Exhibit 99.2
INDEX TO FINANCIAL STATEMENTS
Unaudited Consolidated Financial Statements of Business Acquired:
| | |
| Unaudited Consolidated Statements of Financial Condition as of March 31, 2006 and December 31, 2005 | | 2 |
| Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005 | | 3 |
| Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 | | 4 |
| Notes to Consolidated Financial Statements – Unaudited | | 5 |
1
MDTA LLC
Unaudited Consolidated Statements of Financial Condition
As of March 31, 2006 and December 31, 2005
| | | | | | |
| | | March 31, 2006 | | December 31, 2005 |
Assets | | | | | | |
Current assets | | | | | | |
Cash and cash equivalents | | $ | 3,431,693 | | $ | 2,398,413 |
Investments | | | 15,687,132 | | | 19,386 |
Receivables | | | 2,143,745 | | | 963,189 |
Other current assets | | | 338,279 | | | 237,057 |
| | | | | | |
Total current assets | | | 21,600,849 | | | 3,618,045 |
| | | | | | |
Goodwill | | | 32,708,651 | | | 32,708,651 |
| | |
Fixed assets, net | | | 233,669 | | | 220,815 |
| | | | | | |
Total assets | | $ | 54,543,169 | | $ | 36,547,511 |
| | | | | | |
Liabilities, Minority Interests and Members’ Equity | | | | | | |
Current liabilities | | | | | | |
Accounts payable | | $ | 993,347 | | $ | 289,780 |
Accrued expenses | | | 1,391,915 | | | 2,420,326 |
Note payable | | | 8,329,184 | | | 8,122,723 |
| | | | | | |
Total current liabilities | | | 10,714,446 | | | 10,832,829 |
| | |
Minority Interests | | | 16,132,344 | | | — |
| | |
Members’ Equity | | | 27,696,379 | | | 25,714,682 |
| | | | | | |
Total liabilities, minority interests and members’ equity | | $ | 54,543,169 | | $ | 36,547,511 |
| | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
2
MDTA LLC
Unaudited Consolidated Statements of Operations
Three months ended March 31,
| | | | | | | |
| | | 2006 | | 2005 | |
Revenues | | | | | | | |
Fee income | | $ | 6,131,708 | | $ | 2,814,857 | |
Other income | | | 918,058 | | | 21,976 | |
Miscellaneous | | | — | | | 21,516 | |
| | | | | | | |
Total revenues | | | 7,049,766 | | | 2,858,349 | |
| | |
Expenses | | | | | | | |
Salaries, commissions and bonuses | | | 2,122,539 | | | 1,456,394 | |
Professional fees | | | 451,960 | | | 25,438 | |
Rent | | | 448,154 | | | 154,704 | |
Interest | | | 206,462 | | | 771,058 | |
Payroll taxes | | | 205,632 | | | 184,528 | |
Travel | | | 124,602 | | | 120,203 | |
Employee benefits | | | 102,418 | | | 132,762 | |
Entertainment, promotion and marketing | | | 85,939 | | | 72,941 | |
Research | | | 60,835 | | | 29,298 | |
Account service | | | 55,255 | | | 40,047 | |
Insurance | | | 36,524 | | | 111,542 | |
Dues, subscriptions and publications | | | 33,761 | | | 8,357 | |
Equipment leases and maintenance | | | 29,290 | | | 30,831 | |
Telephone | | | 22,818 | | | 31,208 | |
Postage | | | 17,742 | | | 13,268 | |
Depreciation and amortization | | | 16,407 | | | 27,077 | |
Recruiting | | | 15,890 | | | 28,129 | |
Office supplies | | | 12,402 | | | 13,169 | |
Computer and related | | | 6,205 | | | 13,047 | |
Trade errors | | | 4,127 | | | — | |
Employee relations | | | 2,339 | | | 8,209 | |
Training and education | | | 565 | | | 2,695 | |
Severance | | | — | | | 545,405 | |
Guaranteed payment | | | — | | | 400,000 | |
Business taxes | | | — | | | 80,062 | |
Miscellaneous | | | 64,669 | | | — | |
| | | | | | | |
Total expenses | | | 4,126,535 | | | 4,300,372 | |
| | | | | | | |
Minority interests | | | 948,534 | | | — | |
| | | | | | | |
Net income/(loss) | | $ | 1,974,697 | | $ | (1,442,023 | ) |
| | | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
3
MDTA LLC
Unaudited Consolidated Statements of Cash Flows
Three months ended March 31,
| | | | | | | | |
| | | 2006 | | | 2005 | |
Cash flows from operating activities | | | | | | | | |
Net income/(loss) | | $ | 1,974,697 | | | $ | (1,442,023 | ) |
Noncash items included in net income/(loss) | | | | | | | | |
Depreciation and amortization expenses | | | 16,407 | | | | 27,077 | |
Unrealized appreciation on investments | | | (1,653,699 | ) | | | — | |
Minority interest expense | | | 948,534 | | | | — | |
