Attached files
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EX-32.2 - EXHIBIT 32.2 - Artio Global Investors Inc. | dp15511_ex3202.htm |
EX-31.2 - EXHIBIT 31.2 - Artio Global Investors Inc. | dp15511_ex3102.htm |
EX-32.1 - EXHIBIT 32.1 - Artio Global Investors Inc. | dp15511_ex3201.htm |
EX-31.1 - EXHIBIT 31.1 - Artio Global Investors Inc. | dp15511_ex3101.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
__________________
FORM
10-Q
__________________
(Mark
One)
[x]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2009
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 1-34457
Artio
Global Investors Inc.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
13-6174048
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
330
Madison Ave.
New
York, NY
|
10017
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
(212)
297-3600
|
||
(Registrant’s
telephone number, including area code)
|
||
Former
name, former address and former fiscal year, if changed since last
report
|
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 is required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. o Yes
x
No
Indicate
by checkmark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). x
Yes
o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Non-accelerated
filer x (Do not check if a smaller reporting
company)
|
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). o Yes
x
No
As of
October 30, 2009, there were 44,406,924 shares outstanding of the
registrant’s Class A common stock, par value $0.001 per share, and Class C
common stock, par value $0.01 per share.
Artio
Global Investors Inc.
Table of
Contents
PART
I – FINANCIAL INFORMATION
|
|
Item
1. Financial Statements (unaudited)
|
|
Consolidated
Statements of Financial Position as of September 30, 2009 and December 31,
2008 (audited)
|
2
|
Consolidated
Statements of Income for the three months ended September 30, 2009 and
2008
|
3
|
Consolidated
Statements of Income for the nine months ended September 30, 2009 and
2008
|
4
|
Consolidated
Statements of Changes in Equity for the nine months ended September 30,
2009 and the year ended
December
31, 2008 (audited)
|
5
|
Consolidated
Statements of Cash Flows for the nine months ended September 30, 2009 and
2008
|
6
|
Notes
to Consolidated Financial Statements
|
7
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
17
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
33
|
Item
4. Controls and Procedures
|
34
|
PART
II –OTHER INFORMATION
|
|
Item
1. Legal Proceedings
|
34
|
Item
1A. Risk Factors
|
34
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
34
|
Item
3. Defaults Upon Senior Securities
|
35
|
Item
4. Submission of Matters to a Vote of Security Holders
|
35
|
Item
5. Other Information
|
35
|
Item
6. Exhibits
|
36
|
Signatures
|
37
|
1
PART I –
FINANCIAL INFORMATION
Item
1. Financial Statements.
ARTIO
GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated
Statements of Financial Position
As
of
|
||||||||
(in
thousands)
|
September
30, 2009
(unaudited)
|
December
31, 2008
(audited)
|
||||||
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 165,189.5 | $ | 86,563.0 | ||||
Marketable
securities, at fair value
|
8,124.4 | 71,329.5 | ||||||
Fees
receivable and accrued fees, net of allowance for doubtful
accounts
|
51,492.2 | 54,799.1 | ||||||
Deferred
taxes, net
|
42,114.6 | 92,702.3 | ||||||
Property
and equipment, net
|
8,269.6 | 9,833.2 | ||||||
Other
assets
|
5,212.5 | 4,248.5 | ||||||
Total
assets
|
$ | 280,402.8 | $ | 319,475.6 | ||||
LIABILITIES
AND EQUITY
|
||||||||
Accrued
compensation and benefits
|
$ | 43,582.1 | $ | 268,924.7 | ||||
Accounts
payable and accrued expenses
|
10,916.5 | 9,372.4 | ||||||
Accrued
income taxes payable
|
840.3 | 1,238.6 | ||||||
Due
to GAM Holding Ltd.
|
220,805.8 | 1,311.4 | ||||||
Payable
under tax receivable agreement
|
32,651.9 | — | ||||||
Other
liabilities
|
4,971.4 | 5,383.4 | ||||||
Total
liabilities
|
313,768.0 | 286,230.5 | ||||||
Commitments
and contingencies (Notes 7 and 11)
|
||||||||
Common
stock
|
234.6 | 420.0 | ||||||
Additional
paid-in capital
|
582,547.8 | 17,930.0 | ||||||
Retained
earnings (deficit)
|
(605,984.2 | ) | 14,895.1 | |||||
Total
stockholders’ equity (deficit)
|
(23,201.8 | ) | 33,245.1 | |||||
Non-controlling
interests
|
(10,163.4 | ) | — | |||||
Total equity
(deficit)
|
(33,365.2 | ) | 33,245.1 | |||||
Total
liabilities and equity
|
$ | 280,402.8 | $ | 319,475.6 |
See
accompanying notes to unaudited consolidated financial statements.
2
ARTIO
GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated
Statements of Income
(Unaudited)
Three
Months Ended September 30,
|
||||||||
(in
thousands, except per share information)
|
2009
|
2008
|
||||||
Revenues
and other operating income:
|
||||||||
Investment
management fees
|
$ | 83,476.8 | $ | 107,551.5 | ||||
Net
gains (losses) on securities held for deferred
compensation
|
976.9 | (1,017.5 | ) | |||||
Foreign
currency gains (losses)
|
34.2 | (5.8 | ) | |||||
Total
revenues and other operating income
|
84,487.9 | 106,528.2 | ||||||
Expenses:
|
||||||||
Employee
compensation and benefits:
|
||||||||
Salaries,
incentive compensation and benefits
|
22,390.5 | 23,460.7 | ||||||
Allocation
of Class B profits interests
|
12,190.7 | 19,992.7 | ||||||
Change
in redemption value of Class B profits interests
|
230,571.8 | 16,920.0 | ||||||
Tax receivable
agreement
|
97,908.6 | — | ||||||
Employee
compensation and benefits
|
363,061.6 | 60,373.4 | ||||||
Shareholder
servicing and marketing
|
4,502.1 | 6,107.5 | ||||||
General
and administrative
|
15,227.9 | 12,992.8 | ||||||
Total
expenses
|
382,791.6 | 79,473.7 | ||||||
Operating
income (loss) before income tax expense
|
(298,303.7 | ) | 27,054.5 | |||||
Non-operating
income:
|
||||||||
Interest
income, net of interest expense
|
108.8 | 548.9 | ||||||
Net
gains on marketable securities
|
12.9 | 28.2 | ||||||
Other income
(loss)
|
— | (21.3 | ) | |||||
Total
non-operating income
|
121.7 | 555.8 | ||||||
Income
(loss) before income tax expense
|
(298,182.0 | ) | 27,610.3 | |||||
Income
taxes
|
113,979.7 | 11,330.1 | ||||||
Net
income (loss)
|
(412,161.7 | ) | 16,280.2 | |||||
Net
income attributable to non-controlling interests
|
261.4 | — | ||||||
Net
income (loss) attributable to Artio Global Investors
|
$ | (412,423.1 | ) | $ | 16,280.2 | |||
Per
share information:
|
||||||||
Basic
net income (loss) attributable to Artio Global Investors
|
$ | (9.81 | ) | $ | 0.39 | |||
Diluted
net income (loss) attributable to Artio Global Investors
|
$ | (9.81 | ) | $ | 0.39 | |||
Weighted
average shares used to calculate per share information:
|
||||||||
Basic
|
42,052.3 | 42,000.0 | ||||||
Diluted
|
42,052.3 | 42,000.0 | ||||||
Dividends
per basic share declared
|
$ | 4.83 | $ | — |
See
accompanying notes to unaudited consolidated financial statements.
3
ARTIO
GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated
Statements of Income
(Unaudited)
Nine
Months Ended September 30,
|
||||||||
(in
thousands, except per share information)
|
2009
|
2008
|
||||||
Revenues
and other operating income:
|
||||||||
Investment
management fees
|
$ | 216,053.0 | $ | 351,058.8 | ||||
Net
gains (losses) on securities held for deferred
compensation
|
1,689.1 | (1,618.5 | ) | |||||
Foreign
currency gains (losses)
|
65.8 | (27.5 | ) | |||||
Total
revenues and other operating income
|
217,807.9 | 349,412.8 | ||||||
Expenses:
|
||||||||
Employee
compensation and benefits:
|
||||||||
Salaries,
incentive compensation and benefits
|
57,307.5 | 76,315.0 | ||||||
Allocation
of Class B profits interests
|
33,662.5 | 63,983.4 | ||||||
Change
in redemption value of Class B profits interests
|
266,109.8 | 53,353.0 | ||||||
Tax
receivable agreement
|
97,908.6 | — | ||||||
Employee
compensation and benefits
|
454,988.4 | 193,651.4 | ||||||
Shareholder
servicing and marketing
|
11,710.4 | 18,832.6 | ||||||
General
and administrative
|
32,805.8 | 47,657.7 | ||||||
Total
expenses
|
499,504.6 | 260,141.7 | ||||||
Operating
income (loss) before income tax expense
|
(281,696.7 | ) | 89,271.1 | |||||
Non-operating
income:
|
||||||||
Interest
income, net of interest expense
|
310.7 | 2,325.6 | ||||||
Net
gains (losses) on marketable securities
|
(522.1 | ) | (351.4 | ) | ||||
Other income
(loss)
|
— | (21.3 | ) | |||||
Total
non-operating income (loss)
|
(211.4 | ) | 1,952.9 | |||||
Income
(loss) before income tax expense
|
(281,908.1 | ) | 91,224.0 | |||||
Income
taxes
|
121,854.0 | 43,321.8 | ||||||
Net
income (loss)
|
(403,762.1 | ) | 47,902.2 | |||||
Net
income attributable to non-controlling interests
|
261.4 | — | ||||||
Net
income (loss) attributable to Artio Global Investors
|
$ | (404,023.5 | ) | $ | 47,902.2 | |||
Per
share information:
|
||||||||
Basic
net income (loss) attributable to Artio Global Investors
|
$ | (9.62 | ) | $ | 1.14 | |||
Diluted
net income (loss) attributable to Artio Global Investors
|
$ | (9.62 | ) | $ | 1.14 | |||
Weighted
average shares used to calculate per share information:
|
||||||||
Basic
|
42,017.4 | 42,000.0 | ||||||
Diluted
|
42,017.4 | 42,000.0 | ||||||
Dividends
per basic share declared
|
$ | 5.16 | $ | 1.95 |
See
accompanying notes to unaudited consolidated financial statements.
4
ARTIO
GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated
Statements of Changes in Equity
(in
thousands, except per
share information)
|
Number
of Class A Common Shares Outstanding
|
Class
A Common Stock
|
Number
of Class B Common Shares Outstanding
|
Class
B Common Stock
|
Number
of Class C Common Shares Outstanding
|
Class
C Common Stock
|
Additional
Paid-in Capital
|
Retained
Earnings
|
Stock-holders’
Equity
|
Non-
controlling
Interests
|
Total
Equity
|
|||||||||||||||||||||||||||||||||
Balance
as of
January
1, 2008
|
— | $ | — | — | $ | — | 42,000.0 | $ | 420.0 | $ | 17,930.0 | $ | 70,743.8 | $ | 89,093.8 | $ | — | $ | 89,093.8 | |||||||||||||||||||||||||
Net
income
|
— | — | — | — | — | — | — | 61,151.3 | 61,151.3 | — | 61,151.3 | |||||||||||||||||||||||||||||||||
Dividends
($2.79 per share)
|
— | — | — | — | — | — | — | (117,000.0 | ) | (117,000.0 | ) | — | (117,000.0 | ) | ||||||||||||||||||||||||||||||
Balance
as of December 31, 2008 (audited)
|
— | — | — | — | 42,000.0 | 420.0 | 17,930.0 | 14,895.1 | 33,245.1 | — | 33,245.1 | |||||||||||||||||||||||||||||||||
Net
income
|
— | — | — | — | — | — | — | (404,023.5 | ) | (404,023.5 | ) | 261.4 | (403,762.1 | ) | ||||||||||||||||||||||||||||||
Reclassification
of liability awards
|
— | — | — | — | — | — | 565,908.6 | — | 565,908.6 | — | 565,908.6 | |||||||||||||||||||||||||||||||||
Issuance
of Class B common stock (see Note 3 )
|
— | — | 18,000.0 | 18.0 | — | — | — | — | 18.0 | — | 18.0 | |||||||||||||||||||||||||||||||||
Net
benefit from step-up in tax basis
(see Note
4)
|
— | — | — | — | — | — | 5,762.1 | — | 5,762.1 | — | 5,762.1 | |||||||||||||||||||||||||||||||||
Initial
public offering
|
25,000.0 | 25.0 | — | — | — | — | 614,875.0 | — | 614,900.0 | — | 614,900.0 | |||||||||||||||||||||||||||||||||
Holdings
units converted into Class A common stock and retirement of Class B common
stock (see Note 2)
|
2,400.0 | 2.4 | (2,400.0 | ) | (2.4 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Stock
repurchases
|
(2,400.0 | ) | (2.4 | ) | — | — | (22,600.0 | ) | (226.0 | ) | (614,671.6 | ) | — | (614.900.0 | ) | — | (614,900.0 | ) | ||||||||||||||||||||||||||
Issuance
and amortization of share-based payments
|
6.9 | — | — | — | — | — | 268.9 | — | 268.9 | — | 268.9 | |||||||||||||||||||||||||||||||||
Distribution
to GAM Holding Ltd., including dividends of $5.16 per
share
|
— | — | — | — | — | — | (17,950.0 | ) | (216,855.8 | ) | (234,805.8 | ) | — | (234,805.8 | ) | |||||||||||||||||||||||||||||
Establishment
of non-controlling interests
|
— | — | — | — | — | — | 10,424.8 | — | 10,424.8 | (10,424.8 | ) | — | ||||||||||||||||||||||||||||||||
Balance
as of September 30, 2009 (unaudited)
|
25,006.9 | $ | 25.0 | 15,600.0 | $ | 15.6 | 19,400.0 | $ | 194.0 | $ | 582,547.8 | $ | (605,984.2 | ) | $ | (23,201.8 | ) | $ | (10,163.4 | ) | $ | (33,365.2 | ) |
See
accompanying notes to unaudited consolidated financial statements.
