Exhibit 99.1
PricewaterhouseCoopers Business Recovery Services Excluding its Broker/Dealer
Activities
Financial Statements
Page
Independent Auditors' Report ................................................................................ 2
Statements of Assets and Liabilities at June 30, 2000, 2001 and 2002 ........................................ 3
Income Statements Before Partner Distributions and Benefits for each of the three years in the period
ended June 30, 2002 ...................................................................................... 4
Statements of Cash Flows for each of the three years in the period ended June 30, 2002 ...................... 5
Statements of Changes in PwC U.S. Investment for each of the three years in the period ended June 30,
2002 ..................................................................................................... 6
Notes to Financial Statements ............................................................................... 7
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INDEPENDENT AUDITORS' REPORT
To the Partners of PricewaterhouseCoopers LLP
We have audited the accompanying statements of assets and liabilities of
PricewaterhouseCoopers Business Recovery Services Excluding its Broker/Dealer
Activities (referred to as the "Business"), a business of PricewaterhouseCoopers
LLP ("PwC LLP" or "PwC U.S."), as of June 30, 2000, 2001 and 2002, and the
related statements of income before partner distributions and benefits, cash
flows and changes in PwC U.S. Investment for the years then ended. These
financial statements are the responsibility of both PwC U.S. and the Business'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
aspects, the financial position of PricewaterhouseCoopers Business Recovery
Services Excluding its Broker/Dealer Activities as of June 30, 2000, 2001 and
2002, and its income before partner distributions and benefits and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
New York, New York
August 9, 2002
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PRICEWATERHOUSECOOPERS BUSINESS RECOVERY SERVICES
EXCLUDING ITS BROKER/DEALER ACTIVITIES
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 2000, 2001 AND 2002
(In Thousands)
- --------------------------------------------------------------------------------
ASSETS 2000 2001 2002
---- ---- ----
CURRENT ASSETS:
Accounts receivable (net of allowances of $7,068, $9,074
and $11,637 at June 30, 2000, 2001 and 2002, respectively) $ 9,407 $13,076 $ 15,600
Unbilled receivables 12,176 20,293 19,730
Prepaid and other current assets -- 187 211
------- ------- --------
Total current assets 21,583 33,556 35,541
TOTAL ASSETS $21,583 $33,556 $ 35,541
======= ======= ========
LIABILITIES AND PwC U.S. INVESTMENT
CURRENT LIABILITIES:
Accrued payroll and related benefits (Note 5) $ 3,114 $ 5,501 6,765
Amounts due to PwC U.S. (Note 4) 4,263 4,139 3,184
Accounts payable and accrued liabilities 653 530 521
Billings in excess of services earned 11,287 26,393 45,003
------- ------- --------
Total current liabilities 19,317 36,563 55,473
COMMITMENTS AND CONTINGENCIES (Note 6)
PwC U.S. INVESTMENT 2,266 (3,007) (19,932)
------- ------- --------
TOTAL LIABILITIES AND PwC U.S. INVESTMENT $21,583 $33,556 $ 35,541
======= ======= ========
The accompanying notes are an integral part of these financial statements.
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PRICEWATERHOUSECOOPERS BUSINESS RECOVERY SERVICES
EXCLUDING ITS BROKER/DEALER ACTIVITIES
INCOME STATEMENTS BEFORE PARTNER DISTRIBUTIONS AND BENEFITS
YEAR ENDED JUNE 30, 2000, 2001 AND 2002
(In Thousands)
- --------------------------------------------------------------------------------
2000 2001 2002
---- ---- ----
REVENUES $141,093 $ 156,948 $ 179,262
Cost of services* 60,744 64,943 64,642
Reimbursables and subcontractor costs 9,401 12,844 14,275
-------- --------- ---------
Total costs of services* 70,145 77,787 78,917
Selling, general and administrative expenses* 30,851 28,387 33,542
-------- --------- ---------
Operating Income* 40,097 50,774 66,803
Interest expense 422 715 603
Other expense 364 605 584
-------- --------- ----------
INCOME BEFORE PARTNER DISTRIBUTIONS
AND BENEFITS* $ 39,311 $ 49,454 $ 65,616
======== ========= ==========
*Excludes payment for partner distributions and benefits.
The accompanying notes are an integral part of these financial statements.
