increased to 43.6% in 1999 from 43.2%
in 1998, and 40.6% in 1997, principally as a result of some of the goodwill
amortization not being deductible for income tax purposes. See Note
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8 of "Notes to Consolidated Financial Statements" for a reconciliation of the
federal statutory rate to our effective tax rates during each of these years,
and a summary of the components of our deferred tax assets and liabilities.
Future Assessment of Recoverability and Impairment of Goodwill
In connection with our various acquisitions, including P&M, we recorded
goodwill, which we are amortizing on a straight-line basis over periods of 15 to
25 years. These are the periods during which we estimate we will benefit from
this goodwill. At June 30, 2000, unamortized goodwill was $93.7 million, or
61.4% of our total assets and 205.6% of our 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. We have determined the period for amortizing
goodwill based upon several factors, the most significant of which are the
relative size, historical financial viability, growth trends of the acquired
companies and the relative lengths of time these companies have been in
existence.
Our management periodically reviews the carrying value and recoverability
of our unamortized goodwill. If the facts and circumstances suggest that the
goodwill may be impaired, we would adjust the carrying value of the goodwill.
This would result in an immediate charge against income during the period of the
adjustment and/or a shortening of the length of the remaining amortization
period, which would result in an increase in the amount of goodwill amortization
during the period of adjustment and each period thereafter until fully
amortized. If we adjust goodwill, we cannot assure you that we will not have to
make further adjustments for impairment and recoverability in future periods.
The most significant of the factors we will consider in determining whether
goodwill is impaired will be losses from operations; loss of customers; and
industry developments such as our inability to maintain market share, the
development of competitive products or services or imposition of additional
regulatory requirements.
Liquidity and Capital Resources
In the first half of 2000, we generated $3.0 million of cash flow in our
operations, compared to $3.2 million in the first half of 1999. We attribute
this lower cash flow to the increase in our net working capital balances,
including the working capital needs of P&M, reduced by the significant increase
in net income excluding non-cash charges for depreciation and amortization and
the extraordinary item of $1.5 million, before taxes. We anticipate that our
cash flow from operations for the rest of 2000 will increase over 1999,
primarily because of our expected increase in net income before non-cash
charges.
In 1999, we generated $8.4 million of cash flow from operations, an
improvement of $3.1 million from 1998. We attribute this increase to our higher
net income excluding non-cash charges (principally depreciation and
amortization) of $2.2 million and the favorable net cash effects of changes in
working capital balances.
To finance the P&M acquisition, we 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 may decline based on our leverage ratio;
. a $7.5 million revolving credit facility (not initially drawn down),
bearing interest at prime plus 1.75%, which also may decline based on
our leverage ratio; and
. $30.0 million of senior subordinated notes maturing January 31, 2007,
bearing 12% annual cash interest and 5% annual interest payable in
kind (PIK).
The credit facilities are secured by all of our assets. We are required to
comply with various specified financial covenants related to our operating
performance and liquidity at the end of each quarter. Further, we have obtained
interest rate protection on $41.0 million of the $61.0 million term loan. We
believe we will be in
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compliance with all our other loan covenants throughout 2000. We used the
proceeds of these facilities, together with approximately $2.0 million of our
existing cash, to purchase P&M and to refinance our existing debt of
approximately $44.0 million. We also issued 604,504 shares of our common stock
to retire approximately $2.7 million of our seller notes to several members of
our senior management team whose businesses we had previously acquired.
In connection with the senior subordinated notes, we issued the holders
warrants to purchase approximately 670,000 shares of our common stock at an
exercise price of $4.44 per share. The warrants expire ten years from the date
of closing. At the same time, we retired warrants for 130,835 shares of our
common stock issued in March 1999 in connection with our prior subordinated debt
of $13.0 million, which we repaid as part of this refinancing.
In 1998, we had borrowed $26.0 million under our prior $27.0 million long-
term credit facility with a bank to provide the $26.4 million of cash needed to
acquire KK&A, KCI and SEA. We negotiated this credit facility in March 1999 and
repaid it on February 4, 2000. In March 1999, we issued $13.0 million of
subordinated debentures, that we also repaid on February 4, 2000.
In connection with the acquisition of businesses in 1997 and 1998, we
issued seller notes that totaled $10.8 million at December 31, 1999. We repaid
$8.1 million of these notes in the refinancing on February 4, 2000, and
exchanged approximately $2.7 million for our common stock as noted above.
During the six months ended June 30, 2000, we spent $1.7 million for
additions to property and equipment. This amount included expenditures for
internal information systems that allow us to better manage our expanding
operations. At June 30, 2000, we had no material commitments for the acquisition
of property and equipment other than a lease for a new office in New York City,
which we expect to occupy before the end of the third quarter of 2000. We
estimate that we will spend about $2.2 million for leasehold improvements,
furniture and fixtures for this new office.
During 1999, we spent $3.1 million for additions to property and equipment.
This amount included expenditures for our internal information systems. At
December 31, 1999, we had no material commitments for the acquisition of
property and equipment.
We believe that cash generated from our operations will allow us to meet
our obligations that mature in 2000, and also provide us the necessary cash
resources we will need in the near term to fund our expanding operations. We
will use the proceeds of this offering to repay our senior subordinated notes,
which will significantly decrease our leverage and interest expense and we
believe increase our ability to obtain financing in the future should the need
arise. As a result of our prepaying the senior subordinated notes, the warrants
we issued to the holders of these notes will be reduced from the right to
purchase 670,404 shares to the right to purchase 473,226 shares of our common
stock at $4.44 per share.
Year 2000 Compliance
During 1999, we implemented a four-stage process to assure Year 2000
compliance of all hardware, software and ancillary equipment that are date
dependent. We completed all four phases and believe 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, we are not aware of
any Year 2000 non-compliance by our customers or suppliers that would have a
material impact on our business. We are not aware of any other material Year
2000 non-compliance that would require repair or replacement or that could have
a material effect on our 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. We have developed a strategy to address these potential consequences
and contingency plans to deal with any disruptions.
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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. We are exposed to market risk from changes in interest rates which
could affect our future results of operations and financial condition. We manage
our exposures to these risks through our regular operating and financing
activities, including the use of derivative financial instruments.
At June 30, 2000, $60.0 million of our long-term debt bore interest at
variable rates. Accordingly, our earnings and after-tax cash flow are affected
by changes in interest rates. To mitigate our exposure, management has utilized
six-year interest rate swap and cap agreements covering $41.0 million of our
long-term debt. In the event of adverse changes in interest rates, management
may take actions to further mitigate our exposure.
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BUSINESS
Overview
We are a multi-disciplined consulting firm with leading practices in the
areas of financial restructuring, litigation consulting and engineering and
scientific investigation. Modern companies, as well as those who advise and
invest in them, face growing challenges on every front. From a proliferation of
"bet-the-company" litigation to increasingly complicated relationships with
lenders and investors in an ever-changing global economy, U.S. companies are
increasingly turning to outside experts and consultants to deal with these
complex issues. We are dedicated to helping companies and their advisors,
lawyers, lenders and investors meet these challenges by providing a broad array
of the highest quality professional services from a single source.
We operate through three business divisions: Financial Consulting,
Litigation Consulting and Applied Sciences. Financial Consulting provides a
range of financial consulting services to financially distressed debtors or
their creditors and investors. Litigation Consulting provides advice and
services throughout all phases of the litigation process. Applied Sciences
offers forensic engineering and scientific investigation services, such as
accident reconstruction, fire investigation and product failure analysis. In all
areas of our business, we believe that our staff of accounting, economic and
statistical, engineering, scientific, communication, artistic, computer
management and jury professionals are recognized experts in their fields. This,
coupled with the broad range of expertise we offer our clients, is how we
compete in the marketplace.
Our clients retain us when confronted with adverse situations such as
bankruptcy, litigation, regulatory investigations or proceedings or insurance
claims. We believe that they retain us for several reasons, including:
. our recognized expertise;
. our unique capabilities in several highly specialized areas;
. their need for an impartial expert;
. our disciplined project management approach that allows us to deliver
consistently high quality advice and services, on schedule and on
budget; and
. the trend in business generally to outsource non-core activities,
especially in those areas that are complex, unique and incident-
driven.
Over the past three years, we have taken several steps to extend our range
of services, leverage our reputation for quality and client service and grow our
business, including the following:
. completed six acquisitions that significantly expanded our size,
service offerings and geographic scope;
. expanded into financial consulting services for restructurings and
bankruptcy proceedings;
. recruited more recognized litigation support professionals and added
to our visual communications staff; and
. developed proprietary trial preparation and presentation software and
software to facilitate forensic engineering and scientific
investigation.
We currently have major offices in New York, Columbus, Chicago, Houston,
Los Angeles, Annapolis and Washington, D.C., as well as over 25 other locations
in the United States.
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Industry Overview
We serve businesses, lenders, investors, insurers and their legal counsel
in adverse circumstances such as class action lawsuits, financial restructurings
and bankruptcy proceedings and accident investigations. Clients' reputations,
financial condition and very existence are sometimes at stake. Consequently, our
clients require objective and professional advice from independent experts.
Also, many businesses, lenders, investors, insurers and law firms are
increasingly outsourcing functions that have become very specialized or require
unique knowledge or technology.
Litigation Consulting and Applied Sciences. Currently, the market for legal
services in the United States exceeds $100 billion annually, according to U.S.
Bureau of Census statistics. We expect this market to continue to grow as rising
litigation costs and the risks of large monetary judgments continue to focus
businesses on better managing risks and the litigation process. Increasingly,
businesses, financial institutions and law firms are turning to outside
litigation service consultants to complement or assist their internal legal
staffs in more efficiently and effectively managing the litigation process.
Demand for specialized litigation and forensic engineering services is also
being driven by a greater emphasis on loss and injury prevention by insurance
companies and manufacturers and significant advances and declining costs in
information technology. Manufacturers are increasingly concerned about product
safety and analyzing failures to make products safer as a result of the
proliferation of mass tort claims and the high costs of product recalls mandated
by government agencies. Insurance companies are also partnering with
manufacturers for the same reasons. Continuing advances and the declining costs
of information technology have resulted in a much greater use of computer
simulations and animations for a wider range of disputes, as well as for product
testing and employee training. Further, such advances and declining costs have
resulted in the cost-effective use of engineering applications beyond high
exposure litigation and high value products.
Traditionally, litigation consulting firms focused on discrete stages of
the litigation process from inception of a cause of action, through a jury trial
to final resolution. Today, clients are seeking outside consulting services
throughout the entire process, including the pre-litigation phase.
Financial Consulting. We have greatly expanded our capabilities and size in
financial restructuring and bankruptcy advice since 1998. We believe that the
number of financial restructurings and bankruptcies will continue to grow
because of intense competition and rapidly changing markets in many industries,
the deregulation of various industries and the recent lengthy economic growth
during which many companies expanded aggressively. The bankruptcy market is
rapidly expanding as more companies seek Chapter 11 protection.
According to Standard & Poor's Credit Week, 1999 was one of the worst years
ever in terms of corporate defaults, with the highest level of defaulted debt
ever reported. Only about 40% of last year's defaults related to economic
turmoil. In fact, most defaults occurred in spite of the recent years of
uninterrupted economic prosperity. Standard & Poor's predicts that the current
wave of defaults will continue for at least the next several years. According to
New Generation Research, a research center for information on bankruptcies and
turnarounds, 120 publicly traded companies, with assets totaling $28.9 billion,
filed for bankruptcy in 1998, compared to 82 publicly traded companies, with
assets totaling $17.3 billion, in 1997. In 1999, 145 public companies, with
assets totaling $58.8 billion, filed for bankruptcy.
Business Strategy
We believe that we are the established leader in consulting to companies
and their creditors facing adverse circumstances. Our goal is to expand our lead
by continuing to anticipate our clients' needs and provide a range of high-
quality consulting services to meet those needs. Success in this marketplace
depends on reputation, service capacity, in some cases geographic location and
to a lesser degree price. The following are the key elements of our business
strategy:
. Leverage Our Reputation for High Quality Consulting Services. We
believe that size and reputation are critical elements in the
purchasing decisions of businesses, law firms, financial institutions
and insurance companies. We provide services to many Fortune 500
companies and major law firms.
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We regularly handle many complex, high profile restructuring and
litigation matters. We receive a high level of repeat business from
our current clients and have been successful in expanding the range of
services we provide to them. We believe we can continue to
successfully leverage our reputation, experience and client base to
obtain new engagements from both existing and new clients.
. Retain and Attract Highly Qualified Professionals. Our professionals
are crucial to delivering our services to clients and generating new
business. We are committed to retaining our existing professionals and
continuing to aggressively recruit additional professionals. We offer
our professionals above average compensation opportunities,
competitive benefits and challenging engagements. Existing employees
are our greatest recruiting asset and the source of a majority of
referrals. We will continue to encourage our employees to refer highly
qualified professionals to us and reward them for these referrals.
. Capitalize on Our Nationwide Network of Offices. We have established a
nationwide network of 33 offices that enables us to leverage our
operations in key geographic markets. We believe that we have a
competitive advantage because we can provide services to large,
geographically diverse corporations and bid for engagements on a
nationwide basis. We also believe that our proximity to our clients
provides a significant cost advantage by allowing us to balance
resources and centralize a number of labor-intensive activities,
including graphics support and document management. We intend to
continue to expand the range of services provided by each of our
offices. Also, our network of offices allows us to attract highly
qualified professionals and to acquire highly respected firms that
would like the ability to provide services on a nationwide basis.
