SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1996; 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: _ _ _ _ _ _ _ _ _ _ _ _ _
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
MARYLAND 52-1261113
- - - - - - - - - - - - - - - - - - - -
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2021 Research Drive, Annapolis, Maryland 21401
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
(Address of Principal Executive Offices)
(Zip Code)
(410) 224-8770
- - - - - - - - - - - -
(Registrant's Telephone Number, Including Area Code)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - -
(Former name, former address and former fiscal year,
if changed since last report)
- - - - - - - - - - - - - - - - - - - - - - - - - - - -
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at November 14, 1996
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Common Stock, par value 4,506,912 shares
$.01 per share
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements . . . . . . . . . . . . . . 3 to 11
Item 2. Management's Discussion and Analysis of
Results of Operations and
Financial Condition . . . . . . . . 12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 24
Forensic Technologies International Corporation
Balance Sheets (Unaudited)
December 31, September 30,
1995 1996
-------------------------------------------
(Restated - Note 3)
Assets
Current assets:
Cash and cash equivalents $ 244,925 $ 6,936,957
Accounts receivable, less allowance of $212,262 in 1995 and $245,581 in 1996 4,633,850 6,838,738
Unbilled receivables, less allowance of $164,935 in 1995 and $177,105 in 1996 2,230,674 2,896,332
Deferred income taxes 499,141 499,141
Prepaid expenses 145,805 669,361
-----------------------------------------------
Total current assets 7,754,395 17,840,529
Property and equipment:
Buildings 411,241 411,241
Furniture and equipment 6,576,259 7,778,134
Leasehold improvements 677,348 781,161
-----------------------------------------------
7,664,848 8,970,536
Accumulated depreciation and amortization (4,784,174) (5,368,220)
-----------------------------------------------
2,880,674 3,602,316
Deferred income taxes 4,090 4,090
Other assets 196,662 224,274
===============================================
Total assets $ 10,835,821 $ 21,671,209
===============================================
December 31, September 30,
1995 1996
-------------------------------------------
(Restated - Note 3)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,171,201 $ 1,360,864
Borrowings under line of credit 2,110,391 713,075
Accrued compensation expense 933,841 844,621
Income taxes payable 288,127 622,255
Deferred revenue 138,889 -
Current portion of capital lease obligations 63,463 56,443
Accrued loss on disposal of discontinued operations 478,828 -
Other current liabilities 310,554 577,879
------------------------------------------------
Total current liabilities 5,495,294 4,175,137
Long-term debt and capital lease obligations, less current portion 206,747 182,931
8% Convertible Subordinated Debentures, due to stockholders 1,800,000 -
Series A Redeemable Convertible Preferred Stock, $.01 par value, stated at
redemption value 1,560,000 -
Common Stock Subject to Repurchase 310,930 -
Commitments and contingent liabilities - -
Stockholders' equity:
Common stock, $.01 par value:
Class A:
Authorized shares - 9,800,000 in 1995 and 16,000,000 in 1996
Shares issued and outstanding and not subject to repurchase -
1,989,059 in 1995 4,506,912 in 1996 19,891 45,070
Class B:
Authorized shares - 6,300,000 in 1995 and 0 in 1996
Issued and outstanding shares - 1,524,600 in 1995 and 0 in 1996 15,246 -
Additional paid-in capital 850 14,385,600
Retained earnings 1,455,773 2,882,471
Less: Unearned compensation recorded upon issuance of common stock
(28,910) -
------------------------------------------------
Total stockholders' equity 1,462,850 17,313,141
================================================
Total liabilities and stockholders' equity $ 10,835,821 $ 21,671,209
================================================
See accompanying notes.
Forensic Technologies International Corporation
Statements of Income (Unaudited)
Three months ended September 30
1995 1996
----------------------------------------------------
(Restated - Note 3)
Revenues $ 5,944,203 $ 7,573,326
Direct cost of revenues 2,888,125 4,171,870
Selling, general and administrative expenses 2,528,520 2,665,547
---------------------------------------------------
Total costs and expenses 5,416,645 6,837,417
----------------------------------------------------
527,558 735,909
Other income (expenses):
Interest and other income 9,790 111,174
Interest expense (63,000) (14,596)
----------------------------------------------------
(53,210) 96,578
----------------------------------------------------
Income from continuing operations before income taxes 474,348 832,487
Income taxes 192,900 345,527
----------------------------------------------------
Income from continuing operations 281,448 486,960
Discontinued operations:
Loss from operations of discontinued Annapplix division
(Net of income tax benefit of $13,100) (43,000) -
----------------------------------------------------
Net income $ 238,448 $ 486,960
====================================================
Earnings Per Share Data:
Per common and common equivalent share:
Income from continuing operations $0.12 $0.10
====================================================
Net income $0.11 $0.10
====================================================
Per common share, assuming full dilution:
Income from continuing operations $0.10 $0.10
====================================================
Net income $0.09 $0.10
====================================================
See accompanying notes.
