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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-13459
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AFFILIATED MANAGERS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3218510
(State or other jurisdiction or (IRS Employer Identification
incorporation or organization) Number)
TWO INTERNATIONAL PLACE, BOSTON, MASSACHUSETTS, 02110
(Address of principal executive offices)
(617) 747-3300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock ($.01 par value) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Aggregate market value of the voting and non-voting common stock held by
non-affiliates of the Registrant, based upon the closing price of $37.125 on
March 13, 1998 on the New York Stock Exchange was $314,705,766. Calculation of
holdings by non-affiliates is based upon the assumption, for these purposes
only, that executive officers, directors, and persons holding 10% or more of the
Registrant's Common Stock (including the Registrant's Common Stock, $.01 par
value per share and the Registrant's Class B Non-Voting Common Stock, $.01 par
value per share, as if they were a single class) are affiliates. Number of
shares of the Registrant's Common Stock outstanding at March 13, 1998:
17,703,617 including 2,636,800 shares of Class B Non-Voting Common Stock. Unless
otherwise specified, the term Common Stock includes both Common Stock and Class
B Non-Voting Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of this report on Form 10-K is
incorporated by reference to certain portions of the Proxy Statement of the
Registrant to be filed pursuant to Regulation 14A and sent to stockholders in
connection with the Annual Meeting of Stockholders to be held on May 20, 1998.
Such Proxy Statement, except for the parts therein which have been specifically
incorporated herein by reference, shall not be deemed "filed" as part of this
report on Form 10-K.
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FORM 10-K
TABLE OF CONTENTS
PART I................................................................................. 3
ITEM 1. BUSINESS..................................................................... 3
ITEM 2. PROPERTIES................................................................... 16
ITEM 3. LEGAL PROCEEDINGS............................................................ 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................... 16
PART II................................................................................ 17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........ 17
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA........................................... 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.................................................................... 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................. 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................................... 51
PART III............................................................................... 51
INCORPORATED BY REFERENCE FROM THE COMPANY'S PROXY STATEMENT FOR
THE ANNUAL MEETING OF SHAREHOLDERS CURRENTLY SCHEDULED TO BE HELD
ON MAY 20, 1998, TO BE FILED PURSUANT TO REGULATION 14A
PART IV................................................................................ 52
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.............. 52
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Affiliated Managers Group, Inc. ("AMG" or the "Company") is an asset
management holding company which acquires majority interests in mid-sized
investment management firms. The Company's strategy is to generate growth
through investments in new affiliates, as well as through the internal growth of
existing affiliated firms. With the completion of its investment in Essex
Investment Management Company, LLC ("Essex"), the Company's most recent
investment, AMG has grown since its founding in December 1993, to eleven
investment management firms (the "Affiliates") with approximately $50 billion in
assets under management.
AMG has developed an innovative transaction structure (the "AMG Structure"),
which it believes addresses the succession planning needs of growing mid-sized
investment management firms. The Company believes that the AMG Structure appeals
to target firms for both financial and operational reasons:
- The AMG Structure allows owners of mid-sized investment management firms
to sell a portion of their interest, while ongoing management retains a
significant ownership interest with the opportunity to realize value for
that interest in the future.
- The AMG Structure provides management owners of each Affiliate with
autonomy over the day-to-day operations of their firm, and includes a
revenue sharing arrangement which provides that a specified percentage of
revenues are retained to pay operating expenses at the discretion of the
Affiliate's management.
The Company believes that the AMG Structure distinguishes AMG from most
other acquirers of investment management firms which generally seek to own 100%
of their target firms and, in many cases, seek to participate in the day-to-day
management of such firms. AMG believes that the opportunity for managers of each
Affiliate to realize the value of their retained equity interest makes the AMG
Structure particularly appealing to managers of firms who anticipate strong
future growth and provides those managers with an ongoing incentive to continue
to grow their firm.
AMG's Affiliates manage assets across a diverse range of investment styles,
asset classes and client types, with significant participation in fast-growing
segments such as equities, global investments and mutual funds. On a pro forma
basis(1), for the year ended December 31, 1997, investments in equity securities
represented 84% of EBITDA Contribution(2), while global investments represented
38% of EBITDA Contribution. For the same period, mutual fund assets represented
31% of EBITDA Contribution on a pro forma basis. Other asset classes, including
fixed income, represented 16% of EBITDA Contribution; domestic investments
represented 62% of EBITDA Contribution; and institutional, high net worth and
other client types represented 69% of EBITDA Contribution for the same period
and on the same basis.
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(1) Throughout this document, the use of the term "pro forma" assumes that the
Company's investment in each Affiliate (other than Essex, in which the
Company invested on March 20, 1998) occurred on January 1, 1997.
(2) EBITDA Contribution represents the portion of an Affiliate's revenues that
is allocated to the Company, after amounts retained by the Affiliate for
compensation and day-to-day operating and overhead expenses, but before the
interest, tax, depreciation and amortization expenses of the Affiliate.
EBITDA Contribution does not include holding company expenses. The Company
believes that EBITDA Contribution may be useful to investors as an indicator
of each Affiliate's contribution to the Company's ability to service debt,
to make new investments and to meet working capital requirements. EBITDA
Contribution is not a measure of financial performance under generally
accepted accounting principles and should not be considered an alternative
to net income as a measure of operating performance or to cash flows from
operating activities as a measure of liquidity. EBITDA Contribution and
EBITDA, as calculated by the Company, may not be consistent with comparable
computations by other companies.
3
THE INDUSTRY
ASSETS UNDER MANAGEMENT
The investment management sector is one of the fastest growing sectors in
the financial services industry. According to U.S. Federal Reserve "Flow of
Funds Account" data, from 1992-1997, mutual fund assets under management
(excluding money market funds) grew at a compound annual growth rate of
approximately 21.9%, while the aggregate assets managed on behalf of pension
funds increased at a compound annual growth rate of approximately 12.1%. These
assets, which totaled over $9.5 trillion in 1997, represent only a portion of
the funds available for investment management. In addition, substantial assets
are managed on behalf of individuals in separate accounts, for foundations and
endowments, as a portion of certain insurance contracts such as variable annuity
plans and on behalf of corporations and other financial intermediaries. The
Company believes that demographic trends and the ongoing disintermediation of
bank deposits and life insurance reserves will result in continued growth of the
investment management industry.
INVESTMENT ADVISERS
The growth in industry assets under management has resulted in a significant
increase in the number of investment management firms within AMG's principal
targeted size range of $500 million to $10 billion of assets under management.
Within this size range, the Company has identified over 1,000 investment
management firms in the United States, and over 200 additional investment
management firms in Canada, the United Kingdom and in other European and Asian
countries. AMG believes that, in the coming years, a substantial number of
investment opportunities will arise as founders of such firms approach
retirement age and begin to plan for succession. The Company also anticipates
that there will be significant additional investment opportunities among firms
which are currently wholly-owned by larger entities. AMG believes that it is
well positioned to take advantage of these investment opportunities because it
has a management team with substantial industry experience and expertise in
structuring and negotiating transactions, as well as a highly organized process
for identifying and contacting investment prospects.
HOLDING COMPANY OPERATIONS
AMG's management performs two primary functions: (i) implementing the
Company's strategy of growth through acquisitions of interests in prospective
affiliates; and (ii) supporting, enhancing, and monitoring the activities of the
existing Affiliates.
ACQUISITION OF INTERESTS IN PROSPECTIVE AFFILIATES
The acquisition of interests in new affiliates is a primary element of AMG's
growth strategy. AMG's management is responsible for each step in the new
investment process, including identification and contact of potential
affiliates, and the valuation, structuring and negotiation of transactions. In
general, the Company seeks to initiate its contacts with potential affiliates on
an exclusive basis and does not actively seek to participate in competitive
auction processes or employ investment bankers or finders. The Company and the
AMG Structure have been competitive, however, in processes where investment
bankers are employed. Of the Company's eleven Affiliates, four were represented
by investment bankers while the remaining seven were transactions initiated by
AMG's management.
AMG's management identifies and develops relationships with promising
potential affiliates based on a thorough understanding of its principal target
universe, mid-sized investment management firms. Using its proprietary
database--comprised of data from third party vendors, public and industry
sources, and AMG research--AMG screens and prioritizes prospects within its
target universe. AMG also utilizes the database to monitor the level and
frequency of interaction with potential affiliates. AMG's database and contact
management system enhances the Company's ability to identify promising potential
affiliates and to develop and maintain relationships with these firms.
4
AMG's management seeks to increase awareness of AMG's approach to investing
by sending periodic mailings to up to 5,000 individuals involved in the industry
and by participating in conferences and seminars related to succession planning
for investment management firms. Such activities lead to a number of unsolicited
calls to AMG by firms which are considering succession planning issues. In
addition, AMG's management maintains an active calling program in order to
develop relationships with prospective affiliates. The Company believes that it
has established ongoing relationships with a substantial number of firms which
will be considering succession planning alternatives in the future.
Once discussions with a target firm lead to transaction negotiations, AMG's
management team performs all of the functions related to the valuation,
structuring, and negotiation of the transaction. The Company's management team
includes professionals with substantial experience in mergers and acquisitions
of investment management firms.
Upon the negotiation and execution of definitive agreements, the firm
contacts its clients to notify them and seek their consent to the transaction
(which constitutes an assignment of the firm's investment advisory contracts) as
required by the Investment Advisers Act of 1940, as amended (the "Investment
Advisers Act") and, with respect to mutual fund clients, seeks new contracts (as
required by the Investment Company Act of 1940, as amended (the "1940 Act"))
through a proxy process.
During 1997 the Company invested in three affiliates: Gofen and Glossberg,
L.L.C., GeoCapital, LLC and Tweedy, Browne Company LLC. In addition, in March,
1998 the Company completed its investment in Essex.
GOFEN AND GLOSSBERG
Gofen and Glossberg, L.L.C. is an investment counseling firm which, as of
December 31, 1997, had $3.86 billion in assets under management. With its
predecessor having been founded in 1932, the firm has a long history of managing
assets for prominent individuals, families, retirement plans, foundations and
endowments. Based in Chicago, the firm is led by its President, William H.
Gofen, and its Executive Vice President, Joseph B. Glossberg.
GEOCAPITAL
GeoCapital, LLC invests in domestic small-capitalization growth and special
situation equities on behalf of corporations, retirement programs, foundations,
high net worth individuals and private partnerships. As of December 31, 1997,
GeoCapital, LLC had $2.39 billion in assets under management. With principal
offices in New York, the firm is led by its Chairman and Chief Investment
Officer, Irwin Lieber, and its President, Barry K. Fingerhut.
TWEEDY, BROWNE
Tweedy, Browne Company LLC is recognized as a leading practitioner of the
value-oriented investment approach first advocated by Benjamin Graham. Tweedy,
Browne Company LLC manages domestic, international and global equity portfolios
for institutions, individuals, partnerships, and mutual funds and, as of
December 31, 1997, had $5.34 billion in assets under management. The firm, which
is the successor to Tweedy & Co., a brokerage firm founded in 1920, is led by
Christopher H. Browne, William H. Browne and John D. Spears. Based in New York,
the firm also maintains a research office in London.
RECENT INVESTMENT: ESSEX
On March 20, 1998, the Company completed its investment (the "Essex
Investment") in Essex Investment Management Company, LLC. Essex is a
Boston-based manager which specializes in investing in growth equities, using a
fundamental research driven approach. As of December 31, 1997, Essex
5
Investment Management Company, Inc. (Essex's predecessor) had $4.3 billion in
assets under management. Essex is led by its Chairman Joseph C. McNay, its
President Stephen D. Cutler and its Executive Vice President Stephen R. Clark.
In the Essex Investment, AMG paid $69.6 million in cash and the assumption of
debt and 1,750,942 shares of its Class C Convertible Non-Voting Stock, $.01 par
value per share (the "Class C Stock"), for an indirect 68.0% interest in the
Owner's Allocation (as defined below) of Essex. The Class C Stock is non-voting
stock and carries no preferences with respect to dividends or liquidation;
however, each share of Class C Stock converts into one share of Common Stock
upon the earlier of March 20, 1999 or certain extraordinary events.
AFFILIATE SUPPORT
In addition to its new investment efforts, AMG seeks to support and enhance
the growth and operations of its Affiliates. AMG believes that the management of
each Affiliate is in the best position to assess its firm's needs and
opportunities, and that the autonomy and culture of each Affiliate should be
preserved. However, when requested by Affiliate management, AMG provides
strategic, marketing, and operational assistance. The Company believes that
these support services are attractive to the Affiliates because such services
otherwise may not be as accessible or as affordable to mid-sized investment
management firms.
In addition to the diverse industry experience and knowledge of AMG's senior
management, AMG maintains relationships with numerous consultants whose specific
expertise enhances AMG's ability to offer a wide range of assistance. Specific
Affiliate support initiatives have included: new product development, marketing
material development, institutional sales assistance, recruiting, compensation
evaluation, regulatory compliance audits, and client satisfaction surveys. The
Company also endeavors to negotiate discounted pricing on products and services
useful to the operations of the Affiliates. For example, AMG has arranged
discounts on services such as sales training seminars, public relations
services, insurance, and retirement benefits.
AMG STRUCTURE AND RELATIONSHIP WITH AFFILIATES
As part of AMG's investment structure, each of the Affiliates is organized
as a separate and largely autonomous limited liability company or partnership.
Each Affiliate operates under its own limited liability company agreement or
partnership agreement (such Affiliate's "organizational document") which
includes provisions regarding the use of the Affiliate's revenues and the
management of the Affiliate. The organizational document of each Affiliate also
gives management owners the ability to realize the value of their retained
equity interests in the future. While the organizational document of each
Affiliate is agreed upon at the time of AMG's investment, from time to time
amendments are made to such organizational documents to accommodate business
needs of the Affiliate or AMG.
OPERATIONAL AUTONOMY OF AFFILIATES
The management provisions in each organizational document are jointly
developed by AMG and the Affiliate's senior management at the time AMG makes its
investment. These provisions, while varying among Affiliates, provide for
delegation to the Affiliate's management team of the power and authority to
carry on the day-to-day operation and management of the Affiliate, including
matters relating to personnel, investment management policies and fee
structures, product development, client relationships and employee compensation
programs. AMG does, however, retain the authority to prevent certain specified
types of actions which AMG believes could adversely affect cash distributions to
AMG. For example, none of the Affiliates may incur material indebtedness without
the consent of AMG. AMG itself does not manage investments for clients, does not
provide any investment management services and is not registered as an
investment adviser under federal or state law.
6
REVENUE SHARING ARRANGEMENTS
AMG has a revenue sharing arrangement with each Affiliate which is contained
in the organizational document of that Affiliate. Each such arrangement
allocates a portion of revenues (typically 50-70%) for use by management of that
Affiliate in paying operating expenses of the Affiliate, including salaries and
bonuses (the "Operating Allocation"). The percentage of revenues included in
each Affiliate's Operating Allocation is determined by AMG and the managers of
the Affiliate at the time of AMG's investment, based on the Affiliate's
historical and projected operating margins. The remaining portion of revenues of
the Affiliate (typically 30-50%) is allocated to the owners of that Affiliate
(including AMG), generally in proportion to their ownership of the Affiliate.
AMG defines the portion of revenues that is allocated to the owners of each
Affiliate as the "Owners' Allocation" because it is the portion of both revenues
and cash flow which the Affiliate's management is prohibited from spending on
operating expenses (under the Affiliate's organizational document) without the
prior consent of AMG.
When AMG makes an investment in an Affiliate, the organizational document of
the Affiliate includes allocation provisions that divide the revenues of the
firm into the Owners' Allocation and the Operating Allocation. Before agreeing
to these allocations, AMG examines the revenue and expense base of the firm and
only agrees to a specific division of revenues if AMG believes that the
allocation to the Operating Allocation both (i) is sufficient to provide for the
payment of all operating expenses of the Affiliate, including salaries and
bonuses, and (ii) includes some Excess Operating Allocation (as defined below)
to provide a cushion against an increase in expenses or a decrease in revenues
which is not accompanied by a corresponding decrease in operating expenses.
While AMG and its management have significant experience in the asset management
industry, there can be no assurance that AMG will successfully anticipate
changes in the revenue and expense base of any firm and, therefore, there can be
no assurance that the agreed-upon allocation of revenues to the Operating
Allocation will be sufficient to pay for all operating expenses, including
salaries and bonuses of the Affiliate.
One of the purposes of the revenue sharing arrangements is to provide
ongoing incentives for the managers of the Affiliates. The revenue sharing
arrangements are designed to allow each Affiliate's managers to participate in
their firm's growth (through their compensation from the Operating Allocation
and their ownership of a portion of the Owners' Allocation) and to make
operating expenditures freely within the limits of the Operating Allocation. The
portion of the Operating Allocation that is not used to pay salaries and other
operating expenses (the "Excess Operating Allocation") is generally available to
be used at the discretion of management of the Affiliate, including for the
payment of bonuses or distributions to management. The managers of each
Affiliate thus have an incentive to both increase revenues (thereby increasing
the Operating Allocation) and to control expenses (thereby increasing the Excess
Operating Allocation). The ownership by an Affiliate's management of a portion
of the Affiliate, which entitles them to a portion of the Owners' Allocation,
provides an important additional incentive to managers of each Affiliate to
increase revenues.
The revenue sharing arrangements allow AMG to participate in the growth of
revenues of each Affiliate, because as revenues increase, the Owners' Allocation
also increases. However, AMG participates in that growth to a lesser extent than
the managers of the Affiliate, because AMG does not participate in the growth of
the Operating Allocation. In addition, according to the organizational documents
of the Affiliates, the allocations and distributions to AMG generally take
priority over the allocations and distributions to the management owners of the
Affiliates, to further protect AMG if there are any expenses in excess of the
Operating Allocation of the Affiliate. Thus, if an Affiliate's expenses exceed
its Operating Allocation, the excess expenses first reduce the portion of the
Owners' Allocation allocated to the Affiliate's management owners, until that
portion is eliminated, and then reduce the portion allocated to AMG.
7
CAPITALIZATION OF RETAINED INTEREST
The incentive effect of retained equity ownership is an integral part of the
AMG Structure. In order to maximize this incentive effect, the organizational
documents of each Affiliate (other than Paradigm Asset Management Company,
L.L.C.) include various provisions for the management owners of that Affiliate
to periodically realize the equity value they have created, by requiring the
Company to purchase portions of their interests in the Affiliate ("Puts"). In
addition, the organizational documents of certain of the Affiliates provide AMG
with the ability to require the management owners to sell portions of their
interests in the Affiliate to AMG ("Calls"). Finally, the organizational
documents of each Affiliate include provisions obligating each such owner to
sell his or her remaining interests at a point in the future, generally after
the termination of his or her employment with the Affiliate. Underlying all of
these provisions is AMG's basic philosophy that management owners of each
Affiliate should maintain an ownership level in that Affiliate within a range
that the Company believes offers them sufficient incentives to grow and improve
their business.
