-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, APnaT6X5UGDs/ZSwt3QL12l687x0dMtta2ssTWMqhTj8NlcE7ssHaGY2wsVpswnR 372+lUrRdKtj4VBZxINGaw== 0000950169-01-500253.txt : 20010816 0000950169-01-500253.hdr.sgml : 20010816 ACCESSION NUMBER: 0000950169-01-500253 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20010801 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20010815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEGG MASON INC CENTRAL INDEX KEY: 0000704051 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 521200960 STATE OF INCORPORATION: MD FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08529 FILM NUMBER: 1715534 BUSINESS ADDRESS: STREET 1: 100 LIGHT ST CITY: BALTIMORE STATE: MD ZIP: 21202-1476 BUSINESS PHONE: 4105390000 MAIL ADDRESS: STREET 1: 100 LIGHT ST CITY: BALTIMORE STATE: MD ZIP: 21202-1476 8-K 1 d8k.txt LEGG MASON SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ____________________ FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of Earliest Event Reported): August 1, 2001 -------------------- LEGG MASON, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Maryland 1-8529 52-1200960 - ------------------------------ ----------- ------------------ (State or Other Jurisdiction (Commission (IRS Employer of Incorporation) File No.) Identification No.) 100 Light Street, Baltimore, Maryland 21202 - -------------------------------------------------------------------- (Address of Principal Executive Office) (Zip Code) Registrant's Telephone Number, Including Area Code: (410) 539-0000 ---------------- Not Applicable ------------------------------------------------------------- (Former name or former address, if changed since last report) Item 2. Acquisition or Disposition of Assets ------------------------------------ On August 1, 2001, the Registrant acquired all of the ownership interests in Private Capital Management, L.P. and certain affiliated entities ("PCM") pursuant to a Purchase Agreement, dated as of May 29, 2001 (the "Purchase Agreement"). PCM is a leading high net worth manager based in Naples, Florida. The ownership interests in PCM were acquired from its co-founder, Miles Collier, and its two operating principals: Bruce S. Sherman, who co- founded the company with Mr. Collier in 1985 and serves as PCM's chairman and chief executive officer, and Gregg J. Powers, president. The Registrant generally intends to continue PCM's operations as they were conducted prior to the acquisition. The aggregate consideration paid by the Registrant was $682 million in cash. The Registrant also incurred acquisition costs of approximately $1 million. In addition, the Purchase Agreement provides for the payment of two contingent cash payments after the third and fifth anniversaries of the closing based on PCM's revenue growth. The aggregate transaction price payable by the Registrant is capped at $1.382 billion. The amount of consideration paid was determined by the Registrant as a result of negotiations between the Registrant and the sellers, taking into consideration, among other things, the revenue, profitability and growth rates of PCM. The Registrant used funds from the following sources in making the initial payment for PCM: the proceeds of the issuance of the Registrant's Liquid Yield Option Notes due 2031 on June 6, 2001; the proceeds of the issuance of the Registrant's 6 3/4% Senior Notes due 2008 on July 2, 2001; and the Registrant's available cash. The foregoing summary is qualified by reference to the full text of the Purchase Agreement, which is included as an exhibit hereto and is incorporated herein by reference. Item 7. Financial Statements and Exhibits --------------------------------- (a) Financial statements of businesses acquired. (i) Audited Combined Financial Statements of Private Capital Management, Inc. and Affiliates (A Carve-Out Entity), as of and for the six months ended June 29, 2000, incorporated herein by reference to Exhibit 99.1 (ii) Audited Combined Financial Statements of Private Capital Management, L.P. and Affiliates (A Carve-Out Entity), as of and for the six months ended December 31, 2000, incorporated herein by reference to Exhibit 99.2 (iii) Audited Financial Statements of Carnes Capital Corporation, as of and for the year ended December 31, 2000, incorporated herein by reference to Exhibit 99.3 (iv) Unaudited Combined Financial Statements of Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) as of and for the six months ended June 30, 2001, incorporated herein by reference to Exhibit 99.4 (v) Unaudited Consolidated Financial Statements of Carnes Capital Corporation and Subsidiary as of and for the six months ended June 30, 2001, incorporated herein by reference to Exhibit 99.5 (b) Pro forma combined financial information. The following pro forma combined financial information is incorporated herein by reference to Exhibit 99.6 (i) Unaudited Pro Forma Combined Balance Sheet as of June 30, 2001 (ii) Unaudited Pro Forma Combined Statement of Earnings for the year ended March 31, 2001 (iii) Unaudited Pro Forma Combined Statement of Earnings for the three months ended June 30, 2001 (iv) Notes to the Unaudited Pro Forma Combined Financial Statements (c) Exhibits. 10 Purchase Agreement as of May 29, 2001 by and among Legg Mason, Inc., Carnes Capital Corporation, Private Capital Management, L.P., PCM-G.P., Inc., MCC-PCM, Inc., Miles C. Collier, Bruce S. Sherman, and Gregg J. Powers (incorporated by reference to Legg Mason's Form 10-Q for the quarter ended June 30, 2001) 23.1 Consent of PricewaterhouseCoopers LLP, independent accountants 23.2 Consent of KPMG LLP, independent accountants 99.1 Audited Combined Financial Statements of Private Capital Management, Inc. and Affiliates (A Carve-Out Entity), as of and for the six months ended June 29, 2000 99.2 Audited Combined Financial Statements of Private Capital Management, L.P. and Affiliates (A Carve-Out Entity), as of and for the six months ended December 31, 2000 99.3 Audited Financial Statements of Carnes Capital Corporation, as of and for the year ended December 31, 2000 99.4 Unaudited Combined Financial Statements of Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) as of and for the six months ended June 30, 2001 99.5 Unaudited Consolidated Financial Statements of Carnes Capital Corporation and Subsidiary as of and for the six months ended June 30, 2001 99.6 Unaudited Pro Forma Combined Financial Information SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. LEGG MASON, INC. Date: August 15, 2001 By: /s/ Robert F. Price -------------------------------------- Robert F. Price Senior Vice President, General Counsel and Secretary EXHIBIT INDEX Exhibit - ------- 10 Purchase Agreement dated as of May 29, 2001 by and among Legg Mason, Inc., Carnes Capital Corporation, Private Capital Management, L.P., PCM-GP, Inc., MCC-PCM, Inc., Miles C. Collier, Bruce S. Sherman, and Gregg J. Powers (incorporated by reference to Legg Mason's Form 10-Q for the quarter ended June 30, 2001) 23.1 Consent of PricewaterhouseCoopers LLP, independent accountants 23.2 Consent of KPMG LLP, independent accountants 99.1 Audited Combined Financial Statements of Private Capital Management, Inc. and Affiliates (A Carve-Out Entity), as of and for the six months ended June 29, 2000 99.2 Audited Combined Financial Statements of Private Capital Management, L.P. and Affiliates (A Carve-Out Entity), as of and for the six months ended December 31, 2000 99.3 Audited Financial Statements of Carnes Capital Corporation, as of and for the year ended December 31, 2000 99.4 Unaudited Combined Financial Statements of Private Capital Management, L.P. and Affiliates (A Carve-Out Entity), as of and for the six months ended June 30, 2001 99.5 Unaudited Consolidated Financial Statements of Carnes Capital Corporation and Subsidiary as of and for the six months ended June 30, 2001 99.6 Unaudited Pro Forma Combined Financial Information EX-23.1 3 dex231.txt CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-00151, 333-33298, 333-34674) and Form S-8 (Nos. 2-87754, 33-20027, 33-28609, 33-45453, 33-48239, 33-55814, 33-61441, 33-61445, 333-08721, 333-45307, 333-59841, 333-61163, 333-66891, 333-86863, 333-86869, 333-53102, 333-53104) of Legg Mason, Inc. of: (1) our report dated August 1, 2001, relating to the financial statements of Private Capital Management, Inc. and Affiliates for the six-month period ended June 29, 2000; and (2) our report dated August 1, 2001 relating to the financial statements of Private Capital Management, L.P. and Affiliates for the period from June 30, 2000 through December 31, 2000, which appear in this Current Report on Form 8-K of Legg Mason, Inc. dated August 1, 2001. /s/ PricewaterhouseCoopers LLP Baltimore, Maryland August 13, 2001 EX-23.2 4 dex232.txt CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT ----------------------------- The Board of Directors Carnes Capital Corporation: We consent to the incorporation by reference in the registration statements on Form S-3 (Nos. 333-00151, 333-33298, 333-34674) and Form S-8 (Nos. 2-87754, 33-20027, 33-28609, 33-45453, 33-48239, 33-55814, 33-61441, 33-61445, 333-08721, 333-45307, 333-59841, 333-61163, 333-66891, 333-86863, 333-86869, 333-53102, 333-53104) of Legg Mason, Inc. of our report dated February 16, 2001, with respect to the statement of financial condition of Carnes Capital Corporation as of December 31, 2000, and the related statements of income, stockholder's equity, and cash flows for the year then ended, which report appears in Form 8-K of Legg Mason, Inc. dated August 1, 2001. /s/ KPMG LLP Tampa, Florida August 13, 2001 EX-99.1 5 dex991.txt PRIVATE CAPITAL MGMT, INC. FINANCIAL STMTS 6/29/00 Exhibit 99.1 Private Capital Management, Inc. and Affiliates (A Carve-Out Entity) Combined Financial Statements For the Six-Month Period Ended June 29, 2000 Private Capital Management, Inc. and Affiliates (A Carve-Out Entity) Table of Contents - --------------------------------------------------------------------------------
Page(s) Report of Independent Accountants 1 Financial Statements: Combined Statement of Financial Position 2 Combined Statement of Operations and Shareholders' Equity 3 Combined Statement of Cash Flows 4 Notes to Combined Financial Statements 5-8
