Exhibit 99.2
FTI CONSULTING, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On August 30, 2002, FTI acquired PwC's U.S. Business Recovery Services
Division (BRS) for $141.1 million in cash and 3,000,000 shares of FTI common
stock, valued at $101.9 million. FTI also incurred acquisition-related expenses
of approximately $1.4 million. In addition, FTI borrowed $119.0 million on
August 30, 2002 to pay part of the cash consideration for the BRS acquisition.
In addition, in July 2002, FTI committed to a plan to sell its applied
sciences practice group. FTI's historical financial statements beginning in the
third quarter of 2002 will present the operations of the applied sciences
practice group as discontinued operations.
The accompanying unaudited pro forma combined statements of income for the
year ended December 31, 2001 and the six months ended June 30, 2002 give effect
to the acquisition of BRS, including the assumed effects of the debt financing
transactions related to the acquisition, as if the acquisition had occurred on
January 1, 2001. BRS operated under a fiscal year ending June 30. The
accompanying pro forma combined statements of income for both the annual and
six-month period presented have been prepared after adjusting BRS' accounting
period to conform to FTI's year end of December 31. FTI's unaudited pro forma
combined statements of income also are adjusted to remove the historical
operating results of the applied sciences practice group from FTI's historical
continuing operations for the periods presented.
The accompanying unaudited pro forma combined balance sheet at June 30,
2002 gives effect to the acquisition of BRS, including the assumed effects of
the debt financing transactions related to the acquisition, as if the
acquisition occurred on June 30, 2002. FTI will allocate the cost of the
acquisition of BRS to identifiable assets and liabilities based on their
estimated relative fair values. FTI has not completed its allocation process,
and therefore the allocation of the purchase price for BRS included in the
accompanying pro forma combined financial statements is preliminary. FTI is
performing a valuation of the intangible assets that it acquired from BRS. The
estimated valuation of these intangible assets for purposes of preparing the
accompanying unaudited pro forma combined financial statements is based on the
data that FTI has developed to date, and FTI expects to complete its valuation
in October 2002. The final purchase price allocation is not expected to vary
significantly from the preliminary allocation included in the accompanying
unaudited pro forma combined financial statements.
The pro forma adjustments are described in the accompanying notes and are
based upon available information and various assumptions that management
believes are reasonable. These adjustments give effect to events directly
attributable to the transactions and do not reflect any restructuring or
integration costs, or any potential cost savings or other synergies that
management expects to realize as a result of the transaction. The unaudited pro
forma combined financial statements do not purport to represent what FTI's
financial position and results of operations would have actually been had the
acquisition occurred on the dates indicated.
1
Unaudited Pro Forma Combined Statements of Income
Year ended December 31, 2001
------------------------------------------------------------------------------------
Historical Discontinued Pro Forma Pro Forma
FTI Operations FTI BRS(*) Adjustments Total
---------- -------------- ---------- --------- ----------- ----------
(in thousands, except per share data)
Revenues ............................. $166,359 $44,042 $122,317 $170,689 $ (3,445)(b) $289,561
Direct cost of revenues .............. 83,449 24,375 59,074 80,840 28,895 (c) 156,102
(1,721)(d)
(10,049)(e)
(937)(f)
Selling, general and administrative
expenses ............................. 45,591 12,506 33,085 30,828 (11,962)(g) 51,951
Amortization expense (a) ............. 5,049 814 4,235 -- 2,000 (h) 6,235
---------- ------------- --------- -------- ------------ ----------
Total costs and expenses ............. 134,089 37,695 96,394 111,668 6,226 214,288
---------- ------------- --------- -------- ------------ ----------
Income from operations ............... 32,270 6,347 25,923 59,021 (9,671) 75,273
Interest expense, net ................ (4,356) (536) (3,820) (912) (6,414)(i) (10,234)
912 (j)
---------- ------------- --------- -------- ------------ ----------
