SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1998; 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: 0000887936 FTI CONSULTING, INC. (Exact Name of Registrant as Specified in its Charter) MARYLAND 52-1261113 -------- ---------- (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2021 Research Drive, Annapolis, Maryland 21401 ---------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (410) 224-8770 -------------- (Registrant's Telephone Number, Including Area Code) ---------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) ---------------------------------------------- Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of 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. [ X ] Yes [ ] No State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding at November 13, 1998 ----- -------------------------------- Common Stock, par value 4,781,895 $.01 per share
FTI CONSULTING, INC. INDEX PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Balance Sheets - December 31, 1997 and September 30, 1998 3 Statements of Income - Three months ended September 30, 1997, three months ended September 30, 1998 5 Statements of Income - Nine months ended September 30, 1997, nine months ended September 30, 1998 6 Statements of Cash Flows - Nine months ended September 30, 1997, nine months ended September 30, 1998 7 Notes to Unaudited Financial Statements - September 30, 1998 8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 12 PART II OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 2
FTI Consulting, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands) <TABLE> <CAPTION> DECEMBER 31, SEPTEMBER 30, 1997 1998 -------------------------------------- (audited) (unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 2,456 $ 3,806 Accounts receivable, less allowance of $487 in 1997 and $858 in 1998 10,198 11,288 Unbilled receivables, less allowance of $415 in 1997 and $983 in 1998 4,194 8,921 Income taxes receivable - 423 Deferred income taxes 160 - Prepaid expenses and other current assets 681 1,960 -------------------------------------- Total current assets 17,689 26,398 Property and equipment: Buildings 411 411 Furniture and equipment 11,745 13,583 Leasehold improvements 1,591 1,609 -------------------------------------- 13,747 15,603 Accumulated depreciation and amortization (7,459) (8,323) -------------------------------------- 6,288 7,280 Goodwill, net of accumulated amortization of $81 in 1997 and $521 in 1998 5,141 46,634 Other assets 58 110 ====================================== Total assets $ 29,176 $ 80,422 ====================================== </TABLE> 3
<TABLE> <CAPTION> DECEMBER 31, SEPTEMBER 30, 1997 1998 -------------------------------------- (audited) (unaudited) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 2,825 $ 2,604 Line of credit - 26,000 Accrued compensation expense 1,995 2,793 Income taxes payable 297 - Current portion of long-term debt 1,200 10,650 Current deferred taxes - 593 Advances from clients 519 472 Other current liabilities 219 320 -------------------------------------- Total current liabilities 7,055 43,432 Long-term debt, less current portion 730 9,700 Other long-term liabilities 203 227 Deferred income taxes 169 2,322 Commitments and contingent liabilities - - Stockholders' equity: Preferred stock, $.01 par value; 4,000 shares authorized, none outstanding -- -- Common stock, $.01 par value; 16,000 shares authorized; 4,551 and 4,782 shares issued and outstanding in 1997 and 1998, respectively 46 48 Additional paid-in capital 14,526 16,190 Retained earnings 6,447 8,503 -------------------------------------- Total stockholders' equity 21,019 24,741 ====================================== Total liabilities and stockholders' equity $ 29,176 $ 80,422 ====================================== </TABLE> See accompanying notes. 4
FTI Consulting, Inc. and Subsidiaries Consolidated Statements of Income (in thousands of dollars except per share data) <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30 1997 1998 -------------------------------- (unaudited) <S> <C> <C> Revenues $ 10,675 $ 13,501 Direct cost of revenues 5,338 7,107 Selling, general and administrative expenses 3,684 5,367 ------------------------------- Total costs and expenses 9,022 12,474 ------------------------------- Income from operations 1,653 1,027 Other income (expense): Interest and other income 89 87 Interest expense (76) (423) ------------------------------- 13 (336) ------------------------------- Income before income taxes 1,666 691 Income taxes 693 309 =============================== Net income $ 973 $ 382 =============================== Net income per common share $0.21 $0.08 =============================== Net income per common share - assuming dilution $0.20 $0.08 =============================== </TABLE> See accompanying notes. 5