5
ARTIO
GLOBAL INVESTORS INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(Unaudited)
Nine
Months Ended September 30,
|
||||||||
(in
thousands)
|
2009
|
2008
|
||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | (403,762.1 | ) | $ | 47,902.2 | |||
Adjustments:
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
2,404.7 | 2,108.3 | ||||||
Deferred
compensation
|
268,877.4 | 62,162.2 | ||||||
Deferred
income taxes
|
89,001.7 | (25,163.7 | ) | |||||
Share-based
compensation
|
268.9 | — | ||||||
Interest
accrued on marketable securities and accretion and amortization of premium
and discount
|
267.8 | 110.3 | ||||||
(Gains)/losses
on marketable securities and securities held for deferred
compensation
|
(1,167.0 | ) | 1,969.9 | |||||
Changes
in assets and liabilities:
|
||||||||
Fees
receivable and accrued fees, net of allowance for doubtful
accounts
|
3,306.9 | 14,209.4 | ||||||
Other
assets
|
(968.4 | ) | 263.4 | |||||
Accrued
compensation and benefits
|
71,688.6 | (29,404.9 | ) | |||||
Accounts
payable and accrued expenses
|
1,478.4 | (2,870.6 | ) | |||||
Due
to GAM Holding Ltd.
|
(1,307.2 | ) | 5,588.7 | |||||
Accrued
income taxes payable
|
(398.3 | ) | (3,789.6 | ) | ||||
Other
liabilities
|
(411.9 | ) | 250.0 | |||||
Net
cash provided by operating activities
|
29,279.5 | 73,335.6 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchase
of marketable securities and securities held for deferred
compensation
|
(2,528.8 | ) | (88,415.8 | ) | ||||
Proceeds
from sales or maturities of marketable securities and securities held for
deferred compensation
|
66,633.1 | 39,719.1 | ||||||
Purchase
of fixed assets
|
(841.1 | ) | (2,591.7 | ) | ||||
Net
cash provided by (used in) investing activities
|
63,263.2 | (51,288.4 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from initial public offering
|
614,900.0 | — | ||||||
Repurchase
and retirement of Class C common stock
|
(555,869.6 | ) | — | |||||
Repurchase
of Class A common stock
|
(59,030.4 | ) | — | |||||
Issuance
of Class B common stock
|
18.0 | — | ||||||
Dividends
paid
|
(14,000.0 | ) | (82,000.0 | ) | ||||
Net
cash used by financing activities
|
(13,982.0 | ) | (82,000.0 | ) | ||||
Effect
of exchange rates on cash
|
65.8 | (27.5 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
78,626.5 | (59,980.3 | ) | |||||
Cash
and cash equivalents:
|
||||||||
Beginning
of period
|
86,563.0 | 133,447.1 | ||||||
End
of period
|
$ | 165,189.5 | $ | 73,466.8 | ||||
Cash
paid during period for:
|
||||||||
Income
taxes, net of refunds
|
$ | 34,001.4 | $ | 73,906.7 |
Non-cash
transaction – Prior to the initial public offering, a dividend and capital
distribution payable to GAM Holding Ltd. totaling $220.8 million was declared,
of which $180.7 million is payable within 45 days of September 30, 2009, and
$40.1 million is payable by September 30, 2010.
See
accompanying notes to unaudited consolidated financial statements.
6
ARTIO
GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
Note 1. Background and Basis of Presentation
Artio
Global Investors Inc. (“Investors” or the “Company”) and subsidiaries
(collectively, “we,” “us” or “our”) comprises Investors and its three
subsidiaries, Artio Global Holdings LLC (“Holdings”), an intermediate holding
company, Artio Global Management LLC (“Artio Global”), a registered investment
adviser under the Investment Advisers Act of 1940, and Artio Capital Management
LLC (“ACM”). Holdings is approximately 74% owned by Investors, 13% owned by
Richard Pell, our Chairman, Chief Executive Officer and Chief Investment Officer
(“Pell”), and 13% owned by Rudolph-Riad Younes, our Head of International Equity
(“Younes,” together with Pell, the “Principals”). The Principals’ interests are
reflected in the Consolidated Financial Statements as non-controlling interests.
Artio Global and ACM are wholly owned subsidiaries of Holdings.
Artio
Global is our primary operating entity and a registered investment adviser that
provides investment management services to institutional and mutual fund
clients. It manages and advises the Artio Global Funds (the “Funds”), which are
U.S. registered investment companies; commingled institutional investment
vehicles; separate accounts; and sub-advisory accounts. Assets under management
are invested primarily outside of the U.S.
The
Consolidated Financial Statements are prepared in conformity with U.S. Generally
Accepted Accounting Principles (“US GAAP”). These principles require management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities (including contingent liabilities), revenues and expenses as of the
date of the Consolidated Financial Statements.
Our
interim consolidated financial statements are unaudited. Interim results reflect
all normal recurring adjustments that are, in the opinion of management,
necessary for a fair presentation of the results. Revenues and other operating
income and Net
income can vary significantly from quarter to quarter due to the nature
of our business activities. The financial results of interim periods may not be
indicative of the financial results for the entire year. As part of the
preparation of the interim consolidated financial statements, we performed an
evaluation of subsequent events occurring after the consolidated statement of
financial position date of September 30, 2009, through November 12,
2009, the date the interim consolidated financial statements were
issued.
These
statements should be read in conjunction with our consolidated financial
statements and related notes as of December 31, 2008 and for the three years
then ended, in our registration statement on Form S-1 (File No. 333-149178), as
filed with the U.S. Securities and Exchange Commission on February 12, 2008, as
amended. (See Note 2. Initial
Public Offering and Changes in the Principals’ Interests.)
Note
2. Initial Public Offering and Changes in the Principals’ Interests
Prior to
September 29, 2009, Investors was a wholly owned subsidiary of GAM Holding Ltd.
(formerly known as Julius Baer Holding Ltd.), a Swiss corporation (“GAM”). On
September 29, 2009, we completed an initial public offering (“IPO”) of 25.0
million shares of Investors’ Class A common stock (“Class A common stock”) at a
price of $26.00 per share, before the underwriting discount, for net proceeds of
$614.9 million. The net proceeds were used to repurchase and retire, at the IPO
price, net of the underwriting discount, an aggregate of 22.6 million shares of
Investors’ Class C common stock (“Class C common stock”) from GAM, and to
repurchase 1.2 million shares of Class A common stock from each of the
Principals.
On
October 5, 2009, the underwriters exercised their option to purchase additional
shares of Class A common stock at the IPO price, net of the underwriting
discount, resulting in the issuance of 2,644,156 shares of Class A common stock.
The net proceeds were used to repurchase and retire, at the IPO price, net of
the underwriting discount, 2,644,156 shares of Class C common stock from
GAM.
Following
the IPO and the exercise of the underwriters’ option, GAM owned approximately
27.9% of the outstanding shares of our capital stock through its ownership of
the outstanding shares of Class C common stock.
Prior to
the IPO, each of the Principals transferred a portion of his existing Class B
profits interest in Artio Global to a Grantor Retained Annuity Trust (“GRAT”)
for which such Principal serves as settlor and trustee. Each Principal is
7
ARTIO
GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
deemed
the beneficial holder of the securities held by his GRAT, and references to
securities held by a Principal will, unless otherwise indicated, include
references to securities held in his GRAT.
Each
Principal had a 15% Class B profits interest in Artio Global, which was
accounted for as compensation for financial accounting purposes. Immediately
prior to the IPO, each Principal exchanged his Class B profits interest for a
15% non-voting Class A membership interest in Holdings (“New Class A Units”).
Each Principal also purchased, at par value, nine million shares of voting,
non-participating, Investors’ Class B common stock (“Class B common stock”). In
addition, the Principals entered into a tax receivable agreement with the
Company (see Note 4. Tax
Receivable Agreement). Upon the exchange of their Class B profits
interests for vested New Class A Units, the fair value of the Class B profits
interests was adjusted to reflect the offering price of Class A common stock,
and totaled $468.0 million. This resulted in an additional compensation charge
related to the redemption value of the Class B profits interests of $215.8
million that was recorded concurrent with the IPO and represents the difference
between the fair value of $468.0 million and the related liability immediately
prior to the IPO of $252.2 million ($201.9 million as of December 31, 2008). In
addition, we recorded a compensation charge of $97.9 million relating to the
estimated present value of the tax receivable agreement (see Note 4. Tax Receivable
Agreement). As the Principals’ new economic interests will be accounted
for as equity, the adjusted liability of $565.9 million was reclassified into
Additional paid-in
capital on our Consolidated Statement of Financial Position. The related
deferred tax asset of $110.3 million ($88.3 million as of December 31, 2008) was
de-recognized and charged to expense. The Principals’ New Class A Units,
representing an approximate 26% interest in Holdings, are accounted for by us as
non-controlling
interests.
Note
3. Stockholders’ Equity
Class A
common stock entitles holders to one vote per share and economic rights
(including rights to dividends and distributions upon liquidation). Class B
common stock entitles holders to one vote per share but have no economic rights
(including no rights to dividends and distributions upon liquidation). Class C
common stock entitles holders to an aggregate vote equal to the greater of the
number of votes they would be entitled to on a one-vote-per-share basis and 20%
of the combined voting power of all classes of common stocks. Class C common
stock also entitles holders to economic rights (including rights to dividends
and distributions upon liquidation) equal to the economic rights of each share
of Class A common stock. If GAM transfers any shares of its Class C common stock
to anyone other than any of its subsidiaries, or to us, such shares will
automatically convert to an equal number of shares of Class A common stock. In
addition, on the second anniversary of the IPO, any outstanding shares of Class
C common stock will automatically convert to Class A common stock on a
one-to-one basis. Prior to the IPO, GAM also entered into a shareholder
agreement under which it agreed that, to the extent it has voting power as
holder of Class C common stock in excess of that which it would be entitled to
on a one-vote-per-share basis, it will on all matters vote the shares
representing such excess on the same basis and in the same proportion as the
votes cast by the holders of Class A and Class B common stock.
Class
A
Common
Stock
|
Class
B
Common
Stock
|
Class
C
Common
Stock
|
||||||||||
As
of September 30, 2009:
|
||||||||||||
Authorized
|
500,000,000 | 50,000,000 | 210,000,000 | |||||||||
Reserved
under 2009 Stock Incentive Plan
|
9,693,076 | — | — | |||||||||
Par
value
|
$ | 0.001 | $ | 0.001 | $ | 0.01 |
8
ARTIO
GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
The table
below sets forth the number of shares of Class A, Class B and Class C common
stock issued and outstanding following the restructuring transactions and use of
proceeds associated with the IPO. (See Note 2. Initial Public Offering and
Changes in Principals’ Interests.)
(in
thousands)
|
Class
A
Common
Stock
|
Class
B
Common
Stock
|
Class
C
Common
Stock
|
|||||||||
As
of December 31, 2008:
|
||||||||||||
GAM
|
— | — | 42,000.0 | |||||||||
Activity:
|
||||||||||||
Shares
issued to the Principals(a)
|
— | 18,000.0 | — | |||||||||
Shares
issued to the public(b)
|
25,000.0 | — | — | |||||||||
Stock
issued to independent directors(c)
|
6.9 | — | — | |||||||||
Exchange
by the Principals(d)
|
2,400.0 | (2,400.0 | ) | — | ||||||||
Repurchase
from GAM(e)
|
— | — | (22,600.0 | ) | ||||||||
Repurchase
from the Principals(d)
|
(2,400.0 | ) | — | — | ||||||||
As
of September 30, 2009
|
25,006.9 | 15,600.0 | 19,400.0 |
(a)
|
Represents
the 18.0 million shares of non-participating Class B common stock issued
to the Principals (see Note
2. Initial Public Offering and Changes in the Principals’
Interests). These shares have voting, but no economic
rights.
|
(b)
|
Represents
the 25.0 million shares of Class A common stock that were issued to the
public in connection with the IPO.
|
(c)
|
Represents
the 6,924 shares of fully-vested Class A common stock (subject to transfer
restrictions) that were awarded to our independent directors in connection
with the IPO. The table does not reflect 2.1 million restricted stock
units (see Note
9. Share-Based Payments) awarded to certain employees (other than
the Principals), each of which represents the right to receive one share
of Class A common stock upon the lapse of restrictions. These restrictions
generally lapse pro rata over a five-year
period.
|
(d)
|
Represents
the effect of the issuance of 1.2 million shares of Class A common stock
to each of the Principals upon exchange of an equivalent number of New
Class A Units and subsequent repurchase of such Class A common stock by us
with a portion of the net proceeds from the IPO. Upon the exchange of New
Class A Units for Class A common stock, corresponding shares of Class B
common stock were canceled.
|
(e)
|
Represents
the 22.6 million shares of Class C common stock we repurchased from GAM
and retired with a portion of the net proceeds from the
IPO.
|
On
October 5, 2009, the underwriters exercised their option to purchase additional
shares of Class A common stock at the IPO price, less the underwriting discount,
resulting in the issuance of 2,644,156 shares of Class A common stock, the net
proceeds of which were used to repurchase and retire an equivalent number of
shares of Class C common stock from GAM.
Note
4. Tax Receivable Agreement
The
Principals (whose ownership represents the non-controlling interests in
Holdings) entered into an exchange agreement which provides that they may
exchange their New Class A Units for shares of Class A common stock. Upon such
an exchange, Holdings expects to make an election under Section 754 of the
Internal Revenue Code of 1986, as amended, to increase the tax basis of its
tangible and intangible assets. The amortization of the increased basis is
available to reduce future taxable income generally over a 15-year
period.
We
entered into a tax receivable agreement with the Principals under which they are
entitled to receive 85% of the tax benefits realized by us in our tax returns as
a result of the increases in tax basis created by each Principal’s exchange
described above.
