<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number: 001-14875
FTI CONSULTING, INC.
--------------------
(Exact Name of Registrant as Specified in its Charter)
Maryland 52-1261113
-------- ----------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2021 Research Drive, Annapolis, Maryland 21401
--------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
410-224-8770
------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $.01 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at August 3, 2000
----------------------- -----------------------------
Common Stock, par value
$.01 per share 6,539,347
<PAGE>
FTI CONSULTING, INC.
--------------------
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets - December 31, 1999 and
June 30, 2000 3
Consolidated Statements of Income - Three months ended
June 30, 1999, three months ended June 30, 2000 and
Pro Forma Consolidated Statement of Income - Three
months ended June 30, 1999 5
Consolidated Statements of Income - Six months ended
June 30, 1999, six months ended June 30, 2000 6
Pro Forma Consolidated Statements of Income - Six months
ended June 30, 1999, six months ended June 30, 2000 7
Consolidated Statements of Cash Flows - Six months
ended June 30, 1999, six months ended June 30, 2000 8
Notes to Unaudited Consolidated Financial Statements
June 30, 2000 9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 18
Item 3. Quantitative and Qualitative Disclosures About 23
Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
2
<PAGE>
Part I. Financial Information
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands of dollars)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---------------------------------
(audited) (unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,046 $ 2,992
Accounts receivable, less allowance of $1,065 in 1999 and $980 in
2000 14,458 25,020
Unbilled receivables, less allowance of $1,160 in 1999 and $867
in 2000 9,222 15,168
Income taxes recoverable 64 446
Deferred income taxes 641 641
Prepaid expenses and other current assets 1,461 1,875
-------------------------------
Total current assets 30,892 46,142
Property and equipment:
Furniture, equipment and software 17,205 18,762
Leasehold improvements 1,955 2,293
-------------------------------
19,160 21,055
Accumulated depreciation and amortization (10,781) (12,165)
-------------------------------
8,379 8,890
Goodwill, net of accumulated amortization of $3,473 in 1999 and
$5,722 in 2000 43,658 93,702
Other assets 1,363 3,921
-------------------------------
Total assets $ 84,292 $ 152,655
===============================
</TABLE>
See accompanying notes.
3
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands of dollars)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
--------------------------------
(audited) (unaudited)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 3,240 $ 2,550
Accrued compensation expense 5,373 7,816
Deferred income taxes 471 471
Current portion of long-term debt 1,718 4,750
Advances from clients 435 6,902
Other current liabilities 422 984
-------------------------------
Total current liabilities 11,659 23,473
Long-term debt, less current portion 41,009 82,277
Other long-term liabilities 411 372
Deferred income taxes 961 961
Commitments and contingent liabilities - -
Stockholders' equity:
Preferred stock, $.01 par value; 4,000,000 shares authorized,
none outstanding - -
Common stock, $.01 par value; 16,000,000 shares authorized;
4,913,905 and 6,465,968 shares issued and outstanding in 1999
and 2000, respectively 49 65
Additional paid-in capital 18,197 30,543
Retained earnings 12,006 14,964
-------------------------------
Total stockholders' equity 30,252 45,572
-------------------------------
Total liabilities and stockholders' equity $ 84,292 $ 152,655
===============================
</TABLE>
See accompanying notes.
4
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Three months ended June 30,
Actual Pro Forma Actual
1999 1999 2000
--------------------------------------
(unaudited)
<S> <C> <C> <C>
Revenues $21,273 $26,757 $34,585
Direct cost of revenues 10,920 12,680 17,435
Selling, general and
administrative expenses 7,257 7,616 9,297
Amortization of goodwill 569 1,229 1,233
------- ------- -------
Total costs and expenses 18,746 21,525 27,965
------- ------- -------
Income from operations 2,527 5,232 6,620
Other income (expense):
Interest and other income 76 76 52
Interest expense (1,101) (3,071) (3,194)
------- ------- -------
(1,025) (2,995) (3,142)
------- ------- -------
Income before income taxes 1,502 2,237 3,478
Income taxes 731 967 1,530
------- ------- -------
Net income $ 771 $ 1,270 $ 1,948
======= ======= =======
Net income per common share,
basic $ 0.16 $ 0.21 $ 0.30
======= ======= =======
Net income per common share,
diluted $ 0.15 $ 0.20 $ 0.26
======= ======= =======
</TABLE>
See accompanying notes.