Net (increase)/decrease in | | | | | | | | |
Receivables | | | (779,228 | ) | | | 302,685 | |
Other assets | | | (100,207 | ) | | | (101,657 | ) |
Net increase/(decrease) in | | | | | | | | |
Accounts payable | | | 308,179 | | | | (230,701 | ) |
Accrued expenses | | | (1,078,356 | ) | | | (750,104 | ) |
Accrued interest on line of credit | | | 206,462 | | | | 771,058 | |
| | | | | | | | |
Net cash used by operating activities | | | (157,211 | ) | | | (1,423,665 | ) |
| | | | | | | | |
Cash flows from investing activities | | | | | | | | |
Cash acquired from acquisition | | | 1,262,869 | | | | — | |
Purchase of fixed assets | | | (29,262 | ) | | | (6,550 | ) |
| | | | | | | | |
Net cash provided/(used) by investing activities | | | 1,233,607 | | | | (6,550 | ) |
| | |
Cash flows from financing activities | | | | | | | | |
Proceeds from line of credit | | | — | | | | 1,941,639 | |
Member contributions | | | 7,000 | | | | 259,785 | |
Member distributions | | | (50,116 | ) | | | — | |
| | | | | | | | |
Net cash (used)/provided by financing activities | | | (43,116 | ) | | | 2,201,424 | |
| | | | | | | | |
Net increase in cash | | | 1,033,280 | | | | 771,209 | |
| | |
Cash and cash equivalents | | | | | | | | |
Beginning of period | | | 2,398,413 | | | | 112,254 | |
| | | | | | | | |
End of period | | $ | 3,431,693 | | | $ | 883,463 | |
| | | | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
4
MDTA LLC
Notes to the Consolidated Financial Statements - Unaudited
| 1. | Organization and Business |
MDTA LLC (formerly Harris Bretall Sullivan & Smith L.L.C., the “Company”) is a Delaware limited liability company which was formed on February 13, 1997 and started business on November 13, 1997. The principal business activity of the Company is to provide investment advisory services to high-net-worth individuals and institutions primarily through separately managed accounts. The Company also acts as advisor to the MDT mutual funds and various private investment companies. The members of the Company consist of current and former employees and HBSS Acquistion Co., a wholly owned subsidiary of Value Asset Management LLC. Each member of the Company has limited liability. The Company has members who have different priorities to income, losses and distributions. The Company has a final termination date of December 31, 2046.
| 2. | Summary of Significant Accounting Policies |
Basis of Presentation
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The consolidated financial statements include the accounts of the Company and entities in which the Company holds a controlling financial interest. The Company provides for minority interests in consolidated entities for which the Company’s controlling financial interest is less than 100 percent. All significant intercompany accounts and transactions have been eliminated.
Recent Accounting Pronouncements
Effective January 1, 2006, the Company adopted the provisions of Emerging Issues Task Force (“EITF”) Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-5”). EITF 04-5 provides guidance for determining whether a general partner controls a limited partnership. The guidance broadly provides that the general partner in a limited partnership is presumed to control that limited partnership. However, that presumption can be overcome if the limited partners have either substantive kick-out rights or substantive participating rights.
The Company is the General Partner of five limited partnerships and the managing member of one limited liability company. The partnerships and limited liability company are private investment companies. The Company is presumed to control these entities. Accordingly, beginning on January 1, 2006, the net assets of the private investment companies and the results of the operations have been included in the Company’s consolidated financial statements. Total assets at March 31, 2006, included $16,799,338 (primarily investment securities at market value and cash), total liabilities included $647,608 (primarily payables for securities purchased), and $16,132,344 was reflected as minority interest.
