<PAGE> 1
Filed pursuant to Rule 424(B)(4)
Registration No. 333-34679
333-40699
7,500,000 SHARES
AFFILIATED MANAGERS GROUP, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------
Of the 7,500,000 shares of Common Stock offered, 6,000,000 shares are being
offered hereby in the United States and 1,500,000 shares are being offered in a
concurrent international offering outside the United States. The initial public
offering price and the aggregate underwriting discount per share will be
identical for both Offerings. See "Underwriting".
Prior to these Offerings, there has been no public market for the Common
Stock of the Company, and there can be no assurance that an active trading
market will develop or be sustained to support future transactions in the shares
of Common Stock sold in the Offerings. For factors considered in determining the
initial public offering price, see "Underwriting".
PURCHASERS OF SHARES OF COMMON STOCK SOLD IN THE OFFERINGS WILL EXPERIENCE
IMMEDIATE AND SUBSTANTIAL NET TANGIBLE BOOK VALUE DILUTION OF $33.18 PER SHARE.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.
The Common Stock has been approved for listing, subject to notice of
issuance, on the New York Stock Exchange under the symbol "AMG".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
--------------- ------------- ------------
<S> <C> <C> <C>
Per Share................................ $23.50 $1.52 $21.98
Total(3)................................. $ 176,250,000 $11,400,000 $164,850,000
</TABLE>
- ---------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting".
(2) Before deducting estimated expenses of $1,750,000 payable by the Company.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional 900,000 shares at the initial public offering
price per share, less the underwriting discount, solely to cover
over-allotments. Additionally, the Company has granted the International
Underwriters a similar option with respect to an additional 225,000 shares
as part of the concurrent International Offering. If such options are
exercised in full, the total initial public offering price, underwriting
discount and proceeds to the Company will be $202,687,500, $13,110,000 and
$189,577,500, respectively. See "Underwriting".
------------------------
The shares offered hereby are offered severally by the U.S. Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York, on
or about November 26, 1997, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO.
BT ALEX. BROWN
MERRILL LYNCH & CO.
SCHRODER & CO. INC.
------------------------
The date of this Prospectus is November 20, 1997.
LOGO
<PAGE> 2
[GRAPHS--ASSETS UNDER MANAGEMENT & EBITDA CONTRIBUTION]
[Graphical depiction of growth in assets under management from December 30,
1993 to September 30, 1997; vertical axis of assets under management (in
billions) ranging from $0 to $45 billion; horizontal axis is chronology of
December 1993 through September 1997; graph includes indication of approximate
date the Company completed each of its ten investments; line graph begins at
approximately $1 billion in December 1993 and rises to approximately $43 billion
in September 1997.]
[Pie chart display of EBITDA Contribution(1) pro forma nine months ended
September 30, 1997 by client type, asset class and geography; first pie chart
depicting EBITDA Contribution by client type showing institutional, mutual
funds, high net worth and other client types representing 48%, 29%, 16% and 7%
of EBITDA Contribution, respectively; second pie chart depicting asset class
EBITDA Contribution with equities, other and fixed income at 84%, 12% and 4%,
respectively; third pie chart depicting EBITDA Contribution by geography with
domestic investments and global investments(2) representing 63% and 37%,
respectively.]
(1) THE COMPANY HOLDS INTERESTS IN TEN INVESTMENT MANAGEMENT FIRMS (THE
"AFFILIATES"). THE COMPANY HOLDS A MAJORITY INTEREST IN ALL BUT ONE OF THE
AFFILIATES. 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. EBITDA CONTRIBUTION ACROSS
ALL AFFILIATES BY ASSET CLASS, CLIENT TYPE, AND GEOGRAPHY OF INVESTMENT IS
DETERMINED BY EMPLOYING THE FOLLOWING CONVENTION: EACH AFFILIATE'S EBITDA
CONTRIBUTION FOR THAT PERIOD IS MULTIPLIED BY THE PERCENTAGE OF ITS PERIOD
END ASSETS UNDER MANAGEMENT IN THE RELEVANT CATEGORY. THE SUM OF THE EBITDA
CONTRIBUTION BY CATEGORY FOR ALL AFFILIATES CONSTITUTES THE EBITDA
CONTRIBUTION TO THE COMPANY IN THAT CATEGORY FOR THE PERIOD.
(2) GLOBAL INVESTMENTS CONSIST OF ACCOUNTS INVESTED PRIMARILY IN NON-U.S.
MARKETABLE SECURITIES.
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
SUCH SECURITIES AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERINGS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. In this Prospectus, unless
otherwise indicated, the financial information for Affiliated Managers Group,
Inc. ("AMG" or the "Company") as of any date or for any period gives pro forma
effect to each of the investments the Company has made to date and the related
financings as if each such transaction had been completed as of such date or the
beginning of such period. Except as otherwise indicated, all references in this
Prospectus 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
AMG 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 Tweedy, Browne Company LLC ("Tweedy, Browne"), the Company's most
recent and largest investment to date, AMG has grown since its founding in
December 1993 to ten investment management firms (the "Affiliates") with over
$40 billion in assets under management.
AMG has developed an innovative transaction structure (the "AMG Structure")
which it believes is a superior succession planning alternative for 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 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 other
acquirors 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 have achieved substantial internal growth in assets under
management. For the nine months ended September 30, 1997 the Affiliates
increased their assets under management 55%. Tweedy, Browne, AMG's largest
Affiliate, based on EBITDA Contribution*, achieved growth of 49% in assets under
management for the same period. The 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. For the nine months ended September 30, 1997 investments in equity
securities represented 84% of EBITDA Contribution, while global investments
represented 37% of EBITDA Contribution. For the same period, mutual fund assets
represented 29% of EBITDA Contribution. Other asset classes, including fixed
income, represented 16% of EBITDA Contribution; domestic investments represented
63% of EBITDA Contribution; and institutional, high net worth and other client
types represented 71% of EBITDA Contribution for the same period. The three
largest Affiliate mutual funds, Tweedy, Browne
- ---------------
* 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
<PAGE> 4
- -------------------------------------------------------------------------------
American Value, Tweedy, Browne Global Value and Skyline Special Equities, which
represented approximately 95% of the Company's total mutual fund assets under
management at September 30, 1997, are each rated "five stars", by Morningstar,
Inc., and these funds' assets increased 122%, 60% and 111%, respectively, for
the nine months ended September 30, 1997.
On an historical basis, the Company had net income of $833,000 and net loss
after extraordinary item of $281,000 for the nine months ended September 30,
1997 and 1996, respectively, a net loss after extraordinary item of $2.4 million
for the year ended December 31, 1996 and a net loss of $2.9 million for the year
ended December 31, 1995.
AMG believes that significant opportunities exist for future growth through
acquisitions of equity interests in additional mid-sized investment management
firms. The Company estimates that there are approximately 1,200 firms in the
United States, Canada, and the United Kingdom in this category (which the
Company generally defines as firms with assets under management of between $500
million and $10 billion). 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.
AMG AFFILIATES
<TABLE>
<CAPTION>
AMG'S ASSETS UNDER
EQUITY OWNERSHIP MANAGEMENT AS
PRINCIPAL DATE OF PERCENTAGE AS OF SEPTEMBER 30,
AFFILIATE LOCATION(S) INVESTMENT OF SEPTEMBER 30, 1997 1997
--------- ----------- ---------- --------------------- ----------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
The Burridge Group LLC
("Burridge").................. Chicago December 1996 55.0% $ 1,514
First Quadrant, L.P.; First
Quadrant Limited
(collectively, "First
Quadrant").................... Pasadena, CA; March 1996 66.2 24,559(1)
London
GeoCapital, LLC ("GeoCapital").. New York September 1997 60.0 2,375
Gofen and Glossberg, L.L.C.
("Gofen and Glossberg")....... Chicago May 1997 55.0 3,626
J.M. Hartwell Limited
Partnership ("Hartwell")...... New York May 1994 75.8 344
Paradigm Asset Management
Company, L.L.C. ("Paradigm")... New York May 1995 30.0 1,871
Renaissance Investment
Management ("Renaissance").... Cincinnati November 1995 66.7 1,463
Skyline Asset Management, L.P.
("Skyline")................... Chicago August 1995 64.0 1,238
Systematic Financial Management,
L.P. ("Systematic")........... Fort Lee, NJ May 1995 90.7 1,003
Tweedy, Browne Company LLC
("Tweedy, Browne")............ New York; October 1997 71.2 5,113
London
Total....................... $ 43,106
========
</TABLE>
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(1) Includes directly managed assets of $8.0 billion and $16.6 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.
- --------------------------------------------------------------------------------
4
<PAGE> 5
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock offered(1):
United States Offering............. 6,000,000 shares
International Offering............. 1,500,000 shares
Total......................... 7,500,000 shares
Common Stock to be outstanding after the
Offerings(1)(2)....................... 16,578,617 shares
Use of proceeds......................... The net proceeds to the Company from the offering
made in the United States (the "U.S. Offering") and
the concurrent international offering (the
"International Offering" and, together with the
U.S. Offering, the "Offerings") are estimated to be
$163.1 million, all of which are expected to be
used to reduce indebtedness of the Company. See
"Use of Proceeds".
New York Stock Exchange symbol.......... AMG
</TABLE>
- ---------------
(1) Does not include shares of Common Stock that may be sold by the Company
pursuant to the Underwriters' over-allotment options. See "Underwriting".
(2) Excludes 682,500 shares of Common Stock reserved for issuance upon the
exercise of outstanding options pursuant to the Company's 1995 Incentive
Stock Plan (the "1995 Plan") and the Company's 1997 Stock Option and
Incentive Plan (the "1997 Stock Plan"). See "Management -- Compensation,
Benefit and Retirement Plans".
SUMMARY RISK FACTORS
Before purchasing shares of the Common Stock offered by this Prospectus,
prospective investors should consider carefully, in addition to the other
information contained in this Prospectus, the matters set forth under the
caption "Risk Factors". Such risks include, among others:
- - The Company's growth strategy and investments may not be successful, and the
Company may not be able to locate suitable investments in the future
- - The Company may continue to have future operating losses
- - Future debt and equity financings could adversely affect the Company and its
stockholders
- - The Company's existing indebtedness and its plans to use debt to finance
future acquisitions could adversely affect the Company's financial condition
- - The Company could be adversely affected by additional write-offs of intangible
assets from current and future investments
- - The performance of the Company and its Affiliates may be adversely affected by
changes in economic and market conditions, and there can be no assurance that
future market performance will be favorable or that growth in assets under
management by Affiliates may be sustained
- - Poor performance by Tweedy, Browne would adversely affect the Company's
results of operations and financial condition
- - The Affiliates' investment management contracts are subject to termination on
short notice, and since the Company's revenues are related to the Affiliates'
assets under management, changes in clients' accounts and fluctuations in
securities prices could adversely affect the Company's revenues
- - The Company and its Affiliates rely on key management personnel whose
continued service is not guaranteed, and the loss of senior management at
either level would adversely affect client relationships and the Company's
business
5
<PAGE> 6
- - The Company could be adversely affected by liens on interests in Affiliates,
limitations on payment of distributions by Affiliates, and contingent
repurchase obligations
- - The Company's ability to alter the management practices and policies of its
Affiliates is limited in certain respects
- - The Company may be exposed to liabilities incurred by the Affiliates, and
there can be no assurance that existing insurance coverage will be sufficient
to offset such liabilities
- - The businesses of the Company and its Affiliates are highly competitive, and
certain competitors have greater resources than the Company, which may affect
the Company's ability to compete for future investments, and the ability of
the Affiliate to compete for client assets, all of which could adversely
affect the Company's business
- - Risks inherent in international operations could adversely affect the Company
- - The business of each of the Affiliates is highly regulated, and the failure of
the Company or an Affiliate to comply with such regulation could result in
fines and other sanctions
- - The ability to effect a change of control of the Company could be limited by
certain provisions of the Company's charter and by-laws and Delaware law, even
if such a change would be beneficial to the stockholders, which could limit
the market price of the Common Stock
- - Certain stockholders may have the ability to exert significant influence over
the board of directors of the Company and thus influence the outcome of
certain corporate transactions requiring stockholder approval
- - Purchasers of Common Stock in the Offerings will experience immediate and
substantial dilution in the net tangible book value per share of Common Stock
purchased in the Offerings
- - The Company does not plan to pay dividends, and its agreement with its senior
lenders prohibits dividends and other distributions to stockholders
- - The lack of a prior public market, variations in equity market conditions, and
the shares eligible for future sale could adversely affect the market price of
the Common Stock
BENEFITS TO RELATED PARTIES
Chase Equity Associates, L.P. ("Chase Equity Associates"), which will be
the beneficial owner of approximately 10.1% of the Common Stock after giving
effect to the Offerings, and The Chase Manhattan Bank, which is an affiliate of
Chase Equity Associates, will realize material benefits from the Offerings, in
that the Company will use the net proceeds from the Offerings, estimated to be
$163.1 million, to repay approximately $60.0 million of subordinated debt owed
to Chase Equity Associates and approximately $103.1 million of borrowings under
a senior credit facility (the "Credit Facility") with a syndicate of banks
managed by The Chase Manhattan Bank. See "Use of Proceeds". 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.
------------------------
Unless otherwise indicated, information in this Prospectus assumes no
exercise of the Underwriters' over-allotment options and has been adjusted to
reflect: (i) exercise of all warrants to purchase shares of the Company's
convertible preferred stock (the "Convertible Preferred Stock"), the conversion
of all outstanding shares of Convertible Preferred Stock into shares of Common
Stock and the issuance of shares of Common Stock to the shareholders of an
Affiliate, in each case upon consummation of the Offerings; and (ii) a 50-for-1
stock split of the Common Stock, effected retroactively for all periods
presented in the form of a stock dividend (collectively, the
"Recapitalization"). Except as otherwise indicated, all references in this
Prospectus to "Common Stock" include the Class B Non-Voting Common Stock, par
value $.01 per share (the "Class B Common Stock"), which is not being offered in
the Offerings, and the Common Stock.
6
<PAGE> 7
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary historical consolidated statement of operations data and
balance sheet data set forth below are derived in the relevant periods from the
consolidated financial statements and the notes thereto of the Company. The
Company's consolidated financial statements have been audited by Coopers &
Lybrand L.L.P., independent accountants, as of December 31, 1995 and 1996, and
for each of the three years in the period ended December 31, 1996, and are
included elsewhere in this Prospectus, together with the report of Coopers &
Lybrand L.L.P. thereon. The summary historical consolidated income statement
data for the nine months ended September 30, 1996 and 1997 and balance sheet
data at September 30, 1997, presented below, were derived from the Company's
unaudited consolidated financial statements that are included elsewhere in this
Prospectus and include, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial information for such periods. The results of
operations for the nine months ended September 30, 1996 and 1997 are not
necessarily indicative of the results of operations to be expected for the full
year. The unaudited pro forma consolidated financial information is not
necessarily indicative of the results that might have occurred had such
transactions actually taken place at the beginning of the period specified and
is not intended to be a projection of future results. This summary historical
and pro forma financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations", the
Company's consolidated financial statements and the notes thereto, the Company's
Unaudited Pro Forma Consolidated Financial Information and the notes thereto,
and the other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------------
PRO FORMA
NINE MONTHS ENDED PRO FORMA AS ADJUSTED
YEAR ENDED DECEMBER 31, NINE MONTHS NINE MONTHS
SEPTEMBER 30, ENDED ENDED
---------------------------- ------------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 1997 1997(1) 1997(1)(2)
------ ------- ------- ------- -------- ------------- -------------
(IN THOUSANDS, EXCEPT AS INDICATED AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues.................................. $5,374 $14,182 $50,384 $32,170 $ 53,280 $ 103,859 $ 103,859
Operating expenses:
Compensation and related expenses........ 3,591 6,018 21,113 13,421 18,900 31,072 31,072
Amortization of intangible assets........ 774 4,174 8,053 2,518 3,121 11,067 11,217
Depreciation and other amortization...... 19 133 932 653 1,059 2,351 2,117
Other operating expenses................. 1,000 2,567 13,115 9,578 21,228 26,643 26,643
------ ------- ------- ------- -------- --------- ---------
Total operating expenses............... 5,384 12,892 43,213 26,170 44,308 71,133 71,049
------ ------- ------- ------- -------- --------- ---------
Operating income (loss)................... (10) 1,290 7,171 6,000 8,972 32,726 32,810
Non-operating (income) and expenses:
Investment and other income.............. (966) (265) (337) (763) (814) (832) (832)
Interest expense......................... 158 1,244 2,747 2,036 2,707 23,473 10,693
------ ------- ------- ------- -------- --------- ---------
(808) 979 2,410 1,273 1,893 22,641 9,861
------ ------- ------- ------- -------- --------- ---------
Income before minority interest, income
taxes and extraordinary item............. 798 311 4,761 4,727 7,079 10,085 22,949
Minority interest(3)...................... (305) (2,541) (5,969) (3,732) (6,025) (14,923) (14,734)
------ ------- ------- ------- -------- --------- ---------
Income (loss) before income taxes......... 493 (2,230) (1,208) 995 1,054 (4,838) 8,215
Income taxes.............................. 699 706 181 696 221 899 3,450
------ ------- ------- ------- -------- --------- ---------
Income (loss) before extraordinary item... (206) (2,936) (1,389) 299 833 (5,737) 4,765
Extraordinary item........................ -- -- (983) (580) -- -- --
------ ------- ------- ------- -------- --------- ---------
Net income (loss)......................... $ (206) $(2,936) $(2,372) $ (281) $ 833 $ (5,737) $ 4,765
====== ======= ======= ======= ======== ========= =========
Net income (loss) per share(4)............ $(0.05) $ (0.58) $ (0.36) $ (0.04) $ 0.12 $ (0.63) $ 0.29
====== ======= ======= ======= ======== ========= =========
OTHER FINANCIAL DATA
Assets under management (at period end, in
millions)................................ $ 755 $ 4,615 $19,051 $16,074 $ 37,993 $ 43,106 $ 43,106
EBITDA(5)................................. 1,444 3,321 10,524 6,202 7,941 32,053 32,242
EBITDA as adjusted(6)..................... 587 1,371 7,596 3,470 5,013 7,681 18,099
Cash flow from operating activities....... 818 1,292 6,185 5,122 6,749 15,051 25,280
Cash flow used in investing activities.... (6,156) (37,781) (29,210) (28,513) (27,007) (327,702) (327,702)
Cash flow from financing activities....... 9,509 46,414 15,650 18,419 24,032 327,107 327,107
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1997(1) 1997(2)
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Current assets...................................................... $ 33,331 $ 41,216 $ 41,216
Acquired client relationships....................................... 44,917 143,211 143,951
Goodwill............................................................ 53,545 254,023 255,132
Total assets........................................................ 142,400 459,397 456,078
Current liabilities................................................. 17,251 26,948 21,448
Senior debt......................................................... 63,300 285,300 182,200
Subordinated debt................................................... -- 59,600 800
Total liabilities................................................... 84,800 370,597 208,697
Minority interest(3)................................................ 8,775 8,775 8,775
Preferred stock..................................................... 53,577 84,777 --
Stockholders' equity................................................ 48,825 80,025 238,606
</TABLE>
(1) Pro forma data give effect to: (i) the investments made during the year
ended December 31, 1996 and the nine months ended September 30, 1997 (the
"Prior Investments"); (ii) the recent investment in Tweedy, Browne which
occurred subsequent to September 30, 1997 (the "Subsequent Investment"); and
(iii) cash received from borrowings under the Company's new $300 million
senior credit facility, from the issuance of $60 million face amount of
subordinated debt and from the issuance of $30 million of Class C
Convertible Preferred Stock and warrants to purchase Class C Convertible
Preferred Stock in connection with the Subsequent Investment (the "Recent
Financing"). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Unaudited Pro Forma
Consolidated Financial Information and the notes thereto included elsewhere
in this Prospectus.
(2) Pro forma as adjusted data give effect to: (i) the Recapitalization; and
(ii) the sale of 7,500,000 shares of Common Stock in the Offerings (at an
initial public offering price of $23.50 per share) and the receipt and
application of the estimated net proceeds therefrom. The Company will
record, in the quarter in which the Offerings are consummated, an
extraordinary loss on early retirement of debt. As of September 30, 1997,
the amount of such loss was estimated to be $6.4 million. See "Use of
Proceeds" and "Capitalization".
(3) 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.
(4) Net income (loss) per share is calculated using the weighted average number
of common and common equivalent shares outstanding for the periods
indicated. Using Securities and Exchange Commission (the "Commission")
directives for companies contemplating an initial public offering, stock
options and restricted stock issued within one year of an initial public
offering have been included as outstanding shares using the treasury stock
method for all periods presented. In addition, the Company's shares of
Convertible Preferred Stock are considered common equivalent shares, since
their respective dates of issuance, as they convert to shares of Common
Stock immediately prior to the consummation of the Offerings. Pro forma net
income (loss) per share has been calculated using the weighted average
shares outstanding calculated as described above after giving effect to both
the Recapitalization (excluding the issuance of shares of Common Stock to
the shareholders of an Affiliate) and issuances related to the investments
made subsequent to January 1, 1996, including the Subsequent Investment from
January 1, 1996. All proceeds received from shares sold in the Offerings
will be used to retire debt. Pro forma net income (loss) per share as
adjusted is computed using the pro forma weighted average shares outstanding
plus the shares sold in the Offerings, all of which will be used to retire
debt, and the shares from the issuance of Common Stock to the shareholders
of an Affiliate, as if all such shares were issued at the beginning of the
periods presented.
(5) EBITDA represents earnings before interest, income taxes, depreciation,
amortization and extraordinary items. 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.
(6) EBITDA as adjusted represents earnings after interest expense and income
taxes but before depreciation and amortization and extraordinary items. 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 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.
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RISK FACTORS
This Prospectus contains certain forward-looking statements. The Company's
actual results could differ materially from those set forth in the
forward-looking statements as a result of matters discussed in the risk factors
set forth below and elsewhere in this Prospectus. In addition to the other
information contained in this Prospectus, prospective investors should consider
carefully the risk factors listed below in evaluating an investment in the
shares of Common Stock offered by this Prospectus.
THE COMPANY'S GROWTH STRATEGY AND INVESTMENTS MAY NOT BE SUCCESSFUL
The Company's growth strategy includes acquiring ownership interests in
investment management firms. To date, AMG has invested in ten 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 HAS A LIMITED OPERATING HISTORY AND HAS EXPERIENCED NET LOSSES
The Company has an operating history of fewer than four years and has
experienced net losses in each of its first three years of operations. Since
inception, the Company's growth has largely been attributable to new investments
and such growth may not be sustainable. There can be no assurance that as the
Company continues its investment strategy it will not experience net losses in
the future, which could have an adverse effect on the Company's results of
operations, financial condition and prospects.
FUTURE FINANCINGS COULD ADVERSELY AFFECT THE COMPANY AND ITS STOCKHOLDERS
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. In
addition, significant capital requirements associated with such investments may
impair the Company's ability to pay dividends (although the Company does not
anticipate paying any dividends on its Common Stock in the foreseeable future).
There can be no assurance that acceptable financing for future investments can
be obtained on suitable terms, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
THE COMPANY'S USE OF DEBT TO FINANCE ACQUISITIONS COULD ADVERSELY AFFECT THE
COMPANY
Upon completion of the Offerings and assuming the application of net
proceeds of the Offerings of approximately $163.1 million to repay certain
indebtedness, the Company expects to have approximately $182.2 million of
indebtedness outstanding under the Credit Facility, with approximately $17.8
million available under the Credit Facility for future investments and working
capital needs (assuming the Company maintains compliance with certain financial
ratios). The Company anticipates that it will incur additional indebtedness in
the future in connection with investments in investment management firms. The
Company plans to seek additional borrowing capacity through the replacement of
the existing Credit Facility with a new credit facility. There can be no
assurance, however, that the Company will succeed in obtaining all or any
portion of such replacement financing, and the Company cannot predict at this
time the terms of such financing, if obtained. 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
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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 Company's
borrowings under the Credit Facility are collateralized by pledges of all of its
interests in the Affiliates (including all interests in the Affiliates which are
directly held by the Company, as well as all interests in the Affiliates which
are indirectly held by the Company through wholly-owned subsidiaries),
representing in excess of 97% of the Company's assets at September 30, 1997 on a
pro forma basis. The Credit Facility 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 Company's 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,
with which the Company is currently in compliance. The Company's ability to
borrow under the Credit Facility is conditioned upon its compliance with the
requirements of the 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 Credit Facility. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources". In addition, the 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 contract than would otherwise
apply under the actual indebtedness. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Interest Rate Sensitivity"
and "-- Interest Rate Hedging Contracts".
THE COMPANY COULD BE ADVERSELY AFFECTED BY WRITE-OFFS OF ACQUIRED CLIENT
RELATIONSHIPS AND GOODWILL
On a pro forma basis at September 30, 1997, the Company's total assets were
approximately $459.4 million, of which approximately $397.2 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. These intangible assets are being amortized on a
straight-line basis over periods ranging from nine to 26 years in the case of
acquired client relationships and 15 to 35 years in the case of goodwill. Pro
forma for all investments in Affiliates to date, amortization of intangible
assets, including goodwill, would have resulted in a charge to operations of
$11.1 million for the nine months ended September 30, 1997. The Company
evaluates each investment and establishes appropriate amortization periods based
on the underlying facts and circumstances. Subsequent to each investment, the
Company reevaluates, on a regular basis, such facts and circumstances to
determine if the related intangible assets continue to be realizable and if the
amortization period continues to be appropriate. In 1995 and 1996, such a
reevaluation resulted in the write-off of approximately $2.5 million and $4.6
million of unamortized goodwill, respectively. Although at September 30, 1997,
the net unamortized balance of intangible assets is not considered to be
impaired, any such future determination requiring the write-off of a significant
portion of unamortized intangible assets could adversely affect the Company's
results of operations and financial position. In addition, the Company intends
to invest in additional investment management firms in the future. While these
firms will contribute additional revenue to the Company, such
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investments will also result in the recognition of additional intangible assets
which will cause further increases in amortization expense.
THE PERFORMANCE OF THE COMPANY AND ITS AFFILIATES MAY BE ADVERSELY AFFECTED BY
CHANGES IN ECONOMIC AND MARKET CONDITIONS
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. For
example, between January 1, 1995 and September 30, 1997, the S&P 500 Index
appreciated at a compound annual rate in excess of 30% 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 of January 1, 1995 through 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
distributable to the Company.
POOR PERFORMANCE BY TWEEDY, BROWNE WOULD ADVERSELY AFFECT THE COMPANY
The Company has recently completed its investment in Tweedy, Browne (the
"Tweedy, Browne Investment"). The Tweedy, Browne Investment represents the
Company's single largest investment to date, with an aggregate purchase price of
approximately $300 million. The addition of Tweedy, Browne significantly
increases the aggregate size of AMG's revenue base, representing 37% of the
Company's pro forma revenues for the nine months ended September 30, 1997. Poor
financial performance by Tweedy, Browne would have an adverse effect on the
Company's results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
THE AFFILIATES' INVESTMENT MANAGEMENT CONTRACTS ARE SUBJECT TO TERMINATION ON
SHORT NOTICE
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
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given Affiliate will be able to retain its fee structure or, with such fee
structure, retain its clients in the future.
THE COMPANY AND ITS AFFILIATES RELY ON KEY MANAGEMENT PERSONNEL WHOSE CONTINUED
SERVICE IS NOT GUARANTEED
The Company is dependent on the efforts of Mr. Nutt, its President, Chief
Executive Officer and Chairman of the Board of Directors, and Sean M. Healey,
its Executive Vice President, and other senior management personnel. Messrs.
Nutt and Healey in particular play an important role in identifying suitable
investment opportunities for the Company and in structuring and negotiating the
terms of the Company's investments in investment management firms. Messrs. Nutt
and Healey do not have employment agreements with the Company. The Company also
believes that the business of Tweedy, Browne, its largest Affiliate based on
EBITDA Contribution, is highly dependent on the services of Christopher H.
Browne, William H. Browne and John D. Spears, who have been involved in the
management of Tweedy, Browne for over 20 years and who continue to be primarily
responsible for all of that firm's investment decisions. Although each of these
individuals has entered into a 10-year employment agreement with Tweedy, Browne
pursuant to which he has agreed to devote substantially all of his working time
to the business and affairs of the firm, this can serve as no guarantee that he
will remain with the Company for the specified term of the Agreement. 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 an Affiliate could jeopardize the Affiliate's
relationships with its clients and lead to the loss of 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 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 COULD BE ADVERSELY AFFECTED BY LIENS ON INTERESTS IN AFFILIATES,
LIMITATIONS ON PAYMENT OF DISTRIBUTIONS BY AFFILIATES, AND CONTINGENT REPURCHASE
OBLIGATIONS
LIENS ON INTERESTS IN AFFILIATES
Because AMG is structured as a holding company, all of the cash flow at the
parent company level consists of distributions received from the Affiliates.
Borrowings under the Credit Facility, of which approximately $182.2 million will
be outstanding upon completion of the Offerings and the receipt and application
of the proceeds therefrom, are secured by AMG's interests in the Affiliates.
LIMITATION ON PAYMENT OF DISTRIBUTIONS BY AFFILIATES
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. See "Business -- AMG Structure and Relationship with
Affiliates -- Revenue Sharing Arrangements". 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 or
distributed to its management team. 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.
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CONTINGENT REPURCHASE OBLIGATIONS
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 or issue new shares of Common Stock to its
Affiliates' managers, and its ownership interests in its Affiliates may change
from time to time, which may have an adverse affect on the Company's cash flow
and liquidity. See "Business -- AMG Structure and Relationship with Affiliates
- -- Capitalization of Retained Interest".
THE COMPANY'S ABILITY TO ALTER THE MANAGEMENT PRACTICES AND POLICIES OF ITS
AFFILIATES IS LIMITED
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. See "Risk Factors -- Regulation". In addition, because each
Affiliate is responsible for its own marketing and client relations, Affiliates
may, from time to time, compete with each other for clients. See "Business --
AMG Structure and Relationship with Affiliates".
THE COMPANY MAY BE EXPOSED TO LIABILITIES INCURRED BY ITS AFFILIATES
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 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 any of the Affiliates or the Company in
excess of available coverage could have a material adverse effect on the
Company. See "Business -- Corporate Liability and Insurance".
THE BUSINESSES OF THE COMPANY AND ITS AFFILIATES ARE HIGHLY COMPETITIVE
The Company operates as an asset management holding company organized to
invest in mid-sized investment management firms. The market for partial or total
acquisitions of interests in investment management firms is highly competitive.
The Company is aware of several other holding companies which have been
organized to invest in or acquire investment management firms, and the Company
views these firms as among its competitors. In addition, numerous other
companies, both privately and publicly held, including commercial and investment
banks, insurance companies, and investment management firms, most of which have
longer established operating histories and significantly greater resources than
the Company, make investments in and acquire investment management firms.
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. There can be no assurance that the Company will be able to
compete effectively with such competitors, that additional competitors will not
enter the market or that such competition will not make it more
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difficult or impracticable for the Company to make investments in investment
management firms. See "Business -- Competition".
The investment management business is also highly competitive. Each of the
Affiliates competes with a broad range of investment managers, including public
and private investment advisers as well as affiliates of securities
broker-dealers, banks, insurance companies and other entities. From time to
time, Affiliates may also compete with each other for clients. Many of the
Affiliates' competitors have greater resources than any of the Affiliates and
than the Company and the Affiliates on a consolidated basis. In addition to
competing directly for clients, competition can impact the Affiliates' fee
structures. The Company believes that each Affiliate's ability to compete
effectively with other firms is dependent upon the Affiliate's products, level
of investment performance and client service, as well as the marketing and
distribution of its investment products. There can be no assurance that the
Affiliates will be able to achieve favorable investment performance and retain
their existing clients. See "Business -- Competition".
RISKS INHERENT IN INTERNATIONAL OPERATIONS COULD ADVERSELY AFFECT THE COMPANY
First Quadrant Limited is organized and headquartered in London, England.
In addition, Tweedy, Browne and other Affiliates are investment advisers to
certain funds which are organized under non-U.S. jurisdictions, including
Luxembourg and Bermuda. 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 an
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.
THE BUSINESS OF EACH OF THE AFFILIATES IS HIGHLY REGULATED
The business of each of the Affiliates is highly regulated primarily at the
federal level, and the business of certain of the Affiliates is subject to the
authority of non-U.S. regulators. The failure of an Affiliate to comply with
applicable laws or regulations could result in fines, suspensions of individual
employees or other sanctions, including revocation of an Affiliate's
registration as an investment adviser, commodity trading advisor or
broker-dealer. Each Affiliate (other than First Quadrant Limited) is registered
with the Commission as an investment adviser under the Investment Advisers Act
of 1940, as amended (the "Investment Advisers Act"), and is subject to the
provisions of the Investment Advisers Act and the Commission's regulations
promulgated thereunder. The Investment Advisers Act imposes numerous obligations
on registered investment advisers, including fiduciary, record keeping,
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. Certain of the
Affiliates, including Tweedy, Browne, act as advisers or subadvisers to mutual
funds which are registered with the Commission under the Investment Company Act
of 1940, as amended (the "1940 Act"). 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. Each
Affiliate is 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 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,
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Browne is registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as a broker-dealer and thus is subject to extensive regulation
with respect to sales methods, trading practices, the use and safekeeping of
customers' funds and securities, capital structure, record keeping and the
conduct of directors, officers and employees.
In addition, applicable law provides that the investment management
contracts under which Affiliates manage assets for other parties either
terminate automatically if assigned, or are not assignable unless the applicable
client consents to the assignment. Assignment, as generally defined, includes
direct assignments as well as assignments which may be deemed to occur, under
certain circumstances, upon the direct or indirect transfer of a "controlling
block" of the voting securities of an Affiliate. Moreover, applicable law
provides that all investment contracts with mutual fund clients may be
terminated by such clients, without penalty, upon no later than 60 days' notice.
Investment contracts with institutional and other clients are typically
terminable by the client, also without penalty, upon 30 days' notice.
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).
AMG itself does not manage investments for clients, does not provide any
investment management services and, therefore, is not registered as an
investment adviser under federal or state law.
THE ABILITY TO EFFECT A CHANGE OF CONTROL OF THE COMPANY COULD BE LIMITED BY
PROVISIONS OF THE COMPANY'S CHARTER AND BY-LAWS, AND DELAWARE LAW
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate") and Amended and Restated By-laws (the
"By-laws") and Delaware law could, together or separately, discourage potential
acquisition proposals, delay or prevent a change in control of the Company,
hinder the removal of incumbent directors, and limit the price that certain
investors might be willing to pay in the future for shares of the Common Stock,
all of which may be beneficial to the interests of the stockholders under
certain circumstances. These provisions include the issuance, without further
stockholder approval, of preferred stock with rights and privileges which could
be senior to the Common Stock. The Company also is subject to Section 203 of the
Delaware General Corporation Law which, subject to certain exceptions, prohibits
a Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder. See
"Description of Capital Stock -- Certain Provisions of the Company's Certificate
of Incorporation and By-laws" and "-- Statutory Business Combination Provision".
CERTAIN STOCKHOLDERS MAY HAVE THE ABILITY TO EXERT SIGNIFICANT INFLUENCE OVER
THE BUSINESS, POLICIES AND AFFAIRS OF THE COMPANY
After giving effect to the sale of the shares of Common Stock sold in the
Offerings, investors including investment funds associated with TA Associates,
Inc. ("TA Associates"), Hartford Accident and Indemnity Company ("The
Hartford"), members of senior management and key employees of the Company, and
managers of Affiliates will beneficially own in the aggregate approximately
23.5%, 2.3%, 5.9% and 5.3%, respectively, of the outstanding Common Stock,
including approximately 27.9%, 2.7%, 7.1% and 6.2% of the voting Common Stock.
In addition, NationsBanc Investment Corporation ("NationsBank") and Chase Equity
Associates will beneficially own in the aggregate 5.9% and 10.1% of the
outstanding Common Stock after the Offerings, respectively, in the form of
non-voting Class B Common Stock. To the knowledge of the Company, upon
consummation of the Offerings, there will be no agreements among such persons
relating to the voting of the Common Stock or otherwise relating to corporate
governance issues (except that the holders of shares of non-voting Class B
Common Stock have agreed that, to the extent such
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shares are entitled to vote as a class on any matter, they will vote such shares
in the same proportion as the votes of the holders of the shares of voting
Common Stock on such matter). If such persons were to vote their shares
together, these persons would have the ability to exert significant influence
over the Company's Board of Directors, and, therefore, the business, policies
and affairs of the Company. In addition, by reason of such holdings, these
stockholders may have the ability to exert significant influence over the
outcome of certain fundamental corporate transactions requiring stockholder
approval, including mergers and sales of assets, and the election of the members
of the Company's Board of Directors. This influence could preclude any
unsolicited acquisition of the Company and, consequently, adversely affect the
market price of the Common Stock. See "Certain Transactions", "Principal
Stockholders" and "Shares Eligible for Future Sale".
PURCHASERS OF COMMON STOCK IN THE OFFERINGS WILL EXPERIENCE IMMEDIATE AND
SUBSTANTIAL DILUTION
The initial public offering price will be substantially higher than the pro
forma net tangible book value (deficit) per share of the Company which, as of
September 30, 1997, was $(34.94). Purchasers of the shares of Common Stock sold
in the Offerings will experience immediate and substantial pro forma net
tangible book value dilution of $33.18 per share. See "Dilution".
THE COMPANY DOES NOT PLAN TO PAY DIVIDENDS
Following the consummation of the Offerings, 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. Any declaration of dividends in the future will depend upon,
among other things, the Company's results of operations, financial condition and
capital requirements as well as general business conditions. The Credit Facility
also prohibits the Company from making dividend payments to its stockholders.
See "Dividend Policy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".