5
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Six months ended June 30,
1999 2000
-------------------------------
(unaudited)
<S> <C> <C>
Revenues $41,273 $65,599
Direct cost of revenues 21,350 32,811
Selling, general and administrative expenses 14,445 18,211
Amortization of goodwill 1,139 2,249
------- -------
Total costs and expenses 36,934 53,271
------- -------
Income from operations 4,339 12,328
Other income (expense):
Interest and other income 142 92
Interest expense (1,962) (5,586)
------- -------
(1,820) (5,494)
------- -------
Income before income taxes and extraordinary item 2,519 6,834
Income taxes 1,189 3,007
------- -------
Income before extraordinary item 1,330 3,827
Extraordinary loss on early extinguishment of debt,
net of income taxes of $660 - 869
------- -------
Net income $ 1,330 $ 2,958
======= =======
Income before extraordinary item per common share, basic $ 0.28 $ 0.62
======= =======
Net income per common share, basic $ 0.28 $ 0.48
======= =======
Income before extraordinary item per common share, diluted $ 0.27 $ 0.55
======= =======
Net income per common share, diluted $ 0.27 $ 0.43
======= =======
</TABLE>
See accompanying notes.
6
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Pro Forma Consolidated Statements of Income
(in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Six months ended June 30,
1999 2000
-------------------------------
(unaudited)
<S> <C> <C>
Revenues $52,276 $68,037
Direct cost of revenues 24,770 33,761
Selling, general and administrative expenses 15,182 18,317
Amortization of goodwill 2,457 2,466
------- -------
Total costs and expenses 42,409 54,544
------- -------
Income from operations 9,867 13,493
Other income (expense):
Interest and other income 141 92
Interest expense (6,140) (6,166)
------- -------
(5,999) (6,074)
------- -------
Income before income taxes and extraordinary item 3,868 7,419
Income taxes 1,671 3,253
------- -------
Income before extraordinary item 2,197 4,166
Extraordinary loss on early extinguishment of debt
net of income taxes of $660 - 869
------- -------
Net income $ 2,197 $ 3,297
======= =======
Income before extraordinary item per common share, basic $ 0.35 $ 0.65
======= =======
Net income per common share, basic $ 0.35 $ 0.51
======= =======
Income before extraordinary item per common share, diluted $ 0.35 $ 0.57
======= =======
Net income per common share, diluted $ 0.35 $ 0.45
======= =======
</TABLE>
See accompanying notes.
7
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands of dollars)
<TABLE>
<CAPTION>
Six months ended June 30,
1999 2000
-------------------------------
(unaudited)
<S> <C> <C>
Operating activities
Net income $ 1,330 $ 2,958
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss on early extinguishments
of debt, before income taxes - 1,529
Amortization of goodwill 1,412 2,249
Depreciation and other amortization 1,029 1,280
Provision for doubtful accounts 567 (378)
Deferred income taxes (132) -
Loss on disposal of assets 10 17
Non-cash interest expense - 1,116
Changes in operating assets and liabilities:
Accounts receivable 332 (5,281)
Unbilled receivables (2,424) (5,267)
Prepaid expenses and other current assets (429) (408)
Accounts payable and accrued expenses (853) (1,494)
Accrued compensation expense 1,282 1,887
Income taxes recoverable/payable 610 (383)
Advances from clients (9) 4,225
Other current liabilities 456 992
-------------------------------
Net cash provided by operating activities 3,181 3,042
Investing activities
Purchase of property and equipment (1,316) (1,699)
Proceeds from sale of property and equipment 98 47
Contingent payments to former owners of subsidiaries (451) (165)
Costs associated with acquisition of subsidiaries (56) -
Acquisition of P&M, including acquisition costs - (49,404)
Change in other assets 1 (232)
-------------------------------
Net cash used in investing activities (1,724) (51,453)
Financing activities
Issuance of common shares 136 741
Payments of long-term debt (13,213) (40,820)
Retirement of detachable stock warrants - (277)
Payment of financing fees (900) (3,782)
Proceeds from senior credit facility, net - 59,937
Proceeds from subordinated notes payable and detachable stock warrants 13,000 30,611
Payments of other long-term liabilities (68) (53)
-------------------------------
Net cash provided by (used in) financing activities (1,045) 46,357
-------------------------------
Net increase (decrease) in cash and cash equivalents 412 (2,054)
Cash and cash equivalents at beginning of period 3,223 5,046
-------------------------------
Cash and cash equivalents at end of period $ 3,635 $ 2,992
===============================
</TABLE>
See accompanying notes.
