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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, 1998
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 (IRS Employer
of incorporation or Identification
organization) 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:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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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 $24.625 on
March 26, 1999 on the New York Stock Exchange was $493,458,405. 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 26, 1999:
23,282,559 including 1,492,079 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, 1999.
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
PAGE
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PART I..................................................................................................... 3
ITEM 1. BUSINESS........................................................................................ 3
ITEM 2. PROPERTIES...................................................................................... 20
ITEM 3. LEGAL PROCEEDINGS............................................................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................. 20
PART II.................................................................................................... 21
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................... 21
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA.............................................................. 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION............ 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............ 54
PART III................................................................................................... 55
INCORPORATED BY REFERENCE FROM THE COMPANY'S PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS CURRENTLY SCHEDULED
TO BE HELD ON MAY 25, 1999, TO BE FILED PURSUANT TO REGULATION 14A
PART IV.................................................................................................... 55
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K................................. 55
2
PART I
ITEM 1. BUSINESS
OVERVIEW
We buy and hold equity interests in mid-sized investment management firms
and currently derive all of our revenues from those firms. We refer to firms in
which we have purchased less than 100%, typically less than 80%, as our
"affiliates". We hold investments in 13 affiliates that managed $62.1 billion in
assets at December 31, 1998. Our most recent affiliate investments were in Essex
Investment Management Company, LLC (March 1998); Davis Hamilton Jackson &
Associates, L.P. (December 1998) and Rorer Asset Management, LLC (January 1999).
On January 29, 1999, we also entered into a definitive agreement to acquire
substantially all of the partnership interests in The Managers Funds, L.P.,
which serves as the adviser to a family of ten equity and fixed income no-load
mutual funds. These mutual funds had a total of $1.8 billion in assets under
management at December 31, 1998.
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 of them 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.
The key component of our transaction structure is our purchase of majority
interests in these firms. 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. 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. 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.
The table below depicts the pro forma change in our assets under management
(assuming all 13 of our affiliates were included for the entire periods
presented).
YEAR ENDED DECEMBER
31,
--------------------
1997 1998
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(IN MILLIONS)
Assets under management--beginning........................ $ 35,324 $ 54,961
Net new sales............................................. 12,339 2,001
Market appreciation....................................... 7,298 5,169
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Assets under management--ending........................... $ 54,961 $ 62,131
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We generally seek to acquire interests in investment management firms with
$500 million to $10 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, in the
coming years, a substantial number of investment opportunities will arise as
founders of these firms approach retirement age and begin to plan for
succession. We also anticipate significant additional investment opportunities
in firms
3
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.
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. In general, we try to
initiate our discussions with potential affiliates on an exclusive basis. We do
not actively seek to participate in competitive auction processes or employ
investment bankers or finders. However, we have been competitive in cases where
investment bankers have been involved. Of our 13 affiliates, five were
represented by investment bankers while the remaining eight were transactions
initiated by our management.
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 three years, our
management has visited over 440 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.
4
Descriptions of our most recently completed affiliate investments in Essex
Investment Management Company, LLC ("Essex"), Davis Hamilton Jackson &
Associates, L.P. ("DHJA") and Rorer Asset Management, LLC ("Rorer") are set
forth below.
ESSEX INVESTMENT MANAGEMENT COMPANY, LLC
Essex is a Boston-based investment adviser specializing in investing in
growth equities and fixed income securities employing a fundamental
research-driven approach. Founded in 1976, Essex is led by its founder, Chairman
and Chief Investment Officer, Joseph C. McNay, along with a management group led
by Stephen D. Cutler, President, and Stephen R. Clark, Executive Vice President.
Essex provides investment advisory services to defined benefit plans,
endowments, foundations, partnerships and private individuals and acts as a
subadviser to a mutual fund.
DAVIS HAMILTON JACKSON & ASSOCIATES, L.P.
DHJA is a Houston-based investment adviser which manages equity securities
employing a disciplined growth approach and fixed income instruments. Founded in
1988, the firm is led by its co-founders Robert C. Davis and Jack R. Hamilton,
along with a management group of other investment and client service
professionals, who serve a diversified client base including pension and profit
sharing plans for public and private entities, corporations and Taft-Hartley
accounts, as well as trusts, high net worth individuals and a sub-advised mutual
fund.
