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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 001-13459
AFFILIATED MANAGERS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3218510
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
TWO INTERNATIONAL PLACE, BOSTON, MASSACHUSETTS 02110
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(617) 747-3300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK ($.01 PAR VALUE) NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
form 10-K. [ ]
Aggregate market value of the voting and non-voting Common Stock held by
non-affiliates of the Registrant, based upon the closing price of $50.00 on
March 23, 2000 on the New York Stock Exchange was $1,032,445,400. Calculation of
holdings by non-affiliates is based upon the assumption, for these purposes
only, that executive officers, directors, and persons holding 10% or more of the
Registrant's Common Stock (including the Registrant's Common Stock and Class B
Non-Voting Common Stock as if they were a single class) are affiliates. Number
of shares of the Registrant's Common Stock outstanding at March 23, 2000:
22,417,889 including 971,929 shares of Class B Non-Voting Common Stock. Unless
otherwise specified, the term Common Stock includes both Common Stock and
Class B Non-Voting Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of this report on Form 10-K is
incorporated by reference from certain portions of the Proxy Statement of the
Registrant to be filed pursuant to Regulation 14A and sent to stockholders in
connection with the Annual Meeting of Stockholders to be held on May 25, 2000.
Such Proxy Statement, except for the parts therein which have been specifically
incorporated herein by reference, shall not be deemed "filed" as part of this
report on Form 10-K.
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FORM 10-K
TABLE OF CONTENTS
PART I........................................................................ 3
ITEM 1. BUSINESS.................................................... 3
ITEM 2. PROPERTIES.................................................. 21
ITEM 3. LEGAL PROCEEDINGS........................................... 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 21
PART II....................................................................... 22
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 22
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA.......................... 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 56
PART III...................................................................... 56
PART IV....................................................................... 56
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON 8-K... 56
2
PART I
ITEM 1. BUSINESS
OVERVIEW
We buy and hold equity interests in mid-sized investment management firms
(our "Affiliates") and currently derive all of our revenues from those firms. We
hold investments in 15 Affiliates that in aggregate managed $87.0 billion in
assets at December 31, 1999. Our most recent investments were in Rorer Asset
Management, LLC (January 1999), The Managers Funds LLC (April 1999), and
Frontier Capital Management Company, LLC (January 2000).
We were founded in 1993 to address the succession and ownership transition
issues facing the founders and principal owners of many mid-sized investment
management firms. We did this because we believed that many wanted a new
alternative for shifting ownership to the next generation of management. We
developed an innovative transaction structure to serve as a succession planning
alternative for these firms.
A key component of our transaction structure is our purchase of majority
interests in these firms, with certain exceptions (such as The Managers Funds
LLC ("Managers")) as further described below. Within this structure, we allow
ongoing managers to keep a significant ownership interest in their firms which
they may sell to us in the future, we give management autonomy over the
day-to-day operations of their firm, and we allow management to decide how to
spend a fixed portion of revenues on salaries, bonuses and other operating
expenses.
We implement our structure through a revenue sharing arrangement with each
of our Affiliates (other than Managers). This arrangement allocates a specified
percentage of revenues, typically 50-70%, for use by the Affiliate's management
in paying the salaries, bonuses and other operating expenses (the "Operating
Allocation") of the Affiliate. The remaining portion of revenues, typically
30-50% (the "Owners' Allocation"), is allocated to the owners of that Affiliate,
including us, generally in proportion to ownership of the Affiliate. At some
Affiliates, we receive a guaranteed payment for the use of our capital or a
license fee which in each case is paid from that portion of revenues which we
refer to as our Owners' Allocation. We believe that our structure is
particularly appealing to managers of firms which anticipate strong future
growth, because it gives them the opportunity to profit from an Affiliate's
growth through this revenue sharing arrangement. Unlike all other Affiliates,
Managers is not subject to a revenue sharing arrangement since we own
substantially all of the firm. As a result, we participate fully in any increase
or decrease in the revenues or expenses of the firm.
We generally seek to acquire interests in investment management firms with
$500 million to $15 billion of assets under management. The growth in the
investment management industry has resulted in a significant increase in the
number of firms in this size range. We have identified over 1,300 of these firms
in the United States, Canada and the United Kingdom. We believe that a
substantial number of investment opportunities will continue to arise as
founders of these firms approach retirement age and begin to plan for
succession. We also anticipate significant additional investment opportunities
in firms that are currently wholly-owned by larger entities. We believe that we
can take advantage of these investment opportunities because our management team
has substantial industry experience and expertise in structuring and negotiating
transactions, as well as a highly organized process for identifying and
contacting investment prospects.
HOLDING COMPANY OPERATIONS
Our management performs two primary functions:
- implementing our strategy of growth through acquisitions of interests in
prospective Affiliates; and
- supporting, enhancing, and monitoring the activities of our existing
Affiliates.
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ACQUISITION OF INTERESTS IN PROSPECTIVE AFFILIATES
The acquisition of interests in new Affiliates is a primary element of our
growth strategy. Our management takes responsibility for each step in this
process, including identification and contact of potential Affiliates, and the
valuation, structuring and negotiation of transactions. While we try to initiate
our discussions with potential Affiliates on an exclusive basis, we have been
competitive in cases where investment bankers have been involved.
Our management identifies and develops relationships with promising
potential Affiliates based on a thorough understanding of the universe of
mid-sized investment management firms derived from our proprietary database made
up of data from third party vendors, public and industry sources and our own
research. We use this database to screen and prioritize investment prospects. We
also use the database to monitor the level and frequency of interaction with
potential Affiliates. This database and our related contact management system
help us to identify promising potential Affiliates and to develop and maintain
relationships with these firms.
We try to increase awareness of our approach to investing by actively
participating in conferences and seminars related to succession planning for
investment management firms. These activities lead to a substantial number of
unsolicited calls from firms considering succession planning issues. In
addition, our management maintains an active calling program in order to develop
relationships with prospective Affiliates. In the past four years, our
management has visited approximately 475 firms. We believe we have established
ongoing relationships with a substantial number of firms which will be
considering succession planning alternatives in the future.
Once discussions with a target firm lead to transaction negotiations, our
management team performs all of the functions related to the valuation,
structuring and negotiation of the transaction. Our management team includes
professionals with substantial experience in mergers and acquisitions of
investment management firms.
Upon the negotiation and execution of definitive agreements, the target firm
contacts its clients to notify them and seek their consent to the transaction
(which constitutes an assignment of the firm's investment advisory contracts),
as required by the Investment Advisers Act of 1940, as amended. If the firm has
mutual fund clients, the firm seeks new contracts with those funds, as required
by the Investment Company Act of 1940, as amended. The new contracts must be
approved by the funds' shareholders through a proxy process.
Descriptions of our most recently completed Affiliate investments in Rorer
Asset Management, LLC ("Rorer"), Managers and Frontier Capital Management
Company, LLC ("Frontier") are set forth below.
RORER ASSET MANAGEMENT, LLC
Rorer is a value-oriented equity and fixed income manager based in
Philadelphia which offers four types of investment management accounts:
large-capitalization equity, mid-capitalization equity, balanced and fixed
income. Founded in 1978, Rorer is led by its founder, Chairman and Chief
Investment Officer Edward C. Rorer, and a committee including James G. Hesser,
President, and Clifford B. Storms, Jr., Director of Research.
THE MANAGERS FUNDS LLC
Managers is a mutual fund company based in Norwalk, Connecticut which
employs an innovative business model for The Managers Funds, a no-load mutual
fund family it manages and distributes, whereby it selects sub-advisers from a
universe of over a thousand investment managers. Managers also manages and
distributes Managers AMG Funds, a no-load mutual fund family. Essex Aggressive
Growth Fund, the first series of Managers AMG Funds, commenced operations on
November 1, 1999. The mutual funds advised by Managers are distributed to retail
and institutional clients directly and through intermediaries
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including independent investment advisers, 401(k) plan sponsors and alliances,
broker-dealers, major fund programs, and bank trust departments.
FRONTIER CAPITAL MANAGEMENT COMPANY, LLC
Frontier is a Boston-based investment adviser, which provides investment
services to a diverse client base including corporate, public and multi-employer
pension and profit sharing plans, foundations, endowment and high net worth
individuals. Frontier employs a disciplined stock selection process driven by
internal research which targets companies with prospects for above-average
earnings growth over extended time periods. The firm offers a broad range of
investment management products, including small-cap growth equity, growth
equity, capital appreciation, mid-cap growth equity, large-cap growth equity,
balanced, and long/short investment partnerships. Frontier was founded in 1980
by the firm's Chairman, J. David Wimberly, who, along with President Thomas W.
Duncan and Frontier's other management partners, continue to lead the firm.
AFFILIATE DEVELOPMENT
In addition to pursuing new investments, we seek to support and enhance the
growth and operations of our Affiliates. We believe that the management of each
Affiliate is in the best position to assess its firm's needs and opportunities,
and that the autonomy and culture of each Affiliate should be preserved.
However, we provide strategic, marketing and operational assistance to our
Affiliates, and believe that our Affiliates find these support services
attractive because the services otherwise may not be as accessible or affordable
to mid-sized investment management firms.
One way we support the growth and operations of our Affiliates is by
providing a cost-effective way to access the mutual fund marketplace through our
Affiliate, Managers. In November 1999, we launched Managers AMG Funds, a no-load
mutual fund family managed by Managers and distributed to retail and
institutional clients directly by Managers and through intermediaries. The first
series in this family of funds is the Essex Aggressive Growth Fund, which is
sub-advised by our Affiliate, Essex Investment Management Company, LLC.
Another way we seek to enhance the growth of our Affiliates is by helping
them acquire smaller investment management firms or teams which are not suitable
as stand-alone investments for us. Mid-sized firms may have difficulty finding
and capitalizing on these opportunities on their own. As an example, in
December 1999, we assisted our Affiliate, First Quadrant, L.P. in the
acquisition of Objective Asset Management Ltd. ("Objective").
Other initiatives to support our Affiliates have included:
- new product development,
- marketing material development,
- institutional sales assistance,
- recruiting,
- compensation evaluation,
- development of client servicing technology,
- regulatory compliance audits, and
- client satisfaction surveys.
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We also work to obtain discounts on some of the products and services that
our Affiliates need, such as:
- sales training seminars,
- public relations services,
- insurance, and
- retirement benefits.
