SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO THE SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO _______
COMMISSION FILE NUMBER: 001-14875
FTI CONSULTING, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1261113
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2021 RESEARCH DRIVE, ANNAPOLIS, MARYLAND 21401
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(Address of Principal Executive Offices) (Zip Code)
(410) 224-8770
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
Common Stock, $.01 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at May 11, 1999
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Common Stock, par value 4,829,132
$.01 per share
FTI CONSULTING, INC.
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INDEX
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheets - December 31, 1998 and
March 31, 1999 3
Statements of Income - Three months ended
March 31, 1998, three months ended March 31, 1999 5
Statements of Cash Flows - Three months ended
March 31, 1998, three months ended March 31, 1999 6
Notes to Unaudited Financial Statements - March 31, 1999 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 19
2
Part I. Financial Information
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands of dollars)
DECEMBER 31, MARCH 31,
1998 1999
--------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,223 $ 2,136
Accounts receivable, less allowance of $1,305 in 1998 and $1,372
in 1999 13,139 13,163
Unbilled receivables, less allowance of $1,117 in 1998 and $1,196
in 1999 7,803 10,161
Income taxes recoverable 794 19
Deferred income taxes -- 173
Prepaid expenses and other current assets 1,262 1,174
--------------------------------------
Total current assets 26,221 26,826
Property and equipment:
Buildings 411 411
Furniture and equipment 14,752 15,460
Leasehold improvements 1,891 1,876
--------------------------------------
17,054 17,747
Accumulated depreciation and amortization (8,767) (9,268)
--------------------------------------
8,287 8,479
Goodwill, net of accumulated amortization of $1,077 in 1998 and
$1,647 in 1999 45,164 44,594
Other assets 75 844
--------------------------------------
Total assets $ 79,747 $ 80,743
======================================
See accompanying notes.
3
DECEMBER 31, MARCH 31,
1998 1999
--------------------------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,924 $ 1,990
Accrued compensation expense 2,765 3,546
Current portion of long-term debt 10,650 2,588
Advances from clients 498 526
Other current liabilities 313 287
--------------------------------------
Total current liabilities 17,150 8,937
Long-term debt, less current portion 35,630 42,888
Other long-term liabilities 269 243
Deferred income taxes 1,104 1,146
Commitments and contingent liabilities -- --
Stockholders' equity:
Preferred stock, $.01 par value; 4,000,000 shares
authorized, none outstanding -- --
Common stock, $.01 par value; 16,000,000 shares
authorized; 4,781,895 and 4,829,132 shares issued and
outstanding in 1998 and 1999, respectively 48 48
Additional paid-in capital 16,531 17,907
Retained earnings 9,015 9,574
--------------------------------------
Total stockholders' equity 25,594 27,529
======================================
Total liabilities and stockholders' equity $79,747 $80,743
======================================
See accompanying notes.
4
FTI Consulting, Inc. and Subsidiaries
Consolidated Statement of Income
(in thousands of dollars, except per share data)
THREE MONTHS ENDED MARCH 31
1998 1999
-----------------------------------------------
(Unaudited)
Revenues $ 14,109 $ 20,000
Direct cost of revenues 7,579 10,430
Selling, general and administrative expenses 4,662 7,758
-----------------------------------------------
Total costs and expenses 12,241 18,188
-----------------------------------------------
Income from operations 1,868 1,812
Other income (expense):
Interest and other income 56 66
Interest expense (59) (861)
-----------------------------------------------
(3) (795)
-----------------------------------------------
Income before income taxes 1,865 1,017
Income taxes 759 458
------------------------------------------------
Net income $ 1,106 $ 559
===============================================
Basic earnings per common share $ 0.24 $ 0.12
===============================================
Diluted earnings per common share $ 0.22 $ 0.12
===============================================
See accompanying notes.