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.
AFFILIATE SUPPORT
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, when requested by the management of an affiliate, we provide strategic,
marketing and operational assistance. We believe that our affiliates find these
support services attractive because the services otherwise may not be as
accessible or as affordable to mid-sized investment management firms.
In addition to the diverse industry experience and knowledge of our senior
management, we maintain relationships with many consultants whose specific
expertise enhances our ability to offer a wide range of assistance. Our
initiatives to support our affiliates have included:
- new product development,
- marketing material development,
- institutional sales assistance,
- recruiting,
- compensation evaluation,
- regulatory compliance audits, and
- client satisfaction surveys.
5
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.
One way that 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 July
1998, we structured and financed the acquisition of Sound Capital Partners, LLC
by The Burridge Group LLC, one of our affiliates.
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, a limited liability
company agreement or partnership agreement. The organizational document 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 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.
We retain, however, the authority to prevent specified types of actions
which we believe could adversely affect cash distributions to us. 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, 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
6
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 affiliate in consultation with the managers 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 in proportion
to their ownership interests in that affiliate.
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 all operating expenses of the affiliate,
including in cases involving an increase in expenses, or a 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 the 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 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 the affiliates, the allocations and
distributions of cash to us generally take priority over the allocations and
distributions to the management 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.
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
7
owners can realize a portion of the equity value that they create 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
can do this by transferring purchased interests in the affiliate to more junior
members of its management.
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 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 generally 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.
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
8
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.
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 Rorer
Asset Management, LLC, in which we invested in January 1999. We own a majority
interest in each in our affiliates other than Paradigm.
PRO FORMA
ASSETS UNDER
PRINCIPAL DATE OF MANAGEMENT AS OF
AFFILIATE LOCATION(S) INVESTMENT DECEMBER 31,1998
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(IN MILLIONS)
The Burridge Group LLC ("Burridge")....................... Chicago; Seattle December 1996 $ 1,594
Davis Hamilton Jackson & Associates, L.P. ("DHJA")........ Houston December 1998 3,468
Essex Investment Management Company, LLC ("Essex")........ Boston March 1998 5,558
First Quadrant, L.P.; First Quadrant Limited Pasadena, CA;
(collectively, "First Quadrant")........................ London March 1996 26,615(1)
GeoCapital, LLC ("GeoCapital")............................ New York September 1997 2,543
Gofen and Glossberg, L.L.C. ("Gofen and Glossberg")....... Chicago May 1997 4,280
J.M. Hartwell Limited Partnership ("Hartwell")............ New York May 1994 362
Paradigm Asset Management Company, L.L.C. ("Paradigm").... New York May 1995 2,898
Renaissance Investment Management ("Renaissance")......... Cincinnati November 1995 1,390
Rorer Asset Management, LLC ("Rorer")..................... Philadelphia January 1999 4,400
Skyline Asset Management, L.P. ("Skyline")................ Chicago August 1995 1,161
Systematic Financial Management, L.P. ("Systematic")...... Teaneck, NJ May 1995 1,221
Tweedy, Browne Company LLC ("Tweedy, Browne")............. New York; London October 1997 6,641
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Total................................................. $ 62,131
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(1) Includes directly managed assets of $10.5 billion and $16.1 billion of
assets indirectly managed using overlay strategies which employ futures,
options or other derivative securities to achieve a particular investment
objective. These overlay strategies are intended to add incremental value to
the underlying portfolios, which may or may not be directly managed by First
Quadrant, and generate advisory fees which are generally at the lower end of
the range of those generated by First Quadrant's directly managed
portfolios.
9
THE MANAGERS FUNDS, L.P.
On January 29, 1999, we signed a definitive agreement to purchase
substantially of all the partnership interests in The Managers Funds, L.P.