OUR STRUCTURE AND RELATIONSHIP WITH AFFILIATES
As part of our investment structure, each of our Affiliates is organized as
a separate and largely autonomous limited liability company or partnership. Each
Affiliate operates under its own organizational document, either a limited
liability company agreement or partnership agreement, which includes provisions
regarding the use of the Affiliate's revenues and the management of the
Affiliate. The organizational document also generally gives management owners
the ability to realize the value of their retained equity interests in the
future. While the organizational document of each Affiliate is agreed upon at
the time of our investment, from time to time we agree to amendments to
accommodate our business needs or those of our Affiliates.
OPERATIONAL AUTONOMY OF AFFILIATES
We develop the management provisions in each organizational document jointly
with the Affiliate's senior management at the time we make our investment. Each
organizational document has provisions that differ from the others. However, all
of them (with the exception of the organizational documents of Managers) give
the Affiliate's management team the power and authority to carry on the
day-to-day operations and management of the Affiliate, including matters
relating to:
- personnel,
- investment management,
- policies and fee structures,
- product development,
- client relationships, and
- employee compensation programs.
In the case of Managers, the organizational documents do not provide such
operational and management autonomy.
We retain, however, the authority to prevent specified types of actions
which we believe could adversely affect cash distributions to us, as well as the
authority to cause certain types of actions to protect our interests. For
example, none of the Affiliates may incur material indebtedness without our
consent. We do not directly engage in the business of providing investment
advice and, therefore, are not registered as an investment adviser.
REVENUE SHARING ARRANGEMENTS
When we make an investment in an Affiliate (other than Managers), we
negotiate a revenue sharing arrangement with that Affiliate, which we place in
its organizational document. The revenue sharing arrangement allocates a
percentage of revenues (typically 50-70%) for use by management of that
Affiliate in paying operating expenses of the Affiliate, including salaries and
bonuses. We call this the "Operating Allocation". We determine the percentage of
revenues designated as Operating Allocation for each
6
Affiliate in consultation with senior management of the Affiliate at the time of
our investment based on the Affiliate's historical and projected operating
margins. The organizational document of each Affiliate allocates the remaining
portion of the Affiliate's revenues (typically 30-50%) to the owners of that
Affiliate (including us), generally in proportion to their ownership of the
Affiliate. We call this the "Owners' Allocation" because it is the portion of
revenues which the Affiliate's management is prohibited from spending on
operating expenses without our prior consent. Each Affiliate distributes its
Owners' Allocation to its management owners and us generally in proportion to
our respective ownership interests in that Affiliate. At some Affiliates, we
receive a guaranteed payment for the use of our capital or a license fee which
in each case is paid from that portion of revenues which we refer to as our
Owners' Allocation. Unlike all other Affiliates, Managers is not subject to a
revenue sharing arrangement since we own substantially all of the firm. As a
result, we participate fully in any increase or decrease in the revenues or
expenses of Managers.
Before agreeing to these allocations, we examine the revenue and expense
base of the firm. We only agree to a division of revenues if we believe that the
Operating Allocation will cover operating expenses of the Affiliate, including
in cases involving a foreseeable increase in expenses, or a likely decrease in
revenues without a corresponding decrease in operating expenses. While our
management has significant experience in the asset management industry, we
cannot be certain that we will successfully anticipate changes in the revenue
and expense base of any firm. Therefore, we cannot be certain that the
agreed-upon Operating Allocation will be large enough to pay for all operating
expenses, including salaries and bonuses of the Affiliate.
One of the purposes of our revenue sharing arrangements is to provide
ongoing incentives for the managers of each Affiliate by allowing them:
- to participate in their firm's growth through their compensation from the
Operating Allocation,
- to receive a portion of the Owners' Allocation based on their ownership
interest in the Affiliate, and
- to control operating expenses, thereby increasing the portion of the
Operating Allocation which is available for growth initiatives and bonuses
for management of the Affiliate.
The managers of each Affiliate, therefore, have an incentive to both
increase revenues (thereby increasing the Operating Allocation and their Owners'
Allocation) and to control expenses (thereby increasing the excess Operating
Allocation).
The revenue sharing arrangements allow us to participate in the revenue
growth of each Affiliate because we receive a portion of the additional revenue
as our share of the Owners' Allocation. However, we participate in that growth
to a lesser extent than the managers of the Affiliate, because we do not share
in the growth of the Operating Allocation.
Under the organizational documents of each Affiliate (other than Managers),
the allocations and distributions of cash to us generally take priority over the
allocations and distributions to the management owners of each Affiliate. This
further protects us if there are any expenses in excess of the Operating
Allocation of an Affiliate. Thus, if an Affiliate's expenses exceed its
Operating Allocation, the excess expenses first reduce the portion of the
Owners' Allocation allocated to the Affiliate's management owners until that
portion is eliminated, and then reduce the portion allocated to us. Any such
reduction in our portion of the Owners' Allocation is required to be paid back
to us out of the portion of future Owners' Allocation allocated to the
Affiliate's management owners. Unlike all other Affiliates, Managers is not
subject to a revenue sharing arrangement since we own substantially all of the
firm. As a result, we participate fully in any increase or decrease in the
revenues or expenses of Managers.
7
OUR PURCHASE OF ADDITIONAL INTERESTS IN OUR EXISTING AFFILIATES
Under our transaction structure, the management team at each Affiliate
retains an ownership interest in its own firm. We consider this a key way that
we provide management owners with incentives to grow their firms. In order to
provide as much incentive as we can, we include in the organizational documents
of each Affiliate (other than Paradigm Asset Management Company, LLC) "put"
rights for its management owners. The put rights require us periodically to buy
part of the management owners' interests in the Affiliate for cash, shares of
our Common Stock or a combination of both. In this way, the management owners
can realize a portion of the equity value that they have created in their firm.
In addition, the organizational documents of some of our Affiliates provide us
with "call" rights that let us require the management owners to sell us portions
of their interests in the Affiliate. Finally, the organizational documents of
each Affiliate include provisions obligating each such owner to sell his or her
remaining interests at a point in the future, generally after the termination of
his or her employment with the Affiliate. Underlying all of these provisions is
our basic philosophy that management owners of each Affiliate should maintain an
ownership level in that Affiliate within a range that offers them sufficient
incentives to grow and improve their business to create equity value for
themselves.
PUT RIGHTS
The put rights are designed to let the management owners sell portions of
their retained ownership interest for cash, shares of our Common Stock or a
combination of both, prior to their retirement. In addition, as an alternative
to simply purchasing all of a management owner's interest in the Affiliate
following the termination of his or her employment, the put rights enable us to
purchase additional interests in the Affiliates at a more gradual rate. We
believe that a more gradual purchase of interests in Affiliates will make it
easier for us to keep our ownership of each Affiliate within a desired range. We
intend to continue providing equity participation opportunities in our
Affiliates to more junior members of their management as well as to key new
hires.
In most cases, the put rights do not become exercisable for a period of
several years from the date of our investment in an Affiliate. Once exercisable,
the put rights generally are limited in the aggregate to a percentage of the
management owner's ownership interests. The most common formulation among all
the Affiliates is that a management owner's put rights:
- do not commence for five years from the date of our investment (or, if
later, the date he or she purchased his or her interest in the Affiliate),
- are limited, in the aggregate, to fifty percent of the management owner's
interests in the Affiliate, and
- are limited, in any twelve-month period, to ten percent of the greatest
interest he or she held in the Affiliate. In addition, the organizational
documents of the Affiliates often contain a limitation on the maximum
total amount that management of any Affiliate may require us to purchase
pursuant to their put rights in any given twelve-month period.
The purchase price under the put rights is generally based on a multiple of
the Affiliate's Owners' Allocation at the time the right is exercised, with the
multiple generally having been determined at the time we made our initial
investment.
CALL RIGHTS
The call rights are designed to assure us and the management members of some
of our Affiliates that we can facilitate some transition within the senior
management team after an agreed-upon period of time. The call rights vary in
each specific instance, but in all cases the timing, mechanism and price are
agreed upon when we make our investment. The price is payable in cash, shares of
our Common Stock or a combination of both.
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BUY-OUT RIGHTS
The organizational documents of each Affiliate provide that the management
owners will realize the remaining equity value they have created generally
following the termination of their employment with the Affiliate. In general,
upon a management owner's retirement after an agreed-upon number of years, or
upon his or her earlier death, permanent incapacity or termination without cause
(but with our consent), that management owner is required to sell to us (and we
are required to purchase from the management owner) his or her remaining
interests. The purchase price in these cases is payable either in cash, shares
of our Common Stock or a combination of both. The purchase price is generally
based on the same formulas that apply to put rights. In general, if a management
owner quits early or is terminated for cause, his or her interests will be
purchased by us for cash at a substantial discount to the price that he or she
would otherwise be paid. Also, if a management owner quits or is terminated for
cause within the first several years following our investment (or, if later, the
date the management owner purchased his or her interest in the Affiliate), the
management owner generally receives nothing for his or her retained interest.
If an Affiliate collects any key-man life insurance or lump-sum disability
insurance proceeds upon the death or permanent incapacity of a management owner,
the Affiliate must use that money to purchase his or her interests. A purchase
by an Affiliate would have the effect of ratably increasing our ownership
percentage as well as each of the remaining management owners. By contrast, the
purchase of interests by us only increases our ownership percentage. The
organizational documents of most of the Affiliates provide for the purchase of
such insurance, to the extent we have requested it. The premium costs are
subtracted from the Owners' Allocation of the Affiliate, so all of the
Affiliate's owners (including AMG and management) bear this cost.
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THE AFFILIATES
In general, our Affiliates derive revenues by charging fees to their clients
that are typically based on the market value of assets under management. In some
instances, however, the Affiliates may derive revenues from fees based on
investment performance.
Our Affiliates are listed below in alphabetical order and include Frontier
Capital Management Company, LLC, in which we invested in January 2000. We own a
majority interest of each of our Affiliates other than Paradigm, and as
described above, we own substantially all interests in Managers.