Forensic Technologies International Corporation
Statements of Income (Unaudited)
Nine months ended
September 30
1995 1996
---------------------------------------------------
(Restated - Note 3)
Revenues $ 17,401,799 $ 22,547,184
Direct cost of revenues 8,502,331 12,337,641
Selling, general and administrative expenses 7,122,184 7,758,103
Total costs and expenses 15,624,515 20,095,744
---------------------------------------------------
1,777,284 2,451,440
---------------------------------------------------
Other income (expenses):
Interest and other income 27,996 192,971
Interest expense (187,000) (155,982)
---------------------------------------------------
(159,004) 36,989
---------------------------------------------------
Income from continuing operations before income taxes 1,618,280 2,488,429
Income taxes 646,900 1,046,136
---------------------------------------------------
Income from continuing operations 971,380 1,442,293
Discontinued operations:
Income from operations of discontinued Annapplix division
(less applicable income taxes of $47,300) 25,000 -
---------------------------------------------------
Net income $ 996,380 $ 1,442,293
===================================================
Earnings Per Share Data:
Per common and common equivalent share:
Income from continuing operations $0.42 $0.41
===================================================
Net income $0.43 $0.41
===================================================
Per common share, assuming full dilution:
Income from continuing operations $0.30 $0.37
===================================================
Net income $0.31 $0.37
===================================================
See accompanying notes.
Forensic Technologies International Corporation
Statements of Cash Flows (Unaudited)
Nine months ended September 30,
1995 1996
------------------------------------------------------
(Restated - Note 3)
Operating activities
Net income $ 993,380 $ 1,442,293
Adjustment to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 290,691 525,230
Amortization 36,913 77,237
Non-cash compensation 43,374 28,910
Provision for doubtful accounts 85,574 45,489
Accrued loss on disposal of discontinued Annapplix division - (478,828)
Changes in operating assets and liabilities:
Accounts receivable (637,586) (2,238,207)
Unbilled receivables (956,897) (677,828)
Prepaid expenses (234,977) (523,556)
Accounts payable 768,781 189,663
Accrued compensation expense 492,721 (89,220)
Income taxes payable 196,003 334,128
Deferred revenue (250,000) (138,889)
Other current liabilities 70,622 267,325
Accounting adjustment due to pooling - 71,911
-------------------------------------------------------
Net cash provided by (used in) operating activities 898,599 (1,164,342)
Investing activities
Purchase of property and equipment (1,100,233) (1,305,688)
Acquisition of Applix Software Computer Service (200,000) -
Change in other assets (13,855) (46,033)
-------------------------------------------------------
Net cash used in investing activities (1,314,088) (1,351,721)
Financing activities
Issuance of Class A Common Stock - 11,125,138
Repurchase of Class A Common Stock (500,980) (130,260)
Repurchase of Class A Common Stock subject to Repurchase (103,635) (310,930)
Repurchase of Class B Common Stock (254,800) (300)
Exercise of stock options - 14,995
Net borrowings (repayments) under line of credit 1,728,005 (1,397,316)
Payments of capital lease obligations (224,555) (30,836)
Dividends paid (62,399) (62,396)
-------------------------------------------------------
Net cash provided by financing activities 581,636 9,208,095
-------------------------------------------------------
Net increase in cash and cash equivalents 166,147 6,692,032
Cash and cash equivalents at beginning of period 245,918 244,925
=======================================================
Cash and cash equivalents at end of period $ 412,065 $ 6,936,957
=======================================================
See accompanying notes.
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month and nine
month periods ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1996. For further
information, refer to the financial statements and notes thereto incorporated by
reference in the Company's registration statement on Form 8-A filed on May 8,
1996.
2. DISCONTINUED OPERATIONS
As described in the notes to the 1995 audited financial statements, in March
1996 the Company agreed to sell the Annapplix division to a group including the
former owner, who during 1995 managed the division as an officer of the Company,
and certain other officers and stockholders of the Company. The Company,
effective March 31, 1996, sold the furniture, equipment, and intangible assets
of the division in exchange for cash of $150,000, and retained ownership of
billed and unbilled accounts receivable, buildings and accounts payable.
The Company recorded the results of operations and estimated loss on the sale of
Annapplix as a discontinued operation in the 1995 annual financial statements.
At December 31, 1995, the Company recorded an accrual of $365,109 for the
estimated loss on the sale of the division, which included $285,000 for the
estimated operating losses, net of the related income tax benefit, for the
period from January 1, 1996 through March 31, 1996, the effective date of
disposal. The actual loss did not differ materially from the Company's estimate.