As a
consequence, we recorded a compensation expense for financial accounting
purposes of $97.9 million representing the present value of the future tax
benefits that would have been realized had the Principals exchanged all of their
shares at the IPO price, and assuming that we have future taxable income to
utilize the increased tax deductions.
Actual
recognition of a deferred tax benefit in our consolidated financial statements
occurs at the time of exchange. Immediately following the IPO, the Principals
each exchanged approximately 13.3% of their New Class A Units. A deferred tax
asset of $38.4 million was established for the estimated future tax benefits
resulting from the
9
ARTIO
GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
amortization
of the increased basis. Of this amount, $32.7 million, representing 85% of the
benefits, has been recorded in Payable under tax receivable
agreement, and the remaining 15% is recorded in Additional paid-in capital on
our Consolidated Statement of Financial Position. Future adjustments to the
deferred tax asset resulting from changes in the underlying assumptions will be
reflected within Payable under
tax receivable agreement (85%) on our Consolidated Statement of Financial
Position and in Income taxes
(15%) on
our Consolidated Statement of Income.
Amounts
payable to the Principals under the tax receivable agreement are generally
payable approximately 60 days following the filing of our income tax returns.
Should the deductions resulting from the increased depreciation and amortization
allowable to us due to the step-up in tax basis be subsequently disallowed, we
would not be able to recover amounts already paid to the
Principals.
Note
5. Related Party Activities
We engage
in transactions with GAM and other affiliates in the ordinary course of
business.
Affiliate
Transactions – Mutual and Offshore Funds
We earn
management fees and incentive income from the Funds, which are considered
related parties, as Artio Global manages the operations and makes investment
decisions for these Funds. Artio Global provides investment management services
to the Funds pursuant to investment management agreements with the Funds, which
are subject to review and approval by their boards of directors or trustees.
Artio Global also derives investment management revenue from advising or
sub-advising certain offshore funds sponsored by affiliates of GAM. Revenues
related to these services are included in Investment management fees in
the Consolidated Statement of Income as follows:
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
(in
thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Funds
investment management fees
|
$ | 46,732.4 | $ | 64,635.5 | $ | 122,100.7 | $ | 212,104.5 | ||||||||
Advisory
and sub-advisory investment management fees on offshore funds(a)
|
1,148.7 | 1,431.2 | 3,255.3 | 4,735.9 |
(a)
|
Investment
management fees of $0.6 million for the three months ended September 30,
2009, $0.6 million for the three months ended September 30, 2008, $1.8
million for the nine months ended September 30, 2009, and $1.9 million for
the nine months ended September 30, 2008, were related to funds sponsored
by GAM.
|
Fees
receivable related to investment management fees are included in Fees receivable and accrued fees,
net of allowance for doubtful accounts in the Consolidated Statement of
Financial Position as follows:
(in
thousands)
|
September
30, 2009
|
December
31, 2008
|
||||||
Funds
investment management fees
|
$ | 16,139.1 | $ | 14,231.2 | ||||
Advisory
and sub-advisory investment management fees on offshore funds(a)
|
1,056.5 | 1,060.7 |
(a)
|
Fees
receivable related to funds sponsored by GAM were $0.4 million as of
September 30, 2009 and $0.5 million as of December 31,
2008.
|
Prior to
the IPO, we had a licensing fee arrangement with the parent for the use of its
name in our products and marketing strategies. These licensing fees were $2.7
million for the nine months ended September 30, 2009, and were $5.7 million for
the nine months ended September 30, 2008. This arrangement has been
terminated.
10
ARTIO
GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
Note
6. Marketable Securities, at Fair Value
We carry
our marketable securities portfolio at fair value using a valuation hierarchy
based on the transparency of the inputs to the valuation techniques used to
measure fair value. Classification within the hierarchy is based upon the lowest
level of input that is significant to the fair value measurement. The valuation
hierarchy contains three levels: (i) valuation inputs comprising unadjusted
quoted market prices for identical assets or liabilities in active markets
(“Level 1”); (ii) valuation inputs comprising quoted prices for identical assets
or liabilities in markets that are not active, quoted market prices for similar
assets and liabilities in active markets, and other observable inputs directly
or indirectly related to the asset or liability being measured (“Level 2”); and
(iii) valuation inputs that are unobservable and are significant to the fair
value measurement (“Level 3”).
Our
marketable securities and cash equivalents as of September 30, 2009, are valued
using prices as follows:
(in
thousands)
|
Marketable
Securities
|
Cash
Equivalents
|
Total
|
|||||||||
Level
1
|
$ | 8,107.0 | $ | — | $ | 8,107.0 | ||||||
Level
2
|
— | — | — | |||||||||
Level
3
|
17.4 | — | 17.4 | |||||||||
Total
|
$ | 8,124.4 | $ | — | $ | 8,124.4 |
Our
marketable securities and cash equivalents as of December 31, 2008, are valued
using prices as follows:
(in
thousands)
|
Marketable
Securities
|
Cash
Equivalents
|
Total
|
|||||||||
Level
1
|
$ | 71,314.9 | $ | 71,116.6 | $ | 142,431.5 | ||||||
Level
2
|
— | — | — | |||||||||
Level
3
|
14.6 | — | 14.6 | |||||||||
Total
|
$ | 71,329.5 | $ | 71,116.6 | $ | 142,446.1 |
The
change in Level 3 securities is as follows:
(in
thousands)
|
September
30, 2009
|
September
30, 2008
|
||||||
Beginning
of year
|
$ | 14.6 | $ | 10.0 | ||||
Unrealized
gains
|
2.8 | 7.8 | ||||||
End
of period
|
$ | 17.4 | $ | 17.8 |
Marketable
securities as of September 30, 2009, consist of the following:
(in
thousands)
|
Fair
Value
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
||||||||||||
U.S.
government and agency instruments:
|
||||||||||||||||
Due
5 - 10 years
|
$ | 413.9 | $ | 437.8 | $ | — | $ | (23.9 | ) | |||||||
Artio
Global Funds
|
7,693.1 | 8,525.4 | — | (832.3 | ) | |||||||||||
Other
investments
|
17.4 | 10.0 | 7.4 | — | ||||||||||||
Total
|
$ | 8,124.4 | $ | 8,973.2 | $ | 7.4 | $ | (856.2 | ) |
11
ARTIO
GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
Marketable
securities as of December 31, 2008, consist of the following:
(in
thousands)
|
Fair
Value
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
||||||||||||
U.S.
government and agency instruments:
|
||||||||||||||||
Due
within 1 year
|
$ | 60,375.2 | $ | 60,277.3 | $ | 97.9 | $ | — | ||||||||
Due
5 - 10 years
|
5,028.3 | 4,587.6 | 440.7 | — | ||||||||||||
Artio
Global Funds
|
5,911.4 | 8,594.9 | — | (2,683.5 | ) | |||||||||||
Other
investments
|
14.6 | 10.0 | 4.6 | — | ||||||||||||
Total
|
$ | 71,329.5 | $ | 73,469.8 | $ | 543.2 | $ | (2,683.5 | ) |
Unrealized
gains (losses) and realized gains (losses) were recorded in Net gains (losses) on marketable
securities and Net
gains (losses) on securities held for deferred compensation on our
Consolidated Statement of Income, as follows:
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
(in
thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
U.S.
government and agency and other securities:
|
||||||||||||||||
Unrealized
gains (losses)
|
$ | (24.7 | ) | $ | 58.7 | $ | (559.7 | ) | $ | (226.1 | ) | |||||
Realized
gains (losses)
|
37.6 | (30.5 | ) | 37.6 | (125.3 | ) | ||||||||||
Net
gains (losses) on marketable securities
|
$ | 12.9 | $ | 28.2 | $ | (522.1 | ) | $ | (351.4 | ) | ||||||
Artio
Global Funds:
|
||||||||||||||||
Unrealized
gains (losses)
|
$ | 976.9 | $ | (1,020.0 | ) | $ | 1,851.2 | $ | (1,447.9 | ) | ||||||
Realized
gains (losses)
|
— | 2.5 | (162.1 | ) | (170.6 | ) | ||||||||||
Net
gains (losses) on securities held for deferred
compensation
|
$ | 976.9 | $ | (1,017.5 | ) | $ | 1,689.1 | $ | (1,618.5 | ) |
Note
7. Debt
In
September 2009, Holdings entered into a $110.0 million credit facility
consisting of a $60.0 million three-year term credit facility and a $50.0
million three-year revolving credit facility.
In
October 2009, we borrowed $60.0 million under the term credit facility. The
interest associated with the $60.0 million borrowing is LIBOR plus 300 basis
points, which was initially set at 3.28406%, and will reset on the date that is
three months following the borrowing date. The amortization schedule will
require quarterly principal payments of 7.5% in both years two and three, with a
final payment of 40% at maturity. There is no remaining capacity under the term
credit facility. A portion of the $60.0 million borrowing is being used to fund
payments to GAM and the Principals. The balance of the $60.0 million borrowing
may also be used for working capital needs and to potentially provide seed
capital to fund future investment products.
The $50.0
million revolving credit facility may be used primarily for working capital
needs. Borrowings under the revolving credit facility bear interest at a rate
equal to, at our option, (i) LIBOR plus a range of 300 to 400 basis points or
(ii) the base rate (as defined in the credit facility agreement) plus a range of
200 to 300 basis points. The interest rate will float and reset at certain
intervals. There were no borrowings under the revolving credit facility during
the period.
The
spread to LIBOR or the base rate is correlated to the consolidated leverage
ratio as prescribed within the credit facility agreement. Our current spread to
LIBOR and the base rate is 300 basis points and 200 basis points, respectively.
These spreads could increase if our consolidated leverage ratio exceeds
1.0x.
12
ARTIO
GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
The
covenants in the credit facility agreement require compliance with the following
financial ratios (each in accordance with the definitions (including earnings
before interest, taxes, depreciation and amortization (“EBITDA”)) in the credit
facility agreement), to be calculated on a consolidated basis at the end of each
fiscal quarter:
·
|
maintenance
of a maximum consolidated leverage ratio of less than or equal to 2.00x
(calculated as the ratio of consolidated funded indebtedness plus the
remaining amount of a deferred payment to GAM of $40.1 million, which
is payable by September 30, 2010, to consolidated EBITDA for the last six
months multiplied by two); and
|
·
|
maintenance
of a minimum consolidated interest coverage ratio of greater than or equal
to 4.00x (calculated as the ratio of consolidated EBITDA for the last six
months to consolidated interest charges for such
period).
|
The credit facility agreement also
contains customary affirmative and negative covenants, including limitations on
indebtedness, liens, cash dividends and fundamental corporate changes. As of
September 30, 2009, Holdings was in compliance with all such
covenants.
Note
8. Class B Profits Interests
In 2004,
each Principal was granted a Class B, non-voting profits interest in Artio
Global, which entitled each of them to receive 15% of the profits (30% in the
aggregate) of our asset management business, as defined in Artio Global’s
operating agreement. The allocation of such profits interests was expensed as
incurred and included in Employee compensation and
benefits on the Consolidated Statement of Income for financial accounting
purposes. The liability for these interests was $34.1 million as of December 31,
2008. These Class B profits interests were exchanged for New Class A Units in
connection with the IPO. The remaining balance of $17.8 million payable to the
Principals is expected to be paid within 45 days after September 30, 2009, and
is included within Accrued
compensation and benefits on our Consolidated
Statement of Financial Position.
Under the
Artio Global operating agreement, we were required to repurchase the Class B
profits interests upon the occurrence of certain events. The repurchase price
was computed utilizing a model based on the average profitability of Artio
Global and the average price-earnings multiple of the common stock of GAM. The
benefits were to vest ratably over a ten-year period ending in 2014. The
Principals exchanged their Class B profits interests for vested New Class A
Units. We recorded the obligation associated with the full value of the Class B
profits interests as a liability at fair value in Accrued compensation and
benefits in the Consolidated Statements of Financial Position, and
recognized the expense as Employee compensation and
benefits in the Consolidated Statement of Income. The fully vested value
as of the date of exchange was determined from the offering price of the stock
(see Note 2. Initial Public
Offering and Changes in Principals’ Interests). The redemption value and
liabilities of this obligation were as follows:
(in
thousands)
|
Redemption
Value
|
Liabilities
|
Unvested
Balance
|
|||||||||
September
30, 2009
|
$ | — | $ | — | $ | — | ||||||
December
31, 2008
|
504,725.0 | 201,890.3 | 302,834.7 |
Subsequent
to the IPO, the Principals hold New Class A Units. These interests are
represented as Non-controlling
interests in the consolidated financial statements.
Note
9. Share-Based Payments
In
September 2009, the Board of Directors of Investors approved the Artio Global
Investors Inc. 2009 Stock Incentive Plan (the “Plan”), and reserved 9.7 million
shares of Class A common stock for share awards. Under the Plan, the Board of
Directors is authorized to grant incentive stock options, non-qualified stock
options, stock appreciation rights, restricted stock awards, performance awards
and other stock-based awards to Directors, officers and other employees of, and
consultants to, Investors and its affiliates. On September 29, 2009, we made
grants of
13
ARTIO
GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
restricted
stock units (“RSUs”) to certain employees (other than the Principals), which
generally vest over a five-year period from the date of the grant. The weighted average fair value of the
RSUs at the date of the grant was $26.25, which was the closing price of the
Class A common stock on the grant date.
Awards
under the Plan have been granted as follows:
Fair
Value*
|
Shares
|
|||||||
Available
for grant as of September 29, 2009
|
9,700,000 | |||||||
Fully-vested
shares granted to independent directors subject to transfer
restrictions
|
$ | 26.25 | (6,924 | ) | ||||
Unvested
RSUs granted to certain employees (other than the
Principals)
|
$ | 26.25 | (2,147,132 | ) | ||||
Available
for grant as of September 30, 2009
|
7,545,944 |
*Based on
closing price of grant date.