. Expand the Range of Our Services. We will continue to anticipate our
clients' growing needs for expert services and expand our services to
meet their needs. By expanding the range of our capabilities and
integrating them with existing services, we can continue to position
ourselves to provide more broad-based services to our clients. In
recent years, we have significantly expanded our range of services to
include such services as visual communications, forensic engineering,
restructuring and bankruptcy consulting and electronic document
management.
. Continue to Expand the Use of Technology in Litigation Consulting. We
will continue to develop and apply new technology to improve the cost-
effectiveness of our services and to maintain our competitive edge.
For example, we recently developed our eWar Room service, a new
technology-based trial service that accelerates lawyers' trial
preparation by combining specialized consulting with powerful new
software. We are also focusing on taking advantage of the efficiencies
of the Internet to improve information exchange and reduce costs
throughout the entire litigation process. For example, we have
recently introduced our secure extranet service to provide more
solutions to the challenges of the increasing complexity of high
stakes, multi-district litigation.
. Selectively Acquire Companies to Obtain New Professionals and
Capabilities. We will continue to build on our record of successfully
identifying, executing and integrating strategic acquisitions. Since
1997, we have made six acquisitions that have enhanced our position as
the leader in consulting to companies facing adverse circumstances. We
will continue to selectively pursue strategic acquisitions that offer
complementary businesses that we can leverage with our existing client
base, offer increased efficiencies by leveraging our network of 33
locations, add new, highly qualified professional staff, and bring new
clients to which we can cross sell our existing capabilities.
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Financial Consulting
Our Financial Consulting division provides expertise in financial
restructurings and workouts, forensic accounting and statistical and economic
analysis. As a result of the recent increase in bankruptcy filings and defaults
in speculative grade debt, Financial Consulting has become the fastest growing
of our three divisions.
As part of our financial restructuring and workout practice, we provide
services to financially distressed companies or to the secured and unsecured
creditors of these companies. Our financial restructuring professionals advise
companies and creditors in some of the largest, most complex bankruptcy
proceedings and out-of-court restructurings in the United States. When advising
a corporate client, we work with the company's management to assess the client's
financial condition and viability, and then structure and implement a business
rehabilitation plan to manage the client's cash flow to at least a break-even
point. We also identify any non-essential assets that can be sold to generate
cash. Typically, we then assist these corporate clients as they negotiate with
their lenders to restructure their debt. In the event an out-of-court workout
appears unlikely, we assess the impact of a bankruptcy filing on the client's
financial condition and operating performance and seek Debtor-in-Possession
financing on the client's behalf. If the client voluntarily files bankruptcy or
is involuntarily forced into bankruptcy, we will assist in managing the entire
bankruptcy process, including structuring, negotiating with creditors and
implementing the plan of reorganization. We also render expert testimony in
connection with the bankruptcy proceeding on such issues as business unit
valuation and economic loss.
When assisting creditors, we seek to maximize amounts owed to them by the
debtor in an out-of-court workout or bankruptcy. In a workout engagement, we
evaluate and monitor the quality and value of the collateral and any other
assets available to the creditor, analyze the debtor's business plan and
underlying cash flow projections and assess the adequacy of the debtor's
financial reporting systems. Based on our analysis, we then assess the debtor's
viability and develop and evaluate restructuring plans. In the event that an
out-of-court workout is not feasible, we assist creditors in deciding whether to
provide Debtor-in-Possession financing, in working through the bankruptcy
process and in structuring and evaluating various reorganization plan
alternatives.
Our forensic accounting specialists work with companies faced with fraud
and financial disclosure issues. Many of these companies are undergoing
restructuring or bankruptcy reorganizations. Our statistical and economic
experts use a range of statistical and economic tools to help companies evaluate
issues, such as the economic impact of deregulation on a particular industry,
the amount of commercial damages suffered by a business as a result of a tort or
a breach of contract, the existence of discriminatory employment practices or
the value of a business or professional practice. We also work with clients to
develop business strategy and tactics on an ongoing basis to address these
issues.
Litigation Consulting
During the past 18 years, we have been a pioneer in developing and
delivering professional services and creative solutions to litigation problems.
We focus on developing and providing innovative applications from the fields of
accounting, science, education, communications and technology to meet our
clients' needs. From the first computer animations used in court to the latest
in digital graphic presentations, we have been a leader in providing high-
quality, cost-effective methods to prepare for and try cases. Our trial
technology professionals have supported clients in the courtroom in some of the
largest and most complex civil trials. Through the use of information technology
and the Internet, we have demonstrated our ability to control litigation costs,
speed-up the trial process and provide litigants superior access to data, a key
competitive advantage.
We have drawn on the skills and techniques used in 3D computer animation
and simulation and pioneered their use to enhance presentations and expert
testimony on complex subjects, such as toxic torts, vehicle accidents, airplane
crashes, financial disputes, intellectual property resolutions and physical
phenomena. The significant decrease in the cost of technology has made it a
cost-effective alternative for most trials. Further, the dramatic increase in
the size of trials and volume of information has made the visualization of
concepts and themes through animated and static "pictures" a necessity for an
effective presentation to a judge or jury.
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One of the important trends affecting the growth of litigation consulting
is the increasing sophistication of courtroom presentation and document
management techniques. Computerized document management in cases involving
thousands or even millions of pages of depositions, testimony and exhibits is
becoming a necessity in the federal and state court systems. Our document
management and exhibit and trial preparation solutions enable our clients to
better focus on preparing for and trying cases.
The following are the type of services we might provide in a complex
litigation matter:
. visual communication consulting services;
. graphic exhibit design and production;
. customized database development and distribution;
. video deposition capture and transcript linking;
. management of designated trial exhibits;
. courtroom survey, design and configuration;
. on-site technical trial support;
. hardware procurement and tracking; and
. secure extranet storage and distribution of data, documents,
transcripts, videos and exhibits.
We have developed a number of technology-based tools to assist our clients
in managing complex litigation:
. TrialMax(TM) is our comprehensive trial preparation solution. TrialMax
(TM) provides a litigation team with the ability to easily store,
annotate and display documents, computer graphics, video clips and
digitized depositions in the courtroom. One of the innovative features
of TrialMax(TM) is its ability to segment digitized video depositions
for presentation in the courtroom.
. eWar Room is our automated tool for handling trial data regardless of
information source or data type. This tool electronically retrieves and
displays documents in court in any order selected by the lawyer and also
enables document highlights to be presented to the judge or jury. Using
our service, trial lawyers can now review an entire exhibit package on
screen, make changes in real time and rehearse in any media they select,
from graphics, video or PowerPoint to paper documents. With the
assistance of our professionals, trial lawyers can develop key themes
and concepts, and we help them get their point across in the most
effective manner.
. Secure Extranet Services is our recently introduced Internet application
for clients who are parties to multi-district litigation. This service
will further our objective of providing better and more cost-effective
service to our clients.
We believe the extranet will become the backbone for the delivery of custom
litigation support software applications and services designed for delivery over
the Internet. To maintain our competitive technological edge, we recently
created a strategic alliance with USinternetworking, one of the leading
application service providers, to host our secure extranet service.
29
<PAGE>
Applied Sciences
Our Applied Sciences division specializes in forensic engineering and
scientific investigation. We analyze the causes of accidents and other claims
resulting from fires, vehicle design, chemical mishaps, poor product design and
other causes. As an extension of our engineering and scientific work, clients
also seek expert testimony from our professionals and network of more than 2,000
on-call technical and scientific consultants.
Our Applied Sciences professionals blend state-of-the-art technology with
their many years of practical experience. For example, we have developed a
proprietary software and full-scale test equipment system for calculating the
precise performance characteristics and center of gravity of virtually any
vehicle, which may be critical in determining liability in accident cases. We
also use this equipment to assist vehicle manufacturers, government agencies and
auto racing teams in maximizing safety and vehicle performance.
We believe we are the leader in vehicle accident reconstruction and highway
defect litigation. Visually demonstrating accidents has become an accepted and
even a necessary trial tool. For example, we have recently provided aircraft
accident analysis for several high-profile crashes. We employ our expertise to
create computer simulations for our Litigation Consulting division for courtroom
presentation. We also created a complete aircraft crash simulation video that a
number of airlines have adopted for pilot training.
Our Applied Sciences professionals are well-recognized as experts in the
investigation of fires and explosions. Our staff includes origin and cause
experts, flammability reconstructionists, fire protection engineers, electrical
engineers and mechanical engineers. We have staged actual fires in real
buildings for research and training purposes, using these exercises not only to
educate our own staff but to also train insurance, legal and government
organizations.
We are also engaged by companies at an early stage of potential litigation
to evaluate the cause of product failures and relative responsibility for an
accident, or to assess product safety or preventative safety measures. The
Applied Sciences division also assists companies in assessing preventative
measures relating to product design and evaluating the causes of product
failures. We are regularly called upon to assess the causes and relative levels
of responsibility for an accident, as well as to design preventative measures.
Because we are engaged early in the process, we believe our revenues from these
services are steadier and less incident-driven than those of our competitors who
are focused exclusively on trial preparation and presentation.
Clients
We have cultivated long-term relationships with many of the premier
financial institutions, law firms and businesses in the U.S. In 1999, we worked
for over 1,900 clients, including:
. 1,139 law firms, 60 of which were rated among the top 100 law firms
(based on 1998 U.S. revenues as measured by American Lawyer magazine);
. 198 industrial clients, 75 of which were among the Fortune 500 in 1999;
. 22 of the 25 largest banks located in the U.S. (also listed among the
Fortune 500 in 1999); and
. 447 insurance companies, 61 of which were among the top 100 property and
casualty insurers (as reported by A.M. Best Company in 1999).
In 1999, we derived approximately 75% of our revenues from existing clients
or referrals from existing clients. Our largest client represented less than 8%
of our 1999 revenues. As of December 31, 1999, we were actively working on 3,369
different matters for 1,732 different clients.
30
<PAGE>
Marketing and Sales
Historically, we have relied primarily on our reputation to market our
services to new and existing clients since most of our work is repeat work for
existing clients or referrals from existing clients. Our professionals develop
close, personal relationships with clients and often learn about new business
opportunities from their frequent contacts with clients. Consequently, we
encourage our professionals to generate new business and reward them with
increased compensation and promotions for generating new business.
Our Litigation Consulting division has about ten full-time sales people and
our Applied Sciences division has about 20 full-time sales people who are
involved in marketing our services. Our Financial Consulting division primarily
relies upon referrals and does not require sales personnel. In marketing our
services, we emphasize our experience, the quality of our services and our
professionals' particular areas of expertise. While we aggressively seek new
business opportunities, we maintain high professional standards and carefully
evaluate potential new client relationships and engagements.
We plan to develop greater brand awareness of "FTI" as a provider of a
broad range of high quality consulting services. We are currently focused on
improving the quality and functionality of our Web sites, where we describe our
services and experience and promote our reputation. Although we currently market
many of our services under different names, we are in the final stages of a
brand identification study by an outside consulting firm. As a result of this
study, we expect to build and promote a single brand.
Competition
The markets in which we operate are highly competitive. We face competition
from several national companies, national accounting firms and a number of
smaller firms that provide one or more services in local and regional markets.
Financial Consulting competes primarily against national accounting firms and
private financial consulting firms. Litigation Consulting competes against
Trialgraphics, Decision Quest, Engineering Animation, Exponent and, to a limited
extent, other litigation consulting services and individual consultants. Applied
Sciences competes primarily against several regional or national concerns,
independent experts and research organizations.
Competitive factors for our services include reputation, size, geographic
location, performance record, quality of work, range of services provided and
relationships with clients. To a lesser extent, we also compete on price, but
the critical nature of our services typically reduces price to a secondary
consideration.
Some national support service providers are larger than we are and, on any
given engagement, may have a competitive advantage over us with respect to one
or more competitive factors. In addition, smaller local or regional firms, while
not offering the range of services we provide, often are able to provide the
lowest price on a specific engagement because of their lower overhead costs and
proximity to the engagement. The fragmented nature of our markets may also
provide opportunities for large companies that offer complementary services to
enter one or more of our markets through acquisition. In the future, these and
other competitive pressures could require us to modify our pricing or increase
our spending for marketing to attract business.
Human Resources
As of June 30, 2000, we had 519 employees. Of that total, 110 are in the
Financial Consulting division, 122 are in the Litigation Consulting division,
250 are in the Applied Sciences division and 37 are in corporate management and
administrative positions. We also maintain consulting arrangements with about
1,700 independent consultants, about 430 of whom were utilized on our
engagements during 1999. About 79% of our professionals have more than ten years
of experience in their field of practice, and many are well recognized for their
expertise and experience.
Our professionals have varied specialties and specialized backgrounds in
such fields as engineering, accounting, mathematics, statistics and psychology.
A number have Ph.D.s or other advanced degrees. Some have
31
<PAGE>
legal training and experience. We strongly believe that our ability to recruit
and retain bright, experienced and ambitious professionals is a key factor to
our continued success.
We believe that professionals join us at FTI because we provide challenging
work assignments and compensation packages that are generally above the industry
standard. People who join FTI gain practical experience and knowledge from
highly talented co-workers, and we treat them as valued professionals. Moreover,
most of our professional employees participate in an incentive compensation plan
in addition to receiving base salaries.
