SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
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
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
900 Bestgate Road, Suite 100, 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
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Common Stock, $.01 par value New York 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of shares of Registrant's Common Stock outstanding on March 18, 2002
was 19,971,497.
The aggregate market value of voting stock held by non-affiliates of the
Registrant, based upon the average sales price of the Registrant's Common Stock
on March 18, 2002 was $557,060,500*.
* Excludes 231,578 shares deemed to be held by directors, officers and
greater than 10% holders of the Common Stock outstanding at March 18, 2002.
Exclusion of Common Stock held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of the Company,
or that such person is controlled by, or under common control with, the
Company.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement to be
filed with the Securities and Exchange Commission within 120 days after the end
of the Company's fiscal year are incorporated by reference into Part III of this
Annual Report on Form 10-K.
i
FTI CONSULTING, INC.
Annual Report on Form 10-K
Fiscal Year Ended December 31, 2001
TABLE OF CONTENTS
Page Reference to
Form 10-K
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Part I
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Item 1. Business.............................................................................. 4
Item 2. Properties............................................................................15
Item 3. Legal Proceedings.....................................................................15
Item 4. Submission of Matters to a Vote of Security Holders...................................15
Part II
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Item 5. Market for the Company's Common Equity and
Related Shareholder Matters.........................................................16
Item 6. Selected Financial Data...............................................................16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................................18
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.........................................................................24
Item 8. Financial Statements and Supplementary Data...........................................25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................................50
Part III
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Item 10. Directors and Executive Officers of the Company.......................................50
Item 11. Executive Compensation................................................................50
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................................................50
Item 13. Certain Relationships and Related Transactions........................................50
Part IV
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Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.................................................................51
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
We are a multi-disciplined consulting firm with leading practices in the areas
of financial restructuring, litigation consulting and engineering and scientific
investigation. Modern companies, as well as those who advise and invest in them,
face growing challenges on every front. From a proliferation of
"bet-the-company" litigation to increasingly complicated relationships with
lenders and investors in an ever-changing global economy, U.S. companies are
increasingly turning to outside experts and consultants to deal with these
complex issues. We are dedicated to helping companies and their advisors,
lawyers, lenders and investors meet these challenges by providing a broad array
of the highest quality professional services from a single source.
Our clients retain us when confronted with adverse situations such as loan
defaults, bankruptcy, litigation, regulatory investigations or proceedings or
insurance claims. We believe that they retain us for several reasons, including:
. our recognized expertise;
. our unique capabilities in several highly specialized areas;
. their need for an impartial expert;
. our disciplined project management approach that allows us to deliver
consistently high-quality advice and services, on schedule and on budget;
. our repeated success in satisfying their needs; and
. the trend in business generally to outsource non-core activities,
especially in those areas that are complex, unique and incident-driven.
Over the past four years, we have taken several steps to extend our range of
services, leverage our reputation for quality and client service and grow our
business, including the following:
. completed five acquisitions since 1997 that significantly expanded our
size, service offerings and geographic scope, including the acquisition on
February 4, 2000 of Policano & Manzo, L.L.C., one of the leading financial
consulting firms in the United States;
. expanded into financial consulting services for restructurings and
bankruptcy proceedings including crisis management; energy consulting;
intellectual property consulting; electronic evidence discovery and other
specialties; and
. developed proprietary trial preparation and presentation software and
software to facilitate forensic engineering and scientific investigation.
We have organized our business into the following three divisions:
. Our Financial Consulting division serves both financially distressed
companies and financial institutions that are regularly involved in
litigation or regulatory, bankruptcy or other proceedings. These companies
and institutions typically require extensive, highly specialized, long-term
advisory services. For companies and institutions in regulated industries,
we provide expert testimony, cost benefit analysis, damage assessment,
market competition analysis and business valuations. In bankruptcies,
restructurings and other financial distress situations, or alleged
irregularities or, in the case of professional firms, malpractice, we
provide companies or their creditors with business and strategic plan
development and forensic accounting services.
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. Our Applied Sciences division offers forensic engineering and scientific
investigation services. These services include accident reconstruction,
fire investigation and product failure analysis. The division also
provides quality control services, including assessment of preventive
measures relating to product design and evaluations of the causes of
product failures.
. Our Litigation Consulting division advises clients in all phases of
litigation, including discovery, jury selection, trial preparation and the
actual trial. The division also provides visual communications services,
such as animation, image enhancement and computer simulation to improve
trial presentation.
INDUSTRY OVERVIEW
We serve businesses, lenders, investors, insurers and their legal counsel in
adverse circumstances such as class action lawsuits, financial restructurings
and bankruptcy proceedings and accident investigations. Clients' reputations,
financial condition and very existence are sometimes at stake. Consequently,
our clients require objective and professional advice from independent experts.
Also, many businesses, lenders, investors, insurers and law firms are
increasingly outsourcing functions that have become very specialized or require
unique knowledge or technology.
Financial Consulting. We have greatly expanded our capabilities and size in
financial restructuring and bankruptcy advice since we entered the business in
1998. We believe that the number of financial restructurings and bankruptcies
will continue to grow because of intense competition and rapidly changing
markets in many industries, the deregulation of various industries and the
recent lengthy economic growth during which many companies expanded
aggressively. The bankruptcy market is rapidly expanding as more companies seek
Chapter 11 protection.
According to Moody's Investor Service, 253 companies around the world defaulted
on $110.2 billion in bonds in 2001, eclipsing the 167 companies that failed to
pay the previous record of $49.2 billion in bonds during 2000. Moody's also
reports that the default rate on junk paper was 10.2% in 2001. Other financial
rating services, including Standard and Poor's, also report similar, although
not identical, statistics. We have also expanded our financial consulting to
include fraud investigations, electronic evidence discovery, intellectual
property financial litigation and energy and utility consulting to meet growing
market needs.
Litigation Consulting and Applied Sciences. The market for legal services in
the United States exceeds $100 billion annually, according to U.S. Bureau of
Census statistics. We expect this market to continue to grow as rising
litigation costs and the risks of large monetary judgments continue to focus
businesses on better managing risks and the litigation process. Increasingly,
businesses, financial institutions and law firms are turning to outside
litigation service consultants to complement or assist their internal legal
staffs in more efficiently and effectively managing the litigation process.
Demand for specialized litigation and forensic engineering services is also
being driven by a greater emphasis on loss and injury prevention by insurance
companies and manufacturers and significant advances and declining costs in
information technology. Manufacturers are increasingly concerned about product
safety and analyzing failures to make products safer as a result of the
proliferation of mass tort claims and the high costs of product recalls
mandated by government agencies. Insurance companies are also partnering with
manufacturers for the same reasons. Continuing advances and the declining costs
of
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information technology have resulted in a much greater use of computer
simulations and animations for a wider range of disputes, as well as for
product testing and employee training. Further, such advances and declining
costs have resulted in the cost-effective use of engineering applications
beyond high exposure litigation and high value products.
Traditionally, litigation consulting firms focused on discrete stages of the
litigation process from inception of a cause of action, through a jury trial to
final resolution. Today, clients are seeking outside consulting services
throughout the entire process, including the pre-litigation phase.
BUSINESS STRATEGY
We believe that we are the established leader in consulting to companies and
their creditors facing adverse circumstances. Our goal is to expand our lead by
continuing to anticipate our clients' needs and provide a range of high-quality
consulting services to meet those needs. Success in this marketplace depends on
reputation, service capacity, in some cases geographic location and to a lesser
degree price. The following are the key elements of our business strategy:
. Leverage Our Reputation for High Quality Consulting Services. We believe
that size and reputation are critical elements in the purchasing decisions
of businesses, law firms, financial institutions and insurance companies.
We provide services to many Fortune 500 companies and major law firms. We
regularly handle many complex, high-profile restructuring and litigation
matters. We receive a high level of repeat business from our current
clients and have been successful in expanding the range of services we
provide to them. We believe we can continue to successfully leverage our
reputation, experience and client base to obtain new engagements from both
existing and new clients.
. Retain and Attract Highly Qualified Professionals. Our professionals are
crucial to delivering our services to clients and generating new business.
We are committed to retaining our existing professionals and continuing to
aggressively recruit additional professionals. We offer our professionals
above-average compensation opportunities, competitive benefits and
challenging engagements. Existing employees are our greatest recruiting
asset and the source of a majority of referrals. We will continue to
encourage our employees to refer highly qualified professionals to us and
reward them for these referrals.
. Capitalize on Our Nationwide Network of Offices. We have established a
nationwide network of 33 offices that enables us to leverage our
operations in key geographic markets. We believe that we have a
competitive advantage because we can provide services to large,
geographically diverse corporations and bid for engagements on a
nationwide basis. We also believe that our proximity to our clients
provides a significant cost advantage by allowing us to balance resources
and centralize a number of labor-intensive activities, including graphics
support and document management. We intend to continue to expand the range
of services provided by each of our offices. Also, our network of offices
allows us to attract highly qualified professionals and to acquire highly
respected firms that would like the ability to provide services on a
nationwide basis.
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. Expand the Range of Our Services. We will continue to anticipate our
clients' growing needs for expert services and expand our services to meet
their needs. By expanding the range of our capabilities and integrating
them with existing services, we can continue to position ourselves to
provide more broad-based services to our clients. In recent years, we have
significantly expanded our range of services to include such services as
restructuring and bankruptcy consulting, forensic engineering, regulatory
consulting, intellectual property consulting, visual communications, and
electronic evidence.
. Continue to Expand the Use of Technology in Litigation Consulting. We will
continue to develop and apply new technology to improve the
cost-effectiveness of our services and to maintain our competitive edge.
We are also focusing on taking advantage of the efficiencies of the
Internet to improve information exchange and reduce costs throughout the
entire litigation process. For example, in 2000 we introduced our secure
extranet service to provide more solutions to the challenges of the
increasing complexity of high stakes, multi-district litigation.
. Selectively Acquire Companies to Obtain New Professionals and
Capabilities. We will continue to build on our record of successfully
identifying, executing and integrating strategic acquisitions. Over the
past four years, we have made five acquisitions that have enhanced our
position as the leader in consulting to companies facing adverse
circumstances. We will continue to selectively pursue strategic
acquisitions that offer complementary businesses that we can leverage with
our existing client base, offer increased efficiencies by leveraging our
network of 33 locations, add new, highly qualified professional staff, and
bring new clients to which we can cross sell our existing capabilities.
FINANCIAL CONSULTING
Our Financial Consulting division provides expertise in financial
restructurings and workouts, forensic accounting and statistical and economic
analysis. As a result of the recent increases in defaults in speculative-grade
debt and bankruptcy filings as well as other financial and structural aspects
of modern business, Financial Consulting has become the fastest growing of our
three divisions.
As part of our financial restructuring and workout practice, we provide
services to financially distressed companies or to the secured and unsecured
creditors of these companies. Our financial restructuring professionals advise
companies and creditors in some of the largest, most complex bankruptcy
proceedings and out-of-court restructurings in the United States. When advising
a corporate client, we work with the company's management to assess the
client's financial condition and viability, and then structure and implement a
business rehabilitation plan to manage the client's cash flow to at least a
break-even point. We also identify any non-essential assets that can be sold to
generate cash. Typically, we then assist these corporate clients as they
negotiate with their lenders to restructure their debt. In the event an
out-of-court workout appears unlikely, we assess the impact of a bankruptcy
filing on the client's financial condition and operating performance and seek
Debtor-in-Possession financing on the client's behalf. If the client
voluntarily files bankruptcy or is involuntarily forced into bankruptcy, we
will assist in managing the entire bankruptcy process, including structuring,
negotiating with creditors and implementing the plan of reorganization. We also
render expert testimony in connection with the bankruptcy proceeding on such
issues as business unit valuation and economic loss.