Report of Independent Accountants To the Owners of Private Capital Management, Inc. and Affiliates (A Carve-Out Entity) In our opinion, the accompanying combined statement of financial position and the related combined statements of operations and shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Private Capital Management, Inc. and Affiliates (a carve-out entity) (the "Company") at June 29, 2000, and the results of their operations and their cash flows for the six-month period then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the combined financial statements, on June 29, 2000, the Company contributed its investment advisory business and certain operating assets to Private Capital Management, L.P. On August 1, 2001, Private Capital Management, L.P. and Affiliates were acquired by Legg Mason, Inc. /s/ PricewaterhouseCoopers LLP Baltimore, Maryland August 1, 2001 Private Capital Management, Inc. and Affiliates (A Carve-Out Entity) Combined Statement of Financial Position - -------------------------------------------------------------------------------- June 29, 2000 Assets Current assets: Cash and cash equivalents $ 6,548,632 Accounts and other receivables 13,025,063 Prepaid expenses 19,941 ----------- Total current assets 19,593,636 Other assets: Investment in partnerships 8,993,107 Other 8,815 ----------- Total assets $28,595,558 =========== Liabilities and Shareholders' Equity Current liabilities: Accrued compensation $11,135,597 Accounts payable and other accrued expenses 782,450 ----------- Total current liabilities 11,918,047 Shareholders' equity 16,677,511 ----------- Total liabilities and shareholders' equity $28,595,558 =========== The accompanying notes are an integral part of these combined financial statements. -2- Private Capital Management, Inc. and Affiliates (A Carve-Out Entity) Combined Statement of Operations and Shareholders' Equity - -------------------------------------------------------------------------------- Six-month period ended June 29, 2000 Revenues: Investment advisory fees $ 25,864,173 Performance allocation from partnerships 8,208,433 Income from partnerships 361,978 -------------- Total revenues 34,434,584 Operating expenses: Compensation and related expenses 15,643,009 Professional and consulting fees 423,087 Travel and entertainment 130,785 Other 234,322 -------------- Operating income 18,003,381 Other income: Interest earned 132,325 -------------- Net income $ 18,135,706 ============= Shareholders' Equity, beginning of period 22,948,643 Distributions to Shareholders (24,406,838) ------------- Shareholders' Equity, end of period $ 16,677,511 ============= The accompanying notes are an integral part of these combined financial statements. -3- Private Capital Management, Inc. and Affiliates (A Carve-Out Entity) Combined Statement of Cash Flows - -------------------------------------------------------------------------------- Six-month period ended June 29, 2000 Cash flows from operating activities: Net income $ 18,135,706 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,173 Income allocated from partnerships (8,570,411) Changes in operating assets and liabilities: Decrease in accounts and other receivables 3,227,198 Decrease in prepaid expenses 108,606 Increase in accrued compensation 2,605,639 Increase in accounts payable and other accrued expenses 686,074 ------------- Net cash provided by operating activities 16,195,985 ------------- Cash flows from investing activities: Withdrawals from partnerships 11,472,624 ------------- Net cash provided by investing activities 11,472,624 ------------- Cash flows from financing activities: Distributions to Shareholder (24,406,838) ------------- Net cash used in financing activities (24,406,838) ------------- Increase in cash and cash equivalents 3,261,771 Cash and cash equivalents, beginning of period 3,286,861 ------------- Cash and cash equivalents, end of period $ 6,548,632 ============= The accompanying notes are an integral part of these combined financial statements. -4- Private Capital Management, Inc. and Affiliates (A Carve-Out Entity) Notes to Combined Financial Statements June 29, 2000 - -------------------------------------------------------------------------------- 1. Organization and nature of business Private Capital Management, Inc ("PCM"), an S Corporation, was organized in the state of Florida as a registered investment advisor that specializes in the management of equity assets for individuals and institutions. PCM, located in Naples, Florida began operations in 1987. On June 29, 2000, PCM contributed its investment advisory business and certain operating assets of approximately $7.4 million to Private Capital Management, L.P. ("PCM- L.P.") for a partnership interest in PCM-L.P. The assets transferred were recorded in the accounting records of PCM-L.P. at the historical carrying values used by PCM. On August 1, 2001, Legg Mason, Inc. ("Legg Mason") completed its acquisition of PCM-L.P. whereby it acquired certain business operations of PCM-L.P., Carnes Capital Corporation ("CCC"), and certain affiliated entities (the "Affiliates"). Under the terms of the agreement, Legg Mason paid $682 million at closing. The transaction also includes two contingent payments at the end of the third and fifth anniversaries of the closing, with the total purchase price capped at $1.382 billion. PCM, CCC and the Affiliates are under common control and/or management. Collectively, the business operations acquired, including the related assets, liabilities and operations of PCM contributed to PCM-L.P. and those of the Affiliates, excluding the assets, liabilities and operations of CCC which are reported on in a separate set of financial statements, are referred to hereafter as the "Company". CCC is a broker-dealer registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc. CCC generates its revenue principally by providing securities brokerage services to clients of affiliated entities. The Affiliates, consisting of Private Value Equity Partners L.P., SPS Management, LLC and SPS Partners, L.P., provide management and administrative services to certain private equity investment limited partnerships (the "Private Equity Funds"). 2. Summary of Significant Accounting Policies Basis of presentation The combined financial statements of the Company include the carve-out of the combined assets, liabilities and results of operations of the businesses of the Company acquired by Legg Mason as of and for the period ended June 29, 2000. For purposes of presenting the carve-out combined financial statements of the Company, allocations were required to be determined for the assets and operations that were not acquired by Legg Mason. All significant intercompany accounts and transactions have been eliminated. Management believes that the allocation methodology is reasonable. -5- Private Capital Management, Inc. and Affiliates (A Carve-Out Entity) Notes to Combined Financial Statements June 29, 2000 - ------------------------------------------------------------------------------ Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates. Cash and equivalents The Company considers money market accounts and all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents. Accounts receivable Accounts receivable represents the balance due from the Company's clients for investment management and advisory services. Management estimates these receivables to be fully collectible. Investment in partnerships Investment in partnerships represents the Company's capital balance in the Private Equity Funds resulting from net unrealized and realized capital gains allocated to the Company as general partner of the partnerships plus income and expenses allocated to the Company on its undistributed capital balances that remained invested in the partnerships (see Note 3). Losses are only allocated to the general partner to the extent there are undistributed gains available to offset losses, and gains are only allocated to the extent they exceed previous unallocated losses. Revenue recognition The Company recognizes revenue for investment advisory fees based upon a percentage of the assets under management as calculated on the last day of each calendar quarter. At June 29, 2000, investment advisory fees were charged on approximately $4.91 billion in assets under management, excluding the Private Equity Funds. Investment advisory fees are recognized as earned and are normally 1.0% to 1.5% (annualized) of assets under management, with discounts offered in certain cases. The Company is also responsible for the management and administration of the Private Equity Funds (see Note 3). The Company receives a quarterly fee based upon the market value of the outstanding units of the Private Equity Funds, as calculated on the last day of each calendar quarter. The Company also earns a performance allocation based upon the net realized and unrealized gains of the Private Equity Funds. Performance allocations are recognized at the end of the performance period, either monthly or quarterly, and paid, either quarterly or annually, as defined. -6- Private Capital Management, Inc. and Affiliates (A Carve-Out Entity) Notes to Combined Financial Statements June 29, 2000 - ------------------------------------------------------------------------------ Income taxes The Company consists of an S Corporation, partnerships and a limited liability company. As such, net income was not subject to federal or state income taxes as the income is taxed directly to the owners. Thus, no provision has been made for federal or state income taxes. 3. Private Equity Funds The Company serves as general partner and/or investment manager for four Private Equity Funds: Private Value Fund, L.P.; Private Value Fund II, L.P.; Collier Fund, Ltd.; and Entrepreneurial Value Fund, L.P. All of these partnerships were formed for the purpose of investing primarily in public securities, therefore, their assets principally consist of investment securities accounted for at fair value. The Company's assets under management and investment in partnerships at June 29, 2000 were as follows: Assets under management Investment in (000's) partnerships Private Value Fund, L.P. $ 109,322 $ 355,764 Private Value Fund II, L.P. 273,565 3,507,201 Collier Fund, Ltd. 132,665 - Entrepreneurial Value Fund, L.P. 197,336 5,130,142 ------------ -------------- $ 712,888 $ 8,993,107 ============ ============== The following table summarizes the financial information of the Private Equity Funds as of and for the six-month period ended June 29, 2000 (unaudited):
Private Private Entrepreneurial Value Value Collier Value Fund, L.P. Fund II, L.P. Fund, Ltd. Fund, L.P. Total assets $119,125,990 $ 273,676,199 $133,249,289 $ 197,336,456 Total liabilities 9,940,696 506,619 1,077,382 423,076 Total net investment income (loss) 826,568 1,119,485 (167,835) 734,448 Total realized and unrealized gains (losses) 2,682,781 19,565,004 8,879,117 28,964,538
-7- Private Capital Management, Inc. and Affiliates (A Carve-Out Entity) Notes to Combined Financial Statements June 29, 2000 - ------------------------------------------------------------------------------ 4. Pension and 401(k) Plans The Company's employees participate in a pension plan administered by an affiliated entity. The Company contributed 6% of participants' eligible compensation (or approximately $42,000) to the plan for the six-month period ended June 29, 2000. The Company's employees participate in a 401(k) plan pursuant to salary reduction agreements. The Company matches the employees' contributions up to a maximum of 4%. For the six-month period ended June 29, 2000, Company contributions under the plan amounted to approximately $28,000. 5. Related Party Transactions Certain expenses and various assets are shared with an affiliated entity and the allocation of these expenses and assets is estimated by management. Other affiliated entities also provide consulting and certain supporting administrative services to the Company and certain expenses of the Company are paid for by, and reimbursable to, these affiliated entities. For the six-month period ended June 29, 2000, the Company incurred expenses of approximately $280,000 payable to these affiliated entities. Accounts and other receivables includes approximately $3,537,000 as of June 29, 2000 for amounts due for investment advisory services from affiliated companies or individuals related to the owners of the Company. Investment advisory fees and performance allocations of approximately $15,674,000 for the six-month period ended June 29, 2000 were earned from affiliated companies, the Private Equity Funds, and individuals related to the owners. The fee rate charged for these services is equivalent to the rate offered to unaffiliated clients. Clients that represent approximately 71% of the assets under management of the Company are also clients of CCC. 6. Fair Value of Financial Instruments Financial Accounting Standards Board Statement No. 107, Disclosures About Fair Value of Financial Instruments requires that all entities disclose the fair value of financial instruments, as defined, for both assets and liabilities recognized and not recognized in the statement of financial position. The Company's financial instruments, as defined, are carried at, or approximate, fair value. -8- EX-99.2 6 dex992.txt PRIVATE CAPITAL MGMT L.P. FINANCIAL STMTS 12/31/00 Exhibit 99.2 Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Combined Financial Statements For the Period June 30, 2000 Through December 31, 2000 Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Table of Contents - --------------------------------------------------------------------------------
