SEC Filing | FTI Consulting, Inc.

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _______ Commission file number: 001-14875 FTI CONSULTING, INC. -------------------- (Exact Name of Registrant as Specified in its Charter) Maryland 52-1261113 -------- ---------- (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 2021 Research Drive, Annapolis, Maryland 21401 -------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) 410-224-8770 ------------ (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered - ------------------- ----------------------------------------- Common Stock, $.01 par value American Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding at August 3, 2000 - ----------------------- ----------------------------- Common Stock, par value $.01 per share 6,539,347

FTI CONSULTING, INC. -------------------- INDEX Page ---- PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) Consolidated Balance Sheets - December 31, 1999 and June 30, 2000 3 Consolidated Statements of Income - Three months ended June 30, 1999, three months ended June 30, 2000 and Pro Forma Consolidated Statement of Income - Three months ended June 30, 1999 5 Consolidated Statements of Income - Six months ended June 30, 1999, six months ended June 30, 2000 6 Pro Forma Consolidated Statements of Income - Six months ended June 30, 1999, six months ended June 30, 2000 7 Consolidated Statements of Cash Flows - Six months ended June 30, 1999, six months ended June 30, 2000 8 Notes to Unaudited Consolidated Financial Statements June 30, 2000 9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 18 Item 3. Quantitative and Qualitative Disclosures About 23 Market Risk PART II OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Changes in Securities 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 25 2

Part I. Financial Information FTI Consulting, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands of dollars) December 31, June 30, 1999 2000 --------------------------------- (audited) (unaudited) Assets Current assets: Cash and cash equivalents $ 5,046 $ 2,992 Accounts receivable, less allowance of $1,065 in 1999 and $980 in 2000 14,458 25,020 Unbilled receivables, less allowance of $1,160 in 1999 and $867 in 2000 9,222 15,168 Income taxes recoverable 64 446 Deferred income taxes 641 641 Prepaid expenses and other current assets 1,461 1,875 ------------------------------- Total current assets 30,892 46,142 Property and equipment: Furniture, equipment and software 17,205 18,762 Leasehold improvements 1,955 2,293 ------------------------------- 19,160 21,055 Accumulated depreciation and amortization (10,781) (12,165) ------------------------------- 8,379 8,890 Goodwill, net of accumulated amortization of $3,473 in 1999 and $5,722 in 2000 43,658 93,702 Other assets 1,363 3,921 ------------------------------- Total assets $ 84,292 $ 152,655 =============================== See accompanying notes. 3

FTI Consulting, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands of dollars) December 31, June 30, 1999 2000 -------------------------------- (audited) (unaudited) Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses $ 3,240 $ 2,550 Accrued compensation expense 5,373 7,816 Deferred income taxes 471 471 Current portion of long-term debt 1,718 4,750 Advances from clients 435 6,902 Other current liabilities 422 984 ------------------------------- Total current liabilities 11,659 23,473 Long-term debt, less current portion 41,009 82,277 Other long-term liabilities 411 372 Deferred income taxes 961 961 Commitments and contingent liabilities - - Stockholders' equity: Preferred stock, $.01 par value; 4,000,000 shares authorized, none outstanding - - Common stock, $.01 par value; 16,000,000 shares authorized; 4,913,905 and 6,465,968 shares issued and outstanding in 1999 and 2000, respectively 49 65 Additional paid-in capital 18,197 30,543 Retained earnings 12,006 14,964 ------------------------------- Total stockholders' equity 30,252 45,572 ------------------------------- Total liabilities and stockholders' equity $ 84,292 $ 152,655 =============================== See accompanying notes. 4

FTI Consulting, Inc. and Subsidiaries Consolidated Statements of Income (in thousands of dollars, except per share data) Three months ended June 30, Actual Pro Forma Actual 1999 1999 2000 -------------------------------------- (unaudited) Revenues $21,273 $26,757 $34,585 Direct cost of revenues 10,920 12,680 17,435 Selling, general and administrative expenses 7,257 7,616 9,297 Amortization of goodwill 569 1,229 1,233 ------- ------- ------- Total costs and expenses 18,746 21,525 27,965 ------- ------- ------- Income from operations 2,527 5,232 6,620 Other income (expense): Interest and other income 76 76 52 Interest expense (1,101) (3,071) (3,194) ------- ------- ------- (1,025) (2,995) (3,142) ------- ------- ------- Income before income taxes 1,502 2,237 3,478 Income taxes 731 967 1,530 ------- ------- ------- Net income $ 771 $ 1,270 $ 1,948 ======= ======= ======= Net income per common share, basic $ 0.16 $ 0.21 $ 0.30 ======= ======= ======= Net income per common share, diluted $ 0.15 $ 0.20 $ 0.26 ======= ======= ======= See accompanying notes. 5

