Amendment to Form S-4

As filed with the Securities and Exchange Commission on January 13, 2006

Registration No. 333-129718


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

AMENDMENT NO. 1 to

Form S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


 

FTI CONSULTING, INC.

(Exact name of registrant as specified in charter)

 


 

Maryland   8742   52-1261113

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

500 East Pratt Street, Suite 1400

Baltimore, Maryland 21202

 

SUBSIDIARY GUARANTORS LISTED ON SCHEDULE A HERETO

(Address, including zip code, and telephone number, including area code, of registrants’ principal executive offices)

 


 

Theodore I. Pincus

Executive Vice President, Chief Financial Officer

FTI Consulting, Inc.

909 Commerce Road

Annapolis, Maryland 21401

(410) 224-8770

(Name, address, including zip code, and telephone number, including area code, of agent for service of process)

 


 

With a copy to:

David J. Johnson, Jr., Esq.

O’Melveny & Myers LLP

7 Times Square

New York, New York 10036

(212) 326-2000

 


 

Approximate date of commencement of proposed sale to the public:    As soon as practicable after this registration statement becomes effective.

 

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box:  ¨

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 


 

CALCULATION OF REGISTRATION FEE

 


Title of each Class of

Securities to be Registered

  

Amount

to be
Registered

  

Proposed Maximum
Offering Price

Per Note

    Proposed Maximum
Aggregate
Offering Price(1)
   Amount of
Registration Fee

7 5/8% Senior Notes due 2013

   $ 200,000,000    100 %   $ 200,000,000    $ 23,540

Guarantees of 7 5/8% Senior Notes due 2013

                         (2)

(1) The registration fee has been calculated pursuant to Rule 457(f)(2) under the Securities Act of 1933, as amended. The proposed maximum offering price is estimated solely for purpose of calculating the registration fee.
(2) Pursuant to Rule 457(n), no additional registration fee is payable with respect to the guarantees.

 


 

The registrants hereby amend this registration statement on such date or dates as may be necessary to delay its effective date until the registrants shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.



SCHEDULE A

 

Subsidiary Guarantor


  

State or Other Jurisdiction of
Incorporation or Organization


  

I.R.S. Employer

Identification Number


FTI, LLC

  

Maryland

   34-2025396

FTI Repository Services, LLC

  

Maryland

   02-0736098

Lexecon, LLC

  

Maryland

   20-0302099

Technology & Financial Consulting, Inc.

  

Texas

   76-0663038

Teklicon, Inc.

  

California

   94-3000753

FTI Cambio LLC

  

Maryland

   11-3750355

FTI IP, LLC

  

Maryland

   11-3755429

FTI Compass, LLC

  

Maryland

   42-1684514

FTI Investigations, LLC

  

Maryland

   42-1684517


The information in this prospectus is not complete and may be changed. We may not complete the exchange offer and issue these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell securities and it is not soliciting an offer to buy these securities in any state where the offer is not permitted.

 

Subject to completion, dated January 13, 2006

 

PROSPECTUS

 

LOGO

 

FTI Consulting, Inc.

 


 

Offer to Exchange

$200,000,000 Aggregate Principal Amount of 7 5/8% Senior Notes due 2013

that have been registered under the Securities Act of 1933, as amended,

for any and all outstanding

$200,000,000 Aggregate Principal Amount of 7 5/8% Senior Notes due 2013

 

We hereby offer, upon the terms and subject to the conditions set forth in this prospectus and the accompanying letter of transmittal (which together constitute the “exchange offer”), to exchange up to $200,000,000 aggregate principal amount of our registered 7 5/8% Senior Notes due 2013, which we refer to as the exchange notes, in denominations of $2,000 in principal amount and integral multiples of $1,000 in excess thereof, for a like principal amount of our outstanding 7 5/8% Senior Notes due 2013, which we refer to as the old notes. We refer to the old notes and the exchange notes collectively as the notes. The terms of the exchange notes are substantially identical to the terms of the old notes in all material respects, except for the elimination of some transfer restrictions, registration rights and special provisions relating to the old notes.

 

We will accept for exchange any and all old notes validly tendered and not withdrawn prior to 5:00 pm., New York City time, on [                    ], 2006 unless extended. We will not receive any proceeds from the exchange offer.

 

We have not applied, and do not intend to apply, for listing of the notes on any national securities exchange or automated quotation system.

 

You should carefully review the Risk Factors beginning on page 11 of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is                     , 2006


TABLE OF CONTENTS

 

     Page

Additional Information

   ii

Cautionary Notice Regarding Forward-Looking Statements

   iii

Prospectus Summary

   1

Risk Factors

   11

The Exchange Offer

   22

Use Of Proceeds

   31

Capitalization

   32

Selected Financial Data

   33

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

   35

Business

   62

Management

   77

Security Ownership Of Certain Beneficial Owners And Management

   91

Certain Relationships And Related Transactions

   94

Description Of Other Indebtedness

   95

Description Of The Exchange Notes

   99

Material U.S. Federal Income Tax Consequences

   140

Plan of Distribution

   141

Notice To Canadian Residents

   142

Legal Matters

   143

Independent Registered Public Accounting Firm

   143

Index To Financial Statements

   F-1

 

i


ADDITIONAL INFORMATION

 

This prospectus is part of a registration statement on Form S-4 that we have filed with the Securities Exchange Commission, or SEC, under the Securities Act. This prospectus does not contain all of the information set forth in the registration statement. For further information about us and the exchange notes, you should refer to the registration statement. This prospectus summarizes material provisions of contracts and other documents to which we refer you. Since this prospectus may not contain all of the information that you find important, you should review the full text of these documents. We have filed these documents as exhibits to our registration statement.

 

The registration statements (including exhibits and schedules thereto) and the annual, quarterly and special reports, proxy statements and other information we file with the SEC may be read and copied at the public reference facilities of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549. Please call the SEC at 1-888-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC’s web site at www.sec.gov or from our web site at www.fticonsulting.com. However, the information on our web site does not constitute a part of this prospectus.

 

You should rely only upon the information provided in this prospectus. We have not authorized anyone to provide you with different information. You should not assume that the information in this document is accurate as of any date other than that on the front cover of this prospectus.

 

ii


CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, compensation arrangements, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information and, in particular, may appear under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” When used in this prospectus, the words estimates, expects, anticipates, projects, plans, intends, believes, forecasts and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, management’s examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs and projections will result or be achieved.

 

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this prospectus are set forth in this prospectus, including under the heading “Risk Factors.” As stated elsewhere in this prospectus, such risks, uncertainties and other important factors relate to, among others:

 

    retention of qualified professionals and senior management;

 

    conflicts resulting in our inability to represent certain clients;

 

    former employees joining competing businesses;

 

    ability to manage utilization and pricing rates;

 

    damage to our reputation as a result of claims involving the quality of our services;

 

    competition;

 

    costs of integrating any future acquisitions;

 

    industry trends;

 

    changes in demand for our services; and

 

    changes in our leverage.

 

There may be other factors that may cause our actual results to differ materially from the forward-looking statements.

 

All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this prospectus and are expressly qualified in their entirety by the cautionary statements included in this prospectus. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances and do not intend to do so.

 

iii


PROSPECTUS SUMMARY

 

This summary contains basic information about FTI Consulting, Inc. It likely does not contain all the information that is important to you. You should read the entire prospectus, including the consolidated financial statements and related notes thereto, before making an investment decision. Except as otherwise indicated herein, or as the context may otherwise require, the references to “FTI,” “we,” “us” and “our” refer to FTI Consulting, Inc., a Maryland corporation and the issuer of the notes.

 

Our Company

 

We are a leading provider of forensic/litigation/technology (“forensic”), corporate finance/restructuring (“corporate finance”) and economic consulting services in the United States. Our experienced team of professionals, many of whom are widely recognized as experts in their respective fields, provide high-caliber consulting services to a broad range of clients. We began operations in 1982 as a consulting firm focused on providing forensic investigation, scientific and trial support services, and have evolved through internal growth and strategic acquisitions. We believe clients retain us because of our recognized expertise and capabilities in highly specialized areas, as well as our reputation for satisfying clients’ needs. During 2004, we staffed large and complex assignments for our clients which include 95 of the top 100 U.S. law firms, 20 of the 25 largest U.S. commercial banks and 181 corporate clients in the Fortune 500. Representative clients to date include Wyeth, Tower Automotive and the U.S. Departments of Justice and the Interior.

 

Our professionals have experience providing testimony in many areas, including: fraud, damages, lost profits, valuation, accountant’s liability and malpractice, contract disputes, patent infringement, price fixing, purchase price disputes, solvency and insolvency, fraudulent conveyance, preferences, disclosure statements, trademark and copyright infringement and the financial impact of government regulations. We have strong capabilities in highly specialized industries, including telecommunications, health care, transportation, utilities, chemicals, energy, commercial and investment banking, pharmaceuticals, tobacco, retail and information technology. As of September 30, 2005, we had 1,291 total employees, including 966 revenue-generating consultants, across 24 U.S. cities, London, England and Melbourne, Australia.

 

Forensic Practice

 

We are a leading provider of forensic consulting services in the United States. Through this practice we provide an extensive range of services to assist clients in all phases of litigation, including pre-filing, discovery, jury selection, trial preparation, expert testimony and other trial support services. Specifically, we help clients assess complex financial transactions, reconstruct events from incomplete and/or corrupt data, uncover vital evidence, identify potential claims and assist in the pursuit of financial recoveries and settlements. We also provide asset tracing and fraud investigation services. Through the use of proprietary information technology, we have demonstrated our ability to help control litigation costs, expedite the trial process and provide our clients with the ability to readily organize and access case-related data. Our repository services offer clients a secure extranet and web-hosting service for critical information. Our graphics services at trial and technology and electronic evidence experts assist clients in preparing for and presenting their cases in court. On February 28, 2005, we acquired the Ringtail Solutions Group (“Ringtail”), a leading developer of litigation support and knowledge management technologies for law firms, Fortune 500 corporate legal departments, government agencies and courts, which operates as part of our forensic practice.

 

As of September 30, 2005, we had 462 revenue-generating consultants in our forensic practice.

 

Corporate Finance Practice

 

We believe we are the largest corporate finance consulting practice in the United States. We analyze, recommend and implement strategic alternatives for our corporate finance clients, offering services such as

 

1


interim management in turnaround situations, rightsizing infrastructure, assessing long-term enterprise viability and business strategy consulting. We assist underperforming companies as they make decisions to improve their financial condition and operations. We lead and manage the financial aspects of in-court restructuring processes by offering services that include an assessment of the impact of a bankruptcy filing on the client’s financial condition and operations. We also assist our clients in planning for a smooth transition into and out of bankruptcy, facilitating the sale of assets and arranging debtor-in-possession financing. Our acquisition of Cambio Health Solutions (“Cambio”), a leading provider of management change solutions for hospital and health systems, in May of 2005, greatly enhanced our industry expertise in health care management and finance.

 

As of September 30, 2005, we had 333 revenue-generating consultants in our corporate finance practice.

 

Economic Consulting

 

We are a leading provider of economic consulting services in the United States and deliver sophisticated economic analysis and modeling of issues arising in mergers and acquisitions and other complex commercial and securities litigation. Our 2003 acquisition of the Lexecon business, a leading provider of economic consulting services in the United States, has greatly enhanced our market position within this practice and our ability to provide complex economic consulting services. Our statistical and economic experts help companies evaluate issues such as the economic impact of deregulation on a particular industry or the amount of commercial damages suffered by a business. We have deep industry experience in such areas as commercial and investment banking, telecommunications, energy, transportation and pharmaceuticals. Our professionals regularly provide expert testimony on damages, rates and prices, valuations, merger effects, intellectual property disputes in antitrust cases, regulatory proceedings and valuations. On January 6, 2006, we completed our acquisition of Competition Policy Associates, Inc., which we refer to as Compass, and related assets. Compass is one of the top competition economics consulting firms in the world, with offices in Washington, D.C. and San Francisco. Compass’ practice involves sophisticated economic analysis in the context of antitrust disputes, mergers and acquisitions, regulatory and policy debates, and general commercial litigation across a broad range of industries in the United States, Europe and the Pacific Rim.

 

As of September 30, 2005, we had 171 revenue-generating consultants in our economic consulting practice.

 

Corporate Information

 

We are a publicly traded company with our common stock listed on the New York Stock Exchange, or NYSE stock market, under the symbol “FCN.”

 

Our executive offices are located at 500 East Pratt Street, Suite 1400, Baltimore, Maryland 21202.

 

Recent Developments

 

On January 6, 2006, we completed our acquisition of all of the outstanding common stock of Compass and related assets from the stockholders of Compass. Compass is a top competition economics consulting firm, with offices in Washington, D.C. and San Francisco. Compass’ practice involves sophisticated economic analysis in the context of antitrust disputes, mergers and acquisitions, regulatory and policy debates, and general commercial litigation across a broad range of industries in the United States, Europe and the Pacific Rim. On the closing date, we paid approximately $71.5 million as estimated purchase price for the acquisition, of which approximately $45.8 million was paid in cash and approximately $25.7 million was paid through the delivery of 932,599 shares of common stock. The cash portion of the purchase price was financed from cash on hand. The purchase agreement provides for (A) post-closing purchase price adjustments based on actual adjusted earnings before interest and taxes, or EBIT, of the Business (as defined in the purchase agreement) as of December 31, 2005 and (B) post-closing cash adjustment payments based on actual Working Capital (as defined in the purchase agreement) as of December 31, 2005.

 

2


The Cambio Acquisition

 

On May 31, 2005, we completed our acquisition of Cambio. Founded in 1989 in Nashville, Tennessee, Cambio is a leading provider of management change solutions for hospital and health systems. The acquisition provides strategic, operational and turnaround management consulting services to academic medical centers, integrated healthcare delivery systems, stand-alone community hospitals, investor-owned hospitals and special medical facilities. The total acquisition cost was $42.3 million, consisting of net cash of $28.9 million, transaction costs of $0.5 million and 578,994 shares of our common stock valued at $12.9 million. The cash portion of the purchase price was financed by us from cash on hand.

 

The Ringtail Acquisition

 

On February 28, 2005, we completed our acquisition of Ringtail, a leading developer of litigation support and knowledge management technologies for law firms, Fortune 500 corporate legal departments, government agencies and courts. The total acquisition cost was $34.6 million, consisting of net cash of $19.2 million, transaction costs of $0.4 million and 784,109 shares of our common stock valued at $15.0 million plus an earn-out over the next three years based on future performance. The cash portion of the purchase price was financed by us from cash on hand and borrowings under our revolving line of credit.

 

3


The Exchange Offer

 

The following is a brief summary of the terms of the exchange offer. For a more complete description of the terms of the exchange offer, see “The Exchange Offer” in this prospectus.

 

Background of the Old Notes

On August 2, 2005, we issued $200.0 million aggregate principal amount of our 7 5/8% Senior Notes due 2013, or the old notes, to Goldman, Sachs & Co. and Banc of America Securities LLC, as the initial purchasers, in a transaction exempt from the registration requirements of the Securities Act. The initial purchasers then sold the old notes to qualified institutional buyers and outside the United States in reliance on Rule 144A and Regulation S under the Securities Act. Because the old notes have been sold in reliance on exemptions from registration, the old notes are subject to transfer restrictions. In connection with the issuance of the old notes, we entered into a registration rights agreement with the initial purchasers in which we agreed to deliver to you this prospectus and to use our commercially reasonable efforts to complete the exchange offer or to file and cause to become effective a registration statement covering the resale of the old notes.

 

Concurrently with our issuance of the old notes, we issued $150.0 million in aggregate principal amount of convertible senior subordinated notes due July 15, 2012 (the “convertible notes”).

 

The Exchange Offer

We are offering to issue up to $200.0 million aggregate principal amount of 7 5/8% Senior Notes due 2013, or the exchange notes, in exchange for an identical aggregate principal amount of old notes. Old notes may be exchanged only in denominations of $2,000 in principal amount and integral multiples of $1,000 in excess thereof. The terms of the exchange notes are identical in all material respects to the terms of the old notes, except that the exchange notes have been registered under the Securities Act and do not contain transfer restrictions, registration rights or additional interest provisions. We will issue and deliver the exchange notes as promptly as practicable after the expiration of the exchange offer.

 

Resale of Exchange Notes

Based on an interpretation by the SEC’s staff set forth in no-action letters issued to third parties unrelated to us, we believe that, with the conditions set forth below, exchange notes issued in the exchange offer may be offered for resale, resold and otherwise transferred by the holder of exchange notes without compliance with the registration and prospectus delivery requirements of the Securities Act, if:

 

    you, or the person or entity receiving the exchange notes, acquires the exchange notes in the ordinary course of business;

 

    neither you nor any such person or entity receiving the exchange notes is engaging in or intends to engage in a distribution of the exchange notes within the meaning of the federal securities laws;

 

   

neither you nor any such person or entity receiving the exchange notes has an arrangement or understanding with any

 

4


 

person or entity to participate in any distribution of the exchange notes; and

 

    neither you nor any such person or entity receiving the exchange notes is an “affiliate” of FTI Consulting, Inc., as that term is defined in Rule 405 under the Securities Act.

 

 

Each broker-dealer that is issued exchange notes in the exchange offer for its own account in exchange for old notes acquired by the broker-dealer as a result of market-making or other trading activities must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of the exchange notes issued in the exchange offer. See “Plan of Distribution.” We have not submitted a no-action letter to the SEC and there can be no assurance that the SEC would make a similar determination with respect to this exchange offer. If you do not meet the conditions described above, you may incur liability under the Securities Act if you transfer any exchange note without delivering a prospectus meeting the requirements of the Securities Act. We do not assume or indemnify you against that liability.

 

Expiration Date

5:00 p.m., New York City time, on                     , 2006, unless, in our sole discretion, we extend the exchange offer.

 

Withdrawal Rights

You may withdraw old notes at any time before 5:00 p.m., New York City time, on the Expiration Date. See “The Exchange Offer—Withdrawal Rights.”

 

Conditions to the Exchange Offer

The exchange offer is subject to certain customary conditions, including our determination that the exchange offer does not violate any law, statute, rule, regulation or interpretation by the staff of the SEC or any regulatory authority or other foreign, federal, state or local government agency or court of competent jurisdiction, some of which may be waived by us. See “The Exchange Offer—Conditions to the Exchange Offer.”

 

Consequences of Failure to Exchange

Old notes that are not tendered, or that are tendered but not accepted, will be subject to their existing transfer restrictions. We will have no further obligation, except under limited circumstances, to provide for registration under the Securities Act of the old notes. See “The Exchange Offer—Purpose and Effect.”

 

Material U.S. Federal Income Tax Consequences

The exchange of old notes for exchange notes by tendering holders should not be a taxable exchange for federal income tax purposes, and such holders should not recognize any taxable gain or loss or any interest income for federal income tax purposes as a result of such exchange. This does not constitute tax advice, and we encourage you to consult with your own tax and legal advisors. See “Certain United States Federal Income Tax Considerations.”

 

Exchange Agent

Wilmington Trust Company is serving as exchange agent in connection with the exchange offer.

 

5


The Exchange Notes

 

Issuer

FTI Consulting, Inc.

 

Securities Offered

$200.0 million principal amount of 7 5/8% Senior Notes due 2013.

 

Maturity Date

June 15, 2013.

 

Interest Rate

The exchange notes will accrue interest at the rate of 7 5/8% per annum, payable semiannually on June 15 and December 15, commencing on December 15, 2005.

 

Ranking

The exchange notes will be our unsecured senior obligations. The exchange notes will rank pari passu in right of payment with all of our existing and future senior indebtedness and senior in right of payment to all of our existing and future subordinated indebtedness. The exchange notes will be effectively subordinated to all of our existing and future secured indebtedness. The exchange notes, together with any old notes that remain outstanding, will constitute our only outstanding senior indebtedness. As of September 30, 2005, we had $91.4 million of revolving availability under our senior secured credit facility, all borrowings under which will constitute senior secured indebtedness.

 

Guarantees

Substantially all of our existing and future domestic subsidiaries will guarantee the exchange notes on a senior unsecured basis.

 

Optional Redemption

On or after June 15, 2009, we may redeem some or all of the exchange notes at the redemption prices set forth under “Description of Exchange Notes—Optional Redemption.” At any time before June 15, 2008, we may redeem up to 35% of the exchange notes at a redemption price of 107.625% of the principal amount, plus accrued and unpaid interest, if any, to the date of redemption with the proceeds of certain equity offerings.

 

Change of Control

In the event of a change of control, as described under “Description of Exchange Notes—Repurchase at the Option of Holders—Change of Control,” holders of the exchange notes may require us to purchase all or part of the exchange notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. If a change in control occurs, we must give holders of the exchange notes the opportunity to sell us their exchange notes at 101% of their face amount, plus accrued and unpaid interest.

 

 

We might not be able to pay you the required price for exchange notes you present to us at the time of a change of control, because:

 

    we might not have enough funds at that time; or

 

    the terms of our senior debt may prevent us from paying.

 

6


Restrictive Covenants

The indenture governing the exchange notes contains certain covenants that, among other things, limit our ability and that of our subsidiaries to:

 

    incur additional indebtedness or issue preferred stock;

 

    pay dividends or make other distributions in respect of our capital stock or to make other restricted payments;

 

    make certain investments;

 

    create certain liens;

 

    enter into certain transactions with affiliates;

 

    sell assets; or

 

    enter into certain mergers and consolidations.

 

 

In addition, under certain circumstances, we will be required to offer to purchase the exchange notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase, with the proceeds of certain asset sales. See “Description of Exchange Notes—Repurchase at the Option of Holders—Asset Sales.”

 

 

These covenants are subject to a number of important limitations, exceptions and qualifications that are described under “Description of Exchange Notes—Certain Covenants.”

 

Use of Proceeds

We will not receive any proceeds upon the completion of the exchange offer.

 

Risk Factors

See “Risk Factors” and other information in this prospectus for a discussion of factors that you should consider carefully before deciding to invest in the exchange notes.

 

7


Summary Consolidated Financial Data and Other Operating Information

 

We have derived the following summary historical consolidated income statement, cash flow and other financial data for the years ended December 31, 2002, 2003 and 2004 from our consolidated financial statements, which have been audited by Ernst & Young LLP, an independent registered public accounting firm. We derived the summary historical consolidated income statement, cash flow and other financial data for the nine months ended September 30, 2004 and 2005 and the summary consolidated balance sheet data as of September 30, 2005 from our unaudited consolidated financial statements. We prepared the summary unaudited interim financial data on a basis consistent with the audited consolidated financial statements as of and for the year ended December 31, 2004. In management’s opinion, the unaudited interim consolidated financial information reflects all adjustments that are necessary for a fair presentation of the results for the interim periods presented. All adjustments made were normal and recurring accruals. You should not expect the results of operations for the interim periods to necessarily be an indication of the results for a full year or any future period. You should read the following data in conjunction with “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

We have prepared the following summary unaudited pro forma consolidated income statement data for the year ended December 31, 2004 and for the nine months ended September 30, 2005 giving effect to the Transactions (as defined below), as if they had occurred on January 1, 2004.

 

As used in this prospectus, the term “Transactions” means, collectively:

 

    the offering of the old notes and the concurrent offering of the convertible notes on August 2, 2005 (which we refer to together as the “Offerings”);

 

    the repayment, using $142.5 million of the net proceeds from the Offerings, of all of our outstanding term loan borrowings under our senior secured credit facility;

 

    the repurchase, using approximately $125.4 million of the net proceeds from the Offerings, of shares of our common stock in connection with the Offerings; and

 

    our payment of fees and expenses in connection with the foregoing.

 

The unaudited pro forma consolidated financial statements have been derived by the application of pro forma adjustments to our historical consolidated financial statements for the year ended December 31, 2004 and the nine-months ended September 30, 2005. The unaudited pro forma adjustments are based on estimates, available information and certain assumptions that we believe are reasonable and may be revised as additional information becomes available. The pro forma adjustments include:

 

    The elimination of interest expense due to the repayment of amounts due under our senior secured credit facility, including the amortization and write-off of deferred financing costs attributable to our prepayment of term loans in the amount of $5.3 million for the year ended December 31, 2004 and $6.3 million for the nine months ended September 30, 2005.

 

    The addition of interest expense related to the Offerings (all of which are assumed to be outstanding for each period presented) in the amount of $22.6 million for the year ended December 31, 2004 and $17.0 million for the nine months ended September 30, 2005. The additional interest expense includes the amortization of deferred financing costs attributable to the Offerings.

 

    The adjustment to the income tax provision resulting from the adjustments above was calculated using our effective tax rate which was 42.1% for the year ended December 31, 2004 and 42.0% for the nine months ended September 30, 2005.

 

8


    The weighted average shares outstanding were adjusted to reflect the weighted average effect of the repurchase of 5.2 million shares of our common stock in connection with the Offerings. The convertible notes may have a dilutive effect on earnings per share in any period in which the market price of our common stock exceeds the conversion price for the convertible notes even if the convertible notes are not convertible.

 

The pro forma adjustments exclude the impact of the interest rate swap agreements we entered into subsequent to the closing of the Transactions and the forward contract portion of the accelerated stock repurchase transaction we finalized with one of the underwriters of the Offerings subsequent to the closing of the Transactions. For more detailed information, see notes 5 and 7 to our unaudited quarterly consolidated financial statements for the nine months ended September 30, 2005 appearing elsewhere in this prospectus.

 

We have presented the unaudited pro forma financial data for informational purposes only. You should not consider the pro forma consolidated income statement and balance sheet data to be indicative of what the actual results would have been had the transactions described above been completed on the dates indicated nor should you expect the pro forma results to be an indication of the results of operations or financial condition as of any future date or for any future period. You should read the following data in conjunction with “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

Average Billable Rate per Hour. Effective January 1, 2005, we modified our calculation of average billable rate per hour to include revenue realization adjustments and success fees earned as part of employee revenues. Average billable rates per hour for 2003 and 2004 have been adjusted to conform to our current presentation. The average billable rate per hour for 2002 is not available on a basis comparable to our current calculation. Prior to modifying our calculation, our average billable rate per hour was $311 for the year ended December 31, 2002, $363 for the year ended December 31, 2003, $354 for the year ended December 31, 2004 and $353 for the nine months ended September 30, 2004.

 

Ratio of Earnings to Fixed Charges. For the purpose of computing the ratio of earnings to fixed charges, earnings consist of income from continuing operations, before income taxes plus fixed charges. Fixed charges consist of:

 

    interest on all indebtedness and amortization of deferred financing costs; and

 

    the portion of rental expense that we believe is representative of interest.

 

9


    Year Ended December 31,

    Nine Months Ended

    Pro Forma

 
      Year Ended
December 31,
2004


    Nine Months
Ended
September 30,
2005


 
    2002

    2003

    2004

    September 30,
2004


    September 30,
2005


     
    (dollars in thousands, except per share and average billable rate data)  
                      (unaudited)     (unaudited)  

INCOME STATEMENT DATA:

                                                       

Revenues

  $ 224,113     $ 375,695     $ 427,005     $ 322,118     $ 373,720     $ 427,005     $ 373,720  

Direct cost of revenues

    108,104       176,429       234,970       176,994       202,878       234,970       202,878  

Selling, general and administrative expense

    51,647       81,761       106,730       76,348       90,030       106,730       90,030  

Amortization of other intangible assets

    1,033       3,680       6,836       4,220       4,309       6,836       4,309  
   


 


 


 


 


 


 


Operating income

    63,329       113,825       78,469       64,556       76,503       78,469       76,503  

Interest and other expenses, net

    (4,717 )     (4,196 )     (6,086 )     (4,178 )     (9,879 )     (23,388 )     (20,563 )

Litigation settlement gains (losses), net

    —         —         1,672       —         (991 )     1,672       (991 )
   


 


 


 


 


 


 


Income from continuing operations before income tax provision

    58,612       109,629       74,055       60,378       65,633       56,753       54,949  

Income tax provision

    23,704       44,838       31,177       25,117       27,566       23,893       23,079  
   


 


 


 


 


 


 


Income from continuing operations

    34,908       64,791       42,878       35,261       38,067       32,860       31,870  

Income (loss) from discontinued operations

    2,254       (5,322 )     —         —         —         —         —    
   


 


 


 


 


 


 


Net income

  $ 37,162     $ 59,469     $ 42,878     $ 35,261     $ 38,067     $ 32,860     $ 31,870  
   


 


 


 


 


 


 


Earnings per common share—net income

                                                       

Basic

  $ 1.16     $ 1.45     $ 1.02     $ 0.84     $ 0.91     $ 0.89     $ 0.85  
   


 


 


 


 


 


 


Diluted

  $ 1.09     $ 1.41     $ 1.01     $ 0.83     $ 0.90     $ 0.88     $ 0.83  
   


 


 


 


 


 


 


Weighted average number of common shares outstanding

                                                       

Basic

    32,031       40,925       42,099       42,135       41,760       36,883       37,671  

Diluted

    34,197       42,046       42,512       42,534       42,404       37,296       38,315  

CASH FLOW DATA:

                                                       

Net cash provided by operating activities

  $ 80,657     $ 100,177     $ 58,443     $ 30,232     $ 43,503                  

Net cash used in investing activities

    (156,386 )     (231,741 )     (13,693 )     (8,551 )     (57,658 )                

Net cash provided by (used in) financing activities

    72,779       127,423       (24,811 )     (18,459 )     103,708                  

OTHER FINANCIAL DATA:

                                                       

Capital expenditures

    8,777       10,612       11,939       6,694       12,077                  

SELECTED OPERATING INFORMATION:

                                                       

Revenue-generating professionals

    610       827       745       726       966                  

Utilization rates

    88 %     83 %     77 %     78 %     79 %                

Average billable rate per hour

    N/A     $ 347     $ 343     $ 341     $ 337                  

CREDIT STATISTICS:

                                                       

Ratio of earnings to fixed charges

    9.2 x     15.7 x     8.3 x     9.0 x     6.1 x     3.1 x     3.2 x

 

     September 30, 2005

    

(in thousands)

(unaudited)

BALANCE SHEET DATA:

      

Cash and cash equivalents

   $ 115,257

Working capital

     195,837

Total assets

     924,316

Long-term debt, including fair value hedge adjustment of $748

     349,252

Stockholders’ equity

     444,100

 

10


RISK FACTORS

 

In addition to the risks below, other risks and uncertainties not known to us or that we deem to be immaterial may also materially adversely affect our business operations. All of the following risks could materially and adversely affect our business, financial condition or results of operations. In such a case, you could lose all of or a part of your original investment. You should carefully consider the risks described below as well as other information and data included in this prospectus before making an investment decision with respect to the exchange notes.