Page(s) Report of Independent Accountants 1 Financial Statements: Combined Statement of Financial Position 2 Combined Statement of Operations and Partners' Equity 3 Combined Statement of Cash Flows 4 Notes to Combined Financial Statements 5-8
Report of Independent Accountants To the Owners of Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) In our opinion, the accompanying combined statement of financial position and the related combined statements of operations and partners' equity and of cash flows present fairly, in all material respects, the financial position of Private Capital Management, L.P. and Affiliates (a carve-out entity) (the "Company") at December 31, 2000, and the results of their operations and their cash flows for the period from June 30, 2000 through December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the combined financial statements, on August 1, 2001, the Company was acquired by Legg Mason, Inc. /s/ PricewaterhouseCoopers LLP Baltimore, Maryland August 1, 2001 Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Combined Statement of Financial Position - -------------------------------------------------------------------------------- December 31, 2000 Assets Current assets: Cash and cash equivalents $ 559,060 Accounts and other receivables 16,517,435 Prepaid expenses 26,250 ---------------- Total current assets 17,102,745 ---------------- Other assets: Investment in partnerships 10,662,931 Other 39,487 ---------------- Total assets $ 27,805,163 ================ Liabilities and Partner's Equity Current liabilities: Accounts payable and accrued expenses $ 477,663 Partners' equity 27,327,500 ---------------- Total liabilities and partners' equity $ 27,805,163 ================ The accompanying notes are an integral part of these combined financial statements. -2- Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Combined Statement of Operations and Partners' Equity - -------------------------------------------------------------------------------- Period from June 30, 2000 through December 31, 2000 Revenues: Investment advisory fees $ 31,595,319 Performance allocation from partnerships 1,136,131 Income from partnerships 533,980 -------------- Total revenues 33,265,430 Operating expenses: Compensation and related expenses 740,152 Professional and consulting fees 156,637 Travel and entertainment 123,652 Other 185,337 -------------- Operating income 32,059,652 Other income: Interest earned 182,499 -------------- Net income $ 32,242,151 ============== Partners' Equity, beginning of period 9,314,363 Partner Contributions 7,345,411 Distributions to Partners (21,574,425) -------------- Partners' Equity, end of period $ 27,327,500 ============== The accompanying notes are an integral part of these combined financial statements. -3- Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Combined Statement of Cash Flows - -------------------------------------------------------------------------------- Period from June 30, 2000 through December 31, 2000 Cash flows from operating activities: Net income $ 32,242,151 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,897 Income allocated from partnerships (1,670,111) Changes in operating assets and liabilities: Increase in accounts and other receivables (8,562,980) Increase in prepaid expenses (18,336) Increase in other assets (33,569) Increase in accounts payable and accrued expenses 108,739 ------------ Net cash provided by operating activities 22,068,791 ------------ Cash flows from investing activities: Withdrawals from partnerships 287 ------------ Net cash provided by investing activities 287 ------------ Cash flows from financing activities: Distributions to Partners (21,574,425) ------------ Net cash used in financing activities (21,574,425) ------------ Increase in cash and cash equivalents 494,653 Cash and cash equivalents, beginning of period 64,407 ------------ Cash and cash equivalents, end of period $ 559,060 ============ Non-cash financing activity: Contribution of assets and liabilities $ 7,345,411 ============ The accompanying notes are an integral part of these combined financial statements. -4- Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Notes to Combined Financial Statements December 31, 2000 - -------------------------------------------------------------------------------- 1. Organization and nature of business On August 1, 2001, Legg Mason, Inc. ("Legg Mason") completed its acquisition of Private Capital Management, L.P. (PCM-L.P.) whereby it acquired certain business operations of PCM-L.P., Carnes Capital Corporation ("CCC"), and certain affiliated entities (the "Affiliates"). PCM-L.P., CCC and the Affiliates are under common control and/or management. Collectively, the business operations acquired, including the related assets, liabilities and operations of PCM-L.P., excluding the assets, liabilities and operations of CCC which are reported on in a separate set of financial statements, are referred to hereafter as the "Company". Under the terms of the agreement, Legg Mason paid $682 million at closing. The transaction also includes two contingent payments at the end of the third and fifth anniversaries of the closing, with the total purchase price capped at $1.382 billion. PCM-L.P., a Florida Limited Partnership, is a registered investment advisor that specializes in the management of equity assets for individuals and institutions. PCM-L.P. was formed on June 29, 2000, whereby Private Capital Management, Inc. (an S Corporation) contributed its investment advisory business and certain operating assets of approximately $7.4 million to PCM- L.P. for a partnership interest in PCM-L.P. The assets transferred were recorded in the accounting records of PCM-L.P. at the historical carrying value used by Private Capital Management, Inc. CCC is a broker-dealer registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc. CCC generates its revenue principally by providing securities brokerage services to clients of affiliated entities. The Affiliates, consisting of PCM G.P., Inc., Private Value Equity Partners L.P., SPS Management, LLC and SPS Partners, L.P., provide management and administrative services to certain private equity investment limited partnerships (the "Private Equity Funds"). PCM G.P., Inc., owns a 0.1% interest and is the general partner of PCM-L.P. PCM G.P., Inc. is a wholly-owned subsidiary of one of the limited partners. 2. Summary of Significant Accounting Policies Basis of presentation The combined financial statements of the Company include the carve-out of the combined asset, liabilities and results of operations of the businesses of the Company acquired by Legg Mason as of and for the period ended December 31, 2000. For purposes of presenting the carve-out combined financial statements of the Company, allocations were required to be determined for the assets and operations that were not acquired by Legg Mason. The assets and liabilities of the Company are presented at their historical carrying values. All significant intercompany accounts and transactions have been eliminated. Management believes that the allocation methodology is reasonable. -5- Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Notes to Combined Financial Statements December 31, 2000 - -------------------------------------------------------------------------------- Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates. Cash and equivalents The Company considers money market accounts and all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents. Accounts receivable Accounts receivable represents the balance due from the Company's clients for investment management and advisory services. Management estimates these receivables to be fully collectible. Investment in partnerships Investment in partnerships represents the Company's capital balance in the Private Equity Funds resulting from net unrealized and realized capital gains allocated to the Company as general partner of the partnerships plus income and expenses allocated to the Company on its undistributed capital balances that remained invested in the partnerships (see Note 3). Losses are only allocated to the general partner to the extent there are undistributed gains available to offset losses, and gains are only allocated to the extent they exceed previous unallocated losses. Revenue recognition The Company recognizes revenue for investment advisory fees based upon a percentage of the assets under management as calculated on the last day of each calendar quarter. At December 31, 2000, investment advisory fees were charged on approximately $5.87 billion in assets under management, excluding the Private Equity Funds. Investment advisory fees are recognized as earned and are normally 1.0% to 1.5% (annualized) of assets under management, with discounts offered in certain cases. The Company is also responsible for the management and administration of certain Private Equity Funds (see Note 3). The Company receives a quarterly fee based upon the market value of the outstanding units of the Private Equity Funds, as calculated on the last day of each calendar quarter. The Company also earns a performance allocation based upon the net realized and unrealized gains of the Private Equity Funds. Performance allocations are recognized at the end of the performance period, either monthly or quarterly, and paid, either quarterly or annually, as defined. -6- Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Notes to Combined Financial Statements December 31, 2000 - -------------------------------------------------------------------------------- Income taxes The Company consists of partnerships and a limited liability company. As such, net income of the Company was not subject to federal or state income taxes as the income is taxed directly to the owners. Thus, no provision has been made for federal or state income taxes. 3. Private Equity Funds The Company serves as general partner and/or investment manager for four Private Equity Funds: Private Value Fund, L.P.; Private Value Fund II, L.P.; Collier Fund, Ltd..; and Entrepreneurial Value Fund, L.P. All of these partnerships were formed for the purpose of investing primarily in public securities, therefore, their assets principally consist of investment securities accounted for at fair value. The Company's assets under management and investment in partnerships at December 31, 2000 were as follows: Assets under management Investment in (000's) partnerships Private Value Fund, L.P. $ 125,318 $ 1,864,190 Private Value Fund II, L.P. 309,031 4,214,704 Collier Fund, Ltd. 151,878 - Entrepreneurial Value Fund, L.P. 195,420 4,584,037 ----------- ------------ $ 781,647 $ 10,662,931 =========== ============ The following table summarizes the financial information of the Private Equity Funds as of and for the period ended December 31, 2000 (unaudited):
Private Private Entrepreneurial Value Value Collier Value Fund, L.P. Fund II, L.P. Fund, Ltd. Fund, L.P. Total assets $ 133,646,385 $ 309,046,023 $ 152,085,498 $ 195,419,946 Total liabilities 8,484,492 571,599 1,154,814 418,735 Total net investment income 780,988 674,734 41,770 828,365 Total realized and unrealized gains (losses) 15,210,610 34,627,421 18,281,541 (2,740,811)