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When assisting creditors, we seek to maximize amounts owed to them by the
debtor in an out-of-court workout or bankruptcy. In a workout engagement, we
evaluate and monitor the quality and value of the collateral and any other
assets available to the creditor, analyze the debtor's business plan and
underlying cash flow projections and assess the adequacy of the debtor's
financial reporting systems. Based on our analysis, we then assess the debtor's
viability and develop and evaluate restructuring plans. In the event that an
out-of-court workout is not feasible, we assist creditors in deciding whether
to provide Debtor-in-Possession financing, in working through the bankruptcy
process and in structuring and evaluating various reorganization plan
alternatives. We have also recently entered into the crisis management aspect
of the business in which our teams will perform senior management functions
such as a chief executive officer, chief operating officer or chief financial
officer within companies facing turnaround, financial restructuring and
bankruptcy reorganization challenges.
Our forensic accounting specialists work with companies faced with fraud and
financial disclosure issues. Many of these companies are undergoing
restructuring or bankruptcy reorganizations. Our financial, statistical,
valuation and economic experts use a range of statistical and economic tools to
help companies evaluate issues, such as the economic impact of pricing changes
or deregulation in a particular industry, the amount of commercial damages
suffered by a business as a result of a tort or a breach of contract, the
existence of discriminatory employment practices or the value of a business or
professional practice. We also work with clients to develop business strategy
and tactics on an ongoing basis to address these issues.
APPLIED SCIENCES
Our Applied Sciences division specializes in forensic engineering and
scientific investigation. We analyze the causes of accidents and other claims
resulting from fires, vehicle design, chemical mishaps, poor product design and
other causes. As an extension of our engineering and scientific work, clients
also seek expert testimony from our professionals and network of more than
2,000 on-call technical and scientific consultants.
Our Applied Sciences professionals blend state-of-the-art technology with their
many years of practical experience. For example, we have developed a
proprietary software and full-scale test equipment system for calculating the
precise performance characteristics and center of gravity of virtually any
vehicle, which may be critical in determining liability in accident cases. We
also use this equipment to assist vehicle manufacturers, government agencies
and auto racing teams in maximizing safety and vehicle performance.
We believe we are the leader in vehicle accident reconstruction and highway
defect litigation. Visually demonstrating accidents has become an accepted and
even a necessary trial tool. For example, we have recently provided aircraft
accident analysis for several high-profile crashes. We employ our expertise to
create computer simulations for our Litigation Consulting division for
courtroom presentation. We also created a complete aircraft crash simulation
video that a number of airlines have adopted for pilot training.
Our Applied Sciences professionals are well-recognized as experts in the
investigation of fires and explosions. Our staff includes origin and cause
experts, flammability reconstructionists, fire protection engineers, electrical
engineers and mechanical engineers. We have staged actual fires in real
buildings for research and training purposes, using these exercises not only to
educate our own staff but to also train insurance, legal and government
organizations.
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We are also engaged by companies at an early stage of potential litigation to
evaluate the cause of product failures and relative responsibility for an
accident, or to assess product safety or preventative safety measures. The
Applied Sciences division also assists companies in assessing preventative
measures relating to product design and evaluating the causes of product
failures. We are regularly called upon to assess the causes and relative levels
of responsibility for an accident, as well as to design preventative measures.
Because we are engaged early in the process, we believe our revenues from these
services are steadier and less incident-driven than those of our competitors
who are focused exclusively on trial preparation and presentation.
LITIGATION CONSULTING
During the past 18 years, we have been a pioneer in developing and delivering
professional services and creative solutions to litigation problems. We focus
on developing and providing innovative applications in the fields of
accounting, science, education, communications and technology to meet our
clients' needs. From the first computer animations used in court to the latest
in digital graphic presentations, we have been a leader in providing
high-quality, cost-effective methods to prepare for and try cases. Our trial
technology professionals have supported clients in the courtroom in some of the
largest and most complex civil trials. Through the use of information
technology and the Internet, we have demonstrated our ability to control
litigation costs, speed-up the trial process and provide litigants superior
access to data, a key competitive advantage.
We have drawn on the skills and techniques used in 3D computer animation and
simulation, and pioneered their use to enhance presentations and expert
testimony on complex subjects, such as toxic torts, vehicle accidents, airplane
crashes, financial disputes, intellectual property resolutions and physical
phenomena. The significant decrease in the cost of technology has made it a
cost-effective alternative for most trials. Further, the dramatic increase in
the size of trials and volume of information has made the visualization of
concepts and themes through animated and static "pictures" a necessity for an
effective presentation to a judge or jury.
One of the important trends affecting the growth of litigation consulting is
the increasing sophistication of courtroom presentation and document management
techniques. Computerized document management in cases involving thousands or
even millions of pages of depositions, testimony and exhibits is becoming a
necessity in the federal and state court systems. Our document management and
exhibit and trial preparation solutions enable our clients to better focus on
preparing for and trying cases.
The following is the range of services we have provided in complex litigation
matters:
. visual communication consulting services;
. graphic exhibit design and production;
. customized database development and distribution;
. video deposition capture and transcript linking;
. management of designated trial exhibits;
. courtroom survey, design and configuration;
. on-site technical trial support;
. trial specific hardware procurement and tracking; and
. secure extranet storage and distribution of data, documents, transcripts,
videos and exhibits.
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We have developed a number of technology-based tools to assist our clients in
managing complex litigation:
. TrialMax/R/ is our comprehensive trial preparation solution. TrialMax/R/
provides a litigation team with the ability to easily store, annotate and
display documents, computer graphics, video clips and digitized
depositions in the courtroom. One of the innovative features of
TrialMax/R/ is its ability to segment digitized video depositions for
presentation in the courtroom.
. eWar Room/R/ is our automated tool for handling trial data regardless of
information source or data type. This tool electronically retrieves and
displays documents in court in any order selected by the lawyer and also
enables document highlights to be presented to the judge or jury. Using
our service, trial lawyers can now review an entire exhibit package on
screen, make changes in real time and rehearse in any media they select,
from graphics, video or PowerPoint to paper documents. With the assistance
of our professionals, trial lawyers can develop key themes and concepts,
and we help them get their point across in the most effective manner.
. Secure Extranet Services is our Internet application for clients who are
parties to multi-district litigation. This service will further our
objective of providing better and more cost-effective service to our
clients. To maintain our competitive technological edge, we created a
strategic alliance with USinternetworking, one of the leading application
service providers, to host our secure extranet service.
A decline in our Litigation Consulting revenues began in the third quarter of
2000 as a result of an unusual number of trials that were deferred or cancelled
due to settlement or settlement discussions. Our Litigation Consulting division
revenues decreased 19.7% to $25.2 million in 2001 from $31.4 million in 2000,
continuing the decline that began in the third quarter of 2000 primarily as a
result of an unusual number of trials that were deferred or cancelled due to
settlement or settlement discussions. Because we do not foresee this trend
reversing during 2002, we continue to monitor this business segment closely and
have taken significant steps to contain costs, including reorganizing
responsibilities along national lines for our two principal practice areas,
trial consulting and trial technologies. Our goals are to improve our overall
utilization of employees, further standardize practices, install new incentive
systems for our sales and marketing efforts, establish new profit incentive
programs, continue to reduce costs by flattening our organizational structure
and work on enhancing opportunities through our new electronic evidence and
intellectual property consulting businesses.
CLIENTS
We have cultivated long-term relationships with many of the premier financial
institutions, law firms and businesses in the U.S. In 2001, we performed work
for 2,492 clients on 16,571 matters, including:
. 1,319 law firms, 81 of which were rated among the top 100 law firms (based
on 2000 U.S. revenues as measured by American Lawyer magazine);
. 533 industrial clients, 127 of which were among the Fortune 500 in 2001;
. 21 of the 25 largest banks located in the U.S.; and
. 619 insurance companies, 63 of which were among the top 100 property and
casualty insurers (as reported by A.M. Best Company in 2000).
In 2001, we believe that we derived approximately 80% of our revenues from
existing clients or referrals
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from existing clients. Our largest client represented less than 2.4% of our
2001 revenues. As of December 31, 2001, we were actively working on 3,436
different matters for 1,006 different clients.
MARKETING AND SALES
Historically, we have relied primarily on our reputation to market our services
to new and existing clients since most of our work is repeat work for existing
clients or referrals from existing clients. Our professionals develop close,
personal relationships with clients and often learn about new business
opportunities from their frequent contacts with clients. Consequently, we
encourage our professionals to generate new business and reward them with
increased compensation and promotions for generating new business.
Our Litigation Consulting division has about ten full-time sales people and our
Applied Sciences division has about fourteen full-time sales people who are
involved in marketing our services. Our Financial Consulting division primarily
relies upon referrals and does not require sales personnel. In marketing our
services, we emphasize our experience, the quality of our services and our
professionals' particular areas of expertise. While we aggressively seek new
business opportunities, we maintain high professional standards and carefully
evaluate potential new client relationships and engagements.
We are developing greater brand awareness of "FTI" as a provider of a broad
range of high-quality consulting services. We are constantly improving the
quality and functionality of our Web sites, where we describe our services and
experience and promote our reputation. Although we currently market many of our
services under different names, we are in process of building and promoting a
single brand.
COMPETITION
The markets in which we operate are highly competitive. We face competition
from several national companies, national accounting firms and a number of
smaller firms that provide one or more services in local and regional markets.
Financial Consulting competes primarily against national accounting firms and
private financial consulting firms. Litigation Consulting competes against
Trialgraphics, Decision Quest, and, to a limited extent, other litigation
consulting services and individual consultants. Applied Sciences competes
primarily against Exponent and Engineering Animation and several regional or
national concerns, independent experts and research organizations.
Competitive factors for our services include reputation, size, geographic
location, performance record, quality of work, range of services provided and
relationships with clients. To a lesser extent, we also compete on price, but
the critical nature of our services typically reduces price to a secondary
consideration.
Some national support service providers are larger than we are and, on any
given engagement, may have a competitive advantage over us with respect to one
or more competitive factors. In addition, smaller local or regional firms,
while not offering the range of services we provide, often are able to provide
the lowest price on a specific engagement because of their lower overhead costs
and proximity to the engagement. The fragmented nature of our markets may also
provide opportunities for large companies that offer complementary services to
enter one or more of our markets through acquisition. In the future, these and
other competitive pressures could require us to modify our pricing or increase
our spending for marketing to attract business.
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HUMAN RESOURCES
As of December 31, 2001, we had 582 employees. Of that total, 175 are in the
Financial Consulting division, 95 are in the Litigation Consulting division,
268 are in the Applied Sciences division and 44 are in corporate management and
administrative positions. We also maintain consulting arrangements with about
2,300 independent consultants, about 335 of whom were utilized on our
engagements during 2001. About 80% of our professionals have more than ten
years of experience in their field of practice, and many are well recognized
for their expertise and experience.
Our professionals have varied specialties and specialized backgrounds in such
fields as engineering, accounting, mathematics, statistics and psychology. A
number of our professionals have Ph.D.s or other advanced degrees, and some
have legal training and experience. We strongly believe that our ability to
recruit and retain bright, experienced and ambitious professionals is a key
factor to our continued success.