 

Risks Related to Our Business

 

Our failure to retain qualified professionals or hire additional qualified professionals would have a negative effect on our future growth and financial performance as well as on client engagements, services and relationships.

 

Our business involves the delivery of professional forensic, corporate finance and economic consulting services. In the consulting business, professional acumen, trust and relationships are critical elements of a company’s ability to deliver high quality professional services. Our professionals have highly specialized skills. They also develop strong bonds with the clients they service. Our continued success depends upon our ability to attract and retain our staff of professionals who have expertise, reputations and client relationships critical to maintaining and developing our business. We face intense competition in recruiting and retaining highly qualified professionals that we must employ to continue our service offerings. As of September 30, 2005, substantially all of the senior managing directors had written employment agreements with us. Many of our employment agreements will expire between 2006 and 2008 because of the timing of our acquisitions and our 2004 initiative to enter into written agreements with our senior professionals. We monitor these expirations carefully to commence dialogues with professionals regarding their employment well in advance of the actual contract expiration dates. Our goal is to renew employment agreements when advisable and to stagger the expirations of the agreements if possible. Because of the high concentration of contract expirations between 2006 and 2008, we may experience high turnover or other adverse consequences, such as higher costs, loss of clients and engagements, or difficulty staffing engagements, if we are unable to renegotiate employment arrangements or the costs of retaining qualified professionals become higher. We cannot assure you that we will be able to attract and retain enough qualified professionals to maintain or expand our business. Moreover, competition has been increasing our costs of retaining or hiring qualified professionals, a trend which could harm our operating margins and results of operations.

 

We have begun to focus on renegotiating new long-term employment agreements with key senior managing directors. In connection with those discussions, we may offer a senior managing director the opportunity to participate in all or a portion of the benefits under an incentive compensation package that includes cash, which may be in the form of an unsecured general recourse forgivable loan, and significant additional payments upon the execution of and during the term of such employment agreement in the form of stock option and restricted stock awards, or alternatively, cash equivalents, if we do not have adequate equity securities available under stockholder approved equity plans. Any new employment agreements entered into with senior managing directors may not have staggered termination dates, so that we could face similar retention issues at the end of the terms of those agreements, although this risk could be reduced in light of our intention to include automatic one-year renewal options in the new employment agreements beginning at the end of their initial terms unless either party provides to the other prior notice that he or us do no not intend to renew. While we hope that we enter into new long-term employment contracts with a significant number of senior managing directors there is no assurance we will do so. The aggregate principal amount of all loans made to senior managing directors through 2006 could exceed $50.0 million, of which some or all of the principal amount and accrued interest could be forgivable by us upon the passage of time or certain other events, such as death or disability or termination by us without cause or by the employee with good reason. If all the other compensation features described above were to be implemented, the equity awards to such senior managing directors would also be significant.

 

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Our clients may preclude us from representing multiple clients in connection with the same engagement or competitive matter; our other practices may be precluded from accepting engagements from clients with respect to the same or competitive matter for which another practice has been engaged to provide services; and we may be required to forego potential business prospects in order to win engagements, which could harm our revenues, results of operations and client relationships and engagements.

 

We follow internal practices to assess real and potential relationships between and among our clients, engagements, practices and professionals. For example, we generally will not represent parties adverse to each other in the same matter. Under bankruptcy rules, we generally may not represent both a debtor and its creditors on the same engagement. Under federal bankruptcy laws, we are required to notify the U.S. Trustee of real or potential conflicts. The U.S. Trustee could find that we no longer meet the disinterestedness standard because of real or potential conflicts, and order us to resign and refund fees that have been paid to us. In some cases we could be ordered to refund fees that were not paid to us, but rather to the sellers of businesses that we acquired. We may not have recourse to recover any or all of any refunded fees from such sellers. Future relationships may require us to decline or resign from client engagements. New acquisitions may require us to resign from current client engagements because of relationship issues that are not currently identifiable. In addition, businesses that we acquire may not be free to accept engagements they could have accepted prior to our acquiring them because of relationship issues. Our inability to accept engagements from clients or prospective clients, represent multiple clients in connection with the same or competitive engagements, and any requirement that we resign from client engagements may negatively impact our revenues, revenue growth and results of operations.

 

If our former professionals go into business in competition with us or join our competitors, our client engagements and relationships could decline, financial performance and growth could slow or decline, and employee morale could suffer, and we may not have legal recourse.

 

Typically, our professionals have a close relationship with the clients they serve, not only based on their expertise but also on bonds of personal trust and confidence. Although our clients generally contract for services with us as a company, and not with individual professionals, in the event that professionals leave, such clients would not be prohibited from hiring those professionals to perform future engagements. Clients could also decide to transfer active engagements to professionals who leave. The engagement letters that we typically enter into with clients do not obligate them to continue to use our services. Typically, our engagement letters permit clients to terminate our services at any time. Furthermore, while in some cases, the termination of an ongoing engagement by a client could constitute a breach of the client’s contract with us, we could decide that preserving the overall client relationship is more important than seeking damages for the breach, and for that or other reasons that are not currently identifiable, decide not to pursue any legal remedies that might be available to us. We would make the determination whether to pursue any legal actions against a client on a case-by-case basis.

 

All of our written employment agreements with our senior managing directors include noncompetition and nonsolicitation arrangements. These noncompetition agreements have generally been drafted to comply with state “reasonableness” standards. However, states generally interpret noncompetition clauses narrowly. Therefore, a state may hold certain restrictions on competition to be unenforceable. In the case of former Ringtail employees residing in Australia, the noncompetition provisions have been drafted to comply with Australian law. In the event an employee departs, we will consider any legal remedies we may have against such professional on a case-by-case basis. However, we may decide that preserving cooperation and a professional relationship, or other concerns, outweigh the benefits of any possible legal recovery. Therefore, we may determine not to pursue legal action, even if available.

 

In the first quarter of 2004, we experienced the unanticipated departures of about 60 professionals in our former FTI/Policano & Manzo restructuring practice. We have strived to build relationships and reassure our professionals and clients of our interest in them and our ability to provide services comparable to those provided by the departing professionals. Those departures had a negative impact on our financial results for 2004. In the fourth quarter of 2004, we entered into a monetary settlement of arbitration proceedings brought against those former employees and the company they formed to compete with us.

 

12


Our profitability will suffer if we are not able to manage utilization and pricing rates of our professional staff.

 

We calculate the utilization rate for our professional staff by dividing the number of hours that all of our professionals worked on client assignments during a period by the total available working hours for all of our professionals, assuming a 40-hour work week and a 52-week year. Available working hours include vacation and professional training days, but exclude holidays. The hourly rates we charge our clients for our services and the number of hours our professionals are able to charge our clients for our services are affected by the level of expertise and experience of the professionals working on a particular engagement and, to a lesser extent, the pricing and staffing policies of our competitors. If we fail to manage our utilization rates for our professionals or maintain or increase the hourly rates we charge our clients for our services, we may experience adverse consequences, such as non-revenue generating professionals, the loss of clients and engagements and the inability to appropriately staff engagements, and our profitability will suffer.

 

Demand for our corporate finance professionals declined in early 2004 primarily as a result of general economic conditions, including the strengthening of the economy, the availability of credit, low interest rates, fewer mergers and acquisitions and fewer large bankruptcy proceedings. Our operating profit margins declined in 2004 due to the slow down in our corporate finance business and due to lower utilization rates in that practice and our recently acquired businesses relative to our historical experiences. We also experienced lower utilization in our forensic practice during late 2003 and the early part of 2004 resulting from the absorption of the professionals who joined us in connection with our acquisition of the dispute advisory services of KPMG LLP. Many of the billable professionals that resigned during the first quarter of 2004 were among our highest utilized and billing professionals, which also contributed to our lower utilization rates and operating profit margins in 2004.

 

We rely heavily on our senior management team and practice leaders for the success of our business.

 

We rely heavily on our senior management team and practice leaders to manage our practices. Given the highly specialized nature of our services and the scale of our operations, these people must have a thorough understanding of our service offerings as well as the skills and experience necessary to manage a large organization. If one or more members of our senior management team or our practice leaders leave and we cannot replace them with a suitable candidate quickly, we could experience difficulty in managing our business properly, and this could harm our business prospects, client relationships, employee morale and results of operations.

 

Any claims involving the quality of our services could harm our overall professional reputation, which could harm our ability to compete for new business opportunities, retain and attract clients and engagements, and hire and retain qualified professionals.

 

Many of our engagements involve complex analysis and the exercise of professional judgment. Therefore, we are subject to the risk of professional liability. Often, our engagements involve matters that, if resolved unfavorably, may result in a severe impact on the client’s business, cause the client a substantial monetary loss or prevent the client from pursuing business opportunities. Since our ability to attract new clients and generate engagements depends upon our ability to maintain a high degree of client satisfaction as well as our reputation among industry professionals, any claims against us involving the quality of our services may be more damaging than similar claims against businesses in other industries.

 

We do not generally indemnify our clients; however, in certain cases, such as with clients who are governmental agencies or authorities, we may agree to indemnify them and their affiliates against third party liabilities. Indemnification provisions are negotiated on a contract-by-contract basis and in some cases may be reciprocal or may be coupled with limitations on the amount and type of damages that can be recovered.

 

Any claim by a client or a third party against us could expose us to professional or other liabilities in excess of our insurance limits. We maintain a limited amount of liability insurance. The damages and/or expenses

 

13


resulting from any successful claims against us, for indemnity or otherwise, in excess of our insurance limits would have to be borne directly by us and could seriously harm our profitability, financial resources and reputation.

 

Our clients may terminate our engagements with little or no notice, which may cause us to experience unexpected declines in our profitability and utilization.

 

Much of our business involves large client engagements that we staff with a substantial number of professionals. The engagement letters that we typically enter into with clients do not obligate them to continue to use our services. Typically, our engagement letters permit clients to terminate our services at any time. If our clients unexpectedly cancel engagements with us or curtail the scope of our engagements, we may be unable to replace the lost revenues from those engagements, quickly eliminate costs associated with those engagements, or quickly find other engagements to utilize our professionals. Any decrease in revenues without a corresponding reduction in our costs will likely harm our profitability.

 

We face intense competition in our business. If we fail to compete effectively, we may miss new business opportunities or lose existing clients and our revenues and profitability may decline. Parties from whom we acquire assets may reenter the marketplace to compete with us in the future.

 

The market for our consulting services is highly competitive. Our competitors range from large organizations, such as the national accounting firms and the large management consulting companies that offer a broad range of consulting services, to small firms and independent contractors that provide one specialized service. Some of our competitors have significantly more financial resources, larger professional staffs and greater brand recognition than we do. Since our business depends in a large part on professional relationships, our business has low barriers of entry for professionals wanting to start their own firms. In addition, it is relatively easy for professionals to change employers. We cannot assure you that we will continue to compete successfully for new business opportunities or retain our existing clients or professional employees.

 

In connection with our acquisitions, we generally obtain nonsolicitation agreements from the professionals we hire as well as noncompetition agreements from senior managers and professionals. In some cases we enter into noncompetition or nonsolicitation arrangements generally with sellers. We cannot assure you that any one or more of the parties from whom we acquire assets or a business who do not join us, or persons who join us if upon expiration or breach of their agreements not to compete or solicit will not compete with us in the future. Also, the duration of those agreements are limited ranging from three to five years after the acquisition date. Certain activities may be carved out of or otherwise may not be prohibited by those arrangements. Also, in some cases we may agree to restraints on our ability to compete with the sellers of those businesses with respect to certain practice areas or locations. Competition may harm our expected revenues growth and results of operations and cause the actual profitability of the business to differ materially from our expectations and the expectations of the investing public. A failure to meet these expectations could cause the price of our stock to decline. In connection with the acquisition in 2002 of certain assets and liabilities of the U.S. Business Recovery Services (“BRS”) division of PricewaterhouseCoopers LLP (“PwC”), we obtained a three-year agreement from PwC not to compete with us. On December 23, 2003, we filed an action in the Supreme Court of the State of New York against PwC seeking enforcement of the noncompetition covenants, damages, and injunctive and other equitable relief. On November 3, 2004, we entered into a settlement and release in the action, which enforced the current non-compete until August 31, 2005.

 

We may have difficulty integrating our acquisitions, or convincing clients to allow assignment of their contracts to us, which may cause our client engagements to decline, with a consequent detrimental effect on our financial results.

 

The process of integrating our acquisitions into our existing operations may result in unforeseen operating difficulties and may require significant financial, operational and managerial resources that would otherwise be

 

14


available for the operation, development and expansion of our existing business. To the extent that we have miscalculated our ability to integrate and properly manage any or all of our acquisitions, we may have difficulty in achieving our operating and strategic objectives.

 

A substantial amount of our growth has been due to acquisitions. During 2002, we acquired the BRS practice. During 2003, we completed three significant acquisitions: Lexecon, the former dispute advisory business of KPMG LLP and Ten Eyck, all of which occurred in the fourth quarter. On February 28, 2005, we acquired substantially all of the assets and assumed certain liabilities of the Ringtail group. Ringtail is a leading developer of litigation support and knowledge management technologies for law firms. On May 31, 2005, we acquired substantially all of the assets and assumed certain liabilities of Cambio from certain of the individual owners of Cambio Partners, LLC (“Cambio Partners”), the direct parent of Cambio, and certain of its investors. Cambio is a leading provider of change management solutions for hospital and health systems. On January 6, 2006, we completed our acquisition of all of the outstanding common stock of Competition Policy Associates, Inc., which we refer to as Compass, and related assets from the stockholders of Compass. Compass is a top competition economics consulting firm, with offices in Washington, D.C. and San Francisco. Compass’ practice involves sophisticated economic analysis in the context of antitrust disputes, mergers and acquisitions, regulatory and policy debates, and general commercial litigation across a broad range of industries in the United States, Europe and the Pacific Rim. The extent of integration of these businesses at this time differs. Some of the integration challenges we face include differences in corporate cultures and management styles, additional or conflicting government regulation, disparate company polices and practices and client conflict issues. All of our acquisitions in 2003, our Ringtail and Cambio acquisitions in 2005 and a portion of our acquisition of the Compass business in 2006, were structured as asset transactions. Asset transactions generally necessitate receipt of third party consents to assign client engagements. All clients might not affirmatively consent to an assignment. In addition, in some cases there are no written client contracts memorializing an engagement. Such engagements will only continue at the pleasure of those clients. In certain cases, such as government contracts and bankruptcy engagements, the consents of clients cannot be solicited until after the acquisition has closed. Further, such contracts may be subject to security clearance requirements or bidding provisions with which we might not be able to comply. There is no assurance that local, state and federal governments will agree to novate their contracts to us. In addition, in an engagement that involves a bankruptcy case, we must make a filing with the applicable U.S. Trustee, at which time such U.S. Trustee may find that we are no longer disinterested. In connection with such bankruptcy cases, we may be required to resign and to refund fees collected in connection with those engagements. We could be responsible for returning fees even if they were not paid to us, but rather to the company from whom we acquired the business. In some cases, we may not have legal recourse to demand that the seller of the business reimburse us.

 

Our corporate finance practice has an increased risk of fee nonpayment.

 

Many of our clients have engaged us because they are experiencing financial distress. We recognize that these clients may not have sufficient funds to continue operations or to pay for our services. We typically do not receive retainers before we begin performing services on a client’s behalf in connection with a significant amount of our corporate finance business. In the cases that we have received retainers, we cannot assure you that the retainers will adequately cover our fees for the services we perform on behalf of these clients. We are not always able to obtain retainers from clients in bankruptcy as the bankruptcy court must approve our retainers for those clients. Even if a bankruptcy court approves our retainer or engagement, a bankruptcy court has the discretion to require us to return all, or a portion of, our fees. Therefore, we face the risk of nonpayment, which can result in write-offs. For the three years ended December 31, 2004, and the nine months ended September 30, 2005 we wrote off a total of approximately $17.2 million and $2.3 million, respectively, of uncollectible fees in all practices. Our total write-offs exclude unbilled fee adjustments and amounts attributable to our applied sciences practice, which we sold in 2003. More write-offs than we expect in any period would have a negative impact on our results of operations.

 

15


If the size, complexity and number of debt defaults, bankruptcy or restructuring actions or other factors affecting demand for our corporate finance services declines, our revenues and profitability could suffer.

 

Our corporate finance practice provides various restructuring and restructuring-related services to companies in financial distress or their creditors or other stakeholders. A number of factors affect demand for this practice’s services. These include:

 

    the availability and level of lending activity, interest rates and over-leveraging of companies;

 

    over-expansion by various businesses;

 

    merger and acquisition activity;

 

    management problems; and

 

    the general economic factors resulting in the decline in the economy in the U.S.

 

Notwithstanding increases in debt, we have also seen a decline of the mega-bankruptcy cases, resulting in a greater portion of our business being comprised of engagements relating to bankruptcy and restructuring matters involving mid-size companies, primarily as a result of general economic conditions, including the strengthening of the economy, the availability of credit, low interest rates and fewer mergers and acquisitions. In our experience, mid-size bankruptcy and restructuring engagements are more susceptible to cyclical factors such as holidays and vacations. The shift to mid-size engagements could result in lower utilization during the third and fourth quarters due to these factors. Declines in demand for our restructuring, turnaround and bankruptcy services as well as smaller engagements could result in lower revenues and decrease our overall profitability.

 

If we fail to find suitable acquisition candidates, or if we are unable to take advantage of opportunistic acquisition situations, our ability to expand may be curtailed.

 

The number of suitable acquisition candidates may decline if the competition for acquisition candidates increases. As a result, we may be unable to make acquisitions or be forced to pay more or agree to less advantageous acquisition terms for the companies that we are able to acquire. Alternatively, at the time an acquisition opportunity presents itself, internal and external pressures (including, but not limited to, borrowing capacity under our senior secured credit facility or the availability of alternative financing), may cause us to be unable to pursue or complete an acquisition. Our ability to grow our business, particularly through acquisitions, may depend on our ability to raise capital by selling equity or debt securities or obtaining additional debt financing. We cannot assure you, however, that we will be able to obtain financing when we need it or on terms acceptable to us. In any case, we may be unable to grow our business or expand our service offerings as quickly as we have in the past, and our profitability may decline.

 

We may not manage our growth effectively, and our profitability may suffer.

 

We have experienced rapid growth in recent years. This rapid expansion of our business may strain our management team, human resources and information systems. We cannot assure you that we can successfully manage the integration of any businesses we may acquire or that they will result in the financial, operational and other benefits that we anticipate. To manage our growth successfully, we may need to add qualified managers and employees and periodically update our operating, financial and other systems, as well as our internal procedures and controls. We also must effectively motivate, train and manage a larger professional staff. Such expansion may result in significant expenditures. If we fail to add qualified managers or manage our growth effectively, our business, results of operations and financial condition may be harmed.

 

Our revenues, operating income and cash flows are likely to fluctuate.

 

We have experienced fluctuating revenues, operating income and cash flows and expect that this will occur from time to time in the future. We may experience fluctuations in our annual or quarterly revenues and operating income because of the timing of our client assignments, the types of assignments we are working on at different times, hiring trends and decreased productivity because of vacations taken by our professionals. This means our profitability will likely decline if we experience an unexpected variation in the number or timing of client assignments or during the third quarter when substantial numbers of professionals take vacations, which

 

16


reduces their utilization rates. We may also experience future fluctuations in our cash flows because of the timing of the payment of incentive compensation to our professionals, which we generally pay during the first quarter of each year. Also, the timing of any future acquisitions and the cost of integrating them may cause fluctuations in our operating results.

 

A significant portion of Lexecon’s revenues results from relationships with clients and industry professionals maintained by Daniel Fischel, Dennis Carlton and Joseph P. Kalt. The loss of one or more of them could decrease our revenues and our profitability.

 

The success of our acquisition of Lexecon will depend upon our retention of Daniel Fischel, Dennis Carlton and Joseph P. Kalt. They have reputations in the field of economics for highly specialized expertise as well as important relationships with existing clients and industry professionals. Their reputations and relationships are critical to retaining and gaining new client engagements, particularly large, complex matters. We have written five-year employment agreements with Messrs. Fischel, Carlton and Kalt. The loss of Messrs. Fischel, Carlton or Kalt could harm the success of our acquisition of the Lexecon practice.

 

We have a different system of governance and management from the companies from whom we made our acquisitions, which could cause senior professionals who joined us from the acquired companies to leave us.

 

Lexecon, the dispute advisory services, or DAS business, of KPMG LLP that we acquired in 2003, and the BRS business shared many of the management practices and policies of their parent companies. We believe our management practices and policies differ from the practices and policies of those companies, including, but not limited to, the manner in which potential conflicts of interest were handled. In some cases, these different management practices and policies may lead to workplace dissatisfaction on the part of those professionals with our way of conducting business. The loss of one or more key professionals may harm our business and results of operations.

 

Risks Related to the Exchange Notes and the Exchange Offer

 

Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under the exchange notes.

 

We have a significant amount of indebtedness. As of September 30, 2005, we had total indebtedness of $350.0 million and an additional $100.0 million of revolving availability under our senior secured credit facility, subject to $8.6 million of outstanding letters of credit.

 

Our substantial indebtedness could have important consequences to you. For example, it could:

 

    make it more difficult for us to satisfy our obligations with respect to the exchange notes;

 

    increase our vulnerability to adverse economic and industry conditions;

 

    require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund acquisitions, working capital, capital expenditures, research and development efforts and other general corporate purposes;

 

    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

    place us at a competitive disadvantage compared to our competitors that have less debt;

 

    limit our ability to borrow additional funds; and

 

    limit our ability to make future acquisitions.

 

In addition, our senior secured credit facility and the indenture governing the exchange notes contains restrictive (and, in the case of the senior secured credit facility, financial) covenants that limit our ability to engage in activities that may be in our best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts.

 

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Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage.

 

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the indenture do not fully prohibit us or our subsidiaries from doing so. As of September 30, 2005, we had an additional $100.0 million of revolving availability under our senior secured credit facility, subject to $8.6 million of outstanding letters of credit. Any borrowings under our senior secured credit facility would be effectively senior to the exchange notes to the extent of the value of the assets securing the senior secured credit facility. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify. See “Description of Other Indebtedness.”

 

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

 

Our ability to make payments on and to refinance our indebtedness, including the exchange notes, and to fund capital expenditures, acquisitions and research and development efforts will depend on our ability to generate cash. This, to a certain extent, is subject to economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

 

Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our senior secured credit facility will be adequate to meet our liquidity needs for at least the next few years.

 

We cannot assure you, however, that our business will generate sufficient cash flows from operations, that anticipated cost savings and operating improvements will be realized on schedule or that future borrowings will be available to us under our senior secured credit facility or that we can obtain alternative financing proceeds in an amount sufficient to enable us to pay our indebtedness, including the exchange notes, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, including the notes, on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including our senior secured credit facility or the notes, on commercially reasonable terms or at all.

 

Your right to receive payments on the exchange notes is effectively subordinated to the rights of our existing and future secured creditors.

 

Holders of our secured indebtedness will have claims that are prior to your claims as holders of the exchange notes to the extent of the value of the assets securing that other indebtedness. Notably, we and certain of our subsidiaries are parties to the senior secured credit facility, which are secured by liens on substantially all of our assets and the assets of the guarantors. In the event of any distribution or payment of our assets in any foreclosure, dissolution, winding-up, liquidation, reorganization, or other bankruptcy proceeding, holders of secured indebtedness will have prior claim to those of our assets that constitute their collateral. Holders of the exchange notes will participate ratably with all holders of our unsecured indebtedness that is deemed to be of the same class as the exchange notes, and potentially with all of our other general creditors, based upon the respective amounts owed to each holder or creditor, in our remaining assets. In any of the foregoing events, we cannot assure you that there will be sufficient assets to pay amounts due on the exchange notes. As a result, holders of exchange notes may receive less, ratably, than holders of secured indebtedness.

 

As of September 30, 2005, we had $100.0 million of revolving availability under our senior secured credit facility, subject to $8.6 million of outstanding letters of credit. Our senior secured credit facility is secured by substantially all of our assets. See “Description of Other Indebtedness.” In addition we have $0.1 million in outstanding capital lease obligations.

 

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The convertible notes are our subordinated obligations, but will mature prior to the exchange notes. In addition, we may be required to pay substantial amounts in cash to holders of the convertible notes at the time of conversion prior to maturity. As a result of making cash payments on the convertible notes, we may not have sufficient cash to pay the principal of, or interest on, the exchange notes.

 

The exchange notes are senior in right of payment to the convertible notes. However, the convertible notes will mature on July 15, 2012, one year before the maturity of the exchange notes. Therefore, we will repay the holders of the convertible notes $150.0 million before we are required to repay principal of the exchange notes at maturity. In addition, we may be required to pay substantial amounts in cash to holders of the convertible notes prior to their stated maturity at the time of conversion. The indenture governing the exchange notes generally allows for these payments, and our senior secured credit facility permits these payments in some, but not all, circumstances. See “Description of Other Indebtedness—Convertible Notes.” However, payments of the convertible notes upon conversion could be construed to be a prepayment of principal on subordinated debt, and our existing and future senior debt may prohibit us from making those payments, or may restrict our ability to do so by requiring that we satisfy certain covenants relating to the making of restricted payments. If we are unable to pay the conversion consideration, we could seek consent from our senior creditors to make the payment. If we are unable to obtain their consent, we could attempt to refinance the debt. If we were unable to obtain consent or refinance the debt, we would be prohibited from paying the cash portion of the conversion consideration, in which case we would have an event of default under the indenture governing the convertible notes. An event of default under the convertible note indenture most likely would constitute an event of default under the indenture governing the exchange notes and under our senior secured credit facility.

 

The indenture governing the convertible notes provides that the convertible notes are convertible only upon the occurrence of certain events. However, we generally will be unable to control timing of any conversion of the convertible notes. As a result of making cash payments on the convertible notes, we may not have sufficient cash to pay the principal of, or interest on, the exchange notes. For example, if a significant amount of convertible notes were converted shortly before a regular interest payment date for the exchange notes offered hereby, we may not have sufficient cash to make the interest payment on the exchange notes. We may attempt to borrow under our senior secured credit facility to fund interest payments on the exchange notes, but there can be no assurance that we will have sufficient availability under that or any successor facility or that our credit facility lenders will allow us to draw on that facility for the purpose of making payments on the senior notes.

 

Your right to receive payments on the exchange notes could be adversely affected if any of our non-guarantor subsidiaries declare bankruptcy, liquidate, or reorganize.

 

Some but not all of our subsidiaries will guarantee the exchange notes. In the event of a bankruptcy, liquidation or reorganization of any of our non-guarantor subsidiaries, holders of their indebtedness and their trade creditors will generally be entitled to payment of their claims from the assets of those subsidiaries before any assets are made available for distribution to us.

 

As of September 30, 2005, the notes were effectively junior to $0.3 million of indebtedness and other liabilities (including trade payables) of our non-guarantor subsidiaries. Our non-guarantor subsidiaries generated 0.7% of our consolidated revenues in the nine-month period ended September 30, 2005 and held 3.3% of our consolidated assets as of that date.

 

Federal and state statutes allow courts, under specific circumstances, to void guarantees and require note holders to return payments received from guarantors.

 

Under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee can be voided, or claims in respect of a guarantee can be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee:

 

    received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee; and

 

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    was insolvent or rendered insolvent by reason of such incurrence; or

 

    was engaged in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital; or

 

    intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.

 

In addition, any payment by that guarantor pursuant to its guarantee can be voided and required to be returned to the guarantor, or to a fund for the benefit of the creditors of the guarantor.

 

The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a guarantor would be considered insolvent if:

 

    the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets; or

 

    if the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

 

    it could not pay its debts as they become due.

 

On the basis of historical financial information, recent operating history and other factors, we believe that each guarantor, after giving effect to its guarantee of these notes, will not be insolvent, will not have unreasonably small capital for the business in which it is engaged and will not have incurred debts beyond its ability to pay such debts as they mature. We cannot assure you, however, as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard.

 

We may not have the ability to raise the funds necessary to finance the change of control offer required by the indenture.

 

Upon the occurrence of certain specific kinds of change of control events, we will be required to offer to repurchase all outstanding exchange notes at 101% of the principal amount thereof plus accrued and unpaid interest and special interest, if any, to the date of repurchase. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of notes or that restrictions in our senior secured credit facility will not allow such repurchases. In addition, certain important corporate events, such as leveraged recapitalizations, that would increase the level of our indebtedness, would not constitute a “change of control” under the indenture. See “Description of the Exchange Notes—Repurchase at the Option of Holders.”

 

If an active trading market does not develop for these notes you may not be able to resell them.

 

There is no existing trading market for the exchange notes. We do not intend to list the old notes or the exchange notes on any national securities exchange or to seek the admission of the notes for quotation through the National Association of Securities Dealers Automated Quotation System. Although the initial purchasers of the old notes have informed us that they intend to make a market in the exchange notes, they are not obligated to do so and may discontinue such market-making activity at any time without notice. In addition, market-making activity will be subject to the limits imposed by the Securities Act and the Exchange Act and may be limited during the exchange offer and the pendency of any shelf registration statement. Although the old notes are eligible for trading in The PORTAL Market, there can be no assurance as to the development or liquidity of any market for the old notes or the exchange notes, the ability of the holders of the old notes or the exchange notes to sell their old notes or the exchange notes or the price at which the holders would be able to sell their old notes or the exchange notes.

 

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The liquidity of any trading market for the exchange notes will depend upon the number of holders of the exchange notes, our performance, the market for similar securities, the interest of securities dealers in making a market in the exchange notes and other factors. As a result, you cannot be sure that an active trading market will develop for the exchange notes.

 

In addition, the market for non-investment grade debt historically has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the old notes and the exchange notes. The market for the old notes or exchange notes, if any, may be subject to similar disruptions that could adversely affect their value and liquidity.

 

Risks Related to Notes Not Exchanged

 

If you do not properly tender your old notes, your ability to transfer those old notes will be adversely affected.