Properties
We lease our principal facility in Annapolis, Maryland, which totals
approximately 39,100 square feet, under a lease that expires in December 2003.
We also lease 32 other offices across the United States, including offices in
cities such as New York, Chicago, Houston, Los Angeles, Atlanta, Columbus and
Washington, D.C. We believe that our leased facilities are adequate for our
current needs and that suitable additional space, should it be needed, will be
available to accommodate expansion of our operations on commercially reasonable
terms.
Legal Proceedings
We are not currently a party to any material litigation.
32
<PAGE>
MANAGEMENT
The following are our executive officers and directors:
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<S> <C> <C>
Jack B. Dunn, IV............. 49 Chairman of the Board and Chief Executive Officer
Stewart J. Kahn.............. 56 President, Chief Operating Officer and Director
Theodore I. Pincus........... 57 Executive Vice President, Chief Financial Officer
and Secretary
Patrick A. Brady............. 46 President, Litigation Consulting Division
Glenn R. Baker............... 58 President, Applied Sciences Division
Barry M. Monheit............. 53 President, Financial Consulting Division
Scott S. Binder.............. 45 Director
Denis J. Callaghan........... 58 Director
James A. Flick............... 66 Director
Peter F. O'Malley............ 61 Director
Dennis J. Shaughnessy........ 52 Director
George P. Stamas............. 49 Director
</TABLE>
Jack B. Dunn, IV became our Chairman of the Board of Directors in December
1998 and has served as our Chief Executive Officer since October 1995. From
October 1995 to December 1998 he also served as our President. From May 1994 to
October 1995 he served as our Chief Operating Officer and from October 1992
through September 1995 he served as our Chief Financial Officer. Mr. Dunn is a
limited partner of the Baltimore Orioles. Prior to joining us, he was a member
of the Board of Directors and a Managing Director of Legg Mason Wood Walker,
Incorporated and directed its Baltimore corporate finance and investment banking
activities.
Stewart J. Kahn has served as our President since December 1998 and as our
Chief Operating Officer since September 1999. Mr. Kahn is also a director of
Kahn Consulting, Inc. ("KCI"), the accounting and financial services consulting
firm we acquired in September 1998. From 1989 to September 1998, Mr. Kahn was a
director and President of KCI. Prior to 1989, he was with Arthur Andersen & Co.
for 24 years. He is a certified public accountant.
Theodore I. Pincus has been our Executive Vice President and Chief
Financial Officer since March 1999. Prior to joining us, Mr. Pincus was
Executive Vice President and Chief Financial Officer of Nitinol Medical
Technologies from May 1995 to March 1999. Before then, he was President of the
Pincus Group, a financial consulting firm, from December 1989 to May 1995.
Earlier in his career, he was a partner at Ernst & Young and was Partner-in-
Charge of Management Consulting in the New York Region of KPMG Main Hurdman,
both public accounting firms. He is a certified public accountant.
Patrick A. Brady has been President of our Litigation Consulting division
since May 1999. From 1994 to May 1999, he was Executive Vice President of
Litigation Consulting, and from 1996 to May 1999, he was also our Chief
Operating Officer. From 1994 to 1996, Mr. Brady was General Manager of our
Visual Communications and Trial Consulting Services. Mr. Brady joined us in 1986
and specialized in project management methodologies for dealing with major
failure investigations and complex litigation matters.
33
<PAGE>
Glenn R. Baker has been President of our Applied Sciences division since
September 1998. Prior to joining us, he was Chief Executive Officer and
President of SEA, which we acquired in September 1998. Mr. Baker co-founded SEA
in 1970. Mr. Baker is a certified fire investigator and obtained his MBA in
1966.
Barry M. Monheit has been President of our Financial Consulting division
since May 1999. From 1992 to 1998, he was a Managing Director of KCI. We
acquired KCI in September, 1998. Prior to joining KCI, Mr. Monheit was the
Partner-in-Charge of Arthur Andersen & Co.'s New York Financial Consulting
Division and its U.S. bankruptcy and reorganization practice. Before joining
Arthur Andersen in 1988, he served as Partner-in-Charge of Spicer and
Oppenheim's bankruptcy and reorganization practice and as managing director of
its Houston office. Mr. Monheit is a certified public accountant.
Scott S. Binder became a director of FTI in May 1999. Since 1997, he has
been a Principal with Allied Capital Corporation. From 1985 until 1997, Mr.
Binder was President of Overland Capital Corporation, an owner and operator of
cable television systems and radio stations. From 1991 until 1998, he was also a
director of CIH, Ltd. a Washington, D.C. public affairs consulting firm. Mr.
Binder is a certified public accountant.
Denis J. Callaghan became a director of FTI on July 25, 2000. Mr. Callaghan
retired from Deutsche Banc Alex. Brown on February 29, 2000, where he was the
Director of North American Equity Research. Prior to becoming Director of Equity
Research in 1992, Mr. Callaghan was responsible for Alex. Brown's Insurance and
Financial Services Research Groups. Prior to joining Alex. Brown in 1988, he was
a Senior Insurance Analyst and First Vice President with PaineWebber.
James A. Flick has been a director of FTI since 1992. He is President,
Chief Executive Officer and a director of Dome Corporation, a real estate
development and management services company. He is also President of Winnow,
Inc. From 1991 through 1994, Mr. Flick was an Executive Vice President of Legg
Mason Wood Walker, Incorporated. Mr. Flick also is a director of Capital One
Financial Corporation and Bethlehem Steel Credit Affiliates. Mr. Flick is a
certified public accountant.
Peter F. O'Malley has been a director of FTI since 1992. He is President of
Aberdeen Creek Corporation, a privately-held company engaged in investment,
business consulting and development activities. Mr. O'Malley is the founder of,
and since 1989 has been Of Counsel to, the law firm of O'Malley, Miles, Nylen &
Gilmore. Mr. O'Malley is a director of Potomac Electric Power Company and Legg
Mason, Inc.
Dennis J. Shaughnessy has been a director of FTI since 1992. He is a
Managing Director of Grotech Capital Group, Inc., a venture capital firm
headquartered in Timonium, Maryland. Prior to becoming a Managing Director of
Grotech Capital Group in 1989, Mr. Shaughnessy was Chief Executive Officer of
CRI International, Inc. Mr. Shaughnessy also is a director of TESSCO
Technologies, Inc. and U.S. Vision, Inc.
George P. Stamas has been a director of FTI since 1992. Since December
1999, Mr. Stamas has been Vice Chairman of Deutsche Banc Alex. Brown. From 1996
to 1999, he was a partner in the law firm of Wilmer, Cutler & Pickering. Before
then, he was a partner in the law firm of Piper & Marbury L.L.P. Mr. Stamas was
counsel to, and is a limited partner of, the Baltimore Orioles.
34
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table shows the beneficial ownership of our common stock as
of July 31, 2000 by:
. each stockholder known to us that beneficially owns more than 5% of our
common stock;
. each of our current executive officers and directors; and
. all of our current directors and executive officers as a group.
The table also shows the number of shares being sold by each selling
stockholder and the number and percentage of our outstanding shares each selling
stockholder will own after the offering.
<TABLE>
<CAPTION>
Before Offering After Offering
----------------------- Shares ----------------------
Name of Beneficial Owner (1)(2) Shares Percent Offered Shares Percent
------------------------------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Executive Officers, Key Employees and Directors:
Jack B. Dunn, IV (3) .............................................. 387,689 5.8% 50,000 337,689(33) 3.3%
Stewart J. Kahn (4)................................................ 475,194 6.8 50,000 425,194(33) 4.2
Theodore I. Pincus (5)............................................. 15,334 * -- 15,334 *
Patrick A. Brady (6)............................................... 184,100 2.8 -- 184,100 1.8
Glenn R. Baker (7)................................................. 23,533 * -- 23,533 *
Barry M. Monheit (8)............................................... 166,652 2.6 50,000 116,652(33) 1.1
Robert Manzo (9)................................................... 507,500 7.8 50,000 457,500(33) 4.5
Michael Policano (10).............................................. 507,500 7.8 50,000 457,500(33) 4.5
Scott S. Binder (11)............................................... 20,000 * -- 20,000 *
Denis J. Callaghan................................................. -- -- -- -- --
James A. Flick, Jr. (12)........................................... 69,331 1.1 -- 69,331 *
Peter F. O'Malley (13)............................................. 79,063 1.2 -- 79,063 *
Dennis J. Shaughnessy (14)......................................... 80,600 1.3 -- 80,600 *
George P. Stamas (15).............................................. 61,438 1.0 -- 61,438 *
All directors and executive officers as a group (12 persons)....... 2,004,530 27.4 150,000 1,854,530(33) 16.6
Other Selling Stockholders:
Allied Capital Corporation (16)(17)................................ 449,935 6.9 351,345 -- *
Allied Investment Corporation (17)(18)............................. 146,938 2.5 146,938 -- *
Bank of America, N.A............................................... 25,000 * 25,000 -- --
Grotech Partners III, LP (19)(20)(21).............................. 389,721 6.1 389,721 -- --
Grotech III Companion Fund, LP (19)(20)(22)........................ 46,439 * 46,439 -- --
Grotech Capital Group, Inc. (19)(20)(23)........................... 75,600 * 20,000 55,600 *
Grotech III Pennsylvania Fund, LP (19)(20)(24)..................... 27,840 * 27,840 -- --
ReliaStar Financial Corp (25)...................................... 111,734 1.7 78,871 -- --
SunTrust Bank, N.A (26)............................................ 111,734 1.7 78,871 -- --
Michael R. Baranowski (27)......................................... 44,225 * 7,500 36,725(33) *
Dennis A. Guenther (28)............................................ 44,882 * 7,834 37,048(33) *
Christopher D. Kent (29)........................................... 53,070 * 8,500 44,570(33) *
John C. Klick (30)................................................. 53,070 * 8,500 44,570(33) *
Laureen M. Ryan (31)............................................... 11,277 * 2,641 8,636(33) *
Other Principal Stockholders:
Investment Counselors of Maryland, Inc. (32)....................... 391,000 6.1 -- 391,000 3.9
Joseph R. Reynolds, Jr............................................. 441,416 6.9 -- 441,416 4.4
</TABLE>
__________________
* Less than 1%.
35
<PAGE>
(1) Unless otherwise specified, the address of these persons is c/o FTI
Consulting, Inc., 2021 Research Drive, Annapolis, Maryland 21401.
(2) We use the SEC's definition of beneficial ownership. This means that the
persons named in this table have sole or shared voting and/or investment
power over the shares shown. Beneficial ownership also includes shares
underlying options or warrants currently exercisable or exercisable within
60 days.
(3) After this offering, includes 34,730 shares of common stock and 294,759
shares of common stock issuable upon the exercise of options. Includes
8,000 shares of common stock over which Mr. Dunn and his wife share voting
and investment power and includes 200 shares over which Mr. Dunn and his
son share voting and investment power.
(4) After this offering, includes 298,528 shares of our common stock, 60,000
shares of our common stock issuable on exercise of a currently exercisable
warrant and 66,666 shares of our common stock issuable upon exercise of
stock options.
(5) Includes 2,000 shares of our common stock and 13,334 shares of our common
stock issuable upon exercise of stock options.
(6) Includes 5,500 shares of our common stock and 178,600 shares of our common
stock issuable upon exercise of stock options.
(7) Includes 10,200 shares of our common stock and 13,333 shares of our common
stock issuable upon exercise of stock options.
(8) After this offering, includes 52,653 shares of our common stock, 46,666
shares of our common stock issuable upon exercise of stock options and a
warrant for 17,333 shares of our common stock.
(9) After this offering, includes 357,500 shares of our common stock and
100,000 shares of our common stock issuable upon exercise of stock options.
(10) After this offering, includes 357,500 shares of our common stock and
100,000 shares of our common stock issuable upon exercise of stock options.
(11) Represents 20,000 shares of our common stock issuable upon the exercise of
options granted to Mr. Binder as one of our non-employee directors.
(12) Includes 13,731 shares of our common stock and 55,600 shares of our common
stock issuable upon exercise of stock options.
(13) Includes 23,463 shares of our common stock and 55,600 shares of our common
stock issuable upon exercise of stock options.
(14) Includes 25,000 shares of our common stock and 55,600 shares of our common
stock issuable upon exercise of options granted to Mr. Shaughnessy as one
of our non-employee directors. Under an arrangement between Mr.
Shaughnessy and Grotech Capital Group, Grotech Capital Group has the sole
right to exercise the options and exercise voting and investment power over
the shares of our common stock issuable on exercise of the options. Mr.
Shaughnessy disclaims beneficial ownership of all shares of our common
stock and shares issuable upon exercise of warrants held by Grotech III
Pennsylvania Fund, Grotech III Companion Fund and Grotech Partners III.
(15) Includes 5,838 shares of our common stock over which Mr. Stamas and his
wife share voting and investment power and 55,600 shares of our common
stock issuable upon exercise of options granted to Mr. Stamas as one of our
non-employee directors.
(16) Represents a warrant for 449,935 shares of our common stock before this
offering. The number of shares of our common stock underlying the warrant
is reduced by 98,590 shares as a result of our prepayment of the senior
subordinated notes with the net proceeds of this offering.
