United Asset Management Corporation
United Asset Management's
clients
United Asset Management is one of the largest independent investment management
firms in the world. By funding growth, rewarding superior investment
performance, ensuring business stability, and maintaining the autonomy of its
firms, UAM has assembled an outstanding group of independent investment
management affiliates that employ a variety of investment styles to manage a
broad mix of asset classes around the globe.
UAM's firms manage both domestic and international investment portfolios for
corporate, government and union benefit plans, mutual funds, individuals,
endowments, and foundations. As of December 31, 1998, UAM's firms had
approximately $201.4 billion under management with an average account size of
$32.3 million. The mix of assets under management for clients of UAM's firms was
63% U.S. equities, 14% international securities, 13% U.S. bonds and cash, 5%
real estate and 5% stable value assets. The 20 largest clients of UAM's
affiliates represented 16% of total revenues and the 100 largest clients
represented 28%.
The goal of each of UAM's firms is to provide superior, focused and individual
service to its clients. A sound and consistent investment philosophy, regular
communications and a keen awareness of individual client needs are all critical
elements in providing exceptional client service. To retain existing clients
and attract new prospects, UAM and its affiliates are co-investing in a wide
range of initiatives ranging from client relationship management and back
office systems to new product development and marketing support. These
investments are part of a stronger, more effective operating partnership
between UAM and its affiliates, and are at the center of UAM's four-point
strategy to enhance shareholder value and increase the internal growth of its
firms.
Assets under Average
management Number account size
As of December 31, 1998 (in millions) Percent of clients (in millions)
............................................................................................
Corporate employee benefit plans $ 68,400 34.0% 1,672 $ 40.9
............................................................................................
Mutual funds 48,483 24.1 260 186.5
............................................................................................
Government employee benefit plans 33,345 16.5 343 97.2
............................................................................................
Individuals 20,512 10.1 2,704(1) 7.6
............................................................................................
Endowments and foundations 14,070 7.0 769 18.3
............................................................................................
Union member benefit plans 13,086 6.5 284 46.1
............................................................................................
Corporate cash reserves 1,778 0.9 24 74.1
............................................................................................
Professional groups 1,719 0.9 185 9.3
- --------------------------------------------------------------------------------------------
$201,393 100.0% 6,241 $ 32.3
============================================================================================
(1) These clients include 105 wrap-fee relationships with brokerage firms which
represent approximately 29,000 individual accounts with $9.3 billion under
management.
36
Management's discussion and analysis
The principal business activities of UAM are investment advisory services,
primarily for institutional clients, and the acquisition of institutional
investment management firms. The Company's wholly owned subsidiaries operate in
one business segment, that is, as investment advisers, managing both domestic
and international investment portfolios for corporate, government and union
benefit plans, mutual funds, individuals, endowments, and foundations.
The revenues of UAM's affiliated firms are derived primarily from fees for
investment advisory services provided to institutional and other clients.
Investment advisory fees are generally a function of the overall fee rate
charged to each account and the level of assets under management by the
affiliated firms. A minor portion of revenues is generated when firms
consummate transactions for client portfolios. Assets under management can be
affected by the addition of new client accounts or client contributions to
existing accounts, withdrawals of assets from or terminations of client
accounts, and investment performance, which may depend on general market
conditions.
Amortization of cost assigned to contracts acquired and Operating Cash Flow
(net income (loss) plus amortization, depreciation and the reduction in value
of intangible assets, net of taxes)
Cost assigned to contracts acquired, net of accumulated amortization,
represented approximately 65% of the Company's total assets as of December 31,
1998. Amortization of cost assigned to contracts acquired, which is a noncash
charge, represented 15% of the Company's operating expenses. Recording the cost
assigned to contracts acquired as an asset, with the resulting amortization as
an operating expense, reflects the application of generally accepted accounting
principles to acquisitions by UAM of investment management firms in
transactions accounted for as purchases. The principal assets acquired are the
investment advisory contracts which evidence the firms' ongoing relationships
with their clients.
Although the contracts acquired are typically terminable on 30-days notice,
analyses conducted by independent consultants retained by UAM and the
experience of UAM's firms to date have indicated that: (1) contracts are
usually relatively long-lived; (2) the duration of contracts can be reasonably
estimated; and (3) the value of the cost assigned to contracts acquired can be
estimated based on the present value of their projected income stream.
The cost assigned to contracts acquired is amortized on a straight-line basis
over the estimated weighted average useful life of the contracts of individual
firms acquired. These lives are estimated through statistical analysis of
historical patterns of terminations and the size and age of the contracts
acquired as of the acquisition date.
When actual terminations differ from the statistical patterns developed, or
upon the occurrence of certain other events, the Company updates the lifing
analyses discussed above. If the update indicates that any of the estimates
should be shortened, the remaining cost assigned to contracts acquired will be
amortized over the shorter life commencing in the year in which the new
estimate is determined. The Company regularly performs reviews for potential
impairment of the value of contracts. If the review indicates that the carrying
value of the contracts is impaired, the asset is adjusted to its estimated fair
value.
Cost assigned to contracts acquired is amortized as an operating expense. It
does not, however, require the use of cash and therefore, management believes
that it is important to distinguish this expense from other operating expenses
in order to evaluate the performance of the Company. Amortization of cost
assigned to contracts acquired per share referred to below has been calculated
by dividing total amortization by the same number of shares used in the diluted
earnings-per-share calculation.
37
United Asset Management Corporation
For purposes of this discussion, Operating Cash Flow is defined as net income
(loss) plus amortization, depreciation and the reduction in value of intangible
assets, net of taxes, as reflected in the Company's Consolidated Statement of
Cash Flows. Operating Cash Flow is used to invest in affiliate growth
initiatives, repurchase shares of the Company's common stock, pay dividends to
shareholders and fund acquisitions. Management uses Operating Cash Flow not to
the exclusion of net income (loss), but rather as an additional important
measure of the Company's performance.
Results of operations
Revenues were $961,854,000, $941,621,000 and $883,267,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. The increase in revenues year
over year was the result of positive portfolio performance achieved by UAM's
affiliated firms as well as purchase business combinations, partially offset by
the effect of net client cash outflows. In addition, in 1998 UAM received life
insurance proceeds as a result of the death of an executive. Also in 1998,
Heitman Financial LLC sold its non-retail property management operation. In
1996, nonrecurring revenues included the redemption of the Company's minority
interest in Aldrich Eastman Waltch. The revenues of OSV Partners, J.R. Senecal
& Associates Investment Counsel Corp., Pacific Financial Research, Inc.,
Thomson Horstmann & Bryant, Inc., Lincluden Management Limited and Integra
Capital Management Corporation have been included since their acquisition dates
of April 22, 1996, January 7, 1997, May 29, 1997, June 6, 1997, September 4,
1997 and January 6, 1998, respectively.
Assets under management totaled $201.4 billion in 1998 compared to $197.5
billion in 1997 and $171.0 billion in 1996. The net increase in assets under
management of $3.9 billion during 1998 consisted of investment performance of
$21.2 billion and acquisitions totaling $2.5 billion, partially offset by
negative net client cash flow of $19.8 billion. The net increase in assets
under management of $26.5 billion during 1997 consisted of investment
performance of $27.1 billion and acquisitions totaling $15.4 billion, partially
offset by negative net client cash flow of $16.0 billion. UAM is undertaking a
number of initiatives focused on improving net client cash flow.
Compensation and related expenses was $474,721,000 in 1998, $470,372,000 in
1997 and $431,877,000 in 1996. The increase in compensation and related
expenses each year was due to higher compensation earned by employees in
accordance with revenue sharing plans. Amortization of cost assigned to
contracts acquired was $113,296,000 in 1998, $105,242,000 in 1997 and
$101,935,0000 in 1996. The increase each year was primarily due to the
acquisitions described above. Other operating expenses were $179,342,000 in
1998, $163,927,000 in 1997 and $138,450,000 in 1996. The increase between years
reflects the acquisitions described above as well as the higher costs of
marketing, client service and product development. The Company expects to
continue the investments it makes with affiliates in marketing, distribution
and new product development. Furthermore, the Company plans to continue
supporting firms at various stages of development.
During the fourth quarter of 1997, the Company recorded a noncash charge
reducing the recorded value of intangible assets to reflect an impairment of
the cost assigned to contracts acquired of $170,982,000 ($99,347,000 net of
taxes) due to a projected decline in revenues at two affiliates. The assets
were reduced to their estimated fair value.
Interest expense was $60,275,000 in 1998, $43,156,000 in 1997 and $43,289,000
in 1996. The increase in 1998 was due to an increase in both the Company's
average debt levels and the average interest rates charged on borrowings. The
Company's average debt levels also increased between 1996 and 1997 but were
partially offset by a decrease in the average interest rates charged on
borrowings.