Approximately
$54.4 million (2,071,266 shares) of the granted RSUs will vest pro rata, on an
annual basis, over a five-year period from the date of the grant, and
approximately $2.0 million (75,866 shares) will vest no later than February
2010. Compensation expense associated with the amortization of these awards will
be recorded in Salaries,
incentive compensation and benefits in our Consolidated Statement of
Income.
Upon the vesting of RSUs, a
corresponding number of New Class A Units are issued to
Investors.
Note
10. Earnings Per Share (“EPS”)
Basic and
diluted EPS from continuing operations were calculated using the
following:
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
(in
thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Net
income (loss) attributable to Artio Global Investors Inc.
|
$ | (412,423.1 | ) | $ | 16,280.2 | $ | (404,023.5 | ) | $ | 47,902.2 | ||||||
Weighted
average shares for basic EPS
|
42,052.3 | 42,000.0 | 42,017.4 | 42,000.0 | ||||||||||||
Dilutive
potential shares from grants of RSUs(a)
|
— | — | — | — | ||||||||||||
Weighted
average shares for diluted EPS
|
42,052.3 | 42,000.0 | 42,017.4 | 42,000.0 |
(a) The
RSUs were anti-dilutive for the three- and nine-month periods ended September
30, 2009.
Note
11. Commitments and Contingencies
There are
no claims against us that are considered probable or reasonably possible of
having a material effect on our cash flows, results of operations or financial
position.
Note
12. Income Taxes
We are a
‘C’ Corporation under the Internal Revenue Code of 1986, as amended (the
“Code”), and liable for Federal, state and local taxes on the income derived
from our economic interest in Holdings. Holdings is a limited liability company
that is treated as a partnership for tax purposes, and as such is not subject to
Federal or state income taxes. Holdings is subject to the New York City
Unincorporated Business Tax (“UBT”).
14
ARTIO
GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
Income taxes reflect not only
the portion attributable to our stockholders but also the portion of New York
City UBT attributable to non-controlling interests. A summary of the provisions
for income taxes is as follows:
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
(in
thousands)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Current:
|
||||||||||||||||
Federal
|
$ | 12,594.1 | $ | 17,153.8 | $ | 27,716.2 | $ | 49,511.3 | ||||||||
State
and local
|
(2,248.6 | ) | 581.7 | 5,136.1 | 18,974.2 | |||||||||||
Total
|
10,345.5 | 17,735.5 | 32,852.3 | 68,485.5 | ||||||||||||
Deferred:
|
||||||||||||||||
Federal
|
71,983.0 | (7,318.8 | ) | 61,791.6 | (20,069.1 | ) | ||||||||||
State
and local
|
31,651.2 | 913.4 | 27,210.1 | (5,094.6 | ) | |||||||||||
Total
|
103,634.2 | (6,405.4 | ) | 89,001.7 | (25,163.7 | ) | ||||||||||
Income
tax expense
|
$ | 113,979.7 | $ | 11,330.1 | $ | 121,854.0 | $ | 43,321.8 |
Taxes are
computed using the asset and liability method. Deferred income taxes reflect the
net tax effect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes.
Net
deferred tax assets are comprised of the following:
(in
thousands)
|
September
30, 2009
|
December
31, 2008
|
||||||
Deferred
tax assets:
|
||||||||
Deferred
compensation - Class B profits interests(a)
|
$ | — | $ | 88,316.5 | ||||
Deferred
compensation - other
|
1,397.7 | 1,117.6 | ||||||
Depreciation
and amortization
|
1,017.2 | 764.5 | ||||||
Provisions
and other
|
1,295.5 | 2,503.7 | ||||||
Step-up of tax basis(b)
|
38,404.2 | — | ||||||
Total
deferred tax assets
|
42,114.6 | 92,702.3 | ||||||
Less:
valuation allowance
|
— | — | ||||||
Net
deferred tax asset
|
$ | 42,114.6 | $ | 92,702.3 |
(a)
|
As a
result of the Principals' exchange of their Class B profits interests for
New Class A Units, the Principals’ ownership interests were reclassified
to equity for financial accounting purposes and the related deferred tax
asset was de-recognized.
|
(b)
|
Under
the tax receivable agreement, 85% of the estimated future tax benefit is
payable to the Principals.
|
The exchange by the Principals of a
portion of their New Class A Units for 2.4 million shares of Class A common
stock (see Note 4. Tax
Receivable Agreement) has
allowed us to make an election to step up our tax basis in accordance with
Section 754 of the Code. The amortization expense resulting from this
step-up is deductible for tax purposes generally over a 15-year period. Based on
the exchange date, this election gave rise to a $38.4 million deferred tax asset
and a corresponding $32.7 million liability to the Principals under the tax
receivable agreement. Based on our history of profitability and taxable
income, we assessed whether the deferred tax asset would be realizable and
determined that the benefit would more likely than not be
realized. Accordingly, no valuation allowance is
required.
15
ARTIO
GLOBAL INVESTORS INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
A reconciliation between the Federal statutory tax rate of 35% and the effective tax rates are as follows:
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
(in
percentages)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Federal
statutory rate
|
35 | % | 35 | % | 35 | % | 35 | % | ||||||||
State
and local, net of Federal benefit, and other
|
9 | 4 | 8 | 9 | ||||||||||||
Permanent
differences:
|
||||||||||||||||
Compensation
expenses - fully vested Class B profits interests
|
(32 | ) | — | (40 | ) | — | ||||||||||
Compensation
expenses - tax receivable agreement
|
(14 | ) | — | (14 | ) | — | ||||||||||
De-recognition
of deferred tax asset
|
(35 | ) | — | (31 | ) | — | ||||||||||
Other
|
(1 | ) | 2 | (1 | ) | 3 | ||||||||||
Total
|
(38 | )% | 41 | % | (43 | )% | 47 | % |
Other
permanent differences consist of the non-deductible portion of meals,
entertainment, gifts and certain costs related to the IPO.
Holdings
is subject to New York City UBT, of which a substantial portion is credited
against our tax liability.
For the
three months and nine months ended September 30, 2009 and 2008, there were no
material charges relating to interest and penalties. As of September 30, 2009,
and December 31, 2008, we did not have any unrecognized tax
benefits.
Tax years
2006 to the present are open for examination by Federal, state and local tax
authorities. We are not currently under examination by any major tax
jurisdiction.
Note
13. Recently Issued Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 167, Amendments to FASB Interpretation
No. 46(R). SFAS No. 167 is effective for us in 2010. SFAS 167 gives
additional guidance on determining whether an entity is a variable interest
entity and requires ongoing assessments of whether an enterprise is the primary
beneficiary of a variable interest entity. We are evaluating the effect of SFAS
167 on our financial statements.
16
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”).
Introduction
Artio
Global Investors Inc. (“Investors” or the “Company”) and subsidiaries
(collectively, “we,” “us” or “our”) comprises Investors and its three
subsidiaries, Artio Global Holdings LLC (“Holdings”), an intermediate holding
company, Artio Global Management LLC (“Artio Global”), a registered investment
adviser under the Investment Advisers Act of 1940, and Artio Capital Management
LLC (“ACM”). Holdings is approximately 74% owned by Investors, 13% owned by
Richard Pell, our Chairman, Chief Executive Officer and Chief Investment Officer
(“Pell”), and 13% owned by Rudolph-Riad Younes, our Head of International Equity
(“Younes,” together with Pell, the “Principals”). The Principals’ interests are
reflected in the Consolidated Financial Statements as non-controlling interests.
Artio Global and ACM are wholly owned subsidiaries of Holdings.
Our
MD&A is provided in addition to the accompanying consolidated financial
statements and footnotes to assist readers in understanding our results of
operations, financial position and cash flows. The MD&A is organized as
follows:
·
|
General Overview.
Beginning on page 18, we provide a summary of our overall business and
discuss our recent initial public offering (“IPO”) and the economic
environment.
|
·
|
Key Performance
Indicators. Beginning on page
19, we discuss some of the operating and financial indicators that guide
management’s review of our
performance.
|
·
|
Assets Under
Management. Beginning on page 21, we provide a detailed discussion
of our assets under management (“AuM”), which is a major driver of our
operating revenues and key performance
indicators.
|
·
|
Revenues and Other Operating
Income. Beginning on page 26, we discuss our revenue and other
operating income compared to the corresponding periods a year
ago.
|
·
|
Operating
Expenses. Beginning on page
27, we discuss our operating expenses compared to the corresponding
periods a year ago.
|
·
|
Liquidity and Capital
Resources. Beginning on page 30, we analyze our working capital as
of September 30, 2009, and December 31, 2008, and cash flows for the first
nine months of 2009 and 2008. Also included is a discussion of the amount
of financial capacity available to help fund our future
activities.
|
·
|
New Accounting Pronouncements
Not Yet Adopted. Beginning on page 32, we discuss new accounting
pronouncements.
|
·
|
Cautionary Note Regarding
Forward-Looking Statements. Beginning on page 32, we describe the
risks and uncertainties that could cause actual results to differ
materially from those discussed in forward-looking statements set
forth in this MD&A relating to our financial results, operations,
business plans and prospects. Such forward-looking statements are based on
management’s current expectations about future events, which are
inherently susceptible to uncertainty and changes in
circumstances.
|
Our
results for the three and nine months ended September 30, 2009, include a
significant amount of expenses that are either non-recurring or relate to
agreements that were terminated in connection with the IPO. These expenses
include, but are not limited to, Allocation of Class B profits
interests, Change in
redemption value of Class B profits interests, Tax receivable agreement,
deferred compensation awarded to our Principals, the de-recognition of deferred
tax assets, as well as certain professional and license fees within General & administrative
expenses. Further, our results for the three and nine months ended September 30,
2009, include certain ongoing expenses on a pro rata basis for the two day
period following the IPO including, but not limited to, the accrual for the
Principals’ annual bonus, amortization of restricted stock units (“RSUs”) and
commitment fees on our credit facility. Additionally, the three and
nine months ended September 30, 2009, do not contain interest expense relating
to the $110.0 million credit facility, as there were no borrowings under such
facility during that period. In October 2009,
17
Holdings
borrowed $60.0 million under the term credit facility and will incur interest
expense in the future. Management has not included within this Report on Form
10-Q a full-period pro forma result to reflect the ongoing expense
structure.
General
Overview
Business
We are an
asset management company that provides investment management services to
institutional and mutual fund clients. We manage and advise proprietary funds,
commingled institutional investment vehicles, institutional separate accounts
and sub-advisory accounts. Our operations are based principally in the U. S.
However, our AuM are invested primarily outside of the U. S.
Initial Public Offering and
Changes in Principals’ Interests
On
September 29, 2009, we completed an initial public offering (“IPO”) of 25.0
million shares of Investors’ Class A common stock (“Class A common stock”) at a
price of $26.00 per share. The IPO proceeds, net of the underwriting discount,
of $614.9 million were used to repurchase and retire an aggregate of 22.6
million shares of Investors’ Class C common stock (“Class C common stock”) from
GAM Holding Ltd. (formerly known as Julius Baer Holding Ltd.), a Swiss
corporation, (“GAM”) and to repurchase 1.2 million shares of Class A common
stock from each of the Principals.
On
October 5, 2009, the underwriters exercised their option to purchase additional
shares of Class A common stock at the IPO price, net of the underwriting
discount, resulting in the issuance of 2,644,156 shares of Class A common stock.
The net proceeds were used to repurchase and retire at the IPO price, net of the
underwriting discount, 2,644,156 shares of Class C common stock from GAM.
Following the IPO and the exercise of the underwriters’ option, GAM owns
approximately 27.9% of the outstanding shares of our capital stock.
Prior to
the IPO, each Principal had a 15% Class B profits interest in Artio Global,
which was accounted for as compensation for financial accounting purposes.
Immediately prior to the IPO, each Principal exchanged his Class B profits
interest for a 15% non-voting Class A membership interest in Holdings (“New
Class A Units”). Each Principal also purchased, at par value, nine million
shares of voting, non-participating, Investors’ Class B common stock (“Class B
common stock”). In addition, the Principals entered into a tax receivable
agreement with the Company (see Notes to Consolidated Financial Statements,
Note 4. Tax Receivable
Agreement). Upon the exchange of their Class B profits interests for
vested New Class A Units, the fair value of the Class B profits interests was
adjusted to reflect the offering price of Class A common stock, and totaled
$468.0 million. This resulted in an additional compensation charge related to
the redemption value of the Class B profits interests of $215.8 million that was
recorded concurrent with the IPO and represents the difference between the fair
value of $468.0 million and the related liability immediately prior to the IPO
of $252.2 million ($201.9 million as of December 31, 2008). In addition, we
recorded a compensation charge of $97.9 million relating to the estimated
present value of the tax receivable agreement (see Notes to Consolidated
Financial Statements, Note 4.
Tax Receivable Agreement). As the Principals’ new economic interests will
be accounted for as equity, the adjusted liability of $565.9 million was
reclassified into Additional
paid-in capital on our Consolidated Statement of Financial Position. The
related deferred tax asset of $110.3 million ($88.3 million as of December 31,
2008) was de-recognized and charged to expense.
Subsequent
to the IPO and the exchange of 1.2 million New Class A Units and corresponding
cancellation of an equivalent number of Class B common stock for 1.2 million
shares of Class A common stock, as well as the subsequent repurchase by us of
such Class A common stock, each of the Principals’ New Class A Units represented
approximately 13% membership interests in Holdings and is accounted for by us as
non-controlling
interests.
Economic
Environment
As an
investment manager, we derive substantially all of our operating revenues from
providing investment management services to our institutional and mutual fund
clients. Such revenues are driven by the amount and
18
composition
of our AuM, as well as by our fee structure. Accordingly, our business results
are highly dependent upon the prevailing global economic climate and its impact
on the capital markets.