FTI Consulting, Inc. and Subsidiaries Consolidated Statements of Income (in thousands of dollars, except per share data) Six months ended June 30, 1999 2000 ------------------------------- (unaudited) Revenues $41,273 $65,599 Direct cost of revenues 21,350 32,811 Selling, general and administrative expenses 14,445 18,211 Amortization of goodwill 1,139 2,249 ------- ------- Total costs and expenses 36,934 53,271 ------- ------- Income from operations 4,339 12,328 Other income (expense): Interest and other income 142 92 Interest expense (1,962) (5,586) ------- ------- (1,820) (5,494) ------- ------- Income before income taxes and extraordinary item 2,519 6,834 Income taxes 1,189 3,007 ------- ------- Income before extraordinary item 1,330 3,827 Extraordinary loss on early extinguishment of debt, net of income taxes of $660 - 869 ------- ------- Net income $ 1,330 $ 2,958 ======= ======= Income before extraordinary item per common share, basic $ 0.28 $ 0.62 ======= ======= Net income per common share, basic $ 0.28 $ 0.48 ======= ======= Income before extraordinary item per common share, diluted $ 0.27 $ 0.55 ======= ======= Net income per common share, diluted $ 0.27 $ 0.43 ======= ======= See accompanying notes. 6

FTI Consulting, Inc. and Subsidiaries Pro Forma Consolidated Statements of Income (in thousands of dollars, except per share data) Pro Forma Six months ended June 30, 1999 2000 ------------------------------- (unaudited) Revenues $52,276 $68,037 Direct cost of revenues 24,770 33,761 Selling, general and administrative expenses 15,182 18,317 Amortization of goodwill 2,457 2,466 ------- ------- Total costs and expenses 42,409 54,544 ------- ------- Income from operations 9,867 13,493 Other income (expense): Interest and other income 141 92 Interest expense (6,140) (6,166) ------- ------- (5,999) (6,074) ------- ------- Income before income taxes and extraordinary item 3,868 7,419 Income taxes 1,671 3,253 ------- ------- Income before extraordinary item 2,197 4,166 Extraordinary loss on early extinguishment of debt net of income taxes of $660 - 869 ------- ------- Net income $ 2,197 $ 3,297 ======= ======= Income before extraordinary item per common share, basic $ 0.35 $ 0.65 ======= ======= Net income per common share, basic $ 0.35 $ 0.51 ======= ======= Income before extraordinary item per common share, diluted $ 0.35 $ 0.57 ======= ======= Net income per common share, diluted $ 0.35 $ 0.45 ======= ======= See accompanying notes. 7

FTI Consulting, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands of dollars) Six months ended June 30, 1999 2000 ------------------------------- (unaudited) Operating activities Net income $ 1,330 $ 2,958 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on early extinguishments of debt, before income taxes - 1,529 Amortization of goodwill 1,412 2,249 Depreciation and other amortization 1,029 1,280 Provision for doubtful accounts 567 (378) Deferred income taxes (132) - Loss on disposal of assets 10 17 Non-cash interest expense - 1,116 Changes in operating assets and liabilities: Accounts receivable 332 (5,281) Unbilled receivables (2,424) (5,267) Prepaid expenses and other current assets (429) (408) Accounts payable and accrued expenses (853) (1,494) Accrued compensation expense 1,282 1,887 Income taxes recoverable/payable 610 (383) Advances from clients (9) 4,225 Other current liabilities 456 992 ------------------------------- Net cash provided by operating activities 3,181 3,042 Investing activities Purchase of property and equipment (1,316) (1,699) Proceeds from sale of property and equipment 98 47 Contingent payments to former owners of subsidiaries (451) (165) Costs associated with acquisition of subsidiaries (56) - Acquisition of P&M, including acquisition costs - (49,404) Change in other assets 1 (232) ------------------------------- Net cash used in investing activities (1,724) (51,453) Financing activities Issuance of common shares 136 741 Payments of long-term debt (13,213) (40,820) Retirement of detachable stock warrants - (277) Payment of financing fees (900) (3,782) Proceeds from senior credit facility, net - 59,937 Proceeds from subordinated notes payable and detachable stock warrants 13,000 30,611 Payments of other long-term liabilities (68) (53) ------------------------------- Net cash provided by (used in) financing activities (1,045) 46,357 ------------------------------- Net increase (decrease) in cash and cash equivalents 412 (2,054) Cash and cash equivalents at beginning of period 3,223 5,046 ------------------------------- Cash and cash equivalents at end of period $ 3,635 $ 2,992 =============================== See accompanying notes. 8

FTI Consulting, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) June 30, 2000 (in thousands of dollars, except per share data) 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1999. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2000, are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. The accompanying Pro Forma Consolidated Statements of Income for the three months ended June 30, 1999, and six months ended June 30, 2000 and 1999, are presented to give effect to the January 31, 2000, acquisition of Policano & Manzo, L.L.C. and related financing assuming the transactions occurred on January 1, 1999 (see Notes 5 and 6). These Pro Forma Financial Statements should be read in conjunction with the Company's current report on Form 8-K, filed on April 6, 2000. This Form 8-K more fully describes the assumptions used in preparing the pro forma financial information. The Pro Forma Consolidated Statements of Income are not necessarily indicative of the operating results that would have been achieved had the transactions actually occurred on January 1, 1999, nor are they necessarily indicative of future operations. 2. Stockholders' Equity Additional Common Paid-in Retained Stock Capital Earnings Total ----------------------------------------------- Balance at January 1, 2000 $ 49 $18,197 $12,006 $30,252 Issuance of warrants to purchase 670,404 shares of common stock in connection with debt refinancing 3,714 3,714 Retirement of 130,835 warrants to purchase common stock in connection with early retirement of debt (277) (277) Issuance of 604,504 shares of common stock in exchange for debt to sellers of acquired businesses 6 2,677 2,683 Issuance of 815,000 shares of common stock for the acquisition of Policano & Manzo, L.L.C. 8 5,493 5,501 Issuance of 52,892 shares of common stock under Employee Stock Purchase Plan 1 229 230 Issuance of 20,000 shares of restricted common stock - 159 159 Exercise of options and warrants to purchase 59,667 shares of common stock 1 351 352 Net income for six months ended June 30, 2000 2,958 2,958 ----------------------------------------------- Balance at June 30, 2000 $ 65 $30,543 $14,964 $45,572 =============================================== 9