 

We will only issue exchange notes in exchange for old notes that are timely received by the exchange agent, together with all required documents, including a properly completed and signed letter of transmittal. Therefore, you should allow sufficient time to ensure timely delivery of the old notes, and you should carefully follow the instructions on how to tender your old notes. See “The Exchange Offer—Procedures for Tendering.” Neither we nor the exchange agent are required to tell you of any defects or irregularities with respect to your tender of the old notes. If you do not tender your old notes or if we do not accept your old notes because you did not tender your old notes properly, then, after we consummate the exchange offer, you may continue to hold old notes that are subject to the existing transfer restrictions. In addition, if you tender your old notes for the purpose of participating in a distribution of the exchange notes, you will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the exchange notes. If you are a broker-dealer that receives exchange notes for your own account in exchange for old notes that you acquired as a result of market-making activities or any other trading activities, you will be required to acknowledge that you will deliver a prospectus in connection with any resale of those exchange notes. After the exchange offer is consummated, if you continue to hold any old notes, you may have difficulty selling them because there will be fewer old notes outstanding. In addition, if a large number of old notes are not tendered or are tendered improperly, the limited number of exchange notes that would be issued and outstanding after we consummate the exchange offer could lower the market price of the exchange notes.

 

If you do not exchange your old notes, your old notes will continue to be subject to the existing transfer restrictions and you may be unable to sell your old notes.

 

We did not register the old notes under the Securities Act, nor do we intend to do so following the exchange offer. Old notes that are not tendered will therefore continue to be subject to the existing transfer restrictions and may be transferred only in limited circumstances under the securities laws. If you do not exchange your old notes, you will lose your right to have your old notes registered under the federal securities laws, except in limited circumstances. As a result, you will not be able to offer or sell old notes except in reliance on an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws.

 

Because we anticipate that most holders of old notes will elect to exchange their old notes, we expect that the liquidity of the market for any old notes remaining after the completion of the exchange offer may be substantially limited. Any old notes tendered and exchanged in the exchange offer will reduce the aggregate principal amount of the old notes outstanding. Following the exchange offer, if you did not tender your old notes you generally will not have any further registration rights. Accordingly, the liquidity of the market for any old notes could be adversely affected and you may be unable to sell them.

 

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THE EXCHANGE OFFER

 

Purpose and Effect

 

On August 2, 2005, we entered into a registration rights agreement with the initial purchasers of the old notes, which requires us to file a registration statement under the Securities Act with respect to the old notes and, upon the effectiveness of the registration statement, offer to the holders of the old notes the opportunity to exchange their old notes for a like principal amount of exchange notes. The exchange notes will be issued without a restrictive legend and generally may be reoffered and resold without registration under the Securities Act. The registration rights agreement further provides that we must use our commercially reasonable efforts to have the registration statement declared effective by the SEC by February 28, 2006 and must use our commercially reasonable efforts to issue on or prior to 30 business days, or longer, if required by the federal securities laws, after the date on which the registration statement was declared effective by the SEC, exchange notes in exchange for all old notes tendered prior thereto in the exchange offer.

 

Except as described below, upon the completion of the exchange offer, our obligations with respect to the registration of the old notes and the exchange notes will terminate. A copy of the registration rights agreement was filed with the SEC on August 3, 2005 as an exhibit to our current report on Form 8-K, and this summary of the material provisions of the registration rights agreement does not purport to be complete and is qualified in its entirety by reference to the complete registration rights agreement. As a result of the timely filing and the effectiveness of the registration statement, we will not have to pay certain Special Interest on the old notes provided in the registration rights agreement. Following the completion of the exchange offer, holders of old notes not tendered will not have any further registration rights other than as set forth in the following paragraph and the old notes will continue to be subject to certain restrictions on transfer. Additionally, the liquidity of the market for the old notes could be adversely affected upon consummation of the exchange offer.

 

After the exchange offer, we will still be required to file a shelf registration statement covering resales of the old notes if:

 

(1) we are not permitted to consummate the exchange offer because the exchange offer is not permitted by applicable law or SEC policy; or

 

(2) any holder of Transfer Restricted Securities notifies FTI prior to the 20th business day following consummation of the exchange offer that:

 

(a) it is prohibited by law or SEC policy from participating in the exchange offer;

 

(b) it may not resell the exchange notes acquired by it in the exchange offer to the public without delivering a prospectus and the prospectus contained in the exchange offer registration statement is not appropriate or available for such resales; or

 

(c) it is a broker-dealer and owns notes acquired directly from FTI or an affiliate of FTI.

 

For purposes of the preceding, “Transfer Restricted Securities” means each old note until the earliest to occur of:

 

(1) the date on which such old note has been exchanged by a Person other than a broker-dealer for an exchange note in the exchange offer;

 

(2) following the exchange by a broker-dealer in the exchange offer of an old note for an exchange note, the date on which such exchange note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the exchange offer registration statement;

 

(3) the date on which such old note has been effectively registered under the Securities Act and disposed of in accordance with the shelf registration statement; or

 

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(4) the date on which such old note is distributed to the public pursuant to Rule 144 under the Securities Act.

 

If obligated to file the shelf registration statement, we will use our commercially reasonable efforts to file the shelf registration statement with the SEC on or prior to 30 days after the filing obligation arises (but no earlier than November 30, 2005) and to cause the shelf registration statement to be declared effective by the SEC on or prior to 90 days after the obligation arises (but no earlier than February 28, 2006).

 

If:

 

(1) we fail to file any of the registration statements required by the registration rights agreement on or before the date specified for such filing;

 

(2) any of such registration statements is not declared effective by the SEC on or prior to the date specified for such effectiveness;

 

(3) we fail to consummate the exchange offer within 30 business days of the date the exchange offer registration statement is declared effective by the SEC; or

 

(4) the shelf registration statement or the exchange offer registration statement is declared effective but thereafter ceases to be effective or usable in connection with resales of Transfer Restricted Securities during the periods specified in the registration rights agreement (each such event referred to in clauses (1) through (4) above, a “Registration Default”),

 

then we will pay Special Interest to each holder of Transfer Restricted Securities from and including the date on which any such Registration Default occurs to but excluding the date on which all Registration Defaults have been cured or waived.

 

The rate of Special Interest will be 0.25% per annum for the first 90-day period immediately following the occurrence of the first Registration Default, and such rate will increase by an additional 0.25% per annum with respect to each subsequent 90-day period thereafter until all Registration Defaults have been cured or waived, up to a maximum amount of Special Interest for all Registration Defaults of 1.0% per annum.

 

All accrued Special Interest will be paid by us on the next scheduled interest payment date to The Depository Trust Company or its nominee by wire transfer of immediately available funds or by federal funds check and to holders of Certificated Notes by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified. Special Interest is in addition to any other interest or premium, if any, that may be payable from time to time with respect to the notes.

 

Following the cure of all Registration Defaults, the accrual of Special Interest will cease.

 

Transferability of the Exchange Notes

 

Based on an interpretation by the SEC’s staff set forth in no-action letters issued to third parties unrelated to us, we believe that, with the exceptions set forth below, exchange notes issued in the exchange offer may be offered for resale, resold and otherwise transferred by the holder of exchange notes without compliance with the registration and prospectus delivery requirements of the Securities Act, if:

 

    you, or the person or entity receiving the exchange notes, acquires the exchange notes in the ordinary course of business;

 

    neither you nor any such person or entity is engaging in or intends to engage in a distribution of the exchange notes within the meaning of the federal securities laws;

 

    neither you nor any such person or entity has an arrangement or understanding with any person or entity to participate in any distribution of the exchange notes; and

 

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    neither you nor any such person or entity is an “affiliate” of FTI Consulting, Inc., as that term is defined in Rule 405 under the Securities Act.

 

To participate in the exchange offer, you must represent as the holder of old notes that each of these statements is true.

 

Any holder of outstanding notes who is our affiliate or who intends to participate in the exchange offer for the purpose of distributing the exchange notes:

 

    will not be able to rely on the interpretation of the staff of the SEC set forth in the no-action letters described above; and

 

    must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the exchange notes, unless the sale or transfer is made pursuant to an exemption from those requirements.

 

Each broker-dealer that receives exchange notes for its own account in exchange for old notes, where those old notes were acquired by that broker-dealer as a result of market making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of those exchange notes. See “Plan of Distribution.” Broker-dealers who acquired old notes directly from us and not as a result of market making activities or other trading activities may not rely on the staff’s interpretations discussed above or participate in the exchange offer and must comply with the prospectus delivery requirements of the Securities Act in order to sell the old notes.

 

Following the consummation of the exchange offer, holders of the old notes who were eligible to participate in the exchange offer but who did not tender their old notes will not have any further registration rights and the old notes will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for the outstanding notes could be adversely affected.

 

Terms of the Exchange Offer

 

Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, we will accept any and all old notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on [                    ], 2006, or such date and time to which we extend the offer. We will issue in denominations of $2,000 in principal amount and integral multiples of $1,000 in principal amount in excess thereof of exchange notes in exchange for each $1,000 principal amount of outstanding old notes accepted in the exchange offer. Holders may tender some or all of their old notes pursuant to the exchange offer. However, old notes may be tendered only in integral multiples of $1,000 in principal amount.

 

The exchange notes will evidence the same debt as the old notes and will be issued under the terms of, and entitled to the benefits of, the indenture relating to the old notes.

 

This prospectus, together with the letter of transmittal, is being sent to the registered holder and to others believed to have beneficial interests in the old notes. We intend to conduct the exchange offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the SEC promulgated under the Exchange Act.

 

We will be deemed to have accepted validly tendered old notes when we have given oral or written notice thereof to Wilmington Trust Company, the exchange agent. The exchange agent will act as agent for the tendering holders for the purpose of receiving the exchange notes from us. If any tendered old notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth under the heading “—Conditions to the Exchange Offer” or otherwise, certificates for any such unaccepted old notes will be returned, without expense, to the tendering holder of those old notes promptly after the Expiration Date unless the exchange offer is extended.

 

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Holders who tender old notes in the exchange offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of old notes in the exchange offer. We will pay all charges and expenses, other than certain applicable taxes, applicable to the exchange offer. See “—Fees and Expenses.”

 

Expiration Date; Extensions; Amendments

 

The Expiration Date shall be 5:00 p.m., New York City time, on [                    ], 2006 unless we, in our sole discretion, extend the exchange offer, in which case the Expiration Date shall be the latest date and time to which the exchange offer is extended. In order to extend the exchange offer, we will issue a notice of such extension by press release or other public announcement and notify the exchange agent and each registered holder of such extension by oral or written notice prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. We reserve the right, in our sole discretion:

 

    to extend the exchange offer (and, in connection with any such extension, to delay the acceptance of any old notes) or, if any of the conditions set forth under “—Conditions to the Exchange Offer” have not been satisfied, to terminate the exchange offer, by giving oral or written notice of that delay, extension or termination to the exchange agent; or

 

    to amend the terms of the exchange offer in any manner.

 

In the event that we make a fundamental change to the terms of the exchange offer, we will file a post-effective amendment to the registration statement.

 

Each broker-dealer that receives exchange notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. See “Plan of Distribution.”

 

Procedures for Tendering

 

Only a holder of old notes may tender the old notes in the exchange offer. Except as set forth under “—Book-Entry Transfer,” to tender in the exchange offer a holder must complete, sign and date the letter of transmittal, or a copy of the letter of transmittal, have the signatures on the letter of transmittal guaranteed if required by the letter of transmittal and mail or otherwise deliver the letter of transmittal or copy to the exchange agent prior to the Expiration Date. In addition:

 

    certificates for the old notes must be received by the exchange agent along with the letter of transmittal prior to the Expiration Date;

 

    a timely confirmation of a book-entry transfer, or a Book-Entry Confirmation, of the old notes, if that procedure is available, into the exchange agent’s account at The Depository Trust Company, or the Book-Entry Transfer Facility, following the procedure for book-entry transfer described below, must be received by the exchange agent prior to the Expiration Date; or

 

    you must comply with the guaranteed delivery procedures described below.

 

To be tendered effectively, the letter of transmittal and other required documents must be received by the exchange agent at the address set forth under “—Exchange Agent” prior to the Expiration Date.

 

Your tender, if not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date, will constitute an agreement between you and us in accordance with the terms and subject to the conditions set forth herein and in the letter of transmittal.

 

The method of delivery of old notes and the letter of transmittal and all other required documents to the exchange agent is at your election and risk. Instead of delivery by mail, it is recommended that you use an

 

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overnight or hand delivery service. In all cases, sufficient time should be allowed to assure delivery to the exchange agent before the Expiration Date. No letter of transmittal or old notes should be sent to us. You may request your broker, dealer, commercial bank, trust company or nominee to effect these transactions for you.

 

Any beneficial owner whose old notes are registered in the name of a broker, dealer, commercial bank, trust company, or other nominee and who wishes to tender should contact the registered holder promptly and instruct the registered holder to tender on the beneficial owner’s behalf. If the beneficial owner wishes to tender on its own behalf, the beneficial owner must, prior to completing and executing the letter of transmittal and delivering the owner’s old notes, either make appropriate arrangements to register ownership of the old notes in the beneficial owner’s name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time.

 

Signatures on a letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an “eligible guarantor institution” within the meaning of Rule 17Ad-15 under the Exchange Act unless old notes tendered pursuant thereto are tendered:

 

    by a registered holder who has not completed the box entitled “Special Registration Instruction” or “Special Delivery Instructions” on the letter of transmittal; or

 

    for the account of an eligible guarantor institution.

 

If signatures on a letter of transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, the guarantee must be by any eligible guarantor institution that is a member of or participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Program or an eligible guarantor institution.

 

If the letter of transmittal is signed by a person other than the registered holder of any old notes listed in the letter of transmittal, the old notes must be endorsed or accompanied by a properly completed bond power, signed by the registered holder as that registered holder’s name appears on the old notes.

 

If the letter of transmittal or any old notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and evidence satisfactory to us of their authority to so act must be submitted with the letter of transmittal unless waived by us.

 

All questions as to the validity, form, eligibility, including time of receipt, acceptance, and withdrawal of tendered old notes will be determined by us in our sole discretion, which determination will be final and binding. We reserve the absolute right to reject any and all old notes not properly tendered or any old notes our acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the right to waive any defects, irregularities or conditions of tender as to particular old notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of old notes must be cured within the time that we determine. Although we intend to notify holders of defects or irregularities with respect to tenders of old notes, neither we, the exchange agent, nor any other person will incur any liability for failure to give that notification. Tenders of old notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any old notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the exchange agent to the tendering holders, unless otherwise provided in the letter of transmittal, promptly following the Expiration Date, unless the exchange offer is extended.

 

In addition, we reserve the right in our sole discretion to purchase or make offers for any old notes that remain outstanding after the Expiration Date or, to the extent permitted by applicable law, purchase old notes in the open market, in privately negotiated transactions, or otherwise, following a termination of the exchange offer. The terms of any such purchases or offers could differ from the terms of the exchange offer.

 

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In all cases, issuance of exchange notes for old notes that are accepted for exchange in the exchange offer will be made only after timely receipt by the exchange agent of certificates for those old notes or a timely Book-Entry Confirmation of those old notes into the exchange agent’s account at the Book-Entry Transfer Facility, a properly completed and duly executed letter of transmittal or, with respect to The Depository Trust Company and its participants, electronic instructions in which the tendering holder acknowledges its receipt of and agreement to be bound by the letter of transmittal, and all other required documents. If any tendered old notes are not accepted for any reason set forth in the terms and conditions of the exchange offer or if old notes are submitted for a greater principal amount than the holder desires to exchange, those unaccepted or non-exchanged old notes will be returned without expense to the tendering holder or, in the case of old notes tendered by book-entry transfer into the exchange agent’s account at the Book-Entry Transfer Facility according to the book-entry transfer procedures described below, those non-exchanged old notes will be credited to an account maintained with that Book-Entry Transfer Facility, in each case, promptly after the expiration or termination of the exchange offer.

 

Each broker-dealer that receives exchange notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. See “Plan of Distribution.”

 

Book-Entry Transfer

 

The exchange agent will make a request to establish an account with respect to the old notes at the Book-Entry Transfer Facility for purposes of the exchange offer within two business days after the date of this prospectus, and any financial institution that is a participant in the Book-Entry Transfer Facility’s systems may make book-entry delivery of old notes being tendered by causing the Book-Entry Transfer Facility to transfer those old notes into the exchange agent’s account at the Book-Entry Transfer Facility in accordance with that Book-Entry Transfer Facility’s procedures for transfer. However, although delivery of old notes may be effected through book-entry transfer at the Book-Entry Transfer Facility, the letter of transmittal or copy of the letter of transmittal, with any required signature guarantees and any other required documents, must, in any case other than as set forth in the following paragraph, be transmitted to and received by the exchange agent at the address set forth under “—Exchange Agent” on or prior to the Expiration Date or the guaranteed delivery procedures described below must be complied with.

 

The Depository Trust Company’s Automated Tender Offer Program, or ATOP, is the only method of processing exchange offers through The Depository Trust Company. To accept the exchange offer through ATOP, participants in The Depository Trust Company must send electronic instructions to The Depository Trust Company through The Depository Trust Company’s communication system instead of sending a signed, hard copy letter of transmittal. The Depository Trust Company is obligated to communicate those electronic instructions to the exchange agent. To tender old notes through ATOP, the electronic instructions sent to The Depository Trust Company and transmitted by The Depository Trust Company to the exchange agent must contain the character by which the participant acknowledges its receipt of and agrees to be bound by the letter of transmittal.

 

Guaranteed Delivery Procedures

 

If a registered holder of the old notes desires to tender old notes and the old notes are not immediately available, or time will not permit that holder’s old notes or other required documents to reach the exchange agent prior to 5:00 p.m., New York City time, on the Expiration Date, or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if:

 

    the tender is made through an eligible guarantor institution;

 

   

prior to 5:00 p.m., New York City time, on the Expiration Date, the exchange agent receives from that eligible guarantor institution a properly completed and duly executed letter of transmittal or a facsimile

 

27


 

of duly executed letter of transmittal and notice of guaranteed delivery, substantially in the form provided by us, by telegram, telex, fax transmission, mail or hand delivery, setting forth the name and address of the holder of old notes and the amount of the old notes tendered and stating that the tender is being made by guaranteed delivery and guaranteeing that within three New York Stock Exchange, Inc., or NYSE, trading days after the date of execution of the notice of guaranteed delivery, the certificates for all physically tendered old notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, will be deposited by the eligible guarantor institution with the exchange agent; and

 

    the certificates for all physically tendered old notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, are received by the exchange agent within three NYSE trading days after the date of execution of the notice of guaranteed delivery.

 

Withdrawal Rights

 

Tenders of old notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date.

 

For a withdrawal of a tender of old notes to be effective, a written or, for The Depository Trust Company participants, electronic ATOP transmission notice of withdrawal, must be received by the exchange agent at its address set forth under “—Exchange Agent” prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must:

 

    specify the name of the person having deposited the old notes to be withdrawn, or the Depositor;

 

    identify the old notes to be withdrawn, including the certificate number or numbers and principal amount of those old notes;

 

    be signed by the holder in the same manner as the original signature on the letter of transmittal by which those old notes were tendered, including any required signature guarantees, or be accompanied by documents of transfer sufficient to have the trustee register the transfer of those old notes into the name of the person withdrawing the tender; and

 

    specify the name in which those old notes are to be registered, if different from that of the Depositor.

 

All questions as to the validity, form, eligibility and time of receipt of these notices will be determined by us, which determination will be final and binding on all parties. Any old notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the exchange offer. Any old notes which have been tendered for exchange, but which are not exchanged for any reason, will be returned to the holder of those old notes without cost to that holder promptly after withdrawal, rejection of tender, or termination of the exchange offer. Properly withdrawn old notes may be retendered by following one of the procedures under “—Procedures for Tendering” at any time on or prior to the Expiration Date.

 

Conditions to the Exchange Offer

 

Notwithstanding any other provision of the exchange offer, we will not be required to accept for exchange, or to issue exchange notes in exchange for, any old notes and may terminate or amend the exchange offer if at any time before the acceptance of those old notes for exchange or the exchange of the exchange notes for those old notes, we determine in our reasonable judgment that the exchange offer violates applicable law, any applicable interpretation of the staff of the SEC or any order of any governmental agency or court of competent jurisdiction.

 

The foregoing conditions are for our sole benefit and may be asserted by us regardless of the circumstances giving rise to any such condition or may be waived by us in whole or in part at any time and from time to time. The failure by us at any time to exercise any of the foregoing rights will not be deemed a waiver of any of those rights and each of those rights will be deemed an ongoing right which may be asserted at any time and from time

 

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to time. Notwithstanding the foregoing, all conditions to the exchange offer, other than those relating to violations of applicable law or an order of a governmental agency or court, must be satisfied or waived prior to expiration of the exchange offer. In the event that we waive any of the foregoing conditions, such waiver will apply equally to all tendering holders.

 

In addition, we will not accept for exchange any old notes tendered, and no exchange notes will be issued in exchange for those old notes, if at such time any stop order will be threatened or in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the indenture under the Trust Indenture Act of 1939. In any of those events we are required to use every commercially reasonable effort to obtain the withdrawal of any stop order at the earliest possible time.

 

Effect of Not Tendering

 

To the extent old notes are tendered and accepted in the exchange offer, the principal amount of old notes will be reduced by the amount so tendered and a holder’s ability to sell untendered old notes could be adversely affected. In addition, after the completion of the exchange offer, the old notes will remain subject to restrictions on transfer. Since the old notes have not been registered under the federal securities laws, they bear a legend restricting their transfer absent registration or the availability of a specific exemption from registration. The holders of old notes not tendered will have no further registration rights, except for the limited registration rights described above under the heading “—Purpose and Effect.”

 

Accordingly, the old notes not tendered may be resold only:

 

    to us or our subsidiaries;

 

    pursuant to a registration statement which has been declared effective under the Securities Act;

 

    for so long as the old notes are eligible for resale pursuant to Rule 144A under the Securities Act, to a person the seller reasonably believes is a qualified institutional buyer that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that the transfer is being made in reliance on Rule 144A; or

 

    pursuant to any other available exemption from the registration requirements of the Securities Act (in which case FTI Consulting, Inc. and the trustee under the indenture for the old notes will have the right to require the delivery of an opinion of counsel, certifications and/or other information satisfactory to FTI Consulting, Inc. and the trustee).

 

Upon completion of the exchange offer, due to the restrictions on transfer of the old notes and the absence of such restrictions applicable to the exchange notes, it is likely that the market, if any, for old notes will be relatively less liquid than the market for exchange notes. Consequently, holders of old notes who do not participate in the exchange offer could experience significant diminution in the value of their old notes compared to the value of the exchange notes.

 

29


Exchange Agent

 

All executed letters of transmittal should be directed to the exchange agent. Wilmington Trust Company has been appointed as exchange agent for the exchange offer. Questions, requests for assistance and requests for additional copies of this prospectus or of the letter of transmittal should be directed to the exchange agent addressed as follows:

 

By Certified or Registered Mail:   By Overnight Courier or Hand:   By Facsimile:

Wilmington Trust Company

DC-1626 Processing Unit

P.O. Box 8861

Wilmington, DE 19899-8861

 

Wilmington Trust Company

Corporate Capital Markets

1100 North Market Street

Wilmington, DE 19890-1626

 

(302) 636-4139

Attention: Exchanges

Confirm by Telephone:

(302) 636-6470

For Information Call:

(302) 636-6470

 

Originals of all documents sent by facsimile should be sent promptly by registered or certified mail, by hand or by overnight delivery service.

 

Fees And Expenses

 

We will not make any payments to brokers, dealers or others soliciting acceptances of the exchange offer. The principal solicitation is being made by mail; however, additional solicitations may be made in person or by telephone by our officers and employees. The estimated cash expenses to be incurred in connection with the exchange offer will be paid by us and will include fees and expenses of the exchange agent, accounting, legal, printing and related fees and expenses.

 

Transfer Taxes

 

Holders who tender their old notes for exchange notes will not be obligated to pay any transfer taxes in connection with that tender or exchange, except that holders who instruct us to register exchange notes in the name of, or request that old notes not tendered or not accepted in the exchange offer be returned to, a person other than the registered tendering holder will be responsible for the payment of any applicable transfer tax on those old notes.

 

Accounting Treatment

 

The exchange notes will be recorded at the same carrying value as the old notes, as reflected in our accounting records on the date of the exchange. Accordingly, we will recognize no gain or loss for accounting purposes upon the closing of the exchange offer. We will amortize the expenses of the exchange offer over the term of the exchange notes under accounting principles generally accepted in the United States.

 

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USE OF PROCEEDS

 

We will not receive any cash proceeds from the exchange offer. In consideration for issuing the exchange notes as contemplated in this prospectus, we will receive in exchange old notes in like principal amount, which will be cancelled and as such will not result in any increase in our indebtedness.

 

We used the net proceeds from the Offerings to repay $142.5 million of term loan indebtedness under our senior secured credit facility and to repurchase approximately $125.4 million of our common stock through a combination of direct share repurchases and an accelerated stock buyback program. The remaining net proceeds are available for general corporate purposes, which may include acquisitions.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2005. You should read this table in conjunction with “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of September 30,
2005


     (unaudited)
(in thousands)

Cash and cash equivalents

   $ 115,257
    

Debt:

      

Senior notes, excluding fair value hedge adjustment of $748

   $ 200,000

Convertible notes

     150,000
    

Total debt

     350,000

Total stockholders’ equity

     444,100
    

Total capitalization

   $ 794,100
    

 

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SELECTED FINANCIAL DATA

 

We derived the selected financial data presented below for the periods or dates indicated from our consolidated financial statements. The consolidated financial statements as of and for the years ended December 31, 2000, 2001, 2002, 2003 and 2004 were audited by Ernst & Young LLP, an independent registered public accounting firm. Our audited consolidated financial statements as of December 31, 2003 and 2004 and for each of the three years in the period ended December 31, 2004 and our unaudited consolidated financial statements as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005 are included elsewhere in this prospectus. We prepared the summary unaudited interim consolidated financial data on a basis consistent with the audited consolidated financial statements as of and for the year ended December 31, 2004. In management’s opinion, the unaudited interim consolidated financial data reflects all adjustments that are necessary for a fair presentation of the results for the interim periods presented. All adjustments made were normal and recurring accruals. You should not expect the results of operations for the interim periods to necessarily be an indication of the results for a full year or any future period. You should read the following data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

Acquisitions

 

Our results of operations and financial position for the periods presented were impacted by our acquisition activities. We acquired the following businesses in transactions accounted for as purchase business combinations.

 

    As of August 30, 2002, we acquired the U.S. Business Recovery Services division of PwC.

 

    As of October 15, 2003, we acquired Ten Eyck Associates.

 

    As of October 31, 2003, we acquired the dispute advisory services business of KPMG LLP.

 

    As of November 28, 2003, we acquired Lexecon, Inc.

 

    As of February 28, 2005, we acquired the Ringtail group.

 

    As of May 31, 2005, we acquired Cambio.

 

Selling, General and Administrative Expense

 

Selling, general and administrative expense includes losses on subleased facilities of $4.7 million for the year ended December 31, 2004 and $0.9 million of for the nine months ended September 30, 2005.

 

Amortization

 

Effective January 1, 2002, we adopted Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, we no longer amortize goodwill and intangible assets with indefinite useful lives, but we are required to test these assets for impairment at least annually.

 

Interest Expense, Net

 

For the year ended December 31, 2004, interest expense, net, includes a $475,000 discount on a note receivable due from the purchaser of one of our former subsidiaries. We discounted this note by $475,000 in exchange for payment of the note ahead of its maturity in 2010. We received this prepayment in January 2005.

 

On January 1, 2003, we adopted Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Among other changes, Statement No. 145 rescinds Statement No. 4, which required all gains and losses from extinguishments of debt to be aggregated and classified as an extraordinary item, net of the related tax effect. Statement No. 145 provides that gains and losses from extinguishments of debt should be classified as extraordinary items only if they are unusual or infrequent or they otherwise meet the criteria for classification as an extraordinary item, and observes that debt extinguishment transactions would seldom, if ever, result in extraordinary item classification of the resulting gains and losses. Accordingly, our losses on retirement of debt of $8.5 million for the year ended December 31, 2000, $0.8 million for the year ended December 31, 2003 and $1.7 million for the nine months ended September 30, 2005 are included in interest expense.

 

33


Discontinued Operations

 

In 2002, we committed to a plan to sell our applied sciences practice which we sold in 2003. Because we eliminated the operations and cash flows of the business components comprising the applied sciences practice from our ongoing operations as a result of the disposal transactions, and because we do not have any significant continuing involvement in the operations after the disposal transactions, we have presented the results of the applied sciences practice’s operations as a discontinued operation for all periods.

 

Ratio of Earnings to Fixed Charges

 

For the purpose of computing the ratio of earnings to fixed charges, earnings consist of income from continuing operations, before income taxes plus fixed charges. Fixed charges consist of:

 

    interest on all indebtedness and amortization of deferred financing costs; and

 

    the portion of rental expense that we believe is representative of interest.