LACK OF A PRIOR MARKET, EQUITY MARKET CONDITIONS, AND SHARES AVAILABLE FOR
FUTURE SALE COULD ADVERSELY AFFECT THE TRADING PRICE OF THE COMMON STOCK
NO PRIOR MARKET FOR THE COMMON STOCK
Prior to the Offerings, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained in the future or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public offering
price of the Common Stock was determined by negotiations between the Company and
the representatives of the U.S. Underwriters and the International Underwriters
and may not be indicative of the market price of the Common Stock after the
Offerings. See "Underwriting". From time to time after the Offerings, there may
be significant volatility in the market price for the Common Stock. Quarterly
operating results of the Company, changes in general conditions in the economy
or the financial markets, or other developments affecting the Company or its
competitors, could cause the market price of the Common Stock to fluctuate
substantially. In addition, in recent years, the stock market has experienced
significant price and volume fluctuations. This volatility has affected the
market prices of securities issued by many companies for reasons unrelated to
their operating performance and may adversely affect the price of the Common
Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after the
Offerings could adversely affect the market price of the Common Stock. In
addition to the 7,500,000 shares of Common Stock offered in the Offerings, up to
6,681,186 shares of Common Stock owned by the current stockholders will be
eligible for sale in accordance with Rule 144 under the Securities Act of 1933,
as amended (the "Securities Act"), beginning 90 days after the consummation of
the Offerings, and an additional 2,331,806 shares of Common Stock will become
eligible for sale in the public market under Rule 144 at various dates through
November 1998. The remaining 65,625 shares of Common Stock owned by the current
stockholders are subject to vesting provisions and
16
<PAGE> 17
will become eligible for sale in the public market under Rule 144 at various
times after November 1998 as they become vested. If such stockholders should
sell or otherwise dispose of a substantial amount of Common Stock in the public
market, the prevailing market price could be adversely affected. However,
subject to certain exceptions, the Company and holders of 9,078,617 shares of
Common Stock outstanding before the Offerings have agreed not to offer, sell, or
otherwise dispose of any shares of Common Stock for a period of 180 days after
the date of this Prospectus without the prior written consent of the
representatives of the Underwriters. See "Shares Eligible For Future Sale".
REGISTRATION RIGHTS
The holders of 8,076,686 shares of Common Stock have the right in certain
circumstances to require the Company to register their shares under the
Securities Act for resale to the public, and the holders of 8,766,217 shares
have the right to include their shares in a registration statement filed by the
Company. In addition, certain of the managers of the Affiliates have the right
under certain circumstances to exchange portions of their interests in the
Affiliate of which they are a manager for shares of Common Stock. See
"Business -- AMG Structure and Relationship with Affiliates -- Capitalization of
Retained Interest". Certain of the managers who have these exchange rights have
the right to include the shares of Common Stock received by them in such
exchange in a registration statement filed by the Company under the Securities
Act. These registration rights may enable such holders to publicly sell shares
which would otherwise be ineligible for sale in the public market. The Company
also intends to register all of the shares of Common Stock issuable under the
Company's stock plans as soon as practicable following the consummation of the
Offerings. See "Management -- Compensation, Benefit and Retirement Plans". The
sale of a substantial number of shares of Common Stock into the public market
following the Offerings, or the availability of such shares for future sale,
could adversely affect the market price for the Common Stock and could impair
the Company's ability to obtain additional capital in the future through an
offering of equity securities should it desire to do so. See "Shares Eligible
for Future Sale" and "Underwriting".
17
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 7,500,000 shares of
Common Stock in the Offerings, after deducting the underwriting discount and
expenses payable by the Company in connection with the Offerings, will be
approximately $163.1 million ($187.8 million if the Underwriters' over-allotment
options are exercised in full). The Company intends to use such net proceeds to
repay outstanding indebtedness, all of which was incurred to finance portions of
the Company's investments in certain Affiliates, as follows: (i) approximately
$60.0 million will be used to repay certain subordinated debt which bears
interest initially at LIBOR plus 7.25% and matures on April 7, 1998, and (ii)
approximately $103.1 million will be used to repay a portion of the outstanding
borrowings under the Credit Facility, which bear interest at variable rates
based on the prime rate or LIBOR as selected by the Company, and mature on
October 9, 2004 and October 9, 2005. The interest rate on indebtedness under the
Credit Facility at November 14, 1997 was 8.125% with respect to $118.3 million,
8.25% with respect to $117.0 million and 8.75% with respect to $50.0 million.
Upon repayment of such indebtedness, and assuming the Company maintains
compliance with certain financial ratios, approximately $17.8 million will be
available for future borrowings under the Credit Facility.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common Stock.
The Company currently intends to retain earnings to finance the growth and
development of its business, including possible investments, and does not
anticipate paying cash dividends for the foreseeable future. Any payment of cash
dividends in the future will depend upon the financial condition, capital
requirements and earnings of the Company, as well as other factors the Company's
Board of Directors may deem relevant. In addition, the Credit Facility 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".
18
<PAGE> 19
DILUTION
The pro forma net tangible book value (deficit) of the Common Stock at
September 30, 1997 before adjustment for the Offerings was $(317.2) million, or
$(34.94) per share after giving effect to the Recapitalization. After giving
effect to the sale of the 7,500,000 shares of Common Stock in the Offerings at
an initial public offering price of $23.50 per share (before deducting the
estimated underwriting discounts and commissions and estimated offering
expenses), and applying the estimated net proceeds therefrom as set forth in
"Use of Proceeds" (with the associated write-off of $6.4 million in debt
issuance costs and debt discount), the pro forma net tangible book value
(deficit) of the Company at September 30, 1997 would have been $(160.5) million,
or $(9.68) per share.
<TABLE>
<S> <C> <C>
Initial public offering price per share (1)...................... $ 23.50
Pro forma net tangible book value (deficit) per share before
the Offerings............................................. $(34.94)
Increase in pro forma net tangible book value per share
attributable to the Offerings............................. 25.26
-------
As adjusted pro forma net tangible book value (deficit) per share
after the Offerings............................................ (9.68)
-------
Dilution in pro forma net tangible book value (deficit) per share
to new investors (2)(3)........................................ $ 33.18
=======
</TABLE>
- ---------------
(1) Initial public offering price before deduction of underwriting discounts and
commissions and estimated expenses of the Offerings to be paid by the
Company.
(2) Dilution is determined by subtracting the pro forma net tangible book value
per share of Common Stock after the Offerings from the initial public
offering price paid by purchasers in the Offerings for a share of Common
Stock.
(3) Assumes no exercise of outstanding stock options. As of the date of this
Prospectus, there are options outstanding to purchase a total of 92,500
shares of Common Stock at an exercise price of $9.10 per share. See
"Management -- Compensation, Benefit and Retirement Plans" and Note 13 of
the Notes to the Company's Consolidated Financial Statements. If any of
these options were exercised, there would be further dilution to purchasers
of Common Stock in the Offerings.
Assuming the Underwriters' over-allotment options are exercised in full,
the pro forma net tangible book value (deficit) at September 30, 1997 would be
$(135.7) million or $(7.67) per share, the immediate increase in pro forma net
tangible book value of shares owned by existing stockholders would be $27.27 per
share, and the immediate dilution to purchasers of shares of Common Stock in the
Offerings would be $31.17 per share.
The following table summarizes, at September 30, 1997, after giving effect
to the sale of the shares of Common Stock in the Offerings at an initial public
offering price of $23.50 per share, (i) the number and percentage of shares of
Common Stock purchased from the Company, (ii) the total cash consideration paid
for the Common Stock, and (iii) the average price per share of Common Stock paid
by existing stockholders and by purchasers of the Common Stock in the Offerings:
<TABLE>
<CAPTION>
TOTAL
SHARES OWNED CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders......... 9,078,617 54.8% $ 86,640,000 33.0% $ 9.54
New investors.......... 7,500,000 45.2 176,250,000 67.0 23.50
---------- ----- ------------ -----
Total............. 16,578,617 100.0% $262,890,000 100.0%
========== ===== ============ =====
</TABLE>
19
<PAGE> 20
CAPITALIZATION
The following table sets forth at September 30, 1997: (i) the historical
capitalization of the Company; (ii) the pro forma capitalization reflecting the
Subsequent Investment and the Recent Financing; and (iii) the pro forma
capitalization described in clause (ii) as adjusted to give effect to the
Recapitalization and sale of the shares of Common Stock in the Offerings (at an
initial public offering price of $23.50 per share) and the application of the
net proceeds therefrom as described under "Use of Proceeds".
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Senior debt, current portion....................... $ -- $ 5,500 $ --
Senior debt, long-term portion..................... 63,300 279,800 182,200
Subordinated debt.................................. -- 59,600 800
--------- --------- ---------
Total debt....................................... 63,300 344,900 183,000
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none issued and outstanding
historical, pro forma and pro forma as
adjusted...................................... -- -- --
Convertible preferred stock, $.01 par value;
137,396 shares authorized and 125,916 shares
issued and outstanding historical; 213,935
shares authorized and 159,249(1) shares issued
and outstanding pro forma; and none
authorized, issued or outstanding pro forma as
adjusted...................................... 53,577 84,777 --
Common Stock, $.01 par value; 17,160,050 shares
authorized and 1,037,500 shares issued and
outstanding historical; 10,961,000 shares
authorized and 1,037,500(2) shares issued and
outstanding pro forma; and 40,000,000 shares
authorized and 13,941,817 shares issued and
outstanding pro forma as adjusted............. -- -- 139
Class B Common Stock, $.01 par value, non-voting;
970,150 shares authorized and none issued and
outstanding historical; 3,342,250 shares
authorized and none issued and outstanding pro
forma; and 3,000,000 shares authorized and
2,636,800 shares issued and outstanding pro
forma as adjusted............................. -- -- 26
Additional paid-in capital on common stock....... 15 15 249,576
Foreign translation adjustment................... (86) (86) (86)
Accumulated deficit.............................. (4,681) (4,681) (11,049)
--------- --------- ---------
Total stockholders' equity............... 48,825 80,025 238,606
--------- --------- ---------
Total capitalization..................... $ 112,125 $ 424,925 $ 421,606
========= ========= =========
</TABLE>
- ---------------
(1) Includes the issuance of 5,333 shares of Series C-2 Non-Voting Convertible
Preferred Stock and assumes the exercise of warrants to purchase 28,000
shares of Series C-2 Non-Voting Convertible Preferred Stock subsequent to
September 30, 1997.
(2) Excludes 92,500 shares of Common Stock reserved for issuance under options
outstanding under the 1995 Plan, of which 23,125 shares were issuable at
September 30, 1997 upon the exercise of outstanding stock options at $9.10
per share. See "Management--Compensation, Benefit and Retirement Plans".
20
<PAGE> 21
SELECTED PRO FORMA FINANCIAL DATA
The selected pro forma statement of operations data and balance sheet data
set forth below are derived from the unaudited pro forma consolidated statement
of operations and balance sheet for the Company as of and for the nine months
ended September 30, 1997, and the related notes thereto, as set forth in the
Unaudited Pro Forma Consolidated Financial Statements included elsewhere in this
Prospectus. The selected pro forma data are adjusted to reflect: (i) the Prior
Investments (in the case of the selected pro forma statement of operations data)
and the Subsequent Investment; (ii) the Recent Financing (as defined below),
which was entered into in connection with the Subsequent Investment; and (iii)
the Offerings (including the application of the net proceeds therefrom) and the
Recapitalization in connection with the Offerings. The selected pro forma
statement of operations data for the nine months ended September 30, 1997 assume
that each of these transactions occurred on January 1, 1996. The selected pro
forma balance sheet data assume that each of these transactions occurred on
September 30, 1997.
The pro forma adjustments are based on available information and upon
certain assumptions that management believes are reasonable under the
circumstances. The Prior Investments and the Subsequent Investment are accounted
for under the purchase method of accounting. Under this method of accounting,
the purchase price has been allocated to the assets and liabilities acquired
based upon estimates of fair value. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations". The Prior Investments were
primarily funded with cash received from borrowings under the Company's
revolving credit facility and from issuances of the Company's Convertible
Preferred Stock. The Subsequent Investment has been funded by: (i) cash received
from borrowings ("Senior Debt") under the Company's new $300 million senior
credit facility (the "Credit Facility"), (ii) cash received from the issuance of
$60 million face amount of subordinated debt (the "Subordinated Debt"), and
(iii) cash received from the issuance of $30 million of Class C Convertible
Preferred Stock and warrants to purchase Class C Convertible Preferred Stock
(clauses (i) - (iii) collectively, the "Recent Financing"). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources".
The selected pro forma financial data should be read in conjunction with
the Unaudited Pro Forma Consolidated Financial Information and the related notes
thereto, and the Consolidated Financial Statements of the Company (including the
unaudited information as of and for the nine months ended September 30, 1997)
and the related notes thereto, included elsewhere in this Prospectus. The pro
forma information is based on the historical data with respect to the Company
and the acquired businesses comprising the Prior Investments and the Subsequent
Investment, is not necessarily indicative of the results that might have
occurred had the transactions reflected actually taken place at the beginning of
the period specified and is not intended to be a projection of future results.
21
<PAGE> 22
SELECTED PRO FORMA FINANCIAL DATA
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
FINANCING OFFERING PRO FORMA
HISTORICAL INVESTMENTS(1) ADJUSTMENTS(2) PRO FORMA ADJUSTMENTS(3) AS ADJUSTED
----------- -------------- --------------- ---------- -------------- ------------
(IN THOUSANDS, EXCEPT WHERE INDICATED AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Revenues.................. $ 53,280 $ 50,579 $ -- $103,859 $ -- $ 103,859
Operating expenses:
Compensation and
related expenses.... 18,900 12,172 -- 31,072 -- 31,072
Amortization of
intangible assets... 3,121 7,946 -- 11,067 150 11,217
Depreciation and other
amortization........ 1,059 499 793 2,351 (234) 2,117
Other operating
expenses............ 21,228 5,415 -- 26,643 -- 26,643
--------- -------- --------- -------- ---------- ----------
Total operating
expenses........ 44,308 26,032 793 71,133 (84) 71,049
--------- -------- --------- -------- ---------- ----------
Operating income (loss)... 8,972 24,547 (793) 32,726 84 32,810
Non-operating (income) and
expenses:
Investment and other
income.............. (814) (18) -- (832) -- (832)
Interest expense...... 2,707 36 20,730 23,473 (12,780) 10,693
--------- -------- --------- -------- ---------- ----------
1,893 18 20,730 22,641 (12,780) 9,861
--------- -------- --------- -------- ---------- ----------
Income (loss) before
minority interest and
income taxes............ 7,079 24,529 (21,523) 10,085 12,864 22,949
Minority interest......... (6,025) (8,898) -- (14,923) 189 (14,734)
--------- -------- --------- -------- ---------- ----------
Income (loss) before
income taxes............ 1,054 15,631 (21,523) (4,838) 13,053 8,215
Income taxes.............. 221 678 -- 899 2,551 3,450
--------- -------- --------- -------- ---------- ----------
Net income (loss)......... $ 833 $ 14,953 $ (21,523) $ (5,737) $ 10,502 $ 4,765
========= ======== ========= ======== ========== ==========
Net income (loss) per
share (4)............... $ 0.12 $ (0.63) $ 0.29
========= ======== ==========
Number of shares used in
net income (loss) per
share................... 6,858 9,056 16,635
========= ======== ==========
OTHER FINANCIAL DATA
Assets under management
(at period end, in
millions)............... $ 37,993 $ 5,113 $ -- $ 43,106 $ -- $ 43,106
EBITDA (5)................ 7,941 24,112 -- 32,053 189 32,242
EBITDA as adjusted(5)..... 5,013 23,398 (20,730) 7,681 10,418 18,099
Cash flow from (used in)
operating activities.... 6,749 29,107 (20,805) 15,051 10,229 25,280
Cash flow used in
investing activities.... (27,007) (370) (300,325) (327,702) -- (327,702)
Cash flow from financing
activities.............. 24,032 -- 303,075 327,107 -- 327,107
BALANCE SHEET DATA
Current assets............ $ 33,331 $ 5,385 $ 2,500 $ 41,216 $ -- $ 41,216
Acquired client
relationships........... 44,917 98,294 -- 143,211 740 143,951
Goodwill.................. 53,545 200,478 -- 254,023 1,109 255,132
Total assets.............. 142,400 305,597 11,400 459,397 (3,319) 456,078
Current liabilities....... 17,251 9,697 -- 26,948 (5,500) 21,448
Senior debt............... 63,300 210,600 11,400 285,300 (103,100) 182,200
Subordinated debt......... -- 59,600 -- 59,600 (58,800) 800
Total liabilities......... 84,800 274,397 11,400 370,597 (161,900) 208,697
Minority interest......... 8,775 -- -- 8,775 -- 8,775
Preferred stock........... 53,577 31,200 -- 84,777 (84,777) --
Stockholders' equity...... 48,825 31,200 -- 80,025 158,581 238,606
</TABLE>
- ---------------
(1) Gives effect to the recent investment in Tweedy, Browne (the "Subsequent
Investment"), which occurred subsequent to September 30, 1997, and, in the
case of the selected statement of operations data, to the investments made
during the year ended December 31, 1996 and the nine months ended September
30, 1997 (the "Prior Investments"). See notes (B), (C) and (H)-(L) to the
Unaudited Pro Forma Consolidated Financial Information included elsewhere in
this Prospectus.
(2) To adjust for the Recent Financing, which was entered into in connection
with the Subsequent Investment. See notes (B), (D) and (M) to the Unaudited
Pro Forma Consolidated Financial Information included elsewhere in this
Prospectus.
(3) To adjust for (i) the sale of Common Stock offered by the Offerings and the
application of the net proceeds therefrom, and (ii) the related
Recapitalization, consisting of a 50-for-1 stock split of the Common Stock
effected in the form of a stock dividend and the issuance of 78,700 shares
of Common Stock to shareholders of an Affiliate upon consummation of the
Offerings, in each case as of the date of this Prospectus, the exercise of
all warrants to purchase shares of the Company's convertible preferred stock
(the "Convertible Preferred Stock") and the conversion of all outstanding
shares of the Convertible Preferred Stock into shares of Common Stock, in
each case upon consummation of the Offerings. See notes (E)-(G) and (N)-(Q)
to the Unaudited Pro Forma Consolidated Financial Information included
elsewhere in this Prospectus.
(4) See note (4) to the Summary Historical and Pro Forma Financial Data included
elsewhere in this Prospectus.
(5) See notes (5) and (6) to the Summary Historical and Pro Forma Financial Data
included elsewhere in this Prospectus.
22
<PAGE> 23
SELECTED HISTORICAL FINANCIAL DATA
The selected consolidated statement of operations data and balance sheet
data set forth below are derived in the relevant periods from the consolidated
financial statements and the notes thereto of the Company. The Company's
consolidated financial statements have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as of December 31, 1995 and 1996, and for each of the
three years in the period ended December 31, 1996, and are included elsewhere in
this Prospectus, together with the report of Coopers & Lybrand L.L.P. thereon.
The selected consolidated statement of operations data for the nine months ended
September 30, 1996 and 1997 and balance sheet data at September 30, 1997,
presented below, were derived from the Company's unaudited consolidated
financial statements that are included elsewhere in this Prospectus and include,
in the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
information for such periods. The results of operations for the nine months
ended September 30, 1996 and 1997 are not necessarily indicative of the results
of operations to be expected for the full year. This selected historical
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations", the Company's
consolidated financial statements and the notes thereto, and the other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
YEAR ENDED DECEMBER 31,
-------------------------------- --------------------
1994 1995 1996 1996 1997
------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT AS INDICATED AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues.................................................... $5,374 $14,182 $50,384 $32,170 $53,280
Operating expenses:
Compensation and related expenses....................... 3,591 6,018 21,113 13,421 18,900
Amortization of intangible assets....................... 774 4,174 8,053 2,518 3,121
Depreciation and other amortization..................... 19 133 932 653 1,059
Other operating expenses................................ 1,000 2,567 13,115 9,578 21,228
------ ------- ------- ------- -------
Total operating expenses............................ 5,384 12,892 43,213 26,170 44,308
Operating income............................................ (10) 1,290 7,171 6,000 8,972
Non-operating (income) and expenses:
Investment and other income............................. (966) (265) (337) (763) (814)
Interest expense........................................ 158 1,244 2,747 2,036 2,707
------ ------- ------- ------- -------
(808) 979 2,410 1,273 1,893
------ ------- ------- ------- -------
Income before minority interest, income taxes and
extraordinary item........................................ 798 311 4,761 4,727 7,079
Minority interest (3)....................................... (305) (2,541) (5,969) (3,732) (6,025)
------ ------- ------- ------- -------
Income (loss) before income taxes........................... 493 (2,230) (1,208) 995 1,054
Income taxes................................................ 699 706 181 696 221
------ ------- ------- ------- -------
Income (loss) before extraordinary item..................... (206) (2,936) (1,389) 299 833
Extraordinary item.......................................... -- -- (983) (580) --
------ ------- ------- ------- -------
Net income (loss)........................................... $ (206) $(2,936) $(2,372) $ (281) $ 833
====== ======= ======= ======= =======
Net income (loss) per share (1)............................. $(0.05) $ (0.58) $ (0.36) $ (0.04) $ 0.12
====== ======= ======= ======= =======
OTHER FINANCIAL DATA
Assets under management (at period end, in millions)........ $ 755 $ 4,615 $19,051 $16,074 $37,993
EBITDA (2).................................................. 1,444 3,321 10,524 6,202 7,941
EBITDA as adjusted(2)....................................... 587 1,371 7,596 3,470 5,013
Cash flow from operating activities......................... 818 1,292 6,185 5,122 6,749
Cash flow used in investing activities...................... (6,156) (37,781) (29,210) (28,513) (27,007)
Cash flow from financing activities......................... 9,509 46,414 15,650 18,419 24,032
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
---------------------------------- 30,
1994 1995 1996 1997
------- ------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Current assets................................................. $ 4,791 $16,847 $ 23,064 $ 33,331
Acquired client relationships.................................. 3,482 18,192 30,663 44,917
Goodwill....................................................... 5,417 26,293 40,809 53,545
Total assets................................................... 13,808 64,699 101,335 142,400
Current liabilities............................................ 2,021 4,111 23,591 17,251
Senior debt.................................................... -- 18,400 33,400 63,300
Total liabilities.............................................. 3,925 26,620 60,856 84,800
Minority interest (3).......................................... 80 1,212 3,490 8,775
Preferred stock................................................ 10,004 40,008 42,476 53,577
Stockholders' equity........................................... 9,803 36,867 36,989 48,825
</TABLE>
- ---------------
(1) See note (4) to the Summary Historical and Pro Forma Financial Data included
elsewhere in this Prospectus.
(2) See notes (5) and (6) to the Summary Historical and Pro Forma Financial Data
included elsewhere in this Prospectus.
(3) See note (3) to the Summary Historical and Pro Forma Financial Data included
elsewhere in this Prospectus.
24
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
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
documents 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
available for payment to the managers and other key employees of such Affiliate
in the form of bonuses. 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 a further 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 retained by it to pay salaries, bonuses and other operating
expenses, as well as the portion of each Affiliate's revenues which is included
in its Owners' Allocation and distributed to 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 amounts 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.
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<PAGE> 26
The following diagram depicts the allocation of the Affiliates' revenues.
[Description of Flow Diagram:]
[Diagram demonstrating the flow of revenues from an Affiliate to the
Company, to management owners of the Affiliate, and to pay operating expenses of
the Affiliate.]
[Diagram begins on the left side of the page with a square with "Affiliate"
written inside; an arrow moves from left to right, beginning on the right side
of the square, and connects to a rectangle entitled "Revenue Sharing
Agreement".]
[Two arrows originate from the right side of the "Revenue Sharing
Agreement" rectangle; one arrow begins at the top right corner and moves
diagonally upwards to the right to an oval shape with "Operating Allocation"
written inside; the bottom arrow moves diagonally downwards to the right from
the lower right corner of the rectangle and connects to an oval shape with
"Owners' Allocation" written inside.]
[Two arrows originate from the right side of the oval titled "Operating
Allocation"; one arrow moves diagonally upwards and to the right and connects
with another oval shape entitled "Salary and Bonuses to Employees; Other
Operating Expenses"; the second arrow, with the words "Excess Operating
Allocation" written on the arrow, moves diagonally downwards and to the right to
a rectangle entitled "Affiliate Management Equity Holders".]
[The "Owners' Allocation" oval has two arrows originating on the right
side; one arrow, with the words "Owners' Allocation" written on it, moves
diagonally upwards and to the right and connects to the rectangle called
"Affiliate Management Equity Holders" described above; the second arrow, with
the words "Owners' Allocation" written on it, moves diagonally downwards and to
the right and connects to a pennant-shaped symbol with "AMG" written inside.]
The EBITDA Contribution of an Affiliate represents the Owners' Allocation
of that Affiliate allocated to AMG before interest, taxes, depreciation and
amortization of that Affiliate. EBITDA Contribution does not include 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, including Tweedy, Browne, bill advisory
fees for all or a portion of their clients based upon assets under management
valued at the beginning of a billing period ("in advance"). Other Affiliates
bill advisory fees for all or a portion of their clients based upon assets under
management valued at the end of the billing period ("in arrears"). Advisory fees
billed in advance will not reflect subsequent changes in the market value of
assets under management for that period. Conversely, advisory fees billed in
arrears will reflect changes in the market value of assets under management for
that period. In addition, several of the Affiliates charge performance-based
fees to certain of their clients; these performance-based fees result in
payments to the applicable Affiliate if specified levels of investment
performance are achieved. All references to "assets under management" include
assets directly managed as well as assets underlying overlay strategies which
employ futures, options or other derivative securities to achieve a particular
investment objective.
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
26
<PAGE> 27
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 ten
investments in Affiliates. In September and October 1997, the Company completed
investments in GeoCapital and Tweedy, Browne, respectively. The Company also
made investments during 1996 and 1997 in First Quadrant (March 1996), Burridge
(December 1996) and Gofen and Glossberg (May 1997). The Tweedy, Browne
Investment is the Company's largest to date, representing 53% of the Affiliates'
pro forma EBITDA Contribution for the nine months ended September 30, 1997.
In the Tweedy, Browne Investment, AMG paid $300 million in cash for a 71.2%
interest in Tweedy, Browne's Owners' Allocation. In August 1997, when the
Tweedy, Browne purchase agreement was executed, AMG's interest represented an
estimated $30 million of annualized EBITDA Contribution based on Tweedy,
Browne's assets under management as of such date. There can be no assurance that
the actual EBITDA Contribution of Tweedy, Browne will equal this estimate. On a
pro forma basis for the year ended December 31, 1996 and the nine months ended
September 30, 1997, Tweedy, Browne's EBITDA Contribution was approximately $21.4
million and $20.6 million, respectively.
The remaining portion of the firm's Owners' Allocation is owned by the
senior management of Tweedy, Browne, including Christopher H. Browne, William H.
Browne, and John D. Spears (collectively, the "Original Partners"). In
connection with the transaction, the Original Partners signed ten year
employment agreements with Tweedy, Browne. In addition, the Original Partners
agreed to invest $100 million of the sale proceeds in accounts under Tweedy,
Browne's management for a ten year period, bringing the total assets of the
Original Partners, former partners and employees of Tweedy, Browne and their
respective families under management by the firm to over $300 million (although
no fees are paid with respect to most of these assets under management and,
other than the $100 million described above, there is no requirement that such
funds remain under the management of the firm).
Pursuant to the Tweedy, Browne Company LLC Limited Liability Company
Agreement (the "Tweedy, Browne LLC Agreement"), the management members have
certain rights to require the Company to purchase their retained interests in
the firm (the "Tweedy, Browne Puts") and AMG has certain rights to require
management members to sell their retained interest in the firm (the "Tweedy,
Browne Calls"). For the Original Partners, the Tweedy, Browne Puts are
exercisable beginning in 2003, with the maximum aggregate percentage of the
retained interest which may be sold in any year limited to 2.5% of the firm
until 2008, when all of the Original Partners' remaining interests are eligible
to be put to AMG. The Tweedy, Browne Calls are exercisable with respect to each
management member after they reach a certain defined age, and are limited in any
one year to 20% of the maximum interests held by each person. The Tweedy, Browne
LLC Agreement provides that, except in limited circumstances (e.g., death or
disability), if an Original Partner (or other management member) terminates his
employment prior to the agreed upon retirement eligibility date, his interest
will be repurchased at a substantial discount to the Fair Value Purchase Price.
See "Business -- AMG Structure and Relationship with
Affiliates -- Capitalization of Retained Interest". In a separate provision of
the Tweedy, Browne LLC Agreement, the Original Partners agreed to provide for an
8% interest in the firm to be sold to key employees over the five years
following AMG's investment (in addition to 2% which was sold to such employees).
These employees will be granted Tweedy, Browne Puts with respect to one half of
their interest which will be exercisable beginning five years after their
issuance subject to annual limitations.
The Company's investments, including the Tweedy, Browne Investment, have
been accounted for under the purchase method of accounting under which goodwill
is recorded for the excess of the
27
<PAGE> 28
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 September 30, 1997, the Company's total assets, on a pro forma basis for the
inclusion of the Subsequent Investment, were approximately $459.4 million, of
which approximately $143.2 million consisted of "acquired client relationships"
and $254.0 million consisted of "goodwill" (acquired client relationships and
goodwill are collectively referred to as "intangible assets"). The amortization
period for intangible assets from each investment is assessed individually, with
amortization periods for the Company's investments to date, including the
Subsequent Investment occurring after September 30, 1997, 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 its carrying value or its useful life. 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. See
"Risk Factors -- Risks Related to Write-Offs of Acquired Client Relationships
and Goodwill".
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 Prospectus
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.
Because the Company has made investments in each of the periods for which
financial statements are presented, the Company believes that the 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
acquisition.
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<PAGE> 29
The Unaudited Pro Forma Consolidated Statements of Operations appearing
elsewhere in this Prospectus present the results of operations of the Company
for the year ended December 31, 1996 and the nine months ended September 30,
1997, as if the Prior Investments, the Subsequent Investment, the Recent
Financing, the Recapitalization and the sale of Common Stock offered in the
Offerings and the application of the net proceeds therefrom had occurred on
January 1, 1996 (without any cumulative effect). The Unaudited Pro Forma
Consolidated Balance Sheet reflects the Subsequent Investment and the Recent
Financing as if they had occurred on September 30, 1997. Such Pro Forma
Consolidated Financial Statements are based on the historical financial
information of the Subsequent Investment and have been adjusted to reflect the
new cost basis of net assets acquired and such other adjustments as further
described in the Notes to the Unaudited Pro Forma Consolidated Financial
Statements. The Unaudited Pro Forma Consolidated Financial Statements are not
necessarily indicative of the results that would have occurred had the
transactions occurred on the dates indicated or which may be realized in the
future.
The following table presents supplemental unaudited pro forma information
prepared on the same basis as the pro forma information appearing in the
Unaudited Pro Forma Consolidated Financial Statements described above. Such
information is provided to enhance the reader's understanding and evaluation of
the effects to the Company of the Tweedy, Browne Investment, the Company's
largest investment to date.
UNAUDITED PRO FORMA SUPPLEMENTAL INFORMATION(1)
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C>
Assets under Management -- at period end:
Tweedy, Browne.................................. $ 3,422 $ 5,113
Other Affiliates................................ 24,325 37,993
--------- ----------
Total........................................ $ 27,747 $ 43,106
========= ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, 1996 ENDED SEPTEMBER 30, 1997
----------------- ------------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Revenues:
Tweedy, Browne.................................. $ 39,905 $ 38,108
Other Affiliates................................ 81,094 65,751
--------- ----------
Total........................................ $ 120,999 $ 103,859
========= ==========
Owners' Allocation(2):
Tweedy, Browne.................................. $ 26,623 $ 25,853
Other Affiliates(3)............................. 33,078 25,144
--------- ----------
Total........................................ $ 59,701 $ 50,997
========= ==========
EBITDA Contribution(4):
Tweedy, Browne.................................. $ 21,374 $ 20,566
Other Affiliates(5)............................. 24,036 18,478
--------- ----------
Total........................................ $ 45,410 $ 39,044
========= ==========
OTHER PRO FORMA FINANCIAL DATA
Reconciliation of EBITDA Contribution to EBITDA:
Total EBITDA Contribution (as above)............ $ 45,410 $ 39,044
Less holding company expenses................... (5,602) (6,802)
--------- ----------
EBITDA.......................................... 39,808 32,242
--------- ----------
EBITDA as adjusted(6)............................. 24,002 18,099
Cash flow from operating activities............... 25,343 25,280
Cash flow used in investing activities............ (358,844) (327,702)
Cash flow from financing activities............... 350,624 327,107
</TABLE>
29
<PAGE> 30
- ---------------
(1) All amounts are pro forma for the inclusion of the Prior Investments and the
Subsequent Investment as if such transactions occurred on January 1, 1996.
See Notes to Unaudited Pro Forma Consolidated Financial Statements. In
addition, EBITDA Contribution and other pro forma financial data reflect the
issuance of shares of Common Stock to the shareholders of an Affiliate in
exchange for an additional ownership interest in that Affiliate, resulting
in a reduction of minority interest of $189,000.
(2) Owners' Allocation represents the portion of an Affiliate's revenues which
is allocated to the owners of that Affiliate, including AMG, generally in
proportion to their ownership interest, pursuant to the revenue sharing
agreement with such Affiliate. The Company believes that the Owners'
Allocation may be useful to investors as an indicator of the revenues an
Affiliate has available for distribution to the Company. Owners' Allocation,
as calculated by the Company, may not be consistent with comparable
computations of Owners' Allocation by other companies with revenue sharing
agreements.
(3) No Affiliate other than Tweedy, Browne accounted for more than 16% and 15%
of Owners' Allocation for the periods ended December 31, 1996 and September
30, 1997, respectively. No single client relationship accounted for more
than 3% of Owners' Allocation for the nine months ended September 30, 1997.
(4) 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 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.
(5) No Affiliate other than Tweedy, Browne accounted for more than 16% and 17%
of EBITDA Contribution for the periods ended December 31, 1996 and September
30, 1997, respectively. No single client relationship accounted for more
than 3% of EBITDA Contribution for the nine months ended September 30, 1997.
(6) EBITDA as adjusted represents earnings after interest expense and income
taxes but before depreciation and amortization and extraordinary items. 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 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.
On a pro forma basis for the nine months ended September 30, 1997 assets
under management increased $15.4 billion, or 55%, to $43.1 billion from $27.7
billion at December 31, 1996.
Pro forma consolidated revenues were $103.9 million for the nine months
ended September 30, 1997 while pro forma Owners' Allocation and pro forma EBITDA
Contribution were $51.0 million and $39.0 million for the same period,
respectively. Of the $39.0 million of EBITDA Contribution, $20.6 million was
related to Tweedy, Browne, while the remaining $18.4 million was related to the
other Affiliates.
Tweedy, Browne's pro forma EBITDA Contribution was based on revenues of
$38.1 million for the nine months ended September 30, 1997 which were partially
based upon advisory fees billed in advance. For the other Affiliates, the $18.4
million of EBITDA Contribution was based on revenues of $65.8 million for the
nine months ended September 30, 1997. The consolidated pro forma EBITDA
Contribution did not increase proportionately to the increase in assets under
management for the same period, in part because the fees for Tweedy, Browne and
certain other Affiliates were billed in advance rather than in arrears.
30
<PAGE> 31
HISTORICAL
NINE MONTHS ENDED SEPTEMBER 30, 1997 AS COMPARED TO SEPTEMBER 30, 1996
As a result of the factors described below, the Company had net income of
$833,000 for the nine months ended September 30, 1997 compared to a net loss of
$281,000 for the nine months ended September 30, 1996. The net loss for the nine
months ended September 30, 1996 resulted primarily from an extraordinary loss of
$580,000, net of related tax benefit, from the early extinguishment of debt.
Assets under management increased by $21.9 billion to $38.0 billion at
September 30, 1997 from $16.1 billion at September 30, 1996 in part due to the
investments made in Burridge, Gofen and Glossberg and GeoCapital which were
completed in December 1996, May 1997 and September 1997, respectively. Excluding
the initial assets under management of these Affiliates at the respective dates
of the Company's investments, assets under management increased by $14.9
billion, as a result of $4.1 billion in market appreciation and $10.8 billion
from net new sales.
Consolidated revenues increased by $21.1 million to $53.3 million for the
nine months ended September 30, 1997 from $32.2 million for the nine months
ended September 30, 1996. Since September 30, 1996 the Company invested in
Burridge in December 1996 and Gofen and Glossberg in May 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 nine months ended September 30, 1996 from its purchase date. Revenues from
these investments accounted for $21.7 million of the increase in revenues from
1996 to 1997 and were partially offset by a $2.5 million decline in revenues at
Systematic following a period during 1996 of net client asset withdrawals.
Performance-based fees, primarily earned by First Quadrant, increased by $6.0
million to $11.0 million for the nine months ended September 30, 1997 compared
to the nine months ended September 30, 1996. The Company completed its
investment in GeoCapital on September 30, 1997 and, therefore, GeoCapital's
operating results were not included in either period.
Compensation and related expenses increased by $5.5 million to $18.9
million for the nine months ended September 30, 1997 from $13.4 million for the
nine months ended September 30, 1996. The inclusion of the First Quadrant,
Burridge and Gofen and Glossberg investments accounted for $4.2 million of this
increase and the remainder was due to increased compensation and related
expenses at AMG and other Affiliates, including the costs of new hires to
support the Company's growth.
Amortization of intangible assets increased by $602,000 to $3.1 million for
the nine months ended September 30, 1997 from $2.5 million for the nine months
ended September 30, 1996 as a result of the inclusion of the First Quadrant,
Burridge and Gofen and Glossberg investments.
Selling, general and administrative expenses increased by $10.2 million to
$17.8 million for the nine months ended September 30, 1997 from $7.6 million for
the nine months ended September 30, 1996. The First Quadrant, Burridge and Gofen
and Glossberg investments accounted for $8.2 million of this increase and the
remainder was primarily due to increases in AMG and other Affiliates' selling,
general and administrative expenses.