(17) Mr. Binder is a principal of Allied Capital Corporation and Allied
Investment Corporation. Mr. Binder disclaims beneficial ownership of the
warrants and underlying shares held by Allied Capital Corporation and
Allied Investment Corporation. Allied entities' addresses are 1919
Pennsylvania Avenue, N.W. Washington, DC 20006.
(18) Represents a warrant for 146,938 shares of our common stock.
(19) Grotech Capital Group is the general partner of Grotech III Pennsylvania
Fund, Grotech III Companion Fund and Grotech Partners III. Dennis J.
Shaughnessy, one of our directors, is a Managing Director of Grotech
Capital Group. Grotech Capital Group maintains beneficial ownership over
each Fund's shares. Mr. Shaughnessy disclaims beneficial ownership of all
shares of our common stock and shares issuable upon exercise of warrants
held by Grotech III Pennsylvania Fund, Grotech III Companion Fund and
Grotech Partners III.
(20) Grotech entities' addresses are 9690 Deereco Road, Timonium, Maryland
21093.
36
<PAGE>
(21) Includes 381,322 shares of our common stock and a warrant for 8,399 shares
of our common stock.
(22) Includes 45,438 shares of our common stock and a warrant for 1,001 shares
of our common stock.
(23) After this offering, represents 55,600 shares of our common stock issuable
upon exercise of stock options granted to Mr. Shaughnessy, one of our
directors. Pursuant to an arrangement between Mr. Shaughnessy and Grotech
Capital Group, Grotech Capital Group has the sole right to exercise the
options and to vote or invest the common stock issuable thereunder.
(24) Before this offering, includes 27,240 shares of our common stock and a
warrant for 600 shares of our common stock.
(25) Represents a warrant for 111,734 shares of our common stock before this
offering. The number of shares of our common stock underlying the warrant
is reduced by 32,863 shares as a result of our prepayment of the senior
subordinated notes with the net proceeds of this offering.
(26) Represents a warrant for 111,734 shares of our common stock before this
offering. The number of shares of our common stock underlying the warrant
is reduced by 32,863 shares as a result of our prepayment of the senior
subordinated notes with the net proceeds of this offering.
(27) After this offering, includes 30,058 shares of our common stock and a
warrant for 6,667 shares of our common stock.
(28) After this offering, includes 23,715 shares of our common stock and a
warrant for 13,333 shares of our common stock.
(29) After this offering, includes 36,570 shares of our common stock and a
warrant for 8,000 shares of our common stock.
(30) After this offering, includes 36,570 shares of our common stock and a
warrant for 8,000 shares of our common stock.
(31) After this offering, includes 6,936 shares of our common stock and a
warrant for 1,700 shares of our common stock.
(32) Investment Counselors of Maryland's address is 803 Cathedral Street,
Baltimore, Maryland 21401. Information is based on an amended Schedule 13G
filed with the SEC on February 9, 2000.
(33) Assumes no exercise of the underwriters' over-allotment option.
37
<PAGE>
UNDERWRITING
We, the selling stockholders and the underwriters named below have entered
into an underwriting agreement with respect to the shares being offered.
Subject to certain conditions, each underwriter has severally agreed to purchase
the number of shares of common stock indicated in the following table.
Number of
Underwriters Shares
------------ ------
ING Barings LLC.................................
Janney Montgomery Scott LLC.....................
---------
Total...................................... 4,450,000
=========
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares of common stock are subject to certain
conditions. The underwriters are committed to purchase all of the shares of
common stock offered by us and the selling stockholders if they purchase any of
the shares of common stock.
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this Prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to public. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from
the initial price to public. If all the shares are not sold at the initial
price to public, the representatives may change the offering price and the other
selling terms.
We and the selling stockholders have granted to the underwriters an option
to purchase up to an aggregate of 382,526 and 284,974 additional shares of
common stock, respectively, the public offering price less the aggregate
underwriting discounts and commissions shown on the cover page of this
Prospectus, exercisable solely to cover over-allotments, if any. Such option may
be exercised at any time until 30 days after the date of this Prospectus. To the
extent the option is exercised, the Underwriters will be committed, subject to
certain conditions, to purchase a number of additional shares of common stock
proportionate to such underwriter's initial commitment as indicated in the above
table, and we will be obligated, pursuant to such over-allotment option, to sell
such shares of common stock to the underwriters.
The following table shows the underwriting fees to be paid to the
underwriters by the selling stockholders and by us in connection with this
offering. These amounts are shown assuming both no exercise and full exercise of
the underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
FTI:
Per share................................................................ $ $
Total.................................................................... $ $
Selling stockholders:
Per share................................................................ $ $
Total.................................................................... $ $
</TABLE>
38
<PAGE>
All of our senior executive officers, directors and the selling
stockholders have agreed with the underwriters that, subject to certain
exceptions, during the period beginning from the date of this Prospectus and
continuing to and including the date 90 days after the date of this Prospectus,
they will not offer, sell, contract to sell or otherwise dispose of any of our
common stock or other securities (other than pursuant to employee plans
existing, or on the conversion or exchange of convertible or exchangeable
securities outstanding, on the date of this Prospectus) which are substantially
similar to the common stock, or which are convertible or exchangeable into
common stock, without the prior written consent of ING Barings.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute, under certain
circumstances, to payments that the underwriters may be required to make in
respect thereof.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale, by the underwriters, of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the American
Stock Exchange, in the over-the-counter market or otherwise.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the underwriters
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
The underwriters have informed us that they do not intend to confirm sales
of common stock offered hereby to any accounts over which they exercise
discretionary authority.
An affiliate of ING Barings is a member of the syndicate of lenders under
our senior credit facility. None of the proceeds of this offering will be used
to pay any of our indebtedness to ING Barings.
Janney has periodically performed investment banking and financial advisory
services for FTI, including providing an opinion regarding the fairness, from a
financial point of view, of the consideration we paid for P&M. We paid Janney a
fee of $100,000 for its services and reimbursed Janney for its reasonable
out-of-pocket expenses. We also agreed to indemnify Janney and certain of its
related persons against certain liabilities arising out of the P&M acquisition
engagement.
LEGAL MATTERS
The validity of our common stock offered by this Prospectus will be passed
upon for us by Piper Marbury Rudnick & Wolfe LLP, Baltimore, Maryland. Piper
Marbury Rudnick & Wolfe LLP provides legal services to us on an ongoing basis.
Certain legal matters will be passed upon for the underwriters by Duane, Morris
& Heckscher LLP, Harrisburg, Pennsylvania.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule
39
<PAGE>
at December 31, 1998 and 1999, and for each of the three years in the period
ended December 31, 1999, as set forth in their report. Ernst & Young LLP have
also audited the financial statements of Policano & Manzo, L.L.C. at December
31, 1998 and 1999, and for each of the three years in the period ended December
31, 1999 as set forth in their report. We have included our consolidated
financial statements and schedules, the financial statements of Policano &
Manzo, L.L.C., and the information under the caption "Selected Financial Data"
for each of the five years ended December 31, 1999, in this Prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information that we file with the SEC at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-
0330 for further information on the public reference room. These SEC filings are
also available to the public from commercial document retrieval services and at
the Internet site maintained by the SEC at "http://www.sec.gov." Reports, proxy
statements and other information filed by us should also be available for
inspection at the offices of the American Stock Exchange, 86 Trinity Place, New
York, New York 10006.
We filed a Registration Statement on Form S-2 to register with the SEC the
shares of our common stock to be issued and sold in this offering. This
Prospectus is a part of that Registration Statement. As allowed by SEC rules,
this Prospectus does not contain all of the information you can find in the
Registration Statement or the exhibits to that Registration Statement. You
should rely only on the information contained or incorporated by reference in
this Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" information into this
Prospectus, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered part of this Prospectus, except for any
information superseded by information contained directly in this Prospectus or
in later filed documents incorporated by reference in this Prospectus. The
following documents and information that we have previously filed with the SEC
are incorporated by reference in this Prospectus. These documents contain
important information about us and our finances and should be reviewed
carefully:
. Annual Report on Form 10-K for the year ended December 31, 1999;
. Quarterly Reports on Form 10-Q for the quarters ended March 31, 2000
and June 30, 2000;
. Current Report on Form 8-K filed on February 15, 2000 and as amended
on April 6, 2000 to add financial statements of Policano & Manzo and
pro forma financial information; and
. The description of our common stock which is contained in filings we
have made under the Securities Exchange Act of 1934, including all
amendments or reports we have filed for the purpose of updating this
description.
We file periodic reports with the SEC, including Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as
well as proxy statements. Any documents filed by us with the SEC and
incorporated by reference (excluding exhibits, unless specifically incorporated
in this Prospectus) are available without charge upon written or oral request to
Theodore I. Pincus, Secretary, FTI Consulting, Inc. Telephone requests may be
directed to Mr. Pincus at (410)224-8770.
40
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Financial Statements of FTI Consulting, Inc.
Report of Independent Auditors..................................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999
and June 30, 2000 (unaudited)..................................................... F-3
Consolidated Statements of Income for each of the three years in
the period ended December 31, 1999 and for the six months
ended June 30, 1999 and 2000 (unaudited).......................................... F-4
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 1999 and for the
six months ended June 30, 2000 (unaudited)........................................ F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1999 and for the six
months ended June 30, 1999 and 2000 (unaudited)................................... F-6
Notes to Consolidated Financial Statements......................................... F-7
Financial Statements of Policano & Manzo, L.L.C.
Report of Independent Auditors..................................................... F-26
Balance Sheets as of December 31, 1998 and 1999.................................... F-27
Statements of Income for each of the three years in the period
ended December 31, 1999.......................................................... F-28
Statements of Members' Equity for each of the three years in the period
ended December 31, 1999.......................................................... F-29
Statements of Cash Flows for each of the three years in the period
ended December 31, 1999.......................................................... F-30
Notes to Financial Statements...................................................... F-31
Unaudited Consolidated Pro Forma Financial Information
Unaudited Pro Forma Consolidated Statements of Income
for the year ended December 31, 1999 and for the six
months ended June 30, 2000........................................................ P-1
Notes to Unaudited Consolidated Pro Forma Statements of
Income............................................................................ P-3
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
FTI Consulting, Inc.