Income before income taxes was $137,249,000 in 1998 compared to a loss before
income taxes of $7,223,000 in 1997 and income before income taxes of
$171,248,000 in 1996 primarily as a result of the events described above. Net
income for 1998 was $78,507,000 compared to a net loss of $4,133,000 in 1997
and net income of $97,822,000 in 1996. Diluted earnings per share for 1998 were
$1.15 compared to diluted loss per share of $.06 in 1997 and diluted earnings
per share of $1.36 in 1996.
38
Amortization of cost assigned to contracts acquired per share increased to
$1.66 in 1998 from $1.44 in 1997 and $1.41 in 1996. Operating Cash Flow was
$211,404,000 in 1998, $213,652,000 in 1997 and $211,371,000 in 1996. The
changes in Operating Cash Flow were primarily the result of the circumstances
discussed above.
Excluding the effects of the 1997 reduction in value of intangible assets of
$170,982,000 and the 1996 redemption of the minority interest in Aldrich
Eastman Waltch, net income was $95,214,000 in 1997 and $90,719,000 in 1996.
Diluted earnings per share were $1.31 in 1997 and $1.26 in 1996. Operating Cash
Flow was $213,652,000 in 1997 and $204,268,000 in 1996.
Financial condition and liquidity
The Company generated $211,404,000 of Operating Cash Flow in 1998. This
Operating Cash Flow and additional borrowings under the Company's line of
credit were primarily used to repurchase shares of the Company's common stock
for $270,579,000, to finance the $144,303,000 cash portion of acquisition
activity, and to pay dividends to shareholders totaling $53,675,000. As of
December 31, 1998, the Company had working capital of $83,315,000 and had
$463,000,000 available under its line of credit (see Note 3 to the Consolidated
Financial Statements included in this Annual Report which details changes in
the Company's credit arrangements over the past year).
Management believes that the Company's existing capital, together with
Operating Cash Flow and borrowings available under its revolving line of
credit, will provide the Company with sufficient resources to meet its present
and reasonably foreseeable future cash needs. Management expects that the
principal uses of financial resources will be to repurchase shares of the
Company's common stock, to provide further support for investing with existing
affiliates, to pay shareholder dividends, to acquire additional investment
management firms, and to fund commitments due or potentially due to former
owners of affiliated firms.
Although the Company is still pursuing acquisitions of investment management
firms, the activity level has slowed in recent years due to prices for firms
increasing significantly as well as UAM increasing its support for growth
initiatives at individual affiliates in areas such as product development and
client service. The Company is also taking steps to refocus operations that do
not meet strategic objectives. This has allowed the Company and its affiliates
to reallocate resources toward more efficient uses. Furthermore, during 1998,
the Company significantly increased its repurchases of UAM common stock.
Increases or decreases in interest rates affect UAM's costs of operations
chiefly through raising or lowering the interest expense related to the
Company's variable-rate debt outstanding. To mitigate the risks associated with
increases in interest rates, UAM has entered into and plans to continue to
enter into interest-rate protection agreements (see Notes 1 and 3 to the
Consolidated Financial Statements included in this Annual Report). Rates of
interest on the $400,000,000 of Senior Notes and the existing subordinated debt
are fixed. Increases and decreases in interest rates may also affect market
prices of assets managed by the Company's affiliated firms. Changes in such
prices may affect the affiliated firms' revenues, and therefore UAM's
consolidated revenues.
Effects of inflation
The Company's business is not capital intensive. Management believes that
financial results as reported would not be significantly effected had such
results been adjusted to reflect inflation and price changes.
Year 2000 and other system-related issues
The "Year 2000 issue" is the result of computer programs and other electronic
systems that use two digits rather than four to define the applicable year.
These programs and systems may not be able to process dates beyond 1999, which
may cause system failures or create erroneous results.
The Company has retained a consulting firm since 1997 to help develop and
implement a program to assess its Year 2000 readiness. An inventory of the
Company's computer hardware and software programs, as well as surveys conducted
of all of its software and hardware vendors, have substantially been completed.
As part of this program, the Company is testing, modifying, upgrading or
replacing its computer software applications and systems, and seeks to be Year
2000 compliant by June 30, 1999.
39
United Asset Management Corporation
The Company is also addressing Year 2000 issues related to non-information
technology (non-IT) systems, including embedded software and equipment (e.g.
elevators, telephone systems, etc.), and addressing the compliance of key
business partners. The Company has substantially completed an assessment of its
non-IT systems and service providers and is in the process of gaining
assurances that they will be Year 2000 compliant, and seeks to have these
assurances by June 30, 1999.
The Company is in the process of developing contingency plans in the event that
the IT or non-IT systems of the Company or any of its key service providers are
not Year 2000 compliant by the end of 1999. The contingency plans, which are
expected to be completed by the end of 1999, will address how to mitigate risks
associated with the worst reasonably likely failures of systems at critical
dates in both the short term and the long term. Any Year 2000 compliance
problem of the Company, any of its affiliated firms, any of its vendors and any
other company with which it conducts business could have a material adverse
effect on the Company's consolidated financial position, its consolidated
results of operations or its consolidated cash flows.
To date, the Company and its affiliates have incurred expenses in the amount of
approximately $1,200,000 and expect to incur an additional $1,000,000 related
to this issue. These costs, which principally represent consulting fees, are
being expensed as incurred. The Company has performed, and expects to continue
to perform, modifications, upgrades and replacements of its computer software
applications and systems through the Company's ongoing maintenance program.
Therefore, the Company has not incurred, and does not expect to incur,
significant incremental expenses for such modifications, upgrades and
replacements. The Company does not segregate payroll or other internal costs
specifically devoted to its efforts to address Year 2000 issues, but does not
believe these costs to be significant. The expenses of the Company's affiliated
firms related to Year 2000 issues are funded out of the share of revenues
reserved for the affiliates under revenue sharing agreements and do not affect
the share of revenues retained by the Company. The total cost associated with
becoming Year 2000 compliant is not expected to be material to the Company's
consolidated financial position, its consolidated results of operations or its
consolidated cash flows.
The Company's affiliates that are registered with the Securities and Exchange
Commission (SEC) as investment advisers or broker-dealers are required to
discuss their Year 2000 readiness in Forms ADV-Y2K or BD-Y2K which are filed
with the SEC and are available to clients.
On January 1, 1999, 11 European Union member states adopted the "Euro" as their
common national currency. This currency will replace existing national
currencies in all participating countries over a period ending July 1, 2002.
During this period, both the Euro and existing national currencies will be
accepted. The Company and its affiliates have identified and addressed the
operational and information system issues related to the Euro conversion. The
costs associated with adopting the Euro did not have a material adverse effect
on the Company's consolidated financial position, its consolidated results of
operations or its consolidated cash flows.
The estimates and conclusions herein contain forward-looking statements and are
based on management's best estimates of future events. These statements should
be read in conjunction with the Company's disclosures under the heading
"Forward-looking statements" detailed below.
Derivative instruments and hedging activities
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, which establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. The standard is effective for fiscal years beginning
after June 15, 1999 and, based on current activities, is not expected to have a
material impact on the Company's consolidated financial position, its
consolidated results of operations or its consolidated cash flows.
Forward-looking statements
Certain statements within this Annual Report filed under Form 10-K, in future
filings by the Company with the SEC,
40
in the Company's press releases, and in other written or oral communications
made by or with the approval of an authorized executive officer of the Company
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The words or phrases "can be,"
"expects," "may affect," "may depend," "believes," "estimate," "project" and
similar words and phrases are intended to identify such forward-looking
statements.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors, which may cause the actual results, performances or
achievements of the Company to be materially different from any future results,
performances or achievements expressed or implied by such forward-looking
statements. Some of these risks, uncertainties and other factors are: changes
in domestic and foreign economic and market conditions, effects of client cash
flow, impairment of acquired client contracts, competition in the investment
management industry, and other factors as more thoroughly identified and
explained in Exhibit 99.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 filed with the SEC. Because of such risks,
uncertainties and other factors, the Company cautions each person receiving
such forward-looking statements not to place undue reliance on any such
statements. All such forward-looking statements are current only as of the date
and time they are made. The Company has no obligation, and will not undertake,
to release publicly any revisions to such forward-looking statements (for
example, to reflect events or circumstances occurring after the date and time
such statements were made, or to reflect events or circumstances that were not
anticipated at the date and time such statements were made).
41
United Asset Management Corporation
Eleven-year review
(In thousands, unless otherwise indicated,
except per-share amounts)
1998 1997 1996(1)
..............................................................................................................
Statement of Revenues $ 961,854 $ 941,621 $ 883,267
operations data ----------------------------------------------------------------------------------------------
Operating expenses:
..............................................................................................
Compensation and related expenses 474,721 470,372 431,877
..............................................................................................
Amortization of cost assigned
to contracts acquired 113,296 105,242 101,935
..............................................................................................
Other operating expenses 179,342 163,927 138,450
..............................................................................................