 

     Year Ended December 31,

    Nine Months Ended
September 30,


 
     2000

    2001

    2002

    2003

    2004

    2004

    2005

 
                                   (unaudited)  
     (in thousands, except per share data)  

INCOME STATEMENT DATA

                                                        

Revenues

   $ 95,532     $ 122,317     $ 224,113     $ 375,695     $ 427,005     $ 322,118     $ 373,720  

Direct cost of revenues

     48,979       59,074       108,104       176,429       234,970       176,994       202,878  

Selling, general and administrative expense

     23,920       33,085       51,647       78,701       106,730       76,348       90,030  

Special termination charges

     —         —         —         3,060       —         —         —    

Amortization of other intangible assets

     3,942       4,235       1,033       3,680       6,836       4,220       4,309  
    


 


 


 


 


 


 


Operating income

     18,691       25,923       63,329       113,825       78,469       64,556       76,503  

Interest and other expenses, net

     (19,242 )     (4,356 )     (4,717 )     (4,196 )     (6,086 )     (4,178 )     (9,879 )

Litigation settlement gains (losses), net

     —         —         —         —         1,672       —         (991 )
    


 


 


 


 


 


 


(Loss) income from continuing operations before income tax provision

     (551 )     21,567       58,612       109,629       74,055       60,378       65,633  

Income tax provision

     184       8,621       23,704       44,838       31,177       25,117       27,566  
    


 


 


 


 


 


 


(Loss) income from continuing operations

     (735 )     12,946       34,908       64,791       42,878       35,261       38,067  

Income from operations of discontinued operations, net of income tax provision

     3,296       3,523       3,145       1,649       —         —         —    

Loss from sale of discontinued operations, net of income tax provision (benefit)

     —         —         (891 )     (6,971 )     —         —         —    
    


 


 


 


 


 


 


Income (loss) from discontinued operations

     3,296       3,523       2,254       (5,322 )     —         —         —    
    


 


 


 


 


 


 


Net income

   $ 2,561     $ 16,469     $ 37,162     $ 59,469     $ 42,878     $ 35,261     $ 38,067  
    


 


 


 


 


 


 


Earnings per common share—basic

                                                        

(Loss) income from continuing operations

   $ (0.05 )   $ 0.48     $ 1.09     $ 1.58     $ 1.02     $ 0.84     $ 0.91  
    


 


 


 


 


 


 


Net income

   $ 0.16     $ 0.61     $ 1.16     $ 1.45     $ 1.02     $ 0.84     $ 0.91  
    


 


 


 


 


 


 


Earnings per common share—diluted

                                                        

(Loss) income from continuing operations

   $ (0.04 )   $ 0.44     $ 1.02     $ 1.54     $ 1.01     $ 0.83     $ 0.90  
    


 


 


 


 


 


 


Net income

   $ 0.14     $ 0.56     $ 1.09     $ 1.41     $ 1.01     $ 0.83     $ 0.90  
    


 


 


 


 


 


 


OTHER DATA

                                                        

Ratio of earnings to fixed charges

     1.7 x     4.8 x     9.2 x     15.7 x     8.3 x     9.0 x     6.1 x

 

     December 31,

   September 30, 2005

     2000

   2001

   2002

   2003

   2004

  
                              (unaudited)

BALANCE SHEET DATA

                                         

Cash and cash equivalents

   $ 3,235    $ 12,856    $ 9,906    $ 5,765    $ 25,704    $ 115,257

Working capital

     20,163      28,766      13,778      14,933      60,241      195,837

Total assets

     149,246      159,098      430,531      660,565      708,525      924,316

Long-term debt, including fair value hedge adjustment of $748

     60,500      28,166      97,833      121,250      105,000      349,252

Stockholders’ equity

     68,624      105,136      267,975      455,156      496,154      444,100

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The purpose of this section is to discuss and analyze our consolidated financial condition, liquidity and capital resources and results of operations. You should read this analysis in conjunction with the consolidated financial statements and notes that appear elsewhere in this prospectus. This section contains certain “forward-looking statements” within the meaning of federal securities laws that involve risks and uncertainties, including statements regarding our plans, objectives, goals, strategies and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under “Cautionary Notice Regarding Forward-Looking Statements” and “Risk Factors” and elsewhere in this prospectus.

 

Overview

 

General. We are a leading provider of forensic, corporate finance and economic consulting services in the United States. Through our forensic practice, we provide an extensive range of services to assist clients in all phases of litigation, including pre-filing, discovery, jury selection, trial preparation, expert testimony and other trial support services. Specifically, we help clients assess complex financial transactions, reconstruct events from incomplete and/or corrupt data, uncover vital evidence, identify potential claims and assist in the pursuit of financial recoveries and settlements. Through the use of proprietary information technology, we have demonstrated our ability to help control litigation costs, expedite the trial process and provide our clients with the ability to readily organize and access case-related data. Our repository services offer clients a secure extranet and web-hosting service for critical information. Our graphics services at trial and technology and electronic evidence experts assist clients in preparing for and presenting their cases in court. As of September 30, 2005, we had 462 revenue-generating consultants in our forensic practice.

 

We believe we are the largest corporate finance consulting practice in the United States. We assist underperforming companies as they make decisions to improve their financial condition and operations. We analyze, recommend and implement strategic alternatives for our corporate finance clients offering services, such as interim management in turnaround situations, rightsizing infrastructure, assessing long-term viability, transaction advisory and business strategy consulting. We lead and manage the financial aspects of in-court restructuring processes by offering services that include an assessment of the impact of a bankruptcy filing on the client’s financial condition and operations. We also assist our clients in planning for a smooth transition into and out of bankruptcy, facilitating the sale of assets and arranging debtor-in-possession financing. Our acquisition of Cambio in May of 2005, greatly enhanced our industry expertise in health care management and finance. As of September 30, 2005, we had 333 revenue-generating consultants in our corporate finance practice.

 

We are a leading provider of economic consulting services in the United States and deliver sophisticated economic analysis and modeling of issues arising in mergers and acquisitions and other complex commercial and securities litigation. Our 2003 acquisition of the Lexecon business, a leading provider of economic consulting services in the United States, has greatly enhanced our market position within this practice and our ability to provide complex economic consulting services.

 

Our services include providing advice and testimony related to:

 

    antitrust and competition issues that arise in the context of potential mergers and acquisitions;

 

    other antitrust issues, including alleged price fixing, cartels and other forms of exclusionary behavior;

 

    the application of modern finance theory to issues arising in securities litigation; and

 

    public policy studies on behalf of companies, trade associations and governmental agencies.

 

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Our statistical and economic experts help companies evaluate issues such as the economic impact of deregulation on a particular industry or the amount of commercial damages suffered by a business. We have deep industry experience in such areas as commercial and investment banking, telecommunications, energy, transportation and pharmaceuticals. Our professionals have experience providing testimony in the following areas: fraud, damages, lost profits, valuation, accountant’s liability and malpractice, contract disputes, patent infringement, price fixing, purchase price disputes, solvency and insolvency, fraudulent conveyance, preferences, disclosure statements, trademark and copyright infringement and the financial impact of government regulations. As of September 30, 2005, we had 171 revenue-generating consultants in our economic consulting practice.

 

Recent Events Affecting Our Operations. During the first quarter of 2004, we announced the unanticipated departure of a number of senior professionals in our corporate finance practice. Some or all of those professionals have formed a company to compete with us. In addition, some of our clients with engagements ongoing at that time transferred these engagements to those former employees and their company. These clients requested refunds of their retainer balances, which negatively impacted our cash flows during the early part of 2004.

 

In July 2004, we entered into a new lease agreement for office space in New York City. The lease expires in November 2021. In accordance with the lease terms, we received a cash inducement of $8.1 million which we have classified as deferred rent in our balance sheet. We are amortizing the cash inducement over the life of the lease as a reduction to the cash rent expense. During the fourth quarter of 2004, we consolidated our New York City and Saddle Brook, New Jersey offices and relocated our employees into the new space. As a result of this decision, we vacated our leased office facilities prior to the lease termination dates. During the fourth quarter of 2004, we recorded a loss of $4.7 million related to the abandoned facilities.

 

On February 28, 2005, we acquired substantially all of the assets and assumed certain liabilities of the Ringtail group. Ringtail is a leading developer of litigation support and knowledge management technologies for law firms, Fortune 500 legal departments, government agencies and courts. The assets we acquired include software products and technologies and intellectual property. Ringtail has developed a suite of integrated software modules to manage the information and workflow in complex legal cases. The total acquisition cost was $34.6 million, consisting of net cash of $19.2 million, transaction costs of $0.4 million and 784,109 shares of our common stock valued at $15.0 million. We financed the cash portion of the purchase price with cash on hand and borrowings under our revolving line of credit. We may be required to pay the sellers additional annual consideration based upon post-acquisition revenues for the each of the years from 2005 through 2007. The earnout consideration may be up to $2.5 million per year and may be paid in cash, shares of our common stock or a combination of both. We granted the sellers contractual protection against a decline in the value of the purchase price and any earnout payment made in shares of our common stock. If, on the first anniversary date of any issuance of purchase price or earnout shares, the market price of our common stock has not increased by at least 10%, we have agreed to make an additional cash payment to the sellers equal to the deficiency. Ringtail operates as part of the forensic practice.

 

On April 19, 2005, we amended our senior secured credit facility to provide for $50.0 million in additional secured term loan financing. The entire $50.0 million in additional term loan financing was fully drawn on April 19, 2005. A portion of the proceeds was used to pay amounts outstanding under our revolving line of credit, with the remainder available for general corporate purposes.

 

On May 31, 2005, we acquired substantially all of the assets and assumed certain liabilities of Cambio. The total acquisition cost was $42.3 million, consisting of net cash of $28.9 million, transaction costs of $0.5 million and 578,994 shares of our common stock valued at $12.9 million plus an earn-out over the next three years based on future performance. Cambio is a leading provider of change management solutions for hospital and health systems. It provides strategic, operational and turnaround management consulting services to improve the operational efficiency and financial performance of its clients, which include academic medical centers, integrated delivery systems, stand-alone community hospitals, investor-owned hospitals and special medical facilities. Cambio was founded in 1989 and is based in Nashville, Tennessee. Cambio operates as part of our corporate finance practice.

 

36


On August 2, 2005, we offered and sold the old notes and the convertible notes. We used approximately $142.5 million of net proceeds from the Offerings to repay all outstanding term loan indebtedness under our senior secured credit facility and approximately $125.4 million of such net proceeds to repurchase shares of our common stock through a combination of direct share repurchases, an accelerated stock buyback program and open market repurchases. In connection with the offerings, we amended our senior secured credit facility to facilitate the Transactions, adjust our financial covenants and effect certain other changes.

 

Events Subsequent to September 30, 2005 Affecting our Operations. On January 6, 2006, we completed our acquisition of all of the outstanding common stock of Compass, and related assets from the stockholders of Compass. On the closing date, we paid approximately $71.5 million as estimated purchase price for the acquisition, of which approximately $45.8 million was paid in cash and approximately $25.7 million was paid through the delivery of 932,599 shares of common stock. The cash portion of the purchase price was financed from cash on hand. The purchase agreement provides for (A) post-closing purchase price adjustments based on actual adjusted earnings before interest and taxes, EBIT, of the Business (as defined in the purchase agreement) as of December 31, 2005 and (B) post-closing cash adjustment payments based on actual Working Capital (as defined in the purchase agreement) as of December 31, 2005. The purchase agreement also provides for additional consideration for each fiscal year ending December 31, 2006 to 2013 based on EBIT of the Business Unit (as defined in the purchase agreement); the set aside of a percentage of EBIT of the Business Unit (as defined in the purchase agreement) for each such fiscal year to be used as incentive compensation to employees of and consultants to the business; and conditional contractual protection against a decline in the value of the shares of our common stock issued as acquisition consideration, determined from time to time during the five years following the closing date of the acquisition in accordance with the purchase agreement. Compass is a top competition economics consulting firm, with offices in Washington, D.C. and San Francisco. Compass’ practice involves sophisticated economic analysis in the context of antitrust disputes, mergers and acquisitions, regulatory and policy debates, and general commercial litigation across a broad range of industries in the United States, Europe and the Pacific Rim. The Compass acquisition is expected to be additive to our earnings per share for 2006 by approximately $0.04 to $0.08 per share, net of the effect of rapid amortization of intangible assets, and before any effect under FASB 123 (R) (which, as previously announced, FTI will adopt as of January 1, 2006) of the issuance of stock options in connection with the employment agreements with the key principals.

 

In December 2005, we received a large contingent or “success” fee in the amount of approximately $22.5 million in connection with the resolution of a legal case involving a bankrupt estate for which we served as fiduciary. The case had proceeded for over eight years and came to FTI as part of the acquisition of the PricewaterhouseCoopers Business Recovery Services Division in 2002. It was resolved when the defendant did not file, by November 16, 2005, for an appeal, which could have extended the case indefinitely. In addition to payment of our standard compensation to professionals in our Corporate Finance/Restructuring practice who participated in the assignment, we intend to use a portion of the proceeds to provide incentive compensation for long-term employee retention. After such expenses, the success fee is expected to provide approximately $0.10-0.13 to earnings per share in the fourth quarter.

 

Financial and Operating Overview. We derive substantially all of our revenues from providing professional services to our clients in the United States. Over the past several years the growth in our revenues and profitability has resulted primarily from the acquisitions we have completed and also from our ability to attract new and recurring engagements.

 

Most of our services are rendered under time-and-expense arrangements that require the client to pay us a fee for the hours that we incur at agreed upon rates. Under this arrangement we also bill our clients for reimbursable expenses, which may include 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 also have performance-based engagements in which we earn a success fee if and when certain predefined outcomes occur. This type of success fee may supplement a time-and-expense arrangement. Success fee revenues may cause significant variations in our revenues and operating results due to the timing of achieving the performance-based criteria.

 

37


During the three months ended September 30, 2005, our revenues increased $28.8 million, or 27.5%, as compared to the three months ended September 30, 2004. During the nine months ended September 30, 2005, our revenues increased $51.6 million, or 16.0%, as compared to the nine months ended September 30, 2004. Revenues increased in each of our operating segments for the three- and nine-month periods ended September 30, 2005 as compared to 2004. This growth is primarily attributable to an increase in the number of billable professionals we employ as well as to the acquisitions of Ringtail and Cambio completed during 2005.

 

During the year ended December 31, 2004, our revenues increased $51.3 million, or 13.7%, as compared to the year ended December 31, 2003. Revenues increased by 73.3% in our forensic practice and by 397.5% in our economic consulting practice. This growth was almost entirely due to the acquisitions we completed during the fourth quarter of 2003 and, to a lesser extent, from internal growth. Although total revenues increased, the reduced volume of new business in the restructuring market and the unanticipated departure of a number of revenue generating professionals in our corporate finance practice resulted in a 36.4% decrease in revenues from those services during 2004 as compared to 2003. In August 2002, we acquired the Business Recovery Services division of PwC. This acquisition accounted for the majority of the increase in our revenues and profitability for 2003 as compared to 2002. See “—Results of Operations” for a more detailed discussion and analysis of our financial results.

 

Our financial results are primarily driven by:

 

    the utilization rates of the billable professionals we employ;

 

    the number of revenue-generating professionals we employ;

 

    the rates per hour we charge our clients for service; and

 

    the number and size of engagements we secure.

 

Utilization Rates of Billable Professionals

 

     Year Ended December 31,

    Three Months Ended September 30,

    Nine Months Ended September 30,

 
     2003

    2004

   

Percent

Change


    2004

    2005

    Percent
Change


    2004

    2005

    Percent
Change


 

Forensic

   70 %   74 %   5.7 %   71 %   73 %   2.8 %   74 %   76 %   2.7 %

Corporate Finance

   91 %   82 %   (9.9 )%   84 %   79 %   (6.0 )%   84 %   82 %   (2.4 )%

Economic Consulting

   82 %   78 %   (4.9 )%   70 %   80 %   14.3 %   79 %   84 %   6.3 %

Total

   83 %   77 %   (7.2 )%   75 %   76 %   1.3 %   78 %   79 %   1.3 %

 

We calculate the utilization rate for our professionals by dividing the number of hours that all of our professionals worked on client assignments during a period by the total available working hours for all of our professionals, assuming a 40-hour work week and a 52-week year. Available working hours include vacation and professional training days, but exclude holidays. Utilization of our professionals is affected by a number of factors, including:

 

    the number, size and timing of client engagements;

 

    the hiring of new professionals, which generally results in a temporary drop in our utilization rate during the transition period for new hires;

 

    our ability to forecast demand for our services and thereby maintain an appropriate level of professionals; and

 

    conditions affecting the industries in which we practice as well as general economic conditions.

 

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Three and nine months ended September 30, 2005 compared to three and nine months ended September 30, 2004

 

During the three- and nine-month periods ended September 30, 2005, our overall utilization rate increased as compared to 2004 which is primarily attributable to the increased utilization of professionals in our forensic and economic consulting practices offset by decreased utilization of professionals in our corporate finance practice. The increased utilization rate in our economic consulting practice is primarily attributable to larger client assignments in 2005 as compared to 2004 and to more robust market conditions. The utilization of professionals in our corporate finance practice decreased primarily due to the hiring of new professionals which typically results in a temporary drop in utilization rates.

 

The increased utilization rate in our forensic practice for the three and nine-months ended September 30, 2005 as compared to 2004 is primarily attributable to the dispute advisory services business of KPMG that we acquired in the fourth quarter of 2003. The overall utilization rate of these professionals was low during 2004 after completion of the acquisition. This had a negative impact on the overall utilization rate for this practice during 2004. Our utilization rate is highly impacted by seasonal factors such as the vacation of our staff as well as client personnel, particularly in our forensic and economic consulting practices. As a result, utilization rates are lower during the summer months of the third quarter than we experience during the first half of the year.

 

Year ended December 31, 2004 compared to year ended December 31, 2003

 

During the year ended December 31, 2004, we experienced a decrease in our overall utilization rate as compared to the year ended December 31, 2003. This is primarily attributable to a change in economic conditions, the unanticipated departures of some of our professionals and the acquisitions we completed in 2003.

 

During the first half of 2003, utilization rates were high and our financial performance was strong across all practice areas. However, during the third quarter of 2003, demand for our corporate finance services began to decline, primarily resulting from a strengthening economy coupled with a decline in the volume of new business in the restructuring market. As a result of economic conditions, utilization rates decreased in our corporate finance practice during 2003. The unanticipated departures of professionals from this practice area during the first quarter of 2004 resulted in a further reduction to utilization rates beginning in 2004, since these professionals were highly utilized. Beginning in late 2003, we began to mitigate the impact of declining utilization rates by reassigning our corporate finance professionals to other practice areas where demand was higher. We also began to more closely manage our professional staffing levels to optimize our utilization rates. We believe we successfully implemented our business strategy as evidenced by the stabilization of the utilization rates generated by this practice area.

 

During the year ended December 31, 2004, the utilization rate in our forensic and litigation consulting and technology practice was higher than for the same period of 2003. This is primarily attributable to the dispute advisory services business of KPMG that we acquired in the fourth quarter of 2003. The overall utilization rate of these professionals was much lower than we anticipated for the first few months after completion of the acquisition. This had a negative impact on the overall utilization rate of this practice late in 2003 and early in 2004. However, utilization rates improved beginning late in the first quarter of 2004, resulting in a higher utilization rate in 2004 as compared to 2003. The utilization rate in this practice is highly impacted by seasonal factors such as the vacation of our staff as well as client personnel. This typically results in lower utilization rates during the summer months of the third quarter and during the holiday season in the fourth quarter.

 

The economic consulting practice predominately reflects the results of the Lexecon business we acquired in the fourth quarter of 2003. Prior to the Lexecon acquisition, our economic consulting practice was relatively small and the utilization rates in 2003 primarily reflect the impact of several large engagements that were ongoing at that time.

 

39


Number of Revenue—Generating Professionals

 

    December 31, 2003

    December 31, 2004

    Percent
Change


    September 30, 2004

    September 30, 2005

    Percent
Change


 
    Head-
    count    


  % of
    Total    


    Head-
    count    


  % of
    Total    


      Head-
    count    


  % of
    Total    


    Head-
    count    


  % of
    Total    


   

Forensic

  343   41.5 %   357   47.9 %   4.1 %   348   47.9 %   462   47.8 %   32.8 %

Corporate Finance

  305   36.9 %   243   32.6 %   (20.3 )%   230   31.7 %   333   34.5 %   44.8 %

Economic Consulting

  179   21.6 %   145   19.5 %   (19.0 )%   148   20.4 %   171   17.7 %   15.5 %
   
 

 
 

 

 
 

 
 

 

Total

  827   100.0 %   745   100.0 %   (9.9 )%   726   100.0 %   966   100.0 %   33.1 %
   
 

 
 

 

 
 

 
 

 

 

Revenue-generating professionals include both billable consultants that generate revenues based on hourly billing rates and other revenue-generating employees who support our customers or develop software products.

 

Three and nine months ended September 30, 2005 compared to three and nine months ended September 30, 2004

 

The number of revenue-generating employees in the forensic practice increased from September 30, 2004 to September 30, 2005 due to increased demand for services as well as the acquisition of Ringtail on February 28, 2005. This acquisition added 23 revenue-generating professionals to the forensic practice. These professionals primarily develop software products. The number of billable professionals in the corporate finance practice increased throughout 2004 as this practice was recovering from the unanticipated departure of about 60 billable professionals during the first quarter of 2004. In addition, the acquisition of Cambio on May 31, 2005 added 56 revenue-generating professionals to the corporate finance practice. During 2005, the number of billable professionals in the economic consulting practice increased in response to increased demand for economic consulting services resulting from improving market conditions.

 

Year ended December 31, 2004 compared to year ended December 31, 2003

 

The number of revenue-generating professionals decreased from December 31, 2003 to December 31, 2004 largely due to the decrease in demand for our corporate finance services. In addition, during the first quarter of 2004, about 60 of our professionals departed from our former FTI/Policano & Manzo corporate finance practice. During the first quarter of 2004, about 35 employees were reorganized from the economic consulting practice to the forensic practice, resulting in a decrease in headcount in that practice area.

 

Average Billable Rate per Hour

 

    

Year Ended

December 31,


   

Three Months

Ended

September 30,


   

Nine Months

Ended

September 30,


 
     2003

   2004

   Percent
Change


    2004

   2005

   Percent
Change


    2004

   2005

   Percent
Change


 

Forensic

   $ 270    $ 287    6.3 %   $ 280    $ 277    (1.1 )%   $ 286    $ 278    (2.8 )%

Corporate Finance

     393      407    3.6 %     403      388    (3.7 )%     404      399    (1.2 )%

Economic Consulting

     270      366    35.6 %     360      368    2.2 %     368      375    1.9 %

Total

     347      343    (1.2 )%     340      331    (2.7 )%     341      337    (1.2 )%

 

We calculate average billable rate per hour by dividing employee revenues for the period, excluding:

 

    revenues generated from utilizing outside consultants,

 

    revenues not associated with billable hours, and

 

    revenues resulting from reimbursable expenses;

 

40


by the number of hours worked on client assignments during the same period. Average billable rates are affected by a number of factors, including:

 

    the relative mix of our billable professionals (utilization by staff level);

 

    our standard billing rates, which we have increased across all practices;

 

    our clients’ perception of our ability to add value through the services we provide;

 

    the market demand for our services;

 

    introduction of new services by our competitors;

 

    the pricing policies of our competitors;

 

    the mix of services that we provide;

 

    the level of revenue realization adjustments made during the period, including adjustments for potential or court ordered fee and expense adjustments; and

 

    general economic conditions.

 

Effective January 1, 2005, we modified our calculation of average billable rate per hour to include revenue realization adjustments and success fees earned as part of employee revenues. Average billable rates per hour in the table above for 2003 and 2004 have been adjusted to conform to our current presentation.

 

Three and nine months ended September 30, 2005 compared to three and nine months ended September 30, 2004

 

Average billable rate per hour decreased in our forensic practice primarily due to an increase in the proportion of billable professionals at lower levels, resulting in lower billing rates relative to the prior year. Our corporate finance practice implemented planned bill rate increases during the second quarter of 2004, during the third quarter of 2004 as a result of promotions and again during the first quarter of 2005. However, the average billable rate per hour decreased in this practice primarily due to a decrease in success fees recognized, an increase in realization adjustments and a change in staff mix. Average billable rate per hour increased in our economic consulting practice primarily due to an increase in demand for these services and planned fee increases implemented in the first and third quarters of 2005.

 

Year ended December 31, 2004 compared to year ended December 31, 2003

 

Our average billable rate per hour increased across all practice areas from December 31, 2003 to December 31, 2004. The improvement in average billable rates by practice area was the result of several factors, including:

 

    planned bill rate increases implemented throughout our corporate finance practice during the second quarter of 2004, and as a result of promotions during the third quarter of 2004;

 

    a change in the mix of billable professionals in our corporate finance practice, which resulted in an increasing percentage of our professional employees being billable at higher rates; and

 

    an increase in the billable rates in our economic practice attributable to the Lexecon acquisition.

 

Although average billable rates increased across all of our practice areas during 2004 as compared to 2003, the total company average billable rate decreased. This decrease was due to a larger percentage of our business being generated in 2004 by the forensic practice which has lower billable rates than our corporate finance practice. In 2003, our corporate finance practice accounted for 68.0% of our consolidated revenues, while in 2004, our corporate finance practice accounted for 38.1% of our consolidated revenues. At the same time, the percentage of consolidated revenues generated by our forensic practice increased from 27.4% during 2003 to 41.8% during 2004.

 

41


Segment Profits

 

We evaluate the performance of our operating segments based on operating income before depreciation, amortization and corporate selling, general and administrative expenses. Segment profit consists of the revenues generated by that segment, less the direct costs of revenues and selling, general and administrative costs that are incurred directly by that segment as well as an allocation of some centrally managed costs, such as information technology services, marketing and facility costs. Unallocated corporate costs include costs related to other centrally managed administrative costs. These administrative costs include corporate office support costs, costs relating to accounting, human resources, legal, company-wide business development functions, as well as costs related to overall corporate management.

 

Three and nine months ended September 30, 2005 compared to three and nine months ended September 30, 2004

 

     2004

    2005

    Percent
Change


 
     Segment
Profits


    % of
Segment
Revenues


    Segment
Profits


    % of
Segment
Revenues


   
     (dollars in thousands)  

Three Months Ended September 30,

                                  

Forensic

   $ 11,708     26.6 %   $ 16,786     30.4 %   43.4 %

Corporate Finance

     13,557     33.6 %     14,087     28.4 %   3.9 %

Economic Consulting

     3,354     16.8 %     7,211     25.4 %   115.0 %

Corporate

     (4,459 )   —         (7,827 )   —       75.5 %
    


 

 


 

 

Total Company

   $ 24,160     23.1 %   $ 30,257     22.7 %   25.2 %
    


 

 


 

 

Nine Months Ended September 30,

                                  

Forensic

   $ 38,737     28.9 %   $ 50,699     32.2 %   30.9 %

Corporate Finance

     38,816     31.5 %     41,507     30.7 %   6.9 %

Economic Consulting

     14,112     21.7 %     19,880     24.4 %   40.9 %

Corporate

     (16,242 )   —         (22,966 )   —       41.4 %
    


 

 


 

 

Total Company

   $ 75,423     23.4 %   $ 89,120     23.8 %   18.2 %
    


 

 


 

 

 

The increase in segment profits for the three and nine months ended September 30, 2005 as compared to 2004 was driven by several factors, including the following:

 

    a $5.1 million and a $12.0 million increase attributable to our forensic practice. Included in these increases is a $2.6 million increase for the three-month period and $5.5 million increase for the nine-month period attributable to the acquisition of Ringtail in February 2005. The remaining increase was due primarily to an increase in the number of billable professionals, coupled with an increase in utilization rates. This resulted in revenues growing at a faster pace than operating costs and thereby generating increased profitability.

 

    a $0.5 million and a $2.7 million increase attributable to our corporate finance practice. Improved segment profits in this practice are primarily attributable to the acquisition of Cambio which contributed to $2.3 million to the quarterly increase and $3.0 million to the year to date increase. Excluding the results generated by the Cambio acquisition, segment profits declined primarily as a result of an increased investment in our current and recently hired professionals to respond to increasing demand for our services. Segment profits also declined due to a decrease in utilization rates and a decline in the average billable rate per hour.

 

    a $3.9 million and a $5.7 million increase attributable to our economic consulting practice. This increase was due primarily to an increase in the number of billable professionals, and increased utilization of our professionals coupled with increasing average billable rates which results in increased profitability.

 

    offset by a $3.4 million and a $6.7 million increase in corporate overhead expenses which is discussed in more detail below under “—Results of Operations—Selling, General and Administrative Expense.”

 

42


Year ended December 31, 2004 compared to year ended December 31, 2003

 

    

Year Ended

December 31, 2003


   

Year Ended

December 31, 2004


    Percent
Change


 
     Segment
Profits


    % of
Segment
Revenues


    Segment
Profits


    % of
Segment
Revenues


   
     (dollars in thousands)        

Forensic

     N/A     N/A     $ 50,556     28.3 %   N/A  

Corporate Finance

     N/A     N/A       50,714     31.2 %   N/A  

Economic Consulting

     N/A     N/A       19,333     22.5 %   N/A  

Corporate

   $ (18,720 )   N/A       (26,185 )   N/A     39.9 %
    


 

 


 

 

Total

   $ 123,537     32.9 %   $ 94,418     22.1 %   (23.6 )%
    


 

 


 

 


N/A—Not available

 

In 2003, we did not operate our business practices as segments. Accordingly, we did not report results of operations by segment for that year.

 

Total segment profits decreased during the year ended December 31, 2004 as compared to the comparable period of 2003. This decrease was driven by several factors, including:

 

    the decrease in demand for our corporate finance related services, which began late in the third quarter of 2003;

 

    the unanticipated departure during the first quarter of 2004 of a number of billable professionals from our corporate finance practice who operated at high utilization rates;

 

    lower utilization rates generated by the businesses we acquired in late 2003 relative to our historical experience;

 

    lower gross profit margins generated by our recently acquired businesses, particularly Lexecon, an economic consulting business that operates in a competitive environment that typically generates lower gross margins than those experienced by our forensic and corporate finance practices;

 

    the increased investment in practice area expansion, including sign-on and direct compensation for several senior level professionals;

 

    a $4.7 million loss on abandoned facilities recorded in our corporate segment during 2004 related to the relocation and consolidation of our New York City and one of our Saddle Brook, New Jersey offices; and

 

    an increase in corporate overhead expenses driven largely by increased staffing and consulting costs to support our growing organization, to address the requirements of the Sarbanes-Oxley Act and to further strengthen our corporate governance activities.

 

During 2004, we addressed the decrease in demand for our services through the voluntary and involuntary turnover of our professionals as well as through reassignments of professionals to other practice areas. Our efforts were successful in neutralizing the impact of decreased demand for our services. Any decrease in revenues without a corresponding reduction in our costs would harm our profitability.

 

Critical Accounting Policies

 

General. Our discussion and analysis of our financial condition and results of operations is 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

 

43


contingent assets and liabilities. We evaluate our estimates, including those related to bad debts, goodwill, income taxes and contingencies on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These results 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 reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

Revenue Recognition. Our services are primarily rendered under arrangements that require the client to pay us on a time-and-expense basis. We recognize revenues for our professional services rendered under time-and-expense engagements based on the hours incurred at agreed upon rates as work is performed. We recognize revenues from reimbursable expenses in the period in which the expense is incurred. The basis for our policy is the fact that we normally obtain engagement letters or other agreements from our clients prior to performing any services. In these letters and other agreements, the clients acknowledge that they will pay us based upon our time spent on the engagement and at our agreed upon hourly rates. We are periodically engaged to provide services in connection with client matters where payment of our fees is deferred until the conclusion of the matter or upon the achievement of performance-based criteria. We recognize revenues for these arrangements when all the performance-based criteria are met and collection of the fee is reasonably assured.