8
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2000
(in thousands of dollars, except per share data)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1999.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 2000, are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000.
The accompanying Pro Forma Consolidated Statements of Income for the three
months ended June 30, 1999, and six months ended June 30, 2000 and 1999, are
presented to give effect to the January 31, 2000, acquisition of Policano &
Manzo, L.L.C. and related financing assuming the transactions occurred on
January 1, 1999 (see Notes 5 and 6). These Pro Forma Financial Statements
should be read in conjunction with the Company's current report on Form 8-K,
filed on April 6, 2000. This Form 8-K more fully describes the assumptions used
in preparing the pro forma financial information. The Pro Forma Consolidated
Statements of Income are not necessarily indicative of the operating results
that would have been achieved had the transactions actually occurred on January
1, 1999, nor are they necessarily indicative of future operations.
2. Stockholders' Equity
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
-----------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 2000 $ 49 $18,197 $12,006 $30,252
Issuance of 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 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 shares of restricted common stock - 159 159
Exercise of options and warrants to purchase 59,667
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 $ 65 $30,543 $14,964 $45,572
===============================================
</TABLE>
9
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2000 (continued)
(in thousands of dollars, except per share data)
3. Earnings Per Share
The following table summarizes the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three months ended June 30,
Actual Actual Pro Forma
1999 2000 1999
-------------------------------------
<S> <C> <C> <C>
Numerator used in basic and diluted earnings
per common share:
Net income $ 771 $1,948 $1,270
=====================================
Denominator:
Denominator for basic earnings per common share
- weighted average shares 4,829 6,423 6,134
Effect of dilutive securities:
Warrants 143 604 143
Employee stock options 38 486 38
-------------------------------------
181 1,090 181
-------------------------------------
Denominator for diluted earnings per common
share - weighted average shares and effect
of dilutive securities 5,010 7,513 6,315
=====================================
Net income per common share, basic $ 0.16 $ 0.30 $ 0.21
=====================================
Net income per common share, diluted $ 0.15 $ 0.26 $ 0.20
=====================================
</TABLE>
10
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2000 (continued)
(in thousands of dollars, except per share data)
3. Earnings Per Share (continued)
<TABLE>
<CAPTION>
Actual Pro Forma
Six months ended Six months ended
June 30, June 30,
1999 2000 1999 2000
-------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator used in basic and diluted
earnings per common share:
Income before extraordinary item $ 1,330 $ 3,827 $ 2,197 $ 4,166
Extraordinary item, net of taxes - 869 - 869
-------------------------------------------------------
Net income $ 1,330 $ 2,958 $ 2,197 $ 3,297
=======================================================
Denominator:
Denominator for basic earnings per
common share - weighted average shares 4,829 6,139 6,249 6,404
Effect of dilutive securities:
Warrants 44 480 44 350
Employee stock options 22 336 22 533
-------------------------------------------------------
66 816 66 883
-------------------------------------------------------
Denominator for diluted earnings per
common share - weighted average shares
and effect of dilutive securities 4,895 6,955 6,315 7,287
=======================================================
Income before extraordinary item per
common share, basic $ 0.28 $ 0.62 $ 0.35 $ 0.65
Extraordinary loss per common share, basic - (0.14) - (0.14)
-------------------------------------------------------
Net income per common share, basic $ 0.28 $ 0.48 $ 0.35 $ 0.51
=======================================================
Income before extraordinary item per
common share, diluted $ 0.27 $ 0.55 $ 0.35 $ 0.57
Extraordinary loss per common share, - (0.12) - (0.12)
diluted
-------------------------------------------------------
Net income per common share, diluted $ 0.27 $ 0.43 $ 0.35 $ 0.45
=======================================================
</TABLE>
11
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2000 (continued)
(in thousands of dollars, except per share data)
4. Income Taxes
The income tax provisions for interim periods in 2000 and 1999 are based on the
estimated effective tax rates applicable for the full years. The Company's
income tax provision of $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.