Reduction in value of intangible assets -- 170,982(2) --
----------------------------------------------------------------------------------------------
767,359 910,523 672,262
----------------------------------------------------------------------------------------------
Operating income 194,495 31,098 211,005
----------------------------------------------------------------------------------------------
Interest expense, net and other amortization 57,246 38,321 39,757
----------------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit) 137,249 (7,223) 171,248
..............................................................................................
Income tax expense (benefit) 58,742 (3,090) 73,426
----------------------------------------------------------------------------------------------
Net income (loss) $ 78,507 $ (4,133) $ 97,822
==============================================================================================
..............................................................................................................
Per-share Basic earnings (loss) per share $ 1.19 $ (.06) $ 1.43
data ..............................................................................................
Diluted earnings (loss) per share $ 1.15 $ (.06) $ 1.36
..............................................................................................
Dividends declared per share $ .80 $ .77 $ .66
..............................................................................................
..............................................................................................................
Operating data Operating Cash Flow(3) $ 211,404 $ 213,652 $ 211,371
..............................................................................................
Assets under management at end of year (in millions) $ 201,393 $ 197,489 $ 171,027
..............................................................................................
..............................................................................................................
Balance sheet Total assets $1,439,511 $1,513,500 $1,449,049
data ..............................................................................................
Cost assigned to contracts acquired, net $ 931,815 $1,018,172 $ 959,886
..............................................................................................
Long-term debt (including current portion) $ 890,361 $ 773,255 $ 610,967
..............................................................................................
Total stockholders' equity $ 269,844 $ 458,152 $ 552,244
..............................................................................................
Number of common shares outstanding
at end of year 61,554 69,257 68,711
..............................................................................................
1995 1994 1993 1992
.............................................................................................................................
Statement of Revenues $ 734,353 $ 521,369 $ 476,729 $ 396,074
operations data -------------------------------------------------------------------------------------------------------------
Operating expenses:
.............................................................................................................
Compensation and related expenses 362,516 261,031 237,403 200,884
.............................................................................................................
Amortization of cost assigned
to contracts acquired 93,192 55,121 48,493 37,279
.............................................................................................................
Other operating expenses 115,454 86,895 78,537 70,650
.............................................................................................................
Reduction in value of intangible assets -- -- -- --
-------------------------------------------------------------------------------------------------------------
571,162 403,047 364,433 308,813
-------------------------------------------------------------------------------------------------------------
Operating income 163,191 118,322 112,296 87,261
-------------------------------------------------------------------------------------------------------------
Interest expense, net and other amortization 44,181 12,829 15,328 16,232
-------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit) 119,010 105,493 96,968 71,029
.............................................................................................................
Income tax expense (benefit) 51,754 45,108 41,989 30,298
-------------------------------------------------------------------------------------------------------------
Net income (loss) $ 67,256 $ 60,385 $ 54,979 $ 40,731
=============================================================================================================
.............................................................................................................................
Per-share Basic earnings (loss) per share $ .99 $ .95 $ .92 $ .76
data .............................................................................................................
Diluted earnings (loss) per share $ .95 $ .90 $ .84 $ .68
.............................................................................................................
Dividends declared per share $ .58 $ .50 $ .42 $ .34
.............................................................................................................
.............................................................................................................................
Operating data Operating Cash Flow(3) $ 169,008 $ 121,979 $ 109,552 $ 83,681
.............................................................................................................
Assets under management at end of year (in millions) $ 151,606 $ 111,507 $ 106,082 $ 90,240
.............................................................................................................
.............................................................................................................................
Balance sheet Total assets $1,419,031 $ 947,598 $ 708,412 $ 658,900
data .............................................................................................................
Cost assigned to contracts acquired, net $1,055,676 $ 674,526 $ 480,101 $ 460,523
.............................................................................................................
Long-term debt (including current portion) $ 680,300 $ 369,268 $ 216,230 $ 275,110
.............................................................................................................
Total stockholders' equity $ 491,769 $ 406,158 $ 358,301 $ 288,751
.............................................................................................................
Number of common shares outstanding
at end of year 67,540 63,772 61,530 56,986
.............................................................................................................
10-year
annual
compound
growth
1991 1990 1989 1988 rate
....................................................................................................................................
Statement of Revenues $ 324,772 $ 268,022 $ 227,745 $ 189,839 17.6%
operations data --------------------------------------------------------------------------------------------------------------------
Operating expenses:
....................................................................................................................
Compensation and related expenses 163,054 130,095 108,595 86,789 18.5%
....................................................................................................................
Amortization of cost assigned
to contracts acquired 30,535 27,157 23,808 21,387 18.1%
....................................................................................................................
Other operating expenses 58,825 57,665 43,446 39,951 16.2%
....................................................................................................................
Reduction in value of intangible assets -- -- -- -- --
--------------------------------------------------------------------------------------------------------------------
252,414 214,917 175,849 148,127 17.9%
--------------------------------------------------------------------------------------------------------------------
Operating income 72,358 53,105 51,896 41,712 16.6%
--------------------------------------------------------------------------------------------------------------------
Interest expense, net and other amortization 17,040 13,158 13,166 13,203 15.8%
--------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit) 55,318 39,947 38,730 28,509 17.0%
....................................................................................................................
Income tax expense (benefit) 22,936 16,664 15,107 11,380 17.8%
--------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 32,382 $ 23,283 $ 23,623 $ 17,129 16.4%
====================================================================================================================
.......................................................................................................................... ........
Per-share Basic earnings (loss) per share $ .65 $ .48 $ .51 $ .36 12.7%
data ....................................................................................................................
Diluted earnings (loss) per share $ .58 $ .44 $ .45 $ .34 13.0%
....................................................................................................................
Dividends declared per share $ .28 $ .22 $ .17 $ .13 19.9%
.......................................................................................................... ........
....................................................................................................................................
Operating data Operating Cash Flow(3) $ 67,572 $ 54,772 $ 51,416 $ 42,954 17.3%
....................................................................................................................
Assets under management at end of year (in millions) $ 76,182 $ 58,123 $ 53,319 $ 40,628 17.4%
.......................................................................................................... ........
....................................................................................................................................
Balance sheet Total assets $ 532,610 $ 461,626 $ 406,952 $ 345,747 --
data ....................................................................................................................
Cost assigned to contracts acquired, net $ 343,421 $ 320,940 $ 292,199 $ 258,804 --
....................................................................................................................
Long-term debt (including current portion) $ 208,475 $ 190,635 $ 157,459 $ 133,541 --
....................................................................................................................
Total stockholders' equity $ 226,904 $ 190,185 $ 175,528 $ 160,359 --
....................................................................................................................
Number of common shares outstanding
at end of year 50,926 47,986 46,518 46,436 --
....................................................................................................................
(1) Nonrecurring gains contributed approximately $12,000,000 to revenues, or
$.10 to earnings per share.
(2) Reduction in value of intangible assets of approximately $170,982,000 was
charged to operating expenses ($99,347,000 net of taxes), or $1.37 to loss
per share.
(3) Net income (loss) plus amortization, depreciation and the reduction in
value of intangible assets, net of taxes.
United Asset Management Corporation
Consolidated balance sheet
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------
Assets Current assets:
...................................................................................
Cash and cash equivalents $ 153,616,000 $ 173,638,000
...................................................................................
Investment advisory fees receivable 169,061,000 180,921,000
...................................................................................
Other current assets 12,419,000 11,863,000
-----------------------------------------------------------------------------------
Total current assets 335,096,000 366,422,000
...................................................................................
Fixed assets, net 42,148,000 41,110,000
...................................................................................
Cost assigned to contracts acquired, net of
accumulated amortization of $598,621,000
in 1998 and $508,087,000 in 1997 931,815,000 1,018,172,000
...................................................................................
Other assets 130,452,000 87,796,000
-----------------------------------------------------------------------------------
Total assets $1,439,511,000 $1,513,500,000
===================================================================================
...........................................................................................................
Liabilities and Current liabilities:
stockholders' equity ...................................................................................
Accounts payable and accrued expenses $ 143,559,000 $ 118,386,000
...................................................................................
Accrued compensation 108,222,000 143,633,000
-----------------------------------------------------------------------------------
Total current liabilities 251,781,000 262,019,000
...................................................................................
Senior notes payable 687,521,000 514,843,000
...................................................................................
Subordinated notes payable 202,840,000 258,412,000
...................................................................................
Deferred income taxes 27,525,000 20,074,000
-----------------------------------------------------------------------------------
Total liabilities 1,169,667,000 1,055,348,000
-----------------------------------------------------------------------------------
Commitments and contingencies
...................................................................................
Stockholders' equity:
...................................................................................
Common stock, par value $.01 per share:
Authorized: 200,000,000 shares
Issued: 70,346,577 shares in 1998 and 1997 703,000 703,000
...................................................................................
Capital in excess of par value 360,781,000 357,239,000
...................................................................................
Retained earnings 140,751,000 133,291,000
...................................................................................
Accumulated other comprehensive income (10,132,000) (4,369,000)
-----------------------------------------------------------------------------------
492,103,000 486,864,000
...................................................................................