FTI Consulting, Inc. and Subsidiaries Consolidated Statements of Income (in thousands of dollars except per share data) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30 1997 1998 -------------------------------------- (unaudited) <S> <C> <C> Revenues $ 29,686 $ 39,470 Direct cost of revenues 15,753 21,419 Selling, general and administrative expenses 10,122 14,116 -------------------------------------- Total costs and expenses 25,875 35,535 -------------------------------------- Income from operations 3,811 3,935 Other income (expense): Interest and other income 261 200 Interest expense (119) (621) -------------------------------------- 142 (421) -------------------------------------- Income before income taxes 3,953 3,514 Income taxes 1,631 1,458 ====================================== Net income $ 2,322 $ 2,056 ====================================== Net income per common share $ 0.51 $ 0.44 ====================================== Net income per common share - assuming dilution $ 0.49 $ 0.41 ====================================== </TABLE> See accompanying notes. 6
FTI Consulting, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands of dollars) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30 1997 1998 -------------------------------------------- (unaudited) <S> <C> <C> OPERATING ACTIVITIES Net income $ 2,322 $ 2,056 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provided by operating activities: Depreciation 978 1,310 Amortization 146 579 Provision for doubtful accounts - (109) Loss on disposal of assets 335 12 Non cash interest expense - 140 Changes in operating assets and liabilities: Accounts receivable 534 3,516 Unbilled receivables (2,372) (790) Prepaid expenses (144) (968) Accounts payable (556) (335) Accrued compensation expense 651 (415) Income taxes payable 452 (664) Advances from clients (200) (47) Other current liabilities 428 (241) ------------------------------------------ Net cash provided by operating activities 2,574 4,044 INVESTING ACTIVITIES Purchase of property and equipment (1,839) (1,687) Proceeds from sale of property and equipment (3,665) 73 Cash assumed in acquistion of KK&A - 90 Cash assumed in acquistion of SEA - 300 Acquisition of KK&A - (6,125) Acquisition of KCI - (10,206) Acquisition of SEA - (10,216) Contingent payments to LWG - (544) Change in other assets (76) 2 ------------------------------------------ Net cash used in investing activities (5,580) (28,313) FINANCING ACTIVITIES Exercise of stock options 24 1,611 Borrowings on line of credit - 26,000 Borrowings on notes payable 157 - Payments on notes payable - (1,944) Payments of other long-term liabilities (140) (48) ------------------------------------------ Net cash provided by financing activities 41 25,619 ------------------------------------------ Net increase in cash and cash equivalents (2,965) 1,350 Cash and cash equivalents at beginning of period 5,894 2,456 ========================================== Cash and cash equivalents at end of period $ 2,929 $ 3,806 ========================================== </TABLE> See accompanying notes. 7
FTI CONSULTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 (dollars in thousands, except for 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 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-KSB for the year ended December 31, 1997. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month and nine month periods ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. 2. EARNINGS PER SHARE The following table summarizes the computations of basic and diluted earnings per share: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1997 1998 1997 1998 -------------- -------------- ------------ --------------- <S> <C> <C> <C> <C> Numerator used in basic and diluted earnings per common share: Net income $ 973 $ 382 $ 2,322 $2,056 ============== ============== ============ =============== Denominator: Denominator for basic earnings per common share - weighted average shares 4,527 4,774 4,525 4,706 Effect of dilutive securities: Employee stock options 243 104 243 369 -------------- -------------- ------------ --------------- Denominator for diluted earnings per common share - weighted average shares and assumed conversions 4,770 4,878 4,768 5,075 ============== ============== ============ =============== Basic earnings per common share $ .21 $ .08 $ .51 $ .44 ============== ============== ============ =============== Diluted earnings per common share $ .20 $ .08 $ .49 $ .41 ============== ============== ============ =============== </TABLE> 8