Revenue Recognition
The Company earns management fees based on a percentage of the assets under the Company’s management. In general, the Company bills quarterly in advance for such fees earned in accordance with the related contractual agreements.
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MDTA LLC
Notes to the Consolidated Financial Statements - Unaudited
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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of a highly liquid short-term investment in a money market account. The Company maintains its cash balances in various operating and money market accounts at one financial institution which are insured up to $100,000 by the Federal Deposit Insurance Corporation. The Company had balances in excess of the insurable amount periodically throughout the year.
Income Taxes
The Company is a limited liability company and is treated as a partnership for tax purposes. Accordingly, the results of operations of the Company for federal and state income tax purposes will be reflected on the individual income tax returns of the members.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line or declining-balance methods over the useful lives of the assets, which range from 3 to 10 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the lease.
Goodwill
Goodwill represents the excess cost of purchased companies over the fair value of net assets acquired. In accordance with the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets (“SFAS No. 142”), the Company performs an impairment test on the goodwill on at least an annual basis.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations of credit risk include trade receivables. The Company performs ongoing evaluations of customers’ financial condition and generally does not require collateral.
6
MDTA LLC
Notes to the Consolidated Financial Statements - Unaudited
Receivables consist of the following:
| | | | | | |
| | | March 31, 2006 | | December 31, 2005 |
Trade | | $ | 1,526,191 | | $ | 956,725 |
Investment securities sold | | | 592,466 | | | — |
Other | | | 25,088 | | | 6,464 |
| | | | | | |
Total | | $ | 2,143,745 | | $ | 963,189 |
| | | | | | |
Other current assets consist of the following:
| | | | | | |
| | | March 31, 2006 | | December 31, 2005 |
Prepaid insurance | | $ | 194,068 | | $ | 173,442 |
Prepaid contracts | | | 59,217 | | | 3,128 |
Other | | | 84,994 | | | 60,487 |
| | | | | | |
Total | | $ | 338,279 | | $ | 237,057 |
| | | | | | |
Fixed assets consist of the following:
| | | | | | |
| | | March 31, 2006 | | December 31, 2005 |
Furniture, fixtures and equipment | | $ | 675,570 | | $ | 674,015 |
Computer equipment and software | | | 1,670,593 | | | 1,642,887 |
Leasehold improvements | | | 858,454 | | | 858,454 |
| | | | | | |
| | | 3,204,617 | | | 3,175,356 |
Less: Accumulated depreciation | | | 2,970,948 | | | 2,954,541 |
| | | | | | |
Total | | $ | 233,669 | | $ | 220,815 |
| | | | | | |
Depreciation and amortization of fixed assets for the quarters ended March 31, 2006 and 2005 was $16,407 and $27,077, respectively.
7
MDTA LLC
Notes to the Consolidated Financial Statements - Unaudited
Accrued expenses consist of the following:
| | | | | | |
| | | March 31, 2006 | | December 31, 2005 |
Accrued bonuses | | $ | 458,033 | | $ | 1,731,695 |
Accrued professional fees | | | 742,683 | | | 432,801 |
Accrued vacation | | | 187,530 | | | 187,530 |
Other accrued expenses | | | 3,669 | | | 68,300 |
| | | | | | |
Total | | $ | 1,391,915 | | $ | 2,420,326 |
| | | | | | |
The Company has available a $7,000,000 revolving line of credit from one of its members that currently bears interest at prime plus three points pursuant to a letter of understanding executed on April 5, 2005. The balance outstanding at March 31, 2006 and December 31, 2005 under the line of credit was $8,329,184 and $8,122,723, respectively, including cumulative accrued interest.
Interest expense on the line of credit for the three months ended March 31, 2006 and 2005 was $206,462 and $771,058, respectively.
| 8. | Commitments and Contingencies |
In the normal course of business, the Company is involved with certain legal matters. In the opinion of management, the outcome of this litigation will not have a material impact on the consolidated financial statements.
On July 14, 2006, members of the Company sold their interests to Federated Investors, Inc. (“Federated”). The transaction included initial purchase payments of approximately $110 million, the majority of which were paid at closing, and a series of contingent payments totaling as much as $130 million over the next three years based on growth. As of the closing, Federated owned approximately 89% of the outstanding equity interests of the Company and had the right to acquire the remaining 11% by June 2007.
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