Less treasury shares at cost: 8,792,879 shares
in 1998 and 1,089,548 in 1997 (222,259,000) (28,712,000)
-----------------------------------------------------------------------------------
Total stockholders' equity 269,844,000 458,152,000
-----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,439,511,000 $1,513,500,000
===================================================================================
See notes to consolidated financial statements.
44
Consolidated statement of operations
Year ended December 31, 1998 1997 1996
........................................................................................................
Revenues Revenues $ 961,854,000 $941,621,000 $ 883,267,000
------------------------------------------------------------------------------------------
........................................................................................................
Operating Compensation and related expenses 474,721,000 470,372,000 431,877,000
expenses ..........................................................................................
Amortization of cost assigned
to contracts acquired 113,296,000 105,242,000 101,935,000
..........................................................................................
Other operating expenses 179,342,000 163,927,000 138,450,000
..........................................................................................
Reduction in value of intangible assets -- 170,982,000 --
------------------------------------------------------------------------------------------
767,359,000 910,523,000 672,262,000
------------------------------------------------------------------------------------------
Operating income 194,495,000 31,098,000 211,005,000
------------------------------------------------------------------------------------------
........................................................................................................
Non-operating Interest expense, net 52,770,000 35,879,000 37,523,000
expenses ..........................................................................................
Other amortization 4,476,000 2,442,000 2,234,000
------------------------------------------------------------------------------------------
57,246,000 38,321,000 39,757,000
------------------------------------------------------------------------------------------
Income (loss) before income
tax expense (benefit) 137,249,000 (7,223,000) 171,248,000
..........................................................................................
Income tax expense (benefit) 58,742,000 (3,090,000) 73,426,000
------------------------------------------------------------------------------------------
........................................................................................................
Net income Net income (loss) $ 78,507,000 $ (4,133,000) $ 97,822,000
(loss) ==========================================================================================
Basic earnings (loss) per share $ 1.19 $ (.06) $ 1.43
==========================================================================================
Diluted earnings (loss) per share $ 1.15 $ (.06) $ 1.36
==========================================================================================
See notes to consolidated financial statements.
45
United Asset Management Corporation
Consolidated statement
of cash flows
Year ended December 31, 1998 1997 1996
................................................................................................................................
Cash flow related to Net income (loss) $ 78,507,000 $ (4,133,000) $ 97,822,000
operating activities ........................................................................................................
Adjustments to reconcile net income (loss)
to net cash flow from operating activities:
........................................................................................................
Amortization of cost assigned to contracts acquired 113,296,000 105,242,000 101,935,000
........................................................................................................
Depreciation 13,767,000 10,754,000 9,380,000
........................................................................................................
Amortization of goodwill and other 5,834,000 2,442,000 2,234,000
........................................................................................................
Reduction in value of intangible assets, net of taxes -- 99,347,000 --
--------------------------------------------------------------------------------------------------------
Net income (loss) plus amortization, depreciation
and the reduction in value of intangible assets,
net of taxes 211,404,000 213,652,000 211,371,000
................................................................................................................................
Changes in assets Decrease (increase) in investment advisory fees
and liabilities receivable 12,181,000 (35,970,000) (14,234,000)
........................................................................................................
Decrease (increase) in other current assets (513,000) (43,000) 2,446,000
........................................................................................................
Increase in accounts payable and accrued expenses 21,560,000 7,134,000 16,512,000
........................................................................................................
Increase (decrease) in accrued compensation (35,276,000) 27,795,000 28,965,000
........................................................................................................
Increase (decrease) in deferred income taxes 2,669,000 919,000 (6,887,000)
--------------------------------------------------------------------------------------------------------
Net cash flow from operating activities 212,025,000 213,487,000 238,173,000
--------------------------------------------------------------------------------------------------------
................................................................................................................................
Cash flow related to Purchase of fixed assets (14,828,000) (21,715,000) (10,897,000)
investing activities ........................................................................................................
Cash additions to cost assigned to contracts acquired (18,477,000) (152,068,000) (292,000)
........................................................................................................
Change in other assets (43,247,000) (8,866,000) 10,291,000
--------------------------------------------------------------------------------------------------------
Net cash flow used in investing activities (76,552,000) (182,649,000) (898,000)
--------------------------------------------------------------------------------------------------------
................................................................................................................................
Cash flow related to Purchase of treasury shares (270,579,000) (76,411,000) (43,718,000)
financing activities ........................................................................................................
Additions to notes payable 237,501,000 303,161,000 61,750,000
........................................................................................................
Reductions in notes payable (94,112,000) (313,619,000) (117,597,000)
........................................................................................................
Issuance or reissuance of equity securities 25,924,000 29,029,000 22,743,000
........................................................................................................
Dividends paid (53,675,000) (51,543,000) (40,204,000)
--------------------------------------------------------------------------------------------------------
Net cash flow used in financing activities (154,941,000) (109,383,000) (117,026,000)
--------------------------------------------------------------------------------------------------------
................................................................................................................................
Effect of foreign exchange rate changes
on cash flow (554,000) 3,784,000 2,702,000
--------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (20,022,000) (74,761,000) 122,951,000
........................................................................................................
Cash and cash equivalents at beginning of year 173,638,000 248,399,000 125,448,000
--------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 153,616,000 $ 173,638,000 $ 248,399,000
========================================================================================================
See notes to consolidated financial statements.
46
Consolidated statement of changes in stockholders' equity
Year ended December 31, 1998 1997 1996
.......................................................................................................................
Common stock Balance, beginning of year $ 703,000 $ 692,000 $ 692,000
at par value ......................................................................................................
Exercise of stock options and warrants -- 11,000 --
-----------------------------------------------------------------------------------------------------
Balance, end of year 703,000 703,000 692,000
-----------------------------------------------------------------------------------------------------
.......................................................................................................................
Capital in Balance, beginning of year 357,239,000 346,017,000 341,631,000
excess of ......................................................................................................
par value Issuance of stock (2,000) -- --
......................................................................................................
Exercise of stock options and warrants 3,293,000 9,928,000 4,284,000
......................................................................................................
Issuance of warrants 251,000 1,294,000 102,000
-----------------------------------------------------------------------------------------------------
Balance, end of year 360,781,000 357,239,000 346,017,000
-----------------------------------------------------------------------------------------------------
.......................................................................................................................
Retained Balance, beginning of year 133,291,000 216,989,000 183,198,000
earnings ......................................................................................................
Exercise of stock options and warrants (18,912,000) (25,852,000) (21,302,000)
......................................................................................................
Net income (loss) 78,507,000 (4,133,000) 97,822,000
......................................................................................................
Dividends declared ($.80, $.77, $.66 per share) (52,135,000) (53,713,000) (42,729,000)
-----------------------------------------------------------------------------------------------------
Balance, end of year 140,751,000 133,291,000 216,989,000
-----------------------------------------------------------------------------------------------------
.......................................................................................................................
Accumulated Balance, beginning of year (4,369,000) 714,000 (2,248,000)
other ......................................................................................................
comprehensive Foreign currency translation adjustment, net of tax (7,026,000) (5,083,000) 2,962,000
income (loss) ......................................................................................................
Unrealized gain on marketable securities, net of tax 1,263,000 -- --
-----------------------------------------------------------------------------------------------------
Balance, end of year (10,132,000) (4,369,000) 714,000
-----------------------------------------------------------------------------------------------------
.......................................................................................................................
Treasury shares Balance, beginning of year (28,712,000) (12,168,000) (31,504,000)
at cost ......................................................................................................
Issuance of stock 19,007,000 -- --
......................................................................................................
Exercise of stock options and warrants 58,025,000 59,867,000 63,054,000
......................................................................................................
Purchase of treasury shares (270,579,000) (76,411,000) (43,718,000)
-----------------------------------------------------------------------------------------------------
Balance, end of year (222,259,000) (28,712,000) (12,168,000)
-----------------------------------------------------------------------------------------------------
Total stockholders' equity $ 269,844,000 $ 458,152,000 $ 552,244,000
=====================================================================================================
.......................................................................................................................
Shares issued Balance, beginning of year 70,346,577 69,217,426 69,217,426
......................................................................................................
Exercise of stock options and warrants -- 1,129,151 --
-----------------------------------------------------------------------------------------------------
Balance, end of year 70,346,577 70,346,577 69,217,426
-----------------------------------------------------------------------------------------------------
.......................................................................................................................
Treasury shares Balance, beginning of year (1,089,548) (506,046) (1,676,930)
......................................................................................................
Issuance of stock 769,000 -- --
......................................................................................................
Exercise of stock options and warrants 2,255,769 2,284,398 3,113,184
......................................................................................................
Purchase of treasury shares (10,728,100) (2,867,900) (1,942,300)
-----------------------------------------------------------------------------------------------------
Balance, end of year (8,792,879) (1,089,548) (506,046)
-----------------------------------------------------------------------------------------------------
Shares outstanding 61,553,698 69,257,029 68,711,380
=====================================================================================================
.......................................................................................................................