FTI CONSULTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 (CONTINUED) 3. STOCKHOLDERS EQUITY <TABLE> <CAPTION> Additional Common Paid in Retained Stock Capital Earnings Total ----- ------- -------- ----- <S> <C> <C> <C> <C> Balance at January 1, 1998 $ 46 $ 14,526 $ 6,447 $ 21,019 Exercise of options to purchase 230,983 shares of Common Stock, including income tax benefit of $55. 2 1,664 1,666 Net income for nine months ended September 30, 1998 2,056 2,056 =========== =========== ========= ========= Balance at September 30, 1998 $ 48 $ 16,190 $ 8,503 $ 24,741 =========== =========== ========= ========= </TABLE> 4. INCOME TAXES The tax provision for the nine months periods ended September 30, 1998 and 1997 are based on the estimated effective tax rates applicable for the full years. The Company's income tax provision of $1,458 for the nine month period ended September 30, 1998 consists of federal and state income taxes. 9
FTI CONSULTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 (CONTINUED) 5. ACQUISITIONS Effective June 1, 1998 the Company acquired all of the outstanding common stock of Klick, Kent & Allen, Inc. (KK&A). KK&A, based in Alexandria, VA, 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 acquisition was accounted for using the purchase method of accounting. The purchase price of $10.0 million includes an initial payment of $6.0 million with the remainder evidenced by a note payable bearing interest at 7.5%. Approximately $9.8 million in goodwill was recorded and is being amortized over 20 years. The results of KK&A operations from June 1, 1998 are included in the accompanying consolidated statement of income for the nine months ended September 30, 1998. Effective September 1, 1998 the Company acquired all of the outstanding common stock of S.E.A., Inc. (SEA). SEA, based in Columbus, OH, provides investigation, research, analysis and quality control services in areas such as distress, product failure, fire and explosion, and vehicle and workplace accidents. The acquisition was accounted for using the purchase method of accounting. The purchase price of $15.6 million includes an initial payment of $10 million with the remainder evidenced by a note payable bearing interest at 7.5%. Approximately $13.2 million in goodwill was recorded and is being amortized over 20 years. The results of SEA operations from September 1, 1998 are included in the accompanying consolidated statement of income for the nine months ended September 30, 1998. Effective September 17, 1998 the Company acquired all of the outstanding common stock of Kahn Consulting Inc. and Affiliate (KCI). KCI, based in New York, NY, provides litigation consulting services, including expert testimony in financial proceedings, forensic accounting, fraud investigation and fact-finding services. Additionally, KCI provides government contract consulting, strategic advisory, turnaround, bankruptcy and trustee services. The acquisition was accounted for using the purchase method of accounting. The purchase price of $20 million includes an initial payment of $10 million with the remainder evidenced by a note payable bearing interest at 7.5%. Approximately $18.5 million in goodwill was recorded and is being amortized over 20 years. The results of KCI operations from September 17, 1998 are included in the accompanying consolidated statement of income for the nine months ended September 30, 1998. 10
FTI CONSULTING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1998 (CONTINUED) 5. ACQUISITIONS (CONTINUED) The following unaudited pro forma summary combines the consolidated results of operations of the Company, KK&A, KCI and SEA as if the acquisitions had occurred at the beginning of 1998 and 1997, after giving effect to certain adjustments, including amortization of intangible assets, increased interest expense on the acquisition debt, decrease in officer compensation, and related income tax effects. In connection with the acquisition, the Company entered into employment agreements with certain stockholders and executive officers of these companies. The future amount of compensation to be paid to these officers, who will have substantially the same duties and responsibilities, will be less than the amounts paid in periods prior to the acquisition. <TABLE> <CAPTION> Pro Forma Years Ended September 30, 1997 September 30, 1998 - --------------------- ------------------ ------------------ <S> <C> Revenues $ 52,098.3 $ 59,391.6 Net income $ 2,978.0 $ 1,851.8 Net income per common share - assuming dilution $ .62 $ .36 </TABLE> The pro forma consolidated results do not purport to be indicative of results that would have occurred had the acquisition been in effect for the periods presented, nor do they purport to be indicative of the results that will be obtained in the future. 6. BORROWINGS UNDER LINE OF CREDIT The Company has a demand line of credit with a bank expiring on May 31, 2000, under which the Company may borrow up to $27,000, subject to restrictions based on the available collateral. Borrowings under this line of credit bear interest at prime less variable percentages and are secured by accounts receivable and unbilled receivables. In connection with this line of credit, the Company is required to comply with certain financial ratios and convenants. 11
