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-