("Managers") which is being reorganized as The Managers Funds LLC as part of the
transaction. Managers employs an innovative business model whereby it selects
subadvisers for its mutual fund products from a universe of over a thousand
investment managers. The mutual funds advised by Managers are distributed to
retail and institutional clients directly and through intermediaries including
independent investment advisers, 401(k) plan sponsors and alliances, broker-
dealers, major fund marketplaces, and bank trust departments. We believe that
the acquisition of Managers will provide some of our affiliates that have
traditionally focused on institutional clients with an opportunity to reach new
clients through Managers' mutual fund distribution channels. In the transaction,
we will purchase ninety-five percent of the outstanding partnership interests
and become the manager-member of The Managers Funds LLC, while a five percent
interest will remain in the hands of the senior management team. Following the
transaction, the firm will continue to employ its subadviser strategy and will
continue to be operated from its offices in Norwalk, Connecticut. The closing of
this transaction is subject to customary conditions.
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, 1998. All amounts below are pro forma for the inclusion of the
Essex, DHJA and Rorer investments and financing transactions as if such
transactions occurred on January 1, 1998. Except as otherwise indicated, none of
the financial or other information contained in this Form 10-K reflects our
planned acquisition of Managers.
10
PRO FORMA
ASSETS UNDER MANAGEMENT AND EBITDA CONTRIBUTION(1)
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------
ASSETS UNDER PERCENTAGE EBITDA PERCENTAGE
MANAGEMENT OF TOTAL CONTRIBUTION OF TOTAL
------------ ------------- ------------- -------------
(IN (IN
MILLIONS) THOUSANDS)
CLIENT TYPE:
Institutional............................................... $ 47,461 76% $ 48,852 50%
Mutual fund................................................. 4,317 7 24,187 25
High net worth.............................................. 9,255 15 18,008 19
Other....................................................... 1,098 2 5,879 6
------------ --- ------------- ---
Total................................................... $ 62,131 100% $ 96,926 100%
------------ --- ------------- ---
------------ --- ------------- ---
ASSET CLASS:
Equity...................................................... $ 41,578 67% $ 87,264 90%
Fixed income................................................ 4,391 7 5,689 6
Tactical asset allocation................................... 16,162 26 3,973 4
------------ --- ------------- ---
Total................................................... $ 62,131 100% $ 96,926 100%
------------ --- ------------- ---
------------ --- ------------- ---
GEOGRAPHY:
Domestic investments........................................ $ 39,833 64% $ 72,940 75%
Global investments.......................................... 22,298 36 23,986 25
------------ --- ------------- ---
Total................................................... $ 62,131 100% $ 96,926 100%
------------ --- ------------- ---
------------ --- ------------- ---
OTHER PRO FORMA FINANCIAL DATA:
RECONCILIATION OF EBITDA CONTRIBUTION TO EBITDA:
Total EBITDA Contribution (as above)................................................................ $ 96,926
Less holding company expenses....................................................................... (7,648)
----------
EBITDA(2)........................................................................................... $ 89,278
----------
EBITDA as adjusted(3)................................................................................. $ 52,724
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OTHER HISTORICAL CASH FLOW DATA:
Cash flow from operating activities................................................................. $ 45,424
Cash flow used in investing activities.............................................................. (72,665)
Cash flow from financing activities................................................................. 28,163
EBITDA(2)........................................................................................... 76,312
EBITDA as adjusted(3)............................................................................... 45,675
- - ------------------------
(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 each
affiliate's contribution to our ability to service debt, to 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 and EBITDA, 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, as
calculated by us, may not be consistent with computations of EBITDA by other
companies. 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.
(3) EBITDA as adjusted represents earnings after interest expense and income
taxes but before 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. EBITDA as adjusted, as calculated by us, may not be
consistent with computations of EBITDA as adjusted by other companies EBITDA
as adjusted 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.
11
INDUSTRY
ASSETS UNDER MANAGEMENT
The investment management sector is one of the fastest growing sectors in
the financial services industry. According to U.S. Federal Reserve "Flow of
Funds Account" data, from 1991-1997, mutual fund assets under management
(excluding money market funds) grew at a compound annual growth rate of
approximately 24.3%, while the aggregate assets managed on behalf of pension
funds increased at a compound annual growth rate of approximately 11.5%. These
assets, which totaled over $9.5 trillion in 1997, represent only a portion of
the funds available for investment management. In addition, 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 $10 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.