The Puts are designed to let the management owners of an Affiliate realize
portions of the equity value they have created prior to their retirement. In
addition, as an alternative to simply purchasing all of a management owner's
interest in the Affiliate following the termination of his or her employment,
the Puts enable AMG to purchase additional interests in the Affiliates at a more
gradual rate. The Company believes that a more gradual purchase of interests in
Affiliates will make it easier for AMG to keep its ownership of each Affiliate
within a desired range, by transferring purchased interests in the Affiliate to
more junior members of that Affiliate's management. In most cases, the Puts do
not become exercisable for a period of several years from the date of AMG's
investment in an Affiliate, and once exercisable, are generally limited in the
aggregate to a percentage of a given management owner's ownership interests. The
most common formulation among all the Affiliates is that a management owner's
Puts (i) do not commence for five years from the date of AMG's investment (or,
if later, the date he or she purchased his or her interest in the Affiliate),
(ii) are limited, in the aggregate, to fifty percent of the interests he or she
held in the Affiliate, and (iii) are limited, in any twelve-month period, to ten
percent of the greatest interest he or she held in the Affiliate. In addition,
the organizational documents of the Affiliates generally contain a limitation on
the maximum aggregate amount that management owners of any Affiliate may require
AMG to purchase pursuant to their Puts in any given twelve-month period. The
purchase price for Puts to AMG is paid either in cash, AMG stock, or a
combination of cash and AMG stock. If paid in cash, the purchase price for Puts
is generally based on a multiple of the Owners' Allocation of the Affiliate at
the time the Put is exercised, with the multiple generally having been
determined at the time AMG made its initial investment (the "Fair Value Purchase
Price"). If paid in stock, the most common formulation is as follows: AMG will
exchange a number of shares of Common Stock equal in value to seventy-five
percent of the trailing Owners' Allocation purchased in the transaction,
multiplied by the multiple of trailing EBITDA at which AMG Common Stock is then
trading in the public market.
The Calls are designed to provide the Company and management members of
certain Affiliates with the assurance that a mechanism exists for AMG to
facilitate a degree of transition within the senior management team after an
agreed-upon period of time. While the Calls vary in each specific instance, in
all cases, the timing, mechanism and price are agreed upon when AMG makes its
investment, with the price payable in cash or AMG stock and if paid in cash,
with the price generally being the Fair Value Purchase Price.
The organizational documents of each Affiliate provide that the management
owners will realize the remaining equity value they have created generally
following the termination of their employment with the Affiliate. In general,
upon a management owner's retirement after an agreed-upon number of years, or
upon his earlier death, permanent incapacity or termination without cause (but
with AMG's consent), that management owner (or his estate) is required to sell
to AMG (and AMG is required to purchase from the management owner) his or her
remaining interests. The purchase price in these cases is paid either in cash,
AMG stock or a combination of cash and AMG stock. If paid in cash, the purchase
price is generally the
8
Fair Value Purchase Price, and if paid in stock, the most common formulation is
identical to that used in the payment of a purchase price for Puts in shares of
AMG stock. In general, if a management owner quits early or is terminated for
cause, his or her interests will be purchased by AMG at a reduced multiple which
represents a substantial discount to the Fair Value Purchase Price, and, in
general, if he or she quits or is terminated for cause within the first several
years following AMG's investment (or, if later, the date he or she purchased his
or her interest in the Affiliate) he or she generally receives nothing for his
or her retained interest.
THE AFFILIATES
In general, the Affiliates derive revenues by charging fees to their clients
that are typically based on the market value of assets under management. In some
instances, however, the Affiliates may derive revenues from fees based on
investment performance.
AMG's Affiliates are listed below in alphabetical order and include Essex,
in which AMG invested in March 1998. Unless otherwise indicated, AMG holds a
majority ownership interest in each such Affiliate.
PRO FORMA
AMG'S EQUITY ASSETS UNDER
OWNERSHIP MANAGEMENT
PERCENTAGE AS OF
AS OF DECEMBER 31,
PRINCIPAL DATE OF DECEMBER 31, 1997
AFFILIATE LOCATION(S) INVESTMENT 1997(1) (IN MILLIONS)
- -------------------------------------------------------- ------------- -------------- --------------- -------------
The Burridge Group LLC ("Burridge")..................... Chicago December 1996 55.0% $ 1,353
Essex Investment Management Company, LLC ("Essex")...... Boston March 1998 68.0 4,310
First Quadrant, L.P.; First Quadrant Limited Pasadena, CA; March 1996 66.1 26,735(2)
(collectively, "First Quadrant")...................... London
GeoCapital, LLC ("GeoCapital").......................... New York September 1997 60.0 2,391
Gofen and Glossberg, L.L.C. ("Gofen and Glossberg")..... Chicago May 1997 55.0 3,857
J.M. Hartwell Limited Partnership ("Hartwell").......... New York May 1994 74.9 334
Paradigm Asset Management Company, L.L.C. ("Paradigm").. New York May 1995 30.0 1,925
Renaissance Investment Management ("Renaissance")....... Cincinnati November 1995 66.7 1,373
Skyline Asset Management, L.P. ("Skyline").............. Chicago August 1995 62.5 1,214
Systematic Financial Management, L.P. ("Systematic").... Teaneck, NJ May 1995 90.7 1,148
Tweedy, Browne Company LLC ("Tweedy, Browne")........... New York; October 1997 71.2 5,343
London
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Total................................................... $ 49,983
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(1) Except for Essex, in which AMG invested in March 1998.
(2) Includes directly managed assets of $9.2 billion and $17.5 billion of assets
indirectly managed using overlay strategies ("overlay strategies") which
employ futures, options or other derivative securities to achieve a
particular investment objective. These overlay strategies are intended to
add incremental value to the underlying portfolios, which may or may not be
directly managed by First Quadrant, and generate advisory fees which are
generally at the lower end of the range of those generated by First
Quadrant's directly managed portfolios.
The following table provides the pro forma composition of the Company's
assets under management and relative EBITDA Contribution of the Affiliates for
the year ended December 31, 1997.
All amounts below are pro forma for the inclusion of the investments in
Gofen and Glossberg, GeoCapital and Tweedy, Browne as if such transactions
occurred on January 1, 1997 and excludes the Essex Investment. In addition,
EBITDA Contribution and other unaudited pro forma financial data reflect the
Company's Recent Financing (with interest expense adjusted for the terms of the
New Credit Facility) (as such terms are defined in "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Liquidity and Capital
Resources"), the sale of Common Stock sold in the Company's initial public
offering ("IPO") and the application of the net proceeds therefrom, the
conversion of convertible preferred stock into Common Stock, the 50-for-1 split
of each share of Common Stock outstanding prior to the IPO, and the issuance of
shares of Common Stock to the shareholders of an Affiliate in exchange for an
additional ownership interest in that Affiliate, all effected in connection with
the initial public offering.
9
UNAUDITED PRO FORMA
ASSETS UNDER MANAGEMENT AND EBITDA CONTRIBUTION(1)
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------
PERCENTAGE PERCENTAGE
OF TOTAL EBITDA OF TOTAL
--------- CONTRIBUTION ---------
--------------
ASSETS UNDER (IN THOUSANDS)
MANAGEMENT
--------------
(IN MILLIONS)
CLIENT TYPE:
Institutional................. $ 36,401 80% $ 24,945 47%
Mutual fund................... 3,376 7 16,599 31
High net worth................ 5,276 12 8,555 16
Other......................... 620 1 3,322 6
------- --- -------------- ---
Total....................... $ 45,673 100% $ 53,421 100%
------- --- -------------- ---
------- --- -------------- ---
ASSET CLASS:
Equity........................ $ 25,345 56% $ 44,953 84%
Fixed income.................. 2,829 6 2,072 4
Tactical asset allocation..... 17,499 38 6,396 12
------- --- -------------- ---
Total....................... $ 45,673 100% $ 53,421 100%
------- --- -------------- ---
------- --- -------------- ---
GEOGRAPHY:
Domestic investments.......... $ 23,425 51% $ 33,130 62%
Global investments............ 22,248 49 20,291 38
------- --- -------------- ---
Total....................... $ 45,673 100% $ 53,421 100%
------- --- -------------- ---
------- --- -------------- ---
OTHER PRO FORMA FINANCIAL
DATA:
RECONCILIATION OF EBITDA
CONTRIBUTION TO EBITDA:
Total EBITDA Contribution
(as above)................ $ 53,421
Less holding company
expenses.................. (8,411)
--------------
EBITDA (2).................... $ 45,010
--------------
EBITDA as adjusted (3)........ $ 26,695
OTHER HISTORICAL CASH FLOW
DATA:
Cash flow from operating
activities................ $ 16,205
Cash flow used in investing
activities................ (327,275)
Cash flow from financing
activities................ 327,112
EBITDA (2).................... $ 20,044
EBITDA as adjusted (3)........ $ 10,201
- ------------------------
(1) As defined by Note (2) on page 3.
(2) EBITDA represents earnings before interest, income taxes, depreciation,
amortization and extraordinary item. The Company believes EBITDA may be
useful to investors as an indicator of the Company's ability to service
debt, to make new investments and to meet working capital requirements.
EBITDA, as calculated by the Company, may not be consistent with
computations of EBITDA by other companies. EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
operating performance or to cash flows from operating activities as a
measure of liquidity.
(3) EBITDA as adjusted represents earnings after interest expense and income
taxes but before depreciation, amortization and extraordinary item. The
Company believes that this measure may be useful to investors as another
indicator of funds available to the Company, which may be used to make new
investments, repay debt obligations, repurchase shares of Common Stock or
pay dividends on Common Stock. EBITDA as adjusted, as calculated by the
Company, may not be consistent with computations of EBITDA as adjusted by
other companies. EBITDA as adjusted is not a measure of financial
performance under generally
10
accepted accounting principles and should not be considered an alternative
to net income as a measure of operating performance or to cash flows from
operating activities as a measure of liquidity.
COMPETITION
The Company operates as an asset management holding company organized to
invest in mid-sized asset management firms. The Company believes that the market
for investments in asset management companies is, and will continue to remain,
highly competitive. The Company competes with many purchasers of investment
management firms, including other investment management holding companies,
insurance companies, broker-dealers, banks and private equity firms. Many of
these companies, both privately and publicly held, have longer operating
histories and greater resources than the Company, which may make them more
attractive to the owners of firms in which AMG is considering an investment and
may enable them to offer greater consideration to such owners. The Company is
aware of several other holding companies that have been organized to invest in
or acquire less than 100% of investment management firms and the Company views
these firms as among its competitors. Certain of the Company's principal
stockholders also pursue investments in, and acquisitions of, investment
management firms, and the Company may, from time to time, encounter competition
from such principal stockholders with respect to certain investments. The
Company believes that important factors affecting its ability to compete for
future investments are (i) the degree to which target firms view the AMG
Structure as preferable, financially and operationally, to acquisition or
investment arrangements offered by other potential purchasers, (ii) the
attractiveness of AMG's Common Stock as a form of consideration in acquisitions,
and (iii) the reputation and performance of the existing Affiliates and future
affiliates, by which target firms will judge AMG and its future prospects.
The Affiliates compete with a large number of domestic and foreign
investment management firms, including public companies, subsidiaries of
commercial banks, and insurance companies. Many of these firms have greater
resources and assets under management than any of the Affiliates, and offer a
broader array of investment products and services than any of the Affiliates.
From time to time, Affiliates may also compete with other Affiliates for
clients. In addition, there are relatively few barriers to entry by new
investment management firms, especially in the institutional managed accounts
business. AMG believes that the most important factors affecting its Affiliates'
ability to compete for clients are (i) the products offered, (ii) the abilities,
performance records and reputation of its Affiliates and their management teams,
(iii) the management fees charged, (iv) the level of client service offered, and
(v) the development of new investment strategies and marketing. The importance
of these factors can vary depending on the type of investment management service
involved. Each Affiliate's ability to retain and increase assets under
management would be adversely affected if client managed accounts underperform
in comparison to relevant benchmarks, or if key management or employees leave
the Affiliate. The ability of each Affiliate to compete with other investment
management firms is also dependent, in part, on the relative attractiveness of
their respective investment philosophies and methods under then prevailing
market conditions.
GOVERNMENT REGULATION
Virtually all aspects of the Affiliates' businesses are subject to extensive
regulation. Each Affiliate (other than First Quadrant Limited) is registered
with the Securities and Exchange Commission (the "Commission") as an investment
adviser under the Investment Advisers Act. As an investment adviser, each such
Affiliate is subject to the provisions of the Investment Advisers Act and the
Commission's regulations promulgated thereunder. The Investment Advisers Act
imposes numerous obligations on registered investment advisers, including
fiduciary, recordkeeping, operational, and disclosure obligations. Each of the
Affiliates (other than First Quadrant Limited) is, as an investment adviser,
also subject to regulation under the securities laws and fiduciary laws of
certain states. Each of the mutual funds for which Tweedy, Browne and Skyline
are advisors is registered with the Commission under the 1940 Act, shares of
each such fund are registered with the Commission under the Securities Act of
1933, as amended (the "Securities Act"), and the shares of each such fund are
qualified for sale (or exempt from such
11
qualification) under the laws of each state and the District of Columbia to the
extent such shares are sold in any of such jurisdictions. In addition, each of
Renaissance, Systematic and Essex are subadvisors for one or more mutual funds.
As an adviser or subadviser to a registered investment company, each such
Affiliate is subject to requirements under the 1940 Act and the Commission's
regulations promulgated thereunder. The Affiliates are also subject to the
Employee Retirement Income Security Act of 1974 ("ERISA"), and to regulations
promulgated thereunder, insofar as they are "fiduciaries" under ERISA with
respect to certain of their clients. ERISA and the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code") impose certain duties on
persons who are fiduciaries under ERISA, and prohibit certain transactions
involving the assets of each ERISA plan which is a client of an Affiliate, as
well as certain transactions by the fiduciaries (and certain other related
parties) to such plans. Each of First Quadrant, L.P. and Renaissance is also
registered with the Commodity Futures Trading Commission as a Commodity Trading
Advisor and each is a member of the National Futures Association. Tweedy, Browne
is registered as a broker-dealer under the Securities Exchange Act of 1934, as
amended and is subject to regulation by the Commission, the National Association
of Securities Dealers, Inc. and other federal and state agencies. As a
registered broker-dealer, Tweedy, Browne is subject to the Commission's net
capital rules. Under certain circumstances, these rules may limit the ability of
Tweedy, Browne to make distributions to the Company.
A number of the Affiliates are subject to the laws of non-U.S. jurisdictions
and non-U.S. regulatory agencies or bodies. For example, First Quadrant Limited,
located in London, is a member of the Investment Management Regulatory
Organisation of the United Kingdom, and Tweedy, Browne and other Affiliates are
investment advisers to certain funds which are organized under non-U.S.
jurisdictions, including Luxembourg (where they are regulated by the Institute
Monetaire Luxembourgeois) and Bermuda (where they are regulated by the Bermuda
Monetary Authority).
Under the Investment Advisers Act, every investment advisory contract
between a registered investment adviser and its clients must provide that it may
not be assigned by the investment adviser without the consent of the client. In
addition, under the 1940 Act, each contract with a registered investment company
must provide that it terminates upon its assignment. Under both the Investment
Advisers Act and the 1940 Act, an investment advisory contract is deemed to have
been assigned in the case of a direct "assignment" of the contract as well as in
the case of a sale, directly or indirectly, of a "controlling block" of the
adviser's voting securities. Such an assignment may be deemed to take place when
a firm is acquired by AMG. Prior to AMG's investment, each Affiliate sought to
obtain the consent of its clients to the assignment of the advisory contracts
which results from the acquisition (and, in the case of mutual fund clients,
sought to obtain new advisory contracts on substantially the same terms). Each
investment consummated thus far has been, and the Company expects that each
future investment will be, conditioned on the obtaining of such consents (and,
to the extent applicable, new contracts) from substantially all of the clients
of the acquired firm. Because the reduction or dilution of the interests in AMG
of certain of AMG's stockholders could be considered to constitute a deemed
"assignment" of AMG's Affiliates' contracts with their clients, each of AMG's
Affiliates will solicit their clients' consents to such a reduction or dilution.
The foregoing laws and regulations generally grant supervisory agencies and
bodies broad administrative powers, including the power to limit or restrict any
of the Affiliates from conducting their business in the event that they fail to
comply with such laws and regulations. Possible sanctions that may be imposed in
the event of such noncompliance include the suspension of individual employees,
limitations on the Affiliate's business activities for specified periods of
time, revocation of the Affiliate's registration as an investment adviser,
commodity trading adviser and/or other registrations, and other censures and
fines. Changes in these laws or regulations could have a material adverse impact
on the profitability and mode of operations of the Company and each of its
Affiliates.
The officers, directors and employees of AMG and each of the Affiliates may,
from time to time, own securities that are also owned by one or more of the
Affiliates' clients. Each Affiliate and AMG has
12
internal policies with respect to individual investments and requires reports of
securities transactions and restricts certain transactions so as to minimize
possible conflicts of interest.
EMPLOYEES
As of December 31, 1997, the Company and its Affiliates employed
approximately 311 persons, approximately 293 of which are full-time employees.
The Company and its Affiliates are not subject to any collective bargaining
agreements and the Company believes that its labor relations are good.
CORPORATE LIABILITY AND INSURANCE
The businesses of the Affiliates entail the inherent risk of liability
related to litigation from clients and actions taken by regulatory agencies. In
addition, the Company faces liability both directly as a control person, and
indirectly as a direct or indirect general partner of certain of the Affiliates.
To protect its overall operations from such potential liabilities, the Company
and each of its Affiliates maintains errors and omissions and general liability
insurance in amounts which the Company and its Affiliates' management consider
appropriate. There can be no assurance, however, that a claim or claims will not
exceed the limits of available insurance coverage, that any insurer will remain
solvent and will meet its obligations to provide coverage, or that such coverage
will continue to be available with sufficient limits or at a reasonable cost. A
judgment against one of the Affiliates or the Company in excess of available
coverage could have a material adverse effect on the Company.
CAUTIONARY STATEMENTS
The Company's growth strategy includes acquiring ownership interests in
investment management firms. To date, AMG has invested in eleven such firms and
intends to continue this investment program in the future, subject to its
ability to locate suitable investment management firms in which to invest and
its ability to negotiate agreements with such firms on acceptable terms. There
can be no assurance that AMG will be successful in locating or investing in such
firms or that any of such firms will have favorable operating results.