 

Revenues recognized but not yet billed to clients is recorded at net realizable value as unbilled receivables in the accompanying consolidated balance sheets. Billings in excess of services provided represent amounts billed to clients, such as retainers, in advance of work being performed.

 

Some clients pay us retainers before we begin any work for them. We hold retainers on deposit until we have completed the work. We apply these retainers to final billings and refund any excess over the final amounts billed to clients, as appropriate, upon our completion of the work. If the client is in bankruptcy, fees for our professional services may be subject to court approval. In some cases, a portion of the fees to be paid to us by a client is required by a court to be held until completion of our work. We make a determination whether to record all or a portion of such a holdback as revenues prior to collection on a case-by-case basis.

 

Allowance for Doubtful Accounts and Unbilled Services. 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, as well as potential fee reductions or refunds imposed by bankruptcy courts. Even if a bankruptcy court approves of our services, it has the discretion to require us to refund all or a portion of our fees due to the outcome of the case or a variety of other factors. We estimate the allowance for these risks by reviewing the status of all accounts and recording reserves based on our experiences in these cases and historical bad debt expense. However, our actual experience may vary significantly from our estimates. If the financial condition of our clients were to deteriorate, resulting in their inability to pay our fees, or a bankruptcy court requires us to refund certain fees, we may need to record additional allowances or write-offs in future periods. This risk is mitigated to the extent that we may receive retainers from some of our clients prior to performing significant services.

 

The provision for doubtful accounts and unbilled services is recorded as a reduction to revenues to the extent the provision relates to fee adjustments, estimates of refunds that may be imposed by bankruptcy courts and other discretionary pricing adjustments. To the extent the provision relates to a client’s inability to make required payments, the provision is recorded as bad debt expense, which we classify within selling, general and administrative expense.

 

Goodwill and Other Intangible Assets. As of September 30, 2005, goodwill and other intangible assets represented 64.5% of our total assets. The majority of our goodwill and other intangible assets were generated from acquisitions we have completed since 2002. Other intangible assets include trade names, customer

 

44


relationships, contract backlog, non-competition agreements, software and intellectual property. We make at least annual assessments of impairment of our goodwill and intangible assets. 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 reporting units of our business that are associated with these assets. 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 and other intangible assets to their estimated implied fair value or net realizable value.

 

Income Taxes. Our income tax provision consists principally of federal and state income taxes. Our estimated combined federal and state income tax rate was 42% for the year ended December 31, 2004 and the first nine months of 2005. We generate income in a significant number of states located throughout the United States. Our effective income tax rate may fluctuate due to a change in the mix of earnings between higher and lower state tax jurisdictions and the impact of non-deductible expenses. Additionally, we record deferred tax assets and liabilities using the liability method of accounting, which requires us to measure these assets and liabilities using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We have not recorded any significant valuation allowances on our deferred tax assets as we believe the recorded amounts are more likely than not to be realized. If the assumptions used in preparing our income tax provision were to differ from those used in the preparation of our income tax return, we may experience a change in our effective income tax rate for the year.

 

Significant New Accounting Pronouncements

 

As permitted by Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation,” we currently account for share-based payments to employees using the intrinsic value method under Accounting Principles Board, or APB, Opinion No. 25. As such, we generally do not recognize compensation cost related to employee stock options. In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement No. 123(R), “Share-Based Payment,” which is a revision of Statement No. 123.

 

Statement No. 123(R) allows for two adoption methods:

 

    the modified prospective method which requires companies to recognize compensation cost beginning with the effective date of adoption based on (a) the requirements of Statement No. 123(R) for all share-based payments granted after the effective date of adoption and (b) the requirements of Statement No. 123 for all awards granted to employees prior to the effective date of adoption that remain unvested on the date of adoption; or

 

    the modified retrospective method which includes the requirements of the modified prospective method described above, but also requires restatement of prior period financial statements using amounts previously disclosed under the pro forma provisions of Statement 123.

 

We expect to adopt the standard effective January 1, 2006 using the modified prospective method.

 

Statement No. 123(R) requires all share-based payments to employees and directors to be recognized in the financial statements based on their fair values, using prescribed option-pricing models. Upon adoption of Statement No. 123(R), pro forma disclosure will no longer be an alternative to financial statement recognition. Accordingly, the adoption of the fair-value method prescribed by Statement No. 123(R) will have a significant impact on our results of operations, although it will not have an impact on our overall financial position. The impact of adopting Statement No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement No. 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement No. 123 as described above under “Stock-Based Compensation.”

 

45


Statement No. 123(R) also requires the benefit related to income tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current accounting principles. This requirement will reduce our net operating cash flows and increase our net financing cash flows in periods after adoption. When Statement No. 123(R) is adopted we may elect to change our valuation method or assumptions. Such changes could have an impact on the amount of stock-based compensation we record.

 

In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections.” This new standard replaces APB Opinion No. 20, “Accounting Changes” and Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” Among other changes, Statement No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented based on the new accounting principle, unless it is impracticable to do so. Statement No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for prospectively as a change in estimate that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be treated as a restatement. We are required to and will adopt the provisions of Statement No. 154 on January 1, 2006. We do not believe that the implementation of this standard will have a material impact on our financial position or results of operations.

 

Results of Operations

 

Three and nine months ended September 30, 2005 compared to three and nine months ended September 30, 2004

 

Revenues

 

     2004

    2005

    Percent
Change


 
     Revenues

   % of Total

    Revenues

   % of Total

   
     (dollars in thousands)  

Three Months Ended September 30,

                                

Forensic

   $ 44,035    42.2 %   $ 55,197    41.4 %   25.3 %

Corporate Finance

     40,409    38.7 %     49,605    37.2 %   22.8 %

Economic Consulting

     19,989    19.1 %     28,387    21.3 %   42.0 %
    

  

 

  

 

Total Company

   $ 104,433    100.0 %   $ 133,189    100.0 %   27.5 %
    

  

 

  

 

Nine Months Ended September 30,

                                

Forensic

   $ 133,890    41.6 %   $ 156,924    42.0 %   17.2 %

Corporate Finance

     123,272    38.3 %     135,441    36.2 %   9.9 %

Economic Consulting

     64,956    20.1 %     81,355    21.8 %   25.2 %
    

  

 

  

 

Total Company

   $ 322,118    100.0 %   $ 373,720    100.0 %   16.0 %
    

  

 

  

 

 

Revenues for the quarter ended September 30, 2005 increased $28.8 million, or 27.5%, as compared to the quarter ended September 30, 2004. Revenues for the nine months ended September 30, 2005 increased $51.6 million, or 16.0%, as compared to the nine months ended September 30, 2004. The increase in revenues is attributable to the following.

 

    Forensic Practice. Revenues increased by $11.2 million for the three-month period and by $23.0 million for the nine-month period. The acquisition of the Ringtail group on February 28, 2005 contributed to the increased revenues by $3.4 million for the three months ended September 30, 2005 as compared to 2004 and by $7.3 million for the nine months ended September 30, 2005 as compared to 2004. Our existing technology practice also contributed to the increased revenues in this practice by $5.7 million for the three months ended September 30, 2005 as compared to 2004 and by $13.0 million for the nine months ended September 30, 2005 as compared to 2004. The remaining increase is attributable to an increase in the number of billable professionals and higher utilization rates.

 

46


    Corporate Finance Practice. Revenues increased by $9.2 million for the three-month period and by $12.2 million for the nine-month period due to the following:

 

    a $8.0 million and a $10.8 million increase attributable to the acquisition of Cambio that occurred on May 31, 2005;

 

    a $2.0 million and a $7.1 million increase attributable to increases in hourly billing rates as well as increases in the number of billable professionals partially offset by decreased utilization rates and increased realization adjustments; and

 

    a $0.8 million decrease and a $0.8 million increase attributable to our merger and acquisitions group; offset by

 

    a $6.5 million decrease related to the unanticipated departure of a number of billable professionals during the nine months ended September 30, 2004.

 

    Economic Consulting Practice. Revenues increased by $8.4 million for the three-month period and by $16.4 million for the nine-month period primarily due to increased utilization of our professionals relating to increased demand for economic consulting services resulting from more robust market conditions in 2005 as compared to 2004.

 

Direct Cost of Revenues

 

     2004

    2005

    Percent
Change


 
     Cost of
Revenues


   % of
Segment
Revenues


    Cost of
Revenues


   % of
Segment
Revenues


   
     (dollars in thousands)  

Three Months Ended September 30,

                                

Forensic

   $ 23,364    53.1 %   $ 28,602    51.8 %   22.4 %

Corporate Finance

     19,857    49.1 %     27,067    54.6 %   36.3 %

Economic Consulting

     13,518    67.6 %     17,672    62.3 %   30.7 %
    

        

            

Total Company

   $ 56,739    54.3 %   $ 73,341    55.1 %   29.3 %
    

        

            

Nine Months Ended September 30,

                                

Forensic

   $ 70,903    53.0 %   $ 80,117    51.1 %   13.0 %

Corporate Finance

     64,097    52.0 %     71,632    52.9 %   11.8 %

Economic Consulting

     41,994    64.7 %     51,129    62.9 %   21.8 %
    

        

            

Total Company

   $ 176,994    55.0 %   $ 202,878    54.3 %   14.6 %
    

        

            

 

Our direct cost of revenues consists primarily of employee compensation and related payroll benefits, including the amortization of signing bonuses given in the form of forgivable loans, the cost of outside consultants that we retain to supplement our professional staff, reimbursable expenses, including travel and out-of-pocket expenses incurred in connection with an engagement; depreciation on equipment used to support our client engagements and other related expenses billable to clients. Direct cost of revenues decreased as a percentage of revenues for the three- and nine-month periods ended September 30, 2005 as compared to 2004 for the forensic practice. This is primarily due to higher utilization rates as well as the acquisition of Ringtail on February 28, 2005, which generates a high gross margin due to the nature of its software business as compared with the historical results of this operating segment. Direct cost of revenues also decreased as a percentage of revenues in our economic consulting practice for the three and nine months ended September 30, 2005 as compared to 2004 primarily due to hourly billing rate increases and increased utilization of billable professionals. Direct cost of revenues increased as a percentage of revenues in our corporate finance practice primarily due to decreased utilization of billable professionals and an increase in the number of billable professionals at lower average billable rates during the third quarter of 2005 as compared to the third quarter of 2004. In addition compensation expenses have also increased as we continue to invest in high quality people, particularly at the senior management level, to respond to increasing demand for our services.

 

47


Selling, General and Administrative Expense

 

     2004

    2005

    Percent
Change


 
     Selling, General
&
Administrative


   % of
Segment
Revenues


    Selling, General
&
Administrative


   % of
Segment
Revenues


   
     (dollars in thousands)  

Three Months Ended September 30,

                                

Forensic

   $ 9,875    22.4 %   $ 10,915    19.8 %   10.5 %

Corporate Finance

     7,374    18.3 %     8,883    17.9 %   20.5 %

Economic Consulting

     3,355    16.8 %     3,811    13.4 %   13.6 %

Corporate

     5,226    —         8,978    —       71.8 %
    

        

            

Total Company

   $ 25,830    24.7 %   $ 32,587    24.5 %   26.2 %
    

        

            

Nine Months Ended September 30,

                                

Forensic

   $ 26,787    20.0 %   $ 29,284    18.7 %   9.3 %

Corporate Finance

     21,570    17.5 %     23,546    17.4 %   9.2 %

Economic Consulting

     9,532    14.7 %     11,236    13.8 %   17.9 %

Corporate

     18,459    —         25,964    —       40.7 %
    

        

            

Total Company

   $ 76,348    23.7 %   $ 90,030    24.1 %   17.9 %
    

        

            

 

Selling, general and administrative expenses consist primarily of salaries and benefits paid to office and sales staff, rent, marketing, corporate overhead expenses, bad debt expense and depreciation and amortization of property and equipment. Segment selling, general and administrative costs include those expenses that are incurred directly by that segment as well as an allocation of some centrally managed costs, such as information technology services, marketing and facility costs. Unallocated corporate selling, general and administrative costs include expenses related to other centrally managed administrative and marketing functions. These costs include corporate office support costs, costs relating to accounting, human resources, legal, company-wide business development and advertising functions, as well as costs related to overall corporate management. Selling, general and administrative expenses decreased as a percentage of revenues across all operating segments for the three- and nine-month periods ended September 30, 2005 as compared to 2004 except for corporate overhead costs which increased as a percentage of total revenues from 5.7% during the first nine months of 2004 to 7.0% during the first nine months of 2005.

 

Selling, general and administrative expenses related to our operating segments increased by $3.0 million for the three months ended September 30, 2005 as compared to 2004 and $6.2 million for the nine months ended September 30, 2005 as compared to 2004. The increased expenses resulted from the following.

 

    Forensic Practice. Selling, general and administrative expenses increased by $1.0 million and $2.5 million for the three- and nine-month periods ended September 30, 2005 as compared to 2004. These increases are primarily due to a $0.8 million and $3.0 million increase in rent and facility related costs; a $0.4 million and a $0.8 million increase in recruiting expenses; offset by a $0.2 million and a $0.9 million decrease in bad debt expense and a $0.4 million decrease in other expenses during the nine-month period.

 

    Corporate Finance/Restructuring Practice. Selling, general and administrative expenses increased by $1.5 million and $2.0 million for the three- and nine-month periods ended September 30, 2005 as compared to 2004. These increases are primarily due to a $0.6 million and a $1.0 million increase in rent and facility related costs; a $0.5 and a $1.0 million increase in recruiting expenses for the nine-month period; a $0.4 million increase in outside service and legal expenses for the nine-month period; and a $0.7 million and a $0.8 million increase in payroll related and other expenses; offset by a $0.3 million and a $1.2 million decrease in bad debt expense.

 

   

Economic Consulting Practice. Selling, general and administrative expenses increased by $0.5 million and $1.7 million for the three- and nine-month periods ended September 30, 2005 as compared to 2004.

 

48


 

These increases are primarily due to a $0.3 million and a $0.7 million increase in rent and facility related costs; a $0.3 million increase in recruiting expenses for the nine-month period; a $0.4 million and a $1.0 million increase in payroll related and other expenses; offset by a $0.2 million and a $0.3 million decrease in bad debt expense.

 

Rent expense increased across all practices primarily due to the relocation of our New York City offices into a larger facility during the fourth quarter of 2004.

 

Our corporate selling, general and administrative expenses increased by $3.8 million for the three months ended September 30, 2005 as compared to 2004 and $7.5 million for the nine months ended September 30, 2005 as compared to 2004. The increase in expense for the three- and nine-month periods ended September 30, 2005 as compared to 2004 is attributable to:

 

    a $1.2 million and a $3.1 million increase in salaries and related employee expenses as a result of a 22.2% increase in the number of corporate employees necessary to support our growing organization as well as increased regulatory requirements;

 

    a $0.8 million and a $2.1 million increase related to office rent and facility related costs, including depreciation and amortization expense, to support a growing corporate services organization;

 

    a $0.9 million charge for the loss on subleased facilities in our current New York City location for the three- and nine-month periods;

 

    a $0.7 million and a $0.9 million increase in outside services, primarily due to increases in fees for audit, tax, legal and other consulting services; and

 

    a $0.2 million and a $0.5 million increase in advertising and other costs necessary to support a larger organization.

 

Amortization of Other Intangible Assets. The amortization expense related to other intangible assets increased by $0.7 million, or 56.9%, for the three months ended September 30, 2005 as compared to 2004 resulting from a $1.7 million increase attributable to the acquisitions completed during 2005 offset by a decrease of $1.0 million as substantially all of the contract backlog and non-competition agreements associated with the acquisitions completed in 2002 and 2003 became fully amortized during 2004. The amortization expense related to other intangible assets increased by $0.1 million, or 2.1%, for the nine months ended September 30, 2005 as compared to 2004 resulting from a $2.2 million increase attributable to the acquisitions completed during 2005, offset by a decrease of $2.1 million as substantially all of the contract backlog and non-competition agreements associated with the acquisitions completed in 2002 and 2003 became fully amortized during 2004.

 

Interest Expense and Other. During 2004 and through the second quarter of 2005, interest expense primarily consists of interest on our term loans and revolving line of credit. Since August 2, 2005, interest expense is primarily attributable to the old notes and the convertible notes. As a result of higher average borrowings outstanding during the third quarter and higher average borrowing rates in 2005 as compared to 2004, interest expense has increased by $3.3 million during the three-month period ended September 30, 2005 as compared the same period in 2004 and by $4.4 million during the nine-month period ended September 30, 2005 as compared to the same period in 2004.

 

Early Extinguishment of Term Loans. On August 2, 2005, we used $142.5 million of the net proceeds from our senior notes and convertible notes offerings to repay all outstanding term loan borrowings under our senior secured credit facility prior to maturity. As a result of this early extinguishment of debt, we wrote off $1.7 million of unamortized debt financing fees.

 

Litigation Settlement Gains (Losses), net. Litigation settlement gains (losses), net for the nine months ended September 30, 2005 consists primarily of $0.7 million we paid in May 2005 to settle potential litigation in connection with a company we sold in 2003 as well as other smaller settlements.

 

49


Year ended December 31, 2004 compared to year ended December 31, 2003

 

Revenues

 

     Year ended December 31,

    Percent
Change


 
     2003

    2004

   
     Revenues

   % of
Total


    Revenues

   % of
Total


   
     (dollars in thousands)  

Forensic

   $ 103,101    27.4 %   $ 178,650    41.8 %   73.3 %

Corporate Finance

     255,336    68.0 %     162,495    38.1 %   (36.4 )%

Economic Consulting

     17,258    4.6 %     85,860    20.1 %   397.5 %
    

  

 

  

     

Total

   $ 375,695    100.0 %   $ 427,005    100.0 %   13.7 %
    

  

 

  

     

 

Revenues from continuing operations increased during the year ended December 31, 2004 as compared to 2003. This increase is primarily attributable to the acquisitions we completed during the fourth quarter of 2003 offset by the decrease in demand for our corporate finance services, which began during the third quarter of 2003, as well as the unanticipated departure of professionals from this practice during the first quarter of 2004. The acquisitions of Ten Eyck and the dispute advisory services business from KPMG accounted for about $67.8 million of the $75.5 million increase in revenues from our forensic practice. The remainder of the increase in revenues from our forensic practice is primarily attributable to growth in our trial consulting business.

 

The acquisition of Lexecon accounted for substantially all of the increase in revenues related to our economic consulting practice.

 

Our corporate finance practice accounted for 68.0% of our revenues during the year ended December 31, 2003 as compared to 38.1% during the year ended December 31, 2004. Late in the third quarter of 2003, we began to experience a decrease in demand for our corporate finance related services, which negatively impacted our revenues from that practice. The departure of a number of our billable professionals in the corporate finance practice during the first quarter of 2004 also contributed to the decrease in revenues from that practice. Because this practice generates the highest billable rate per hour, the decrease in revenues attributable to this practice has largely impacted our overall revenue growth. Revenues attributable to this practice stabilized beginning in the second quarter of 2004 after decreasing significantly from the fourth quarter of 2003 to the first quarter of 2004.

 

Direct Cost of Revenues

 

     Year ended December 31,

    Percent
Change


 
     2003

    2004

   
     Cost of
Revenues


   % of
Segment
Revenues


    Cost of
Revenues


   % of
Segment
Revenues


   
     (dollars in thousands)  

Forensic

   $ 57,256    55.5 %   $ 95,473    53.4 %   66.7 %

Corporate Finance

     108,826    42.5 %     84,877    52.2 %   (22.0 )%

Economic Consulting

     10,347    60.0 %     54,620    63.6 %   427.9 %
    

        

            

Total

   $ 176,429    47.0 %   $ 234,970    55.0 %   33.2 %
    

        

            

 

Direct cost of revenues increased as a percentage of revenues in both our corporate finance and economic consulting segments primarily due to lower utilization rates experienced by those practices during the year ended December 31, 2004 as compared to the same period in 2003. This resulted from revenues growing at a slower pace than direct costs. In addition:

 

   

The number of revenue generating professionals in our corporate finance practice decreased by 20.3%, from 305 to 243, resulting in a decrease in direct costs in that practice. The unanticipated departure of

 

50


 

some of our professionals in this practice during the first quarter of 2004 accounts for the majority of the decrease. This contributed to the increase in direct costs as a percentage of revenues in that practice, primarily because these professionals generally operated at higher utilization rates and higher billable rates than our other professionals.

 

    The acquisition of Lexecon, which operates at a lower gross margin than our other operating segments, contributed to the increase in our economic consulting practice.

 

    During 2004, we paid $10.6 million in signing bonuses to attract and retain highly-skilled professionals. These signing bonuses were granted in the form of forgivable loans that we are amortizing over periods of one to five years. These signing bonuses increased direct costs during 2004 as compared to 2003 by $0.8 million in the forensic practice, $1.4 million in the corporate finance practice and $0.4 million in the economic consulting practice.

 

Direct cost of revenues as a percentage of revenues for the forensic practice decreased slightly during 2004 as compared to 2003. This is primarily due to an improvement in utilization rates which resulted in revenues growing at a faster pace than direct costs.

 

Selling, General and Administrative Expense

 

     December 31,

    Percent
Change


 
     2003

    2004

   
     Selling, General
&
Administrative


   % of
Segment
Revenues


    Selling, General
&
Administrative


   % of
Segment
Revenues


   
     (dollars in thousands)  

Forensic

     N/A    N/A     $ 36,175    20.2 %   N/A  

Corporate Finance

     N/A    N/A       28,512    17.5 %   N/A  

Economic Consulting

     N/A    N/A       12,839    15.0 %   N/A  

Corporate

   $ 17,632    N/A       24,534    N/A     39.1 %
    

        

            

Total

   $ 78,701    20.9 %   $ 102,060    23.9 %   29.7 %
    

        

            

N/A—Not available

 

Selling, general and administrative expense increased as a percentage of our total revenues for the year ended December 31, 2004 as compared to 2003. This increase is largely attributable to increased personnel, facilities and general corporate expenses associated with the businesses we acquired in late 2003. The number of non-billable employees increased by 12.4%, from 258 at December 31, 2003 to 290 at December 31, 2004.

 

The increase in corporate overhead expenses is primarily related to increased back-office staffing and related costs to support our growing organization. In addition, corporate staffing and consulting costs have increased to address the requirements of the Sarbanes-Oxley Act and to further strengthen our corporate governance activities. In particular, beginning in late 2003 we began expanding our internal legal and audit departments and enhanced our regulatory reporting functions.

 

Bad debt expense increased as a percentage of revenues from 1.4% for the year ended December 31, 2003 to 1.7% for the year ended December 31, 2004. This increase accounted for $2.0 million of the increase in our total selling, general and administrative expenses. The majority of this increase, or $1.6 million, is attributable to our acquired operations. The remaining increase is primarily attributable to our corporate finance practice. The days sales outstanding related to our corporate finance practice more than doubled, from just under 30 days to just under 60 days. As a result of the unanticipated departure of professionals during the first quarter of 2004, we returned a large volume of retainers to clients we lost. This resulted in an increase in days sales outstanding, as the remaining part of this practice does not generally obtain large retainers in advance of performing work.

 

51


Depreciation and amortization of property and equipment classified within total selling, general and administrative expense increased by $3.1 million, or 51.1%, from the year ended December 31, 2003 as compared to the same period in 2004. This increase is a result of the increase in the furniture and equipment and office build-out necessary to support a larger organization which grew as a result of the acquisitions we completed during the fourth quarter of 2003.

 

Loss on Abandoned Facilities. During the fourth quarter of 2004, we consolidated our New York City and one of our Saddle Brook, New Jersey offices and relocated our employees into new office facilities in New York City. As a result of this decision, we vacated our leased office facilities prior to the lease termination dates. During the fourth quarter of 2004, we recorded a loss of $4.7 million related to the abandoned facilities.

 

Special Termination Charges. During the fourth quarter of 2003 we recorded $3.1 million of special termination charges. These charges relate to contractual benefits payable to specified employees as a result of the termination of their employment.

 

Amortization of Other Intangible Assets. The amortization expense related to other intangible assets increased by $3.2 million, or 85.8%, for the year ended December 31, 2004 as compared to the same period in 2003. This increase is related to the identifiable intangible assets recorded in connection with the acquisitions we completed during the fourth quarter of 2003.

 

Interest Expense. Interest expense consists primarily of interest on debt we incurred to purchase businesses over the past several years, including the amortization of deferred bank financing fees. Interest expense increased by $1.0 million, or 18.7%, for the year ended December 31, 2004 as compared to 2003. This increase is primarily attributable to higher average borrowings outstanding during 2004 as compared to 2003. Average borrowings increased in the fourth quarter of 2003 and remained at this higher level throughout 2004 as a result of the three business combinations completed in late 2003. During the year ended December 31, 2003, we wrote off $768,000 of deferred bank financing fees as a result of the early extinguishment of long-term debt.

 

Discount on Note Receivable. In December 2004, we agreed to discount a note receivable due from the owners of one of our former subsidiaries. We discounted this note by $475,000 in exchange for payment of the note ahead of its maturity in 2010. We received this prepayment in January 2005.

 

Litigation Settlement Gains (Losses), Net. During the fourth quarter of 2004, we reached a settlement on various lawsuits. As a result, we recorded a gain of $1.7 million, net of legal costs.

 

Income Taxes. Our effective tax rate for continuing operations was 42.1% during 2004 and 40.9% during 2003. Our effective tax rate increased over the past year as a result of an increasing portion of our taxable income being generated in state and local jurisdictions with higher tax rates. See note 9 of Notes to Consolidated Financial Statements appearing elsewhere in this prospectus 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. We anticipate that our effective tax rate during 2005 will be similar to 2004.

 

Year ended December 31, 2003 compared to year ended December 31, 2002

 

Revenues. Revenues from continuing operations increased 67.6% from $224.1 million for the year ended December 31, 2002 to $375.7 million for 2003. This increase is primarily attributable to the acquisition of BRS, which occurred on August 30, 2002. Our corporate finance practice accounted for about 68% of our revenues during 2003. About 27% of our revenues was attributable to our forensic practice, and less than 5% of our revenues was derived from our economic consulting practice.

 

During the third quarter of 2003, we began to experience a decrease in demand for our corporate finance related services. Consequently, the decrease in the demand for those services resulted in a lower utilization of billable professionals during the second half of 2003 than we had experienced in earlier quarters and a decline in

 

52


the growth of our revenues beginning in the third quarter of 2003. We began mitigating the impact of this decrease in demand by redeploying some of these professionals to work on transaction support, loan due diligence reviews and forensic accounting assignments where demand was higher. In addition, during the fourth quarter of 2003, we recorded a special termination charge totaling $3.1 million related to contractual benefits due to specified employees as a result of the termination of their employment.

 

Headcount Summary

 

As of December 31,


   Billable

    Non-billable

    Total

 

2002(1)

   610     159     769  

2003

   827     258     1,085  
    

 

 

Increase

   217     99     316  
    

 

 

% Increase

   35.6 %   62.3 %   41.1 %

(1) The headcount information for 2002 excludes 294 employees associated with our discontinued operations.

 

The number of billable employees increased from December 31, 2002 to December 31, 2003 largely due to the acquisitions of Lexecon and KPMG’s dispute advisory services business. We acquired about 290 billable employees as a result of these transactions in the fourth quarter of 2003. During the latter part of 2003, our corporate finance practice experienced a decrease in billable employees related to the decreased demand for these services.

 

Utilization of billable professionals was about 83% during 2003, compared to about 88% for the same period of 2002. We experienced a decrease in utilization rates across our largest practice areas in 2003, consisting of our corporate finance and forensic practices. During 2003, the volume of bankruptcy cases declined. As a result, utilization rates decreased in our corporate finance practice primarily due to the decrease in demand for these services. The decrease in utilization rates in our forensic practice is primarily attributable to the DAS business that we acquired from KPMG in the fourth quarter of 2003. We acquired 151 billable employees from this transaction. The overall utilization rate of these professionals was lower than our existing practice. As a result, we actively repositioned our resources to focus on services where demand was higher.

 

Our average billable rate per hour for 2003, as it was measured prior to our modification of the calculation effective January 1, 2005, was $363, an increase from an average of $311 for 2002. The improvement in our bill rates was the result of several factors, including:

 

    an increase in our standard hourly bill rates during the year;

 

    an increased concentration of corporate finance practice, beginning in August 2002, which typically have higher hourly bill rates than some of our other practice areas; and

 

    a decrease in billable employees in our corporate finance practice primarily at the lower levels, which resulted in an increasing percentage of our professional employees being billable at higher rates.

 

Direct Cost of Revenues. 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. Direct cost of revenues from our continuing operations was 47.0% of our total revenues for the year ended December 31, 2003 as compared to 48.2% for the comparable period in 2002. The increases in our bill rates resulted in revenues increasing at a faster rate than direct costs.

 

Selling, General and Administrative Expense. Selling, general and administrative expense was 20.9% of our total revenues for 2003 and 23.0% for 2002. This improvement in 2003 was primarily due to the greater leverage of our corporate overhead costs in relation to our increased revenue base resulting primarily from the acquisition of BRS. Although selling, general and administrative expense did not increase as a percentage of revenues, it increased

 

53


in absolute dollars by $27.1 million. This increase is largely attributable to increased personnel, facilities and general corporate expenses associated with the acquired operations of BRS and other business expansion.

 

Our corporate overhead expenses, included in selling, general and administrative expense, represented about 5.0% of total revenues for the year ended December 31, 2003 and 6.8% for 2002. Although corporate overhead expenses did not increase as a percentage of revenues, it increased in absolute dollars by $3.5 million or 23.1%. The increase in corporate overhead expenses is primarily related to increased staffing and consulting costs to address the requirements of the Sarbanes-Oxley Act and to further strengthen our corporate governance and control activities. In particular, we have created an internal legal department, expanded internal audit activities and enhanced our regulatory reporting functions. We also increased our back-office staffing during 2003 to support our growing organization. The decline in our corporate overhead costs relative to our revenues reflects the increased leverage of our overhead and corporate support services in relation to our increased revenue base.

 

Bad debt expense, included in selling, general and administrative expense, increased from 1.2% of revenues for the year ended December 31, 2002 to 1.4% of revenues for 2003. This increase represented $2.3 million of the increase in selling, general and administrative expense.