BUSINESS RISKS
WE DEPEND UPON OUR PROFESSIONALS AND OUTSIDE CONSULTANTS.
Our business involves the delivery of professional services. Therefore, our
continued success depends upon our ability to retain and expand our staff of
highly skilled professionals and outside consultants. We face intense
competition for highly skilled professionals in our fields of practice. We
cannot assure you that we will be able to retain our key professionals or that
we will be able to attract, assimilate or retain the necessary number of
qualified professionals in the future. We do not have non-competition
agreements with most of our professional staff. This means that these
professionals could resign with little advance notice to join one of our
competitors. If we lose the services of a number of our key professionals or
fail to expand our professional staff, we are unlikely to be able to expand our
business and may be unable to maintain our business at current levels.
WE RELY HEAVILY ON OUR MANAGEMENT TEAM.
We are highly dependent upon our management team, particularly Messrs. Dunn,
Kahn, Baker, Policano, Manzo and Pincus. If we were to lose any of these
persons and were unable to replace them quickly, we could have difficulty in
properly managing our business. This could have a materially adverse effect on
our business prospects and results of operations.
WE FACE SIGNIFICANT COMPETITION FOR NEW BUSINESS OPPORTUNITIES.
The market for our consulting services is highly competitive, and we face
competition from many other providers of consulting services. Our competitors
range from large organizations, such as the national accounting firms and the
large management consulting companies that offer a full range of consulting
services, to small firms and independent contractors that provide only one
specialized service. Some of our competitors have significantly more financial
and marketing resources, larger professional staffs or are more widely
recognized. There are few barriers to entry into the consulting business. As
the number of our competitors increases, we cannot assure that we will be able
to continue to compete successfully for new business opportunities or retain
our existing clients.
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WE ARE SUBJECT TO THE RISK OF PROFESSIONAL LIABILITY.
Many of our engagements involve complex analysis and the exercise of
professional judgment. As a result, we are subject to the risk of professional
liability. Often, our engagements involve matters that, if resolved
unfavorably, may have a severe impact on the client's business, cause the
client a substantial monetary loss or prevent the client from pursuing business
opportunities. Therefore, if we fail to perform to the client's satisfaction,
the client may threaten or bring a lawsuit against us, claiming we performed
negligently or otherwise breached our obligations to the client. Any claim by a
client against us could expose us to liability in excess of our insurance
limits and could severely injure our reputation.
WE MAY HAVE TROUBLE FINDING SUITABLE ACQUISITION CANDIDATES AND DIFFICULTY
FINANCING POTENTIAL ACQUISITIONS.
A number of our competitors also have adopted a strategy of expanding and
diversifying through acquisitions of other consulting firms. We experience
competition, therefore, in our effort to execute our acquisition strategy, and
we expect the level of competition to increase in the future. As a result, we
may be unable to continue to make acquisitions or may be forced to pay more for
companies we are able to acquire. In such an event, we may be unable to grow
our business as quickly as we have in the past, and our profitability may
decline.
Our ability to grow our business, particularly through acquisitions, may depend
on our ability to raise capital through the issuance of additional equity or
debt. We cannot be sure, however, that we will be able to raise equity or
obtain debt financing when we need it or on terms acceptable to us. If we
cannot, we may have to curtail our planned growth and not pursue acquisition
opportunities.
OUR PROFESSIONAL REPUTATION IS CRITICAL TO OUR BUSINESS.
We depend upon our reputation and the individual reputations of our
professionals to obtain new client engagements and attract and retain highly
qualified professionals. We obtain a substantial number of new engagements from
existing clients or through referrals from existing clients. Therefore, we may
have difficulty in competing for new engagements if our existing clients become
dissatisfied with our performance. Further, any factor that diminishes our
reputation or the reputations of our personnel may make it more difficult for
us to compete successfully for either new engagements or qualified
professionals.
WE MUST SUCCESSFULLY MANAGE THE GROWTH OF OUR BUSINESS.
We have experienced rapid growth in recent years, including five acquisitions
in the past four years. We plan to continue to rapidly expand our business,
which may strain our management, human resources and information systems. To
successfully manage our growth, we must add managers and employees and
periodically update our operating, financial and other systems, procedures and
controls. We also must effectively motivate, train and manage a larger
professional staff. If we fail to manage our growth effectively, our business,
results of operations and financial condition are likely to be adversely
affected.
13
OUR REVENUES, OPERATING INCOME AND CASH FLOW ARE LIKELY TO FLUCTUATE.
We have experienced fluctuating revenues, operating income and cash flow in
some prior periods and expect this may occur from time to time in the future.
We may experience future fluctuations because of the timing of our client
assignments and the type of assignments we are working on at different times.
This means our profitability is likely to be lower if we experience an
unexpected variation in the number or timing of client assignments. Also, the
timing of future acquisitions and the cost of integrating them may cause
similar fluctuations in our operating results.
OUR BUSINESS IS SEASONAL.
We experience a reduced level of business during a portion of the third quarter
primarily because courts usually recess during these months. Also, many members
of our professional staff and key contacts at our clients take vacations during
the summer.
WE HAVE OPERATED WITH A SUBSTANTIAL AMOUNT OF DEBT.
Although our total indebtedness as of December 31, 2001 was only $28.2 million,
operating with a high amount of leverage could require us to dedicate a
substantial portion of our cash flow from operations to payments on our debt,
thereby reducing funds available for operations, future business opportunities,
capital expenditures, acquisitions or other purposes, and limit our flexibility
in planning for, or reacting to, changes in our business and our industry.
OUR LITIGATION CONSULTING DIVISION IS SUBJECT TO TECHNOLOGICAL CHANGE.
We regularly develop solutions for our clients by using information technology,
electronic document management techniques, the Internet and other
state-of-the-art technology. Many of these technologies have only recently
emerged, will rapidly change and may become obsolete as new technologies
appear. Our future success will depend upon the ability of our professionals to
remain current with the rapid changes in the technologies we use in our
business and to learn quickly to use new technologies as they emerge. If our
professionals fail to do this, we could be at a competitive disadvantage. Our
competitors may gain exclusive access to improved technology, which also could
put us at a competitive disadvantage. There may be changes in our clients' or
prospective clients' preferences for technology solutions. If we cannot adapt
to these changes, our business, results of operations and financial condition
are likely to be adversely effected.
Risks associated with quantitative and qualitative market risks such as
fluctuations in interest rates are described under Item 7A. of this Annual
Report.
14
ITEM 2. PROPERTIES
We lease our principal corporate facility in Annapolis, Maryland, which totals
approximately 14,000 square feet, under a lease that expires in February 2007.
We also lease 32 other offices across the United States, including offices in
cities such as New York, Chicago, Houston, Dallas, Los Angeles, Columbus and
Washington, D.C. We believe that our leased facilities are adequate for our
current needs and that suitable additional space, should it be needed, will be
available to accommodate expansion of our operations on commercially reasonable
terms.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our stockholders for consideration during the
quarter ended December 31, 2001.
15
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
(a) During 2001, we did not conduct any sales of our equity securities
that were not registered under the Securities Act of 1933, as amended.
(b) From 2000 through August 15, 2001, FTI's common stock traded on the
American Stock Exchange under the symbol "FCN". On August 16, 2001, FTI's
common stock began trading on the New York Stock Exchange, under the same
symbol. The following table sets forth for the periods indicated the high and
low sales prices for the common stock, as reported on the New York Stock
Exchange or the American Stock Exchange as applicable. These prices have been
adjusted to give effect to the 3 for 2 stock split that was paid as a stock
dividend to shareholders of record on January 2, 2002:
High Low
----- ----
Fiscal Year Ended December 31, 2000
First fiscal quarter $ 5.17 $ 3.17
Second fiscal quarter $ 7.67 $ 4.42
Third fiscal quarter $ 7.75 $ 4.88
Fourth fiscal quarter $ 7.25 $ 3.75
Fiscal Year Ended December 31, 2001
First fiscal quarter $ 8.67 $ 5.67
Second fiscal quarter $ 14.53 $ 8.67
Third fiscal quarter $ 19.60 $ 12.83
Fourth fiscal quarter $ 22.73 $ 18.40
As of March 18, 2002, the number of record holders of the Company's common
stock was 108 and the Company believes the number of beneficial holders
approximates 6,905.
The Company has not declared or paid any cash dividends on the Company's common
stock to date and does not anticipate paying any cash dividends on its shares
of common stock in the foreseeable future because it intends to retain its
earnings, if any, to finance the expansion of its business and for general
corporate purposes. Further, the Company's credit facility restricts the
Company's ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended December 31, 2001, are
derived from the Company's consolidated financial statements. The consolidated
financial statements for the years ended December 31, 1997, 1998, 1999, 2000
and 2001 were audited by Ernst & Young LLP. The data below should be read in
conjunction with the consolidated financial statements and related notes
thereto included elsewhere in this report and "Management's Discussion and
Analysis of Financial Conditions and Results of Operations."
16
ITEM 6. SELECTED FINANCIAL DATA
Year ended December 31,
---------------------------------------------------------------
2001 2000/(1)/ 1999 1998/(2)/ 1997/(3)/
---------------------------------------------------------------
(in thousands, except per share data)
-------------------------------------
Statements of Income Data:
Revenues $166,359 $134,764 $84,607 $58,615 $44,175
Direct cost of revenues 83,449 68,667 44,149 31,402 23,564
Selling, general and administrative expenses 45,591 36,732 28,829 20,532 15,159
Amortization of goodwill 5,049 4,723 2,313 996 82
---------------------------------------------------------------
Total costs and expenses 134,089 110,122 75,291 52,930 38,805
---------------------------------------------------------------
Income from operations 32,270 24,642 9,316 5,685 5,370
Interest income (expense) (4,356) (10,771) (4,014) (1,163) 173
---------------------------------------------------------------
Income before income taxes and
extraordinary item 27,914 13,871 5,302 4,522 5,543
Income taxes 11,445 5,917 2,311 1,954 2,250
---------------------------------------------------------------
Income before extraordinary item 16,469 7,954 2,991 2,568 3,293
Extraordinary loss on early extinguishment
of debt, net of income taxes - (5,393) - - -
---------------------------------------------------------------
Net income $ 16,469 $ 2,561 $ 2,991 $ 2,568 $ 3,293
===============================================================
Income before extraordinary item, per
common share, basic $0.92 $0.75 $0.41 $0.36 $0.49
Earnings per common share, basic $0.92 $0.24 $0.41 $0.36 $0.49
Income before extraordinary item, per
common share, diluted $0.84 $0.66 $0.39 $0.34 $0.47
Earnings per common share, diluted $0.84 $0.21 $0.39 $0.34 $0.47
Shares used in computation 19,631 11,988 7,543 7,615 7,047
---------------------------------------------------------------
2001 2000 1999 1998 1997
---------------------------------------------------------------
Balance Sheet Data:
Working capital $28,766 $20,163 $19,233 $9,071 $10,634
Total assets 154,353 146,131 83,857 79,747 28,657
Long-term debt and capital lease obligations 24,277 56,690 41,154 36,016 1,014
Total stockholder's equity 105,136 68,624 30,252 25,594 21,019
/(1)/ Effective January 31, 2000, we acquired Policano & Manzo,
L.L.C. in a business combination accounted for as a
purchase. See Note 4 to our historical consolidated
financial statements for additional information.