The
global economic environment deteriorated sharply in 2008. Global equity markets
fell, particularly as the financial crisis intensified in the third and fourth
quarters of 2008. The economic environment began to improve in the second
quarter of 2009 and continued to gain momentum during the third quarter of 2009,
driven primarily by government stimulus initiatives. In response, returns for
global stocks and bonds improved. For example, in the third quarter of 2009, the
MSCI All Country World Index (ex US) (“MSCI ACWI (ex-US)”) increased 14.8% in
local currency terms and 19.7% in U.S. dollar terms. Investors’ risk tolerance
also began to increase, resulting in positive net flows into equity and fixed
income products over that time period, according to industry data.
Key
Performance Indicators
Our
management reviews our performance on a monthly basis, focusing on the
indicators described below.
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
(in
millions, except basis points and percentages)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Operating
indicators(a)
|
||||||||||||||||
AuM
at end of period
|
$ | 55,798 | $ | 56,648 | $ | 55,798 | $ | 56,648 | ||||||||
Average
AuM for period(b)
|
51,793 | 66,525 | 46,051 | 70,806 | ||||||||||||
Net
client cash flows
|
321 | (1,038 | ) | 1,294 | 3,953 | |||||||||||
Financial
indicators
|
||||||||||||||||
Investment
management fees
|
83 | 108 | 216 | 351 | ||||||||||||
Effective
fee rate (basis points)(c)
|
64.5 | 64.7 | 62.6 | 66.1 | ||||||||||||
Operating
income (loss) before income tax expense
|
(298 | ) | 27 | (282 | ) | 89 | ||||||||||
Operating
income (loss) before income tax expense margin(d)
|
(353 | )% | 25 | % | (129 | )% | 26 | % | ||||||||
Adjusted
operating income(e)
|
43 | 66 | 116 | 213 | ||||||||||||
Adjusted
operating margin(f)
|
50.2 | % | 62.1 | % | 53.3 | % | 61.0 | % | ||||||||
EBITDA(e)
|
44 | 67 | 118 | 215 | ||||||||||||
EBITDA Margin(g)
|
51.6 | % | 62.8 | % | 54.4 | % | 61.6 | % | ||||||||
Compensation
as a % of total revenues and other operating income(h)
|
26.4 | % | 19.9 | % | 26.3 | % | 19.9 | % | ||||||||
Effective
tax rate
|
(38.2 | )% | 41.0 | % | (43.2 | )% | 47.5 | % |
(a)
|
Excluding
legacy activities.
|
(b)
|
Average
AuM for a period is computed on the beginning-of-first-month balance and
all end-of-month balances within the
period.
|
(c)
|
The
effective fee rate is computed by dividing annualized investment
management fees by average AuM for the
period.
|
(d)
|
Operating
income (loss) before income tax expense margin is calculated as Operating
income (loss) before income tax expense divided by Total
revenues and other operating
income.
|
(e)
|
See
the “Supplemental Performance Measure” section of this MD&A for a
reconciliation of Operating
income (loss) before income tax expense to Adjusted operating
income and Earnings before Interest, Taxes, Depreciation and Amortization
(“EBITDA”).
|
(f)
|
Adjusted
operating margin is calculated as Adjusted operating income divided by
Total
revenues and other operating
income.
|
(g)
|
EBITDA
margin is calculated as EBITDA divided by Total
revenues and other operating
income.
|
(h)
|
Compensation
is calculated as Salaries,
incentive compensation and benefits excluding deferred compensation
relating to the Principals and the amortization expense associated with
the RSUs awarded as part of the IPO. Such amount was approximately $0.1
million.
|
Supplemental Performance
Measures
As
supplemental information, we provide performance measures that are not prepared
in conformity with U.S. Generally Accepted Accounting Principles which we refer
to as Adjusted operating income and EBITDA. These measures are provided in
addition to, but not as a substitute for, Operating income (loss) before
income tax expense. Under our Adjusted operating income definition, we
add to Operating income (loss)
before income tax expense certain components of the compensation
arrangements relating to our Principals that relate to their compensation
19
arrangements
prior to the IPO or are non-recurring in nature. These adjustments
include Allocation of Class B
profits interests, Change in redemption value of Class
B profits interests, Tax receivable agreement and
deferred compensation awarded to our Principals. Additionally, we add to Operating income (loss) before
income tax expense the amortization expense of the equity awards granted
to certain employees (other than the Principals) in conjunction with the IPO. We
consider Adjusted operating income and EBITDA to be important measures of our
financial performance, as we believe they best present operating performance on
a basis that is comparable with our current structure and eliminates the effect
of the non-cash and non-recurring equity awards issued in conjunction with the
IPO. Adjusted operating income and EBITDA are used by our management as
principal performance benchmarks.
The
following table provides a reconciliation of Operating income (loss) before
income tax expense to Adjusted operating income and EBITDA:
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
(in
millions)
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Operating
income (loss) before income tax expense
|
$ | (298 | ) | $ | 27 | $ | (282 | ) | $ | 89 | ||||||
Allocation
of Class B profits interests
|
12 | 20 | 34 | 64 | ||||||||||||
Change
in redemption value of Class B profits interests
|
231 | 17 | 266 | 53 | ||||||||||||
Tax
receivable agreement
|
98 | — | 98 | — | ||||||||||||
Deferred
compensation related to the Principals
|
— | 2 | — | 7 | ||||||||||||
Amortization
expense of IPO-related RSU grants
|
— | — | — | — | ||||||||||||
Adjusted
operating income
|
43 | 66 | 116 | 213 | ||||||||||||
Depreciation
and amortization
|
1 | 1 | 2 | 2 | ||||||||||||
EBITDA
|
$ | 44 | $ | 67 | $ | 118 | $ | 215 |
Operating
Indicators
Our
revenues are driven by the amount and composition of our AuM, as well as by our
fee structure. As a result, management closely monitors our AuM. We believe
average AuM is important because it allows us to analyze the change in the
amount of AuM over a period of time, which results in a more useful comparison.
It also represents a better indication of our revenue stream as most of our fees
are calculated based on daily, monthly or quarterly average AuM rather than on
period-end balances of AuM.
Net
client cash flows represent sales either to new clients or existing clients,
less redemptions. Our net client cash flows are driven by the performance of our
investment strategies, competitiveness of fee rates, the success of our
marketing and client service efforts, and the state of the overall equity and
fixed income markets. In addition, our net client cash flows reflect
client-specific actions, such as portfolio rebalancing or decisions to change
portfolio managers.
Substantial
declines in global equity markets, particularly in the third and fourth quarters
of 2008, and a strengthening of the U.S. dollar, resulted in our AuM at year-end
2008 being 40% lower than at the start of the year. In addition, the poor
performance of global equity markets, coupled with forecasts of a global
recession, discouraged investors from entering or increasing their exposure to
equity markets. Despite these challenging market conditions, we had positive net
client cash flows of $1.9 billion for full-year 2008. As economic conditions
improved throughout the first nine months of 2009, equity markets increased and
the U.S. dollar weakened, resulting in our AuM as of September 30, 2009, being
23% higher than at the beginning of the year and 19% higher than at the end of
the second quarter of 2009. In addition, we experienced net client cash inflows
of $1.3 billion for the first nine months of 2009, with $321 million for the
three months ended September 30, 2009. Although market sentiment has improved,
we believe portfolio rebalancing activity has decreased from historical levels
as investors evaluate their
20
investment
strategies. As a consequence, we believe this may reduce the overall number of
institutional mandates and may reduce our level of net client cash
flows.
Financial
Indicators
Management
reviews certain financial ratios to monitor progress with internal forecasts,
understand the underlying business and compare our firm with others in our
industry. The effective fee rate represents the amount of investment management
fees we earn for each dollar of client assets we manage. We use this information
to evaluate the contribution to revenue of our products. Operating and EBITDA
margins are important indicators of our profitability and the efficiency of our
business model. Other ratios shown in the table above allow us to manage
expenses in comparison with our revenues.
Our
effective fee rate for the three and nine months ended September 30, 2009,
decreased from the corresponding periods in 2008 due primarily to a greater
proportion of our AuM being within our institutional separate accounts and fixed
income strategies, both of which have lower average fee rates as compared to our
overall blended rate. In addition, we earn higher investment management fees
from our proprietary funds than our other investment vehicles. Our proprietary
funds have declined to 43% of our AuM as of September 30, 2009, from 45% of our
AuM as of September 30, 2008. Our fixed income strategies represented
approximately 14% of AuM as of September 30, 2009 and approximately 10% of AuM
as of September 30, 2008. Our International Equity strategies represented
approximately 84% of AuM as of September 30, 2009 and approximately 88% of
assets under management as of September 30, 2008.
Our
Adjusted operating income and EBITDA margins in the three months and nine months
ended September 30, 2009, declined compared to the corresponding periods last
year. Revenues declined faster than expenses, primarily occurring in the first
half of the year. Although the economic events since the latter part of 2008
have severely impacted our business, we continued to generate strong Adjusted
operating income and EBITDA margins, which we believe reflects the strength of
our franchise and the variability of our expense base. Operating income (loss)
before income tax expense margins decreased in the three months and nine months
ended September 30, 2009, due primarily to non-recurring compensation charges in
connection with the IPO and the reasons discussed above.
Assets
under Management (“AuM”)
Changes
to our AuM, the distribution of our AuM among our investment products and
investment strategies, and the effective fee rates on our products, all affect
our operating results from one period to another.
The
amount and composition of our AuM are, and will continue to be, influenced by a
variety of factors including, among other things:
·
|
investment
performance, including fluctuations in both the financial markets and
foreign currency exchange rates and the quality of our investment
decisions;
|
·
|
client
cash flows into and out of our investment
products;
|
·
|
the
mix of AuM among our various strategies;
and
|
·
|
our
introduction or closure of investment strategies and
products.
|
Our five
core investment strategies are:
·
|
International
Equity;
|
·
|
Global
Equity;
|
·
|
U.S.
Equity;
|
·
|
High
Grade Fixed Income; and
|
·
|
High
Yield.
|
We offer
investors the ability to invest in each of our strategies through the investment
vehicles set forth in the following table.
21
The
following table sets forth a summary of our AuM (including legacy activities) by
investment vehicle type as of September 30, 2009 and 2008:
As
of September 30,
|
As
a % of AuM
|
|||||||||||||||
(in
millions, except percentages)
|
2009
|
2008
|
Sept.
30, 2009
|
Sept.
30, 2008
|
||||||||||||
Proprietary
Funds(a)
|
||||||||||||||||
A
shares
|
$ | 7,777 | $ | 8,541 | ||||||||||||
I
shares(b)
|
16,286 | 17,175 | ||||||||||||||
Total
|
24,063 | 25,716 | 43.1 | % | 45.4 | % | ||||||||||
Institutional
commingled funds
|
8,916 | 8,385 | 16.0 | 14.8 | ||||||||||||
Separate
accounts
|
17,396 | 16,687 | 31.2 | 29.5 | ||||||||||||
Sub-advisory
accounts
|
5,423 | 5,860 | 9.7 | 10.3 | ||||||||||||
Legacy
activities(c)
|
─
|
40 |
─
|
─
|
||||||||||||
Ending
AuM
|
$ | 55,798 | $ | 56,688 | 100.0 | % | 100.0 | % |
(a)
|
Proprietary
Funds include both SEC registered funds and private offshore funds. SEC
registered mutual funds within proprietary funds are: Artio International
Equity Fund; Artio International Equity Fund II; Artio Total Return Bond
Fund; Artio Global High Income Fund; Artio Global Equity Fund Inc.; Artio
U.S. Microcap Fund; Artio U.S. Midcap Fund; Artio U.S. Multicap Fund; and
Artio U.S. Smallcap Fund.
|
(b)
|
Amounts
invested in private offshore funds are categorized as “I”
shares.
|
(c)
|
Legacy
activities relate to a hedge fund product which we discontinued in the
fourth quarter of 2008.
|
The
different fee structures associated with each type of investment vehicle make
the composition of our AuM an important determinant of the investment management
fees we earn. We typically earn higher effective investment management fee rates
from our proprietary funds and institutional commingled funds than on our
separate and sub-advised accounts. In the latter half of 2008, the amount of AuM
related to proprietary funds as a percentage of total AuM decreased as
proprietary fund redemptions exceeded client cash inflows within the proprietary
funds. Proprietary funds include a significant number of underlying retail
investors. We believe that institutional investors, who typically invest in our
other vehicles, generally have longer-term investment horizons than retail
proprietary fund investors.