Comprehensive Net income (loss) $ 78,507,000 $ (4,133,000) $ 97,822,000
income (loss) ......................................................................................................
Other comprehensive income (loss) (5,763,000) (5,083,000) 2,962,000
-----------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 72,744,000 $ (9,216,000) $ 100,784,000
=====================================================================================================
See notes to consolidated financial statements.
47
United Asset Management Corporation
Notes to consolidated
financial statements
Note 1
Summary of significant accounting policies
The Company
The principal business activities of United Asset Management Corporation (the
Company) are investment advisory services, primarily for institutional clients,
and the acquisition of institutional investment management firms. The Company's
wholly owned subsidiaries operate in one business segment, that is, as
investment advisers, managing both domestic and international investment
portfolios for corporate, government and union benefit plans, mutual funds,
individuals, endowments, and foundations. While the Company's subsidiaries
primarily specialize in the management of U.S. equities, bonds and cash, other
asset classes under management include international securities, real estate,
and stable value assets.
The Company has arrangements with its affiliates and certain of their principal
officers to share revenues (revenue sharing plans). Under these revenue sharing
plans, the affiliates retain a portion (determined by formula) of their revenues
to meet all their operating expenses, including compensation, at the discretion
of the subsidiaries' management. The remaining portion of those revenues is used
by the Company to meet its operating and cash flow needs. All operating expenses
incurred by the affiliates are charged to operations and reported as
compensation and related expenses or as other operating expenses in these
consolidated financial statements.
Consolidation
The Company's consolidated financial statements include the accounts of the
Company and all of its subsidiaries. Inter-company balances and transactions
have been eliminated.
Revenue recognition
The majority of the Company's revenues are derived from fees for investment
advisory services provided to institutional and other clients. Investment
advisory fees are generally a function of the overall fee rate charged to each
account and the level of assets under management by the affiliated firms.
Assets under management can be affected by the addition of new client accounts
or client contributions to existing accounts, withdrawals of assets from or
terminations of client accounts, and investment performance, which may depend
on general market conditions. Any fees collected in advance are deferred and
recognized as income over the period earned. Transaction-based fees, including
performance fees, are recognized when all contractual obligations have been
satisfied. All investment advisory fees receivable are expected to be
collected.
Fixed assets and depreciation
Equipment and other fixed assets are recorded at cost and depreciated using the
straight-line method over their estimated useful lives. Leasehold improvements
are amortized over the shorter of their estimated useful lives or the term of
the lease.
Cost assigned to contracts acquired and goodwill
The purchase price for the acquisition of a firm acquired in a business
combination accounted for as a purchase transaction is allocated based on the
fair value of the net assets acquired, primarily investment advisory contracts.
The cost assigned to contracts acquired is amortized using the straight-line
method over periods ranging from five to 20 years. These lives represent the
estimated weighted average lives of the contracts acquired and are based
generally on the historical experience of the individual companies acquired.
The estimated remaining weighted average lives of contracts acquired are
periodically reevaluated. If experience after the acquisition indicates that
the estimate of the average remaining lives should be shortened, the cost
assigned to contracts acquired will be amortized over the shorter life
commencing in the year in which the new estimate is determined.
48
Amounts paid to certain key employees for entering into long-term employment
contracts and noncompete agreements at the time of purchase business
combinations are included in cost assigned to contracts acquired and are
amortized on a straight-line basis over the lives of such arrangements. Purchase
price in excess of the fair value of the net assets acquired is recorded as
goodwill and amortized using the straight-line method over 40 years. Goodwill,
net of accumulated amortization, was $83,493,000 and $59,144,000 at December 31,
1998 and 1997, respectively, and is included in other assets on the accompanying
consolidated balance sheet.
The Company evaluates its long-lived assets for impairment when circumstances
indicate that the carrying value of such assets may not be fully recoverable.
Such an evaluation compares the carrying value of the asset against the
estimated undiscounted future cash flows associated with the asset. If the
evaluation indicates that the undiscounted future cash flows are not sufficient
to recover the carrying value of the asset, the asset is adjusted to its
estimated fair value. During the fourth quarter of 1997, due to a projected
decline in revenues at two affiliates, the Company recorded a noncash reduction
in value of intangible assets to reflect an impairment of the cost assigned to
contracts acquired. The Company estimated the fair value of the contracts based
on estimated discounted future cash flow projections. The total impairment
charge was $170,982,000 ($99,347,000 net of taxes).
Retirement and pension plans
The Company has certain retirement and pension plans which cover eligible
employees of the Company and its subsidiaries. All plans are defined
contribution retirement plans, with the exception of a defined benefit pension
plan maintained by a non-U.S. subsidiary. The expense related to all plans was
$11,631,000, $11,780,000 and $10,428,000 in 1998, 1997 and 1996, respectively.
The defined benefit pension plan has an excess of plan assets over plan
obligations. Excess plan assets and pension expense relating to this plan are
not significant in relation to the Company's consolidated financial statements.
Stock-based compensation plans
As permitted under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (FAS 123), the Company accounts for its
stock-based compensation plans using the intrinsic value method prescribed by
Accounting Principals Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). (See Note 5.)
Earnings (loss) per share
Basic earnings (loss) per share are computed by dividing income (loss)
available to common shareholders by the weighted-average common shares
outstanding during the period. Diluted earnings (loss) per share are computed
by giving effect to all dilutive potential common shares that were outstanding
during the period.
Following is a reconciliation of the numerators and denominators used in
calculating basic and diluted earnings (loss) per share:
1998 1997 1996
Numerator:
...................................................................................
Net income (loss) for basic
and diluted earnings (loss)
per share $78,507,000 $(4,133,000) $97,822,000
====================================================================================
Denominator:
...................................................................................
Weighted average common
shares -- basic calculation 66,158,000 69,611,000 68,515,000
...................................................................................
Effect of dilutive securities 1,911,000 -- 3,536,000
...................................................................................
Weighted average common
shares -- diluted calculation 68,069,000 69,611,000 72,051,000
====================================================================================
Basic earnings (loss) per share $ 1.19 $ (0.06) $ 1.43
====================================================================================
Diluted earnings (loss) per share $ 1.15 $ (0.06) $ 1.36
====================================================================================
During 1998, 1997 and 1996, options on 2,014,000, 7,013,000 and 96,000 shares
of common stock and warrants on 1,523,000, 9,350,000, and 708,000 shares of
common stock were outstanding, respectively, but were not included in computing
diluted earnings (loss) per share in each of these years because their effects
were antidilutive.
49
United Asset Management Corporation
Cash and cash equivalents
Cash equivalents represent highly liquid investments purchased with a remaining
maturity of three months or less. The Company invests its excess cash in
deposits with major banks, in money market funds or in securities composed
primarily of commercial paper of companies with strong credit ratings in
diversified industries for all of which cost approximates fair value. At
December 31, 1998 and 1997, cash equivalents included $8,454,000 and
$10,628,000, respectively, of short-term interest-bearing debt securities, which
were classified as held to maturity.
Investments in mutual funds
During 1998, the Company invested in mutual funds advised by the Company's
affiliates. In accordance with Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities, these
securities are classified as available-for-sale and as such, unrealized gains
(losses) are recorded as a component of accumulated other comprehensive income
on the accompanying consolidated balance sheet.
At December 31, 1998, the fair value and cost basis of these investments totaled
$7,564,000 and $6,301,000, respectively, resulting in an unrealized gain of
$1,263,000. Any related tax effects are not considered material. For the year
ended December 31, 1998, gross realized gains (losses) from sales of
available-for-sale securities were not material. The cost of securities sold is
based on the specific identification method.
Foreign operations
The financial statements of all non-U.S. subsidiaries are translated into U.S.
dollars as follows: assets and liabilities at year-end exchange rates; income,
expenses and cash flows at average exchange rates; and stockholders' equity at
historical exchange rates. The resulting translation adjustment is recorded as a
component of accumulated other comprehensive income on the accompanying
consolidated balance sheet. Any related tax effects are not considered material.
Interest-rate protection agreements
The Company periodically enters into interest-rate protection agreements to
reduce the potential impact of interest-rate increases associated with the
Company's outstanding variable-rate borrowings. Premiums paid for these
instruments are amortized as interest expense over the terms of the agreements.
Any amounts receivable under these agreements are recorded as a reduction of
interest expense.
Deferred incentive compensation plan
The Company has a deferred incentive compensation plan for employees of
affiliates that is based on each affiliate's growth. The deferred compensation
is payable over seven years and is subject to increases or decreases in value
during that period based on performance. The expense of this incentive plan is
recorded over the period in which the incentive compensation is earned.
Use of estimates and reclassifications
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts and disclosures reported in the accompanying consolidated
financial statements. Certain amounts have been reclassified to conform with
the current year's presentation.