PRINCIPAL DATE OF
AFFILIATE LOCATION(S) INVESTMENT
- --------- ---------------- --------------
The Burridge Group LLC ("Burridge") Chicago; Seattle December 1996
Davis Hamilton Jackson & Associates, L.P. ("DHJA") Houston December 1998
Essex Investment Management Company, LLC ("Essex") Boston March 1998
First Quadrant, L.P.; First Quadrant Limited Pasadena, CA;
(collectively, "First Quadrant") London March 1996
Frontier Capital Management Company, LLC ("Frontier") Boston January 2000
GeoCapital, LLC ("GeoCapital") New York September 1997
Gofen and Glossberg, L.L.C. ("Gofen and Glossberg") Chicago May 1997
J.M. Hartwell Limited Partnership ("Hartwell") New York May 1994
The Managers Funds LLC ("Managers") Norwalk, CT April 1999
Paradigm Asset Management Company, L.L.C. ("Paradigm") New York May 1995
Renaissance Investment Management ("Renaissance") Cincinnati November 1995
Rorer Asset Management, LLC ("Rorer") Philadelphia January 1999
Skyline Asset Management, L.P. ("Skyline") Chicago August 1995
Systematic Financial Management, L.P. ("Systematic") Teaneck, NJ May 1995
Tweedy, Browne Company LLC ("Tweedy, Browne") New York; London October 1997
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The following table provides the pro forma composition of our assets under
management and relative EBITDA Contribution of our Affiliates for the year ended
December 31, 1999. All amounts below are pro forma for the inclusion of the
Rorer, Managers and Frontier investments and financing transactions as if such
transactions occurred on January 1, 1999.
PRO FORMA
ASSETS UNDER MANAGEMENT AND EBITDA CONTRIBUTION(1)
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------
ASSETS
UNDER PERCENTAGE EBITDA PERCENTAGE
MANAGEMENT OF TOTAL CONTRIBUTION OF TOTAL
------------- ---------- -------------- ----------
(IN MILLIONS) (IN THOUSANDS)
CLIENT TYPE:
Institutional................................... $ 59,724 69% $128,104 63%
Mutual fund..................................... 7,474 9 31,936 16
High net worth.................................. 15,926 18 36,912 18
Other........................................... 3,904 4 5,994 3
-------- --- -------- ---
Total......................................... $ 87,028 100% $202,946 100%
======== === ======== ===
ASSET CLASS:
Equity.......................................... $ 56,420 65% $179,240 88%
Fixed income.................................... 4,495 5 10,808 5
Tactical asset allocation....................... 26,113 30 12,898 7
-------- --- -------- ---
Total......................................... $ 87,028 100% $202,946 100%
======== === ======== ===
GEOGRAPHY:
Domestic investments............................ $ 63,557 73% $157,141 77%
Global investments.............................. 23,471 27 45,805 23
-------- --- -------- ---
Total......................................... $ 87,028 100% $202,946 100%
======== === ======== ===
OTHER PRO FORMA FINANCIAL DATA:
RECONCILIATION OF EBITDA CONTRIBUTION TO EBITDA:
Total EBITDA Contribution (as above).......... $202,946
========
Less holding company expenses................. (17,653)
========
EBITDA(2)..................................... $185,293
========
Cash Net Income(3)............................ $112,593
========
HISTORICAL FINANCIAL DATA:
Cash flow from operating activities........... $ 89,119
Cash flow used in investing activities........ (112,939)
Cash flow from financing activities........... 54,035
EBITDA(2)..................................... $166,801
Cash Net Income(3)............................ 98,318
========
- ------------------------
(1) EBITDA Contribution represents the portion of an Affiliate's revenues that
is allocated to us, after amounts retained by the Affiliate for
compensation and day-to-day operating and overhead expenses, but before the
interest, tax, depreciation and amortization expenses of the Affiliate.
EBITDA Contribution does not include holding company expenses. We believe
that EBITDA Contribution may be useful to investors as an indicator of our
Affiliate contribution to our ability to service debt, to
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make new investments and to meet working capital requirements. EBITDA
Contribution is not a measure of financial performance under generally
accepted accounting principles and should not be considered an alternative
to net income as a measure of operating performance or to cash flows from
operating activities as a measure of liquidity. EBITDA Contribution, as
calculated by us, may not be consistent with comparable computations by
other companies.
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization and extraordinary items. We believe EBITDA may
be useful to investors as an indicator of our ability to service debt, to
make new investments and to meet working capital requirements. EBITDA is not
a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of operating performance or to cash flows from operating activities
as a measure of liquidity. EBITDA, as calculated by us, may not be
consistent with computations of EBITDA by other companies.
(3) Cash Net Income represents net income plus depreciation and amortization
and extraordinary items. We believe that this measure may be useful to
investors as another indicator of funds available to the Company, which may
be used to make new investments, repay debt obligations, repurchase shares
of Common Stock or pay dividends on Common Stock. Cash Net Income is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of operating performance or to cash flows from operating activities
as a measure of liquidity. Cash Net Income, as calculated by us, may not be
consistent with computations of Cash Net Income by other companies. Cash Net
Income as defined herein has historically been referred to by us as "EBITDA
as adjusted".
INDUSTRY
ASSETS UNDER MANAGEMENT
The investment management sector is one of the fastest growing sectors in
the financial services industry with record performance and growth in recent
years. As one example of this growth, the assets under management of mutual
funds increased 24% to $6.8 trillion in 1999, the fifth consecutive year of more
than 20% growth, according to the Investment Company Institute. Mutual fund
assets represent only a portion of the funds available for investment
management, as substantial assets are managed on behalf of individuals in
separate accounts, for foundations and endowments, as a portion of certain
insurance contracts such as variable annuity plans and on behalf of corporations
and other financial intermediaries. We believe that demographic trends and the
ongoing disintermediation of bank deposits and life insurance reserves will
result in continued growth of the investment management industry.
INVESTMENT ADVISERS
The growth in industry assets under management has resulted in a significant
increase in the number of investment management firms within our principal
targeted size range of $500 million to $15 billion of assets under management.
Within this size range, we have identified over 1,300 investment management
firms in the United States, Canada and the United Kingdom. We believe that, in
the coming years, a substantial number of investment opportunities will arise as
founders of such firms approach retirement age and begin to plan for succession.
We also anticipate that there will be significant additional investment
opportunities among firms which are currently wholly-owned by larger entities.
We believe that we are well positioned to take advantage of these investment
opportunities because we have a management team with substantial industry
experience and expertise in structuring and negotiating transactions, as well as
a highly organized process for identifying and contacting investment prospects.
12
COMPETITION
We operate as an asset management holding company organized to buy and hold
equity interests in mid-sized investment management firms. We are aware of
several other holding companies that have been organized to invest in or acquire
investment management firms and we view these firms as among our competitors. We
believe that the market for investments in asset management companies is and
will continue to remain highly competitive. We compete with many purchasers of
investment management firms, including other investment management holding
companies, insurance companies, broker-dealers, banks and private equity firms.
Many of these companies, both privately and publicly held, have longer operating
histories and greater resources than we do, which may make them more attractive
to the owners of firms in which we are considering an investment and may enable
them to offer greater consideration to such owners. Certain of our principal
stockholders also pursue investments in, and acquisitions of, investment
management firms, and we may, from time to time, encounter competition from such
principal stockholders with respect to certain investments. We believe that
important factors affecting our ability to compete for future investments are
(i) the degree to which target firms view our investment structure as
preferable, financially and operationally, to acquisition or investment
arrangements offered by other potential purchasers, and (ii) the reputation and
performance of the existing and future Affiliates, by which target firms will
judge us and our future prospects.
Our Affiliates compete with a large number of domestic and foreign
investment management firms, including public companies, subsidiaries of
commercial banks, and insurance companies. Many of these firms have greater
resources and assets under management than any of our Affiliates, and offer a
broader array of investment products and services than any of our Affiliates.
From time to time, our Affiliates may also compete with each other for clients.
In addition, there are relatively few barriers to entry by new investment
management firms, especially in the institutional managed accounts business. We
believe that the most important factors affecting our Affiliates' ability to
compete for clients are (i) the products offered, (ii) the abilities,
performance records and reputation of the particular Affiliate and its
management team, (iii) the management fees charged, (iv) the level of client
service offered, and (v) the development of new investment strategies and
marketing. The relative importance of each of these factors can vary depending
on the type of investment management service involved. Each Affiliate's ability
to retain and increase assets under management would be adversely affected if
client accounts underperform in comparison to relevant benchmarks, or if key
management or employees leave the Affiliate. The ability of each Affiliate to
compete with other investment management firms is also dependent, in part, on
the relative attractiveness of its investment philosophies and methods under
then prevailing market conditions.
GOVERNMENT REGULATION
Our Affiliates' businesses are highly regulated, primarily by U.S. federal
authorities and to a lesser extent by other authorities including non-U.S.
authorities. The failure of our Affiliates to comply with laws or regulations
could result in fines, suspensions of individual employees or other sanctions,
including revocation of an Affiliate's registration as an investment adviser,
commodity trading advisor or broker/ dealer. Each of our Affiliates (other than
First Quadrant Limited) is registered as an investment adviser with the
Securities and Exchange Commission under the Investment Advisers Act of 1940, as
amended (the "Investment Advisers Act"), and is subject to the provisions of the
Investment Advisers Act and related regulations. The Investment Advisers Act
requires registered investment advisers to comply with numerous obligations,
including record keeping requirements, operational procedures and disclosure
obligations. Each of our Affiliates (other than First Quadrant Limited) is also
subject to regulation under the securities laws and fiduciary laws of several
states. Moreover, some of our Affiliates, including Tweedy, Browne, Managers and
Skyline, act as advisers or sub-advisers to mutual funds which are registered
with the Securities and Exchange Commission pursuant to the Investment Company
Act of 1940, as amended (the "1940 Act"). As an adviser or sub-adviser to a
registered investment company, each of these Affiliates must comply with the
requirements of the 1940 Act and related regulations. In addition, an adviser or
13
subadviser to a registered investment company generally has obligations with
respect to the qualification of the registered investment company under the
Internal Revenue Code of 1986, as amended.
Our Affiliates are also subject to the Employee Retirement Income Security
Act of 1974 ("ERISA"), and related regulations, to the extent they are
"fiduciaries" under ERISA with respect to some of their clients. ERISA and
related provisions of the Internal Revenue Code of 1986, as amended, impose
duties on persons who are fiduciaries under ERISA, and prohibit some
transactions involving the assets of each ERISA plan which is a client of an
Affiliate, as well as some transactions by the fiduciaries (and several other
related parties) to such plans. Two of our Affiliates, First Quadrant and
Renaissance, are also registered with the Commodity Futures Trading Commission
as commodity trading advisers and are members of the National Futures
Association. Finally, Tweedy, Browne and Managers are registered under the
Exchange Act as a broker-dealers and, therefore, are subject to extensive
regulation relating to sales methods, trading practices, the use and safekeeping
of customers' funds and securities, capital structure, record keeping and the
conduct of directors, officers and employees.