22
The
following table sets forth the changes in AuM by investment vehicle
type:
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||||||||||
(in
millions, except percentages)
|
2009
|
2008
|
%
Change
|
2009
|
2008
|
%
Change
|
||||||||||||||||||
Proprietary
Funds:
|
||||||||||||||||||||||||
Beginning
AuM
|
$ | 20,153 | $ | 33,974 | (41 | )% | $ | 19,466 | $ | 37,117 | (48 | )% | ||||||||||||
Gross
client cash inflows(a)
|
1,821 | 1,806 | 1 | 5,644 | 6,608 | (15 | ) | |||||||||||||||||
Gross
client cash outflows(a)
|
(1,730 | ) | (3,044 | ) | 43 | (5,071 | ) | (6,924 | ) | 27 | ||||||||||||||
Net
client cash flows
|
91 | (1,238 | ) | 107 | 573 | (316 | ) | 281 | ||||||||||||||||
Transfers
between investment vehicles(a)
|
─
|
(109 | ) | 100 |
─
|
(189 | ) | 100 | ||||||||||||||||
Total
client cash flows
|
91 | (1,347 | ) | 107 | 573 | (505 | ) | 213 | ||||||||||||||||
Market
appreciation (depreciation)
|
3,819 | (6,911 | ) | 155 | 4,024 | (10,896 | ) | 137 | ||||||||||||||||
Ending
AuM
|
24,063 | 25,716 | (6 | ) | 24,063 | 25,716 | (6 | ) | ||||||||||||||||
Institutional
Commingled Funds:
|
||||||||||||||||||||||||
Beginning
AuM
|
7,324 | 10,288 | (29 | ) | 7,056 | 9,357 | (25 | ) | ||||||||||||||||
Gross
client cash inflows(a)
|
481 | 661 | (27 | ) | 1,192 | 3,316 | (64 | ) | ||||||||||||||||
Gross
client cash outflows(a)
|
(326 | ) | (218 | ) | (50 | ) | (890 | ) | (997 | ) | 11 | |||||||||||||
Net
client cash flows
|
155 | 443 | (65 | ) | 302 | 2,319 | (87 | ) | ||||||||||||||||
Transfers
between investment vehicles(a)
|
(10 | ) | 62 | (116 | ) | (9 | ) | 187 | (105 | ) | ||||||||||||||
Total
client cash flows
|
145 | 505 | (71 | ) | 293 | 2,506 | (88 | ) | ||||||||||||||||
Market
appreciation (depreciation)
|
1,447 | (2,408 | ) | 160 | 1,567 | (3,478 | ) | 145 | ||||||||||||||||
Ending
AuM
|
8,916 | 8,385 | 6 | 8,916 | 8,385 | 6 | ||||||||||||||||||
Separate
Accounts:
|
||||||||||||||||||||||||
Beginning
AuM
|
14,778 | 21,270 | (31 | ) | 14,342 | 22,897 | (37 | ) | ||||||||||||||||
Gross
client cash inflows(a)
|
634 | 129 | 391 | 1,797 | 1,279 | 41 | ||||||||||||||||||
Gross
client cash outflows(a)
|
(624 | ) | (416 | ) | (50 | ) | (1,545 | ) | (1,078 | ) | (43 | ) | ||||||||||||
Net
client cash flows
|
10 | (287 | ) | 103 | 252 | 201 | 25 | |||||||||||||||||
Transfers
between investment vehicles(a)
|
10 |
─
|
─
|
9 | (45 | ) | 120 | |||||||||||||||||
Total
client cash flows
|
20 | (287 | ) | 107 | 261 | 156 | 67 | |||||||||||||||||
Market
appreciation (depreciation)
|
2,598 | (4,296 | ) | 160 | 2,793 | (6,366 | ) | 144 | ||||||||||||||||
Ending
AuM
|
17,396 | 16,687 | 4 | 17,396 | 16,687 | 4 | ||||||||||||||||||
Sub-advisory
Accounts:
|
||||||||||||||||||||||||
Beginning
AuM
|
4,571 | 7,072 | (35 | ) | 4,336 | 5,991 | (28 | ) | ||||||||||||||||
Gross
client cash inflows(a)
|
234 | 316 | (26 | ) | 660 | 2,491 | (74 | ) | ||||||||||||||||
Gross
client cash outflows(a)
|
(169 | ) | (272 | ) | 38 | (493 | ) | (742 | ) | 34 | ||||||||||||||
Net
client cash flows
|
65 | 44 | 48 | 167 | 1,749 | (90 | ) | |||||||||||||||||
Transfers
between investment vehicles(a)
|
─
|
47 | (100 | ) |
─
|
47 | (100 | ) | ||||||||||||||||
Total
client cash flows
|
65 | 91 | (29 | ) | 167 | 1,796 | (91 | ) | ||||||||||||||||
Market
appreciation (depreciation)
|
787 | (1,303 | ) | 160 | 920 | (1,927 | ) | 148 | ||||||||||||||||
Ending
AuM
|
5,423 | 5,860 | (7 | ) | 5,423 | 5,860 | (7 | ) |
23
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||||||||||
(in
millions, except percentages)
|
2009
|
2008
|
%
Change
|
2009
|
2008
|
%
Change
|
||||||||||||||||||
Legacy
Activities:
|
||||||||||||||||||||||||
Beginning
AuM
|
─
|
45 | (100 | ) | 4 |
─
|
100 | |||||||||||||||||
Gross
client cash inflows(a)
|
─
|
─
|
─
|
─
|
44 | (100 | ) | |||||||||||||||||
Gross
client cash outflows(a)
|
─
|
─
|
─
|
─
|
─
|
─
|
||||||||||||||||||
Net
client cash flows
|
─
|
─
|
─
|
─
|
44 | (100 | ) | |||||||||||||||||
Transfers
between investment vehicles(a)
|
─
|
─
|
─
|
─
|
─
|
─
|
||||||||||||||||||
Total
client cash flows
|
─
|
─
|
─
|
─
|
44 | (100 | ) | |||||||||||||||||
Market
appreciation (depreciation)
|
─
|
(5 | ) | 100 | (4 | ) | (4 | ) |
─
|
|||||||||||||||
Ending
AuM
|
─
|
40 | (100 | ) |
─
|
40 | (100 | ) | ||||||||||||||||
Total
AuM (including legacy activities):
|
||||||||||||||||||||||||
Beginning
AuM
|
46,826 | 72,649 | (36 | ) | 45,204 | 75,362 | (40 | ) | ||||||||||||||||
Gross
client cash inflows(a)
|
3,170 | 2,912 | 9 | 9,293 | 13,738 | (32 | ) | |||||||||||||||||
Gross
client cash outflows(a)
|
(2,849 | ) | (3,950 | ) | 28 | (7,999 | ) | (9,741 | ) | 18 | ||||||||||||||
Net
client cash flows
|
321 | (1,038 | ) | 131 | 1,294 | 3,997 | (68 | ) | ||||||||||||||||
Transfers
between investment vehicles(a)
|
─
|
─
|
─
|
─
|
─
|
─
|
||||||||||||||||||
Total
client cash flows
|
321 | (1,038 | ) | 131 | 1,294 | 3,997 | (68 | ) | ||||||||||||||||
Market
appreciation (depreciation)
|
8,651 | (14,923 | ) | 158 | 9,300 | (22,671 | ) | 141 | ||||||||||||||||
Ending
AuM
|
55,798 | 56,688 | (2 | ) | 55,798 | 56,688 | (2 | ) | ||||||||||||||||
Total
AuM (excluding legacy activities):
|
||||||||||||||||||||||||
Beginning
AuM
|
46,826 | 72,604 | (36 | ) | 45,200 | 75,362 | (40 | ) | ||||||||||||||||
Gross
client cash inflows(a)
|
3,170 | 2,912 | 9 | 9,293 | 13,694 | (32 | ) | |||||||||||||||||
Gross
client cash outflows(a)
|
(2,849 | ) | (3,950 | ) | 28 | (7,999 | ) | (9,741 | ) | 18 | ||||||||||||||
Net
client cash flows
|
321 | (1,038 | ) | 131 | 1,294 | 3,953 | (67 | ) | ||||||||||||||||
Transfers
between investment vehicles(a)
|
─
|
─
|
─
|
─
|
─
|
─
|
||||||||||||||||||
Total
client cash flows
|
321 | (1,038 | ) | 131 | 1,294 | 3,953 | (67 | ) | ||||||||||||||||
Market
appreciation (depreciation)
|
8,651 | (14,918 | ) | 158 | 9,304 | (22,667 | ) | 141 | ||||||||||||||||
Ending
AuM
|
$ | 55,798 | $ | 56,648 | (2 | ) | $ | 55,798 | $ | 56,648 | (2 | ) |
(a)
|
Gross
client cash inflows and outflows, as well as transfers between investment
vehicles, are tracked by information systems, which we believe are
accurate in all material respects. Certain of our intermediaries elect to
automatically reinvest all cash dividends in our investment vehicles and,
to the extent any of such intermediary’s underlying investors do not elect
dividend reinvestment but prefer cash, they cause such investor’s newly
received shares to be redeemed. Accordingly, the gross flows data set
forth above may overstate redemptions, although we do not believe the
effect is material.
|
Net
client cash flows across all investment vehicles increased $1.4 billion during
the three months ended September 30, 2009, as compared to the corresponding
period in 2008, mainly as a result of a $0.5 billion decrease in net client cash
outflows from our International Equity I strategy, a $0.5 billion increase in
net client cash inflows to our High Yield strategy, and a $0.2 billion increase
in net client cash inflows to our International Equity II strategy.
Net
client cash flows across all investment vehicles decreased $2.7 billion for the
nine months ended September 30, 2009, compared to the corresponding period in
2008, mainly as a result of a $3.7 billion decrease in net client cash inflows
to the International Equity II strategy and a $0.3 billion decrease in net
client cash inflows to the High Grade Fixed Income strategy, partially offset by
a $0.9 billion increase in net client cash inflows to our High Yield strategy
and a $0.4 billion decrease in net client cash outflows from our International
Equity I strategy.
24
Market
appreciation for the three months and nine months ended September 30, 2009,
compared to market depreciation for the three months and nine months ended
September 30, 2008, were primarily attributable to the following
strategies:
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||||||||||
(in
millions, except percentages)
|
2009
|
2008
|
%
Change
|
2009
|
2008
|
%
Change
|
||||||||||||||||||
Market
appreciation (depreciation)
(excluding
legacy activities):
|
||||||||||||||||||||||||
International
Equity I
|
$ | 3,765 | $ | (8,375 | ) | 145 | % | $ | 3,605 | $ | (13,046 | ) | 128 | % | ||||||||||
International
Equity II
|
4,156 | (6,115 | ) | 168 | 4,385 | (9,138 | ) | 148 | ||||||||||||||||
Other
strategies
|
730 | (428 | ) | 270 | 1,314 | (483 | ) | 372 | ||||||||||||||||
Total
market appreciation (depreciation)
|
$ | 8,651 | $ | (14,918 | ) | 158 | $ | 9,304 | $ | (22,667 | ) | 141 |
The MSCI
AC World ex USA Index experienced a 19.7% increase during the three months ended
September 30, 2009, and a 36.4% increase during the nine months ended September
30, 2009. In the three months ended September 30, 2009, the gross performance of
our International Equity I strategy outperformed the index by 0.4% and the gross
performance of our International Equity II strategy trailed the index by 0.3%.
In the nine months ended September 30, 2009, the gross performances of our
International Equity I strategy trailed the index by 14.0% and our International
Equity II strategy trailed the index by 14.3%.
Proprietary
Funds
Net
client cash flows related to proprietary funds increased $1.3 billion during the
three months ended September 30, 2009, as compared to the corresponding period
in 2008, mainly as a result of a $0.7 billion decrease in net client cash
outflows from our International Equity I Fund, a $0.3 billion increase in net
client cash inflows to our Global High Income Fund and a $0.3 billion increase
in net client cash flows into our International Equity II Fund, which in the
current year period had net client cash inflows compared to net client cash
outflows a year ago.
Net
client cash flows related to proprietary funds increased $0.9 billion for the
nine months ended September 30, 2009, compared to the corresponding period in
2008, mainly as a result of a $0.9 billion decrease in net client cash outflows
from our International Equity I Fund and a $0.6 billion increase in net client
cash inflows to our Global High Income Fund, partially offset by a $0.5 billion
decrease in net client cash inflows to our International Equity II Fund and a
$0.2 billion decrease in net client cash inflows to our Total Return Bond
Fund.
Institutional Commingled
Funds
Net
client cash flows related to institutional commingled funds decreased $0.3
billion during the three months ended September 30, 2009, as compared to the
corresponding period in 2008, mainly as a result of a $0.4 billion decrease in
net client cash inflows to our International Equity II vehicles.
Net
client cash flows related to institutional commingled funds decreased $2.0
billion for the nine months ended September 30, 2009, compared to the
corresponding period in 2008, mainly as a result of a $2.0 billion decrease in
net client cash inflows to our International Equity II vehicles.
Separate
Accounts
Net
client cash flows related to separate accounts increased $0.3 billion during the
three months ended September 30, 2009, as compared to the corresponding period
in 2008, mainly as a result of a $0.4 billion increase in net client cash flows
into the International Equity II and a $0.1 billion increase in net client cash
flows into the High Grade Fixed Income strategy, as both strategies had net
client cash inflows in the current year period, compared to net client cash
outflows a year ago, partially offset by a $0.3 billion increase in net client
cash outflows from the International Equity I strategy.
25
Net
client cash flows related to separate accounts increased $0.1 billion for the
nine months ended September 30, 2009, compared to the corresponding period in
2008, mainly as a result of a $0.4 billion increase in net client cash inflows
to the International Equity II strategy and a $0.1 billion increase in net
client cash flows into the High Yield strategy, as the current year period had
net client cash inflows compared to net client cash outflows a year ago. These
increases in net client cash flows were partially offset by a $0.5 billion
decrease in net client cash flows to the International Equity I strategy, as the
current year period had net client cash outflows compared to net client cash
inflows a year ago, and a $0.1 billion increase in net client cash outflows from
the Global Equity strategy.
Sub-advisory
Accounts
Net
client cash flows related to sub-advised accounts increased slightly during the
three months ended September 30, 2009, as compared to the corresponding period
in 2008, mainly as a result of a $0.2 billion increase in net client cash flows
to our High Yield accounts, as the current year period had net client cash
inflows compared to net client cash outflows a year ago, partially offset by a
$0.2 billion decrease in net client cash flows into our International Equity II
accounts, as the current year period had net client cash outflows compared to
net client cash inflows a year ago.
Net
client cash flows related to sub-advised accounts decreased $1.6 billion for the
nine months ended September 30, 2009, compared to the corresponding period in
2008, mainly as a result of a $1.6 billion decrease in net client cash inflows
to our International Equity II accounts, as the year ago period includes the
impact of a $1.5 billion funding related to a new client. The decrease is also
partially offset by a $0.2 billion increase in net client cash inflows to our
High Yield accounts.
As
previously disclosed in our registration statement on Form S-1 (File No.
333-149178), as filed with the U.S. Securities and Exchange Commission on
February 12, 2008, as amended, our largest sub-advisory client made a partial
redemption of their account in October 2009 of approximately $0.8
billion.
Revenues
and Other Operating Income
Our
revenues are driven by investment management fees earned from managing clients’
assets. Investment management fees fluctuate based on the total value of AuM,
composition of AuM among our investment vehicles and among our investment
strategies, changes in the investment management fee rates on our products and,
for the few accounts on which we earn performance based fees, the investment
performance of those accounts. Performance fees may be subject to clawback
provisions as a result of performance declines. If such declines occur, the
performance fee clawback provisions are recognized when the amount is known.