/(2)/ In June 1998, we acquired Klick, Kent & Allen, Inc. In
September 1998, we acquired S.E.A., Inc., Kahn Consulting,
Inc., and KCI Management Corp. These business combinations
were accounted for as purchases.
/(3)/ In September 1997, we acquired L.W.G., Inc. and
subsidiary, and Bodaken & Associates in business
combinations accounted for as purchases.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
FTI Consulting, Inc. (the "Company" or "FTI") is a multi-disciplined consulting
firm with leading practices in the areas of financial restructuring, litigation
support and engineering and scientific investigation. We are organized into
three distinct operating segments that contribute to the overall performance of
our company.
Our Financial Consulting division, which accounted for 58.4% of our 2001
revenues and was our most profitable division, offers a broad range of
financial consulting services, such as forensic accounting, bankruptcy and
restructuring analysis, expert testimony, damage assessment, cost benefit
analysis and business valuations. Our Applied Sciences division, which
accounted for 26.4% of our 2001 revenues, offers forensic engineering and
scientific investigation services, accident reconstruction, fire investigation
and expert testimony regarding intellectual property rights. Our Litigation
Consulting division, which accounted for 15.2% of our 2001 revenues, provides
advice and services in connection with all phases of the litigation process.
We evaluate segment performance based on our operating income before
depreciation and amortization, corporate general and administrative expenses
and income taxes for each division. In 2001, our Financial Consulting division
accounted for 78.7% of our operating income, while our Applied Sciences
division accounted for 15.1% and our Litigation Consulting division accounted
for 6.2%.
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.
In 2001 our direct costs were 50.2% of revenues, consistent with our overall
long-term 50.0% target and an improvement from 51.0% in 2000.
Selling, general and administrative expenses consist primarily of salaries and
benefits paid to office and corporate staff, as well as rent, marketing,
corporate overhead expenses and depreciation and amortization of property and
equipment. In 2001, selling, general and administrative expenses, including
depreciation and amortization, accounted for about 27.4% of our revenues,
approximately the same as the 27.3% result in 2000 and consistent with our
long-term target of 25.0% excluding depreciation and amortization. Our
corporate overhead costs which are included in selling, general and
administrative expenses, represented about 6.3% of revenues in 2001 and 5.9% in
2000.
Critical Accounting Policies
General
Our discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which we have
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to bad debts, goodwill, income taxes, and contingencies. We base
our estimates on
18
historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe that the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition
We derive most of our revenue from providing professional services to our
clients. Most of these services are rendered under arrangements that require
the client to pay us a fee for the hours that we incur at agreed upon rates. We
also bill our clients for the cost of the production of our work products and
other direct expenses that we incur on behalf of the client, such as travel
costs and materials that we purchase to produce presentations for courtroom
proceedings. We recognize our revenue from professional services as our work
is performed and expenses are incurred. Because we normally obtain engagement
letters and other agreements from our clients prior to performing our services,
the revenue that we recognize in any period is generally not subject to the
risk that future discounts or allowances will significantly reduce the revenue
that we recognized.
Bad Debts
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our clients to pay our fees or for disputes that affect
our ability to fully collect our billed accounts receivable. We estimate this
allowance by reviewing the status of past-due accounts and recording general
reserves based on historical bad debt expense. Our actual experience has not
varied significantly from our estimates. However, if the financial condition of
our clients were to deteriorate, resulting in their inability to pay our fees,
we may need to record additional allowances in future periods. Mitigating this
risk is that we often require retainers from our clients prior to performing
significant services. At December 31, 2001, these retainers totaled $10.4
million, and are recorded as a reduction of accounts receivable.
Goodwill
We have remaining goodwill of $90.2 million at December 31, 2001 that was
recorded in connection with business combinations that we completed principally
in the last five years. This goodwill represents about 58% of our total assets
at December 31, 2001. We amortize this goodwill over useful lives that range
from 20 to 25 years. Beginning in January 2002, when we adopt a new accounting
standard issued by the Financial Accounting Standards Board, we will no longer
amortize this goodwill, but rather will make annual assessments of impairment.
In making these impairment assessments, we must make subjective judgments
regarding estimated future cash flows and other factors to determine the fair
value of the segments of our business that are associated with this goodwill.
It is possible that these judgments may change over time as market conditions
or our strategies change, and these changes may cause us to record impairment
charges to adjust our goodwill to its estimated fair value.
Effect of Recent Accounting Pronouncements
In connection with our various acquisitions, we recorded goodwill. Goodwill
arises when an acquirer pays more for a business than the fair value of the
tangible and separately measurable intangible net assets.
19
On December 31, 2001, we had about $90.2 million of unamortized goodwill, which
we had been amortizing over 20 to 25-year periods. In June 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Statement No. 142 eliminates the requirement
to amortize goodwill over finite lives. Rather, the asset must be tested for
impairment at least annually at the reporting level using an approach defined
by the Statement.
We will adopt Statement No. 142 in January 2002 and accordingly amortization of
goodwill will no longer be recorded. Goodwill amortization was approximately
$5.0 million in 2001. The Statement also provides that any impairment loss
recognized as a result of a transitional impairment test of goodwill is
recognized as the effect of a change in accounting principle in the period of
adoption. We believe that a transitional impairment charge will not be
required. We discuss goodwill amortization further in "Amortization of
Goodwill" below.
ACQUISITION
On February 4, 2000, we acquired Policano & Manzo, L.L.C. ("P&M") as further
described in Note 4 of "Notes to Consolidated Financial Statements." P&M, based
in Saddle Brook, New Jersey, specializes in providing financial restructuring,
advisory and forensic accounting services to the workout and bankruptcy
community. These services are provided on a nationwide basis to financially
distressed businesses, creditors, investors and other interested parties. The
purchase price totaled $54.9 million, consisting of $48.3 million in cash,
1,222,000 shares of our common stock valued at $5.5 million and
acquisition-related expenses of $1.1 million. We did not make any acquisitions
in 2001
20
RESULTS OF OPERATIONS
Years Ended December 31, 2001, 2000, and 1999
Revenues. Total revenues in 2001 increased 23.4% to $166.4 million from $134.8
million in 2000. Our Financial Consulting division revenues grew by 51.2% to
$97.1 million in 2001 from $64.2 million in 2000, primarily as a result our
ability to recruit seasoned financial professionals to meet the continued
strong demand for our financial consulting services in both restructuring and
turnaround activities and the forensic accounting and strategic consulting
portions of the business, coupled with increases in professional rates. We
believe that the market demand for our services in these areas will continue to
be strong throughout 2002, and we have added several new practice areas to the
division in early 2002, including crisis management, intellectual property
litigation consulting, electronic evidence discovery and utility regulatory and
financial consulting.
Our Applied Sciences division experienced 12.2% revenue growth in 2001 to $44.0
million from $39.2 million in 2000. This division grew faster than its
historical rate of 6% to 10% due primarily to a significant number of
unanticipated assignments. These engagements include restoration assignments
near the site of the former World Trade Center that are expected to be
completed early in the first quarter of 2002. We see no changes in the
long-term trends for this division and anticipate that its growth for 2002 will
be within its historical range.
Our Litigation Consulting division revenues decreased 19.7% to $25.2 million in
2001 from $31.4 million in 2000, continuing the decline that began in the third
quarter of 2000 primarily as a result of an unusual number of trials that were
deferred or cancelled due to settlement or settlement discussions. Because we
do not foresee this trend reversing during 2002, we continue to monitor this
business segment closely and have taken significant steps to contain costs,
including reorganizing responsibilities along national lines for our two
principal practice areas, trial consulting and trial technologies. Our goals
are to improve our overall utilization of employees, further standardize
practices, install new incentive systems for our sales and marketing efforts,
establish new profit incentive programs, continue to reduce costs by flattening
our organizational structure and work on enhancing opportunities through our
new electronic evidence and intellectual property consulting businesses.
Total revenues in 2000 increased 59.3% over 1999. Our Litigation Consulting
revenues increased 7.9% from 1999 to 2000 as a result of an increased volume of
cases. Our Applied Sciences division experienced 9.8% growth in 2000 compared
to 1999, the high end of its historical growth trend. Our Financial Consulting
division's revenues grew by 222.6% in 2000 compared to 1999. On a pro forma
basis, including the acquisition in February 2000 of P&M described above, the
division grew 61.0%, due in part to the faster than anticipated integration of
the acquisition and the strong market demand for our financial consulting
services.
Direct Cost of Revenues. Direct cost of revenues was 50.2% of our total
revenues in 2001, 50.9% in 2000 and 52.2% in 1999. The improvement in 2001
resulted primarily from the relative growth of the Financial Consulting
division which has a higher operating margin than our other divisions, and is
in line with our long-term target of 50.0%.
Selling, General and Administrative Expenses. As a percent of our total
revenues, these expenses, which include depreciation and amortization of
property and equipment, were 27.4% in 2001, 27.3% in 2000 and 34.1% in 1999.
The decrease in 2001 and 2000 compared to 1999 was primarily attributed to the
21
growth of our Financial Consulting division that has a lower ratio of selling,
general and administrative expenses to revenues than our Litigation Consulting
and Applied Sciences divisions. Selling, general and administrative expenses,
excluding depreciation and amortization, was 25.1% of revenues in 2001, and is
consistent with our long-term target of 25.0%.
Amortization of Goodwill. Annual amortization of goodwill increased from $4.7
million in 2000 to $5.0 million in 2001, primarily as a result of additional
contingent consideration related to our acquisitions. Amortization of goodwill
increased from $2.3 million in 1999 primarily as a result of the P&M
acquisition in February 2000 described above.
Other Income and Expenses. Interest expense consisted primarily of interest on
debt we incurred to purchase businesses over the past several years. Interest
expense decreased substantially in 2001 because we were able to retire our debt
with cash flow from operations and because interest rates were lower. We used
the proceeds of an equity offering in October 2000 to repay $30.0 million of
debt; refinanced our remaining debt in late 2000 to achieve lower interest
rates; used cash generated from operations and proceeds from the exercise of
options and warrants to pay down debt; and experienced declining market
interest rates on our revolving credit facility.
Income Taxes. Our effective tax rate decreased to 41.0% in 2001 from 42.7% in
2000 and 43.7% in 1999, principally as a reduced effect of some of the goodwill
amortization during those periods not being deductible for income tax purposes.
We expect that our effective tax rate will decline to about 40.5% in 2002.
See Note 7 of "Notes to Consolidated Financial Statements" for a reconciliation
of the federal statutory rate to our effective tax rates during each of these
years, and a summary of the components of our deferred tax assets and
liabilities.
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 or early retirement in 2000, we had a $5.4 million loss on early
extinguishment of debt, net of taxes in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our cash flow generated from operations increased from $15.6 million in 2000 to
$27.3 million in 2001. This increase of $11.7 million is primarily the result
of an increase in our net income before non-cash charges of $7.0 million. We
also were able to increase our operating cash flows by reducing our working
capital balances, despite significant growth in our revenues. The average
collection period for our fees has declined because we continue to increase the
use of retainers when we are engaged on major assignments and because we have
improved our collection monitoring processes.
During the year ended December 31, 2001, we spent $3.1 million for net
additions to property and equipment, primarily for the cost of the expansion of
five of our major offices. At December 31, 2001, we had no material commitments
for the acquisition of property and equipment. We also paid $3.2 million to
former owners of businesses we acquired in previous years to satisfy contingent
consideration and other obligations. During 2000, we spent $6.6 million for
additions to property and equipment and $49.4 million to acquire P&M.