5. Acquisition of Policano & Manzo, L.L.C.
Effective on January 31, 2000, the Company acquired the membership interests of
Policano & Manzo, L.L.C. ("P&M"). P&M, based in Saddle Brook, New Jersey, is a
leader in providing bankruptcy and turnaround consulting services to large
corporations, money center banks and secured lenders throughout the U.S. The
purchase price totaled approximately $54.9 million, consisting of $48.3 million
in cash, 815,000 shares of common stock valued at $5.5 million, and acquisition
related expense 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 accompanying unaudited Pro Forma Consolidated Statements of Income give
effect to the acquisition of P&M and the related refinancing discussed in Note
6, assuming that these transactions occurred as of January 1, 1999, and should
be read in conjunction with the Company's current report on Form 8-K, filed on
April 6, 2000.
12
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2000 (continued)
(in thousands of dollars, except per share data)
6. Debt
In connection with the acquisition of P&M, the Company entered into a $68.5
million senior credit facility to provide the cash needed to consummate the
acquisition, partially refinance existing long-term debt arrangements, and to
provide working capital for expansion. The senior credit facility consists of
(i) a $61.0 million amortizing term loan maturing through January 31, 2006, that
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.
The fair value of these warrants was estimated at the date of grant using the
Black-Scholes pricing model with the following assumptions: risk-free interest
rate of 5.5%; expected dividend yield of 0%; expected warrant life of 10 years;
and expected stock price volatility of 0.647. Using these assumptions, the fair
value of the warrants was computed to be $5.44 per share, and the total value
assigned was $3.7 million. This amount was recorded as additional paid-in
capital and a corresponding debt discount was recorded that is recognized as
additional interest expense over the term of the debt instruments.
The proceeds from these borrowings of $91.0 million, in tandem with $2.0 million
of cash, were used to finance the $47.5 million cash purchase price of P&M,
refinance $41.2 million of the $44.0 million of existing long-term debt, and
fund acquisition and finance related expenses of $4.3 million. The remaining
$2.7 million of long-term debt was exchanged for 604,504 shares of common stock.
In connection with the early extinguishment of the $44.0 million of debt,
warrants to purchase 130,835 shares of common stock for $3.21 per share, were
retired. In addition, an extraordinary loss of $869,000 net of income taxes was
incurred related to unamortized debt discount and deferred financing costs
attributable to the retired debt.