Income from continuing operations
before income taxes ................ 27,914 5,811 22,103 58,109 (15,173) 65,039
Income taxes ......................... 11,445 2,481 8,964 -- 17,174 (k) 26,138
---------- ------------- --------- -------- ------------ ----------
Income from continuing operations .... $ 16,469 $ 3,330 $ 13,139 $ 58,109 $(32,347) $ 38,901
========== ============= ========= ======== ============ ==========
Earnings per common share from
continuing operations:
Basic .............................. $ 0.92 $ 1.87
========== ==========
Diluted ............................ $ 0.84 $ 1.72
========== ==========
Weighted average shares outstanding,
basic ................................ 17,841 3,000 (l) 20,841
========== ============ ==========
Weighted average shares outstanding,
diluted .............................. 19,631 3,000 (l) 22,631
========== ============ ==========
Six months ended June 30, 2002
------------------------------------------------------------------------------------
Historical Discontinued Pro Forma Pro Forma
FTI Operations FTI BRS(*) Adjustments Total
----------- ------------ ---------- --------- ----------- ----------
(in thousands, except per share data)
Revenues ............................. $101,755 $24,058 $77,697 $ 94,438 $ (2,992)(b) $169,143
Direct cost of revenues .............. 51,386 13,206 38,180 39,965 15,539 (c) 86,941
(1,269)(d)
(4,921)(e)
(553)(f)
Selling, general and administrative
expenses ............................. 26,690 6,900 19,790 18,900 (5,553)(g) 33,137
Amortization expense (a) ............. -- -- -- -- 1,000 (h) 1,000
---------- ------------- --------- -------- ----------- ----------
Total costs and expenses ............. 78,076 20,106 57,970 58,865 4,243 121,078
---------- ------------- --------- -------- ----------- ----------
Income from operations ............... 23,679 3,952 19,727 35,573 (7,235) 48,065
Interest expense, net ................ (1,340) (193) (1,147) (61) (3,210)(i) (4,357)
61 (j)
---------- ------------- --------- -------- ----------- ----------
Income from continuing operations 22,339 3,759 18,580 35,512 (10,384) 43,708
before income taxes ..................
Income taxes ......................... 9,047 1,605 7,442 -- 10,051 (k) 17,493
---------- ------------- --------- -------- ----------- ----------
Income from continuing operations .... $ 13,292 $ 2,154 $11,138 $ 35,512 $(20,435) $ 26,215
========== ============= ========= ======== =========== ==========
Earnings per common share from
continuing operations:
Basic .............................. $ 0.67 $ 1.14
========== ==========
Diluted ............................ $ 0.62 $ 1.07
========== ==========
Weighted average shares outstanding,
basic ................................ 19,981 3,000 (l) 22,981
========== =========== ==========
Weighted average shares outstanding,
diluted .............................. 21,501 3,000 (l) 24,501
========== =========== ==========
(*) Excludes payments for partner distributions and benefits.
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Unaudited Pro Forma Combined Balance Sheet
At June 30, 2002
-------------------------------------------------------------------------------
Historical Historical Pro Forma Pro Forma
FTI BRS Subtotal Adjustments Total
----------- ----------- ----------- ----------- -----------
(in thousands)
Assets:
Current assets:
Cash and cash equivalents ................... $ 21,236 $ -- $ 21,236 $ (17,236)(1) $ 4,000
Accounts receivable, net of allowance
for doubtful accounts ..................... 25,213 15,600 40,813 -- 40,813
Unbilled receivables, net of allowance ...... --
for doubtful accounts .................... 15,875 19,730 35,605 -- 35,605
Income tax receivable ....................... 894 -- 894 -- 894
Deferred income taxes ....................... 1,325 -- 1,325 -- 1,325
Prepaid expenses and other
current assets ............................ 2,430 211 2,641 -- 2,641
----------- ----------- ----------- ----------- -----------
Total current assets ........................... 66,973 35,541 102,514 (17,236) 85,278
Property and equipment, net .................... 14,423 -- 14,423 -- 14,423
Goodwill, net of accumulated
amortization ................................ 93,969 -- 93,969 252,030(2) 345,999
Other intangibles -- -- -- 4,000(2) 4,000
Other assets ................................... 1,298 -- 1,298 4,000(3) 5,298
----------- ----------- ----------- ----------- -----------
Total assets ................................... $ 176,663 $ 35,541 $ 212,204 $ 242,794 $ 454,998