5
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands of dollars)
THREE MONTHS ENDED MARCH 31
1998 1999
-----------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 1,106 $ 559
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
used in operating activities:
Depreciation 445 492
Amortization 110 643
Provision for doubtful accounts 160 145
Deferred income taxes -- (132)
Loss on disposal of assets -- 8
Changes in operating assets and liabilities:
Accounts receivable (1,401) (91)
Unbilled receivables 465 (2,437)
Prepaid expenses and other current assets (484) 88
Accounts payable and accrued expenses (862) (934)
Accrued compensation expense (321) 781
Income taxes recoverable 448 775
Advances from clients (117) 28
Other current liabilities (103) (21)
-----------------------------------------
Net cash used in operating activities (554) (96)
INVESTING ACTIVITIES
Purchase of property and equipment (621) (845)
Proceeds from sale of property and equipment 70 82
Change in other assets (2) 2
-----------------------------------------
Net cash used in investing activities (553) (761)
FINANCING ACTIVITIES
Exercise of stock options 1,337 136
Payments under long-term credit facility -- (6,000)
Payment of refinancing fees -- (771)
Payment on notes payable for acquired businesses -- (6,563)
Borrowings on subordinated notes payable -- 13,000
Payments of other long-term liabilities (23) (32)
-----------------------------------------
Net cash provided by (used in) financing activities 1,314 (230)
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 207 (1,087)
Cash and cash equivalents at beginning of period 2,456 3,223
=========================================
Cash and cash equivalents at end of period $ 2,663 $ 2,136
=========================================
See accompanying notes.
FTI CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
(in thousands of dollars, except per share data)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended December 31, 1998.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999.
2. EARNINGS PER SHARE
The following table summarizes the computations of basic and diluted earnings
per share:
THREE MONTHS ENDED
MARCH 31
1998 1999
-----------------------------------
Numerator used in basic and diluted earnings per common share:
Net income $1,106 $ 559
===================================
Denominator:
Denominator for basic earnings per common share - weighted
average shares 4,598 4,829
Effect of dilutive securities:
Warrants 7 --
Employee stock options 467 12
Convertible notes payable -- --
-----------------------------------
474 12
-----------------------------------
Denominator for diluted earnings per common
share - weighted average shares and
assumed conversions 5,072 4,841
===================================
Basic earnings per common share $ 0.24 $ 0.12
===================================
Diluted earnings per common share $ 0.22 $ 0.12
===================================
7
FTI CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999 (CONTINUED)
3. STOCKHOLDERS' EQUITY
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
-------------------------------------------------
Balance at January 1, 1999 $ 48 $16,531 $9,015 $25,594
Exercise of options to purchase 47,000 shares of 136 136
common stock
Issuance of 533,000 warrants to purchase common stock
1,240 1,240
Net income for three months ended March 31, 1999 559 559
=================================================
Balance at March 31, 1999 $ 48 $17,907 $9,574 $27,529
=================================================
4. INCOME TAXES
The income tax provisions for the three months ended March 31, 1999 and 1998 are
based on the estimated effective tax rates applicable for the full years. The
Company's income tax provision of $458 for the three month period ended March
31, 1999 consists of federal and state income taxes.
5. DEBT
In March 1999, the Company renegotiated the terms of its $27,000 long-term
credit facility. Amounts borrowed under the revolving credit facility are
secured by all assets of the Company, bear interest at LIBOR or prime (as
elected by the Company each quarter) plus specified additions, and mature on
September 30, 2001. The Company is required to comply with certain specified
financial covenants related to operating performance and liquidity at the end of
each quarter.
In connection with the renegotiation of the financing, the lender was issued
warrants to purchase 25,000 shares of common stock at an exercise price of $3.00
per share. The warrants expire in March 2006, contain anti-dilution provisions
and contain put rights.
Also in March 1999, the Company issued $13,000 of subordinated notes bearing
interest at 9.25% per annum through June 2000, and 12% per annum thereafter
until maturity in March 2004. The subordinated notes are secured by a second
priority interest in all of the assets of the Company, and prohibit the payment
of dividends without the consent of the lender. The proceeds from the issuance
of the notes have been used to fund 1999 maturities of long-term debt and for
working capital.
8
FTI CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999 (CONTINUED)
5. DEBT (CONTINUED)
In connection with the issuance of the subordinated debt, the lender was issued
warrants to purchase 392,506 shares of common stock at an exercise price of
$3.21 per share. The warrants expire six years from the date of final payment on
the subordinated debt and contain put rights.