22
During the year ended December 31, 2001, options to purchase 2,498,672 shares
of common stock were exercised, generating $19.4 million in new capital
including related tax benefits. In addition, we sold 174,906 shares of common
stock to our employees participating in the Employee Stock Purchase Plan,
generating $1.0 million of cash. We used these net proceeds and cash flow from
operations to pay-down $32.3 million of debt during the year.
In 2000, we completed a public offering of 6.038 million shares of our common
stock. We used the net proceeds and our other financial resources to repay the
$30.0 million senior subordinated notes that we issued on February 4, 2000. In
addition, we retired warrants for 492,001 shares of our common stock issued in
February 2000 in connection with the $30.0 million senior subordinated notes
that were repaid.
In December 2000, we refinanced our $61.0 million term loan and the $7.5
million revolving credit facility. Our new credit facility consists of an
amortizing term loan of $32.5 million of which $28.2 million was outstanding at
December 31, 2001, and a $47.5 million revolving credit line. At December 31,
2001, we have no outstanding balances on the line of credit The credit facility
bears interest at LIBOR plus 2.25%, which would decline based on our leverage
ratio. The interest rate declined to LIBOR plus 2.00% at the beginning of
August 2001 and declined to 1.75% at the beginning of November 2001. We
obtained interest rate protection, through interest rate swaps, on the $32.5
million term loan.
The credit facility is secured by all of our assets. Under the credit facility,
we are required to comply with various specified financial covenants related to
our operating performance at the end of each quarter, and the payment of
dividends is restricted. We were in compliance with all loan covenants
throughout 2001 and expect to be in compliance with all loan covenants until
the term loan is fully repaid by the end of December 2005. Required principal
payments under the term loan are substantially less in each year than our cash
flow from operations for 2001. We also believe that our available cash and the
revolving credit facility will be sufficient to meet our normal on-going
operating requirements until the facility expires and do not envision
circumstances that are reasonably likely to affect these sources of liquidity.
We do not have any significant capital lease obligations.
A summary of our contractual obligations and commitments including the
aforementioned credit facility are as follows:
- -------------------------------------------------------------------------------------
Payments Due by Period
- -------------------------------------------------------------------------------------
Contractual Obligations Total 2002 2003 2004 2005 Thereafter
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Long-Term Debt 28,166 4,333 6,500 8,667 8,666 -
- -------------------------------------------------------------------------------------
Operating Leases 35,842 5,470 5,333 4,982 4,650 15,407
- -------------------------------------------------------------------------------------
Total Obligations 64,008 9,803 11,833 13,649 13,316 15,407
- -------------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
Some of the statements under "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and elsewhere in this Annual 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
23
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 Annual 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, the risk
factors described elsewhere in this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We are subject to market risk associated with changes in interest rates on our
variable rate debt. We have managed this risk by entering into interest rate
swaps. These hedges reduce our exposure to rising interest rates, but also
reduce the benefits from lower interest rates. We do not anticipate any
material changes to our market risk exposures in 2002.
Interest rate swaps with notional principal amounts of $28.2 million at
December 31, 2001 were designated as hedges against outstanding debt and were
used to convert the interest rate on our variable rate debt to fixed rates for
the life of the swap. Our pay rate on our debt was 8.39% at December 31, 2001,
compared to our receive rate of 4.02 %. Because of the effectiveness of our
hedge of variable interest rates associated with our debt, the change in fair
value of our interest rate swaps resulting from changes in market interest
rates is reported as a component of other comprehensive income.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FTI Consulting, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2001, 2000 and 1999
CONTENTS
Report of Independent Auditors .............................................26
Consolidated Financial Statements
Consolidated Balance Sheets.................................................27
Consolidated Statements of Income...........................................29
Consolidated Statements of Stockholders' Equity.............................30
Consolidated Statements of Cash Flows.......................................31
Notes to Consolidated Financial Statements..................................32
25
Report of Independent Auditors
Board of Directors and Stockholders
FTI Consulting, Inc.
We have audited the accompanying consolidated balance sheets of FTI Consulting,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed in the Index at Item 14. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FTI
Consulting, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Baltimore, Maryland
February 11, 2002
26
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
2001 2000
---------------------------------------
(dollars in thousands)
Assets
Current assets:
Cash and cash equivalents $ 12,856 $ 3,235
Accounts receivable, less allowance of $1,508 in
2001 and $1,321 in 2000 20,435 20,380
Unbilled receivables, less allowance of $815 in
2001 and $797 in 2000 12,154 11,952
Income taxes recoverable 1,790 1,317
Deferred income taxes 1,325 1,029
Prepaid expenses and other current assets 2,361 1,924
---------- ----------
Total current assets 50,921 39,837
Property and equipment:
Furniture, equipment and software 19,535 20,977
Leasehold improvements 4,102 4,560
---------- ----------
23,637 25,537
Accumulated depreciation and amortization (11,384) (12,382)
---------- ----------
12,253 13,155
Deferred income taxes 150 -
Goodwill, net of accumulated amortization of
$13,245 in 2001 and $8,196 in 2000 90,156 91,971
Other assets 873 1,168
---------- -----------
Total assets $ 154,353 $ 146,131
========== ===========
27
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
December 31,
2001 2000
--------------------------------------
(dollars in thousands)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 4,788 $ 4,325
Accrued compensation expense 12,536 10,339
Deferred income taxes 130 500
Current portion of long-term debt. 4,333 4,333
Other current liabilities 368 177
------------ -----------
Total current liabilities 22,155 19,674
Long-term debt, less current portion 23,833 56,167
Other long-term liabilities 1,481 600
Deferred income taxes 1,748 1,066
Commitments and contingent liabilities - -
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none outstanding - -
Common stock, $.01 par value; 45,000,000 shares
authorized; 19,590,938 and 15,851,168 shares
issued and outstanding in 2001 and 2000,
respectively
196 159
Additional paid-in capital 75,416 53,898
Unearned compensation (568) -
Retained earnings 31,036 14,567
Accumulated other comprehensive income (loss) (944) -
------------- -----------
Total stockholders' equity 105,136 68,624
------------- -----------
Total liabilities and stockholders' equity $ 154,353 $ 146,131
============= ===========
See accompanying notes.
28
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31,
2001 2000 1999
--------------------------------------------
(dollars in thousands, except per share data)
Revenues $ 166,359 $ 134,764 $ 84,607
Direct cost of revenues 83,449 68,667 44,149
Selling, general and administrative expenses 45,591 36,732 28,829
Amortization of goodwill 5,049 4,723 2,313
--------- --------- --------
Total costs and expenses 134,089 110,122 75,291
--------- --------- --------
Income from operations 32,270 24,642 9,316
--------- --------- --------
Other income (expenses):
Interest income 162 253 136
Interest expense (4,518) (11,024) (4,150)
--------- --------- --------
(4,356) (10,771) (4,014)
--------- --------- --------
Income before income taxes and extraordinary item 27,914 13,871 5,302
Income taxes 11,445 5,917 2,311
--------- --------- --------
Income before extraordinary item 16,469 7,954 2,991
Extraordinary loss on early extinguishment of debt, net
of income taxes of $3,078 in 2000 - 5,393 -
--------- --------- --------
Net income $ 16,469 $ 2,561 $ 2,991
========= ========= ========
Income before extraordinary item
per common share, basic $ 0.92 $ 0.75 $ 0.41
========= ========= ========
Earnings per common share, basic $ 0.92 $ 0.24 $ 0.41
========= ========= ========
Income before extraordinary item
per common share, diluted $ 0.84 $ 0.66 $ 0.39
========= ========= ========
Earnings per common share, diluted $ 0.84 $ 0.21 $ 0.39
========= ========== ========
See accompanying notes.
29
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Accumulated
Additional Comprehensive
Common Paid-in Unearned Retained Other
Stock Capital Compensation Earnings Income (Loss) Total
--------------------------------------------------------------
(dollars in thousands)
Balance at January 1, 1999 $ 73 $16,506 $ 9,015 $ 25,594
Issuance of 828,808 warrants to purchase common stock 1,291 1,291
Issuance of 198,015 shares of common stock
under Employee Stock Purchase Plan 2 374 376
Net income for 1999 2,991 2,991
--------------------------------------------------------------
Balance at December 31, 1999 75 18,171 12,006 30,252
Issuance of warrants to purchase 1,005,606 shares of common
stock in connection with debt refinancing - 3,714 3,714
Issuance of 1,222,500 shares of common stock for the acquisition of
Policano & Manzo, L.L.C. 12 5,489 5,501
Issuance of 906,756 shares of common stock in exchange for debt
To sellers of acquired businesses 9 2,674 2,683
Retirement of 492,001 warrants to purchase common stock in
Connection with debt refinancing - (1,272) (1,272)
Issuance of 171,856 shares of common stock under Employee Stock
Purchase Plan 2 485 487
Exercise of options and warrants to purchase 111,700 shares of
common stock 1 472 473
Issuance of 6,037,500 shares of common stock for cash, net of
offering costs of $2,138 60 24,006 24,066
Issuance of 30,000 shares of restricted stock - 159 159
Net income for 2000 2,561 2,561
--------------------------------------------------------------
Balance at December 31, 2000 159 53,898 - 14,567 - 68,624
Issuance of 174,906 shares of common stock under
Employee Stock Purchase Plan 2 1,014 1,016
Exercise of options to purchase 2,498,672 shares of common stock,
including income tax benefit of $8,100 25 19,919 19,944
Exercise of warrants to purchase 1,347,082 shares of common stock 13 3,445 3,458
Retirement of 311,515 shares of common stock in connection with
warrant exercise (3) (3,455) (3,458)
Issuance of 32,100 shares of restricted stock - 595 (595) -
Amortization of unearned compensation expense 27 27
Comprehensive Income:
Cumulative effect on prior years of changing to a different method
of accounting for interest rate swaps (348) (348)
Other comprehensive loss - change in fair value of
Interest rate swaps (596) (596)
Net income for 2001 16,469 16,469
--------------------------------------------------------------
Balance at December 31, 2001 $196 $75,416 $(568) $31,036 $(944) $105,136
==============================================================
See accompanying notes.
30
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
Year ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Operating activities
Net income $ 16,469 $ 2,561 $ 2,991
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss on early extinguishment
of debt, before income taxes - 8,471 -
Depreciation and other amortization 3,867 2,769 2,621
Amortization of goodwill 5,049 4,723 2,313
Provisions for doubtful account 205 (116) (197)
Other 449 (111) 26
Changes in operating assets and liabilities:
Accounts receivable, billed and unbilled (463) (5,632) (2,604)
Deferred income taxes (134) (254) (313)
Income taxes recoverable/payable (473) (1,253) 730
Prepaid expenses and other current assets (437) (458) (199)
Accounts payable and accrued expenses 463 700 316
Accrued compensation expenses 2,197 4,409 2,608
Other current liabilities 120 (247) 109
----------- ---------- ----------
Net cash provided by operating activities 27,312 15,562 8,401
Investing activities
Purchase of property and equipment (4,366) (6,640) (3,093)
Proceeds from landlord reimbursements and sales of
property and equipment 1,231 47 592
Contingent payments to former owners of subsidiaries (3,023) (907) (807)
Acquisition of subsidiaries (211) (49,404) -
Change in other assets 67 246 (1,288)
----------- ---------- ----------
Net cash used in investing activities (6,302) (56,658) (4,596)
Financing activities
Issuance of common stock and exercise of warrants
and options 20,959 25,185 376
Borrowings under long-term debt arrangements - 151,500 33,000
Retirement of detachable stock warrants - (1,272) -
Repayments of long-term debt arrangements (32,334) (130,825) (35,500)
Payment of financing fees (17) (4,894) -
Changes in other long-term liabilities 3 (409) 142
----------- ---------- ----------
Net cash provided by (used in) financing activities (11,389) 39,285 (1,982)
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 9,621 (1,811) 1,823
Cash and cash equivalents at beginning of year 3,235 5,046 3,223
----------- ---------- ----------
Cash and cash equivalents at end of year $ 12,856 $ 3,235 $ 5,046
=========== ========== ==========
See accompanying notes.