FTI Consulting, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) June 30, 2000 (continued) (in thousands of dollars, except per share data) 3. Earnings Per Share The following table summarizes the computations of basic and diluted earnings per share: Three months ended June 30, Actual Actual Pro Forma 1999 2000 1999 ------------------------------------- Numerator used in basic and diluted earnings per common share: Net income $ 771 $1,948 $1,270 ===================================== Denominator: Denominator for basic earnings per common share - weighted average shares 4,829 6,423 6,134 Effect of dilutive securities: Warrants 143 604 143 Employee stock options 38 486 38 ------------------------------------- 181 1,090 181 ------------------------------------- Denominator for diluted earnings per common share - weighted average shares and effect of dilutive securities 5,010 7,513 6,315 ===================================== Net income per common share, basic $ 0.16 $ 0.30 $ 0.21 ===================================== Net income per common share, diluted $ 0.15 $ 0.26 $ 0.20 ===================================== 10

FTI Consulting, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) June 30, 2000 (continued) (in thousands of dollars, except per share data) 3. Earnings Per Share (continued) Actual Pro Forma Six months ended Six months ended June 30, June 30, 1999 2000 1999 2000 ------------------------------------------------------- Numerator used in basic and diluted earnings per common share: Income before extraordinary item $ 1,330 $ 3,827 $ 2,197 $ 4,166 Extraordinary item, net of taxes - 869 - 869 ------------------------------------------------------- Net income $ 1,330 $ 2,958 $ 2,197 $ 3,297 ======================================================= Denominator: Denominator for basic earnings per common share - weighted average shares 4,829 6,139 6,249 6,404 Effect of dilutive securities: Warrants 44 480 44 350 Employee stock options 22 336 22 533 ------------------------------------------------------- 66 816 66 883 ------------------------------------------------------- Denominator for diluted earnings per common share - weighted average shares and effect of dilutive securities 4,895 6,955 6,315 7,287 ======================================================= Income before extraordinary item per common share, basic $ 0.28 $ 0.62 $ 0.35 $ 0.65 Extraordinary loss per common share, basic - (0.14) - (0.14) ------------------------------------------------------- Net income per common share, basic $ 0.28 $ 0.48 $ 0.35 $ 0.51 ======================================================= Income before extraordinary item per common share, diluted $ 0.27 $ 0.55 $ 0.35 $ 0.57 Extraordinary loss per common share, - (0.12) - (0.12) diluted ------------------------------------------------------- Net income per common share, diluted $ 0.27 $ 0.43 $ 0.35 $ 0.45 ======================================================= 11

FTI Consulting, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) June 30, 2000 (continued) (in thousands of dollars, except per share data) 4. Income Taxes The income tax provisions for interim periods in 2000 and 1999 are based on the estimated effective tax rates applicable for the full years. The Company's income tax provision of $3,007 for the six month period ended June 30, 2000 consists of federal and state income taxes. The effective income tax rate in 2000 is expected to be approximately 44%. This rate is higher than the statutory federal income tax rate of 34%, due principally to state and local taxes and the effects of nondeductible goodwill recorded in certain acquisitions. 5. Acquisition of Policano & Manzo, L.L.C. Effective on January 31, 2000, the Company acquired the membership interests of Policano & Manzo, L.L.C. ("P&M"). P&M, based in Saddle Brook, New Jersey, is a leader in providing bankruptcy and turnaround consulting services to large corporations, money center banks and secured lenders throughout the U.S. The purchase price totaled approximately $54.9 million, consisting of $48.3 million in cash, 815,000 shares of common stock valued at $5.5 million, and acquisition related expense of $1.1 million. The acquisition was accounted for using the purchase method of accounting and approximately $52.2 million of goodwill was recorded and is being amortized over its estimated useful life of twenty years. The accompanying unaudited Pro Forma Consolidated Statements of Income give effect to the acquisition of P&M and the related refinancing discussed in Note 6, assuming that these transactions occurred as of January 1, 1999, and should be read in conjunction with the Company's current report on Form 8-K, filed on April 6, 2000. 12