COMPETITION
We operate as an asset management holding company organized to invest 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
12
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 importance 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 and Skyline,
act as advisers or subadvisers 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 subadviser 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 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 Advisors and are members of the National Futures
Association. Finally, Tweedy, Browne is registered under the Exchange Act as a
broker/dealer and, therefore, is 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
13
Management Regulatory Organisation 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).
We anticipate that, subject to a fulfillment of certain conditions, we will
complete our acquisition of The Managers Funds LLC in April 1999. The Managers
Funds LLC will serve as an investment adviser to a family of mutual funds and
also be registered as a broker-dealer, and, as such, will be subject to the
investment adviser, investment company and broker-dealer regulations described
above.
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, 1998, we had 17 employees and our affiliates employed
approximately 412 persons, approximately 410 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 affiliates, and
indirectly as a direct or indirect 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 13 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 five years and had net losses in the first
four years. To date, our growth has come mostly from making new investments.
However, the performance of our existing affiliates is becoming 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
14
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.
On March 3, 1999 we completed our second public offering of Common Stock
which generated $102.3 million of net proceeds which was used to repay
indebtedness. After the application of these proceeds we had $156.2 million of
outstanding debt and $173.8 million available to borrow under our credit
facility. 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 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, 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 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.
At December 31, 1998, our total assets were $605.3 million, of which $490.5
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 nine 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
$21.3 million for the year ended December 31, 1998.
15
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.
The Financial Accounting Standards Board ("FASB") is currently considering a
new approach for all companies that would require all purchased goodwill to be
amortized on a straight-line basis over its useful life, not to exceed 20 years.
The FASB is also considering an approach in which the useful life of goodwill
would be presumed to be 10 years or less, unless sufficient evidence supports a
longer life, not to exceed 20 years. It is not certain whether the FASB's new
approach would apply only to newly purchased goodwill or whether it would apply
to both previously recorded and newly purchased goodwill, however, the FASB
voted to grandfather the accounting for goodwill recorded prior to the effective
date of the final statement in the first quarter of 1999. The final statement on
this issue, which is expected to be issued in the fourth quarter of 2000, may
present a different approach.
We currently amortize goodwill purchased in our 13 investments on a straight
line basis ranging from 15 to 35 years. Any changes in generally accepted
accounting principles ("GAAP") that reduce the period over which we may amortize
goodwill may have an adverse effect on our acquisition strategy and 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 President and Chief
Executive Officer, Sean M. Healey, our Executive Vice President, 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, Tweedy, Browne, our largest affiliate based on revenue, depends
heavily on the services of Christopher H. Browne, William H. Browne and John D.
Spears. These individuals have managed Tweedy, Browne for over 20 years and are
primarily responsible for all of that firm's investment decisions. Although each
of these individuals has entered into an employment agreement with Tweedy,
Browne providing for continued employment until October 2007, these employment
agreements are not a guarantee that these individuals will remain with Tweedy,
Browne 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
16
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, between January 1, 1995 and December 31, 1998, the S&P 500 Index
appreciated at a compound annual rate of approximately 30.5% and the aggregate
assets under management of mutual and pension funds grew at a compound annual
rate of 20.7% during 1995-1997, according to the Federal Reserve Board and 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 investment in Tweedy, Browne represents our single largest investment to
date, with a purchase price of $300 million. Tweedy, Browne's revenues
represented 28% of our pro forma revenues for 1998. Poor financial performance
by Tweedy, Browne would have an adverse effect on our consolidated results of
operations and financial condition.
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 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.
Because we are a holding company, we receive all of our cash from
distributions made to us by our affiliates. All of our affiliates 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
17
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 situations such as the preceding
example, our financial condition and results of operations 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 any 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
18
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 of our 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 other 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 varying 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 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".
The "Year 2000" poses a concern to our business as a result of the fact that
computer applications have historically used the last two digits, rather than
all four digits, to store year data. If left unmodified, these applications
would misinterpret the year 2000 for the year 1900 and would in many cases be
unable to function properly in the Year 2000 and beyond. We cannot be certain
that we or our affiliates will not encounter unforeseen delays or costs in
completing preparations for the Year 2000. For further information concerning
the Year 2000, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Year 2000".
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".