Furthermore, the Investment Advisers Act and the 1940 Act provide that each
investment management contract under which our Affiliates manage assets for
other parties either terminates automatically if assigned, or must state that it
is not assignable without consent. In general, the term "assignment" includes
not only direct assignments, but also indirect assignments which may be deemed
to occur upon the direct or indirect transfer of a "controlling block" of our
voting securities or the voting securities of one of our Affiliates. The 1940
Act provides that all investment contracts with mutual fund clients may be
terminated by such clients, without penalty, upon no later than 60 days' notice.
Several of our Affiliates are also subject to the laws of non-U.S.
jurisdictions and non-U.S. regulatory agencies. For example, First Quadrant
Limited, located in London, is a member of the Investment Management Regulatory
Organization of the United Kingdom, and some of our other Affiliates are
investment advisers to funds which are organized under non-U.S. jurisdictions,
including Luxembourg (where the funds are regulated by the Institute Monetaire
Luxembourgeois) and Bermuda (where the funds are regulated by the Bermuda
Monetary Authority).
The foregoing laws and regulations generally grant supervisory agencies and
bodies broad administrative powers, including the power to limit or restrict any
of the Affiliates from conducting their business in the event that they fail to
comply with such laws and regulations. Possible sanctions that may be imposed in
the event of such noncompliance include the suspension of individual employees,
limitations on the Affiliate's business activities for specified periods of
time, revocation of the Affiliate's registration as an investment adviser,
commodity trading adviser and/or other registrations, and other censures and
fines. Changes in these laws or regulations could have a material adverse impact
on our profitability and mode of operations.
Our officers, directors and employees and the officers and employees of each
of the Affiliates may own securities that are also owned by one or more of the
Affiliates' clients. We and each Affiliate have internal policies with respect
to individual investments and require reports of securities transactions and
restrict certain transactions so as to minimize possible conflicts of interest.
EMPLOYEES
As of December 31, 1999, we had 25 employees and our Affiliates employed
approximately 571 persons, approximately 518 of which were full-time employees.
Neither we nor any of our Affiliates is subject to any collective bargaining
agreements and we believe that our labor relations are good.
CORPORATE LIABILITY AND INSURANCE
Our Affiliates' operations entail the inherent risk of liability related to
litigation from clients and actions taken by regulatory agencies. In addition,
we face liability both directly as a control person of our
14
Affiliates, and indirectly as a general partner of certain of our Affiliates. To
protect our overall operations from such liability, we maintain errors and
omissions and general liability insurance in amounts which we and our Affiliates
consider appropriate. There can be no assurance, however, that a claim or claims
will not exceed the limits of available insurance coverage, that any insurer
will remain solvent and will meet its obligations to provide coverage, or that
such coverage will continue to be available with sufficient limits or at a
reasonable cost. A judgment against one of our Affiliates in excess of available
coverage could have a material adverse effect on us.
CAUTIONARY STATEMENTS
Our growth strategy includes acquiring ownership interests in mid-sized
investment management firms. To date, we have invested in 15 such firms. We
intend to continue this investment program in the future, assuming that we can
find suitable firms to invest in and that we can negotiate agreements on
acceptable terms. We cannot be certain that we will be successful in finding or
investing in such firms or that they will have favorable operating results.
We have been in operation for six years and had net losses in the first four
years. While historically our growth came largely from making new investments,
in recent periods the performance of our existing Affiliates has become
increasingly important to our growth. We may not be successful in making new
investments and the firms we invest in may fail to carry out their growth or
management succession plans. As we continue to execute our business strategy, we
may experience net losses in the future, which could have an adverse effect on
our financial condition and prospects.
A large part of the purchase price we pay for the firms in which we invest
usually consists of cash. We believe that our existing cash resources and cash
flow from operations will be sufficient to meet our working capital needs for
normal operations for the foreseeable future. However, we expect that these
sources of capital will not be sufficient to fund anticipated investments in
firms. Therefore, we will need to raise capital by making additional long-term
or short-term borrowings or by selling shares of our stock, either publicly or
privately, in order to complete further investments. This could increase our
interest expense, decrease our net income or dilute the interests of our
existing shareholders. Moreover, we may not be able to obtain financing for
future investments on acceptable terms, if at all.
In January 2000, we closed our most recent investment in Frontier. After
borrowings from our credit facility related to Frontier and other borrowing and
repayment activity after December 31, 1999, we had $240.5 million of outstanding
debt and $89.5 million available to borrow under our credit facility at
March 23, 2000. We can use borrowings under our credit facility for future
investments and for our working capital needs only if we continue to meet the
financial tests under the terms of our credit facility. We may also expand our
credit facility by an additional $70 million with the consent of our lenders. We
anticipate that we will borrow more in the future when we invest in additional
investment management firms. This will subject us to the risks normally
associated with debt financing.
Our credit facility contains provisions for the benefit of our lenders which
could operate in ways that restrict the manner in which we can conduct our
business or may have an adverse impact on the interests of our stockholders. For
example:
- Our borrowings under the credit facility are collateralized by pledges of
all of our interests in our Affiliates (including all interests indirectly
held through wholly-owned subsidiaries).
- Our credit facility contains, and future debt instruments may contain,
restrictive covenants that could limit our ability to obtain additional
debt financing and could adversely affect our ability to make future
investments in investment management firms.
- Our credit facility prohibits us from paying dividends and other
distributions to our stockholders and restricts us, our Affiliates and any
other subsidiaries we may have from incurring indebtedness,
15
incurring liens, disposing of assets and engaging in extraordinary
transactions. We are also required to comply with the credit facility's
financial covenants on an ongoing basis.
- We cannot borrow under our credit facility unless we comply with its
requirements.
Because indebtedness under our credit facility bears interest at variable
rates, interest rate increases will increase our interest expense, which could
adversely affect our cash flow and ability to meet our debt service obligations.
Although we have entered into interest rate "hedging" contracts designed to
offset a portion of our exposure to interest rate fluctuations above specified
levels, we cannot be certain that we will continue to maintain such hedging
contracts at their existing levels of coverage, the coverage maintained will
cover all our indebtedness outstanding at any such time, or that this strategy
will be effective. If prevailing interest rates drop below levels set in our
hedging contracts, we may have to pay higher interest rates under the hedging
contracts than would otherwise apply under the actual indebtedness.
Our credit facility matures in December 2002. We may not be able to obtain
new financing at terms similar to our current facility, which may have the
effect of increasing our interest expense, decreasing our net income or diluting
the interests of our existing shareholders.
At December 31, 1999, our total assets were $909.1 million, of which
$574.9 million were intangible assets consisting of acquired client
relationships and goodwill. We cannot be certain that we will ever realize the
value of such intangible assets. We are amortizing (writing off) these
intangible assets on a straight-line basis over periods ranging from eight to
28 years in the case of acquired client relationships and 15 to 35 years in the
case of goodwill. Pro forma for all investments in our Affiliates to date,
amortization of intangible assets, including goodwill, would have resulted in a
charge to operations of $26.9 million for the year ended December 31, 1999.
We evaluate each investment and establish appropriate amortization periods
based on a number of factors including:
- the firm's historical and potential future operating performance and rate
of attrition among clients,
- the stability and longevity of existing client relationships,
- the firm's recent, as well as long-term, investment performance,
- the characteristics of the firm's products and investment styles,
- the stability and depth of the firm's management team, and
- the firm's history and perceived franchise or brand value.
After making each investment, we reevaluate these and other factors on a
regular basis to determine if the related intangible assets continue to be
realizable and if the amortization period continues to be appropriate. In 1995
and 1996, our reevaluations resulted in the write-off of approximately
$2.5 million and $4.6 million of unamortized goodwill, respectively.
Any future determination requiring the write-off of a significant portion of
unamortized intangible assets could adversely affect our results of operations
and financial position. In addition, we intend to invest in additional
investment management firms in the future. While these firms may contribute
additional revenue to us, they will also result in the recognition of additional
intangible assets which will cause further increases in amortization expense.
In September 1999, the Financial Accounting Standards Board ("FASB")
released for preliminary public comment its new approach to the accounting for
business combinations and intangible assets. The FASB's approach provides for
one method of accounting, the purchase method, for business combinations
consummated after the approach is effective. The FASB's approach will also limit
the goodwill amortization period to 20 years. As proposed, the new approach will
not apply to goodwill recorded on transactions
16
initiated before the approach is effective. The final statement on this issue,
which is expected to be released and effective in the fourth quarter of 2000,
may present a different approach.
We currently amortize goodwill purchased in our 15 investments on a straight
line basis ranging from 15 to 35 years. As a result of the FASB approach or
otherwise, any changes in generally accepted accounting principles ("GAAP") that
reduce the period over which we may amortize goodwill may impact our acquisition
strategy and have an adverse effect our financial results. A shorter goodwill
amortization period would increase annual amortization expense and reduce our
net income over the amortization period.
We depend on the efforts of William J. Nutt, our Chairman and Chief
Executive Officer, Sean M. Healey, our President and Chief Operating Officer,
and our other officers. Messrs. Nutt and Healey, in particular, play an
important role in identifying suitable investment opportunities for us.
Messrs. Nutt and Healey do not have employment agreements with us, although each
of them has a significant equity interest in us (including options subject to
vesting provisions).
In addition, Essex and Tweedy, Browne, our largest two Affiliates based on
revenue, depend heavily on the services of key principals, who have managed
their firms for over 20 years and are primarily responsible for all investment
decisions. Although each of the principals has a significant equity interest in
their firm and has entered into an employment agreement with their respective
firm providing for continued employment until October 2007 (in the case of
Tweedy, Browne) and March 2008 (in the case of Essex), these arrangements are
not a guarantee that such principals will remain with their firms until that
date.
Our loss of key management personnel or our inability to attract, retain and
motivate sufficient numbers of qualified management personnel may adversely
affect our business. The market for investment managers is extremely competitive
and is increasingly characterized by frequent movement by investment managers
among different firms. In addition, because individual investment managers at
our Affiliates often maintain a strong, personal relationship with their clients
based on the clients' trust in individual managers, the loss of a key investment
manager at an Affiliate could jeopardize the Affiliate's relationships with its
clients and lead to the loss of client accounts. Losing client accounts in these
circumstances could have a material adverse effect on the results of our
operations and our financial condition and that of our Affiliates. Although we
use a combination of economic incentives, vesting provisions, and, in some
instances, non-solicitation agreements and employment agreements in an attempt
to retain key management personnel, we cannot guarantee that key managers will
remain with us.
Because our Affiliates offer a broad range of investment management services
and utilize a number of distribution channels, changing conditions in the
financial and securities markets directly affect our performance.