Again in March 1999, the Company restructured certain seller promissory notes
that it had issued in June 1998 to sellers of KK&A and in September 1998 to
sellers of S.E.A. and KCI. In connection with this restructuring, holders of
such obligations who deferred the payments due in September 1999 and September
2000 until June 2002 received an amended and restated promissory that provided:
(i) for every three dollars of face amount deferred until 2002, an increased
rate of 9.25% per annum on two dollars of the face amount; (ii) for every three
dollars of face amount deferred until 2002, an interest rate of 6.0% per annum
on one dollar of the face amount plus the right to convert that portion of the
note into common stock at the lower of $5.00 per share or the average common
stock price for June 2000; and (iii) 115,033 five-year warrants, exerciseable to
March 2004 with an exercise price of $3.21.
Warrants to purchase common stock issued in connection with the March 1999
financings were valued at $1,240, an estimate determined using the Black Scholes
Option Pricing Model, a generally accepted warrant valuation methodology. The
estimated value of the warrants was recorded as additional paid-in capital and
the debt has been recorded net of a discount of $1,240.
Debt consists of the following:
DECEMBER 31, MARCH 31,
1998 1999
----------------------------
Amounts due under a $27,000 long-term credit facility (net of discount of $52 in
1999) expiring in September 2001, bearing interest at LIBOR plus variable
percentages. The facility is secured by substantially all of the assets of the
Company.
$26,000 $19,948
Notes payable to former shareholders of acquired businesses (net of discount of
$220), maturing periodically through 2002, and bearing interest payable as
described above.
20,280 13,496
Subordinated debentures (net of discount of $968) bearing interest at 9.25% per
annum through June 2000, and 12% per annum thereafter until
maturity in March 2004 -- 12,032
----------------------------
Subtotal of debt 46,280 45,476
Less current portion (10,650) (2,588)
----------------------------
Total long-term debt $35,630 $42,888
============================
9
FTI CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999 (CONTINUED)
6. SEGMENT REPORTING
The Company provides forensic, strategic consulting and claims management
advisory services through three distinct operating segments. The Expert
Financial Services division provides services in various financial proceedings
such as mathematical and statistical analysis, forensic accounting, fraud
investigation and strategic advisory, turnaround, bankruptcy and trustee
services. The Applied Sciences division provides services in connection with
engineering and scientific investigation and analysis of failures and accidents
alleged in court cases. The Litigation Services division provides consulting
services in the areas of visual communications, trial management and courtroom
technology.
The Company's reportable segments are business units that offer distinct
services. The segments are managed separately by division presidents who are
most familiar with the segment operations. The following table sets forth
information on the Company's reportable segments:
THREE MONTHS ENDED MARCH 31, 1998
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EXPERT FINANCIAL APPLIED LITIGATION
SERVICES SCIENCES SERVICES TOTAL
- --------------------------------------------------------------------------------------------------------
REVENUES $1,208 $4,086 $8,815 $14,109
OPERATING EXPENSES 812 3,322 5,059 9,193
--- ----- ----- -----
SEGMENT PROFIT $396 $764 $3,756 $4,916
THREE MONTHS ENDED MARCH 31, 1999
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EXPERT FINANCIAL APPLIED LITIGATION
SERVICES SCIENCES SERVICES TOTAL
- --------------------------------------------------------------------------------------------------------
REVENUES $5,077 $8,308 $6,615 $20,000
OPERATING EXPENSES 3,629 7,199 4,477 15,305
----- ----- ----- ------
SEGMENT PROFIT $1,448 $1,109 $2,138 $4,695
A reconciliation of segment profit for all segments to income before income
taxes is as follows:
1998 1999
- --------------------------------------------------------------------------------
OPERATING PROFIT:
TOTAL SEGMENT PROFIT $4,916 $4,695
CORPORATE GENERAL AND ADMINISTRATIVE
EXPENSES (2,493) (1,748)
DEPRECIATION AND AMORTIZATION (555) (1,135)
OTHER EXPENSE (3) (795)
------------------------------------
INCOME BEFORE INCOME TAXES $1,865 $1,017
------------------------------------
10
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 of more of its
consolidated revenues.