The Company's acquisitions of interests in investment management firms
require substantial capital investments. Although the Company believes that its
existing cash resources and cash flow from operations will be sufficient to meet
the Company's working capital needs for normal operations for the foreseeable
future, these sources of capital are not expected to be sufficient to fund
anticipated investments. Therefore, the Company will need to raise capital
through the incurrence of additional long-term or short-term indebtedness or the
issuance of additional equity securities in private or public transactions in
order to complete further investments. This could result in dilution of existing
equity positions, increased interest expense or decreased net income. There can
be no assurance that acceptable financing for future investments can be obtained
on suitable terms, if at all.
The Company has outstanding indebtedness of $222.3 million under its New
Credit Facility (as defined in "Management's Discussion and Analysis of
Financial Condition and Results of Operation-- Liquidity and Capital Resources")
as of March 20, 1998, and anticipates that it will incur additional indebtedness
in the future in connection with investments in investment management firms and
to fund working capital. The Company will be subject to risks normally
associated with debt financing. Accordingly, the Company will be subject to the
risk that a substantial portion of the Company's cash flow may be required to be
dedicated to the payment of the Company's debt service obligations or even that
its cash flow will be insufficient to meet required payments of principal and
interest. The failure to make any required debt service payments or to comply
with any restrictive or financial covenants contained in any debt instrument
could give rise to a default permitting acceleration of the debt under such
instrument as well as debt under other instruments that contain
cross-acceleration or cross-default provisions, which could have an adverse
effect on the Company's financial condition and prospects. The New Credit
Facility
13
contains, and future debt instruments may contain, restrictive covenants that
could limit the Company's ability to obtain additional debt financing and could
adversely affect the Company's ability to make future investments in investment
management firms. The New Credit Facility prohibits the payment of dividends and
other distributions to stockholders of the Company and restricts the Company,
the Affiliates and the Company's other subsidiaries from incurring indebtedness,
incurring liens, disposing of assets and engaging in extraordinary transactions.
The Company is also required to comply with certain financial covenants on an
ongoing basis. The Company's ability to borrow under the New Credit Facility is
conditioned upon its compliance with the requirements of the New Credit
Facility, and any non-compliance with those requirements could give rise to a
default entitling the lenders to accelerate all outstanding borrowings under the
New Credit Facility. In addition, the New Credit Facility bears interest at
variable rates and future indebtedness may also bear interest at variable rates.
An increase in interest rates on such indebtedness would increase the Company's
interest expense, which could adversely affect the Company's cash flow and
ability to meet its debt service obligations. Although the Company has entered
into interest rate hedging contracts designed to offset a portion of the
Company's exposure to interest rate fluctuations above certain levels, there can
be no assurance that this objective will be achieved, and, if prevailing
interest rates drop below a given point, the Company may be obligated to pay a
higher interest rate under the hedging contracts than would otherwise apply
under the actual indebtedness.
At December 31, 1997, the Company's total assets were approximately $457
million, of which approximately $393 million were intangible assets consisting
of acquired client relationships and goodwill. There can be no assurance that
the value of such intangible assets will ever be realized by the Company. In
addition, the Company intends to invest in additional investment management
firms in the future. While these firms may contribute additional revenue to the
Company, such investments will also result in the recognition of additional
intangible assets which will cause further increases in amortization expense.
The loss of key management personnel or an inability to attract, retain and
motivate sufficient numbers of qualified management personnel on the part of the
Company or any of its Affiliates would adversely affect the Company's business.
The market for investment managers is extremely competitive and is increasingly
characterized by frequent movement by investment managers among different firms.
In addition, individual investment managers at the Affiliates often have regular
direct contact with particular clients, which can lead to a strong client
relationship based on the client's trust in that individual manager. The loss of
a key investment manager of certain of the Affiliates could jeopardize the
Affiliate's relationships with its clients and lead to the loss of the client
accounts at such Affiliate. Losses of such accounts could have a material
adverse effect on the results of operations and financial condition of the
Affiliate and, in the case of certain of the Affiliates, the Company. Although
the Company uses a combination of economic incentives, vesting provisions, and,
in some instances, non-solicitation agreements and employment agreements as a
means of seeking to retain key management personnel at the Company and each of
the Affiliates, there can be no assurance that key management personnel will
remain with their respective firms.
The Company's Affiliates offer a broad range of investment management
services and styles to institutional and retail investors. Across all the
Affiliates, the Company operates in a number of sectors within the investment
management industry, both with respect to products and distribution channels.
Consequently, the Company's performance is directly affected by conditions in
the financial and securities markets. The financial markets and the investment
management industry in general have experienced record performance and record
growth in recent years. The financial markets and businesses operating in the
securities industry, however, are highly volatile and are directly affected by,
among other factors, domestic and foreign economic conditions and general trends
in business and finance, all of which are beyond the control of the Company.
There can be no assurance that broader market performance will be favorable in
the future. Any decline in the financial markets or a lack of sustained growth
may result in a corresponding decline in performance by the Affiliates and may
adversely affect assets under management and/or fees at the Affiliate level,
which would reduce cash flow distributable to the Company.
14
Substantially all of the Affiliates' revenues are derived from investment
management contracts which are typically terminable, without the payment of a
penalty, in the case of contracts with mutual fund clients, upon 60 days'
notice, and, in the case of institutional contracts, upon 30 days' notice.
Because of this, clients of the Affiliates may withdraw funds from accounts
under management by the Affiliates generally in their sole discretion. In
addition, the Affiliates' contracts generally provide for fees payable for
investment management services based on the market value of assets under
management, although a portion also provide for the payment of fees based on
investment performance. Because most contracts provide for a fee based on market
values of securities, fluctuations in securities prices may have an adverse
effect on the Company's consolidated results of operations and financial
condition. Changes in the investment patterns of clients will also affect the
total assets under management. In addition, in the case of contracts which
provide for the payment of performance-based fees, the investment performance of
the Affiliates will affect the Company's consolidated results of operations and
financial condition. Some of the Affiliates' fees are higher than those of other
investment managers for similar types of investment services. Each Affiliate's
ability to maintain its fee structure in a competitive environment is dependent
on the ability of the Affiliate to provide clients with investment returns and
service that will cause clients to be willing to pay those fees. There can be no
assurance that any given Affiliate will be able to retain its fee structure or,
with such fee structure, retain its clients in the future.
While AMG's agreements with the Affiliates contain provisions pursuant to
which each Affiliate has agreed to pay to AMG a specified percentage of such
Affiliate's gross revenues, there can be no assurance that distributions will
always be made by the Affiliates to AMG or as to the amounts of any
distributions. In the organizational documents of each Affiliate, the
distributions to AMG represent only a portion of the revenues of the Affiliate,
with the remainder being retained by the Affiliate for the payment of expenses
or distributed to its management team as bonuses or distributions. In addition,
the payment of distributions to AMG may be subject to limitations under the laws
of the jurisdiction of organization of each of the Affiliates, regulatory
requirements, claims of creditors of each such Affiliate and applicable
bankruptcy and insolvency laws.
In connection with its investments in each of its Affiliates, AMG has agreed
to purchase ownership interests retained by the Affiliate's management team in
certain amounts, at certain times and at certain prices. Consequently, AMG may
be required to pay cash (which may require the incurrence of additional
indebtedness) or issue new shares of Common Stock to its Affiliates' managers.
As set forth above, such transactions could result in increased interest
expense, dilution of existing equity positions and decreased net income. In
addition, these transactions will result in the Company's ownership interests in
its Affiliates changing from time to time, which may have an adverse affect on
the Company's cash flow and liquidity.
Although AMG retains both the authority to prevent and cause certain types
of activities by the Affiliates and has voting and veto rights regarding
significant decisions pursuant to its agreements with the Affiliates, the
Affiliates are authorized to manage and conduct their own day-to-day operations,
including matters relating to employees who are not also owners, investment
management policies and fee structures, product development, client
relationships, compensation programs and compliance activities. Accordingly,
under these agreements, AMG generally does not alter Affiliate day-to-day
decisions, policies and strategies. Similarly, an Affiliate's non-compliance
with regulatory requirements that AMG might detect if it operated the business
of the Affiliates itself may not be detected by AMG as quickly, if at all, which
may adversely affect the Company's financial condition and results of
operations.
Certain of the Company's existing Affiliates are organized as partnerships
that include the Company as a general partner. Consequently, to the extent any
such Affiliate incurs liabilities or expenses which exceed its ability to pay or
fulfill such liabilities or expenses, the Company would be liable for their
payment.
In addition, in the context of certain liabilities, the Company could be
held liable, as a control person, for acts of Affiliates or their employees. The
Company and its Affiliates maintain errors and omissions and
15
general liability insurance in amounts which the Company and its Affiliates'
management consider appropriate. There can be no assurance, however, that a
claim or claims will not exceed the limits of available insurance coverage, that
any insurer will remain solvent and will meet its obligations to provide
coverage, or that such coverage will continue to be available with sufficient
limits or at a reasonable cost. A judgment against any of the Affiliates or the
Company in excess of available coverage could have a material adverse effect on
the Company.
ITEM 2. PROPERTIES
AMG's executive offices are located at Two International Place, 23rd Floor,
Boston, Massachusetts 02110. In Boston, AMG currently occupies 8,047 square feet
under a lease that expires in March 2003. Each of the Affiliates also leases
office space in the cities in which they conduct business.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company and its Affiliates may be parties to various
claims, suits and complaints. Currently, there are no such claims, suits or
complaints that, in the opinion of management, would have a material adverse
effect on the Company's financial position, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 4, 1997, the Company submitted the following matters to the
stockholders of the Company in connection with the Company's initial public
offering of Common Stock: (i) approval of an Amended and Restated Certificate of
Incorporation of the Company (the "Amended Certificate") to be effective on the
date the Securities and Exchange Commission declared the Company's registration
statement for its initial public offering effective, (ii) approval of a further
Amended and Restated Certificate of Incorporation of the Company to be effective
immediately upon the closing of the Company's initial public offering of its
Common Stock, (iii) approval of Amended and Restated By-laws of the Company to
be effective upon the effectiveness of the Amended Certificate, and (iv)
approval of the Affiliated Managers Group, Inc. 1997 Stock Option and Incentive
Plan, which provides for the issuance of up to 1,750,000 shares of Common Stock.
Each of these matters was approved by the unanimous written consent of the
Company's stockholders on November 14, 1997.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange (symbol:
AMG). The following table sets forth the high and low closing prices as reported
on the New York Stock Exchange composite tape since the Company's initial public
offering on November 21, 1997 through December 31, 1997.
1997 HIGH LOW
- ----------------------------------------------------------------------------------------- --------- ---------
Fourth Quarter (from November 21, 1997 through December 31, 1997)........................ $ 29.875 $ 24.00
The closing price for the shares on the New York Stock Exchange on March 13,
1998 was $37.125.
As of December 31, 1997 there were 57 stockholders of record. As of March
13, there were 63 stockholders of record.
The Company has not declared a dividend with respect to the periods
presented. The Company intends to retain earnings to repay debt and to finance
the growth and development of its business and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The New Credit Facility
(as defined herein) also prohibits the Company from making dividend payments to
its stockholders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Liquidity and Capital Resources."
SALES OF UNREGISTERED SECURITIES DURING 1997
During 1997, the Company issued unregistered securities to a limited number
of persons, as described below. No underwriters or underwriting discounts or
commissions were involved. There was no public offering in any such transaction,
and the Company believes that each transaction was exempt from the registration
requirements of the Securities Act, by reason of Section 4(2) thereof, based on
the private nature of the transactions and the financial sophistication of the
purchasers, all of whom had access to complete information concerning the
Company and acquired the securities for investment and not with a view to the
distribution thereof.
(1) On January 2, 1997, the Company issued an aggregate of 1,715 shares
of Series B-1 Voting Convertible Preferred Stock (convertible into 85,750
shares of Common Stock) with a value of approximately $1.5 million as
consideration for shares of capital stock of The Burridge Group Inc. in
connection with the Company's investment in Burridge. The shares of Series
B-1 Voting Convertible Preferred Stock were converted into Common Stock in
connection with the Company's initial public offering in November 1997.
(2) On September 30, 1997, the Company issued an aggregate of 10,667
shares of Class D Convertible Preferred Stock (convertible into 533,350
shares of Common Stock) with a value of approximately $9.6 million to the
stockholders of GeoCapital Corporation in connection with the Company's
investment in GeoCapital. The shares of Class D Convertible Preferred Stock
were converted into Common Stock in connection with the Company's initial
public offering in November 1997.
(3) On October 9, 1997, the Company issued (i) an aggregate of 5,333
shares of Series C-2 Non-Voting Convertible Preferred Stock and warrants to
purchase 28,000 shares of Series C-2 Non-Voting Convertible Preferred Stock
(the "Series C-2 Warrants") (convertible into 266,650 and 1,400,000 shares
of Common Stock, respectively) to Chase Equity Associates for an aggregate
purchase price of $30 million; (ii) senior subordinated notes (the
"Subordinated Notes") to Chase Equity Associates for $60 million; and (iii)
warrants to purchase Class B Common Stock (the "Class B Warrants") of the
Company into an escrow, to be issued to the holders of the Subordinated
Notes if such Subordinated
17
Notes were not paid on or prior to April 7, 1998. In connection with the
Company's initial public offering in November 1997, the shares of Series C-2
Non-Voting Convertible Preferred Stock (including those issued upon
conversion of the Series C-2 Warrants) were converted into Common Stock, the
Subordinated Notes were repaid and the Class B Warrants were extinguished.
REPORT OF USE OF PROCEEDS OF INITIAL PUBLIC OFFERING
The Company completed the initial public offering of its Common Stock in
November 1997. The initial public offering was made pursuant to (i) a
Registration Statement on Form S-1, originally filed with the Commission on
August 29, 1997, as amended (Commission File No. 333-34679), and (ii) a
Registration Statement on Form S-1, filed with the Commission pursuant to Rule
462(b) under the Securities Act on November 20, 1997 (Commission File No.
333-40699), both of which registration statements became effective on November
20, 1997. The initial public offering commenced on November 21, 1997 and
terminated shortly thereafter after the sale into the public market of all of
the registered shares of Common Stock.
The shares of Common Stock sold in the initial public offering were offered
for sale in the United States by a syndicate of U.S. underwriters represented by
Goldman, Sachs & Co., BT Alex. Brown Incorporated, Merrill Lynch, Pierce Fenner
& Smith Incorporated and Schroder & Co., Inc., and outside the United States by
a syndicate of international underwriters represented by Goldman Sachs
International, BT Alex. Brown International, a division of Bankers Trust
International PLC, Merrill Lynch International and J. Henry Schroder & Co.
Limited.
The Company registered an aggregate of 8,625,000 shares of Common Stock
(including 1,125,000 shares issued upon the exercise of the underwriters'
overallotment options) for sale in the initial public offering at a per share
price of $23.50, for an aggregate offering price of approximately $202.7
million. All of such shares were registered for the Company's account. As stated
above, all of such shares were sold shortly after the commencement of the
offering.
The Company incurred the following expenses in connection with the initial
public offering (in millions):
Underwriting discounts and commissions............................... $ 13.1
Other expenses....................................................... 2.6
---------
Total expenses....................................................... $ 15.7
After deducting the expenses set forth above, the Company received
approximately $187.0 million in net proceeds of the initial public offering. The
Company used $60.0 million of the proceeds to repay the Subordinated Notes
issued to Chase Equity Associates and approximately $125.8 million of the
proceeds to repay borrowings under the Company's then existing senior credit
facility with a syndicate of banks led by The Chase Manhattan Bank and an
additional $1.2 million to pay accrued interest.
Chase Equity Associates is a limited partnership whose sole limited partner
is an affiliate of Chase Manhattan Corporation (the parent company of The Chase
Manhattan Bank) and whose sole general partner has as its partners certain
employees of The Chase Manhattan Bank (including John M.B. O'Connor, a director
of the Company) and an affiliate of Chase Manhattan Corporation. Chase
Securities Inc., also an affiliate of Chase Equity Associates, was a participant
in the underwriting syndicate of the U.S. portion of the initial public
offering.
18
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
Set forth below are selected financial data for the Company for the four
years since inception, December 29, 1993. This data should be read in
conjunction with, and is qualified in its entirety by reference to, the
financial statements and accompanying notes included elsewhere in this Form
10-K.
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT AS INDICATED
AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Revenues.............................................................. $ 5,374 $ 14,182 $ 50,384 $ 95,287
Operating expenses:
Compensation and related expenses................................... 3,591 6,018 21,113 41,619
Amortization of intangible assets................................... 774 4,174 8,053 6,643
Depreciation and other amortization................................. 19 133 932 1,915
Other operating expenses............................................ 1,000 2,567 13,115 22,549
--------- --------- --------- ---------
Total operating expenses.......................................... 5,384 12,892 43,213 72,726
--------- --------- --------- ---------
Operating income (loss)............................................... (10) 1,290 7,171 22,561
Non-operating (income) and expenses:
Investment and other income....................................... (966) (265) (337) (1,174)
Interest expense.................................................. 158 1,244 2,747 8,479
--------- --------- --------- ---------
(808) 979 2,410 7,305
--------- --------- --------- ---------
Income before minority interest, income taxes and extraordinary
item................................................................ 798 311 4,761 15,256
Minority interest(1).................................................. (305) (2,541) (5,969) (12,249)
--------- --------- --------- ---------
Income (loss) before income taxes and extraordinary item.............. 493 (2,230) (1,208) 3,007
Income taxes.......................................................... 699 706 181 1,364
--------- --------- --------- ---------
Income (loss) before extraordinary item............................... (206) (2,936) (1,389) 1,643
--------- --------- --------- ---------
Extraordinary item.................................................... -- -- (983) (10,011)
--------- --------- --------- ---------
Net (loss)............................................................ $ (206) $ (2,936) $ (2,372) $ (8,368)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net (loss) per share(2)--basic........................................ $ (0.07) $ (2.95) $ (5.49) $ (3.69)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net (loss) per share(2)--diluted...................................... $ (0.07) $ (2.95) $ (5.49) $ (1.02)
--------- --------- --------- ---------
--------- --------- --------- ---------
Average shares outstanding--basic..................................... 3,030,548 996,144 431,908 2,270,684
Average shares outstanding--diluted................................... 3,030,548 996,144 431,908 8,235,529
OTHER FINANCIAL DATA
Assets under management (at period end, in millions).................. $ 755 $ 4,615 $ 19,051 $ 45,673
EBITDA(3)............................................................. 1,444 3,321 10,524 20,044
EBITDA as adjusted(4)................................................. 587 1,371 7,596 10,201
Cash flow from operating activities................................... 818 1,292 6,185 16,205
Cash flow used in investing activities................................ (6,156) (37,781) (29,210) (327,275)
Cash flow from financing activities................................... 9,509 46,414 15,650 327,112
BALANCE SHEET DATA
Current assets........................................................ $ 4,791 $ 16,847 $ 23,064 $ 52,058
Acquired client relationships, net.................................... 3,482 18,192 30,663 142,875
Goodwill, net......................................................... 5,417 26,293 40,809 249,698
Total assets.......................................................... 13,808 64,699 101,335 456,990
Current liabilities................................................... 2,021 4,111 23,591 18,815
Senior debt........................................................... -- 18,400 33,400 159,500
Total liabilities..................................................... 3,925 26,620 60,856 180,771
Minority interest(1).................................................. 80 1,212 3,490 16,479
Preferred stock....................................................... 10,004 40,008 42,476 --
Stockholders' equity.................................................. 9,803 36,867 36,989 259,740
19
- ------------------------
(1) All but one of the Company's Affiliates are majority-owned subsidiaries (the
Company owns less than a 50% interest in Paradigm which is accounted for
under the equity method of accounting). The portion of each Affiliate's
operating results and net assets that are owned by minority owners of each
Affiliate is accounted for as minority interest.