FTI Consulting, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) June 30, 2000 (continued) (in thousands of dollars, except per share data) 6. Debt In connection with the acquisition of P&M, the Company entered into a $68.5 million senior credit facility to provide the cash needed to consummate the acquisition, partially refinance existing long-term debt arrangements, and to provide working capital for expansion. The senior credit facility consists of (i) a $61.0 million amortizing term loan maturing through January 31, 2006, that initially bears interest at LIBOR plus specified margins ranging from 3.25% to 3.75%, and (ii) a $7.5 million revolving credit facility, initially bearing interest at prime plus 1.75%. The interest rates on these borrowings will decline if the Company's leverage ratios improve. The Company also issued $30.0 million of subordinated notes to lenders that mature on January 31, 2007, and bear interest at 17% per annum, payable semi- annually. The interest rate of 17% consists of a cash component equal to 12% per annum of principal and a component payable in additional notes equal to 5% per annum of principal. These lenders also received warrants to purchase 670,404 shares of the Company's common stock at the exercise price of $4.44 per share that expire on January 31, 2010. The fair value of these warrants was estimated at the date of grant using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 5.5%; expected dividend yield of 0%; expected warrant life of 10 years; and expected stock price volatility of 0.647. Using these assumptions, the fair value of the warrants was computed to be $5.44 per share, and the total value assigned was $3.7 million. This amount was recorded as additional paid-in capital and a corresponding debt discount was recorded that is recognized as additional interest expense over the term of the debt instruments. The proceeds from these borrowings of $91.0 million, in tandem with $2.0 million of cash, were used to finance the $47.5 million cash purchase price of P&M, refinance $41.2 million of the $44.0 million of existing long-term debt, and fund acquisition and finance related expenses of $4.3 million. The remaining $2.7 million of long-term debt was exchanged for 604,504 shares of common stock. In connection with the early extinguishment of the $44.0 million of debt, warrants to purchase 130,835 shares of common stock for $3.21 per share, were retired. In addition, an extraordinary loss of $869,000 net of income taxes was incurred related to unamortized debt discount and deferred financing costs attributable to the retired debt. 13

FTI Consulting, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) June 30, 2000 (continued) (in thousands of dollars, except per share data) 6. Debt (continued) In summary, debt consists of the following: December 31, June 30, 1999 2000 ------------------------------- Amounts due under the $61.0 million amortizing term loans $ - $ 59,938 Amounts due under $30.0 million subordinated notes (net of discount of $3.5 million and PIK interest of $600,000) - 27,089 Amounts due under a $27.0 million long-term credit facility (net of discount of $36,000 in 1999), bearing interest at LIBOR plus variable percentages 19,964 - Notes payable to former shareholders of acquired businesses (net of discount of $169,000) 10,611 - Subordinated debentures (net of discount of $848,000) bearing interest at 9.25% 12,152 - ------------------------------- Total debt 42,727 87,027 Less current portion (1,718) (4,750) ------------------------------- Total long-term debt $ 41,009 $ 82,277 =============================== The aggregate maturities of long-term debt outstanding at June 30, 2000, prior to amortization of debt discount are as follows: July 1 through December 31, 2000 $ 2,125 December 31, 2001 5,750 December 31, 2002 7,750 December 31, 2003 11,250 December 31, 2004 14,500 December 31, 2005 14,875 Thereafter 33,687 ------- $89,937 ======= 14

FTI Consulting, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) June 30, 2000 (continued) (in thousands of dollars, except per share data) 6. Debt (continued) In March 2000, the Company entered into interest rate swap and cap transactions on $41.0 million of the outstanding amortizing term loans, in accordance with provisions of the credit facility. The $20.5 million swap transactions resulted in exchanging floating LIBOR rates for fixed rates. The $20.5 million cap transactions limited the Company's exposure to substantial increases in the LIBOR rate by establishing the maximum rate over the life of the cap to be 7.75%. These interest rate hedge transactions expire in three years. The premium associated with the cap transactions have been incorporated into the swap transactions and resulted in the fixed rates of 7.41% on $10.0 million and 7.43% on $10.5 million. At June 30, 2000, the estimated positive market value of the interest rate swap and cap agreements was approximately $174,000. The fair value of swap and cap agreements and changes in the fair value as a result of changes in market interest rates are not recognized in the consolidated financial statements. 7. Segment Reporting The Company provides litigation and claims management consulting services through three distinct operating segments. The Financial Consulting division offers a range of financial consulting services, such as forensic accounting, bankruptcy and restructuring analysis, expert testimony, damage assessment, cost benefit analysis and business valuations. The Litigation Consulting division provides advice and services in connection with all phases of the litigation process. The Applied Sciences division offers engineering and scientific consulting services, accident reconstruction, fire investigation, equipment procurement and expert testimony regarding intellectual property rights. The Company evaluates performance and allocates resources based on operating income before depreciation and amortization, corporate general and administrative expenses, and income taxes. The Company does not allocate assets to its reportable segments as assets generally are not specifically attributable to any particular segment. Accordingly, asset information by reportable segment is not presented. The accounting policies used by the reportable segments are the same as those used by the Company. There are no significant intercompany sales or transfers. 15