-7- Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Notes to Combined Financial Statements December 31, 2000 - -------------------------------------------------------------------------------- 4. Pension and 401(k) Plans The Company's employees participate in a pension plan administered by an affiliated entity. The Company made no contributions to the plan for the period ended December 31, 2000. The Company's employees participate in a 401(k) plan pursuant to salary reduction agreements. The Company matches the employees' contributions up to a maximum of 4 percent. For the period ended December 31, 2000, Company contributions under the plan amounted to approximately $1,000. 5. Related Party Transactions Certain expenses and various assets are shared with an affiliated entity and the allocation of these expenses and assets is estimated by management. Other affiliated entities also provide consulting and certain supporting administrative services to the Company and certain expenses of the Company are paid for by, and reimbursable to, these affiliated entities. For the period ended December 31, 2000, the Company incurred expenses of approximately $297,000 payable to these affiliated entities. Accounts receivable includes approximately $4,131,000 as of December 31, 2000 for amounts due for investment advisory services from affiliated companies or individuals related to the owners of the Company. Investment advisory fees and performance allocations of approximately $9,900,000 for the period ended December 31, 2000 were earned from affiliated companies, the Private Equity Funds, and individuals related to the owners. The fee rate charged for these services is equivalent to the rate offered to unaffiliated clients. Clients that represent approximately 68% of the assets under management of the Company are also clients of CCC. 6. Fair Value of Financial Instruments Financial Accounting Standards Board Statement No. 107, Disclosures About Fair Value of Financial Instruments requires that all entities disclose the fair value of financial instruments, as defined, for both assets and liabilities recognized and not recognized in the statement of financial position. The Company's financial instruments, as defined, are carried at, or approximate, fair value. -8- EX-99.3 7 dex993.txt CARNES CAPITAL CORP. FINANCIAL STMTS AND SCHEDULES Exhibit 99.3 CARNES CAPITAL CORPORATION Financial Statements December 31, 2000 (With Independent Auditors' Report Thereon) Independent Auditors' Report Board of Directors Carnes Capital Corporation: We have audited the accompanying statement of financial condition of Carnes Capital Corporation as of December 31, 2000, and the related statements of income, stockholder's equity, and cash flows for the year ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Carnes Capital Corporation as of December 31, 2000, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Tampa, Florida February 16, 2001 CARNES CAPITAL CORPORATION Statement of Financial Condition December 31, 2000
Assets Cash and cash equivalents $ 1,878,758 Receivable from clearing broker 385,081 Furniture, fixtures and equipment, and leasehold improvements, at cost, less accumulated depreciation and amortization of $382,467 316,597 Receivable from subscription agent 1,526,081 Other assets 163,987 ---------------- Total assets $ 4,270,504 ================ Liabilities and Stockholder's Equity Liabilities: Payable to affiliate $ 81,567 Accounts payable and accrued expenses 589,600 ---------------- Total liabilities 671,167 ---------------- Stockholder's equity: Common stock, $1 par value, 200,000 shares authorized, 105,600 shares issued and outstanding 105,600 Additional paid-in capital 932,933 Retained earnings 2,560,804 ---------------- Total stockholder's equity 3,599,337 Commitments (note 5) ---------------- Total liabilities and stockholder's equity $ 4,270,504 ================
See accompanying notes to financial statements. -1- CARNES CAPITAL CORPORATION Statement of Income Year ended December 31, 2000
Revenue: Commissions $ 6,954,152 Interest and dividends 636,363 ---------------- Total revenue 7,590,515 ---------------- Expenses: Compensation and related expenses 2,740,367 Floor brokerage and clearance fees 1,029,423 Professional and consulting fees 600,543 Travel and entertainment 287,625 Communications 253,309 Depreciation and amortization 149,551 Other expenses 720,688 ---------------- Total expenses 5,781,506 ---------------- Net income $ 1,809,009 ================
See accompanying notes to financial statements. -2- CARNES CAPITAL CORPORATION Statement of Changes in Stockholder's Equity For the year ended December 31, 2000
Additional Total Common paid-in Retained stockholder's stock capital earnings equity --------------- ---------------- ---------------- ------------------ Balance at December 31, 1999 $ 105,600 932,933 1,351,795 2,390,328 Net income -- -- 1,809,009 1,809,009 Distributions to stockholder -- -- (600,000) (600,000) --------------- ---------------- ---------------- ------------------ Balance at December 31, 2000 $ 105,600 932,933 2,560,804 3,599,337 =============== ================ ================ ==================
See accompanying notes to financial statements. -3- CARNES CAPITAL CORPORATION Statement of Cash Flows Year ended December 31, 2000 Cash flows from operating activities: Net income $ 1,809,009 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 149,551 (Increase) decrease in operating assets: Decrease in receivable from clearing broker 200,235 Increase in receivable from subscription agent (1,526,081) Increase in other assets (81,614) Increase (decrease) in operating liabilities: Decrease in securities sold, not yet purchased, at market value (281,800) Increase in payable to affiliate 14,719 Increase in accounts payable and accrued expenses 496,468 ----------------- Net cash provided by operating activities 780,487 ----------------- Cash flows from investing activities: Purchase of property and equipment (108,565) ----------------- Net cash used in investing activities (108,565) ----------------- Cash flows from financing activities: Distributions to stockholder (600,000) ----------------- Net cash used in financing activities (600,000) ----------------- Increase in cash and cash equivalents 71,922 Cash and cash equivalents at beginning of year 1,806,836 ----------------- Cash and cash equivalents at end of year $ 1,878,758 ================= Supplemental cash flows disclosures: Interest payments $ 3,423 =================
See accompanying notes to financial statements. -4- CARNES CAPITAL CORPORATION Notes to Financial Statements December 31, 2000 (1) Organization and Summary of Significant Accounting Policies Carnes Capital Corporation (the "Company") is a broker-dealer registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc. The Company is 100 percent owned by an individual. The Company generates its revenue principally by providing securities trading and brokerage services to clients of an affiliated entity for which its revenue is transaction based. The following is a summary of significant accounting policies: (a) Clearing Arrangements Pursuant to agreements between the Company and its correspondent clearing broker, securities transactions effected by the Company are cleared on a fully disclosed basis through the correspondent broker. (b) Commissions Securities transaction revenue and related expenses are recorded on a settlement date basis and transactions are reviewed on a trade date basis for significant changes. Adjustments are made if pending transactions have a material effect on the financial statements. At December 31, 2000, no such adjustments were necessary. (c) Furniture, Fixtures and Equipment and Leasehold Improvements Depreciation is provided on a straight-line basis using an estimated useful life of three to five years for equipment and five to seven years for furniture and fixtures. Leasehold improvements are amortized on a straight-line basis over the lesser of the useful life of the improvement or the term of the lease. During 2000, the estimated useful life of certain leasehold improvements and fixtures have been shortened to reflect the Company's planned move in 2001. The effect of this change in the estimated useful life was the recognition of approximately $66,000 of additional depreciation expense during 2000. (d) Income Taxes The Company is recognized as an S corporation for Federal income tax purposes. Thus, no provision has been made for Federal income taxes. (e) Cash Equivalents The Company considers money market instruments with maturities of 90 days or less to be cash equivalents. (Continued) -5- CARNES CAPITAL CORPORATION Notes to Financial Statements December 31, 2000 (f) Receivable From Clearing Broker Receivable from clearing broker represents commissions and interest receivable from the Company's clearing broker. Such amounts are not collateralized and are expected to be fully collectible. (g) Receivable from Subscription Agent Receivable from subscription agent represents funds on deposit at the subscription agent for delivery of Nasdaq common stock that was offered through a private placement offering. (h) Management's Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (i) Securities Owned and Securities Sold, But Not Yet Purchased Securities owned and securities sold, but not yet purchased are valued at quoted market value and represent U.S. equity securities. As of December 31, 2000 the Company had no securities owned or securities sold, but not yet purchased. (2) Furniture, Fixtures and Equipment and Leasehold Improvements The balances of furniture, fixtures and equipment and leasehold improvements at December 31, 2000 are: Furniture and fixtures $ 144,917 Equipment 329,971 Leasehold improvements 224,176 Accumulated depreciation and amortization (382,467) ---------------- $ 316,597 ================
(Continued) -6- CARNES CAPITAL CORPORATION Notes to Financial Statements December 31, 2000 (3) Net Capital Requirements As a registered broker-dealer under the Securities Exchange Act of 1934 (the "Act"), the Company is subject to the Securities and Exchange Commission's Uniform Net Capital Rule pursuant to Rule 15c3-1 of the Act, which requires the maintenance of minimum net capital. At December 31, 2000, the Company had net capital of $1,547,655, which was $1,447,655 in excess of required net capital of $100,000. The Company's percentage of aggregate indebtedness to net capital was 43.4 percent. (4) Pension and 401(k) Plans The Company's employees participate in a pension plan administered by an affiliate of the sole stockholder. The Company contributed 6 percent of participant's eligible compensation to the plan for the year ended December 31, 2000. Pension plan expenses were $71,198 in the year ended December 31, 2000. The Company's employees participate in a 401(k) salary deferral plan administered by an affiliate of the sole stockholder. Employees are permitted, within limitations imposed by tax law, to make pre-tax contributions to the 401(k) plan pursuant to salary reduction agreements. The Company matches the employees' contributions up to a maximum of 4 percent. Plan expenses were $51,079 in the year ended December 31, 2000. (5) Commitments Under operating leases, with remaining noncancelable terms in excess of one year at December 31, 2000, minimum aggregate annual rentals for office space are as follows:
Year ending December 31, ----------------------------------- 2001 $ 323,478 2002 389,398 2003 387,833 2004 285,843 2005 295,889 2006 and thereafter 703,024 ---------------- $ 2,385,465 ================