(2) The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). This
standard became effective for financial statements issued for periods ending
after December 15, 1997. The Company has adopted FAS 128 for its fiscal year
ending December 31, 1997 and has restated prior-period EPS data to conform
to the new standard. The calculation for the basic earnings per share is
based on the weighted average of common shares outstanding during the
period. The calculation for the diluted earnings per share is based on the
weighted average of common and common equivalent shares outstanding during
the period. Because the computation of diluted EPS shall not assume exercise
of securities that would have an anti-dilutive effect on earnings per share,
as is the case in a loss year before extraordinary item, the effect of
outstanding convertible preferred stock and unvested restricted common stock
was excluded from the diluted calculation in 1994, 1995 and 1996.
(3) As defined by Note(2) on page 10.
(4) As defined by Note(3) on page 10.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS FORM 10-K AND IN FUTURE FILINGS BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION, IN THE COMPANY'S PRESS RELEASES AND IN ORAL
STATEMENTS MADE WITH THE APPROVAL OF AN AUTHORIZED EXECUTIVE OFFICER, THE WORDS
OR PHRASES "WILL LIKELY RESULT", "ARE EXPECTED TO", "WILL CONTINUE", "IS
ANTICIPATED", "BELIEVES", "ESTIMATE", "PROJECT" OR SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED UNDER THE CAPTION
"BUSINESS--CAUTIONARY STATEMENTS", THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL EARNINGS AND THOSE PRESENTLY ANTICIPATED OR
PROJECTED. THE COMPANY WISHES TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON
ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE. THE
COMPANY WISHES TO ADVISE READERS THAT THE FACTORS DISCUSSED IN
"BUSINESS--CAUTIONARY STATEMENTS", AS WELL AS OTHER FACTORS, COULD AFFECT THE
COMPANY'S FINANCIAL PERFORMANCE AND COULD CAUSE THE COMPANY'S ACTUAL RESULTS FOR
FUTURE PERIODS TO DIFFER MATERIALLY FROM ANY OPINIONS OR STATEMENTS EXPRESSED
WITH RESPECT TO FUTURE PERIODS IN ANY CURRENT STATEMENTS.
THE COMPANY WILL NOT UNDERTAKE AND SPECIFICALLY DECLINES ANY OBLIGATION TO
RELEASE PUBLICLY THE RESULT OF ANY REVISIONS WHICH MAY BE MADE TO ANY
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF
SUCH STATEMENTS OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED
EVENTS.
OVERVIEW
The Company acquires equity positions in mid-sized investment management
firms, and derives its revenues from such firms. AMG has a revenue sharing
arrangement with each Affiliate which is contained in the organizational
document of that Affiliate. Each such arrangement allocates a specified
percentage of revenues (typically 50-70%) for use by management of that
Affiliate in paying operating expenses of the Affiliate, including salaries and
bonuses (the "Operating Allocation"). The remaining portion of revenues of the
Affiliate, typically 30-50% (the "Owners' Allocation"), is allocated to the
owners of that Affiliate (including the Company), generally in proportion to
their ownership of the Affiliate.
One of the purposes of the revenue sharing arrangements is to provide
ongoing incentives for the managers of the Affiliates. The revenue sharing
arrangements are designed to allow each Affiliate's managers to participate in
that firm's growth (through their compensation paid out of the Operating
Allocation and their ownership of a portion of the Owners' Allocation) and to
make operating expenditures freely within the limits of the Operating
Allocation. The portion of the Operating Allocation that is not used to pay
salaries and other operating expenses (the "Excess Operating Allocation") is
generally available to be used at the discretion of management of such
Affiliate, including for the payment of
20
bonuses or distributions to management. The managers of each Affiliate thus have
an incentive to increase revenues (thereby increasing the Operating Allocation)
and control expenses (thereby increasing the Excess Operating Allocation). The
ownership by an Affiliate's management of a portion of the Affiliate, which
entitles them to a portion of the Owners' Allocation, provides an important
additional incentive to managers of each Affiliate to increase revenues.
The revenue sharing arrangements allow AMG to participate in the growth of
revenues of each Affiliate, because as revenues increase, the Owners' Allocation
also increases. However, the Company participates in that growth to a lesser
extent than the managers of the Affiliate, because AMG does not participate in
the growth of the Operating Allocation.
The portion of each Affiliate's revenues which is included in its Operating
Allocation and used to pay salaries, bonuses and other operating expenses, as
well as the portion of each Affiliate's revenues which is included in its
Owners' Allocation and distributed to AMG and the other owners of the Affiliate,
are both included as "revenues" on the Company's Consolidated Statements of
Operations. The expenses of each Affiliate which are paid out of the Operating
Allocation, as well as the holding company expenses of AMG which are paid by the
Company out of the Owners' Allocation which AMG receives from the Affiliates,
are both included in "operating expenses" on the Company's Consolidated
Statements of Operations. The portion of each Affiliate's Owners' Allocation
which is allocated to owners of the Affiliates other than the Company is
included in "minority interest" on the Company's Consolidated Statements of
Operations.
The EBITDA Contribution of an Affiliate represents the Owners' Allocation of
that Affiliate allocated to AMG before interest, income taxes, depreciation and
amortization of that Affiliate. EBITDA Contribution does not include holding
company expenses of AMG.
The Affiliates' revenues are derived from the provision of investment
management services for fees. Investment management fees are usually determined
as a percentage fee charged on periodic values of a client's assets under
management. Certain of the Affiliates bill advisory fees for all or a portion of
their clients based upon assets under management valued at the beginning of a
billing period ("in advance"). Other Affiliates bill advisory fees for all or a
portion of their clients based upon assets under management valued at the end of
the billing period ("in arrears"). Advisory fees billed in advance will not
reflect subsequent changes in the market value of assets under management for
that period. Conversely, advisory fees billed in arrears will reflect changes in
the market value of assets under management for that period. In addition,
several of the Affiliates charge performance-based fees to certain of their
clients which result in payments to the applicable Affiliate if specified levels
of investment performance are achieved. All references to "assets under
management" include assets directly managed as well as assets underlying overlay
strategies which employ futures, options or other derivative securities to
achieve a particular investment objective.
The Company's level of profitability will depend on a variety of factors
including principally: (i) the level of Affiliate revenues, which is dependent
on the ability of the Affiliates and future affiliates to maintain or increase
assets under management by maintaining their existing investment advisory
relationships and fee structures, marketing their services successfully to new
clients, and obtaining favorable investment results; (ii) the receipt of Owners'
Allocation, which is dependent on the ability of the Affiliates and future
affiliates to maintain certain levels of operating profit margins; (iii) the
availability and cost of the capital with which AMG finances its investments;
(iv) the Company's success in attracting new investments and the terms upon
which such transactions are completed; (v) the level of intangible assets and
the associated amortization resulting from the Company's investments; (vi) the
level of expenses incurred by AMG for holding company operations, including
compensation for its employees; and (vii) the level of taxation to which the
Company is subject, all of which are, to some extent, dependent on factors which
are not in the Company's control, such as general securities market conditions.
Since its founding in December 1993, the Company has completed 11
investments in Affiliates. The most recent investment, in Essex, was completed
in March 1998 and is not included in pro forma operating
21
results except where indicated. In May, September and October 1997, the Company
completed investments in Gofen and Glossberg, GeoCapital and Tweedy, Browne,
respectively. The Company also made investments during March and December 1996,
in First Quadrant and Burridge, respectively. The Tweedy, Browne investment is
the Company's largest to date, representing 54% of the Affiliates' pro forma
EBITDA Contribution (which does not include Essex) for the year ended December
31, 1997.
The Company's investments have been accounted for under the purchase method
of accounting under which goodwill is recorded for the excess of the purchase
price for the acquisition of interests in Affiliates over the fair value of the
net assets acquired, including acquired client relationships.
As a result of the series of investments made by the Company, intangible
assets (goodwill and acquired client relationships) constitute a substantial
percentage of the assets of the Company and the Company's results of operations
have included increased charges for amortization of those intangible assets. As
of December 31, 1997, the Company's total assets were approximately $457.0
million, of which approximately $142.9 million consisted of "acquired client
relationships" and $249.7 million consisted of "goodwill" (collectively,
acquired client relationships and goodwill are referred to as "intangible
assets"). The amortization period for intangible assets for each investment is
assessed individually, with amortization periods for the Company's investments
to date ranging from nine to 26 years in the case of acquired client
relationships and 15 to 35 years in the case of goodwill. In determining the
amortization period for intangible assets acquired, the Company considers a
number of factors including: the firm's historical and potential future
operating performance; the firm's historical and potential future rates of
attrition among clients; the stability and longevity of existing client
relationships; the firm's recent, as well as long-term, investment performance;
the characteristics of the firm's products and investment styles; the stability
and depth of the firm's management team; and the firm's history and perceived
franchise or brand value. The Company continuously evaluates all components of
intangible assets to determine whether there has been any impairment in their
carrying value or their useful lives. The Company makes such evaluations
quarterly on an Affiliate-by-Affiliate basis to assess if facts and
circumstances exist which suggest an impairment has occurred in the value of the
intangible assets or if the amortization period needs to be shortened. If such a
condition exists, the Company will evaluate the recoverability of the intangible
asset by preparing a projection of the undiscounted future cash flows of the
Affiliate. If impairment is indicated, then the carrying amount of intangible
assets, including goodwill, will be reduced to their fair values.
While amortization of intangible assets has been charged to the results of
operations and is expected to be a continuing material component of the
Company's operating expenses, management believes it is important to distinguish
this expense from other operating expenses since such amortization does not
require the use of cash. Because of this, and because the Company's
distributions from its Affiliates are based on their Owners' Allocation,
management has provided additional supplemental information in this annual
report for "cash-related" earnings, as an addition to, but not as a substitute
for, measures related to net income. Such measures are (i) EBITDA, which the
Company believes is useful to investors as an indicator of the Company's ability
to service debt, make new investments and meet working capital requirements, and
(ii) EBITDA as adjusted, which the Company believes is useful to investors as
another indicator of funds available to the Company, which may be used to make
new investments, repay debt obligations, repurchase shares of Common Stock or
pay dividends on Common Stock.
RESULTS OF OPERATIONS
SUPPLEMENTAL PRO FORMA INFORMATION
Affiliate operations are included in the Company's historical financial
statements from their respective dates of acquisition. The Company consolidates
Affiliates when it owns a controlling interest and includes in minority interest
the portion of capital and Owners' Allocation owned by persons other than the
Company. One of the Company's Affiliates, Paradigm, is not controlled by the
Company and is accounted for under the equity method of accounting.
22
Because the Company has made investments during each of the periods for
which financial statements are presented, the Company believes that the
historical operating results for these periods are not directly comparable.
Substantially all of the changes in the Company's income, expense and balance
sheet categories result from the inclusion of the acquired businesses from the
dates of their investment.
All amounts in the table which follows are pro forma for the inclusion of
the 1997 investments in Gofen and Glossberg, GeoCapital and Tweedy, Browne as if
such transactions occurred on January 1, 1997. In addition, EBITDA Contribution
and other pro forma financial data reflect the Company's Recent Financing (with
interest expense adjusted for the terms of the New Credit Facility) (as such
terms are defined in "Management's Discussion and Analysis of Financial
Condition and Results of Operations-- Liquidity and Capital Resources"), the
sale of Common Stock sold in the Company's IPO and the application of the net
proceeds therefrom, the conversion of preferred stock into Common Stock, the
50-for-1 split of each share of Common Stock outstanding prior to the IPO, and
the issuance of shares of Common Stock to the shareholders of an Affiliate in
exchange for an additional ownership interest in that Affiliate, all effected in
connection with the initial public offering. Such information is provided to
enhance the reader's understanding and evaluation of the effects to the Company
of Tweedy, Browne, AMG's largest affiliate by EBITDA contribution.
23
DECEMBER 31, 1997
-------------------
(IN MILLIONS)
UNAUDITED PRO FORMA SUPPLEMENTAL INFORMATION:
Assets under Management--at period end:
Tweedy, Browne............................................................................... $ 5,343
Other Affiliates............................................................................. 40,330
-------
Total...................................................................................... $ 45,673
-------
-------
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
Revenues:
Tweedy, Browne............................................................................... $ 53,506
Other Affiliates............................................................................. 93,653
--------
Total...................................................................................... $ 147,159
--------
--------
Owners' Allocation(1):
Tweedy, Browne............................................................................... $ 36,314
Other Affiliates(2).......................................................................... 36,838
--------
Total...................................................................................... $ 73,152
--------
--------
EBITDA Contribution(3):
Tweedy, Browne............................................................................... $ 28,643
Other Affiliates(4).......................................................................... 24,778
--------
Total...................................................................................... $ 53,421
--------
--------
OTHER PRO FORMA FINANCIAL DATA:
RECONCILIATION OF EBITDA CONTRIBUTION TO EBITDA
Total EBITDA Contribution (as above)......................................................... $ 53,421
Less holding company expenses................................................................ (8,411)
--------
EBITDA(5)...................................................................................... $ 45,010
--------
EBITDA as adjusted(6).......................................................................... $ 26,695
HISTORICAL CASH FLOW AND OTHER DATA:
Cash flow from operating activities.......................................................... $ 16,205
Cash flow used in investing activities....................................................... (327,275)
Cash flow from financing activities.......................................................... 327,112
EBITDA(5).................................................................................... $ 20,044
EBITDA as adjusted(6)........................................................................ $ 10,201
- ------------------------
(1) As defined in "Business--AMG Structure and Relationship with
Affiliates--Revenue Sharing Arrangements" on page 6.
(2) No Affiliate other than Tweedy, Browne accounted for more than 16% of
Owners' Allocation for the year ended December 31, 1997. No single client
relationship accounted for more than 3% of Owner's Allocation for the year
ended December 31, 1997.
(3) As defined by Note (2) on page 3.
(4) No Affiliate other than Tweedy, Browne accounted for more than 17% of EBITDA
Contribution for the yearended December 31, 1997.
(5) As defined by Note (2) on page 10.
(6) As defined by Note (3) on page 10.
24
The table below depicts the pro forma change in the Company's assets under
management (assuming that all Affiliates in which the Company owned an interest
at December 31, 1997 were included for the entire year).
PRO FORMA CHANGE IN ASSETS UNDER MANAGEMENT
- --------------------------------------------------------------------------------
YEAR ENDED
DECEMBER
31,
1997
-----------
(IN
MILLIONS)
Assets under management--beginning.............................................. $ 27,747
Net new sales................................................................... 11,942
Market appreciation............................................................. 5,984
-----------
Assets under management--ending................................................. $ 45,673
-----------
-----------
HISTORICAL
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996
The Company had a net loss after extraordinary item of $8.4 million for the
year ended December 31, 1997 compared to a net loss after extraordinary item of
$2.4 million for the year ended December 31, 1996. The net loss for the year
ended December 31, 1997 resulted primarily from the extraordinary item of $10.0
million, net of related tax benefit, from the early extinguishment of debt.
Before extraordinary item, net income was $1.6 million for the year ended
December 31, 1997 compared to a net loss of $1.4 million for the year ended
December 31, 1996.
Assets under management on a historical basis increased by $26.6 billion to
$45.7 billion at December 31, 1997 from $19.1 billion at December 31, 1996, in
part due to the investments made in Gofen and Glossberg, GeoCapital and Tweedy,
Browne during 1997. Excluding the initial assets under management of these
Affiliates at the respective dates of the Company's investments, assets under
management increased by $15.8 billion as a result of $4.6 billion in market
appreciation and $11.2 billion from positive net client cash flows.
Total revenues for the year ended December 31, 1997 were $95.3 million, an
increase of $44.9 million or 89% over the year ended December 31, 1996. The
Company invested in Burridge in December 1996, Gofen and Glossberg in May 1997,
GeoCapital in September 1997 and Tweedy, Browne in October 1997, and included
their results from their respective purchase dates. In addition, the Company
invested in First Quadrant in March 1996 and its results were included in the
results for the year ended December 31, 1996 from its purchase date. Revenues
from these investments accounted for $43.1 million of the increase in revenues
from 1996 to 1997 while revenues from other existing Affiliates increased by
$1.8 million to $26.7 million. Performance-based fees, primarily earned by First
Quadrant, increased by $4.0 million to $17.2 million for the year ended December
31, 1997 compared to $13.2 million for the year ended December 31, 1996.
Compensation and related expenses increased by $20.5 million to $41.6
million for the year ended December 31, 1997 from $21.1 million for the year
ended December 31, 1996. The inclusion of the First Quadrant, Burridge, Gofen
and Glossberg, GeoCapital and Tweedy, Browne investments accounted for $19.3
million of this increase while the remainder of the increase was attributable to
the increased compensation costs of AMG personnel, including the cost of new
hires.
Amortization of intangible assets decreased by $1.5 million to $6.6 million
for the year ended December 31, 1997 from $8.1 million for the year ended
December 31, 1996. Amortization of intangible assets increased by $3.1 million
as a result of the inclusion of the First Quadrant, Burridge, and Gofen and
Glossberg, GeoCapital and Tweedy, Browne investments, which increase was offset
by an impairment loss of $4.6 million taken on the Systematic investment during
1996 with no similar item in 1997.
25
Selling, general and administrative expenses increased by $8.0 million to
$18.9 million for the year ended December 31, 1997 from $10.9 million for the
year ended December 31, 1996. The First Quadrant, Burridge, Gofen and Glossberg,
GeoCapital and Tweedy, Browne investments accounted for $6.0 million of this
increase and the remainder was primarily due to increases in AMG's and the other
Affiliates' selling, general and administrative expenses.