3. ACQUISITION OF TEKLICON, INC.
On September 30, 1996, the Company acquired all of the outstanding common stock
of Teklicon, Inc. ("Teklicon") in exchange for 415,000 shares of common stock.
The acquisition was accounted for as a pooling of interests and, accordingly,
the Company's financial statements have been restated for all periods prior to
the merger to include the financial position, results of operations, and cash
flows of Teklicon.
Teklicon is based in Mountain View, California and provides technical consulting
and expert witness testimony to attorneys and businesses.
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996 (CONTINUED)
3. ACQUISITION OF TEKLICON, INC. (CONTINUED)
A summary of the separate amount of revenue and net income of the combined
companies for the periods reported herein is as follows:
Pre-Merger Post-Merger
Company Teklicon Combined
------------------------ ------------------------ ------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1995:
Revenues $5,240,000 $704,203 $5,944,203
Net income (loss) $267,000 $(31,552) $235,448
NINE MONTHS ENDED SEPTEMBER 30, 1995:
Revenues $15,073,000 $2,328,799 $17,401,799
Net income $952,000 $41,380 $993,380
THREE MONTHS ENDED SEPTEMBER 30, 1996:
Revenues $6,977,983 $595,343 $7,573,326
Net income (loss) $546,405 $(59,445) $486,960
NINE MONTHS ENDED SEPTEMBER 30, 1996
Revenues $20,338,661 $2,208,523 $22,547,184
Net income (loss) $1,494,797 $(52,504) $1,442,293
In connection with the merger, the Company entered into an employment agreement
with the sole stockholder and executive officer of Teklicon. The future amount
of compensation to be paid the officer, who will have substantially the same
duties, will be less than the amounts paid in periods prior to the merger. Pro
forma net income of the Company, assuming that the officer had received the
reduced amount of compensation in the periods presented herein, is as follows:
Combined Historical Combined
Net Income Pro Forma Adjustments Pro Forma Net Income
----------------------------- ------------------------ ---------------------------------
Three months ended September 30, 1995 $238,448 $ 54,533 $292,981
Nine months ended September 30, 1995 $996,380 $163,699 $1,160,079
Three months ended September 30, 1996 $486,960 $ 4,075 $491,035
Nine months ended September 30, 1996 $1,442,293 $ 59,175 $1,501,468
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996 (CONTINUED)
4. STOCKHOLDER'S EQUITY
On January 12, 1996, the Board of Directors approved the issuance of options to
purchase 184,800 shares of Class A Common Stock to key employees. The exercise
price of the granted shares is $6.38 per share, or the estimated fair market
value of a share of Class A Common Stock at the date of grant, and the options
vest ratably over a three year period.
On January 26, 1996, the Board of Directors approved a 4.2-for-1 stock split of
the Company's Class A Common Stock. The application of anti-dilution provisions
effectively resulted in a 4.2-for-1 split of the Class B Common Stock and Series
A Redeemable Preferred Stock. The stated par values of the common and preferred
stocks were not changed. All share and per share amounts have been restated to
retroactively reflect the split of the Class A Common Stock and effective split
of the Class B Common Stock and Series A Redeemable Preferred Stock.
The Board of Directors on January 26, 1996 also amended the Company's articles
of incorporation to change the authorized number of shares of preferred stock of
all classes to 4,000,000 shares upon the closing of the initial public offering.
Upon the closing of the initial public offering in May 1996, the Company's
outstanding 8% Convertible Subordinated Debentures and all shares of Series A
Redeemable Convertible Preferred Stock converted into shares of Common Stock.
In May 1996, upon the closing of its initial public offering and the exercise of
the over-allotment option, the Company issued 1,800,000 and 220,000 shares of
common stock, respectively, for net proceeds of $11,110,000.
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996 (CONTINUED)
5. EARNINGS PER SHARE
The following tables summarize the computations of earnings per share for the
three month and nine month periods ended September 30, 1995 and 1996. These
tables should be read in conjunction with Note 2 to the 1995 audited financial
statements.