19
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 1,750,000 shares of our
Common Stock reserved for issuance under our stock plans. As of December 31,
1998, options to purchase 1,171,750 shares of our Common Stock were outstanding
and will be eligible for sale in the public market from time to time subject to
vesting and, in the case of some stock options, the expiration of lock-up
agreements. The possible sale of a significant number of the 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 include shares in
our registration statements could have an adverse effect on our ability to raise
needed capital.
ITEM 2. PROPERTIES
Our executive offices are located at Two International Place, 23rd Floor,
Boston, Massachusetts 02110. In Boston, we occupy 8,047 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.
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.
20
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 since our initial public offering on
November 21, 1997.
HIGH LOW
-------- ---------
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
1997
Fourth Quarter (since November 21, 1997)............................... $29 7/8 $24
The closing price for the shares on the New York Stock Exchange on March 26,
1999 was $24 5/8.
As of December 31, 1998 there were 95 stockholders of record. As of March
26, there were 119 stockholders of record.
We have not declared a dividend with respect to the periods presented. 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. 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".
21
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
Set forth below are selected financial data for the five years since
inception, December 29, 1993. 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,
------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT AS INDICATED AND PER
SHARE DATA)
STATEMENT OF OPERATIONS DATA
Revenues............................. $ 5,374 $ 14,182 $ 50,384 $ 95,287 $ 238,494
Operating expenses:
Compensation and related
expenses........................... 3,591 6,018 21,113 41,619 87,669
Amortization of intangible
assets............................. 774 4,174 8,053 6,643 17,417
Depreciation and other
amortization....................... 19 133 932 1,915 2,707
Other operating expenses........... 1,000 2,567 13,115 22,549 37,921
--------- --------- --------- --------- ----------
Total operating expenses......... 5,384 12,892 43,213 72,726 145,714
--------- --------- --------- --------- ----------
Operating income (loss).............. (10) 1,290 7,171 22,561 92,780
Non-operating (income) and expenses:
Investment and other income........ (966) (265) (337) (1,174) (2,251)
Interest expense................... 158 1,244 2,747 8,479 13,603
--------- --------- --------- --------- ----------
(808) 979 2,410 7,305 11,352
--------- --------- --------- --------- ----------
Income before minority interest,
income taxes and extraordinary
item............................... 798 311 4,761 15,256 81,428
Minority interest(1)................. (305) (2,541) (5,969) (12,249) (38,843)
--------- --------- --------- --------- ----------
Income (loss) before income taxes and
extraordinary item................. 493 (2,230) (1,208) 3,007 42,585
Income taxes......................... 699 706 181 1,364 17,034
--------- --------- --------- --------- ----------
Income (loss) before extraordinary
item............................... (206) (2,936) (1,389) 1,643 25,551
--------- --------- --------- --------- ----------
Extraordinary item................... -- -- (983) (10,011) --
--------- --------- --------- --------- ----------
Net income (loss).................... $ (206) $ (2,936) $ (2,372) $ (8,368) $ 25,551
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Net income (loss) per share--basic... $ (0.07) $ (2.95) $ (5.49) $ (3.69) $ 1.45
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Net income (loss) per
share--diluted..................... $ (0.07) $ (2.95) $ (5.49) $ (1.02) $ 1.33
--------- --------- --------- --------- ----------
Average shares outstanding--basic.... 3,030,548 996,144 431,908 2,270,684 17,582,900
Average shares
outstanding--diluted............... 3,030,548 996,144 431,908 8,235,529 19,222,831
OTHER FINANCIAL DATA
Assets under management (at period
end, in millions).................. $ 755 $ 4,615 $ 19,051 $ 45,673 $ 57,731
EBITDA(2)............................ 1,444 3,321 10,524 20,044 76,312
EBITDA as adjusted(3)................ 587 1,371 7,596 10,201 45,675
Cash flow from operating
activities......................... 818 1,292 6,185 16,205 45,424
Cash flow used in investing
activities......................... (6,156) (37,781) (29,210) (327,275) (72,665)
Cash flow from financing
activities......................... 9,509 46,414 15,650 327,112 28,163
BALANCE SHEET DATA
Current assets....................... $ 4,791 $ 16,847 $ 23,064 $ 52,058 $ 95,811
Acquired client relationships, net... 3,482 18,192 30,663 142,875 169,065
Goodwill, net........................ 5,417 26,293 40,809 249,698 321,409
Total assets......................... 13,808 64,699 101,335 456,990 605,334
Current liabilities.................. 2,021 4,111 23,591 18,815 64,617
Senior debt.......................... -- 18,400 33,400 159,500 190,500
Total liabilities.................... 3,925 26,620 60,856 180,771 267,531
Minority interest(1)................. 80 1,212 3,490 16,479 24,148
Preferred stock...................... 10,004 40,008 42,476 -- --
Stockholders' equity................. 9,803 36,867 36,989 259,740 313,655
- - ------------------------
(1) All but one of our affiliates are majority-owned subsidiaries (we own less
than a 50% interest in Paradigm). Minority interest consists of that portion
of each affiliate's operating results and net assets that are owned by
minority owners and is reflected as a reduction of net income and
stockholders' equity, respectively.