Derivative instruments and hedging activities
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, which establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. The standard is effective for fiscal years beginning
after June 15, 1999 and, based on current activities, is not expected to have a
material impact on the Company's consolidated financial position, its
consolidated results of operations or its consolidated cash flows.
Note 2
Fixed assets and lease obligations
Fixed assets, which have estimated useful lives of up to 10 years, consisted of
the following:
December 31, 1998 1997
Equipment, leasehold improvements
and other fixed assets $ 97,357,000 $ 89,841,000
..........................................................................
Accumulated depreciation and
amortization (55,209,000) (48,731,000)
..........................................................................
$ 42,148,000 $ 41,110,000
==========================================================================
50
At December 31, 1998, future minimum rentals for operating leases that had
initial or noncancelable lease terms in excess of one year were payable as
follows:
Year ended Required
December 31, minimum payment
1999 $24,044,000
....................................
2000 $22,247,000
....................................
2001 $20,508,000
....................................
2002 $17,773,000
....................................
2003 $12,847,000
....................................
Thereafter $24,928,000
....................................
Rent expense for 1998, 1997 and 1996 approximated $23,735,000, $24,475,000 and
$21,361,000, respectively.
Note 3
Notes payable
In April 1998, the Company amended and restated its Reducing Revolving Credit
Agreement (the Credit Agreement) with a group of banks, increasing the amount
which the Company may borrow, prepay and reborrow from $500,000,000 to
$750,000,000 through April 29, 2003. Any principal amount of borrowings
outstanding under the Credit Agreement will be due and payable at that date.
At December 31, 1998, an annual commitment fee of .30% was payable on the daily
average unused portion of the Credit Agreement. Interest rates available for
amounts outstanding under this arrangement are currently: prime, 1.5% over LIBOR
or a money market bid option. At December 31, 1998 and 1997, the Company had
borrowings outstanding under its Credit Agreement of $287,000,000 and
$303,000,000, respectively. The effective interest rate on the outstanding
borrowings at December 31, 1998 was 7.11%.
In addition, the Company has $150,000,000 in Senior Notes outstanding with a
group of institutional investors which mature in accordance with a scheduled
payment plan calling for equal annual payments beginning August 25, 2000 and
ending August 25, 2005. The Senior Notes bear interest at a fixed rate of 8.92%.
In August 1998, the Company issued an aggregate of $250,000,000 in additional
Senior Notes to institutional investors. Principal payments on these Senior
Notes are due over periods beginning in July 2005 and ending in July 2008 and
bear interest at fixed rates ranging from 8.52% to 8.72%.
Under the terms of the Credit Agreement and both Senior Notes, the Company is
required to meet certain financial covenants, including maintaining certain
cash flow and debt ratios. Borrowings under these credit facilities are secured
by the stock of the Company's subsidiaries.
At December 31, 1998, the Company was a party to interest-rate protection
agreements entered into with certain members of the Company's banking group,
which extend up to three years and limit interest rates to an average of 8.5%.
The notional principal amount of debt covered by these arrangements over their
remaining lives ranges from $100,000,000 to $275,000,000. At December 31, 1998
and 1997, unamortized premiums were not significant. Amortization of premiums,
which is included in interest expense, was $541,000, $960,000 and $1,381,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. Currently, the
Company mitigates the credit risk associated with interest-rate protection
agreements by entering into these arrangements only with members of the group of
banks who are party to the Credit Agreement. The Company monitors the credit
standing of these counterparties on a continuous basis.
At December 31, 1998 and 1997, the Company also had $202,840,000 and
$258,549,000, respectively, of subordinated notes outstanding. These notes
primarily represent a portion of the consideration paid to selling shareholders
of businesses acquired, the majority of whom remain employed by the Company's
subsidiaries after the date of acquisition. The notes mature at various dates
through 2005, and as of December 31, 1998, have interest rates ranging from
5.5% to 7.5%. The notes outstanding may be tendered upon the exercise of
warrants issued in conjunction with the notes. In connection with the exercise
of warrants through the tender of subordinated notes, subordinated debt of
$16,158,000, $11,391,000 and $19,375,000 was extinguished in 1998, 1997 and
1996, respectively. In addition, $24,698,000, $313,619,000 and $49,832,000 was
paid in cash during 1998, 1997 and 1996, respectively, primarily as a result of
subordinated notes maturing which
51
United Asset Management Corporation
were issued at the time of acquisition. The Company intends to finance
subordinated debt that becomes due which has not been tendered in connection
with the exercise of warrants by utilizing its Credit Agreement. As such, the
$10,657,000 of subordinated notes due in 1999 have been included in the payments
due in 2003, the year the line of credit expires.
The aggregate cash repayments of all outstanding borrowings during the five
years after December 31, 1998 total the following amounts:
Year ended Required
December 31, minimum payment
1999 $ 0
....................................
2000 $ 30,107,000
....................................
2001 $115,936,000
....................................
2002 $ 82,699,000
....................................
2003 $324,582,000
....................................
The recorded cost of the Senior Notes approximates fair value. Due to the unique
nature of each of the subordinated debt instruments issued to the sellers of
firms, the assessment of current fair value is not practicable.
Accrued interest of $19,898,000 and $11,981,000 was included in accounts payable
and accrued expenses at December 31, 1998 and 1997, respectively. Interest
expense and interest paid for each of the three years ended December 31 were as
follows:
1998 1997 1996
Interest expense $60,275,000 $43,156,000 $43,289,000
..................................................................
Interest paid $51,817,000 $47,156,000 $51,272,000
..................................................................
Note 4
Stockholders' equity
In 1998, the Company issued 239,320 shares of common stock in connection with an
acquisition of an equity interest. Also, during 1998, the Company issued 529,680
shares of common stock in connection with additional purchase price commitments
related to a prior year acquisition. In 1996, the Company issued 7,586,402
shares of common stock to effect acquisitions accounted for as poolings of
interests.
The Company issued 167,100, 1,097,566 and 62,010 warrants during 1998, 1997 and
1996, respectively, to effect acquisitions accounted for as purchases.
The Company has a systematic program to repurchase shares of its common stock
to meet the requirements for future issuance of shares upon the exercise of
stock options and warrants. Since the program began in 1987, 24,788,134 shares
of common stock have been repurchased at a cost of $497,753,000, including
certain shares repurchased under the terms of the Company's systematic program.
As of December 31, 1998, all but 8,792,879 shares had been reissued from
treasury upon the exercise of stock options and warrants. During 1998, the
Company's directors increased the number of shares authorized for repurchase
from 16,000,000 as of December 31, 1997 to a total of 32,000,000 shares as of
December 31, 1998.
Included in accounts payable and accrued expenses at December 31, 1998 and 1997
were dividends payable of $12,311,000 and $13,851,000, respectively.
At December 31, 1998, the following warrants were outstanding at a weighted
average exercise price of $23.70 per share:
Year of Shares Range of
expiration issuable exercise prices
1999 552,278 $16.50-17.50
..................................................................
2000 240,840 $14.50-16.50
..................................................................
2001 3,755,268 $14.50-28.75
..................................................................
2002 2,494,198 $19.50-28.75
..................................................................
2003 59,565 $23.00
..................................................................
2004 1,097,566 $23.00-34.00
..................................................................
2005 167,100 $22.66
- -------------------------------------------------------------------
8,366,815
===================================================================
The Company is authorized to issue 5,000,000 shares of $1.00 par value
preferred stock, none of which had been issued through December 31, 1998.
52
Note 5
Stock option plans
Under the Company's Amended and Restated 1994 Stock Option Plan, the Board of
Directors is authorized to grant options for the purchase of 11,900,000 shares
of the Company's common stock to directors, officers and other key employees of
the Company and its subsidiaries. The exercise price of the options granted to
officers and other key employees is not less than the fair market value of the
Company's common stock at the date of the grant. These options expire five years
from the date of the grant and may not be exercised for one year from the date
of the grant. Thereafter, they may be exercised ratably over the ensuing four
years.
Each eligible director is granted 14,000 options annually for the purchase of
shares of the Company's common stock at the fair market value at the date of the
grant. Eligible directors may also elect to receive discounted options in lieu
of a portion of their directors' fees. All options granted to directors expire
five years from the date of the grant and may not be exercised for six months
from the date of the grant. In 1998, 98,000 options were granted under the
annual provision and 15,841 discounted options were issued in lieu of directors'
fees. The Company applies APB 25 in accounting for its stock option plans. Had
compensation cost for the Company's plans been determined based on the fair
value of the awards at the grant dates, consistent with the methodology
prescribed by FAS 123, the Company's net income (loss) and earnings (loss) per
share, including tax effects if any, would have been as follows:
1998 1997 1996
Net income (loss) $71,580,000 $(9,277,000) $94,932,000
................................................................................
Basic earnings (loss)
per share $1.08 $(.13) $1.39
................................................................................
Diluted earnings
(loss) per share $1.05 $(.13) $1.33
................................................................................