11
FTI CONSULTING, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
FTI Consulting, Inc. is a leading provider of forensic, strategic consulting and
claims management advisory services to major corporations, law firms, banks and
insurance companies. The Company derives revenue primarily from three business
divisions: Litigation Services, Applied Sciences and Expert Financial Services.
Through its Litigation Services division, FTI provides advice and services in
connection with all phases of the litigation process. FTI offers its clients,
through the Applied Sciences division, engineering and scientific consulting
services, accident reconstruction, fire investigation, equipment procurement and
expert testimony regarding intellectual property rights. FTI provides a range of
financial consulting services, such as forensic accounting, fraud investigation,
claims management and expert testimony, and bankruptcy and turnaround analysis,
through its Expert Financial Services division. The revenues generated from the
business divisions consist of: (i) fees for professional services; (ii) fees for
use of the Company's equipment and facilities, particularly animation computers;
(iii) pass-through expenses such as the recruiting of subjects and participants
for research surveys and mock trial activities and travel; and (iv) fees
associated with work product production, such as static graph boards, color
copies and digital video production. The Company recognizes revenue as work is
performed or as related expenses are incurred.
The Company's goal is to provide value-added services to its clients either on a
case-by-case basis or through ongoing relationships with major users of
litigation and claims services. Over the past three years, the Company has taken
several steps to grow the business and its industry prominence. Such steps
include expanding into financial consulting services for trials, turnarounds and
bankruptcies and recruiting additional visual communication staff and recognized
professionals in the trial consulting business. By virtue of its recent
acquisitions, the Company has further expanded its geographic reach with major
offices now in New York, Columbus, Chicago, Houston, Los Angeles and Washington,
D.C.
In 1998, the Company made three major acquisitions, all of which were accounted
for as purchases. In June, the Company acquired Klick, Kent & Allen (KK&A). KK&A
provides strategic and economic consulting to various regulated businesses,
advising on such matters as industry deregulation, mergers and acquisitions,
rate and cost structures, economic and financial modeling and litigation risk
analysis.
In September 1998, the Company acquired both S.E.A., Inc. (S.E.A.) and Kahn
Consulting, Inc. (KCI). S.E.A., headquartered in Columbus, Ohio, provides
investigation, research, analysis and quality control services in areas such as
distress, product failure, fire and explosion and vehicle and workplace
accidents. The S.E.A. acquisition has allowed the Company to significantly
expand it scientific consulting offerings, in addition to providing geographic
expansion into the southeast and midwest markets. KCI, headquartered in New York
City, provides expert testimony on accounting and financial
12
issues; forensic accounting and fraud investigation services; strategic
advisory, turnaround, bankruptcy and trustee services, and government contract
consulting. The acquisitions of KCI and KK&A provide the foundation for the
expansion of expert financial services into markets where the Company already
has a presence.
In connection with the September acquisitions, the Company expanded and amended
its line of credit with its bank and utilized $26 million of borrowings against
a $27 million credit line to fund the initial acquisition payments. In March
1999, the Company amended its bank financing extending the maturity to September
2001, or possibly later under certain conditions, and revising certain covenants
and other terms, including elimination of the requirement to add $10 million of
equity by May 1999. The Company also obtained $13 million of subordinated debt
financing through the sale of subordinated debentures (with warrants) to an
investor, maturing in March 2004. Further, the seller notes were restructured in
consideration for the acceleration of certain payments due in 1999 to March 31,
1999, the extension of certain other payments through June 30, 2002, adjustments
to interest rates, the issuance of warrants to purchase an aggregate of 115,033
shares of the Company's common stock at $3.21 per share, and the right to
convert $2,875,800 of debt into common stock at the lower of $5 per share or the
average closing price of the Company's common stock on the AMEX for the month of
June 2000.