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PRICEWATERHOUSECOOPERS BUSINESS RECOVERY SERVICES
EXCLUDING ITS BROKER/DEALER ACTIVITIES
STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, 2000, 2001 AND 2002
(In Thousands)
- --------------------------------------------------------------------------------
2000 2001 2002
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before partner distributions and benefits $ 39,311 $ 49,454 $ 65,616
Adjustments to reconcile to net cash provided by
(used in) operating activities
Allowance for bad debts 6,156 3,006 3,763
Changes in assets and liabilities:
Accounts receivable (8,305) (6,675) (6,287)
Unbilled receivables (2,830) (8,117) 563
Prepaid and other current assets 109 (187) (24)
Accrued payroll and related benefits (518) 2,387 1,264
Accounts payable and accrued liabilities 119 (123) (9)
Billings in excess of services earned 8,082 15,106 18,610
-------- -------- --------
Net cash provided by operating activities 42,124 54,851 83,496
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Amount (due to) from PwC U.S. 721 (124) (955)
Activity in PwC U.S. investment, net (42,845) (54,727) (82,541)
Net cash used in financing activities (42,124) (54,851) (83,496)
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS -- -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR -- -- --
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ -- $ -- $ --
======== ======== ========
The accompanying notes are an integral part of these financial statements.
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PRICEWATERHOUSECOOPERS BUSINESS RECOVERY SERVICES
EXCLUDING ITS BROKER/DEALER ACTIVITIES
STATEMENTS OF CHANGES IN PwC U.S. INVESTMENT
JUNE 30, 2000, 2001 AND 2002
(In Thousands)
- --------------------------------------------------------------
BALANCE AS OF JUNE 30, 1999 $ 5,800
Income before partner distributions and benefits 39,311
Activity in PwC U.S. investment, net (42,845)
---------
BALANCE AS OF JUNE 30, 2000 2,266
Income before partner distributions and benefits 49,454
Activity in PwC U.S. investment, net (54,727)
---------
BALANCE AS OF JUNE 30, 2001 (3,007)
Income before partner distributions and benefits 65,616
Activity in PwC U.S. investment, net (82,541)
---------
BALANCE AS OF JUNE 30, 2002 $ (19,932)
=========
The accompanying notes are an integral part of these financial statements.
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PRICEWATERHOUSECOOPERS BUSINESS RECOVERY SERVICES
EXCLUDING ITS BROKER/DEALER ACTIVITIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000, 2001 AND 2002
(In Thousands)
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
The Business Recovery Services business unit excluding the broker/dealer
activities (the "Business") of PricewaterhouseCoopers LLP ("PwC LLP" or "PwC
U.S.") is a provider of financial and strategic services to under-performing and
troubled businesses.
The Business focuses on solutions to help troubled businesses through bankruptcy
advisory services, crisis management and consulting, as well as trustee and
receiver services. The Business works with under-performing companies to help
rebuild shareholder value.
On July 24, 2002, PricewaterhouseCoopers LLP and FTI Consulting, Inc. entered
into an agreement for the purchase and sale of assets of the Business.
2. BASIS OF PRESENTATION
The financial statements of the Business are prepared in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP"). All material inter-firm balances and transactions have been eliminated.
These financial statements have been derived from the books and records of PwC
U.S. Accordingly, assumptions and allocations have been made which are estimates
(Notes 3 and 4). Management believes that the assumptions and allocations
underlying these financial statements are reasonable. Management does not
believe, however, that it is practical to estimate what these expenses would
have been had the Business operated as an independent entity, including any
expenses associated with obtaining any of these services from unaffiliated
entities. In addition, the Business receives referrals from other business units
of PwC U.S. that may not continue.
PwC U.S. is a partnership where earnings are allocable to its partners and
principals. Partnership distributions are not considered "executive
compensation" in the customary sense of that term because partnership
distributions are comprised of distributions of current earnings. Therefore, it
is not practical to differentiate the ownership components of distributions to
partners from the compensation components of such distributions. As a result,
the financial statements do not reflect the assets and liabilities or income
before partner distributions and benefits had the Business operated as a
stand-alone entity.
The Merger of Coopers & Lybrand and Price Waterhouse Global Networks. Effective
July 1, 1998, substantially all of the various professional services firms
comprising the global networks of Coopers & Lybrand and Price Waterhouse
combined on a country-by-country or regional basis and established a new global
network of combined firms that comprise PricewaterhouseCoopers ("PwC"). The PwC
network of firms adopted a coordinated strategy, branding and standards of
operations on a global basis under a common global management team.