During the initial phase-in period of FAS 123, pro forma disclosures may not be
representative of the effects on reported net income (loss) and earnings (loss)
per share for future years because the FAS 123 method of accounting has not
been applied to options granted prior to January 1, 1995.
The fair value of each option grant is estimated on the date of each grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for options granted in 1998, 1997 and 1996,
respectively: expected life of 4.5 years for all years; stock price volatility
of 22.5, 22.1 and 23.9 percent; risk-free interest rates of 5.3, 6.3, and 5.7
percent; and dividend yield of 3.4, 2.6, and 2.9 percent. The weighted-average
fair value of options granted during 1998, 1997 and 1996 was $4.46, $6.08 and
$4.55, respectively.
A summary of the Company's stock option plans as of December 31, 1998, 1997 and
1996, and changes during the years ending on those dates is presented below:
Options outstanding Options exercisable
Weighted- Weighted-
Number of average Number of average
options exercise options exercise
outstanding price exercisable price
................................................................................
Balance,
December 31, 1995 7,212,422 $15.23 3,026,974 $11.94
................................................................................
Options granted 1,658,644 $20.72
................................................................................
Options exercised (1,693,498) $13.77
................................................................................
Options canceled (159,372) $17.79
- --------------------------------------------------------------------------------
Balance,
December 31, 1996 7,018,196 $16.83 3,015,657 $13.83
................................................................................
Options granted 2,047,125 $26.90
................................................................................
Options exercised (2,102,764) $11.86
................................................................................
Options canceled (203,446) $21.19
- --------------------------------------------------------------------------------
Balance,
December 31, 1997 6,759,111 $21.29 2,558,059 $18.79
................................................................................
Options granted 3,519,027 $23.42
................................................................................
Options exercised (1,345,494) $17.80
................................................................................
Options canceled (1,018,793) $23.66
- --------------------------------------------------------------------------------
Balance,
December 31, 1998 7,913,851 $22.53 2,823,398 $20.83
================================================================================
53
United Asset Management Corporation
At December 31, 1998, the Company had 3,669,219 options available for future
grants. Shares reserved but unissued at December 31, 1998 and 1997 were
11,583,070 and 12,979,814, respectively.
The following table summarizes information about all stock options outstanding
at December 31, 1998:
Options outstanding Options exercisable
Weighted- Weighted-
Range of Number of average Number of average
Year of exercise options exercise options exercise
expiration price outstanding price exercisable price
..........................................................................................
1999 $13.41 - 20.38 965,697 $19.21 868,197 $18.71
..........................................................................................
2000 $13.36 - 19.94 1,132,919 $18.44 802,069 $18.41
..........................................................................................
2001 $18.19 - 26.75 1,121,363 $20.79 550,264 $21.08
..........................................................................................
2002 $21.09 - 29.50 1,610,695 $26.96 491,951 $27.19
..........................................................................................
2003 $18.56 - 27.19 3,083,177 $23.39 110,917 $25.44
- ------------------------------------------------------------------------------------------
$13.36 - 29.50 7,913,851 $22.53 2,823,398 $20.83
==========================================================================================
Note 6
Income taxes
Income taxes for financial reporting purposes are recorded in accordance with an
asset and liability approach which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of the Company's assets
and liabilities.
Income (loss) before income tax expense (benefit) was taxed under the following
jurisdictions:
Year ended
December 31, 1998 1997 1996
Domestic $118,135,000 $(27,290,000) $159,436,000
.........................................................................
Foreign 19,114,000 20,067,000 11,812,000
- -------------------------------------------------------------------------
$137,249,000 $ (7,223,000) $171,248,000
=========================================================================
Income tax expense (benefit) consisted of the following:
Year ended
December 31, 1998 1997 1996
Current:
.........................................................................
Federal $41,462,000 $54,910,000 $65,031,000
.........................................................................
State 8,485,000 8,797,000 11,371,000
.........................................................................
Foreign 6,737,000 5,527,000 3,911,000
.........................................................................
Deferred:
.........................................................................
Federal 2,615,000 (58,131,000) (5,914,000)
.........................................................................
State 2,080,000 (13,693,000) (973,000)
.........................................................................
Foreign (2,637,000) (500,000) --
- -------------------------------------------------------------------------
$58,742,000 $(3,090,000) $73,426,000
=========================================================================
Deferred income taxes consisted of the following:
December 31, 1998 1997
Deferred tax assets:
..........................................................................
Deferred incentive compensation $ 6,167,000 $ 2,358,000
..........................................................................
Additional contract amortization
for book purposes 55,071,000 56,430,000
..........................................................................
State net operating loss
carryforwards 7,495,000 3,523,000
..........................................................................
Foreign tax credit carryforwards 6,749,000 5,788,000
- --------------------------------------------------------------------------
Total gross deferred tax assets 75,482,000 68,099,000
..........................................................................
Deferred tax assets valuation
allowance (7,602,000) (3,780,000)
- --------------------------------------------------------------------------
67,880,000 64,319,000
- --------------------------------------------------------------------------
Deferred tax liabilities:
..........................................................................
Additional contract amortization
for tax purposes 51,377,000 41,698,000
..........................................................................
Contracts acquired in
nontaxable transactions 34,992,000 36,692,000
..........................................................................
Other 9,036,000 6,003,000
- --------------------------------------------------------------------------
95,405,000 84,393,000
- --------------------------------------------------------------------------
Net deferred tax liability $27,525,000 $20,074,000
==========================================================================
54
A component of the Company's deferred tax asset consists of the future tax
benefits from domestic net operating loss carryforwards and foreign tax credits.
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, requires that a valuation allowance be recorded against deferred tax
assets for which it is believed that it is more likely than not that all or a
portion of the benefits of the carryforward losses and tax credits will not be
realized. In establishing a valuation reserve, management considers such factors
as earnings in recent years and the scheduled expiration of the net operating
loss carryforwards and tax credits. During 1998, the Company increased its
deferred tax valuation allowance by $3,822,000, to a total of $7,602,000 as of
December 31, 1998.
At December 31, 1998, the Company had state net operating loss carryforwards of
approximately $80,616,000 which will begin to expire in 2003. Also, at December
31, 1998, the Company had approximately $6,749,000 of foreign tax credit
carryforwards of which $1,328,000, $3,008,000, $1,432,000 and $981,000 expire in
1999, 2000, 2001 and 2002, respectively.
The effective income tax rate differed from the statutory federal income tax
rate as follows:
Year ended December 31, 1998 1997 1996
Federal income tax statutory rate 35% (35)% 35%
.......................................................................
State income taxes, net of federal
benefit 4 (15) 5
.......................................................................
Foreign tax rate differential -- (11) --
.......................................................................
Nondeductible items and other 4 18 3
- -----------------------------------------------------------------------
43% (43)% 43%
=======================================================================
Excluding the effect of the 1997 charge reducing the value of intangible assets,
the percentages presented above for 1997 would have been similar to those
reported for 1998 and 1996. Income taxes of approximately $48,500,000,
$76,800,000 and $61,500,000 were paid in 1998, 1997 and 1996, respectively.
For purchase acquisitions which occurred prior to the Revenue Reconciliation Act
of 1993 (the Act), the additional contract amortization for income tax purposes
results from the application of a method under which the deductions for income
tax purposes are determined by: (1) amortizing the cost assigned to contracts
acquired on a straight-line basis over the same estimated useful lives as those
used for financial reporting purposes; and (2) deducting the unamortized balance
of such cost which is allocated to an individual contract when the contract is
terminated. For acquisitions after the Act, the deduction for income tax
purposes is determined by amortizing the cost assigned to contracts acquired on
a straight-line basis over a 15-year period, with no deduction for the
unamortized balance of individual contract terminations.
The Company's federal income tax returns for the years ending December 31, 1984
through December 31, 1992 are under audit by the Internal Revenue Service. The
Company received a Revenue Agent's Report on December 27, 1996 proposing
certain adjustments for these years. The principal issue raised in the Report
is the amount of deductions claimed by the Company for amortization of the cost
of acquired investment management contracts. The Company is appealing the
results of the audit to the Appellate Division of the Internal Revenue Service.
Previously, in a 1992 Revenue Agent's Report covering the years ending December
31, 1984, 1985 and 1986, the Internal Revenue Service challenged the Company's
practice of deducting the amortization of cost assigned to acquired investment
management contracts on the premise that no part of these costs could be
amortized and deducted because such assets were in the nature of nonamortizable
goodwill. The Revenue Agent's Report received in 1996 agrees with the Company's
position that costs properly assigned to acquired contracts are amortizable and
deductible, but proposes adjustments to the Company's valuation of the acquired
contracts. If the adjustments proposed in the Revenue Agent's Report were
upheld in their entirety, the Company's additional liability for federal income
tax for the years 1984 through 1992 would approximate $56,000,000, plus
statutory interest thereon. Management and its advisors believe that there are
substantial defects in the Revenue Agent's Report with respect to the valuation
of the acquired contracts and that the audit will be resolved without material
adverse effect on the Company's consolidated financial position, its
consolidated results of operations or its consolidated cash flows.