(Continued) -7- CARNES CAPITAL CORPORATION Notes to the Financial Statements December 31, 2000 The Company leases its current office space in an office complex owned by an affiliate under an agreement expiring August 2008. Another affiliate with 100 percent common ownership shares the office space and paid 50 percent of the total rent expense for the year ended December 31, 2000. The Company's rent expense, including related charges, was $96,976 for the year ended December 31, 2000. The Company plans to move its operations to a new location in 2001. As such the Company has entered into an agreement to lease office space in an office complex at the new location. The Company plans to terminate or assign its lease at the current location. The above schedule includes scheduled lease payments for its current office space up to the date the lease may be cancelled and it includes all contractual termination fees. The Company does not enter into significant transactions in financial instruments with off-balance-sheet risk. (6) Related Party Transactions Commission revenue for the year ended December 31, 2000 includes $6,570,176 from clients of the Company that are also clients of an affiliate of the sole stockholder, which serves as investment advisor to the clients. Other expenses and various assets are shared with the affiliated entity and the allocation of these expenses and assets is estimated by management. Other entities affiliated with the sole stockholder also provide certain supporting administrative services to the Company and certain expenses of the Company are paid for by, and reimbursable to, an affiliated entity. (7) Fair Value of Financial Instruments Financial Accounting Standards Board Statement No. 107, Disclosures About Fair Value of Financial Instruments requires that all entities disclose the fair value of financial instruments, as defined, for both assets and liabilities recognized and not recognized in the statement of financial condition. The Company's financial instruments, as defined, are carried at, or approximate, fair value. -8- EX-99.4 8 dex994.txt PRIVATE CAPITAL MGMT. L.P. UNAUDITED FINAN. STMTS. Exhibit 99.4 Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Unaudited Combined Financial Statements For the Six Months Ended June 30, 2001 Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Table of Contents - --------------------------------------------------------------------------------
Page(s) Financial Statements: Unaudited Combined Statement of Financial Position 1 Unaudited Combined Statement of Operations and Partners' Equity 2 Unaudited Combined Statement of Cash Flows 3 Notes to Unaudited Combined Financial Statements 4-7
Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Unaudited Combined Statement of Financial Position - -------------------------------------------------------------------------------- June 30, 2001 Assets Current assets: Cash and cash equivalents $ 4,619,912 Accounts and other receivables 20,857,227 Prepaid expenses 22,789 ------------- Total current assets 25,499,928 ------------- Other assets: Investment in partnerships 7,833,849 Other 3,820 ------------- Total assets $ 33,337,597 ============= Liabilities and Partner's Equity Current liabilities: Accounts payable and accrued expenses $ 387,985 Partners' equity 32,949,612 ------------- Total liabilities and partners' equity $ 33,337,597 ============= The accompanying notes are an integral part of these unaudited combined financial statements. -1- Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Unaudited Combined Statement of Operations and Partners' Equity - --------------------------------------------------------------------------------
Six Months Ended June 30, 2001 Revenues: Investment advisory fees $ 35,972,609 Performance allocation from partnerships 7,629,698 Income from partnerships 204,151 ------------ Total revenues 43,806,458 Operating expenses: Compensation and related expenses 711,969 Other 634,748 ------------ Operating income 42,459,741 Other income: Interest earned 90,513 ------------ Net income $ 42,550,254 ============ Partners' Equity, beginning of period 27,327,500 Distributions to Partners (36,928,142) ------------ Partners' Equity, end of period $ 32,949,612 ============
The accompanying notes are an integral part of these unaudited combined financial statements. -2- Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Unaudited Combined Statement of Cash Flows - -------------------------------------------------------------------------------- Six Months Ended June 30, 2001 Cash flows from operating activities: Net income $ 42,550,254 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,098 Income allocated from partnerships (7,833,849) Changes in operating assets and liabilities: Increase in accounts and other receivables (4,306,223) Decrease in prepaid expenses 3,461 Decrease in accounts payable and accrued expenses (89,678) ------------ Net cash provided by operating activities 30,326,063 ------------ Cash flows from investing activities: Withdrawals from limited partnerships 10,662,931 ------------ Net cash provided by investing activities 10,662,931 ------------ Cash flows from financing activities: Distributions to Partners (36,928,142) ------------ Net cash used in financing activities (36,928,142) ------------ Increase in cash and cash equivalents 4,060,852 Cash and cash equivalents, beginning of period 559,060 ------------ Cash and cash equivalents, end of period $ 4,619,912 ============ The accompanying notes are an integral part of these unaudited combined financial statements. -3- Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Notes to Unaudited Combined Financial Statements June 30, 2001 - -------------------------------------------------------------------------------- 1. Organization and nature of business On August 1, 2001, Legg Mason, Inc. ("Legg Mason") completed its acquisition of Private Capital Management, L.P. and certain affiliated entities (PCM-L.P.) whereby it acquired the business operations of PCM-L.P. and Carnes Capital Corporation ("CCC"). PCM-L.P. and CCC are under common control and/or management. Collectively, the business operations acquired, including the related assets, liabilities and operations of PCM-L.P., excluding the assets, liabilities and operations of CCC which are reported on in a separate set of financial statements, are referred to hereafter as the "Company". Under the terms of the agreement, Legg Mason paid $682 million at closing. The transaction also includes two contingent payments on the third and fifth anniversaries of the closing, with the purchase price capped at $1.382 billion. PCM-L.P., a Florida Limited Partnership, is a registered investment advisor that specializes in the management of equity assets for individuals and institutions. PCM-L.P. was formed on June 29, 2000, when Private Capital Management, Inc. (an S Corporation) contributed its investment advisory business and certain operating assets of approximately $7.4 million to PCM- L.P. for a partnership interest in PCM-L.P. The assets transferred were recorded in the accounting records of PCM-L.P. at the historical carrying value used by Private Capital Management, Inc. CCC is a broker-dealer registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc. CCC generates its revenue principally by providing securities brokerage services to clients of affiliated entities. The Affiliates, consisting of PCM G.P., Inc., Private Value Equity Partners L.P., SPS Management, LLC and SPS Partners, L.P., provide management and administrative services to certain private equity investment limited partnerships (the "Private Equity Funds"). PCM G.P., Inc., owned a 0.1% interest and is the general partner of PCM- L.P. PCM G.P., Inc. is a wholly-owned subsidiary of one of the limited partners. 2. Summary of Significant Accounting Policies Basis of presentation The combined financial statements of the Company include the carve-out of the combined assets, liabilities and results of operations of the businesses of the Company acquired by Legg Mason as of and for the period ended June 30, 2001. For purposes of presenting the carve-out combined financial statements of the Company, allocations were required to be determined for the assets and operations that were not acquired by Legg Mason. The assets and liabilities of the Company are presented at their historical carrying values. All significant intercompany accounts and transactions have been eliminated. Management believes that the allocation methodology is reasonable. -4- Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Notes to Unaudited Combined Financial Statements June 30, 2001 - -------------------------------------------------------------------------------- Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates. Cash and equivalents The Company considers money market accounts and all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents. Accounts receivable Accounts receivable represents the balance due from the Company's clients for investment management and advisory services. Management estimates these receivables to be fully collectible. Investment in partnerships Investment in partnerships represents the Company's capital balance in the Private Equity Funds resulting from net unrealized and realized capital gains allocated to the Company as general partner of the partnerships plus income and expenses allocated to Company on its undistributed capital balances that remained invested in the partnerships (see Note 3). Losses are only allocated to the general partner to the extent there are gains available to offset losses, and gains are only allocated to the extent they exceed previous unallocated losses. Revenue recognition The Company recognizes revenue for investment advisory fees based upon a percentage of the assets under management as calculated on the last day of each calendar quarter. At June 30, 2001, investment advisory fees were charged on approximately $7.69 billion in assets under management, excluding the Private Equity Funds. Investment advisory fees are recognized as earned and are normally 1.0% to 1.5% (annualized) of assets under management, with discounts offered in certain cases. The Company is also responsible for the management and administration of certain Private Equity Funds (see Note 3). The Company receives a quarterly fee based upon the market value of the outstanding units of the Private Equity Funds, as calculated on the last day of each calendar quarter. The Company also earns a performance allocation based upon the net realized and unrealized gains of the Private Equity Funds. Performance allocations are recognized at the end of the performance period, either monthly or quarterly, and paid, either quarterly or annually, as defined. -5- Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Notes to Unaudited Combined Financial Statements June 30, 2001 - -------------------------------------------------------------------------------- Income taxes The Company consists of partnerships and a limited liability company. As such, net income of the Company was not subject to federal or state income taxes as the income is taxed directly to the owners. Thus, no provision has been made for federal or state income taxes. 3. Private Equity Funds The Company serves as general partner and/or investment manager for four Private Equity Funds: Private Value Fund, L.P.; Private Value Fund II, L.P.; Collier Fund, L.P.; and Entrepreneurial Value Fund, L.P. All of these partnerships were formed for the purpose of investing primarily in public securities; therefore, their assets principally consist of investment securities accounted for at fair value. The Company's assets under management and investment in partnerships at June 30, 2001 were as follows: Assets under management Investment in (000's) partnerships Private Value Fund, L.P. $ 137,410 $ 424,346 Private Value Fund II, L.P. 339,993 4,279,162 Collier Fund, L.P. 185,548 - Entrepreneurial Value Fund, L.P. 210,183 3,130,341 -------------- ----------------- $ 873,134 $ 7,833,849 The following table summarizes the financial information of the Private Equity Funds as of and for the period ended June 30, 2001:
Private Private Entrepreneurial Value Value Collier Value Fund, L.P. Fund II, L.P. Fund, L.P. Fund, L.P. Total assets $ 145,324,759 $ 340,004,812 $ 192,383,642 $ 222,017,323 Total liabilities 8,086,782 629,870 7,529,531 12,283,409 Total net investment income 338,447 362,793 236,310 946,633 Total realized and unrealized gains (losses) 13,106,495 33,823,312 19,084,861 18,967,042