FTI Consulting, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) June 30, 2000 (continued) (in thousands of dollars, except per share data) 7. Segment Reporting (continued) The following table sets forth information on the Company's reportable segments for the three months ended June 30, 1999 and three months ended June 30, 2000: Three months ended June 30, 1999 ----------------------------------------------- Financial Applied Litigation Consulting Sciences Consulting Total - ----------------------------------------------------------------------- Revenues $4,827 $9,461 $6,985 $21,273 Operating expenses 3,642 7,692 4,986 16,320 ------ ------ ------ ------- Segment profit $1,185 $1,769 $1,999 $ 4,953 ====== ====== ====== ======= Three months ended June 30, 2000 ----------------------------------------------- Financial Applied Litigation Consulting Sciences Consulting Total - ----------------------------------------------------------------------- Revenues $16,332 $9,683 $8,570 $34,585 Operating expenses 9,687 8,036 6,351 24,074 ------- ------ ------ ------- Segment profit $ 6,645 $1,647 $2,219 $10,511 ======= ====== ====== ======= A reconciliation of segment profit for all segments to income before income taxes is as follows: Three months ended June 30, 1999 2000 - -------------------------------------------------------------------------- Operating Profit: Total segment profit $ 4,953 $10,511 Corporate general and administrative expenses (1,120) (2,010) Depreciation and amortization (1,306) (1,881) Interest and other expense (1,025) (3,142) ------- ------- Income before income taxes $ 1,502 $ 3,478 ======= ======= The following table sets forth information on the Company's reportable segments for the six months ended June 30, 1999 and six months ended June 30, 2000: Six months ended June 30, 1999 ----------------------------------------------- Financial Applied Litigation Consulting Sciences Consulting Total - ----------------------------------------------------------------------- Revenues $9,903 $17,769 $13,601 $41,273 Operating expenses 7,261 14,891 9,697 31,849 ------ ------- ------- ------- Segment profit $2,642 $ 2,878 $ 3,904 $ 9,424 ====== ======= ======= ======= Six months ended June 30, 2000 ----------------------------------------------- Financial Applied Litigation Consulting Sciences Consulting Total - ----------------------------------------------------------------------- Revenues $28,851 $19,668 $17,080 $65,599 Operating expenses 16,866 16,063 12,706 45,635 ------- ------- ------- ------- Segment profit $11,985 $ 3,605 $ 4,374 $19,964 ======= ======= ======= ======= 16

A reconciliation of segment profit for all segments to income before income taxes and extraordinary item is as follows: Six months ended June 30, 1999 2000 - --------------------------------------------------------------------- Operating Profit: Total segment profit $ 9,424 $19,964 Corporate general and administrative expenses (2,644) (4,107) Depreciation and amortization (2,441) (3,529) Interest and other expense (1,820) (5,494) ------- ------- Income before income taxes and extraordinary item $ 2,519 $ 6,834 ======= ======= Substantially all of the revenue and assets of the Company's reportable segments are attributed to or located in the United States. Additionally, the Company does not have a single customer which represents ten percent or more of its consolidated revenues. 17

FTI Consulting, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview FTI is a multi-disciplined consulting firm with leading practices in the areas of financial restructuring, litigation support, and engineering and scientific investigation. Our Financial Consulting division, which accounted for 44% of our revenues for the six-months ended June 30, 2000, offers a range of financial consulting services, such as forensic accounting, bankruptcy and restructuring analysis, expert testimony, damage assessment, cost benefit analysis and business valuations. Our Litigation Consulting division, which accounted for 26% of our revenues for the six-months ended June 30, 2000, provides advice and services in connection with all phases of the litigation process. Our Applied Sciences division, which accounted for 30% of our revenues for the six-months ended June 30, 2000, offers forensic engineering and scientific investigation services, accident reconstruction, fire investigation and expert testimony regarding intellectual property rights. Revenues generated by our business divisions consist primarily of fees for our professional services. We charge our professionals' time at hourly rates, which vary from professional to professional, based on the professional's position, experience and expertise. We also directly bill our clients for services provided by our independent consultants. We recognize revenues for the production of our work product, including static graph boards, color copies and digital video production, and fees for use of our equipment and facilities. We also pass through our out-of-pocket expenses, such as our cost of recruiting subjects and participants for research surveys, mock trial activities and our travel. We recognize revenues in the period when the service is provided. Our direct cost of revenues consists primarily of employee compensation and related payroll benefits, the cost of outside consultants assigned to revenue- generating activities and other related expenses billable to clients. Selling, general and administrative expenses consist primarily of salaries and benefits paid to office and corporate staff, as well as rent, marketing and corporate overhead expenses. In the six months ended June 30, 2000, selling, general and administrative expenses accounted for about 28% of our revenues. Our corporate overhead costs, excluding depreciation and amortization, which are included in selling, general and administrative expenses, represented about 6.0% of revenues in the six months ended June 30, 2000. We are organized into three distinct operating segments that contribute to the overall performance of our company. As such, we evaluate segment performance and allocate resources based on the operating income before depreciation and amortization, corporate general and administrative expenses and income taxes for each division. For the six months ended June 30, 2000, our Financial Consulting division accounted for 60.0% of this operating income, our Litigation Consulting division accounted for 22.0% and our Applied Sciences division accounted for 18.0%. On June 30, 2000, we had about $93.7 million of unamortized goodwill, which we are amortizing over 15 to 25 year periods. Annual goodwill amortization, including goodwill associated with the acquisition of P&M, is approximately $5.1 million. Approximately $14.6 million of this goodwill is not deductible for tax purposes. Consequently, we estimate that our effective tax rate for 2000 will be about 42% before amortization of goodwill and 44% after amortization of goodwill. Recent Acquisitions Since September 1997, we made six major acquisitions, all of which were accounted for as purchases. On February 4, 2000, we acquired Policano & Manzo as further described in Note 5 of "Notes to Consolidated Financial Statements." P&M, based in Saddle Brook, New Jersey, specializes in providing financial restructuring, advisory and forensic accounting services to the work-out and bankruptcy community. These services are provided on a nationwide basis to financially distressed businesses, creditors, investors and other interested parties. The purchase price consisted of $48.3 million in cash and 815,000 shares of our common stock. 18