31
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001
(dollars in tables expressed in thousands, except per share data)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
Description of Business
FTI Consulting, Inc. and subsidiaries (the "Company" or "FTI") is a
multi-disciplined consulting firm with leading practices in the areas of
financial restructuring, litigation support and engineering and scientific
investigation. The Company provides services to major corporations, law firms,
banks and insurance companies. These services include visual communications and
trial consulting, engineering and scientific services, expert financial
services including turnaround and bankruptcy consulting, assessment and expert
testimony regarding intellectual property rights and claims management
outsourcing services, from assessment to restoration. At December 31, 2001, the
Company had 582 employees in 33 locations throughout the United States.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions have
been eliminated.
SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
The Company uses estimates to determine the amount of the allowance for
doubtful accounts necessary to reduce accounts receivable and unbilled
receivables to their expected net realizable value. The Company estimates the
amount of the required allowance by reviewing the status of significant
past-due receivables and analyzing historical bad debt trends. Actual
collection experience has not varied significantly from estimates, due
primarily to credit policies, collection experience, and a lack of
concentrations of accounts receivable. Accounts receivable balances are not
collateralized.
Estimates are also required in such areas as the Company's self-insurance
reserves for certain employee benefit plans and other ordinary accruals. Such
estimates are based upon historical trends, current experience and knowledge of
relevant factors.
32
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method. Furniture and equipment is depreciated over estimated
useful lives ranging from three to seven years, and leasehold improvements are
amortized over the lesser of the estimated useful life of the asset or the
lease term.
Goodwill
Goodwill consists of the excess of the purchase price over the fair value of
tangible and identifiable intangible net assets acquired in purchase business
combinations, and is amortized over periods ranging from 20 to 25 years. (See
also Note 1, Impact of Adoption of Recent Accounting Pronouncements.)
Impairment of Long-Lived Assets
Long-lived assets, including goodwill, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset or group of assets may not be fully recoverable. These events or changes
in circumstances may include a significant deterioration of operating results,
changes in business plans, or changes in anticipated future cash flows. If an
impairment indicator is present, the Company evaluates recoverability by a
comparison of the carrying amount of the assets to future undiscounted net cash
flows expected to be generated by the assets. Assets are grouped at the lowest
level for which there is identifiable cash flows that are largely independent
of the cash flows generated by other asset groups. If the assets are impaired,
the impairment recognized is measured by the amount by which the carrying
amount exceeds the fair value of the assets. Fair value is generally determined
by estimates of discounted cash flows. The discount rate used in any estimate
of discounted cash flows would be the rate required for a similar investment of
like risk.
Assets to be disposed of are reported at the lower of carrying values or fair
values, less estimated costs of disposal.
33
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company derives most of its revenues from professional service activities.
The vast majority of these activities are provided under "time-and-materials"
billing arrangements, and revenues, consisting of billed fees and pass-through
expenses, are recorded as work is performed and expenses are incurred. Revenues
recognized but not yet billed to clients, have been recorded as unbilled
receivables in the accompanying consolidated balance sheets. The Company
obtains retainers from many of its clients in advance of providing professional
service. At December 31, 2001 and 2000, retainers of $10.4 million and $7.3
million, respectively, were excluded from revenue and offset against accounts
receivable.
Direct Cost of Revenues
Direct cost of revenues consists primarily of billable employee compensation
and related payroll benefits, the cost of consultants assigned to
revenue-generating activities and direct expenses billable to clients. Direct
cost of revenues does not include an allocation of overhead costs.
Stock Options and Stock Granted to Employees
The Company records compensation expense for all stock-based compensation plans
using the intrinsic value method prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees ("APB No. 25"). Under APB No. 25, compensation
expense is recorded over the vesting period to the extent that the fair value
of the underlying stock on the date of grant exceeds the exercise or
acquisition price of the stock or stock-based award. Financial Accounting
Standards Board Statement No. 123, Accounting for Stock-Based Compensation
("Statement 123") encourages companies to recognize expense for stock-based
awards based on their estimated value on the date of grant. Statement 123
requires the disclosure of pro forma income and earnings per share data in the
notes to the financial statements if the fair value method is not adopted. The
Company has supplementally disclosed in Note 7 the required pro forma
information as if the fair value method had been adopted.
The Company also periodically issues restricted and unrestricted stock to
employees in connection with new hires and performance evaluations. The fair
market value on the date of issue of unrestricted stock is immediately charged
to compensation expense, and the fair value on the date of issue of restricted
stock is charged to compensation expense ratably over the restriction period.
34
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Accounting Change and Interest Rate Swaps
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, which requires that all derivative instruments be
reported on the balance sheet at fair value and that changes in a derivative's
fair value be recognized currently in earnings unless specified hedge criteria
are met. Under Statement 133, if an interest rate swap is designated a cash flow
hedge, the effective portions of the changes in the fair value of the swap are
recorded in other comprehensive income. Ineffective portions of changes in the
fair value of cash flow hedges are recognized in earnings.
As part of managing the exposure to changes in the market interest rates on its
variable rate debt, the Company has entered into various interest rate swap
transactions with financial institutions acting as the counterparty. To ensure
both appropriate use as a hedge and hedge accounting treatment, all swaps
entered into are designated according to the hedge objective against a specific
debt issue. The notional amounts, rates and maturities of the Company's
interest rate swaps are closely matched to the related terms of hedged debt
obligations. None of the Company's interest rate swaps would result in a
significant loss to the Company if a counterparty failed to perform according
to the terms of the agreement.
The Company recorded a cumulative effect adjustment of $348,000, net of tax, in
2001 in accordance with the transition provisions of Statement 133.
Impact of Adoption of Recent Accounting Pronouncements
In June 2001, the FASB issued Statement of Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("Statement 142"). Statement 142 requires
that goodwill and intangible assets with indefinite lives arising from a
business combination will no longer be amortized to earnings, but instead
reviewed annually for impairment. The Company has adopted Statement 142
effective January 1, 2002. Upon adoption of Statement 142 on January 1, 2002,
the Company is required to perform a transitional impairment test for all
recorded goodwill within six months and, if necessary, determine the amount of
an impairment loss by December 31, 2002. The Company does not expect that a
transitional impairment charge will be required. The annual amortization
expense for goodwill was $5.0 million in 2001.
35
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impact of Adoption of Recent Accounting Pronouncements (continued)
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("Statement
144"). Statement 144 supercedes and serves to clarify and further define the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and provides a single accounting model for long-lived assets to be
disposed of.
Statement 144 does not apply to goodwill and other intangible assets that are
not amortized, and retains the Company's current policy to recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted future cash flows and to measure the
impairment loss as the difference between the carrying amount and the fair
value of the asset. The Company will apply the new rules on accounting for the
impairment or disposal of long-lived assets on January 1, 2002. The effect of
adoption is not expected to have a material effect on the Company's
consolidated financial position or results of operations.
36
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. EARNINGS PER SHARE
The following table summarizes the computations of basic and diluted earnings
per share:
Year ended December 31,
2001 2000 1999
-------- -------- -------
Numerator used in basic and diluted
earnings per common share
Income before extraordinary item $16,469 $ 7,954 $2,991
Extraordinary item, net of taxes - (5,393) -
-------- -------- -------
Net income $16,469 $ 2,561 $2,991
-------- -------- -------
Denominator
Denominator for basic earnings per common
share - weighted average shares outstanding 17,841 10,612 7,308
Effect of dilutive securities:
Warrants 319 789 173
Employee stock options 1,471 587 62
-------- -------- -------
1,790 1,376 235
-------- -------- -------
Denominator for diluted earnings per common
share - weighted average shares outstanding
and assumed conversions 19,631 11,988 7,543
-------- -------- -------
Income before extraordinary item per common
share, basic $ 0.92 $ 0.75 $ 0.41
Extraordinary loss per common share, basic - (0.51) -
-------- -------- -------
Earnings per common share, basic $ 0.92 $0.24 $ 0.41
======== ======== =======
Income before extraordinary item per common
share, diluted $ 0.84 $ 0.66 $ 0.39
Extraordinary loss per common share, diluted - (0.45) -
-------- -------- -------
Earnings per common share, diluted $ 0.84 $ 0.21 $ 0.39
======== ======== =======
37
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
In 2000, the Company purchased the membership interests of Policano & Manzo,
L.L.C. for total consideration of $54.9 million. In connection with this
acquisition, assets with a fair market value of $58.1 million were acquired and
liabilities of approximately $3.2 million were assumed. The Company did not
make any acquisitions during 2001 or 1999.
The Company paid interest of $4.6 million, $10.8 million and $4.1 million, and
income taxes of $6.0 million, $4.3 million and $2.0 million during fiscal years
2001, 2000 and 1999, respectively.
4. ACQUISITIONS
Policano & Manzo, L.L.C.
Effective 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, 1,222,000 shares of common stock valued at $5.5 million and
acquisition related expenses of $1.1 million. The acquisition was accounted for
using the purchase method of accounting and approximately $52.2 million of
goodwill was recorded and was being amortized over its estimated useful life of
20 years. The results of operations of P&M are included in the accompanying
consolidated statements of income commencing January 31, 2000.
Contingent Payments to Previous Owners
In 2001, the Company paid contingent consideration of approximately $3.0
million to the former shareholders of Klick, Kent & Allen, Inc., a company
acquired in 1998 and the former shareholder of LWG, Inc., a company acquired in
1997. The contingent payments were attributed to the achievement of specified
pre-tax earnings. Additionally, the Company paid the working capital adjustment
balance of $211,000 to the former shareholders of P&M, which was acquired in
2000. There are no future contingent payments due on any of the previous
acquisitions of the Company.
38
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
2001 2000
----------------------------
Amounts due under an $80.0 million long-term credit facility,
consisting of an amortizing term loan of $32.5 million and a $47.5
million revolving credit line, (of which zero was drawn at December
31, 2001), bearing interest at LIBOR plus variable percentages
(4.02% at December 31, 2001). This facility is secured by
substantially all the assets of the Company, and the unpaid
principal matures in varying amounts through December 31, 2005.
$28,166 $60,500
Less current portion (4,333) (4,333)
-------- --------
Total long-term debt $23,833 $56,167
======== ========
The Company has entered into interest rate swap transactions on the $28.2
million of outstanding amortizing term loans. The swap transactions resulted in
exchanging floating LIBOR rates for a fixed rate of 6.64%, and expire in 2004.
The cost is included as a component of interest expense in the accompanying
statements of income. The changes in the fair value of the swaps are recognized
in the consolidated financial statements as changes in accumulated other
comprehensive income (loss).