Other operating expenses increased by approximately $1.5 million to $3.5
million for the nine months ended September 30, 1997 from $2.0 million for the
nine months ended September 30, 1996. The First Quadrant, Burridge and Gofen and
Glossberg investments accounted for most of this increase.
Minority interest increased by $2.3 million to $6.0 million for the nine
months ended September 30, 1997 from $3.7 million for the nine months ended
September 30, 1996 as a result of the addition of new Affiliates as described
above and the Owners' Allocation growth at the Company's Affiliates.
31
<PAGE> 32
EBITDA increased by $1.7 million to $7.9 million for the nine months ended
September 30, 1997 from $6.2 million for the nine months ended September 30,
1996 as a result of the inclusion of new Affiliates as described above and
revenue growth.
Interest expense increased $671,000 to $2.7 million for the nine months
ended September 30, 1997 from $2.0 million for the nine months ended September
30, 1996 as a result of the increased indebtedness incurred in connection with
the investments described above.
Income tax expense of $221,000 for the nine months ended September 30, 1997
consisted of current provisions for state and local income taxes and a deferred
provision for future tax liabilities. For the nine months ended September 30,
1997, the Company did not accrue a current provision for federal income taxes as
a result of its utilization of historical net operating loss carryforwards. As a
result of the above, the effective tax rate for the nine months ended September
30, 1997 was 21%. Income tax expense of $696,000 consisted of $596,000 of
deferred taxes for the effects of timing differences between the recognition of
deductions for book and tax purposes primarily related to accelerated
amortization of certain intangible assets and $100,000 of current state and
local taxes.
EBITDA as adjusted increased by $1.5 million to $5.0 million for the nine
months ended September 30, 1997 from $3.5 million for the nine months ended
September 30, 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 $4.2 million for the nine months ended
September 30, 1997 and $3.8 million for the nine months ended September 30,
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 a partial period in 1995
and from the inclusion of First Quadrant's results from its acquisition date in
March 1996.
Assets under management 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 new sales 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 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 to support
the Company's growth.
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<PAGE> 33
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 the
Company'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 amortization 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.
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.
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.
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.
33
<PAGE> 34
YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO DECEMBER 31, 1994
Net loss was $2.9 million for the year ended December 31, 1995 compared to
$206,000 for the year ended December 31, 1994. The change occurred as a result
of higher amortization of intangible assets and interest expense and was
partially offset by higher operating income from Affiliates.
Assets under management increased by $3.8 billion to $4.6 billion at
December 31, 1995 from $755.0 million at December 31, 1994, primarily as a
result of the investments made in Systematic, Paradigm, Skyline and Renaissance
which were completed in May 1995, May 1995, August 1995 and November 1995,
respectively. Excluding the assets under management of these Affiliates at the
dates of investment, assets under management decreased by $21.6 million as a
result of net client out flows of $320.6 million and was partially offset by
$299.0 million of market appreciation.
Consolidated revenues increased $8.8 million to $14.2 million for the year
ended December 31, 1995 from $5.4 million for the year ended December 31, 1994.
Substantially all of this increase was attributable to investments in Affiliates
after December 31, 1994. In addition, for the year ended December 31, 1995, the
results of Hartwell were included for the full year. Hartwell, the only
Affiliate included in the results of operations for the year ended December 31,
1994, was acquired in a series of transactions in 1994. Performance fees were
$1.4 million for the year ended December 31, 1995. There were no performance
fees for the year ended December 31, 1994.
Compensation and related benefits expenses increased $2.4 million to $6.0
million for the year ended December 31, 1995 from $3.6 million for the year
ended December 31, 1994 due to the inclusion of the new Affiliates. In addition,
for the year ended December 31, 1995, the results of Hartwell were included for
the full year.
The amortization of intangible assets increased by $3.4 million to $4.2
million for the year ended December 31, 1995 from $774,000 for the year ended
December 31, 1994. Of this increase, $900,000, or 26%, was attributable to the
investments in Affiliates during the year ended December 31, 1995 and $2.5
million was attributable to an accelerated write-off of intangible assets for
the Hartwell investment following a loss of client assets.
Minority interest increased $2.2 million to $2.5 million for the year ended
December 31, 1995 from $305,000 for the year ended December 31, 1994, as a
result of the addition of new Affiliates during the year and revenue growth at
the Company's Affiliates.
EBITDA increased by $1.9 million to $3.3 million for the year ended
December 31, 1995 from $1.4 million for the year ended December 31, 1994 as a
result of the inclusion of new Affiliates as described above and revenue growth.
Interest expense increased $1.0 million to $1.2 million for the year ended
December 31, 1995 from $158,000 for the year ended December 31, 1994. The
increase in interest expense was due to the incurrence of additional
indebtedness by the Company in connection with the investments consummated
during 1995.
Income tax expense was $706,000 for the year ended December 31, 1995
compared to $699,000 for the year ended December 31, 1994. The tax provision for
1994 included $335,000 of federal income taxes primarily relating to Hartwell
prior to its inclusion in the Company's consolidated federal income tax return.
The remaining $364,000 of income taxes in 1994 related to state and local taxes,
primarily relating to Hartwell. The 1995 provision for taxes included $261,000
in federal income taxes including $201,000 in federal deferred taxes relating to
timing differences in connection with the recognition of deductions for
intangible assets.
EBITDA as adjusted increased by approximately $800,000 to $1.4 million for
the year ended December 31, 1995 from $587,000 for the year ended December 31,
1994 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 $4.3 million for the year ended Decem-
34
<PAGE> 35
ber 31, 1995 and $793,000 for the year ended December 31, 1994 and from the
inclusion of Affiliates for the whole period which were acquired during the
previous year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its cash requirements primarily through cash generated
by its operating activities, bank borrowings, and the issuance by the Company of
equity and debt securities in private placement transactions. See "Certain
Transactions". 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 securities to finance future affiliate
investments. 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 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 $6.2 million, $1.3 million and
$818,000 for the years ended December 31, 1996, 1995 and 1994, respectively, and
$6.7 million and $5.1 million for the nine months ended September 30, 1997 and
1996, respectively.
Net cash flow used in investing activities was $29.2 million, $37.8 million
and $6.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Of these amounts, $25.6 million, $38.0 million and $6.5 million,
respectively, were used to make investments in Affiliates. Net cash flow used in
investing activities was $27.0 million and $28.5 million for the nine months
ended September 30, 1997 and 1996, respectively. Of these amounts, $25.6 million
and $25.2 million, respectively, were used to make investments in Affiliates.
At September 30, 1997 the Company had outstanding borrowings under its then
existing lines of credit of $63.3 million, all of which were subsequently repaid
in October 1997 with proceeds from the Credit Facility described below.
In October 1997 the Company completed its investment in Tweedy, Browne,
which required approximately $298.0 million in cash (including transaction
costs). See "Unaudited Pro Forma Consolidated Financial Statements".
The Company obtained the financing for the Subsequent Investment pursuant
to (i) borrowings under the Credit Facility (the "Senior Debt"), (ii) $60.0
million face amount of Subordinated Bridge Notes (the "Subordinated Debt") and
(iii) $30.0 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 includes $200.0
million in revolving credit with a 7-year maturity, $50.0 million of 7-year
Tranche A and $50.0 million of 8-year Tranche B term loans. Interest on the
$200.0 million revolving credit and the Tranche A term loan is based on LIBOR
plus up to 2.5% based upon the Company's ratio of Senior Debt to EBITDA
(adjusted for certain items). Interest on the Tranche B term loan is based upon
LIBOR plus a margin of 3%. The Subordinated Debt bears interest initially at
LIBOR plus 7.25% which margin increases by 1/2 of 1% every quarter to a maximum
cash paying rate of 15% and a maximum total interest rate of 17%. Interest
accruing above 15% will be added to the face amount of the Subordinated Debt.
The Tranche A and Tranche B term loans can be prepaid without penalty at
any time and the Subordinated Debt can be prepaid without penalty within six
months of its issuance out of proceeds from an initial public offering.
Principal repayments, if not otherwise retired from the proceeds of the
Offerings, are required on the term loans in aggregate semi-annual amounts of
$2.75 million during the first four years of the loans, $5.25 million during the
fifth and sixth years, $16.75 million during the seventh year and $11.75 million
during the eighth year.
35
<PAGE> 36
The Company intends to retire the Subordinated Debt, repay the $100.0
million of term loans under the Credit Facility and to repay approximately $3.1
million of the revolving credit portion of the Credit Facility with the net
proceeds of the Offerings. As a result, upon completion of the Offerings and the
application of the net proceeds therefrom and assuming the Company maintains
compliance with certain financial ratios, the Company will have approximately
$182.2 million of indebtedness outstanding under the Credit Facility, with
approximately $17.8 million available under the Credit Facility for future
investments and working capital needs. The Company plans to seek additional
borrowing capacity to fund such needs through the replacement of the existing
Credit Facility with a new credit facility. There can be no assurance, however,
that the Company will succeed in obtaining all or any portion of such
replacement financing, and the Company cannot predict at this time the terms of
such financing, if obtained.
The Company's borrowings under the 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 in excess of 97% of the Company's assets at
September 30, 1997 on a pro forma basis. The credit agreement (the "Credit
Agreement") evidencing the 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 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 after the date of the Credit Agreement (subject to
certain adjustments in the case of any net losses)); a covenant requiring that
Consolidated EBITDA (as such term is defined in the Credit Agreement) exceed
interest expense by 1.75 to 1.0 (rising to 2.25 in 1999 and 3.0 thereafter); and
a covenant requiring that senior debt not exceed Adjusted EBITDA (as such term
is defined in the Credit Agreement) during any trailing twelve-month period by
more than 6.5 to 1.0 (declining to 4.5 on October 1, 1998 and 3.5 on June 30,
1999). As of the date of this Prospectus, 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.
As part of the Recent Financing, the Company also issued to Chase Equity
Associates 5,333 shares of Series C-2 Non-Voting Convertible Preferred Stock and
warrants to purchase at nominal cost 28,000 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
shares of Class D Convertible Preferred Stock valued at $9.6 million. See
"Certain Transactions".
Net cash flow from financing activities was $15.7 million, $46.4 million,
and $9.5 million for the years ended December 31, 1996, 1995 and 1994,
respectively, and was $24.0 million and $18.4 million for the nine months ended
September 30, 1997 and 1996, respectively. The principal sources of cash from
financing activities has been from borrowings under senior credit facilities and
private placements of the Company's equity securities.
36
<PAGE> 37
The uses of cash from financing activities were for the repayment of bank
debt, repayment of notes issued as purchase price consideration and for payment
of debt issuance costs.
The Company's cash flows from equity issuances were $2.5 million, $30.0
million and $10.0 million for the years ended December 31, 1996, 1995 and 1994,
respectively, and $2.5 million for the nine months ended September 30, 1996. The
1996 cash flows from equity issuances were from the issuance and sale of 3,703
shares of Series B-1 Voting Convertible Preferred Stock in an exempt offering
under Rule 701(c) of the Securities Act of 1933, as amended (the "Securities
Act"), to officers, employees and consultants of Affiliates. The 1995 cash flows
from equity issuances were from 19,403 shares of Series B-2 Non-Voting
Convertible Preferred Stock sold to NationsBank for $13.0 million, 10,448 shares
of Series B-1 Voting Convertible Preferred Stock sold primarily to The Hartford
and TA Associates for an aggregate of $7.0 million, and 40,000 shares of Class A
Convertible Preferred Stock sold primarily to TA Associates for $10.0 million.
The 1994 cash flows from equity issuances were from 40,000 shares of Class A
Convertible Preferred Stock sold primarily to TA Associates.
In March 1996, the Company replaced its then-existing $50.0 million credit
facility with a $125.0 million credit facility (the "1996 Credit Facility"). The
1996 Credit Facility provided for borrowings to finance the Company's investment
activities and for limited amounts of working capital. The indebtedness under
the 1996 Credit Facility had a stated maturity of March 6, 2001, and accrued
interest at fluctuating rates based on the prime rate or LIBOR, plus a margin
ranging from 1.00% to 2.25% depending on the Company's Senior Debt to EBITDA
(adjusted for certain items), as selected by the Company in connection with each
borrowing under the 1996 Credit Facility. The 1996 Credit Facility was replaced
by the Credit Facility as part of the Recent Financing described above.
The Company estimates that it will have approximately $182.2 million in
outstanding indebtedness under the Credit Facility following the completion of
the Offerings and the application of the net proceeds therefrom. See
"Capitalization" and "Use of Proceeds".
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,
depending on market and other conditions. There can be no assurance that such
additional financing will be 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 values of assets managed. 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 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".
The Company's annual interest expense increases or decreases by $228,000
for each 1/8 of 1% change in interest rates assuming LIBOR is between 5% and
6.67%.
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. As of November 14, 1997, the Company is a party, with two major
commercial banks as counterparties, to $185.0 million notional
37
<PAGE> 38
amount of swap contracts which are designed to limit interest rate increases on
the Company's borrowings and are linked to the three-month LIBOR. 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 interest rate debt is swapped for fixed rate debt at
rates ranging between 6.67% and 6.78%. The Company generally borrows at LIBOR
and pays an additional interest margin as described above. 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 $185.0 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.
RECENT ACCOUNTING DEVELOPMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128, Earnings Per Share
("FAS 128"). FAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share. In June 1997, the FASB issued Statement of
Financial Standards No. 130, Reporting Comprehensive Income ("FAS 130"). FAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. FAS 128 and FAS 130 are effective for
fiscal years beginning after December 15, 1997. Early application is permitted
for FAS 130 but not for FAS 128. If comparative financial statements are
presented for earlier periods, those statements must be restated to reflect the
application of FAS 128 and FAS 130. The Company intends to comply with the
disclosure requirements of these pronouncements in 1998.
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 September 30, 1997, the S&P 500 Index
appreciated at a compound annual rate in excess of 30% 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.
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
38
<PAGE> 39
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.
39
<PAGE> 40
BUSINESS
OVERVIEW
AMG 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 Tweedy, Browne, the Company's most recent and largest investment
to date, AMG has grown since its founding in December 1993 to ten investment
management firms with over $40 billion in assets under management.
The Company was founded in December 1993 by William J. Nutt, the Company's
President, Chief Executive Officer and Chairman of the Board of Directors, and
TA Associates, a Boston-based private equity investment firm. Mr. Nutt has
extensive previous experience in the money management industry, including as
President of The Boston Company, a leading institutional asset manager,
administrator and adviser of mutual funds, and private banking institution.
AMG was established to address the succession and transition issues facing
the founders and principal owners of many mid-sized investment management firms.
Before AMG, succession planning alternatives for mid-sized firms were typically
limited to (i) internal transfers to firm employees (at prices generally below
fair market value), or (ii) the sale of 100% of the firm's equity, which often
failed to provide adequate incentives for succeeding management to grow the
firm.
AMG has developed an innovative transaction 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 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 other
acquirors 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.
40
<PAGE> 41
AMG's Affiliates have achieved substantial internal growth in assets under
management. For the nine months ended September 30, 1997, the Affiliates
increased their assets under management 55%. Tweedy, Browne, AMG's largest
Affiliate, based on EBITDA Contribution*, achieved growth of 49% in assets under
management for the same period.
The table below depicts the pro forma change in the Company's assets under
management (assuming all Affiliates were included for the entire periods
presented).
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
1996 1997
------------ -------------------
(IN MILLIONS)
<S> <C> <C>
Assets under management -- beginning....................... $ 24,549 $27,747
Net new sales.............................................. 666 10,668
Market appreciation........................................ 2,532 4,691
-------- -------
Assets under management -- ending.......................... $ 27,747 $43,106
======== =======
</TABLE>
The 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. For the nine
months ended September 30, 1997, investments in equity securities represented
84% of EBITDA Contribution, while global investments represented 37% of EBITDA
Contribution. For the same period, mutual fund assets represented 29% of EBITDA
Contribution. Other asset classes, including fixed income, represented 16% of
EBITDA Contribution; domestic investments represented 63% of EBITDA
Contribution; and institutional, high net worth and other client types
represented 71% of EBITDA Contribution for the same period. The three largest
Affiliate mutual funds, Tweedy, Browne American Value, Tweedy, Browne Global
Value and Skyline Special Equities, which represented approximately 95% of the
Company's total mutual fund assets under management at September 30, 1997, are
each rated "five stars", by Morningstar, Inc., and these funds' assets increased
122%, 60% and 111%, respectively, for the nine months ended September 30, 1997.
- ---------------
* 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.
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<PAGE> 42
The following table provides the pro forma composition of the Company's
assets under management and relative EBITDA Contribution of the Affiliates for
the nine months ended September 30, 1997.
PRO FORMA ASSETS UNDER MANAGEMENT AND EBITDA CONTRIBUTION(1)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------------------------
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
ASSETS UNDER ---------- EBITDA ----------
MANAGEMENT CONTRIBUTION
------------ --------------
(IN (IN THOUSANDS)
MILLIONS)
<S> <C> <C> <C> <C>
CLIENT TYPE:
Institutional........................ $ 34,312 80% $ 18,645 48%
Mutual fund.......................... 3,176 7 11,490 29
High net worth....................... 4,949 11 6,220 16
Other................................ 669 2 2,689 7
---------- --- ---------- ---
Total........................... $ 43,106 100% $ 39,044 100%
========== === ========== ===
ASSET CLASS:
Equity............................... $ 23,215 54% $ 32,856 84%
Fixed income......................... 2,608 6 1,586 4
Tactical asset allocation............ 17,283 40 4,602 12
---------- --- ---------- ---
Total........................... $ 43,106 100% $ 39,044 100%
========== === ========== ===
GEOGRAPHY:
Domestic investments................. $ 22,742 53% $ 24,579 63%
Global investments................... 20,364 47 14,465 37
---------- --- ---------- ---
Total........................... $ 43,106 100% $ 39,044 100%
========== === ========== ===
OTHER PRO FORMA FINANCIAL DATA:
Reconciliation of EBITDA Contribution to EBITDA:
Total EBITDA Contribution (as above)......................... $ 39,044
Less holding company expenses................................ (6,802)
----------
EBITDA....................................................... 32,242
----------
EBITDA as adjusted(2).......................................... 18,099
Cash flow from operating activities............................ 25,280
Cash flow used in investing activities......................... (327,702)
Cash flow from financing activities............................ 327,107
</TABLE>
- ---------------
(1) 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. In addition, EBITDA Contribution reflects
the issuance of shares of Common Stock to the shareholders of an Affiliate
in exchange for an additional ownership interest in that Affiliate,
resulting in a reduction in minority interest of $189,000.
(2) EBITDA as adjusted represents earnings after interest expense and income
taxes but before depreciation and amortization and extraordinary items. 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 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.
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On an historical basis, the Company had net income of $833,000 and net loss
after extraordinary item of $281,000 for the nine months ended September 30,
1997 and 1996, respectively, a net loss after extraordinary item of $2.4 million
for the year ended December 31, 1996 and a net loss of $2.9 million for the year
ended December 31, 1995.
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 1986-1996, mutual fund assets under management grew at
a compound annual growth rate of approximately 25.3%, while the aggregate assets
managed on behalf of pension funds increased at a compound annual growth rate of
approximately 11.9%. These assets, which totaled over $8.6 trillion in 1996,
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 $10.0 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 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. Of the Company's ten
Affiliates, three were represented by investment bankers while the remaining
seven were transactions initiated by AMG 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
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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.
AMG's management seeks to increase awareness of AMG's approach to investing
by sending periodic mailings to 5,000 individuals involved in the industry and
by actively participating in conferences and seminars related to succession
planning for investment management firms. Such activities lead to a substantial
number of unsolicited calls to AMG by firms which are considering succession
planning issues. In addition, AMG management maintains an active calling program
in order to develop relationships with prospective affiliates. In the past two
years, AMG management has had discussions with over 400 firms, including visits
to over 300 of these firms. 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 and, with respect to mutual fund
clients, seeks new contracts (as required by the Investment Company Act) through
a proxy process.
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, client satisfaction
surveys, and evaluation of acquisitions of other firms by Affiliates. 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, sponsored conferences,
public relations services, audit and tax services, insurance, and retirement
benefits.
Where appropriate, AMG may assist Affiliates by facilitating access to the
various resources and distribution channels of AMG's institutional investors, TA
Associates, NationsBank, The Hartford, and Chase Equity Associates. For example,
one of Skyline's mutual funds is made available through the NationsBanc
Investments, Inc. no-load mutual fund program. Similarly, The Hartford has
provided initial "seed capital" for new products at Systematic and Skyline, as
well as made certain fund products available for sale to clients of its
retirement planning programs. In addition, TA Associates, which in the past has
introduced opportunities for new affiliate investments to the Company, has also
introduced certain of the Affiliates to a number of large pension plans and
endowments which are limited partners of various private equity funds sponsored
by TA Associates.
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AMG STRUCTURE AND RELATIONSHIP WITH AFFILIATES
As part of AMG's investment structure, each of the Affiliates is (and the
Company believes that each future affiliate will be) 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.
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 instance, 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.
REVENUE SHARING ARRANGEMENTS
AMG has a revenue sharing arrangement with each Affiliate which is
contained in the organizational documents 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
percentage of revenues included in each Affiliate's Operating Allocation is
determined by the Company and the managers of the Affiliate at the time of the
Company'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. The Company 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.
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 available for payment
to the managers and other key employees of such Affiliate in the form of
bonuses. 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 a further 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. In addition, according to the
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<PAGE> 46
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 the Company 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.
The following diagram depicts the allocation of the Affiliates' revenues.
[Description of Flow Diagram:]
[Diagram demonstrating the flow of revenues from an Affiliate to the
Company, to management owners of the Affiliate, and to pay operating expenses of
the Affiliate.]
[Diagram begins on the left side of the page with a square with "Affiliate"
written inside; an arrow moves from left to right, beginning on the right side
of the square, and connects to a rectangle entitled "Revenue Sharing
Agreement".]
[Two arrows originate from the right side of the "Revenue Sharing
Agreement" rectangle; one arrow begins at the top right corner and moves
diagonally upwards to the right to an oval shape with "Operating Allocation"
written inside; the bottom arrow moves diagonally downwards to the right from
the lower right corner of the rectangle and connects to an oval shape with
"Owners' Allocation" written inside.]
[Two arrows originate from the right side of the oval titled "Operating
Allocation"; one arrow moves diagonally upwards and to the right and connects
with another oval shape entitled "Salary and Bonuses to Employees; Other
Operating Expenses"; the second arrow, with the words "Excess Operating
Allocation" written on the arrow, moves diagonally downwards and to the right to
a rectangle entitled "Affiliate Management Equity Holders".]
[The "Owners' Allocation" oval has two arrows originating on the right
side; one arrow, with the words "Owners' Allocation" written on it, moves
diagonally upwards and to the right and connects to the rectangle called
"Affiliate Management Equity Holders" described above; the second arrow, with
the words "Owners' Allocation" written on it, moves diagonally downwards and to
the right and connects to a pennant-shaped symbol with "AMG" written inside.]
When AMG makes an investment in an Affiliate, the organizational document
of the Affiliate includes provisions which divide revenues of the firm into the
Owners' Allocation and the Operating Allocation by allocating a certain
percentage to the Operating Allocation and allocating a certain percentage to
the Owners' Allocation. Before agreeing to these allocations, AMG examines the
revenue and expense base of the firm and only agrees to a 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 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 the Company and its management have significant
experience in the asset management industry, there can be no assurance that the
Company will successfully anticipate changes in the revenue and expense base of
any firm and, therefore, 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.
CAPITALIZATION OF RETAINED INTEREST
The incentive effect of retained equity is an integral part of the AMG
Structure. In order to maximize this incentive effect, the organizational
documents of each Affiliate (other than Paradigm) 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
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<PAGE> 47
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 management owner
to sell his or her remaining interests after the termination of his or her
employment with the Affiliate. Underlying all of these provisions is AMG's basic
philosophy that the Company should maintain an ownership level in each Affiliate
(and, conversely, the ownership level of management of that Affiliate) within a
range that the Company believes offers the management of that Affiliate
sufficient incentives to grow and improve their business to create equity value
for themselves.
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
holds 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 most Affiliates contain a limitation
on the maximum aggregate amount that management of any Affiliate may require AMG
to purchase pursuant to their Puts in any given twelve-month period. The
purchase price for Puts is based on a multiple of the Owners' Allocation of the
Affiliate at the time the Put is exercised, with the multiple having been
determined at the time AMG made its initial investment (the "Fair Value Purchase
Price").
The Calls are designed to provide the Company and management members of the
Affiliates with the assurance that a mechanism exists for AMG to facilitate a
certain 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 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 upon the
termination of their employment with the Affiliate. In general, upon a
management owner's retirement after an agreed-upon number of years, or upon his
or her earlier death, permanent incapacity or termination without cause (but
with AMG's consent), that management owner is required to sell to AMG (and AMG
is required to purchase from the management owner) his or her remaining
interests for the Fair Value Purchase Price. 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 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.
To the extent of the proceeds of any key-man life insurance or lump-sum
disability insurance which are collected by an Affiliate upon the death or
permanent incapacity of a management owner, the Affiliate, rather than AMG,
would purchase that management owner's interests. A purchase by an Affiliate
would have the effect of ratably increasing the ownership percentage of AMG and
each of the remaining management owners, whereas the purchase by AMG only
increases AMG's ownership percentage. The organizational documents of most of
the Affiliates provide for the
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purchase of such insurance, to the extent requested by AMG, with the premiums to
be paid by all owners (including AMG and management) as a deduction to the
Owners' Allocation of the Affiliate.
In general, the organizational documents of each Affiliate provide the
management owners with the opportunity to receive the purchase price for Puts,
or sales upon termination of employment, in cash or in shares of Common Stock of
AMG. The most common formulation of the right to receive the purchase price in
shares of Common Stock of AMG is as follows: AMG will exchange a number of
shares of Common Stock as is equal in value to seventy-five percent of the
Owners' Allocation purchased in the transaction, multiplied by the multiple of
EBITDA at which AMG Common Stock is then trading in the public market.
The Company believes that its investment structure, which permits
management of each Affiliate to receive ownership interests in the Affiliate and
to have AMG purchase such interests in accordance with a predetermined pricing
formula, provides each Affiliate with an important incentive and recruiting
tool. The Company also believes that the AMG Structure, which allows individuals
to determine, within agreed upon limits, when to sell their interests and which
permits additional issuances to future generations of management of each
Affiliate, will enable the Affiliates to continue to grow as successive
generations of management assume control of their firm.
THE AFFILIATES
In general, the Affiliates derive revenues by charging fees to their
clients which 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. Unless otherwise
indicated, AMG holds a majority ownership interest in each such Affiliate.
<TABLE>
<CAPTION>
AMG'S
EQUITY OWNERSHIP ASSETS UNDER
PRINCIPAL DATE OF PERCENTAGE AS OF MANAGEMENT AS OF
AFFILIATE LOCATION(S) INVESTMENT SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
- ------------------ -------------- --------------- --------------------- ---------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Burridge.......... Chicago December 1996 55.0% $ 1,514
First Quadrant.... Pasadena, CA; March 1996 66.2 24,559(1)
London
GeoCapital........ New York September 1997 60.0 2,375
Gofen and
Glossberg....... Chicago May 1997 55.0 3,626
Hartwell.......... New York May 1994 75.8 344
Paradigm.......... New York May 1995 30.0 1,871
Renaissance....... Cincinnati November 1995 66.7 1,463
Skyline........... Chicago August 1995 64.0 1,238
Systematic........ Fort Lee, NJ May 1995 90.7 1,003
Tweedy, Browne.... New York; October 1997 71.2 5,113
London
-------
Total........ $43,106
=======
</TABLE>
- ---------------
(1) Includes directly managed assets of $8.0 billion and $16.6 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.
BURRIDGE
Burridge, founded in 1986, is a Chicago-based firm which specializes in the
management of mid-capitalization growth equity portfolios. Burridge's clients
include corporate, Taft-Hartley, and public pension plans, as well as
foundations, endowments and individuals. The firm applies its investment
strategy through a combination of separate accounts, regional and national
wrap-fee
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programs, and a recently introduced mutual fund. Burridge's management team is
led by Chairman, Richard M. Burridge, President and Chief Executive Officer,
John H. Streur, Jr., and Vice-Chairman, Kenneth M. Arenberg.
Burridge utilizes proven valuation disciplines to invest in
mid-capitalization stocks with superior projected earnings growth based upon
fundamental company analysis. Burridge concentrates its analysis on companies
which fit the following criteria: (i) a focus on one business line; (ii) an
increasing market share; (iii) a strong balance sheet; (iv) superior projected
earnings growth; and (v) a proven, shareholder-oriented management team.
Burridge constructs a fully invested portfolio of the 35 most attractive of such
companies prioritized on anticipated earnings growth relative to their
price/earnings ratios. On average, these securities are held for approximately
three years, resulting in a low turnover ratio.
FIRST QUADRANT
First Quadrant, one of the largest quantitative investment managers in the
world, specializes in asset allocation and style management on a global basis.
First Quadrant, L.P. is headed by Robert D. Arnott, its Chief Executive Officer,
a recognized leader in the field of quantitative investing, and its sister
company, First Quadrant Limited, is led by William A. R. Goodsall. First
Quadrant employs a highly disciplined quantitative methodology to guide its
investment strategy. First Quadrant seeks to add value by assessing relative
valuations across major segments of the portfolio: among asset classes, across
global markets, between equity styles, and in currency allocation.
First Quadrant's management pioneered the application of style management
strategies to the U.S. and major international equity markets. The firm has also
pioneered a global approach to tactical asset allocation, and the Company
believes it maintains a leading market share in these two products. First
Quadrant offers various tailored approaches in each of the following product
areas: U.S. tactical asset allocation; global tactical asset allocation
(developed and/or emerging markets); U.S. equity style management; global equity
style management (multi- or specific country strategies); currency management
strategies; and policy allocation control strategies.
With an emphasis on research and publishing, the firm applies advanced
information technology and artificial intelligence techniques to leverage
traditional econometric methods in building quantitative investment systems.
First Quadrant is also committed to continued innovation and product development
in applying these techniques to new markets and products. Coupled with First
Quadrant's management's focus on providing superior service to their large
institutional clients, this innovation and performance has led to significant
growth in First Quadrant's business. First Quadrant provides its services to
large domestic and international corporate and public entities and pension
plans. First Quadrant, L.P. has offices in Pasadena and Boston, while First
Quadrant Limited is based in London. First Quadrant also maintains joint
ventures with firms in Toronto, Tokyo and Paris.
GEOCAPITAL
Founded in 1979, GeoCapital invests in domestic small-capitalization
equities on behalf of corporations, retirement programs, foundations, high net
worth individuals and private partnerships. 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.
GeoCapital's investment approach is to manage fully invested portfolios
which blend two kinds of stocks: "growth companies" that create, commercialize,
and market new technologies and services, and "special situation" companies with
undervalued or unrecognized assets or earnings. GeoCapital believes that the
combination of these two types of investments in a single portfolio can lessen
the market risks, while providing the superior returns of investing in small
companies. Utilizing their own independent fundamental analysis, GeoCapital's
management studies a company from the bottom up beginning with its strategic,
financial, and management strengths. Above all,
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GeoCapital evaluates and monitors a company's management, both before and after
an investment is made. A typical investment is held for three to five years, to
give either the growth or special situation stock time to realize its inherent
value.
GOFEN AND GLOSSBERG
Gofen and Glossberg is one of the oldest and most respected investment
counseling firms in the United States. 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.
Gofen and Glossberg custom tailors portfolios to meet the specific
financial goals of each client. With the perspective that comes from managing
client portfolios through numerous market cycles, Gofen and Glossberg takes a
longer term approach to portfolio management (typically three to five year
growth targets) in order to preserve capital while encouraging growth. Portfolio
managers at Gofen and Glossberg build investment portfolios around a solid
nucleus of common stocks and/or fixed income securities. The firm invests in
quality companies that have strong management, a dominant market share or
proprietary products and services, and growing income or cash flow.
HARTWELL
Founded in 1961, Hartwell is a New York-based growth stock manager, whose
clients include high net worth individuals, an offshore hedge fund and several
large private foundations. The management team is led by William C. Miller, IV.
Hartwell applies a fundamental, bottom-up approach to investing in stocks
of growth companies. The firm uses a disciplined stock selection process to
identify stocks of companies with strong fundamental characteristics and
exposure to longer term secular trends, which the portfolio managers believe can
lead to sales and earnings growth in excess of 20% per year.
Hartwell's investment professionals tailor portfolio construction to meet
specific client needs. On a standardized basis, Hartwell offers three products:
small-capitalization growth, medium-to large-capitalization growth and balanced
accounts.
PARADIGM
Paradigm is a leader in equity style management, with an investment
approach that combines passive management technology with active management
insights. Paradigm's sophisticated investment process typically begins by
identifying several portfolio management styles from a prototypical set of
active managers who exemplify certain risk and return characteristics of the
chosen styles. The process then takes the aggregate portfolios and, using a
sophisticated optimization model, arrives at a smaller portfolio of stocks with
risk and return characteristics that match the larger group. Paradigm offers six
styles which employ this investment process: large-capitalization growth;
large-capitalization value; mid-capitalization growth; mid-capitalization value;
small-capitalization growth; and small-capitalization value.
Based in New York, Paradigm is led by James E. Francis, President and Chief
Executive Officer. Paradigm has a diversified client list of public and private
endowments and Taft-Hartley plans. AMG holds less than a 50% ownership interest
in Paradigm, which is a minority-owned business.
RENAISSANCE
Based in Cincinnati, Ohio, Renaissance provides quantitatively-based
investment management strategies to a variety of institutional and individual
clients. The firm is led by managing directors Michael A. Schroer, Donald W.
Kennedy and Paul A. Radomski.
Renaissance employs a quantitative approach to its equity, fixed income,
and tactical allocation decisions. The stock selection decision is characterized
by companies that have a demonstrated ability in sustaining above-average levels
of profitability and below-average levels of debt. Valuation
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standards are further applied to determine stock-price momentum and trends in a
company's earnings. Balanced and tactical asset allocation begins with a series
of asset allocation models which measure and consistently monitor the relative
attractiveness of cash, bonds, and equities. The models then assign an expected
capital return period for each asset class which is the final measure of
investment value.
Renaissance offers large-capitalization and small-capitalization growth and
American depositary receipt equity products in addition to balanced, tactical
asset allocation and fixed income strategies. The firm's dynamic and flexible
process allows the investment manager to customize portfolios to include
client-specific needs.
SKYLINE
Skyline is a Chicago-based firm which specializes in small-capitalization
and mid-capitalization value equities. Skyline manages assets for institutional
clients, as well as two no-load mutual funds, Skyline Special Equities and
Skyline Special Equities II. The firm is led by its President, William Dutton,
who was named Morningstar Portfolio Manager of the Year in 1992.
Skyline manages equities in three value-driven portfolio styles: Small Cap
Value, Small Cap Value II, and Skyline Select. The Small Cap Value approach
holds stocks of small-capitalization companies ($100 million to $700 million in
market capitalization). The Small Cap Value II approach holds stocks of
small-capitalization to mid-capitalization companies ($400 million to $2 billion
in market capitalization). The Skyline Select portfolios combines select
holdings of both the Small Cap Value and Small Cap Value II series ($100 million
to $2 billion in market capitalization). Each of these three strategies leads to
selections of stocks which have a low price to trailing earnings multiple
relative to the market, attractive earnings prospects (typically in the 10% to
20% per year range) as estimated by fundamental, in-house research, and are
under-followed by the broader marketplace.
SYSTEMATIC
Located in Fort Lee, New Jersey, Systematic manages assets on behalf of a
variety of corporations, jointly-trusteed and public pension funds as well as
for high net worth individuals, principally through wrap programs. Systematic is
led by its President, Charles J. Mohr, and its Chief Investment Officer
Gyanendra (Joe) Joshi. Systematic offers three products: core value equity,
small-capitalization value equity, and free cash flow value equity.
Systematic's core value equity investment approach begins with a
disciplined strategy of selecting large-capitalization, low price/earnings
stocks that have reported earnings in excess of consensus expectations. A
quantitative screen is applied and overlayed with intensive fundamental analysis
to create an equally weighted portfolio of approximately 50 to 60 stocks.
Systematic's small-capitalization value and free cash flow value equity
products quantify a firm's true free cash flow and then identify stocks that are
trading at a discount to the median market multiple of free cash flow.
Fundamental analysis is applied to a focused list of approximately 125 stocks
for the free cash flow product and 100 stocks for the small-capitalization value
product from which the portfolio managers select a portfolio of approximately 40
to 50 stocks.
TWEEDY, BROWNE
Tweedy, Browne is recognized as a leading practitioner of the
value-oriented investment approach first advocated by Benjamin Graham. Tweedy,
Browne manages domestic, international and global equity portfolios for
institutions, individuals, partnerships, and mutual funds. 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.
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Tweedy, Browne's investment philosophy is to invest in companies at a
substantial discount to their true business value. The firm does not attempt to
time markets or focus on particular market sectors, but rather emphasizes a
long-term, low turnover strategy grounded in individual stock selection.
Tweedy, Browne applies its value-oriented investment strategy to
international, as well as domestic equities, with global assets representing
approximately 43% of total assets under management at September 30, 1997. The
firm established its two no-load mutual funds, Tweedy, Browne American Value,
and Tweedy, Browne Global Value, in 1993. The funds, which are each rated "five
stars" by Morningstar, Inc., represent approximately 50% of Tweedy, Browne's
total assets under management at September 30, 1997.
COMPETITION
The Company operates as an asset management holding company organized to
invest in mid-sized investment management firms. The Company is aware of several
other holding companies which have been organized to invest in or acquire
investment management firms, and the Company views these firms as among its
competitors. 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. 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 market
value of AMG's Common Stock, which may be 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 the 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 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.
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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 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, Skyline, and Burridge are advisors, and
Renaissance and Systematic are subadvisors, is registered with the Commission
under the Investment Company Act, shares of each such fund are registered with
the Commission under the Securities Act, and the shares of each such fund are
qualified for sale (or exempt from such qualification) under the laws of each
state and the District of Columbia to the extent such shares are sold in any of
such jurisdictions. 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. Each Affiliate is also
subject to 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 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 are 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 Exchange Act 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 Investment Company Act, each contract with a registered
investment company must provide that it terminates upon its assignment. Under
both the Investment Advisers Act and the Investment Company 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. The
change of control provisions may limit the ability of AMG to issue Common Stock
or to be acquired by a third party.