13
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2000 (continued)
(in thousands of dollars, except per share data)
6. Debt (continued)
In summary, debt consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
-------------------------------
<S> <C> <C>
Amounts due under the $61.0 million amortizing term loans $ - $ 59,938
Amounts due under $30.0 million subordinated notes (net of discount
of $3.5 million and PIK 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 19,964 -
Notes payable to former shareholders of acquired businesses (net of
discount of $169,000) 10,611 -
Subordinated debentures (net of discount of $848,000) bearing
interest at 9.25% 12,152 -
-------------------------------
Total debt 42,727 87,027
Less current portion (1,718) (4,750)
-------------------------------
Total long-term debt $ 41,009 $ 82,277
===============================
</TABLE>
The aggregate maturities of long-term debt outstanding at June 30, 2000, prior
to amortization of debt discount are as follows:
<TABLE>
<CAPTION>
July 1 through
<S> <C>
December 31, 2000 $ 2,125
December 31, 2001 5,750
December 31, 2002 7,750
December 31, 2003 11,250
December 31, 2004 14,500
December 31, 2005 14,875
Thereafter 33,687
-------
$89,937
=======
</TABLE>
14
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2000 (continued)
(in thousands of dollars, except per share data)
6. Debt (continued)
In March 2000, the Company entered into interest rate swap and cap transactions
on $41.0 million of the outstanding amortizing term loans, in accordance with
provisions of the credit facility. The $20.5 million swap transactions resulted
in exchanging floating LIBOR rates for fixed rates. The $20.5 million cap
transactions limited the Company's exposure to substantial increases in the
LIBOR rate by establishing the maximum rate over the life of the cap to be
7.75%. These interest rate hedge transactions expire in three years. The
premium associated with the cap transactions have been incorporated into the
swap transactions and resulted in the fixed rates of 7.41% on $10.0 million and
7.43% on $10.5 million. At June 30, 2000, the estimated positive market value
of the interest rate swap and cap agreements was approximately $174,000. The
fair value of swap and cap agreements and changes in the fair value as a result
of changes in market interest rates are not recognized in the consolidated
financial statements.
7. 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.
The Company evaluates performance and allocates resources based on operating
income before depreciation and amortization, corporate general and
administrative expenses, and income taxes. The Company does not allocate assets
to its reportable segments as assets generally are not specifically attributable
to any particular segment. Accordingly, asset information by reportable segment
is not presented. The accounting policies used by the reportable segments are
the same as those used by the Company. There are no significant intercompany
sales or transfers.
15
<PAGE>
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2000 (continued)
(in thousands of dollars, except per share data)
7. Segment Reporting (continued)
The following table sets forth information on the Company's reportable segments
for the three months ended June 30, 1999 and three months ended June 30, 2000:
<TABLE>
<CAPTION>
Three months ended June 30, 1999
-----------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $4,827 $9,461 $6,985 $21,273
Operating expenses 3,642 7,692 4,986 16,320
------ ------ ------ -------
Segment profit $1,185 $1,769 $1,999 $ 4,953
====== ====== ====== =======
<CAPTION>
Three months ended June 30, 2000
-----------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $16,332 $9,683 $8,570 $34,585
Operating expenses 9,687 8,036 6,351 24,074
------- ------ ------ -------
Segment profit $ 6,645 $1,647 $2,219 $10,511
======= ====== ====== =======
</TABLE>
A reconciliation of segment profit for all segments to income before income
taxes is as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
1999 2000
--------------------------------------------------------------------------
<S> <C> <C>
Operating Profit:
Total segment profit $ 4,953 $10,511
Corporate general and administrative
expenses (1,120) (2,010)
Depreciation and amortization (1,306) (1,881)
Interest and other expense (1,025) (3,142)
------- -------
Income before income taxes $ 1,502 $ 3,478
======= =======
</TABLE>
The following table sets forth information on the Company's reportable segments
for the six months ended June 30, 1999 and six months ended June 30, 2000:
<TABLE>
<CAPTION>
Six months ended June 30, 1999
-----------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
====== ======= ======= =======
<CAPTION>
Six months ended June 30, 2000
-----------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
16
<PAGE>
A reconciliation of segment profit for all segments to income before income
taxes and extraordinary item is as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
1999 2000
---------------------------------------------------------------------
<S> <C> <C>
Operating Profit:
Total segment profit $ 9,424 $19,964
Corporate general and administrative
expenses (2,644) (4,107)
Depreciation and amortization (2,441) (3,529)
Interest and other expense (1,820) (5,494)
------- -------
Income before income taxes and
extraordinary item $ 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.
17
<PAGE>
FTI Consulting, Inc.