Other operating expenses increased by approximately $1.3 million to $3.6
million for the year ended December 31, 1997 from $2.3 million for the year
ended December 31, 1996, primarily due to the results of operations of the new
Affiliates described above.
Minority interest increased by $6.2 million to $12.2 million for the year
ended December 31, 1997 from $6.0 million for the year ended December 31, 1996.
Of this increase, $5.4 million was as a result of the addition of new Affiliates
as described above and the remainder was due to the Owners' Allocation growth at
the Company's existing Affiliates.
Interest expense increased $5.8 million to $8.5 million for the year ended
December 31, 1997 from $2.7 million for the year ended December 31, 1996 as a
result of the increased indebtedness incurred in connection with the investments
described above. See "Liquidity and Capital Resources".
Income tax expense was $1.4 million for the year ended December 31, 1997
compared to $181,000 for the year ended December 31, 1996. The effective tax
rate for the year ended December 31, 1997 was 46% compared to 15% for the year
ended December 31, 1996. The change in effective tax rates from 1996 to 1997 is
related primarily to the change in the provision for federal taxes from 1996 to
1997. In 1996, the Company recorded a federal deferred tax benefit of $233,000
on a pretax loss of $1.2 million. In 1997, the Company recorded a deferred tax
expense of $776,000 on pretax income of $3.0 million. The deferred taxes account
for the effects of temporary differences between the recognition of deductions
for book and tax purposes primarily related to the accelerated amortization of
certain intangible assets.
EBITDA increased by $9.5 million to $20.0 million for the year ended
December 31, 1997 from $10.5 million for the year ended December 31, 1996 as a
result of the inclusion of new Affiliates as described above and revenue growth.
EBITDA as adjusted increased by $2.6 million to $10.2 million for the year
ended December 31, 1997 from $7.6 million for the year ended December 31, 1996
as a result of the factors affecting net income as described above, before
non-cash expenses such as amortization of intangible assets, depreciation and
extraordinary items of $18.6 million for the year ended December 31, 1997 and
$10.0 million for the year ended December 31, 1996.
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net loss was $2.4 million for the year ended December 31, 1996 compared to
$2.9 million for the year ended December 31, 1995. The change was a result of
the higher operating income from Affiliates in 1996 which was offset by an
extraordinary item of $983,000 and higher depreciation and amortization,
interest and minority interest expenses resulting from the inclusion of certain
Affiliate results for a full year in 1996 compared to partial periods in 1995
and from the inclusion of First Quadrant's results from its acquisition date in
March 1996.
Assets under management on a historical basis increased by $14.5 billion to
$19.1 billion at December 31, 1996 from $4.6 billion at December 31, 1995,
primarily as a result of the investments made in First Quadrant and Burridge
which were completed in March 1996 and December 1996, respectively. Excluding
the initial assets under management of these Affiliates at their date of
investment, assets under management increased by $2.0 billion as a result of
positive client cash flows of $495.0 million and $1.5 billion in market
appreciation.
Consolidated revenues increased $36.2 million to $50.4 million for the year
ended December 31, 1996 from $14.2 million for the year ended December 31, 1995.
Of this increase, $25.5 million was attributable
26
to the investment in First Quadrant in March 1996. In addition, for the year
ended December 31, 1996, the results of Systematic, Paradigm, Skyline and
Renaissance were included for the full period. Each of those Affiliates was only
included for a portion of the year ended December 31, 1995. Performance-based
fees increased by $11.8 million to $13.2 million for the year ended December 31,
1996 primarily due to the inclusion of First Quadrant which earned performance
fees of $11.5 million for the period ended December 31, 1996. The Company
completed its investment in Burridge on December 31, 1996.
Compensation and related expenses increased $15.1 million to $21.1 million
for the year ended December 31, 1996 from $6.0 million for the year ended
December 31, 1995. Of this increase, $8.1 million was attributable to the
inclusion of First Quadrant. As noted above, for the year ended December 31,
1996, the expenses of each of Systematic, Skyline and Renaissance were included
for the full period. In addition, $1.1 million was attributable to the increased
compensation costs of AMG personnel, including the cost of new hires.
The amortization of intangible assets increased by $3.9 million to $8.1
million for the year ended December 31, 1996 from $4.2 million for the year
ended December 31, 1995. Of this increase, approximately $700,000 was
attributable to the First Quadrant investment and $1.2 million was due to the
inclusion of the other recently acquired Affiliates for the full period. In the
year ended December 31, 1996, the Company also recognized an impairment loss of
$4.6 million in connection with its investment in Systematic which is included
in amortization of intangible assets. The loss reflects the write down of
Systematic's intangible assets to its net realizable value following a period of
net client asset withdrawals. In the year ended December 31, 1995, AMG also
recognized $2.5 million of impairment loss in connection with its Hartwell
investment following a loss of client assets.
Selling, general and administrative expenses increased from $2.2 million for
the year ended December 31, 1995 to $10.9 million for the year ended December
31, 1996 for the reasons stated above related to the periods of inclusion in the
results of operations of the new Affiliates and due to $1.8 million of higher
selling, general and administrative expenses incurred by AMG relating to its
investment activities.
Other operating expenses increased from $330,000 for the year ended December
31, 1995 to $2.3 million for the year ended December 31, 1996. This $2.0 million
increase was primarily due to the inclusion of operations for the First Quadrant
investment for nine months and the Renaissance investment for a full year in
1996.
Minority interest increased by $3.5 million to $6.0 million for the year
ended December 31, 1996 from $2.5 million for the year ended December 31, 1995,
as a result of the addition of new Affiliates during the year and revenue growth
at the Company's Affiliates.
Interest expense increased from $1.2 million for the year ended December 31,
1995 to $2.7 million for the year ended December 31, 1996. The increase in the
interest expense was due to the incurrence of $16.1 million of average bank
borrowings by the Company in connection with the Systematic, Paradigm, Skyline
and Renaissance transactions and $16.0 million of average bank borrowings
incurred in connection with the 1996 investment in First Quadrant for the nine
months ended December 31, 1996.
Income tax expense was $181,000 for the year ended December 31, 1996
compared to $706,000 for the year ended December 31, 1995. The Company did not
accrue a current provision for federal income taxes in 1996 as a result of its
utilization of net operating loss carryforwards. The net operating loss
carryforwards resulted from prior periods of net losses from operations. The
Company has established a valuation allowance against the resulting net deferred
tax asset. The effective tax rate for the year ended December 31, 1996 was 15%
compared to 32% for the year ended December 31, 1995. The 1995 provision for
taxes included $445,000 for state and local income taxes and $261,000 of federal
income taxes. The federal income tax provision included $201,000 of deferred
taxes for the effects of timing differences between the recognition of
deductions for book and tax purposes primarily related to the accelerated
amortization of certain intangible assets.
27
EBITDA increased $7.2 million to $10.5 million for the year ended December
31, 1996 from $3.3 million for the year ended December 31, 1995 as a result of
the inclusion of new Affiliates as described above and revenue growth.
EBITDA as adjusted increased by $6.2 million to $7.6 million for the year
ended December 31, 1996 from $1.4 million for the year ended December 31, 1995,
as a result of factors affecting net income as described above before non-cash
charges such as amortization of intangible assets, depreciation and
extraordinary items of $10.0 million for the year ended December 31, 1996 and
$4.3 million for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its cash requirements primarily through cash generated
by its operating activities, bank borrowings, the issuance by the Company of
equity and debt securities in private placement transactions and the net
proceeds from the sale of 8,625,000 shares of Common Stock in an initial public
offering in November 1997. The Company anticipates that it will use cash flow
from its operating activities to repay debt and to finance its working capital
needs and will use bank borrowings and issue equity and debt securities to
finance future investments in affiliates and working capital. The Company's
principal uses of cash have been to make investments in Affiliates, to retire
indebtedness, and to support the Company's and its Affiliates' operating
activities. The Company expects that its principal use of funds for the
foreseeable future will be for investments in additional affiliates, repayments
of debt, including interest payments on outstanding debt, distributions of the
Owners' Allocation to owners of Affiliates other than AMG, additional
investments in existing Affiliates including upon the exercise of Puts (as
defined elsewhere herein) and for working capital purposes. The Company does not
expect to make commitments for material capital expenditures.
Net cash flow from operating activities was $16.2 million, $6.2 million and
$1.3 million for the years ended December 31, 1997, 1996 and 1995, respectively.
Net cash flow used in investing activities was $327.3 million, $29.2 million
and $37.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Of these amounts, $325.9 million, $25.6 million, and $38.0
million, respectively, were used to make investments in Affiliates.
Net cash flow from financing activities was $327.1 million, $15.7 million
and $46.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The principal sources of cash from financing activities has been
from borrowings under senior credit facilities and subordinated debt, private
placements of the Company's equity securities and the Company's IPO. The uses of
cash from financing activities during these periods were for the repayment of
bank debt, repayment of subordinated debt, repayment of notes issued as purchase
price consideration and for the payment of debt issuance costs.
At December 31, 1997, the Company had cash and cash equivalents of $22.8
million and outstanding borrowings of senior debt under its New Credit Facility,
as defined below, of $159.5 million.
During 1997, the Company made investments in three new Affiliates, Gofen and
Glossberg, GeoCapital and Tweedy, Browne, and made additional investments in two
of its existing Affiliates which required approximately $325.9 million in cash
(including transaction costs). The Company obtained the financing for these
investments pursuant to (i) borrowings under the Credit Facility, (ii)
borrowings of $60 million face amount of Subordinated Bridge Notes (the
"Subordinated Debt") and (iii) $30 million from the issuance of Class C
Convertible Preferred Stock and warrants to purchase Class C Convertible
Preferred Stock (clauses (i)--(iii) collectively, the "Recent Financing"). The
Credit Facility included $200 million in revolving credit and $50 million of
7-year Tranche A and $50 million of 8-year Tranche B term loans.
On November 21, 1997, the Company successfully completed its IPO with the
sale of 8,625,000 shares of Common Stock. The Company received net proceeds of
$187.0 million, after deducting the underwriting
28
discount and expenses payable by the Company in connection with the offering.
The Company used the proceeds of the offering to retire the Subordinated Debt of
$60 million, the Tranche A term loan of $50 million, the Tranche B term loan of
$50 million, $25.8 million of the revolving credit facility and accrued interest
of $1.2 million.
The Company replaced its Credit Facility with a new credit facility ("New
Credit Facility") during December 1997. The New Credit Facility allows for
borrowings up to $300 million (which may be increased to $400 million upon the
approval of the lenders), bears interest at either LIBOR plus a margin ranging
from 0.50% to 2.25% or the Prime Rate plus a margin ranging up to 1.25% and
matures during December 2002. The Company pays a commitment fee of up to 1/2 of
1% on the daily unused portion of the facility.
The Company's borrowings under the New Credit Facility are collateralized by
pledges of all of its interests in Affiliates (including all interests in
Affiliates which are directly held by the Company, as well as all interests in
Affiliates which are indirectly held by the Company through wholly-owned
subsidiaries), representing substantially all of the Company's assets at
December 31, 1997. The credit agreement (the "Credit Agreement") evidencing the
New Credit Facility contains a number of negative covenants, including those
which prevent the Company and its Affiliates from: (i) incurring additional
indebtedness (with certain enumerated exceptions, including additional
borrowings under the New Credit Facility and borrowings which constitute
Subordinated Indebtedness (as that term is defined in the Credit Agreement)),
(ii) creating any liens or encumbrances on any of their assets (with certain
enumerated exceptions), (iii) selling assets outside the ordinary course of
business or making certain fundamental changes with respect to the Company or
any of its subsidiaries, including a restriction on the Company's ability to
transfer interests in its subsidiaries if, as a result of such transfer, the
Company would own less than 51% of such subsidiary, and (iv) declaring or paying
dividends on the Common Stock of the Company.
The Credit Agreement also requires the Company to comply with certain
financial covenants on an ongoing basis. These include a covenant requiring
minimum stockholders' equity of $36.0 million (plus 85% of net proceeds from
offerings of equity and Subordinated Indebtedness (as such term is defined in
the Credit Agreement) and 50% of quarterly net income (or minus certain
quarterly net losses) after the date of the Credit Agreement); a covenant
requiring that Consolidated EBITDA (as such term is defined in the Credit
Agreement) exceed interest expense by 2.0 to 1.0; and a covenant requiring that
senior debt not exceed adjusted EBITDA (as such term is defined in the Credit
Agreement) by more than 5.0 to 1.0. The Company remains in compliance with each
of the foregoing financial covenants. The Company's ability to borrow under the
Credit Agreement is conditioned upon its compliance with the requirements of
that agreement, and any non-compliance with those requirements could give rise
to a default entitling the lenders to accelerate all outstanding borrowings
under that agreement.
In August 1997, the Company issued to Chase Equity Associates 5,333
(pre-split) shares of Series C-2 Non-Voting Convertible Preferred Stock and
warrants to purchase at nominal cost 28,000 (pre-split) shares of Series C-2
Non-Voting Convertible Preferred Stock for aggregate cash consideration of $30.0
million. As partial consideration in the GeoCapital investment, the Company
issued 10,667 (pre-split) shares of Class D Convertible Preferred Stock valued
at $9.6 million.
On March 20, 1998, the Company acquired a majority interest in Essex
Investment Management, LLC. The Company paid $69.6 million in cash and the
assumption of debt, in addition to 1,750,942 newly-issued shares of Class C
Convertible Non-Voting Stock. The stock will automatically convert into AMG
Common Stock at a 1-for-1 exchange ratio after one year. The Company funded the
cash portion of this investment with borrowings under its New Credit Facility.
In order to provide the funds necessary for the Company to continue to
acquire interests in investment management firms, including its Affiliates upon
the exercise of Puts, it will be necessary for the Company to incur, from time
to time, additional long-term bank debt and/or issue equity or debt securities,
29
depending on market and other conditions. There can be no assurance that such
additional financing will be available or become available on terms acceptable
to the Company.
INTEREST RATE SENSITIVITY
The Company's revenues are derived almost exclusively from fees which are
based on the value of assets under management. Such values are affected by
changes in the broader financial markets which are, in part, affected by
changing interest rates. The Company cannot predict the effects that interest
rates or changes in interest rates may have on either the broader financial
markets or its Affiliates' assets under management and associated fees.
With respect to its debt financings, the Company is exposed to potential
fluctuations in the amount of interest expense resulting from changing interest
rates. The Company seeks to offset such exposure in part by entering into
interest rate hedging contracts. See "Interest Rate Hedging Contracts" below.
The Company's annual interest expense increases or decreases by $199,375 for
each 1/8 of 1% change in interest rates assuming LIBOR is between 5% and 6.78%
and assuming current interest rate margins on bank debt.
INTEREST RATE HEDGING CONTRACTS
The Company seeks to offset its exposure under its debt financing
arrangements to changing interest rates by entering into interest rate hedging
contracts. The Company generally borrows at a floating rate equal to LIBOR plus
a margin as described above. As of December 31, 1997, the Company is a party,
with two major commercial banks as counterparties, to $185 million notional
amount of swap contracts which are designed to limit interest rate increases on
the Company's borrowings. The swap contracts, upon quarterly reset dates, cap
interest rates on the notional amounts when LIBOR exceeds 6.67% or 6.78%. When
LIBOR is at or below 5%, the Company's floating LIBOR-based interest rate debt
is swapped for fixed rate debt at rates ranging between 6.67% and 6.78%. The
hedging contracts limit the effects of the Company's payment of interest at
equivalent LIBOR rates of 6.78% or less on up to $185 million of indebtedness.
However, there can be no assurance that the Company will continue to maintain
such hedging contracts at their existing levels of coverage or that the amount
of coverage maintained will cover all of the Company's indebtedness outstanding
at any such time. In addition, as noted above, the Company's existing hedging
contracts subject the Company to the risk of payments of higher interest rates
when prevailing LIBOR rates are at 5% or less. Therefore, there can be no
assurance that the hedging contracts will meet their overall objective of
reducing the Company's interest expense. In addition, there can be no assurance
that the Company will be successful in obtaining hedging contracts in the future
on any new indebtedness.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
or its Affiliates' computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on a recent assessment, the Company determined that the Year 2000
Issue will not have a significant impact on its own systems. The Company has
communicated with its Affiliates and plans to initiate a formal communication
with all of its significant vendors to determine the extent to which the Company
is vulnerable to those third parties who fail to remediate their own Year 2000
Issue.
30
At this time, the Company's assessment of the impact of the Year 2000 Issue
is incomplete. The Company's assessment is expected to be completed during 1998,
when all of its Affiliates and significant vendors have completed their
individual assessments of the issue.
RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This standard requires that comprehensive income and its components be
reported and displayed in a financial statement with the same prominence as
other financial statements. Comprehensive income includes net income, as well as
certain items that are recorded directly in stockholders' equity, such as
foreign currency translation adjustments. This standard is effective for years
beginning after December 15, 1997, and will not have a material impact on the
Company's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This standard requires disclosure of
financial and descriptive information about an entity's reportable operating
segments. Segments are defined by the standard as components of an entity that
engage in business activities that generate revenues and expenses, and for which
separate financial information should be reported on the basis that is used
internally for senior management review. This standard is effective for
financial statements for periods beginning after December 15, 1997, with
restatement of comparative information for prior periods. The Company is
currently evaluating the impact of this standard on its disclosures.
ECONOMIC AND MARKET CONDITIONS
The financial markets and the investment management industry in general have
experienced record performance and record growth in recent years. For example,
between January 1, 1995 and December 31, 1997, the S&P 500 Index appreciated at
a compound annual rate in excess of 31.2% while, according to the Federal
Reserve Board and the Investment Company Institute, aggregate assets under
management of mutual and pension funds grew at a compound annual rate
approaching 20% for the period January 1, 1995 to December 31, 1996. The
financial markets and businesses operating in the securities industry, however,
are highly volatile and are directly affected by, among other factors, domestic
and foreign economic conditions and general trends in business and finance, all
of which are beyond the control of the Company. There can be no assurance that
broader market performance will be favorable in the future. Any decline in the
financial markets or a lack of sustained growth may result in a corresponding
decline in performance by the Affiliates and may adversely affect assets under
management and/or fees at the Affiliate level, which would reduce cash flow
distributions to the Company.
INTERNATIONAL OPERATIONS
First Quadrant Limited is organized and headquartered in London, England.
Tweedy, Browne, based in New York, also maintains a research office in London.