 

Depreciation and amortization of property and equipment increased by $2.1 million from $4.9 million for the year ended December 31, 2002 to $7.0 million during 2003 as a result of the increase in the furniture and equipment necessary to support a larger organization. Depreciation and amortization decreased from 2.2% of revenues during 2002 to 1.9% of revenues during 2003.

 

Amortization of Other Intangible Assets. In connection with the acquisition of BRS in August 2002, we recorded $5.1 million of other intangible assets, consisting primarily of client backlog. We began to amortize these other intangible assets in September 2002. Amortization expense of $1.0 million in 2002 is entirely attributable to the BRS acquisition. We recorded additional amortizable intangible assets in connection with our acquisition activities in the fourth quarter of 2003. Amortization expense increased by $2.7 million to $3.7 million during 2003 of which $3.1 million relates to the BRS acquisition and $0.6 million relates to the acquisitions completed in 2003.

 

Interest Income. Interest income increased $1.0 million from the year ended December 31, 2002 to $1.2 million during 2003. This increase is primarily due to income recognized on the investment of higher average cash balances during 2003, primarily resulting from the net proceeds received from the public offering of our common stock in February 2003 as well as increasing cash flows provided by operations.

 

Interest Expense. Interest expense consists primarily of interest on debt we incurred to purchase businesses over the past several years. Interest rates during 2003 were lower than in 2002, although the additional borrowings in August 2002 to acquire BRS substantially increased the amount of our outstanding debt at the beginning of 2003 as compared to 2002. At December 31, 2002, we had $97.8 million of outstanding bank debt, and at December 31, 2003, we had $121.3 million of outstanding bank debt.

 

Interest expense increased from $4.9 million during the year ended December 31, 2002 to $5.4 million during 2003. Interest expense in 2003 includes $768,000 of deferred debt financing fees we wrote off in connection with the early debt extinguishments during the year. Interest expense increased during this period primarily due to the higher average borrowings outstanding during 2003 as a result of our additional borrowings in August 2002 to acquire BRS.

 

Income Taxes. Our effective tax rate for continuing operations in 2003 was 40.9% compared to 40.4% in 2002. Our effective tax rate increased from 2002 to 2003 as a result of an increasing portion of our taxable income being generated in state and local jurisdictions with high tax rates. See note 9 of Notes to Consolidated Financial Statements appearing elsewhere in this prospectus 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.

 

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Liquidity and Capital Resources

 

Cash Flows

 

    Year Ended
December 31,


    Changes from
Previous Year


    Nine Months Ended
September 30,


    Change from
Previous Year


 
    2003

    2004

    Dollars

    Percent

    2004

    2005

    Dollars

  Percent

 
    (dollars in thousands)  

Net cash provided by operating activities

  $ 100,177     $ 58,443     $ (41,734 )   (41.7 )%   $ 30,232     $ 43,503     $ 13,271   43.9 %

Net cash used in investing activities

    (231,741 )     (13,693 )     218,048     94.1 %     (8,551 )     (57,658 )     49,107   574.3 %

Net cash provided by (used in) financing activities

    127,423       (24,811 )     (152,234 )   (119.5 )%     (18,459 )     103,708       122,167   661.8 %

 

Nine months ended September 30, 2005 compared to nine months ended September 30, 2004

 

We have historically financed our operations and capital expenditures solely through cash flows from operations. During the first quarter of our fiscal year, our working capital needs generally exceed our cash flows from operations due to the payments of annual incentive compensation amounts and estimated income taxes. As a result, we used borrowings under our revolving line of credit to finance some of our cash needs for operating activities and capital expenditures. We also used borrowings under our revolving line of credit during the first quarter to finance our acquisition of Ringtail and our share repurchase program, discussed in more detail below. Our cash flows from operations improved during 2004 and 2005 subsequent to the first quarter of each year.

 

Our operating assets and liabilities consist primarily of billed and unbilled accounts receivable, accounts payable and accrued expenses and accrued compensation expense. The timing of billings and collections of receivables as well as payments for compensation arrangements affect the changes in these balances. During 2005, our accounts receivable, net of billings in excess of services provided have increased across all practice areas since December 31, 2004. This is primarily due to increasing revenues. Our days sales have increased by about 3 days since December 31, 2004, but have improved since March 31, 2005, due to our increased focus on collection activities. At September 30, 2005, billed and unbilled accounts receivable for our economics practice include $10.5 million of fees for services rendered where payment will not be received until completion of the matter. This specific matter causes days sales outstanding to increase in this practice.

 

Net cash used in investing activities during the nine months ended September 30, 2005 increased $49.1 million as compared to the same period in 2004. This is primarily due to the $26.3 million of net cash used to acquire Cambio, which represents the total cash paid for the acquisition of $29.5 million net of $3.2 million of cash received, the $19.6 million we used to fund the Ringtail acquisition, an increase in capital expenditures of $5.4 million to support our growing organization, offset by $5.5 million received as payment in full from a note receivable due from the purchasers of one of our former subsidiaries. The $5.4 million increase in capital expenditures is primarily due to an increase in spending to relocate and expand our computer data center to support our growing organization and technology business, to modify and expand our office facilities and to acquire additional furniture and information technology equipment, some of which was acquired to directly support client engagements. We had no material outstanding purchase commitments as of September 30, 2005.

 

Our financing activities have consisted principally of borrowings and repayments under long-term debt arrangements as well as issuances of common stock. Our long-term debt arrangements have principally been obtained to provide financing for our business acquisitions or to refinance existing indebtedness. During the nine months ended September 30, 2004, our financing activities consisted principally of $11.3 million of principal payments on our term loans. During the nine months ended September 30, 2005, our financing activities consisted of $350.0 million of gross proceeds from our senior notes and convertible notes offerings and additional term loan borrowings of $50.0 million offset by $155.0 million used to fully repay our term loans and $13.0 million used to pay debt financing costs.

 

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In October 2003, our board of directors authorized the purchase, from time to time, of up to $50.0 million of our common stock. During 2005, the authorized amount has been increased to a total of $187.5 million. Our share repurchase program is effective through December 31, 2006. The shares of common stock may be purchased through open market or privately negotiated transactions and will be funded with a combination of cash on hand, existing bank credit facilities or new credit facilities. During the nine months ended September 30, 2004, we purchased and retired 578,900 shares of our common stock at a total cost of about $9.3 million. During the nine months ended September 30, 2005, we purchased and retired 5.6 million shares of our common stock at a total cost of about $133.1 million, of which we financed $125.3 million from the net proceeds of our convertible notes offering. Since inception of the program, we have purchased and retired a total of 6.5 million shares of our common stock for a total of $147.9 million leaving $39.6 million authorized for future purchases.

 

Year ended December 31, 2004 compared to year ended December 31, 2003

 

During the early part of 2004, our operating income declined as compared to the same period of 2003. As a result, we used borrowings under our revolving line of credit to finance some of our cash needs for operating activities and capital expenditures during 2004. We also used borrowings under our revolving line of credit to finance our share repurchase program. As of December 31, 2004, we fully repaid all borrowings under our revolving line of credit. During 2004, our working capital requirements were higher than we have historically experienced primarily due to:

 

    increased requirements during the first quarter of 2004 to fund the working capital needs of the dispute advisory services business of KPMG that we acquired in October 2003;

 

    increased quarterly incentive compensation payments attributable to the Lexecon business that we acquired in November 2003, as Lexecon has more frequent incentive compensation payments than our existing businesses;

 

    increased sign-on and retention compensation paid during 2004 to attract senior level professionals and retain our strongest performers; and

 

    refunds of retainer balances associated with the loss of client engagements resulting from the departure of corporate finance professionals.

 

Our billed and unbilled accounts receivable, net of billings in excess of services provided, increased during 2004 primarily due to the following:

 

    A decrease in retainers we collect from our clients prior to the performance of our service. Historically, our corporate finance practice has generated the largest amount of retainers from our clients prior to beginning any billable work. This practice area also generates the lowest days sales outstanding rate in our company. The professionals that left us during the first quarter of 2004 transferred some of our clients and engagements to their new company. As a result, we were required to refund a large amount of retainer balances. Accordingly, the average days sales outstanding in this practice area more than doubled, from under 30 days to just under 60 days. The corporate finance practice continues to have the shortest collection period in our company.

 

    The acquisition of the dispute advisory services business of KPMG. We did not acquire any accounts receivable when we acquired the dispute advisory services business of KPMG during the fourth quarter of 2003. This business also did not begin to generate a substantial amount of revenues until late in the first quarter of 2004. Accordingly, the net accounts receivable attributable to the forensic practice has increased substantially more than our other practice areas during 2004 as compared to December 31, 2003.

 

   

The acquisition of Lexecon. The average days sales outstanding for our economic consulting practice is the highest in our company which is attributable to the acquisition of Lexecon late in the fourth quarter of 2003. Lexecon has been engaged to provide services for a client where payment of our fees is deferred until the conclusion of the matter. At December 31, 2004, billed and unbilled receivables for

 

56


 

this business included $7.3 million of fees for services rendered where payment will not be received until completion of the matter. This specific matter is the primary reason for days sales outstanding increasing in the economic consulting practice.

 

Net cash used in investing activities during the year ended December 31, 2004 decreased $218.0 million as compared to the same period in 2003, primarily due to $234.1 million of cash used during 2003 to fund our acquisition activities offset by $12.2 million of cash received during 2003 from the sale of our applied sciences practice.

 

Due to the acquisitions we completed during the fourth quarter of 2003, our average employee headcount during 2004 was about 20% higher than during 2003. Accordingly, capital expenditures increased from $10.6 million during 2003 to $11.9 million during 2004 to support a larger organization during 2004 as compared to during 2003. This increase is primarily due to an increase in spending for leasehold improvements to modify and expand our office facilities, and to acquire additional furniture and information technology equipment. We had no material outstanding purchase commitments as of December 31, 2004.

 

During the first quarter of 2003, we completed the public offering of 4.0 million shares of our common stock, generating net cash proceeds of $99.2 million. We used about half of the net proceeds from the stock offering to repay our long-term debt. We also used all of the net cash proceeds from the sale of our applied sciences practice to repay debt. During the fourth quarter of 2003, we borrowed $104.1 million under our senior secured credit facility in order to finance our acquisition of Lexecon. During the year ended December 31, 2004, our financing activities consisted principally of $16.3 million of principal payments on our term loans and $47.5 million of borrowings under our revolving line of credit that were repaid in full during the year.

 

During 2003, we purchased and retired 194,200 shares of our common stock under our share repurchase program at a total cost of about $4.0 million. During 2004, we purchased and retired 657,300 shares of our common stock under our share repurchase program at a total cost of about $10.8 million.

 

Capital Resources

 

Our senior secured credit facility, as amended on April 19, 2005 and August 2, 2005, provides for a $100.0 million revolving line of credit. The maturity date of the revolving line of credit is November 28, 2008. We may choose to repay outstanding borrowings under the senior secured credit facility at any time before maturity without penalty. Debt under the senior secured credit facility bears interest at an annual rate equal to the Eurodollar rate plus an applicable margin or an alternative base rate defined as the higher of (1) the lender’s announced prime rate or (2) the federal funds rate plus the sum of 50 basis points and an applicable margin. Under the senior secured credit facility, the lenders have a security interest in substantially all of our assets.

 

Our senior secured credit facility and the indenture governing the notes and the exchange notes contain covenants which limit our ability to incur additional indebtedness; create liens; pay dividends on, make distributions or repurchases of our capital stock or make specified other restricted payments; consolidate, merge or sell all or substantially all of our assets; guarantee obligations of other entities; enter into hedging agreements; enter into transactions with affiliates or related persons or engage in any business other than the consulting business. The senior secured credit facility requires compliance with financial ratios, including total indebtedness to earnings before interest, taxes, depreciation and amortization, or EBITDA; EBITDA to specified charges and the maintenance of a minimum net worth, each as defined under the senior secured credit facility. At September 30, 2005, we were in compliance with all covenants as stipulated in the senior secured credit facility and the indenture governing the notes.

 

As of September 30, 2005, our capital resources included $115.3 million of cash and cash equivalents and $100.0 million of borrowing capacity under our revolving line of credit. As of September 30, 2005, we had no borrowings outstanding under our revolving line of credit. The availability of borrowings under our revolving

 

57


line of credit is subject to specified borrowing conditions. We use letters of credit primarily as security deposits for our office facilities. Letters of credit reduce the availability under our revolving line of credit. As of September 30, 2005, we had $8.6 million of outstanding letters of credit, which reduced the available borrowings under our revolving line of credit to $91.4 million.

 

Future Capital Needs. We anticipate that our future capital needs will principally consist of funds required for:

 

    operating and general corporate expenses relating to the operation of our business;

 

    capital expenditures, primarily for information technology equipment, office furniture and leasehold improvements;

 

    debt service requirements;

 

    discretionary funding for our share repurchase program; and

 

    potential acquisitions of businesses that would allow us to diversify or expand our current service offerings.

 

We anticipate capital expenditures will be about $13.0 million to $15.0 million to support our organization during 2005 including direct support for specific client engagements. Our estimate takes into consideration the needs of our existing business as well as the needs of our recently completed acquisitions of Ringtail and Cambio, but does not include the impact of any purchases that we may be required to make to support specific client engagements that are not currently contemplated. Our capital expenditure requirements may change if our staffing levels or technology needs change significantly from what we currently anticipate, if we are required to purchase additional equipment specifically to support a client engagement or if we pursue and complete additional business combinations.

 

Off-Balance Sheet Arrangements

 

On July 28, 2005, we entered into an accelerated share repurchase transaction for 2.3 million shares of our common stock as part of our publicly announced share repurchase program that allows us to purchase up to $187.5 million shares of our common stock through December 31, 2006. To implement this transaction, we entered into a forward contract with an investment bank that is indexed to and potentially settled in our own common stock. The forward contract is a derivative instrument which is classified as equity and is therefore considered to be an off-balance sheet arrangement. For additional information, see note 7 to our unaudited quarterly consolidated financial statements appearing elsewhere in this registration statement.

 

We have no other off-balance sheet arrangements other than operating leases and we have not entered into any transactions involving unconsolidated subsidiaries or special purpose entities.

 

Future Contractual Obligations

 

The following table sets forth our estimates as to the amounts and timing of contractual payments for our most significant contractual obligations and commitments as of September 30, 2005. The table does not include any amounts that we may be obligated to pay for our accelerated share repurchase program described under “Off-Balance Sheet Arrangements.” The information in the table reflects future unconditional payments and is based on the terms of the relevant agreements, appropriate classification of items under generally accepted accounting principles currently in effect and certain assumptions such as interest rates. Future events could cause actual payments to differ from these amounts. See “Cautionary Notice Regarding Forward-Looking Statements.”

 

Future contractual obligations related to our long-term debt assume that payments will be made based on the current payment schedule and exclude any additional revolving line of credit borrowings or any revolving line of credit repayments prior to the November 28, 2008 maturity date.

 

58


The interest obligation on our long-term debt assumes that our senior notes and our convertible notes will bear interest at their standard rates. If we are unable to comply with the terms of our registration rights agreements, we may be required to pay additional interest on our senior notes or convertible notes.

 

Future contractual obligations related to our operating leases are net of our contractual sublease receipts. The payment amounts for capital lease obligations include amounts due for interest.

 

Contractual Obligations


   Total

   2005

   2006

   2007

   2008

   2009

   2010

   Thereafter

     (in thousands)

Notes

   $ 200,000    $ —      $ —      $ —      $ —      $ —      $ —      $ 200,000

Convertible notes(1)

     150,000      —        —        —        —        —        —        150,000

Interest on the notes

     158,175      4,956      20,344      20,875      20,875      20,875      20,875      49,375

Operating leases

     151,527      2,529      11,446      11,041      11,735      12,017      11,699      91,060

Capital leases

     146      47      80      16      3      —        —        —  
    

  

  

  

  

  

  

  

Total obligations

   $ 659,848    $ 7,532    $ 31,870    $ 31,932    $ 32,613    $ 32,892    $ 32,574    $ 490,435
    

  

  

  

  

  

  

  


(1) The convertible notes are convertible prior to their stated maturity upon the occurrence of certain events beyond our control. Upon conversion, the principal is payable in cash. See “Description of Other Indebtedness—Convertible Notes” for additional information.

 

Future Outlook

 

We believe that our anticipated operating cash flows and our total liquidity, consisting of our cash on hand and $91.4 million of availability under our revolving line of credit, are sufficient to fund our capital and liquidity needs for at least the next twelve months. In making this assessment, we have considered:

 

    our $115.3 million of cash and cash equivalents at September 30, 2005;

 

    funds required for debt service payments, including interest payments on the notes;

 

    funds required for capital expenditures during 2005 of about $12.0 million to $15.0 million;

 

    the discretionary funding of our share repurchase program; and

 

    other future contractual obligations.

 

For the last several years, our cash flows from operations have exceeded our cash needs for capital expenditures and debt service requirements. We believe that our cash flows from operations, supplemented by short-term borrowings under our senior secured credit facility, as necessary, will provide adequate cash to fund our long-term cash needs from normal operations.

 

Our conclusion that we will be able to fund our cash requirements by using existing capital resources and cash generated from operations does not take into account the impact of any acquisition transactions, not currently contemplated, or any unexpected changes in significant numbers of revenue-generating professionals. The anticipated cash needs of our business could change significantly if we pursue and complete additional business acquisitions, if our business plans change, if economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that may have a material effect on the cash flow or profitability of our business. Any of these events or circumstances, including any new business opportunity, could involve significant additional funding needs in excess of the identified currently available sources and could require us to raise additional debt or equity funding to meet those needs. Our ability to raise additional capital, if necessary, is subject to a variety of factors that we cannot predict with certainty, including:

 

    our future profitability;

 

    the quality of our accounts receivable;

 

59


    our relative levels of debt and equity;

 

    the volatility and overall condition of the capital markets; and

 

    the market prices of our securities.

 

Any new debt funding, if available, may be on terms less favorable to us than our senior secured credit facility or the indentures that govern the notes and the convertible notes.

 

Quantitative and Qualitative Disclosures about Market Risk

 

We primarily use senior notes and bank credit facilities to finance our obligations. We are exposed to market risk from changes in interest rates and equity prices. Our primary interest rate risk results from changes in the London Interbank Offered Rate, or LIBOR, U.S. Prime and Eurodollar rates, which are used to determine the interest rates applicable to our borrowings. Interest rate changes expose our fixed rate long-term borrowings to changes in fair value and expose our variable rate long-term borrowings to changes in future cash flows. From time to time, we use derivative instruments primarily consisting of interest rate swap agreements to manage this interest rate exposure by achieving a desired proportion of fixed rate versus variable rate borrowings. All of our derivative transactions are entered into for non-trading purposes.

 

The table below summarizes our market risks as of September 30, 2005 and December 31, 2004. Since our financial instruments expose us to interest rate risks, these instruments are presented within each market risk category. The table presents principal cash flows and related weighted average interest rates by year of maturity for our senior notes and our convertible notes. The table excludes the potential exercise of the relevant redemption or conversion features. For interest rate swap agreements, the table presents notional amounts and related interest rates by year of maturity. As of September 30, 2005, fair values included in this section have been determined based on estimates from investment bankers for our senior notes and our convertible notes and estimates from bankers to settle interest rate swap agreements. As of December 31, 2004, we have estimated the fair value of our senior secured credit facility based on its carrying value, as interest rates are reset every 30 to 90 days.

 

    December 31, 2004

  September 30, 2005

    Year of Maturity

 
    Total

   

Fair

Value


  Total

   

Fair

Value


      2005  

    2006  

    2007  

    2008  

    2009  

  Thereafter

 
    (dollars in thousands)  

Interest Rate Sensitivity:

                                                                   

Long-Term debt

                                                                   

Fixed rate

  $ —       $ —     $ 350,000     $ 361.847     $ —     $ —     $ —     $ —     $ —     $ 350,000  

Average interest rate

                  6 %                                           6 %

Variable rate

  $ 105,000     $ 105,000   $ —       $ —       $ —     $ —     $ —     $ —     $ —     $ —    

Average interest rate

    4 %                                                            

Interest rate swaps

                                                                   

Fixed to variable

  $ —       $ —     $ 60,000     $ (748 )   $ —     $ —     $ —     $ —     $ —     $ 60,000  

Average pay rate

                  7 %                                           7 %

Average receive rate

                  8 %                                           8 %

 

Equity Price Sensitivity

 

We are subject to equity price risk related to the accelerated share repurchase agreement described above. For additional information on the agreement, see note 7 to our unaudited quarterly consolidated financial statements appearing elsewhere in this registration statement. At maturity of the agreement, we may be required to pay a price adjustment if the weighted average purchase price of our common stock over a defined period is between $24.04 and $27.19 per share. At our option, the price adjustment can be settled in cash or shares of our common stock. Changes in the fair value of our common stock will impact the final settlements of the program. As of September 30, 2005, the investment bank had acquired 0.7 million shares of our common stock at an average price of $25.18 per share.

 

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As more fully discussed in note 4 to our unaudited quarterly consolidated financial statements appearing elsewhere in this registration statement, we currently have outstanding $150.0 million in principal amount of 3 3/4% convertible senior subordinated notes due July 15, 2012. We are subject to equity price risk related to the convertible feature of the debt. The convertible notes are convertible only under certain conditions at the option of the holder. Upon conversion, the principal portion of the convertible notes will be paid in cash and any excess over the conversion rate will be paid in shares of our common stock or cash at an initial conversion rate of 31.998 shares of our common stock per $1,000 principal amount of convertible notes, representing an initial conversion price of $31.25 per share, subject to adjustment upon specified events. If a specified fundamental change event occurs, the conversion price of our convertible notes may increase, depending on our common stock price at that time. However, the number of shares issuable upon conversion of a note may not exceed 41.5973 per $1,000 principal amount of convertible notes. As of September 30, 2005, the conversion price has not required adjustment and we would not be required to issue any shares of our common stock upon conversion.

 

As more fully discussed in note 2 to our unaudited quarterly consolidated financial statements, we granted the sellers of the Ringtail group contractual protection against a decline in the value of any purchase price or earnout payments made in shares of our common stock. If on the first anniversary date of any issuance of purchase price or earnout shares, the market price of our common stock has not increased by at least 10%, we have agreed to make an additional cash payment to the sellers equal to the deficiency. Based on the price of our common stock on September 30, 2005, we would not be obligated to make any price protection related payments.

 

The following table lists the high and low sale prices per share for our common stock as reported on the New York Stock Exchange for the periods indicated.

 

     High

   Low

Three Months Ended September 30, 2005

   $ 26.37    $ 20.66

Nine Months Ended September 30, 2005

     26.37      17.20

 

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BUSINESS

 

We are a leading provider of forensic and litigation consulting and technology, corporate finance and economic consulting services in the United States. Our experienced team of professionals, many of whom are widely recognized as experts in their respective fields, provide high-caliber consulting services to a broad range of clients. We began operations in 1982 as a consulting firm focused on providing forensic investigation, scientific and trial support services, and have evolved through internal growth and strategic acquisitions. We believe clients retain us because of our recognized expertise and capabilities in highly specialized areas, as well as our reputation for satisfying clients’ needs. During 2004, we staffed large and complex assignments for our clients which include 95 of the top 100 U.S. law firms, 20 of the 25 largest U.S. commercial banks and 181 corporate clients in the Fortune 500. Representative clients to date include Wyeth, Tower Automotive and the U.S. Departments of Justice and the Interior.

 

Our professionals have experience providing testimony in many areas, including: fraud, damages, lost profits, valuation, accountant’s liability and malpractice, contract disputes, patent infringement, price fixing, purchase price disputes, solvency and insolvency, fraudulent conveyance, preferences, disclosure statements, trademark and copyright infringement and the financial impact of government regulations. We have strong capabilities in highly specialized industries, including telecommunications, health care, transportation, utilities, chemicals, energy, commercial and investment banking, pharmaceuticals, tobacco, retail and information technology. As of September 30, 2005, we had 1,291 total employees, including 966 revenue-generating consultants, across 24 U.S. cities, London, England and Melbourne, Australia.

 

Forensic Practice. We are a leading provider of forensic consulting services in the United States. This practice provides an extensive range of services to assist clients in all phases of litigation, including pre-filing, discovery, jury selection, trial preparation, expert testimony and other trial support services. Specifically, we help clients assess complex financial transactions, reconstruct events from incomplete and/or corrupt data, uncover vital evidence, identify potential claims and assist in the pursuit of financial recoveries and settlements. We also provide asset tracing and fraud investigation services. Through the use of proprietary information technology, we have demonstrated our ability to help control litigation costs, expedite the trial process and provide our clients with the ability to readily organize and access case-related data. Our repository services offer clients a secure extranet and web-hosting service for critical information. Our graphics services at trial and technology and electronic evidence experts assist clients in preparing for and presenting their cases in court.

 

As of February 28, 2005, we acquired substantially all of the assets and assumed certain liabilities of the Ringtail group. Established in 1997, Ringtail is a leading developer of litigation support and knowledge management technologies for law firms, Fortune 500 corporate legal departments, government agencies and courts. Ringtail has developed a suite of integrated software modules to manage the information and workflow in complex legal cases. Specifically, Ringtail’s technologies are designed to ensure quality, reduce risk, increase productivity and improve cost effectiveness in the review, preparation and production of litigation data. In addition, Ringtail’s software has also been used in a transactional capacity to support “deal rooms” and merger and acquisition activity. We employ Ringtail’s products in the repository services, electronic evidence and document management services we perform for clients, and we accounted for approximately 30% of Ringtail’s prior year’s business.

 

In the fourth quarter of 2003, we completed two strategic acquisitions that fit within our forensic practice. On October 31, 2003, we acquired specified assets and liabilities of the dispute advisory services, or DAS business, of KPMG LLP, which assists clients in the analysis and resolution of all phases of complex claims and disputes. On October 15, 2003, we acquired substantially all of the assets and assumed certain liabilities of Ten Eyck Associates, P.C., which expanded our consulting services relating to investigations by the SEC and other regulatory authorities, securities law litigation, SEC accounting and enforcement, fraud investigations and the Sarbanes-Oxley Act.

 

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As of September 30, 2005, we had 462 revenue-generating consultants in our forensic practice.

 

Corporate Finance Practice. We believe we are the largest corporate finance consulting practice in the United States. Our corporate finance practice provides turnaround, performance improvement, lending solutions, financial and operational restructuring, restructuring advisory, mergers and acquisitions, transaction advisory and interim management services. We analyze, recommend and implement strategic alternatives for our corporate finance clients, offering services such as interim management in turnaround situations, rightsizing infrastructure, assessing long-term enterprise viability and business strategy consulting. We assist underperforming companies as they make decisions to improve their financial condition and operations. We lead and manage the financial aspects of in-court restructuring processes by offering services that include an assessment of the impact of a bankruptcy filing on the client’s financial condition and operations. We also assist our clients in planning for a smooth transition into and out of bankruptcy, facilitating the sale of assets and arranging debtor-in-possession financing. Through our corporate finance practice, we can help financially distressed companies implement their plans by providing interim management teams.

 

On May 31, 2005, we acquired substantially all of the assets and assumed certain liabilities of Cambio’s business from certain of the individual owners of Cambio Partners, the direct parent of Cambio. Cambio is a leading provider of change management solutions for hospital and health systems. It provides strategic, operational and turnaround management consulting services to improve the operational efficiency and financial performance of its clients which include academic medical centers, integrated delivery systems, stand-alone community hospitals, investor-owned hospitals and special medical facilities. Cambio was founded in 1989 and is based in Nashville, Tennessee. Our acquisition of Cambio greatly enhanced our industry expertise in health care management and finance.

 

As of September 30, 2005, we had 333 revenue-generating consultants in our corporate finance practice.

 

Economic Consulting Practice. We are a leading provider of economic consulting services in the United States and deliver sophisticated economic analysis and modeling of issues arising in mergers and acquisitions and other complex commercial and securities litigation. Within our economic consulting practice, we provide our clients with analyses of complex economic issues for use in legal and regulatory proceedings, strategic decision-making and public policy debates. In the fourth quarter of 2003, we diversified our service offerings by acquiring specified assets and certain liabilities of Lexecon, Inc, from Nextera Enterprises, Inc., to provide economic consulting services by the Lexecon professionals, who are among the leading providers of these services in the United States. As of July 31, 2005, we acquired the business of Hill & Co. (d/b/a Helios), which added eight professionals in the business of advising on developing and implementing concrete strategies for driving revenue growth and profitability. Our statistical and economic experts help companies evaluate issues such as the economic impact of deregulation on a particular industry or the amount of commercial damages suffered by a business. We have deep industry experience in such areas as commercial and investment banking, telecommunications, energy, transportation and pharmaceuticals. Our professionals regularly provide expert testimony on damages, rates and prices, valuations, merger effects, intellectual property disputes in antitrust cases, regulatory proceedings and valuations. More specifically, our professionals have experience providing advice and testimony related to:

 

    antitrust and competition issues that arise in the context of potential mergers and acquisitions;

 

    other antitrust issues, including alleged price fixing, cartels and other forms of exclusionary behavior;

 

    the application of modern finance theory to issues arising in securities litigation; and

 

    public policy studies on behalf of companies, trade associations and governmental agencies.

 

As of September 30, 2005, we had 171 revenue-generating consultants in our economic consulting practice.

 

On January 6, 2006, we completed our acquisition of all of the outstanding common stock of Compass, and related assets from the stockholders of Compass. Compass is a top competition economics consulting firm, with

 

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offices in Washington, D.C. and San Francisco. Compass’ practice involves sophisticated economic analysis in the context of antitrust disputes, mergers and acquisitions, regulatory and policy debates, and general commercial litigation across a broad range of industries in the United States, Europe and the Pacific Rim.

 

Industry Overview

 

We compete in the global consulting services industry, focusing on providing forensic, corporate finance and economic consulting services. We believe that the business environment for our industry has become increasingly complex due to heightened public scrutiny, greater regulation, increased competition and globalization as well as the prevalence of high stakes litigation. There are a number of factors that drive demand for our services:

 

    Regulatory Complexity, Public Scrutiny and Increased Litigation. We believe that heightened focus on corporate mismanagement, fraud-related investigations, ongoing regulatory activity, such as SEC rulemaking, corporate governance scrutiny and increasing complexity in financial reporting requirements, including requirements under the Sarbanes Oxley Act, drive demand for our services. We believe that increasing litigation costs require businesses to focus on better managing risks and the litigation process, particularly in large, complex, multi-jurisdiction cases and mass tort claims.