=========== =========== =========== =========== ===========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and accrued
expenses .................................. $ 3,589 $ 521 $ 4,110 $ -- $ 4,110
Accrued compensation expense ................ 11,147 6,765 17,912 (5,048)(4) 12,864
Deferred income taxes ....................... 130 -- 130 -- 130
Current portion of long-term debt ........... 4,333 -- 4,333 7,834(5) 12,167
Billings in excess of services earned ....... -- 45,003 45,003 -- 45,003
Amounts due to PwC .......................... -- 3,184 3,184 (3,184)(4) --
Other liabilities ........................... 272 -- 272 -- 272
----------- ----------- ----------- ----------- -----------
Total current liabilities ...................... 19,471 55,473 74,944 (398) 74,546
Long-term debt, less current portion ........... 21,667 -- 21,667 121,380(5) 143,047
Deferred income taxes .......................... 1,748 -- 1,748 -- 1,748
Other long-term liabilities .................... 1,627 -- 1,627 -- 1,627
Stockholders' equity:
Preferred stock ............................. -- -- -- -- --
Common stock ................................ 205 -- 205 30(6) 235
Additional paid-in capital .................. 88,907 -- 88,907 101,850(6) 190,757
Unearned compensation ....................... (465) -- (465) -- (465)
Retained earnings ........................... 44,328 (19,932) 24,396 19,932(7) 44,328
Accumulated other comprehensive loss ........ (825) -- (825) -- (825)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ..................... 132,150 (19,932) 112,218 121,812 234,030
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity ..... $ 176,663 $ 35,541 $ 212,204 $ 242,794 $ 454,998
=========== =========== =========== =========== ===========
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NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. The BRS Acquisition (dollar amounts in thousands except for share data)
On August 30, 2002, FTI acquired BRS in a purchase business combination.
The purchase price includes the cash paid at closing, plus the fair market value
of FTI common stock that it delivered to PwC and estimated acquisition-related
costs. The purchase price is summarized as follows:
Cash $ 141,075
Fair value of common stock 101,880
Estimated transaction costs 1,375
------------
$ 244,330
============
The 3,000,000 shares of common stock issued for BRS were valued using the
average stock price of FTI for the five day period beginning two days before and
ending two days after July 24, 2002, which was the date the transaction was
announced. This resulted in an average stock price of $33.96 per share.
The fair values of BRS' assets have been estimated for the purpose of
allocating the purchase price of the acquisition and preparing the pro forma
financial statements. The allocation of purchase price among the assets acquired
and liabilities assumed is based on a preliminary estimate of their relative
fair values. These estimates could change based on a final appraisal of some of
the intangibles that FTI acquired. The estimated purchase price of $244,330 has
been assigned to the tangible and intangible assets acquired and liabilities
assumed as follows:
Current assets at June 30, 2002 $ 35,541
Fair value adjustments:
Identified intangible assets 4,000
Goodwill 252,030
------------
291,571
Less liabilities assumed at June 30, 2002 (47,241)
------------
$ 244,330
============
2. Adjustments to Unaudited Pro Forma Combined Statements of Income
Adjustments to the unaudited pro forma combined statements of income for
the year ended December 31, 2001 and the six-month period ended June 30, 2002 in
connection with the BRS acquisition are presented below:
(a) As of January 1, 2002, FTI adopted Financial Accounting Standards Board
Statement No. 142, Goodwill and Other Intangible Assets ("Statement 142").
Under the new rules, goodwill and other intangible assets deemed to have
indefinite lives are no longer amortized but are subject to impairment
tests at least annually. Other intangible assets with finite lives continue
to be amortized over their useful lives.
In accordance with Statement 142, FTI is no longer amortizing the $94.0
million of goodwill recorded at December 31, 2001. The goodwill
amortization expense for the year ended December 31, 2001 was $5.0 million.
All of the pro forma amortization expense recorded for the six-month period
ended June 30, 2002 was attributable to the estimated fair value of other
intangible assets with finite lives that were recorded in connection with
the BRS acquisition.