In September 1998, we acquired both S.E.A., Inc. ("SEA") and Kahn Consulting, Inc. ("KCI"). SEA, headquartered in Columbus, Ohio, provides investigation, research, analysis and quality control services in areas such as distress, product failure, fire and explosion, and vehicle and workplace accidents. The SEA acquisition has allowed us to significantly expand our scientific consulting offerings, in addition to providing geographic expansion into the southeast and mid-west markets. KCI, headquartered in New York City, provides expert testimony on accounting and financial issues; forensic accounting and fraud investigation services; strategic advisory, turnaround, bankruptcy and trustee services; and government contract consulting. In June 1998, we acquired Klick, Kent & Allen ("KK&A"). KK&A provides strategic and economic consulting to various regulated businesses, advising on such matters as industry deregulation, mergers and acquisitions, rate and cost structures, economic and financial modeling and litigation risk analysis. The acquisitions of KCI and KK&A provided the foundation for our expansion of financial consulting services into cities where we already had a presence. In September 1997, we acquired L.W.G., Inc. ("LWG") and Bodaken Associates. LWG broadened our offerings to the insurance market by adding capabilities in claims management consulting and restoration services. Bodaken enhanced our jury and trial consulting capabilities, particularly in the western region of the U.S. Results of Operations Three Months Ended June 30, 2000 and June 30, 1999 Revenues. Total revenues for the three months ended June 30, 2000, increased 62.4% to $34.6 million compared to $21.3 million for the three months ended June 30, 1999. For the three months ended June 30, 2000, revenues in our Financial Consulting division grew by $11.5 million, or 239.6%, to $16.3 million, compared to 1999. Our acquisition of P&M, as of January 31, 2000, accounted for $8.0 million of this growth, with $3.5 million generated by internal growth. Litigation Consulting division revenues increased 22.9% from $7.0 million in 1999 to $8.6 million in 2000. The Applied Sciences division had 2.1% growth to $9.7 million in revenues in the three months ended June 30, 2000, compared to $9.5 million in the second quarter of 1999. Direct Cost of Revenues. Direct cost of revenues consists primarily of billable employee compensation and related payroll benefits, the cost of outside consultants assigned to revenue-generating activities and other related expenses billable to clients. Direct cost of revenues improved to 50.4% of total revenues for the three months ended June 30, 2000, compared to 51.3% of total revenues for the three months ended June 30, 1999. We attribute this improvement primarily to the acquisition of P&M and productivity increases in the Applied Sciences and Financial Consulting divisions. Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of salaries and benefits paid to our office and corporate staff, as well as rent, marketing and corporate overhead expenses. These expenses were 26.9% of total revenues for the three months ended June 30, 2000, compared to 34.1% for the three months ended June 30, 1999. This improvement resulted primarily from the fact that P&M's selling, general and administrative expenses are a lower percentage of revenues and our significant revenue increases that exceeded the rate of increase of our selling, general and administrative expenses. Amortization of Goodwill. Amortization of goodwill increased from $569,000 in the second quarter of 1999 to $1.2 million in the second quarter of 2000 as a result of our acquisition of P&M as of January 31, 2000. Interest Expense, net. Net interest expense increased to $3.1 million for the three months ended June 30, 2000, from $1.0 million for the three months ended June 30, 1999. Interest expense consisted primarily of net interest expense associated with the purchased businesses referred to above, including P&M, and the refinancing of our debt on February 4, 2000. We discuss this refinancing below in "Liquidity and Capital Resources." 19