(See also the “Assets under Management” section of this MD&A.)
26
The
following table sets forth average AuM, the effective fee rate and Total revenues and other operating
income for the three months and nine months ended September 30, 2009 and
2008:
(in
thousands, except for Average AuM,
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
||||||||||||||||||||||
effective
fee rate and percentages)
|
2009
|
2008
|
Change
|
2009
|
2008
|
Change
|
||||||||||||||||||
Average
AuM(a)
(in millions)
|
$ | 51,793 | $ | 66,525 | (22 | )% | $ | 46,051 | $ | 70,806 | (35 | )% | ||||||||||||
Effective
fee rate (basis points)
|
64.5 | 64.7 | (0.2 | )bp | 62.6 | 66.1 | (3.5 | )bp | ||||||||||||||||
Investment
management fees
|
$ | 83,476.8 | $ | 107,551.5 | (22 | )% | $ | 216,053.0 | $ | 351,058.8 | (38 | )% | ||||||||||||
Net
gains (losses) on securities held for deferred
compensation
|
976.9 | (1,017.5 | ) | 196 | 1,689.1 | (1,618.5 | ) | 204 | ||||||||||||||||
Foreign
currency gains (losses)
|
34.2 | (5.8 | ) | 690 | 65.8 | (27.5 | ) | 339 | ||||||||||||||||
Total
revenues and other operating income
|
$ | 84,487.9 | $ | 106,528.2 | (21 | ) | $ | 217,807.9 | $ | 349,412.8 | (38 | ) |
(a) Excluding
legacy activities.
We expect
that lower average AuM will result in lower investment management fees in 2009
compared to those in 2008.
Total revenues and other operating
income decreased by $22.0 million, or 21%, for the three months ended
September 30, 2009, and decreased by $131.6 million, or 38%, for the nine months
ended September 30, 2009, compared to the corresponding periods in 2008, due
primarily to a decline in average AuM, partially offset by net gains on
securities held for deferred compensation in the 2009 period compared to net
losses on securities held for deferred compensation in the 2008 period. The
decline of the effective fee rate in both periods is primarily the result of a
lower proportion of assets in the International Equity strategies and
proprietary funds, our highest margin products and vehicle.
Performance
fees as a percentage of Total
revenues and other operating income approximated (0.1)% for the three
months ended September 30, 2009, 0.1% for the three months ended September 30,
2008, (0.7)% for the nine months ended September 30, 2009, and 1.4% for the nine
months ended September 30, 2008.
Operating
Expenses
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||||||||||
(in
thousands, except percentages)
|
2009
|
2008
|
%
Change
|
2009
|
2008
|
%
Change
|
||||||||||||||||||
Total
employee compensation and benefits
|
$ | 363,061.6 | $ | 60,373.4 | * | % | $ | 454,988.4 | $ | 193,651.4 | * | % | ||||||||||||
Shareholder
servicing and marketing
|
4,502.1 | 6,107.5 | (26 | ) | 11,710.4 | 18,832.6 | (38 | ) | ||||||||||||||||
General
and administrative
|
15,227.9 | 12,992.8 | 17 | 32,805.8 | 47,657.7 | (31 | ) | |||||||||||||||||
Total
operating expenses
|
$ | 382,791.6 | $ | 79,473.7 | * | $ | 499,504.6 | $ | 260,141.7 | * |
* Calculation
is not meaningful, due to the impact of the IPO in the third quarter of
2009.
Operating
expenses increased by $303.3 million for the three months ended September 30,
2009, compared to the corresponding period in 2008. Operating expenses increased
by $239.4 million for the nine months ended September 30, 2009, compared to the
corresponding period in 2008. These increases were largely due to non-recurring
compensation charges in connection with the IPO and changes in the nature of the
Principals’ economic interests. Such non-recurring compensation charges totaled
$313.8 million.
27
Employee Compensation and
Benefits
The
following table sets forth our Employee compensation and
benefits expenses for the three months and nine months ended September
30, 2009 and 2008:
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||||||||||
(in
thousands, except percentages)
|
2009
|
2008
|
%
Change
|
2009
|
2008
|
%
Change
|
||||||||||||||||||
Salaries,
incentive compensation and benefits
|
$ | 22,390.5 | $ | 23,460.7 | (5 | )% | $ | 57,307.5 | $ | 76,315.0 | (25 | )% | ||||||||||||
Allocation
of Class B profits interests(a)
|
12,190.7 | 19,992.7 | (39 | ) | 33,662.5 | 63,983.4 | (47 | ) | ||||||||||||||||
Change
in redemption value of Class B profits interests(a)
|
230,571.8 | 16,920.0 | * | 266,109.8 | 53,353.0 | * | ||||||||||||||||||
Tax
receivable agreement
|
97,908.6 |
─
|
* | 97,908.6 |
─
|
* | ||||||||||||||||||
Total
employee compensation and benefits
|
$ | 363,061.6 | $ | 60,373.4 | * | $ | 454,988.4 | $ | 193,651.4 | * |
* Calculation
is not meaningful, due to the impact of the IPO in the third quarter of
2009.
(a)
|
In
connection with the IPO (see the “Initial Public Offering and Changes in
Principals’ Interests” section of this MD&A), the Class B profits
interests were exchanged for New Class A Units that are reflected as
equity subsequent to the IPO.
|
Total employee compensation and
benefits increased $302.7 million for the three months ended September
30, 2009, compared to the corresponding period in 2008, due primarily to $313.8
million in non-recurring charges in connection with the IPO. The increase in the
Change in redemption value of
Class B profits interests of approximately $213.7 million is driven by
the acceleration of the vesting of the Principals’ Class B profits interests.
Further, we also incurred charges of $97.9 million related to the tax receivable
agreement that we entered into with the Principals, which were treated as
compensation expense for financial accounting purposes. Total employee compensation and
benefits increased $261.3 million for the nine months ended September 30,
2009, compared to the corresponding period in 2008, due primarily to the reasons
discussed above, partially offset by a $30.3 million decrease in Allocation of Class B profits
interests, a $11.0 million decrease in incentive compensation, including
sales incentives, and the amortization of deferred compensation relating to the
Principals in 2008 that totaled $6.7 million and did not recur in
2009.
Shareholder Servicing and
Marketing
Shareholder servicing and
marketing expenses decreased 26% to $4.5 million for the three months
ended September 30, 2009, compared to the corresponding period in 2008 and
decreased 38% to $11.7 million for the nine months ended September 30, 2009.
These decreases were due primarily to the decrease in the average market value
of proprietary fund AuM reducing shareholder servicing costs.
General and
Administrative
General and administrative
expenses increased $2.2 million, or 17%, to $15.2 million for the three months
ended September 30, 2009, compared to the corresponding period in 2008, due
primarily to an increase of $2.4 million of non-recurring professional fees
related to the completion of the IPO. The increase was partially offset by lower
client-related trading errors. General and administrative
expenses decreased $14.9 million, or 31%, to $32.8 million for the nine
months ended September 30, 2009, due primarily to lower non-recurring
professional fees related to the completion of the IPO, lower client-related
trading errors and lower license fees. The license fees associated with the use
of GAM’s brands were reduced as we rebranded in mid-2008 to the use of the Artio
Global name. License fees will not be paid in the future.
Client-related
trading errors resulted in de minimis losses in the three months ended September
30, 2009, and losses of $1.4 million in the three months ended September 30,
2008, $0.2 million in the nine months ended September 30, 2009 and $4.4 million
in the nine months ended September 30, 2008.
28
Non-operating
Income
Non-operating income is
earned on invested funds. The following table sets forth non-operating income
and average invested funds for the three months and nine months ended September
30, 2009 and 2008:
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||||||||||
(in
thousands, except percentages)
|
2009
|
2008
|
%
Change
|
2009
|
2008
|
% Change
|
||||||||||||||||||
Non-operating
income (loss)
|
$ | 121.7 | $ | 555.8 | (78 | )% | $ | (211.4 | ) | $ | 1,952.9 | (111 | )% | |||||||||||
Average
invested funds(a)
|
39,993.7 | 93,992.4 | (57 | ) | 68,482.9 | 125,029.9 | (45 | ) |
(a)
|
Computed
using the beginning and ending balances for the period of cash equivalents
and marketable securities, exclusive of securities held for deferred
compensation.
|
Non-operating income
decreased for the three months ended September 30, 2009, compared to the
corresponding period in 2008. This decrease was due primarily to lower average
invested funds and lower interest yields.
Non-operating income
decreased for the nine months ended September 30, 2009, compared to the
corresponding period in 2008, primarily due to the reversal during the first
half of 2009 of most of the mark-to-market gains recorded in the fourth quarter
of 2008.
A
reduction in our cash balances, due primarily to expected payments to GAM and to
each Principal, and interest expense associated with the $60.0 million term
credit facility, will result in lower Non-operating income in the
future.
Income
Taxes
Investors
is organized as a Delaware corporation, and therefore is subject to U.S. Federal
and certain state income taxes. As a member of Holdings, Investors incurs U.S.
Federal, state and local income taxes on its allocable share of any net taxable
income of Holdings, including its wholly owned operating company, Artio
Global.
Our
effective tax rates were (38.2)% for the three months ended September 30, 2009,
41.0% for the three months ended September 30, 2008, (43.2)% for the nine months
ended September 30, 2009 and 47.5% for the nine months ended September 30, 2008.
Although we generated a pre-tax loss for both the three and nine months ended
September 30, 2009, as a result of the de-recognition of the deferred tax asset
and permanent items associated with the modification of the Principals’
ownership interests in connection with the IPO, we still incurred tax
expense.
We expect
that our financial statements will initially reflect a significant reduction in
our effective income tax rate as compared to historical rates, due primarily to
the reclassification for financial accounting purposes of the Principals’
economic interests from Class B profits interests to non-controlling interests.
The non-controlling interests, represented by the New Class A Units, will
continue to be treated as partnership interests for U.S. Federal income tax
purposes and the associated Federal and state tax liabilities are the
responsibility of the Principals. Our Consolidated Statement of Income includes
the income attributable to us as well as to the New Class A Units. However,
Income taxes excludes
Federal and state income taxes attributable to the New Class A Units. This
results in a significantly lower effective tax rate for us. As the New Class A
Units are exchanged into shares of Class A common stock, we expect that our
effective income tax rate will increase as the percentage of non-controlling
interests decreases. Assuming the Principals exchange all of their New
Class A Units in Holdings for shares of Class A common stock, we expect that our
effective tax rate will be approximately 42%.
29
Liquidity
and Capital Resources
Working
Capital
Below is
a table showing our liquid assets as of September 30, 2009, and December 31,
2008.
September
30,
|
December
31,
|
|||||||||||
(in
thousands, except percentages)
|
2009
|
2008
|
%
Change
|
|||||||||
Cash
and cash equivalents
|
$ | 165,189.5 | $ | 86,563.0 | 91 | % | ||||||
Marketable
securities less securities held for deferred compensation
|
431.3 | 65,418.1 | (99 | ) | ||||||||
165,620.8 | 151,981.1 | 9 | ||||||||||
Fees
receivable and accrued fees, net of allowance for doubtful
accounts
|
51,492.2 | 54,799.1 | (6 | ) | ||||||||
Total
liquid assets
|
$ | 217,113.0 | $ | 206,780.2 | 5 |
Our
working capital requirements historically have been met through operating cash
flows. In the future we may rely on both our operating cash flows and borrowing
facilities to meet our working capital requirements. Our current working capital
and existing credit facility, which is comprised of a borrowing of $60.0 million
under the term credit facility and $50.0 million under a revolving credit
facility, are sufficient to meet our current obligations.
Fees receivable and accrued fees,
net of allowance for doubtful accounts represent fees that have been, or
will be billed to our clients. We perform a review of our receivables on a
monthly basis and contact clients with receivables older than 60 days. We review
receivables and provide an allowance for doubtful accounts for any receivables
when appropriate. As of September 30, 2009, the allowance for doubtful accounts
was not material to our receivables balance. Historically, we have been able to
collect most receivables within a 60-day period.
Prior to
the IPO, we declared a dividend and capital distribution payable to GAM totaling
$220.8 million, of which $180.7 million is payable within 45 days of September
30, 2009, and $40.1 million is payable by September 30, 2010. The payments will
be funded from our cash balances, which will include $60.0 million from our term
credit facility.
Long-term
Debt
In
September 2009, Holdings entered into a $110.0 million credit facility
consisting of a $60.0 million three-year term credit facility and a $50.0
million three-year revolving credit facility.
In
October 2009, we borrowed $60.0 million under the term credit facility. The
interest associated with the $60.0 million borrowing is LIBOR plus 300 basis
points, which was initially set at 3.28406%, and will reset on the date that is
three months following the borrowing date. The amortization schedule will
require quarterly principal payments of 7.5% in both years two and three, with a
final payment of 40% at maturity. There is no remaining capacity under the term
credit facility. A portion of the $60.0 million borrowing is being used to fund
payments to GAM and the Principals. The balance of the $60.0 million borrowing
may also be used for working capital needs and to potentially provide seed
capital to fund future investment products.
The $50.0
million revolving credit facility may be used primarily for working capital
needs. Borrowings under the revolving credit facility bear interest at a rate
equal to, at our option, (i) LIBOR plus a range of 300 to 400 basis points or
(ii) the base rate (as defined in the credit facility agreement) plus a range of
200 to 300 basis points. The interest rate will float and reset at certain
intervals. There were no borrowings under the revolving credit facility during
the period.
The
spread to LIBOR or the base rate is correlated to the consolidated leverage
ratio as prescribed within the credit facility agreement. Our current spread to
LIBOR and the base rate is 300 basis points and 200 basis points, respectively.
These spreads could increase if our consolidated leverage ratio exceeds
1.0x.