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
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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 which are also owned by one or more of
the Affiliates' clients. Each Affiliate and AMG has 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 September 30, 1997, the Company and its Affiliates employed
approximately 310 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.
PROPERTIES
AMG's executive offices are located at Two International Place, 23rd Floor,
Boston, Massachusetts 02110. In Boston, AMG occupies 4,413 square feet under a
lease which expires in July 2000. Each of the Affiliates also leases office
space in the cities in which they conduct business.
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 which, in the opinion of management, would have a material adverse
effect on the Company's financial position, liquidity or results of operations.
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, other than Hartwell, 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. See "Risk Factors -- Exposure to Liability".
TRADEMARKS
"Affiliated Managers Group" is a registered trademark of the Company, with
registration expiring October 2007. "Skyline Fund", the Skyline logo, Skyline
Special Equities Portfolio and Skyline Special Equities II are all registered
marks of the Company, with registrations expiring between November 2002 and
April 2009.
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MANAGEMENT
EXECUTIVE OFFICERS
The names, ages and positions of each of the executive officers of the
Company, as well as a description of their business experience and past
employment are as set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- -----------------------------------------------
<S> <C> <C>
William J. Nutt............... 52 President, Chief Executive Officer and Chairman
of the Board of Directors
Sean M. Healey................ 36 Executive Vice President
Levon Chertavian, Jr. ........ 38 Senior Vice President, Affiliate Support
Nathaniel Dalton.............. 31 Senior Vice President, General Counsel and
Secretary
Brian J. Girvan............... 42 Senior Vice President, Chief Financial Officer
and Treasurer
Seth W. Brennan............... 27 Vice President
Jeffrey S. Murphy............. 31 Vice President
</TABLE>
William J. Nutt founded the Company in December 1993 and has served as its
Chairman, President and Chief Executive Officer since that time. Mr. Nutt began
his career at the law firm of Ballard, Spahr, Andrews & Ingersoll in
Philadelphia, where he was a Partner until he joined The Boston Company in 1982.
As Senior Executive Vice President of that firm, Mr. Nutt built The Boston
Company's mutual fund administration, distribution and custody business serving
over 45 fund sponsors with assets of $119.0 billion. In 1989, he became
President, assuming overall responsibility for The Boston Company's $36.0
billion institutional money management business, its $190.0 billion master
trustee and custodian business, and the personal banking and trust business of
the Boston Safe Deposit and Trust Company. Mr. Nutt received a J.D. from the
University of Pennsylvania and a B.A. from Grove City College. From 1991 to
1994, Mr. Nutt served on the Executive Committee of the Board of Governors of
the Investment Company Institute.
Sean M. Healey joined the Company as its Executive Vice President in 1995.
Prior to joining AMG, Mr. Healey was a Vice President in the Mergers and
Acquisitions Department at Goldman, Sachs & Co. focusing on financial
institutions. In eight years at Goldman Sachs, Mr. Healey had substantial
experience advising clients and executing transactions in the investment
management and related industries. Mr. Healey received a J.D. from Harvard Law
School, an M.A. from University College, Dublin and an A.B. from Harvard
College.
Levon Chertavian, Jr. joined the Company as a Senior Vice President of
Affiliate Support in 1995. Mr. Chertavian was formerly President of USAffinity
Advisers, the mutual fund operation of TransNational Group. Prior to Trans
National Group, Mr. Chertavian held positions with Bain & Company, Fidelity
Investments, Bankers Trust Company and Equitable Life. Mr. Chertavian received
an M.B.A. from the Harvard Business School and a B.A. from Bowdoin College.
Nathaniel Dalton joined the Company as a Senior Vice President and General
Counsel in 1996. Prior to joining AMG, Mr. Dalton was an attorney at Goodwin,
Procter & Hoar LLP, focusing on mergers and acquisitions, including those in the
asset management industry. Mr. Dalton received a J.D. from Boston University
School of Law and a B.A. from the University of Pennsylvania.
Brian J. Girvan joined the Company as a Senior Vice President and Chief
Financial Officer in 1997. Mr. Girvan possesses twenty years of experience in
senior roles primarily within leading asset management firms. Most recently he
was Chief Financial Officer of Fidelity Investments Institutional Services.
Prior to that, Mr. Girvan served in various roles including Chief Financial
Officer at PIMCO Advisors L.P. and Thomson Advisory Group L.P. Before joining
Thomson Advisory Group, Mr. Girvan was a Vice President at Thomson McKinnon
Securities and was an auditor with Coopers
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& Lybrand. Mr. Girvan received a B.S. (B.B.A.) from Manhattan College and is a
member of the American Institute of Certified Public Accountants.
Seth W. Brennan joined the Company as an Assistant Vice President in 1995,
and became a Vice President in 1996. Prior to joining AMG, Mr. Brennan was a
Financial Analyst in the Global Insurance Investment Banking Group at Morgan
Stanley & Co. Incorporated. Before joining Morgan Stanley, Mr. Brennan was a
Financial Analyst in the Financial Institutions Group at Wasserstein, Perella &
Co. Mr. Brennan received a B.A. from Hamilton College.
Jeffrey S. Murphy joined the Company as an Assistant Vice President in
1995, and became a Vice President in 1996. Prior to joining AMG, Mr. Murphy was
a Financial Analyst at United Asset Management Corporation, and prior to that,
Mr. Murphy was the Assistant Controller of TA Associates, Inc. Mr. Murphy
received a B.S. in Business Administration from Northeastern University.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the cash compensation
awarded to the Company's Chief Executive Officer and the Company's four (4)
other most highly compensated executive officers whose total salary and bonus
exceeded $100,000 during the fiscal year ended December 31, 1996 (collectively,
the "Named Executive Officers").
1996 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1996 ANNUAL
COMPENSATION
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
- ------------------------------------------------------ -------- -------- ----------------
<S> <C> <C> <C>
William J. Nutt, Chairman, President and Chief
Executive Officer................................... $354,350 $315,000 $ 26,750
Sean M. Healey, Executive Vice President.............. 270,460 277,500 26,750
Levon Chertavian, Jr., Senior Vice President.......... 159,227 116,667 24,813
Nathaniel Dalton, Senior Vice President (2)........... 98,498 100,000 17,068
Seth W. Brennan, Vice President....................... 56,277 55,000 15,806
</TABLE>
- ---------------
(1) Includes (i) contributions by the Company under its 401(k) Profit Sharing
Plan in the amount of $22,500 on behalf of each of Messrs. Nutt, Healey and
Chertavian, $14,755 on behalf of Mr. Dalton and $14,375 on behalf of Mr.
Brennan; and (ii) the dollar value of insurance premiums paid by the Company
with respect to term life and long term disability insurance policies for
the benefit of the Named Executive Officers in the amount of $4,250 on
behalf of Messrs. Nutt and Healey, $2,313 on behalf of Messrs. Chertavian
and Dalton and $1,431 on behalf of Mr. Brennan.
(2) Mr. Dalton's employment with the Company commenced in May 1996.
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<PAGE> 57
DIRECTORS
The names, ages and a description of the business experience, principal
occupation and past employment during at least the last five years of each of
the directors of the Company are set forth below.
<TABLE>
<CAPTION>
NAME AGE
---------------------------------------------------------------------- ---
<S> <C>
William J. Nutt(1).................................................... 52
Richard E. Floor(2)................................................... 57
Roger B. Kafker(2)(3)................................................. 35
P. Andrews McLane(1)(3)............................................... 50
John M. B. O'Connor(1)(3)............................................. 43
W. W. Walker, Jr.(2)(3)............................................... 50
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Messrs. McLane, Kafker, Walker and O'Connor were elected as directors in
accordance with the terms of a certain Amended and Restated Stockholders'
Agreement dated as of October 9, 1997 (the "Stockholders' Agreement") among
the Company and certain of the Company's stockholders, including TA
Associates, NationsBank, The Hartford and Chase Equity Associates, which was
entered into in connection with the recent equity investment by Chase Equity
Associates in the Company. These provisions of the Stockholders' Agreement
will be terminated upon consummation of the Offerings.
For Mr. Nutt's biographical information, see information under "--Executive
Officers".
Richard E. Floor has been a director of the Company since its formation. A
professional corporation of which Mr. Floor is the sole stockholder is and has
been a partner at the law firm of Goodwin, Procter & Hoar LLP or its predecessor
since 1975. Mr. Floor is also a director of Town & Country Corporation, a
jewelry manufacturer, and New America High Income Fund, a closed-end investment
company.
Roger B. Kafker has been a director of the Company since its formation. Mr.
Kafker has been associated with TA Associates, Inc. or its predecessor since
1989 and became a Principal of that firm in 1994 and a Managing Director in
1995. Mr. Kafker is also a director of ANSYS Inc., a software company, Boron,
LePore & Associates, Inc., a service provider to the pharmaceutical industry,
and Monarch Dental Corporation, a dental practice management company.
P. Andrews McLane has been a director of the Company since its formation.
He has been at TA Associates, Inc. or its predecessors since 1979, where he is a
Managing Director and a member of the firm's Executive Committee. Mr. McLane
leads TA Associates' investment activities in the asset management industry. Mr.
McLane is also a director of Altamira Management Ltd, an investment management
firm based in Toronto, Canada, and Allegis Realty Investors, LLC, a real estate
investment management firm.
John M. B. O'Connor has been a director of the Company since October 9,
1997. Mr. O'Connor is a General Partner of Chase Capital Partners which he
joined in May 1995. Mr. O'Connor has been employed by Chase Manhattan
Corporation or its predecessors since 1987 in a variety of senior investment
banking positions including management of Corporate Securities Sales, Trading
and Research. Mr. O'Connor is also a director of United States Corrections
Corporation, a correctional services company, and Hamilton Services Limited, a
technology and insurance services provider to insurance and reinsurance
companies.
W. W. Walker, Jr. has been a director of the Company since April 1997.
Since 1972, Mr. Walker has been employed by NationsBank, N.A. or its
predecessor, where he has held positions in various departments including
corporate banking, private placements, syndications and project finance.
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Mr. Walker founded NationsBank Capital Investors in 1993 and is presently a
Managing Director of that group.
The number of members of the Board of Directors of the Company is currently
fixed at six. Within 90 days after the completion of the Offerings, the Company
intends to expand the Board of Directors and elect at least two additional
Directors who will not be officers or employees of the Company.
The Company's Board of Directors has established an Audit Committee (the
"Audit Committee") and a Compensation Committee (the "Compensation Committee").
The Audit Committee recommends the firm to be appointed as independent
accountants to audit financial statements and to perform services related to the
audit, reviews the scope and results of the audit with the independent
accountants, reviews with management and the independent accountants the
Company's year-end operating results, considers the adequacy of internal
accounting procedures and considers the effect of such procedures on the
accountants' independence. The Audit Committee will consist, upon consummation
of the Offerings, of Messrs. Floor, Kafker and Walker. The Compensation
Committee, which will consist, upon consummation of the Offerings, of Messrs.
Nutt, McLane and O'Connor, reviews and recommends the compensation arrangements
for all directors and officers, except that Mr. Nutt does not participate in the
recommendation of his compensation arrangements.
COMPENSATION OF DIRECTORS
Directors of the Company who are also employees receive no additional
compensation for their services as a director. Non-employee directors
("Independent Directors") do not currently receive a fee for their service as
directors, although the Board of Directors may determine to pay such a fee in
the future. Also, Independent Directors may be entitled to receive options to
purchase shares of Common Stock. See "-- The 1997 Stock Plan".
All directors of the Company are reimbursed for travel expenses incurred in
attending meetings of the Board of Directors and its committees.
COMPENSATION, BENEFIT AND RETIREMENT PLANS
The Company currently has in place the following stock plans: The
Affiliated Managers Group, Inc. 1994 Incentive Stock Plan, The Affiliated
Managers Group, Inc. 1995 Incentive Stock Plan, The Affiliated Managers Group,
Inc. 1995 Stock Purchase Plan, and The Affiliated Managers Group, Inc. 1997
Stock Option and Incentive Plan (collectively, the "Plans"). Upon consummation
of the Offerings and after giving effect to the grants made in connection with
the Offerings, under the Plans, the Company will have (i) awarded options to
purchase up to 672,500 shares of Common Stock, or approximately 4.1% of the
outstanding Common Stock of the Company, to members of senior management, (ii)
issued 337,500 shares of restricted Common Stock, or approximately 2.0% of the
outstanding Common Stock of the Company, to members of senior management, (iii)
issued for sale 184,150 shares of Common Stock, or approximately 1.1% of the
outstanding Common Stock of the Company, to certain officers, managers of
Affiliates and consultants and advisors of the Company, and (iv) reserved
2,523,850 shares, or approximately 13.2% of the outstanding Common Stock of the
Company (including shares reserved under the Plans), for issuance under the
Plans. Overall, members of the Company's senior management own an aggregate
1,657,046 shares of Common Stock (on a fully diluted basis and giving effect to
the Recapitalization and including shares of stock purchased outside of the
Plans), or approximately 9.6% of the outstanding Common Stock of the Company.
The following is a brief summary of each of the Plans.
THE 1994 PLAN
On March 31, 1994, the Board of Directors adopted, and the stockholders of
the Company subsequently approved, the Affiliated Managers Group, Inc. 1994
Incentive Stock Plan. On November 7, 1995, the Board of Directors adopted, and
the stockholders of the Company approved, an
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<PAGE> 59
amendment and restatement of the 1994 Incentive Stock Plan (as so amended and
restated, the "1994 Plan") pursuant to which the number of shares of Common
Stock reserved under the 1994 Plan was reduced to 125,000.
The 1994 Plan permits (i) the grant of options to purchase shares of Common
Stock intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended, (the "Code") ("Incentive Options"),
(ii) the grant of options that do not so qualify ("Non-Qualified Options"), and
(iii) the issuance of stock which may be subject to certain restrictions
("Restricted Stock"). The 1994 Plan was designed and intended as a performance
incentive for officers, employees, consultants and other key persons performing
services for the Company to encourage such persons to acquire or increase a
proprietary interest in the success and progress of the Company. As of September
30, 1997, no options had been awarded under the 1994 Plan, and the Company had
issued an aggregate of 125,000 shares of Restricted Stock under the 1994 Plan.
The Company does not intend to make any grants under the 1994 Plan after the
consummation of the Offerings.
THE 1995 PLAN
On November 7, 1995, the Board of Directors adopted, and the stockholders
of the Company subsequently approved, the Affiliated Managers Group, Inc. 1995
Incentive Stock Plan, under which 425,000 shares of Common Stock were authorized
and reserved for issuance. In May 1997, the Board of Directors voted to amend
and restate, and the stockholders of the Company subsequently approved the
amendment and restatement of, the 1995 Incentive Stock Plan (as so amended and
restated, the "1995 Plan"). Under the 1995 Plan, a total of 425,000 shares of
Common Stock are authorized and reserved for issuance.
The 1995 Plan permits (i) the grant of Incentive Options, (ii) the grant of
Non-Qualified Options, and (iii) the issuance of Restricted Stock. Like the 1994
Plan, the 1995 Plan was designed and intended as a performance incentive for
officers, employees, consultants and other key persons performing services for
the Company to encourage such persons to acquire or increase a proprietary
interest in the success and progress of the Company. In May 1997, the Company
granted options to purchase an aggregate of 1,850 shares of Class A Convertible
Preferred Stock (carrying a $250 per share liquidation preference and
convertible into an aggregate of 92,500 shares of Common Stock) at an exercise
price of $455 per share (or $9.10 per underlying share of Common Stock),
consisting of options to purchase 500, 500, 200, 300, 250 and 100 shares of
Class A Convertible Preferred Stock granted to Messrs. Nutt, Healey, Chertavian,
Dalton, Brennan and Murphy, respectively. As of September 30, 1997, the Company
had issued an aggregate 212,500 shares of Restricted Stock under the 1995 Plan.
The Company does not intend to make any grants under the 1995 Plan after the
consummation of the Offerings.
THE 1997 STOCK PLAN
The 1997 Stock Option and Incentive Plan (the "1997 Stock Plan") was
adopted by the Board of Directors in October 1997 and was subsequently approved
by the Company's stockholders. The 1997 Stock Plan permits (i) the grant of
Incentive Options, (ii) the grant of Non-Qualified Options, (iii) the grant of
stock appreciation rights, (iv) the issuance or sale of Common Stock with
vesting or other restrictions, (v) the issuance or sale of Common Stock without
restrictions ("Unrestricted Stock"), (vi) the grant of the right to receive
Common Stock in the future with or without vesting or other restrictions
("Deferred Stock Awards"), (vii) the grant of Common Stock upon the attainment
of specified performance goals ("Performance Share Awards"), and (viii) the
grant of the right to receive cash dividends with the holders of the Common
Stock as if the recipient held a specified number of shares of the Common Stock
("Dividend Equivalent Rights"). These grants may be made to officers and other
employees, directors, advisors, consultants and other key persons of the Company
and its subsidiaries. The 1997 Stock Plan provides for the issuance of 1,750,000
shares of Common Stock. Certain Incentive Options and Non-Qualified Options will
be granted to employees in connection with the Offerings. See "-- New Plan
Benefits". On and after
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the date the 1997 Stock Plan becomes subject to Section 162(m) of the Code,
options or stock appreciation rights with respect to no more than 700,000 shares
of Common Stock may be granted to any one individual in any calendar year.
The following summary description is qualified in its entirety by the 1997
Stock Plan, a copy of which is filed as an exhibit to the Registration Statement
of which this Prospectus is a part.
PLAN ADMINISTRATION; ELIGIBILITY. The 1997 Stock Plan is administered by
the Board of Directors or the Compensation Committee (the "Administrator"). If
the 1997 Stock Plan is administered by the Compensation Committee, then all
members of the Compensation Committee must be "non-employee directors" as that
term is defined under the rules promulgated by the Commission. On and after the
date the 1997 Stock Plan becomes subject to Section 162(m) of the Code, all
members of the Compensation Committee must be "outside directors" as defined in
Section 162(m) of the Code and the regulations promulgated thereunder.
The Administrator has full power to select, from among the employees and
other persons eligible for awards, the individuals to whom awards will be
granted, to make any combination of awards to participants, and to determine the
specific terms and conditions of each award, subject to the provisions of the
1997 Stock Plan.
Persons eligible to participate in the 1997 Stock Plan will be those
officers, employees and other key persons, such as consultants, of the Company
and its subsidiaries who are responsible for or contribute to the management,
growth or profitability of the Company and its subsidiaries, as selected from
time to time by the Administrator. Independent Directors will also be eligible
for certain awards under the 1997 Stock Plan.
STOCK OPTIONS. The 1997 Stock Plan permits the granting of (i) Incentive
Options and (ii) Non-Qualified Options. Only employees of the Company and its
subsidiaries may be granted Incentive Options. The option exercise price of each
option will be determined by the Administrator but may not be less than 100% of
the fair market value of the Common Stock on the date of grant in the case of
Incentive Options, and may not be less than 85% of the fair market value of the
Common Stock on the date of grant in the case of Non-Qualified Options.
Employees participating in the 1997 Stock Plan may, however, elect, with the
consent of the Administrator, to receive discounted Non-Qualified Options in
lieu of cash bonuses. In the case of such grants, the option exercise price may
be less than 85% of the fair market value of the Common Stock on the date of
grant.
STOCK OPTIONS GRANTED TO INDEPENDENT DIRECTORS. The 1997 Stock Plan
contemplates the grant to each additional Independent Director of a
Non-Qualified Option upon his or her initial election to the Board of Directors.
The exercise price of each such Non-Qualified Option would be the fair market
value of the Common Stock on the date of grant, and each such grant would be
subject to vesting requirements as determined by the Administrator. The
Administrator may also grant additional Non-Qualified Options to Independent
Directors.
STOCK APPRECIATION RIGHTS. The Administrator may award a stock
appreciation right ("SAR") either as a freestanding award or in tandem with a
stock option. Upon exercise of the SAR, the holder will be entitled to receive
an amount equal to the excess of the fair market value on the date of exercise
of one share of Common Stock over the exercise price per share specified in the
related stock option (or, in the case of a freestanding SAR, the price per share
specified in such right, which price may not be less than 85% of the fair market
value of the Common Stock on the date of grant) times the number of shares of
Common Stock with respect to which the SAR is exercised. This amount may be paid
in cash, Common Stock, or a combination thereof, as determined by the
Administrator.
RESTRICTED STOCK. The Administrator may also award shares of Restricted
Stock to officers, other employees and key persons of the Company. The
conditions and restrictions applicable to the Restricted Stock may include the
achievement of certain performance goals and/or continued employment with the
Company through a specified restricted period. These conditions and restric-
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tions, as well as the purchase price of shares of Restricted Stock, will be
determined by the Administrator. If the performance goals and other restrictions
are not attained, the employees will forfeit their awards of Restricted Stock.
UNRESTRICTED STOCK. The Administrator may also grant shares (at no cost or
for a purchase price determined by the Administrator) of Unrestricted Stock to
employees and key persons in recognition of past services or other valid
consideration, and shares of Unrestricted Stock may be issued in lieu of cash
compensation to be paid to such employees and key persons.
DEFERRED STOCK AWARDS. The Administrator may also award Deferred Stock
Awards which are ultimately payable in the form of shares of Unrestricted Stock.
The Deferred Stock Awards may be subject to such conditions and restrictions as
the Administrator may determine, including the achievement of certain
performance goals and/or continued employment with the Company through a
specified restricted period. If the performance goals and other restrictions are
not attained, the participants will forfeit their Deferred Stock Awards.
Subject to the consent of the Administrator, an Independent Director, an
employee or key person of the Company may make an irrevocable election to
receive a portion of his fees or compensation in Deferred Stock Awards (valued
at fair market value on the date the cash compensation would otherwise be paid).
PERFORMANCE SHARE AWARDS. The Administrator may also grant Performance
Share Awards to employees or other key persons of the Company entitling the
recipient to receive shares of Common Stock upon the achievement of individual
or Company performance goals and such other conditions as the Administrator
shall determine.
DIVIDEND EQUIVALENT RIGHTS. The Administrator may grant Dividend
Equivalent Rights, which give the recipient the right to receive credits for
dividends that would be paid if the grantee had held specified shares of Common
Stock. Dividend Equivalent Rights may be settled in cash, shares, or a
combination thereof.
AMENDMENTS AND TERMINATION. The Board of Directors may at any time amend
or discontinue the 1997 Stock Plan and the Administrator may at any time amend
or cancel outstanding awards for the purpose of satisfying changes in the law or
for any other lawful purpose. No such action may be taken, however, which
adversely affects any rights under outstanding awards without the holder's
consent. Further, amendments to the 1997 Stock Plan shall be subject to approval
by the Company's stockholders if and to the extent required by the Code to
preserve the qualified status of Incentive Options or to preserve tax
deductibility of compensation earned under stock options and stock appreciation
rights.
CHANGE IN CONTROL PROVISIONS. The 1997 Stock Plan provides that in the
event of a sale of all or substantially all of the assets or Common Stock of the
Company, a merger or consolidation which results in a change in control of the
Company or the liquidation or dissolution of the Company (a "Change in
Control"), all stock options and stock appreciation rights shall automatically
become fully exercisable. In addition, at any time prior to or after a Change of
Control, the Administrator may accelerate awards and waive conditions and
restrictions on any awards to the extent it may determine appropriate.
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<PAGE> 62
NEW PLAN BENEFITS. Approximately 310 employees and 5 non-employee
directors are currently eligible to participate in the 1997 Stock Plan. The
table below shows the options that will be granted to employees in connection
with the Offerings.
1997 STOCK PLAN
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND POSITION UNDERLYING STOCK OPTIONS(1)
- -------------------------------------------------------------------- ---------------------------
<S> <C>
William J. Nutt, Chairman, President and Chief Executive Officer.... 180,000
Sean M. Healey, Executive Vice President............................ 170,000
Levon Chertavian, Jr., Senior Vice President........................ 30,000
Nathaniel Dalton, Senior Vice President............................. 57,500
Brian J. Girvan, Senior Vice President.............................. 57,500
Seth W. Brennan, Vice President..................................... 50,000
Jeffrey S. Murphy, Vice President................................... 35,000
Executive Group (7 persons)......................................... 580,000
Non-Executive Officer Employee Group (2 persons).................... 10,000
</TABLE>
- ---------------
(1) All options will be granted to the employees with an exercise price equal to
the initial public offering price per share. In general, the options will be
exercisable over seven years, with 15% exercisable at the end of each of the
first six anniversaries of the date of grant and 10% exercisable on the
seventh anniversary. The exercisability of these options will be accelerated
upon a change in control (as defined in the 1997 Stock Plan) and upon the
achievement with respect to any future calendar quarter of a level of pro
forma EBITDA as adjusted per share which, on a comparable basis, equals or
exceeds 2.44 times adjusted pro forma EBITDA as adjusted per share for the
quarter ended September 30, 1997.
TAX ASPECTS UNDER THE CODE. The following is a summary of the principal
Federal income tax consequences of option grants under the 1997 Stock Plan. It
does not describe all Federal tax consequences under the 1997 Stock Plan, nor
does it describe state or local tax consequences.
Incentive Options. Under the Code, an employee will not realize taxable
income by reason of the grant or the exercise of an Incentive Option. If an
employee exercises an Incentive Option and does not dispose of the shares until
the later of (a) two years from the date the option was granted or (b) one year
from the date the shares were transferred to the employee, the entire gain, if
any, realized upon disposition of such shares will be taxable to the employee as
long-term capital gain, and the Company will not be entitled to any deduction.
If an employee disposes of the shares within such one-year or two-year period in
a manner so as to violate the holding period requirements (a "disqualifying
disposition"), the employee generally will realize ordinary income in the year
of disposition, and, provided the Company complies with applicable withholding
requirements, the Company will receive a corresponding deduction, in an amount
equal to the excess of (i) the lesser of (x) the amount, if any, realized on the
disposition and (y) the fair market value of the shares on the date the option
was exercised over (ii) the option price. Any additional gain realized on the
disposition of the shares acquired upon exercise of the option will be long-term
or short-term capital gain and any loss will be long-term or short-term capital
loss depending upon the holding period for such shares. The employee will be
considered to have disposed of his shares if he sells, exchanges, makes a gift
of or transfers legal title to the shares (except by pledge or by transfer on
death). If the disposition of shares is by gift and violates the holding period
requirement, the amount of the employee's ordinary income (and the Company's
deductions) is equal to the fair market value of the shares on the date of
exercise less the option price. If the disposition is by sale or exchange, the
employee' tax basis will equal the amount paid for the shares plus any ordinary
income realized as a
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<PAGE> 63
result of the disqualifying distribution. The exercise of an Incentive Option
may subject the employee to the alternative minimum tax.
Special rules apply if an employee surrenders shares of Common Stock in
payment of the exercise price of an Incentive Option.
An Incentive Option that is exercised by an employee more than three months
after an employee's employment terminates will be treated as a Non-Qualified
Option for Federal income tax purposes. In the case of an employee who is
disabled, the three-month period is extended to one year and in the case of an
employee who dies, the three-month employment rule does not apply.
Non-Qualified Options. There are no Federal income tax consequences to
either the optionee or the Company on the grant of a Non-Qualified Option. On
the exercise of a Non-Qualified Option, the optionee has taxable ordinary income
equal to the excess of the fair market value of the Common Stock received on the
exercise date over the option price of the shares. The optionee's tax basis for
the shares acquired upon exercise of a Non-Qualified Option is increased by the
amount of such taxable income. The Company will be entitled to a Federal income
tax deduction in an amount equal to such excess. Upon the sale of the shares
acquired by exercise of a Non-Qualified Option, the optionee will realize
long-term or short-term capital gain or loss depending upon his or her holding
period for such shares.
Special rules apply if an optionee surrenders shares of Common Stock in
payment of the exercise price of a Non-Qualified Option.
1995 STOCK PURCHASE PLAN
On November 28, 1995, the Board of Directors adopted the Affiliated
Managers Group, Inc. 1995 Stock Purchase Plan (the "1995 Purchase Plan"), under
which 4,477 shares of Series B-1 Voting Convertible Preferred Stock of the
Company (convertible into 223,850 shares of Common Stock) were authorized for
issuance. The 1995 Purchase Plan was designed to provide certain employees,
directors, general partners, officers, consultants and advisors with the
opportunity to purchase shares of capital stock of the Company. In June 1996,
the Company issued an aggregate 3,703 shares of Series B-1 Voting Convertible
Preferred Stock (which are convertible, in the aggregate, into 185,150 shares of
Common Stock immediately prior to the Offerings), to certain members of
management and advisors of the Company, including 150 and 38 shares of Series
B-1 Voting Convertible Preferred Stock (convertible into 7,500 and 1,900 shares
of Common Stock, respectively) to Mr. Chertavian and Mr. Murphy, respectively,
as well as managers of certain Affiliates, for an aggregate consideration of
approximately $2.5 million (the "1996 Offering"). In connection with the 1996
Offering, each of the purchasers executed a stock purchase and restriction
agreement pursuant to which the shares purchased by each such purchaser are
subject to certain restrictions on transfer. There are currently 774 shares of
Series B-1 Voting Convertible Preferred Stock (convertible into 38,700 shares of
Common Stock) available for issuance and sale under the 1995 Purchase Plan. The
Company does not intend to issue any additional shares of stock under the 1995
Purchase Plan.
KEY EXECUTIVE LIFE INSURANCE
The Company currently maintains, and is the sole beneficiary of,
$10,000,000 in life insurance policies on William J. Nutt and a $2,000,000 life
insurance policy on Sean M. Healey. In addition, the Company and the Affiliates
carry life insurance policies on the lives of certain key members of management
of the Affiliates in amounts which the Company considers sufficient to
repurchase such individuals' direct or indirect interest in the applicable
Affiliate. The Company also currently maintains, and is the sole beneficiary of,
additional life insurance policies on the lives of certain key members of
management of the Affiliates. These key executive life insurance policies range
from $100,000 to $10,000,000. See "Business -- AMG Structure and Relationship
with Affiliates -- Capitalization of Retained Interest" and "Risk
Factors -- Reliance on Key Management".
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PENSION AND PROFIT SHARING PLANS
The Company currently maintains the Affiliated Managers Group, Inc. 401(k)
Profit Sharing Plan (the "Profit Sharing Plan"). Under the Profit Sharing Plan,
qualifying employees of the Company and the participating Affiliates are able to
both accumulate savings by means of a salary reduction, as well as participate
in the profits of their participating employer (either the Company or the
applicable Affiliate). Any contributions by the Company under the Profit Sharing
Plan are determined annually by the Compensation Committee, while contributions
by participating Affiliates are determined by their respective management teams
and funded out of such respective Affiliate's Operating Allocation. Certain of
the Affiliates maintain their own 401(k) and profit sharing plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since January 1, 1996, the Company's executive compensation decisions have
been made by the Compensation Committee of the Board of Directors, consisting of
Messrs. McLane and Floor, neither of whom is an employee of the Company. Upon
consummation of the Offerings, the Company's Compensation Committee will consist
of Messrs. McLane, Nutt and O'Connor. After the Offerings, the Compensation
Committee will review and recommend executive compensation arrangements for all
officers and employees other than Mr. Nutt, and the members of the Compensation
Committee other than Mr. Nutt will review and recommend all executive
compensation arrangements with respect to Mr. Nutt.
CERTAIN TRANSACTIONS
In August 1997, the Company entered into a series of transactions in
connection with the Tweedy, Browne Investment, including:
(i) entering into a Preferred Stock and Warrant Purchase Agreement
(the "Preferred Stock Purchase Agreement") with Chase Equity Associates,
whereby on October 9, 1997, Chase Equity Associates invested $30 million in
the Company and acquired 5,333 shares of Series C-2 Non-Voting Convertible
Preferred Stock of the Company and warrants to purchase up to an additional
28,000 shares of Series C-2 Non-Voting Convertible Preferred Stock of the
Company (convertible into 266,650 and 1,400,000 shares of Common Stock,
respectively); and
(ii) entering into a Securities Purchase Agreement (the "Securities
Purchase Agreement") with Chase Equity Associates, whereby on October 9,
1997, Chase Equity Associates invested $60 million and acquired senior
subordinated notes (the "Subordinated Notes"). In addition, warrants to
purchase Class B Common Stock (the "Class B Warrants") of the Company were
issued into an escrow, to be issued to the holders of the Subordinated
Notes, if such Subordinated Notes were not paid on or prior to April 7,
1998.
In connection with these transactions, on October 9, 1997, the Company
entered into an Amended and Restated Stockholders' Agreement (the "Stockholders'
Agreement") with TA Associates, NationsBank, The Hartford, Chase Equity
Associates and certain members of senior management and their transferees
(collectively, the "Investors").
Pursuant to the terms of the Stockholders' Agreement, (i) each Investor and
the holders of shares of Class B Common Stock after exercise of the Class B
Warrants (the "Warrant Shareholders") received from the Investors holding shares
of Class A Convertible Preferred Stock of the Company (the "Class A Investors"),
and the Class A Investors granted to the other Investors and the Warrant
Shareholders, rights (the "Class A Co-Sale Rights") to participate on a pro rata
basis in certain resales of shares of Class A Convertible Preferred Stock (or
Common Stock issuable upon conversion thereof), (ii) the Investors holding
shares of Class B Preferred Stock of the Company (the "Class B Investors") and
the Investors holding shares of Class C Preferred Stock of the Company (the
"Class C Investors") agreed to certain restrictions on transfers of shares,
(iii) each Class B Investor and each Class C Investor granted to the Warrant
Shareholders rights
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<PAGE> 65
(the "Warrant Shareholder Co-Sale Rights") to participate on a pro-rata basis in
certain resales of shares of capital stock, (iv) each Investor agreed to sell
such Investor's shares of capital stock in the Company in certain circumstances
if a majority-in-interest of the stockholders negotiated such a sale with an
unaffiliated third party, (v) Chase Equity Associates granted to NationsBank a
right (the "Right of First Offer") to purchase its shares of capital stock and
Class B Warrants in certain circumstances, (vi) each Investor and Warrant
Shareholder received "piggy-back" registration rights, (vii) each Investor and
Warrant Shareholder received demand registration rights, (viii) each Investor
and Warrant Shareholder was granted participation rights with respect to certain
future issuances of securities by the Company, and (ix) each Investor agreed to
elect one individual nominated by the Class C Investors, one individual
nominated by NationsBank and The Hartford, and two individuals nominated by TA
Associates to the Board of Directors. Messrs. O'Connor, Walker, Kafker and
McLane have been elected as directors of the Company pursuant to the
Stockholders' Agreement. Each of the rights of the Warrant Shareholders under
the Stockholders' Agreement are of no force or effect unless or until the Class
B Warrants become eligible to be released from escrow. The Class B Warrants will
terminate unexercised in connection with the repayment of the Subordinated Debt.
Effective upon and subject to the consummation of the Offerings, provisions
of the Stockholders' Agreement relating to the participation rights, the Class A
Co-Sale Rights, the Warrant Shareholder Co-Sale Rights, the Right of First
Offer, the restrictions on transfer of shares, and the election of the directors
will terminate in accordance with their terms.
In connection with these transactions, the Company has paid certain fees to
Chase Equity Associates, including (i) a facility fee of $1.2 million, (ii) a
commitment fee of approximately $45,000 and (iii) a take down fee of $1.2
million. 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.
In October 1997, the Company entered into the Credit Facility. In
connection with entering into the Credit Facility, the Company has paid Chase
Securities Inc. an underwriting fee of $6 million. In addition, in connection
with the Credit Facility, the Company agreed to pay The Chase Manhattan Bank an
annual administrative agency fee of $75,000. The Company also paid The Chase
Manhattan Bank a commitment fee of approximately $437,500 for the period June
26, 1997 through October 1997.
Chase Securities Inc., an affiliate of The Chase Manhattan Bank and Chase
Equity Associates, is a participant in the underwriting syndicate in the U.S.
Offering.
In September 1997, the Company paid $14.4 million in cash and issued an
aggregate of approximately 10,667 shares of Class D Convertible Preferred Stock
(convertible into 533,331 shares of Common Stock) with a value of approximately
$9.6 million in connection with the merger of GeoCapital Corporation with and
into a wholly owned subsidiary of the Company. The stockholders of GeoCapital
Corporation were Irwin Lieber and Barry K. Fingerhut and members of their
immediate families. Before giving effect to the Offerings, Messrs. Lieber and
Fingerhut and their families are the sole holders of the Class D Convertible
Preferred Stock.
In June 1996, a retirement plan for the benefit of Mr. Chertavian, an
executive officer of the Company, invested $100,500 to purchase 150 shares of
the Company's Series B-1 Voting Convertible Preferred Stock (convertible into
7,500 shares of Common Stock) pursuant to an offering under the Company's 1995
Stock Purchase Plan.
In August 1995, the Skyline Funds, for which Skyline provides investment
advisory services, retained Funds Distributor, Inc., as a distributor of shares
in the Skyline Funds. Mr. Nutt is Chairman of Funds Distributor, Inc., and the
Chairman and Chief Executive Officer and majority stockholder of
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its parent, Boston Institutional Group, Inc. Since January 1996, the Skyline
Funds have paid Funds Distributor, Inc. approximately $175,000.
In December 1996, the Burridge Capital Development Fund, for which Burridge
provides investment advisory services, retained Funds Distributor, Inc., as a
distributor of shares in the Burridge Capital Development Fund. Since this time,
the Burridge Capital Development Fund has paid Funds Distributor, Inc.
approximately $82,000.
Since January 1996, the Company has retained Goodwin, Procter & Hoar LLP
(and its predecessor Goodwin, Procter & Hoar) for certain legal services.
Richard E. Floor, a director of the Company, is the sole shareholder of Richard
E. Floor, P.C., which is a partner in Goodwin, Procter & Hoar LLP and was a
partner in its predecessor.