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
REVENUES. Total revenues for the three months ended March 31,1999 increased
41.8% to $20.0 million compared to $14.1 million for the three months ended
March 31, 1998. Excluding acquisitions completed in 1998, revenues would have
decreased 22.2%. Litigation services revenues decreased 23.3% from $8.6 million
in 1998 to $6.6 million in 1999 as a result of softness in the markets beginning
in the second quarter of 1998 from which the company began to recover in the
fourth quarter of 1998 and continued its recovery in the first quarter of 1999
with an 11.6% improvement in the first quarter of 1999 compared to the fourth
quarter of 1998. The Applied Sciences Division experienced 92.6% growth to $8.3
million in the three months ended March 31, 1999 compared to $4.3 million in the
first quarter of 1998, all of that growth coming from the acquisition of S.E.A,
reduced by a 12.1% decrease in revenues from units other than S.E.A. The Expert
Financial Services division grew by 320.3%, with all of that growth coming from
acquisitions, reduced by a 53.4% decrease in revenues generated by the Company's
Teklicon subsidiary.
DIRECT COST OF REVENUES. Direct cost of revenues consists primarily of billable
employee compensation and related payroll benefits, the cost of contractors
assigned to revenue-generating activities and other related expenses billable to
clients. Direct cost of revenues improved to 52.2% of revenue for the three
months ended March 31, 1999, compared to 53.7% of revenue for the three months
ended March 31, 1998, the improvement coming primarily from acquisitions and the
Litigation Services Division.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of salaries and benefits paid to
office and corporate staff, as well as rent, marketing, and corporate overhead
expenses. Selling, general and administrative expenses also include amortization
of goodwill. As a percent of revenues, these expenses were 38.8% for the three
months ended March 31, 1999 compared to
13
33.0% for the three months ended March 31, 1998. Excluding goodwill
amortization, selling, general and administrative expenses as a percentage of
sales were 33.2% in 1999 and 31.2% in 1998.
OTHER INCOME AND EXPENSES. Other income and expenses consists primarily of net
interest expense on the line of credit and the interest expense associated with
the purchased businesses referred to above. Net interest expense increased to
$795,000 for the three months ended March 31, 1999, from $3,000 for the three
months ended March 31, 1998.
INCOME TAXES. In the first quarter of 1999, principally as a result of certain
goodwill amortization not being deductible for income tax purposes, the
effective tax rate increased to 45.0% from 40.7% in the first quarter of 1998.
It is anticipated that the effective income tax rate will be between 45% and 49%
for the foreseeable future.
FUTURE ASSESSMENT OF RECOVERABILITY AND IMPAIRMENT OF GOODWILL
In connection with its various acquisitions, the Company recorded goodwill,
which is being amortized on a straight-line basis over periods of 15 to 25
years, the estimated periods that the Company will be benefited by such
goodwill. At March 31, 1999, the unamortized goodwill was $44.6 million (which
represented 55.2% of total assets and 162% of stockholders' equity). Goodwill
arises when an acquirer pays more for a business than the fair value of the
tangible and separately measurable intangible net assets. For financial
reporting purposes, goodwill and all other intangible assets are amortized over
the estimated period benefited. The Company has determined the life for
amortizing goodwill based upon several factors, the most significant of which
are the relative size, historical financial viability and growth trends of the
acquired companies and the relative lengths of time such companies have been in
existence.
Management of the Company periodically reviews the Company's carrying value and
recoverability of unamortized goodwill. If the facts and circumstances suggest
that the goodwill may be impaired, the carrying value of such goodwill will be
adjusted which will result in an immediate charge against income during the
period of the adjustment and/or the length of the remaining amortization period
may be shortened, which will result in an increase in the amount of goodwill
amortization during the period of adjustment and each period thereafter until
fully amortized. Once adjusted, there can be no assurance that there will not be
further adjustments for impairment and recoverability in future periods. Of the
various factors to be considered by management of the Company in determining
whether goodwill is impaired, the most significant will be (i) losses from
operations, (ii) loss of customers, and (iii) industry developments, including
the Company's inability to maintain its market share, development of competitive
products or services, and imposition of additional regulatory requirements.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 1999, the Company used $96,000 of cash in operations, an
improvement of $458,000 as compared to a use of cash in operations in the first
quarter of 1998 of $554,000. This improvement is attributable primarily to the
favorable net cash effects of changes in working capital balances, reduced by a
small decrease in net income
14
excluding non-cash charges (principally depreciation and amortization). The
Company expects that cash flows from operations will increase in 1999, in part
as a result of additional operating cash provided from businesses acquired in
late 1998.