Item 2. 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 44% of
our revenues for the six-months ended June 30, 2000, offers a range of financial
consulting services, such as forensic accounting, bankruptcy and restructuring
analysis, expert testimony, damage assessment, cost benefit analysis and
business valuations. Our Litigation Consulting division, which accounted for 26%
of our revenues for the six-months ended June 30, 2000, provides advice and
services in connection with all phases of the litigation process. Our Applied
Sciences division, which accounted for 30% of our revenues for the six-months
ended June 30, 2000, offers forensic engineering and scientific investigation
services, accident reconstruction, fire investigation and expert testimony
regarding intellectual property rights.
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, 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 the six months ended June 30, 2000, selling,
general and administrative expenses accounted for about 28% of our revenues.
Our corporate overhead costs, excluding depreciation and amortization, which are
included in selling, general and administrative expenses, represented about 6.0%
of revenues in the six months ended June 30, 2000.
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. For the six months ended June 30, 2000, our Financial Consulting
division accounted for 60.0% of this operating income, our Litigation Consulting
division accounted for 22.0% and our Applied Sciences division accounted for
18.0%.
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 this 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.
Recent Acquisitions
Since September 1997, we made six major acquisitions, all of which were
accounted for as purchases.
On February 4, 2000, we acquired Policano & Manzo as further described in Note 5
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 work-out and bankruptcy community. These
services are provided on a nationwide basis to financially distressed
businesses, creditors, investors and other interested parties. The purchase
price consisted of $48.3 million in cash and 815,000 shares of our common stock.
18
<PAGE>
In September 1998, we acquired both S.E.A., Inc. ("SEA") 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 our 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.
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. The
acquisitions of KCI and KK&A provided the foundation for our expansion of
financial consulting services into cities where we already had a presence.
In September 1997, we acquired L.W.G., Inc. ("LWG") 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
Three Months Ended June 30, 2000 and June 30, 1999
Revenues. Total revenues for the three months ended June 30, 2000, increased
62.4% to $34.6 million compared to $21.3 million for the three months ended June
30, 1999. For the three months ended June 30, 2000, revenues in our Financial
Consulting division grew by $11.5 million, or 239.6%, to $16.3 million, compared
to 1999. Our acquisition of P&M, as of January 31, 2000, accounted for $8.0
million of this growth, with $3.5 million generated by internal growth.
Litigation Consulting division revenues increased 22.9% from $7.0 million in
1999 to $8.6 million in 2000. The Applied Sciences division had 2.1% growth to
$9.7 million in revenues in the three months ended June 30, 2000, compared to
$9.5 million in the second quarter 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 50.4% of total
revenues for the three months ended June 30, 2000, compared to 51.3% of total
revenues for the three 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 26.9% of total revenues for the three months ended
June 30, 2000, compared to 34.1% for the three months ended June 30, 1999. This
improvement resulted primarily from the fact that P&M's selling, general and
administrative expenses are a lower percentage of revenues and our significant
revenue increases that exceeded the rate of increase of our selling, general and
administrative expenses.
Amortization of Goodwill. Amortization of goodwill increased from $569,000 in
the second quarter of 1999 to $1.2 million in the second quarter of 2000 as a
result of our acquisition of P&M as of January 31, 2000.
Interest Expense, net. Net interest expense increased to $3.1 million for the
three months ended June 30, 2000, from $1.0 million for the three 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."
19
<PAGE>
Income Taxes. In the second quarter of 2000, our effective income tax rate
decreased to 44.0% from 48.7% in the second quarter of 1999. This decrease was
primarily the result of the proportionately lower non-deductible goodwill
amortization resulting from our acquisitions in 1997 and 1998.
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 191.9%, to $28.9 million, compared
to 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 increased 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 to 35.0% for the six months ended June 30, 1999. This
improvement resulted primarily from the fact that P&M's selling, general and
administrative expenses are a lower percentage of revenues and our significant
revenue increases that exceeded the rate of increase of 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 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.
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.
20
<PAGE>
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, including our inability to maintain market share, development of
competitive products or services and 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. This lower
generation of cash was attributable to the increase in 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 in part by an increase in net income before non-cash charges.
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, 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). We obtained interest rate protection on $41.0
million of the $61.0 million term loan.