The financial markets and the investment management industry in general have
experienced both record performance and record growth in recent years. For
example, for the five years ended December 31, 1999, the S&P 500 Index
appreciated at an average annual rate of 28.6%. The assets under management of
mutual funds increased 24% to $6.8 trillion in 1999, the fifth consecutive year
of more than 20% growth, according to the Investment Company Institute. Domestic
and foreign economic conditions and general trends in business and finance,
among other factors, affect the financial markets and businesses operating in
the securities industry. We cannot guarantee that broader market performance
will be favorable in the future. Any decline in the financial markets or a lack
of sustained growth may result in a corresponding decline in our Affiliates'
performance and may cause our Affiliates to experience declining assets under
management and/or fees, which would reduce cash flow distributable to us.
Our Affiliates derive almost all of their revenues from investment
management contracts. These contracts are typically terminable without penalty
upon 60 days' notice in the case of mutual fund clients or upon 30 days' notice
in the case of individual and institutional clients. As a result, our
Affiliates' clients
17
may withdraw funds from accounts managed by the Affiliates at their election. In
addition, these contracts generally provide for payment based on the market
value of assets under management, although a portion also provide for payment
based on investment performance. Because most of these contracts provide for
payments based on market values of securities, fluctuations in securities prices
will directly affect our consolidated results of operations and financial
condition. Changes in our clients' investment patterns will also affect the
total assets under management. Moreover, some of our Affiliates' fees are higher
than those of other investment managers for similar types of investment
services. The ability of each of our Affiliates to maintain its fee levels in a
competitive environment depends on its ability to provide clients with
investment returns and services which are satisfactory to its clients. We cannot
be certain that our Affiliates will be able to retain their existing clients or
to attract new clients at their current fee levels.
As noted above, investment management contracts at certain of our Affiliates
provide that fees are paid on the basis of investment performance. Fees based on
investment performance are inherently dependent on investment results, and
therefore may vary substantially from year to year. In particular,
performance-based fees have been of an unusual magnitude in recent years, and
may not recur to the same magnitude in future years, if at all. In addition,
while the performance-based fee contracts of our Affiliates apply to investment
management services in a range of investment management styles and securities
market sectors, such contracts may be concentrated in certain styles and
sectors. For example, in each of 1998 and 1999 we benefited from a concentration
of such products in technology sectors which performed well in those years. To
the extent such contracts are concentrated within styles or sectors, they are
subject to the continuing impact of fluctuating securities prices in such styles
and sectors as well as the performance of the relevant Affiliates.
Because we are a holding company, we receive all of our cash from
distributions made to us by our Affiliates. All of our Affiliates (other than
Managers) have entered into agreements with us pursuant to which they have
agreed to pay to us a specified percentage of their gross revenues on a
quarterly basis. In our agreements with our Affiliates, the distributions made
to us by our Affiliates represent only a portion of our Affiliates' gross
revenues. Our Affiliates use the portion of their revenues not required to be
distributed to us to pay their operating expenses and distributions to their
management teams. The payment of distributions to us by our Affiliates may be
subject to the claims of our Affiliates' creditors and to limitations applicable
to our Affiliates under state laws governing corporations, partnerships and
limited liability companies, state and federal regulatory requirements for the
securities industry and bankruptcy and insolvency laws. As a result, we cannot
guarantee that our Affiliates will always make these distributions. See
"Business--Our Structure and Relationship with Affiliates--Revenue Sharing
Arrangements".
When we made our original investments in our Affiliates, we agreed to
purchase the additional ownership interests in each Affiliate from the owners of
these interests on pre-negotiated terms which are subject to several conditions
and limitations. Consequently, we may have to purchase some of these interests
from time to time for cash (which we may have to borrow) or in exchange for
newly issued shares of our Common Stock. These purchases may result in us having
more interest expense and less net income or in our existing stockholders
experiencing a dilution of their ownership of us. In addition, these purchases
may result in our ownership of larger portions of our Affiliates, which may have
an adverse effect on our cash flow and liquidity. See "Business--Our Structure
and Relationship with Affiliates--Our Purchase of Additional Interests in Our
Existing Affiliates".
Although our agreements with our Affiliates give us the authority to control
some types of business activities undertaken by them and we have voting rights
with respect to significant decisions, our Affiliates manage and control their
own day-to-day operations, including all investment management policies and fee
levels, product development, client relationships, compensation programs and
compliance activities. As a result, we may not become aware, for example, of one
of our Affiliates' non-compliance with a regulatory requirement as quickly as if
we were involved in the day-to-day business of the Affiliate or we may not
become aware of such non-compliance. In such situations, our financial condition
and results of operations
18
may be adversely affected by problems stemming from the day-to-day operations of
our Affiliates. See "Business--Government Regulation". In addition, because our
Affiliates conduct their own marketing and client relations, they may from time
to time compete with each other for clients. See "Business--Our Structure and
Relationship with Affiliates".
Some of our existing Affiliates are partnerships of which we are the general
partner. Consequently, to the extent any of these Affiliates incurs liabilities
or expenses which exceed its ability to pay for them, we are liable for their
payment. In addition, with respect to all of our Affiliates we may be held
liable in some circumstances as a control person for their acts as well as those
of their employees. We and our Affiliates maintain errors and omissions and
general liability insurance in amounts which we and they believe to be adequate
to cover many potential liabilities. We cannot be certain, however, that we will
not have claims which exceed the limits of our available insurance coverage,
that our insurers will remain solvent and will meet their obligations to provide
coverage, or that insurance coverage will continue to be available to us with
sufficient limits or at a reasonable cost. A judgment against us or any of our
Affiliates in excess of our available coverage could have a material adverse
effect on us.
We are an asset management holding company which invests in mid-sized
investment management firms. The market for partial or total acquisitions of
interests in investment management firms is highly competitive. We have several
competitors which are also set up as holding companies and invest in or buy
investment management firms. In addition, many other public and private
companies, including commercial and investment banks, insurance companies and
investment management firms, most of which have longer operating histories and
significantly greater resources than us, invest in or buy investment management
firms. Moreover, some of our principal stockholders also invest in or buy
investment management firms and may compete with us as we pursue additional
investments. We cannot guarantee that we will be able to compete effectively
with such competitors, that new competitors will not enter the market or that
such competition will not make it more difficult or impracticable for us to make
new investments in investment management firms.
The investment management business is also highly competitive. Our
Affiliates compete with a broad range of investment managers, including public
and private investment advisers as well as firms associated with securities
broker-dealers, banks, insurance companies and other entities. From time to
time, our Affiliates may also compete with each other for clients. Many of our
Affiliates' competitors have greater resources than do we and our Affiliates. In
addition to competing directly for clients, competition may reduce the fees that
our Affiliates can obtain for their services. We believe that each Affiliate's
ability to compete effectively with other firms is dependent upon the
Affiliate's products, level of investment performance and client service, as
well as the marketing and distribution of its investment products. We cannot be
certain that our Affiliates will be able to achieve favorable investment
performance and retain their existing clients.
Some of our Affiliates operate or advise clients outside of the United
States. Furthermore, in the future we may invest in investment management firms
which operate or advise clients outside of the United States and our existing
Affiliates may expand their non-U.S. operations. Our Affiliates take risks
inherent in doing business internationally, such as changes in applicable laws
and regulatory requirements, difficulties in staffing and managing foreign
operations, longer payment cycles, difficulties in collecting investment
advisory fees receivable, political instability, fluctuations in currency
exchange rates, expatriation controls and potential adverse tax consequences. We
cannot be certain that one or more of these risks will not have an adverse
effect on our Affiliates, including investment management firms in which we may
invest in the future, and, consequently, on our consolidated business, financial
condition and results of operations.
Many aspects of our Affiliates' businesses are subject to extensive
regulation by various U.S. federal regulatory authorities, certain state
regulatory authorities, and non-U.S. regulatory authorities. There is no
assurance that our Affiliates will fulfill all applicable regulatory
requirements. The failure of any Affiliate
19
to meet regulatory requirements could subject such Affiliate to sanctions which
might materially impact the Affiliate's business and our business. For further
information concerning the regulations to which we and our Affiliates are
subject, see "Business--Government Regulation".
Several provisions of our Amended and Restated Certificate of Incorporation,
our Amended and Restated By-laws and Delaware law may, together or separately,
prevent a transaction which is beneficial to our stockholders from occurring.
These provisions may discourage potential purchasers from presenting acquisition
proposals, delay or prevent potential purchasers from acquiring a controlling
interest in us, block the removal of incumbent directors or limit the price that
potential purchasers might be willing to pay in the future for shares of our
Common Stock. These provisions include the issuance, without further stockholder
approval, of preferred stock with rights and privileges which could be senior to
the Common Stock. We are also subject to Section 203 of the Delaware General
Corporation Law which, subject to a few exceptions, prohibits a Delaware
corporation from engaging in any of a broad range of business combinations with
any "interested stockholder" for a period of three years following the date that
such stockholder became an interested stockholder.
We have never declared or paid a cash dividend on our Common Stock. We
intend to retain earnings to repay debt and to finance the growth and
development of our business and do not anticipate paying cash dividends on our
Common Stock in the foreseeable future. Any declaration of cash dividends in the
future will depend, among other things, upon our results of operations,
financial condition and capital requirements as well as general business
conditions. Our credit facility also contains restrictions which prohibit us
from making dividend payments to our stockholders. See "Market for Registrant's
Common Equity and Related Stockholder Matters".
The market price of our Common Stock has historically experienced and may
continue to experience high volatility. Our quarterly operating results, changes
in general conditions in the economy or the financial markets and other
developments affecting us or our competitors could cause the market price of our
Common Stock to fluctuate substantially. In addition, in recent years, the stock
market has experienced significant price and volume fluctuations. This
volatility has affected the market prices of securities issued by many companies
for reasons unrelated to their operating performance and may adversely affect
the price of our Common Stock.
If our stockholders sell substantial amounts of our Common Stock (including
shares issued upon the exercise of outstanding options) in the public market,
the market price of our Common Stock could fall. Such sales may also make it
more difficult for us to sell equity or equity-related securities in the public
market in the future at a time and at a price that we deem appropriate.
In addition, we have registered for resale the 3,250,000 shares of our
Common Stock reserved for issuance under our stock plans. As of December 31,
1999, options to purchase 2,015,250 shares of our Common Stock were outstanding
and will be eligible for sale in the public market from time to time subject to
vesting. The possible sale of a significant number of these shares may cause the
price of our Common Stock to fall.