The Company believes that all of the transactions identified above were
conducted on terms no less favorable to the Company than could have been
obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth as of October 15, 1997 and as adjusted to
reflect the sale of the shares of Common Stock in the Offerings certain
information regarding the beneficial ownership of Common Stock by (i) each
person or "group" (as that term is defined in Section 13(d)(3) of the Exchange
Act) known by the Company to beneficially own more than 5% of the Common Stock,
(ii) each Named Executive Officer, (iii) each director of the Company and (iv)
all directors and executive officers as a group (12 persons). Except as
otherwise indicated, the Company believes, based on information furnished by
such persons, that each person listed below has sole voting and investment power
over the shares of Common Stock shown as beneficially owned, subject to
community property laws, where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(2)
NUMBER OF -----------------------
SHARES BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER(1) OWNED(2) OFFERINGS OFFERINGS
- ------------------------------------------------------ ------------------- --------- ---------
<S> <C> <C> <C>
TA Associates Group (3)............................... 3,895,106 42.9% 23.5%
Chase Equity Associates, L.P. (4) .................... 1,666,650 18.4 10.1
NationsBanc Investment Corporation (4)................ 970,150 10.7 5.9
William J. Nutt (5)................................... 540,793 6.0 3.3
Hartford Accident and Indemnity Company............... 373,150 4.1 2.3
Sean M. Healey (6).................................... 248,519 2.7 1.5
Levon Chertavian, Jr. (7)............................. 85,833 * *
Nathaniel Dalton (8).................................. 55,000 * *
Brian J. Girvan (9)................................... 50,000 * *
Seth W. Brennan (10).................................. 21,667 * *
Jeffrey S. Murphy (11)................................ 13,567 * *
Richard E. Floor...................................... 41,492 * *
Roger B. Kafker (12).................................. 5,972 * *
P. Andrews McLane (13)................................ 5,972 * *
John M. B. O'Connor (14).............................. 1,666,650 18.4 10.1
W. W. Walker, Jr. .................................... -- -- --
All directors and executive officers
as a group (12 persons) (15)........................ 2,735,465 30.0% 16.5%
</TABLE>
- ---------------
* Less than 1%
(1) The address of the TA Associates Group and Messrs. Kafker and McLane is c/o
TA Associates, Inc., High Street Tower, Suite 2500, 125 High Street,
Boston, Massachusetts 02110-2720. The address of Chase Equity Associates,
L.P. and Mr. O'Connor is 380 Madison Avenue, 12th Floor, New York, New York
10017. The address of NationsBanc Investment Corporation and Mr. Walker is
c/o NationsBank Capital Investors, NationsBank Corporate Center, 10th
Floor, 100 North Tryon Street, Charlotte, North Carolina 28255. The address
of Hartford Accident and Indemnity Company is 200 Hopmeadow Street, P.O.
Box 2999, Simsbury, Connecticut 06104. The address of Mr. Floor is c/o
Goodwin, Procter & Hoar LLP, Exchange Place, Boston, Massachusetts 02109.
The address of all other listed stockholders is c/o Affiliated Managers
Group, Inc., Two International Place, 23rd Floor, Boston, Massachusetts
02110.
(2) In computing the number of shares of Common Stock beneficially owned by a
person, shares of Common Stock subject to options and warrants held by that
person that are currently exercisable or that become exercisable within 60
days of October 15, 1997 are deemed outstanding. For purposes of computing
the percentage of outstanding shares of Common Stock beneficially owned by
such person, such shares of stock subject to options or warrants that are
currently exercisable or that become exercisable within 60 days are deemed
to be outstanding for such person but are not deemed to be outstanding for
purposes of computing the ownership percentage of any other person. As of
October 15, 1997 a total of 9,109,450
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shares of Common Stock were either outstanding or subject to options, warrants
or other convertible securities that are exercisable or that will become
exercisable within 60 days.
(3) Includes (i) 2,596,756 shares of Common Stock owned by Advent VII L.P.,
(ii) 533,956 shares of Common Stock owned by Advent Atlantic and Pacific II
L.P., (iii) 192,525 shares of Common Stock owned by Advent Industrial II
L.P., (iv) 259,691 shares of Common Stock owned by Advent New York L.P. and
(v) 42,841 shares of Common Stock owned by TA Venture Investors Limited
Partnership. The foregoing partnerships are part of an affiliated group of
investment partnerships referred to, collectively, as the TA Associates
Group. The general partner of Advent VII L.P. is TA Associates VII L.P. The
general partner of each of Advent Industrial II L.P. and Advent New York
L.P. is TA Associates VI L.P. The general partner of Advent Atlantic and
Pacific II L.P. is TA Associates AAP II Partners L.P. The general partner
of each of TA Associates VII L.P., TA Associates VI L.P. and TA Associates
AAP II Partners L.P. is TA Associates, Inc. In such capacity, TA
Associates, Inc. exercises sole voting and investment power with respect to
all the shares of Common Stock held of record by the named investment
partnerships, with the exception of those shares held by TA Venture
Investors Limited Partnership; individually no stockholder, director or
officer of TA Associates, Inc. is deemed to have or share such voting or
investment power. Principals and employees of TA Associates, Inc.
(including Messrs. Kafker and McLane, directors of the Company) comprise
the general partners of TA Venture Investors Limited Partnership. In such
capacity, Messrs. Kafker and McLane may be deemed to share voting and
investment power with respect to the 42,841 shares of Common Stock held of
record by TA Venture Investors Limited Partnership. Messrs. Kafker and
McLane disclaim beneficial ownership of such shares, except in the case of
Mr. Kafker to the extent of 5,972 shares as to which he holds a pecuniary
interest and in the case of Mr. McLane to the extent of 5,972 shares as to
which he holds a pecuniary interest. Also includes (i) 201,964 shares of
Common Stock held by Chestnut III Limited Partnership and (ii) 67,373
shares of Common Stock held by Chestnut Capital International III L.P. TA
Associates, Inc. indirectly has voting and investment power with respect to
these shares pursuant to a proxy.
(4) The 1,666,650 shares beneficially owned by Chase Equity Associates, L.P.
and the 970,150 shares beneficially owned by NationsBanc Investment
Corporation are shares of non-voting Class B Common Stock. See "Description
of Capital Stock -- Class B Common Stock".
(5) Includes (i) 381,986 shares of restricted Common Stock, 352,405 of which
have vested, 11,646 of which will vest in annual installments through March
1999, and 17,935 of which will vest on January 1, 1998, and (ii) 8,333
shares of Common Stock subject to options exercisable within 60 days.
Excludes (i) 196,667 shares subject to unvested options and (ii) 199,992
shares held by irrevocable trusts for the benefit of members of Mr. Nutt's
immediate family of which Mr. Nutt is not a trustee, as to which shares Mr.
Nutt disclaims beneficial ownership.
(6) Includes (i) 235,000 shares of restricted Common Stock, 217,500 of which
have vested and 17,500 of which will vest in annual installments through
March 1999, and (ii) 8,333 shares of Common Stock subject to options
exercisable within 60 days. Excludes 186,667 shares subject to unvested
options.
(7) Includes (i) 75,000 shares of restricted Common Stock, 50,000 of which have
vested, 12,500 of which will vest in annual installments through March
1999, and 12,500 of which will vest in August 1998, and (ii) 3,333 shares
of Common Stock subject to options exercisable within 60 days. Excludes
36,667 shares subject to unvested options.
(8) Includes (i) 50,000 shares of restricted Common Stock, 25,000 of which have
vested and 25,000 of which will vest in equal annual installments through
May 1999, and (ii) 5,000 shares of Common Stock subject to options
exercisable within 60 days. Excludes 67,500 shares subject to unvested
options.
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(9) Includes 50,000 shares of restricted Common Stock, 12,500 of which have
vested and 37,500 of which will vest in equal annual installments through
February 2000. Excludes 57,500 shares subject to unvested options.
(10) Includes (i) 17,500 shares of restricted Common Stock, 8,750 of which have
vested and 8,750 of which will vest in equal annual installments through
March 1999, and (ii) 4,167 shares of Common Stock subject to options
exercisable within 60 days. Excludes 58,333 shares subject to unvested
options.
(11) Includes (i) 10,000 shares of restricted Common Stock, 5,000 of which have
vested and 5,000 of which will vest in equal annual installments through
March 1999, and (ii) 1,667 shares of Common Stock subject to options
exercisable within 60 days. Excludes 38,333 shares subject to unvested
options.
(12) Includes 5,972 shares beneficially owned by Mr. Kafker through TA Venture
Investors Limited Partnership, all of which shares are included in the
3,895,106 shares described in footnote (3) above. Does not include any
shares owned by Advent VII L.P., Advent Atlantic and Pacific II L.P.,
Advent Industrial II L.P., Advent New York L.P., Chestnut III Limited
Partnership or Chestnut Capital International III L.P., of which shares Mr.
Kafker disclaims beneficial ownership.
(13) Includes 5,972 shares of Common Stock beneficially owned by Mr. McLane
through TA Venture Investors Limited Partnership, all of which shares are
included in the 3,895,106 shares described in footnote (3) above. Does not
include any shares owned by Advent VII L.P., Advent Atlantic and Pacific II
L.P., Advent Industrial II L.P., Advent New York L.P., Chestnut III Limited
Partnership or Chestnut Capital International III L.P., of which shares Mr.
McLane disclaims beneficial ownership.
(14) Includes 1,666,650 shares of Class B Common Stock beneficially owned by
Chase Equity Associates, L.P., of which Mr. O'Connor disclaims beneficial
ownership.
(15) Includes 819,486 shares of Common Stock held by executive officers and
directors which are subject to vesting and repurchase in certain
circumstances.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Immediately upon consummation of the Offerings, the Company will file and
cause to become effective an Amended and Restated Certificate of Incorporation
(the "Certificate"), which has previously been adopted by the Board of Directors
and approved by the stockholders of the Company. Pursuant to the Certificate,
the Company is authorized to issue (i) 40,000,000 shares of Common Stock, (ii)
3,000,000 shares of Class B Common Stock, and (iii) 5,000,000 shares of
undesignated preferred stock, par value $.01 per share (the "Preferred Stock").
Immediately upon consummation of the Offerings, approximately 13,941,817 shares
of Common Stock will be issued and outstanding, 2,636,800 shares of Class B
Common Stock will be issued and outstanding and no shares of Preferred Stock
will be issued and outstanding. The following summary description of the capital
stock of the Company is qualified in its entirety by reference to the
Certificate and the Company's Amended and Restated By-laws (the "By-laws"),
copies of which are filed as exhibits to the Registration Statement of which
this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted on by stockholders. Holders of Common Stock are not entitled to
cumulative voting rights. Therefore, the holders of a majority of the shares
voted in the election of directors can elect all of the directors then standing
for election, subject to the rights of the holders of Preferred Stock, if and
when issued. The holders of Common Stock have no preemptive or other
subscription rights, and there are no conversion rights or redemption or sinking
fund provisions with respect to the Common Stock.
The holders of Common Stock and Class B Common Stock are entitled to
receive such dividends, if any, as may be declared from time to time by the
Board of Directors from funds legally available therefor, with each share of
Common Stock and each share of Class B Common Stock sharing equally in such
dividends. If dividends are declared which are payable in shares of Common Stock
or shares of Class B Common Stock, dividends shall be declared which are payable
at the same rate in both classes of stock and the dividends payable in shares of
Common Stock shall be payable to the holders of shares of Common Stock, and the
dividends payable in shares of Class B Common Stock shall be payable to the
holders of shares of Class B Common Stock. See "Dividend Policy". The possible
issuance of Preferred Stock with a preference over Common Stock and Class B
Common Stock as to dividends could impact the dividend rights of holders of
Common Stock and Class B Common Stock. All outstanding shares of Common Stock
and Class B Common Stock, including the shares offered by this Prospectus, are,
or will be upon consummation of the Offerings, fully paid and non-assessable.
The By-laws provide, subject to the rights of the holders of the Preferred
Stock, if and when issued, that the number of directors shall be fixed by the
Board of Directors. Subject to any rights of the holders of Preferred Stock, if
and when issued, to elect directors, and to remove any director whom the holders
of any such Preferred Stock had the right to elect, any director of the Company
may be removed from office only with cause and by the affirmative vote of at
least two-thirds of the total votes which would be eligible to be cast by
stockholders in the election of such director.
CLASS B COMMON STOCK
Holders of Class B Common Stock generally have the same rights and
privileges as holders of Common Stock, except that holders of Class B Common
Stock do not have any voting rights other than those which may be provided by
applicable law. Each share of Class B Common Stock is convertible, at the option
of the holder thereof, into one share of Common Stock (subject to adjustment to
reflect any dividend in Common Stock or Class B Common Stock); provided, that
such conversion is not inconsistent with any regulation, rule or other
requirement of any governmental authority applicable to such holder at such
time.
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UNDESIGNATED PREFERRED STOCK
The Board of Directors of the Company is authorized, without further action
of the stockholders of the Company, to issue up to 5,000,000 shares of Preferred
Stock in classes or series and to fix the designations, powers, preferences and
the relative, participating, optional or other special rights of the shares of
each series and any qualifications, limitations and restrictions thereon as set
forth in the Certificate. Any such Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. The purpose of authorizing the Board of Directors to issue
Preferred Stock is, in part, to eliminate delays associated with a stockholder
vote on specific issuances. The issuance of Preferred Stock could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring or seeking to acquire, a significant
portion of the outstanding stock of the Company.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
GENERAL
A number of provisions of the Company's Certificate and By-laws concern
matters of corporate governance and the rights of stockholders. Certain of these
provisions, including those which grant the Board of Directors the ability to
issue shares of Preferred Stock and to set the voting rights, preferences and
other terms thereof, may be deemed to have an anti-takeover effect and may
discourage takeover attempts not first approved by the Board of Directors
(including takeovers which certain stockholders may deem to be in their best
interests). To the extent takeover attempts are discouraged, temporary
fluctuations in the market price of the Common Stock, which may result from
actual or rumored takeover attempts, may be inhibited. Certain of these
provisions also could delay or frustrate the removal of incumbent directors or
the assumption of control by stockholders, even if such removal or assumption
would be beneficial to stockholders of the Company. These provisions also could
discourage or make more difficult a merger, tender offer or proxy contest, even
if they could be favorable to the interests of stockholders, and could
potentially depress the market price of the Common Stock. The Board of Directors
of the Company believes that these provisions are appropriate to protect the
interests of the Company and all of its stockholders. The Board of Directors has
no present plans to adopt any other measures or devices which may be deemed to
have an "anti-takeover effect".
MEETINGS OF STOCKHOLDERS
The By-laws provide that a special meeting of stockholders may be called
only by the Board of Directors unless otherwise required by law. The By-laws
provide that only those matters set forth in the notice of the special meeting
may be considered or acted upon at that special meeting, unless otherwise
provided by law. In addition, the By-laws set forth certain advance notice and
informational requirements and time limitations on any director nomination or
any new business which a stockholder wishes to propose for consideration at an
annual meeting of stockholders.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT
The Certificate provides that any action required or permitted to be taken
by the stockholders of the Company at an annual or special meeting of
stockholders must be effected at a duly called meeting and may not be taken or
effected by a written consent of stockholders in lieu thereof.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The By-laws of the Company provide that directors and officers of the
Company shall be, and in the discretion of the Board of Directors non-officer
employees may be, indemnified by the Company to the fullest extent authorized by
Delaware law, as it now exists or may in the future be amended, against all
expenses and liabilities reasonably incurred in connection with service for or
on behalf of the Company. The By-laws of the Company also provide that the right
of directors and officers to
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indemnification shall be a contract right and shall not be exclusive of any
other right now possessed or hereafter acquired under any by-law, agreement,
vote of stockholders or otherwise. The Certificate contains a provision
permitted by Delaware law that generally eliminates the personal liability of
directors for monetary damages for breaches of their fiduciary duty, including
breaches involving negligence or gross negligence in business combinations,
unless the director has breached his or her duty of loyalty, failed to act in
good faith, engaged in intentional misconduct or a knowing violation of law,
paid a dividend or approved a stock repurchase in violation of the Delaware
General Corporation Law or obtained an improper personal benefit. This provision
does not alter a director's liability under the federal securities laws. In
addition, this provision does not affect the availability of equitable remedies,
such as an injunction or rescission, for breach of fiduciary duty.
AMENDMENT OF THE CERTIFICATE
The Certificate provides that an amendment thereof must first be approved
by a majority of the Board of Directors and (with certain exceptions) thereafter
must be approved by the holders of a majority of the total votes eligible to be
cast by holders of Common Stock with respect to such amendment or repeal.
AMENDMENT OF BY-LAWS
The Certificate provides that the By-laws may be amended or repealed by the
Board of Directors or by the stockholders. Such action by the Board of Directors
requires the affirmative vote of a majority of the directors then in office.
Such action by the stockholders requires the affirmative vote of the holders of
at least two-thirds of the total votes eligible to be cast by holders of Common
Stock with respect to such amendment or repeal at an annual meeting of
stockholders or a special meeting called for such purpose, unless the Board of
Directors recommends that the stockholders approve such amendment or repeal at
such meeting, in which case such amendment or repeal shall only require the
affirmative vote of a majority of the total votes eligible to be cast by holders
of Common Stock with respect to such amendment or repeal.
STATUTORY BUSINESS COMBINATION PROVISION
Upon completion of the Offerings, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person, or an affiliate or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in the person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined (with certain limited exceptions) as any
person that is (A) the owner of 15% or more of the outstanding voting stock of
the corporation or (B) an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action of
its stockholders to exempt itself from coverage,
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<PAGE> 73
provided that, with certain limited exceptions, such by-law or charter amendment
shall not become effective until 12 months after the date it is adopted. Neither
the Certificate nor the By-laws contains any such exclusion.
REGISTRATION RIGHTS
Pursuant to the terms of the Stockholders' Agreement, holders of 8,076,686
shares of Common Stock, including TA Associates, NationsBank, The Hartford,
Chase Equity Associates and certain members of senior management of the Company,
have the right in certain circumstances to require the Company to register
shares of Common Stock under the Securities Act for resale to the public. The
Stockholders' Agreement also provides that holders of 8,076,686 shares of Common
Stock have the right to include their shares of Common Stock in a registration
statement filed by the Company. See "Certain Transactions". The holders of an
additional 689,531 shares of Common Stock also have the right to include their
shares of Common Stock in a registration statement filed by the Company. In
addition, a number of managers of the Affiliates have registration rights under
the transaction documents pursuant to which AMG made its investment in each such
Affiliate. These registration rights relate to shares of Common Stock which such
managers acquire upon the exchange of certain of their interests in the
respective Affiliates. See "Business -- AMG Structure and Relationship with
Affiliates -- Capitalization of Retained Interest". Each of such manager's
rights are subject to the right of an underwriter participating in the offering
to limit the number of shares included in the registration. All expenses
relating to the filing of such registration statements, excluding underwriting
discounts and selling expenses, will be paid by the Company. The foregoing
rights will be waived in connection with the Offerings but will remain in effect
following the Offerings.
TRANSFER AGENT AND REGISTRAR
The Company has selected ChaseMellon Shareholder Services L.L.C. as the
transfer agent and registrar for the Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, the Company will have a total of
16,578,617 shares of Common Stock outstanding. Of these shares, the 7,500,000
shares sold in the Offerings will be freely transferable without restriction or
registration under the Securities Act, except for any shares held by
"affiliates" of the Company, as that term is used under the Securities Act and
the regulations promulgated thereunder, and except to the extent such shares are
subject to the agreements with the Underwriters described below. The remaining
9,078,617 shares, held by officers, directors, employees and other stockholders
of the Company and its Affiliates, were sold by the Company in private
transactions in reliance on exemptions from the registration requirements of the
Securities Act and will be "restricted securities" within the meaning of Rule
144 ("Rule 144") adopted under the Securities Act (the "Restricted Shares"). Of
these Restricted Shares, 8,766,217 shares of Common Stock will be subject to the
registration rights of certain stockholders. See "Description of Capital Stock
- -- Registration Rights".
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate of the Company, who has
beneficially owned Restricted Shares for at least one year (as computed under
Rule 144) is entitled to sell within any three-month period a number of shares
that does not exceed the greater of (i) 1% of the number of shares of Common
Stock then outstanding (approximately 165,786 shares after giving effect to the
Offerings), or (ii) the average weekly trading volume in the Common Stock during
the four calendar weeks immediately preceding the filing of a Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain
provisions relating to the manner of sale and notice requirements, and to the
availability of current public information about the Company. In addition, under
Rule 144(k), a person (or persons whose shares are aggregated) who is not deemed
to have been an affiliate of the Company at any time during the 90 days
immediately preceding a sale, and who has beneficially owned the shares proposed
to be sold for at least two years (as computed under Rule 144), will be entitled
to sell such shares under Rule 144(k) without regard to the volume requirements
described above. Rule 144 also provides that affiliates that are selling shares
of Common Stock that are not Restricted Shares must nonetheless comply with the
provisions of Rule 144 other than the holding period requirement.
Beginning 180 days after the date of this Prospectus, upon the expiration
of certain agreements entered into between the Underwriters and certain of the
Company's officers, directors, stockholders and holders of outstanding options
or warrants (the "Lock-up Agreements"), the Company believes that 75,000 of the
Restricted Shares will be eligible for sale in the public market pursuant to
Rule 144(k) and 6,646,561 additional Restricted Shares will be eligible for sale
in the public market subject to the provisions of Rule 144 referred to above. Of
the remaining 2,357,056 Restricted Shares, the Company estimates that 2,291,431
shares will become eligible for sale pursuant to Rule 144 at various dates
through November 1998. The remaining 65,625 Restricted Shares will become
eligible for sale in the public market under Rule 144 (including paragraph (k)
thereof) at various times after November 1998 as they become vested.
Under the 1995 Plan and the 1997 Stock Plan, there are an aggregate of
2,175,000 shares of Common Stock reserved for issuance. As of the Effective
Date, options to purchase 682,500 shares have been granted pursuant to the 1995
Plan and the 1997 Stock Plan, and all of such options remain outstanding.
Beginning 180 days after the date of this Prospectus, upon the expiration of the
Lock-up Agreements, 43,681 of these option shares, if exercised, will be
eligible for sale in the public market in accordance with the requirements of
Rule 701, to the extent the options are exercised. Rule 701 promulgated under
the Securities Act provides that shares of Common Stock acquired pursuant to the
exercise of options outstanding prior to the Offerings or the grant of Common
Stock prior to the Offerings pursuant to written compensation plans or contracts
may be resold by persons other than affiliates beginning 90 days after the date
of the Offerings, subject only to the manner of sale provisions of Rule 144, and
by affiliates, beginning 90 days after the date of the Offerings, subject to all
provisions of Rule 144 except its one-year minimum holding period
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requirement. Of the option shares of Common Stock described above, all of such
shares of Common Stock are held by affiliates of the Company.
As soon as practicable following the Offerings, the Company intends to file
one or more registration statements on Form S-8 under the Securities Act to
register all shares of Common Stock reserved for issuance under the 1995 Plan
and the 1997 Stock Plan. If the Company files one or more registration
statements on Form S-8, non-affiliate holders of shares registered under the
Form S-8 that are issuable upon exercise of stock options granted pursuant to
the 1995 Plan and the 1997 Stock Plan will be eligible to sell such shares in
the public market without regard to the restrictions of Rule 144, subject to the
Lock-Up Agreements, as applicable. Affiliates will continue to be subject to
certain limitations on sale, including the volume restrictions described above,
as well as the Lock-up Agreements.
The Lock-up Agreements provide that the holders of all of the outstanding
shares of Common Stock prior to the Offerings will not, without the prior
written consent of the Underwriters, offer, sell, pledge, contract to sell,
grant any option to purchase or otherwise dispose of any shares of Common Stock
beneficially owned or otherwise held or any securities convertible into,
derivative of or exercisable or exchangeable for such Common Stock during the
180-day period commencing on the Effective Date. In addition, the Company has
also agreed that the Company will not, without the prior written consent of the
Underwriters, offer, sell, pledge, contract to sell, grant any option to
purchase or otherwise dispose of any Common Stock (other than pursuant to
employee stock option or purchase plans existing, or on the conversion or
exchange of convertible or exchangeable securities or the exercise of warrants
outstanding, on the date of this Prospectus) or any securities of the Company
which are substantially similar to the shares of Common Stock, or which are
convertible into or exercisable or exchangeable for Common Stock or any such
other securities during the 180-day period commencing on the date of this
Prospectus, except for (i) shares of Common Stock offered in connection with the
Offerings and (ii) shares of Common Stock or such other securities issued as
consideration in future investments, provided that such securities are made
subject to such 180-day restriction.
Prior to the Offerings, there has been no public market for the Company's
Common Stock. No prediction can be made as to the effect, if any, that sales of
shares of Common Stock into the public market or the availability of such shares
for sale will have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock into the public
market after the restrictions described above lapse could adversely affect the
prevailing market price and the ability of the Company to obtain equity capital
in the future. See "Risk Factors -- Shares Eligible for Future Sale".
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VALIDITY OF SECURITIES
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Goodwin, Procter & Hoar LLP, Boston, Massachusetts, and
for the Underwriters by Sullivan & Cromwell, New York, New York. Partners (or,
in the case of partners which are professional corporations, the sole
stockholders of such corporations) of Goodwin, Procter & Hoar LLP own an
aggregate of 43,392 shares of Common Stock.
EXPERTS
The financial statements included in this Prospectus listed on page F-1 for
Affiliated Managers Group, Inc., Gofen and Glossberg, Inc., The Burridge Group
Inc., GeoCapital Corporation and Tweedy, Browne Company L.P. have been included
herein in reliance on the reports of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The combined statements of income of First Quadrant Institutional and First
Quadrant Limited for the period from January 1, 1996 to March 25, 1996 and for
the year ended December 31, 1995 have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (including all amendments thereto, the "Registration Statement") under the
Securities Act with respect to the Common Stock offered by this Prospectus. As
permitted by the rules and regulations of the Commission, this Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any agreement or other document referred to are not necessarily complete. With
respect to each such agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in all respects by such reference.
The Registration Statement, including the exhibits and schedules thereto,
may be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC
20549 and at the following regional offices of the Commission: Seven World Trade
Center, New York, New York 10048, and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials may be obtained from the
public referrals section of the Commission at its Washington address upon
payment of the prescribed fees. The Company is required to file electronic
versions of these documents with the Commission through the Commission's
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") System. The
electronically filed documents, which also include reports, proxy statements and
other information, are maintained by the Commission and may be found at the
World Wide Web site http://www.sec.gov. The Common Stock has been approved for
listing, subject to notice of issuance, on the NYSE. Certain reports, proxy
statements and other information of listed companies can be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10005.
The Company intends to furnish to its stockholders annual reports
containing audited financial statements for each fiscal year.
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<PAGE> 78
AFFILIATED MANAGERS GROUP, INC. AND AFFILIATES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE COMPANY
AFFILIATED MANAGERS GROUP, INC.
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1997............ F-3
Unaudited Pro Forma Consolidated Statements of Operations for the Year Ended December 31,
1996 and for the Nine Months Ended September 30, 1997...................................... F-4
Notes to Unaudited Pro Forma Consolidated Financial Statements............................... F-6
Report of Independent Accountants............................................................ F-10
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997
(Unaudited)................................................................................ F-11
Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996
and for the Nine Months Ended September 30, 1996 and 1997 (Unaudited)...................... F-12
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996
and for the Nine Months Ended September 30, 1996 and 1997 (Unaudited)...................... F-13
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31,
1994, 1995 and 1996 and for the Nine Months Ended September 30, 1997 (Unaudited)........... F-14
Notes to Consolidated Financial Statements................................................... F-15
PRIOR INVESTMENTS
GOFEN AND GLOSSBERG, INC.
Report of Independent Accountants............................................................ F-30
Statements of Financial Condition as of December 31, 1996 and 1995........................... F-31
Statements of Operations for the Years Ended December 31, 1996 and 1995...................... F-32
Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1996 and
1995....................................................................................... F-33
Statements of Cash Flows for the Years Ended December 31, 1996 and 1995...................... F-34
Notes to Financial Statements................................................................ F-35
THE BURRIDGE GROUP INC.
Report of Independent Accountants............................................................ F-38
Statements of Operations for the Period January 1, 1996 to December 30, 1996 and for the
Years Ended December 31, 1995 and 1994..................................................... F-39
Statements of Changes in Shareholders' Equity for the Period January 1, 1996 to December 30,
1996 and for the Years Ended December 31, 1995 and 1994.................................... F-40
Statements of Cash Flows for the Period January 1, 1996 to December 30, 1996 and for the
Years Ended December 31, 1995 and 1994..................................................... F-41
Notes to Financial Statements................................................................ F-42
FIRST QUADRANT INSTITUTIONAL AND FIRST QUADRANT LIMITED
Independent Auditors' Report................................................................. F-45
Combined Statements of Income for the Period January 1, 1996 through 1996 and for the Year
Ended December 31, 1995.................................................................... F-46
Notes to Combined Statements of Income....................................................... F-47
GEOCAPITAL CORPORATION
Report of Independent Accountants............................................................ F-51
Balance Sheets as of September 30, 1996 and 1995............................................. F-52
Statements of Income and Retained Earnings for the Years Ended September 30, 1996, 1995 and
1994....................................................................................... F-53
Statements of Cash Flow for the Years Ended September 30, 1996, 1995 and 1994................ F-54
Notes to Financial Statements................................................................ F-55
SUBSEQUENT INVESTMENT
TWEEDY, BROWNE COMPANY L.P.
Report of Independent Accountants............................................................ F-59
Balance Sheets as of December 31, 1996 and September 30, 1996 and 1995....................... F-60
Statements of Operations for the period October 1, 1996 through December 31, 1996 and the
Years Ended September 30, 1996, 1995 and 1994.............................................. F-61
Statements of Changes in Partners' Capital for the period October 1, 1996 through December
31, 1996 and the Years Ended September 30, 1996 and 1995................................... F-62
Statements of Cash Flows for the period October 1, 1996 through December 31, 1996 and the
Years Ended September 30, 1996, 1995 and 1994.............................................. F-63
Notes to Financial Statements................................................................ F-64
</TABLE>
F-1
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AFFILIATED MANAGERS GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth the unaudited pro forma consolidated
statements of operations for the Company for the year ended December 31, 1996
and the nine months ended September 30, 1997, and the unaudited pro forma
consolidated balance sheet of the Company as of September 30, 1997, after giving
effect to: (i) the investments made during the year ended December 31, 1996 and
the nine months ended September 30, 1997 (the "Prior Investments"); (ii) the
recent investment in Tweedy, Browne (the "Subsequent Investment"), which
occurred subsequent to September 30, 1997; (iii) the Company's Recent Financing
(as defined below), which was entered into in connection with the Subsequent
Investment; (iv) a 50-for-1 stock split of the Common Stock effected in the form
of a stock dividend as of the date of this Prospectus, the exercise of all
warrants to purchase Shares of the Company's convertible preferred stock (the
"Convertible Preferred Stock") and the conversion of all outstanding shares of
the Convertible Preferred Stock into shares of Common Stock upon consummation of
the Offerings and the issuance of 78,700 shares of Common Stock to shareholders
of an Affiliate (the "Recapitalization"); and (v) the sale of Common Stock
offered in the Offerings and the application of the net proceeds therefrom. The
unaudited pro forma consolidated statement of operations for the year ended
December 31, 1996 and the nine months ended September 30, 1997 assume that each
of the transactions occurred on January 1, 1996. The unaudited pro forma
consolidated balance sheet assumes that each of these transactions occurred on
September 30, 1997.
The pro forma adjustments are based on available information and upon
certain assumptions that management believes are reasonable under the
circumstances. The Prior Investments and the Subsequent Investment are accounted
for under the purchase method of accounting. Under this method of accounting,
the purchase price has been allocated to the fair value of net assets acquired,
primarily acquired client relationships, and any remaining excess purchase price
over net assets acquired is categorized as goodwill. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations". The
Prior Investments were primarily funded with cash received from borrowings under
the Company's revolving credit facility and from issuances of the Company's
Convertible Preferred Stock. The Subsequent Investment has been funded by: (i)
cash received from borrowings ("Senior Debt") under the Credit Facility, (ii)
cash received from the issuance of $60 million face amount of subordinated debt
(the "Subordinated Debt"), and (iii) cash received from the issuance of $30
million of Class C Convertible Preferred Stock and warrants to purchase Class C
Convertible Preferred Stock (clauses (i) - (iii) collectively, the "Recent
Financing"). See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources".
The unaudited pro forma consolidated financial information should be read
in conjunction with the Consolidated Financial Statements of the Company
(including the unaudited information as of and for the nine months ended
September 30, 1997) and the related notes thereto included elsewhere in this
Prospectus. The unaudited pro forma consolidated financial information is based
on the historical data with respect to the Company and the acquired businesses
comprising the Prior Investments and the Subsequent Investment, and is not
necessarily indicative of the results that might have occurred had such
transactions actually taken place at the beginning of the period specified and
is not intended to be a projection of future results.
F-2
<PAGE> 80
AFFILIATED MANAGERS GROUP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUBSEQUENT
HISTORICAL INVESTMENT FINANCING PRO FORMA OFFERING PRO FORMA
(A) (B) ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
---------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........ $ 10,442 $ 2,647 $ 2,425(D) $ 15,514 $ -- $ 15,514
Investment advisory fees
receivable..................... 19,580 2,734 -- 22,314 -- 22,314
Prepaid expenses and other
current assets................. 3,309 4 75(D) 3,388 -- 3,388
-------- --------- ------- -------- --------- --------
Total current assets....... 33,331 5,385 2,500 41,216 -- 41,216
Fixed assets, net................ 4,071 640 -- 4,711 -- 4,711
Secured demand notes
receivable..................... -- 800 -- 800 -- 800
Equity investment in Affiliate... 1,211 -- -- 1,211 -- 1,211
Acquired client relationships,
net of accumulated
amortization................... 44,917 98,294(C) -- 143,211 740(E) 143,951
Goodwill, net of accumulated
amortization................... 53,545 200,478(C) -- 254,023 1,109(E) 255,132
Other assets..................... 5,325 -- 8,900(D) 14,225 (5,168)(F) 9,057
-------- --------- ------- -------- --------- --------
Total assets............... $142,400 $ 305,597 $11,400 $459,397 $ (3,319) $ 456,078
======== ========= ======= ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable and accrued
liabilities.................... $ 17,251 $ 4,197 $ -- $ 21,448 $ -- $ 21,448
Senior debt -- current portion... -- 5,500 -- 5,500 (5,500)(G) --
-------- --------- ------- -------- --------- --------
Total current
liabilities.............. 17,251 9,697 -- 26,948 (5,500) 21,448
Senior debt...................... 63,300 205,100 11,400(D) 279,800 (97,600)(G) 182,200
Other long-term liabilities...... 4,249 -- -- 4,249 -- 4,249
Subordinated debt................ -- 59,600 -- 59,600 (58,800)(G)(F) 800
-------- --------- ------- -------- --------- --------
Total liabilities.......... 84,800 274,397 11,400 370,597 (161,900) 208,697
-------- --------- ------- -------- --------- --------
Minority interest................ 8,775 -- -- 8,775 -- 8,775
Stockholders' equity:
Preferred stock................ 53,577 31,200 -- 84,777 (84,777)(G) --
Common stock................... 15 -- -- 15 249,726(G)(E) 249,741
Foreign translation
adjustment................... (86) -- -- (86) -- (86)
Accumulated deficit............ (4,681) -- -- (4,681) (6,368)(F) (11,049)
-------- --------- ------- -------- --------- --------
Total stockholders'
equity................... 48,825 31,200 -- 80,025 158,581 238,606
-------- --------- ------- -------- --------- --------
Total liabilities and
stockholders' equity..... $142,400 $ 305,597 $11,400 $459,397 $ (3,319) $ 456,078
======== ========= ======= ======== ========= ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
F-3
<PAGE> 81
AFFILIATED MANAGERS GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRIOR SUBSEQUENT ADJUSTMENTS
INVESTMENTS INVESTMENT FOR FINANCING
HISTORICAL (H) (I) INVESTMENTS ADJUSTMENTS PRO FORMA
---------- ----------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 50,384 $29,997 $ 36,942 $ 3,676(J) $ -- $120,999
Operating expenses:
Compensation and related
expenses................... 21,113 21,494 5,402 (9,917)(J) -- 38,092
Amortization of intangible
assets..................... 8,053 -- -- 11,277(K) -- 19,330
Depreciation and other
amortization............... 932 308 328 -- 1,078(M) 2,646
Other operating expenses..... 13,115 7,253 5,623 -- -- 25,991
-------- ------- -------- --------- -------- --------
Total operating expenses... 43,213 29,055 11,353 1,360 1,078 86,059
-------- ------- -------- --------- -------- --------
Operating income (loss)....... 7,171 942 25,589 2,316 (1,078) 34,940
Non-operating (income) and
expenses:
Investment and other income.. (337) (93) (1) -- -- (431)
Interest expense............. 2,747 -- 48 -- 28,501(M) 31,296
-------- ------- -------- --------- -------- --------
2,410 (93) 47 -- 28,501 30,865
-------- ------- -------- --------- -------- --------
Income (loss) before minority
interest and income taxes.... 4,761 1,035 25,542 2,316 (29,579) 4,075
Minority interest............. (5,969) -- -- (11,570)(J) -- (17,539)
-------- ------- -------- --------- -------- --------
Income (loss) before income
taxes........................ (1,208) 1,035 25,542 (9,254) (29,579) (13,464)
Income taxes.................. 181 604 938 (604)(L) -- 1,119
-------- ------- -------- --------- -------- --------
Net income (loss)............. $ (1,389) $ 431 $ 24,604 $ (8,650) $(29,579) $(14,583)
======== ======= ======== ========= ======== ========
Net income (loss) per share... $ (0.21)(R) $ (1.63)(Q)
======== ========
Number of shares used in net
income (loss) per share...... 6,634 8,920(Q)
======== ========
<CAPTION>
PRO FORMA
OFFERING AS
ADJUSTMENTS ADJUSTED
---------- ---------
<S> <C<C> <C>
Revenues...................... $ -- $120,999
Operating expenses:
Compensation and related
expenses................... -- 38,092
Amortization of intangible
assets..................... 200(N) 19,530
Depreciation and other
amortization............... (312)(O) 2,334
Other operating expenses..... -- 25,991
-------- -------
Total operating expenses... (112) 85,947
-------- -------
Operating income (loss)....... 112 35,052
Non-operating (income) and
expenses:
Investment and other income.. -- (431)
Interest expense............. (17,039)(O) 14,257
-------- -------
(17,039) 13,826
-------- -------
Income (loss) before minority
interest and income taxes.... 17,151 21,226
Minority interest............. -- (17,539)
-------- -------
Income (loss) before income
taxes........................ 17,151 3,687
Income taxes.................. 430(P) 1,549
-------- -------
Net income (loss)............. $ 16,721 $ 2,138
======== =======
Net income (loss) per share... $ 0.13 (Q)
=======
Number of shares used in net
income (loss) per share...... 16,498 (Q)
=======
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
F-4
<PAGE> 82
AFFILIATED MANAGERS GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRIOR SUBSEQUENT ADJUSTMENTS PRO FORMA
INVESTMENTS INVESTMENT FOR FINANCING OFFERING AS
HISTORICAL (H) (I) INVESTMENTS ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED
---------- ----------- ---------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $ 53,280 $11,566 $ 35,519 $ 3,494(J) $ -- $103,859 $ -- $103,859
Operating expenses:
Compensation and
related
expenses......... 18,900 9,539 5,735 (3,102)(J) -- 31,072 -- 31,072
Amortization of
intangible
assets........... 3,121 -- -- 7,946(K) -- 11,067 150(N) 11,217
Depreciation and
other
amortization..... 1,059 26 473 -- 793(M) 2,351 (234)(O) 2,117
Other operating
expenses......... 21,228 1,496 3,919 -- -- 26,643 -- 26,643
-------- ------- -------- --------- --------- -------- --------- --------
Total operating
expenses....... 44,308 11,061 10,127 4,844 793 71,133 (84) 71,049
-------- ------- -------- --------- --------- -------- --------- --------
Operating income
(loss)............. 8,972 505 25,392 (1,350) (793) 32,726 84 32,810
Non-operating
(income) and
expenses:
Investment and
other income..... (814) (10) (8) -- -- (832) -- (832)
Interest expense... 2,707 -- 36 -- 20,730(M) 23,473 (12,780)(O) 10,693
-------- ------- -------- --------- --------- -------- --------- --------
1,893 (10) 28 -- 20,730 22,641 (12,780) 9,861
-------- ------- -------- --------- --------- -------- --------- --------
Income (loss) before
minority interest
and income taxes... 7,079 515 25,364 (1,350) (21,523) 10,085 12,864 22,949
Minority interest.... (6,025) -- -- (8,898)(J) -- (14,923) 189(N) (14,734)
-------- ------- -------- --------- --------- -------- --------- --------
Income (loss) before
income taxes....... 1,054 515 25,364 (10,248) (21,523) (4,838) 13,053 8,215
Income taxes......... 221 94 678 (94)(L) -- 899 2,551(P) 3,450
-------- ------- -------- --------- --------- -------- --------- --------
Net income (loss).... $ 833 $ 421 $ 24,686 $ (10,154) $ (21,523) $ (5,737) $ 10,502 $ 4,765
======== ======= ======== ========= ========= ======== ========= ========
Net income (loss) per
share.............. $ 0.12 $ (0.63) (Q) $ 0.29 (Q)
======== ======== ========
Number of shares used
in net income
(loss) per share... 6,858 9,056 (Q) 16,635 (Q)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
consolidated financial statements.