(b) Adjustment to eliminate the portion of billable revenues of BRS partners
and staff working on non-BRS related engagements. Because BRS was a
division of a large, multi-disciplined business, BRS partners and staff
could be assigned to non-BRS engagements. The historical financial
statements include all revenues generated by BRS partners and staff
regardless of the nature of the engagement. This adjustment adjusts
revenues to the amounts generated from the business acquired and eliminates
revenue generated from assisting other PwC divisions.
(c) Adjustment to record pro forma compensation expense, including retirement
and other benefits, for the former partners of BRS. Historically, the BRS
statement of income excluded payments for partner distribution and profits
because partners did not receive salaries as compensation for services, but
rather received earnings distributions recorded as a reduction of net
assets. In connection with the acquisition of BRS, FTI entered into
employment contracts with 49 former partners of BRS that provide for the
payment of salaries consistent with the amounts received in BRS' fiscal
year 2002 as earnings distributions. The pro forma adjustment assumes that
earnings distributions to partners for each respective period were expensed
as compensation.
(d) Adjustment to eliminate the direct costs, such as partner and staff
salaries, related to eliminated revenues generated by BRS partners and
staff assigned to non-BRS engagements, as discussed above in Note (b).
(e) Adjustment to reduce to estimated actual cost the direct costs allocated to
BRS for personnel costs associated with non-BRS professionals working on
BRS engagements. The revenues associated with non-BRS personnel working on
BRS matters was included in the historical BRS financial statements.
However, there was no gross margin associated with these revenues. The
historical financial statements
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prepared by BRS assumed that the personnel cost of professionals borrowed
from other divisions of PwC to complete BRS engagements was equal to the
associated revenue recorded for their billable time. The pro forma
adjustment assumes that the estimated actual personnel costs of 52% of
revenue for the year ended December 31, 2001 and 47% of revenue for the six
months ended June 30, 2002 were incurred for revenues generated by borrowed
personnel. These estimates are based on actual personnel costs for BRS
professionals assigned to BRS engagements.
(f) Adjustment to reduce direct costs for pension expense eliminated in the BRS
acquisition. Employee benefit compensation expense under the former PwC
defined benefit and contribution plans for the year ended December 31, 2001
and six-month period ended June 30, 2002 was $1.3 million and $754,000,
respectively. Under the FTI defined contribution plan, employee benefit
compensation expense related to BRS personnel for the year ended December
31, 2001 and six months ended June 30, 2002 would have been $401,000 and
$200,000, respectively.
(g) Adjustment to eliminate certain non-recurring selling, general and
administrative costs allocated to BRS by PwC. PwC allocated to BRS in the
historical financial statements a proportionate share of all overhead costs
incurred by PwC. These costs consisted principally of general PwC
management and support costs. FTI has reviewed all overhead cost
allocations and has determined the verifiable amount allocated that will
not be incurred subsequent to the acquisition.
(h) Adjustment to record pro forma amortization expense for the $4.0 million of
estimated other intangible assets recorded upon the acquisition of BRS.
These intangible assets consist principally of engagement backlog,
intellectual property and non-competition agreements. These assets will be
amortized over their estimated useful lives. The weighted-average estimated
useful life of these acquired intangible assets is two years.
(i) Adjustment to record pro forma interest expense. In connection with the
acquisition of BRS, FTI incurred $4.0 million of financing costs that are
being amortized over the average contractual life of the related debt of
four years. In addition, FTI assumed that it borrowed $129.2 million to pay
the cash portion of the acquisition cost. See Note (1) below under
"Adjustments to Unaudited Pro Forma Combined Balance Sheet." Based on the
LIBOR rate in effect at the closing date, the average interest rate
associated with the acquisition related borrowings was 4.3% at the closing
date of August 30, 2002.
(j) Adjustment to eliminate the interest expense allocated to BRS by PwC. FTI
assumed no debt from PwC in connection with the BRS acquisition but
financed a portion of the purchase price. Pro forma interest expense
related to the debt FTI incurred is adjusted as described in Note (i)
above.