In addition, the holders of certain shares of our Common Stock have the
right in some circumstances to require us to register their shares under the
Securities Act of 1933, as amended (the "Securities Act") for resale to the
public, while those holders as well as others have the right to include their
shares in any registration statement filed by us.
In addition, some of the managers of our Affiliates have the right under
some circumstances to exchange portions of their interests in our Affiliates for
shares of our Common Stock. Some of these managers also have the right to
include these shares in a registration statement filed by us under the
Securities Act. By exercising their registration rights and causing a large
number of shares to be sold in the public market, these holders may cause the
price of our Common Stock to fall. In addition, any demand to
20
include shares in our registration statements could have an adverse effect on
our ability to raise needed capital.
We and our Affiliates transitioned into the Year 2000 without material
disruption to or adverse effect on our businesses. While our Year 2000 related
remediation efforts are complete, we cannot guarantee that additional Year 2000
issues will not arise (either within our operations or associated with third
party service providers).
ITEM 2. PROPERTIES
Our executive offices are located at Two International Place, 23rd Floor,
Boston, Massachusetts 02110. In Boston, we occupy 10,569 square feet under a
lease that expires in March 2003. Each of our Affiliates also leases office
space in the city or cities in which it conducts business.
In December 1999, we signed a purchase and sale agreement to acquire
property in Prides Crossing, Massachusetts in anticipation of the development of
our future corporate headquarters. We intend to close our acquisition of the
property in the second quarter of the year 2000 and to develop the site within
twenty-four months after closing. We believe this site will provide suitable
capacity for our future business activities.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we and our Affiliates may be parties to various claims,
suits and complaints. Currently, there are no such claims, suits or complaints
that, in our opinion, would have a material adverse effect on our financial
position, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of the year covered by this Annual Report on Form 10-K.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the New York Stock Exchange (symbol: AMG). The
following table sets forth the high and low closing prices as reported on the
New York Stock Exchange composite tape during the last two years.
HIGH LOW
------------ -------------
1999
First Quarter........................................ $33 1/16 $24
Second Quarter....................................... 32 1/4 25
Third Quarter........................................ 31 3/8 24 7/8
Fourth Quarter....................................... 40 7/16 23
1998
First Quarter........................................ $37 3/16 $27 1/4
Second Quarter....................................... 39 3/16 34 1/16
Third Quarter........................................ 37 7/16 13 11/16
Fourth Quarter....................................... 30 3/4 13 11/16
The closing price for the shares on the New York Stock Exchange on
March 23, 2000 was $50.00.
As of March 23, 2000, we had repurchased 681,600 shares of Common Stock
since December 31, 1999 at an average price per share of $37.44 under the share
repurchase program.
As of December 31, 1999 there were 101 stockholders of record. As of
March 23, 2000 there were 85 stockholders of record.
We have not declared a dividend with respect to the periods presented. We
intend to retain earnings to finance investments in new Affiliates, repay
indebtedness, pay interest and income taxes, repurchase our Common Stock when
appropriate, and develop our existing business and do not anticipate paying cash
dividends on our Common Stock in the foreseeable future. Our credit facility
also prohibits us from making dividend payments to our stockholders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources".
22
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
Set forth below are selected financial data for the last five years. This
data should be read in conjunction with, and is qualified in its entirety by
reference to, the financial statements and accompanying notes included elsewhere
in this Form 10-K.
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT AS INDICATED AND PER SHARE
DATA)
STATEMENT OF OPERATIONS DATA
Revenues................................... $14,182 $ 50,384 $ 95,287 $238,494 $518,726
Net income (loss).......................... (2,936) (2,372) (8,368) 25,551 72,188
Earnings per share--diluted................ (2.95) (5.49) (1.02) 1.33 $ 3.18
Average shares outstanding--diluted(1)..... 996 432 8,236 19,223 22,693
OTHER FINANCIAL DATA
Assets under management (at period end, in
millions)................................ $ 4,615 $ 19,051 $ 45,673 $ 57,731 $ 82,041
EBITDA(2).................................. 3,321 10,524 20,044 76,312 166,801
Cash Net Income(3)......................... 1,371 7,596 10,201 45,675 98,318
BALANCE SHEET DATA
Intangible assets(4)....................... $44,485 $ 71,472 $392,573 $490,949 $574,881
Total assets............................... 64,699 101,335 456,990 605,334 909,073
Senior debt................................ 18,400 33,400 159,500 212,500 174,500
Stockholders' equity(1).................... 36,867 36,989 259,740 313,655 477,986
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS FORM 10-K AND IN OUR FUTURE FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION, IN OUR PRESS RELEASES AND IN ORAL STATEMENTS MADE WITH
THE APPROVAL OF AN AUTHORIZED OFFICER, THE WORDS OR PHRASES "WILL LIKELY
RESULT", "ARE EXPECTED TO", "WILL CONTINUE", "IS ANTICIPATED", "BELIEVES",
"ESTIMATE", "PROJECT" OR SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES, INCLUDING THOSE DISCUSSED UNDER THE CAPTION "BUSINESS--CAUTIONARY
STATEMENTS" THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL
EARNINGS AND THOSE PRESENTLY ANTICIPATED OR PROJECTED. WE WISH TO CAUTION
READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS,
WHICH SPEAK ONLY AS OF THE DATE MADE. WE WISH TO ADVISE READERS THAT THE FACTORS
UNDER THE CAPTION "BUSINESS--CAUTIONARY STATEMENTS" COULD AFFECT OUR FINANCIAL
PERFORMANCE AND COULD CAUSE OUR ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER
MATERIALLY FROM ANY OPINIONS OR STATEMENTS EXPRESSED WITH RESPECT TO FUTURE
PERIODS IN ANY CURRENT STATEMENTS.
WE WILL NOT UNDERTAKE AND WE SPECIFICALLY DISCLAIM ANY OBLIGATION TO RELEASE
PUBLICLY THE RESULT OF ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING
STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS
OR TO REFLECT THE OCCURRENCE OF EVENTS, WHETHER OR NOT ANTICIPATED.
- ------------------------
(1) In connection with out initial public offering in November 1997, we raised
$189 million from the sale of 8.7 million shares of Common Stock and
8.0 million shares of preferred stock converted to shares of Common Stock.
In March 1999, we raised $102.3 million from our sale of an additional
4.0 million shares of Common Stock.
(2) As defined by Note(2) on page 12.
(3) As defined by Note(3) on page 12.
(4) Intangible assets have increased with each new investment in an Affiliate.
From our inception through December 31, 1999, we made investments in
fourteen Affiliates.
23
OVERVIEW
We buy and hold equity interests in mid-sized investment management firms
(our "Affiliates") and currently derive all of our revenues from those firms. We
hold investments in 15 Affiliates that in aggregate managed $87.0 billion in
assets at December 31, 1999. Our most recent investments were Rorer
(January 1999), Managers (April 1999) and Frontier (January 2000).
We have a revenue sharing arrangement with each of our Affiliates (other
than Managers) which allocates a specified percentage of revenues (typically
50-70%) for use by management of that Affiliate in paying operating expenses,
including salaries and bonuses (the "Operating Allocation"). The remaining
portion of revenues of each such Affiliate, typically 30-50% (the "Owners'
Allocation"), is allocated to the owners of that Affiliate (including AMG),
generally in proportion to their ownership of the Affiliate. At some Affiliates,
we receive a guaranteed payment for the use of our capital or a license fee
which in each case is paid from that portion of revenues which we refer to as
our Owners' Allocation. One of the purposes of our revenue sharing arrangements
is to provide ongoing incentives for the managers of these Affiliates by
allowing them:
- to participate in their firm's growth through their compensation from the
Operating Allocation,
- to receive a portion of the Owners' Allocation based on their ownership
interest in the Affiliate, and
- to control operating expenses, thereby increasing the portion of the
Operating Allocation which is available for growth initiatives and bonuses
for management of such Affiliate.
Under the revenue sharing arrangements, the managers of our Affiliates have
an incentive to both increase revenues of the Affiliate (thereby increasing the
Operating Allocation and their Owners' Allocation) and to control expenses of
the Affiliate (thereby increasing the excess Operating Allocation).
The revenue sharing arrangements allow us to participate in the revenue
growth of our Affiliates because we receive a portion of the additional revenue
as our share of the Owners' Allocation. However, we participate in that growth
to a lesser extent than the managers of our Affiliates, because we do not share
in the growth of the Operating Allocation.
Under the organizational documents of the Affiliates (other than Managers),
the allocations and distributions of cash to us generally take priority over the
allocations and distributions to the other owners of the Affiliates. This
further protects us if there are any expenses in excess of the Operating
Allocation of an Affiliate. Thus, if an Affiliate's expenses exceed its
Operating Allocation, the excess expenses first reduce the portion of the
Owners' Allocation allocated to the Affiliate's management owners, until that
portion is eliminated, and then reduce the portion allocated to us. Any such
reduction in our portion of the Owners' Allocation is required to be paid back
to us out of future Affiliate management Owners' Allocation. Unlike all other
Affiliates, Managers is not subject to a revenue sharing arrangement since we
own substantially all of the firm. As a result, we participate fully in any
increase or decrease in the revenues or expenses of Managers.
The portion of our Affiliates' revenues which is included in their Operating
Allocation and retained by them to pay salaries, bonuses and other operating
expenses, as well as the portion of our Affiliates' revenues which are included
in their Owners' Allocation and distributed to us and the other owners of the
Affiliates, are included as "revenues" in our Consolidated Statements of
Operations. The expenses of our Affiliates which are paid out of the Operating
Allocation, as well as our holding company expenses which we pay out of the
amounts of the Owners' Allocation which we receive from the Affiliates, are both
included in "operating expenses" on our Consolidated Statements of Operations.
Since Managers is not subject to a revenue sharing arrangement, all revenues and
expenses of Managers are consolidated into the revenues and operating expenses
in our Consolidated Statements of Operations. The portion of our
24
Affiliates' revenues which is allocated to owners of the Affiliates other than
us is included in "minority interest" on our Consolidated Statements of
Operations.
The EBITDA Contribution of an Affiliate represents the Owners' Allocation of
that Affiliate allocated to AMG (or, in the case of Managers, the income
allocated to AMG) before interest, taxes, depreciation and amortization of that
Affiliate. EBITDA Contribution does not include our holding company expenses.