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The combination of partners' book capital interests have been accounted for as a
combination at predecessor basis as of the date of combination. In the
combination of the partnerships, neither predecessor partner group received a
partnership interest that represents a fair value residual equity interest in
the combined partnerships. Partners' rights are limited to the amount of their
book capital contributed and any allocated but undistributed profits. Partners
continued to maintain their same book capital account in the combined
partnership and agreed to share profits in the combined firm on the same basis
as prior to the combination.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents - Cash and cash equivalents are managed centrally
within PwC U.S. The Business does not maintain any cash and cash equivalent
balances of its own.
Fair Value of Financial Instruments - All financial instruments, principally
accounts receivable and unbilled receivables, are stated at historical cost,
which approximates fair value due generally to their short-term nature.
Property and Equipment - The Business does not individually own property and
equipment. These types of assets are not included in the statements of assets
and liabilities. PwC U.S. allocates to the Business its applicable portion of
facilities costs incurred by PwC U.S. See Note 4 for a discussion of allocated
costs.
Provision for Taxes - No income tax provision is recorded in the historical
financial statements of the Business, since PwC U.S. is a partnership and the
tax effects accrue directly to its partners.
Revenue Recognition - Revenues include all amounts billable to clients,
including professional services provided by partners and employees of the
Business, as well as subcontractors working for the Business. Revenues are
recognized in the period in which services are rendered at net realizable value.
Reimbursements, including those related to travel and other out-of-pocket
expenses, as well as subcontractor fees and expenses are also included in
revenues. Revisions to engagement revenues recognized to date, resulting from
changes in circumstances, are recorded in the period in which such changes
become known.
Losses on contracts are recognized during the period in which the loss first
becomes probable and reasonably estimable. Contract losses are determined to be
the amount by which the estimated service costs of the contract exceed the
estimated total revenues that will be generated by the contract.
Unbilled receivables represent revenues for services rendered and expenses
incurred that have not yet been billed to clients.
Billings in excess of services earned represents amounts billed to clients in
advance of work being performed (i.e. retainers, and holdbacks). Retainers are
paid by clients before work has begun, and are held on deposit until completion
of work. Such amounts are either applied to final billings or refunded to
clients upon completion of work. Holdbacks are portions of client fees deferred
by the Business or required to be held by courts of law to be realized upon
completion of work. Holdbacks are recorded as reserves in billings in excess of
services earned until amounts are actually collected, as collection is not
certain.
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Cost of Services - Cost of services includes employee compensation and related
benefits for client service staff, outside consultants used on client
engagements, the costs of their recruitment and continuing training, and an
allocation of information technology costs attributable to these staff. Costs
related to research and development activities are expensed as incurred.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses include general and administrative costs incurred by PwC
U.S. and allocated to the Business, as well as costs incurred directly by the
Business. Selling, general and administrative costs include compensation and
benefits for non-client service and practice support personnel, infrastructure
expenses including: rent, legal and professional indemnity insurance costs, new
business development activities, information technology not attributable to
client service staff, marketing, advertising and other firmwide costs.
Allocated Costs and Partnership Distributions - PwC U.S. provides various
services and infrastructure to the Business. The costs of these services are
allocated to the Business on bases that PwC U.S. management believes to be
reasonable. See Note 4 for a discussion of allocated costs. PwC U.S. is a
partnership and its earnings are allocable to its partners. Partnership
distributions are not considered "executive compensation" in the customary sense
of that term because partnership distributions are comprised of distributions of
current earnings. Therefore, it is not practical to differentiate the ownership
components of distributions to partners from the compensation components of such
distributions. Accordingly, distributions and benefits for services rendered by
partners have not been reflected in the income statements before partner
distributions and benefits.
Earnings Per Share - The Business has no single capital structure upon which to
calculate earnings per share information. Accordingly, earnings per share
information is not presented.
Credit Risk - The Business provides professional services to a diversified
client base. The majority of client engagements are with major corporations and
financial institutions. The Business also serves a range of troubled companies
varying in size from large conglomerates to mid-cap companies that retain the
Business' services through bankruptcy trustees. The Business performs ongoing
credit evaluations of its clients and may require advances or retainers prior to
engagement. Accounts receivable are reviewed on a periodic basis and an
allowance for bad debts is recorded where such amounts are determined to be
uncollectible. Due to the large number of client accounts and the diversified
client base, across many industries, management does not believe that a
significant concentration of credit risk loss exists.
Use of Estimates - The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, or the disclosure of contingent
assets and liabilities at the date of the financial statements and reported
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
4. TRANSACTIONS WITH PwC
In the normal course of business, the Business uses the professional services of
other PwC U.S. business units on the Business' engagements. Related party
revenues include billings for professional services provided by the Business to
other PwC U.S. business units. For the years ended June 30, 2000, 2001 and 2002,
revenues include approximately $14,000, $11,600 and $5,900, respectively,
related to professional services provided to other PwC U.S. business units.