-6- Private Capital Management, L.P. and Affiliates (A Carve-Out Entity) Notes to Unaudited Combined Financial Statements June 30, 2001 - -------------------------------------------------------------------------------- 4. Pension and 401(k) Plans The Company's employees participate in a pension plan administered by an affiliated entity. The Company contributed 6% of the participants' eligible compensation (approximately $25,000) to the plan for the six months ended June 30, 2001. The Company's employees participate in a 401(k) plan pursuant to salary reduction agreements. The Company matches the employees' contributions up to a maximum of 4 percent. For the six months ended June 30, 2001, Company contributions under the plan amounted to approximately $32,000. 5. Related Party Transactions Certain expenses and various assets are shared with an affiliated entity and the allocation of these expenses and assets is estimated by management. Other affiliated entities also provide consulting and certain supporting administrative services to the Company and certain expenses of the Company are paid for by, and reimbursable to, these affiliated entities. For the six months ended June 30, 2001, the Company incurred expenses of approximately $350,000 payable to these affiliated entities. Accounts and other receivables includes approximately $5,690,000 as of June 30, 2001 for amounts due for investment advisory services from affiliated companies or individuals related to the owners of the Company. Investment advisory fees and performance allocations of approximately $16,783,000 for the six months ended June 30, 2001 were earned from affiliated companies, the Private Equity Funds and individuals related to the owners. The fee rate charged for these services is equivalent to the rate offered to unaffiliated clients. Clients that represent approximately 69% of the assets under management of the Company are also clients of CCC. 6. Fair Value of Financial Instruments Financial Accounting Standards Board Statement No. 107, Disclosures About Fair Value of Financial Instruments requires that all entities disclose the fair value of financial instruments, as defined, for both assets and liabilities recognized and not recognized in the statement of financial position. The Company's financial instruments, as defined, are carried at, or approximate, fair value. -7- EX-99.5 9 dex995.txt CARNES CAPITAL CORP. UNAUDITED FINANCIAL STMTS. Exhibit 99.5 CARNES CAPITAL CORPORATION AND SUBSIDIARY Unaudited Consolidated Financial Statements June 30, 2001 CARNES CAPITAL CORPORATION AND SUBSIDIARY Unaudited Consolidated Statement of Financial Condition June 30, 2001
Assets Cash and cash equivalents $ 1,314,867 Receivable from clearing broker and other receivables 1,069,262 Furniture, fixtures and equipment, and leasehold improvements, at cost, less accumulated depreciation and amortization of $543,415 1,738,708 Investment in securities 1,510,131 Other assets 127,500 ---------------- Total assets $ 5,760,468 ================ Liabilities and Stockholder's Equity Liabilities: Accounts payable and accrued expenses 221,972 ---------------- Total liabilities 221,972 ---------------- Stockholder's equity: Common stock, $1 par value, 200,000 shares authorized, 105,600 shares issued and outstanding 105,600 Additional paid-in capital 932,933 Retained earnings 4,499,963 ---------------- Total stockholder's equity 5,538,496 Commitments ---------------- Total liabilities and stockholder's equity $ 5,760,468 ================
See accompanying notes to unaudited consolidated financial statements. 1 CARNES CAPITAL CORPORATION AND SUBSIDIARY Unaudited Consolidated Statement of Income For the six months ended June 30, 2001 Six Months Ended June 30, 2001 Revenue: Commissions $ 4,891,558 Interest and dividends 725,057 Other 189,821 ---------------- Total revenue 5,806,436 ---------------- Expenses: Compensation and related expenses 1,761,650 Floor brokerage and clearance fees 611,741 Depreciation and amortization 160,947 Other expenses 1,045,124 ---------------- Total expenses 3,579,462 ---------------- Net income $ 2,226,974 ================
See accompanying notes to unaudited consolidated financial statements. 2 CARNES CAPITAL CORPORATION AND SUBSIDIARY Unaudited Consolidated Statement of Changes in Stockholder's Equity For the six months ended June 30, 2001
Additional Total Common paid-in Retained stockholder's stock capital earnings equity --------------- ---------------- ---------------- ------------------ Balance at December 31, 2000 $ 105,600 $ 932,933 $ 2,572,989 $ 3,611,522 Net income -- -- 2,226,974 2,226,974 Distributions to stockholder -- -- (300,000) (300,000) --------------- ---------------- ---------------- ------------------ Balance at June 30, 2001 $ 105,600 $ 932,933 $ 4,499,963 $ 5,538,496 =============== ================ ================ ==================
See accompanying notes to unaudited consolidated financial statements. 3 CARNES CAPITAL CORPORATION AND SUBSIDIARY Unaudited Consolidated Statement of Cash Flows For the six months ended June 30, 2001 Cash flows from operating activities: Net income $ 2,226,974 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 160,947 (Increase) decrease in operating assets: Increase in receivable from clearing broker and other receivables (698,973) Decrease in other assets 36,487 Increase (decrease) in operating liabilities: Increase in securities sold, not yet purchased, at market value 15,950 Decrease in accounts payable and accrued expenses (449,195) ------------ Net cash provided by operating activities 1,292,190 ------------ Cash flows from investing activities: Purchase of property and equipment (1,583,058) ------------ Net cash used in investing activities (1,583,058) ------------ Cash flows from financing activities: Distributions to stockholder (300,000) ------------ Net cash used in financing activities (300,000) ------------ Increase in cash and cash equivalents (590,868) Cash and cash equivalents at beginning of period 1,905,735 ------------ Cash and cash equivalents at end of period $ 1,314,867 ============
See accompanying notes to unaudited consolidated financial statements. 4 CARNES CAPITAL CORPORATION AND SUBSIDIARY Notes to Unaudited Consolidated Financial Statements June 30, 2001 (1) Organization and Nature of Business Carnes Capital Corporation ("CCC") is a broker-dealer registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc. CCC is 100 percent owned by an individual and generates its revenue principally by providing securities brokerage services to clients of Private Capital Management, L.P. ("PCM-L.P.") for which its revenue is transaction based. Institutional Capital Management, Inc. ("ICM"), a wholly-owned subsidiary of CCC, is a consulting firm that provides research and analysis services to CCC and PCM-L.P. Collectively the assets, liabilities and operations of CCC and ICM are referred to hereafter as the "Company". On August 1, 2001, Legg Mason, Inc. ("Legg Mason") completed its acquisition of certain business operations of the Company, PCM-L.P. and certain affiliated entities (the "Affiliates"), which are all under common control and/or management. PCM-L.P. and the Affililiates are reported on in a separate set of financial statements. (2) Summary of Significant Accounting Policies (a) Basis of Presentation The consolidated financial statements of the Company include the combined assets, liabilities and results of operations of CCC and ICM. All significant intercompany accounts and transactions have been eliminated. (b) Clearing Arrangements Pursuant to agreements between the Company and its correspondent clearing broker, securities transactions effected by the Company are cleared on a fully disclosed basis through the correspondent broker. (c) Commissions Securities transaction revenue and related expenses are recorded on a trade date basis. (d) Furniture, Fixtures and Equipment and Leasehold Improvements Depreciation is provided on a straight-line basis using an estimated useful life of three to five years for equipment and five to seven years for furniture and fixtures. Leasehold improvements are amortized on a straight-line basis over the lesser of the useful life of the improvement or the term of the lease. During 2000 the estimated useful lives of certain leasehold improvements and fixtures were shortened to reflect the Company's relocation during the second quarter. (e) Income Taxes The Company is recognized as an S corporation for Federal income tax purposes. Thus, no provision has been made for Federal income taxes. 5 (f) Cash Equivalents The Company considers money market instruments with maturities of 90 days or less to be cash equivalents. (g) Receivable From Clearing Broker and Other Receivables Receivable from clearing broker and other receivables consists primarily of commissions and interest receivable from the Company's clearing broker. Such amounts are not collateralized and are expected to be fully collectible. (h) Investment in Securities Investment in securities consists primarily of NASDAQ common stock that was offered through a private placement offering. The stock is not publicly traded and transferability is restricted. Because no market exists for the stock, it is recognized on the Company's financial statements at its cost basis, which is estimated to be its market value. This caption also contains securities sold, but not yet purchased, at market value. These investments, primarily in U.S. equity securities, are temporarily acquired in the normal course of business and any gains, losses and cash flows are considered part of the Company's normal business operations. (i) Management's Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (2) Furniture, Fixtures and Equipment and Leasehold Improvements The balances of furniture, fixtures and equipment and leasehold improvements at June 30, 2001 are: Furniture and fixtures $ 697,214 Equipment 367,929 Leasehold improvements 1,216,980 Accumulated depreciation and amortization (543,415) ------------ $ 1,738,708 ============ (3) Net Capital Requirements As a registered broker-dealer under the Securities Exchange Act of 1934 (the "Act"), the Company is subject to the Securities and Exchange Commission's Uniform Net Capital Rule pursuant to Rule 15c3-1 of the Act, which requires the maintenance of minimum net capital. At June 30, 2001, the Company had net capital of $2,066,060, which was $1,966,060 in excess of required net capital of $100,000. The Company's percentage of aggregate indebtedness to net capital was 10.7%. 