F-5
<PAGE> 83
AFFILIATED MANAGERS GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
PRO FORMA CONSOLIDATED BALANCE SHEET
The accompanying pro forma consolidated balance sheet as of September 30,
1997 gives effect to the Subsequent Investment and the adjustments as a result
of the Offerings. The estimated fair market values reflected below are based on
the assumption that the Subsequent Investment had occurred on September 30, 1997
after giving effect to the new cost basis, including intangible assets, in the
net assets acquired and to the minimum amounts of cash, net working capital and
net worth contractually required to remain in the business acquired. The
estimated fair market values reflected below use estimates and make assumptions
about purchase price allocation for the Subsequent Investment and are subject to
revision but, in management's opinion, such revisions are not expected to be
material.
(A) Represents the historical unaudited consolidated condensed balance
sheet of the Company at September 30, 1997.
(B) Reflects the Subsequent Investment as if such investment had occurred
on September 30, 1997. The consideration paid for the Subsequent Investment, net
of cash acquired and including transaction costs, consisted of $298.0 million in
cash. In conjunction with the Subsequent Investment certain senior employees
have entered into long-term employment and non-competition agreements with
Tweedy, Browne and the Company.
The estimated fair market value of the assets and liabilities of the
Subsequent Investment is as follows:
NET ASSETS ACQUIRED
<TABLE>
<CAPTION>
DESCRIPTION TWEEDY, BROWNE
------------------------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
Accounts receivable.......................................... $ 2,734
Other current assets......................................... 4
Fixed assets, net............................................ 640
Secured demand note receivables.............................. 800
Acquired client relationships................................ 98,294
Goodwill..................................................... 200,478
Accounts payable and accrued liabilities..................... (4,197)
Subordinated debt............................................ (800)
--------
Total................................................... $297,953
========
</TABLE>
Net assets acquired are as shown net of $2.5 million of cash acquired and
includes capitalized transaction costs (see note C below).
In determining the carrying value and associated amortization periods of
intangible assets, the Company considers the attributes of each of the
businesses in which it invests. (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 1 -- "Acquired Client
Relationships and Goodwill" to the Company's consolidated financial statements.)
F-6
<PAGE> 84
AFFILIATED MANAGERS GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company financed the purchase price of the Subsequent Investment as
follows (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources").
FINANCING FOR CONSIDERATION PAID
<TABLE>
<CAPTION>
DESCRIPTION TWEEDY, BROWNE
- ----------------------------------------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
Senior debt.................................................................. $210,500
Subordinated debt............................................................ 58,800
Class C Convertible Preferred Stock and warrants............................. 31,200
Cash acquired................................................................ (2,547)
--------
Total................................................................... $297,953
========
</TABLE>
(C) The purchase price of the Company's investments have been allocated to
acquired client relationships based on the net present value of client
relationships existing at the acquisition date. The excess of purchase price for
the acquisition of Affiliates over the fair value of the net assets acquired,
including acquired client relationships, was classified as goodwill. (see Note
(K) to the Unaudited Pro Forma Consolidated Financial Statements and Note 1
- --"Acquired Client Relationships and Goodwill" to the Company's consolidated
financial statements.) The purchase price of the Company's investments also
includes $500,000 of estimated capitalized transaction costs in connection with
the Subsequent Investment.
(D) Includes $8.9 million of estimated capitalized debt issuance costs and
$75,000 of prepaid Senior Debt fees borrowed in connection with the Senior Debt
and the Subordinated Debt and $2.4 million borrowed for working capital
purposes.
(E) Reflects the issuance of 78,700 shares of Common Stock issued to
shareholders of an Affiliate upon consummation of the Offerings in exchange for
an additional purchased interest in the Affiliate. (See Note (N) below.)
(F) Reflects the amortization of $1.2 million in debt discount in
connection with the retired Subordinated Debt, the write-off of $418,000 of
capitalized debt issuance costs related to the Company's outstanding Senior
Debt, which was retired with the proceeds from the Recent Financing, and the
write-off of $6.0 million of capitalized debt issuance costs related to the
repayment of Senior Debt and the retirement of Subordinated Debt incurred in
connection with the Subsequent Investment with the application of the net
proceeds of the Offerings.
(G) Reflects the issuance of 7,500,000 shares of the Company's Common
Stock, par value $.01 per share, at a price of $23.50 per share in the
Offerings, resulting in a combined net increase of $163.1 million to Common
Stock and Additional Paid-In Capital on Common Stock. Gross proceeds to the
Company are expected to be $176.3 million and transaction costs, including the
underwriting discount, are expected to be $13.2 million. Also reflects the
application of the net proceeds of the proposed Offerings to retire $5.5 million
of current portion of Senior Debt, $97.6 million of long-term portion of Senior
Debt and $60.0 million face amount of Subordinated Debt after amortization of
$1.2 million of debt discount.
Also reflects the conversion of the Company's Convertible Preferred Stock
and warrants to purchase Class C Convertible Preferred Stock into Common Stock
immediately prior to the Offerings. Upon the closing of the Offerings, $84.8
million of Convertible Preferred Stock will be
F-7
<PAGE> 85
AFFILIATED MANAGERS GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
converted at the specified conversion prices into Common Stock which would
represent an increase of $80,000 to Common Stock and $84.7 million to Additional
Paid-In Capital on Common Stock.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying unaudited pro forma consolidated statements of operations
for the year ended December 31, 1996 and the nine months ended September 30,
1997 are presented as if each of the following transactions and events had
occurred on January 1, 1996: (i) the Prior Investments and the Subsequent
Investment, (ii) the Recent Financing and (iii) the proposed Offerings and
application of proceeds therefrom. The Unaudited Pro Forma Consolidated
Statements of Operations reflect the historical operations of each acquired
entity, as adjusted to reflect certain pro forma adjustments primarily relating
to: (i) increases in revenues from significant investment advisory contracts
with managed funds, previously managed directly by certain key employees, which
were entered into in connection with the investments in Tweedy, Browne and
GeoCapital, (ii) reductions in expenses from discretionary compensation plans
and arrangements to give effect to the contractually agreed upon cash flow
distribution obligations of the Affiliate, (iii) amortization of intangible
assets arising in connection with the acquisitions, (iv) interest expense
related to debt incurred to finance such acquisitions and (v) tax effects of the
above.
(H) Reflects the combined historical results of the Prior Investments
beginning January 1, 1996 and ending on the date of investment.
(I) Reflects the historical results of operations of Tweedy, Browne as if
the Subsequent Investment occurred on January 1, 1996.
(J) Reflects the pro forma increase in revenues from significant investment
advisory contracts entered into by the acquired businesses on assets managed
directly by certain key employees of the acquired businesses prior to AMG's
investment, and the reduction in compensation expense from discretionary
compensation plans and arrangements, and increases in minority interest expense
to give effect to accrued cash flow distributions as determined under the
organizational documents of the businesses comprising the Prior Investments and
the Subsequent Investment.
(K) Reflects adjustments for increased amortization expense of the
Company's intangible assets for each of the Prior Investments and Subsequent
Investment as if they had been acquired on January 1, 1996. The amortization
period for intangible assets from each investment is assessed individually, with
amortization periods for the Company's investments to date, including the
Subsequent Investment occurring after September 30, 1997, ranging from nine to
26 years in the case of acquired client relationships and 15 to 35 years for
goodwill. The expected useful lives of acquired client relationships is 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. In determining the amortization period for goodwill acquired,
the Company considers a number of factors for each investment 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. (see Note (C) to the
Unaudited Pro Forma Consolidated Financial Statements and Note 1 -- "Acquired
Client Relationships and Goodwill" to the Company's consolidated financial
statements.)
F-8
<PAGE> 86
AFFILIATED MANAGERS GROUP, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(L) Reflects, upon AMG's investment, the elimination of income taxes based
upon the pre-acquisition conversion into a limited partnership or limited
liability company form from corporate form.
(M) Reflects the additional interest expense and amortization of debt
issuance costs of $28.5 million and $1.1 million, respectively, for the year
ended December 31, 1996 and $20.7 million and $793,000, respectively, for the
nine months ended September 30, 1997, which would have been incurred by the
Company assuming (i) the Prior Investments and the Subsequent Investment had
occurred on January 1, 1996, (ii) the Recent Financing occurred as of January 1,
1996 and (iii) such Recent Financing amounts and the associated interest rates
had remained unchanged for the year ended December 31, 1996 and for the nine
months ended September 30, 1997. The borrowings made as part of the Recent
Financing contain interest rate terms which vary. For each 1/8 of 1% change in
interest rates, annual interest expense related to the Recent Financing after
application of the net proceeds from the Offerings, would increase or decrease
by $228,000.
(N) Reflects the increased amortization of intangible assets and reduction
in minority interest associated with the additional purchased interest in an
Affiliate acquired in exchange for Common Stock issued to shareholders of the
Affiliate in connection with the Offerings. (See Note (E) above.)
(O) Reflects the elimination of interest expense of $17.0 million for the
year ended December 31, 1996 and $12.8 million for the nine months ended
September 30, 1997 related to the application of the estimated net proceeds of
the Offerings to the retirement of $5.5 million current portion of Senior Debt,
$97.6 million long-term portion of Senior Debt and $60.0 million face amount of
Subordinated Debt (after amortization of $1.2 million of debt discount). Also
reflects the reduction of $312,000 and $234,000 for the year ended December 31,
1996 and nine months ended September 30, 1997, respectively, in amortization of
capitalized issuance costs upon the retirement of debt.
(P) Reflects the provision for federal and state income taxes at an
effective statutory rate of 42%.
(Q) Net income (loss) per share is computed on the weighted average number
of shares of Common Stock and common equivalent shares for the respective
period. Using Securities and Exchange Commission directives for companies
contemplating an initial public offering, stock options and restricted stock
issued within one year of an initial public offering have been included as
outstanding shares using the treasury stock method for all periods presented. In
addition, the Company's shares of Convertible Preferred Stock are considered
common equivalent shares, since their respective dates of issuance, as they
convert to shares of Common Stock immediately prior to the consummation of the
Offerings.
Pro forma net income (loss) per share has been calculated using the
weighted average shares outstanding calculated as described above after giving
effect to both the Recapitalization (excluding the issuance of shares of Common
Stock to the shareholders of an Affiliate) and issuances related to the
investments made subsequent to January 1, 1996, including the Subsequent
Investment from January 1, 1996. All proceeds received from shares sold in the
Offerings will be used to retire debt. Pro forma net income (loss) per share as
adjusted is computed using the pro forma weighted average shares outstanding
plus the shares sold in the Offerings, all of which will be used to retire debt,
and the shares from the issuance of Common Stock to the shareholders of an
Affiliate, as if all such shares were issued at the beginning of the periods
presented.
(R) Before extraordinary items.
F-9
<PAGE> 87
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, 1996 and 1995, 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,
1996. 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 audit.
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, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
April 26, 1997, except for
Note 16 for which the
date is October 27, 1997
F-10
<PAGE> 88
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $14,096 $ 6,767 $ 10,442
Investment advisory fees receivable...................... 2,545 15,491 19,580
Other current assets..................................... 206 806 3,309
------- -------- ---------
Total current assets.............................. 16,847 23,064 33,331
Fixed assets, net.......................................... 1,086 2,999 4,071
Equity investment in Affiliate............................. 976 1,032 1,211
Acquired client relationships, net of accumulated
amortization of $1,242 in 1995, $2,979 in 1996 and $4,623
in 1997.................................................. 18,192 30,663 44,917
Goodwill, net of accumulated amortization of $3,706 in
1995, $10,022 in 1996 and $11,499 in 1997................ 26,293 40,809 53,545
Other assets............................................... 1,305 2,768 5,325
------- -------- ---------
Total assets...................................... $64,699 $101,335 $ 142,400
======= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 316 $ 396 $ 3,908
Notes payable to related parties......................... 1,212 7,379 --
Accrued liabilities...................................... 2,583 15,816 13,343
------- -------- ---------
Total current liabilities......................... 4,111 23,591 17,251
Senior bank debt........................................... 18,400 33,400 63,300
Deferred income tax liabilities............................ 216 -- 69
Accrued affiliate liability................................ 3,200 3,200 3,200
Notes payable to related party............................. 693 -- --
Other long-term liabilities................................ -- 665 980
------- -------- ---------
Total liabilities................................. 26,620 60,856 84,800
Minority interest.......................................... 1,212 3,490 8,775
Commitments and contingencies.............................. -- -- --
Stockholders' equity:
Class A Preferred Stock.................................. 20,008 20,008 20,008
Class B Preferred Stock:
Series B-1 Voting Preferred stock...................... 7,000 9,468 10,968
Series B-2 Non-voting Preferred stock.................. 13,000 13,000 13,000
Class D Preferred Stock.................................. -- -- 9,601
Common stock............................................. -- -- --
Additional paid-in capital on common stock............... 1 5 15
Foreign translation adjustment........................... -- 22 (86)
Accumulated deficit...................................... (3,142) (5,514) (4,681)
------- -------- ---------
Total stockholders' equity........................ 36,867 36,989 48,825
------- -------- ---------
Total liabilities and stockholders' equity........ $64,699 $101,335 $ 142,400
======= ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-11
<PAGE> 89
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues......................... $ 5,374 $ 14,182 $ 50,384 $ 32,170 $ 53,280
Operating expenses:
Compensation and related
expenses.................... 3,591 6,018 21,113 13,421 18,900
Amortization of intangible
assets...................... 774 4,174 8,053 2,518 3,121
Depreciation and other
amortization................ 19 133 932 653 1,059
Selling, general and
administrative.............. 743 2,237 10,854 7,615 17,767
Other operating expenses....... 257 330 2,261 1,963 3,461
---------- ---------- ---------- ---------- ----------
5,384 12,892 43,213 26,170 44,308
---------- ---------- ---------- ---------- ----------
Operating income
(loss)............... (10) 1,290 7,171 6,000 8,972
Non-operating (income) and
expenses:
Investment and other income.... (966) (265) (337) (763) (814)
Interest expense............... 158 1,244 2,747 2,036 2,707
---------- ---------- ---------- ---------- ----------
(808) 979 2,410 1,273 1,893
---------- ---------- ---------- ---------- ----------
Income before minority interest,
income taxes and extraordinary
item........................... 798 311 4,761 4,727 7,079
Minority interest................ (305) (2,541) (5,969) (3,732) (6,025)
---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes and extraordinary
item........................ 493 (2,230) (1,208) 995 1,054
Income taxes..................... 699 706 181 696 221
---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item............. (206) (2,936) (1,389) 299 833
---------- ---------- ---------- ---------- ----------
Extraordinary item............... -- -- (983) (580) --
---------- ---------- ---------- ---------- ----------
Net income (loss)................ $ (206) $ (2,936) $ (2,372) $ (281) $ 833
========== ========== ========== ========== ==========
Net income (loss) per share:
Income (loss) per common and
common equivalent share
before extraordinary item... $ (0.05) $ (0.58) $ (0.21) $ 0.05 $ 0.12
Extraordinary item............. -- -- (0.15) (0.09) --
---------- ---------- ---------- ---------- ----------
Net income (loss) per common
and common equivalent
share....................... $ (0.05) $ (0.58) $ (0.36) $ (0.04) $ 0.12
========== ========== ========== ========== ==========
Weighted average number of
common and common equivalent
shares outstanding.......... 4,481,461 5,058,009 6,633,966 6,587,969 6,857,845
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-12
<PAGE> 90
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)..................... $ (206) $ (2,936) $ (2,372) $ (281) $ 833
Adjustments to reconcile net income
(loss) to net cash flow from
operating activities:
Amortization of intangible assets... 774 4,174 8,053 2,519 3,121
Equity-based compensation costs..... -- -- 665 478 314
Extraordinary item.................. -- -- 983 580 --
Minority interest................... 80 631 2,309 2,756 776
Depreciation and other
amortization...................... 19 133 932 653 1,059
Realized gain....................... (865) -- -- -- --
Changes in assets and liabilities:
(Increase) decrease in investment
advisory fees receivable............ 170 (186) (8,473) (1,907) (212)
(Increase) decrease in other current
assets.............................. 2,747 (397) (1,881) (565) (2,304)
Increase (decrease) in accounts
payable and accrued expenses........ (426) (268) 6,184 889 3,093
Increase (decrease) in deferred income
taxes............................... (1,475) 141 (215) -- 69
------- -------- -------- -------- --------
Cash flow from operating
activities.................... 818 1,292 6,185 5,122 6,749
------- -------- -------- -------- --------
Cash flow used in investing activities:
Purchase of fixed assets.............. (87) (287) (922) (811) (1,545)
Costs of investments, net of cash
acquired............................ (6,477) (38,031) (25,646) (25,187) (25,629)
Sale of investment.................... -- -- 642 -- --
Distribution received................. -- -- 275 -- --
Increase (decrease) in other assets... (55) 216 (3,639) (2,595) 167
Proceeds from sale of business........ 463 -- -- -- --
Repayment on notes recorded in sale of
business............................ -- 321 80 80 --
------- -------- -------- -------- --------
Cash flow used in investing
activities.................... (6,156) (37,781) (29,210) (28,513) (27,007)
------- -------- -------- -------- --------
Cash flow from financing activities:
Borrowings of senior bank debt........ -- 28,400 21,000 21,000 31,900
Repayments of senior bank debt........ -- (10,000) (6,000) (4,000) (2,000)
Repayments of notes payable........... (500) (962) (1,212) (462) (5,878)
Issuances of equity securities........ 10,009 20,001 2,484 2,484 10
Repayment of subscription
receivable.......................... -- 10,000 -- -- --
Repurchase of preferred stock......... -- -- (13) -- --
Debt issuance costs................... -- (1,025) (609) (603) --
------- -------- -------- -------- --------
Cash flow from financing
activities.................... 9,509 46,414 15,650 18,419 24,032
Effect of foreign exchange rate changes
on cash flow.......................... -- -- 46 (47) (99)
Net increase (decrease) in cash and cash
equivalents........................... 4,171 9,925 (7,329) (5,019) 3,675
Cash and cash equivalents at beginning
of year............................... -- 4,171 14,096 14,096 6,767
------- -------- -------- -------- --------
Cash and cash equivalents at end of
year.................................. $ 4,171 $ 14,096 $ 6,767 $ 9,077 $ 10,442
======= ======== ======== ======== ========
Supplemental disclosure of cash flow
information:
Interest paid......................... $ 104 $ 1,005 $ 2,905 $ 2,216 $ 2,264
Income taxes paid..................... 192 696 436 433 129
Supplemental disclosure of non-cash
investing activities:
Notes received in sale of business.... 401 -- -- -- --
Increase in long-term liabilities
related to acquisitions............. -- 3,200 -- -- --
Supplemental disclosure of non-cash
financing activities:
Preferred stock issued................ -- -- -- -- 11,101
Notes issued in acquisitions.......... 3,367 -- 6,686 -- --
Equity securities subscribed.......... 10,000 -- -- -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-13
<PAGE> 91
AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL FOREIGN TOTAL
PREFERRED COMMON PREFERRED COMMON PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS'
SHARES SHARES STOCK STOCK CAPITAL ADJUSTMENTS DEFICIT EQUITY
--------- ---------- --------- ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994.... -- -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock.... -- 4,550,000 -- -- 20,009 -- -- 20,009
Subscription receivable..... -- -- -- -- (10,000) -- -- (10,000)
Exchange of common stock for
preferred stock........... 40,000 (2,000,000) 10,004 -- (10,004) -- -- --
Net loss.................... -- -- -- -- -- -- (206) (206)
------- ------- ------- ----- -------- ----- ------- --------
Balance, 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)
------- ------- ------- ----- -------- ----- ------- --------
Balance, 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
------- ------- ------- ----- -------- ----- ------- --------
Balance, December 31, 1996.. 113,534 987,500 42,476 -- 5 22 (5,514) 36,989
Issuance of common stock.... -- 50,000 -- -- 10 -- -- 10
Issuance of preferred
stock..................... 12,382 -- 11,101 -- -- -- -- 11,101
Net income.................. -- -- -- -- -- -- 833 833
Foreign translation
adjustment................ -- -- -- -- -- (108) -- (108)
------- ------- ------- ----- -------- ----- ------- --------
Balance, September 30, 1997
(unaudited)............... 125,916 1,037,500 $53,577 $ -- $ 15 $ (86) $(4,681) $ 48,825
======= ======= ======= ===== ======== ===== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-14
<PAGE> 92
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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, while the remaining
portion of revenues (the Owners' Allocation) is allocable to AMG and the other
partners or members 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 capital owned by owners
other than AMG.
Unaudited Interim Financial Statements
The unaudited interim financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (the
"Commission"). Certain information and note disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. In the opinion of
management, all adjustments necessary for a fair presentation of interim results
of operations (consisting only of normal recurring accruals and adjustments)
have been made to the interim financial statements. Results of operations for
interim periods are not necessarily indicative of results of operations for the
respective full year.
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 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.
F-15
<PAGE> 93
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 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 25 years. The expected useful lives of acquired client
relationships is 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 30 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 in 1994 or for the nine months ended
September 30, 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.
Debt issuance costs of $983 were written off as
F-16
<PAGE> 94
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
an extraordinary item in 1996 as part of the Company's replacement of its
previous credit facility with a new facility.
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.
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 12, 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 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 proforma 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.
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.
F-17
<PAGE> 95
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. CONCENTRATIONS OF CREDIT RISK:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
accounts 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 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, 1996,
one of those Affiliates accounted for approximately 34% of AMG's share of the
Owners' Allocation.
3. FIXED ASSETS AND LEASE COMMITMENTS:
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------ -------
<S> <C> <C>
Office equipment........................ $ 683 $ 2,614
Furniture and fixtures.................. 313 1,677
Leasehold improvements.................. 59 538
Computer software....................... 156 184
------ -------
Total fixed assets............ 1,211 5,013
------ -------
Accumulated depreciation................ (125) (2,014)
------ -------
Fixed assets, net............. $1,086 $ 2,999
====== =======
</TABLE>
The Company and its Affiliates lease computer equipment and office space
for their operations. At December 31, 1996, the Company's aggregate future
minimal rentals for operating leases having initial or noncancelable lease terms
greater than one year are payable as follows:
<TABLE>
<CAPTION>
REQUIRED
MINIMUM
YEAR ENDING DECEMBER 31, PAYMENTS
-------------------------------------------------- --------
<S> <C>
1997.............................................. $1,040
1998.............................................. 744
1999.............................................. 550
2000.............................................. 488
2001.............................................. 343
Thereafter........................................ --
</TABLE>
Consolidated rent expense for 1994, 1995 and 1996 was $260, $493 and
$2,359, respectively.
F-18
<PAGE> 96
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Accrued compensation.................... $1,283 $ 9,264
Accrued rent............................ 27 3,509
Accrued interest........................ 304 121
Accrued taxes........................... 298 4
Deferred revenue........................ 9 796
Accrued commissions..................... 201 236
Accrued professional services........... 66 1,350
Other................................... 395 536
------ --------
$2,583 $ 15,816
====== ========
</TABLE>
5. RETIREMENT PLANS:
At December 31, 1996, AMG had a defined contribution retirement plan (the
"Plan") covering substantially all of its full-time employees and four of its
Affiliates. Three of AMG's other Affiliates had 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 1996 and 1995 were $656
and $222, respectively. The Company did not make any discretionary contributions
to the Plan in 1994.
6. SENIOR BANK DEBT PAYABLE:
In 1995, the Company negotiated a Senior Revolving Credit Agreement (the
"Credit Agreement") with a syndicate of banks enabling the Company to borrow, on
a revolving credit basis, up to $50 million. The Credit Agreement had a
five-year term and reduced the amount available for borrowing during its term. A
commitment fee of 1/2 of 1% was payable on the daily average unused portion of
the $50 million commitment. Interest rates on borrowings varied according to a
sliding scale with a maximum interest rate of either 1.75% over the Prime Rate
or 2.75% over the London Interbank Offered Rates ("LIBOR").
In March 1996, the Company replaced the Credit Agreement with a $125
million senior revolving credit facility, with principal repayment due on March
6, 2001. The Company pays a commitment fee of 1/2 of 1% on the daily unused
portion of the facility. Interest is payable at rates up to 1.25% over the Prime
Rate or 2.25% over LIBOR on amounts borrowed.
The effective interest rates on the outstanding borrowings were 6.5% and
8.5% at December 31, 1996 and 1995, respectively. All borrowings under the
agreements are collateralized by pledges of all capital stock or other equity
interests in each AMG Affiliate owned or to be acquired. The 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 agreement. The agreement also limits the
Company's ability to pay dividends and incur additional indebtedness.
At December 31, 1996, the Company was a party to two interest rate swap
agreements with a commercial bank linked to the three month LIBOR for a notional
principal amount of debt of $35 million. The swap agreements, which expire on
March 6, 2001, consisted of caps and floors that, upon quarterly reset dates,
will cap the cost of associated floating rate debt at 6.78% if floating rates
exceed 6.78% and exchange floating rate debt for fixed rate debt at 6.78% if
floating rates decline to 5% or below. The agreements are designed to limit
interest rate increases on the Company's borrowings. Under the swap agreements,
no amounts are exchanged between the Company and its counterparty unless the
three
F-19
<PAGE> 97
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
month LIBOR exceeds the cap of 6.78% or declines to or below the floor of 5%.
Amounts paid under these agreements will be accounted for as increases or
decreases to interest expense. No amounts have been exchanged under these
agreements.
7. INCOME TAXES:
A summary of the provision for income taxes is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ----- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal: Current............................ $379 $ 60 $ -- $ --
Deferred.......................... (44) 201 (233) 69
State: Current............................ 357 514 397 152
Deferred.......................... 7 (69) 17 --
---- ---- ----- -----
Provision for income taxes.................. $699 $706 $ 181 $ 221
==== ==== ===== =====
</TABLE>
The effective income tax rate differs from the amount computed on income
(loss) before income tax and extraordinary item by applying the U.S. federal
income tax rate because of the effect of the following items:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER NINE MONTHS
31, ENDED
----------------------- SEPTEMBER 30,
1994 1995 1996 1997
--- --- --- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Tax at U.S. federal income tax rate................ 35% (35)% (35)% 35%
Nondeductible expenses, primarily amortization of
intangibles...................................... 59 54 21 24
State income taxes, net of federal benefit......... 48 13 23 10
Valuation allowance................................ -- -- 6 --
Recognition of benefit of net operating loss
carryforwards.................................... -- -- -- (48)
--- --- --- ---
142% 32% 15% 21%
=== === === ===
</TABLE>
The components of deferred tax assets and liabilities follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
----- -------
<S> <C> <C>
Deferred assets (liabilities):
Net operating loss carryforward................................ $ 431 $ 3,481
Intangible amortization........................................ (708) (4,950)
Accrued compensation........................................... -- 2,004
Other, net..................................................... 61 (58)
----- -------
(216) 477
----- -------
Valuation allowance.............................................. -- (477)
----- -------
Net deferred income taxes........................................ $(216) $ --
===== =======
</TABLE>
F-20
<PAGE> 98
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
At December 31, 1996, the Company had tax net operating loss ("NOL")
carryforwards of $8,400 which expire beginning in the year 2010. Realization is
dependent on generating sufficient taxable income prior to expiration of the
loss carryforwards. At December 31, 1996, management believed it was more likely
than not that the Company's deferred tax asset of $477, arising from NOL
carryforwards, would not be realized and accordingly established a full
valuation allowance against the asset. As a result of the Company's initial
public offering, there may be a limitation placed on the Company's utilization
of its NOL's by Section 382 of the Internal Revenue Code. The Company will
review the valuation allowance at the end of each quarter 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 are 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:
1996
During 1996, the Company acquired in purchase transactions majority
interests in First Quadrant and The Burridge Group ("Burridge"). In addition,
the Company acquired additional partnership interests from limited partners of
two of its existing Affiliates.
The Company issued notes in the amount of $6,686 to Burridge selling
shareholders who remained as employees on December 31, 1996 as partial
consideration in the purchase. On January 3, 1997, the notes were settled in
cash for $5,185 and the issuance of 1,715 shares of Series B-1 Voting
Convertible Preferred Stock.
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 Financial Management ("Systematic"), Skyline Asset
Management ("Skyline") and Renaissance Investment Management ("Renaissance").
The Company also made a minority investment in Paradigm Asset Management Company
("Paradigm"). In connection with the Skyline acquisition, the Company assumed an
unconditional $3,200 purchase obligation on the equity interests of limited
partners which will be settled in either cash or the Company's stock.
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.
F-21
<PAGE> 99
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1994
In 1994, the Company acquired in a series of purchase transactions an 80%
interest in JMH Management Corporation ("JMH") for $6,320 in cash and the
issuance by JMH of promissory notes for $3,367. The promissory notes accrued
interest at 6% per annum and were paid in installments through January 31, 1997.
JMH is the general partner of J.M. Hartwell Limited Partnership ("Hartwell") and
owned 68% of Hartwell from 1994 through 1996. On January 1, 1996, the Company
acquired an additional 8.78% of Hartwell directly from a former limited partner.
The results of operations of JMH and Hartwell are included in the
consolidated results of operations of the Company beginning January 1, 1994.
The total purchase price, including cash, notes and capitalized transaction
costs, associated with these investments, is allocated as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Allocation of Purchase Price:
Net tangible assets................................ $ 350 $ 1,720 $ 2,198
Intangible assets.................................. 9,633 39,800 35,040
Minority investment................................ -- 888 --
------ ------- -------
Total purchase price....................... $9,983 $42,408 $37,238
====== ======= =======
</TABLE>
Unaudited pro forma data for the years ended December 31, 1995 and 1996 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 1995, assuming revenue sharing arrangements had been in effect for the entire
period and after making certain other pro forma adjustments.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
------- -------
<S> <C> <C>
Revenues............................................ $49,760 $60,392
Income before extraordinary item.................... 2,646 7
Net income (loss)................................... 2,646 (976)
Primary income (loss) per share..................... 0.52 (0.15)
</TABLE>
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, to make additional purchase payments of up to
$15,160 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 the JMH investment, a former institutional shareholder is
entitled to redeem a cash value warrant on April 30, 1999. Using the actual
results of operations to date, the cash value warrant had no value and,
therefore, no amounts have been accrued in these financial statements.
10. EQUITY INVESTMENTS:
In 1995, the Company purchased a 30% equity interest in Paradigm Asset
Management Company, L.L.C. ("Paradigm"), which is accounted for under the equity
method of accounting.
F-22
<PAGE> 100
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Summarized financial information for Paradigm at December 31, 1996 and 1995 and
for the year ended December 31, 1996 and for the period from May 22, 1995 (the
date of acquisition) to December 31, 1995 is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
1995 1996
----------------- --------------------
<S> <C> <C>
Balance Sheet Data:
Current assets........................ $ 563 $ 756
Non current assets.................... 530 492
------- ------
Total assets................ $ 1,093 $1,248
======= ======
Current liabilities................... $ 427 $ 493
Non current liabilities............... -- --
------- ------
Total liabilities........... $ 427 $ 493
======= ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 22, 1995
(DATE OF FOR THE
ACQUISITION) YEAR ENDED
TO DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------- -----------------
<S> <C> <C>
Statement of Earnings Data:
Total revenues........................ $ 894 $ 2,051
Operating and other expenses.......... 840 1,488
------ -------
Net Income............................ $ 54 $ 563
====== =======
</TABLE>
11. SALE OF BUSINESS:
Hartwell, the successor to Hartwell Management Company, Inc. ("HMC"), acts
as Investment Advisor to Hartwell Growth Fund, Inc. and Hartwell Emerging Growth
Fund, Inc. (the "Funds"). Under the terms of an agreement dated November 15,
1990, HMC and Hartwell Distributors, Inc., sold the goodwill, business and
assets relating to the provision of investment advice, management and
underwriting services to the Funds to Hartwell Keystone Advisors, Inc. ("HKAI")
in exchange for 100 Class B common shares (nonvoting) of HKAI. The shares were
recorded at a value of $1.00. Keystone Custodian Funds, Inc. ("Keystone") owns
all of HKAI's Class A common shares.
Concurrent with the sale, HMC entered into a sub-advisory agreement with
HKAI under which HMC would provide investment advisory services to the Funds.
These investment advisory services are now provided by Hartwell. The investment
advisory agreement is renewable annually by the Funds' board of directors. As
compensation for its services, JMH receives a sub-advisory fee. Three years
after the agreement's closing date, Keystone had the option to acquire the 100
Class B shares from HMC at a price based on the value of the Funds' shares which
existed at the closing date. On March 27, 1994, Keystone exercised this option.
Of the purchase price of approximately $865 (which is included in interest and
other income in the 1994 statement of operations), $401 remained unpaid at
December 31, 1994. This balance (which includes related accrued interest) was
paid in five quarterly installments through March 1996.
12. 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 are
exercisable beginning in 1997 and continue through the year
F-23
<PAGE> 101
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2004. In addition, Affiliate management owners have options ("Puts") to 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. The
Put obligations begin in 1998 and continue through 2017. 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 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 September 30, 1997 ranged from $8.5 million on the one hand,
assuming all such obligations occur due to early terminations or terminations
for cause, and $41.2 million on the other hand, assuming all such obligations
occur due to death, disability or terminations without cause. The Company would
receive approximately $9.7 million in additional Owners' Allocation annually
upon satisfaction of the above.
13. STOCKHOLDERS' EQUITY:
Common Stock
The Company had 18,227,700 and 18,313,450 authorized shares of common stock
(including Class B common stock) with a par value of $.01 per share of which
987,500 and 825,000 shares were issued and outstanding at December 31, 1996 and
1995, respectively.
Preferred Stock
The Company has two classes of convertible Preferred Stock. The Company has
80,000 shares of Class A Preferred Stock authorized with a par value of $.01 per
share, all of which were issued and outstanding at December 31, 1996 and 1995.
The Company also has two series of Class B Preferred Stock. There are 34,328
authorized shares of Series B-1 Voting Preferred Stock with a par value of $.01
per share of which 14,131 and 10,448 shares were issued and outstanding as of
December 31, 1996 and 1995, respectively. There are 19,403 authorized shares of
Series B-2 Non-Voting Preferred Stock with a par value of $.01 per share, all of
which were issued and outstanding at December 31, 1996 and 1995.