In the future, the Company may seek to invest in other investment management
firms which are located and/or conduct a significant part of their operations
outside of the United States. There are certain risks inherent in doing business
internationally, such as changes in applicable laws and regulatory requirements,
difficulties in staffing and managing foreign operations, longer payment cycles,
difficulties in collecting investment advisory fees receivable, political
instability, fluctuations in currency exchange rates, expatriation controls and
potential adverse tax consequences. There can be no assurance that one or more
of such factors will not have a material adverse effect on First Quadrant
Limited or other non-U.S. investment management firms in which the Company may
invest in the future and, consequently, on the Company's business, financial
condition and results of operations.
INFLATION
The Company does not believe that inflation or changing prices have had a
material impact on its results of operations.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Affiliated Managers Group, Inc.:
We have audited the accompanying consolidated balance sheets of Affiliated
Managers Group, Inc. and Affiliates as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Affiliated
Managers Group, Inc. and Affiliates as of December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 10, 1998
except for Note 16
for which the date is
March 20, 1998.
32
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
----------------------
1996 1997
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 6,767 $ 22,766
Investment advisory fees receivable..................................................... 15,491 27,061
Other current assets.................................................................... 806 2,231
---------- ----------
Total current assets.................................................................. 23,064 52,058
Fixed assets, net......................................................................... 2,999 4,724
Equity investment in Affiliate............................................................ 1,032 1,237
Acquired client relationships, net of accumulated amortization of $2,979 in 1996 and
$6,142 in 1997.......................................................................... 30,663 142,875
Goodwill, net of accumulated amortization of $10,022 in 1996 and $13,502 in 1997.......... 40,809 249,698
Other assets.............................................................................. 2,768 6,398
---------- ----------
Total assets.......................................................................... $ 101,335 $ 456,990
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................................................ $ 16,212 $ 18,815
Notes payable to related parties........................................................ 7,379 --
---------- ----------
Total current liabilities............................................................. 23,591 18,815
Senior bank debt.......................................................................... 33,400 159,500
Accrued affiliate liability............................................................... 3,200 --
Other long-term liabilities............................................................... 665 1,656
Subordinated debt......................................................................... -- 800
---------- ----------
Total liabilities..................................................................... 60,856 180,771
Minority interest......................................................................... 3,490 16,479
Commitments and contingencies
Stockholders' equity:
Preferred stock........................................................................... 42,476 --
Common stock.............................................................................. -- 177
Additional paid-in capital on common stock................................................ 5 273,475
Foreign translation adjustment............................................................ 22 (30)
Accumulated deficit....................................................................... (5,514) (13,882)
---------- ----------
Total stockholders' equity............................................................ 36,989 259,740
---------- ----------
Total liabilities and stockholders' equity............................................ $ 101,335 $ 456,990
---------- ----------
---------- ----------
The accompanying notes are an integral part of the consolidated financial
statements.
33
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
Revenues................................................................... $ 14,182 $ 50,384 $ 95,287
Operating expenses:
Compensation and related expenses........................................ 6,018 21,113 41,619
Amortization of intangible assets........................................ 4,174 8,053 6,643
Depreciation and other amortization...................................... 133 932 1,915
Selling, general and administrative...................................... 2,237 10,854 18,912
Other operating expenses................................................. 330 2,261 3,637
---------- ---------- ----------
12,892 43,213 72,726
---------- ---------- ----------
Operating income....................................................... 1,290 7,171 22,561
Non-operating (income) and expenses:
Investment and other income.............................................. (265) (337) (1,174)
Interest expense......................................................... 1,244 2,747 8,479
---------- ---------- ----------
979 2,410 7,305
---------- ---------- ----------
Income before minority interest, income taxes and extraordinary item....... 311 4,761 15,256
Minority interest.......................................................... (2,541) (5,969) (12,249)
---------- ---------- ----------
Income (loss) before income taxes and extraordinary item................... (2,230) (1,208) 3,007
Income taxes............................................................... 706 181 1,364
---------- ---------- ----------
Income (loss) before extraordinary item.................................... (2,936) (1,389) 1,643
---------- ---------- ----------
Extraordinary item, net.................................................... -- (983) (10,011)
---------- ---------- ----------
Net (loss)................................................................. $ (2,936) $ (2,372) $ (8,368)
---------- ---------- ----------
---------- ---------- ----------
Income (loss) per share--basic:
Income (loss) before extraordinary item................................ $ (2.95) $ (3.22) $ 0.72
Extraordinary item, net................................................ -- (2.27) (4.41)
---------- ---------- ----------
Net (loss)............................................................. $ (2.95) $ (5.49) $ (3.69)
---------- ---------- ----------
---------- ---------- ----------
Income (loss) per share--diluted:
Income (loss) before extraordinary item................................ $ (2.95) $ (3.22) $ 0.20
Extraordinary item, net................................................ -- (2.27) (1.22)
---------- ---------- ----------
Net (loss)............................................................. $ (2.95) $ (5.49) $ (1.02)
---------- ---------- ----------
---------- ---------- ----------
Average shares outstanding--basic.......................................... 996,144 431,908 2,270,684
Average shares outstanding--diluted........................................ 996,144 431,908 8,235,529
The accompanying notes are an integral part of the consolidated financial
statements.
34
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Cash flow from operating activities:
Net (loss).......................................................................... $ (2,936) (2,372) $ (8,368)
Adjustments to reconcile net (loss) to net cash flow from operating activities:
Amortization of intangible assets................................................. 4,174 8,053 6,643
Extraordinary item................................................................ -- 983 10,011
Minority interest................................................................. 631 2,309 13,108
Depreciation and other amortization............................................... 133 932 1,915
Increase (decrease) in deferred income taxes...................................... 141 (215) --
Changes in assets and liabilities:
Increase in investment advisory fees receivable................................... (186) (8,473) (3,980)
Increase in other current assets.................................................. (397) (1,881) (977)
Increase (decrease) in accounts payable, accrued expenses and other liabilities... (268) 6,849 (2,147)
--------- --------- ---------
Cash flow from operating activities............................................... 1,292 6,185 16,205
--------- --------- ---------
Cash flow used in investing activities:
Purchase of fixed assets............................................................ (287) (922) (1,648)
Costs of investments, net of cash acquired.......................................... (38,031) (25,646) (325,896)
Sale of investment.................................................................. -- 642 --
Distributions received from Affiliate equity investment............................. -- 275 229
Increase (decrease) in other assets................................................. 216 (3,639) 40
Repayment on notes recorded in purchase of business................................. 321 80 --
--------- --------- ---------
Cash flow used in investing activities............................................ (37,781) (29,210) (327,275)
--------- --------- ---------
Cash flow from financing activities:
Borrowings of senior bank debt...................................................... 28,400 21,000 303,900
Repayments of senior bank debt...................................................... (10,000) (6,000) (177,800)
Repayments of notes payable......................................................... (962) (1,212) (5,878)
Borrowings of subordinated bank debt................................................ -- -- 58,800
Repayments of subordinated bank debt................................................ -- -- (60,000)
Issuances of equity securities...................................................... 20,000 2,485 217,021
Issuance of warrants................................................................ -- -- 1,200
Payment of subscription receivable.................................................. 10,000 -- --
Repurchase of preferred stock....................................................... -- (13) --
Debt issuance costs................................................................. (1,024) (610) (10,131)
--------- --------- ---------
Cash flow from financing activities............................................... 46,414 15,650 327,112
Effect of foreign exchange rate changes on cash flow.................................. -- 46 (43)
Net increase (decrease) in cash and cash equivalents.................................. 9,925 (7,329) 15,999
Cash and cash equivalents at beginning of year........................................ 4,171 14,096 6,767
--------- --------- ---------
Cash and cash equivalents at end of year.............................................. $ 14,096 $ 6,767 $ 22,766
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information:
Interest paid....................................................................... $ 1,005 $ 2,905 $ 8,559
Income taxes paid................................................................... 696 436 256
Supplemental disclosure of non-cash investing activities:
Increase (decrease) in liabilities related to acquisitions.......................... 3,200 -- (3,200)
Supplemental disclosure of non-cash financing activities:
Preferred stock issued in acquisitions.............................................. -- -- 11,101
Common stock issued in exchange for Affiliate equity interests...................... -- -- 1,849
Notes issued in acquisitions........................................................ -- 6,686 --
Conversion of preferred stock to common stock....................................... -- -- 83,576
Exchange of common stock for preferred stock........................................ 10,004 -- --
The accompanying notes are an integral part of the consolidated financial
statements.
35
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ADDITIONAL FOREIGN TOTAL
PREFERRED COMMON PREFERRED COMMON PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS'
SHARES SHARES STOCK STOCK CAPITAL ADJUSTMENTS DEFICIT EQUITY
----------- --------- ----------- ----------- ----------- ----------- ------------ -------------
December 31, 1994......... 40,000 2,550,000 $ 10,004 $ -- $ 5 $ -- $ (206) $ 9,803
Issuance of common stock.. -- 275,000 -- -- -- -- -- --
Payment of subscription
receivable.............. -- -- -- -- 10,000 -- -- 10,000
Exchange of common stock
for preferred stock..... 40,000 (2,000,000) 10,004 -- (10,004) -- -- --
Issuance of preferred
stock................... 29,851 -- 20,000 -- -- -- -- 20,000
Net loss.................. -- -- -- -- -- -- (2,936) (2,936)
----------- --------- ----------- ----- ----------- ----------- ------------ -------------
December 31, 1995......... 109,851 825,000 40,008 -- 1 -- (3,142) 36,867
Issuance of common stock.. -- 162,500 -- -- 4 -- -- 4
Issuance of preferred
stock................... 3,703 -- 2,481 -- -- -- -- 2,481
Repurchase of preferred
stock................... (20) -- (13) -- -- -- -- (13)
Net loss.................. -- -- -- -- -- -- (2,372) (2,372)
Foreign translation
adjustment.............. -- -- -- -- -- 22 -- 22
----------- --------- ----------- ----- ----------- ----------- ------------ -------------
December 31, 1996......... 113,534 987,500 42,476 -- 5 22 (5,514) 36,989
Issuance of common stock.. -- 8,753,667 -- 98 188,773 -- -- 188,871
Issuance of preferred
stock and warrants...... 45,715 -- 41,100 -- 1,200 -- -- 42,300
Conversion of preferred
stock................... (159,249) 7,962,450 (83,576) 79 83,497 -- -- --
Net loss.................. -- -- -- -- -- -- (8,368) (8,368)
Foreign translation
adjustment.............. -- -- -- -- -- (52) -- (52)
----------- --------- ----------- ----- ----------- ----------- ------------ -------------
December 31, 1997......... -- 17,703,617 $ -- $ 177 $ 273,475 $ (30) $ (13,882) $ 259,740
----------- --------- ----------- ----- ----------- ----------- ------------ -------------
----------- --------- ----------- ----- ----------- ----------- ------------ -------------
The accompanying notes are an integral part of the consolidated financial
statements.
36
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
The principal business activity of Affiliated Managers Group, Inc. ("AMG" or
the "Company") is the acquisition of equity interests in investment management
firms ("Affiliates"). AMG's Affiliates operate in one industry segment, that of
providing investment management services, primarily in the United States and
Europe, to mutual funds, partnerships and institutional and individual clients.
Affiliates are either organized as limited partnerships, general
partnerships or limited liability companies. AMG has contractual arrangements
with each Affiliate whereby a percentage of revenues is allocable to fund
Affiliate operating expenses, including compensation (the Operating Allocation),
while the remaining portion of revenues (the Owners' Allocation) is allocable to
AMG and the other partners or members, generally with a priority to AMG.
Affiliate operations are consolidated in these financial statements. The portion
of the Owners' Allocation allocated to owners other than AMG is included in
minority interest in the statement of operations. Minority interest on the
consolidated balance sheets includes undistributed Owners' Allocation and
Operating Allocation and capital owned by owners other than AMG.
CONSOLIDATION
These consolidated financial statements include the accounts of AMG and each
Affiliate in which AMG has a controlling interest. In each such instance, AMG
is, directly or indirectly, the sole general partner (in the case of Affiliates
which are limited partnerships), sole managing general partner (in the case of
the Affiliate which is a general partnership) or sole manager member (in the
case of Affiliates which are limited liability companies). Investments where AMG
does not hold a controlling interest are accounted for under the equity method
of accounting and AMG's portion of net income is included in investment and
other income. All intercompany balances and transactions have been eliminated.
REVENUE RECOGNITION
The Company's consolidated revenues represent advisory fees billed quarterly
and annually by Affiliates for managing the assets of clients. Asset-based
advisory fees are recognized monthly as services are rendered and are based upon
a percentage of the market value of client assets managed. Any fees collected in
advance are deferred and recognized as income over the period earned.
Performance-based advisory fees are recognized when earned based upon either the
positive difference between the investment returns on a client's portfolio
compared to a benchmark index or indices, or an absolute percentage of gain in
the client's account, and are accrued in amounts expected to be realized.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash equivalents are stated at
cost, which approximates market value due to the short-term maturity of these
investments.
FIXED ASSETS
Equipment and other fixed assets are recorded at cost and depreciated using
the straight-line method over their estimated useful lives ranging from three to
five years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the lease.
ACQUIRED CLIENT RELATIONSHIPS AND GOODWILL
The purchase price for the acquisition of interests in Affiliates is
allocated based on the fair value of assets acquired, primarily acquired client
relationships. In determining the allocation of purchase price to acquired
client relationships, the Company analyzes the net present value of each
acquired Affiliate's existing client relationships based on a number of factors
including: the Affiliate's historical and potential
37
future operating performance; the Affiliate's historical and potential future
rates of attrition among existing clients; the stability and longevity of
existing client relationships; the Affiliate's recent, as well as long-term,
investment performance; the characteristics of the firm's products and
investment styles; the stability and depth of the Affiliate's management team,
and the Affiliate's history and perceived franchise or brand value. The cost
assigned to acquired client relationships is amortized using the straight line
method over periods ranging from nine to 26 years. The expected useful lives of
acquired client relationships are analyzed separately for each acquired
Affiliate and determined based on an analysis of the historical and potential
future attrition rates of each Affiliate's existing clients, as well as a
consideration of the specific attributes of the business of each Affiliate.
The excess of purchase price for the acquisition of interests in Affiliates
over the fair value of net assets acquired, including acquired client
relationships, is classified as goodwill. Goodwill is amortized using the
straight-line method over periods ranging from 15 to 35 years. In determining
the amortization period for goodwill, the Company considers a number of factors
including: the firm's historical and potential future operating performance; the
characteristics of the firm's clients, products and investment styles; as well
as the firm's history and perceived franchise or brand value. Unamortized
intangible assets, including acquired client relationships and goodwill, are
periodically re-evaluated and if experience subsequent to the acquisition
indicates that there has been an impairment in value, other than temporary
fluctuations, an impairment loss is recognized. Management evaluates the
recoverability of unamortized intangible assets quarterly for each acquisition
using estimates of undiscounted cash flows factoring in known or expected
trends, future prospects and other relevant information. If impairment is
indicated, the Company measures its loss as the excess of the carrying value of
the intangible assets for each Affiliate over its fair value determined using
valuation models such as discounted cash flows and market comparables. Included
in amortization expense for 1996 and 1995 are impairment losses of $4,628 and
$2,500, respectively, relating to two of AMG's Affiliates following periods of
significant client asset withdrawals. Fair value in such cases was determined
using market comparables based on revenues, cash flow and assets under
management. No impairment loss was recorded for the year ended December 31,
1997.
DEBT ISSUANCE COSTS
Debt issuance costs incurred in securing credit facility financing are
capitalized and subsequently amortized over the term of the credit facility.
Unamortized debt issuance costs of $983 and $10,011, net of taxes, were written
off as an extraordinary item in 1996 and 1997, respectively, as part of the
Company's replacement of its previous credit facilities with new facilities.
INTEREST-RATE HEDGING AGREEMENTS
The Company periodically enters into interest-rate hedging agreements to
hedge against potential increases in interest rates on the Company's outstanding
borrowings. The Company's policy is to accrue amounts receivable or payable
under such agreements as reductions or increases in interest expense,
respectively.
INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards No. 109
("FAS 109") which requires the use of the asset and liability approach for
accounting for income taxes. Under FAS 109, the Company recognizes deferred tax
assets and liabilities for the expected consequences of temporary differences
between the financial statement amount and tax basis of the Company's assets and
liabilities. A deferred tax valuation allowance is established if, in
management's opinion, it is more likely than not that all or a portion of the
Company's deferred tax assets will not be realized.
38
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of non-U.S. based Affiliates are translated into
U.S. dollars at the exchange rates in effect as of the balance sheet date.
Revenues and expenses are translated at the average monthly exchange rates then
in effect.
PUTS AND CALLS
As further described in Note 11, the Company periodically purchases
additional equity interests in Affiliates from minority interest owners (prior
shareholders of acquired Affiliates). Resulting payments made to such owners are
considered purchase price for such acquired interests. The estimated cost of
purchases from equity holders who have been awarded equity interests in
connection with their employment is accrued, net of estimated forfeitures, over
the service period as equity-based compensation.
EQUITY-BASED COMPENSATION PLANS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). This standard became effective January 1, 1996. The
standard encourages, but does not require, adoption of a fair value-based
accounting method for stock-based compensation arrangements which includes stock
option grants, sales of restricted stock and grants of equity-based interests in
Affiliates to certain limited partners or members. An entity may continue to
apply Accounting Principles Board Opinion No. 25 ("APB 25") and related
interpretations, provided the entity discloses its pro forma net income and
earnings per share as if the fair value based method had been applied in
measuring compensation cost. The Company continues to apply APB 25 and related
interpretations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts included in the financial
statements and disclosure of contingent assets and liabilities at the date of
the financial statements. Actual results could differ from those estimates.
2. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
investment advisory fees receivable. The Company maintains cash and cash
equivalents, short-term investments and certain off-balance-sheet financial
instruments with various financial institutions. These financial institutions
are located in places where AMG and its Affiliates operate. For AMG and certain
Affiliates, cash deposits at a financial institution may exceed FDIC insurance
limits.
Substantially all of the Company's revenues are derived from the investment
management operations of its Affiliates. For the year ended December 31, 1997,
one of those Affiliates accounted for approximately 33% of AMG's share of total
Owners' Allocation.