Three months ended
September 30
1995 1996
---------------------- --------------------
(Unaudited)
Primary:
Weighted average number of shares of common stock outstanding during
the period 2,122,074 4,504,913
Options to purchase common stock issued within one year of registration
statement - based on treasury stock method using estimated offering
price 61,900 -
Dilutive effect of other options and warrants - based on treasury stock
method using average market price 82,955 217,438
---------------------- --------------------
Total common and common equivalent shares of stock considered outstanding
during the year 2,266,929 4,722,351
====================== ====================
Net income $ 238,448 $ 486,960
====================== ====================
Per share amount $ 0.11 $ 0.10
====================== ====================
Fully diluted:
Weighted average number of shares of common stock outstanding during
the period 2,122,074 4,504,913
Options to purchase common stock issued within one year of registration
statement - based on treasury stock method using estimated offering
price 61,900 -
Dilutive effect of other options and warrants - based on treasury stock
method using market price at the end of the period 88,907 246,237
Assumed conversion of Series A Redeemable Convertible Preferred Stock 655,200 -
Assumed conversion of 8% Convertible Subordinated Debentures 378,000 -
---------------------- --------------------
Total fully diluted securities considered outstanding during the year 3,306,081 4,751,150
====================== ====================
Net income $ 238,448 $ 486,960
Add 8% Convertible Subordinated Debenture interest, net of income taxes 42,768 10,077
====================== ====================
$ 281,216 $ 497,037
====================== ====================
Per share amount $ 0.09 $ 0.10
====================== ====================
Nine months ended
September 30
1995 1996
---------------------- -----------------------
(Unaudited)
Primary:
Weighted average number of shares of common stock outstanding during
the period 2,188,976 3,282,509
Options to purchase common stock issued within one year of registration
statement - based on treasury stock method using estimated offering
price 61,900 20,633
Dilutive effect of other options and warrants - based on treasury stock
method using average market price 65,410 186,133
---------------------- -----------------------
Total common and common equivalent shares of stock considered outstanding
during the year 2,316,286 3,489,275
====================== =======================
Net income $ 996,380 $ 1,442,293
====================== =======================
Per share amount $ 0.43 $ 0.41
====================== =======================
Fully diluted:
Weighted average number of shares of common stock outstanding during
the period 2,188,976 3,282,509
Options to purchase common stock issued within one year of registration
statement - based on treasury stock method using estimated offering
price 61,900 20,633
Dilutive effect of other options and warrants - based on treasury stock
method using market price at the end of the period 88,907 213,697
Assumed conversion of Series A Redeemable Convertible Preferred Stock 655,200 320,426
Assumed conversion of 8% Convertible Subordinated Debentures 378,000 184,861
---------------------- -----------------------
Total fully diluted securities considered outstanding during the year 3,372,983 4,022,126
====================== =======================
Net income $ 996,380 $ 1,442,293
Add 8% Convertible Subordinated Debenture interest, net of income taxes 42,768 31,402
====================== =======================
$ 1,039,148 $ 1,473,695
====================== =======================
Per share amount $ 0.31 $ 0.37
====================== =======================
FORENSIC TECHNOLOGIES INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Revenues for the third quarter and nine months ended September 30, 1996,
increased 27.4%, to $7.6 million and 29.5% to $22.5 million over the same
periods in 1995, respectively. These increases are primarily the result of
revenues from trial consulting, growing 135% to $1.7 million in the quarter and
152% to $4.8 million for the nine months, and revenues from visual communication
services increasing 57% to $3.5 million during the quarter and 47% to $9.8
million for the nine months. Such increases were primarily attributable to the
increased market penetration by the Chicago and Los Angeles offices. Engineering
revenues for the quarter and nine months declined 21% to $2.2 million and 12% to
$7.5, respectively, due primarily to the lack of activity in any major cases
during these periods.
Direct costs, as a percentage of revenue, increased during the quarter and six
months, resulting primarily from the redirection of efforts by certain key
personnel from selling, general and administrative activities to revenue
generating activities. Additionally, the increase was due to the increased
percentage of revenue from trial consulting and the recently acquired Teklicon,
which carries slightly higher direct costs. Interest expense decreased in both
the quarter and six months due to lower usage on the line of credit resulting
from funds received from the sale of Common Stock in May, 1996.
Income from continuing operations grew 73% to $486,900 during the second quarter
and 48% to $1,442,300 for the nine months. This growth is principally the result
of the increase in both trial consulting and visual communication services
revenues while costs remained approximately constant as a percentage of revenue.
Income (loss) from discontinued operations, the company's division providing
general data processing consulting services and network administration services
sold during the first quarter of 1996, had no impact to date in 1996 compared to
$(43,000) and $25,000 for the quarter and nine months ended September 30, 1995.
Cash flow during the quarter decreased, principally due to increases in accounts
receivable resulting from a general increase in the level of business activity.
For the nine months, cash flow increased as a result of the proceeds from the
recent sale of the company's stock, providing approximately $11.1 to be used to
repay the company's borrowings under a revolving line of credit, purchase
additional video and animation equipment and develop new technology. The balance
of the net proceeds, approximately $7.1 million, will be used for working
capital and other general corporate purposes, including possible acquisitions.