The Company is required to comply with certain financial and non financial
covenants contained in the revolving credit and term loan agreements. For the
year ended December 31, 2001, the Company was in compliance with all covenants
as stipulated in the agreements.
Aggregate maturities of debt at December 31, 2001, are as follows:
2002 $ 4,333
2003 6,500
2004 8,667
2005 8,666
--------
Total $ 28,166
========
The terms of the credit facility prohibit the payment of dividends without the
consent of the lender.
The fair value of long-term debt at December 31, 2001 approximates its carrying
value.
39
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTION PLANS
Prior to 1997, the Company granted options to key employees under the 1992
Stock Option Plan. This plan was terminated in 1997 upon the adoption of the
1997 Stock Option Plan. The 1997 Plan, provides for the granting to employees
and non-employee directors of qualified and non-qualified options to purchase
an aggregate of up to 6,225,000 shares of common stock. Options to purchase
common stock may be granted at prices not less than 50% of the fair market
value of the common stock at the date of grant, for a term of no more than ten
years. Vesting provisions for individual awards are at the discretion of the
Board of Directors.
The following table summarizes the option activity under the plans for the
three-year period ended December 31, 2001:
2001 2000 1999
Weighted Avg. Weighted Avg. Weighted Avg.
2001 Exercise Price 2000 Exercise Price 1999 Exercise Price
---------------------------------------------------------------------------------------
Options outstanding at January 1 4,896,193 $ 4.74 3,027,044 $ 4.74 2,731,244 $ 5.24
Options granted 847,500 17.11 2,013,300 4.65 596,250 2.83
Options exercised (2,492,841) 4.69 (96,701) 3.71 - -
Options forfeited (79,000) 3.65 (47,450) 4.69 (300,450) 5.50
----------- ------ ---------- ------ --------- ------
Options outstanding at December 31 3,171,852 $ 8.09 4,896,193 $ 4.74 3,027,044 $ 4.74
=========== ====== ========== ====== ========= ======
Options exercisable at December 31 1,024,352 $ 5.25 2,655,200 $ 4.99 1,796,387 $ 5.25
=========== ====== ========== ====== ========= ======
All options granted have an exercise price equal to or greater than the fair
value of the Company's common stock on the date of grant. Exercise prices for
options outstanding as of December 31, 2001, ranged from $1.92 to $21.20 as
follows:
Weighted Average
Remaining
Weighted Average Contractual Life Weighted Average
Range of Options Exercise Price of of Options Options Exercise Price of
Exercise Prices Outstanding Options Outstanding Outstanding Exercisable Options Exercisable
- ----------------------------------------------------------------------------------------------------------------
$1.92 - $4.42 1,738,488 $ 4.15 7.89 years 613,488 $4.15
$4.46 - $9.00 617,693 $ 6.40 7.52 years 352,693 $6.11
$10.72-$21.20 815,671 $17.76 9.49 years 58,171 $11.72
--------------- --------------
3,171,852 1,024,352
=============== ==============
Pro Forma Disclosures Required by Statement 123
For the years ended December 31, 2001, 2000 and 1999, pro forma net income and
earnings per share information required by Statement 123 has been determined as
if the Company had accounted for its stock options using the fair value method
rather than the intrinsic value method followed by the Company. The fair value
of these options was estimated at the date of grant using the Black-Scholes
option pricing model with the following assumptions:
40
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. STOCK OPTION PLANS (CONTINUED)
Year ended December 31,
2001 2000 1999
---------------------------------------------------------
Risk free interest rate 4.5% 5.5% 5.5%
Expected dividend yield 0% 0% 0%
Expected option life 3.38 years 4 years 4 years
Expected stock price volatility 0.758 - 0.782 0.779 - 0.790 0.788 - 0.808
Weighted average fair value of granted options $9.40 $2.09 $1.77
The Black-Scholes option pricing model and other models were developed for use
in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
The following table summarizes pro forma income (loss) and earnings (loss) per
share:
Year ended December 31,
2001 2000 1999
----------------------------------
Income before extraordinary item, as reported $ 16,469 $ 7,954 $ 2,991
Pro forma income before extraordinary item $ 14,100 $ 5,196 $ 1,820
Net income, as reported $ 16,469 $ 2,561 $ 2,991
Pro forma net income (loss) $ 14,100 $ (197) $ 1,820
Income before extraordinary item per common share, basic, as reported $ 0.92 $ 0.75 $ 0.41
Pro forma income before extraordinary item per common share, basic $ 0.79 $ 0.49 $ 0.25
Income before extraordinary item per common share, diluted, as reported $ 0.84 $ 0.66 $ 0.39
Pro forma income before extraordinary item per common share, diluted $ 0.72 $ 0.45 $ 0.24
Earnings per common share, basic, as reported $ 0.92 $ 0.24 $ 0.41
Pro forma earnings (loss) per common share, basic $ 0.79 $ (0.02) $ 0.25
Earnings per common share, diluted, as reported $ 0.84 $ 0.21 $ 0.39
Pro forma earnings (loss) per common share, diluted $ 0.72 $ (0.02) $ 0.24
41
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities are
as follows:
2001 2000
---------------------------------
Deferred tax assets:
Allowance for doubtful accounts $ 953 $ 529
Accrued vacation and bonus 372 500
Other 150 -
---------------------------------
Total deferred tax assets 1,475 1,029
Deferred tax liabilities:
Use of cash basis for income tax purposes by subsidiary - 350
Goodwill 1,407 610
Capitalized software 341 447
Other 130 159
----------------------------------
Total deferred tax liabilities 1,878 1,566
----------------------------------
Net deferred tax liability $ (403) $ (537)
==================================
Income tax expense (benefit), before extraordinary item consisted of the
following:
Year ended December 31
2001 2000 1999
------------------------------------------------
Current:
Federal $ 9,192 $ 4,766 $ 1,937
State 2,388 1,405 687
------------------------------------------------
11,580 6,171 2,624
Deferred (benefit):
Federal (49) (145) (190)
State (86) (109) (123)
------------------------------------------------
(135) (254) (313)
------------------------------------------------
$ 11,445 $ 5,917 $ 2,311
================================================
The Company's provision for income taxes resulted in effective tax rates that
varied from the statutory federal income tax rate as follows:
Year Ended December 31,
----------------------------------------------------
2001 2000 1999
----------------------------------------------------
Expected federal income tax provision at 34% $ 9,491 $ 4,716 $ 1,803
Expenses not deductible for tax purposes 359 557 302
State income taxes, net of federal benefit 1,474 732 286
Other 121 (88) (80)
----------------------------------------------------
$ 11,445 $ 5,917 $ 2,311
====================================================
42
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. OPERATING LEASES
The Company leases office space under non-cancelable operating leases that
expire in various years through 2010. The leases for certain office space
contain provisions whereby the future rental payments may be adjusted for
increases in maintenance and insurance above specified amounts. The Company also
leases certain furniture and equipment in its operations under operating leases
having initial terms of less than one year.
Future minimum payments under non-cancelable operating leases with initial terms
of one year or more consist of the following at December 31, 2001:
2002 $ 5,470
2003 5,333
2004 4,982
2005 4,650
2006 3,479
Thereafter 11,928
----------------
Total minimum lease payments $ 35,842
================
Rental expense consists of the following:
Year ended December 31,
2001 2000 1999
-----------------------------------------------
Furniture and equipment $ 409 $ 324 $ 392
Office and storage 5,171 3,556 2,859
-------- -------- --------
$ 5,580 $ 3,880 $ 3,251
======== ======== ========
43
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE BENEFIT PLANS
The Company maintains a qualified defined contribution 401(k) plan which covers
substantially all employees. Under the plan, participants are entitled to make
both pre-tax and after-tax contributions. The Company matches a certain
percentage of participant contributions pursuant to the terms of the plan, which
are limited to a percent of the participant's eligible compensation. The
percentage match is at the discretion of the Board of Directors. The Company
made contributions of $1.1 million, $685,000 and $344,000 during 2001, 2000 and
1999, respectively, related to these plans.
The Company also maintains an Employee Stock Purchase Plan which covers
substantially all employees. Under the plan, participants are eligible to
purchase shares of the Company's common stock at a price that is equal to 85% of
the lesser of the fair market value of the stock on the first or the last
trading day of the offering period. Offering periods commence the first day of
each January and July in any particular year. There are 750,000 shares of the
Company's common stock issuable under the Plan, of which 608,350 shares have
been issued or subscribed for as of December 31, 2001.
10. EXTRAORDINARY LOSS
In connection with the acquisition of P&M, the Company refinanced its debt
during the first quarter of 2000 and retired all long-term debt outstanding at
February 4, 2000. In connection with this early extinguishment of debt, the
Company wrote off unamortized debt discount and financing fees, incurring an
extraordinary loss of $869,000 (net of a $660,000 income tax benefit).
During the fourth quarter of 2000, the Company successfully completed a
secondary offering of 6,038 million shares of common stock. The $24.0 million
proceeds, net of offering costs, together with internal cash resources, were
used to repay the $30.0 million of subordinated notes issued in connection with
the acquisition of P&M. Concurrent with the repayment of the subordinated notes,
the Company refinanced its long-term debt to obtain more attractive terms and to
reduce interest expense. In connection with the fourth quarter early
extinguishment of debt, the Company wrote-off unamortized debt discount and
financing fees and pre-payment penalties, resulting in an extraordinary loss of
$4.5 million (net of a $2.4 million income tax benefit).
44
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. SEGMENT REPORTING
The Company is a multi-disciplined consulting firm with leading practices in the
areas of financial restructuring, litigation consulting and engineering and
scientific investigation, 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
Applied Sciences division offers engineering and scientific consulting services,
accident reconstruction, fire investigation, equipment procurement and expert
testimony regarding intellectual property rights. The Litigation Consulting
division provides advice and services in connection with all phases of the
litigation process.
The Company evaluates performance 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 is the same as those used by
the Company and described in Note 1 to the consolidated financial statements.
There are no significant inter-company sales or transfers.
The Company's reportable segments are business units that offer distinct
services. The following tables set forth historical information on the Company's
reportable segments:
Year ended December 31, 2001
-----------------------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- --------------------------------------------------------------------------------------------
Revenues $ 97,107 $ 44,042 $ 25,210 $ 166,359
Operating expenses 56,408 36,255 21,959 114,622
--------- --------- --------- ---------
Segment profit $ 40,699 $ 7,787 $ 3,251 $ 51,737
========= ========= ========= =========
Year ended December 31, 2000
-----------------------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- --------------------------------------------------------------------------------------------
Revenues $ 64,175 $ 39,232 $ 31,357 $ 134,764
Operating expenses 38,286 31,963 24,489 94,738
--------- --------- --------- ---------
Segment profit $ 25,889 $ 7,269 $ 6,868 $ 40,026
========= ========= ========= =========
Year ended December 31, 1999
-----------------------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- --------------------------------------------------------------------------------------------
Revenues $ 19,851 $ 35,693 $ 29,063 $ 84,607
Operating expenses 14,489 30,276 20,579 65,344
--------- --------- --------- ---------
Segment profit $ 5,362 $ 5,417 $ 8,484 $ 19,263
========= ========= ========= =========
45
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. SEGMENT REPORTING (CONTINUED)
A reconciliation of segment profit for all segments to income before income
taxes is as follows:
Year ended December 31,
2001 2000 1999
- -------------------------------------------------------------------------------
Operating Profit:
Total segment profit $ 51,737 $40,026 $19,263
Corporate general and
administrative expenses (10,551) (7,892) (5,251)
Depreciation and amortization (8,916) (7,492) (4,696)
Interest expense, net (4,356) (10,771) (4,014)
------------------------------------------
Income before income taxes and
extraordinary item $27,914 $13,871 $ 5,302
======= ======= =======
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 that represents ten percent or more of its
consolidated revenues.