 

    Increasing Need for Independent Expertise. We believe that as a result of increased public scrutiny, regulatory complexity and litigation, businesses, their creditors and other institutional stakeholders increasingly engage consulting firms to provide objective and independent expertise. This is particularly true in highly complex and sophisticated areas such as restructurings, bankruptcies, economic consulting, forensic accounting and high-stakes regulatory and legal proceedings. The emerging trend toward hiring consulting firms unaffiliated with company auditors represents a fundamental shift in the demand for our services and has increased the size of our overall practices.

 

    Trends in Corporate Debt and Debt Default Rates. We believe that corporate debt levels and related default rates are important indicators of the potential need for restructuring, turnaround, bankruptcy and related consulting services. Both U.S. and international companies have increasingly relied on debt to finance acquisitions, growth initiatives and working capital requirements, as evidenced by the fact that 2004 saw more high yield issuances than any prior year. Demand for our services is particularly strong in sectors such as automotive, airline and retail, all of which rely on corporate debt and continue to exhibit sector weakness.

 

    Strong Economy and Growing Merger and Acquisition Activity. We believe that the overall strength of the economy and the growth in merger and acquisition activity are important drivers for our economic consulting services. The United States has seen improving economic conditions, as evidenced by Gross Domestic Product growth of 4.4% from 2003 to 2004. Additionally, according to Thomson Financial, announced U.S. merger and acquisition volume increased by 11% year-over-year for the first quarter of 2005. We believe there are more complex, high-stakes litigation and regulatory activity during strong economic conditions. During periods of increased merger and acquisition activity, we experience increased use of our economic consulting services driven by growing areas such as antitrust regulation, intellectual property disputes and breaches of contract.

 

Our Competitive Strengths

 

We compete primarily on the basis of institutional and individual reputations, ability to immediately staff a significant engagement, performance record, quality of work, range of services provided and existing client relationships. We attribute our success and distinction to a combination of long-standing advantages, including:

 

   

Premium Brand Name with Leading Market Positions. We believe that we are one of the most recognized brand names in the corporate finance consulting services industry. In addition, we believe we have leading market positions in both forensic and economic consulting practices based on revenues

 

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for those segments. The strength of our brand name and market positions are enhanced by the stellar reputation of our well-recognized consultants, many of whom are leading members of their respective fields. We have benefited from our strategy of acquiring the leading practitioners in each practice, as well as including in select cases, the continued use of their brand names, either independently or coupled with the FTI brand, such as Lexecon, Ten Eyck, Ringtail, Cambio and Compass.

 

    Diversified Revenue Source. We have created a balanced portfolio of services organized into three practice segments: forensic, corporate finance and economic consulting. Our strategy is to continue to maintain such diversification. We believe that our broad service offerings and diversity of our revenues insulate us from fluctuations in market conditions in any one of our practices.

 

    Diversified Portfolio of Elite Clients. We provide services for a diverse group of clients, many of whom are blue chip corporations, financial institutions, law firms and private equity firms. In 2004, we performed work for approximately 1,300 clients on about 3,200 matters across multiple industries, including:

 

    approximately 490 law firms, 95 of which were ranked among the top 100 U.S. law firms (based on 2004 U.S. revenues as measured by The American Lawyer magazine);

 

    20 of the 25 largest U.S. commercial banks;

 

    181 corporate clients that were among the Fortune 500 in 2004; and

 

    a broad range of federal, state and local government agencies.

 

In 2004, our top 10 clients accounted for 17% of our total revenues, with no single client accounting for more than 3% of our total revenues and no single matter accounting for more than 2% of total revenues. Among these top 10 clients in 2004 were six nationally recognized law firms, each of whom represented multiple clients and matters.

 

    High Level of Repeat and Referral Business. We derive a substantial portion of our revenues from repeat clients or referrals. In 2004, approximately 80% of our revenues were derived from repeat or referral business. Many of our client relationships are long-standing and include multiple contact points within each organization, increasing the depth and continuity of these relationships. We cultivate our critical relationships with financial institutions and law firms, which have served as entry points into significant, high-profile and reputation enhancing engagements.

 

    Strong Free Cash Flow. We generated revenues of $427.0 million for the year ended December 31, 2004 and $373.7 million for the nine months ended September 30, 2005. Our business model has several characteristics that produce strong cash flows including high margins, low capital expenditures and low working capital requirements. Our consistently strong free cash flow supports our acquisition and growth strategies and our ability to service our indebtedness.

 

Our Business Strategy

 

We are one of the largest providers of forensic and litigation consulting and technology, corporate finance/restructuring and economic consulting services in the United States. We have a 22-year track record of performance and overall expertise. We provide high caliber consulting services through our staff of professionals who are able to quickly staff even the largest and most complex assignments. Our goal is to anticipate our clients’ needs and expand our expertise, professionals and the range of consulting services we offer in the United States and to expand internationally. Success in our marketplace depends primarily on having a reputation for providing consistently high-quality advice and services, on schedule and on budget. The following are key elements of our business strategy:

 

   

Attract and Retain Highly Qualified Professionals. Our professionals are crucial to delivering our services to clients and generating new business. We have assembled a staff of 966 revenue-generating professionals, many of whom have established and widely recognized names in their respective practice

 

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areas. Through our substantial staff of highly qualified professionals, we can handle a number of large, complex assignments simultaneously. To attract and retain highly qualified professionals, we offer significant compensation opportunities, including sign-on bonuses, primarily in the form of forgivable loans, incentive bonus and equity compensation, along with a competitive benefits package and the chance to work on challenging engagements. We have written employment arrangements with substantially all of our senior managing directors that include noncompetition and nonsolicitation clauses. Because of the high concentration of contract expirations between 2006 and 2008, we may experience high turnover, loss of clients and engagements or difficulty staffing engagements, if we are unable to renegotiate employment agreements. We have begun to focus on renegotiating new long-term employment agreements with key senior managing directors. Any new employment agreements entered into with senior managing directors may not have staggered termination dates, so that we could face similar retention issues at the end of the terms of those agreements, although this risk could be reduced in light of our intention to include automatic one-year renewal options in the new employment agreements beginning at the end of their initial terms unless either party provides to the other prior notice that he or us do not intend to renew. While we hope that we enter into new long-term employment contracts with a significant number of senior managing directors, there is no assurance we will do so. We take a disciplined approach when recruiting additional professionals. We focus on hiring qualified individuals who meet our selective criteria.

 

    Optimize Utilization and Billing Rates of Our Professionals. We carefully monitor our utilization rates on a weekly, monthly and annual basis and have maintained average annual utilization rates between 77% and 88% over each of the last three years (based on approximately 2,024 available hours per year). Our goal is to manage growth to maintain utilization rates among all of our professionals rather than intermittently expanding our staff in anticipation of short-term demand. We strive to attain utilization rates that allow us to maintain our profitability, make us less vulnerable to fluctuations in our workload, and minimize seasonal factors affecting utilization. In addition, the nature of our services allows us to bill our revenue generating professionals at premium rates, which enhances our profitability.

 

    Leverage Our Relationships and Expertise. We work hard to maintain our existing client relationships and develop new ones. We believe that the strength of our existing client relationships and the quality of our reputation across our industry, coupled with our recognized industry expertise, successful track record and size, are the most critical elements in a decision to retain us. We receive a significant amount of repeat business and referrals from our financial institution clients, from our clients in regulated industries, and from law firm clients. We strive to build client relationships on a company-wide basis and encourage cross-selling among our practices. By successfully leveraging our reputation, experience and broad client base, we expect to continue to obtain engagements from both existing and new clients.

 

   

Expand the Breadth of Our Services and Geographic Presence. We strive to increase diversification of our service offerings. We believe diversification of our services will help to insulate our overall business from changing or fluctuating market conditions. In the fourth quarter of 2003, we diversified our service offerings to expand our economic consulting practice through the acquisition of Lexecon, one of the leading providers of these services in the United States. The professionals, who joined us in the fourth quarter of 2003 from Ten Eyck, provide consulting services relating to SEC and other regulatory investigations, securities law litigation, SEC accounting and enforcement, fraud investigations and Sarbanes-Oxley. We have also increased our capacity to assist clients in the analysis and resolution of all phases of complex claims and disputes through the acquisition of the U.S. dispute advisory services business of KPMG LLP. In February 2005, we acquired the business of Ringtail, a leading developer of litigation support and knowledge management technologies for law firms, Fortune 500 corporate legal departments, government agencies and courts. The acquisition of Ringtail expanded our presence to Australia. The professionals who joined us in may 2005 from Cambio expanded our healthcare practice to provide change management solutions for hospital and health systems. Other business activities that contributed to diversification in 2004 included our investment banking and merger and acquisition services to middle market companies through our registered broker-dealer and National Association of

 

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Securities Dealers, or NASD, member, our transaction advisory and interim management services, and our corporate finance practice in the United Kingdom, that commenced in 2003. We also strive to offer our clients comprehensive solutions to their most complex problems, wherever they are in the world. Increasingly, our clients demand expertise across multiple markets and continents. To meet this demand, we provide our clients with a complete suite of services across all three practices. As we continue to grow, we plan to broaden our industry expertise and expand our electronic evidence and electronic repository services. We also intend to explore opportunities to increase our European presence to better serve our clients and to capitalize on what we believe are favorable market conditions.

 

    Selectively Acquire Companies and Integrate Our New Professionals and Capabilities. We follow a disciplined approach to executing and integrating acquisitions targeting those that complement our business strategy or operate in an attractive specialized niche. Since January of 1998, we have completed ten acquisitions that have greatly enhanced our practices. We intend to continue to selectively pursue strategic acquisitions. We seek to integrate acquisitions in a way that fosters organic growth and provides synergies or cross-practice sales opportunities. We also structure our acquisitions to ensure that key individuals from the acquired company are retained and integrated after the transaction is executed. In August 2005, several professionals joined us to initiate our San Francisco intellectual property practice within the forensic practice, which involved the acquisition of associated practice assets from their former firm.

 

Our Services

 

Forensic Practice. Our forensic accounting specialists work with companies faced with fraud, financial disclosure and accounting investigations, misstatements and malpractice issues. As perpetrators of fraud become more ingenious, the expertise required to unravel their schemes increases. We have a team of forensic accountants, certified fraud examiners and computer technicians who are experts in discovering and analyzing the most sophisticated ways to circumvent internal financial controls. We routinely assess complex financial transactions and reconstruct events from incomplete and/or corrupt data, uncover vital evidence, identify potential claims and assist in the pursuit of financial recoveries and settlements. We utilize sophisticated software tools to analyze and uncover important information from the computer systems used in the frauds. With our advanced search techniques and innovative methods, we are able to uncover valuable information that was considered lost, deleted or hidden. The acquisition of the U.S. dispute advisory business of KPMG LLP in 2003 greatly expanded our ability to provide those services.

 

We develop and deliver creative solutions to litigation problems. As an innovator in digital graphic presentations, we have been one of the leaders 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 proprietary information technology, we have demonstrated our ability to help control litigation costs, expedite the trial process and provide our clients with the ability to readily organize and access case-related data. We prepare and enhance presentations and expert testimony on complex subjects, such as toxic torts, financial disputes and intellectual property resolutions. We have responded to the increasing demand for document management in cases involving thousands or even millions of pages of depositions, testimony and exhibits by developing document management and exhibit and trial preparation solutions that enable our clients to better focus on preparing for and trying cases. Our range of services for complex litigation matters include 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. We have developed a number of technology-based tools to assist our clients in managing complex litigation. TrialMax®, our comprehensive trial preparation software, enables a litigation team to easily store, annotate and display documents, computer graphics, video clips and digitized depositions in the courtroom. We employ an automated tool for handling trial data regardless of information source or data type.

 

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Our repository services include secure extranet and web-hosting services for clients that are parties to multi-district litigation. We also intend to expand our web-hosting capabilities to teleconference and other Internet-based applications. On February 28, 2005, we acquired substantially all of the assets and assumed certain liabilities of the Ringtail group. Ringtail will be integrated into our repository services offerings within our forensic practice. Ringtail is a leading developer of litigation support and knowledge management technologies for law firms, Fortune 500 corporate legal departments, government agencies and courts, with established offices in Williamsburg, Virginia; Melbourne, Australia and London, UK. Ringtail has developed a suite of integrated software modules to manage the information and workflow in complex legal cases. Specifically, Ringtail’s technologies are designed to ensure quality, reduce risk, increase productivity and improve cost effectiveness in the review, preparation and production of litigation data. In addition, Ringtail’s software has also been used in a transactional capacity to support “deal rooms” and merger and acquisition activity. Ringtail’s flagship product, Ringtail CaseBook, provides knowledge management and case preparation through an Intranet repository for litigation document and information management and collaboration for legal cases. We accounted for approximately 30% of Ringtail’s prior year’s business. Historically, Ringtail has offered its products either through application service providers, or ASPs, or as direct client installations. The ASP model allows clients to outsource information technology and case management needs. The direct installation model allows clients to in-source Ringtail’s benefits within their existing infrastructure and accommodates particular data management or legacy requirements. With our financial and human capital resources behind Ringtail’s application technologies, we believe the Ringtail business can serve as a platform to:

 

    pursue content development in other areas already served by us, such as corporate finance and economic consulting;

 

    expand our international presence; and

 

    diversify our client base.

 

We provide services relating to securities, regulatory and Sarbanes-Oxley investigations, and dispute advisory services. The acquisition of the Ten Eyck business in 2003 has greatly expanded our ability to provide those services.

 

Our experienced intellectual property professionals provide valuation, damage analysis and expert testimony services. They provide those services to a range of industries, including oil and gas, technology and consumer products. They perform financial analyses of intellectual property in licensing and royalty disputes, antitrust claims and other types of disputes. Our professionals employ industry research, statistical analysis, regression techniques, portfolio analysis and sophisticated financial modeling to support defensible, credible valuation and damage conclusions. In August 2005, several professionals joined us to initiate our San Francisco intellectual property practice within the forensic practice, which involved the acquisition of associated practice assets from their former firm.

 

Our dispute settlement services help our clients mitigate the cost of, or avoid, litigation by evaluating claims and risks. These professionals coordinate business expertise with legal and technical analysis to develop cost-effective settlement strategies and implement mutually beneficial business resolutions.

 

We also provide asset tracing investigative services. We analyze corporate and personal records and electronic information, conduct interviews and evaluate related financial information to trace the flow of funds and locate assets that may have been misappropriated due to illegal or fraudulent activity. We use sophisticated software tools, advanced data mining and search techniques as well as databases to conduct asset searches for companies, government agencies and individuals. We have provided investigative services in diverse cases involving misdirected or stolen assets, embezzlements and bank, healthcare, insurance, energy, telecommunications and bankruptcy frauds.

 

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Corporate Finance Practice. Our corporate finance practice has regularly advised companies and creditors in some of the largest, most complex bankruptcy proceedings and out-of-court restructurings in the U.S. A number of factors affect demand for this practice’s services. These include:

 

    the level of lending activity and over-leveraging of companies;

 

    over-expansion by various businesses;

 

    increases in merger and acquisition activity;

 

    management problems; and

 

    the general economy in the U.S. and abroad.

 

When we represent companies, we work with our client’s management. We assess the client’s financial condition and viability to structure and implement a business rehabilitation plan to manage the client’s cash flow to at least a break-even point. We help clients to identify any non-essential assets or business units that could be sold to generate cash for the client. We assist clients as they negotiate with their lenders to restructure their debt. If 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 for bankruptcy or is involuntarily forced into bankruptcy, we have the expertise to manage the entire bankruptcy process, including structuring, negotiating with creditors and implementing the plan of reorganization. We also provide expert testimony in bankruptcy and restructuring proceedings on such issues as business unit valuation and economic loss. When we represent creditors, we seek to maximize amounts owed to them by the debtor, whether 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 assess the debtor’s viability and develop and evaluate restructuring plans. If we conclude that an out-of-court workout is not feasible, we assist the 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. Demand for our corporate finance services declined in 2004, primarily as a result of general economic conditions, including the strengthening of the economy, the availability of credit, low interest rates, fewer mergers and acquisitions and fewer large bankruptcy proceedings. We have been able to offset a portion of the effects of that decline by increasing our middle market bankruptcy, restructuring and workout engagements.

 

To better meet the needs of companies suffering a financial or operating crisis, we also offer interim management services. Interim management professionals are able to assume interim senior management roles at companies in crisis. We can deploy our professionals to function as a chief executive officer, chief operating officer, chief financial officer or chief restructuring officer. We reevaluate business strategy and financial forecasts and implement plans to meet financial and operating challenges for our clients. Our creative approaches and innovative solutions can create short-term liquidity to stabilize the business and afford the distressed company time to explore its options. We are keenly aware of the sensitive nature of these arrangements and the need to build consensus around a realistic restructuring plan.

 

We have extensive experience in crisis management, negotiations of complex mergers, acquisitions and capital restructurings, as well as the liquidation of surplus assets. We have regularly provided our corporate financing, turnaround, restructuring, bankruptcy and related consulting services to the largest banks in the United States, including Bank of America, N.A., Wachovia Bank, N.A. and JP Morgan Chase Bank. We have been involved in many of the largest bankruptcy proceedings and out-of-court restructurings in the United States. In January and February 2004, we experienced the unanticipated departure of about 60 professionals in our corporate finance practice. We continue to employ and have hired additional professionals who have expertise in providing the same type and level of services.

 

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Our mergers and acquisitions advisory specialists, through FTI Capital Advisors, a registered broker-dealer and NASD member, assist primarily middle-market clients in negotiating and structuring business combinations, acquisitions and dispositions of assets, business units or entire businesses.

 

Our lender and transactional support services assist lenders and other institutional clients in performing financial due diligence for loans, acquisitions and other transactions.

 

Economic Consulting. Our economic consulting practice provides sophisticated economic analysis of issues arising in merger, acquisition and other complex commercial and securities litigation, and modeling and analysis of the potential competitive effects and other financial advisory services. Our statistical and economic experts in our regulatory consulting practice use a range of tools to help companies evaluate issues such as the economic impact of deregulation on a particular industry, the amount of commercial damages suffered by a business as a result of a tort or a breach of contract or the value of a business. We also work with clients to develop business strategy and tactics on an ongoing basis to address these issues. We have deep industry experience in areas such as telecommunications, energy and transportation. Our professionals regularly provide expert testimony on damages, rates and prices, merger effects, intellectual property disputes in antitrust cases, regulatory proceedings, mergers, acquisitions and valuations. Our 2003 acquisition of the Lexecon business has greatly enhanced our ability to provide complex economic consulting services. On January 6, 2006, we completed our acquisition of all of the outstanding common stock of Compass, and related assets from the stockholders of Compass. Compass is a top competition economics consulting firm, with offices in Washington, D.C. and San Francisco. Compass’ practice involves sophisticated economic analysis in the context of antitrust disputes, mergers and acquisitions, regulatory and policy debates, and general commercial litigation across a broad range of industries in the US, Europe and the Pacific Rim.

 

Related Expert Services. Our practices have experience providing testimony in the following areas: fraud, damages, lost profits, valuation, accountant’s liability and malpractice, contract disputes, patent infringement, price fixing, purchase price disputes, solvency and insolvency, fraudulent conveyance, preferences, disclosure statements, trademark and copyright infringement and the financial impact of government regulations.

 

Recent Acquisitions and Divestitures

 

Compass. On January 6, 2006, we completed our acquisition of all of the outstanding common stock of Compass, and related assets from the stockholders of Compass. On the closing date, we paid approximately $71.5 million as estimated purchase price for the acquisition, of which approximately $45.8 million was paid in cash and approximately $25.7 million was paid through the delivery of 932,599 shares of common stock. The cash portion of the purchase price was financed from cash on hand. The purchase agreement provides for (A) post-closing purchase price adjustments based on actual adjusted EBIT of the Business (as defined in the purchase agreement) as of December 31, 2005 and (B) post-closing cash adjustment payments based on actual Working Capital (as defined in the purchase agreement) as of December 31, 2005. The purchase agreement also provides for additional consideration for each fiscal year ending December 31, 2006 to 2013 based on EBIT of the Business Unit (as defined in the purchase agreement); the set aside of a percentage of EBIT of the Business Unit (as defined in the purchase agreement) for each such fiscal year to be used as incentive compensation to employees of and consultants to the business; and conditional contractual protection against a decline in the value of the shares of our common stock issued as purchase price, determined from time to time during the five years following the closing date of the acquisition in accordance with the purchase agreement. The selling stockholders of the Compass business, whom we refer to as the sellers, have entered into employment or consulting agreements with one of our affiliates pursuant to which they have agreed to provide services for an eight year period and covenant not to compete or to solicit our employees for an additional two years. Certain sellers have been awarded stock options on the effective date exercisable for a specified number of our shares of common stock. The sellers also entered into restricted stock agreements at closing, which provide for the escrow of all shares paid to them pursuant to the purchase agreement, including any shares of common stock that may be paid

 

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in consideration of the post-closing purchase price adjustment. The shares of common stock placed in escrow will be available for purchase price adjustments and to secure their indemnity obligations. In addition, pursuant to the restricted stock agreements, the sellers have agreed not to sell, transfer, assign, pledge or otherwise dispose of the shares of common stock after the closing. Shares of common stock will be released from escrow and their contractual restrictions on transfer will lapse in increments over a five year period from the closing date of the acquisition, except that the restrictions would lapse immediately upon death or disability and certain other events related to his or her employment or consulting status. In the event a seller is terminated by us for “Cause” or resigns without “Good Reason” or “Breach of Contract” (as each such term is defined in the employment or consulting agreement, as applicable) any restrictions on the shares of our common stock then held in escrow would be extended for an additional five year period from the date of termination or resignation. Certain of the sellers also received loans from us aggregating $8.0 million. As of the closing date, such sellers executed and delivered promissory notes in our favor. Such loans accrue interest payable on a calendar quarterly basis. Outstanding principal and unpaid accrued interest will be repayable on the tenth anniversary of the closing date, unless such seller’s repayment obligation has been accelerated due to personal bankruptcy or any termination of employment or service providing relationship other than an expiration of the eight year term followed by continued compliance with the noncompete and nonsolicit obligations under his or her employment or consulting agreement. Compass is a top competition economics consulting firm, with offices in Washington, D.C. and San Francisco. Compass’ practice involves sophisticated economic analysis in the context of antitrust disputes, mergers and acquisitions, regulatory and policy debates, and general commercial litigation across a broad range of industries in the United States, Europe and the Pacific Rim.

 

Cambio. On May 31, 2005, we acquired substantially all of the assets and assumed certain liabilities of Cambio, and acquired personal goodwill relating to Cambio’s business from certain of the individual owners of Cambio Partners, the direct parent of Cambio. Cambio is a leading provider of change management solutions for hospital and health systems. It provides strategic, operational and turnaround management consulting services to improve the operational efficiency and financial performance of its clients which include academic medical centers, integrated delivery systems, stand-alone community hospitals, investor-owned hospitals and special medical facilities. Cambio was founded in 1989 and is based in Nashville, Tennessee. The total acquisition cost was $42.3 million, consisting of net cash of $28.9 million, transaction costs of $0.5 million and 578,994 shares of our common stock valued at $12.9 million. We financed the cash portion of the purchase price from cash on hand. The sellers of the business placed 564,597 shares of our common stock and $323,865 in cash in escrow at closing to fund, among other things, Cambio’s obligations, if any, under the post-closing adjustments and Cambio’s obligations to indemnify us and certain of our related persons with respect to certain liabilities and expenses to the extent that they arise no later than the fourth anniversary of the closing. To the extent not subject to claims under the purchase agreement, up to $5.0 million of the escrowed amounts would initially be subject to release to individual members of Cambio Partners on the second anniversary of the closing, and the remainder of the escrowed amounts, to the extent not subject to claims under the purchase agreement, would initially be subject to release to individual members of Cambio Partners beginning on the fourth anniversary of the closing. Certain recipients of the shares of our common stock issued pursuant to the purchase agreement entered into agreements not to sell, transfer, assign, pledge or otherwise dispose of their shares of our common stock issued in connection with the acquisition for periods ranging from two to five years after the closing. The restrictions on any such recipient’s shares would lapse immediately upon the occurrence of specified change-of-control events. In addition, in the case of such a recipient that is employed by us, the restrictions would lapse immediately upon certain employment-related events, and, in the event that the recipient is terminated for cause or resigns without good reason, any restrictions on the shares then held by the recipient would be extended for a period ranging from four to eight years from the date of termination or resignation. We would be required, subject to specified conditions, to register these recipients’ shares of our common stock for resale on Form S-3 (or a successor form) if, on the 182nd day after the second anniversary of the closing or on the fifth anniversary of the closing, Rule 144 promulgated under the Securities Act is not available for resales of such shares. Subject to limited exceptions, recipients of shares of our common stock issued pursuant to the purchase agreement receive from us contractual protection against a decline in the value of the common stock from the closing date value for periods varying from one to four years after the closing, depending generally on each recipient’s percentage ownership

 

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interest in Cambio Partners immediately prior to the closing. The price protection will generally be further extended for any longer period during which the shares are held in escrow. Any price protection payments by us will be made in cash.

 

Ringtail. On February 28, 2005, we acquired substantially all of the assets and assumed certain liabilities of the Ringtail group. The total acquisition cost was $34.6 million, consisting of net cash of $19.2 million, transaction costs of $0.4 million and 784,109 shares of our common stock valued at $15.0 million. The asset purchase agreement that governed the acquisition provides for an earnout over the next three years based on future performance of up to an aggregate of $7.5 million, or $2.5 million per year, consisting, in our sole discretion, of all cash, restricted shares of our common stock, or a combination of cash and stock. The cash portion of the purchase price was financed from cash on hand and our senior secured credit facility. We have contractually agreed to pay additional consideration if the value of the shares issued as part of the purchase price and earnout is not at least 10% higher than their respective issuance prices on the date such shares or portion thereof first become eligible for resale under Rule 144 of the Securities Act. If the market value (as such value will be determined pursuant to the asset purchase agreement) of the stock issued as of February 28, 2005 is less than $16.5 million, and the earnout stock is up to $8.25 million, on their respective eligible resale dates, we will be obligated to pay the difference between the actual market value on such date and the protected share value, which will be paid in cash. We have substantial experience with the Ringtail products and the employees from Ringtail who have joined us, as we use Ringtail’s software in the electronic evidence, repository services and document management services we provide to certain clients. Edward O’Brien and Christopher Priestley, Ringtail’s founders, and 22 other former Ringtail employees have joined us. Mr. O’Brien has entered into a written three-year employment agreement, and Mr. Priestley has entered into a written four-year employment agreement. The employment arrangements for the other employees range from one year to three years, which may be extended. Of the employees, 14 are resident in Australia, one is resident in the United Kingdom, and the rest are resident in the United States. Messrs. O’Brien and Priestley split their time between Australia and U.S. The employment agreements contain noncompetition and nonsolicitation provisions, which in most cases have been designed to comply with Australian law.

 

Lexecon. On November 28, 2003, we acquired substantially all of the assets and assumed certain liabilities of Lexecon from its parent company, Nextera. The purchase price for Lexecon consisted of cash totaling $129.2 million, which was financed from a combination of cash on hand and $104.1 million of borrowings under our senior bank term loan. The acquisition of Lexecon has enabled us to expand the type and sophistication of the economic consulting services that we offer our clients. In connection with the acquisition, Daniel Fischel and Dennis Carlton, two leading experts on economic consulting in the United States, joined the company. Mr. Fischel’s areas of expertise are securities, corporation law, regulation of financial markets and the application of economics of corporate finance to problems in those areas. Mr. Fischel has published widely and is the Lee and Brena Freeman Professor of Law and Business at the University of Chicago. Dr. Carlton, Professor of Economics at the Graduate School of Business at the University of Chicago, specializes in the economics of industrial organization, which is the study of individual markets and includes the study of antitrust and regulatory issues. Joseph P. Kalt, a senior economist, also joined us as a senior managing director at that time. Messrs. Fischel, Carlton and Kalt have entered into employment agreements with us that expire December 31, 2008. In connection with the acquisition, we entered into a noncompetition arrangement with Nextera. During the five-year noncompetition period, Nextera has agreed not to, directly or indirectly, offer or provide services of the type offered by Lexecon in the United States and Canada. Nextera also agreed not to hire as a partner, director, principal or employee, engage as an agent or contractor, or enter into a partnership, joint venture or other business association with, any person who was at any time an employee, representative, officer, director or manager of Nextera, for a period of 12 months after such person’s relationship with Nextera ended. Lexecon has offices in Chicago, Illinois and Cambridge, Massachusetts.

 

Dispute Advisory Business of KPMG. On October 31, 2003, we acquired specified assets and assumed liabilities associated with the dispute advisory services business of KPMG. We acquired the DAS business for $89.1 million in cash, which we financed from our cash reserves. The DAS business compliments and expands

 

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our forensic practice in the analysis and resolution of all phases of complex claims and disputes. Twenty-eight former KPMG partners or managing directors have entered into written five-year employment agreements that expire October 31, 2008. In connection with the acquisition, we entered into a noncompetition arrangement with KPMG LLP. During the four-year noncompetition period, KPMG has agreed not to, directly or indirectly, offer or provide dispute advisory services of the type offered within 12 months prior to October 31, 2003, with specified exceptions, and market services using the terms “DAS” or “DAS Services” in the United States. For a period of five years following the closing date of the acquisition, KPMG also agreed not to hire as a partner, director, principal or employee or engage as an agent or contractor, certain former employees that joined us in connection with the acquisition. We agreed not to solicit for hire or hire any employee employed by KPMG in its investigative and integrity advisory services business for a period of five years following the closing date, unless such person is a former employee who has not been employed by KPMG for a period of six consecutive months.

 

Ten Eyck. On October 15, 2003, we acquired substantially all of the assets and assumed certain liabilities associated with Ten Eyck. Through that acquisition we expanded our consulting services to include SEC and similar regulatory investigations, securities law litigation, SEC accounting and enforcement, fraud investigations and Sarbanes-Oxley mandated requirements. We acquired the Ten Eyck business for $13.2 million in cash, which we financed from our cash reserves, and 175,536 restricted shares of our common stock that was then valued at approximately $2.4 million. Ten Eyck complements and expands our forensic practice. Five former Ten Eyck officers and stockholders have entered into written long-term employment agreements that expire on October 15, 2007.