We have audited the accompanying consolidated balance sheets of FTI Consulting,
Inc. and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FTI
Consulting, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Baltimore, Maryland
February 11, 2000
F-2
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999 2000
---------------------------------------
(unaudited)
(dollars in thousands)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,223 $ 5,046 $ 2,992
Accounts receivable, less allowance of $1,305
in 1998, $1,065 in 1999 and $980 in 2000 13,139 14,458 25,020
Unbilled receivables, less allowance of $1,117
in 1998, $1,160 in 1999 and $867 in 2000 7,803 9,222 15,168
Income taxes recoverable 794 64 446
Deferred income taxes - 641 641
Prepaid expenses and other current assets 1,262 1,461 1,875
-----------------------------------------
Total current assets 26,221 30,892 46,142
Property and equipment:
Buildings 411 - -
Furniture, equipment and software 14,752 17,205 18,762
Leasehold improvements 1,891 1,955 2,293
-----------------------------------------
17,054 19,160 21,055
Accumulated depreciation and amortization (8,767) (10,781) (12,165)
-----------------------------------------
8,287 8,379 8,890
Goodwill, net of accumulated amortization of
$1,160 in 1998, $3,473 in 1999 and $5,723 in 2000 45,164 43,658 93,702
Other assets 75 1,363 3,921
-----------------------------------------
Total assets $79,747 $ 84,292 $152,655
=========================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 2,924 $ 3,240 $ 2,550
Accrued compensation expense 2,765 5,373 7,816
Deferred income taxes - 471 471
Current portion of long-term debt 10,650 1,718 4,750
Advances from clients 498 435 6,902
Other current liabilities 313 422 984
-----------------------------------------
Total current liabilities 17,150 11,659 23,473
Long-term debt, less current portion 35,630 41,009 82,277
Other long-term liabilities 269 411 372
Deferred income taxes 1,104 961 961
Commitments and contingent liabilities - - -
Stockholders' equity:
Preferred stock, $0.01 par value; 4,000,000
shares authorized in 1998, 1999 and 2000,
none outstanding - - -
Common stock, $0.01 par value; 16,000,000 shares
authorized; 4,781,895, 4,913,905 and
6,465,968 shares issued and outstanding in
1998, 1999 and 2000, respectively 48 49 65
Additional paid-in capital 16,531 18,197 30,543
Retained earnings 9,015 12,006 14,964
-----------------------------------------
Total stockholders' equity 25,594 30,252 45,572
-----------------------------------------
Total liabilities and stockholders' equity $79,747 $ 84,292 $ 152,655
=========================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
1997 1998 1999 1999 2000
----------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues $ 44,175 $ 58,615 $ 84,607 $ 41,273 $ 65,599
Direct cost of revenues 23,564 31,402 44,149 21,350 32,811
Selling, general and administrative
expenses 15,160 20,532 28,829 14,445 18,211
Amortization of goodwill 81 996 2,313 1,139 2,249
----------------------------------------------------------------------
Total costs and expenses 38,805 52,930 75,291 36,934 53,271
----------------------------------------------------------------------
Income from operations 5,370 5,685 9,316 4,339 12,328
----------------------------------------------------------------------
Other income (expense):
Interest and other income 343 319 136 142 92
Interest expense (170) (1,482) (4,150) (1,962) (5,586)
----------------------------------------------------------------------
173 (1,163) (4,014) (1,820) (5,494)
-----------------------------------------------------------------------
Income before income taxes and
extraordinary item 5,543 4,522 5,302 2,519 6,834
Income taxes 2,250 1,954 2,311 1,189 3,007
----------------------------------------------------------------------
Income before extraordinary item 3,293 2,568 2,991 1,330 3,827
Extraordinary loss on early extinguishment
of debt, net of income taxes of $660 - - - - 869
----------------------------------------------------------------------
Net income $ 3,293 $ 2,568 $ 2,991 $ 1,330 $ 2,958
======================================================================
Income before extraordinary item per
common share, basic $ 0.73 $ 0.54 $ 0.61 $ 0.28 $ 0.62
======================================================================
Earnings per common share, basic $ 0.73 $ 0.54 $ 0.61 $ 0.28 $ 0.48
======================================================================
Income before extraordinary item per
common share, diluted $ 0.70 $ 0.51 $ 0.59 $ 0.27 $ 0.55
======================================================================
Earnings per common share, diluted $ 0.70 $ 0.51 $ 0.59 $ 0.27 $ 0.43
======================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(dollars in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
--------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 45 $ 14,429 $ 3,154 $ 17,628
Exercise of options to purchase 34,000 shares
of common stock 1 97 - 98
Net income for 1997 - - 3,293 3,293
---------------------------------------------
Balance at December 31, 1997 46 14,526 6,447 21,019
Exercise of options to purchase 217,900 shares
of common stock 2 2,005 - 2,007
Net income for 1998 - - 2,568 2,568
---------------------------------------------
Balance at December 31, 1998 48 16,531 9,015 25,594
Issuance of 552,539 warrants to purchase
common stock - 1,291 - 1,291
Issuance of 132,010 shares of common stock
under Employee Stock Purchase Plan 1 375 - 376
Net income for 1999 - - 2,991 2,991
---------------------------------------------
Balance at December 31, 1999 49 18,197 12,006 30,252
Issuance of warrants to purchase 670,404
shares of common stock in connection with
debt refinancing - 3,714 - 3,714
Retirement of 130,835 warrants to purchase
shares of 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 52,892 shares of common stock
under Employee Stock Purchase Plan 1 229 - 230
Issuance of 20,000 share of restricted common
stock - 159 - 159
Exercise of options and warrants to purchase
59,997 shares of common stock 1 351 - 352
Net income for six months ended June 30, 2000 - - 2,958 2,958
---------------------------------------------
Balance at June 30, 2000 (unaudited) $ 65 $ 30,543 $ 14,964 $ 45,572
=============================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
1997 1998 1999 1999 2000
-----------------------------------------------------
(unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income $ 3,293 $ 2,568 $ 2,991 $ 1,330 $ 2,958
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Extraordinary loss on early extinguishment of
debt, before income taxes - - - - 1,529
Depreciation and other amortization 1,434 1,789 2,621 1,029 1,280
Amortization of goodwill 307 1,192 2,313 1,412 2,249
Provision for doubtful accounts 526 473 (197) 567 (378)
Deferred income taxes (227) (626) (313) (132) -
Loss (gain) on disposal of assets - - 26 10 17
Non-cash interest expense - - - - 1,116
Other - 208 - - -
Changes in operating assets and liabilities:
Accounts receivable (3,284) 1,207 (1,079) 332 (5,281)
Unbilled receivables (788) 51 (1,462) (2,424) (5,267)
Income taxes recoverable/payable 408 (694) 730 610 (383)
Prepaid expenses and other current assets 170 (270) (199) (429) (408)
Accounts payable and accrued expenses 826 (83) 316 (853) (1,494)
Accrued compensation expense 1,017 (205) 2,608 1,282 1,887
Advances from clients (67) (21) (63) (9) 4,225
Other current liabilities 33 (296) 109 456 992
-----------------------------------------------------
Net cash provided by operating activities 3,648 5,293 8,401 3,181 3,042
Investing activities
Purchase of property and equipment (2,800) (3,327) (3,093) (1,316) (1,699)
Proceeds from sale of property and equipment - 130 592 98 47
Contingent payments to former shareholders of
subsidiaries - (440) (807) (451) (165)
Acquisition of P&M, including acquisition costs - - - - (49,404)
Acquisition of KK&A, including acquisition costs - (6,242) - - -
Acquisition of KCI, including acquisition costs - (10,237) - (56) -
Acquisition of SEA, including acquisition costs - (9,961) - - -
Acquisition of Bodaken, including acquisition costs (1,875) - - - -
Acquisition of LWG, including acquisition costs (1,956) - - - -
Change in other assets 480 - (1,288) 1 (232)
-----------------------------------------------------
Net cash used in investing activities (6,151) (30,077) (4,596) (1,724) (51,453)
Financing activities
Issuance of common stock and exercise of stock
options 98 1,610 376 136 741
Borrowings under long-term debt arrangements - 26,000 33,000 13,000 90,548
Retirement of detachable stock warrants - - - - (277)
Repayments of long-term debt (842) (1,959) (35,500) (13,213) (40,820)
Payment of financing fees - - - (900) (3,782)
Changes in other long-term liabilities (191) (100) 142 (68) (53)
-----------------------------------------------------
Net cash provided by (used in) financing activities (935) 25,551 (1,982) (1,045) 46,357
-----------------------------------------------------
Net increase (decrease) in cash and cash equivalents (3,438) 767 1,823 412 (2,054)
Cash and cash equivalents at beginning of period 5,894 2,456 3,223 3,223 5,046
-----------------------------------------------------
Cash and cash equivalents at end of period $ 2,456 $ 3,223 $ 5,046 $ 3,635 $ 2,992
=====================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in tables expressed in thousands, except per share data)
(Information as of June 30, 2000 and for each of the six month periods ended
June 30, 1999 and 2000 is unaudited)
1. Description of Business and Significant Accounting Policies
Basis of Presentation of Financial Statements
Description of Business
FTI Consulting, Inc. and subsidiaries (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. The
Company provides services to major corporations, law firms, banks and insurance
companies. These services include visual communications and trial consulting,
engineering and scientific services, expert financial services including
turnaround and bankruptcy consulting, assessment and expert testimony regarding
intellectual property rights and claims management outsourcing services, from
assessment to restoration. The Company has nearly 500 employees in over 30
locations throughout the United States.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions have
been eliminated.
Unaudited Interim Financial Information
The unaudited interim financial information as of June 30, 2000 and for the six
months ended June 30, 1999 and 2000 has been prepared in accordance with
generally accepted accounting principles for interim financial information and
with instructions to Article 10 of Regulation S-X. In the opinion of management,
such information contains all adjustments, consisting only of normal recurring
adjustments, considered necessary for a fair presentation of such period. The
operating results for any interim period are not necessarily indicative of
results for any future periods.
F-7
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
The Company uses estimates to determine the amount of the allowance for doubtful
accounts necessary to reduce accounts receivable and unbilled receivables to
their expected net realizable value. The Company estimates the amount of the
required allowance by reviewing the status of significant past-due receivables
and analyzing historical bad debt trends. Actual collection experience has not
varied significantly from estimates, due primarily to credit policies,
collection experience, and a lack of concentrations of accounts receivable.
Accounts receivable balances are not collateralized.
Cash Equivalents
The Company considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-line
method. Furniture and equipment is depreciated over estimated useful lives
ranging from five to seven years, and leasehold improvements are amortized over
the lesser of the estimated useful life of the asset or the lease term.
On January 1, 1999, the Company adopted AICPA Statement of Position 98-1 ("SOP
98-1"),"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 requires the capitalization of direct costs incurred in
connection with developing or obtaining software for internal use, including
external direct costs of materials and services and payroll and payroll-related
costs for employees who are directly associated with and devote time to an
internal use software development project. During 1999, the Company capitalized
$1.3 million of costs related to the development and implementation of internal
use software.
F-8
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Significant Accounting Policies (continued)
Intangible Assets
Goodwill consists of the cost in excess of fair value of the net assets of
entities acquired in purchase transactions and is amortized over the expected
periods of benefit, which range from 15 to 25 years. On a periodic basis, the
Company evaluates goodwill for impairment. In completing this evaluation, the
Company compares its best estimates of undiscounted future cash flows with the
carrying value of goodwill.
Revenue Recognition
The Company derives most of its revenues from professional service activities.
The vast majority of these activities are provided under "time-and-materials"
billing arrangements, and revenues, consisting of billed fees and pass-through
expenses, are recorded as work is performed and expenses are incurred. Revenues
recognized but not yet billed to clients have been recorded as unbilled
receivables in the accompanying consolidated balance sheets.
Direct Cost of Revenues
Direct cost of revenues consists primarily of billable employee compensation and
related payroll benefits, the cost of consultants assigned to revenue-generating
activities and direct expenses billable to clients. Direct cost of revenues does
not include an allocation of overhead costs.
Stock Options Granted to Employees
The Company records compensation expense for all stock-based compensation plans
using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"). Under APB No. 25, if the exercise
price of the Company's employee stock-based awards equals or exceeds the
estimated fair value of the underlying stock on the date of grant, no
compensation expense is generally recognized. Financial Accounting Standards
Board Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement
123") encourages companies to recognize expense for stock-based awards based on
their estimated value on the date of grant. Statement 123 requires the
disclosure of pro forma income and earnings per share data in the notes to the
financial statements if the fair value method is not adopted. The Company has
supplementally disclosed in Note 7 the required pro forma information as if the
fair value method had been adopted.
F-9
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Significant Accounting Policies (continued)
Income Taxes
The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
2. Earnings Per Share
The following table summarizes the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
1997 1998 1999 1999 2000
---------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
Numerator used in basic and diluted earnings
per common share
Income before extraordinary item $3,293 $2,568 $2,991 $1,330 $3,827
Extraordinary item, net of taxes - - - - 869
------------ ------------- ------------ ----------- -------------
Net income $3,293 $2,568 $2,991 $1,330 $2,958
============ ============= ============ =========== =============
Denominator
Denominator for basic earnings per common
share - weighted average shares 4,529 4,725 4,872 4,829 6,139
------------ ------------- ------------ ----------- -------------
Effect of dilutive securities:
Warrants - - 115 44 480
Employee stock options 169 352 41 22 336
------------ ------------- ------------ ----------- -------------
169 352 156 66 816
------------ ------------- ------------ ----------- -------------
Denominator for diluted earnings per common
share - weighted average shares and
assumed conversions
4,698 5,077 5,028 4,895 6,955
=========== ============ =========== ========== ============
</TABLE>
F-10
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Earnings Per Share (continued)
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
1997 1998 1999 1999 2000
---------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Income before extraordinary item per
common share, basic $0.73 $0.54 $0.61 $0.28 $ 0.62
Extraordinary loss per common share, basic - - - - (0.14)
------------ ------------- ------------ ----------- ------------
Earnings per common share, basic $0.73 $0.54 $0.61 $0.28 $ 0.48
============ ============= ============ =========== ============
Income before extraordinary item per common
share, diluted $0.70 $0.51 $0.59 $0.27 $ 0.55
Extraordinary loss per common share, diluted - - - - (0.12)
------------ ------------- ------------ ----------- ------------
Earnings per common share, diluted $0.70 $0.51 $0.59 $0.27 $ 0.43
============ ============= ============ =========== ============
</TABLE>
3. Supplemental Disclosure of Cash Flow Information
In 1997, the Company purchased two entities for total consideration of $5.3
million. In connection with these acquisitions, assets with a fair market value
of $7.3 million were acquired and liabilities of approximately $2.0 million were
assumed. In 1998, the Company purchased three entities for total consideration
of $45.6 million. In connection with these acquisitions, assets with a fair
market value of $50.4 million were acquired and liabilities of approximately
$4.8 million were assumed. In February 2000, the Company purchased Policano &
Manzo, L.L.C. for total consideration of $54.9 million. In connection with this
acquisition, assets with a fair market value of $58.0 million were acquired and
liabilities of approximately $3.1 million were assumed.
The Company paid interest of $117,000, $1.0 million and $4.1 million and income
taxes of $1.5 million, $2.9 million and $2.0 million during fiscal years 1997,
1998 and 1999, respectively. The Company paid interest of $1.8 million and $3.9
million and income taxes of $1.0 million and $3.0 million for the six months
ended June 30, 1999 and 2000, respectively.
F-11
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Acquisitions
L.W.G., Inc.
Effective September 1, 1997, the Company acquired all of the outstanding common
stock of L.W.G., Inc. and its subsidiary (collectively, "LWG"). LWG is based in
Northbrook, Illinois, and provides claims management consulting and restoration
services to the insurance industry. The acquisition was accounted for using the
purchase method of accounting. The purchase price consisted of an initial cash
payment of $1.8 million, plus additional consideration equal to 50% of the pre-
tax profits of LWG for each quarterly period from October 1, 1997 through
September 30, 2001. Upon the resolution of the amount of any contingent
payments, the Company records any additional consideration payable as additional
goodwill and amortizes that amount over the remaining amortization period. At
September 1, 1997, goodwill of approximately $1.5 million was recorded and is
being amortized over a period of 25 years. During 1998 and 1999, additional
contingent consideration of $440,000 and $398,000, respectively, was paid and
recorded as goodwill. The results of operations of LWG are included in the
accompanying consolidated statements of income commencing September 1, 1997.