(k) Adjustment to record the pro forma income tax expense for (i) the
operations of BRS for which no taxes were provided in the historical
financial statements because BRS was a component of a partnership, and (ii)
the estimated tax effects of pro forma adjustments, all at the combined
federal and state statutory income tax rate of approximately 40%.
(l) Adjustment to increase the weighted-average shares outstanding for the
3,000,000 shares that FTI issued upon the acquisition of BRS.
3. Adjustments to Unaudited Pro Forma Combined Balance Sheet
Adjustments to the unaudited pro forma combined balance sheet at June 30,
2002 in connection with the BRS acquisition are presented below:
(1) Adjustment to record the use of cash to purchase BRS. Upon the closing of
the acquisition, FTI paid PwC $141.1 million and incurred transaction costs
of $1.4 million. FTI also borrowed $119.0 million from its lenders and
incurred $4.0 million in financing fees to arrange for this borrowing on
August 30, 2002. This adjustment assumes that FTI borrowed $129.2 million,
or the amount it would have borrowed at June 30, 2002 to maintain
sufficient cash for operations. FTI's borrowings include a line-of-credit
arrangement with additional borrowing capacity to allow FTI to manage its
working capital needs.
(2) Adjustment to record the allocation of the purchase price to goodwill and
other intangible assets acquired in the transaction. The estimated purchase
price of $244,330 has been assigned to the tangible and intangible assets
acquired and liabilities assumed as discussed above.
(3) Adjustment to record the $4.0 million of deferred financing costs arising
from the issuance of debt in connection with the acquisition of BRS.
(4) Adjustment to eliminate certain accrued expenses and amounts due to PwC not
assumed by FTI in accordance with the purchase agreement with PwC.
(5) Adjustment to record the assumed incurrence of $129.2 million of additional
debt in order to fund the acquisition of BRS.
(6) Adjustment to record the assumed issuance of 3,000,000 shares of FTI common
stock at an average stock price of $33.96 in accordance with the purchase
agreement with PwC.
(7) Adjustment to eliminate the PwC investment balance in BRS.
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4. Unaudited Pro Forma Statement of Income for BRS as a Stand Alone Company
The following unaudited pro forma statements of income are based on the
historical financial statements of BRS for the periods presented, adjusted to
present BRS as a company separate from PwC. The pro forma adjustments are
described in the notes above and are based upon available information and
assumptions that management believes are reasonable.
Year ended December 31, 2001 Six months ended June 30, 2002
------------------------------------ -----------------------------------
Pro Forma Pro Forma Pro Forma Pro Forma
BRS(*) Adjustments As Adjusted BRS(*) Adjustments As Adjusted
-------- ----------- ----------- ------- ----------- -----------
(in thousands)
Revenues ............................................... $170,689 $ (3,445)(b) $167,244 $94,438 $ (2,992)(b) $91,446
Direct cost of revenues ................................ 80,840 28,895(c) 97,028 39,965 15,539(c) 48,761
(1,721)(d) (1,269)(d)
(10,049)(e) (4,921)(e)
(937)(f) (553)(f)
Selling, general and administrative expenses ........... 30,828 (11,962)(g) 18,866 18,900 (5,553)(g) 13,347
-------- -------- -------- ------- -------- -------
Total costs and expenses ............................... 111,668 4,226 115,894 58,865 3,243 62,108
-------- -------- -------- ------- -------- -------
Income from operations ................................. 59,021 (7,671) 51,350 35,573 (6,235) 29,338
Interest expense, net .................................. (912) 912(j) - (61) 61(j) -
-------- -------- -------- ------- -------- -------
Income from operations before income taxes ............. 58,109 (6,759) 51,350 35,512 (6,174) 29,338
Income taxes ........................................... -- 20,540(k) 20,540 -- 11,735(k) 11,735
-------- -------- -------- ------- -------- -------
Income from continuing operations ...................... $ 58,109 $(27,299) $ 30,810 $35,512 $(17,909) $17,603
======== ======== ======== ======= ======== =======
(*) Excludes payments for partner distributions and benefits.
6