Income Taxes. In the second quarter of 2000, our effective income tax rate decreased to 44.0% from 48.7% in the second quarter of 1999. This decrease was primarily the result of the proportionately lower non-deductible goodwill amortization resulting from our acquisitions in 1997 and 1998. Six Months ended June 30, 2000 and June 30, 1999 Revenues. Total revenues for the six months ended June 30, 2000 increased 58.8% to $65.6 million compared to $41.3 million for the six months ended June 30, 1999. For the six months ended June 30, 2000, revenues in our Financial Consulting division grew by $19.0 million, or 191.9%, to $28.9 million, compared to 1999. Our acquisition of P&M as of January 31, 2000 accounted for $13.3 million of this growth, with $5.7 million generated by internal growth. Litigation Consulting division revenues increased 25.6% from $13.6 million in 1999 to $17.1 million in 2000. The Applied Sciences division increased 10.7% to $19.7 million in revenues in the six months ended June 30, 2000, compared to $17.8 million in the first half of 1999. Direct Cost of Revenues. Direct cost of revenues consists primarily of billable employee compensation and related payroll benefits, the cost of outside consultants assigned to revenue-generating activities and other related expenses billable to clients. Direct cost of revenues improved to 50.0% of total revenues for the six months ended June 30, 2000, compared to 51.7% of total revenues for the six months ended June 30, 1999. We attribute this improvement primarily to the acquisition of P&M and productivity increases in the Applied Sciences and Financial Consulting divisions. Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of salaries and benefits paid to our office and corporate staff, as well as rent, marketing and corporate overhead expenses. These expenses were 27.8% of total revenues for the six months ended June 30, 2000, compared to 35.0% for the six months ended June 30, 1999. This improvement resulted primarily from the fact that P&M's selling, general and administrative expenses are a lower percentage of revenues and our significant revenue increases that exceeded the rate of increase of our selling, general and administrative expenses. Amortization of Goodwill. Amortization of goodwill increased from $1.1 million in the first half of 1999 to $2.2 million in the first half of 2000 as a result of our acquisition of P&M as of January 31, 2000. Interest Expense, net. Net interest expense increased to $5.5 million for the six months ended June 30, 2000, from $1.8 million for the six months ended June 30, 1999. Interest expense consisted primarily of net interest expense associated with the purchased businesses referred to above, including P&M, and the refinancing of our debt on February 4, 2000. We discuss this refinancing below in "Liquidity and Capital Resources." Income Taxes. In the first half of 2000, our effective income tax rate decreased to 44.0% from 47.2% in the first half of 1999. This decrease was primarily the result of the proportionately lower non-deductible goodwill amortization resulting from our acquisitions in 1997 and 1998. Extraordinary Item, net of taxes. As a result of the write-off of unamortized debt discount and deferred financing costs associated with the debt that we refinanced on February 4, 2000, we had an $869,000 loss on early extinguishment of debt, net of taxes in the first half of 2000. Future Assessment of Recoverability and Impairment of Goodwill In connection with our various acquisitions, including P&M, we recorded goodwill, which we are amortizing on a straight-line basis over periods of 15 to 25 years. These are the periods during which we estimate we will benefit from this goodwill. At June 30, 2000, unamortized goodwill was $93.7 million, or 61.4% of our total assets and 205.6% of our stockholders' equity. Goodwill arises when an acquirer pays more for a business than the fair value of the tangible and separately measurable intangible net assets. For financial reporting purposes, goodwill and all other intangible assets are amortized over the estimated period benefited. We have determined the period for amortizing goodwill based upon several factors, the most significant of which are the relative size, historical financial viability, growth trends of the acquired companies and the relative lengths of time these companies have been in existence. 20

Our management periodically reviews the carrying value and recoverability of our unamortized goodwill. If the facts and circumstances suggest that the goodwill may be impaired, we would adjust the carrying value of the goodwill. This would result in an immediate charge against income during the period of the adjustment and/or a shortening of the length of the remaining amortization period, which would result in an increase in the amount of goodwill amortization during the period of adjustment and each period thereafter until fully amortized. If we adjust goodwill, we cannot assure you that we will not have to make further adjustments for impairment and recoverability in future periods. The most significant of the factors we will consider in determining whether goodwill is impaired will be losses from operations, loss of customers and industry developments, including our inability to maintain market share, development of competitive products or services and imposition of additional regulatory requirements. Liquidity and Capital Resources In the first half of 2000, we generated $3.0 million of cash flow in our operations, compared to $3.2 million in the first half of 1999. This lower generation of cash was attributable to the increase in net working capital balances, including the working capital needs of P&M, reduced by the significant increase in net income excluding non-cash charges for depreciation and amortization and the extraordinary item of $1.5 million, before taxes. We anticipate that our cash flow from operations for the rest of 2000 will increase over 1999 in part by an increase in net income before non-cash charges. To finance the P&M acquisition, we entered into a senior credit facility, consisting of a $61.0 million amortizing term loan maturing through January 31, 2006, initially bearing interest at LIBOR plus specified margins ranging from 3.25% to 3.75%, which may decline based on our leverage ratio; a $7.5 million revolving credit facility, bearing interest at prime plus 1.75%, which also may decline based on our leverage ratio; and $30.0 million of senior subordinated notes maturing January 31, 2007, bearing 12% annual cash interest and 5% annual interest payable in kind (PIK). We obtained interest rate protection on $41.0 million of the $61.0 million term loan. The credit facilities are secured by all of our assets. We are required to comply with various specified financial covenants related to our operating performance and liquidity at the end of each quarter. We believe we will be in compliance with all covenants throughout 2000. We used the proceeds of these facilities, together with approximately $3.0 million of our existing cash, to purchase P&M and to refinance our existing debt of approximately $44.0 million. We also issued 604,504 shares of our common stock to retire approximately $2.7 million of our seller notes to several members of our senior management team whose businesses we had previously acquired. In connection with the senior subordinated notes, we issued the holders warrants to purchase approximately 670,000 shares of our common stock at an exercise price of $4.44 per share. The warrants expire ten years from the date of closing. At the same time, we retired warrants for 130,835 shares of our common stock issued in March 1999, in connection with our prior subordinated debt of $13.0 million, which we repaid as part of this refinancing. In 1998, we had borrowed $26.0 million under our prior $27.0 million long-term credit facility with a bank to provide the $26.4 million of cash needed for the initial payments in the acquisition of KK&A, KCI and SEA. We renegotiated this credit facility in March 1999, and repaid it on February 4, 2000. In March 1999, we issued $13.0 million of subordinated debentures, that we also repaid on February 4, 2000. In connection with the acquisition of businesses in 1997 and 1998, we issued seller notes that totaled $10.8 million at December 31, 1999. We repaid $8.1 million of these notes in the refinancing on February 4, 2000, and exchanged approximately $2.7 million for our common stock as noted in Note 6 of Notes to Consolidated Financial Statements. During the six months ended June 30, 2000, we spent $1.7 million for additions to property and equipment. This amount included expenditures for internal information systems that allow us to better manage our expanding operations. At June 30, 2000, we had no material commitments for the acquisition of property and equipment other than in March 2000, we entered into a lease agreement for a new office in New York City, which we expect to occupy before the end of the third quarter 2000, for which we estimate that we will spend about $2.2 million for leasehold improvements, furniture and fixtures. As our present Credit Facilities contain an annual limitation of capital expenditures, which for 2000 is $3.1 million, we will 21