Additionally, cost of services includes $32,600, $24,800 and $18,700,
respectively, related to
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professional services received from other PwC U.S. business units. These related
party transactions are settled within "PwC U.S. Investment."
Settlement of Internal Costs and Expenses within PwC U.S. - PwC U.S. provides
various services and infrastructure on a centralized basis to the Business
including occupancy, technology services, finance and planning, human resources,
marketing and business development, risk management and practice protection,
firm-wide management, and new product development. The methods of allocating
these centralized costs to the Business include relative revenues, headcount,
square footage, or other basis. These service and infra-structure costs are paid
or settled with PwC U.S. using cash provided by operations of the Business.
Accordingly, these costs are credited directly to the PwC U.S. Investment
account, on the basis that cash generated by the Business is distributed to PwC
U.S. for the settlement of commonly incurred liabilities, acquisitions of common
assets and distributions to PwC U.S. partners.
Total allocated costs approximated $22,723, $22,523 and $26,615 for the years
ended June 30, 2000, 2001 and 2002, respectively, and are included in the
accompanying statements of income before partner distributions and benefits, as
follows: costs of services of $3,621, $2,239 and $2,111; selling, general and
administrative expenses of $18,455, $19,349 and $23,889; interest expense of
$422, $715 and $603; and other expense of $225, $220 and $12.
Cash receipts, which the Business generates, are collected by PwC U.S. Such cash
is generally managed via common pools for all lines of service within PwC U.S.
Cash generated by the Business that is managed by PwC U.S. has not been
reflected in these financial statements.
Settlement of Costs and Expenses with Employees and Allocated Debt - The
Business funds its operations from internally generated cash flows, funds
provided by PwC U.S., bank borrowings, loans, or other debt of PwC U.S. PwC U.S.
incurs and settles payroll and accounts payable on a centralized basis and
allocates a portion of its short-term and long-term funding to support the
operations of the Business. Accordingly, prepaid and other current assets and
payroll taxes and deductions are allocated based on the ratio of the Business'
employee expenses to total PwC U.S. employee expenses, Certain accounts payable
and accrued liabilities are allocated based on the Business' ratio of
non-employee expense to total PwC U.S. non-employee expense. Short-term and
long-term debt are allocated to the Business based on the ratio of the Business'
accounts receivable and unbilled receivables to total accounts receivable and
unbilled receivables of PwC U.S. Interest is allocated to debt but is not
allocated to other allocated liabilities, such as accounts payable, accrued
liabilities, accrued payroll and related benefits. Interest related to allocated
debt is allocated on a monthly basis using the ratio of the Business' revenues
to total revenues of PwC U.S.
These allocated amounts have been included in "Amounts due to PwC U.S." in the
accompanying statements of assets and liabilities and are comprised of:
June 30,
2000 2001 2002
---- ---- ----
Prepaid and other current assets $ (150) $ (60) $ (453)
Payroll taxes and deductions 547 932 1,473
Accounts payable 615 331 1,835
Accrued and other liabilities 726 941 329
Debt 2,525 1,995 0
Amounts due to PwC U.S. $ 4,263 $ 4,139 $ 3,184
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5. ACCRUED PAYROLL AND RELATED BENEFITS
Accrued payroll and related benefits consisted of the following:
June 30,
--------
2000 2001 2002
---- ---- ----
Accrued bonus $2,037 $4,169 $5,048
Accrued vacation 1,077 1,332 1,717
------ ------ ------
Total accrued payroll and related benefits $3,114 $5,501 $6,765
The Business has various performance-driven bonus plans under which employees
are awarded cash bonuses generally based upon the performance of their unit, as
well as their own individual performance against predefined goals. Bonuses are
generally earned and recognized within a given fiscal year and paid in the
following fiscal year. Distributions and related benefits for partners have not
been reflected in the income statements before partner distributions and
benefits.
6. COMMITMENTS AND CONTINGENCIES
Litigation - The PwC global network, as well as the Business, is involved in
litigation arising in the ordinary course of business, some of which may be
related to the Business' operations. Some of the actions and proceedings have
been brought on behalf of various claimants and certain of these claimants seek
damages of unspecified amounts. The member firms within the PwC global network
have established a series of captive insurance companies to self-insure
themselves against troublesome practice matters. The insurance provided by these
captive insurance companies covers, on a PwC U.S. basis, liability relating to
professional services performed by the Business as well as professional services
performed by all other business units within PwC U.S. Management believes that
any potential losses will not exceed the designated amounts covered by the
captive insurance companies. While the ultimate outcome of any outstanding
litigation cannot be predicted with certainty, it is the opinion of management
that the resolution of such litigation will not have a material adverse effect
on the statements of assets and liabilities, income before partner distributions
and benefits or cash flow of the business.