 

U.S. Business Recovery Services, or BRS, Division of PricewaterhouseCoopers LLP. On August 30, 2002, we acquired certain assets and assumed certain liabilities of BRS. The purchase price for BRS consisted of $142.0 million in cash and 4.5 million shares of our common stock valued at $101.9 million. Each of the 49 BRS partners that joined us has entered into a four-year employment agreement with us that expires August 30, 2006. When they withdrew as partners of PricewaterhouseCoopers LLP, or PwC, 47 of them received shares of our common stock from PwC. As adjusted for the three-for-two stock split paid as a stock dividend on June 4, 2003 to stockholders of record on May 7, 2003, these partners received an aggregate of approximately 1.8 million shares of our common stock and then agreed with us to restrict the transfer of 40% of their shares. We granted the BRS partners contractual protection against a decline in the value of their restricted shares during the four-year restricted period if the market price for the shares falls below $18.89 per share (as adjusted for the three-for-two stock split during 2003). The contractual restrictions on transfer with respect to one-half of these shares expired in August 2004. The restrictions will expire with respect to the balance of the shares in August 2006, unless the applicable employee terminates his employment prior to that date, in which case the shares would continue to be subject to transfer and resale restrictions for eight years from the date of termination, and would lose their price protection. Nearly all of the BRS partners and selected other executives that joined us also received options to purchase a total of 903,000 shares of our common stock (as adjusted for the three-for-two stock split during 2003) at the fair market value of our common stock on August 30, 2002. These options vest in equal annual installments over three years beginning one year from the closing of the acquisition. In connection with the acquisition, we obtained a three-year agreement from PwC not to compete with us. On November 3, 2004, we settled an action filed on December 23, 2003, in the Supreme Court of the State of New York against PwC seeking enforcement of the noncompetition covenants, damages, and injunctive and other equitable relief. See “—Legal Proceedings” below. In June of 2005, we filed suit against PwC for recovery of fees relating to post-acquisition work performed by certain of the 49 BRS partners that joined FTI and for damages relating to a lawsuit that PwC failed to disclose adequately to us at the time of the acquisition.

 

Employment Terms

 

Our standard form of written long-term employment agreement that we use in connection with our acquisitions and new hires of senior professionals at the senior managing director level or higher generally provides for fixed salary, incentive payments (which in some cases may be based on financial measures such as earnings before interest, income taxes, depreciation of property and equipment and amortization of other

 

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intangible assets, or EBITDA) and, in some cases, long-term equity incentives and other incentive bonus and incentive payments. Our employment agreements also typically provide for some form of equity incentive in the form of stock options or restricted stock. They also entitle the professional to participate in our benefit plans. In many cases, we extend forgivable loans to professionals below the executive officer level in lieu of paying cash signing bonuses. We believe that the loan arrangements (which require repayment in full if the employee’s employment terminates on certain events prior to his contract’s expiration date) enhance our ability to attract and retain senior professionals. As of September 30, 2005, unforgiven loans to senior managing directors in the principal amount of approximately $7.6 million were outstanding and classified as an asset on our balance sheet.

 

Employment agreements generally provide for salary continuation benefits, accrued bonuses and other benefits beyond the termination date if the professional leaves our employ for certain reasons prior to the agreement’s expiration date. The length and amount of payments to be paid by us following the termination or resignation of a professional varies depending on whether such person resigned or was terminated with cause or good reason, resigned or was terminated without cause or good reason, died or became disabled, or was terminated as a result of a change of control. Each agreement contains noncompetition and nonsolicitation covenants, which under various circumstances, may extend beyond the expiration or termination date depending upon the reason for such termination. Under the noncompetition agreement, the professional generally agrees not to offer or perform consulting services of the type performed during his employment, directly, or indirectly through another person or entity, in competition with us, within specified geographic areas, subject, in some cases, to certain exceptions. Generally, the professional also agrees not to solicit business regarding any case, matter or client upon which such professional worked on our behalf, or to solicit, hire, or influence the departure of, any FTI employee, consultant or independent contractor. Under the general terms of his or her employment agreement, the professional also agrees to maintain the confidentiality of our proprietary information and affirms that we are the owners of copyrights, trade marks, patents and inventions developed during the course of employment.

 

As of December 31, 2004, substantially all of the senior managing directors have entered into written employment agreements. Many of these employment agreements will expire between 2006 and 2008 because of the timing of our acquisitions and our 2004 initiative to enter into written agreements with our senior professionals. Our goal is to renew employment agreements when advisable and to stagger the expirations of the agreements if possible. Because of the high concentration of contract expirations between 2006 and 2008, we may experience high turnover, loss of clients and engagements or difficulty staffing engagements, if we are unable to renegotiate employment agreements. We have begun to focus on renegotiating new long-term employment agreements with key senior managing directors. In connection with those discussions, we may offer a senior managing director the opportunity to participate in all or a portion of the benefits under an incentive compensation package that includes cash, which may be in the form of an unsecured general recourse forgivable loan, and significant additional payments upon the execution and during the term of such employment agreement in the form of stock option and restricted stock awards, or alternatively, cash equivalents, if we do not have adequate equity securities available under stockholder approved equity plans. We have, in a few cases, also required that SMDs use the proceeds of the loans to purchase shares of our common stock on the open market. Those shares then serve as collateral for the loans, which are otherwise nonrecourse. Any new employment agreements entered into with senior managing directors may not have staggered termination dates, so that we could face similar retention issues at the end of the terms of those agreements, although this risk could be reduced in light of our intention to include automatic one-year renewal options in the new employment agreements beginning at the end of their initial terms unless either party provides to the other prior notice that he or us do not intend to renew. While we hope that we enter into new long-term employment contracts with a significant number of senior managing directors, there is no assurance we will do so. The aggregate principal amount of all loans made to senior managing directors through 2006 could exceed $50.0 million, of which some or all of the principal amount and accrued interest could be forgivable by us upon the passage of time or certain other events, such as death or disability or termination by us without cause or by the employee with good reason. If all the other compensation features described above were to be implemented, the equity awards to such senior managing directors would also be significant.

 

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Marketing and Sales

 

We rely primarily on referrals and our reputation to market our services to new and existing clients since most of our work is repeat work for existing clients or comes from referrals from existing clients or relationships with partners in major law firms or other professionals. Our professionals develop close working relationships with clients and often learn about new business opportunities from their frequent contacts with clients. In marketing our services, we emphasize our experience, the quality of our services and our professionals’ particular areas of expertise, as well as our ability to quickly staff new engagements. While we aggressively seek new business opportunities, we maintain high professional standards and carefully evaluate potential new client relationships and engagements before accepting them. In the fourth quarter of 2004, we reorganized our marketing and sales divisions to employ 23 full-time people, who assist with the marketing of our consulting services.

 

Facilities

 

We lease about 33,300 square feet of office space for our principal corporate facilities located in Annapolis, Maryland, under various leases expiring through August 2009. We lease about 10,600 square feet of office space for our executive offices located in Baltimore, Maryland under a lease expiring January 2016. We also lease offices in 23 other cities across the U.S., including such cities as New York, Chicago, Houston, Dallas, Los Angeles and Washington, D.C., as well as London, England and Melbourne, Australia, to support our operations.

 

Clients

 

We have cultivated long-term relationships with many of the premier corporations, financial institutions, law firms and private equity firms. In 2004, we performed work for approximately 1,300 clients on about 3,200 matters, including:

 

    Approximately 490 law firms, 95 of which were rated among the top 100 U.S. law firms (based on 2004 U.S. revenues as measured by The American Lawyer magazine);

 

    20 of the 25 largest U.S. commercial banks;

 

    181 corporate clients that were among the Fortune 500 in 2004; and

 

    a broad range of federal, state and local government agencies.

 

In 2004, approximately 80% of our revenues were derived from repeat or referral business. Our largest client represented less than 5% of our 2004 revenues from continuing operations.

 

Competition

 

Our business is highly competitive. Our competitors range from large organizations, such as the national accounting firms and the large management consulting companies that offer a broad range of consulting services, to small firms and independent contractors that provide one specialized service. We compete primarily on the basis of institutional and individual reputations, ability to immediately staff a significant engagement, performance record, quality of work, range of services provided and existing client relationships. To a lesser extent, we also compete on price, but the critical nature of our services typically reduces price to a secondary consideration. Since our business depends in a large part on professional relationships, our business has low barriers of entry for professionals, including our professionals, wanting to start their own firms or to change employers.

 

Some national 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. The 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.

 

Patents, Licenses and Proprietary Information

 

We consider certain of our products and processes, including our TrialMax® comprehensive trial preparation software to be proprietary and confidential. The Ringtail CaseBook software that we acquired from

 

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the Ringtail group on February 28, 2005 has been registered pursuant to U.S. federal copyright laws, and we consider the other technologies and software that we acquired in connection with the Ringtail transaction to be proprietary and confidential. We believe that our non-patented software and intellectual property, particularly some of our process software and intellectual property, is important to our forensic practice. We rely upon non-disclosure agreements and contractual agreements and a system of internal controls, including confidentiality and invention disclosure agreements with our employees and independent contractors, and license agreements with third parties, to protect our proprietary information. Despite these safeguards, there is a risk that competitors may obtain and use such information.

 

Employees

 

As of September 30, 2005, we had 1,291 total employees, including 966 revenue-generating consultants, across 24 U.S. cities, London and Melbourne. We also engage independent contractors to supplement our professionals on client engagements as needed. Most of our professionals have many years of experience in their field of practice, and many are well recognized for their expertise and experience. None of our employees are subject to collective bargaining contracts or represented by a union. We believe our relationship with our employees is good.

 

Legal Proceedings

 

From time to time in the ordinary course of business, we are subject to claims, asserted or unasserted, or named as a party to lawsuits or investigations. Litigation, in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings cannot be predicted with any certainty and in the case of more complex legal proceedings such as intellectual property and securities litigation, the results are difficult to predict at all. We are not aware of any asserted or unasserted legal proceedings or claims that we believe would have a material adverse effect on our financial condition or results of our operations.

 

On February 18, 2004, we filed suit in New Jersey state court against former employees and the corporation they formed and asserted numerous claims, including that the former employees breached their duties of loyalty by wrongfully soliciting our employees and clients and unlawfully used and disclosed our confidential information in the new business venture. On December 31, 2004, the parties settled this action for an agreed upon amount paid to the Company and executed settlement agreements.

 

On December 23, 2003, we filed an action in New York state court against PwC seeking damages and injunctive relief and the enforcement of the non-competition covenants in the asset purchase agreement with PwC of its domestic Business Recovery Services. On February 10, 2004, the court granted in part our motion for preliminary injunction. PwC appealed the ruling and in June 2004, the Appeals Court of the State of New York upheld the injunction and affirmed our interpretation of the purchase agreement. On November 3, 2004, the parties executed a settlement and release in the case pursuant to which:

 

    PwC paid an agreed upon amount;

 

    the current injunction remains in place until August 31, 2005; and

 

    the action was dismissed with leave to refile, if there is a violation of the injunction.

 

In May 2005, we paid $0.7 million to settle potential litigation in connection with a company we sold in 2003.

 

In June 2005, we filed suit against PricewaterhouseCoopers LLP, or PwC, in the Supreme Court of the State of New York, seeking (1) damages, costs and attorneys fees based on PwC’s withholding of approximately $0.5 million paid to it in December 2004 in a matter that transferred to us when we acquired PwC’s Business Recovery Services business in August 2002, and (2) for indemnification and repayment to us of all costs, expenses, attorneys fees and settlement amounts paid by us in the case of RSR v. PwC and FTI. The complaint alleges that possible claims by RSR against PwC were not fully and accurately disclosed to us at the time of the acquisition.

 

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MANAGEMENT

 

The table below sets forth our executive officers, other key employees and directors and their ages as of January 9, 2006:

 

NAME


   AGE

  

POSITION


  

DIRECTOR CLASS


Jack B. Dunn

   54   

Chief Executive Officer, President and Director

   III

Dennis J. Shaughnessy

   58   

Chairman of the Board

   II

Dominic DiNapoli

   50   

Executive Vice President and Chief Operating Officer

    

Theodore I. Pincus

   62   

Executive Vice President and Chief Financial Officer

    

John MacColl

   57   

Executive Vice President and Chief Risk Officer

    

David G. Bannister

   50   

Senior Vice President—Business Development

    

Sara K. Lacombe

   37   

Senior Vice President—Human Resources

    

Dianne R. Sagner

   59   

Vice President and General Counsel

    

Charles Boryenace

   55   

Vice President Controller and principal accounting officer

    

Curt A.H. Jeschke, Jr.

   55   

Vice President—Internal Audit

    

Mark H. Berey

   53   

Director

   III

Gerard E. Holthaus

   56   

Director

   III

James A. Flick, Jr.

   71   

Director

   I

Peter F. O’Malley

   66   

Director

   I

Denis J. Callaghan

   63   

Director

   II

George P. Stamas

   54   

Director

   II

Matthew F. McHugh

   66   

Director

   I

 

Jack B. Dunn has served as our Chief Executive Officer since October 1995 and as a director since 1992. In May 2004, he assumed the position of President, a position he also held from October 1995 to December 1998. He served as our Chairman of the Board from December 1998 to October 2004. From May 1994 to October 1995, he served as our Chief Operating Officer. Mr. Dunn is a limited partner of the Baltimore Orioles. Prior to joining us, he was a member of the Board of Directors and a Managing Director of Legg Mason Wood Walker, Incorporated and directed its Baltimore corporate finance and investment banking activities. Mr. Dunn is a Trustee of University of Maryland/Shock Trauma and the Gilman School. Mr. Dunn also is a director of Aether Systems, Inc. and a member of its Compensation Committee and Nominating and Corporate Governance Committee, and he is a director of Pepco Holdings, Inc. and a member of its Corporate Governance/Nominating Committee and its Finance Committee.

 

Dennis J. Shaughnessy has been our executive Chairman of the Board since October 2004 and a director since 1992. From 1989 to October 2004, he was a General Partner of Grotech Capital Group, Inc., a private equity firm. He continues to be a non-voting special general partner of certain partnerships affiliated with Grotech Capital Group. Prior to becoming a General Partner of Grotech Capital Group in 1989, Mr. Shaughnessy was the Chief Executive Officer of CRI International, Inc. Mr. Shaughnessy also is a director and a member of the Compensation Committee and Nominating Committee of TESSCO Technologies, Inc.

 

Dominic DiNapoli has been an Executive Vice President and our Chief Operating Officer since February 2004. From August 2002 to February 2004, Mr. DiNapoli was a Senior Managing Director in our corporate finance practice. From 1998 to 2002, Mr. DiNapoli was a Managing Partner of PricewaterhouseCoopers LLP’s U.S. business recovery services (BRS) practice.

 

Theodore I. Pincus has been an Executive Vice President and our Chief Financial Officer since April 1999. Prior to joining us, Mr. Pincus was Executive Vice President and Chief Financial Officer of Nitinol Medical Technologies from May 1995 to March 1999. He was President of the Pincus Group, a financial consulting firm, from December 1989 to May 1995, and prior to that was a Partner at Ernst & Young LLP.

 

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John MacColl has been an Executive Vice President and our Chief Risk Officer since January 2006. From April 2004 to April 2005, Mr. MacColl was Vice Chairman of St. Paul Travelers, a position he held with its predecessor, The St. Paul Companies, Inc. from May 2002 to April 2004. From May 1999 to August 2004, Mr. MacColl also held the position of General Counsel. Mr. MacColl joined the St. Paul Companies in 1998, following the company’s merger with USF&G, where he served as Executive Vice President of Human Resources and General Counsel.

 

David G. Bannister joined us as Senior Vice President—Business Development in May 2005. From 1983 to 1998, Mr. Bannister was employed in the investment banking division of Alex Brown & Sons, holding the position of Managing Director when he left in 1998. From 1998 to 2004, Mr. Bannister was a General Partner of Grotech Capital Group. Mr. Bannister is a director of Landstar System, Inc., the Chairman of its Audit Committee and a member of several of its committees. Mr. Bannister is also a director of Allied Holding, Inc., the Chairman of its Audit Committee, and a member of several of its committees.

 

Sara K. Lacombe has been our Senior Vice President—Human Resources since May 2005. Prior to joining us, Ms. Lacombe was employed by Merrill Lynch & Co., Inc. from March 1994 to May 2005. Ms. Lacombe held the position of Director of Human Resources, Global Securities Research and Economics at Merrill Lynch from November 2001 to March 2005.

 

Dianne R. Sagner has been a Vice President and our General Counsel since December 2002. Until May 2004, she was also Secretary of FTI. From March 2002 to June 2002, Ms. Sagner was General Counsel and Secretary of OAO Technology Solutions, Inc. From March 1999 to December 2000, she was Corporate Counsel of GSE Systems, Inc. From May 1995 to December 1998, Ms. Sagner was General Counsel and Secretary of Peak Technologies Group, Inc.

 

Charles Boryenace assumed the duties as our Vice President and Controller and principal accounting officer in May 2005. From November 2004 to May 2005, he was our Interim Controller and acting principal accounting officer. From May 2004 to November 2004, he was our Vice President—Financial Planning and Analysis. From February 2002 to May 2004, he was a Managing Director of our Policano & Manzo subsidiary, which we acquired in February 2002. Prior to February 2002, Mr. Boryenace was a consultant to Policano & Manzo.

 

Curt A.H. Jeschke, Jr. joined us as Vice President—Internal Audit in May 2004. From November 1998 through June 2003, he was Senior Vice President and Chief Financial Officer of Renaissance Aircraft LLC, a manufacturer of general aviation aircraft. He managed his family’s real estate business from July 2003 to May 2004.

 

Mark H. Berey has been a member of our Board of Directors since 2004. Mr. Berey has been Chief Financial Officer and a director of Avendra, LLC a procurement company formed in 2001 to serve the hospitality industry in North America and the Caribbean since 2001. In 2004, Mr. Berey also assumed the position of Executive Vice President—Business Development with Avendra. From 2000 to 2001, he was Executive Vice President and Chief Financial Officer of Discovery.com. Prior to mid-2000, he was the Senior Vice President and Chief Financial Officer for Giant Food, Inc.

 

Gerard E. Holthaus has been a member of our Board of Directors since 2004. Since April 1997, Mr. Holthaus has been President and Chief Executive Officer of Williams Scotsman, Inc., the largest provider of mobile office space and modular buildings in the U.S. He was elected Chairman of the Board of Williams Scotsman in April 1999. From October 1995 to April 1997, he was its President and Chief Operating Officer. Prior to October 1995, he was its Executive Vice President and Chief Financial Officer. He is a Certified Public Accountant. Mr. Holthaus is also a director and Chairman of the Board of Williams Scotsman International, Inc.

 

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James A. Flick, Jr. has been a member of our Board of Directors since 1992. Mr. Flick has been President and Chief Executive Officer of Winnow, Inc., a management consulting firm, since 1994. From 1994 to 2001, Mr. Flick was also Chairman, President and Chief Executive Officer of Dome Corporation, a real estate development and management services company. Mr. Flick is a Certified Public Accountant. Mr. Flick is also a director and Chairman of the Audit Committee of Williams Scotsman International, Inc.

 

Peter F. O’Malley has been a member of our Board of Directors since 1992. Mr. O’Malley is President of Aberdeen Creek Corporation, a privately held company engaged in investment, business consulting and development activities. He is a founder of, and since 1989 has been Of Counsel to, the law firm of O’Malley, Miles, Nylen & Gilmore. Mr. O’Malley is a director and Chairman (Lead Independent Director) and member of the Nominating and Corporate Governance Committee and a member of the Compensation/Human Resources Committee and Executive Committee of Pepco Holdings, Inc.

 

Denis J. Callaghan has been a member of our Board of Directors since 2000. Mr. Callaghan retired from Deutsche Bank Securities, Inc. in February 2000, where he was the Director of North American Equity Research. Prior to becoming Director of Equity Research in 1992, Mr. Callaghan was responsible for the Insurance and Financial Services Research Groups of Alex, Brown & Sons Incorporated.

 

George P. Stamas has been a member of our Board of Directors since 1992. Since 2002, Mr. Stamas has been a Partner of the international law firm of Kirkland & Ellis LLP. He is also a Venture Partner of New Enterprise Associates, a venture capital firm. From 1999 to January 2002, Mr. Stamas was Vice Chairman of the Board of Directors of Deutsche Bank Securities, Inc. He is a limited partner of the Baltimore Orioles, the Washington Capitals and the Washington Wizards. Mr. Stamas is also a director and a member and Chairman of the Nominating and Corporate Governance Committee of Aether Systems, Inc.

 

Matthew F. McHugh has been a member of our Board of Directors since October 2005. Congressman McHugh, after retiring from Congress, was a senior advisor at The World Bank, acting as senior counselor to the President from May 1993 to June 2005, as an employee to December 2000, and beginning in December 2000, as a consultant. From 1975 to 1992, Congressman McHugh was a U.S. Representative in Congress for the 27th and 28th Congressional Districts of New York. He was also a member of the Permanent Select Committee on Intelligence, chairing its Subcommittee on Legislation, from 1985-1990. In 1991, he was appointed Acting Chairman of the Committee on Standards of Official Conduct.

 

Committees of the Board of Directors

 

Our Board of Directors has an audit committee, a nominating and corporate governance committee and a compensation committee. The audit committee selects, appoints and approves fees of our independent auditors, reviews and discusses the scope of the annual audit and our independent auditors’ written communications to the audit committee and management, oversees our financial reporting activities, approves audit and non-audit services by our independent auditors, reviews and discusses our periodic reports filed with the SEC, and reviews and oversees our internal system of audit, financial and disclosure controls. The current members of the audit committee are: Messrs. Holthaus (Chair), Berey and Callaghan, each of whom are “audit committee financial experts” within the meaning of Rule 401(h) of Regulation S-K. The nominating and corporate governance committee recommends the slate of nominees for election to the Board of Directors and appointment to each of the committees of the Board of Directors and monitors compliance with, reviews and recommends changes to our corporate governance guidelines and the committee charters. The current members of the nominating and corporate governance committee are Messrs. Callaghan (Chair), Berey, Holthaus, McHugh and O’Malley. The compensation committee reviews and makes recommendations regarding the compensation of executive officers and other employees and our compensation policies, strategies, plans and programs, including, but not limited to, any performance-based incentive plans, stock option or equity award plans and change in control or other severance plans. The current members of the compensation committee are Messrs. Berey (Chair), Callaghan, McHugh and O’Malley.

 

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Executive Compensation

 

Summary Compensation Table

 

The following table sets forth information regarding compensation awarded to, earned by, or paid to our chief executive officer, our other four most highly compensated executive officers for the periods indicated and one former executive officer for the periods indicated.

 

    Annual Compensation

    Long-Term Compensation

  All Other
Compensation(1)
($)(4)


 
    Year

 

Salary

($)(1)


   

Bonus

($)(2)


 

Other

Annual
Compensation
($)(3)


    Awards

    Payouts

 

Name and Principal
Position


         

Restricted
Stock
Award(s)

($)


   

Securities
Underlying
Options

(#)


   

LTIP
Payouts

($)


 

Dennis J. Shaughnessy

Chairman of the Board

  2004   192,308 (5)   —     854     3,000,000 (6)   200,000 (6)   —  
—  
  10,708  

Jack B. Dunn, IV

President and Chief

Executive Officer

  2004
2003
2002
  1,000,000
1,000,000
900,000
 
 
 
  —  
600,000
1,625,000
  15,873
3,436
4,105
(7)
 
 
  1,000,000
—  
—  
(8)
 
 
  90,000
90,000
150,000
 
 
 
  —  
—  
—  
  6,150
6,743
6,664
 
 
 

Dominic DiNapoli

Executive Vice President

and Chief Operating

Officer

  2004   2,000,000     500,000   4,473     —       50,000     —  
—  
  34,063 (9)

Theodore I. Pincus

Executive Vice President

and Chief Financial

Officer

  2004
2003
2002
  500,000
500,000
400,000
 
 
 
  100,000
400,000
620,000
  6,090
4,763
3,249
 
 
 
  —  
—  
—  
 
 
 
  50,000
—  
45,000
 
 
 
  —  
—  
—  
  8,225
10,071
9,305
(10)
 
 

Barry S. Kaufman

Executive Vice President—

Chief Risk Management

Officer

  2004
2003
2002
  500,000
500,000
250,000
 
 
 
  125,000
250,000
50,000
  6,802
—  
—  
 
 
 
  —  
—  
—  
 
 
 
  50,000
—  
25,000
 
 
 
  —  
—  
—  
  6,150
7,290
6,595
 
 
 

Stewart J. Kahn

Retired President and Chief

Operating Officer

  2004
2003
2002
  384,616
1,000,000
900,000
(11)
 
 
  —  
600,000
1,625,000
  8,354
7,242
3,179
 
 
 
  —  
—  
—  
 
 
 
  —  
—  
90,000
 
 
 
  —  
—  
—  
  358,073
7,340
7,389
(12)
 
 

(1) Includes annual base salary, including amounts earned but deferred at the election of the executive officer, such as salary deferrals under our 401(k) Plan.
(2) For purposes of this table, bonuses have been reported in the fiscal year earned.
(3) These amounts represent the payment of automobile expenses on behalf of the named executive officers. In addition, Mr. Dunn and a non-executive are currently the designated members under a corporate golf club membership, the cost of which for 2004 is reflected in this column. In all cases these perquisites and other personal benefits amount in the aggregate to the lesser of either $50,000 or 10% of the total of annual salary and bonus reported for the named executive officer in columns (c) and (d).
(4) These amounts represent our payment of matching and discretionary contributions to our 401(k) Plan. For 2003 and 2002, these amounts also include payments of life insurance premiums. For 2004, life insurance payments have been omitted as such benefits are identical to those offered to all salaried employees and do not discriminate in favor of executive officers. 401(k) contributions for 2004 for Messrs. Shaughnessy, Dunn, DiNapoli, Pincus, Kaufman and Kahn were $0.00, $6,150, $6,150, $6,150, $6,150 and $6,150, respectively. For 2004, includes $10,708 paid on behalf of Mr. Shaughnessy for legal services incurred by him in connection with the negotiation of his employment agreement in 2004.
(5) Dennis J. Shaughnessy was appointed as our executive Chairman of the Board on October 18, 2004. Under his employment agreement, his base annual salary for 2004 is $1,000,000. The amount shown in the table represents the amount actually paid to him as base salary for the period October 18, 2004 through December 31, 2004.
(6) In connection with his employment, Mr. Shaughnessy was awarded restricted stock under our 2004 Long-Term Incentive Plan, as amended, valued at $3.0 million at the grant date of October 18, 2004, equating to 152,517 whole shares based on the closing price of a share of our common stock on the NYSE on that date. The restricted shares vest in ten equal annual installments beginning one year from the date of grant. As of December 31, 2004, those shares were valued at approximately $3.2 million, based on a market value of $21.07 per share (the closing price of a share of our common stock on the NYSE on that date). We have never paid dividends on our common stock but Mr. Shaughnessy would be entitled to receive such dividends on account of the restricted stock if and when authorized, declared and paid. As of October 18, 2004, he was also awarded an option exercisable for 200,000 shares of our common stock at an exercise price equal to the closing price of a share of our common stock on the NYSE on that date, or $19.67 per share, which option vests in three equal annual installments beginning on the date of grant. Mr. Shaughnessy’s employment agreement, including compensation arrangements, is described under “Executive Officers and Compensation — Employment Arrangements.”

 

80


(7) Includes $11,000 for the cost of a corporate golf club membership. Mr. Dunn and a non-executive are currently the designated members.
(8) In connection with the amendment of Mr. Dunn’s employment agreement, he was awarded restricted stock under our 2004 Long-Term Incentive Plan, as amended, valued at $1.0 million at the grant date of September 23, 2004, equating to 53,106 whole shares based on the closing price of a share of our common stock on the NYSE on that date, which vest in five equal annual installments beginning one year from the date of grant. As of December 31, 2004, those shares were valued at approximately $1.1 million, based on a market value of $21.07 per share (the closing price of a share of our common stock on the NYSE on that date). We have never paid dividends on our common stock but Mr. Dunn would be entitled to receive such dividends on account of the restricted stock if and when authorized, declared and paid. Mr. Dunn’s employment agreement, as amended, including compensation arrangements, is described under “Executive Officers and Compensation—Employment Arrangements.”
(9) Dominic DiNapoli was appointed our Executive Vice President and Chief Operating Officer in February 2004. He joined FTI from the business recovery services (BRS) business of PricewaterhouseCoopers LLP, which was acquired by FTI in August 2002. In connection with that acquisition, Mr. DiNapoli received shares of FTI common stock that are restricted under the terms of his employment agreement. FTI granted the former BRS partners who joined FTI, contractual protection against a decline in the value of their restricted shares during the four-year restricted period if the market price falls below $18.89 per share. $27,913 included in the above table relates to his contractual stock price protection. All restricted shares become unrestricted on August 30, 2006. If Mr. DiNapoli were to terminate his employment with us prior to August 30, 2006, the restricted period for his restricted shares would be extended to eight years from the date of termination.
(10) Includes premium payments for 2004, 2003 and 2002 for the following insurance benefits that are not provided to other executive officers or employees in general: approximately $795 for additional liability coverage and $1,220 for additional long-term disability coverage.
(11) Mr. Kahn retired as our President and Chief Operating Officer and as a director effective May 19, 2004. The amount shown represents the base salary paid to him for the period January 1, 2004 through May 19, 2004.
(12) Pursuant to Mr. Kahn’s employment agreement, following his retirement he became an advisor to our CEO for which he receives an annualized transition payment of $500,000. For the period May 19, 2004 through December 31, 2004, we paid Mr. Kahn $351,923 of his annualized transition payment.

 

Equity Compensation Plans

 

Option Grants in Last Fiscal Year

 

The following table sets forth the options granted to our named executive officers during 2004.

 

     Individual Grants

  

Potential Realizable

Value at Assumed Annual
Rate of Stock Price
Appreciation for Option Term


Name


   Number of
Securities
Underlying
Options
Granted


   % of Total
Options
Granted
to
Employees
in 2004


  

Exercise
Price per
Share

($/Share)(1)


  

Expiration

Date


  

        5%        

($)(2)


  

        10%        

($)


Dennis J. Shaughnessy(3)

   200,000    18.96    19.67    10/18/14    2,473,643    6,268,452

Jack B. Dunn, IV(4)

   22,500    2.13    17.91    2/19/14    193,729    547,237