(2) As defined by Note (2) on page 11.
(3) As defined by Note (3) on page 11.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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 EXECUTIVE 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.
IN ADDITION, THE DISCUSSION AND ANALYSIS WITH RESPECT TO THE YEAR 2000 ISSUE
IN THIS FORM 10-K, INCLUDING (i) OUR EXPECTATIONS OF WHEN YEAR 2000 COMPLIANCE
WILL ACTUALLY BE ACHIEVED, (ii) ESTIMATES OF THE COSTS INVOLVED IN ACHIEVING
YEAR 2000 READINESS AND (iii) OUR BELIEF THAT THE COSTS WILL NOT BE MATERIAL TO
OPERATING RESULTS, ARE BASED ON MANAGEMENT'S ESTIMATES WHICH, IN TURN, ARE BASED
UPON A NUMBER OF ASSUMPTIONS REGARDING FUTURE EVENTS, INCLUDING THIRD PARTY
MODIFICATION PLANS AND THE AVAILABILITY OF CERTAIN RESOURCES. THERE CAN BE NO
GUARANTEE THAT THESE ESTIMATES WILL BE ACHIEVED, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM MANAGEMENT'S ESTIMATES. SPECIFIC FACTORS WHICH MIGHT CAUSE SUCH
MATERIAL DIFFERENCES WITH RESPECT TO THE YEAR 2000 ISSUE INCLUDE, BUT ARE NOT
LIMITED TO, THE FAILURE OF THIRD PARTY PROVIDERS TO ACHIEVE REPRESENTED OR
STATED LEVELS OF YEAR 2000 COMPLIANCE, AVAILABILITY AND COST OF PERSONNEL
TRAINED IN THIS AREA, THE ABILITY TO LOCATE AND CORRECT ALL RELEVANT COMPUTER
CODES, AND SIMILAR UNCERTAINTIES.
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.
OVERVIEW
We acquire equity interests in mid-sized investment management firms and
currently derive all of our revenues from those firms. We refer to firms in
which we have purchased less than 100% (typically less than 80%) as our
"affiliates". We hold investments in 13 affiliates that managed $62.1 billion in
assets at December 31, 1998. Our most recent affiliate investments were in Essex
(March 1998), DHJA (December 1998) and Rorer (January 1999). On January 29,
1999, we entered into a definitive agreement to acquire substantially all of the
partnership interests in the Managers Funds, L.P. ("Managers"), which serves as
the adviser to a family of ten equity and fixed income no-load mutual funds.
These mutual funds had a total of $1.8 billion in assets under management at
December 31, 1998.
We have a revenue sharing arrangement with each of our affiliates 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
the 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. One of the purposes of our revenue sharing
arrangements is to provide ongoing incentives for the managers of the 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 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).
23
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 the affiliates, the allocations and
distributions of cash to us generally take priority over the allocations and
distributions to the management 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.
The portion of each affiliate's revenues which is included in its Operating
Allocation and retained by it to pay salaries, bonuses and other operating
expenses, as well as the portion of each affiliate's revenues which is included
in its Owners' Allocation and distributed to us and the other owners of the
affiliate, are both included as "revenues" on our Consolidated Statements of
Operations. The expenses of each affiliate 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.