In December 2000, the Trustee of Keller Financial Services of Florida, Inc.
filed an action in the United States of District Court for the Middle District
of Florida, alleging that PwC U.S. work as the financial advisor of this former
client, which subsequently went into bankruptcy, was negligent and that PwC U.S.
breached its fiduciary duty by not placing the client into bankruptcy soon after
PwC U.S.'s engagement began in June 1997. PwC U.S. believes it has meritorious
legal defenses regarding this matter, and further, other parties may have
liability to the plaintiff, which would also reduce the liability, if any, of
PwC U.S. Nevertheless, it is reasonably possible that this case could result in
an outcome unfavorable to PwC U.S. Because this case is still in its preliminary
stages, PwC U.S. is unable to estimate the loss, or range of loss, if any, that
might ultimately be incurred. PwC U.S. will retain this liability in connection
with the sale to FTI.
In one matter, General Cinemas, the creditors have filed an objection to the
firm's final fee application in total. If successful, the firm could not collect
any of the outstanding fees and would have to disgorge any fees PwC U.S. has
collected to date. The total fees collected and
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billed but not collected are approximately $2.1 million. The matter is still in
discovery. PwC U.S. is unable to estimate the loss, or range of loss, if any,
that might ultimately be incurred.
In another matter, Aureal, the Court objected to PwC U.S.'s final fee
application and ordered disgorgement of the entire fees of approximately
$350,000, on various grounds. PwC U.S. is moving for reconsideration of that
ruling.
In RSR, PwC U.S. provided advisory services to this distressed company. PwC U.S.
declined thereafter to provide RSR with an affidavit for use against another PwC
U.S. client in litigation and further revised to provide a tolling agreement to
RSR. PwC U.S. does not believe that the former client has a viable claim should
it ever be brought.
Leases - PwC U.S. has obligations under long-term, noncancelable, operating
lease agreements, principally for office space and data processing equipment,
including personal computers, some of which relate to the Business' operations.
Certain agreements are subject to periodic escalation charges for increases in
real estate taxes and other charges. Renewal options are available on the
majority of the office leases. No leases are held by PwC U.S. exclusively for
the benefit of the Business. PwC U.S. allocates shared occupancy costs to its
business units and sub-business units based on headcount and space-utilized
factors.
Rent expense, including allocated amounts, approximated $4,352, $3,966 and
$6,029 for the years ended June 30, 2000, 2001 and 2002, respectively.
7. EMPLOYEE BENEFIT PLANS
Defined Benefit Retirement and Post-retirement Benefit Plans - Historically, all
employees of PwC U.S., including those of the Business, have participated in
various benefit and retirement plans sponsored by PwC U.S. The costs with
respect to these plans are allocated among all of the lines of service within
PwC U.S. The cost allocated to the Business for defined benefit plans included
within cost of services was $691, $859 and $1,032 for the years ended June 30,
2000, 2001 and 2002, respectively.
Additionally, PwC U.S. has unfunded post-retirement benefit plans that provide
medical and life insurance for eligible retirees, employees, and dependents, as
well as post-employment benefits that include severance benefits upon
involuntary separation from PwC U.S. PwC U.S. has retained these plans, and
therefore, for purposes of these financial statements, the assets and
liabilities of these plans are not allocated to the Business. For the years
ended June 30, 2000, 2001 and 2002, the Business recognized expense related to
post-retirement benefit plans of $284, $308 and $481, respectively.
Defined Contribution Plans - PwC U.S. sponsors the Savings Plan for Employees
and Partners of PricewaterhouseCoopers LLP and the Savings Plan for Employees of
PricewaterhouseCoopers LLP (collectively, the "Savings Plans"), defined
contribution savings plans, available to all PwC U.S. employees and partners who
meet certain eligibility requirements. The Savings Plans are 401(k) based plans
that allow employees to contribute up to the maximum limit established by law
($10.0, $10.5, $10.5 and $11.0 for calendar years 1999, 2000, 2001 and 2002,
respectively). PwC U.S. provides a matching contribution for employees under the
terms of the Savings Plans.
The costs allocated to the Business for defined contribution plans included in
cost of services was $154, $253 and $381, for the years ended June 30, 2000,
2001 and 2002, respectively.
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