Our revenues are generally derived from the provision of investment
management services for fees by our Affiliates. Investment management fees are
usually determined as a percentage fee charged on periodic values of a client's
assets under management. Certain of the Affiliates bill advisory fees for all or
a portion of their clients based upon assets under management valued at the
beginning of a billing period ("in advance"). Other Affiliates bill advisory
fees for all or a portion of their clients based upon assets under management
valued at the end of the billing period ("in arrears"), while mutual fund
clients are billed based upon daily assets. Advisory fees billed in advance will
not reflect subsequent changes in the market value of assets under management
for that period. Conversely, advisory fees billed in arrears will reflect
changes in the market value of assets under management for that period. In
addition, several of the Affiliates charge performance-based fees to certain of
their clients; these performance-based fees result in payments to the applicable
Affiliate based on levels of investment performance achieved. While the
Affiliates bill performance-based fees at various times throughout the year, the
greatest portion of these fees have historically been billed in the fourth
quarter in any given year. All references to "assets under management" include
assets directly managed as well as assets underlying overlay strategies which
employ futures, options or other derivative securities to achieve a particular
investment objective.
Our level of profitability will depend on a variety of factors including
principally: (i) the level of Affiliate revenues, which is dependent on the
ability of our existing and future Affiliates to maintain or increase assets
under management by maintaining their existing investment advisory relationships
and fee structures, marketing their services successfully to new clients, and
obtaining favorable investment results; (ii) a variety of factors affecting the
securities markets generally, which could potentially result in considerable
increases or decreases in the assets under management at our Affiliates;
(iii) the receipt of Owners' Allocation, which is dependent on the ability of
our existing and future Affiliates to maintain certain levels of operating
profit margins; (iv) the availability and cost of the capital with which we
finance our existing and new investments; (v) our success in attracting new
investments and the terms upon which such transactions are completed; (vi) the
level of intangible assets and the associated amortization expense resulting
from our investments; (vii) the level of expenses incurred for holding company
operations, including compensation for its employees; and (viii) the level of
taxation to which we are subject. In addition, our profitability will depend
upon fees paid on the basis of investment performance at certain of our
Affiliates. Fees based on investment performance are inherently dependent on
investment results, and therefore may vary substantially from year to year. In
particular, performance-based fees have been of an unusual magnitude in recent
years, and may not recur to the same magnitude in future years, if at all. In
addition, while the performance-based fee contracts of our Affiliates apply to
investment management services in a range of investment management styles and
securities market sectors, such contracts may be concentrated in certain styles
and sectors. For example, in each of 1998 and 1999 we benefited from a
concentration of such products in technology sectors which performed well in
those years. To the extent such contracts are concentrated within styles or
sectors, they are subject to the continuing impact of fluctuating securities
prices in such styles and sectors as well as the performance of the relevant
Affiliates.
Assets under management on a historical basis increased by $24.3 billion to
$82.0 billion at December 31, 1999 from $57.7 billion at December 31, 1998. The
increase in assets under management during the year was principally due to
investment performance of $17.4 billion. Assets under management at our new
Affiliates at the time of investment ($4.4 billion at Rorer, $1.7 billion at
Managers) and First Quadrant's purchase of Objective ($1.4 billion) also
contributed to the increase in assets under management. Net
25
client cash flows for directly managed assets increased by $0.5 billion, offset
by a decline in overlay assets (which generally carry lower fees than directly
managed assets) of $1.1 billion for the year.
Our investments have been accounted for using the purchase method of
accounting under which goodwill is recorded for the excess of the purchase price
for the acquisition of interests in Affiliates over the fair value of the net
assets acquired, including acquired client relationships.
As a result of our investments, intangible assets, consisting of acquired
client relationships and goodwill, constitute a substantial percentage of our
consolidated assets. As of December 31, 1999, our total assets were
approximately $909.1 million, of which approximately $186.5 million consisted of
acquired client relationships and $385.4 million consisted of goodwill.
The amortization period for intangible assets for each investment is
assessed individually, with amortization periods for our investments to date
ranging from eight to 28 years in the case of acquired client relationships and
15 to 35 years in the case of goodwill. In determining the amortization period
for intangible assets acquired, we consider a number of factors including: the
firm's historical and potential future operating performance and rate of
attrition among clients; the stability and longevity of existing client
relationships; the firm's recent, as well as long-term, investment performance;
the characteristics of the firm's products and investment styles; the stability
and depth of the firm's management team and the firm's history and perceived
franchise or brand value. We perform a quarterly evaluation of intangible assets
on an investment-by-investment basis to determine whether there has been any
impairment in their carrying value or their useful lives. If impairment is
indicated, then the carrying amount of intangible assets, including goodwill,
will be reduced to their fair values.
While amortization of intangible assets has been charged to the results of
operations and is expected to be a continuing material component of our
operating expenses, management believes it is important to distinguish this
expense from other operating expenses since such amortization does not require
the use of cash. Because of this, and because our distributions from our
Affiliates are based on their Owners' Allocation, we have provided additional
supplemental information in this report for "cash" related earnings, as an
addition to, but not as a substitute for, measures related to net income. Such
measures are (i) EBITDA, which we believe is useful to investors as an indicator
of our ability to service debt, to make new investments and meet working capital
requirements, and (ii) Cash Net Income, which we believe is useful to investors
as another indicator of funds available which may be used to make new
investments, to repay debt obligations, to repurchase shares of our Common Stock
or pay dividends on our Common Stock (although the Company has no current plans
to pay dividends). Cash Net Income has historically been referred to by us as
"EBITDA as adjusted".
RESULTS OF OPERATIONS
SUPPLEMENTAL PRO FORMA INFORMATION
Affiliate operations are included in our historical financial statements
from their respective dates of investment. We consolidate Affiliates when we own
a controlling interest and include in minority interest the portion of capital
and Owners' Allocation owned by persons other than us.
Because we have made investments in each of the periods for which financial
statements are presented, we believe that the operating results for these
periods are not directly comparable. We have provided the following pro forma
data, which should be read with our consolidated financial statements and the
notes to such statements, which are included elsewhere in this report.
26
All amounts below are pro forma for the inclusion of all investments made as
of December 31, 1999 and the Frontier investment completed on January 18, 2000
as if such investments occurred on January 1, 1998.
UNAUDITED PRO FORMA SUPPLEMENTAL INFORMATION
(IN THOUSANDS UNLESS OTHERWISE NOTED)
DECEMBER 31,
-------------------
1998 1999
-------- --------
PRO FORMA ASSETS UNDER MANAGEMENT DATA (IN MILLIONS):
Assets under management--beginning.......................... $ 60,524 $ 68,877
Net client cash flows--directly managed assets.............. 4,127 644
Net client cash flows--overlay assets(1).................... (1,572) (1,142)
Market appreciation......................................... 5,798 18,649
-------- --------
Assets under management--ending............................. $ 68,877 $ 87,028
======== ========
PRO FORMA FINANCIAL DATA:
Revenues.................................................... $321,488 $550,139
Owners' Allocation(2)....................................... 155,624 284,586
EBITDA Contribution(3)...................................... 109,391 202,946
EBITDA(4)................................................... 101,743 185,293
Cash Net Income(5).......................................... 58,351 112,593
RECONCILIATION OF EBITDA CONTRIBUTION TO EBITDA
Total EBITDA Contribution (as above)........................ $109,391 $202,946
Less holding company expenses............................... (7,648) (17,653)
-------- --------
EBITDA(4)................................................... $101,743 $185,293
======== ========
HISTORICAL FINANCIAL DATA:
Cash flow from operating activities......................... $ 45,424 $ 89,119
Cash flow used in investing activities...................... (72,665) (112,939)
Cash flow from financing activities......................... 28,163 54,035
EBITDA(4)................................................... 76,312 166,801
Cash Net Income(5).......................................... 45,674 98,318
- ------------------------
(1) Overlay assets are assets managed subject to strategies which employ
futures, options or other derivative securities to add incremental value to
directly managed portfolios. These strategies generate fees which are
generally at the low end of the range of fees generated in other investment
management strategies.
(2) As defined in "Revenue Sharing Arrangements" on page 6.
(3) As defined by Note(1) on page 11.
(4) As defined by Note(2) on page 12.
(5) As defined by Note(3) on page 12.
27
HISTORICAL
YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO YEAR ENDED DECEMBER 31, 1998
We had net income of $72.2 million for the year ended December 31, 1999
compared to net income of $25.6 million for the year ended December 31, 1998.
The increase in net income resulted primarily from a growth in the EBITDA
Contribution of our Affiliates. This growth resulted from a substantial increase
in performance-based fees earned by several Affiliates (principally Essex), as
well as growth in asset-based fees resulting from positive investment
performance. In addition, the new investments we made in 1998 and 1999
significantly contributed to the growth in EBITDA Contribution. We invested in
Essex in March 1998, DHJA in December 1998, Rorer in January 1999 and Managers
in April 1999 and have included their results from the respective dates of
investment.
Revenues for the year ended December 31, 1999 were $518.7 million, an
increase of $280.2 million over the year ended December 31, 1998. The increase
in revenues resulted from a substantial increase in performance-based fees
earned by several Affiliates, as well as growth in asset-based fees resulting
from positive investment performance and investments in new Affiliates. Revenues
from performance-based fees increased from approximately 18% of total revenues
for the year ended December 31, 1998 to approximately 39% of total revenues for
the year ended December 31, 1999. The increase in performance-based fees is
primarily the result of performance-based fee contracts in place at Essex.
Performance-based fees realized during the year were of an unusual magnitude,
and, as they are inherently dependent on investment results, they may not recur
to the same magnitude in future years.
Operating expenses increased by $160.4 million to $306.1 million for the
year ended December 31, 1999 over the year ended December 31, 1998. Compensation
and related expenses increased by $130.1 million to $217.8 million, amortization
of intangible assets increased by $4.8 million to $22.2 million, selling,
general and administrative expenses increased by $21.6 million to
$53.3 million, and other operating expenses increased by $2.6 million to
$8.9 million. The growth in operating expenses was principally a result of an
increase in Affiliates' Operating Allocation due to a substantial increase in
performance-based fees earned by several Affiliates, growth in asset-based fees
resulting from positive investment performance and investments in new
Affiliates.
Investment and other income increased by $12.0 million to $14.2 million for
the year ended December 31, 1999 over the year ended December 31, 1998,
substantially from our allocation of income from capital maintained in Affiliate
private partnerships.
Minority interest increased by $47.4 million to $86.2 million for the year
ended December 31, 1999 over the year ended December 31, 1998, primarily as a
result of the increase in Affiliates' Owners' Allocation due to a substantial
increase in performance-based fees earned by several Affiliates, growth in
asset-based fees resulting from positive investment performance and investments
in new Affiliates.