The portion of each affiliate's Owners' Allocation 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 before interest, taxes, depreciation and
amortization of that affiliate. EBITDA Contribution does not include our holding
company expenses.
The affiliates' revenues are derived from the provision of investment
management services for fees. 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"). 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 if specified levels of investment performance are achieved. 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 affiliates 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) the receipt of Owners'
Allocation, which is dependent on the ability of the affiliates and future
affiliates to maintain certain levels of operating profit margins; (iii) the
availability and cost of the capital with which we finance our investments; (iv)
our success in attracting new investments and the terms upon which such
transactions are completed; (v) the level of intangible assets and the
associated amortization expense resulting from our investments; (vi) the level
of expenses incurred for holding company operations, including compensation for
its employees; and (vii) the level of taxation to which we are subject, all of
which are, to some extent, dependent on factors which are not in our control,
such as general securities market conditions.
Assets under management on a historical basis increased by $12.0 billion to
$57.7 billion at December 31, 1998 from $45.7 billion at December 31, 1997, in
part due to the investments made in Essex and DHJA during 1998. Excluding the
initial assets under management at the dates of these investments, assets
24
under management increased by $3.8 billion as a result of $3.6 billion in market
appreciation and $159.6 million from net client cash flows. Excluding assets
managed using "overlay" strategies (which generally carry fees at the lower end
of the range of fees for directly managed assets), assets increased by $1.7
billion for the year. Assets indirectly managed using such "overlay" strategies
declined by $1.6 billion for the year.
Our investments have been accounted for under 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 the series of our investments, intangible assets, consisting
of acquired client relationships and goodwill, constitute a substantial
percentage of our consolidated assets and our results of operations have
included increased charges for amortization of those intangible assets. As of
December 31, 1998, our total assets were approximately $605.3 million, of which
approximately $169.1 million consisted of acquired client relationships and
$321.4 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 nine 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 affiliate-by-affiliate 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, management has 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) EBITDA as adjusted, 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.
RESULTS OF OPERATIONS
SUPPLEMENTAL PRO FORMA INFORMATION
Affiliate operations are included in our historical financial statements
from their respective dates of acquisition. 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. Substantially all of the changes in our
income, expense and balance sheet categories result from the inclusion of the
acquired businesses from the dates of our investments in them. Therefore, 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.
All amounts below are pro forma for the inclusion of the Essex, DHJA and
Rorer investments as if such transactions occurred on January 1, 1998.
25
UNAUDITED PRO FORMA SUPPLEMENTAL INFORMATION
DECEMBER 31,
1998
---------------
(IN MILLIONS)
Assets under Management--at period end:
Tweedy, Browne............................................................ $ 6,641
Other Affiliates.......................................................... 55,490
-------
Total....................................................................... $ 62,131
-------
-------
YEAR ENDED
DECEMBER 31, 1998
(IN THOUSANDS)
-----------------
Revenues:
Tweedy, Browne............................................................................... $ 78,243
Other Affiliates............................................................................. 200,084
--------
Total...................................................................................... $ 278,327
--------
--------
Owners' Allocation(1):
Tweedy, Browne............................................................................... $ 54,097
Other Affiliates............................................................................. 88,936
--------
Total...................................................................................... $ 143,033
--------
--------
EBITDA Contribution(2):
Tweedy, Browne............................................................................... $ 39,284
Other Affiliates............................................................................. 57,642
--------
Total...................................................................................... $ 96,926
--------
--------
OTHER PRO FORMA FINANCIAL DATA:
RECONCILIATION OF EBITDA CONTRIBUTION TO EBITDA
Total EBITDA Contribution (as above)......................................................... $ 96,926
Less holding company expenses................................................................ (7,648)
--------
EBITDA(3)...................................................................................... $ 89,278
--------
EBITDA as adjusted(4).......................................................................... $ 52,724
- - ------------------------------------------------------------------------------------------------------------------
OTHER HISTORICAL CASH FLOW DATA:
Cash flow from operating activities.......................................................... $ 45,424
Cash flow used in investing activities....................................................... (72,665)
Cash flow from financing activities.......................................................... 28,163
EBITDA(3).................................................................................... 76,312
EBITDA as adjusted(4)........................................................................ 45,675
- - ------------------------
(1) As defined in "Revenue Sharing Arrangements" on page 6.