The Company borrowed $26.0 million in 1998 under its $27.0 million long-term
credit facility with a bank to provide the $26.4 million of cash needed to
acquire Klick, Kent & Allen, Inc., Kahn Consulting, Inc., and SEA, Inc. This
credit facility was renegotiated in March 1999, and the new terms extend the
maturity date of the loan to September 2001. This maturity date may be extended
an additional year if the Company is successful in extending the maturity dates
of certain notes issued to sellers of the acquired 1998 and 1997 businesses.
In connection with the acquisition of certain businesses in 1998 and 1997, the
Company is obligated under certain seller notes totaling $13.7 million at March
31, 1999. Of the $13.7 million outstanding at March 31, 1999, $2.6 million is
payable in the remainder of 1999. As described above, the Company in March 1999
issued $13.0 million of subordinated debentures to provide additional cash
resources as the seller notes begin to mature. The subordinated debentures
initially bear interest at 9.25% per annum, and mature in lump sum in March
2004. The debentures prohibit the payment of dividends without the written
consent of the holder.
The Company is required to comply with certain financial covenants related to
operating performance and liquidity, as calculated quarterly, for both the
revised and extended long-term credit facility and the subordinated debentures.
The Company believes that it will be in compliance with all covenants throughout
1999.
During the quarter ended March 31, 1999 the Company expended $0.8 million for
additions to property and equipment. This amount included expenditures for
internal information systems that allow the Company to better manage its
expanding operations. At March 31, 1999 the Company had no material commitments
for the acquisition of property and equipment.
The Company believes that cash generated from operations and the financing
arrangements completed in March 1999 will allow it to meet its obligations under
notes maturing in 1999, and further provide for the necessary cash resources
required in the near term to fund its expanding operations.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs written using two digits
(rather than four) to define the applicable year. Absent corrective actions,
programs with date-sensitive logic may recognize "00" as 1900 rather than 2000.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has commenced a process to assure Year 2000 compliance of all
hardware, software, and ancillary equipment that are date dependent. The process
involves four phases:
15
Phase I - Inventory and Data Collection. This phase involves an identification
of all items that are date dependent. The Company commenced this phase in the
first quarter of 1998 and is now complete.
Phase II - Compliance Requests. This phase involves requests to systems vendors
for verification that the systems identified in Phase I are Year 2000 compliant.
The Company continues to replace critical systems that cannot be updated or
certified compliant. The Company commenced this phase in the first quarter of
1998 and expects to complete this phase before the end of the second quarter of
1999. The Company's principal compliance issue is focused on the existing
business and accounting system developed over the past ten years. A new business
and accounting system has been implemented and is vendor-certified to be Year
2000 compliant. In addition, the Company has determined that substantially all
of its personal computers and PC applications are compliant.
Phase III - Test, Fix and Verify. This phase involves testing all items that are
date dependent and upgrading the critical, non-compliant system as well as
completing the implementation of the new business and accounting system. The
Company has begun this phase and expects completion by the middle of the third
quarter of 1999.
Phase IV - Final Testing, New Item Compliance. This phase involves review of all
systems for compliance and re-testing as necessary. During this phase, all new
systems and equipment will be tested for Year 2000 compliance. The Company
expects to complete this phase by the end of the third quarter of 1999. The
Company presently believes that, with the implementation of the new business and
accounting system, including hardware and software, the Year 2000 issue will not
pose any significant operational problem. This substantial compliance has been
achieved without the need to acquire significant new hardware, software, or
systems other than in the ordinary course of business. The Company is not aware
of any other material Year 2000 non-compliance that would require repair or
replacement that would have a material effect on its financial position. As part
of the Year 2000 process, formal communication with the Company's suppliers,
customers and other support services has been initiated during the first quarter
of 1999 and efforts will continue until positive statements of readiness have
been received from all third parties. To date, the Company is not aware of any
Year 2000 non-compliance by its customers or suppliers that would have material
impact on the Company's business. Nevertheless, there can be no assurance that
unanticipated Year 2000 non-compliance will not occur, and such Year 2000
non-compliance could require material costs to repair or could cause material
disruptions if not repaired. The Company is in the process of developing a
strategy to address these potential consequences that may result from unresolved
Year 2000 issues, which will include the development of one or more contingency
plans by mid 1999.