Bodaken & Associates
Effective September 1, 1997, the Company acquired substantially all of the
assets of Bodaken & Associates, a trial research and consulting firm serving law
firms and corporations. The acquisition was accounted for using the purchase
method of accounting. The purchase price of $3.5 million included an initial
cash payment of $1.7 million with the remainder of $1.8 million evidenced by a
note payable bearing interest at 7%. Approximately $3.5 million in goodwill was
recorded and is being amortized over 20 years. The results of operations of
Bodaken & Associates are included in the accompanying consolidated statements of
income commencing September 1, 1997.
Kahn Consulting, Inc.
On September 17, 1998, the Company acquired all of the outstanding common stock
of Kahn Consulting, Inc., and KCI Management Corp. (collectively, "KCI"). KCI,
based in New York, New York, provides strategic advisory, turnaround, bankruptcy
and trustee services, as well as litigation consulting services. The purchase
price of $20.0 million included an initial payment of $10.0 million in cash,
with the remainder evidenced by notes payable bearing interest at 7.5%. The
acquisition was accounted for using the purchase method of accounting. At the
acquisition date, approximately $17.4 million of goodwill was recorded which is
being amortized over its estimated useful life of 20 years. The results of
operations of KCI are included in the accompanying consolidated statements of
income commencing September 17, 1998.
F-12
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Acquisitions (continued)
S.E.A., Inc.
Effective September 1, 1998, the Company acquired all of the outstanding common
stock of S.E.A., Inc. ("SEA"). SEA, based 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 purchase price of $15.6 million included an initial payment of
$10.0 million in cash, with the remainder evidenced by notes payable bearing
interest at 7.5%. The acquisition was accounted for using the purchase method of
accounting. At the acquisition date, approximately $13.6 million of goodwill was
recorded which is being amortized over its estimated useful life of 20 years.
The results of operations of SEA are included in the accompanying consolidated
statements of income commencing September 1, 1998.
Klick, Kent & Allen, Inc.
On June 1, 1998, the Company acquired all of the outstanding common stock of
Klick, Kent & Allen, Inc. ("KK&A"). KK&A, based in Alexandria, Virginia,
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. The initial purchase price of approximately $10.0 million included
$6.0 million in cash and $4.0 million evidenced by notes payable bearing
interest at 7.5%. Contingent consideration equal to 50% of the excess over $1.0
million of pre-tax earnings of KK&A for 2000 and 2001 will be payable. The
acquisition was accounted for using the purchase method of accounting. At the
acquisition date, approximately $9.7 million of goodwill was recorded which is
being amortized over its estimated useful life of 20 years. The results of
operations of KK&A are included in the accompanying consolidated statements of
income commencing June 1, 1998. During 1999, contingent consideration of
$409,000 was earned and recorded as goodwill.
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 $54.9 million, consisting of $48.3 million
in cash and 815,000 shares of common stock valued at $5.5 million and
acquisition related expenses of $1.1 million. 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
20 years. The results of operations of P&M are included in the accompanying
consolidated statements of income commencing January 31, 2000.
F-13
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Acquisitions (continued)
Pro Forma Information for Acquisition of P&M
The following table summarizes the unaudited pro forma consolidated results of
operations for the year ended December 31, 1999 and the six months ended June
30, 2000 assuming that the acquisition of P&M had occurred on January 1, 1999.
The pro forma information gives effect to certain adjustments, including
increased interest expense on acquisition debt and amortization of recorded
goodwill.
<TABLE>
<CAPTION>
Six months
Year ended ended
December 31, 1999 June 30, 2000
------------------------------------------------
<S> <C> <C>
Revenues $106,119 $68,037
Income before extraordinary item 4,549 4,166
Net income 4,549 3,297
Income before extraordinary item
per common share, diluted $ 0.71 $ 0.57
Net income per common share -
diluted $ 0.71 $ 0.45
</TABLE>
The pro forma consolidated results of operations are not necessarily indicative
of the results that would have occurred had these transactions been consummated
as of the beginning of 1999 or of future operations of the Company.
5. 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
initially 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.
F-14
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Debt (continued)
The proceeds from these borrowings of $91.0 million, in tandem with $2.0 million
of available cash, were used to finance the $48.3 million cash purchase price of
P&M, refinance $41.2 million of the $43.9 million of existing long-term debt and
fund acquisition and finance related expenses of $3.5 million. The remaining
$2.7 million of long-term debt was exchanged for 604,504 shares of common stock.
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.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999 2000
-----------------------------------------------------------
<S> <C> <C> <C>
Amounts due under a $61.0 million amortizing term loan. This
facility is secured by substantially all assets of the Company. $ - $ - $ 59,938
Amounts due under $30.0 million of subordinated notes (net of
discount of $3.5 million plus payment-in-kind interest of $600,000) - - 27,089
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 26,000 19,964 -
Subordinated debentures (net of discount of $848,000 in 1999)
bearing interest at 9.25% per annum. - 12,152 -
Notes payable to former shareholders of acquired businesses (net of
discount of $169,000 in 1999). 20,280 10,611 -
-----------------------------------------------------------
Total debt 46,280 42,727 87,027
Less current portion (10,650) (1,718) (4,750)
-----------------------------------------------------------
Total long-term debt $ 35,630 $ 41,009 $ 82,277
===========================================================
</TABLE>
F-15
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Debt (continued)
The aggregate maturities of long-term debt at June 30, 2000, excluding debt
discount, are as follows:
July 1 through December 31, 2000 $ 2,125
Year ended December 31, 2001 5,750
2002 7,750
2003 11,250
2004 14,500
2005 14,875
Thereafter 33,687
-------
Total $89,937
=======
The terms of the subordinated debentures prohibit the payment of dividends
without the consent of the lender.
The fair values of long-term debt are estimated to approximate their carrying
values.
In March 2000, the Company entered into interest rate swap and cap transactions
on $41.0 million of outstanding amortizing term loans, in accordance with
provisions of the credit facility. The $20.5 million of swap transactions
resulted in exchanging floating LIBOR rates for fixed rates. The $20.5 million
of 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 swap
transactions and resulted in fixed rates of 7.41% on $10.0 million of debt and
7.43% on $10.5 million of debt. The mark-to-market valuation of these hedges at
June 30, 2000 was approximately $50,000.
F-16
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Warrants
In connection with the issuance of long-term debt, the Company issued warrants
that allow for the purchase of 1,242,943 shares of common stock. In February
2000, in connection with the debt refinancing described in Note 5, the Company
repurchased warrants to purchase 130,835 shares of common stock. At June 30,
2000, warrants to purchase 1,102,108 shares of common stock remain outstanding,
with the following terms:
Year Issued Number of Shares Exercise Price Per Share Expiration Date
--------------------------------------------------------------------------------
1996 10,000 $8.50 May 2001
1999 20,000 $3.68 February 2009
1999 25,000 $3.00 March 2006
1999 261,671 $3.21 March 2010
1999 115,033 $3.21 March 2004
2000 670,404 $4.44 January 2010
----------------
1,102,108
================
The fair value of the warrants issued in each period was estimated using the
Black-Scholes option pricing model, a generally accepted warrant valuation
methodology. The following valuation assumptions were used in the calculations
of the value of the warrants:
Warrants Issued Warrants Issued
Assumptions in 1999 in 2000
--------------------------------------------------------------------------------
Risk free interest rate 5.5% 5.5%
Expected dividend yield 0% 0%
Expected stock price volatility 0.930 0.647
Expected life 4 to 8.8 years 5 years
Aggregate fair value $1,300 $3,700
The estimated value of the warrants was recorded as additional paid-in capital,
and the related debt was recorded net of the resulting discount.
F-17
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Option Plans
Prior to 1997, the Company granted certain options to key employees under the
1992 Stock Option Plan. This plan was terminated in 1997 upon the adoption of
the 1997 Stock Option Plan ("the 1997 Plan"). The 1997 Plan, provides for the
granting to employees and non-employee directors of non-qualified options to
purchase an aggregate of up to 3,000,000 shares of common stock. Options to
purchase common stock may be granted at prices not less than 50% of the fair
market value of the common stock at the date of grant, for a term of no more
than ten years. Vesting provisions for individual awards are at the discretion
of the Board of Directors.
The following table summarizes the option activity under the Plan for the three-
year period ended December 31, 1999:
<TABLE>
<CAPTION>
1997 1998
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1997 Price 1998 Price 1999 Price
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at January 1 576,179 $5.88 1,495,229 $7.96 1,820,829 $7.86
Options granted 995,850 9.02 565,000 7.73 397,500 4.25
Options exercised (34,000) 2.85 (217,900) 6.83 - -
Options forfeited (42,800) 8.48 (21,500) 8.92 (200,300) 8.25
--------- ----- --------- ----- --------- -----
Options outstanding at December 31 1,495,229 $7.96 1,820,829 $7.86 2,018,029 $7.11
========= ===== ========= ===== ========= =====
Options exercisable at December 31 448,325 $6.47 674,580 $7.69 1,197,591 $7.87
========= ===== ========= ===== ========= =====
</TABLE>
All options granted have an exercise price equal to or greater than the fair
value of the Company's common stock on the date of grant. Exercise prices for
options outstanding as of December 31, 1999, ranged from $2.38 to $19.59 as
follows:
<TABLE>
<CAPTION>
Weighted Average
Remaining Weighted
Weighted Average Contractual Life Average Exercise
Range of Options Exercise Prices of of Options Options Prices of Options
Exercise Prices Outstanding Options Outstanding Outstanding Exercisable Exercisable
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.38 - $7.98 1,094,447 $ 4.99 8.01 years 488,750 $ 5.43
$8.50 - $9.90 843,582 $ 8.97 7.64 years 657,174 $ 8.97
$12.38 - $19.59 80,000 $16.63 8.28 years 51,667 $16.89
</TABLE>
F-18
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Option Plans (continued)
Pro Forma Disclosures Required by Statement 123
For the years ended December 31, 1997, 1998 and 1999, pro forma net income and
earnings per share information required by Statement 123 has been determined as
if the Company had accounted for its stock options using the fair value method.
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions:
Year ended December 31,
1997 1998 1999
----------------------------------
Risk free interest rate 5.5% 5.5% 5.5%
Expected dividend yield 0% 0% 0%
Expected option life 4 years 4 years 4 years
Expected stock price volatility 0.420-0.901 0.628-1.606 0.518-1.394
Weighted average fair value of $2.98 $4.58 $3.22
granted options
The Black-Scholes option pricing model and other models were developed for use
in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
The following table summarizes pro forma income and earnings per share:
Year ended December 31,
1997 1998 1999
---------------------------
Net income, as reported $3,293 $2,568 $2,991
Pro forma net income $2,355 $1,022 $1,233
Earnings per share, basic, as reported $ 0.73 $ 0.54 $ 0.61
Pro forma earnings per common share, basic $ 0.52 $ 0.22 $ 0.25
Earnings per common share, diluted, as reported $ 0.70 $ 0.51 $ 0.59
Pro forma earnings per common share, diluted $ 0.50 $ 0.20 $ 0.24
F-19
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Income Taxes
Significant components of the Company's deferred tax assets and liabilities at
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1999
----------------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 404 $ 428
Accrued vacation 82 213
------- ------
Total deferred tax assets 486 641
Deferred tax liabilities:
Use of cash basis for income tax purposes by subsidiary 1,268 699
Goodwill 133 344
Capitalized software 134 175
Prepaid expenses 50 36
Other 5 178
------- ------
Total deferred tax liabilities 1,590 1,432
------- ------
Net deferred tax liability $(1,104) $ (791)
======= ======
</TABLE>
Income tax expense (benefit) consisted of the following:
Year ended December 31
1997 1998 1999
-----------------------------------
Current:
Federal $1,983 $2,038 $1,937
State 494 542 687
------ ------ ------
2,477 2,580 2,624
Deferred (benefit):
Federal (253) (525) (190)
State 26 (101) (123)
------ ------ ------
(227) (626) (313)
------ ------ ------
$2,250 $1,954 $2,311
====== ====== ======
F-20
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
The Company's provision for income taxes resulted in effective tax rates that
varied from the statutory federal income tax rate as follows:
Year ended December 31,
1997 1998 1999
----------------------------
Expected federal income tax provision at 34% $1,885 $1,537 $1,803
Expenses not deductible for tax purposes 70 181 302
State income taxes, net of federal benefit 293 239 286
Other 2 (3) (80)
------ ------ ------
$2,250 $1,954 $2,311
====== ====== ======
The income tax provisions for interim periods in 1999 and 2000 are based on the
estimated effective tax rates applicable for the full years. The Company's
income tax expense of $3,007 for the six month period ended June 30, 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.
9. Operating Leases
The Company leases office space under noncancelable operating leases that expire
in various years through 2008. The leases for certain office space contain
provisions whereby the future rental payments may be adjusted for increases in
maintenance and insurance above specified amounts. The Company also leases
certain furniture and equipment in its operations under operating leases having
initial terms of less than one year.
Future minimum payments under noncancelable operating leases with initial terms
of one year or more consist of the following at December 31, 1999:
2000 $ 2,743
2001 2,354
2002 2,110
2003 1,581
2004 638
Thereafter 1,643
-------
Total minimum lease payments $11,069
=======
F-21
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Operating Leases (continued)
Rental expense consists of the following:
Year ended December 31,
1997 1998 1999
-------------------------------
Furniture and equipment $ 211 $ 326 $ 392
Office and storage 1,131 1,975 2,859
------ ------ ------
$1,342 $2,301 $3,251
====== ====== ======
10. Employee Benefit Plans
The Company maintains qualified defined contribution plans and 401(k) plans
which cover substantially all employees. Under the plans, participants are
entitled to make both pre-tax and after-tax contributions. The Company matches a
certain percentage of participant contributions pursuant to the terms of each
plan which are limited to a percent of the participant's eligible compensation.