(2) As defined by Note(1) on page 11.
(3) As defined by Note(2) on page 11.
(4) As defined by Note(3) on page 11.
26
The table below depicts the pro forma change in our assets under management
giving effect to all investments made as of December 31, 1998 and the Rorer
investment completed on January 6, 1999 as if such investments occurred on
January 1, 1998.
YEAR ENDED
DECEMBER
31, 1998
-----------
(IN
MILLIONS)
Assets under management--beginning...................................... $ 54,961
Net new sales........................................................... 2,001
Market appreciation..................................................... 5,169
-----------
Assets under management--ending......................................... $ 62,131
-----------
-----------
HISTORICAL
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 remained 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.
EBITDA as adjusted 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
27
above, before non-cash expenses such as amortization of intangible assets and
depreciation of $20.1 million for the year ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996
We had a net loss of $8.4 million for the year ended December 31, 1997
compared to a net loss of $2.4 million for the year ended December 31, 1996. The
net loss for the year ended December 31, 1997 resulted primarily from the
extraordinary item of $10.0 million, net of related tax benefit, from the early
extinguishment of debt. Before extraordinary item, net income was $1.6 million
for the year ended December 31, 1997 compared to a net loss of $1.4 million for
the year ended December 31, 1996.
Total revenues for the year ended December 31, 1997 were $95.3 million, an
increase of $44.9 million or 89% over the year ended December 31, 1996. We
invested in Burridge in December 1996, Gofen and Glossberg in May 1997,
GeoCapital in September 1997 and Tweedy, Browne in October 1997, and included
their results from their respective purchase dates. In addition, we invested in
First Quadrant in March 1996 and its results were included in the results for
the year ended December 31, 1996 from its purchase date. Revenues from these
investments accounted for $43.1 million of the increase in revenues from 1996 to
1997 while revenues from other existing affiliates increased by $1.8 million to
$26.7 million. Performance-based fees, primarily earned by First Quadrant,
increased by $4.0 million to $17.2 million for the year ended December 31, 1997
compared to $13.2 million for the year ended December 31, 1996.
Compensation and related expenses increased by $20.5 million to $41.6
million for the year ended December 31, 1997 from $21.1 million for the year
ended December 31, 1996. The inclusion of the First Quadrant, Burridge, Gofen
and Glossberg, GeoCapital and Tweedy, Browne investments accounted for $19.3
million of this increase while the remainder of the increase was attributable to
the increased compensation costs of AMG personnel, including the cost of new
hires.
Amortization of intangible assets decreased by $1.5 million to $6.6 million
for the year ended December 31, 1997 from $8.1 million for the year ended
December 31, 1996. Amortization of intangible assets increased by $3.1 million
as a result of the inclusion of the First Quadrant, Burridge, and Gofen and
Glossberg, GeoCapital and Tweedy, Browne investments, which increase was offset
by an impairment loss of $4.6 million taken on the Systematic investment during
1996 with no similar item in 1997.
Selling, general and administrative expenses increased by $8.0 million to
$18.9 million for the year ended December 31, 1997 from $10.9 million for the
year ended December 31, 1996. The First Quadrant, Burridge, Gofen and Glossberg,
GeoCapital and Tweedy, Browne investments accounted for $6.0 million of this
increase and the remainder was primarily due to increases in our selling,
general and administrative expenses as well as our other affiliates.
Other operating expenses increased by approximately $1.3 million to $3.6
million for the year ended December 31, 1997 from $2.3 million for the year
ended December 31, 1996, primarily due to the results of operations of the new
affiliates described above.
Minority interest increased by $6.2 million to $12.2 million for the year
ended December 31, 1997 from $6.0 million for the year ended December 31, 1996.
Of this increase, $5.4 million was as a result of the addition of new affiliates
as described above and the remainder was due to the Owners' Allocation growth at
our existing affiliates.
Interest expense increased $5.8 million to $8.5 million for the year ended
December 31, 1997 from $2.7 million for the year ended December 31, 1996 as a
result of the increased indebtedness incurred in connection with the investments
described above.
Income tax expense was $1.4 million for the year ended December 31, 1997
compared to $181,000 f