46
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
------------------------------------------------------------
Revenues $41,475 $42,154 $40,555 $42,175
Operating expenses 33,365 33,864 33,548 33,312
------------------------------------------------------------
Operating income 8,110 8,290 7,007 8,863
Interest, net (1,443) (1,147) (970) (796)
------------------------------------------------------------
Income before income taxes 6,667 7,143 6,037 8,067
Income taxes 2,834 2,967 2,414 3,230
------------------------------------------------------------
Net income $3,833 $4,176 $3,623 $4,837
============================================================
Net income per
common share, basic $0.24 $0.24 $0.19 $0.25
============================================================
Net income per
common share, diluted $0.21 $0.22 $0.18 $0.23
============================================================
Weighted average shares
outstanding:
Basic 15,933 17,228 18,760 19,397
============================================================
Diluted 18,051 19,202 20,340 20,827
============================================================
47
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY FINANCIAL DATA (UNAUDITED) - CONTINUED
Quarter Ended
------------------------------------------------------------
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
- -------------------------------------------------------------------------------------------
Revenues $31,013 $34,585 $33,395 $35,771
Operating expenses 25,305 27,965 27,630 29,222
------------------------------------------------------------
Operating income 5,708 6,620 5,765 6,549
Interest, net (2,352) (3,142) (3,143) (2,134)
------------------------------------------------------------
Income before income taxes
and extraordinary item 3,356 3,478 2,622 4,415
Income taxes 1,476 1,530 1,154 1,757
------------------------------------------------------------
Income before
extraordinary item 1,880 1,948 1,468 2,658
Extraordinary loss on early
extinguishment of debt,
net of taxes 869 - - 4,524
------------------------------------------------------------
Net income (loss) $ 1,011 $ 1,948 $ 1,468 $(1,866)
============================================================
Income before
extraordinary item per
common share, basic $ 0.21 $ 0.20 $ 0.15 $ 0.28
============================================================
Net income (loss) per
common share, basic $ 0.11 $ 0.20 $ 0.15 $ (0.20)
============================================================
Income before
extraordinary item per
common share, diluted $ 0.19 $ 0.17 $ 0.13 $ 0.17
============================================================
Net income (loss) per
common share, diluted $ 0.11 $ 0.17 $ 0.13 $ (0.12)
============================================================
Weighted average shares
outstanding:
Basic 8,781 9,635 9,804 14,238
============================================================
Diluted 9,600 11,270 11,604 15,411
============================================================
48
FTI CONSULTING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
13. CONTINGENCIES
The Company is subject to legal actions arising in the ordinary course of its
business. In management's opinion, the Company has adequate legal defenses
and/or insurance coverage with respect to the eventuality of such actions and
does not believe any settlement would materially affect the Company's financial
position.
14. SUBSEQUENT EVENTS
The Company's board of directors authorized a 3 for 2 stock split in the form of
a stock dividend to be distributed to shareholders of record on January 2, 2002.
All share and per share date included in the consolidated financial statements
have been restated to reflect the stock split.
Effective January 2, 2002, the Company acquired all of the outstanding common
stock of Technology and Financial Consulting, Inc. ("TFC"). TFC, based in
Houston, Texas, provides intellectual property consulting services. The total
purchase price of $4.1 million includes cash payments of $3.1 million and common
stock valued at $1.0 million. The acquisition was accounted for using the
purchase method of accounting. At the acquisition date, approximately $3.7
million of goodwill was recorded.
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Certain information required in Part III is omitted from this Report, but is
incorporated herein by reference from the Company's Definitive Proxy Statement
for the 2002 Annual Meeting of Stockholders to be filed within 120 days after
the end of the Company's fiscal year ended December 31, 2001 (the "Proxy
Statement"), pursuant to Regulation 14A with the Securities and Exchange
Commission.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information contained in the Proxy Statement under the caption "The Board of
Directors" and "Executive Officers and Compensation" is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption "Executive
Officers and Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information contained in the Proxy Statement under the caption "Stock
Ownership" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption "Executive
Officers and Compensation -- Certain Relationships and Related Transactions" is
incorporated herein by reference.
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, EXHIBITS AND SCHEDULES
1. FINANCIAL STATEMENTS (See Item 8 hereof.)
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2001 and December
31, 2000
Consolidated Statements of Income for the fiscal years
ended December 31, 2001, December 31, 2000 and December
31, 1999
Consolidated Statements of Stockholders' Equity for the
fiscal years ended December 31, 2001, December 31, 2000
and December 31, 1999
Consolidated Statements of Cash Flows for the fiscal years
ended December 31, 2001, December 31, 2000 and December
31, 1999
Notes to Consolidated Financial Statements
51
2. FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
All schedules, other than those outlined below, are
omitted as the information is not required or is otherwise
furnished.
- -------------------------------------------------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -------------------------------------------------------------------------------------------------------------------------
FTI Consulting, Inc. and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------
(in thousands)
- -------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------------------------------------------------------------------------------------
Additions
- -------------------------------------------------------------------------------------------------------------------------
Description Balance at Charged to Charged to Deductions Balance at End
Beginning of Costs and Other of Period
Period Expenses Accounts
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001:
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Reserves and allowances deducted from asset accounts:
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts 2,118 2,383 2,178 /(1)/ 2,323
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000:
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Reserves and allowances deducted from asset accounts:
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts 2,225 1,740 9 /(2)/ 1,856 /(1)/ 2,118
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999:
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Reserves and allowances deducted from asset accounts:
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts 902 527 1,048 /(2)/ 55 /(1)/ 2,422
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
/(1)/ Uncollectible accounts written off, net of recoveries.
- -------------------------------------------------------------------------------------------------------------------------
/(2)/ Allowance recorded for acquisitions.
- -------------------------------------------------------------------------------------------------------------------------
52
3. EXHIBITS
NUMBER DESCRIPTION
------- --------------------------------------------------------
*3.1 Amended and Restated Articles of Incorporation of FTI
Consulting, Inc.
+++++3.2 Bylaws of FTI Consulting, Inc., as amended and restated.
**3.3 Amendment to Articles of Incorporation
***4.2 Specimen Common Stock Certificate
*10.1 1992 Stock Option Plan, as amended
****10.2 1997 Stock Option Plan, as amended
*10.3 Employment Agreement dated as of January 1, 1996, between
Forensic Technologies International Corporation and Jack B.
Dunn, IV
*10.4 Employment Agreement dated as of January 1, 1996, between
Forensic Technologies International Corporation and Joseph R.
Reynolds, Jr.
*****10.5 Employee Stock Purchase Plan
+10.6 Stock Purchase Agreement dated as of June 30, 1998, by and among
FTI Consulting, Inc., Klick, Kent & Allen, Inc., and the
stockholders named therein
++10.7 Stock Purchase Agreement dated as of September 25, 1998, by and
among FTI Consulting, Inc., Glenn R. Baker and Dennis A.
Guenther
+++10.8 Stock Purchase Agreement dated as of September 17, 1998, by and
among FTI Consulting, Inc., Kahn Consulting, Inc., KCI
Management Corp., and the stockholders named therein
++++10.9 LLC Membership Interests Purchase Agreement dated as of January
31, 2000, by and among FTI Consulting, Inc., and Michael
Policano and Robert Manzo (schedules and exhibits omitted)
53
++++10.10 Credit Agreement dated as of February 4, 2000, by and among FTI
Consulting, Inc., and its subsidiaries named therein, Newcourt
Commercial Finance Corporation, an affiliate of The CIT Group,
Inc., and the other agents and lenders named therein
(schedules and exhibits omitted)
++++10.11 Investment and Loan Agreement dated as of February 4, 2000, by
and among FTI Consulting, Inc., and its subsidiaries named
therein, Jack B. Dunn, IV, Stewart J. Kahn, Allied Capital
Corporation, and the other lenders named therein
(schedules and exhibits omitted)
++++10.12 Form of Series A Stock Purchase Warrant dated as of February 4,
2000, by and between FTI Consulting, Inc., and each of the
lenders named in the above-referenced Investment and Loan
Agreement (schedules and exhibits omitted)
+++++10.13 Credit Agreement dated as of December 22, 2000, among FTI
Consulting, Inc. and the lenders and agents named therein
(schedules omitted).
+++++10.14 First Amendment to Credit Agreement dated as of February 23,
2001, among FTI Consulting, Inc. and the lenders agents named
therein.
11.0 Computation of Earnings Per Share (included in Note 2 to the
Consolidated Financial Statements included in Item 8 herein)
21.0 Schedule of Subsidiaries
23.0 Consent of Ernst & Young, LLP
* Filed as an exhibit to the Company's Registration Statement on Form SB-1,
as amended (File No. 333-2002) and incorporated herein by reference.
** Filed as an exhibit to the Company's Registration Statement on Form 8-A
(File No. 001-14875) and incorporated herein by reference.
*** Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, and incorporated herein by reference.
**** Filed as an exhibit to the Company's Registration Statement on Form S-8
(File No. 333-32160) and incorporated herein by reference.
***** Filed as an exhibit to the Company's Registration Statement on Form S-8
(File No. 333-30357) and incorporated herein by reference.
+ Filed as an exhibit to the Company's Current Report on Form 8-K filed
July 15, 1998, and incorporated herein by reference.
++ Filed as an exhibit to the Company's Current Report on Form 8-K filed
October 13, 1998, and incorporated herein by reference.
54
+++ Filed as an exhibit to the Company's Current Report on Form 8-K filed
October 2, 1998, and incorporated herein by reference.
++++ Filed as an exhibit to the Company's Current Report on Form 8-K filed
February 15, 2000, and incorporated herein by reference.
+++++ Filed as an exhibit to the Company's Annual Report on Form 10-K/A for the
year ended December 31, 2000, and incorporated herein by reference.
(b) None.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized this 27th
day of March, 2002.
FTI CONSULTING, INC.
By: /s/ Jack B. Dunn, IV
-------------------------
Name: Jack B. Dunn, IV
Title: Chief Executive Officer
and Chairman of the Board
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- --------- ------------------------ ----
/s/ JACK B. DUNN, IV Chairman of the Board and Chief March 27, 2002
- ------------------------------------
Jack B. Dunn, IV Executive Officer (principal
executive officer)
/s/ STEWART J. KAHN President, Chief Operating March 27, 2002
- ------------------------------------
Stewart J. Kahn Officer and Director
/s/ THEODORE I. PINCUS Executive Vice President, Chief March 27, 2002
- -----------------------------
Theodore I. Pincus Financial Officer and Secretary
(principal financial accounting officer)
/s/ DENIS J. CALLAGHAN Director March 27, 2002
- ------------------------------------
Denis J. Callaghan
/s/ JAMES A. FLICK, JR. Director March 27, 2002
- ------------------------------------
James A. Flick, Jr.
/s/ PETER F. O'MALLEY Director March 27, 2002
- ------------------------------------
Peter F. O'Malley
/s/ DENNIS J. SHAUGHNESSY Director March 27, 2002
- ------------------------------------
Dennis J. Shaughnessy
/s/ GEORGE P. STAMAS Director March 27, 2002
- ------------------------------------
George P. Stamas
56