30
The
covenants in the credit facility agreement require compliance with the following
financial ratios (each in accordance with the definitions (including EBITDA) in
the credit facility agreement), to be calculated on a consolidated basis at the
end of each fiscal quarter:
·
|
maintenance
of a maximum consolidated leverage ratio of less than or equal to 2.00x
(calculated as the ratio of consolidated funded indebtedness plus the
remaining amount of a deferred payment to GAM of $40.1 million, which
is payable by September 30, 2010, to consolidated EBITDA for the last six
months multiplied by two); and
|
·
|
maintenance
of a minimum consolidated interest coverage ratio of greater than or equal
to 4.00x (calculated as the ratio of consolidated EBITDA for the last six
months to consolidated interest charges for such
period).
|
The credit facility agreement also
contains customary affirmative and negative covenants, including limitations on
indebtedness, liens, cash dividends and fundamental corporate changes. As of
September 30, 2009, Holdings was in compliance with all such
covenants.
Cash
Flows
The
following table sets forth our cash flows for the first nine months of 2009 and
2008:
Nine
Months Ended September 30,
|
||||||||||||
(in
thousands, except percentages)
|
2009
|
2008
|
%
Change
|
|||||||||
Cash
flow data:
|
||||||||||||
Net
cash provided by operating activities
|
$ | 29,279.5 | $ | 73,335.6 | (60 | )% | ||||||
Net
cash provided by (used in) investing activities
|
63,263.2 | (51,288.4 | ) | 223 | ||||||||
Net
cash (used in) financing activities
|
(13,982.0 | ) | (82,000.0 | ) | 83 | |||||||
Effect
of exchange rate changes on cash
|
65.8 | (27.5 | ) | 339 | ||||||||
Net
increase (decrease) in cash and cash equivalents
|
$ | 78,626.5 | $ | (59,980.3 | ) | 231 |
Net cash
provided by operating activities decreased $44.1 million, or 60%, in the nine
months ended September 30, 2009, compared to the corresponding period in 2008,
primarily reflecting lower revenues.
Net cash
provided by investing activities was $63.3 million in the nine months ended
September 30, 2009, compared to net cash used in investing activities of $51.3
million in the corresponding period in 2008, primarily reflecting the sales of
our securities. We liquidated our holdings of investment securities towards the
latter part of the third quarter of 2009 in anticipation of making payments to
GAM and the Principals.
Net cash
used by financing activities decreased $68.0 million, or 83%, in the nine months
ended September 30, 2009, compared to the corresponding period in 2008,
primarily reflecting lower dividend payments in 2009.
A
distribution to GAM of $180.7 million is payable within 45 days of September 30,
2009.
Deferred
Taxes
As a
result of the Principals’ exchange of their Class B profits interests for New
Class A Units, the Principals’ ownership interests were reclassified to equity
for financial accounting purposes and the related deferred tax asset was
de-recognized.
Each
Principal exchanged 1.2 million of his New Class A Units for an equivalent
number of shares of Class A common stock. In connection with the
exchange, we elected to step up our tax basis in the incremental assets
acquired in accordance with Section 754 of the Code. The tax
benefits arising from the resultant step-up in tax basis became determinable,
and deferred tax benefits of $38.4 million were recorded, and will be recovered
generally over a 15-year period. These benefits will be shared between us and
each Principal under a tax receivable agreement (see Notes to the Consolidated
Financial Statements, Note 4.
Tax Receivable Agreement).
31
Recovery
of deferred tax benefits over the 15-year period will depend on our ability to
generate sufficient taxable income. The deferred tax asset of $38.4 million as
of September 30, 2009, will require annual taxable income of $6.1 million over
the 15-year amortization period to be recovered in full. As our taxable income
has historically been significantly in excess of such amount, we believe that it
is more likely than not that the deferred tax asset will be recovered and,
therefore, that no valuation allowance is necessary.
Off-Balance
Sheet Arrangements
We did
not have any off-balance sheet arrangements as of September 30, 2009, or as of
December 31, 2008.
New
Accounting Pronouncements Not Yet Adopted
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 167, Amendments to FASB Interpretation
No. 46(R). SFAS No. 167 is effective for us in 2010. SFAS 167 gives
additional guidance on determining whether an entity is a variable interest
entity and requires ongoing assessments of whether an enterprise is the primary
beneficiary of a variable interest entity. We are evaluating the effect of SFAS
167 on our financial statements.
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
We have
made statements in our “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and in other sections of this Form 10-Q
that are forward-looking statements. In some cases, you can identify these
statements by forward-looking words such as “may,” “might,” “will,” “should,”
“expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”
“potential” or “continue,” the negative of these terms and other comparable
terminology. These forward-looking statements, which are subject to risks,
uncertainties and assumptions, may include projections of our future financial
performance, our anticipated growth strategies, descriptions of new business
initiatives and anticipated trends in our business. These statements are only
predictions based on our current expectations and projections about future
events. There are important factors that could cause our actual results, level
of activity, performance or achievements to differ materially from the results,
level of activity, performance or achievements expressed or implied by the
forward-looking statements.
Although
we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, level of activity, performance
or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of any of these forward-looking
statements. We are under no duty to update any of these forward-looking
statements after the date of this Form 10-Q to conform our prior statements to
actual results or revised expectations.
Our
registration statement on Form S-1 (File No. 333-149178) as filed with the U.S.
Securities and Exchange Commission (“SEC”) on February 12, 2008, as amended
(“Form S-1”), pursuant to the provisions of the Securities Act of 1933, as
amended (the “Act”), listed various important factors that could cause actual
results to differ materially from projected and historic results. We note these
factors for investors as permitted by the Private Securities Litigation Reform
Act of 1995. You can find them in our registration statement on Form S-1 under
the heading “Risk Factors.” We incorporate that section of the Form S-1 in this
filing and readers of this Report on Form 10-Q should refer to it. You should
understand that it is not possible to predict or identify all such factors.
Consequently, you should not consider any such list to be a complete set of all
potential risks or uncertainties.
In this
Form 10-Q we state that we may experience a reduced number of institutional
mandates, and net client cash flows, as a result of decreased portfolio
rebalancing following recent market turbulence. Many factors influence our
overall number of institutional mandates, as well as levels of net client cash
flows, including, but not limited to, the performance of our investment
strategies, interest in the particular strategies we offer and general market
and economic conditions.
32
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
Market
Risk
Revenues
and Other Operating Income
Our
exposure to market risk is directly related to the role of Artio Global as
investment advisor for the proprietary funds, institutional commingled funds,
separate accounts and sub-advised accounts it manages. Substantially all of
our revenue is derived from investment advisory agreements with these
funds and accounts. Under these agreements, the fees we receive are based on the
fair value of the assets under management (“AuM”) and our fee rates.
Accordingly, our revenue and income may decline as a result of:
·
|
the
value of AuM decreasing;
|
·
|
our
clients withdrawing funds; or
|
·
|
a
shift in product mix to lower margin
products.
|
The fair
value of AuM was $55.8 billion as of September 30, 2009. Assuming a 10% increase
or decrease in the value of the AuM and the change being proportionally
distributed over all our products, the fair value would increase or decrease by
$5.6 billion, which would cause an annualized increase or decrease in Total revenues and other operating income of
approximately $34.9 million at our current effective fee rate.
We have
not adopted a corporate-level risk management policy regarding client assets,
nor have we historically attempted to hedge at the corporate level the market
risks that would affect the value of separate client portfolios or our overall
AuM. Indeed, some of these risks (e.g., sector risks, currency risks) are
inherent in certain strategies, and clients may invest in particular strategies
to gain exposure to these risks.
Marketable
Securities
We are
subject to market risk from a decline in the price of marketable securities that
we own to manage our excess cash and fund future deferred compensation
liabilities. These securities consist primarily of Artio Global Funds. The fair
value of these marketable securities was $8.1 million as of September 30, 2009.
Management regularly monitors the value of these investments; however, given
their nature and relative size, we have not adopted a specific risk management
policy to manage the associated market risk. Assuming a 10% increase or decrease
in the values of these marketable securities, the fair value would increase or
decrease by $0.8 million as of September 30, 2009.
The
marketable securities held as of September 30, 2009 were denominated in U.S.
dollars. The securities held in relation to the deferred compensation plan
include Artio Global Funds whose underlying assets are primarily non-dollar
denominated. The effect of a change in exchange rates on such securities would
not have a significant effect on the financial statements.
Exchange
Rate Risk
A
substantial portion of the accounts that we advise, or sub-advise, hold
investments that are denominated in currencies other than the U.S. dollar. These
client portfolios may hold currency forwards or other derivative instruments.
The fair value of these investments and instruments may be affected by movements
in the rate of exchange between the U.S. dollar and the underlying foreign
currency. Such movements in exchange rates affect the fair value of assets held
in accounts we manage, thereby affecting the amount of revenue we earn. The fair
value of the assets we manage was $55.8 billion as of September 30, 2009. The
fair value of the AuM would decrease, with an increase in the value of the U.S.
dollar, or increase, with a decrease in the value of the U.S. dollar. Excluding
the impact of any hedging arrangements, a 10% increase or decrease in the value
of the U.S. dollar would decrease or increase the fair value of the AuM by $4.6
billion, which would cause an annualized increase or decrease in Total revenues and other operating income of
$28.7 million. As of September 30, 2009, approximately 82.1% of our AuM was
denominated in currencies other than the U.S. dollar.
33
Interest
Rate Risk
Certain
of the accounts we advise or sub-advise own fixed income securities. Further, we
typically invest our excess cash balances in short-term U.S. government fixed
income securities. Interest rate changes affect the fair value of such
investments or the revenue we earn from them.
Assuming
a 100 basis point increase or decrease in the U.S. Treasury Note rate (and rates
directly or indirectly tied to such rate), we estimate that the value of the
fixed income securities we manage or sub-advise would change by
approximately $252.8 million. The impact of such change would not have a
material impact on our revenues or net income.
Item 4.
Controls and Procedures.
As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
“Exchange Act”)). Based on this evaluation, our principal executive officer and
principal financial officer concluded that our disclosure controls and
procedures are effective in alerting them in a timely manner to material
information required to be disclosed in our periodic reports filed with the
SEC.
During
our most recent fiscal quarter, there has not occurred any change in our
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
PART II –
OTHER INFORMATION
Item 1.
Legal Proceedings.
We have
been named in certain litigation. In the opinion of management, the possibility
of an outcome from this litigation that is materially adverse to us is
remote.
Item 1A.
Risk Factors.
Our Form
S-1 contains a section entitled “Risk Factors.” We incorporate that section of
the Form S-1 in this filing and readers should refer to it.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered
Sales of Equity Securities
In
connection with the IPO, on September 29, 2009, Investors sold 9.0 million
shares of Class B common stock to each Principal at par value. In addition,
Investors issued 1.2 million shares of Class A common stock to each Principal in
exchange for an equivalent number of New Class A Units and the cancellation of
an equivalent number of shares of Class B common stock. These issuances were
exempt from registration pursuant to Section 4(2) of the Act.
Use
of Proceeds
As
described in our Form S-1 effective as of September 23, 2009, on September 29,
2009, we completed an IPO of 25.0 million shares of Class A common stock at a
price of $26.00 per share, before the underwriting discount, for net proceeds of
$614.9 million. The net proceeds were used to repurchase and retire, at the IPO
price, net of the underwriting discount, an aggregate of 22.6 million shares of
Class C common stock from GAM , and to repurchase 1.2 million shares of Class A
common stock from each of the Principals.
34
On
October 5, 2009, the underwriters (managed by Goldman, Sachs & Co. as lead
underwriter), exercised their option to purchase additional shares of Class A
common stock at the IPO price, net of the underwriting discount, resulting in
the issuance of 2,644,156 shares of Class A common stock. The net proceeds were
used to repurchase and retire, at the IPO price, net of the underwriting
discount, 2,644,156 shares of Class C common stock from GAM.
The total expenses of the IPO, excluding
underwriting discounts and commissions, were approximately $17.4 million.
Purchases
of Equity Securities
Investors’
share repurchase activity for each of the three months in the period ended
September 30, 2009, was as follows:
Period
|
Total
Number of Shares Repurchased (a)
|
Average
Price Paid Per Share (a)
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans
or Programs (b)
|
Approximate
Dollar Value of Shares that May Yet be Purchased Under the Plans or
Programs (b)
|
|||||||||||
July
1, 2009 through July 31, 2009
|
─
|
$ |
─
|
─
|
$ |
─
|
|||||||||
August
1, 2009 through August 31, 2009
|
─
|
─
|
─
|
─
|
|||||||||||
September
1, 2009 through September 30, 2009
|
25,000,000 | 24.596 |
─
|
─
|
|||||||||||
For
the quarter ended September 30, 2009
|
25,000,000 | 24.596 |
─
|
─
|
(a)
|
These
columns reflect the following transactions during the third quarter of
2009: the repurchase of 2.4 million shares of Class A common stock and the
repurchase and retirement of 22.6 million shares of Class C common stock
in connection with the initial public
offering.
|
(b)
|
As
of September 30, 2009, Investors did not have a share repurchase
program.
|
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Submission of Matters to a Vote of Security Holders.
None.
Item 5.
Other Information.
Investors’
annual meeting of shareholders for 2010 is scheduled to be held on May 11,
2010. Pursuant to Rule 14(a)-8(e) of the Exchange Act, any
shareholder that wishes to submit a shareholder proposal for such meeting, must
do so by November 30, 2009.
35
Item 6.
Exhibits.
1)
Exhibit 31.1
|
Certification
by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
||
2)
Exhibit 31.2
|
Certification
by the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
3)
Exhibit 32.1
|
Certification
by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
4)
Exhibit 32.2
|
Certification
by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
36
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on
November 13, 2009.
Artio
Global Investors Inc.
|
|||
By: |
/s/
Francis Harte
|
||
Name: |
Francis
Harte
|
||
Title: |
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
37