Typically, the percentage match is based on each participant's respective years
of service and is at the discretion of the Board of Directors. The Company made
contributions of $153,000, $233,000 and $344,000 during 1997, 1998 and 1999,
respectively, related to these plans.
The Company also maintains an Employee Stock Purchase Plan which covers
substantially all employees. Under the Plan, participants are eligible to
purchase shares of the Company's common stock at a price that is equal to 85% of
the lesser of the fair market value of the stock on the first trading day of the
offering period or the last trading day of the offering period. Offering
periods commence the first day of each January and July in any particular year.
There are 400,000 shares of the Company's common stock issuable under the Plan,
and 132,010 shares have been issued as of December 31, 1999.
11. Segment Reporting
The Company provides litigation and claims management consulting services
through three distinct operating segments. The Financial Consulting 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 Consulting 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.
F-22
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Segment Reporting (continued)
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 and described in Note 1 to the
consolidated financial statements. There are no significant intercompany sales
or transfers.
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:
Year ended December 31, 1997
------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
------------------------------------------------------------------------------
Revenues $4,207 $12,000 $27,968 $44,175
Operating expenses 3,445 9,238 17,671 30,354
------ ------- ------- -------
Segment profit $ 762 $ 2,762 $10,297 $13,821
====== ======= ======= =======
Year ended December 31, 1998
------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
------------------------------------------------------------------------------
Revenues $9,264 $22,844 $26,507 $58,615
Operating expenses 6,696 18,931 18,971 44,598
------ ------- ------- -------
Segment profit $2,568 $ 3,913 $ 7,536 $14,017
====== ======= ======= =======
Year ended December 31, 1999
------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
------------------------------------------------------------------------------
Revenues $19,851 $35,693 $29,063 $84,607
Operating expenses 14,489 30,276 20,579 65,344
------- ------- ------- -------
Segment profit $ 5,362 $ 5,417 $ 8,484 $19,263
======= ======= ======= =======
F-23
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Segment Reporting (continued)
Six months ended June 30, 1999
------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
-------------------------------------------------------------------------------
Revenues $9,903 $17,769 $13,601 $41,273
Operating expenses 7,261 14,891 9,697 31,849
-------------------------------------------------------
Segment profit $2,642 $ 2,878 $ 3,904 $ 9,424
=======================================================
Six months ended June 30, 2000
-------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
-------------------------------------------------------------------------------
Revenues $28,851 $19,668 $17,080 $65,599
Operating expenses 16,866 16,063 12,706 45,635
-------------------------------------------------------
Segment profit $11,985 $ 3,605 $ 4,374 $19,964
=======================================================
A reconciliation of segment profit for all segments to income before income
taxes and extraordinary item is as follows:
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
1997 1998 1999 1999 2000
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating profit:
Total segment profit $13,821 $14,017 $19,263 $ 9,424 $19,964
Corporate general and
administrative expenses (6,710) (5,351) (5,251) (2,645) (4,107)
Depreciation and amortization (1,741) (2,981) (4,696) (2,440) (3,529)
Interest (expense) income 173 (1,163) (4,014) (1,820) (5,494)
----------------------------------------------------------
Income before income taxes and
extraordinary item $ 5,543 $ 4,522 $ 5,302 $ 2,519 $ 6,834
============================================================
</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.
F-24
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Quarter ended
------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $14,109 $11,860 $13,501 $19,145
Operating expenses 12,241 10,818 12,474 17,397
------- ------- ------- -------
Operating income 1,868 1,042 1,027 1,748
Non-operating items, net (3) (82) (336) (742)
------- ------- ------- -------
Income before income taxes 1,865 960 691 1,006
Income taxes 759 390 309 496
------- ------- ------- -------
Net income $ 1,106 $ 570 $ 382 $ 510
======= ======= ======= =======
Net income per common share:
Basic $ 0.24 $ 0.12 $ 0.08 $ 0.11
======= ======= ======= =======
Diluted $ 0.22 $ 0.11 $ 0.08 $ 0.11
======= ======= ======= =======
Weighted average shares
outstanding:
Basic 4,598 4,744 4,774 4,782
======= ======= ======= =======
Diluted 5,072 5,267 4,878 4,800
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Quarter ended
-----------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
1999 1999 1999 1999 2000 2000
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $20,000 $21,273 $20,855 $22,479 $31,013 $34,585
Operating expenses 18,188 18,746 18,696 19,661 25,305 27,965
------- ------- ------- ------- ------- -------
Operating income 1,812 2,527 2,159 2,818 5,708 6,620
Non-operating items, net (795) (1,025) (989) (1,205) (2,352) (3,142)
------- ------- ------- ------- ------- -------
Income before income taxes
and extraordinary item 1,017 1,502 1,170 1,613 3,356 3,478
Income taxes 458 731 515 607 1,476 1,530
------- ------- ------- ------- ------- -------
Income before extraordinary
item 559 771 655 1,006 1,880 1,948
Extraordinary loss on early
extinguishment of debt -- -- -- -- 869 --
------- ------- ------- ------- ------- -------
Net income $ 559 $ 771 $ 655 $ 1,006 $ 1,011 $ 1,948
======= ======= ======= ======= ======= =======
Income before extraordinary item
per common share:
Basic $ 0.12 $ 0.16 $ 0.13 $ 0.20 $ 0.32 $ 0.30
======= ======= ======= ======= ======= =======
Diluted $ 0.12 $ 0.15 $ 0.13 $ 0.19 $ 0.29 $ 0.26
======= ======= ======= ======= ======= =======
Net income per common share:
Basic $ 0.12 $ 0.16 $ 0.13 $ 0.20 $ 0.17 $ 0.30
======= ======= ======= ======= ======= =======
Diluted $ 0.12 $ 0.15 $ 0.13 $ 0.19 $ 0.16 $ 0.26
======= ======= ======= ======= ======= =======
Weighted average shares
outstanding:
Basic 4,829 4,829 4,914 4,914 5,854 6,423
======= ======= ======= ======= ======= =======
Diluted 4,841 5,010 5,219 5,172 6,400 7,513
======= ======= ======= ======= ======= =======
</TABLE>
13. Contingencies
The Company is subject to legal actions arising in the ordinary course of its
business. In management's opinion, the Company has adequate legal defenses
and/or insurance coverage with respect to the eventuality of such actions and
does not believe any settlement would materially affect the Company's financial
position.
F-25
<PAGE>
Report of Independent Auditors
Board of Directors and Members
Policano & Manzo, L.L.C.
We have audited the balance sheets of Policano & Manzo, L.L.C. as of December
31, 1998 and 1999, and the related statements of income, members' equity and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Policano & Manzo, L.L.C. at
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
MetroPark, New Jersey
March 10, 2000
F-26
<PAGE>
Policano & Manzo, L.L.C.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
1998 1999
--------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 405,568 $1,101,480
Accounts receivable 4,570,642 4,819,521
Unbilled receivables 285,330 370,072
Other current assets - 24,890
-------------------------------
Total current assets 5,261,540 6,315,963
Furniture and equipment 214,932 266,942
Accumulated depreciation (74,588) (112,662)
-------------------------------
140,344 154,280
Other assets, principally unbilled receivables 233,923 218,566
-------------------------------
Total assets $5,635,807 $6,688,809
===============================
Liabilities and Members' Equity
Current liabilities:
Accounts payable and accrued expenses $ 774,174 $1,026,527
Advances from clients 1,827,013 2,137,400
-------------------------------
Total current liabilities 2,601,187 3,163,927
Commitments and contingencies - -
Members' equity 3,034,620 3,524,882
-------------------------------
Total liabilities and members' equity $5,635,807 $6,688,809
===============================
</TABLE>
See accompanying notes.
F-27
<PAGE>
Policano & Manzo, L.L.C.
Statements of Income
<TABLE>
<CAPTION>
Year ended December 31,
1997 1998 1999
-----------------------------------------------------
<S> <C> <C> <C>
Revenues:
Professional fees $11,290,378 $16,752,726 $21,422,335
Net billable expenses 322,942 401,880 89,856
-----------------------------------------------------
Total revenues 11,613,320 17,154,606 21,512,191
Direct cost of revenues 2,830,491 4,788,254 6,897,632
Selling, general and administrative expenses 614,178 960,550 724,297
-----------------------------------------------------
Total costs and expenses 3,444,669 5,748,804 7,621,929
-----------------------------------------------------
Net income $ 8,168,651 $11,405,802 $13,890,262
=====================================================
</TABLE>
See accompanying notes.
F-28
<PAGE>
Policano & Manzo, L.L.C.
Statements of Members' Equity
Years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1997 $ 1,060,167
Net income 8,168,651
Member distributions (7,400,000)
-------------------
Balance at December 31, 1997 1,828,818
Net income 11,405,802
Member distributions (10,200,000)
-------------------
Balance at December 31, 1998 3,034,620
Net income 13,890,262
Member distributions (13,400,000)
-------------------
Balance at December 31, 1999 $ 3,524,882
===================
</TABLE>
See accompanying notes.
F-29
<PAGE>
Policano & Manzo, L.L.C.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
1997 1998 1999
------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 8,168,651 $ 11,405,802 $ 13,890,262
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 16,452 31,132 38,074
Changes in assets and liabilities:
Accounts receivable (1,074,772) (2,185,817) (248,879)
Unbilled receivables (437,738) 320,530 (84,742)
Other assets 151,664 235,936 (9,533)
Accounts payable and accrued expenses 78,886 450,617 252,353
Advances from clients 576,225 297,053 310,387
---------------------------------------------
Net cash provided by operating activities 7,479,368 10,555,253 14,147,922
Cash flows from investing activities
Purchases of furniture and equipment, net (1,026) (113,138) (52,010)
---------------------------------------------
Net cash used in investing activities (1,026) (113,138) (52,010)
Cash flows from financing activities
Member distributions (7,400,000) (10,200,000) (13,400,000)
---------------------------------------------
Net cash used in financing activities (7,400,000) (10,200,000) (13,400,000)
---------------------------------------------
Net increase in cash 78,342 242,115 695,912
Cash balance at beginning of year 85,111 163,453 405,568
---------------------------------------------
Cash balance at end of year $ 163,453 $ 405,568 $ 1,101,480
=============================================
</TABLE>
See accompanying notes.
F-30
<PAGE>
Policano & Manzo, L.L.C.
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Business Activity
Policano & Manzo, L.L.C. (the "Company") was formed as a New Jersey limited
liability company in 1994 for the purpose of providing financial advisory
services principally to financially troubled companies. The Company is located
in New Jersey and its principal market area is the United States.
The Company includes only individuals as members and the duration of the Company
shall be 49 years from the date of formation unless sooner terminated in
accordance with the operating agreement of the Company.
Accounts Receivable
The Company periodically reviews individual customer account balances and other
customer financial information as part of its credit policy.
Furniture and Equipment
Furniture and equipment is stated at cost. Depreciation of furniture and
equipment is computed on the straight-line method over an estimated useful life
of 7 years.
Advances from Clients
Advances from clients represent deposits made on initial engagements and are
applied against invoices periodically.
Revenue
The Company derives its revenues from professional service activities. These
activities are provided principally under "time and materials" billing
arrangements, and revenues, consisting of billed fees and expenses, are recorded
as work is performed and expenses are incurred. Revenues recognized but not yet
billed to clients have been recorded as unbilled receivables.
F-31
<PAGE>
Policano & Manzo, L.L.C.
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Direct Cost of Revenues
Direct cost of revenues consists primarily of billable employee compensation and
related payroll benefits and the cost of consultants assigned to revenue
generating activities.
Income Taxes
The Company is a limited liability company and as such does not pay federal or
state income taxes; instead, the members are liable for individual income taxes
on the Company's profits. Therefore, no provision for federal or state income
taxes is included in the accompanying financial statements.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. Concentrations of Credit Risk
The Company maintains cash balances with a quality financial institution and,
consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the Company's customer base and its credit policy. No single customer
represents greater than 10% of total accounts receivable as of December 31,
1999, and two customers make up 25% of total accounts receivable at December 31,
1998. Also, no single customer represents greater than 10% of total revenues for
the years ended December 31, 1997 and 1999, one customer makes up 10% of total
revenues for the year ended December 31, 1998.
F-32
<PAGE>
Policano & Manzo, L.L.C.
Notes to Financial Statements (continued)
3. Operating Leases
The Company leases office space and equipment under operating leases that
expires in 2002. Rent expense under these leases totaled $90,293, $153,972 and
$155,646 for the years ended December 31, 1997, 1998 and 1999, respectively.
Future minimum payments under noncancellable operating leases with initial terms
of one year or more consist of the following at December 31, 1999:
2000 $ 29,467
2001 29,467
2002 22,205
---------
Total minimum lease payments $ 81,139
=========
4. Employee Benefit Plan
The Company maintains a Simplified Employee Pension ("SEP") Plan which covers
all employees. The Company contributes a certain percentage of the employees
eligible compensation to the SEP. The Company made contributions of $231,472,
$304,493 and $387,216 during the year ended December 31, 1997, 1998 and 1999,
respectively.