FORWARD-LOOKING STATEMENTS
Some of the statements under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Quarterly Report of
Form 10-Q contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934. These statements involve known and
unknown risks,
16
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. These forward-looking statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "intends," "anticipates," `believes," "estimates,"
"predicts," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Moreover, neither
we nor any other person assumes responsibility for the accuracy and completeness
of such statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform such statements to
actual results and do not intend to do so. Factors which may cause the actual
results of operations in future periods to differ materially from intended or
expected results include, but are not limited to: (1) the loss of any key
employees because the Company's business involves the delivery of professional
services and is labor-intensive; (2) the loss of key officers of the Company,
without 90 day replacement, which would constitute an event of default under the
Company's $13 million Investment and Loan Agreement with Allied Capital
Corporation and Allied Investment Corporation; (3) the availability and terms of
additional capital or debt financing to fund future acquisitions and for working
capital purposes; (4) significant competition for business opportunities and
acquisition candidates; (5) fluctuations of revenue and operating income between
quarters or termination of client engagements; (6) the continued integration of
KK&A, KCI and S.E.A., acquired in 1998, and the integration of future
acquisitions; and (7) risks associated with quantitative and qualitative market
risks such as fluctuations in interest rates.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
1. On February 24, 1999, the Company issued to Grotech Capital Corporation,
et al, warrants exercisable for an aggregate of 20,000 shares of common The
exercise price per share for each of these warrants is $3.25. These warrants
expire on February 23, 2004. The Grotech Warrants were issued by the Company in
reliance on the private placement exemption under Section 4(2) of the Securities
Act. As of May 7, 1999, the Grotech Entities beneficially owned shares of common
stock and securities convertible into shares of common stock as follows: Grotech
III Pennsylvania Fund LP (27,240 shares of common stock and warrants currently
exercisable for 600 shares of common stock), Grotech III Companion Fund, LP
(45,438 shares of common stock and warrants currently exercisable for 1,001
shares of common stock), Grotech Partners III, LP (381,322 shares of common
stock and warrants currently exercisable for 8,399 shares of common stock).
2. The Company issued $13,000,000 of subordinated debentures bearing
interest at 9.25% per annum through June 2000, and 12% per annum thereafter
until maturity in March 2004, of which $5,700,000 was sold to Allied Capital
Corporation and $7,300,000 was sold to Allied Investment Corporation. In
connection with the issuance of the subordinated debt, as of March 29, 1999, the
Company issued warrants to purchase an aggregate of 392,505.73 shares of common
stock at an exercise price of $3.205 per share to the lenders, of which a
warrant exercisable for 172,098.67 shares of common stock was issued to Allied
Capital Corporation and a warrant exercisable for 220,407.06 shares of common
stock was issued to Allied Investment Corporation (collectively, the "Allied
Warrants"). If the debentures are paid in full before the close of business on
June 30, 2000, the number of shares of common stock that are issuable on
exercise of the warrant issued to Allied Capital Corporation will be reduced to
111,713.17 and the number of shares of common stock that are issuable on
exercise of the warrant issued to Allied Investment Corporation will be reduced
to 143,071.25. the right to exercise the Allied Warrants will expire six years
after the date the debentures are paid in full. The Allied Warrants were issued
by the Company in reliance on the private placement exemption under Section 4(2)
of the Securities Act.