39
3. FIXED ASSETS AND LEASE COMMITMENTS
Fixed assets consist of the following:
AT DECEMBER 31,
--------------------
1996 1997
--------- ---------
Office equipment..................................................................... $ 2,614 $ 5,870
Furniture and fixtures............................................................... 1,677 3,530
Leasehold improvements............................................................... 538 2,007
Computer software.................................................................... 184 760
--------- ---------
Total fixed assets............................................................... 5,013 12,167
--------- ---------
Accumulated depreciation............................................................. (2,014) (7,443)
--------- ---------
Fixed assets, net................................................................ $ 2,999 $ 4,724
--------- ---------
--------- ---------
The Company and its Affiliates lease computer equipment and office space for
their operations. At December 31, 1997, the Company's aggregate future minimal
rentals for operating leases having initial or noncancelable lease terms greater
than one year are payable as follows:
REQUIRED
MINIMUM
YEAR ENDING DECEMBER 31, PAYMENTS
- --------------------------------------------------------------------------------------------- -----------
1998......................................................................................... $ 3,091
1999......................................................................................... 2,735
2000......................................................................................... 2,413
2001......................................................................................... 2,094
2002......................................................................................... 2,603
Thereafter................................................................................... 4,547
Consolidated rent expense for 1995, 1996 and 1997 was $493, $2,359 and
$3,637, respectively.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
AT DECEMBER 31,
--------------------
1996 1997
--------- ---------
Accounts payable.................................................................. $ 396 $ 940
Accrued compensation.............................................................. 9,264 6,480
Accrued rent...................................................................... 3,509 2,769
Deferred revenue.................................................................. 796 1,481
Accrued professional services..................................................... 1,350 2,552
Other............................................................................. 897 4,593
--------- ---------
$ 16,212 $ 18,815
--------- ---------
--------- ---------
5. RETIREMENT PLANS
AMG has a defined contribution retirement plan covering substantially all of
its full-time employees and four of its Affiliates. Six of AMG's other
Affiliates have separate defined contribution retirement plans. Under each of
the plans, AMG and each Affiliate is able to make discretionary contributions to
qualified plan participants up to IRS limits. Consolidated expenses related to
these plans in 1995, 1996 and 1997 were $222, $656 and $1,020, respectively.
40
6. SENIOR BANK DEBT AND SUBORDINATED DEBT
In December 1997, the Company replaced its $300 million revolving Credit
Facility with a new $300 million revolving credit facility ("New Credit
Facility"), with principal repayment due in December 2002. Interest is payable
at rates up to 1.25% over the Prime Rate or up to 2.25% over LIBOR on amounts
borrowed. The Company pays a commitment fee of up to 1/2 of 1% on the daily
unused portion of the facility. The Company had $159.5 million outstanding on
the New Credit Facility at December 31, 1997.
The effective interest rates on the outstanding borrowings were 6.5% and
7.2% at December 31, 1996 and 1997, respectively. All borrowings under the New
Credit Facility are collateralized by pledges of all capital stock or other
equity interests in each AMG Affiliate owned or to be acquired. The credit
agreement contains certain financial covenants which require the Company to
maintain specified minimum levels of net worth and interest coverage ratios and
maximum levels of indebtedness, all as defined in the credit agreement. The
credit agreement also limits the Company's ability to pay dividends and incur
additional indebtedness.
As of December 31, 1997, the Company is a party, with two major commercial
banks as counterparties, to $185 million notional amount of swap contracts which
are designed to limit interest rate increases on the Company's LIBOR-based
borrowings. The swap contracts, upon quarterly reset dates, cap interest rates
on the notional amounts at rates ranging between 6.67% and 6.78%. When LIBOR is
at or below 5%, the Company's floating rate LIBOR debt is swapped for fixed rate
debt at rates ranging between 6.67% and 6.78%. The hedging contracts limit the
effects of the Company's payments of interest at equivalent LIBOR rates of 6.78%
or less on up to $185 million of indebtedness. The contracts mature between
March 2001 and October 2002.
One of the Company's Affiliates also operates as a broker-dealer and must
maintain specified minimum amounts of "net capital" as defined in SEC Rule
15c3-1. In connection with this requirement, the Affiliate has $800 of
subordinated indebtedness which qualifies as net capital under the net capital
rule. The subordinated indebtedness is subordinated to claims of general
creditors and is secured by notes and marketable securities of certain of the
Affiliate's management members.
7. INCOME TAXES
A summary of the provision for income taxes, before the 1997 tax benefit of
$846 related to the extraordinary item, is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Federal:
Current............................................................................... $ 60 $ -- $ --
Deferred.............................................................................. 201 (233) 776
State:
Current............................................................................... 514 397 352
Deferred.............................................................................. (69) 17 236
--------- --------- ---------
Provision for income taxes.............................................................. $ 706 $ 181 $ 1,364
--------- --------- ---------
--------- --------- ---------
41
The effective income tax rate differs from the amount computed on "income
(loss) before extraordinary item" by applying the U.S. federal income tax rate
because of the effect of the following items:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Tax at U.S. federal income tax rate............................................... (35)% (35)% 35%
Nondeductible expenses, primarily amortization of intangibles..................... 54 21 15
State income taxes, net of federal benefit........................................ 13 23 13
Valuation allowance............................................................... -- 6 (17)
--- --- ---
32% 15% 46%
--- --- ---
--- --- ---
The components of deferred tax assets and liabilities are as follows:
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Deferred assets (liabilities):
Net operating loss carryforwards................................................. $ 3,481 $ 10,436
Intangible amortization.......................................................... (4,950) (9,238)
Accrued compensation............................................................. 2,004 849
Other, net....................................................................... (58) (58)
--------- ---------
477 1,989
--------- ---------
Valuation allowance................................................................ (477) (1,989)
--------- ---------
Net deferred income taxes.......................................................... $ -- $ --
--------- ---------
--------- ---------
At December 31, 1997, the Company had tax net operating loss ("NOL")
carryforwards of approximately $25 million which expire beginning in the year
2010. Realization is dependent on generating sufficient taxable income prior to
expiration of the tax loss carryforwards. At December 31, 1997, management
believed it was more likely than not that the Company's deferred tax asset of
$1,989, arising primarily from NOL carryforwards, would not be realized and
accordingly established a full valuation allowance against the asset. The
Company will review the valuation allowance at the end of each reporting period
and will make adjustments if it is determined that it is more likely than not
that the NOL's will be realized.
8. CONTINGENCIES
The Company and its Affiliates are subject to claims, legal proceedings and
other contingencies in the ordinary course of their business activities. Each of
these matters is subject to various uncertainties, and it is possible that some
of these matters may be resolved unfavorably to the Company or its Affiliates.
The Company and its Affiliates establish accruals for matters that are probable
and can be reasonably estimated. Management believes that any liability in
excess of these accruals upon the ultimate resolution of these matters will not
have a material adverse effect on the consolidated financial condition or
results of operations of the Company.
9. ACQUISITIONS AND COMMITMENTS
1997
During 1997, the Company acquired in purchase transactions majority
interests in Gofen and Glossberg, GeoCapital and Tweedy, Browne. The Company
also acquired additional interests in two of its existing Affiliates.
42
The Company issued 10,667 shares of Class D Convertible Preferred Stock
valued at $9.6 million as partial consideration in the GeoCapital transaction.
The preferred stock was exchanged for 533,350 shares of the Company's Common
Stock in connection with the Company's initial public offering.
The results of operations of Gofen and Glossberg, GeoCapital and Tweedy,
Browne are included in the consolidated results of operations of the Company
from their respective dates of acquisition, May 7, 1997, September 30, 1997 and
October 9, 1997.
1996
During 1996, the Company acquired in purchase transactions majority
interests in First Quadrant and Burridge. In addition, the Company acquired
additional partnership interests from limited partners of two of its existing
Affiliates.
On December 31, 1996, the Company issued notes in the amount of $6.7 million
as partial consideration in the purchase to Burridge selling shareholders who
remained as employees. On January 3, 1997, the notes were settled in cash for
$5.2 million and the issuance of 1,715 shares of Series B-1 Voting Convertible
Preferred Stock. The Convertible Preferred Stock was subsequently exchanged for
85,750 shares of Common Stock in connection with the Company's initial public
offering.
The results of operations of First Quadrant and Burridge are included in the
consolidated results of operations of the Company from their respective dates of
acquisition, March 28, 1996 and December 31, 1996.
1995
During 1995, the Company acquired in purchase transactions majority
interests in Systematic, Skyline and Renaissance. The Company also made a
minority investment in Paradigm. In connection with an Affiliate acquisition,
the Company assumed an unconditional $3.2 million purchase obligation on the
equity interests of limited partners which would be settled in either cash or
the Company's stock. During 1997, the partners in that affiliate exchanged this
unconditional right for new equity interests in this Affiliate.
The results of operations of Systematic, Skyline and Renaissance are
included in the consolidated results of operations of the Company from their
respective dates of investment, May 16, 1995, August 31, 1995, and November 9,
1995. The net income associated with the Company's minority interest in Paradigm
is included in the consolidated results of operations of the Company using the
equity method from May 22, 1995, the date of investment.
The total purchase price, including cash, notes, common and preferred stock
and capitalized transaction costs, associated with these investments, is
allocated as follows:
DECEMBER 31,
--------------------------------
1995 1996 1997
--------- --------- ----------
Allocation of Purchase Price:
Net tangible assets................................................. $ 1,720 $ 2,198 $ 5,924
Intangible assets................................................... 39,800 35,040 331,421
Minority investment................................................. 888 -- --
--------- --------- ----------
Total purchase price.............................................. $ 42,408 $ 37,238 $ 337,345
--------- --------- ----------
--------- --------- ----------
Unaudited pro forma data for the years ended December 31, 1996 and 1997 are
set forth below, giving consideration to the acquisitions occurring in the
respective two-year period, as if such transactions occurred as of the beginning
of 1996, assuming revenue sharing arrangements had been in effect for the
43
entire period and after making certain other pro forma adjustments. This pro
forma data has been prepared following Accounting Principles Board Opinion No.
16 ("APB 16").
YEAR ENDED DECEMBER
31,
----------------------
1996 1997
---------- ----------
Revenues..................................................................... $ 120,999 $ 147,159
Income before extraordinary item............................................. 1,366 7,230
Extraordinary item, net...................................................... (584) (6,141)
Net income................................................................... 782 1,089
Income before extraordinary item per share--basic............................ $ 0.08 $ 0.41
Income before extraordinary item per share--diluted.......................... 0.08 0.41
Net income per share--basic.................................................. 0.04 0.06
Net income per share--diluted................................................ 0.04 0.06
In conjunction with certain acquisitions, the Company has entered into
agreements and is contingently liable, upon achievement of specified revenue
targets over a five-year period, beginning with the date of AMG's investment, to
make additional purchase payments of up to $23 million plus interest as
applicable. These contingent payments, if achieved, will be settled for cash
with most coming due beginning January 1, 2001 and January 1, 2002 and will be
accounted for as an adjustment to the purchase price of the Affiliate. In
addition, subject to achievement of performance goals, certain key Affiliate
employees have options to receive additional equity interests in their
Affiliates.
Related to one of the Company's Affiliates, a former institutional
shareholder is entitled to redeem a cash value warrant on April 30, 1999. Using
the actual results of operations of this Affiliate to date, the cash value
warrant had no value and, therefore, no amounts have been accrued in these
financial statements.
10. EQUITY INVESTMENT
In 1995, the Company purchased a 30% equity interest in Paradigm, which is
accounted for under the equity method of accounting.
Summarized financial information for Paradigm is as follows:
AT DECEMBER 31,
--------------------
1996 1997
--------- ---------
Balance Sheet Data:
Current assets....................................................................... $ 756 $ 965
Non current assets................................................................... 492 513
--------- ---------
Total assets..................................................................... $ 1,248 $ 1,478
--------- ---------
--------- ---------
Current liabilities.................................................................. $ 493 $ 416
Non current liabilities.............................................................. -- --
--------- ---------
Total liabilities................................................................ $ 493 $ 416
--------- ---------
--------- ---------
44
FOR THE PERIOD
MAY 22, 1995 FOR THE FOR THE
(DATE OF ACQUISITION) YEAR ENDED YEAR ENDED
TO DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------- ----------------- -----------------
Statement of Earnings Data:
Total revenues.............................. $ 894 $ 2,051 $ 3,078
Operating and other expenses................ 840 1,488 2,630
----- ------ ------
Net Income.................................. $ 54 $ 563 $ 448
----- ------ ------
----- ------ ------
11. PUTS AND CALLS
To ensure the availability of continued ownership participation to future
key employees, the Company has options to repurchase ("Calls") certain equity
interests in Affiliates owned by partners or members. The options were
exercisable beginning in 1997. In addition, Affiliate management owners have
options ("Puts"), exercisable beginning in the year 2000, which require the
Company to purchase certain portions of their equity interests at staged
intervals. The Company is also obligated to purchase ("Purchase") such equity
interests in Affiliates upon death, disability or termination of employment. All
of the Puts and Purchases would take place based on a multiple of the respective
Affiliate's Owners' Allocation but using reduced multiples for terminations for
cause or for voluntary terminations occurring prior to agreed upon dates, all as
defined in the general partnership, limited partnership or limited liability
company agreements of the Affiliates. Resulting payments made to former owners
of acquired Affiliates are accounted for as adjustments to the purchase price
for such Affiliates. Payments made to equity holders who have been awarded
equity interests in connection with their employment are accrued, net of
estimated forfeitures, over the service period as equity-based compensation.
The Company's contingent obligations under the Put and Purchase arrangements
at December 31, 1997 ranged from $5.3 million on the one hand, assuming all such
obligations occur due to early terminations or terminations for cause, and
$145.3 million on the other hand, assuming all such obligations occur due to
death, disability or terminations without cause. The Put and Purchase amounts
above were calculated based upon $20.1 million of average annual historical
Owners' Allocation. Assuming the closing of all such Put and Purchase
transactions, AMG would own all the prospective Owners' Allocations.
12. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company had 43,000,000 authorized shares of Common Stock (including
Class B Common Stock) with a par value of $.01 per share of which 987,500 and
17,703,617 shares were issued and outstanding at December 31, 1996 and 1997,
respectively.
INITIAL PUBLIC OFFERING
On November 21, 1997, the Company completed an initial public offering
("IPO"), issuing 8,625,000 shares of Common Stock. In November 1997, the Company
also issued 78,667 shares of Common Stock to limited partners of an Affiliate in
return for equity interests in that Affiliate.
The Company's Board of Directors authorized a 50-for-1 stock split effected
in the form of a stock dividend on the Company's authorized and outstanding
Common Stock. The stock dividend was effective immediately prior to the
Company's IPO. Where applicable, these Consolidated Financial Statements and
Notes thereto reflect the Common Stock split on a retroactive basis.
PREFERRED STOCK
At December 31, 1997, the Company had 5,000,000 authorized shares of
preferred stock ("Preferred Stock"), par value $.01, with no shares issued.
45
At December 31, 1996, the Company had two classes of convertible preferred
stock ("Convertible Preferred Stock"), par value $.01. There were 80,000
authorized and issued shares of Class A Convertible Preferred Stock. The Company
also had two series of Class B Preferred Stock. There were 34,328 authorized and
14,131 issued shares of Series B-1 Voting Convertible Preferred Stock and 19,403
shares authorized and issued of Series B-2 Non-Voting Convertible Preferred
Stock. During 1997, the Company issued 1,715 shares of Series B-1 Convertible
Preferred Stock as partial consideration in the Burridge investment and 10,667
shares of Class D Convertible Preferred Stock in the GeoCapital investment. Also
during 1997, Chase Equity Associates purchased 5,333 shares of Class C
Convertible Preferred Stock and warrants to purchase 28,000 shares of Class C
Convertible Preferred Stock, which were subsequently exercised. On November 21,
1997, the date of the Company's initial public offering, all issued shares of
Convertible Preferred Stock, a total of 159,249 shares, were converted 1-for-50
into the Company's Common Stock, for a total of 7,962,450 common shares. At
December 31, 1997 there were no shares of Convertible Preferred Stock authorized
or issued.
STOCK INCENTIVE PLANS
The Company has established three incentive stock plans ("Stock Plans"),
primarily to incent key employees, under which it is authorized to grant
incentive and non-qualified stock options and to grant or sell shares of stock
which are subject to certain restrictions ("Restricted Stock"). At December 31,
1997, a total of 2,300,000 shares of Common Stock have been reserved for
issuance under these plans, with a total of 337,500 shares of Restricted Stock
sold and 682,500 stock options granted. The plans are administered by a
committee of the Board of Directors. Restricted Stock sales were made at their
then fair market value, as approved by the Board of Directors of the Company,
and generally vest over three years and are subject to significant forfeiture
provisions and other restrictions. The exercise price of the stock options is
determined by the Company's Board of Directors on the date of grant.
The 1994 Incentive Stock Plan (the "1994 Plan") provides for the issuance of
125,000 shares of Common Stock. As of December 31, 1997, the Company had sold an
aggregate of 125,000 shares of Restricted Stock under the 1994 Plan. These
shares vest over periods ranging up to four years. At December 31, 1997, 112,500
of these shares were vested.
The 1995 Incentive Stock Plan (the "1995 Plan") provides for the issuance of
425,000 shares of Common Stock. As of December 31, 1997, the Company had sold an
aggregate 212,500 shares of Restricted Stock under the 1995 Plan. In 1997, the
Company granted options to purchase 92,500 shares to officers of the Company
with an exercise price of $9.10 per share. These options vest over a three year
period ending December 31, 1999. As of December 31, 1997, none of the options
granted under the 1995 Plan had been exercised. The Company does not intend to
make any further grants under the 1995 Plan.
The 1997 Stock Option and Incentive Plan (the "1997 Plan") provides for the
issuance of 1,750,000 shares of Common Stock. In connection with the Company's
initial public offering on November 21, 1997, the Company granted options to
purchase 590,000 shares of Common Stock to officers and employees of the Company
with an exercise price of $23.50 per share. These options are exercisable over
seven years, with 15% exercisable on each of the first six anniversaries of the
date of grant and 10% exercisable on the seventh anniversary of the date of
grant. The vesting period of these options will be accelerated upon a change in
control of the Company or upon the achievement of certain financial goals. On
December 11, 1997, the Company granted an option to purchase 10,000 shares of
Common Stock, with an exercise price of $24.94 per share, to a newly elected
director of the Company. This option becomes exercisable in equal installments
of 625 shares on the first day of each calendar quarter commencing April 1,
1998. The vesting period of this option will be accelerated upon a change in
control of the Company. As of December 31, 1997, none of the options granted
under the 1997 Plan had been exercised.