6 (4) Pension and 401(k) Plans The Company's employees participate in a pension plan administered by an affiliate of the sole stockholder. The Company contributed 6 percent of participant's eligible compensation to the plan for the six months ended June 30, 2001. Pension plan expenses were $53,660 in the six months ended June 30, 2001. The Company's employees participate in a 401(k) salary deferral plan administered by an affiliate of the sole stockholder. Employees are permitted, within limitations imposed by tax law, to make pre-tax contributions to the 401(k) plan pursuant to salary reduction agreements. The Company matches the employees' contributions up to a maximum of 4 percent. Plan expenses were $47,509 in the six months ended June 30, 2001. (5) Commitments Under operating leases, with remaining noncancelable terms in excess of one year at June 30, 2001, minimum aggregate annual rentals for office space are as follows: Year ending December 31, --------------------------- 2001 $ 178,762 2002 366,910 2003 379,779 2004 393,036 2005 406,834 2006 and thereafter 966,665 ----------- $ 2,691,986 =========== The Company moved most of its operations to a new location in the second quarter of 2001. Before relocating, the company leased its office space in an office complex owned by an affiliate under an agreement that was scheduled to expire August 2008. The Company incurred rent expense of $102,233 at the previous location, including a $57,000 lease termination fee that was included in accrued expenses at June 30, 2001. The lease obligations table above excludes any obligations related to the previous lease. PCM-L.P. shares the office space and paid 50 percent of the monthly rent expense for the six months ended June 30, 2001. The Company's total rent expense, including related charges, was $181,112 for the six months ended June 30, 2001. The Company does not enter into significant transactions in financial instruments with off-balance-sheet risk. (6) Related Party Transactions Commission revenue for the six months ended June 30, 2001 includes $4,580,366 from clients of the Company that are also clients of PCM-L.P., which serves as investment advisor to the clients. During the six months the Company earned consulting fees of $189,821 from PCM-L.P., and at June 30, 2001 the Company had balances of $52,928 receivable from PCM-L.P. and the Affiliates. Other expenses and various assets are shared with PCM-L.P. and the allocation of these expenses and assets is estimated by management. Other entities affiliated with the sole stockholder also provide certain supporting administrative services 7 to the Company and certain expenses of the Company are paid for by, and reimbursable to, an affiliated entity. (7) Fair Value of Financial Instruments Financial Accounting Standards Board Statement No. 107, Disclosures About Fair Value of Financial Instruments requires that all entities disclose the fair value of financial instruments, as defined, for both assets and liabilities recognized and not recognized in the statement of financial condition. The Company's financial instruments, as defined, are carried at, or approximate, fair value. 8 EX-99.6 10 dex996.txt UNAUDITED PRO FORMA COMBINED FINANCIAL STMTS. Exhibit 99.6 Unaudited Pro Forma Combined Financial Statements The following unaudited pro forma combined financial statements give effect to the acquisition by Legg Mason, Inc. ("Legg Mason") of Private Capital Management, L.P. and certain affiliated entities ("PCM-L.P.") and Carnes Capital Corporation ("CCC"), (collectively, "PCM"), in a transaction accounted for as a purchase. The unaudited pro forma combined balance sheet presents the combined financial position of Legg Mason and PCM as of June 30, 2001 assuming the acquisition had occurred as of that date. Such pro forma information is based upon the historical balance sheets of Legg Mason and PCM as of June 30, 2001. The unaudited pro forma combined statements of earnings are presented for the year ended March 31, 2001 and the three months ended June 30, 2001 assuming the acquisition occurred on April 1, 2000. The unaudited pro forma combined statement of earnings for the year ended March 31, 2001 combines the historical statements of earnings of Legg Mason for the year ended March 31, 2001 and PCM for the year ended December 31, 2000 (consisting of Private Capital Management, Inc. ("PCM, Inc.") for the six months ended June 29, 2000, PCM-L.P. for the six months ended December 31, 2000, and CCC for the year ended December 31, 2000). The unaudited pro forma combined statement of earnings for the three months ended June 30, 2001 reflects the period from April 1, 2001 to June 30, 2001 for Legg Mason and PCM. Revenues and net earnings of approximately $20.9 million and $18.4 million, respectively, of PCM for the period from January 1, 2001 to March 31, 2001 have been excluded from the unaudited pro forma combined financial statements. The acquisition of PCM by Legg Mason was completed on August 1, 2001. As such, the unaudited pro forma combined financial statements reflect the application of Statement of Financial Accounting Standards ("SFAS") No. 141 -- "Business Combinations" and SFAS No. 142 -- "Goodwill and Other Intangible Assets" to this transaction. SFAS Nos. 141 and 142 are applicable for all business combinations consummated after June 30, 2001. Additionally, the unaudited pro forma combined financial statements as of and for the three months ended June 30, 2001 include the effect of Legg Mason adopting SFAS Nos. 141 and 142 as of April 1, 2001, for all prior business combinations. The unaudited pro forma combined financial statements are provided for informational purposes only and are not necessarily indicative of the financial position or results of operations had the transactions assumed occurred on such dates, nor are they indicative of the results of operations or financial position that may occur. The unaudited pro forma combined financial statements should be read in conjunction with the historical financial statements and notes thereto of Legg Mason, PCM-L.P., PCM, Inc. and CCC. -1- Legg Mason, Inc. Unaudited Pro Forma Combined Balance Sheet June 30, 2001 (Dollars in thousands)
PCM PCM PCM-L.P. CCC Eliminations Combined - --------------------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 4,620 $ 1,315 $ - $ 5,935 Cash and securities segregated for regulatory purposes - Receivables: Customers 20,857 1,069 (39) 21,887 Brokers, dealers and clearing organizations - Others - Securities borrowed - Financial instruments owned, at fair value - Investment securities, at fair value 1,510 1,510 Investments of finance subsidiaries - Equipment and leasehold improvements, net 4 1,739 1,743 Intangible assets, net - Goodwill - Other 7,857 127 7,984 - --------------------------------------------------------------------------------------------------------------------------------- $ 33,338 $ 5,760 $ (39) $ 39,059 ================================================================================================================================= Liabilities and Stockholders' Equity Liabilities Payables: Customers $ - $ - $ - $ - Brokers and dealers - Securities loaned - Short-term borrowings - Financial instruments sold, but not yet purchased, at fair value - Accrued compensation Other 388 222 (39) 571 Notes payable of finance subsidiaries - Long - term debt - - --------------------------------------------------------------------------------------------------------------------------------- 388 222 (39) 571 - --------------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity Common stock - - - - Shares exchangeable into common stock - Additional paid-in capital - Deferred compensation and employee note receivable - Employee stock trust - Deferred compensation employee stock trust - Retained earnings 32,950 5,538 38,488 Accumulated other comprehensive income (loss), net - - --------------------------------------------------------------------------------------------------------------------------------- 32,950 5,538 - 38,488 - --------------------------------------------------------------------------------------------------------------------------------- $ 33,338 $ 5,760 $ (39) $ 39,059 ================================================================================================================================= Legg Mason Pro Forma Pro Forma As Reported Adjustments Combined - --------------------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 741,104 $(262,178) (a) $ 484,861 Cash and securities segregated for regulatory purposes 1,973,746 1,973,746 Receivables: Customers 1,070,639 1,092,526 Brokers, dealers and clearing organizations 183,614 183,614 Others 116,964 116,964 Securities borrowed 276,468 276,468 Financial instruments owned, at fair value 147,598 147,598 Investment securities, at fair value 13,332 14,842 Investments of finance subsidiaries 103,045 103,045 Equipment and leasehold improvements, net 70,832 131 (b) 72,706 Intangible assets, net 66,747 345,000 (b) 411,747 Goodwill 88,612 331,869 (b) 420,481 Other 155,373 3,035 (c) 158,558 (7,834) (d) - --------------------------------------------------------------------------------------------------------------------------------- $ 5,008,074 $ 410,023 $ 5,457,156 ================================================================================================================================= Liabilities and Stockholders' Equity Liabilities Payables: Customers $ 2,909,911 $ - $ 2,909,911 Brokers and dealers 19,640 19,640 Securities loaned 259,621 259,621 Short-term borrowings 128,349 128,349 Financial instruments sold, but not yet purchased, at fair value 29,560 29,560 Accrued compensation 108,434 108,434 Other 129,961 24,654 (d) 155,186 Notes payable of finance subsidiaries 104,320 104,320 Long - term debt 350,259 423,857 (e) 774,116 - --------------------------------------------------------------------------------------------------------------------------------- 4,040,055 448,511 4,489,137 - --------------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity Common stock 6,345 - 6,345 Shares exchangeable into common stock 10,255 10,255 Additional paid-in capital 343,700 343,700 Deferred compensation and employee note receivable (38,634) (38,634) Employee stock trust (87,801) (87,801) Deferred compensation employee stock trust 87,801 87,801 Retained earnings 654,083 (32,488) (d) 654,083 (6,000) (f) Accumulated other comprehensive income (loss), net (7,730) (7,730) - --------------------------------------------------------------------------------------------------------------------------------- 968,019 (38,488) 968,019 - --------------------------------------------------------------------------------------------------------------------------------- $ 5,008,074 $ 410,023 $ 5,457,156 =================================================================================================================================
See Notes to Unaudited Pro Forma Combined Financial Statements. -2- Legg Mason, Inc. Unaudited Pro Forma Combined Statement of Earnings for the three months ended June 30, 2001 (Dollars in thousands, except per share amounts)
PCM PCM PCM-L.P. CCC Eliminations Combined -------- -------- ------------ --------- REVENUES - -------- Investment advisory and related fees $ 25,134 $ - $ - $ 25,134 Commissions - 2,761 - 2,761 Principal transactions - - - - Investment banking - - - - Interest 47 598 - 645 Other - 120 (120) - -------- -------- ----------- --------- Total revenues 25,181 3,479 (120) 28,540 Interest expense Customer interest - - - - Debt interest - - - - -------- -------- ----------- --------- Total interest expense - - - - -------- -------- ----------- --------- Net revenues 25,181 3,479 (120) 28,540 NON-INTEREST EXPENSES - --------------------- Compensation and benefits 329 804 - 1,133 Communications and technology 10 128 - 138 Occupancy 52 137 - 189 Floor brokerage and clearing fees - 292 - 292 Intangible amortization expense - - - - Other 234 272 (120) 386 -------- -------- ----------- --------- Total non-interest expenses 625 1,633 (120) 2,138 Earnings before income taxes 24,556 1,846 - 26,402 Income tax provision - - - - -------- -------- ----------- --------- Net earnings $ 24,556 $ 1,846 $ - $ 26,402 ======== ======== =========== ========= Earnings per common share: Basic Diluted Weighted average shares (in thousands): Basic Diluted Legg Mason Pro Forma Pro Forma As Reported Adjustments Combined ---------------- ----------- -------- REVENUES - -------- Investment advisory and related fees $ 169,453 $ - $ 194,587 Commissions 83,343 - 86,104 Principal transactions 33,246 - 33,246 Investment banking 20,404 - 20,404 Interest 54,743 (808) (a) 54,580 Other 19,811 - 19,811 ------------ ---------- ---------- Total revenues 381,000 (808) 408,732 Interest expense Customer interest 26,017 - 26,017 Debt interest 8,661 9,045 (b) 17,706 ------------ ---------- ---------- Total interest expense 34,678 9,045 43,723 ------------ ---------- ---------- Net revenues 346,322 (9,853) 365,009 NON-INTEREST EXPENSES - --------------------- Compensation and benefits 213,619 3,603 (c) 218,355 Communications and technology 26,181 - 26,319 Occupancy 14,855 - 15,044 Floor brokerage and clearing fees 2,476 - 2,768 Intangible amortization expense 1,812 4,139 (d) 5,951 Other 28,036 - 28,422 ------------ ---------- ---------- Total non-interest expenses 286,979 7,742 296,859 Earnings before income taxes 59,343 (17,595) 68,150 Income tax provision 23,982 3,400 (e) 27,382 ------------ ---------- ---------- Net earnings $ 35,361 $ (20,995) $ 40,768 ============ ========== ========== Earnings per common share: Basic $ 0.55 $ 0.63 Diluted 0.52 0.60 Weighted average shares (in thousands): Basic 64,650 64,650 Diluted 68,005 68,005