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. We believe we will be in
compliance with all covenants throughout 2000. We used the proceeds of these
facilities, together with approximately $3.0 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 for the
initial payments in the acquisition of KK&A, KCI and SEA. We renegotiated 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 in Note 6 of Notes to
Consolidated Financial Statements.
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 in March 2000, we entered into a lease agreement for a
new office in New York City, which we expect to occupy before the end of the
third quarter 2000, for which we estimate that we will spend about $2.2 million
for leasehold improvements, furniture and fixtures. As our present Credit
Facilities contain an annual limitation of capital expenditures, which for 2000
is $3.1 million, we will
21
<PAGE>
exceed the limitation and intend to request a waiver from our debt-holders. We
anticipate that the debt-holders will agree to our waiver request.
We believe that cash generated from our operations will allow us to meet our
obligations that mature in 2000 and thereafter, and also provide us the
necessary cash resources we will need in the near term to fund our expanding
operations. We will also explore appropriate opportunities to raise equity
capital to repay such obligations in whole or part prior to maturity.
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.
Forward-Looking Statements
Some of the statements under "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and elsewhere in this Quarterly Report
contain forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934. These statements involve known and unknown
risks, uncertainties and other factors that may cause our or our industry's
actual results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements not to be fully achieved. These
forward-looking statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or other comparable terminology. These statements
are only predictions. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of such statements. We are
under no duty to update any of the forward-looking statements after the date of
this Quarterly Report to conform such statements to actual results and do not
intend to do so. Factors which may cause the actual results of operations in
future periods to differ materially from intended or expected results include,
but are not limited to (1) the loss of any key employees because the Company's
business involves the delivery of professional services and is labor-intensive;
(2) the loss of key officers of the Company, without 90 day replacement, which
would constitute an event of default under the Company's Senior and Subordinated
Credit Facilities; (3) the availability and terms of additional capital or debt
financing to fund future acquisitions and for working capital purposes; (4)
significant competition for business opportunities and acquisition candidates;
(5) technological changes affecting our Litigation Consulting division; (6) the
risks of professional liability; (7) any factor that diminishes our professional
reputation; (8) fluctuations of revenue and operating income between quarters or
termination of client engagements; (9) the successful management of the growth
of our business; (10) the integration of P&M and of future acquisitions; and
(11) risks associated with quantitative and qualitative market risks such as
fluctuations in interest rates.
22
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss to future earnings, to fair values or to future
cash flows that may result from the changes in the price of financial
instruments. 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 three year
interest rate swap and cap agreements initially covering $41.0 million of this
long-term debt. In the event of adverse changes in interest rates, management
may take actions to further mitigate our exposure.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not presently a party to any material litigation.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 23, 2000. At
the Annual Meeting, the stockholders elected James A. Flick, Jr. and Peter F.
O'Malley as directors for a term of three years. The stockholders voted as
follows:
Number of Votes
---------------
For Authority Withheld
--- ------------------
James A. Flick, Jr. 3,280,849 0
Peter F. O'Malley 3,280,849 0
In addition, the terms of the following directors continued after the Annual
Meeting: Jack B. Dunn, IV, Stewart J. Kahn, Scott S. Binder, Dennis J.
Shaughnessy and George P. Stamas.
At the Annual Meeting, the stockholders also ratified the selection of Ernst &
Young LLP as independent accountants for the Company for the year ended December
31, 2000. The stockholders voted as follows:
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
3,283,081 5,669 400 0
Item 5. Other Information
None.
23
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule for six months ended June 30, 2000
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on February 15, 2000, regarding
the Company's acquisition of P&M and refinancing of its indebtedness. On April
6, 2000, the Company amended the foregoing Report to add financial statements of
P&M and pro forma financial information.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FTI CONSULTING, INC.
Date: August 3, 2000 By /s/ Theodore I. Pincus
-------------------------
THEODORE I. PINCUS
Executive Vice President, Chief Financial Officer
(principal financial and accounting officer) and
Secretary
25