Interest expense decreased by $1.8 million to $11.8 million for the year
ended December 31, 1999 over the year ended December 31, 1998. The reduction in
interest expense resulted from repayments of senior bank debt with the net
proceeds from our public offering of Common Stock in March 1999 and cash flow
from ongoing operations, and was partially offset by borrowings related to new
investments. In addition, interest expense decreased due to the favorable impact
of the public offering on our LIBOR margin as well as a favorable interest rate
environment.
Income tax expense was $56.7 million for the year ended December 31, 1999
compared to $17.0 million for the year ended December 31, 1998. The change in
income tax expense is related principally to the increase in income before taxes
in the year ended December 31, 1999.
EBITDA increased by $90.5 million to $166.8 million for the year ended
December 31, 1999 over the year ended December 31, 1998, resulting from a
substantial increase in performance-based fees earned by
28
several Affiliates, growth in asset-based fees resulting from positive
investment performance and investments in new Affiliates.
Cash Net Income increased by $52.6 million to $98.3 million for the year
ended December 31, 1999 over the year ended December 31, 1998 as a result of the
factors affecting net income as described above, with the exception of the
amortization of intangible assets.
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO YEAR ENDED DECEMBER 31, 1997
We had net income of $25.6 million for the year ended December 31, 1998
compared to net income before extraordinary item of $1.6 million for the year
ended December 31, 1997. The increase in net income resulted substantially from
net income from new investments. We invested in Gofen and Glossberg in
May 1997, GeoCapital in September 1997, Tweedy, Browne in October 1997, and
Essex in March 1998 (collectively, the "New Affiliates") and included their
results from the respective dates of investment. Our net loss after
extraordinary item of $8.4 million for the year ended December 31, 1997 resulted
from a $10.0 million extraordinary item, net of related tax benefit, from the
write-off of debt issuance costs related to the early extinguishment of debt.
Revenues for the year ended December 31, 1998 were $238.5 million, an
increase of $143.2 million over the year ended December 31, 1997. Such increase
was primarily a result of the addition of the New Affiliates. Performance-based
fees earned by our Affiliates were approximately 18% of revenues, increasing
$26.8 million to $44.0 million for the year ended December 31, 1998 compared to
$17.2 million for the year ended December 31, 1997, primarily as a result of the
addition of the New Affiliates.
Operating expenses increased by $73.0 million to $145.7 million for the year
ended December 31, 1998 over the year ended December 31, 1997. Compensation and
related expenses increased by $46.1 million to $87.7 million, amortization of
intangible assets increased by $10.8 million to $17.4 million, selling, general
and administrative expenses increased by $12.7 million to $31.6 million, and
other operating expenses increased by $2.6 million to $6.3 million. The growth
in operating expenses was primarily a result of the addition of the New
Affiliates.
Minority interest increased by $26.6 million to $38.8 million for the year
ended December 31, 1998 over the year ended December 31, 1997, primarily as a
result of the addition of the New Affiliates.
Interest expense increased by $5.1 million to $13.6 million for the year
ended December 31, 1998 over the year ended December 31, 1997, as a result of
the increased indebtedness incurred in connection with the investments in the
New Affiliates.
Income tax expense was $17.0 million for the year ended December 31, 1998
compared to $1.4 million for the year ended December 31, 1997. The change in
income tax expense is principally related to the increase in income before taxes
in the year ended December 31, 1998.
EBITDA increased by $56.3 million to $76.3 million for the year ended
December 31, 1998 over the year ended December 31, 1997, primarily as a result
of the inclusion of the New Affiliates.
Cash Net Income increased by $35.5 million to $45.7 million for the year
ended December 31, 1998 over the year ended December 31, 1997 as a result of the
factors affecting net income as described above, before non-cash expenses such
as amortization of intangible assets and depreciation of $20.1 million for the
year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have met our cash requirements primarily through cash generated by
operating activities, bank borrowings, and the issuance of equity securities in
public transactions. We anticipate that we will use cash flow from our operating
activities to repay debt, pay interest and income taxes and to finance our
working capital needs, and we will use bank borrowings and issue equity and debt
securities to finance future
29
investments. Our principal uses of cash have been to make investments, retire
indebtedness, pay income taxes, repurchase shares and support our and our
Affiliates' operating activities. We expect that our principal use of funds for
the foreseeable future will be for additional investments, repayments of debt,
including interest payments on outstanding debt, payment of income taxes,
repurchase of shares, capital expenditures, distributions to management owners
of Affiliates, additional investments in existing Affiliates, including our
purchase of management owners' retained equity, and for working capital
purposes.
At December 31, 1999, we had outstanding borrowings of senior debt under our
credit facility of $174.5 million. In January 2000, we financed our investment
in Frontier with a borrowing under the credit facility. Giving effect to the
Frontier transaction and other borrowing and repayment activity, at March 23,
2000, we had outstanding borrowings under our credit facility of $240.5 million,
and the ability to borrow an additional $89.5 million. We have the option, with
the consent of our lenders, to increase the facility by another $70 million to a
total of $400 million.
Our borrowings under the credit facility are collateralized by pledges of
all of our interests in Affiliates (including all interests which are directly
held by us, as well as all interests which are indirectly held by us through
wholly-owned subsidiaries), which interests represent substantially all of our
assets. Our credit facility contains a number of negative covenants, including
those which generally prevent us and our Affiliates from: (i) incurring
additional indebtedness (other than subordinated indebtedness), (ii) creating
any liens or encumbrances on material assets (with certain enumerated
exceptions), (iii) selling assets outside the ordinary course of business or
making certain fundamental changes with respect to our businesses, including a
restriction on our ability to transfer interests in any majority owned Affiliate
if, as a result of such transfer, we would own less than 51% of such firm, and
(iv) declaring or paying dividends on our Common Stock. Our credit facility
bears interest at either LIBOR plus a margin or the Prime Rate plus a margin. We
pay a commitment fee on the daily unused portion of the facility. In order to
partially offset our exposure to changing interest rates we have entered into
interest rate hedging contracts. See "Interest Rate Hedging Contracts". The
credit facility matures during December 2002.
In order to provide the funds necessary for us to continue to acquire
interests in investment management firms, including our existing Affiliates upon
the management owners' sales of their retained equity to us, it will be
necessary for us to incur, from time to time, additional long-term bank debt
and/or issue equity or debt securities, depending on market and other
conditions. There can be no assurance that such additional financing will be
available or become available on terms acceptable to us.
Net cash flow from operating activities was $89.1 million, $45.4 million and
$16.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The increase in net cash flow from operating activities from 1998
to 1999 resulted from a substantial increase in performance-based fees earned by
several Affiliates, as well as growth in asset-based fees resulting from
positive investment performance. In addition, the new investments made in 1999
contributed to the increase in these cash flows.
Net cash flow used in investing activities was $112.9 million,
$72.7 million and $327.3 million for the years ended December 31, 1999, 1998 and
1997, respectively. Of these amounts, $103.5 million, $66.6 million, and
$325.9 million, respectively, were used to make investments in Affiliates.
In January 1999, we acquired an approximately 65% interest in Rorer, a
Philadelphia based investment adviser. We paid $65 million in cash for our
investment in Rorer. In April 1999, we acquired substantially all of the
interests in Managers. We financed these two investments with borrowings under
our credit facility. In addition, in January 2000, we acquired an approximately
70% interest in Frontier. The investment in Frontier was also financed with a
borrowing under our credit facility.
Net cash flow from financing activities was $54.0 million, $28.2 million and
$327.1 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The principal sources of cash from financing activities have been
borrowings under senior credit facilities and subordinated debt, and our public
offerings. The uses of cash from financing activities during these periods were
for the repayment of debt
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and notes issued as purchase price consideration and for the repurchase of
Common Stock and payment of debt issuance costs.
In March 1999, we completed a public offering of Common Stock. In the
offering, 5,529,954 shares of Common Stock were sold, of which 4,000,000 shares
were sold by the Company and 1,529,954 shares were sold by selling stockholders.
We used the net proceeds from the offering to reduce indebtedness under our
credit facility and did not receive any proceeds from the sale of Common Stock
by the selling stockholders.
In October 1999, our Board of Directors authorized a share repurchase
program (the "Share Repurchase Program") pursuant to which we can repurchase up
to five percent of our issued and outstanding shares of Common Stock in open
market transactions, with the timing of purchases and the amount of stock
purchased determined at our discretion. As of December 31, 1999, we had
repurchased 346,900 shares of Common Stock at an average price per share of
$26.83.
In December 1999, we signed a purchase and sale agreement to acquire
property in Prides Crossing, Massachusetts in anticipation of the development of
our future corporate headquarters. We intend to close our acquisition of the
property in the second quarter of the year 2000 and to develop the site within
twenty-four months after closing.
YEAR 2000
We and our Affiliates transitioned into the Year 2000 without material
disruption to or adverse effect on our businesses. Our Year 2000 related
remediation efforts are complete, although we cannot guarantee that additional
Year 2000 issues will not arise (either within our operations or associated with
third party service providers).
AMG'S HOLDING COMPANY AND AFFILIATES' REMEDIATION EFFORTS
In anticipation of the Year 2000 problem, we modified, upgraded or replaced
computers, software applications and related equipment to the extent required to
minimize the probability of a material disruption to our business. We incurred
$500,000 of costs in remediating the Year 2000 problem in the last four years.
Each of our Affiliates completed its assessment and renovation or replacement of
all non-compatible systems and the subsequent testing of such systems.
OUTSIDE SERVICE PROVIDERS
In preparing for the Year 2000, we closely monitored the progress of all
outsider service providers, and we believe our third party service providers
have resolved all of their Year 2000 related issues. We have to date experienced
no material disruptions in service provider operations as a result of the onset
of the Year 2000 and we have no reason to believe that we will experience any
disruptions as a result of Year 2000 issues in the future. However, as described
above, we cannot guarantee that additional Year 2000 issues will not arise as
associated with third party service providers.
INTEREST RATE SENSITIVITY
Our revenues are derived primarily from fees which are based on the values
of assets managed. Such values are affected by changes in the broader financial
markets which are, in part, affected by changing interest rates. We cannot
predict the effects that interest rates or changes in interest rates may have on
either the broader financial markets or our Affiliates' assets under management
and associated fees.
With respect to our debt financing, we are exposed to potential fluctuations
in the amount of interest expense resulting from changing interest rates. We
seek to offset such exposure in part by entering into interest rate hedging
contracts. See "Interest Rate Hedging Contracts".
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