3. As of March 31, 1999, the Company restructured certain seller promissory
notes that it had issued in June 1998 to sellers of K.K.&A. and in September
1998 to sellers of S.E.A. and KCI. In connection with this restructuring,
holders of such obligations who deferred the payments due in September 1999 and
September 2000 until June 2002 received an amended and restated promissory that
provided: (i) for every three dollars of face amount deferred until 2002, an
increased rate of 9.25% per annum on two dollars of the face amount; (ii) for
every three dollars of face amount deferred until 2002, a lower interest rate of
6.00% per annum on one dollar of the face amount plus the right
18
to convert that portion of the note into common stock at the lower of $5.00 per
share or the average common stock price for June 2000 (collectively, the
"Convertible Note"); and (iii) five-year warrants (exercisable to March 31,
2004) with an exercise price of $3.205 equal in number to 2% of the portion of
the obligation bearing the 9.25% interest rate (collectively, the "Restructuring
Warrants"). To the extent that the restructuring of the notes is deemed to be
the issuance of restricted securities, as well as the issuances of the
Convertible Notes and the Restructuring Warrants, the following individuals were
issued the following: (a) Stewart A. Kahn: $1,500,000 Convertible Note
(convertible into 300,000 shares of common stock of the Company based on an
assumed conversion price of $5.00 per share) and a Restructuring Warrant for
60,000 shares of Company common stock; (b) Michael R. Baranowski: $166,700
Convertible Note (convertible into 33,340 shares of common stock of the Company
based on an assumed conversion price of $5.00 per share) and a Restructuring
Warrant to purchase 6,667 shares of Company common stock; (c) Barry M. Monheit:
$433,300 Convertible Note (convertible into 86,660 shares of common stock of the
Company based on an assumed conversion price of $5.00 per share) and a
Restructuring Warrant to purchase 17,333 shares of Company common stock; (d)
Laureen M. Ryan: $42,500 Convertible Note (convertible into 8,500 shares of
common stock of the Company based on an assumed conversion price of $5.00 per
share) and a Restructuring Warrant to purchase 1,700 shares of Company common
stock; (e) Dennis A. Guenther: $333,300 Convertible Note (convertible into
66,660 shares of common stock of the Company based on an assumed conversion
price of $5.00 per share) and a Restructuring Warrant to purchase 13,333 shares
of Company common stock; (f) Christopher D. Kent: $200,000 Convertible Note
(convertible into 40,000 shares of common stock of the Company based on an
assumed conversion price of $5.00 per share) and a Restructuring Warrant to
purchase 8,000 shares of Company common stock; and (g) John C. Klick: $200,000
Convertible Note (convertible into 40,000 shares of common stock of the Company
based on an assumed conversion price of $5.00 per share) and a Restructuring
Warrant to purchase 8,000 shares of Company common stock. All of the Convertible
Notes and Restructuring Warrants were issued by the Company in reliance on the
private placement exemption under Section 4(2) of the Securities Act.
4. In March 1999, the Company renegotiated the terms of its $27,000
long-term credit facility. Amounts borrowed under the revolving credit facility
are secured by all assets of the Company, bear interest at LIBOR or prime (as
elected the Company each quarter) plus specified additions, and mature on
September 30, 2001. The maturity date may be extended to September 30, 2002 if
certain specified events occur. The Company is also required to comply with
certain specified financial covenants related to operating performance and
liquidity at the end of each quarter. In connection with the renegotiation of
the financing, the lender was issued warrants to purchase 25,000 shares of
common stock at an exercise price of $3.00 per share. The warrants expire in
March 2006, contain anti-dilution provisions and contain put rights.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27. Financial Data Schedule for three months ended March 31, 1999
(B) REPORTS ON FORM 8-K
Current Report on Form 8-K filed on January 8, 1999.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FTI CONSULTING, INC.
Date: May 11, 1999 By /s/Theodore I. Pincus
------------ ---------------------
Executive Vice President and Chief
Financial Officer (principal financial and
accounting officer)
21
5
1
US DOLLAR
3-MOS
DEC-31-1999
JAN-01-1999
MAR-31-1999
1
$2,135,557
$0
$25,891,308
$2,567,290
$0
$26,824,725
$17,746,524
$9,267,981
$80,741,366
$8,936,765
$0
$48,291
$0
$0
$27,480,958
$80,741,366
$20,000,238
$20,000,238
$10,430,343
$18,188,540
$0
$0
$861,114
$1,016,700
$457,515
$559,185
$0
$0
$0
$559,185
0.12
0.12