5. Subsequent Event
Effective January 31, 2000, the Company entered into a LLC membership purchase
agreement with FTI Consulting, Inc. ("FTI"). Under the terms of the membership
purchase agreement, FTI purchased all of the membership interests of the
Company.
F-33
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statements of Income
Effective on January 31, 2000, we 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 $54.9 million, consisting of $48.3 million in cash,
815,000 shares of common stock valued at $5.5 million and acquisition related
expenses of $1.1 million. 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 following Unaudited Pro Forma Consolidated Statements of Income are based on
our historical consolidated financial statements and the historical financial
statements of P&M for the periods presented, adjusted to give effect to the
acquisition as if it had occurred as of January 1, 1999. The pro forma
adjustments are described in the accompanying notes and are based upon available
information and certain assumptions that management believes are reasonable.
The Unaudited Pro Forma Consolidated Statements of Income do not purport to
represent what our results of operations would actually have been had the
acquisition in fact occurred on such date or to project our results of
operations for any future date or period. The Unaudited Pro Forma Consolidated
Statements of Income should be read in conjunction with our historical
consolidated financial statements and the historical financial statements of
P&M, included elsewhere in this Prospectus, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
P-1
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statements of Income (continued)
(amounts in thousands, except per share data)
For the year ended December 31, 1999
<TABLE>
<CAPTION>
Historical
FTI P&M Total Adjustments Pro Forma
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $84,607 $21,512 $106,119 $106,119
Direct cost of revenues 44,149 6,898 51,047 $ 700 (1) 51,747
Selling, general and administrative expenses 28,829 724 29,553 29,553
Amortization of goodwill 2,313 - 2,313 2,604 (2) 4,917
--------------------------------------------------------------
Total costs and expenses 75,291 7,622 82,913 3,304 86,217
--------------------------------------------------------------
Income from operations 9,316 13,890 23,206 (3,304) 19,902
Interest expense, net 4,014 - 4,014 6,731 (3) 11,914
1,169 (4)
--------------------------------------------------------------
Income before income taxes 5,302 13,890 19,192 (11,204) 7,988
Income taxes 2,311 - 2,311 1,128 (5) 3,439
--------------------------------------------------------------
-
Net income $ 2,991 $13,890 $ 16,881 $(12,332) $ 4,549
==============================================================
Weighted average shares outstanding 5,028 - 5,028 1,420 (6) 6,448
--------------------------------------------------------------
Earnings per common share, diluted $ 0.59 $ 0.71
==============================================================
</TABLE>
See accompanying notes.
For the six months ended June 30, 2000
<TABLE>
<CAPTION>
One month
Six months ended
ended June 30, January 31,
2000 2000
-------------------------------------
Historical
FTI P&M Total Adjustments Pro Forma
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $65,599 $2,438 $68,037 $68,037
Direct cost of revenues 32,811 892 33,703 $ 58 (1) 33,761
Selling, general and administrative expenses 18,211 106 18,317 18,317
Amortization of goodwill 2,249 - 2,249 217 (2) 2,466
-----------------------------------------------------------------------------
Total costs and expenses 53,271 998 54,269 275 54,544
-----------------------------------------------------------------------------
Income from operations 12,328 1,440 13,768 (275) 13,493
Interest expense, net 5,494 - 5,494 483 (3) 6,074
97 (4)
-----------------------------------------------------------------------------
Income before income taxes 6,834 1,440 8,274 (855) 7,419
Income taxes 3,007 - 3,007 246 (5) 3,253
-----------------------------------------------------------------------------
Income before extraordinary item $ 3,827 $1,440 $ 5,267 $(1,101) $ 4,166
=============================================================================
Weighted average shares outstanding 6,955 - 6,955 332 (6) 7,287
-----------------------------------------------------------------------------
Earnings per common share, diluted $ 0.55 $ 0.57
=============================================================================
</TABLE>
See accompanying notes.
P-2
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Unaudited Consolidated Pro Forma Statements of Income
(1) Adjustment to record additional compensation expense for P&M employees. In
connection with the acquisition of P&M, the Company entered into four-year
employment contracts with the former members of P&M. The pro forma
adjustment assumes that the members had received compensation in 1999 as
provided for by these employment contracts. These former members previously
received distributions of profits in lieu of compensation.
(2) Adjustment to reflect the amortization of $52.2 million of goodwill recorded
upon the acquisition of P&M. This goodwill is being amortized over a 20-year
period.
(3) Adjustment to reflect incremental increases in interest expense resulting
from the acquisition of P&M. In February 2000, the Company borrowed $91.0
million to acquire P&M and to refinance $41.2 million of other debt. The
average interest rate associated with the $91.0 million of borrowings is
approximately 12%, as compared to approximately 8.8% associated with the
retired debt.
(4) Adjustment to record the amortization of deferred financing costs and debt
discount arising from the issuance of warrants in connection with the
acquisition of P&M. The deferred financing costs and debt discount are being
amortized over the average 6.5-year term of the related debt.
(5) Adjustment to record the pro forma income tax expense for (i) the operations
of P&M for which no taxes were provided in the historical financial
statements because P&M was organized as an limited liability company, and
(ii) the estimated tax effects of pro forma adjustments, all at the combined
federal and state statutory income tax rate of approximately 42%.
(6) Adjustment to record the additional shares of common stock issued in
connection with the acquisition of P&M and the related February 2000 debt
refinancing. The Company issued 815,000 shares of common stock in
connection with the acquisition of P&M and 604,504 shares of common stock in
exchange for $2.7 million of outstanding notes.
P-3
<PAGE>
--------------------------------------------------------------------------------
You may rely only on the information contained in this Prospectus. We have not
authorized anyone to provide information different from that contained in this
Prospectus. Neither the delivery of this Prospectus nor sale of common stock
means that information contained in this Prospectus is correct after the date of
this Prospectus. This Prospectus is not an offer to sell or solicitation of an
offer to buy these shares of common stock in any circumstances under which the
offer or solicitation is unlawful.
_______________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................................................................... 1
Risk Factors.............................................................................. 7
Use of Proceeds........................................................................... 10
Price Range of Common Stock and Dividend Policy........................................... 10
Capitalization............................................................................ 12
Unaudited Pro Forma Consolidated Financial Statements..................................... 13
Selected Financial Data................................................................... 17
Management's Discussion and Analysis of Financial Condition and Results of Operations..... 19
Business.................................................................................. 25
Management................................................................................ 33
Principal and Selling Stockholders........................................................ 35
Underwriting.............................................................................. 38
Legal Matters............................................................................. 39
Experts................................................................................... 39
Where You Can Find More Information....................................................... 40
Incorporation of Certain Documents by Reference........................................... 40
Index to Consolidated Financial Statements................................................ F-1
</TABLE>
4,450,000 Shares
FTI/Consulting
Common Stock
--------------
Prospectus
--------------
ING Barings
Janney Montgomery Scott LLC
_______, 2000
--------------------------------------------------------------------------------
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The Company estimates that expenses in connection with the offering
described in this registration statement (other than underwriting and brokerage
discounts and commissions) will be as follows:
SEC Registration Fee................. $ 12,619
NASD Filing Fee...................... 5,280
AMEX Application Fee................. 17,500
Printing and Engraving Fees.......... 75,000
Legal Fees and Expenses.............. 125,000
Accounting Fees and Expenses......... 100,000
Transfer Agent and Registrar's Fees.. 5,000
Miscellaneous Expenses............... 9,601
Total................................ $350,000
========
All of expenses are estimates, other than the filing fees payable to the
Securities and Exchange Commission and the NASD.
Item 15. Indemnification of Directors and Officers.
Section 2-418 of the Maryland General Corporation Law permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations. FTI's
Charter and Bylaws include provisions requiring that FTI indemnify its directors
and officers to the fullest extent permitted by Maryland General Corporation
Law, including circumstances in which indemnification is otherwise
discretionary.
Item 16. Exhibits.
Exhibit No. Description
----------- -----------
1.1 Underwriting Agreement #
3.1 Amended and Restated Articles of Incorporation*
3.2 By-laws*
3.3 Amendment to Articles of Incorporation**
3.4 Amendment No. 1 to By-laws**
4.1 Specimen Common Stock Certificate***
4.2 Form of Series A Stock Purchase Warrant dated as of February
4, 2000, by and between the Company and each of the lenders
named in the Investment and Loan Agreement dated as of
February 4, 2000 (schedules and exhibits omitted)****
5.1 Opinion of Piper Marbury Rudnick & Wolfe LLP #
10.1 1992 Stock Option Plan, as amended*
10.2 1997 Stock Option Plan, as amended*****
II-1
<PAGE>
10.3 Employment Agreement dated as of January 1, 1996, between Forensic
Technologies International Corporation and Jack B. Dunn, IV*
10.4 Employment Agreement dated as of January 1, 1996, between Forensic
Technologies international Corporation and Joseph R. Reynolds,
Jr.*
10.5 Employee Stock Purchase Plan+
10.6 Stock Purchase Agreement dated as of June 30, 1998, by and among
FTI Consulting, Inc., Klick, Kent & Allen, Inc. and the
stockholders named therein++
10.7 Stock Purchase Agreement dated as of September 25, 1998, by and
among FTI Consulting, Inc., Glenn R. Baker and Dennis A.
Guenther+++
10.8 Stock Purchase Agreement dated as of September 17, 1998, by and
among FTI Consulting, Inc., Kahn Consulting, Inc., KCI Management
corp. and the stockholders named therein++++
10.9 LLC Membership Interests Purchase Agreement dated as of January
31, 2000, by and among FTI Consulting, Inc., and Michael Policano
and Robert Manzo (schedules and exhibits omitted)+++++
10.10 Credit Agreement dated as of February 4, 2000, by and among FTI
Consulting, Inc. and its subsidiaries named therein, Newcourt
Commercial Finance Corporation, an affiliate of The CIT Group,
Inc., and the other agents and lenders named therein (schedules
and exhibits omitted)+++++
10.11 Investment and Loan Agreement dated as of February 4, 2000, by and
among FTI Consulting, Inc. and its subsidiaries named therein,
Jack B. Dunn, IV, Stewart J. Kahn, Allied Capital Corporation and
the other lenders named therein (schedules and exhibits
omitted)+++++
23.1 Consent of Ernst & Young LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Piper Marbury Rudnick & Wolfe LLP (contained in Exhibit
5.1)
24.1 Power of Attorney (included on signature page)
99.1 Ernst & Young LLP Report on Financial Statement Schedule
99.2 Valuation and Qualifying Accounts Schedule
# To be filed by amendment.
* Incorporated by reference from the Company's Registration Statement on
Form SB-1, as amended (File No. 333-2002).
** Incorporated by reference from the Company's Registration Statement on
Form 8-A (File No. 001-14875).
*** Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
**** Incorporated by reference from the Company's Current Repot on Form 8-K
filed February 15, 2000.
***** Incorporated by reference from the Company's Registration Statement on
Form S-8 (File No. 333-32160).
+ Incorporated by reference from the Company's Registration Statement on
Form S-8 (File No. 333-30357).
++ Incorporated by reference from the Company's Current Report on Form 8-K
filed July 15, 1998.
+++ Incorporated by reference from the Company's Current Report on Form 8-K
filed October 13, 1998.
++++ Incorporated by reference from the Company's Current Report on Form 8-K
filed October 2, 1998.
+++++ Incorporated by reference from the Company's Current Report on Form 8-K
filed February 15, 2000.
II-2
<PAGE>
Item 17. Undertakings.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Baltimore, Maryland, on this 6th day of September, 2000.
FTI CONSULTING, INC.
By /s/ Jack B. Dunn, IV
------------------------------
Jack B. Dunn, IV
Chief Executive Officer and
Chairman of the Board
POWER OF ATTORNEY
Each of the undersigned does hereby constitute and appoint Jack B. Dunn, IV
and Theodore I. Pincus, and each of them, with full power of substitution and
resubstitution, as his attorney-in-fact to execute in the name of each such
person and to file such amendments (including post-effective amendments) to this
registration statement as the paid attorney(s) deems necessary, advisable or
appropriate and appoints each such person as attorney-in-fact to sign on his
behalf amendments, exhibits, supplements and post-effective amendments to this
registration statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jack B. Dunn, IV Chief Executive Officer (principal executive September 6, 2000
-------------------------------- officer) and Chairman of the Board
Jack B. Dunn, IV
/s/ Stewart J. Kahn President, Chief Operating Officer and Director September 6, 2000
--------------------------------
Stewart J. Kahn
/s/ Theodore I. Pincus Executive Vice President, Chief Financial Officer
-------------------------------- (principal financial accounting officer) and September 6, 2000
Theodore I. Pincus Secretary
/s/ Scott S. Binder Director September 6, 2000
--------------------------------
Scott S. Binder
/s/ Denis J. Callaghan Director September 6, 2000
--------------------------------
Denis J. Callaghan
/s/ James A. Flick Director September 6, 2000
--------------------------------
James A. Flick
/s/ Peter F. O'Malley Director September 6, 2000
--------------------------------
Peter F. O'Malley
/s/ Dennis J. Shaughnessy Director September 6, 2000
--------------------------------
Dennis J. Shaughnessy
/s/ George P. Stamas Director September 6, 2000
--------------------------------
George P. Stamas
</TABLE>