FTI CONSULTING, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Revenues for the third quarter and nine months ended September 30, 1998 increased 26.5% to $13.5 million and 32.9% to $39.5 million over the same periods in 1997, respectively. The increases in the quarter were attributable to the acquisitions of LWG and Bodaken in September 1997, KK&A acquired in June 1998, and KCI and SEA acquired in September 1998. Increases in the nine months comparable periods from internal growth amounted to approximately 7% with the remaining increase due to acquisitions. Internal growth was slower primarily as a result of softness in the litigation marketplace resulting in lower than expected revenues during the third quarter. Direct costs during 1998 increased 33.1% and 35.9% over the comparable quarter and nine month periods, respectively. Such increases, representing increases in resources attributable to client projects, were generally below increases in revenues attributable to lower that expected revenues, primarily from litigation services. The increases during 1998 in selling, general and administrative expenses of 45.7% and 39.5% over the comparable quarter and nine month periods represent increased costs due to new operations added through acquisitions and other cost increases attributable to growth of the business. LIQUIDITY AND SOURCES OF CAPITAL Cash flows provided by operations during the nine months of 1998 as compared to the comparable period of 1997 increased largely as a result of the decrease in accounts receivable. Cash was used in this period for the purchase of property and equipment. Additional inflows of cash were provided by the exercise of stock options during the nine months. Options for 217,900 shares were exercised during the nine months of 1998, resulting in an overall increase in cash. During the third quarter, the Company borrowed $26 million on its short-term line of credit for the first installment on the acquisitions of KK&A, KCI and SEA. The Company expects that available cash and existing short-term lines of credit will be sufficient to meet its normal operating requirements over the near term. As a result of the acquisitions of KK&A, KCI and SEA, the Company no longer satisfies the net tangible assets requirement for continued listing on the Nasdaq National Market System and, therefore, is subject to delisting. Accordingly, the Company will pursue other options in effort to have its Common Stock remain listed on a national securities exchange. These options include applying to transfer the Company's listing to either the Nasdaq SmallCap Market or the American Stock Exchange. The Company believes it currently meets the applicable listing requirements on both of these exchanges. 12
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Incorporated by reference from the Forensic Technologies International Corporation (filed as Forensic Technologies International Corporation prior to the effectiveness of the name change) Notice of 1998 Annual Meeting and Proxy Statement filed pursuant to Regulation 14A. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 10.1 Financing and Security Agreement dated September 15, 1998, between the Company and NationsBank, N.A. regarding a revolving credit facility in the maximum amount of $35 million. 22. PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE OF SECURITY HOLDERS Incorporated by reference from the Forensic Technologies International Corporation (filed as Forensic Technologies International Corporation prior to the effectiveness of the name change) Notice of 1998 Annual Meeting and Proxy Statement filed pursuant to Regulation 14A. 27. FINANCIAL DATA SCHEDULE FOR NINE MONTHS ENDED SEPTEMBER 30, 1998. (B) REPORTS ON FORM 8-K The Company filed an 8-K for the acquisition of Klick, Kent & Allen, Inc. on July 15, 1998. 13
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FTI CONSULTING, INC. Date: November 13, 1998 By /s/Gary Sindler ----------------- --------------- Executive Vice President, Chief Financial Officer, Secretary and Treasurer (principal financial and accounting officer)