Each share of Class A and Class B Convertible Preferred Stock is
convertible into 50 shares of common stock at the option of the holder, or upon
certain automatic conversion events, primarily related to an initial public
offering. Except for Series B-2 Convertible Preferred Stock which is non-voting,
each share of preferred stock is entitled to voting rights equal to the
equivalent number of common shares issuable upon conversion. Class A Convertible
Preferred Stock is entitled to a liquidation preference of $250 per share and
Class B Convertible Preferred Stock is entitled to a liquidation preference of
$670 per share. Preferred Stock is shown on the consolidated balance sheets at
face value.
Stock Incentive Plans
The Company has established incentive 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 restricted stock. A total of
550,000 shares of common stock have been reserved for issuance under
F-24
<PAGE> 102
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
these plans. Through December 31, 1996, 287,500 shares of restricted stock have
been sold under these plans and no option grants have been made. 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.
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 options on preferred
stock and grants of 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. The fair value
of equity based interests at the date of grant was estimated using the minimum
value method using a risk free rate of return of 6.5% and weighted-average
expected lives of between 10 and 15 years.
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 income (loss) and net income (loss) per share would have been as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- 1997
1995 1996 (UNAUDITED)
------- ------- -------------
<S> <C> <C> <C>
Net income (loss) -- as reported.......................... $(2,936) $(2,372) $ 833
Net income (loss) -- FAS 123 pro forma.................... (3,091) (2,141) 840
Net income (loss) -- per share -- as reported............. (0.58) (0.36) 0.12
Net income (loss) per share -- FAS 123 pro forma.......... (0.61) (0.32) 0.12
</TABLE>
14. LOSS PER SHARE:
Loss per share is calculated based on the weighted average number of common
and common equivalent shares outstanding during the period using guidance
provided by the SEC for companies contemplating an initial public offering. Loss
per common and common equivalent share for the years ended December 31, 1994,
1995, and 1996 was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Net (loss) attributable to common stock.............. $ (206) $(2,936) $(2,372)
====== ======= =======
Weighted average common shares outstanding........... 3,044 1,439 942
Common equivalent shares:
Incremental shares treasury stock method........... 106 106 106
Assumed conversion of preferred stock.............. 1,331 3,513 5,586
------ ------- -------
Total weighted average common and common equivalent
shares outstanding................................. 4,481 5,058 6,634
====== ======= =======
Net (loss) per common share.......................... $(0.05) $ (0.58) $ (0.36)
====== ======= =======
</TABLE>
F-25
<PAGE> 103
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In accordance with the Commission's Staff Accounting Bulletin 83, the loss
per share has been calculated assuming that all stock options granted by the
Company within one year of the Company's initial public offering have been
outstanding for all periods presented. The effect of such stock options has been
calculated using the "treasury stock" method assuming an estimated initial
public offering price and has been included in the calculation of common
equivalent shares outstanding despite the fact that the effect of the assumed
exercise of such options is anti-dilutive.
If loss per share had been calculated based on the actual common and common
equivalent shares outstanding, rather than utilizing the Commission's guidance
for companies contemplating an initial public offering, the resulting loss per
share would have been $(0.05), $(0.59) and $(0.36) for the years ended December
31, 1994, 1995 and 1996, respectively.
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
FASB Statement 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.
The following table presents a comparison of the carrying value and
estimated fair value of the Company's financial instruments at December 31,
1996:
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
VALUE VALUE
-------- --------
<S> <C> <C>
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 protection agreements................ -- (763)
</TABLE>
F-26
<PAGE> 104
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table presents a comparison of the carrying value and
estimated fair value of the Company's financial instruments at December 31,
1995:
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
VALUE VALUE
-------- --------
<S> <C> <C>
Financial assets:
Cash and cash equivalents.......................... $ 14,096 $ 14,096
Financial liabilities:
Notes payable to related parties................... (1,905) (1,878)
Senior bank debt................................... (18,400) (18,400)
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash and cash equivalents: The carrying amount approximates fair value
because of the short term nature of these instruments.
Notes payable to related parties: The fair value was calculated with a
discounted cash flow model using existing payment terms and the prime rate.
Senior Bank Debt: The carrying value approximates fair value because the
debt is a revolving credit facility with variable interest based on three month
LIBOR rates.
Interest rate protection agreements: The fair value of interest rate
protection agreements are quoted market prices based on the estimated amount
necessary to terminate the agreements.
16. EVENTS SUBSEQUENT TO DECEMBER 31, 1996:
New Investments
On March 5, 1997, the Company announced the signing of a definitive
agreement to purchase an interest in Gofen and Glossberg, LLC, which will
succeed to the business of Gofen and Glossberg, Inc., an investment management
firm based in Chicago, Illinois. The Company completed this investment in May
1997.
On September 30, 1997, the Company completed its investment in GeoCapital,
LLC, an investment management firm based in New York, New York. In connection
with this investment, the Company issued an aggregate 10,667 shares of Class D
Convertible Preferred Stock valued at $9.6 million. Each share of Class D
Convertible Preferred Stock is convertible into 50 shares of Common Stock.
The total purchase price including cash, notes and capitalized transaction
costs associated with these investments is allocated as follows:
<TABLE>
<S> <C>
Allocation of Purchase Price:
Net tangible assets............................................. $ 3,873
Intangible assets............................................... 31,299
-------
Total purchase price.................................... $35,172
=======
</TABLE>
The amortization period used for intangible assets related to these
investments was 18 to 25 years for acquired client relationships and 30 years
for goodwill.
Unaudited pro forma data for the year ended December 31, 1996 and for the
nine month period ended September 30, 1997 are set forth below, giving
consideration to investments occurring in the twenty-one month period ended
September 30, 1997, as if such transactions occurred as of the
F-27
<PAGE> 105
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
beginning of 1996, assuming revenue sharing arrangements had been in effect for
the entire period and after making certain other pro forma adjustments.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Revenues................................ $81,094 $ 65,751
Income before extraordinary item........ 1,187 1,742
Net income.............................. 204 1,742
Primary income per share................ 0.03 0.25
</TABLE>
In October 1997, the Company completed its investment in Tweedy, Browne
Company LLC, an investment adviser and broker dealer in New York, New York.
New Financing
In August and October 1997, the Company entered into agreements to raise,
in a series of transactions, financing totaling up to $390 million in the
aggregate. The financing contains $300 million from a senior credit facility
("Senior Debt") to replace the existing $125 million credit facility, $60
million from subordinated debt ("Subordinated Debt") and $30 million from the
issuance of Class C Convertible Preferred Stock and warrants to purchase Class C
Convertible Preferred Stock. The Senior Debt comprises up to $200 million of
7-year revolving credit loans, $50 million of 7-year Tranche A term loans and
$50 million of 8-year Tranche B term loans. The proceeds of the Senior Debt has
been used primarily for the repayment of existing indebtedness, for new
investments and for general corporate purposes. The Senior Debt contains
financial covenants similar to the Company's existing Credit Agreement and bears
interest at the Prime Rate or LIBOR in each case plus a margin which will vary
depending on the Company's periodic Senior Debt ratio. The Subordinated Debt
accrues interest initially at LIBOR plus 7.25%. The interest rate on the
Subordinated Debt will increase by 1/2 of 1% each quarter to a maximum interest
rate of 17%, of which 15% is required to be paid in cash and 2% is to be added
to the face amount of the notes. The Company intends to redeem the Subordinated
Debt and repay a portion of the Senior Debt out of the proceeds from the
Offerings.
The Company issued 5,333 shares of Class C Convertible Preferred Stock and
warrants to purchase 28,000 shares of Class C Convertible Preferred Stock
exercisable at $.01 per share for $30 million in total consideration to Chase
Equity Associates, L.P. in connection with the recent financing described above.
Each share of Class C Convertible Preferred Stock is convertible into 50 shares
of common stock and has a liquidation preference of $900 per share.
Stock Incentive Plans
In May 1997, the Company granted options to purchase up to 1,850 shares of
Class A Convertible Preferred Stock under the 1995 Plan to management at an
exercise price of $455 per share representing 110% of the estimated fair value
of the underlying stock on the date of grant as approved by the Company's Board
of Directors. These options vest over a three year period. At September 30,
1997, options to purchase 463 shares of Class A Convertible Preferred Stock
(convertible into 23,125 shares of Common Stock) were exercisable.
The Company intends to grant 590,000 options to employees with an exercise
price equal to the initial public offering price under its 1997 Stock Plan. The
options would be exercisable in 15% increments at the end of each of the first
six anniversaries of the date of grant and 10% on the
F-28
<PAGE> 106
AFFILIATED MANAGERS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
seventh anniversary. All these options would become exercisable upon a change in
control and upon the achievement of certain financial goals.
Stock Split
On October 27, 1997, 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, effective prior to the Company's initial public
offering. Where applicable, these Consolidated Financial Statements and Notes
thereto reflect the common stock split on a retroactive basis.
F-29
<PAGE> 107
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Board of Directors
Gofen and Glossberg, Inc.
We have audited the accompanying statements of financial condition of Gofen
and Glossberg, Inc. as of December 31, 1996 and 1995, and the related statements
of operations, changes in shareholders' equity and cash flows for the years then
ended. 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 presentation of the financial
statements. We believe that our audits of the financial statements provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gofen and Glossberg, Inc. as
of December 31, 1996 and 1995 and the results of its operations and cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
August 15, 1997
F-30
<PAGE> 108
GOFEN AND GLOSSBERG, INC.
STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 263 $ 166
Accounts receivable.................................................... 525 395
Prepaid expenses....................................................... 33 31
Employee note receivable............................................... 1 2
------ ------
Total current assets........................................... 822 594
Property, equipment and leasehold improvements (net of accumulated
depreciation and amortization of $1,145 and $989, respectively)........ 529 565
------ ------
Total assets................................................... $1,351 $1,159
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............................... $ 50 $ 45
------ ------
Total current liabilities...................................... 50 45
Deferred revenue....................................................... 645 529
Deferred rent abatement................................................ 150 --
------ ------
Total liabilities.............................................. 845 574
Commitments and Contingencies (Note 4)
Shareholders' equity:
Common stock, no par or stated value; authorized 100,000 shares; issued
and outstanding 15,200 shares....................................... 69 69
Retained earnings...................................................... 437 516
------ ------
Total shareholders' equity..................................... 506 585
------ ------
Total liabilities and shareholders' equity..................... $1,351 $1,159
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-31
<PAGE> 109
GOFEN AND GLOSSBERG, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Revenue:
Asset-based management fees............................................ $7,785 $6,844
Other.................................................................. 50 46
------ ------
Total revenue.................................................. 7,835 6,890
Expenses:
Salaries and benefits.................................................. 6,128 4,489
Incentive compensation and benefits.................................... 257 240
Investment and other purchased services................................ 109 90
Occupancy.............................................................. 495 678
Depreciation and amortization.......................................... 155 134
Marketing.............................................................. 89 73
Professional fees...................................................... 400 407
Telephone and postage.................................................. 81 69
Office supplies........................................................ 146 111
Settlement of litigation............................................... -- 560
Other.................................................................. 54 120
------ ------
Total expenses................................................. 7,914 6,971
------ ------
Net loss....................................................... $ (79) $ (81)
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-32
<PAGE> 110
GOFEN AND GLOSSBERG, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON COMMON RETAINED
SHARES STOCK EARNINGS TOTAL
------ --- ------------ ----
<S> <C> <C> <C> <C>
Balances, January 1, 1995........................... 15,200 $69 $597 $666
Net loss............................................ -- -- (81) (81)
------ --- ---- ----
Balances, December 31, 1995......................... 15,200 69 516 585
Net loss............................................ -- -- (79) (79)
------ --- ---- ----
Balances, December 31, 1996......................... 15,200 $69 $437 $506
====== === ==== ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-33
<PAGE> 111
GOFEN AND GLOSSBERG, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................ $ (79) $ (81)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization........................................ 155 134
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable......................... (130) 93
Decrease in employee note receivable............................... 1 4
(Increase) in prepaid expenses..................................... (2) --
Increase (decrease) in accounts payable and accrued liabilities.... 5 (26)
Increase in deferred liabilities................................... 266 70
----- -----
Net cash provided by operating activities....................... 216 194
----- -----
Cash flows from investing activities:
Purchases of property and equipment..................................... (119) (138)
----- -----
Net cash used in investing activities........................... (119) (138)
----- -----
Net increase in cash and cash equivalents................................. 97 56
Cash and cash equivalents at beginning of year............................ 166 110
----- -----
Cash and cash equivalents at end of year.................................. $ 263 $ 166
===== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-34
<PAGE> 112
GOFEN AND GLOSSBERG, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BUSINESS:
Gofen and Glossberg, Inc., an Illinois corporation (the "Company"),
provides asset management and investment advisory services to institutional
investors and high net worth individuals located throughout the United States.
2. SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
For financial statement purposes, the Company considers interest-bearing
cash and all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents. Cash equivalents are stated at cost which
approximates market value due to the short-term maturity of these investments.
Property and Equipment, Depreciation and Amortization
Property and equipment are recorded at cost and depreciated principally on
accelerated methods over the estimated useful lives of the related assets,
generally five to seven years. Amortization on leasehold improvements is
computed on a straight-line basis over the shorter of their estimated useful
lives or the term of the lease. Maintenance and repairs are charged to expense
when incurred.
Revenue Recognition
The Company's revenues are derived primarily from asset-based investment
advisory fees. These fees are generally billed in advance and on a quarterly
basis based on the amount of assets under management at the beginning of each
quarter. The revenue is deferred and the income is recognized as earned during
the quarter.
Income Taxes
No Provision for income taxes is made in the accompanying financial
statements since the Company, as a Subchapter S Corporation, is treated as a
partnership for income tax purposes whereby the Shareholders are responsible for
recording their proportionate share of the Company's income in their tax
returns.
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 of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-35
<PAGE> 113
GOFEN AND GLOSSBERG, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Office equipment........................................ $ 787 $ 672
Furniture and fixtures.................................. 493 489
Leasehold improvements.................................. 394 393
------- ------
1,674 1,554
Accumulated depreciation and amortization............... (1,145) (989)
------- ------
$ 529 $ 565
======= ======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities under an operating lease that
expires in 2009. During 1996, the Company extended the lease term by ten years
to the 2009 date. In return for this extension rent payments were abated for the
period June 1, 1996 through December 31, 1996. In addition, lease terms during
the ten-year extension are more favorable than the current lease. The Company
accounts for this lease and rent abatement under Statement of Financial
Accounting Standards No. 13, Accounting for Leases whereby total minimum rental
payments are recognized as rent expense on a straight-line basis over the term
of the lease. Amounts charged to rent expense that are in excess of amounts
required to be paid under the lease and rent abatement are carried on the
statement of financial condition as a deferred credit.
The lease also provides the Company with space improvement and redecorating
credits. The Company's maximum available credits for space improvement and for
redecorating are approximately $27 and $136, respectively, of which
approximately $16 and $82, respectively, may be applied against the Company's
future rental commitments. No credits have been utilized by the Company.
Additional terms of the lease provide the Company with the option of
extending the lease term for a five-year period commencing October 1, 2009 and
the option of adding approximately 4,000 square feet to the lease effective
October 1, 2000. Neither of these options have been exercised by the Company.
Rent expense for the years ended December 31, 1996 and 1995 was $428 and $623,
including real estate taxes and maintenance.
At December 31, 1996, future minimum rentals for the above operating lease,
which is subject to an escalation clause, are payable as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
-------------------------------------------------- ------
<S> <C>
1997......................................... $ 363
1998......................................... 364
1999......................................... 322
2000......................................... 190
2001......................................... 194
Thereafter...................................... 1,637
</TABLE>
F-36
<PAGE> 114
GOFEN AND GLOSSBERG, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
5. BENEFIT PLANS:
The Company had a 401(k) retirement plan covering all eligible employees.
Company contributions are made for each eligible participant based upon a
percentage of wages subject to certain minimum and maximum limitations, as
defined. The contributions for the years ended December 31, 1996 and 1995 were
$257 and $244, respectively.
The Company had an unfunded deferred compensation plan for key employees.
In the event of death, disability or retirement, it is payable in 60 monthly
installments of $4. The Company paid $38 and $50 under the plan during 1996 and
1995, respectively. Current obligations existing under this program were $0 and
$38 as of December 31, 1996 and 1995, respectively.
6. SHAREHOLDERS' EQUITY:
A shareholders' agreement provides that the Company will purchase for book
value, as defined, the outstanding shares of any shareholder in the event of
death, disability or termination of service from the Company.
7. SUBSEQUENT EVENT:
On March 5, 1997, the Company transferred substantially all its assets and
liabilities to Gofen and Glossberg, L.L.C., a newly established Delaware limited
liability company (the "LLC"), which will succeed to the business of the
Company. This transfer was performed in conjunction with a definitive purchase
agreement with an independent third-party, Affiliated Managers Group, Inc.
("AMG"), whereby AMG has purchased a majority interest in the LLC.
F-37
<PAGE> 115
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
The Burridge Group Inc.
We have audited the accompanying statements of operations, changes in
shareholders' equity, and cash flows of The Burridge Group Inc. for the period
January 1, 1996 to December 30, 1996 and the years ended December 31, 1995 and
1994. 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 audits 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 presentation of the financial
statements. We believe that our audits of the financial statements provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations of The Burridge Group Inc.
and its cash flows for the period January 1, 1996 to December 30, 1996 and the
years ended December 31, 1995 and 1994, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
August 8, 1997
F-38
<PAGE> 116
THE BURRIDGE GROUP INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD JANUARY 1, 1996 TO DECEMBER 30, 1996
AND THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ --------
<S> <C> <C> <C>
Revenue:
Asset-based management fees.................................... $6,117 $5,002 $ 3,033
Other.......................................................... 38 21 6
------ ------ --------
Total revenue.......................................... 6,155 5,023 3,039
Expenses:
Salaries and benefits.......................................... 2,076 1,767 1,344
Incentive compensation and bonuses............................. 2,049 1,760 695
Investment and other purchased services........................ 258 225 110
Occupancy...................................................... 295 201 161
Depreciation and amortization.................................. 125 97 70
Marketing...................................................... 293 232 166
Professional fees.............................................. 455 57 70
Telephone and postage.......................................... 72 61 56
Office supplies................................................ 56 64 30
Other.......................................................... 441 456 252
------ ------ --------
Total expenses......................................... 6,120 4,920 2,954
------ ------ --------
Income before income taxes....................................... 35 103 85
Income tax expense............................................... 17 46 32
------ ------ --------
Net income............................................. $ 18 $ 57 $ 53
====== ====== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-39
<PAGE> 117
THE BURRIDGE GROUP INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1996 TO DECEMBER 30, 1996
AND THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED PREFERRED COMMON COMMON PAID-IN RETAINED
SHARES STOCK SHARES STOCK CAPITAL EARNINGS TOTAL
--------- --------- ------ ------ ---------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994...... -- $-- 5,500 $ 64 $ -- $154 $218
Net income..................... -- -- -- -- -- 53 53
--
---- ----- --- ---- ---- ----
Balances, December 31, 1994.... -- -- 5,500 64 -- 207 271
Net income..................... -- -- -- -- -- 57 57
--
---- ----- --- ---- ---- ----
Balances, December 31, 1995.... -- -- 5,500 64 -- 264 328
Contributed Capital............ -- -- -- -- 47 -- 47
Net income..................... -- -- -- -- -- 18 18
--
---- ----- --- ---- ---- ----
Balances, December 30, 1996.... 0 $ 0 5,500 $ 64 $ 47 $282 $393
== ==== ===== === ==== ==== ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-40
<PAGE> 118
THE BURRIDGE GROUP INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1996 TO DECEMBER 30, 1996
AND THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 18 $ 57 $ 53
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 125 97 70
Deferred income taxes....................................... 30 (9) (2)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.................. 604 (313) (242)
Increase in other assets.................................... (98) (4) --
Increase in refundable income taxes......................... (56) -- --
Increase in prepaid expense................................. (35) (5) (4)
Increase (decrease) in accounts payable..................... 2 3 (3)
Increase in accrued expenses................................ 263 13 20
Increase in due to TBG LLC.................................. 275 -- --
Increase (decrease) in income taxes payable................. (23) 5 18
Increase (decrease) in deferred revenue..................... (746) 232 182
----- ----- -----
Net cash provided by operating activities.............. 359 76 92
----- ----- -----
Cash flows from investing activities:
Purchases of property and equipment............................ (146) (107) (173)
----- ----- -----
Net cash used in investing activities.................. (146) (107) (173)
----- ----- -----
Cash flows from financing activities:
Proceeds from notes payable.................................... -- 250 --
Principal payments on notes payable............................ (250) (100) --
----- ----- -----
Net cash provided by (used in) financing activities.... (250) 150 --
----- ----- -----
Net increase (decrease) in cash and cash equivalents............. (37) 119 (81)
Cash and cash equivalents at beginning of period................. 170 51 132
----- ----- -----
Cash and cash equivalents at end of period....................... $ 133 $ 170 $ 51
===== ===== =====
Supplemental disclosures of cash flow information -- cash paid
during the year for:
Interest....................................................... $ 7 $ 8 $ 3
Income taxes................................................... 66 51 17
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
Stock options were exercised during the period January 1, 1996 to December 30,
1996 which generated a capital contribution of $47.
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE> 119
THE BURRIDGE GROUP INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION:
The Burridge Group Inc., an Illinois corporation (the "Company"), provides
investment advisory services to endowments, foundations, pension plans,
profit-sharing trusts, public funds, unions, bank trust departments and
individuals located throughout the United States. On October 11, 1996,
Affiliated Managers Group, Inc., a Delaware corporation ("AMG"), entered into a
Stock Purchase Agreement with the Company and the holders of the Company's
capital stock to purchase all the capital stock of the Company. In conjunction
with the completion of the purchase at the close of business on December 30,
1996, the Company transferred substantially all of its assets and substantially
all of its liabilities to The Burridge Group LLC, a newly established Delaware
limited liability company (the "LLC"), for which the Company serves as the
manager member and owns a majority interest. Effective at the close of business
on December 30, 1996, the Company became a wholly-owned subsidiary of AMG.
2. SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
For financial statement purposes, the Company considers interest-bearing
cash and all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents. Cash equivalents are stated at cost which
approximates market value due to the short-term maturity of these investments.
Depreciation and Amortization
Depreciation is computed for financial reporting purposes principally on
the straight-line method over the estimated useful lives of the related assets,
generally five to seven years. Amortization on leasehold improvements is
computed on a straight-line basis over the shorter of their estimated useful
lives or the term of the lease. Maintenance and repairs are charged to expense
when incurred.
Revenue Recognition
The Company's revenues are derived primarily from investment advisory fees.
These fees are generally billed in advance and on a quarterly basis based on the
amount of assets under management at the beginning of each quarter. The revenue
is deferred and the income is recognized as earned during the quarter.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be ultimately realized in
the federal income tax return. The income tax provision is the current tax
liability plus the change during the period in deferred tax assets and
liabilities.
Use of Estimates
The preparation of these statements of operations, changes in shareholders'
equity and cash flows in conformity with generally accepted accounting
principles requires management to make
F-42
<PAGE> 120
THE BURRIDGE GROUP INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
certain estimates and assumptions that affect disclosures and amounts reported
in these statements of operations, changes in shareholders' equity and cash
flows. Actual results could differ from those estimates.
3. CONCENTRATION OF CREDIT AND OTHER RISK:
The Company maintains its cash accounts with a major Chicago-based
commercial bank. Accounts at this bank are insured by the Federal Deposit
Insurance Corporation (the "FDIC") up to $100. At December 30, 1996 and at
December 31, 1995 and 1994, the Company had $339, $252 and $61, respectively,
which was in excess of the FDIC insurance limit.
During the period January 1, 1996 to December 30, 1996 and during the years
ended December 31, 1995 and 1994, the Company derived approximately 10%, 11% and
13% of its revenue, respectively, from a managed account program sponsored by
one national brokerage firm.
4. LEASE COMMITMENTS:
The Company entered into a lease agreement for office facilities in
January, 1994. Leased office facilities are under a sublease agreement with an
unrelated third party and this sublease is subordinate to a master lease
agreement dated July 15, 1983 which expires on January 15, 2001. The Company's
lease expires on August 31, 1998 and provides for certain base rental charges
and escalation charges for real estate taxes and building maintenance costs. The
Company has an option to terminate its lease after January 1, 1997. Termination
can be effected upon giving eight months written notice and making a termination
payment based on the unamortized balance of construction allowances, concessions
or costs previously incurred. As of December 30, 1996, the termination fee was
approximately $24.
Minimum annual rental commitments are as follows:
<TABLE>
<S> <C>
1997................................................. $272
1998................................................. 182
</TABLE>
Rental expense was $263, $181 and $144 for the period January 1, 1996 to
December 30, 1996 and for the years ended December 31, 1995 and 1994,
respectively.
5. STOCK OPTION PLAN:
On September 1, 1994, the Company and certain of its shareholders entered
into an employment and stock option agreement (the "Agreement") with an
employee. Pursuant to this Agreement, the employee was granted an option, which
expired on September 1, 1997, to acquire 250 shares of the Company's stock from
existing shareholders at $518 per share. The exercise date could be accelerated
if 50% or more of the shareholders agreed to a sale of the Company. The
Agreement contained a "Buy/Sell" clause which required the employee to sell
acquired shares to the Company or other shareholders at $518 per share upon
separation of employment or death.
Due to the sale of the Company to AMG (see Note 1), the exercise date for
the option was accelerated and the shares were acquired by the employee from the
existing shareholders prior to their sale to AMG. The "Buy/Sell" clause was also
suspended for purposes of the AMG transaction.
The compensatory value inherent in the option (the difference between the
stock's sale price and $518 per share) was triggered upon the Company's sale to
AMG. The Company was then deemed to have received capital contributions from its
shareholders in an amount equal to the tax
F-43
<PAGE> 121
THE BURRIDGE GROUP INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
benefit derived by the Company from this difference. This difference amounted to
$139 and, based upon the Company's effective tax rate, it received tax benefits
and a capital contribution of $47.
6. PROFIT SHARING PLAN:
The Company had a 401(k) profit sharing plan that covered all employees who
met the minimum service requirements, as defined. Under the terms of the plan,
participants may contribute \on a tax-deferred basis up to 15% of their
compensation or the maximum amount allowable by the current tax law. The
Company, under the terms of the plan, may make discretionary contributions at a
rate determined on a quarterly basis. The Company matching was $26, $19 and $15
for the period January 1, 1996 to December 30, 1996 and for the years ended
December 31, 1995 and 1994, respectively.
7. INCOME TAXES:
As a corporation registered in the State of Illinois, the Company pays
taxes as a stand-alone corporation at the state and federal level. A summary of
the income tax expense is as follows:
<TABLE>
<CAPTION>
JANUARY 1, YEAR ENDED
TO DECEMBER 31,
DECEMBER 30, -------------
1996 1995 1994
------------ ---- ----
<S> <C> <C> <C>
Federal:
Current............................................... $ 27 $ 43 $ 26
Deferred.............................................. (14) (8) (2)
State:
Current............................................... 7 13 9
Deferred.............................................. (3) (2) (1)
---- ---- ----
Income tax expense...................................... $ 17 $ 46 $ 32
==== ==== ====
</TABLE>
The effective income tax rate differs from the amount computed on income
before income taxes by applying the U.S. federal income tax rate because of the
effect of the following items:
<TABLE>
<CAPTION>
JANUARY 1, YEAR ENDED
TO DECEMBER 31,
DECEMBER 30, -------------
1996 1995 1994
------------ ---- ----
<S> <C> <C> <C>
Tax provision at U.S. federal income tax rate........... 34% 34% 34%
Nondeductible expenses, principally business meals and
entertainment......................................... 42 14 10
State income taxes, net of federal income tax expense... 9 7 7
Rate differential for surtax exemption.................. (22) (8) (13)
Depreciation deferral adjustment........................ (14) -- --
Other................................................... -- (2) --
--- --- ---
49% 45% 38%
=== === ===
</TABLE>
F-44
<PAGE> 122
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Quadrant Corp.:
We have audited the accompanying combined statements of income of First
Quadrant Institutional and First Quadrant Limited (a division and subsidiary,
respectively, of First Quadrant Corp.) for the period from January 1, 1996 to
March 25, 1996 and the year ended December 31, 1995. These combined statements
of income are the responsibility of the Company's management. Our responsibility
is to express an opinion on these combined statements of income 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 statements of income are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements of income. 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 combined statements of income referred to above present
fairly, in all material respects, the combined results of operations of First
Quadrant Institutional and First Quadrant Limited in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
July 24, 1997
F-45
<PAGE> 123
FIRST QUADRANT INSTITUTIONAL AND FIRST QUADRANT LIMITED
COMBINED STATEMENTS OF INCOME
FOR THE PERIOD JANUARY 1, 1996 THROUGH MARCH 25, 1996 AND THE
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Revenue:
Asset based management fees........................................... $3,891 $15,472
Performance based management fees..................................... -- 5,210
Other................................................................. -- 93
------ -------
Total revenue................................................. 3,891 20,775
------ -------
Expenses:
Salaries and benefits................................................. 853 4,451
Incentive compensation and bonuses.................................... 832 7,061
Investment and other purchased services............................... 443 1,955
Marketing............................................................. 312 1,505
Professional fees..................................................... 237 401
Occupancy............................................................. 201 1,173
Depreciation and amortization......................................... 130 607
Telephone and postage................................................. 61 351
Office supplies....................................................... 19 122
Other................................................................. 93 744
------ -------
Total expenses................................................ 3,181 18,370
------ -------
Income before income taxes.................................... 710 2,405
Income taxes............................................................ 328 1,091
------ -------
Net income.................................................... $ 382 $ 1,314
====== =======
</TABLE>
See accompanying Notes to Combined Statements of Income.
F-46
<PAGE> 124
FIRST QUADRANT INSTITUTIONAL AND FIRST QUADRANT LIMITED
NOTES TO COMBINED STATEMENTS OF INCOME
FOR THE PERIOD JANUARY 1, 1996 THROUGH MARCH 25, 1996 AND THE
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
1. GENERAL INFORMATION:
First Quadrant Institutional and First Quadrant Limited (collectively known
as the "Company") were a division and wholly owned subsidiary, respectively, of
First Quadrant Corp. ("FQC"). FQC was a wholly owned subsidiary of Talegen
Holdings, Inc. ("Talegen"), which is wholly owned by Xerox Financial Services,
Inc., a wholly owned subsidiary of Xerox Corporation ("Xerox"). On January 17,
1996 Affiliated Managers Group, Inc. ("AMG") entered into a Stock Purchase
Agreement with Talegen to have First Quadrant Holdings, Inc. ("FQ Holdings") (a
wholly owned subsidiary of AMG) purchase all of the capital stock of FQC from
Talegen. At the close of business on March 25, 1996, FQC transferred certain
investment advisory contracts and substantially all of its assets, excluding the
investment in First Quadrant Limited, and substantially all liabilities to the
newly established First Quadrant, L.P., for which FQC serves as the general
partner. On March 28, 1996, AMG completed the purchase from Talegen.
In conjunction with the purchase of First Quadrant Institutional described
above, 100% of the stock of First Quadrant Limited previously owned by FQC was
contributed to a newly formed partnership, First Quadrant U.K. L.P., for which
FQC serves as the general partner. First Quadrant Institutional and First
Quadrant Limited constitute the continuing operations of FQC which are now
majority owned by AMG.
FQC, which commenced operations in 1985, is a registered investment advisor
under the Investment Advisers Act of 1940 (the "Act"). The primary business of
First Quadrant Institutional was to provide advisory, evaluation, and research
services relating to the acquisition and disposition of marketable securities,
including derivative financial instruments. First Quadrant Limited (formerly
Barbican Capital Management, Ltd.), which was wholly owned by FQC, is a foreign
investment advisory concern whose primary business is similar to that of First
Quadrant Institutional.
On August 31, 1995 FQC sold its division, First Quadrant Insurance, and its
25% ownership in Seneca, Inc., a registered investment advisor under the Act, to
American Re Asset Management, Inc. All activity relating to the operations of
First Quadrant Insurance and Seneca, Inc., including the gain recognized on the
sale, are not reflected in the accompanying financial statements.
An integral part of managing the Company's domestic and global tactical
asset allocation and tactical currency allocation strategies for client's
investment accounts involves the use of derivative financial instruments. These
instruments are securities that provide an economic payoff contingent upon the
value of other assets such as stock and bond prices or market index values. The
Company directs the purchase of these instruments only on behalf of client
accounts and in accordance with written guidelines established in the individual
investment contracts with each client. The instruments purchased are exchange
traded futures, options, and foreign currency contracts, all of which are valued
at market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying statements of income have been presented on a combined
basis of accounting. All transactions between First Quadrant Institutional and
First Quadrant Limited have been eliminated in the combined statements of
income.
F-47
<PAGE> 125
FIRST QUADRANT INSTITUTIONAL AND FIRST QUADRANT LIMITED
NOTES TO COMBINED STATEMENTS OF INCOME -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Depreciation and Amortization
Depreciation and amortization on property is computed on a straight-line
basis over the estimated useful lives of the assets (generally one to eight
years). Depreciation and amortization on leasehold improvements is computed on a
straight-line basis over the shorter of their useful lives or the term of the
lease.
Revenue Recognition
Asset based management fee income represents fees for managing the
underlying assets of customers. Performance based management fees are earned
based upon the Company's investment management returns related to a client's
portfolio relative to the passive returns of a benchmark index, or composite of
indices generally computed on an annual basis.
Income Taxes
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to temporary differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases and are measured using enacted tax rates. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance
against deferred tax assets is recorded if it is more likely than not that all
or some portion of the benefits related to deferred tax assets would not be
realized.
Postretirement Benefits
The cost of postretirement benefits is recognized in the financial
statements during the employee's active working career.
Foreign Currency Translation
First Quadrant Limited was responsible for 21% and 8% of the total revenues
and 10% and 8% of the total expenses generated by the Company in the period from
January 1, 1996 through March 25, 1996 and the year ended December 31, 1995.
In accordance with SFAS No. 52, "Accounting for Foreign Currency
Translation," First Quadrant Limited's assets and liabilities are translated to
U.S. dollars at year-end exchange rates, revenues and expenses at average
exchange rates during the year and shareholder's equity at historical exchange
rates. Gains and losses resulting from translation of the financial statements
are excluded from the combined statement of income and are recorded directly to
a separate component of shareholder's equity.
Use of Estimates
Management of the Company has made certain estimates and assumptions in the
preparation of these consolidated statements of income in conformity with
generally accepted accounting principles. Actual results could differ from these
estimates.
3. INCENTIVE COMPENSATION AND BONUSES:
Through December 31, 1995 the Company had an incentive compensation plan
that provided incentive compensation to certain employees. A portion of the
incentive compensation pool was
F-48
<PAGE> 126
FIRST QUADRANT INSTITUTIONAL AND FIRST QUADRANT LIMITED
NOTES TO COMBINED STATEMENTS OF INCOME -- (CONTINUED)
(DOLLARS IN THOUSANDS)
based on revenues from unaffiliated companies. The remaining amount was
discretionary, although it could not exceed certain compensation levels. The
incentive compensation plan was amended effective December 31, 1995 to provide
for no further incentive compensation awards. All bonuses accrued during the
period from January 1, 1996 through March 25, 1996 were based on earnings of
First Quadrant Institutional during that period and were allocated at the
discretion of management.
4. INCOME TAXES:
Xerox and Talegen and in turn, Talegen and FQC, entered into a tax
allocation agreement effective in 1983 which provided that Talegen and its
subsidiaries, including FQC, would pay or be reimbursed by Xerox for the tax
liabilities or benefits generated due to the inclusion of Talegen and its
subsidiaries in the Xerox consolidated Federal income tax return. The right to
reimbursement from Xerox for any tax benefits did not expire due to any
statutory period of limitation under the Internal Revenue Code. The agreement
generally provided that Talegen subsidiaries, including FQC, would compute their
income tax liability on a separate return basis.
The actual tax provision differs from the statutory Federal tax rate of 35%
due to the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
U.S. Federal statutory income tax rate........................ 35.0% 35.0%
State income taxes, net of Federal income tax benefit......... 6.6 6.0
Meals and entertainment....................................... 1.2 1.5
Other......................................................... 3.4 2.9
---- ----
Effective income tax rate................................ 46.2% 45.4%
==== ====
</TABLE>
The treatment of incentive and deferred compensation gives rise to the
significant portion of the Company's deferred tax assets. The provision
(benefit) for income taxes for the period ended March 25, 1996 and the year
ended December 31, 1995, consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
1996:
Federal.................................................. $ 93 $ 163 $ 256
State.................................................... 1 71 72
------- ------ ------
$ 94 $ 234 $ 328
======= ====== ======
1995:
Federal.................................................. $ 1,178 $ (310) $ 868
State.................................................... 311 (88) 223
------- ------ ------
$ 1,489 $ (398) $1,091
======= ====== ======
</TABLE>
5. PENSIONS:
Talegen had a principal noncontributory defined benefit pension plan
("Plan") that covered substantially all employees of the Company who met
eligibility requirements. The Plan provided benefits that were based on total
years of service and compensation during an employee's last five years of
employment. Contributions were made to the Plan in an amount deductible and in
accordance with funding standards established under the Internal Revenue Code as
amended by the Employee Retirement Income Security Act of 1974. Effective July
1, 1993, Talegen amended the Plan with the effect of limiting the accrual of
further benefits to its participants under the terms of the
F-49
<PAGE> 127
FIRST QUADRANT INSTITUTIONAL AND FIRST QUADRANT LIMITED
NOTES TO COMBINED STATEMENTS OF INCOME -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Plan. Total pension costs allocated to the Company approximated $4 and $41 in
1996 and 1995, respectively.
6. OTHER POSTEMPLOYMENT BENEFITS ("OPEB"):
Talegen provided certain health care and life insurance benefits for
retired employees. Prior to 1993, substantially all employees, including those
employees of the Company, became eligible for these benefits if they reached
normal retirement age (or age 55 under certain circumstances), with a defined
minimum period of service, while still working for the Company. In 1993, Talegen
announced its intention to limit the retiree medical benefits to those employees
who had reached age 50 on January 1, 1994 and who ultimately retired with at
least 15 years of service. The total OPEB costs allocated to the Company
approximated $4 and $6 in 1996 and 1995, respectively.