46
The following is a summary of outstanding and exercisable options under the
Stock Plans at December 31, 1997:
WEIGHTED
AVERAGE
EXERCISE EXERCISE
PRICE PRICE OPTIONS EXPIRATION
SHARES ($/SHARE) ($/SHARE) EXERCISABLE DATE
--------- ----------- ----------- ----------- -----------
Options outstanding at December 31, 1996................ -- -- --
Options granted......................................... 92,500 $ 9.10 30,833 5/31/07
Options granted......................................... 590,000 $ 23.50 -- 11/26/07
Options granted......................................... 10,000 $ 24.94 -- 12/10/07
Options exercised....................................... -- --
Options canceled........................................ -- --
--------- ----------- -----------
Options outstanding at December 31, 1997................ 692,500 $ 21.60 30,833
--------- ----------- -----------
--------- ----------- -----------
SUPPLEMENTAL DISCLOSURE FOR EQUITY-BASED COMPENSATION
The Company continues to apply APB 25 and related interpretations in
accounting for its sales of Restricted Stock, grants of stock options and
equity-based interests in Affiliates. FAS 123 defines a fair value method of
accounting for the above arrangements whose impact requires disclosure. Under
the fair value method, compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the expected service period.
The required disclosures under FAS 123 as if the Company had applied the new
method of accounting are made below.
Had compensation cost for the Company's equity-based compensation
arrangements been determined based on the fair value at grant date for awards
subsequent to January 1, 1995, consistent with the requirements of FAS 123, the
Company's net (loss) and net (loss) per share would have been as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Net (loss)--as reported................................................. $ (2,936) $ (2,372) $ (8,368)
Net (loss)--FAS 123 pro forma........................................... (3,091) (2,141) (8,837)
Net (loss) per share--basic--as reported................................ (2.95) (5.49) (3.69)
Net (loss) per share--basic--FAS 123 pro forma.......................... (3.10) (4.96) (3.89)
Net (loss) per share--diluted--as reported.............................. (2.95) (5.49) (1.02)
Net (loss) per share--diluted--FAS 123 pro forma........................ (3.10) (4.96) (1.07)
Solely for purposes of providing the pro forma disclosures required by FAS
123, the fair value of each option grant was estimated on the date of grant
using the minimum value method prior to the initial public offering and the
Black-Scholes option-pricing model after the offering, with the following
weighted average assumptions used for grants of options.
YEAR ENDED DECEMBER
31,
--------------------
1995 1997
--------- ---------
Dividend yield...................................................................... 0% 0%
Volatility.......................................................................... 0% 26%
Risk-free interest rates............................................................ 6.5% 5.96%
Expected option lives in years...................................................... 11.3 6.7
Assumed forfeiture rate............................................................. 0% 29.3%
The estimated fair value of grants of stock options and equity-based
interests in Affiliates was $2.9 million and $4.6 million for 1995 and 1997,
respectively. There were no grants in 1996.
47
13. EARNINGS (LOSS) PER SHARE
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). This standard
became effective for financial statements issued for periods ending after
December 15, 1997. The Company has adopted FAS 128 for its fiscal year ended
December 31, 1997 and has restated prior-period EPS data to conform to the new
standard.
The calculation for the basic earnings per share is based on the weighted
average of common shares outstanding during the period. The calculation for the
diluted earnings per share is based on the weighted average of common and common
equivalent shares outstanding during the period except where the inclusion of
common equivalent shares has an anti-dilutive effect. Following is a
reconciliation of the numerators and denominators of the basic and diluted EPS
computations for "income (loss) before extraordinary item" for the three years
ended December 31, 1997.
1995 1996 1997
------------- ------------- ------------
Numerator:
Income (loss) before extraordinary item................... $ (2,936,000) $ (1,389,000) $ 1,643,000
Denominator:
Average shares outstanding--basic......................... 996,144 431,908 2,270,684
Convertible preferred stock............................... -- -- 5,496,330
Stock options and unvested restricted stock............... -- -- 468,515
------------- ------------- ------------
Average shares outstanding--diluted......................... 996,144 431,908 8,235,529
------------- ------------- ------------
------------- ------------- ------------
Income (loss) before extraordinary item per share:
Basic..................................................... $ (2.95) $ (3.22) $ 0.72
Diluted................................................... $ (2.95) $ (3.22) $ 0.20
Because the computation of diluted EPS shall not assume exercise of
securities that would have an anti-dilutive effect on earnings per share, as is
the case in a loss year before extraordinary items, the effect of 3,512,576 and
5,585,382 outstanding shares of convertible preferred stock and 443,034 and
510,421 of unvested shares of restricted common stock were excluded from the
diluted calculation in 1995 and 1996, respectively.
14. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" ("FAS 107"), requires the Company to
disclose the estimated fair values for certain of its financial instruments.
Financial instruments include items such as loans, interest rate contracts,
notes payable, and other items as defined in FAS 107.
Fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale.
Quoted market prices are used when available, otherwise, management
estimates fair value based on prices of financial instruments with similar
characteristics or using valuation techniques such as discounted cash flow
models. Valuation techniques involve uncertainties and require assumptions and
judgments regarding prepayments, credit risk and discount rates. Changes in
these assumptions will result in different valuation estimates. The fair value
presented would not necessarily be realized in an immediate sale; nor are there
plans to settle liabilities prior to contractual maturity. Additionally, FAS 107
allows companies to use a wide range of valuation techniques, therefore, it may
be difficult to compare the Company's fair value information to other companies'
fair value information.
48
The following tables present a comparison of the carrying value and
estimated fair value of the Company's financial instruments at December 31, 1996
and 1997:
DECEMBER 31, 1996
----------------------
CARRYING ESTIMATED
VALUE FAIR VALUE
--------- -----------
Financial assets:
Cash and cash equivalents....................................................... $ 6,767 $ 6,767
Financial liabilities:
Notes payable to related parties................................................ (7,379) (7,374)
Senior bank debt................................................................ (33,400) (33,400)
Off-balance sheet financial instruments:
Interest-rate hedging agreements................................................ -- (763)
DECEMBER 31, 1997
----------------------
CARRYING ESTIMATED
VALUE FAIR VALUE
---------- ----------
Financial assets:
Cash and cash equivalents..................................................... $ 23,046 $ 23,046
Financial liabilities:
Senior bank debt.............................................................. (159,500) (159,500)
Off-balance sheet financial instruments:
Interest-rate hedging agreements.............................................. -- (2,528)
The carrying amount of cash and cash equivalents approximates fair value
because of the short-term nature of these instruments. The fair value of notes
payable to related parties was calculated with a discounted cash flow model
using existing payment terms and the prime rate. The carrying value of senior
bank debt approximates fair value because the debt is a revolving credit
facility with variable interest based on three-month LIBOR. The fair value of
interest rate hedging agreements are quoted market prices based on the estimated
amount necessary to terminate the agreements.
49
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
of the Company for 1996 and 1997. The amounts are in thousands except for the
per share amounts.
1996
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- --------- --------- ---------
Revenues..................................................... $ 6,756 $ 12,739 $ 12,675 $ 18,214
Operating income............................................. 1,686 2,227 2,087 1,171
Income (loss) before income taxes and extraordinary item..... 1,024 (320) 291 (2,203)
Income (loss) before extraordinary item...................... $ 1,196 $ (469) $ (25) $ (2,091)
Income (loss) before extraordinary item per share-- basic.... $ 3.50 $ (1.07) $ (0.05) $ (4.33)
Income (loss) before extraordinary item per share--
diluted.................................................... $ 0.19 $ (1.07) $ (0.05) $ (4.33)
1997
------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
Revenues.................................................... $ 16,568 $ 16,302 $ 20,410 $ 42,007
Operating income............................................ 3,561 2,141 3,270 13,589
Income (loss) before income taxes and extraordinary item.... 1,220 (419) 253 1,953
Income before extraordinary item............................ $ 674 $ 32 $ 127 $ 810
Income before extraordinary item per share--basic........... $ 1.31 $ 0.06 $ 0.21 $ 0.11
Income before extraordinary item per share--diluted......... $ 0.10 $ -- $ 0.02 $ 0.07
During the fourth quarter of 1997, the Company completed its investment in
Tweedy, Browne. The Company also completed an initial public offering of its
shares of Common Stock. The Company used the net proceeds of the initial public
offering to repay outstanding indebtedness and recognized an extraordinary
write-off of $10,011, net of taxes (representing $(1.37) and $(0.81) per share
on a basic and diluted basis, respectively) from the early retirement of such
indebtedness.
16. EVENTS SUBSEQUENT TO DECEMBER 31, 1997
On March 20, 1998, the Company completed its investment in Essex Investment
Management Company, LLC ("Essex"). The Company paid $69.6 million in cash and
the assumption of debt and 1,750,942 shares of its Class C Convertible
Non-Voting Stock, $.01 par value per share (the "Class C Stock"). Each share of
Class C Stock converts into one share of Common Stock upon the earlier of March
20, 1999, or certain extraordinary events.
The total purchase price including cash, stock and capitalized transaction
costs associated with this investment is allocated as follows:
Allocation of Purchase Price:
Net tangible assets............................................. $ 7,408
Intangible assets............................................... 93,386
---------
Total purchase price........................................ $ 100,794
---------
---------
The amortization periods used for intangible assets related to this
investment are 28 years for acquired client relationships and 30 years for
goodwill. Unaudited pro forma data for the years ended December 31, 1996 and
1997 are set forth below, giving consideration to the Essex investment and
50
investments occurring in the two years ended December 31, 1997, as if such
transactions had occurred as of the beginning of 1996, assuming revenue sharing
arrangements had been in effect for the entire period and after making certain
other pro forma adjustments. This pro forma data has been prepared following APB
16.
YEAR ENDED DECEMBER
31,
----------------------
1996 1997
---------- ----------
Revenues........................................................................ $ 153,771 $ 186,258
Income before extraordinary item................................................ 3,155 10,181
Extraordinary item, net......................................................... (584) (6,141)
Net income...................................................................... 2,571 4,040
Income before extraordinary item per share--basic............................... $ 0.16 $ 0.53
Income before extraordinary item per share--diluted............................. 0.16 0.52
Net income per share--basic..................................................... 0.13 0.21
Net income per share--diluted................................................... 0.13 0.21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information in Part III (Items 10, 11, 12 and 13) is incorporated by
reference to the Company's definitive Proxy Statement, which will be filed not
later than 120 days after the end of the Company's fiscal year.
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)(1) Financial Statements: See Item 8
(2) Financial Statement Schedule: See Page 56
(3) Exhibits
2.1 Purchase Agreement dated August 15, 1997 by and among the Registrant, Tweedy, Browne
Company L.P. and the partners of Tweedy, Browne Company L.P. (excluding schedules
and exhibits, which the Registrant agrees to furnish supplementally to the
Commission upon request) (2)
2.2 Agreement and Plan of Reorganization dated August 15, 1997 by and among the
Registrant, AMG Merger Sub, Inc., GeoCapital Corporation, GeoCapital, LLC and the
stockholders of GeoCapital Corporation (excluding schedules and exhibits, which
the Registrant agrees to furnish supplementally to the Commission upon request)
(2)
2.3 Stock Purchase Agreement dated as of January 17, 1996 by and among the Registrant,
First Quadrant Holdings, Inc., Talegen Holdings, Inc., certain employees of First
Quadrant Corp. and the other parties identified therein (excluding schedules and
exhibits, which the Registrant agrees to furnish supplementally to the Commission
upon request) (2)
2.4 Amendment to Stock Purchase Agreement by and among the Registrant, First Quadrant
Holdings, Inc., Talegen Holdings, Inc., certain managers of First Quadrant Corp.
and the Management Corporations identified therein, effective as of March 28, 1996
(2)
2.5 Partnership Interest Purchase Agreement dated as of June 6, 1995 by and among the
Registrant, Mesirow Asset Management, Inc., Mesirow Financial Holdings, Inc.,
Skyline Asset Management, L.P., certain managers of Mesirow Asset Management, Inc.
and the Management Corporations identified therein (excluding schedules and
exhibits, which the Registrant agrees to furnish supplementally to the Commission
upon request) (2)
2.6 Amendment, made by and among Mesirow Financial Holdings, Inc. and the Registrant, to
Partnership Interest Purchase Agreement by and among the Registrant, Mesirow Asset
Management, Inc., Mesirow Financial Holdings, Inc., Skyline Asset Management,
L.P., certain managers of Mesirow Asset Management, Inc. and the Management
Corporations identified therein, effective as of August 30, 1995 (2)
2.7 Agreement and Plan of Reorganization dated January 15, 1998 by and among the
Registrant, Constitution Merger Sub, Inc., Essex Investment Management Company,
Inc. and certain of the stockholders of Essex Investment Management Company, Inc.
(excluding schedules and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request)(1)
2.8 Amendment to Agreement and Plan of Reorganization dated March 19, 1998 by and among
the Registrant, Constitution Merger Sub, Inc., Essex Investment Management
Company, Inc. and certain of the stockholders of Essex Investment Management
Company, Inc. (excluding schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request)(1)
3.1 Amended and Restated Certificate of Incorporation (2)
3.2 Amended and Restated By-laws (2)
4.1 Specimen certificate for shares of Common Stock of the registrant (2)
52
4.2 Credit Agreement dated as of December 22, 1997 by and among Chase Manhattan Bank,
NationsBank, N.A. and the other lenders identified therein and the Registrant
(excluding schedules and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request) (1)
4.3 Stock Purchase Agreement dated November 7, 1995 by and among the Registrant, TA
Associates, NationsBank, The Hartford, and the additional parties listed on the
signature pages thereto (excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon request) (2)
4.4 Preferred Stock and Warrant Purchase Agreement dated August 15, 1997 between the
Registrant and Chase Equity Associates (excluding schedules and exhibits, which
the Registrant agrees to furnish supplementally to the Commission upon request)
(2)
4.5 Amendment No. 1 to Preferred Stock and Warrant Purchase Agreement dated as of
October 9, 1997 between the Registrant and Chase Equity Associates (2)
4.6 Securities Purchase Agreement dated August 15, 1997 between the registrant and Chase
Equity Associates (excluding schedules and exhibits, which the Registrant agrees
to furnish supplementally to the Commission upon request) (2)
4.7 Securities Purchase Agreement Amendment No. 1 dated as of October 9, 1997 between
the Registrant and Chase Equity Associates (2)
10.1 Amended and Restated Stockholders' Agreement dated October 9, 1997 by and among the
Registrant and TA Associates, NationsBank, The Hartford, Chase Capital and the
additional parties listed on the signature pages thereto (2)
10.2 Tweedy, Browne Company LLC Limited Liability Company Agreement dated October 9, 1997
by and among the Registrant and the other members identified therein (excluding
schedules and exhibits, which the Registrant agrees to furnish supplementally to
the Commission upon request) (2)
10.3 GeoCapital, LLC Amended and Restated Limited Liability Company Agreement dated
September 30, 1997 by and among the Registrant and the members identified therein
(excluding schedules and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request) (2)
10.4 First Quadrant, L.P. Amended and Restated Limited Partnership Agreement dated March
28, 1996 by and among the Registrant and the partners identified therein
(excluding schedules and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request) (2)
10.5 Amendment to First Quadrant, L.P. Amended and Restated Limited Partnership Agreement
by and among the Registrant and the partners identified therein, effective as of
October 1, 1996 (2)
10.6 Second Amendment to First Quadrant, L.P. Amended and Restated Limited Partnership
Agreement by and among the Registrant and the partners identified therein,
effective as of December 31, 1996 (2)
10.7 First Quadrant U.K., L.P. Limited Partnership Agreement dated March 28, 1996 by and
among the Registrant and the partners identified therein (excluding schedules and
exhibits, which the Registrant agrees to furnish supplementally to the Commission
upon request) (2)
53
10.8 Skyline Asset Management, L.P. Amended and Restated Limited Partnership Agreement
dated August 31, 1995 by and among the Registrant and the partners identified
therein (excluding schedules and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request) (2)
10.9 Amendment to Skyline Asset Management, L.P. Amended and Restated Limited Partnership
Agreement by and among the Registrant and the partners identified therein,
effective as of August 1, 1996 (2)
10.10 Second Amendment to Skyline Asset Management, L.P. Amended and Restated Limited
Partnership Agreement by and among the Registrant and the partners identified
therein, effective as of December 31, 1996 (2)
10.11 Affiliated Managers Group, Inc. 1997 Stock Option and Incentive Plan (2)
10.13 Affiliated Managers Group, Inc. 1995 Incentive Stock Plan (2)
10.14 Form of Tweedy, Browne Employment Agreement (2)
10.15 Essex Investment Management Company, LLC Amended and Restated Limited Liability
Company Agreement dated March 20, 1998 by and among the Registrant and the members
identified therein (excluding schedules and exhibits, which the Registrant agrees
to furnish supplementally to the Commission upon request) (1)
10.16 Form of Essex Employment Agreement (1)
21.1 Schedule of Subsidiaries (1)
27.1 Financial Data Schedule (1)
- ------------------------
(1) Filed herewith
(2) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-34679), filed August 29, 1997, as amended
54
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Affiliated Managers
Group, Inc. is included in Item 8 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index in Item 14 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Boston, Massachussetts
February 10, 1998
55
Schedule II
Valuation and Qualifying Accounts
INCOME TAX VALUATION ALLOWANCE
ADDITIONS
BALANCE CHARGED TO DEDUCTIONS BALANCE
YEAR ENDING BEGINNING COSTS AND AND END OF
DECEMBER 31, OF PERIOD EXPENSES WRITE-OFFS PERIOD
- ------------------------------- ----------- ----------- ----------- ---------
(IN THOUSANDS)
1995................ $ -- $ -- $ -- $ --
1996................ -- 477 -- 477
1997................ 477 1,512 -- 1,989
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AFFILIATED MANAGERS GROUP, INC.
(Registrant)
Date: March 31, 1998
By: /s/ WILLIAM J. NUTT
-----------------------------------------
William J. Nutt
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ---------------------------------------- -------------------------------------------------- -------------------
/s/ WILLIAM J. NUTT President, Chief Executive Officer and Chairman of
- ---------------------------------------- the Board of Directors (Principal Executive March 31, 1998
(William J. Nutt) Officer)
/s/ BRIAN J. GIRVAN Senior Vice President, Chief Financial Officer and
- ---------------------------------------- Treasurer (Principal Financial and Principal March 31, 1998
(Brian J. Girvan) Accounting Officer)
/s/ RICHARD E. FLOOR
- ---------------------------------------- Director March 31, 1998
(Richard E. Floor)
/s/ ROGER B. KAFKER
- ---------------------------------------- Director March 31, 1998
(Roger B. Kafker)
/s/ P. ANDREWS MCLANE
- ---------------------------------------- Director March 31, 1998
(P. Andrews Mclane)
/s/ JOHN M.B. O'CONNOR
- ---------------------------------------- Director March 31, 1998
(John M.B. O'Connor)
/s/ W.W. WALKER, JR.
- ---------------------------------------- Director March 31, 1998
(W.W. Walker, Jr.)
/s/ WILLIAM F. WELD
- ---------------------------------------- Director March 31, 1998
(William F. Weld)
57