exceed the limitation and intend to request a waiver from our debt-holders. We anticipate that the debt-holders will agree to our waiver request. We believe that cash generated from our operations will allow us to meet our obligations that mature in 2000 and thereafter, and also provide us the necessary cash resources we will need in the near term to fund our expanding operations. We will also explore appropriate opportunities to raise equity capital to repay such obligations in whole or part prior to maturity. Year 2000 Compliance During 1999, we implemented a four-stage process to assure Year 2000 compliance of all hardware, software and ancillary equipment that are date dependent. We completed all four phases and believe that the Year 2000 issue did not and will not cause us any significant operational problems. In addition, we contacted our important suppliers and customers and received positive statements of compliance from all significant third parties. To date, we are not aware of any Year 2000 non-compliance by our customers or suppliers that would have a material impact on our business. We are not aware of any other material Year 2000 non-compliance that would require repair or replacement or that could have a material effect on our financial position. We cannot assure you, however, that we will not face unanticipated Year 2000 non-compliance problems. If we do, we may have to spend material amounts and could face material disruptions to our business. We have developed a strategy to address these potential consequences and contingency plans to deal with any disruptions. Forward-Looking Statements Some of the statements under "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and elsewhere in this Quarterly Report contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements expressed or implied by such forward-looking statements not to be fully achieved. These forward-looking statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. These statements are only predictions. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report to conform such statements to actual results and do not intend to do so. Factors which may cause the actual results of operations in future periods to differ materially from intended or expected results include, but are not limited to (1) the loss of any key employees because the Company's business involves the delivery of professional services and is labor-intensive; (2) the loss of key officers of the Company, without 90 day replacement, which would constitute an event of default under the Company's Senior and Subordinated Credit Facilities; (3) the availability and terms of additional capital or debt financing to fund future acquisitions and for working capital purposes; (4) significant competition for business opportunities and acquisition candidates; (5) technological changes affecting our Litigation Consulting division; (6) the risks of professional liability; (7) any factor that diminishes our professional reputation; (8) fluctuations of revenue and operating income between quarters or termination of client engagements; (9) the successful management of the growth of our business; (10) the integration of P&M and of future acquisitions; and (11) risks associated with quantitative and qualitative market risks such as fluctuations in interest rates. 22

Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from the changes in the price of financial instruments. We are exposed to market risk from changes in interest rates, which could affect our future results of operations and financial condition. We manage our exposures to these risks through our regular operating and financing activities, including the use of derivative financial instruments. At June 30, 2000, $60.0 million of our long-term debt bore interest at variable rates. Accordingly, our earnings and after-tax cash flow are affected by changes in interest rates. To mitigate our exposure, management has utilized three year interest rate swap and cap agreements initially covering $41.0 million of this long-term debt. In the event of adverse changes in interest rates, management may take actions to further mitigate our exposure. Part II. OTHER INFORMATION Item 1. Legal Proceedings The Company is not presently a party to any material litigation. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of the Company was held on May 23, 2000. At the Annual Meeting, the stockholders elected James A. Flick, Jr. and Peter F. O'Malley as directors for a term of three years. The stockholders voted as follows: Number of Votes --------------- For Authority Withheld --- ------------------ James A. Flick, Jr. 3,280,849 0 Peter F. O'Malley 3,280,849 0 In addition, the terms of the following directors continued after the Annual Meeting: Jack B. Dunn, IV, Stewart J. Kahn, Scott S. Binder, Dennis J. Shaughnessy and George P. Stamas. At the Annual Meeting, the stockholders also ratified the selection of Ernst & Young LLP as independent accountants for the Company for the year ended December 31, 2000. The stockholders voted as follows: For Against Abstain Broker Non-Vote --- ------- ------- --------------- 3,283,081 5,669 400 0 Item 5. Other Information None. 23

Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27. Financial Data Schedule for six months ended June 30, 2000 (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K on February 15, 2000, regarding the Company's acquisition of P&M and refinancing of its indebtedness. On April 6, 2000, the Company amended the foregoing Report to add financial statements of P&M and pro forma financial information. 24

SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FTI CONSULTING, INC. Date: August 3, 2000 By /s/ Theodore I. Pincus ------------------------- THEODORE I. PINCUS Executive Vice President, Chief Financial Officer (principal financial and accounting officer) and Secretary 25

5 6-MOS DEC-31-2000 JUN-30-2000 2,991,935 0 42,034,364 1,846,792 0 46,142,392 21,054,692 12,165,463 152,655,262 23,473,131 0 0 0 64,660 45,507,142 152,655,262 65,598,015 65,598,015 32,809,834 58,764,411 0 0 5,585,740 6,833,604 3,006,786 3,826,818 0 868,541 0 2,958,277 0.48 0.43