7. LEASES:
The Company is obligated under operating leases which expire in 2003 and
2008 for the Company's Pasadena and London offices respectively. The total rent
expense under these operating leases for 1996 and 1995 amounted to approximately
$153 and $646, respectively.
8. RELATED PARTY TRANSACTIONS:
In 1993, the Company entered into agreements with Apprise Corp., an
affiliated entity of Talegen, pursuant to which Apprise Corp. provided data
processing services (including payroll). The service fee for 1996 and 1995
amounted to approximately $53 and $164, respectively, and is included in
investment and other purchased services.
F-50
<PAGE> 128
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
GeoCapital Corporation
We have audited the balance sheets of GeoCapital Corporation (the
"Corporation") as of September 30, 1996 and 1995, and the related statements of
income and retained earnings and cash flows for the years ended September 30,
1996, 1995 and 1994. These financial statements are the responsibility of the
Corporation'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 audits 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 financial position of the Corporation as of
September 30, 1996 and 1995, and the results of its operations and its cash
flows for the years ended September 30, 1996, 1995 and 1994 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
August 15, 1997, except
for Note 9 for which
the date is September 30, 1997
F-51
<PAGE> 129
GEOCAPITAL CORPORATION
BALANCE SHEETS
AS OF SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.............................................. $ 144 $ 176
Investment advisory fees receivable.................................... 3,221 3,553
Prepaid expenses....................................................... 192 153
Other.................................................................. 85 50
------ ------
Total current assets........................................... 3,642 3,932
Fixed assets, net........................................................ 56 49
------ ------
Total assets................................................... $3,698 $3,981
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Current liabilities:
Accounts payable and accrued expenses............................... $ 40 $ 35
Investment advisory fee payable..................................... 327 201
------ ------
Total current liabilities...................................... 367 236
Deferred taxes payable................................................. 130 219
Investment advisory fee payable........................................ 683 482
------ ------
Total other liabilities........................................ 813 701
------ ------
Total liabilities.............................................. 1,180 937
------ ------
Commitments (Note 4)
Stockholders' equity:
Common stock -- par value $1 per share, 100 shares authorized, issued
and outstanding..................................................... -- --
Retained earnings...................................................... 2,585 3,111
------ ------
2,585 3,111
Less:
Treasury stock, at cost, 20 shares.................................. (67) (67)
------ ------
Total stockholders' equity.......................................... 2,518 3,044
------ ------
Total liabilities and stockholders' equity..................... $3,698 $3,981
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 130
GEOCAPITAL CORPORATION
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenue:
Asset based management fee................................ $10,568 $ 9,384 $ 9,606
Performance based management fee.......................... 1,446 1,658 2,431
Other..................................................... 6 6 6
------- ------- -------
Total revenue..................................... 12,020 11,048 12,043
------- ------- -------
Expenses:
Salaries and benefits..................................... 9,450 9,202 11,041
Occupancy................................................. 288 284 262
Marketing................................................. 948 870 1,043
Payroll and other taxes................................... 226 221 205
Travel and entertainment.................................. 93 123 112
Pension expense........................................... -- (155) 324
Telephone, postage and office expense..................... 89 90 73
Performance fee expense................................... 714 304 378
Other..................................................... 497 465 364
------- ------- -------
Total expenses.................................... 12,305 11,404 13,802
------- ------- -------
Net loss before provision for income taxes........ (285) (356) (1,759)
------- ------- -------
Income tax provision:
Current................................................... 240 217 269
Deferred.................................................. (89) (33) (86)
------- ------- -------
151 184 183
------- ------- -------
Net loss.......................................... (436) (540) (1,942)
Retained earnings:
Beginning of year......................................... 3,111 3,651 5,593
Distribution to shareholder............................... (90) -- --
------- ------- -------
End of year....................................... $ 2,585 $ 3,111 $ 3,651
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 131
GEOCAPITAL CORPORATION
STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss..................................................... $(436) $(540) $(1,942)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation.............................................. 20 20 19
Deferred taxes............................................ (89) (33) (86)
Changes in assets and liabilities:
Decrease in accounts receivable........................... 332 681 1,409
(Increase)/decrease in prepaid expenses................... (39) (69) 45
(Decrease)/increase in accounts payable and accrued
expenses................................................ 5 (6) 19
(Increase)/decrease in other assets....................... (36) (34) 8
(Decrease) in pension payable............................. -- (238) (49)
(Decrease) in corporate taxes payable..................... -- -- (79)
Increase in performance fee payable....................... 328 303 379
----- ----- -------
Net cash provided by (used in) operating
activities......................................... 85 84 (277)
----- ----- -------
Cash flows from investing activities:
Purchase of equipment........................................ (26) (7) (20)
Section 444 deposit.......................................... -- -- 34
----- ----- -------
Net cash provided by (used in) investing
activities......................................... (26) (7) 14
----- ----- -------
Cash flows from financing activities:
Distribution to shareholder.................................. (90) -- --
----- ----- -------
Net cash used in financing activities................ (90) -- --
----- ----- -------
Net increase (decrease) in cash and cash
equivalents........................................ (31) 77 (263)
Cash and cash equivalents:
Beginning................................................. 176 99 362
----- ----- -------
Ending.................................................... $ 145 $ 176 $ 99
===== ===== =======
Supplemental disclosure of cash flow information:
Income taxes paid............................................ $ 269 $ 281 $ 298
===== ===== =======
Interest paid................................................ $ -- $ 14 $ --
===== ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 132
GEOCAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
GeoCapital Corporation (the "Corporation") is a Subchapter S Corporation
incorporated under the laws of the State of Delaware and commenced operations on
July 23, 1979.
The Corporation's business is to provide investment advisory services to
individuals, corporations, pension plans and non-profit organizations which are
located nationwide. Advisory fees are based on a percentage of assets managed
for all but two major clients for the year ended September 30, 1996 and three
major clients for the years ended September 30, 1995 and 1994. For these major
clients, the advisory fee is a performance based contract.
A summary of the Corporation's significant accounting policies follows:
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Corporation considers
cash in banks, on hand and invested in money market funds to be cash
equivalents.
Revenue Recognition
The Corporation's revenue consists primarily of asset-based and
performance-based investment advisory fees. Investment advisory fees from
managed accounts are billed on a quarterly basis at the beginning of the quarter
and recorded on a monthly basis over the quarter. Any fees collected in advance
are deferred and recognized as income over the period earned.
Property and Equipment
Property and equipment is stated at cost. Property and equipment are being
depreciated over its estimated useful life of 5 years using the straight-line
method. Maintenance, repairs and minor renewals are expensed as incurred.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax basis. Deferred tax liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment. The principal
source of deferred taxes relates to the cash basis of accounting used for tax
purposes.
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 of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-55
<PAGE> 133
GEOCAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
2. PROPERTY AND EQUIPMENT:
Property and equipment for the years ended September 30, 1996 and 1995 is
summarized as follows:
<TABLE>
<S> <C> <C>
Furniture and fixtures....................................... $149 $123
Accumulated depreciation..................................... (93) (74)
---- ----
$ 56 $ 49
==== ====
</TABLE>
3. PENSION PLAN:
For the period beginning October 1, 1983 through April 30, 1995, the
Corporation had a defined benefit pension plan (the "Plan") covering
substantially all of its employees. The benefits were based on years of service
and the employee's compensation during the last year of employment. The
Corporation's funding policy was to contribute annually the maximum amount that
could be deducted for federal income tax purposes. Contributions were intended
to provide not only for benefits attributed to service to date, but also for
those expected to be earned in the future. The amount contributed by the
Corporation for the year ended September 30, 1994 was $238. Due to an over
accrual of pension expense for the year ended September 30, 1994, the
Corporation reduced pension expense by the amount of $155 for the year ended
September 30, 1995. Effective April 30, 1995, the Corporation terminated its
defined benefit pension plan for all employees. Upon termination of the Plan,
all vested amounts were transferred into an IRA or 401(k) plan at the direction
of the employees.
In addition, all Corporation employees are eligible to participate in the
401(k) plan, effective May 1, 1996. The Corporation, at its discretion, can
match a portion of the employee contributions. The Corporation did not make a
401(k) contribution for the year ended September 30, 1996.
4. COMMITMENTS AND CONTINGENCIES:
The Corporation currently leases office space from Sandler Capital
Management under a lease that provides for an annual expense of $220 plus
additional rent for escalation charges and after hours heating and air
conditioning. The lease expires on November 29, 2000. For the years ended
September 30, 1994 and 1995, the Corporation had a similar lease agreement where
the Corporation leased office space from Sandler Capital Management for an
annual expense of $200. The lease expired on November 29, 1995. The following is
a schedule of future minimum lease payments required under this lease:
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1996
-------------
<S> <C>
1997........................................... $ 220
1998........................................... 220
1999........................................... 220
2000........................................... 220
2001........................................... 37
-----
Total................................ $ 917
=====
</TABLE>
5. PROVISION FOR CORPORATE INCOME TAXES:
No provision for Federal income taxes has been accrued due to the
shareholders' election to be treated as an "S" Corporation for income tax
purposes as of September 28, 1979. As an "S"
F-56
<PAGE> 134
GEOCAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Corporation, income or loss and credits are passed to the shareholders to be
reported on their individual personal income tax returns. Provision has been
made for State and local taxes as follows for the years ended:
<TABLE>
<CAPTION>
NET
CURRENT DEFERRED TAXES
---- ---- ----
<S> <C> <C> <C>
SEPTEMBER 30, 1996
New York State tax and surcharge............................ $ 5 $(39) $(34)
Minnesota State tax......................................... 7 -- 7
California State tax........................................ 4 -- 4
New York City general corporation tax....................... 224 (50) 174
---- ---- ----
Total............................................. $240 $(89) $151
==== ==== ====
SEPTEMBER 30, 1995
New York State tax and surcharge............................ $ 1 $(11) $(10)
California State tax........................................ 1 -- 1
New York City general corporation tax....................... 215 (22) 193
---- ---- ----
Total............................................. $217 $(33) $184
==== ==== ====
SEPTEMBER 30, 1994
New York State tax and surcharge............................ $ 1 $(20) $(19)
California State tax........................................ 1 -- 1
Minnesota State tax......................................... 1 -- 1
New York City general corporation tax....................... 266 (66) 200
---- ---- ----
Total............................................. $269 $(86) $183
==== ==== ====
</TABLE>
6. PERFORMANCE FEE PAYABLE:
The Corporation has entered into a "performance-based" investment fee
contract with the State of Minnesota through June 30, 2001. As of September 30,
1996, the account's performance did not meet the "benchmark" contracted amount.
As such a payable has been recorded. It is the opinion of management that the
performance fee will be recovered in future years. Based on the performance,
under the contract to date, the future performance fee payable is as follows:
<TABLE>
<S> <C>
Current portion..................................... $ 327
Non-current portion................................. 682
------
$1,009
======
</TABLE>
7. CONCENTRATION OF CREDIT RISK:
The Corporation maintains its cash balances in one major New York City
bank. The balance in this account usually exceeds the insurance limit of the
Federal Deposit Insurance Corporation. Two clients comprise a significant
portion of the investment advisory fee receivable balance. The receivables from
these two clients for the years ended September 30, 1996 and 1995 are $676,
$844, respectively.
F-57
<PAGE> 135
GEOCAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
8. TREASURY STOCK:
In 1982, the Corporation repurchased 20 shares of common stock from an
employee in conjunction with the termination of his employment with the
Corporation.
9. SUBSEQUENT EVENTS:
On August 15, 1997, Affiliated Managers Group, Inc. ("AMG"), AMG Merger
Sub, Inc. (a wholly-owned subsidiary of AMG) ("Merger-Sub"), the Corporation,
the stockholders of the Corporation and GeoCapital, LLC (the "LLC") entered into
a definitive agreement whereby the Corporation will merge with and into
Merger-Sub after the Corporation has contributed all of its assets and
liabilities to the LLC, of which the Corporation is the manager member. On
September 30, 1997 this transaction was completed.
F-58
<PAGE> 136
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Tweedy, Browne Company L.P.
We have audited the balance sheets of Tweedy, Browne Company L.P. (the
"Partnership") as of December 31, 1996, September 30, 1996 and 1995, and the
related statements of operations, and cash flows for the period October 1, 1996
through December 31, 1996 and the years ended September 30, 1996, 1995 and 1994
and changes in partners' capital for the period October 1, 1996 through December
31, 1996 and the years ended September 30, 1996 and 1995. These financial
statements are the responsibility of the Partnership'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 audits 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 financial position of the Partnership as of
December 31, 1996, September 30, 1996 and 1995, and the results of its
operations and its cash flows for the period October 1, 1996 through December
31, 1996 and the years ended September 30, 1996, 1995 and 1994, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
September 23, 1997, except for
Note 9 for which
the date is October 9, 1997
F-59
<PAGE> 137
TWEEDY, BROWNE COMPANY L.P.
BALANCE SHEETS
AS OF DECEMBER 31, 1996, SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -----------------
1996 1996 1995
------------ ------ ------
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................ $ 4,504 $1,863 $1,357
Investment advisory fees receivable...................... 2,656 1,960 1,302
Receivable from clearing broker.......................... 408 153 92
Other current assets..................................... 37 43 120
-------- ------ ------
Total current assets............................. $ 7,605 4,019 2,871
-------- ------ ------
Fixed assets, net.......................................... 787 964 672
Deposit with Internal Revenue Service...................... 1,538 1,538 982
Secured demand notes receivable............................ 800 800 800
-------- ------ ------
Total assets..................................... $ 10,730 $7,321 $5,325
======== ====== ======
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Current liabilities:
Accrued compensation.................................. $ 728 $ 914 $ 746
Accounts payable and accrued liabilities.............. 482 325 358
Investment advisory fee payable....................... 80 160 34
-------- ------ ------
Total current liabilities........................ 1,290 1,399 1,138
-------- ------ ------
Subordinated indebtedness.................................. 800 800 800
-------- ------ ------
Total liabilities................................ 2,090 2,199 1,938
-------- ------ ------
Commitments (Note 5)
Partners' capital:
Limited partners......................................... 4,747 2,824 1,866
General partners......................................... 3,893 2,298 1,521
-------- ------ ------
Total partners' capital.......................... 8,640 5,122 3,387
-------- ------ ------
Total liabilities and partners' capital.......... $ 10,730 $7,321 $5,325
======== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE> 138
TWEEDY, BROWNE COMPANY L.P.
STATEMENTS OF OPERATIONS
FOR THE PERIOD OCTOBER 1, 1996 THROUGH DECEMBER 31, 1996 AND THE YEARS ENDED
SEPTEMBER 30, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -------------------------------
1996 1996 1995 1994
------------ ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Asset based management fees................ $8,227 $28,478 $21,195 $14,272
Commissions................................ 1,554 5,129 3,392 4,515
Other...................................... -- 3 508 3
------ ------- ------- -------
Total revenue...................... 9,781 33,610 25,095 18,790
------ ------- ------- -------
Expense:
Salaries and benefits...................... 540 2,321 2,393 2,146
Commissions and clearing charges........... 417 1,587 1,059 1,351
Occupancy.................................. 134 535 532 506
Incentive compensation and bonuses......... 1,100 3,290 2,574 1,839
NYC unincorporated business tax............ 161 829 546 407
Mutual fund expenses....................... 42 419 470 324
Computer expenses.......................... 256 530 351 270
Investment and other purchased services.... 145 485 520 546
Insurance.................................. 31 261 268 274
Professional fees.......................... 60 284 237 643
Office supplies............................ 30 206 194 163
Depreciation and amortization.............. 219 331 155 115
Marketing.................................. 71 176 151 104
Telephone and postage...................... 43 170 166 143
Other...................................... 116 415 386 298
------ ------- ------- -------
Total expenses..................... 3,365 11,839 10,002 9,129
------ ------- ------- -------
Net income......................... $6,416 $21,771 $15,093 $ 9,661
====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE> 139
TWEEDY, BROWNE COMPANY L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIOD OCTOBER 1, 1996 THROUGH DECEMBER 31, 1996 AND THE YEARS ENDED
SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS PARTNERS TOTAL
-------- ------- --------
<S> <C> <C> <C>
Balance, September 30, 1994............................... $ 1,420 $ 1,420 $ 2,840
Transfer general partner to limited partner............... 174 (174) --
Net income for the year ended September 30, 1995.......... 8,339 6,754 15,093
Partners' drawings........................................ (8,067) (6,479) (14,546)
-------- ------- --------
Balance, September 30, 1995............................... 1,866 1,521 3,387
Net income for the year ended September 30, 1996.......... 11,977 9,794 21,771
Partners' drawings........................................ (11,019) (9,017) (20,036)
-------- ------- --------
Balance, September 30, 1996............................... $ 2,824 $ 2,298 $ 5,122
-------- ------- --------
Net income for the period ended December 31, 1996......... 3,530 2,886 6,416
Partners' drawings........................................ (1,607) (1,291) (2,898)
-------- ------- --------
Balance, December 31, 1996................................ $ 4,747 $ 3,893 $ 8,640
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 140
TWEEDY, BROWNE COMPANY L.P.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD OCTOBER 1, 1996 THROUGH DECEMBER 31, 1996
AND THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ----------------------------------
1996 1996 1995 1994
------------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Commissions received.............................. $ 1,299 $ 5,049 $ 3,493 $ 4,659
Asset based management fees received.............. 7,451 27,946 20,851 14,092
Other income received............................. 17 1 508 4
Salaries, benefits, incentive compensation and
bonuses paid.................................... (1,826) (5,443) (4,913) (3,444)
Commissions and clearing charges paid............. (435) (1,567) (1,118) (1,445)
Occupancy tax paid................................ (134) (535) (532) (506)
NYC unincorporated business taxes paid............ -- (874) (448) (454)
Professional fees paid............................ (131) (265) (254) (652)
Other operating expenses paid..................... (666) (2,668) (2,394) (2,112)
------- -------- -------- --------
Net cash provided by operating
activities............................... 5,575 21,644 15,193 10,142
------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures.............................. (42) (622) (277) (109)
Deposit with the IRS.............................. -- (557) (326) (214)
Decrease (increase) in other current assets....... 6 77 (79) 8
(Decrease) increase in other current
liabilities..................................... -- -- (15) 9
------- -------- -------- --------
Net cash used in investing activities...... (36) (1,102) (697) (306)
------- -------- -------- --------
Cash flows from financing activities:
Cash withdrawn by partners during the year........ (2,898) (20,036) (14,546) (10,152)
------- -------- -------- --------
Increase (decrease) in cash and cash equivalents.... 2,641 506 (50) (316)
Cash and cash equivalents, beginning of year........ 1,863 1,357 1,407 1,723
------- -------- -------- --------
Cash and cash equivalents, end of year..... $ 4,504 $ 1,863 $ 1,357 $ 1,407
======= ======== ======== ========
Reconciliation of net income to net cash provided by
operating activities:
Net income........................................ $ 6,416 $ 21,771 $ 15,093 $ 9,661
------- -------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 219 331 155 115
Changes in assets and liabilities:
Increase in investment advisory fees receivable... (696) (658) (349) (178)
(Increase) decrease in receivable from clearing
broker.......................................... (255) (61) 41 49
Increase in other current assets.................. -- -- -- (6)
Increase in accounts payable, accrued liabilities
and other current liabilities................... (109) 261 253 501
------- -------- -------- --------
Total adjustments.......................... (841) (127) 100 481
------- -------- -------- --------
Net cash provided by operating activities........... $ 5,575 $ 21,644 $ 15,193 $ 10,142
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE> 141
TWEEDY, BROWNE COMPANY L.P.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
Tweedy, Browne Company L.P. (the "Partnership") is a limited partnership
organized in the state of Delaware, registered with the Securities and Exchange
Commission as a broker-dealer and an investment advisor, and is a member of the
National Association of Securities Dealers. The partnership consists of three
general partners who are also limited partners and a limited partner who retired
as a general partner in 1995. The Limited Partnership Agreement (the
"Agreement") provides for allocation of net profits and net losses as of the end
of each fiscal period, as defined, to the General Partners and the Limited
Partners in proportion to their respective interests, as defined in the
Agreement.
The Partnership shall continue until July 1, 2038 unless terminated sooner
as provided in the Agreement.
In September of 1993, the Partnership opened a branch office in London,
England to conduct securities research in connection with foreign investments.
All accounts are maintained in U.S. dollars.
A summary of the Partnership's significant accounting policies follows:
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers
cash in banks, on hand and invested in money market funds to be cash
equivalents.
Revenue Recognition
The Partnership's revenue consists primarily of investment advisory fees
and brokerage commissions. Investment advisory fees from managed accounts are
billed on a quarterly basis at the beginning of the quarter and recorded on a
monthly basis over the quarter. Investment advisory fees from domestic regulated
investment companies are billed and recorded on a monthly basis. Brokerage
commissions are recorded on a trade date basis and are remitted by the clearing
broker on a monthly basis after necessary offsets for clearing charges and
execution costs.
Property and Equipment
Property and equipment is stated at cost. Property and equipment are being
depreciated over its estimated useful life ranging from 5 to 7 years using the
straight-line method or an accelerated method beginning in the year it is placed
in service. Leasehold improvements are amortized on a straight-line basis over
their estimated useful lives or the term of the lease.
Income Taxes
Only New York City Unincorporated Business taxes have been provided since
the Partnership is not subject to Federal or State income taxes. The Partnership
maintains a deposit with the Internal Revenue Service required of partnership
entities under Section 444 of the Internal Revenue Code as a condition of
electing a fiscal year other than December 31.
F-64
<PAGE> 142
TWEEDY, BROWNE COMPANY L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Receivable From Clearing Broker
The Partnership is an introducing broker that clears its customer security
transactions through Fleet Clearing Corporation on a fully disclosed basis. The
Partnership pays its clearing broker a fixed ticket charge for clearing its
transactions. For the period October 1, 1996 through December 31, 1996 and the
years ended September 30, 1996 and 1995, amounts of $408, $153 and $92,
respectively, are due from Fleet Clearing Corporation consisting principally of
commissions due on transactions after deductions for clearing and other
execution charges.
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 of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1996 and September 30, 1996 and 1995
is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -----------------
1996 1996 1995
------------ ------ ------
<S> <C> <C> <C>
Office equipment................................... $ 965 $ 931 $ 410
Furniture and fixtures............................. 542 534 548
Leasehold improvements............................. 491 491 491
-------- ------ ------
1,998 1,956 1,449
Accumulated depreciation......................... (1,211) (992) (777)
-------- ------ ------
$ 787 $ 964 $ 672
======== ====== ======
</TABLE>
3. SUBORDINATED INDEBTEDNESS:
On July 1, 1989, the Partnership entered into a subordinated loan agreement
with two of its general partners. In 1995, one of the general partners retired
but continues as a limited partner and remains a party to the subordination
agreement. The individuals each provided collateralized demand notes of $400 to
the Partnership which call for interest at the rate of 6% per annum. These notes
become due on September 30, 2006.
The resulting liability for repayment of such notes is subordinated to all
other claims of general creditors. The loan agreement conforms to all the
requirements of Appendix D to Rule 15c3-1 and is designed to qualify the
borrowings as "net capital." The subordinated notes are collateralized by
marketable securities of the general partners having a market value at December
31, 1996, September 30, 1996 and 1995 in excess of $5,000, $5,000 and $7,000,
respectively. Interest paid on the above subordinated indebtedness amounted to
$12 for the period October 1, 1996 through December 31, 1996 and $48 for each of
the years ended September 30, 1996 and 1995.
F-65
<PAGE> 143
TWEEDY, BROWNE COMPANY L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
4. PROFIT SHARING PLAN:
Effective September 30, 1976, the Partnership's predecessor corporation
established a non-contributory profit sharing plan which covers all eligible
employees of the corporation. This plan complies with the Employee Retirement
Income Security Act of 1974 and the Internal Revenue code of 1985. The
Partnership has adopted this plan. This plan was most recently amended on
November 15, 1994 retroactive to September 30, 1989. The amounts contributed by
the Partnership during the period October 1, 1996 through December 31, 1996 and
for the years ended September 30, 1996, 1995 and 1994 were $171, $405, $385 and
$403, respectively, of which $99, $20 and $25 were due as of December 31, 1996
and September 30, 1996 and 1995, respectively.
5. COMMITMENTS AND CONTINGENCIES:
The Partnership currently leases office space in New York, New York and
London, U.K. under lease agreements expiring April 30, 1999 and April 17, 2005,
respectively. With respect to the latter either party has the right to terminate
by six months written notice as of April 17, 2000. Rent expense under these
leases was approximately $157, $725, $728 and $642 for the period October 1,
1996 through December 31, 1996 and the years ended September 30, 1996, 1995 and
1994, respectively. Future minimum rentals under these leases are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30 NEW YORK CITY LONDON, U.K.
---------------------------------------------- ------------- ---------------
<S> <C> <C>
1997.......................................... $ 528 $14
1998.......................................... 528 14
1999.......................................... 176 14
2000.......................................... -- 4
------- ---
$ 1,232 $46
======= ===
</TABLE>
These minimum rentals are subject to escalation or reduction based upon
certain costs incurred by the landlord and, with respect to London, by real
estate tax of approximately $11 per year for each year that the premise is
actually occupied by the Partnership.
The Partnership has entered into a sublease agreement wherein it leases
approximately 40% of the 7th floor area to a subtenant who pays rent to the
Partnership based upon the percentage of square footage occupied to the total of
the 7th floor square footage. Rent under this sublease will continue through
April 30, 1999. For the period October 1, 1996 through December 31, 1996 and the
years ended September 30, 1996, 1995 and 1994, rental income amounted to $43,
$173, $171 and $163, respectively, and is included as a reduction of the
aggregate rent paid. The Partnership is also subleasing a portion of its London
office.
6. RELATED PARTY TRANSACTIONS:
In addition to commissions and investment advisory fees from unrelated
customers, Tweedy, Browne Company L.P. receives commission income for securities
brokerage services performed for two domestic investment partnerships wherein
the general partners of the Partnership are general partners and for four
Passive Foreign Investment Companies wherein the general partners of the
Partnership are stockholders and the Partnership is the investment advisor. For
the period October 1, 1996 through December 31, 1996 and the years ended
September 30, 1996, 1995 and 1994, such commissions and investment advisory fees
amounted to $179, $656, $421 and $657, respectively, of which $5 and $50 was
owing as of December 31, 1996 and September 30, 1996, respectively. There were
no amounts owed as of September 30, 1995. These commissions are
F-66
<PAGE> 144
TWEEDY, BROWNE COMPANY L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
charged on a basis which is common in the industry and which include a discount
from the previously regulated rates.
Effective June 16, 1993, and December 8, 1993, respectively, the
Partnership entered into distribution agreements with Tweedy, Browne Fund Inc.
as the exclusive sales agent for Tweedy, Browne Global Value Fund and Tweedy,
Browne American Value Fund (the "Funds"), respectively. The Partnership is also
the investment advisor for the Funds. The general partners of the Partnership
are officers and/or directors of Tweedy, Browne Fund Inc. For the period October
1, 1996 through December 31, 1996 and the years ended September 30, 1996, 1995
and 1994, the Partnership earned investment advisory fees from the Funds of
$4,423, $13,893, $9,046 and $3,801, respectively, of which $1,534, $1,325 and
$926 were owing as of December 31, 1996 and September 30, 1996 and 1995,
respectively.
7. NET CAPITAL REQUIREMENT:
As a registered broker/dealer, the Partnership is subject to the Uniform
Net Capital Rule 15c3-1 of the Securities and Exchange Commission. This rule
prohibits a broker-dealer from engaging in securities transactions when its
aggregate indebtedness exceeds 15 times its net capital as those terms are
defined in the net capital rule. Rule 15c3-1 also provides that equity capital
may not be withdrawn or cash dividends paid if the resulting net capital ratio
would exceed 10 to 1. The Partnership computes its net capital under the
aggregate indebtedness method permitted by the rule which requires the
Partnership to maintain minimum net capital, as defined, equal to the greater of
6 2/3% of aggregate indebtedness, as defined, or $5. At December 31, 1996,
September 30, 1996 and 1995, the Partnership had net capital of $6,643, $2,701
and $1,996 which was $6,605, $2,608 and $1,920 in excess of its required net
capital of $37, $93 and $76, respectively. The Partnership's net capital ratio
was .1942 to 1, .5178 to 1 and .5701 to 1 at December 31, 1996, September 30,
1996 and 1995, respectively.
The Partnership is exempt from the provisions of SEC Rule 15c3-3 because it
does not receive any Funds or securities in connection with its activities as a
broker or dealer, and does not otherwise hold funds or securities for, or owe
money or securities to customers.
8. CONCENTRATION OF CREDIT RISK:
The Partnership maintains its cash balances in two major New York City
banks. The balances in these accounts usually exceed the insurance limits of the
Federal Deposit Insurance Corporation.
The majority of the Partnership's brokerage transactions, and consequently
the concentration of its credit exposure, is with broker-dealers, and other
financial institutions. In the event counterparties do not fulfill their
obligations, the Partnership may be exposed to credit risk. The risk of default
depends on the creditworthiness of the counterparty or issuer of the instrument.
The Partnership seeks to control credit risk by following an established credit
approval process, monitoring credit limits, and by requiring collateral where
appropriate.
9. SUBSEQUENT EVENTS:
On August 15, 1997, Affiliated Managers Group, Inc. ("AMG"), the
Partnership and the partners of the Partnership entered into a definitive
agreement whereby AMG will purchase a majority interest in Tweedy, Browne
Company LLC which will succeed to the business of the Partnership. On October 9,
1997, this transaction was completed.
F-67
<PAGE> 145
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the U.S. Underwriters named below, and
each of such U.S. Underwriters, for whom Goldman, Sachs & Co., BT Alex. Brown
Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Schroder &
Co. Inc. are acting as representatives, has severally agreed to purchase from
the Company, the respective number of shares of Common Stock set forth opposite
its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
---------------------------------------------------------------------- ------------
<S> <C>
Goldman, Sachs & Co. ................................................. 1,532,077
BT Alex. Brown Incorporated........................................... 1,532,076
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................. 1,532,076
Schroder & Co. Inc. .................................................. 241,907
Barrington Research Associates, Inc. ................................. 52,200
Chase Securities Inc. ................................................ 106,644
CIBC Oppenheimer Corp. ............................................... 106,644
Dain Bosworth Incorporated............................................ 52,200
Donaldson, Lufkin & Jenrette Securities Corporation................... 106,644
Hudson Knight Securities, Inc. ....................................... 52,200
Edward D. Jones & Co., L.P. .......................................... 52,200
Legg Mason Wood Walker Incorporated................................... 52,200
Mesirow Financial, Inc. .............................................. 52,200
PaineWebber Incorporated.............................................. 106,644
Principal Financial Securities, Inc. ................................. 52,200
Putnam, Lovell & Thornton Inc. ....................................... 52,200
Scott & Stringfellow, Inc. ........................................... 52,200
Smith Barney Inc. .................................................... 106,644
Utendahl Capital Partners, L.P. ...................................... 52,200
Wasserstein Perella Securities, Inc................................... 106,644
---------
Total............................................................ 6,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $0.92 per share. The U.S. Underwriters may allow, and
such dealers may reallow, a concession not in excess of $0.10 per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Company has entered into an underwriting agreement (the "International
Underwriting Agreement") with the underwriters of the International Offering
(the "International Underwriters" and, together with the U.S. Underwriters, the
"Underwriters") providing for the concurrent offer and sale of 1,500,000 shares
of Common Stock in the International Offering outside the United States. The
offering price and aggregate underwriting discounts and commissions per share
for the two Offerings are identical. The closing of the Offering made hereby is
a condition to the closing of the International Offering, and vice versa. The
representatives of the International Underwriters are Goldman Sachs
International, BT Alex. Brown International, division of Bankers Trust
International PLC, Merrill Lynch International and J. Henry Schroder & Co.
Limited.
U-1
<PAGE> 146
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two Offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares offered hereby and subject to certain exceptions, it will offer, sell
or deliver the shares of Common Stock, directly or indirectly, only in the
United States of America (including the States and the District of Columbia),
its territories, its possessions and other areas subject to its jurisdiction
(the "United States") and to U.S. persons, which term shall mean, for purposes
of this paragraph: (a) any individual who is a resident of the United States or
(b) any corporation, partnership or other entity organized in or under the laws
of the United States or any political subdivision thereof and whose office most
directly involved with the purchase is located in the United States. Each of the
International Underwriters has agreed pursuant to the Agreement Between that, as
a part of the distribution of the shares offered as a part of the International
Offering, and subject to certain exceptions, it will (i) not, directly or
indirectly, offer, sell or deliver shares of Common Stock (a) in the United
States or to any U.S. persons or (b) to any person who it believes intends to
reoffer, resell or deliver the shares in the United States or to any U.S.
persons, and (ii) cause any dealer to whom it may sell such shares at any
concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall be
the initial public offering price, less an amount not greater than the selling
concession.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 900,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the U.S. Underwriters exercise their over-allotment option, the U.S.
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
6,000,000 shares of Common Stock offered hereby. The Company has granted the
International Underwriters a similar option to purchase up to an aggregate of
225,000 additional shares of Common Stock.
The Company has agreed, subject to certain exceptions, that during the
period beginning from the date of this Prospectus and continuing to and
including the date 180 days after the date of this Prospectus, it will not
offer, sell, contract to sell or otherwise dispose of any Common Stock (other
than pursuant to employee stock option or purchase plans existing, or on the
conversion or exchange of convertible or exchangeable securities or the exercise
of warrants outstanding, on the date of this Prospectus) or any securities of
the Company which are substantially similar to the Common Stock, or which are
convertible into or exchangeable or exercisable for Common Stock or any such
other securities, without the prior written consent of the representatives,
except for (i) shares of Common Stock offered in connection with the Offerings
and (ii) shares of Common Stock or such other securities issued as consideration
in future investments, provided that such securities are made subject to such
180-day restrictions.
In connection with the Offerings, the Underwriters may purchase and sell
the Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offerings. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock; and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Company in
the Offerings. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to syndicate members or other broker-dealers in respect of
the Common Stock sold in the Offerings for their account may be reclaimed by the
syndicate if such Common Stock is repurchased by the syndicate in stabilizing or
covering transactions. These activities may stabilize, maintain or otherwise
affect the market price of the Common Stock, which may be higher than the price
that might otherwise prevail in the open market, and these activities, if
U-2
<PAGE> 147
commenced, may be discontinued at any time. These transactions may be effected
on the NYSE, in the over-the-counter market or otherwise.
Under Rule 2720 of the National Association of Securities Dealers, Inc.
(the "NASD"), the Company may be deemed an affiliate of Chase Securities Inc.,
one of the U.S. Underwriters. Accordingly, the Offerings are being conducted in
accordance with Rule 2720, which provides that, among other things, when an NASD
member participates in the underwriting of an affiliate's equity securities, the
initial public offering price can be no higher than that recommended by a
"qualified independent underwriter" meeting certain standards. In accordance
with this requirement, Goldman, Sachs & Co. has served in such role and has
recommended a price in compliance with the requirements of Rule 2720. In
connection with the Offerings, Goldman, Sachs & Co., in its role as qualified
independent underwriter, has performed due diligence investigations and reviewed
and participated in the preparation of this Prospectus and the Registration
Statement of which this Prospectus forms a part. In addition, the U.S.
Underwriters may not confirm sales to any discretionary account without the
prior written approval of the customer.
Prior to the Offerings, there has been no public market for the Common
Stock and there can be no assurance that an active trading market will develop
or be sustained to support future transactions in the shares of Common Stock
sold in the Offerings. The initial public offering price was negotiated among
the Company and the representatives of the U.S. Underwriters and the
International Underwriters. Among the factors considered in determining the
initial public offering price of the Common Stock, in addition to prevailing
market conditions, were the Company's historical performance, estimates of the
business potential and earnings prospects of the Company, an assessment of the
Company's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
In connection with the Offerings, the U.S. Underwriters have reserved up to
350,000 shares of Common Stock for sale at the initial public offering price to
persons associated with the Company. The number of shares available for sale to
the general public will be reduced to the extent any reserved shares are
purchased. Any reserved shares not so purchased will be offered by the U.S.
Underwriters on the same basis as the other shares offered hereby.
The Common Stock has been approved for listing, subject to notice of
issuance, on the NYSE under the symbol "AMG". In order to meet one of the
requirements for listing the Common Stock on the NYSE, the Underwriters have
undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial
holders.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
The representatives of the Underwriters have in the past provided, and may
in the future from time to time provide, investment banking services to AMG or
one or more of the Affiliates, for which they may receive customary fees. Among
other things, Goldman, Sachs & Co. recently acted as financial advisor to, and
received a customary fee from, the partners of Tweedy, Browne in connection with
the Tweedy, Browne Investment.
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of the Common Stock, including shares initially sold in the
International Offering, to persons located in the United States.
U-3
<PAGE> 148
- ------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES
IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
Use of Proceeds....................... 18
Dividend Policy....................... 18
Dilution.............................. 19
Capitalization........................ 20
Selected Pro Forma Financial Data..... 21
Selected Historical Financial Data.... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 40
Management............................ 55
Certain Transactions.................. 64
Principal Stockholders................ 67
Description of Capital Stock.......... 70
Shares Eligible for Future Sale....... 74
Validity of Securities................ 76
Experts............................... 76
Additional Information................ 76
Index to Financial Statements......... F-1
Underwriting.......................... U-1
</TABLE>
THROUGH AND INCLUDING DECEMBER 15, 1997 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
7,500,000 SHARES
AFFILIATED
MANAGERS GROUP, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------------------
LOGO
------------------------
GOLDMAN, SACHS & CO.
BT ALEX. BROWN
MERRILL LYNCH & CO.
SCHRODER & CO. INC.
REPRESENTATIVES OF THE UNDERWRITERS
- ------------------------------------------------------
------------------------------------------------------
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