55
United Asset Management Corporation
Note 7
Segment information
The Company operates in one business segment, that is, as investment advisers,
managing both domestic and international investment portfolios for corporate,
government and union benefit plans, mutual funds, individuals, endowments, and
foundations. Although each affiliated firm operates under its own name with its
own investment philosophy and approach, the firms' regulatory environments and
the economic characteristics of their products, services, client bases and
manner of distribution are similar. Therefore, the affiliated firms are
aggregated as one business segment.
Revenues and long-lived assets shown below are classified according to the
affiliate's geographic location. Revenues are derived primarily from fees for
investment advisory services provided to institutional and other clients. These
fees are generally a function of the overall fee rate charged to each account
and the level of assets under management by the affiliated firms.
Year ended
December 31, 1998 1997 1996
Domestic revenues $869,706,000 $ 864,957,000 $ 829,212,000
.........................................................................................
Foreign revenues $ 92,148,000 $ 76,664,000 $ 54,055,000
.........................................................................................
Domestic long-lived assets $941,116,000 $1,015,714,000 $1,023,115,000
.........................................................................................
Foreign long-lived assets $163,299,000 $ 131,364,000 $ 15,979,000
.........................................................................................
Note 8
Acquisitions, commitments and other
At the beginning of January 1998, the Company acquired an interest in Integra
Capital Management Company and during the year provided financing for Pell,
Rudman & Co., Inc. to acquire Sovereign Financial Services, Inc. The Company
also sold Analytic[bullet]TSA International, Inc. and announced its plans to
close UAM Retirement Plan Services, Inc. In addition, Heitman Financial LLC, an
affiliate of the Company, sold its non-retail property management operations.
The Company's results of operations reflect this activity as of their respective
transaction dates. These transactions did not have a material effect on the
Company's consolidated results of operations, either individually or in the
aggregate.
During 1997, the Company acquired J.R. Senecal & Associates Investment Counsel
Corp., Pacific Financial Research, Inc., and Thomson Horstmann & Bryant, Inc.
through purchase transactions. The Company also acquired an interest in
Lincluden Management Limited. In addition, the Company organized Expertise
Asset Management and Palladyne Asset Management B.V. and acquired InvestLink
Technologies, Inc.
During 1996, the Company issued shares of its common stock to acquire Rogge
Global Partners and Clay Finlay Inc. through transactions accounted for as
poolings of interests. The Company also acquired OSV Partners in a purchase
transaction as well as provided financing for an affiliate, Analytic Investment
Management, Inc., to acquire TSA Capital Management, now called Analytic
Investors, Inc.
The purchase price, including direct costs, associated with the acquisitions
accounted for as purchases and the allocations thereof are summarized as
follows:
Year ended
December 31, 1998 1997 1996
Consideration:
............................................................................
Cash $32,923,000 $160,167,000 $651,000
............................................................................
Notes payable -- 105,176,000 --
............................................................................
Common stock
and warrants 7,016,000 1,294,000 --
- ----------------------------------------------------------------------------
$39,939,000 $266,637,000 $651,000
============================================================================
Allocation of
purchase price:
............................................................................
Net tangible assets $ 708,000 $ 1,562,000 $ --
............................................................................
Cost assigned to
contracts acquired 18,209,000 258,492,000 251,000
............................................................................
Other assets 21,022,000 6,583,000 400,000
- ----------------------------------------------------------------------------
$39,939,000 $266,637,000 $651,000
============================================================================
56
During 1997, in conjunction with an acquisition, goodwill and a deferred tax
liability of $35,844,000 were recorded in purchase accounting related to the
cost of contracts capitalized for financial reporting purposes.
At December 31, 1998, $521,000 was accrued in senior notes payable and
capitalized to cost assigned to contracts acquired in connection with an
additional purchase price commitment that is payable in 1999 to the former owner
of an affiliate.
At December 31, 1997, a total of $79,098,000 was accrued in senior notes payable
and subordinated notes payable and capitalized to cost assigned to contracts
acquired in connection with additional purchase price commitments that were
payable in 1998 to the former owners of two affiliates. The actual contingent
payments totaled $82,492,000 and during the first quarter of 1998, 81% of this
amount was paid in cash, 15% was issued in the Company's common stock, and 4%
was issued as subordinated notes.
At December 31, 1996, $12,500,000 was accrued in connection with an additional
purchase price commitment that was paid in 1997 to the former owners of an
affiliate. Of this amount, $6,250,000 was paid in cash and the remainder was
issued as subordinated notes.
In conjunction with certain acquisitions, employment arrangements and incentive
plans, the Company is contingently liable to make payments totaling as much as
$104,000,000 related to acquisitions and employment agreements, and $23,000,000
related to incentive plans. These payments may be in the form of cash and
subordinated notes on dates through 2005 and are dependent upon the achievement
and maintenance of stipulated performance measures.
Unaudited pro forma data for the years ended December 31, 1998, 1997 and 1996
are set forth below, giving consideration to the acquisition activity in the
respective three-year period, assuming revenue sharing plans (see Note 1) had
been in effect and after certain other pro forma adjustments have been made.
Year ended
December 31, 1998 1997 1996
Revenues $961,854,000 $974,324,000 $937,865,000
................................................................................
Net income (loss) $ 78,507,000 $ (5,642,000) $103,970,000
................................................................................
Basic earnings
(loss) per share $1.19 $(.08) $1.51
................................................................................
Diluted earnings
(loss) per share $1.15 $(.08) $1.44
................................................................................
57
United Asset Management Corporation
Report of Independent Accountants
To the Board of Directors and Stockholders of United Asset Management
Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of United Asset Management Corporation and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 3, 1999
58
Common stock The Company's common stock is listed on the New York Stock
information Exchange. Presented below are the high, low and closing
quarterly stock prices for 1997 and 1998, as reported on the
New York Stock Exchange composite tape, together with
quarterly dividends declared.
Ticker Symbol: UAM
1st quarter 2nd quarter 3rd quarter 4th quarter
............................................................................
1997 High $29-1/8 $28-7/8 $28-13/16 $30-3/16
.......................................................................
Low $25-5/8 $24-1/4 $26 $24-1/4
.......................................................................
Close $25-5/8 $28-5/16 $28-11/16 $24-7/16
.......................................................................
Dividend declared $.185 $.185 $.20 $.20
.......................................................................
............................................................................
1998 High $29-5/8 $27-7/16 $29-1/16 $26-1/8
.......................................................................
Low $21-3/16 $24-7/8 $20-1/16 $20-3/8
.......................................................................
Close $27-1/4 $26-1/16 $ 21-1/2 $26
.......................................................................
Dividend declared $.20 $.20 $.20 $.20
.......................................................................
Selected quarterly
financial data
1st quarter 2nd quarter 3rd quarter 4th quarter(1)
................................................................................................
1997 Revenues $ 215,522 $ 219,572 $ 241,710 $ 264,817
..........................................................................................
Operating income (loss) $ 50,452 $ 51,027 $ 51,075 $ (121,456)
..........................................................................................
Income (loss) before
income tax expense (benefit) $ 42,054 $ 42,011 $ 40,693 $ (131,981)
..........................................................................................
Net income (loss) $ 24,055 $ 24,030 $ 23,226 $ (75,444)
..........................................................................................
Basic earnings (loss) per share(2) $.35 $.34 $.33 $(1.09)
..........................................................................................
Diluted earnings (loss) per share(2) $.33 $.33 $.32 $(1.09)
..........................................................................................
Operating Cash Flow(3) $ 51,824 $ 52,722 $ 54,214 $ 54,892
..........................................................................................
................................................................................................
1998 Revenues $ 241,820 $ 254,376 $ 226,745 $ 238,913
..........................................................................................
Operating income $ 50,370 $ 52,046 $ 47,155 $ 44,924
..........................................................................................
Income before
income tax expense $ 38,635 $ 38,665 $ 31,034 $ 28,915
..........................................................................................
Net income $ 22,098 $ 22,117 $ 17,753 $ 16,539
..........................................................................................
Basic earnings per share(2) $.32 $.33 $.27 $.26
..........................................................................................
Diluted earnings per share(2) $.31 $.32 $.27 $.26
..........................................................................................
Operating Cash Flow(3) $ 53,642 $ 57,159 $ 51,243 $ 49,360
..........................................................................................
(1) Reduction in value of intangible assets of approximately $170,982,000 was
charged to operating expenses ($99,347,000 net of taxes), or $1.37 to loss
per share in 1997.
(2) Under generally accepted accounting principles, when earnings (loss) per
share are computed under the treasury stock method, the total of four
quarters' earnings (loss) per share may not equal the earnings (loss) per
share for the year.
(3) Net income (loss) plus amortization, depreciation and the reduction in
value of intangible assets, net of taxes.
59