See Notes to Unaudited Pro Forma Combined Financial Statements. -3- Legg Mason, Inc. Pro Forma Combined Statement of Earnings (Unaudited) for the year ended March 31, 2001 (Dollars in thousands, except per share amounts)
PCM PCM, Inc. PCM-L.P. CCC Combined ----------------- ------------------- ------------- ---------------- REVENUES Investment advisory and related fees $ 34,435 $ 33,265 $ - $ 67,700 Commissions - - 6,954 6,954 Principal transactions - - - - Investment banking - - - - Interest 132 183 636 951 Other - - - - ----------------- ------------------- ------------- ---------------- Total revenues 34,567 33,448 7,590 75,605 Interest expense Customer interest - - - - Debt interest - - - - ----------------- ------------------- ------------- ---------------- Total interest expense - - - - ----------------- ------------------- ------------- ---------------- Net revenues 34,567 33,448 7,590 75,605 NON-INTEREST EXPENSES Compensation and benefits 15,643 740 2,740 19,123 Communications and technology - - 253 253 Occupancy - - - - Floor brokerage and clearing fees - - 1,029 1,029 Intangible amortization expense - - - - Other 788 466 1,759 3,013 ----------------- ------------------- ------------- ---------------- Total non-interest expenses 16,431 1,206 5,781 23,418 Earnings before income taxes 18,136 32,242 1,809 52,187 Income tax provision - - - - ----------------- ------------------- ------------- ---------------- Net earnings $ 18,136 $ 32,242 $ 1,809 $ 52,187 ================= =================== ============= ================ Earnings per common share: Basic Diluted Weighted average shares (in thousands): Basic Diluted Legg Mason Proforma Pro Forma As Reported Adjustments Combined ------------------ ----------------- ------------------- REVENUES Investment advisory and related fees $ 653,992 $ - $ 721,692 Commissions 358,562 - 365,516 Principal transactions 124,556 - 124,556 Investment banking 65,877 - 65,877 Interest 282,201 (1,016) (a) 282,136 Other 51,065 - 51,065 ------------------ ------------------ ------------------- Total revenues 1,536,253 (1,016) 1,610,842 Interest expense Customer interest 168,889 - 168,889 Debt interest 6,500 39,097 (b) 45,597 ------------------ ------------------ ------------------- Total interest expense 175,389 39,097 214,486 ------------------ ------------------ ------------------- Net revenues 1,360,864 (40,113) 1,396,356 NON-INTEREST EXPENSES Compensation and benefits 804,776 (8,297) (c) 815,602 Communications and technology 102,764 - 103,017 Occupancy 51,670 - 51,670 Floor brokerage and clearing fees 7,709 - 8,738 Intangible amortization expense 12,387 16,556 (d) 28,943 Other 115,738 - 118,751 ------------------ ------------------ ------------------- Total non-interest expenses 1,095,044 8,259 1,126,721 Earnings before income taxes 265,820 (48,372) 269,635 Income tax provision 109,590 1,473 (e) 111,063 ------------------ ------------------ ------------------- Net earnings $ 156,230 $ (49,845) $ 158,572 ================== ================== =================== Earnings per common share: Basic $ 2.45 $ 2.49 Diluted 2.30 2.33 Weighted average shares (in thousands): Basic 63,793 63,793 Diluted 67,916 67,916
See Notes to Combined Pro Forma Financial Statements. -4- Notes to the Unaudited Pro Forma Combined Financial Statements Note 1. Basis of Presentation On August 1, 2001, Legg Mason, Inc. ("Legg Mason") completed its acquisition of Private Capital Management, L.P. and certain affiliated entities ("PCM-L.P.") whereby it acquired the business operations of PCM- L.P., and Carnes Capital Corporation ("CCC"), (collectively, "PCM"). Under the terms of the agreement, Legg Mason paid $682 million at closing, plus acquisition costs of approximately $1 million. The transaction also includes two contingent payments on the third and fifth anniversaries of the closing based on PCM's revenue growth, with the aggregate purchase price to be no more than $1.382 billion. As part of the transaction, a contractual revenue sharing arrangement was entered into whereby PCM will distribute to Legg Mason a fixed percentage of operating revenues. The remaining portion will generally be available to fund operating costs (excluding amortization of acquired intangible assets). Additionally, prior to closing, PCM recorded a final distribution to the extent net worth exceeded $6 million. PCM-L.P. is a registered investment advisor that specializes in the management of equity assets for individuals and institutions. PCM-L.P. was formed on June 29, 2000, when Private Capital Management, Inc. ("PCM, Inc.") (an S Corporation) contributed its investment advisory business and certain operating assets of approximately $7.4 million to PCM-L.P. for a partnership interest in PCM-L.P. CCC is a broker-dealer registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. CCC generates its revenues principally by providing securities brokerage services to clients of PCM. The unaudited pro forma combined balance sheet presents the combined financial position of Legg Mason and PCM as of June 30, 2001 assuming the acquisition had occurred as of that date. Such pro forma information is based upon the historical balance sheets of Legg Mason and PCM as of June 30, 2001. The unaudited pro forma combined statements of earnings are presented for the year ended March 31, 2001 and the three months ended June 30, 2001 assuming the acquisition occurred on April 1, 2000. The unaudited pro forma combined statement of earnings for the year ended March 31, 2001 combines the historical statements of earnings of Legg Mason for the year ended March 31, 2001 and PCM for the year ended December 31, 2000 (consisting of PCM, Inc. for the six months ended June 29, 2000, PCM-L.P. for the six months ended December 31, 2000 and CCC for the year ended December 31, 2000). The unaudited pro forma combined statement of earnings for the three months ended June 30, 2001 reflects the period from April 1, 2001 to June 30, 2001 for Legg Mason and PCM. Note 2. Accounting Policies The acquisition of PCM by Legg Mason was completed on August 1, 2001. As such, the unaudited pro forma combined financial statements reflect the application of Statement of Financial Accounting Standards ("SFAS") No. 141 -- "Business Combinations" and SFAS No. 142 -- "Goodwill and Other Intangible Assets" to this transaction. The provisions of SFAS Nos. 141 and 142 are applicable for all business combinations consummated after June 30, 2001. Assuming the transaction occurred as of June 30, 2001, a summary of the net assets acquired is as follows (in thousands): Current assets, net $ 4,257 Fixed assets 1,874 Trade name 47,000 Asset management contracts 298,000 Goodwill 331,869 ------------- Total purchase price, including acquisition costs $ 683,000 ------------- Additionally, the unaudited pro forma combined financial statements as of and for the three months ended June 30, 2001 include the effect of Legg Mason's early adoption of SFAS Nos. 141 and 142 as of April 1, 2001 for all prior business combinations. The following table reflects the pro forma combined results for the year ended March 31, 2001 adjusted as though the adoption of SFAS Nos. 141 and 142 occurred as of the beginning of the year: -5-
Net Basic Diluted Earnings Earnings per Earnings (in thousands) Share/(1)/ per Share/(1)/ --------------- ---------------- --------------- Combined pro forma - as reported $ 158,572 $ 2.49 $ 2.33 Goodwill amortization 4,586 .07 .07 Indefinite-life intangible amortization 1,039 .02 .02 --------------- ---------------- --------------- Combined pro forma - as adjusted $ 164,197 $ 2.57 $ 2.42 --------------- ---------------- ---------------
/(1)/ Column totals may not add due to rounding. Note 3. Debt Issuance On July 2, 2001, Legg Mason issued $425 million principal amount of senior notes, due in July 2008, which bear interest at 6.75%. The notes were sold at a discount to yield 6.80%. Additionally, on June 6, 2001, Legg Mason issued $567 million principal amount at maturity of zero-coupon convertible notes for proceeds of approximately $250 million. The discounted price reflects a yield to maturity of 2.75% per year. The proceeds from the convertible notes and a portion of the proceeds from the senior notes were used to fund the PCM acquisition. Note 4. Earnings Per Common Share The pro forma combined basic and diluted earnings per share for the periods presented are based on the weighted average number of Legg Mason shares as of the end of each applicable period. Note 5. PCM Eliminations The PCM eliminations include investment consulting fees charged to PCM-L.P. by the subsidiary of CCC. Note 6. Pro forma Adjustments The pro forma combined balance sheet has been prepared to reflect the acquisition of PCM by Legg Mason for an aggregate cash purchase price of $683 million. At closing, PCM provided $6 million in net assets. Pro forma adjustments are made to the balance sheet to reflect: (a) The payment of the cash purchase price of $683 million. The cash purchase price was funded with a portion of the net cash proceeds of approximately $421 million from the public offering of the senior notes described in Note 3 above and available cash, resulting in a net reduction in cash of approximately $262 million. (b) Allocation of the purchase price to the estimated fair value of the net assets at acquisition date (see Note 2) consisting of a write up to fixed assets of $131 thousand, recognition of intangible assets of $345 million comprising amortizable management contracts of $298 million and indefinite life intangible assets for trade name of $47 million, and goodwill of $332 million. (c) The debt issuance costs of approximately $3.0 million related to the senior notes described in Note 3 above. (d) Adjustment to reduce the net assets of PCM to $6 million provided at closing in accordance with the terms of the purchase agreement. (e) The issuance of $425 million senior notes, net of discount, as described in Note 3 above. (f) Elimination of net equity of PCM. Pro forma adjustments are made to the statements of earnings to reflect: (a) Reduction in interest income related to the reduction in the cash balance. -6- (b) Increase in interest expense related to the issuance on June 6, 2001 of $567 million principal amount at maturity convertible notes at an effective yield of 2.75%, plus the issuance on July 2, 2001 of $425 million senior notes with an effective yield of 6.80%, assuming the debt was issued as of April 1, 2000. (c) Adjustment to the operating expenses to reflect the contractual revenue sharing and compensation arrangement entered into as part of the transaction as described in Note 1. (d) Amortization of intangible assets related to the $298 million of management contracts over a weighted average period of 18 years. (e) Adjustment to income taxes on a combined basis to reflect the estimated effective tax rate of approximately 39% for PCM. Previously, no income taxes were recorded by PCM. The pro forma combined financial statements do not include integration costs, or other transactions or events that the combined entity may undertake or experience as a result of the acquisition. As such, any restructuring charges, anticipated increases in revenues, or unexpected cost savings, are not presented in the pro forma combined financial statements. Note 7. Performance Fees PCM's investment advisory and related fees in the proforma combined statements of earnings include performance fees of $6.0 million and $12.7 million for the three months ended June 30, 2001 and the year ended March 31, 2001, respectively. -7- -----END PRIVACY-ENHANCED MESSAGE-----